KPNQwest network nears closure as legal battle looms

As banks and creditors clamour for an investigation into KPNQwest, the company's European network looks unlikely to last past the end of the week

The epic bankruptcy saga of KPNQwest became still more entangled on Monday as banks joined the clamour for an investigation of the service providers' accounts. KPNQwest's network, which carries a quarter of Europe's Internet traffic, remains live for now, but could close at any moment as a court order on Friday left the trustees with no money to pay staff.

The banking consortium will demand a court inquiry into discrepancies in KPNQwest's accounts, according to a report in Monday's Financial Times. The consortium, which includes Citigroup, ABN Amro, Fortis, Barclays, Bank of America, Dresdner Kleinwort Wasserstein and Deutsche Bank, lent KPNQwest 525m euros when it bought a previously failed service provider, GTS.

KPNQwest's purchase of GTS, which included the Ebone European backbone network, was completed in March, only weeks before KPNQwest declared itself bankrupt. The consortium alleges that KPNQwest lied about income from its two founders -- KPN of the Netherlands and Qwest Communications of the US -- to make its services revenue look bigger than it was.

This call joins that of KPNQwest bondholders who have made the same demand of KPN and Qwest, following a meltdown faster than that of the collapsed power giant Enron. Former KPNQwest chief Jack McMaster has denied the allegations to journalists.

"The network is still operating, and there is still a sale process going on," said a source close to the company. But every aspect of the case is now shrouded in uncertainty following Friday's court ruling.

Around 20m euros had been promised by KPNQwest customers to keep the network running till the end of June, but the banks that collected that "lifeboat" money refused to hand it over, and the Dutch court on Friday upheld this action.

While the trustees had been hoping to sell KPNQwest for around 200m euros, the offers received are rumoured to have only reached about 20m euros, which may explain the banks' decision to keep the small amount they had in the lifeboat fund.

However, the lifeboat may contain less than it would appear, as it emerged over the weekend that KPN did not pay the 8.8m euros it promised. Instead it paid half of this sum direct to the trustees and not to the banks. "The lifeboat is substantially short," said the source. Even if it were released -- and the trustees are now believed to be counter-suing -- it would not be enough to run the network.

Worse still, Friday's ruling may wreck the working relationships between the banks and the receivers. "The judge nullified the agreements between the banks and the receivers," said the source. Bear Stearns, the group which is still attempting to sell KPNQwest, was contracted by the banks, so its role is now under question, said the source, who added, "Bear Stearns does not know what its position is."

There is now little hope of finalising a sale before the end of this week because further complications will arise from the multiplicity of receivers involved. Netherlands-based KPNQWest and its European subsidiaries went bankrupt at the same time, and the receivers in different countries have been arguing ever since over what assets can be sold by whom.

"It's a nightmare," said the source. "No one has been involved in anything this complex." There are still buyers, but it will be almost impossible for them to know what liabilities they take on if they agree to buy KPNQwest. At the same time, banks are being asked to take 10m or 20m euros for something that was valued at 225m euros only two months ago. "The legal battles will go on for years," said the source.

"I'm an eternal optimist, but a solution is not looking likely," said Graham Kinsey, convenor of the staff at the Ebone network in Belgium. "I'm hoping to find answers this week," he said.

Now the likelihood is that the bandwidth that Ebone leases from service providers could be turned off within the next few days. According to Kinsey, the 40 people in the Belgian network centre are the only ones out of around 200 who can expect any payment. "I'm sorry for field engineers in England. They have been paying money out of their own pocket, borrowing money to keep the network on the road."


For a round-up of the latest tech business coverage, see the Business News Section.

Have your say instantly, and see what others have said. Go to the ZDNet news forum.

Let the editors know what you think in the Mailroom.