Ben Seeder in Riga -

A court in Riga on May 8 ruled that bankruptcy proceedings can begin against Latvijas Krajbanka - the Snoras Bankas subsidiary that collapsed last winter under a cloud of fraud charges and LVL109m in missing money.

Almost a month after hearings started and a hundred hours of damaging allegations against the Baltic subsidiary of auditors KPMG, the Riga Regional Court also turned down an application seeking the removal of the accounting company from its role as administrator of the collapsed bank.

Several major creditors in the insolvency process, as well as former board members and Snoras Bankas majority shareholder Vladimir Antonov, had sought to halt the bankruptcy process and remove KPMG as administrator, claiming the accountancy firm bungled the insolvency, charged too much in fees, had violated the law and was motivated by political goals rather than maximizing returns for all creditors.

Antonov, who was briefly detained by British police in December acting on a Lithuanian-issued arrest warrant, has not returned to Latvia or Lithuania. But Ivars Prieditis, the former president of Krajbanka who is now facing Latvian criminal charges in relation to the collapse, said on the sidelines of the court that the bank could have continued if it hadn't been for KPMG. "My view is that the bank was in a much better financial position in December than it is now. They should have taken an immediate decision over restoration or bankruptcy. They ignored the restoration proposals for political reasons, they have not been looking out for the interests of all creditors," he told bne.

Presiding judge Gvido Ungurs, however, agreed with counsel for KPMG, who told the court that the bank could not survive without state support, which it would not receive. KPMG now has the legal mandate to begin liquidating the bank. Assets include its large branch and ATM network, and around LVL200m in performing loans.

Latvia's Financial Markets Commission suspended Latvijas Krajbanka on November 21, 2011, after Lithuanian regulators discovered €300m missing from parent bank AB Snoras Bankas. The suspension of the bank prompted a local run on Krajbanka ATMs around Latvia, before the government announced a deposit insurance scheme guaranteeing bank accounts for LVL70,000 or less.

According to figures from KPMG, as of March 30, Latvijas Krajbanka had some LVL380m in assets and LVL560m in debt. The biggest creditors include the National Deposit Insurance Fund, which was set up by the state last year to guarantee bank deposits in Krajbanka of LVL70,000 or less.

The hated beancounters

Former Krajbanka director Martins Zalans told the court that KPMG had lost LVL41m since it took over as administrator, and that the accounting firm had broken Latvian law by failing to stage a creditors' meeting.

He told the court that KPMG had ignored "viable" options to keep the bank running as a going concern, including a proposal from Russian investment bank Otkritie Financial Corporation. The Russian group, which was barred by regulators from buying GE Money Bank Latvia last year, proposed taking over Krajbanka with a small cash injection as a direct investment, and a larger investment in the form of long-term loans. KPMG rejected the offer, claiming that any viable rescue plan would have needed at least LVL170m in cash. "I think there is a political motivation here, that KPMG is doing what the [Latvian regulator] Financial Markets Commission wants, and I think the Commission does not wish to see any further Russian participation in the Latvian banking sector," Zalans told bne on the sidelines of the court.

Counsel for creditors and former shareholder Antonov also told the court that the insolvency was illegitimate because of the participation of Aivars Jurcans, head of corporate finance at KPMG - an investment banker with no experience in insolvency matters. KPMG responded by saying Jurcans was "just crunching the numbers" and that the actual insolvency was being managed by an outside contractor who had such experience and qualifications.

Janis Strencis, representing Riga City Council, which claims it is owed LVL10m from the collapsed bank, told the court that KPMG wanted only to move to bankruptcy for political and financial motivations. "Already for three months they have confirmed they received LVL600,000 in administrators' fees, and KPMG could receive up to LVL25m if bankruptcy is declared. That is why they have pushed towards the bankruptcy process and done everything they can to avoid restoration," he told the court.

Counsel for KPMG Baltics, Romualds Vosnovics, told the court that the accounting firm's fees were in line with the administrator's agreement, and would need to be approved by a court in future anyway. He said the "missing" LVL41m was in fact a writedown of the bank's loan portfolio. He denied the claim that Krajbanka's financial position had been worsened by KPMG's actions. Instead, he told the court that the creditors "have managed to delay the bankruptcy process for a long time, and every delay means the value of the recoverable assets is deteriorating".

Despite Vosnovics' courtroom charm, the accounting firm was clearly concerned over damage to its reputation. With television cameras rolling in the court room, the first few days of the hearing were dominated by a constant stream of unpleasant allegations from the half-dozen sharp-suited counsellors sitting opposite.

On the third day, Oskars Firmanis, a local representative of public relations firm, Burson Marsteller, turned up at court and began pressing the flesh with local reporters. He said his firm had been contracted by KPMG to deal with the media, and that any questions from reporters to the accounting firm should go through him.