CHP 11/0097 - Foundations Program Plc (in liquidation) ("FPP")
CHP 11/0098 - FPA Limited (in liquidation) ("FPA")

Update 14 October 2014

Please read this update in conjunction with the 1 August update which sets out the background and defines terms.

Glossary

Foundations Program plc - in liquidation ("FPP")
FPA Limited - in liquidation ("FPA")
Joint Liquidators and Joint Official Receivers ("JL&JORs")

PARTICIPANT UPDATE

Note for Participants and Loan Note Holders (LNHs) and other creditors of FPP & FPA

Update and general explanation of JL&JORs next steps relevant to the liquidations of FPA and FPP

1. The period within which to appeal the Trust Application judgment of the 6th August 2014 (the “Judgment”, previously posted on the foundations website) has now expired (13 October 2014) and thus a final decision has been reached by the Isle of Man High Court, namely that the “Assigned Assets” (assets/policies assigned by the Participants of the Foundations Program to FPA and then assigned by FPA to Barclays) will not, when received, be held on trust by the JL&JORs of FPA.

2. In summary, the effect of the Judgment is that the Assigned Assets (currently held and owned by Barclays) are not held on trust for a specific Participant. The following issues flow from such a finding:-

• a. The JL&JORs understand that as the Judgment appeal period has expired, Barclays will shortly enforce its “security”, to discharge the debts owed to it by FPP.
• b. After FPP’s obligations to Barclays have been discharged, it is envisaged Barclays will essentially step out of the process and transfer the remaining assets to FPA (the Released Assets). The Released Assets are likely to consist mainly of partially redeemed policies and cash from realised or partially realised policies.
• c. The Judgment results in the conclusion that the Released Assets fall into the liquidation estate of FPA, free from individual Participant’s rights. Policies are therefore held by FPA free from any rights or control of the Participants who originally assigned a policy to FPA. The Participants therefore have no rights to deal with or secure a return of the policy they originally assigned.
• d. The general effect is that all the creditors of FPA will share pari passu i.e. on a proportionally equal basis, in the assets of FPA.

3. The JL&JORs are now in a position to proceed with the claims of the various creditors and debtors of FPP and FPA. The process is complicated by the following factors:

• a. The “value” of each Participant’s participation (which unfortunately in this program represents significant losses) is linked to the value of each other Participant’s participation, through the allocation of points. .
• b. The detailed points and participation system was not correctly produced/calculated or recorded by the Program Operators.
• c. The rules/offering document did not anticipate the collapse of the entire program and thus the current circumstances are not adequately dealt with in the Scheme documentation.

4. Notwithstanding these difficulties, the JL&JORs have determined that the following procedure will be adopted to resolve the various claims by and against FPP and FPA:

• a. It is anticipated Barclays (as holders of the assigned policies) will shortly take steps to recover the monies owed to them (by FPP). The monies owed to Barclays will be recovered by realising the Assigned Assets held by them (realising policies in whole or in part).
• b. This process will give rise to a claim by FPA against FPP equivalent to the Barclays claim against FPP, which will have been extinguished by realising Assigned Assets.
• c. The JL&JORs will establish the final value of the claims of other creditors of FPP. These claims if valid, are likely to constitute a program loss of FPP.
• d. Once the total claims against FPP are clear, the JL&JORs will calculate each Participant’s negative ledger account (i.e. the amount currently required to be paid by individual Participants to make good the current anticipated losses of the program). The total of the negative ledger accounts will cover the losses of the Program.
• e. The JL&JORs will calculate entitlements of the Participants to a sum related to the value of their Assigned Assets at the date of liquidation – this is the “Assigned Asset claim”. As described above, this is not a claim to any particular Assigned Asset, but to a sum of money based on the value of each Participant’s Assigned Asset as at the date of liquidation.
• f. Under the Program rules, the sum owed by each Participant in relation to his negative ledger account has to be paid as a condition of any entitlement that the Participant has to any payment in respect of his Assigned Asset claim. No demand will be made for this payment, which will instead be deducted from the Assigned Asset claims of the Participants where possible.
• g. The total sum notionally raised by the deductions will be sufficient to cancel out the FPA claim against FPP (see b above) and to meet nearly all of the claims of other creditors of FPP (see c above). Any shortfall for the other creditors of FPP will relate to non-payment of their negative ledger accounts by individual Participants. This will only occur where the value of the Assigned Asset claim is lower than the sum required to clear the negative ledger account.
• h. The JL&JORs will also need to establish the full extent of the LNHs claim in FPA, which is not yet fully ascertainable as neither FPA nor FPP has any corporate records of any LNHs (for reasons already explained in the Trust Application). It appears however from a review of the claim made against Mr. Brewer and the Brewer Investment Group that the likely sum of moneys owed to LNHs in total is circa $6 million. The JL&JORs are taking steps to attempt to notify all unidentified LNHs.
• i. Once the Participants’ Assigned Asset claims and the LNH’s claims are clear, the JL&JORs will calculate the net sum payable to each Participant and each LNH on a pari passu basis.

5. In the meantime, in order to progress the liquidation, various practical points need addressing:

• a. The question of how Participants are to prove in the liquidation of FPP / FPA.
• b. Whether there is a practical way of enabling the return to Participants of their individual Assigned Assets.

Proofs of Debt by Participants

6. As set out above, the value of the Participants’ Assigned Asset claims is based on the value of the policies as at the date of liquidation. Some Participants have filed proofs of debt in FPA essentially for either a return of their Assigned Assets or the value of the portfolio as at the date of the proof of debt. There are also Participants who have not filed proofs of debt in either FPA or FPP. In the opinion of the JL&JORs the effect of the Judgment is that the Participants claim lies against FPA and the value of their claim/proof of debt in FPA is the value of their Assigned Assets as at the date of Liquidation.

7. In order to resolve this issue and progress the FPA Liquidation, it is the JL&JORs intention to apply to the Isle of Man Court to allow the JL&JORs to waive the requirement for some of the Participants to submit proofs of debt in FPA. In particular the JL&JORs will ask the Court that any Participants proofs of debt submitted in the Program (i.e. in FPP) are treated as a claim in FPA and any Participants who have not filed proofs at all, be admitted in the FPA liquidation. In all cases the JL&JORs will formally admit the claim to the value of the Participants Assigned Assets as at the date of Liquidation (the JL&JORs will obtain this value for the Participants). In the event the Court approves this process the JL&JORs will notify each individual Participant of the admittance of their claim in FPA, the rejection of any claim they have made in FPP and the total amount of their admitted claim in FPA. At this stage each individual Participant would have the right to contest the amount of their proof admitted in FPA in accordance with the Isle of Man Winding Up Rules (R85). The JL&JORs may also need to apply to the Court to deal with those currently unidentified LNHs in advance of a distribution.

8. During this process the JL&JORs will also consider whether they are in a position to make an interim dividend payment to all creditors of FPA and if so what would be a prudent percentage given the current unknown variables.

The Return of Assigned Assets

9. The JL&JORs have received inquiries from some Participants requesting a return of the policies they originally assigned to FPA. The JL&JORs have given consideration as to how this might be achieved (as explained below) but at the same time ensuring this is a financially neutral exercise in so far as FPA or FPP is concerned and thus would not impact upon the remaining Participants or other FPA/FPP creditors.

10. The net effect of the Judgment is that the Assigned Assets are effectively pooled assets held by Barclays and individual Participants have no specific right to “reclaim” the assets they assigned to FPA. Even so, the JL&JORs appreciate that it may be of assistance to individual Participants if their formerly Assigned Asset remained intact. The JL&JORs express no view and can give no opinion on whether such a step is advantageous for a Participant or not. In an effort to attempt to assist any particular Participant to “recover” their policy should they wish to do so (whilst at the same time ensuring the remaining Participants and other creditors are not prejudiced by the release of a policy), the JL&JORs have decided that they will allow any Participant the opportunity to purchase at market value from Barclays any of the policies they assigned to FPA. Such a purchase amounts to an independent transaction designed to mirror the anticipated realisation process that will be conducted by Barclays.

If a Participant wishes to take advantage of the process outlined above to re-purchase his Assigned Asset, the sum to be paid to secure the release of the policy will be ascertained and based on the policy value as at the 1 December 2014 and payment in full of the entire current policy value must be made to FPA within 7 days thereafter.

11. Note: In the event a Participant wishes to exercise this option they must contact Mr Fayle at mfayle@kpmg.co.im or by writing to him at FPA Ltd Heritage Court, 41, Athol Street, Douglas, Isle of Man IM1 1LA, on or before 10 November 2014 to make the necessary arrangements.

12. Note: In the event arrangements are not made by Participants before 10 November with Mr Fayle, policies may be fully or partially redeemed by Barclays.

Summary

13. The next step of this aspect of the Liquidation process is to facilitate the potential release to Participants of the policy they assigned to FPA upon payment in full. Thereafter a Court Application will be made to enable the JL&JORs to admit certain Participants in the liquidation of FPA without their having submitted a proof of debt. The JL&JORs are also investigating other recoveries that might be made by FPP or FPA and intend to provide a further update during 2014 as to the timing of a potential interim dividend and an estimate of the quantum of such potential dividend which will be sent out on an individual basis to creditors of FPP and FPA.

14 October 2014