General Motors is facing a lawsuit in Canada from unsecured bondholders after it paid dividends from a small local unit even as it hovered on the brink of insolvency.
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Citing GM filings and sources close to the legal proceedings, Reuters reported the lawsuit was filed in Nova Scotia courts last month.
Sources with direct knowledge of the suit told the news agency the dividend payouts meant there was a risk that holders of debt issued by the unit, General Motors Nova Scotia Finance, would not be paid.
“This is a violation of Canadian and US laws,” an anonymous source close to the lawsuit was quoted as saying. “Creditors have been left with nothing.”
Bondholders are worried that a GM bankruptcy filing would force them to accept hefty losses on their investments.
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By GlobalDataReuters said the Canadian complaint was led by investment funds including Aurelius Capital Partners, a New York-based firm, according to a form 10-K filed with the US Securities and Exchange Commission by General Motors on 5 March.
The Wall Street Journal reportedly said investment funds Drawbridge DSO Securities and Appaloosa Investment were also listed on the complaint.
The WSJ said the funds held more than 60% of some US$1bn in notes issued by General Motors Nova Scotia Finance in 2003.
According to Reuters, the 5 March SEC filing noted that bondholders asserted that certain transactions violated sections of the Canadian Business Corporations Act. The disputed transactions include two returns of capital in May 2008 and an amendment to a credit agreement.
“Plaintiffs seek a declaration that each of these transactions is ‘oppressive, unfairly prejudicial and unfairly disregarded the interests of creditors’,” GM was reported to have said in the SEC filing.
“Because this action was very recently filed and has not been investigated or analysed, no views regarding the likely outcome can be expressed at this time,” the company said.
