F I Tech: financial services software supplier in trouble

Nortel, one of the world's largest communications networks companies, has been slowly declining in the good times - and in the bad times business opportunities for large complex networks has reduced.

Ironically, Nortel has been working on the development of cutting edge communications equipment, in part to capitalise upon and in part to head off the challenge of internet phones.

And it has found a niche in financial services claiming to supply software to more than 80% of the USA's top 100 banks, and making frequent announcements as to sales in the banking sector around the world.

Nortel's expertise in user authentication is favoured as a tool to aid in the battle against fraud, in particular in fraud in telephone banking where its voice recognition software helps to reduce the opportunity for telephone users to fake themselves as real customers.

The protection measure is designed to make sure that the company can continue trading - but although it puts its name on a great deal of hardware, it makes very little. It is heavily dependent on Singapore owned Flextronics - which, some reports say, recently froze Nortel's credit arrangements and put them onto a regime that is almost cash-with-order - and that in excess of CDN120 million would be paid immediately for stock delivered but not yet paid for.

But that deal is open to challenge by other creditors: if the media reports are correct, Flextronics did the deal on Wednesday morning Canadian time - that's late in the Singapore day. Later on Wednesday, Nortel went to Court to seek protection. The question for the other creditors, and the court, is whether to allow the Flextronics deal to stand or to challenge it as "preferring a creditor."

Without the deal, Nortel will be unable to supply around 75% of its hardware needs and will, therefore, be almost dead in the water. If that happens, banks around the world will be left with orphaned systems, except insofar as others may step in and take over the technology. But it is both implementation and support contracts that will be disrupted first, if that happens.

In this way, then, there is a knock-on concern for financial institutions. What happens to their security systems if Nortel cannot support them and no-one else has the technology, know-how or - equally importantly - access to the intellectual property to provide that support.

Far from being a question of the phones going quiet, if Nortel suddenly ceased business, the impact on financial services businesses including banks around the world will be both devastating and rapid.

The following statement has been received from Nortel explaining the measures in other jurisdictions.

Nortel Networks Corporation announced that further to its press release issued earlier today, the Company, Nortel Networks Limited and certain other Canadian subsidiaries have obtained an Order from the Ontario Superior Court of Justice (the "Canadian Court") for creditor protection pursuant to the provisions of the Companies' Creditors Arrangement Act ("CCAA").

Under the terms of the Order, Ernst & Young Inc. will serve as the Court-appointed Monitor under the CCAA process and will assist the Company in formulating its restructuring plan.

Nortel Networks Inc also brought an application and obtained an Order in the Canadian Court recognising the Chapter 11 cases in the U.S. as "foreign proceedings" in Canada and giving effect to the automatic stay under the U.S. Bankruptcy Code in Canada.

Additionally, Nortel Networks UK Limited ("NNUK") and certain subsidiaries of the Nortel group incorporated in the EMEA region (the "EMEA Subsidiaries", and collectively with NNUK, the "EMEA Companies") have each obtained an administration order from the English High Court of Justice ("the English Court") under the Insolvency Act 1986 ("IA"). The applications were made by the EMEA Subsidiaries under the provisions of the European Union's Council Regulation (EC) No 1346/2000 on Insolvency Proceedings and on the basis that each EMEA Subsidiary's centre of main interests is in England. Under the terms of the orders, representatives of Ernst & Young LLP have been appointed as administrators of each of the EMEA Companies and will continue to manage the EMEA Companies and operate their businesses under the jurisdiction of the English Court and in accordance with the applicable provisions of the IA.