(Dow Jones Newswires) - A committee of Bermuda-based Flag Telecom Holdings Ltd. (FTHLQ) bondholders has alleged the company fraudulently transferred $210 million to a nondebtor subsidiary, and the panel is requesting the unit immediately return the funds, according to the Dow Jones news service.

In response to the committee's filing, an attorney representing Flag Telecom told Dow Jones Newswires on Tuesday that the company believes the allegations of the bondholders' committee are "totally without merit." In court papers filed on Friday, the committee also asked the US Bankruptcy Court in Manhattan to restrict Flag Telecom from spending any cash without court approval. Before Flag Telecom filed for bankruptcy protection last Friday, an ad hoc bondholders' committee was formed to negotiate a potential restructuring of the company's business or a sale of its assets. Before filing for Chapter 11, the company disclosed in its annual report it would fail to make a required interest payment on the dollar- and euro-denominated notes.

The committee holds about $200 million of Flag Telecom's 11.625 percent senior dollar notes due 2010 and about EUR210 million of the firm's 11.625% senior euro notes due 2010. Last Friday, the filing said, Flag Telecom transferred about $210 million - roughly 50 percent of its assets - "for no consideration in return" to Flag Pacific Holdings Ltd., a unit that didn't file for bankruptcy.

The committee contended that Flag Telecom can't offer "any proper justification for the fraudulent transfer." Flag Telecom's attorney, Conor D. Reilly, of the firm Gibson Dunn Crutcher LLP in New York , said the transfer of funds to Flag Pacific Holdings was "not a fraudulent transfer in any sense of the term."Counsel had no further comment on the matter.

According to the committee's filing, the Bermuda -based company said it transferred the funds to pay creditors of other affiliated entities. Also, the company said it feared the financial institutions under affiliate Flag Atlantic Ltd.'s credit pact would freeze Flag Telecom's funds, according to the filing.

However, the committee said that was a "nonsensical argument," because the voluntary Chapter 11 petition would restrict the banks' actions in connection with the company's cash. In its filing, the committee also alleged Flag Telecom paid recently $4.6 million in retention payments to nine senior officers, amended the contract of its chief executive to increase his severance payment to $2.7 million, and paid $2.5 million to certain employees of nondebtor affiliates. The committee says the transfer was likely the source of the $2.5 million paid to employees, according to the filing.

Separately, Flag Telecom is seeking to wind up some or all of the debtor entities in the Supreme Court of Bermuda . As a result, Flag Telecom would apply for the appointment of joint provisional liquidators under Bermuda law.

Since the proceedings in Bermuda would be ancillary to the Chapter 11 case, the company maintained it shouldn't require bankruptcy court approval to begin those proceedings.

Flag Telecom Holdings Ltd. listed total assets of about $3.3 billion and total debts of nearly $2.6 billion as of March 31 in its bankruptcy petition.

In another filing, subsidiary Flag Ltd. cited roughly $1 billion in total assets and about $798.3 million in total debts.

Flag Telecom provides high speed broadband global network services and is a carrier for independent carriers. It also uses its network service products to address the needs of application service providers (news - web sites), Internet service providers and multinational corporate customers.

The company's board authorised the Chapter 11 filing after the acceleration of Flag Atlantic Ltd.'s bank debt by a syndicate of bank lenders, which represented a cross-default under Flag Telecom's indenture for its outstanding senior notes.