Claims regarding GRG
Many claims against the RBS Global Restructuring Group (GRG) await the outcome of the FCA Review into its activities which is now long overdue.1 There have been press reports that RBS plans to set up some kind of compensation scheme following the publication of that review. However, some customers have already issued legal proceedings against RBS relating to GRG’s behaviour. For example, the first trial involving such allegations, Property Alliance Group (PAG) v RBS2, began in the High Court on 26 May 2016.
Allegations against GRG have been made for many years and further impetus was given to these in a report by Lawrence Tomlinson in 2013.3 The Tomlinson Report alleged that RBS was deliberately engineering defaults by its customers to ensure that they could be placed within GRG and, once in GRG, the customers were charged excessive fees which contributed to a further decline in the business, leading to receivership or administration. He alleged that the customers’ business and property were sometimes sold at an undervalue to RBS’s associated company, West Register, which could then retain the assets until prices rose in the future.
Since the Tomlinson Report, further disclosures relating to GRG’s activities have come to light as a result of legal proceedings brought against RBS. In the recent case of Hockin v RBS,4 the Court refused the bank’s application to strike out allegations against GRG and allowed the case to carry on towards trial.
However, allegations are not confined to RBS. Similar allegations have been made against the “Business Support Units” (BSUs) of other leading banks, including Lloyds, Barclays and HSBC. In Re Angel Group Ltd5, claims against Lloyds’ BSU have led to the appointment of separate liquidators (“conflict liquidators”) to investigate claims against the bank and the company’s administrators that they conspired to force the customer into administration.
The legal basis for claims against BSUs
A major difficulty for bank customers has always been the need to obtain sufficient evidence to support these allegations and to identify the legal routes to obtain redress. A court will need to be convinced not just that the bank has acted in an “unfair” way but also that its conduct has been unlawful. To date, the following types of legal claim have been pursued:
- Breach of contract (express terms or implied duty of good faith)
- Unlawful means conspiracy
- Breach of fiduciary duties by directors (including the bank acting as a shadow director)
Patterns of BSU behaviour
From the Tomlinson Report and the subsequent legal actions, the following overall pattern of allegations against banks’ BSUs has emerged:
Among the reasons that have been given to support allegations that banks have wanted to engineer the default of their own customers are the following:
- the bank wishes to exit its relationship with UK business customers because the bank is under pressure to comply with stronger regulatory capital rules. These require the bank to retain a higher ratio of share capital to loans to protect against the possible failure of the bank. One way of achieving this ratio is to reduce the amount of high risk-weighted assets such as commercial loans;
- the bank is either not concerned about the insolvency of the customer because its debt is fully secured or it benefits in the long term by purchasing the customer’s assets through an associated company (such as RBS’ West Register) at a knock down price and holding them until asset values recover; and
- BSUs were considered as profit-generating divisions by the banks and were incentivised by the failure of their customers. A review by Sir Andrew Large, former Deputy Governor of the Bank of England, found that GRG had been an “internal profit centre” for RBS. That put GRG into a position of potential conflict with the interests of the customer.
A hidden agenda?
- In order to retain the customers’ trust, it is alleged that banks deliberately hid the real reasons for putting them into the BSU. The bank would allegedly present the transfer into the BSU as a way of providing the necessary close supervision for achieving a turnaround of the business. However, Tomlinson alleged that almost no customers were successfully turned around by GRG and that, in some cases, the purpose of being put into GRG was to cause the customer’s business to fail.
- If a bank can be shown to have operated this kind of hidden agenda, then the possible legal claims against the bank are:
- that the bank is liable for misrepresentation – that it caused losses arising from misstatements to the customer;
- that the bank acted in bad faith in operating its relationship with the customer in a way which was essentially dishonest; and/or
- that the bank acted in a conspiracy with others (accountants, valuers or other professionals instructed by the bank) to carry out this hidden agenda. Those making these claims point to the substantial fees received by these professionals (often on a repeat basis) as their motivation for entering into this conspiracy.
Challenging the transfer into GRG
A major issue is whether the transfer of the management of the customer into the BSU can be challenged and, if so, on what basis. Usually, customers are transferred into a BSU on a default of one or more of their covenants under the terms of their facility agreement with the bank. However, it has been alleged that sometimes customers were transferred into BSUs for no good reason. In the PAG trial, for example, it has been alleged that customers were transferred into GRG simply as a punishment for suing the bank.
The bank may argue that there are no contractual restrictions on the transfer of customers into BSUs. BSUs may not be referred to in standard facility agreements and banks may say that they have the right to manage a customer’s business in any way they like and therefore they do not need a reason to transfer a customer into a BSU. In response, the customer will need to argue that even if a transfer into a BSU is not an express breach of contract, the bank is in breach of an implied duty of good faith if such a transfer is not for a bona fide purpose.
Various ways of banks deliberately engineering a transfer into BSUs have been alleged:
- One suggested way is to create a breach of the loan to value covenant. This might have been achieved by the bank valuing the company’s property in a way which did not comply with the provisions set out in the contract with the customer. Alternatively, there have been allegations that a property valuation has been obtained by the bank at an undervalue. To confirm this, it would need to be shown that the valuer was either negligent or fraudulent in undervaluing the property.
- Tomlinson also alleges that RBS has relied on technical breaches of covenant, for example, a temporary dip in earnings (before interest, taxes, depreciation and amortization (EBITDA)) or a late submission of information. In order to sustain this claim, it might be necessary to show that there was no actual breach or that the bank had waived the breach, either expressly or impliedly.
In many cases, it has been claimed that a customer’s transfer into BSU has been caused by the actions of the bank itself, e.g. by misselling interest rate swaps. In that situation, customers have claimed that their consequential losses include the costs of being put into the BSU and the subsequent insolvency of the business, where that has occurred.
How the bank obtains control over the customer
It has been alleged that where the bank has had a hidden agenda of deliberately engineering the default and subsequent failure of its customer, it has needed to take steps to obtain greater control of the customer and its assets. It has been claimed that this is achieved in one or more of the following ways:
- The bank may suggest that, in order for it to continue lending to the business, equity funds would have to be provided by shareholders. Additional loans to shareholders, personal guarantees and/or a voluntary sale of properties might also be requested. The bank would present these options as voluntary actions taken in support of turning around the customer’s business. However, to make a successful claim, it would need to be shown that the customer had no real option but to agree to these actions and that the bank never actually had any intention of turning round the business.
- The bank may suggest that a chief restructuring officer or director should be appointed to the board. Again, if this was presented to the customer on the basis that it had to be accepted in order to prevent the bank calling in its loans against the company – and on the basis of representations that it was for the benefit of the company’s future – the customer would not really have any choice but to accept this. Some customers have complained that the costs of such a restructuring officer then created an additional financial burden on the business which it could ill afford. In addition, there have been allegations that the restructuring officer, with the support of the bank, then effectively imposed further professional fees by employing new solicitors and accountants from the bank’s approved panels.
- The bank may then also require an independent business review (IBR) to be carried out on the customer’s business. Again, this is done on the basis that the customer has “voluntarily” agreed to it but the IBR itself would impose further costs on the business which had to pay for it. Tomlinson alleges that the accountants employed to carry out such an IBR have a conflict of interest in that if their findings support the view that the customer should go into administration, the accountants would be in pole position to become the company’s administrators (and to earn substantial fees from that appointment).
- The bank may then require the customer to agree to property participation agreements (PPAs) and/or equity participation agreements (EPAs) under which the shareholders agree to transfer the ownership of properties or shares in the company to the bank in return for continued lending. PPAs and EPAs can result in banks obtaining a windfall on the value of properties or shares if they subsequently rise in value. They are highly controversial since the allegation is that they can be seen as ways in which banks profit from the financial difficulties of their own customers.
- Banks might argue that the customer could have avoided these consequences if it had taken its banking business elsewhere. However, this might not have been practicable if the bank imposed severe exit fees on the customer. This was particularly so where the customer had entered into an interest rate swap with the bank which had substantial break costs payable to the bank.
Wrongfully putting the customer into administration
In many cases, a customer in a BSU will fail and go into administration. This has led to the following allegations:
- that, owing to the financial strain caused by the additional costs imposed by the BSU, the failure of the customer is inevitable and that the company was deliberately forced into administration;
- that the accountants involved in advising the company may be rewarded by appointment as administrators;
- that the bank may not be concerned about the company’s insolvency because its debts are secured and it therefore takes priority over other creditors;
- that, alternatively, the bank’s losses may be mitigated by the fact that the customer’s business and property are sold to an associated company (West Register in the case of RBS). The bank would then benefit in the long term from any subsequent increase in values; and
- that the bank could also recover any shortfall on its repayment from secured assets by enforcing against personal loans and/or personal guarantees obtained from the shareholders (often at a time when the company was under severe financial pressure).
Proving allegations against banks
Clearly, these allegations need to be tested against available evidence. Among the questions to be answered are whether the bank has:
- gone beyond what was included in the express terms of the contract between it and the customer?
- misrepresented the position and its intentions to the customer?
- acted in bad faith? The limits of this duty are not precisely defined but on one definition it is acting in a way which was contrary to honest business practice. There are recent cases which suggest that the English courts may be willing to expand the definition.
- been involved in a fraudulent conspiracy against the interests of the customer?
- put itself in a position where it is acting as a shadow director (i.e. where the actual directors of the company are accustomed to act in accordance with the bank’s instructions or directions)? If so, has the bank been in breach of its fiduciary duties as a director (e.g. to promote the success of the company)?
These allegations remain as yet unproven. What can be said, however, is that in cases such as PAG, Hockin and Angel Group, the courts have now been willing to allow these arguments to be tested in court. No doubt the effect of the many bank scandals following the 2008 financial crisis have had the effect of reducing the credibility of banks in the eyes of the courts but it is also the case that disclosure of more information as part of the court processes has provided more evidence in support of such allegations. We now wait to see what the results of the long awaited FCA review will add to this serious issue.