Since the publication in November 2013 of a report by Dr Lawrence Tomlinson, there has been much media and parliamentary scrutiny of the alleged mistreatment by lenders of SME customers who found themselves in a financially distressed position.
Much of the focus of this scrutiny fell on RBS, who were the subject of a Section 166 Review carried out by the Financial Conduct Authority, but all lenders with business restructuring units (BRUs) have faced some level of attention.
Whilst the recent decision in Broomhead v NatWest  EWHC 1574 (Ch) very much turned on its facts, it is the first case to reach trial involving claims arising from a business restructuring unit situation not attached to allegations concerning IRHPs. As such, it serves as a useful illustration of how difficult it may be for aggrieved customers to succeed in claims of this nature.
Mr Broomhead ran a small construction plant hire business. In 2004, he entered into a loan agreement with NatWest on an interest only basis for a period of 2 years. At the same time, he was also afforded an overdraft facility which, although repayable on demand, was sanctioned for a 12-month period.
Over the next few years, the overdraft limit was increased several times at Mr Broomhead's request and the loan term (on an interest payment basis) also extended.
In September 2007, NatWest transferred Mr Broomhead's facilities to its credit risk management function due to concerns with his business' performance. Over the course of the next 18 months, NatWest sought proposals and business plans from Mr Broomhead as to how he intended to repay the debt.
In March 2009, one of Mr Broomhead's companies was placed into a creditors voluntary liquidation. Mr Broomhead also placed all of the construction plant up for sale and, in July 2009, NatWest transferred the facilities into the Global Restructuring Group. Formal demands were served in May 2010.
Mr Broomhead issued proceedings in April 2015 alleging a number of things, including:
- A collateral contract had been formed in 2004 as a result of promises made by the then relationship manager that the loan and overdraft would always be automatically renewed provided he kept up repayments and stayed within the overdraft limit. NatWest breached this collateral contract by not renewing the facilities and demanding capital repayments.
- The customer / banker relationship contained implied terms that NatWest would not exploit him and would exercise reasonable skill and care in its dealings with him.
- A claim under section 140B of the Consumer Credit Act 1974 for compensation for the "unfair banking relationship" he had with NatWest.
He sought damages of £14M for the loss of profit he claimed he would have gone on to make on contracts he was about to secure.
A cautionary tale
- The courts are aware that a witness' memory is not infallible, especially when the events in question occurred many years before trial (2004 and 2009 in this case). Where it is contradictory to a witness' testimony, contemporaneous documentary evidence is likely to be preferred. The court will also consider whether what is being said is logical or has an inherent probability, especially where a witness may have an ulterior motive (even if an unconscious one) in presenting their evidence in a particular way. In this case, the judge concluded that he should approach Mr Broomhead's witness evidence with caution, never a good sign for a party and which proved fatal to the chances of success as he was the main witness.
- Although the court held that the alleged promises forming the collateral contract had not been made, it also went on to hold that the alleged promises were vague and not intended to have a contractual effect in any event. Mr Broomhead appreciated that any promises needed to be formally recorded in writing to have any legal effect. The fact there were periods where the overdraft and loan facility continued beyond their stated expiry without being formally renewed or demanded did not add any weight to the suggestion of a collateral contract.
- Even if Mr Broomhead had established liability, his case would have floundered as limitation had expired. The alleged breaches complained of occurred more than 6 years before proceedings were issued and there was no continuing breach caused by a failure to renew facilities over a period of time. The cause of action arose on the first date that a failure to renew (i.e. the expiry of a facility) took place. Claims against BRUs will largely emanate from the aftermath of the last recession, meaning most will now be statute barred.
- As a matter of causation, there were numerous other factors (i.e. beyond NatWest's alleged actions) that were the actual cause of the business failure. The business accounts for the five financial periods to 31 July 2009 showed a net loss in each year and the liquidators report for one of his companies stated that the general economic slowdown, unpaid invoices from debtors and the early end of a significant contract were the causes of liquidation. It is unlikely that customers transferred to a BRU won't have exhibited some sign of financial distress, which may make establishing that the true cause of loss was down solely or substantially to the actions of a lender difficult, particularly in complex situations.
- Damages for a loss of chance of business with a third party can only be awarded if the chance was a real and substantial one. Mr Broomhead adduced no substantive evidence that any of the contracts he alleged would have been secured was anything other than speculative. Damages for consequential loss can be difficult to prove and is something that claimants can forget to focus on in their desire to establish liability in the first place.
- There was no unfairness caused simply by transferring the facilities from the relationship manager to GRG; this was no more than an internal change of bank personnel to those who dealt with non-performing borrowing. This sentiment echoes the Court's decision in Property Alliance Group v Royal Bank of Scotland , in which the Court accepted it was perfectly proper for a bank to structure itself internally in any way it wished. Similarly, it was not unfair to seek administrative costs in accordance with the terms of the loan agreement in circumstances where, because the strength of Mr Broomhead's business was in doubt, there was a greater need for NatWest to monitor his performance.
The court dismissed all claims made against NatWest, in what will be seen as a lender friendly judgment, although whether it deters other aggrieved customers from seeking redress from BRUs remains to be seen.