BANKING & FINANCE LITIGATION UPDATE

Issue 57

We wish to establish a dialogue with our readers. CONTENTS Please contact us at B&FL Update and let us know which particular areas you are interested in and what Domestic Banking…………………………………...2 you would find helpful. Domestic General……………………………………4 The Banking & Finance Litigation Update is published monthly and covers current developments European Banking……….……...…………………...4 affecting the Group's area of practice and its clients during the preceding month. European General……….………...…………………5

This publication is a general overview and discussion International Banking………………………………..5 of the subjects dealt with. It should not be used as a International General….……………………………..5 substitute for taking legal advice in any specific situation. DLA Piper UK LLP accepts no Press Releases………….…………………………….5 responsibility for any actions taken or not taken in reliance on it. Case Law……………….……………………………7 Where references or links (which may not be active links) are made to external publications or websites, the views expressed are those of the authors of those publications or websites which are not necessarily those of DLA Piper UK LLP, and DLA Piper UK LLP accepts no responsibility for the contents or accuracy of those publications or websites.

If you would like further advice, please contact Paula Johnson on 08700 111 111.

DOMESTIC BANKING including those branches put up for sale by Lloyds and subsequently bought by the Co-operative BARCLAYS .

1. A consortium including Barclays Bank has been Independent, 14 August 2012 selected as the preferred bidder in a project to construct a massive wind farm in the Thames HSBC Estuary. The consortium includes Macquarie Capital and Mitsubishi Corporation as well as 7. HSBC has announced that it is to join up with the Barclays, and it hopes to build what will be the Post Office network, which means that from largest wind farm in the world, generating enough spring 2013 customers of the bank, including electricity to power 25 per cent of London's those who use telephone banking experts First homes. Direct, should be able to withdraw cash and pay it in free, as well as deposit cheques and check Independent, 19 September 2012 balances at any of the Post Office's 11,500 branches. 2. PPGM, a Dutch pension fund manager, has bought Barclays' 60 per cent share of the UK's Daily Telegraph, 18 September 2012 second-largest student-housing operator, UPP. 8. HSBC has been ordered to pay £113,000 to Adrian Independent, 14 September 2012 and Elisa Rubenstein after the bank gave them incorrect information about the risk of an AIG 3. Antony Jenkins, the new CEO at Barclays, has bond. The couple lost £180,000 when the fund pledged to change the culture which has seen the closed during the collapse of Lehman. bank embroiled in a series of interest rate-fixing and mis-selling scandals. He says his first task is Sunday Telegraph, 16 September 2012 to "stabilise the organisation". LLOYDS BANKING GROUP Independent, 31 August 2012 9. Parliament has been told that the compulsory deal, 4. The latest administrator's report into the collapse forced on Lloyds Banking Group by the European of the Peacocks clothing retail store shows that Commission, under which it must sell 40 per cent Barclays and The Royal Bank of Scotland are to of its assets is "very, very value-destroying". The receive a share of a £69 million return as part of a chairman of UK Financial Investments, Robin syndicate which backed Peacocks bid to stay in Budenburg, told MPs on the Public Accounts business prior to its collapse in January 2012. The Committee that taxpayers will pay a heavy price £69 million is just over half what the were for the sale to the Co-operative Group. owed. Other unsecured creditors have fared much worse and will receive virtually nothing. These Times, 18 September 2012 include HMRC - owed £19.65 million - and Peacocks' staff pension fund which has a shortfall 10. Lloyds has announced that it has no intention of of £15.8 million. abolishing free banking for in-credit accounts.

Sunday Telegraph, 26 August 2012 Sunday Telegraph, 16 September 2012

5. Barclays Capital is advising the wealthy Mexico- 11. Speaking at the CBI Scotland annual dinner, based Beckmann family in the sale of Jose Cuervo António Horta-Osório, boss of Lloyds Banking tequila to Diageo. The deal is said to be worth Group, spoke of the need to bring an end to the around $3 billion. The parties are in advanced sales culture that has riddled the banking industry talks. with scandal. Lenders have become "complacent, non-customer focused and inefficient" and must Daily Telegraph, 20 August 2012 now "recast" themselves as trustworthy, with a focus on customers. 6. The new chairman of Barclays, Sir David Walker, is standing down from his role as deputy chairman Daily Telegraph, 10 September 2012 of NBNK. NBNK will shortly be wound up after it failed to purchase any of the UK banking assets which had been made available in recent months,

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12. The Law Society of Scotland has announced that 17. The RBS Strategic Investment Group (SIG), one discussions with Lloyds Banking Group have of the UK's largest private equity teams, has resulted in the lender agreeing to change its policy swapped its debt for equity in over 350 struggling to allow title deeds to be sent to any Scottish companies, rather than resorting to putting solicitor firm instructed by a borrower for companies into administration or liquidation, and property sales or remortgages, whether or not they now has holdings worth over £4 billion. These are on its conveyancing panel. companies include many international household names, such as Samsonite and Jury's Inn, as well Law Society of Scotland, 22 August 2012 as smaller UK and European companies. Many banks see this strategy as a last resort, but John THE ROYAL BANK OF SCOTLAND Davison, head of SIG at RBS, believes that this approach will benefit RBS in the long run. 13. In an echo of the British Gas 'Tell Sid' privatisation in the 1980s, The Royal Bank of Financial Times, 27 August 2012 Scotland ("RBS") is to offer the public the chance to buy shares in its insurer Direct Line when it 18. Direct Line will be floated on the London Stock floats. Exchange following the failure of discussions with private equity firms to buy the insurance arm of Daily Telegraph, 14 September 2012 RBS. The sale of Direct Line by RBS has been ordered by the European Commission so that it 14. Shareholders of RBS threatening a £3.3 billion complies with EU state aid regulations. The EU lawsuit against the lender and its former directors has said that RBS must sell off half of Direct Line have been dealt a blow after a court in the United by 2013 and the remainder by 2014. The bank States dismissed similar allegations that the bank plans to sell off the insurance company in three had misled investors. The ruling by Judge separate listings between 2012 and 2014 to Deborah Batts in a New York district court maximize returns. dismissed "in its entirety" the case brought by US preference shareholders in 2009 and found that Sunday Telegraph, 26 August 2012 there had been no "material" mis-statements or omissions. 19. RBS has won a legal case over claims it mis-sold an interest rate swap to a property developer. The Daily Telegraph, 6 September 2012 court in Scotland ruled that the bank had not done anything wrong when it sold the swap to a small 15. Ross McEwan, the new head of RBS's retail property developer in 2007, with presiding judge, division, has been given a £3.2m "golden hello". Lord Hodge, dismissing claims by Grant Estates McEwan joined the bank from Commonwealth (GEL), saying that the bank behaved lawfully at Bank of Australia in May. His shares will be all times in the way the swap was sold and that linked to performance and judged on criteria RBS had no "duty of care" to the developer. including customer services and risk management, they will also be subject to clawback provision. Daily Telegraph, 22 August 2012

Daily Telegraph, 31 August 2012

16. RBS is expected to leave the scheme that 20. The head of wholesale banking at Standard guarantees it against excess losses on Chartered, Mike Rees, has said that it is possible approximately £100 billion of assets. RBS has that its wholesale banking section may double its said that it will leave the Asset Protection profits from just over $5 billion to $10 billion Scheme, run by the Asset Protection Agency within 5 years. This year the bank posted record (APA), by the end of 2012 at the latest and profits of $5.2 billion following a year on year possibly as soon as mid-October. The scheme increase over the past decade, fuelled by economic was described by RBS chief executive Stephen growth in Asia that has pushed up demand for its Hester as "essentially worthless" and the chief wholesale and executive of the APA has told its remaining staff services. to expect to be made redundant or reassigned imminently. Daily Telegraph, 18 September 2012

Times, 30 August 2012

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DOMESTIC GENERAL York and Connecticut are the latest to widen the investigation into the alleged manipulation, 21. The Federation of Small Businesses is concerned bringing the threat of prosecutions closer. about the compensation scheme for companies that have been mis-sold financial products which Daily Telegraph, 15 August 2012 starts as a pilot on 21 September 2012. It has written to the Chancellor arguing that the process 27. Chancellor George Osborne will advertise for a will be too slow and that the scheme should be new Bank of England governor to replace Mervyn King whose term expires in June 2013. Many of entirely independent of the banks. those considered suitable candidates for the post Financial Times, 20 September 2012 have had to withdraw their interest after becoming tainted by scandal. 22. Under a new agreement between the UK and the US, UK banks will have to pass details of their US Sunday Times, 12 August 2012 customers to the US authorities by 2015. The agreement is a modification of the US Foreign EUROPEAN BANKING Account Tax Compliance Act, which targets offshore bank accounts and was passed in 2010. CREDIT SUISSE

Financial Times, 20 September 2012 28. Credit Suisse is advising Blackstone and PAI, the private equity owners of United Biscuits snack 23. The Law Society has called on the Secretary of business, KP Snacks (which has household brands State for Business, Innovation and Skills to such as McCoy's, Hula Hoops and KP Nuts and mediate talks between the Society, the Council of Skips), on the sale of the £520 million snack Mortgage Lenders, the banking regulator and business. A four-page sales 'teaser' has been sent lenders regarding problems caused to law firms to half a dozen potential buyers and the Chinese and consumers by banks restricting membership of company, Wahaha, is in pole position. their conveyancing panels. Sunday Telegraph, 19 August 2012 Law Society's Gazette, 13 September 2012 DEUTSCHE BANK 24. According to the UK treasury, a government- backed bank based on the model of the 29. Werner Wenning, an influential supervisory board Reconstruction Credit Institute owned by the member at Deutsche Bank, has announced that he German government, would be unlikely to pass favours a cap on bonuses, putting him at odds with EU state aid and single market rules. the view of co-chief executive Anshu Jain, who wants to retain flexibility over bonuses without a Times, 13 September 2012 formal cap.

25. Which? has issued a report claiming that free Financial Times, 15 September 2012 banking is nothing more than a myth and calling for banks to be more transparent about hidden fees 30. Deutsche Bank has launched an open source and charges. The report compared the massive initiative called the Lodestone Foundation to variations in the costs of bank accounts which are encourage banks to share markets and trading supposedly free, noting that in some cases the software and thus lower costs. interest rates on unauthorised overdrafts can be higher than those on credit cards or loans. The Financial Times, 14 September 2012 British Bankers Association suggested that EUROPEAN CENTRAL BANK Which? was being "disingenuous", as charges can be avoided if customers do not get overdrawn. 31. A German court has rejected legal challenges to the Eurozone bailout fund and decided that the Daily Telegraph, 25 August 2102 European Central Bank's plan to buy medium-term 26. It has emerged that seven banks have been issued bonds from nations in debt if they apply to the with subpoenas in the United States relating to the European Stability Mechanism needs more ongoing scandal concerning allegations of Libor- consideration. rigging, increasing the pressure on the banking Times, 13 September 2012 sector over the scandal. Authorities in both New

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UBS will mean 2,000 BoA staff will switch to Julius Baer. 32. The jury in the trial of Kweku Adoboli, the City trader accused of fraudulently gambling away Independent, 14 August 2012 over £1 billion of his bank's money, has heard that he lost £123,000 of his own cash via a spread CITIGROUP betting account. Adoboli lost so much of his own money that he turned to a number of payday 37. Citigroup has turned down Nasdaq's plan to lenders. He also received two warnings at work compensate firms harmed by Facebook's IPO to for failing to declare that he had an account at IG the tune of $62m. Citi says the sum is far too low Index, a spread betting firm that allows customers and that hundreds of millions more dollars should to bet on financial instruments, which breached be on offer. the bank's rules. The jury also heard how, despite having an annual salary of £360,000 Adoboli's Daily Telegraph, 23 August 2012 personal bank accounts were mostly overdrawn. NOMURA Adoboli denies the charges against him. 38. Nomura is to cut more than 200 London-based Guardian, 18 September 2012 staff as part of a cross-European reduction in manpower. Last week, Nomura tried to downplay EUROPEAN GENERAL comments made in a newspaper interview by its new chief executive, Koji Nagai, that the bank 33. The European Commission has postponed intended to move its international headquarters publishing details of a single guarantee scheme to from London to New York. cover all Eurozone bank deposits following opposition from Germany. Daily Telegraph, 21 September 2012 Financial Times, 14 September 2012 INTERNATIONAL GENERAL 34. The European Commission has published proposals which suggest giving a new 39. The attorneys-general from at least six US states "supervisory board" of the European Central Bank are working closely together to decide whether or authority over all eurozone banks. The final not to bring a joint lawsuit against over a dozen proposals will be issued on 12 September 2012. banks accused of Libor interest rate manipulation. Over 20 lawsuits have been filed so far by Financial Times, 31 August 2012 individuals, cities and companies in the United States claiming damages for the Libor conspiracy, INTERNATIONAL BANKING but these actions have been resisted by the banks, which have argued that they are baseless. Any co- BANK OF AMERICA MERRILL LYNCH ordinated action by states could be much more worrying for the banks and less easily dismissed. 35. Bank of America Merrill Lynch has been hired by surf and boardwear company Rip Curl to advise The Times, 10 September 2012 on a possible sale. The company has received bids valuing the company at around £308 million PRESS RELEASES from private equity firms. A spokesman for Rip Curl said "we have received unsolicited 40. Mortgage Market Review: Commons Library approaches from several international Standard Note organisations". Rival Billabong is also currently considering two private equity bids. The House of Commons Library has issued a Standard Note describing the proposed changes to Daily Telegraph, 18 September 2012 the rules surrounding the granting of mortgages by lenders. 36. Julius Baer will pay £561 million for Bank of America's non-US arm. House of Commons Library, 20 September 2012 Bank of America decided to sell the business in April because it felt that it was not sizeable enough to be considered a core business. The sale

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Further information can be found on the Further information can be found on the FSA Parliament website: website:

http://www.parliament.uk/briefing-papers/ http://www.fsa.gov.uk/library/communication/ SN05808.pdf statements/2012/hbos.shtml

41. The Bill: the Financial 44. ECB extends the swap facility agreement with Policy Committee’s macro-prudential tools the Bank of England

HM Treasury has published a consultation paper The Governing Council of the European Central proposing that the Bank of England's Financial Bank (ECB) has extended its liquidity swap Policy Committee be given new powers to force arrangement with the Bank of England until lenders to increase capital buffers against bad September 30, 2013. debts if financial stability is at risk. It could also be given powers to vary leverage ratios, defining European Central Bank, 13 September 2012 how much debt a bank can take on. Further information can be found on the ECB HM Treasury, 19 September 2012 website:

Further information can be found on the http://www.ecb.int/press/pr/date/2012/html/ Government website: pr120912_1.en.html

http://www.official-documents.gov.uk/document/ 45. CP12/24: Regulatory Reform: PRA and FCA cm84/8434/8434.pdf regimes relating to aspects of authorisation and supervision 42. Core Principles for Effective Banking Supervision This FSA consultation seeks views on certain proposed changes to existing regulatory rules and The minimum standard for sound prudential guidance following the introduction of the regulation and supervision of banks and banking Financial Services Bill in January 2012, which systems is set out in the latest publication from the provides for the creation of the Financial Policy Bank for International Settlements. The revised Committee, the Prudential Regulation Authority set of twenty-nine core principles has been (PRA) and the Financial Conduct Authority reorganised to foster their implementation through (FCA). Comments by 12 December 2012. supervisory powers, responsibilities and functions, and supervisory expectations of banks. Financial Services Authority, 13 September 2012

Basel Committee on Banking Supervision, 18 Further information can be found on the FSA September 2012 website:

Further information can be found on the BIS http://www.fsa.gov.uk/static/pubs/cp/cp12-24.pdf website: 46. European Commission legislative proposals for http://www.bis.org/publ/bcbs230.pdf EU banking union

43. Update on FSA report into the failure of HBOS On 12 September 2012, the European Commission published two legislative proposals Following the conclusion of enforcement for the creation of a single supervisory mechanism proceedings against the former executive director (SSM) for banks in the eurozone, together with a of HBOS, the FSA has announced its intention to communication setting out the Commission's begin work on a review of the failure of HBOS in overall vision for the banking union. The 2008. The terms of reference of the review will Commission proposes to have the SSM in place be to: explain why HBOS failed, covering the by 1 January 2013, with a phasing-in period to FSA's supervision of HBOS and explaining the enable a smooth transition. It proposes that, as of focus of the enforcement actions; and inform a 1 January 2013, the European Central Bank (ECB) wider internal and public understanding of the will be able to decide to assume full supervisory causes of failure during the crisis. responsibility over any bank. From 1 July 2013, all banks of major systemic importance will be put Financial Services Authority, 13 September 2012

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under the supervision of the ECB. The phasing-in 49. Financial Services: contribution to the UK period should be completed by 1 January 2014, economy when all banks in the eurozone will come under the SSM. The House of Commons Library has issued a Standard Note setting out key statistics on the European Commission, 12 September 2012 financial services industry in the UK and measures the contribution made by it to the UK economy. Further information can be found on the Europa website: House of Commons Library, 22 August 2012

http://ec.europa.eu/internal_market/finances/docs/ Further information can be found on the committees/reform/20120912-com-2012- Parliament website: 511_en.pdf http://www.parliament.uk/briefing-papers/ http://ec.europa.eu/internal_market/finances/docs/ SN06193.pdf committees/reform/20120912-com-2012- 512_en.pdf 50. Treasury Committee publishes LIBOR report

http://ec.europa.eu/internal_market/finances/docs/ The Treasury Select Committee published its committees/reform/20120912-com-2012- report into LIBOR on 18 August 2012 following 510_en.pdf its inquiry into the Final Notice issued by the FSA with respect to Barclays on 27 June 2012. 47. Government bank rescues House of Commons Treasury Committee, 18 The House of Commons Library has published a August 2012 Standard Note setting out information concerning the Government's net expenditure on banks Further information can be found on the rescued during the financial crisis of 2008-9 and parliament website: the debts owed to it by other organisations. http://www.parliament.uk/business/committees/ House of Commons Library, 10 September 2012 committees-a-z/commons-select/treasury- committee/news/treasury-committee-publishes- Further information can be found on the libor-report/ Parliament website: CASE LAW http://www.parliament.uk/briefing-papers/ SN05748.pdf 51. Legal assignee of debt under a regulated consumer credit agreement is a "creditor" 48. Reforming financial markets VIII: within the meaning of the Consumer Credit Act implementing the new Basel regulatory capital 1974 rules Patricia Jones ("P") entered into a regulated The House of Commons Library has issued a consumer credit agreement with GE Money Standard Note describing the progress made on Consumer Lending Ltd ("GE"). She defaulted. individual issues concerning actual or proposed GE served on her the various demands and default reforms of either certain parts of the financial notices it was obliged to serve under the Consumer services sector or reforms of certain activities. Credit Act 1974 ("CCA"). It was therefore The note focuses upon the standards for prudential entitled to bring proceedings for the full amount capital and liquidity control put forward at various due in respect of principal and interest. levels of national and international authority. GE assigned the debt owed under the credit House of Commons Library, 22 August 2012 agreement to Link Financial Ltd ("Link") and Link gave notice of the assignment to P. http://www.parliament.uk/briefing-papers/ SN05594.pdf Link issued proceedings against P. The judge found that the assignment to Link was valid under s.136 of the Law of Property Act 1936. Link had

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become entitled to pursue the debt in question in assignee from bringing legal proceedings. S.141 private proceedings. stipulates which court has jurisdiction to hear proceedings brought by a creditor. If the assignee P appealed. She submitted that only a creditor as is not a "creditor" then the provisions within s.141 defined under the CCA can enforce a regulated do not apply. There would be no reason why the consumer credit agreement. A "creditor" is assignee could not bring a claim under s.136 of the defined by s. 189 of the CCA as: Law of Property Act county court jurisdiction or the courts' general jurisdiction. "…the person providing credit under a consumer credit agreement or the person to Patricia Jones v Link Financial Ltd, Queen's whom his rights and duties under the Bench Division, 22 August 2012 agreement have passed by assignment or operation of law..." (emphasis added). 52. Mis-selling of interest rate swap agreement claim fails As only rights, and not duties, pass by assignment, Link could not satisfy the definition of creditor as A property development company, Grant Estates set out in the CCA and could not therefore enforce Limited ("GEL"), entered into an interest rate the agreement. swap agreement ("IRSA") with The Royal Bank of Scotland ("RBS") in 2007. This had the effect of The court ruled that where there is a legal fixing the rate of interest due on GEL's borrowings assignment, the debtor's liability will be owed to from RBS. It protected GEL from the risk of the assignee and it is the assignee who has to rising interest rates but also prevented it from perform the statutory duties relating to benefitting from falling interest rates. The ensuing enforcement. This is not because he comes under financial crisis caused interest rates to fall sharply a contractual obligation to perform these duties in 2008. but rather because he cannot assert his rights under the regulated credit agreement without GEL encountered financial difficulties and RBS accepting the statutory obligation to perform placed it into administration in February 2011. duties under the CCA relating to the enforcement GEL challenged that decision and sought to have of those rights. the administration suspended.

A legal assignee stands in the shoes of the GEL and its two directors commenced an action assignor. Enforcement of an assignor's rights against RBS and the administrators. At the heart under a regulated consumer credit agreement is of the claim was an allegation that RBS's subject to performance of the statutory duties laid employees mis-sold the IRSA to GEL representing down in the CCA. A legal assignee's rights are it as a device to protect GEL from a rise in interest subject to performance of those duties too. rates. GEL asserted however, that far from protecting it, the IRSA became a burden. Had it The position is analogous to the assignment of a not incurred obligations under the IRSA it would contract containing an arbitration clause. An not have been in default of its obligations under its assignee of such a contract is bound to arbitrate in loan agreement with RBS and would not have accordance with the clause because it cannot gone into administration. assert its right inconsistently with the terms of the assigned contract. RBS pointed to the fact that GEL had agreed to RBS's terms of business which made it clear that The "duties" referred to in s.189 are, therefore, services were to be offered on an execution-only those statutory duties under the CCA which the basis and that advice would not be given. The assignee has to perform in order to enforce his terms of business also made it clear that GEL assigned rights. Those duties "pass by should obtain its own independent financial, legal assignment" in the sense that it is by reason of the and tax advice and that any opinions, research or assignment that the assignee becomes obliged to analysis provided by RBS would be for fulfil them. information only and would not amount to advice, an assurance or a guarantee. A legal assignee may therefore be a "creditor" as defined in the CCA. GEL claimed that RBS's written terms of business and other documentation containing waivers and The judge went on to say that even if that were disclaimers did not protect it from actions for wrong, s.141 of CCA would not preclude a legal breach of the Conduct of Business Rules

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("COBS"). S. 150 of the Financial Services and responsibility in the context of a common law Markets Act 2000 ("FSMA") however states that a claim. contravention by an authorised person of a rule is only actionable at the suit of a "private person". GEL's had also asserted that provisions in RBS's GEL was clearly not a "private person". To get terms of business purporting to exclude liability over this hurdle GEL argued that COBS for breach of contract in relation to the giving of implemented the Markets in Financial Instruments financial advice were not fair or reasonable under Directive 2004/39/EC ("MiFID") and that the UK the Unfair Terms Act 1977. However, this legislation and regulatory rules should be argument failed too, as the contractual terms interpreted bearing in mind the results that MiFID which GEL had accepted defined the relationship sought to achieve. As there was no distinction between the parties and the character of what made between an individual person and a RBS's employees said. Those terms did not corporate person in MiFID, GEL ought to be able restrict liability for breach of a contractual to sue the Bank for a breach of COBS. obligation but rather, by defining the scope of service, negated the relationship of adviser and Lord Hodge ruled that MiFID does not require a advisee and the assumption of a general or specific member state to provide protection to a customer advisory duty. GEL had agreed in advance the by means of a direct civil action against the contractual definition of its relationship with RBS authorised person. UK legislation provides and had to accept the consequences of that regulatory remedies for breaches of COBS. These agreement on its contractual and other common regulatory remedies do not distinguish between law claims. natural and non-natural persons. GEL was not a private person and could not sue for breach of (1) Grant Estates Limited (In Liquidation) (2) COBS. Its remedy, if it had one, lay with the FSA. Ruari Stephen (3) Jamie Stephen v (1) The Royal Bank of Scotland Plc (2) Thomas Campbell GEL argued that RBS had been asked for advice Maclennan and Kenneth Robert Craig, Joint and that its employees had given financial advice. Administrators of Grant Estates Limited, Outer This, it asserted, amounted to a contract to give House, Court of Session, 21 August 2012 such advice, giving rise to implied terms in relation to the exercise of skill and care. 53. Exit consent procedure in relation to corporate However, the fundamental problem with this bonds deemed unlawful argument was that the alleged implied contract contradicted RBS's terms of business to which Assénagon Asset Management SA ("Assénagon") GEL had agreed. GEL's arguments that there had sought a declaration from the court as to the been a breach of contract therefore failed. legality under English law of a technique used by the issuers of corporate bonds known as "exit GEL had also argued that it had claims for consent". This technique is used when an issuer negligent misrepresentation and negligent advice wants to persuade all its bondholders to accept an on the basis that RBS had made representations exchange of their bonds for replacement bonds on that interest rates were likely to rise and the IRSA less advantageous terms. The bondholders are all would offer protection. However, Lord Hodge invited to offer their bonds for exchange but on ruled that where parties have agreed terms in a terms that they are required to commit themselves contract then a common law duty of care cannot irrevocably to vote at a bondholders' meeting for a be imposed which conflicts with those contractual resolution amending the terms of the existing terms. If GEL relied on statements made by bonds so as to seriously damage or even destroy RBS's employees as investment advice then that the value of the rights arising from those bonds. reliance was not reasonable in the face of the contractual arrangements into which they had The exit consent has no adverse effect on a entered. bondholder who both offers his bonds for exchange and votes for the resolution. However, In reaching his view, Lord Hodge had noted that by contrast, a bondholder who fails to offer his the parties were of unequal bargaining power. bonds for exchange and either votes against the However, the contractual provisions did not resolution or abstains, takes the risk, if the supersede the regulatory regime which might resolution is passed, that his bonds will be either provide statutory remedies if GEL could establish devalued by the resolution or destroyed by being a breach of that regime. There was no basis for redeemed for a nominal consideration. overriding the contractual allocation of

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In this particular case, Assénagon, which was a received €170 for its 2017 Notes which had had a bondholder, alleged that the majority bondholders face value of €17 million. had abused their power to bind the minority, albeit at the invitation of the issuer. Its challenge was Assénagon argued that: based on the well recognised principle that the majority's powers to bind the minority must be ■ the resolution constituted the conferral of a exercised bona fide in the best interests of the power on the Bank to expropriate the 2017 class of bondholders as a whole and not in a Notes for no more than nominal consideration. manner which is oppressive or otherwise unfair to It was therefore ultra vires the power of the the minority sought to be bound. majority under the conditions of the trust deed ("Trust Deed") under which the bond had been The bonds in issue in this dispute were issued; subordinated floating rate notes ("2017 Notes") issued by Anglo Irish Bank ("Bank"). The 2017 ■ those Noteholders whose votes had been Notes were due to mature in 2017, for redemption counted in support of the resolution had held at par unless redeemed earlier at par by the Bank. their Notes beneficially, or for the account of They carried a floating rate of interest at 0.25% the Bank. All those votes should be above three months Euribor until 2012 and at disregarded pursuant to a provision in the Trust 0.75% above three months Euribor thereafter. Deed which provided that the issuer should not The 2017 Notes were subordinated so as to be be entitled to vote at any meeting in respect of prioritised for payment in an insolvency after all notes beneficially held by it or for its account; secured and unsecured creditors (including the ■ the resolution constituted an abuse of the power Bank's depositors) and ahead only of equity of the voting majority because it conferred no shareholders. They were wholly unsecured. conceivable benefit or advantage upon the 2017 In October 2010 the Bank announced an exchange Noteholders as a class and it affected the Notes offer whereby bondholders would be offered an of that minority which had not coupled an offer exchange of the 2017 Notes for New Notes in the of their Notes for exchange with a commitment exchange ratio of 0.20 (ie an offer of a holding of to vote in favour of the resolution. It was 20 cents of New Notes for every one Euro of 2017 therefore both oppressive and unfair as against Notes). The New Notes were not to be that minority. subordinated and were to carry a coupon of three The court held that the resolution did not of itself month Euribor plus 3.75%, to be guaranteed by sanction the exchange of the 2017 Notes for the the Irish government and to mature in December New Notes. That was a voluntary process in 2011. which the Noteholders were free to proffer (or not In connection with the exchange offer, the Bank to proffer) their Notes for exchange and the Bank also wanted to convene a subsequent separate was free to accept or reject the proffered meeting for bondholders to approve by exchange. The vires of the majority to pass the extraordinary resolution a proposal giving the resolution depended on the resolution falling Bank the right to redeem all, but not some only, of within the power set out in the Trust Deed for a the notes which had not been exchanged following three-fourths majority of Noteholders to "sanction completion of the exchange offer at an amount any abrogation … in respect of the rights of the equal to €0.01 per €1000 in principal amount of Noteholders…against the Issuer". Taking the the notes. It was a condition of participating in provisions of the trust deed as a whole, the the exchange offer that any bondholder should Noteholders must be taken to have assented to the vote in favour of the extraordinary resolution. exercise of a power of the majority to bind the minority both to a cancellation of the principal 92.03 per cent of the 2017 Noteholders by value payable on the Notes and to a cancellation of the offered their notes for exchange and conditionally minimum interest payable on them. The power to bound themselves to vote in favour of the abrogate was capable (in circumstances which did extraordinary resolution. The resolution was not otherwise amount to an abuse) of extending to passed, the exchange of 2017 Notes for New all the rights of the Noteholders as against the Notes took place and the Bank exercised its right Bank. to redeem the remaining 2017 Notes at the price of €0.01 per Euro 1000 face value. Assénagon However, the Notes which had been offered and accepted for exchange prior to the meeting were held for the Bank by the time of the meeting. All

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those Notes had been by that time held under second charge was taken over the twins' parents' contracts for sale between the relevant majority home. Noteholders and the Bank. That conferred a beneficial interest in the Notes on the Bank from The company did not prosper and went into the moment of the Bank's acceptance of the liquidation. The Bank took steps to enforce the offered exchange the day before the meeting. That guarantee submitting that the twins were jointly beneficial interest was an interest of the type and severally liable under the guarantee. contemplated by the prohibition in the Trust Deed and the votes of those Noteholders should be The twins defended the claim and sought to argue disregarded pursuant to the provisions of the Trust that the Bank's relationship manager had given Deed. them an assurance that the guarantee was only temporary, pending execution of the second Even if the judge were wrong on the prohibition charge over their parents' home, and that this had applying, he held that there had been an abuse of induced them to sign the guarantee. They argued power by the majority bondholders. It could not that this amounted to a collateral agreement, be lawful for the majority to lend its aid to the warranty or representation that was capable of coercion of a minority by voting for a resolution giving rise to the discharge or nullification of the which expropriated the minority's rights under indemnity once a second charge had been their bonds for a nominal consideration. In his executed. As the second charge had been words, an "exit consent" is, executed the Bank could no longer enforce the guarantee. "…quite simply, a coercive threat which the issuer invites the majority to level against the The two sides gave conflicting evidence. The minority, nothing more or less. Its only Bank argued that the guarantee had always been function is the intimidation of a potential an essential ingredient of the overall financing minority, based upon the fear of any individual package. A signing meeting had been held at the member of the class that, by rejecting the company's office and this was when the guarantee exchange and voting against the resolution, he had been signed along with waiver documents (or it) will be left out in the cold." stating that the twins had been advised by the Bank to take independent legal advice but had Such a form of coercion is entirely at variance chosen of their own volition not to. with the purposes for which majorities in a class are given power to bind minorities, and it is no In contrast the twins asserted that no such meeting answer for them to say that it is the issuer which had taken place and that the relationship manager has required or invited them to do so. Oppression had given the alleged assurance during a telephone of a minority is of the essence of "exit consents" of conversation. this kind, and it is precisely that at which the principles restraining the abusive exercise of Having considered all the evidence at some length powers to bind minorities are aimed. the judge was clear that the signing meeting had taken place when and where the Bank's employee Assénagon was entitled to the declaration it had said it had. Both HSL and IL had freely and sought. without any pressure signed the guarantee and waiver documents. The relationship manager had Assénagon Asset Management S.A. v Irish Bank never stated anything to HSL, whether at that Resolution Corporation Limited (Formerly Anglo meeting or on any occasion by telephone or at any Irish Bank Corporation Limited), Chancery other meeting, about the guarantee only being Division, 27 July 2012 temporary or tied to the execution of the second charge. 54. No evidence of inducement in guarantee claim The relationship manager had behaved with strict Twin brothers Harinderpal Singh Lotay ("HSL") propriety throughout. He had always intended that and Inderpal Lotay ("IL") were directors of a all three forms of security would be needed to building company. National Westminster Bank support the company's obligations to repay the PLC ("Bank") had agreed to grant the company a financing in full and that all three would remain in loan, overdraft facilities and a company place until the loan had been repaid in full. His facility. In return for this financing a debenture evidence had been honest, straightforward and was taken over the company's assets, HSL and IL accurate and was fully supported and corroborated gave a personal guarantee for £100,000 and a

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at every point by a host of other written and oral operational and other purposes had already been evidence. drawn down by this date.

The Bank was entitled to judgment against both FBME was subsequently given notice of an HSL and IL for £100,000 as their liability under intention to place Project-Pay into Creditors the guarantee was joint and several. Voluntary Liquidation. This entitled FBME to demand repayment of the sums which had been National Westminster Bank PLC v (1) lent to Project-Pay, which it did. Project-Pay did Harinderpal Singh Lotay (2) Inderpal Lotay, not pay and went into administration. Queen's Bench Division, 27 July 2012 56. FBME gave notice and made demand on E and 55. Lender entitled to refuse request for draw A under the guarantees. Neither E nor A paid down and FBME commenced proceedings against them. FBME Bank Ltd ("FBME") entered into a facility agreement with a company called Stonestream Ltd A argued that he should not be bound by the (later re-named Project-Pay) to provide a non- guarantee as it had not been in the terms which he revolving short term loan. At the same time, two had been expecting and it had not been signed on directors of the company, Mr Elwes ("E") and Mr behalf of FBME. He also argued that FBME had Aspin ("A"), entered into guarantees with FBME. not been entitled to refuse to draw down the The guarantees provided that the total amount of £72,000 and that this rendered the guarantee liabilities recoverable from E and A would be unenforceable. limited to £50,000 each. The guarantees also had an addendum, which had been signed by E and A The court ruled that the simple answer was that A but not FBME, stating that any liabilities arising signed the guarantee and was bound by it. To be under the guarantee "shall be discharged in full by enforceable at law the guarantee needed to be the Guarantor making five equal instalments paid signed by A but did not need to be signed by annually on each anniversary of and following the FBME. date of delivery of demand by the Bank to the Guarantor". The terms of clause 3.1 of the second facility agreement were plain. The various separate A second facility agreement was entered into elements could only be drawn down for use for the between FBME and Project-Pay. Clause 3.1 of specified purpose in each case. It was open to the that agreement provided that specified portions of parties to vary the provisions of the clause by the facility were to be used to for the acquisition agreement but they did not do so. FBME was of intellectual property rights, the upgrade of therefore entitled to rely on the agreed terms and "MTT 1581 units in stock" and operational to refuse to allow drawdowns which did not fall expenses. The existing personal guarantees for within the terms of clause 3.1. £50,000 from E and A were to remain in full force as security for the second facility. The relevant provisions of the clause which related to the upgrading of MTT 1581 units were quite At the same time as entering into the second specific and Project-Pay did not have any facility agreement, Project-Pay also entered into a entitlement to use money said to be devoted to debenture in favour of FBME. A schedule to the upgrading MTT 1581 units on replacing those debenture defined an "Enforcement Event" as units or taking steps to keep up to date with including the winding-up, dissolution, technological developments. administration or re-organisation of Project-Pay. The provisions of clause 3.1 were clear. The Project-Pay tried to draw down £72,000 pursuant parties could have agreed that all of the funds to the second facility agreement. It intended to advanced could have been spent however Project- use the money for a "Gateway" for effectively Pay wished or that the purposes for which the keeping pace with developing technology. funds could be spent were broader but they did not. The parties were bound by what had been FBME declined to allow that amount to be drawn agreed unless and until they agreed to vary those down. The funds sought to be drawn down did provisions. not relate to the acquisition of intellectual property rights or the upgrade of MTT 1581 units. Other Even if FBME had been in breach in refusing the parts of the funds which were to be utilised for request to draw down £72,000 that would not have

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had the effect of making A no longer liable under his guarantee. It might have given Project-Pay a claim against FBME but it would not have given A a cause of action. In any event clause 8(d) of the guarantee stipulated that the existence of any claim or set-off or other rights which A might have against Project-Pay, FBME or any other person, or which Project-Pay might have at any time against FBME would not discharge A's liabilities under the guarantee.

FBME was entitled to payment of £10,000 representing the first instalment due under the addendum provisions.

FBME Bank Limited v (1) Jonathan Elwes (2) Kevin Aspin, Queen's Bench Division, 25 July 2012

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This bulletin is intended as a general overview and discussion of the subjects dealt with. It is not intended, and should not be used, as a substitute for taking legal advice in any specific situation. DLA Piper UK LLP will accept no responsibility for any actions taken or not taken on the basis of this publication. If you would like further advice, please contact:

LEEDS: HUGH EVANS T 0113 369 2200 [email protected]

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This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. DLA Piper UK LLP and DLA Piper SCOTLAND LLP will accept no responsibility for any actions taken or not taken on the basis of this publication. If you would like further advice, please contact Hugh Evans (Leeds) T: 0113 369 2200, E: [email protected] or Ioannis Alexopoulos (London) T: 020 7796 6897 E: [email protected] or Stewart Plant (Manchester) T: 0161 235 4544, E: [email protected] on 08700 111 111. www.dlapiper.com

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