In a talk given to the All Party Parliamentary Group on Fair Business Banking at Westminster, Cat Maclean discusses the issue of companies left powerless after their debt has been transferred to vulture funds.
A great many of our clients have seen their debt, whether it was with the Clydesdale, Allied Irish Bank, or some other bank, transferred by the bank to vulture funds such as Cerberus, Promontoria Henrico, Clipper.
In a number of cases, our clients had solid claims against their bank, whether for breach of promise or other misfeasance, and we had actually raised proceedings against the bank in question. Despite the fact that million pound claims had been lodged in court, these debts were blithely transferred to vulture funds who began aggressive pursuit of their debt. As you can imagine, they weren’t best pleased to learn that the debt was disputed and it has been an uphill struggle to persuade them that they must await the outcome of the court proceedings.
These situations are difficult and distressing for the borrower. In these situations though, the borrower retains a control of sorts: it is his company, his decision to pursue his bank, and his choice to expend precious funds on the fight. How much more distressing, then, when all control is taken away from a director of a company which has been placed in insolvency. When this happens, all the control, and all the choices, rest with the liquidator.
I thought the simplest way to illustrate this, would be to tell you a true story. This is the story of a small property rental company, specialising in short term apartment lets in Edinburgh city centre. They were a small, successful company, but unsurprisingly in the economic meltdown unleashed in 2008, times were hard.
The business had been sold a fairly toxic product by their bank, known as a Tailored Business Loan or “TBL”. These products in all respects operated in exactly the same way as derivatives, involving the same increase in monthly payments when interest rates fell, and the same issue of high breakage charges making it impossible to refinance or repay the loan early. However, they were particularly toxic products, perhaps even more so than swaps because despite the way they worked, nevertheless, TBLs are NOT regulated by the FCA. As a result, when the FCA set up its Redress Programme to compensate those who had been missold, the programme excluded the hundreds of thousands of businesses who were missold TBLs and who had incurred significant increased cost and who were locked in for many years due to high breakage charges – as much as 30 or 40% of the underlying loan.
In the case of the company I was telling you about, by June 2010, they had paid around £65k of additional interest as a result of the TBL. Unsurprisingly, they were struggling, and as a consequence their overdraft crept up – to all of £30k.
And so, in June 2010, because of the desperately troubling overdraft of £30k, the company was put into the bank’s recoveries group.
Bear in mind, that at the time that the £30k was being demanded by the bank, the company had paid over twice this amount in additional interest under the TBL. Had it not been for overpaid interest, the company would not have gone into recoveries.
If we wind the clock forward to February 2013, at this time the Clydesdale had come under serious pressure in relation to their TBLs, and had undertaken to follow the same basic guidelines as those applied in the FCA Review Process in relation to companies in difficulties, and had undertaken not to take any adverse steps to place any such companies in an insolvency process whilst a complaint in relation to the misselling of a TBL product was underway.
The company had submitted a claim for the missale of their TBL, and had been told that their claim was being considered by the bank. However, In February 2013, despite the Clydesdale’s promises, they pushed the company into administration, as a result of a default that had arisen in relation to an overdraft facility – an overdraft facility that would never have been required but for the TBL. At this stage, all the company’s assets, including its claim against the bank, were immediately stripped from the hands of the directors and ownership passed to the administrator. This meant the administrator could do exactly as he pleased with everything that had formerly belonged to the company.
The company’s misselling claim totalled around £1.4 million, consisting of around £180k of additional interest payments, together with consequential losses – that is, the lost opportunities and loss of profit sustained by the company. The company had commissioned a report from a respected Scottish forensic accountant, which valued the CL claim at £1.4 million.
In late 2015, the bank offered the sum of £180k (in round terms) to the administrator, but insisted that the basic redress offer had to be accepted in full and final settlement of the entirety of the TBL claim – that is excluding any consequential losses. The company urged the administrator not to accept the basic redress offer, and the directors asked the administrator to assign the claim to them so that they could pursue it at their own cost. Despite this, the administrator refused point blank. He would not pursue the claim himself but he would not allow anyone else to pursue it either. In April of this year the administrator accepted the basic redress offer. It may be no coincidence that the basic redress offer broadly equated to the administrator’s fees.
The company and its directors have been left absolutely powerless to pursue a claim which on any view, standing the bank’s offer of full redress, was a pretty solid one. They have no locus to challenge the settlement reached between the administrator and the bank. So where do they go from here? Their only hope – and it is a slim one – is to try to challenge the administrator on the grounds that he was professionally negligent – but this is a very high hurdle to get over legally – and even if they do, the process will be time consuming and very very expensive.
As I hope this case study illustrates painfully clearly, at the point at which a company is placed in an insolvency process, whether it is administration or liquidation, the directors of that company lose control completely. They lose any right to be heard, and any right to have their views taken into account. So far as the insolvency process is concerned, they are nothing. Their voice is lost.
All of which is bad enough – but if the directors have given Personal Guarantees, they may be in the uniquely awful position of having no say in how claims are pursued, or not pursued, or compromised, yet having an acutely painful personal interest in those claims because they owe substantial sums to their principal creditor as a result of having guaranteed the company’s debts. Put another way, the company may have a claim against the principal creditor, and the principal creditor may hold substantial guarantees from the directors – but the administrator can choose not to advance the claim against the creditor, and leave the creditor to pursue the directors under the guarantees.
So in the case I have been talking about, if personal guarantees are involved, it seems likely that the creditor, the bank, will be able to bury the consequential loss claim, no matter how strong a claim that may have been, and will be free to pursue the directors under the guarantees.
It’s a deeply unfair position to find yourself in, when you have done nothing wrong, and the reason you ended up in default was due to a wrong on the part of the bank which they have admitted to.
And as a lawyer, situations like this make me feel angry, frustrated, and a little bit ashamed that we can’t do more.”
- Cat Maclean is a partner at MBM Commercial.