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England and Wales High Court (Chancery Division) Decisions |
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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Standish & Ors v The Royal Bank of Scotland Plc & Anor [2018] EWHC 1829 (Ch) (30 July 2018) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2018/1829.html Cite as: [2018] EWHC 1829 (Ch) |
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BUSINESS AND PROPERTY COURTS
OF ENGLAND AND WALES
BUSINESS LIST (ChD)
London EC4A 1NL |
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B e f o r e :
____________________
| (1) TRACY DAVID STANDISH (AND 8 OTHERS) |
Claimants |
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| - and - |
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| (1) THE ROYAL BANK OF SCOTLAND PLC (2) SIG NUMBER 2 LTD (formerly West Register Number 2 Ltd) |
Defendants |
____________________
Paul Casey (instructed by Addleshaw Goddard LLP) for the Defendants
Hearing dates: 5 June 2018
____________________
Crown Copyright ©
Chief Master Marsh:
" It is not appropriate to strike out a claim in an area of developing jurisprudence, since, in such areas, decisions as to novel points of law should be based on actual findings of fact."
Reference is made in the notes to a number of authorities to support that proposition, including the decision of the Court of Appeal in Richards v Hughes.
- June 2004 The company executed a debenture over its undertaking and legal charges over its properties in favour of NatWest.
- 2007 to 2009 The company's business was adversely affected by the smoking ban and the global financial crisis.
- 3 February 2009 The company entered into a new facility agreement with NatWest.
- April 2010 The company breached one of the financial covenants in the facility agreement.
- June 2010 The company was referred to RBS' Global Restructuring Group ("the GRG") with Mr Mark Anderson as its relationship manager. This was in place of the company's local relationship manager in Southampton.
- August 2010 Mr Kamaldeep Sondhi of West Register ("Mr Sondhi") started to attend meetings held between the company and RBS.
- At around this time Mr Sondhi stated that West Register wished to obtain an 80% stake in the company.
- November 2010 the company was charged default interest under the terms of the facility.
- Early 2011 the company became aware that it faced a claim by a former landlord for substantial amounts of rent during the term of the lease.
- February to June 2011 the company attempted to agree terms with RBS for a Company Voluntary Arrangement ("CVA"). RBS refused to agree terms which meant that a CVA was not possible.
- 1 July 2011 Terms were agreed for the "First Restructure" which took place by a Deed of Restatement of the 2009 facility (as amended). No debt was written off, but fresh terms were agreed. These included a number of onerous conditions, such as a requirement for the shareholders to provide funding for the company as subordinated debt. In addition, crucially, the First Restructure involved the transfer of 36.3% of the issued share capital in the company to West Register. As part of the First Restructure, Mr Sondhi was appointed as an observer to board meetings.
- January 2012 Mr Sean Cooper, who was nominated by the defendants, was appointed as chairman.
- March/April 2012 The "Second Restructure" took place alongside a CVA which had the principal effect of relieving the company of part of its rent burden. In addition, NatWest wrote off £4.45 million of the company's debt. Further shares were transferred to West Register with the result that it held 60% of the equity with 45% of the voting rights.[2] 20% of the shares were held for the benefit of employees. The net effect of the two restructures was to reduce the shareholding of the Standish family and associated shareholders, subject to the possibility of Mr Standish being allocated the employee benefit shares, from 100% to 20%.
- May 2012 Mr Tracy Standish who was managing director of the company was dismissed on what are said to be spurious grounds achieving one of the objectives of the conspirators.
- July 2014 RBS stated that the company was to be sold.
- March 2015 Terms for the sale were agreed.
- December 2015 The sale was completed.
"The facts of the present case must be, at the very least arguably, shocking to the conscience of the court. A company which [the defendants] assessed as viable, which needed a modest degree of forbearance, and which had put forward a credible CVA (of the very type agreed to by [the defendants] once they had obtained control of the company) was acquired by [the defendants] for themselves. Whether equity and the common law are impotent in the face of such unabashed profiteering by banks from good businesses in temporary distress is a matter of considerable public importance."
"There has been no case in which it has been held that the acquisition by the bank of a shareholding in a company large enough to enable the bank both to the control the company and to squeeze out the other shareholders does not give rise to any claims known to law. This is a fact-pattern specific to the actions of GRG which needs to be fully explored at trial. The court ought not to come to premature conclusions in advance of disclosure and evidence."
(1) That the relationship between the GRG and West Register was inappropriate and gave rise to a series of conflicts of interest that were not adequately addressed (5.1.74).
(2) That there had been cases of a material loss of ownership rights in a business where an unnecessary upside instrument had been required of the business (6.2.47).
"At a date or dates presently unknown to the Claimants, RBS, West Register and (subsequently) Mr Cooper ("the Conspirators") combined with the object of maximising their own equity in the Company and minimising the equity share of the Claimants."
(1) RBS acted in breach of a duty of good faith.
(2) RBS acted in breach of certain equitable duties.
(3) West Register (alternatively Mr Sondhi) acted in breach of its fiduciary duties as a shadow director.
"(1) RBS would perform the Customer Agreement and/or any sub- agreements entered into during the course of the relationship, in good faith and not in a commercially unacceptable or unconscionable way.
(2) RBS would exercise its powers or discretion under the Customer Agreement and/or any sub- agreements entered into during the course of the relationship, in good faith and not arbitrarily or capriciously or for an improper purpose. This obligation extended to include RBS's power or discretion to:
(a) remove the management of the company's relationship from the existing relationship management team at RBS and place under the management of RBS's purported turnaround division, the global restructuring group ("GRG");
(b) waive any covenant breach by the company;
(c) demand repayment of its loan facilities;
(d) vary the interest rates applied to the company;
(e) set the terms of any proposed refinance package for the company, and the time to be allowed for negotiations in relation to the same."
"14. From the outset of the relationship and all material times subsequently, the Company and RBS shared certain understandings about the relationship, including that:
(1) The relationship was envisaged to be a long-term and developing relationship.
(2) The parties would need to work together cooperatively throughout the length of the relationship.
(3) RBS and the company would at all times act in good faith towards the other, and neither would behave in a commercially unacceptable or unconscionable way towards the other.
(4) Debt finance, and the terms on which it was provided with vital to the company's business."
"18A. As the agent of the mortgagee and/or chargeholder, RBS owed to the Company and to the Claimants, as persons interested in the business, duties in equity:
(1) To act in good faith towards the Company and to the Claimants;
(2) Not to exercise its powers as mortgagee, or to threaten to exercise its powers as mortgagee, for an improper motive;
(3) To act fairly towards the Company and to the Claimants;
(4) Not to act unconscionably towards the Company or the Claimants;
(5) Not to act in a manner which unfairly prejudices or wilfully and recklessly sacrifices the interests of the Company or those of the Claimants."
(1) There is no basis upon which the claimants will be able to establish the existence of the Customer Agreement.
(2) If the Customer Agreement existed, or the sub-agreements were subject to the implied terms (albeit this is not the claimants' case), they do not assist the claimants.
(3) There is no basis in law for the equitable duties.
(4) West Register/Mr Sondhi only owed fiduciary duties to the company in respect of the instructions or directions they gave to the board. No breach of duty is asserted in relation to such instructions or directions.
The Customer Agreement and the implied terms
" I agree that the boundaries of the doctrine are not clear. I would not expect them to be so. As the question whether or not any such contract is to be implied is one of fact, its answer must depend upon the circumstances of each particular case - and the different sets of facts which arise for consideration in these cases are legion. I also agree that no such contract should be implied on the facts of any given case unless it is necessary to do so: necessary, that is to say, in order to give business reality to a transaction and to create enforceable obligations between the parties who are dealing with one another in circumstances in which one would expect that business reality and those enforceable obligations to exist."
"It must, surely, be necessary to identify conduct referable to the contract contended for or, at the very least, conduct inconsistent with there being no contract made between the parties to the effect contended for. Put another way, I think it must be fatal to the implication of a contract if the parties would or might have acted exactly as they did in the absence of a contract."
"59. For a contract to come into existence, there must be both (a) an agreement on essentials with sufficient certainty to be enforceable and (b) an intention to create legal relations.
60. Both requirements are normally judged objectively. Absence of the former may involve or be explained by the latter. But this is not always so. A sufficiently certain agreement may be reached, but there may be either expressly (i.e. by express agreement) or impliedly (e.g. in some familiar situations) no intention to create legal relations.
61. An intention to create legal relations is normally presumed in the case of an express or apparent agreement satisfying the first requirement It is then for the party asserting such a contract to show the necessity for implying it. As Morison J said in his para 12(1), if the parties would or might have acted as they did without any such contract, there is no necessity to imply any contract. It is merely putting the same point another way to say that no intention to make any such contract will then be inferred."
(1) The default position is that nothing is to be implied into a contract; the more detailed the contract, the stronger that presumption will be.
(2) The court needs to construe the express words first and then consider implied terms. Until it has been decided what the parties have expressly agreed, it is difficult to see what, if anything, they each have impliedly agreed.
(3) It is impossible to imply into a contract any term or condition inconsistent with the express provisions and, even if there is no necessary inconsistency, an express term in a contract excludes the possibility of implying any term dealing with the same subject matter.
(4) A term can only be implied if it reflects the only meaning consistent with the other provisions of the instrument. If the omission to include an express provision may have been deliberate, no term will be implied.
(5) The implied term must be reasonable and equitable. On the other hand, it is not enough that a term is reasonable or appears fair or equitable for it to be implied. These are necessary but not sufficient grounds. The sufficient ground is that the implied term must be necessary to give business efficacy to the contract and is so obvious that it goes without saying. Moreover, a term can only be implied if, without the term, the contract would lack commercial or practical coherence.
(6) Because the implication of terms is potentially so intrusive, the law imposes strict constraints on the exercise of the power.
(1) Clause 4 deals with interest. Clause 4.1 provides that the interest payable by the borrower is to be the aggregate of three elements including "the margin" which is a defined term meaning 2.75% initially and thereafter the sum calculated in accordance with clause 4.2. Clause 4.2 permits the bank to review the margin in accordance with a formula. Clause 4.4 gives the bank the right to charge interest at a higher rate in the event of a default. The rate is specified to be 4.75% above BBA LIBOR and Mandatory Costs "or such other rate as may be determined by the bank.
(2) Clause 13 defines twelve events of default. Most are defined events. However, the "material adverse change" event is defined by reference to the opinion of the bank. The claimants also point to the provision that applies in relation to all the events of default that the bank may by written notice declare all sums due to be immediately payable.
(1) The circumstances of its creation are wholly unparticularised. The claimants say they are at a disadvantage in pleading their case because they no longer control the company and do not have access to its papers. Whilst there is some truth in this assertion, it is not open to the claimants to avoid setting out their claim in general terms. After all, the first claimant, Mr Tracy Standish, dealt with NatWest and he must know of their dealings. There is simply no basis put forward from which the court might be able to conclude that the parties turned their minds at any stage to the question of whether or not their business relationship, beyond the black letters of their written agreements, gave rise to an additional agreement with wider duties and responsibilities placed upon the bank (which themselves were to be implied into the implied contract).
(2) The contract fails the necessity test. The parties were already dealing with each other in accordance with written contracts and there was no need for another contract to govern their relationship. The claimants are unable to point to any conduct that might have been different had the contract been in place.
(1) The shared assumptions are put forward at a high level of abstraction and they cannot provide a basis for implying additional terms.
(2) Equally, the policy known as TCF does not form a basis for implying terms. TCF is one of the rules of the "Principles for Business" of the FCA Handbook ("PRIN"). Compliance with TCF is mandatory for RBS' regulated business. The decision to extend compliance to the non-regulated side of the bank's business was voluntary. In swaps cases claimants have unsuccessfully argued that terms could be implied in their derivative contracts that the bank would comply with PRIN. A recent example of this is the decision of HHJ Waksman QC (as he then was) in Flex-E-Vouchers v RBS [2016] EWHC 2604. It would be anomalous if terms could not be implied in a regulated context but were to be implied in an unregulated case where the bank, unknown to its customer, voluntarily extends TCF to them. All the more so if the term is to be implied into a contract which itself arises by implication.
(3) The implied terms the claimants rely on would not achieve their objective. It is necessary to distinguish the exercise of a discretion as opposed to the exercise of a contractual right that involves making an assessment or choosing from a range of options: per Jackson LJ in Mid-Essex Hospital Services NHS Trust v Compass Group UK [2013] EWCA Civ 200 at [83]. The claimants rely on five contractual discretions at paragraph 15.2 of the particulars of claim (set out above). Taking them briefly in turn:
(a) There is no contractual term upon which what is said to be the exercise of RBS' discretion to remove the company's management can bite.
(b) The discretion to waive any covenant breach by the company is not the type of discretion that engages a 'Socimer' type term. The discretion is merely that the bank could make a choice about whether to enforce a breach of the terms of lending.
(c) The bank did not demand repayment of its loan facilities so the exercise of a discretion to do so does not arise. The claimant's reliance on clause 13 of the facility agreement, which refers to there being a material adverse change, does not assist them.
(d) The bank had only a very limited right to vary interest rates under clause 4 of the facility in the event of a default. This is not the sort of contractual discretion that could be the basis for an implied term.
(e) The facility agreement does not deal with the terms of a refinance package.
Equitable duties
"18A. As the agent of the mortgagee and/or chargeholder, RBS owed to the company and to the claimants, as persons interested in the business, duties in equity:
(1) To act in good faith towards the Company and to the Claimants;
(2) Not to exercise its powers as mortgagee, or to threaten to exercise its powers as mortgagee, for an improper motive;
(3) To act fairly towards the Company and the Claimants;
(4) Not to act unconscionably towards the Company or the Claimants;
(5) Not to act in a manner which unfairly prejudices or wilfully and recklessly sacrifices the interests of the Company or those of the Claimants."
"The equity of redemption was a Chancery invention, introduced in order to ensure that a conveyance by way of mortgage remained a security for the repayment of money whether or not the date fixed for repayment and reconveyance had passed. The duties imposed on a mortgagee in possession, and on a mortgagee exercising his powers whether or not in possession, were introduced in order to ensure that the mortgagee dealt fairly and equitably with the mortgagor. The duties of a receiver towards the mortgagor have the same origin. They are duties in equity imposed in order to ensure that a receiver, while discharging his duties to manage the property with a view to repayment of the secured debt, nonetheless in doing so takes account of the interests of the mortgagor and others interested in the mortgaged property. These duties are not inflexible. What a mortgagee or a receiver must do to discharge them depends upon the particular facts of the particular case.
the duty in equity appropriate to have been owed by a mortgagee selling in 1888 is not necessarily of the same weight as the duty appropriate to have been owed by a mortgagee selling in 1967. Equity is at least as flexible as the common law in adjusting the duties owed so as to make them fit the requirements of the time." [my emphasis]
(1) Equitable duties are owed by the mortgagee to the mortgagor and any other interested party;
(2) The mortgagee is subject to equitable duties when exercising its powers, whether or not the mortgagee is in possession;
(3) The equitable duties include, butt are not necessarily confined to, a duty of good faith;
(4) Equity is flexible in adjusting the duties owed so as to make them fit the requirements of the time;
(5) The extent and scope of any duty beyond a duty of good faith is dependent on the facts and circumstances of the particular case.
Shadow directorship and fiduciary duties
"(1) Mr Sondhi demanded to see board meeting agendas in advance and
added items to the said agendas;
(2) Mr Sondhi intervened during board meetings to require information and explanation to his satisfaction with regard to each item;
(3) Mr Sondhi imposed new and onerous contracts of employment on [Mr Standish] and Mr Cullaney as part of the First Restructuring;
(4) In around October 2011, required the instruction of KPMG in lieu of MCR to advise the company as to the terms of a CVA;
(5) In around November 2011, decided, on behalf of the Company, that the Company would engage a turnaround consultant;
(6) In around November 2011, decided, on behalf of the Company, the terms on which a turnaround consultant would be engaged by the Company;
(7) Mr Sondhi insisted, in around December 2011, that the Company appoint a turnaround consultant from a shortlist of three candidates identified by RBS;
(8) In around 2012, Mr Sondhi insisted that the Company appoint Mr Cooper, the turnaround consultant who had been selected, as the chairman of the Company;
(9) In around May 2012, Mr Sondhi instructed Mr Cooper to dismiss [Mr Standish] as managing director of the Company."
"(1) A duty to act in the way it/he considers, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole.
(2) A duty to avoid a situation in which it/he has an interest that conflicts, or possibly may conflict, with the interest of the Company."
"(1) In breach of the duty to promote the success of the Company West Register (acting together with RBS):
(a) refused reasonable proposals made by the Company which would have allowed it to trade through its difficulties while adequately protecting West Register and RBS's position;
(b) imposed unnecessarily high rates of interest and additional charges on the Company, which led to a further deterioration in its financial position;
(c) made excessive demands on management time, which distracted management from taking additional steps to improve the company's position.
(2) In breach of the no conflict duty, West Register (alternatively Mr Sondhi) allowed itself to assume a position where the board were accustomed to acting in accordance with its instructions, in circumstances where West Register (and Mr Sondhi) was improperly influenced by the Unconscionable Purpose [the defendants' goal of obtaining 80% of the shares of the company].
(3) In breach of both the duty to promote the success of the company and of the no conflict duty, Mr Sondhi, acting as the employee of West Register and/or as the agent of RBS, who are therefore vicariously liable for his actions;
(a) Promoted the Second Restructure;
(b) Refused to agree to alternatives to the Second Restructure."
"In the end, my own view is that Ultraframe understates the extent to which shadow directors owe fiduciary duties. It seems to me that a shadow director will typically owe such duties in relation at least to the directions or instructions that he gives to the de jure directors. More particularly, I consider that a shadow director will normally owe the duty of good faith when giving such direction or instructions. The shadow director can, I think, reasonably be expected to act in the company's interests rather than his own separate interests when giving such directions and instructions."
(1) The defendants say that the allegations at paragraphs 51(1)(a) and 51(3) (failing to accept reasonable proposals to enable the company to trade through the difficult period and acting in breach of a conflict of interest by promoting the second restructure and by refusing to agree alternatives to it) are defective because the claimants have not identified the alternative proposals which they say the defendants should have accepted. Absent the 'counterfactual', the allegation of breach of duty is empty.
(2) In relation to the same allegations, disregarding the defect the defendants identify, they say they are bound to fail because:
(a) The de jure directors of the company were fully aware of Mr Sondhi's conflict of interest.
(b) No duties were owed in relation to the Second Restructure because it is not alleged that either Mr Sondhi or West Register gave any instructions or directions to the company concerning the Second Restructure. What in fact happened was that Mr Sondhi participated in negotiations with the company on behalf of West Register of terms that the claimants disliked. There is no claim that the claimants' will was overborne. They accepted the terms pressed on them by West Register. This outcome does not involve a breach of fiduciary duty by Mr Sondhi or West Register as a shadow director.
(c) These allegations expose failings on the part of the board of directors that are in equal measure to the failings alleged against the shadow director.
(3) As to the allegation that, in breach of the duty to promote the best interests of the company, excessive interest was charged, there is no allegation, nor could there be, that the bank had no right to charge the interest it levied.
(4) The allegation that Mr Sondhi behaved in a way that was distracting at board meetings overlooks the time the directors were able to spend outside board meetings improving the fortunes of the company and, in any event, it is fanciful to suggest that such behaviour caused loss.
(5) The allegation that there was a breach of the no conflict rule while thinking of a plan to increase West Register's shareholding misses the point that merely thinking about action that may be a breach of duty is not a breach of duty.
Conclusions
Note 1 References in this judgment to the particulars of claim are to the draft amended particulars of claim. [Back] Note 2 The claimants case is that West Register came to control 80% of the equity in the company. [Back]
