Topical Industry News
When is a default due to Insolvency not a default?
There has been an interesting and somewhat landmark ruling in the ongoing Lehman Brothers court case.
Lehman Brothers International entered administration in 2008 as a result of its involvement in the suboptimal mortgage crisis. At the time, Lehman Brothers was party to two interest rate swap transactions with FR Acquisitions Corporation Ltd and JFB Firth Rixson.
Under the interest rate swap agreements, Firth Rixson owed Lehman Brothers more than £8 million. However, the ISDA Master Agreements governing the Swaps contained a term that made any payment obligation arising under the transactions subject to the condition precedent that “no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing”.
The administration of Lehman Brothers was highly successful, with the Administrators having paid in full (or fully reserved for) all provable debts (including subordinated debts), statutory interest entitlements, and non-provable liabilities.
The Court found that, if and when the Administrators have been discharged and a notice has been published that Lehman Brothers has surplus assets over liabilities and is able to pay its debts as they become due, (a) no Event of Default will be continuing under the ISDA Master Agreements, and (b) Firth Rixson will have a contractual obligation to pay the sums owing to Lehman Brothers under the Swaps.
For more information about the ruling, visit Insolvency Insider
HBOS Reading fraud
On 30th January 2017, two former HBOS employees, Lyndon Scourfield and Mark Dobson, were convicted following a four-month trial into corruption and fraud at the Reading offices of HBOS, subsequently taken over by Lloyds Bank.
The fraud involved a firm of consultants, Quayside Corporate Services Ltd, whose services would be imposed on the bank’s small business customers in exchange for bribes.
Quayside purported to be turnaround consultants but far from helping businesses they milked them for huge fees and used their relationship with the bank to bully the business owners and strip them of their assets.
The fraud was uncovered by Nikki and Paul Turner who formed SME Alliance and led a campaign against Lloyds bank for over a decade to get to the truth.
Lloyds bank continued to deny any wrongdoing up until the trial but have now had to admit the position and set aside funds to compensate the victims.
It remains to be seen if victims will get the true level of compensation that they deserve.
The LIBOR scandal peaked at the height of the financial crisis in 2008 and involved various banks and financial institutions fixing the London Interbank Offer Rate (LIBOR).
LIBOR is the average of interest rates estimated by each of the leading banks in London that they would be charged if they were to borrow from other banks.
Bankers from various financial institutions colluded to provide information on interest rates which would artificially increase or decrease the rate so that they could profit from the changes.
The scandal was significant because LIBOR plays a role internationally in determining the price businesses pay for loans and individuals pay for mortgages, and is also used in derivatives pricing. In aggregate LIBOR underpins over $300 trillion of loans and transactions globally.
The scandal dates back to at least 2005 and potentially as far back as 2003.
Regulators in the UK and USA have fined banks more than $9 billion, though many borrowers and other affected businesses and institutions have also started legal action to recover their losses.
Tailored business loans
Interest Rate Hedging Products (IRHPs) and in particular interest rate SWAPS have been widely publicised following the FCA scheme that was set up to ensure banks provide compensation to SMEs adversely affected by these products.
Most businesses are unaware they can obtain compensation in relation to the misselling of Fixed Interest Rate loans (sometimes referred to as Tailored Business Loans) which are not regulated by the FCA and not included within the FCA compensation scheme.
These fixed interest rate loan products were actively sold by some banks and were specifically designed to avoid FCA regulation. They generally included an IRHP embedded within the loan and therefore carried the risks of an IRHP product but without the safeguards provided by the FCA.
The loans were sold on the basis that interest rates would increase without adequate disclosure of the risks and implications of the product, especially in a prolonged low interest rate environment. This can result in serious business debt problems.
AFT have helped clients obtain compensation for these products even in cases where the loan has been repaid and the clients have moved banks.
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Global Restructuring Group (GRG)
The Global Restructuring Group was a separate division of Royal Bank of Scotland which was established to manage business clients who might experience financial difficulty. However a number of serious allegations have been raised about GRG’s actions as the group’s aim was to secure as much profit as possible for the bank rather than to help turn around the businesses transferred into it.
First highlighted by Lawrence Tomlinson, the actions of GRG included charging extortionate fees, aggressive debt restructuring and debt for equity swaps.
The bank also used another of its divisions, called West Register to buy assets of companies managed by GRG and there are examples of the bank actively looking to create a default on a loan facility in order to justify transferring a business to GRG.
RBS has now released a formal apology for its actions and has set aside £400m to compensate customers affected by GRG.
If you would like to discuss how your business has been affected by GRG’s actions please get in touch.
Enterprise Finance Guarantee (EFG) Loans
EFG is a government-backed scheme designed to promote lending to small businesses that would not normally be able to obtain funding due to a lack of or insufficient security.
The government provides the lender with a guarantee for 75% of the loan in order to share the risk should the borrower default. However the borrower remains liable for the full amount of the loan and the lender must realise any security obtained from the borrower before it can rely on the government guarantee.
While the purpose of the EFG scheme is to promote lending to small businesses some borrowers have expressed concern that it has been used by banks to enhance their own position with little or no benefit to the borrower. In addition some borrowers have been led to believe that they would be supported by the Government guarantee and, as a result, they would only have to repay 25% of the loan.
If you have obtained an EFG loan and would like to talk through your particular circumstances please get in touch.
Interest Rate Hedging Products
We have been actively assisting our clients in getting financial compensation from banks involved in the misselling of Interest Rate Hedging Products (IRHPs).
An interest rate SWAP is a type of complex financial derivative (an IRHP) although there are other products, including CAPS, COLLARS and many more.
IRHPs were marketed on the assumption that interest rates would increase, but they were overly complex and speculative instruments. Banks encouraged the sale of these products to their customers and in many cases the full implications and risks were not disclosed.
The compensation for those companies affected by the banks’ actions comes in two parts:
- Basic redress – the direct costs paid by SMEs for these products
- Either a rate of interest paid on the basic redress sum, or an amount equivalent to other losses incurred by the SME as a result of being deprived of the funds. This is commonly referred to as “consequential losses”
Most banks have agreed to repay basic redress claims, but have been less forthcoming in accepting consequential loss claims.