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11 February 2020
Representatives of a lender on a board will not automatically impose directors' duties on the lender, but they may apply where a director's specific instructions have led directly to a breach of fiduciary duty. The High Court recently explored this issue in an appeal in the case of Standish v Royal Bank of Scotland plc.(1)
The claimant comprised current and former shareholders of Bowlplex Ltd, which operated a bowling business at numerous sites across the United Kingdom. The first defendant, the Royal Bank of Scotland (RBS), had provided Bowlplex with banking facilities since 2004.
Following a period of financial downturn, Bowlplex's account with RBS was placed into the bank's turnaround division, known as the global restructuring group (GRG). The now widely reported methods employed by GRG, purportedly to turn around customer businesses, were highly controversial. Specifically, the relationship between GRG and West Register (the division of RBS which acquired and managed the assets of GRG companies and the second defendant in the present case) was found in one report to be inappropriate and gave rise to a series of conflicts of interest.
Around the time of the first restructuring, two important appointments were made:
This restructuring also saw Bowlplex relinquish 35% of its shareholding to West Register.
Bowlplex subsequently recommended to GRG that a company voluntary arrangement (CVA) be considered to allow Bowlplex to continue trading.
The implementation of the CVA included a write-off of £4.5 million of debt owed to RBS, in return for a redistribution of equity holdings that increased West Register's share of Bowlplex to 60%. Subsequently, with RBS's support, Cooper dismissed Bowlplex's managing director and in 2015 Bowlplex's entire share value was sold. This resulted in a return of approximately £22.6 million, of which £13.6 million was paid to West Register in accordance with the reorganised equity holdings.
Bowlplex's claim against RBS and West Register was that RBS (and Sondhi) took steps to undermine the company's financial position to enable the bank or West Register to acquire 80% of the company's equity at the expense of Bowlplex. The losses claimed were the amounts that the claimants' shares would have been worth had the restructures not occured. Bowlplex contended that:
Following a strike-out application, a High Court appeal considered which directors' duties the defendants owed as shadow directors. It had not previously been definitively determined whether a shadow director could owe the same general duties to a company as a formally appointed director.
In considering the issue, the judge noted the following:
In dismissing the appeal, the court rejected the claimants' argument that the instructions of West Register or RBS were sufficiently linked to the breach. The pleaded acts of Sondhi and West Register did relate to the conduct of board meetings, but they did not amount to an instruction or direction to Bowlplex to implement the restructuring.
Although the appointment of Cooper was a definitive act taken by the defendants as shadow directors, the claimants could not show that either the instruction to appoint Cooper or the subsequent direction to remove the managing director could have caused Bowlplex to enter into either restructuring – the instruction to remove the managing director was not given until the second restructure had been completed. It was further noted that the application of commercial pressure was not the same as giving an instruction or direction from which the status of shadow directorship could flow.
This judgment helps to clarify the position for those considering claims as a result of allegedly improper treatment by lenders.
Although the appeal was dismissed, the decision did not go so far as to provide wholesale protection to financial institutions which continue to face allegations that the methods employed by representatives of their turnaround divisions following the financial downturn breached duties owed to borrowers.
However, for those which feel that their decision-making processes have been subject to improper intervention by shadow directors, it is now clear that a successful claim must show that a lender's behaviour amounts to far more than the application of commercial pressure in protection of its own interests.
For further information on this topic please contact Joseph Cresswell or Parham Kouchikali at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
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