BANKING & FINANCE: An Introduction
BANKING & FINANCE: An Introduction
Contributed by Ian Wilson QC and William Day of 3 Verulam Buildings
Current trends in banking and finance litigation, like other sectors of the commercial dispute resolution market, are driven by COVID-19 and Brexit. The UK is experiencing its sharpest recession on record and commercial loans on bank balance sheets are looking increasingly risky. As after the financial crisis of 2008, the types of banking and finance dispute likely to arise in the course of 2020-2021 can be sorted into two principal categories.
The first category of dispute arises in the course of defending a bank’s enforcement action. Expect borrowers to raise the usual allegations of misrepresentation, collateral contracts and negligent advice and complain that financial institutions have failed to comply with their regulatory duties. Clauses otherwise providing contractual estoppel may now be open to greater challenge after the Court of Appeal’s significant decision in First Tower Trustees v CDS two years ago. Defences that bank and customer were in a form of relational contract, giving rise to implied duties of good faith, are also increasingly common.
The paradigm defence for this type of dispute after the financial crisis focused on benchmark manipulation – recall Property Alliance Group v Royal Bank of Scotland and Marme v NatWest Markets – but such claims should in most cases now be time-barred, as the recent decision of Boyse v NatWest Markets demonstrates. Benchmark manipulation has led to a transition away from LIBOR, but that itself may itself create new opportunities to resist bank enforcement where existing loan terms are not sufficiently flexible to absorb that change easily. Waiver may also be a common initial defence, given banks have followed regulatory guidance and not yet rushed to accelerate loans on coronavirus-related defaults. While no-oral modification clauses now take effect according to their terms, after MWB v Rock Advertising, the efficacy of no-oral waiver clauses has not yet been tested fully in litigation and there remains scope for argument.
The second category of claim arises later, after bank enforcement, when shareholders allege that the bank’s transfer of their accounts into the restructuring department at the bank wrongly destroyed their business and left the company facing administration or liquidation. It may be, however, that the lessons from the high-profile RBS GRG scandal will have been learned and bank behaviour will be less open to (valid or spurious) challenge than previously. Recent and current examples of these kind of claims, which are rarely (if ever) successful, include Portland Stone Firms v Barclays Bank, Broomhead v National Westminster Bank, and Cunningham v Ellis.
These claims took longer to emerge after the financial crisis but may be quicker to the fore this time for two reasons: the greater availability of litigation funding to claimants who otherwise could not afford to prosecute a claim, and the recent narrowing of the reflective loss rule by the Supreme Court in Sevilleja v Marex Financial Ltd. There will still be cases in which shareholder claims can be struck out as purely reflective of the loss suffered by the company, but fewer such claims will now fall within the scope of that rule than previously.
Coronavirus has accelerated the introduction of the most significant insolvency and restructuring law reforms for a generation, including the new trading moratorium process under the Corporate Insolvency and Governance Act 2020, which creates a ‘debtor-in-possession’ analogous to Chapter 11 in the US Bankruptcy Code. The unique attraction of the moratorium is that it can prevent the bank crystallising a floating charge and putting the company into administration. In many cases there will now be a race to fire the first shot between a company seeking a moratorium and financial institutions seeking an administration. Banks may find themselves becoming active participants when applications for renewals of moratoriums beyond the first 20 business days are made to court.
Away from lending, in the wholesale markets, the current recession is as likely to lead to familiar disputes as the last. Expect, among other things, another wave of margin call and close-out disputes under the ISDA Master Agreement. Of course, there will be differences from the financial crisis. In order to mitigate some of the challenges felt at that time, the European Market Infrastructure Regulation (EMIR) introduced a requirement for parties to non-cleared derivatives to post initial and variation margin. ISDA has developed annexes to provide mechanisms for complying with EMIR. Necessarily the approach is somewhat open-textured, with the parties agreeing to act in good faith and in a commercially reasonable manner. There will be considerable scope for dispute.
One of the more talked-about consequences for commercial litigation of the UK’s departure from the EU is the impending loss of the free movement of English court judgments across the member states under the Brussels Recast Regulation. On 8 April 2020, the UK applied to join the Lugano Convention in the stead of the Brussels Regulation, but the European Commission has to date adopted a hostile stance to that application. If the UK’s application is not successful, its fallback will be the Hague Conventions on Choice of Court Agreements, which will force parties to look at the jurisdiction agreements in banking and finance contracts through a new lens. The consequences will be worked out through the courts.
If the parties calculate at the outset of their contractual relationship that there may be enforcement issues for any dispute they can take advantage of the wider international coverage of the New York Convention and provide for their disputes to be referred to arbitration rather than litigation. The LCIA caseload attributable to banking and finance disputes has risen from 20% in 2016 (56 claims) to 32% (126 claims) in 2019. While still small overall, compared to the banking and finance work of the English courts, that is still a striking trend and one probably set to continue.
The work of lawyers practising in banking and finance disputes over the next year will remain varied, multi-disciplinary, unpredictable, market sensitive and above all intellectually challenging.