Crestsign Ltd v National Westminster Bank Plc and Another
| Jurisdiction | England & Wales |
| Judge | Mr Tim Kerr |
| Judgment Date | 26 September 2014 |
| Neutral Citation | [2014] EWHC 3043 (Ch) |
| Docket Number | Case No: HC13B02029 |
| Court | Chancery Division |
| Date | 26 September 2014 |
[2014] EWHC 3043 (Ch)
Mr Tim Kerr QC (sitting as a Deputy Judge of the High Court)
Case No: HC13B02029
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Rolls Building, Royal Courts of Justice
7 Rolls Buildings, Fetter Lane
London, EC4A 1NL
RICHARD EDWARDS (Instructed by Slater & Gordon (UK) LLP, 50-52 Chancery Lane, London, WC2A 1HL) appeared on behalf of the Claimant
ANDREW MITCHELL QC and LAURA JOHN (Instructed by DLA Piper, 3 Noble Street, London, EC2V 7EE) appeared on behalf of the Defendants
Hearing dates: 21–24 July 2014, 28–29 July 2014
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Mr Tim Kerr QC:
Introduction
This is a negligence claim brought in respect of economic loss allegedly suffered by the claimant ("Crestsign") as a result of advice given or statements made by either or both of the defendants. The action was tried before me in London over six days in July 2014. The defendants ("NatWest" and "RBS"; together, "the bank(s)") are, and were at the material times, associated companies. The contractual arrangements giving rise to this claim were concluded between Crestsign and NatWest. It is agreed that nothing turns on any differences between the position of NatWest and RBS.
For Crestsign, I heard oral evidence from Mr Ian Parker and his wife Mrs Gillian Parker who are directors of Crestsign, which is their family company and principal source of income; from Mr Stefan Bransby-Zachary, an accountant and former director of Crestsign; and from Mrs Jackie Bowie, an expert adviser on the hedging of interest rate risks and on the suitability of financial products called derivatives, in which risk and liability are linked to fluctuations in interest rates.
For the banks, I heard oral evidence from Mr Stephen Flack, a relationship manager employed by NatWest; from Mr Nathan Gillard, who at the material time was employed by RBS as an interest rate risk manager responsible for introducing the banks' derivative products to customers, and arranging interest rate management transactions; and from Mr Nicholas Gibson, an expert with long experience in financial services regulation and compliance, who now provides consultancy services to businesses in relation to risk and compliance.
The Facts
Crestsign is a small private company incorporated in 1997 to invest in commercial property for letting to commercial tenants. It is owned and controlled by members of the Parker family and managed by Mr Parker. The directors are Mr Parker, Mrs Parker who is also the company secretary, and their son and daughter. The properties were purchased using interest only bank loans, secured on the properties. In 2007 Crestsign had three commercial properties, at Ingham (near Bury St Edmunds), Crewe and Barwell (near Leicester). The properties were acquired with bank loans totalling around £3.3 million.
When Crestsign started its business, the regulatory regime governing bank lending was less developed than it now is. It is unnecessary to rehearse the detail of the regulatory history. In bare outline, from 18 June 2001 until 31 March 2013 the regulator was the Financial Services Authority ("FSA"). In 2013 it was renamed the Financial Conduct Authority ("FCA") (see section 1A and the former section 1 of the Financial Services and Markets Act 2000, as amended ("the 2000 Act")).
Under the 2000 Act, regulated activities can only be carried out by authorised persons (sections 19 and 22 of the 2000 Act). Regulated activities are those found in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544), as amended ("the 2001 Order"). That includes (under article 14 of the 2001 Order) dealing in investments as principal and (by article 53) advising on investments. In the early 2000s, the relevant regulatory instrument was "COB", which stands for "Conduct of Business", the FSA's sourcebook for investment business.
Further development of the regulatory regime was promoted by the Markets in Financial Instruments Directive 2004/39/EC, of 21 April 2004, as subsequently amended ("MiFID"), which replaced and modified earlier European directives. MiFID was in part a response to the advent of financial products that were becoming more complex, making them more difficult for ordinary people to understand. These products included derivatives, so called because rights and obligations under them are derived from sources outside the contract itself, in particular fluctuating interest rates.
In or about 2005, Crestsign entered into a loan facility agreement with Northern Rock plc ("Northern Rock"). This replaced a previous borrowing facility with Anglo Irish Bank. The Northern Rock loan was an interest only facility of around £3.3 million, with an interest rate set at one per cent over LIBOR (the London Interbank Offered Rate). The following year, Crestsign sold one of its properties near Cambridge for about £1.5 million, leaving the three properties mentioned above, and thereby reducing its debt to Northern Rock.
In August 2007, Crestsign's loan facility with Northern Rock was sold to Lehman Commercial Mortgage Conduit Limited, which was part of the Lehman Brothers investment banking group. In September 2007, as is well known, there was a run on Northern Rock. Crestsign became interested in terminating its loan agreement with Northern Rock and refinancing its business elsewhere. This was not just because of concerns about Northern Rock's solvency, but also because Northern Rock wanted Crestsign to enter into an arrangement which included progressive repayment of capital debt as well as interest.
Mr Parker did not favour an arrangement involving capital repayment. He wanted Crestsign's loan facility to remain on an interest only basis. His expectation was that Crestsign would eventually repay its debts by selling its properties, using the surplus to provide income for him and Mrs Parker during their eventual retirement. Mr Parker was aged 54 in the latter part of 2007. I accept his evidence that he intended to run the business for about another 10 years, selling off the properties during the latter part of that period, thereby paying off Crestsign's debts and providing a comfortable retirement income.
Naturally, Mr Parker wanted to negotiate the best terms he could get on refinancing. Crestsign was paying annual interest at a level (linked to LIBOR) which was not far below 8 per cent towards the end of 2007, while the Bank of England's base rate, which had been climbing steadily, had reached 5.75 per cent in July 2007. He expressed his concern in correspondence with Northern Rock and began to look at alternative sources of finance. The base rate fell to 5.5 per cent from 6 December 2007.
At this time, the requirements of MiFID were being implemented in the United Kingdom through various instruments, only small parts of which were drawn to my attention. These included what from 1 November 2007 became the Conduct of Business Sourcebook ("COBS"), replacing (inter alia) COB. It is common ground that COBS was a source of regulatory obligations on the banks from 1 November 2007 and therefore at the time of the events in the first half of 2008, with which I am mainly concerned. My attention was drawn to certain COBS provisions.
It is also common ground that breach of an obligation under COBS is not actionable by Crestsign because it is a limited company carrying on a business (see section 138D of the 2000 Act as amended, and regulation 3(1)(b) of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 (SI 2001/2256)). The present claim is therefore brought only at common law. The regulatory backdrop is relevant only to the extent that it may, or it may not, assist the court in assessing whether the common law duties of care asserted by Crestsign arose and, if they did, whether they were breached.
The candidates to become Crestsign's replacement bankers included NatWest, where Mr and Mrs Parker were long standing personal customers. In the first part of 2008, Mr Parker engaged in correspondence and discussion with NatWest and one or more other institutions which included, at least, Clydesdale Bank and possibly Bank of Scotland (not to be confused with RBS). However, NatWest quickly became the front runner, helped by Mr Parker's prior acquaintance with two of its relationship managers, Mr Trevor Walker and Mr Stephen (Steve) Flack.
Mr and Mrs Parker lunched with these two NatWest bankers on 6 February 2008. Mr Parker explained that he was looking for a loan facility of around £3.3 million, which was the amount of the Northern Rock facility. As it happened, the Bank of England base rate fell the next day from 5.5 per cent to 5.25 per cent. Mr Parker followed up with further written information about Crestsign's properties, and confirmed the figure of "approximately £3.3 million" in an email of 25 February 2008 to Colin Bird of NatWest (in the absence on leave of Messrs Walker and Flack).
Mr Flack reported on the proposal to NatWest's credit committee on 14 March 2008. The documents record that he told the committee Crestsign wanted a £3 million facility rather than £3.3 million but, as he accepted, that was a mistake. He also told the committee that Crestsign was seeking a term of 15 years. However, he recommended a five year term. The committee supported the proposal for a five year loan, subject to a "contingent obligation" of £300,000, consideration of the proposal by the banks' Property Finance Group, and a possible requirement to enter into an "interest rate...
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