RBS v Carlyle – Where Now?
This is clearly a great victory for Mr Carlyle after a long and punishing 7 years. However, when the celebrations are over, the key question that remains to be answered is whether the UK Supreme Court’s decision will have wider implications.
To date, victories by SMEs and individuals against banks have been few and far between. It has, of course, been an uphill battle for property developers and SMEs since the recession first hit, to pursue legitimate claims against their bank: they have faced the double hurdle of the inequity in funding, together with the fact that the courts appear to have taken a very conservative approach to claims against banks.
Some legal commentators are already assessing the Carlyle case as wholly fact-specific, suggesting that despite reaching the Supreme Court, this decision has clearly been driven by a very specific set of facts and circumstances.
However, there is a wider significance to the Carlyle decision, which lies in the fact that for the first time, judges have affirmed the commercial reality known to all those working in the property sector in the years leading up to the crash: deals were done on a handshake, paperwork was scant, and it was common for promises that were intended to be honoured to be made verbally.
In Carlyle we see a rare judicial acknowledgement of this commercial reality. During the course of the hearing, a key issue that emerged was whether or not there was an intention to form a binding agreement or, to put it another way, whether the bank had made a promise. In the end the Supreme Court agreed with Roddy Dunlop QC for Mr Carlyle that the bank had indeed made a promise. They agreed with the judge at first instance that “there is no magic in a collateral contract” and that it matters not what label is given to the promise.
The answer to the central question: “did the bank intend to enter into a binding legal commitment?” was in the end the same. The court applied an objective test, asking what a reasonable outside observer would infer from all the circumstances, and in Mr Carlyle’s case, it was clear that such an observer would conclude that a legally binding obligation had been undertaken.
This judicial recognition will be helpful to those seeking to demonstrate how contracts between bank and customer were made – and broken. However, those seeking to do so should be careful to ensure that any claim which they might have against a bank for a broken promise is raised within the relevant timebar period: in Scotland it is 5 years, whilst in England in broad terms it is 6.
A common misconception is that the prescriptive period can be halted by intimating a claim to the bank; in fact, only the raising of court proceedings will “stop the clock”. Regardless of whether or not protracted negotiations have taken place between the claimant and the bank, this will simply not be enough to overcome timebar if over 5 years (in Scotland) have passed since the promise was broken.
Another hurdle that has to be overcome is the issue of the point at which time starts running. In Scotland, this point is reached when the wrong and the loss combine. Traditionally it was thought that time could be delayed if the claimant did not know that any loss suffered was attributable to someone else’s wrong.
However, a landmark Supreme Court decision in 2014 confirmed that in fact, it matters not whether or not it is known that the loss was caused by someone else’s wrong – as soon as a wrong has been committed and a loss has been sustained, even if you do not know for many years that the loss is attributable to someone else, the clock will nevertheless start running from the date on which the loss was suffered.
If you have an issue with your bank, and you would like advice on whether or not you have a claim, please do not hesitate to contact us.
As experienced investors know only too well, it is far easier to put money into a company than it is to get it back out. Some worrying figures produced earlier this year by the Office of National Statistics suggested that M&A activity had slipped to its lowest level since they began keeping records.
There are, however, signs that things are changing. Over the past year there have been some technology exits at breathtaking prices (more so in America than Europe) and it has been a great year for IPOs.
With a gradual recovery in the banking sector, let us hope that we will see some recovery in traditional M&A activity in the year ahead. There must be many thousands of SMEs effectively “locked up” by the banking system whose owners saw them as their pension but are now struggling to get out. This is a time of opportunity for the Corporate Finance community to come up with creative solutions to assist Buyers and Sellers alike to do deals in a way which meets the reasonable aspirations of both sides.
Much could be done to stimulate economic growth by increasing this type of activity so that “tired” businesses can be passed on to energetic new management to stimulate new investment and create more sustainable employment.
Posted on Oct 12, 2011 by Sandy Finlayson |
The following link may go some way towards explaining why last week’s Economist ran a leading article on the Eurozone crisis under the heading “Be Afraid”www.bloomberg.com If European Governments are now having to write IOUs to pay their creditors we really do have a problem. It reminded me of a slightly surreal conversation with a client at the top of the dotcom boom. Those of us who have been around long enough will remember the “new paradigm” when conventional wisdom went out the window and all that seemed to matter was the number of eye balls (to hit a website). The conversation went something like this:-
Client – Sandy, do you know that you can get cash from customers?
Sandy – Nonsense, you are just trying to pull my leg!
Client – That’s not all. If you give them what they want, they will give you more money!
Sandy – Nonsense, now you are really trying to wind me up.
Client – And I’ll tell you another thing. They don’t want shares for the money!
While we conducted this conversation “tongue in cheek” it illustrated the euphoric madness of the times. Nowadays I spend most of my time talking to people about their business models and financial strategy and become ever more aware of the importance of designing business models which optimise cashflow at the earliest possible date. Much can be achieved with skilful contract negotiation, for example:-
These are just a few examples of the kind of commercial issue which might be raised during a commercial negotiation. As access to Bank finance continues to be a major issue for many businesses, it is more important than ever that they are fully aware of the ways in which they can help to improve their cash-flow and make their businesses self-financing by improving their contract terms.
By Andy Harris
An interesting appeal case was reported this week involving a Dragons' Den reject and a battle over animal-themed childrens ‘ride-on’ luggage cases. This also involved registered design right, an area of IP which gets rather less publicity than its elder siblings (patent, trade mark and copyright) but which can be no less valuable.
Now now children...
The dispute related to the registered community design (RCD) which Magmatic (a successful company despite the Dragons of the Den not biting) had registered for its ‘Trunki ‘ childrens luggage product. It claimed that PMS International was infringing its design with its ‘Kiddee Case’ product, which was also an animal-themed ride on luggage case.
Magmatic won the first decision at court, but as so often happens, that decision was successfully overturned on appeal.
Horns or floppy ears?
With a registered community design, (as with UK registered design) infringement occurs if the ‘offending’ product creates the same overall impression to the informed user as the original product. (If you don’t register a design and rely on unregistered design rights then you need to prove your design was copied. Registering your design should therefore make it easier to protect it).
PMS admitted that their product was inspired by the Trunki. However they argued the overall impressions were not the same. They pointed out that Magmatic had previously produced a childrens ride-on luggage case called the ‘Rodeo.’ For Magmatic to get an RCD for the Trunki meant the Trunki design had to be new and have individual character (otherwise it would not have been granted). They argued that this meant the Trunki must therefore create a different overall impression to the Rodeo, and in the same way, their Kiddee Case must create a different overall impression to the Trunki. In other words, if A was different to B, then B must be different to C.
The court agreed.It felt that the Trunki was more sleek and stylised and created the impression of a horned animal , while the Kiddee Case was softer, more rounded and suggestive of an insect with antennae or an animal with floppy ears. More complex points also arose regarding the relevance of surface ornamentation and colour contrasts which are beyond the scope of this short blog. However they may well be considered again if an appeal to the Supreme Court is taken.
Two moans to finish with. The first being the extent to which IP litigation decisions, perhaps more so than any other area of litigation, vary so much from court to court, when the same rules are being applied. No doubt this is because the considerations involved are ultimately quite subjective ones. For example deciding if there is a ‘likelihood of confusion’ between two trade marks, or, as in this design case, whether one product creates a ‘different overall impression’ from another.
For those of us advising clients in field of IP commercialisation it doesn’t help. Businesses want certainty, and black and white answers. But IP infringement frequently involves large areas of grey. If the cleverest legal minds in the country can’t agree then it doesn’t bode well for the rest of us...
The second moan is why adult ‘ride-on’ luggage cases are not deemed socially acceptable. Kill joys.
Once a company is struck off the Register of Companies then it is dissolved and the Company's life comes to an end. Creditors who have been left out of pocket by the Company may mourn its passing especially if they are only to receive a modest dividend (if they receive anything!). However 'fly by night' directors may well rejoice thinking they are off the hook from any legal liability for improper conduct but are they?
It is possible for the dead Company to be brought back to life in certain circumstances which can often result in the Company's rogue directors being haunted by the return of the Company which is then wound up again and a new Liquidator appointed by tenacious creditors.
The Company can be restored in two ways; application to Companies House or Court. However given rogue directors are unlikely to restore the Company (via the Companies House route) then the way in which the Company comes back to life is invariably through the Court route by the creditor.
A creditor of the Company or any person with a potential legal claim against the Company (among others) may apply to the Court for a restoration order (under section 1029 of the Companies Act 2006). The Court can restore a Company if it has been dissolved following winding up/administration or if it has been struck off the Register of Companies (but only within 6 years of the Company being dissolved unless purpose if application is for personal injury claim) and the judge considers it just.
If the Court grants a restoration order then the restoration will take effect only once the Court's order is delivered to the Registrar (of Companies House). A notice will be placed in the Edinburgh Gazette (in Scotland) by the Registrar stating when the restoration took effect. The Court's restoration order rewinds the clock so that the Company is deemed to have been in existence as if it had never been dissolved or struck off.
Once the company has been restored then a creditor could appoint a liquidator to investigate the directors' conduct. It is possible that the liquidator could raise Court action against the directors which lead to recoveries that can then be shared with creditors of the company. The main court actions that a Liquidator may bring are set out below.
If the directors have set up the company with intent to defraud creditors or for any other fraudulent purpose then a Court action may be raised by the liquidator (s.213 of Insolvency Act 1986 "IA 86") to seek compensation from the director or directors. Any compensation recovered would then be shared among creditors.
The Court has to be persuaded that the directors were dishonest and morally to blame; it is not enough that the directors knew the company was insolvent and continued to accrue debts with creditors.
If a director (or shadow director) knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation but continued to trade then the liquidator can raise a Court action (s.214 of IA 86) seeking a contribution to the assets of a Company to be shared among creditors. Dishonesty is not required so it is a lower evidential hurdle to satisfy than fraudulent trading.
If a director has taken money or property out if the Company then he or she may be guilty of misfeasance. A creditor or liquidator may raise a Court action (s.212 of IA 86) seeking to order the director to repay or account for the money or property which can then be shared among creditors.
If a liquidator takes the view that a director or shadow director is unfit to be a director then they can report the individual to the Secretary of State who can raise a Court action to disqualify the person in question from being a director for anywhere between 2 and 15 years under s.6 of the Directors Disqualification Act 1986.
However the unpaid creditors receive no financial benefit from disqualification and disqualified directors do not require to give back their ill-gotten gains. Disqualification is supposed to act as a deterrent but the lack of enforcement and effectiveness has resulted in criticism. Some commentators have said that hitting the directors in the pocket is more effective than disqualification.
The insolvency process is arguably dependent upon there being sufficient company assets to fund investigation and Court action. This is especially so in Scotland where there is no Liquidator of last resort (whereas England has the Official Receiver). It should also be remembered that many companies are simply struck off the Register and dissolved without any formal insolvency process taking place.
If rogue directors divest the company of remaining assets then it is unlikely that any Liquidator will be in a position to investigate their conduct and creditors may have little appetite in funding the Liquidator to investigate the conduct of the rogue directors.
Often rogue directors will voluntarily liquidate their company but ensuring there are few assets to pay the costs of the liquidation never mind investigation and litigation. Regrettably the result is that currently many rogue directors get off the hook.
However for determined ripped off creditors who are willing to gamble on a recovery being made via one of the above remedies (and pay the liquidator's costs) then the Company restoration route may be an avenue they wish to go down but creditors should do so with their eyes open to the potential costs and timescales. The old Scots saying 'it's a sair fecht for a half-loaf' seems fitting for such actions.
If you have any queries arising from this article, please contact our Dispute Resolution team on 01312268200.
DISCLAIMER: While every effort has been made to ensure the accuracy of this blog post, it is not intended to provide legal advice as individual situations will differ. No recipients of content in this blog post should act or refrain from acting on the basis of the blog post without seeking the appropriate legal advice on the particular facts and circumstances at issue from a qualified solicitor in their jurisdiction. The blog post is for general information only and is not legal advice. The law changes frequently and varies from jurisdiction to jurisdiction. No solicitor-client relationship is formed nor should any such relationship be implied. If you require legal advice, please consult with a solicitor qualified to practise in your jurisdiction. Should you be interested in seeking our assistance with a legal matter, please contact the Dispute Resolution team on 01312268200.