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More skeletons in the closet?

26 February 2014 / Aidan Briggs
Issue: 7596 / Categories: Opinion , Banking
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Business support may be the banks' next headache, says Aidan Briggs

Two recent reports—the RBS Independent Lending Review led by Andrew Large and Lawrence Tomlinson's Banks' Lending Practices: Treatment of Businesses in Distress —have sought to shed light on the "business support" measures imposed by lending banks upon small- and medium-sized enterprises in distress. Such behaviour has come to the fore in mis-selling litigation, as it tends to multiply the burden of interest rate hedging or other products upon struggling businesses.

The key issues

Both reports identify four key issues:

  • Lenders engineering “distress” in client businesses by restricting credit or arbitrarily revaluing assets (eg on a “fire sale” basis);
  • Business support imposing dramatic changes to lending terms by reason of that “distress”, accelerating the client’s decline;
  • Perverse incentives to push viable businesses into insolvency due to increased margins and fees; and
  • Conflicts of interest for bank-appointed valuers, accountants and managers with a view to future insolvency.

The frankly delicious facts of RBS v Highland Financial Securities [2013] EWCA Civ 328,

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