The defendant, RBS, arranged and underwrote a complex, multi-tiered securitisation for Dunedin Property Group Limited, a Scottish property company, in 2006. The claimant, Torre Asset Funding Ltd, invested in a junior subordinated layer of the portfolio and RBS acted as agent (the AgentJunior Lenders) to those lenders (the ).
In July 2007, the portfolio suffered cash flow issues and it was likely that it would fail to meet interest payments on all tiers of the debt unless corrective action was taken. The borrower therefore approached RBS with a new business plan and restructuring proposal that involved rolling up the interest on one tier of the subordinated mezzanine debt until maturity. These documents were received and reviewed by the super-senior and the senior lenders but were not circulated to the Junior Lenders at that time.
The Agent sought consent from the Junior Lenders to implement these plans on the basis that the proposed changes were necessary to facilitate the borrower’s ability to meet the business’s capital expenditure needs. The consent was refused by one of the Junior Lenders. Consequently the borrower became unable to pay its debts as they became due leading to the appointment of an administrative receiver. The claimants and the other Junior Lenders did not receive any repayment from the proceeds of the administrative receivership.
The claimants issued proceedings against the Agent alleging that the Agent (i) had failed in its actual and implied duties under the finance documents to provide details of the borrower’s financial difficulties, (ii) had failed to supply the Junior Lenders with copies of the business plans relating to the proposed restructure, and (iii) had made negligent misstatements when it had sought the consent of the Junior Lenders to the restructuring by stating that this was to assist the borrower in meeting its capital expenditure requirements and failing to disclose that the borrower would be unable to meet its interest payments otherwise.
The High Court dismissed the claim, finding that:
- although the borrower’s financial difficulties in July 2007 constituted an event of default (as did the discussions with the super-senior and senior lenders on rescheduling the debt) neither the Agent nor the borrower believed that an event of default had actually occurred at that time. As the finance documents stated that the Agent was to inform the Junior Lenders on becoming aware of an event of default it had therefore not breached its duties by failing to notify. The Agent, as agent, owed no duties beyond those in the finance documents;
- the finance documents obliged the Agent to pass the business plans on to the Junior Lenders only when they were being provided for the purposes of approval. The borrower had not presented the documents for this purpose but for reviewing the restructuring plans. The Agent was therefore not in breach of those delivery obligations. This point is interesting in that the court did not impose an absolute obligation on the Agent to forward all information received by it to the lenders, but rather such obligation was limited to the specific terms of the finance documents;
- the Agent was in breach of its duty of care in tort to exercise reasonable care in ensuring that the explanation for consent from the Junior Lenders was accurate. The Agent’s explanation was given to induce the Junior Lenders to give their consent to the restructure and therefore gave a materially inaccurate and misleading account of the reason for the request. However, notwithstanding the Agent’s breach of duty, as the proposal had been rejected by the Lenders as a whole, the claimants had not suffered any loss.
This judgment is similar to the decision in Saltri III Ltd v MD Mezzanine SA Sicar & Ors  EWHC 3025, where the court also favoured a strict interpretation of an agent’s obligations in finance documents (in that case a security agent’s obligations) and focussed ion the actual loss suffered by claimants. In Saltri the Agent security agent was only obliged by the documents to act on the instructions of the senior lenders and there was no absolute obligation placed upon the agent to carry out the action that the junior lenders claimed should have been carried out. In addition, in that case the court decided that, although the arguments from the junior lenders were strong, as there was no actual loss suffered by them there was no actionable breach.
Both judgements exemplify the importance of ensuring that the contractual arrangements are clear on their face as to the obligations of agents and security agents, given the unwillingness of courts to imply further duties. Although the courts have acknowledged that conflicts naturally exist between senior and junior lenders, and particularly in a distressed scenario, provided the agent and security agent comply with their contractual, common law and statutory duties the courts will be unwilling to place additional burdens on them. However, both judgements also highlight the importance of splitting the role of agent from that of lender. Wherever possible, the roles of agent and lender within the same institution should be split between different departments.
It is also interesting to not that the court in this case highlighted that the role of an agent is not purely that of a “post box”. The court pointed out that where the finance documents invest an agent with discretion, that discretion “will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality.” See Socimer International Bank Ltd v Standard Bank London Ltd  EWCA Civ 116.