Royal Bank Of Scotland Plc v Hicks & Ors

This pleading arises out of the disclosure provided by RBS and the English Directors pursuant to my orders of 8th March 2012.

The pleading is an unwieldy document. Yet the Former Owners complain that it is not comprehensive due to the time constraints imposed by my order.

The amendments are introduced in the draft Amended Defence and Counterclaim by a proposed paragraph 23 A-23 G. A similar approach is adopted in the draft amended pleading in the English Directors’ action, annexing the same document.

In essence it is alleged that RBS was in breach of the CGSL in that it failed to allow the Chairman to lead the Exit Process and deliberately blocked an exit occurring through refinance and that in effect RBS controlled the sale rather than the Board and blocked refinancing as an option.

In addition the amendments include fairly traditional allegations of breach of RBS’ duty of good faith in relation to realising assets covered by security it had or alternatively a duty to obtain the best price reasonably obtainable on the realisation of assets.

It is also asserted that the appointment of the Independent Observer Mr Edelman appointed by RBS was a sham and in reality he was a director and thus the agent of RBS and thus RBS was a shadow or de factor director. It is in the alternative asserted that RBS is liable as principal in respect of the breaches alleged by the Defendants in the English Directors’ action. This is on the basis that RBS by itself and by its observer exercised management control over the proposed sale and blocked refinance.

Next there is an allegation of misuse of confidential information and finally an allegation that RBS conspired to cause economic harm to the Former Owners by unlawful means or to cause economic harm by using unlawful means knowing that they were unlawful.

There is no allegation of dishonest assistance in respect of the breaches of fiduciary duty alleged in the English Directors’ action against the English Directors. I conclude that despite that point having been ventilated in the United States the Former Owners’ English lawyers do not feel that any part of the extensive disclosure enables them properly to plead that even now.

RBS’ contention (hence its application for negative declaratory relief) is that in April 2010 after the facilities had had a number of renewals the Former Owners agreed to a structure of the group which involved them giving up control, appointing Sir Martin Broughton as the non-executive Chairman and Mr Edelman as the Independent Observer on behalf of RBS. The process RBS contends was for a sale to be achieved by 15th October 2010.

They deny that they owed any obligations as regards giving the Former Owners opportunities to refinance.

RBS contends that an examination of the internal documents relied upon by the Former Owners show that it had no role in the sale that took place. Its stance is that the sale was negotiated by Sir Martin and the Board. Accordingly it can have no liability in respect of the matters alleged in the proposed Amended Defence and Counterclaim.

The Former Owners’ contention is that in reality, whatever the April 2010 paperwork purports to show RBS controlled everything. As part of that exercise RBS was determined to remove the Former Owners from the control of LFC. This the Former Owners contend was because RBS believed that would give them kudos in the eyes of the public, whereas its continued involvement with the Former Owners would operate negatively on its reputation.

The Former Owners contend that the opportunities to refinance were frustrated by RBS deliberately to achieve this ulterior purpose.

The Former Owners have exhibited in their Confidential Schedule a significant number of internal emails disclosed by RBS in accordance with my order. Like many internal emails they are written in language and express opinions that with hindsight might have required better consideration. Emails are not legal documents and no attempt should be made to construe them as such. Equally the meaning and intent of emails cannot necessarily be discerned from reading them in isolation.

RBS contends that the emails show no evidence of any of the supposed breaches set out in the Amended Defence and Counterclaim. Whilst I have sympathy with that I am not persuaded that a final decision can be made on that issue at this preliminary stage. In my view a significant number of the emails at the very least raise questions as to whether or not RBS in reality had a far greater role in the sale of the shares than the documentation suggests.

Further the structure that ensued in April 2010 is unusual. Mr Snowden QC suggested that it was a perfectly normal way for a bank to manage the realisation of its securities without becoming involved directly. He suggested this was a perfectly normal way of proceeding and that if it was challenged in effect the heavens would come crashing down. What concerns me at this stage is that RBS clearly had a desire to realise the securities. However it has attempted to remove itself from that exercise and have it effected by a sale of LFC by the independent directors on the boards of KFHL and Kop Football. Those boards were in reality created at its instigation. The Observer in my mind is an unusual feature also. There is in my mind a question as to whether or not RBS truly distanced itself from the sale process. That is demonstrated in my view by an examination of the emails appended to the proposed Amended Defence and Counterclaim.

In reality what actually happened between April 2010 and October 2010 can only be discerned by a trial when the relevant players give evidence and their evidence is tested by cross-examination in the light of the contemporaneous documents.

In my view it would be wrong and a denial of justice potentially at this preliminary stage to deny the Former Owners an opportunity to have a trial on this issue.

Having formed that view and given the stage at which the proceedings currently are I do not think it would be appropriate for me to express any view one way or the other beyond my conclusion that this is a matter which I believe ought to go to trial. That is the place for judicial consideration of this large amount of documentation.

I would grant permission to amend the Defence and Counterclaim to plead the matters set out in paragraph 23 A and following.

This judgment arises out of a number of applications in the two above mentioned actions. The applications were heard in March of this year and then adjourned over and were heard further in May of this year.

The following applications were before me:-

The fourth application was not formally before me but I will set out the procedural history to explain the hearings that came before me.

On 15^th February 2012 I heard an application in the second action by the Claimants and the First and Second Named Third parties (“the English Directors”) issued on 7^th November 2011 seeking a stay of those proceedings. I refused a stay. At that time I was also aware of RBS’s application for summary judgment in the RBS action. I directed the English Directors to issue a summary judgment application seeking in effect identical relief to that sought by RBS. I did that because it is plain the issues in the two actions are inextricably bound up with one another as I shall set out in this judgment. I made other orders that directed that the English Directors’ application be heard at the same time as the RBS application which was then listed for 2-3 days on 6th-8th March 2012. I directed them to serve any evidence they required to be enabled to participate in the RBS application, such participation to be on terms as decided by the Judge hearing that application.

I decided other matters not relevant to this judgment.

On 6^th March 2012 the RBS application and the cross application to amend came on before me. By 8^th March 2012 I was concerned as to the nature of the relief sought by RBS in advance of it having provided disclosure. Accordingly I adjourned their application to be heard before me on the first available date after 7^th May 2012 and ordered RBS to provide disclosure under CPR 31.12. Disclosure was limited to documents which were created, received or generated during the period of 1^st March 2010 until 31^st October 2010 (the significance of these dates will appear later in this judgment).

There were two important conditions attached to that disclosure. First as Messrs Hicks and Gillett (“the Former Owners”) and their companies are resident out of the jurisdiction and have no assets within the jurisdiction I required them as security for the disclosure exercise which they sought at that hearing to deposit the sum set out in the estimate of costs to be incurred by RBS in giving the disclosure in RBS’ solicitors’ client account. The second condition was the disclosure was restricted to items identified in the order. Furthermore the disclosure was to be provided solely to the Former Owners’ English solicitors and Counsel instructed by them. The reason for that order (which was never appealed) was that there were legitimate concerns by RBS that if documents came into the possession of the Former Owners they might abuse that disclosure by putting selective documents in the public domain in the United States and elsewhere beyond the effective jurisdiction of this court which might cause irreparable damage to RBS. The Former Owners’ conduct in relation to hearings before Floyd J in October 2010 (as to details of which see below) were a legitimate basis for RBS’s application for restricted disclosure.

After the disclosure was provided I directed that after the disclosure was provided unless the Former Owners within 14 days of inspection served an application supported by evidence to amend the Defence and Counterclaim they should be debarred from seeking to run any allegations in the proceedings other than the allegations concerning implied terms as set out in the draft Amended Defence and Counterclaim. The purpose of this was to ensure that the various allegations (see below) being bandied around by the Former Owners in the United States were put forward in properly pleaded draft pleading failing which they should be debarred (having had substantial disclosure) from further raising of these matters.

The reason for this is that in proceedings issued in Texas by the Former Owners and their associated companies against the English Directors and RBS on 13^th October 2010 they accused the Defendants of conspiracy, fraud and dishonesty. They alleged that the English Directors were guilty of breach of fiduciary duty and that RBS aided and abetted that breach of fiduciary duty. That of course is an allegation of dishonest assistance to a breach of fiduciary duty. They also alleged that all of the Defendants to those proceedings had been guilty of constructive fraud and requested a temporary restraining order (“TRO”) and all damages including exemplary damages which they might be entitled to.

None of these allegations had been replicated in the RBS proceedings. Mr Malek QC who with Mr Gregory Mitchell QC and Mr Christopher Harris appears for the Former Owners (and their associated companies) candidly informed me in the March hearing that he as Counsel did not have sufficient material to enable him as Counsel properly to settle any Particulars of Claim making such allegations. When pressed for an explanation as to how his clients could make such allegations in the United States and not make them here I was informed (and this was confirmed by a witness statement of Mr Hicks) that this was because in the United States it was possible to make an allegation without evidence as long as there was a belief on the part of the deponent that it was true. Fortunately more is required in this jurisdiction.

The Former Owners accepted through their Counsel that these matters were not pleaded but sought time to make such applications provided they had disclosure of RBS’s documentation. In addition to disclosure I made a similar order the English Directors’ action requiring the English Directors to provide disclosure and made a third party disclosure order against Keith Edelman (RBS’s nominated observer under documentation created in April 2010 as to which see below).

On 25^th April 2012 the Former Owners applied to vary the terms of the disclosure order by in effect enabling the Former Owners to have full and unrestricted access to the documentation. No credible justification was provided for this. RBS offered to permit the Former Owners to have disclosure by inspecting documents at their English solicitors’ office (Clyde & Co) subject to undertakings by all the lawyers to preserve the confidentiality. That was not acceptable to the Former Owners and they proceeded with their application which I dismissed. I ordered them to pay the costs of that application which I summarily assessed at £40,635.73. The assessment was on an indemnity basis because there was no justification for the application and they abused the process by seeking an order which had no basis especially given the concessions made before the application was issued by RBS as set out above.

The Former Owners issued their application to Re-Amend pursuant to my order of 8^th March 2012 and the matters then came on to be heard by me in May.

The English Directors chose not to have their Part 24 application listed before me but participated in the hearing and accept that they are bound by any relevant findings in this judgment that affect their action. That is of course pursuant to the effect of my order of 8^th March 2012.

The dispute relates to Liverpool Football Club. It of course is a well known Premier League Club and is one of the greatest clubs in the history of English football. The ownership and financing of the club (and I use that as descriptively without intending to identify the relevant entity which operates and controls the activities of the team in the FA Premier League) has been somewhat troubled.

The structure behind the football club is set out in the chart in paragraph 6 of the Former Owners’ supplemental skeleton argument and I attach it as the first appendix to this judgment. The interest of Mr Gillett as can be seen from that structure is charged in favour of Mill Financial which is a special purpose vehicle set up by an American billionaire called Dwight Schar. It had loaned $70m to Gillett Football LLC the vehicle through which Mr Gillett owned his interest in LFC with that debt being secured by a charge on Gillett Football LLC’s shares in KOP Investment LLC. Mr Hicks owned the other 50% but that was not subject to any charge.

The Former Owners through the chain of companies referred to above were the ultimate beneficial owners of the shares in the Liverpool Football Club and Athletic Grounds Ltd (“LFC”) which operated Liverpool Football Club.

In addition to the borrowings of Mr Gillett from Mill Financial substantial funds were borrowed from RBS to operate LFC. These borrowings were renewed from time to time subject to terms. By April 2010 the position had been reached where RBS were no longer prepared to continue financing the Former Owners operations of LFC. This led to a series of documents being executed in April 2010. These documents are crucial to this judgment and I will set them out in detail below.

The litigation which commenced in October 2010 arises out of disputes concerning these documents and a proposed sale of the shares which controlled LFC to UKSV a company wholly owned by New England Sports Ventures (“NESV”).

The first hearing took place before Floyd J on 13^th October 2010. He delivered a judgment [2010] EWHC 2568 (Ch) which sets out the factual background which led to the litigation. I need not set it out in anymore detail here. In essence under the April 2010 documentation the Former Owners were given an opportunity in terms to find a buyer for the shares in LFC. A structure was created whereby the Former Owners became minority directors on the Board. Independent directors headed by a Chairman (Sir Martin Broughton) were appointed to the Board and the Former Owners agreed not to take any steps to remove them from any of the Boards without the agreement of RBS.

In fact on 5^th October 2010 they purported to remove and replace two of the independent directors. That was done to retain control and stop the proposed sale to UKSV.

RBS commenced proceedings seeking mandatory injunctions to restore the constitution and composition of the board to the relevant companies. The Former Owners in Part 8 proceedings begun by them sought to restrain the relevant companies and NESV from proceeding with the sale of the shares in Kop Football (Holdings) Ltd (“KFHL”) to NESV.

Floyd J heard the application on 12^th October 2010 and he granted RBS its relief and dismissed the Former Owners’ application for relief restraining the sale of the shares.

Then some extraordinary events happened. They are set out in Floyd J’s subsequent judgment dated 17^th February 2011 [2011] EWHC 287 (Ch).

In the morning of 13^th October 2010 Floyd J gave his judgment. He refused permission to appeal to the Former Owners and they made no appeal (and have never appealed) his decision. They also accepted that there was no realistic prospect of successfully showing that RBS was in repudiatory breach of various agreements.

At 5.40pm BST on the same day the Former Owners complied with the order in the RBS action by reversing the purported steps that had taken place on 4-5 October 2010. As Floyd J observed in paragraph 24 of his judgment that ought to at least have left the companies free to complete the sale to UKSV.

However 16 minutes later the Former Owners filed a petition (“the Petition”) for a TRO (“Temporary Restraining Order”) in the District Court in Dallas County Texas United States. The Defendants to the Petition included Sir Martin Broughton and his fellow English Directors, RBS and NESV.

That Petition and the TRO were expressly aimed at stopping the sale something the Former Owners had failed to obtain in their application before Floyd J on the same day. The document as he said is a detailed document and was clearly prepared way in advance of the result of the hearing before him. As I said above it contains wild allegations against RBS none of which (save the amendments to which I shall refer below) have found their way into any pleading or witness statement within this jurisdiction. The detailed analysis of the Petition can be found in paragraphs 25-26 of Floyd J’s February judgment.

What was particularly concerning were the communications with the Texas Court.

In paragraph 53 of the Petition reference was made to the RBS action and the order requiring the Former Owners to restore the status quo of the company boards. However no mention was made of the cross application which had been made to restrain the sale which had failed and which had not been appealed. When asked by the Texas Judge why the application was made in Texas not England the Attorney for the Former Owners informed the court that the English Courts were closed and that they could not reach the Court for that relief. That was a blatant lie and no explanation has yet been put forward as to how that occurred. Indeed the Former Owners have never properly explained why it was appropriate for them to seek the same relief in Texas which they had failed to obtain within these Courts. All that was said on their behalf was a statement from their former solicitor that they did not intend any disrespect to the Court and that Texas Counsel was unaware of the fact of the making and refusal of the application. That does not begin to explain what went on. The blatant lie was further compounded when on the return day RBS and the others applied to discharge the TRO and the Former Owners sought enforcement proceedings of the TRO against them. Counsel for the Former Owners stated again to the Texas Judge that no application for the relief covered by the TRO was made in these Courts. That too was untrue.

RBS applied for an anti-suit injunction which Floyd J granted on 14^th October 2010. Ultimately the Texas TRO was discharged maintaining the status quo created by the order of Floyd J.

That enabled the sale of the shares controlling LFC to UKSV, such that NESV is now the entity that controls LFC.

For the purposes of the present judgment there are two decisions of significance. First, Floyd J dismissed the Former Owners’ application to discharge or vary the anti-suit injunction save to support applications in this jurisdiction. Second he gave RBS permission to amend the current proceedings to allow RBS to seek additional declaratory relief.

The reason for that is that the original Particulars of Claim were aimed at challenging the purported removal of two of the English Directors and declarations as to the validity of the purported resolutions amending the articles of association to permit the removal of the English Directors and a declaration that the purported resolutions were also in breach of the Corporate Governance Side Letter dated 30 April 2010 (“the CGSL”) and/or a “Side Letter” dated 16 April 2010 (“Side Letter”). Ancillary relief was also sought restraining the Former Owners from committing any further breaches of the CGSL and the Side Letter.

As a result of the hearings before Floyd J in October 2010, those prayers for relief largely became redundant because the result of Floyd J’s judgments was to reverse the resolutions in any event and to permit the sale to proceed. No appeal was made in respect of Floyd J’s judgment.

By the amendments sought at the hearing before Floyd J on 17 February 2011, RBS was seeking declarations that it was not in a repudiatory breach of the CGSL and/or the Side Letter and was not deprived of the right to seek equitable relief in relation to the enforcement of those letters; that RBS’ conduct in relation to the sale process of LFC did not involve it in dishonestly assisting any breach of fiduciary duty by the English Directors in relation to the sale, RBS’ conduct related to the sale process of LFC did not involve an actionable conspiracy against Holdings or Football, RBS was not prevented from enforcing its rights under the security agreement in respect of the outstanding liabilities owed to RBS and RBS was not prevented from enforcing its right under guarantees from the Former Owners in respect of outstanding liabilities owed to RBS.

Floyd J decided to grant RBS permission to amend to seek that negative declaratory relief. He also granted the English Directors permission to amend the pleading in their action to seek similar declaratory relief.

He declined to vary or discharge the anti-suit injunction. He also consequently dismissed an application by the Former Owners to dismiss the action.

The draft amended particulars of claim in the RBS action were served on 27 October 2010. As I have said the purpose of the amendments was to seek negative declaratory relief. The reason for this was because of the noises being made by the Former Owners outwith the jurisdiction alleging that RBS had been guilty of conspiracy to defraud and dishonest assistance, all of which featured in the Texas proceedings but none of which had found its way into any document for court in this jurisdiction. By 17 February 2011, Floyd J had observed:-

“I think the time has come when the [former] owners need to state their case or accept they do not have one ([69 II]).

The Former Owners served a Defence and Counterclaim on 24 June 2011. If the RBS amendments were designed to flush out the Former Owners position on the allegations made in Texas but not repeated in this jurisdiction they singularly failed to do so at that stage.

The Counterclaim referred to the Agreements of RBS in April 2010 to extend the repayment date under the various facilities until 15 October 2010 (“the Extension Agreement”). It stated that an Agreement was to be found in the CGSL dated 30 April 2010, the Side Letter dated 16 April 2010 and the ninth repayment date amendment letter dated 30 April 2010, and finally the extension fees letter dated 30 April 2010.

The Former Owners’ contention in that pleading was that there were implied terms under the Extension Agreement as defined:-

RBS did not reply to that Defence and Counterclaim. It indicated it was considering its position and ultimately on 28 October 2011, it issued an application for summary judgment on its Claim and the Former Owners Counterclaim on the basis that they had no reasonable prospect of succeeding in their Defence of the declaratory relief and there was no other compelling reason why the case should be disposed of at trial. Alternatively, that the defence be struck out on the basis that the Defence and Counterclaim did not disclose reasonable grounds for defending its claim because there was no prospect of establishing the existence for the implied terms of the collateral contract and/or the Former Owners were estopped from raising such arguments by reason of the Judgment of Floyd J delivered on 13 October 2010, or that such arguments constituted an abuse of process on the basis that such charges should or could have been deployed in relation to the hearings or applications determined by that judgment.

There was an intervening exchange between the English Directors and the Former Owners leading to Vos J’s order and my assessment of the costs of those applications on 15 February 2012, when I also dismissed the English Directors’ application to stay the proceedings.

As a result of orders I made on that date, the RBS summary judgment application came on before me on 8 March.

By that time, the Former Owners had issued a further application on 21 February 2012 for permission to amend their Defence and Counterclaim further.

Those were the two applications I considered on 6-8 March 2012, when I adjourned the applications to be heard by me in May, and made various consequential orders as set out above.

The Former Owners duly issued an application to amend their Defence and Counterclaim on 8 May 2012. There is a document which incorporates both sets of proposed amendments. The amendments in red are those proposed by the original application and the ones in blue are the further changes made as a result of the order made by me on 8 March 2012.

By the first set of amendments the Former Owners attempted to firm up their pleadings in respect of the implied terms and collateral agreements. The later amendments were drafted pursuant to my order of 8 March and the ensuing disclosure. Restrictions on revealing the contents of the draft pleadings were put on the Former Owners. A Confidential Schedule was served with the proposed draft. I will set out the details of the Confidential Schedule in a separate judgment which also (subject to any representations the parties might make or any order I might make) shall also remain confidential. The second draft amendments allege that there were further implied terms of the various documents namely:-

A further implied term was suggested namely that all parties to the Credit Agreement, the Extension Agreement and the Transaction Co-operation Letter were subject to implied terms to use their best endeavours to ensure that the sale process of LFC would be conducted in such a way as to sell it for its maximum value and that no party would take any step or fail to take any step which would impair the attainment of the maximum value.

In the second set of amendments the Former Owners alleged that RBS failed to allow Sir Martin Broughton to pursue the exit process through a refinance as opposed to a sale and deliberately blocked an exit occurring through refinance or sale by acting as set out in the pleadings and in the Confidential Schedule. (paragraph 23B.2)

It is alleged that both are breaches of the CGSL.

In the alternative, it was alleged that the legal mortgage and fixed and floating charges granted under the security agreements and/or the personal guarantees were security for the payments of the debts due to RBS. It was then alleged that the powers conferred under the security documents to RBS could only be lawfully exercised in good faith for the purpose of obtaining repayments of the debts owed and not for a collateral purpose. Accordingly, it is asserted that RBS owed a duty to exercise its rights in good faith for the purpose of obtaining full repayment of the debts owed and not for any collateral purpose namely to remove the Former Owners from control of LFC.

Alternatively, it was alleged that RBS owed a duty to obtain the best price reasonably obtainable for the assets as subject to security, namely LFC. It was alleged that those duties were also owed to the Former Owners as guarantors.

It was alleged that RBS knew that if it exercised rights of appointing an Administrator, pursuant to the Insolvency Act 1986, LFC would suffer a deduction of 9 points by the Football Association Premier League (“FAPL”) and would give rise to very severe criticism of RBS by the media and by LFC’s fans. Accordingly, it was alleged that RBS devised the Extension Agreement as an informal administration which avoided the deduction of penalty points with control of the process of sale of LFC and the repayment of debts being removed from the Former Owners. It was then asserted that the equitable duties are applicable to these circumstances because the making of the Extension Agreement document was tantamount to an exercise by RBS of its security rights.

It was consequently pleaded that RBS was in breach of its good faith obligation in failing to obtain the best price reasonably obtainable and failing to account or pay compensation to (inter alia) the Former Owners for the loss sustained as set out further in the pleading.

A Mr Edelman was appointed by RBS to act as an “observer” to the Board of Directors of Holdings and Football with effect from 15 April 2010. The Former Owners assert that this appointment was a sham because in reality he acted and was intended to act as a director and took a leading role in the sale of the club although he did not have a vote. Accordingly, it is pleaded from 15 April 2010 to 6 October 2010, RBS either by itself or Mr Edelman who is said to be RBS’ agent acted as a de facto director of each company.

Alternatively, it was alleged that RBS whether by itself or by Mr Edelman again, acted as shadow director by giving instructions to the majority of Board of Directors or alternatively to Sir Martin Broughton who acted in accordance with RBS’ instructions. It is then asserted that RBS through Mr Edelman or alternatively as principal owed duties of a director as pleaded in the English Directors’ action and acted in breach of the fiduciary duties set out therein and in the Confidential Schedule.

To support that claim, it is alleged that RBS is liable as principal in respect of each and every allegation of breach of duty made by the Former Owner in their amended defence in the English Directors’ action, it being alleged that RBS by itself and by its observer exercised management control over the proposed sale of LFC and blocked refinance and continuously interfered in the proposed sale with RBS’ own interests in mind.

Under clause 3(d) of the CGSL, Mr Edelman was required to keep confidential all information that he received as observer and that he would not disclose it to anybody (other than RBS). At a board meeting on 27 April 2010, one of the Former Owners, Mr Gillett objected to him participating in the discussions at Board meetings concerning refinance because RBS had a clear conflict of interests. Accordingly, Mr Edelman did not attend that part of the board meeting. Notwithstanding that confidence it is alleged that both Mr Edelman and Sir Martin Broughton passed confidential information including attempts to obtain refinance to RBS. It is alleged that RBS in turn, used that information to block any potential refinancing arrangements. In addition it is alleged that RBS owed a separate duty of confidentiality and broke that by leaking information to the public through media which had the effects of undermining the bidding process and the value of the Former Owners’ equity.

It is alleged that RBS by two of its agents (identified in the Confidential Schedule) conspired to cause economic harm to the Former Owners by unlawful means knowing and intending that the means being used were unlawful or being reckless as to whether those means were lawful or not. Various paragraphs supporting the plea are set out in the Confidential Schedule.

Alternatively, RBS is alleged to have conspired to cause economic harm to the Former Owners by using unlawful means.

The common theme of the allegations is that RBS directly or indirectly prevented the Former Owners from refinancing. The significance of this flows from the price obtained when the shares which provide the control of LFC were sold to NESV in October 2010. The price obtained therefrom was nearly enough to pay off the RBS indebtedness (it claims £29m is still outstanding). The Former Owners contention is twofold. First, that a refinancing would have left them in control of LFC and there would have been no sale which did not achieve a price sufficient to give them any payments for the worth of their shares. Second, the actual sale was a sale at an undervalue orchestrated by RBS and in breach of the duties it is alleged it owed as set out above as mortgagee or as a result of the conspiracies and breach of other allegations.

RBS denies all of these allegations of course. It has not yet pleaded to them because they are in the form of a proposed amendment. However, it accepts that for its summary judgment or strike out application to succeed, it must in effect deal with these arguments. It has not adduced detailed evidence addressing the merits. It attacks the Defendants’ case as unsustainable in law and on the basis of the materials relied upon.

The English Directors support RBS in its stance.

The background arises out of RBS providing finance to the Former Owners to acquire control of LFC. The original lending was a one year bridging loan of £235m which was used to finance the acquisition of the club in 2007. A number of separate facilities were provided.

All relevant companies entered into the Security Agreement on 25 January 2008. This granted RBS security for RBS and another bank, Wachovia first fixed and floating charges over the assets of all of the companies in the group. In addition the Former Owners gave guarantees in respect of the obligations under senior finance documents up to a total amount of £55m.

Upon maturity on 25 January 2009, facilities were extended until 20 July 2009.

There were a number of short term extensions which ultimately extended the maturity date until 9 April 2010. All of the lenders’ rights under the Transaction Co-operation Letters were reserved (see below).

The first relevant letter is the RBS letter dated 5 April 2010. In that letter it referred to the need to resolve the current uncertainty in relation to the ownership of LFC. It noted the lack of investor appetite for a minority stake in the shareholding and it stated that “we believe that the ongoing exit process should now be led by the Board of the Company rather than its shareholders, and that the Board should now focus on announcing and implementing a sale of one hundred per cent of the shares in KOP Football or LFC”.

To facilitate that sale process the letter proposed the appointment of a senior independent director to the Boards as an executive chairman with the authority to lead the sales process to an appropriate conclusion and a public mandate to do so.

The letter went on to consider that if those arrangements were agreed, RBS would be willing to consider a short term extension of the Repayment Date in order to provide LFC with a stable platform to implement the sales process contemplated above.

It must be appreciated that as at that time all of the monies were becoming due. It is also the case that if a demand had been made, LFC and the other companies in the group could not have repaid RBS indebtedness and as a result RBS could have appointed a receiver or put the Group into Administration if it wished. The downside to the appointment of a Receiver or Administrator is of course the loss of points in the Premier League referred to above.

On 6 April 2012, RBS sent a further letter noting that the extension was agreed until 9 April 2010 and as a condition of any agreement of any further extension would involve:-

“A detailed process and timeline (to be agreed) with you for implementing and Exit Transaction with interested parties mentioned to us today, or otherwise for implementing a sale of the Club.”

On 9 April 2010 a short extension of the repayment date to 15 April 2010 was granted.

On 10 April 2010, RBS sent a further letter referring to the agreed extension to 15 April 2010 and the credit approval for that short term extension had been granted. However it was on the basis of what were called revised corporate governance arrangements namely that a non-executive chairman (whose identity had been disclosed and was acceptable to RBS i.e. Sir Martin Broughton) would be appointed and that two of the directors on the board being nominees for Messrs Gillett and Hicks would resign. That was in the context that the ongoing stewardship of the club would be in the hands of the new Chairman and the majority directors. It was proposed that the Former Owners would shortly announce an intention to sell 100% of the shares and would state that they believed the sales process should be run on a timely, efficient and transparent basis to maximise value. On the basis of this understanding, RBS set out that it was prepared to grant a six month extension to the repayment date i.e. to 15 October 2010 in order to provide a stable platform to implement the sales process.

It was understood that the Chairman’s role would include leading the sale process. It was contemplated that the sales process would be run by the majority on the boards as distinct from the Former Owners. The letter also contemplated the appointment of an Independent Observer “for our benefit” (i.e. RBS) rather than as a senior independent director contemplated by the earlier letter. That Board Observer would have a right to attend all board and all directors’ committee meetings and to receive all information provided to the directors for those meetings. In addition, RBS contemplated that the removal of the Chairman thereafter would require its consent and the Chairman would have ongoing control over the composition of the boards and any subsidiaries.

The extension of time was conditional on these matters being finalised to the satisfaction of RBS.

The result of these arrangements as shall appear is threefold in my opinion:-

The Former Owners might not have liked these terms but they freely agreed them.

The first document is the RBS Side Letter dated 16 April 2010. Paragraph 1 showed that the Side Letter was a Side Letter to the Eighth Repayment Date Amendment Letter. Under paragraph 5, it was provided that the terms of the letter were strictly without prejudice to the rights, powers and discretions of RBS under the Finance Documents and was without prejudice to the rights and obligations of the parties to the Transaction Co-operation Letter. The obligors (being the group of companies) and each Sponsor Guarantor i.e. Messrs Gillett and Hicks and their respective SPVs acknowledged and agreed to the matters set out in the schedule thereto. Under the schedule the corporate governance provisions provided for the appointment of a new Chairman, the resignation of the other directors so that the Board should have five directors namely the Chairman, Messrs Hicks and Gillett and such other of the existing management team or such other independent directors as might be determined by the Chairman from time to time.

Removal of the Chairman without the consent of RBS was prohibited.

It provided that the Chairman would have ongoing control over the composition of the Boards but would have no power to remove the Former Owners.

The Side Letter required the Former Owners and KFHL to announce an intention to sell one hundred per cent of the shares in KOP Football or LFC. The sales process was from 16 April 2010 to be transferred from the Former Owners to the Board of KFHL. The Chairman’s role would include leading that process on behalf of KFHL. The Board then needed to have control of all further discussions, correspondence and negotiation with interested parties with the RBS being entitled to be updated on an ongoing basis as the stage of discussions relating to the sales process.

Finally, clause 4 provided for the appointment of a Board observer with the right to attend all Board meetings.

When one looks at the plea of implied terms, what is totally missing from the Side Letter is any obligation on the part of RBS as regards redemption. That is why there is recourse to implied terms. Further, there is no reference to a refinance. The whole thrust of the RBS Side Letter is for there to be a process leading to a sale, that sale is to be negotiated by the Board, the Board is to be reconstituted so that its control was in the hands of the Chairman and that the Chairman was to lead the sales process. The Former Owners thereby relinquished control of the company.

It is hardly surprising such an event occurred. RBS had granted a number of extensions to the loan and without such an agreement the loans could have been called in and the entirety of the group would have then gone into administration. For reasons that I have set out above, that would be unattractive. The price to be paid was that the Former Owners surrendered control to enable a sale to be obtained in the hope that the sale would be the best price reasonably obtainable.

Finally in this context, it is to be noted that the sale was not to be effected by RBS (although they were informed by the Board observer and the obligations to keep them updated). It was to be a sale by the newly constituted Board.

The next letter of significance is the CGSL dated 30 April 2010. This reinforced the provisions of the RBS Side Letter. The first section is headed Corporate Governance. The letter is (in traditional banking style) written as if it was devised and written by the Former Owners. In fact, its creation was entirely that of RBS of course.

Part 1 deals with Corporate Governance. It confirmed the appointment of Sir Martin Broughton as the non-executive Chairman and that his role would include leading to the “Exit” “Exit” was defined in the Transaction Co-operation Letter as a “Sale, Change of Control or other direct or indirect disposal of shares in the Company, any holding company of the Company or any Group Member or of any Permitted Shareholder Debt. It plainly refers to a sale. It reinforced the entrenched position of the Chairman and the loss of majority control by the Former Owners with provisions to ensure that they would not directly or indirectly as shareholders exercise any rights that would be contrary to the corporate governance arrangements.

Paragraph 2 dealt with the sales process and reiterated the matters set out in the RBS Side Letter. Once again the only possible construction of this in my view can be that it concerns a process of sale. There is no mention made of refinancing.

Paragraph 3 provided for the appointment of the Board observer with provisions to deal with the potential conflict that might arise.

Once again, there is missing any reference to obligations on the part of RBS as to refinancing or otherwise. The sale is contemplated to be a sale by KOP Football and the bank is not involved beyond the Observer and the right to be informed. Of course, the Former Owners have relinquished control to Sir Martin Broughton and the majority of the board. That is a decision that they made voluntarily with the benefit of legal advice. It might be said they had little choice but that was because the time for repayment of the substantial monies that they obtained from RBS had after a series of extensions arisen.

The relevant test for implying a term into a contract has been considered in a number of cases. It was succinctly stated by Lord Simon of Glasedale in BP Refinery (Westernport) Pty Ltd The Shire of Hastings [1978] 52 ALJR 20 at 26:-

“Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied, the following conditios (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”

As I have said the whole purpose of the various documents was to proceed to a sale of the shares in the football club as expeditiously as possible. Control of that exercise was removed from the Former Owners and given to the Board. The Former Owners agreed to surrender control of the Board to Sir Martin Broughton and the two other independent directors.

What is totally absent is any reference to any refinancing. Further, beyond the obligations to have consent to various actions, RBS on the face of the documents had no role in the sales process. It certainly had no role to play in any attempt by the Former Owners to raise debt or equity finance. The reason for that is quite obvious. No such proposals are contemplated in the various documentation.

Given that, the question to be asked is “how do the Former Owners assert there are implied terms as regards refinance when refinance is not contemplated under these documents?” One has to search earlier documentation. The Former Owners revert back to documents in 2008 and 2009. The first of those is the first Transaction Co-operation Letter dated 9 December 2008. The second is the “second Transaction Co-operation Letter dated 7 August 2009.

Under the first Transaction Co-operation Letter the Former Owners were by clause 2(a) obligated “to use all reasonable endeavours to achieve a refinancing of the facilities in full before the extended repayment date”.

The second Transaction Co-operation Letter superses the first Transaction Co-operation Letter. It repeated the obligation in 2(a) to use all reasonable endeavours to achieve a refinancing before the repayment date.

Both documents were stated to be supplemental to the Finance Documents.

The repayment date was extended under a series of short term extensions dated 5 March 2010, 19 March 2010, 30 March 2010, 1 April 2010, 6 April 2010, 9 April 2010. In each of those is to be found a provision as follows:-

“The terms of this letter are strictly Without Prejudice to the rights, powers and discretions of the finance parties under the finance documents. For the avoidance of doubt this letter is without prejudice to the rights and obligations of the parties to the transaction cooperation letter.”

The facilities were finally extended by the Ninth Repayment Date Amendment Letter dated 30 April 2010. This too contains the same clause.

Thus, the Former Owners submit that by incorporating that earlier letter, not only was sale considered but refinance was also to be considered.

Of course, that documentation does not put any obligation on RBS to provide assistance nor not to obstruct any refinancing. Thus the Former Owners need to have recourse to implied terms. The implied terms are as follows:-

The Former Owners as I have already set out above plead the same terms by a collateral contract.

Implied terms so as to prevent performance have largely fallen on stony ground, see for example, Luxor (Eastbourne) Ltd v Cooper [1941] AC108 and Thompson v Asda-MFI Plc [1988] 1 Ch 241. I would also refer to Lewison: The Interpretation of Contract (5^th Edition, 2011) and in particular paragraph 6.14 and 6.15 and the reference therein in the latter to the case of James E McCabe Ltd v Scottish Courage [2006] EWCH 538 (Comm).

Even in the Transaction Co-operation Letters there are merely obligations on the part of the Former Owners to achieve a refinance. That that adds nothing beyond the fixing of a date for repayment of a loan in any event.

In my view, the April 2010 documentation is plainly orientated towards a sale and a sale alone. I do not accept that the “belt and braces” inclusion of every previous document has any impact on that. The major difference to my mind between the earlier situations is that in the earlier situations RBS was giving the Former Owners an opportunity to refinance. By April 2010 (self-evident in my view from the relatively short extension periods over that month) RBS had decided that a sale was appropriate. That is entirely in accordance with the documentation. Further, that documentation apart from this oblique reference is also completely at variance with any suggestion that the parties at that time entered into arrangements which tied RBS to a refinancing operation.

In effect the April 2010 documentation was simply a mechanism whereby the shares were put up for sale and the control of that sale was consensually removed from the Former Owners. In exchange for that the Former Owners and the debtor companies were given a further extension until 15 October 2010.

I do not find that the implied terms put forward by the Former Owners are either necessary or at all obvious.

I therefore conclude that the Former Owners have no real prospect of establishing the implied terms that they assert. I therefore refuse them permission to amend their Defence and Counterclaim to seek a claim based on the implied terms set out in the proposed draft Amended Defence and Counterclaim in respect of obligations concerning refinancing.

There is a further reason why such implied terms are in my view inappropriate. RBS has lent money to the debtor companies and obtained security. If it seeks to realise its security it will need to obtain the best price reasonably obtainable. If it fails to do so then it is liable in damages to the borrowers. Equally as the relationship between the debtors companies and RBS is that of mortgagor and mortgagee, a mortgagor (unless there are valid terms in the relevant documentation to the contrary and there is none) has an absolute right to redeem the mortgage. In this case they were in effect given until 15 October 2010 to redeem.

Mr Snowden QC for RBS accepted that RBS could not prevent redemption if money was offered. Given that the oblique references to refinance are nothing more in my view than expressions of the right of the debtor companies at any time to redeem their security. The April documentation does not affect that right so that the reality is that whilst the April documentation was moving towards a sale by no later than 15 October 2010, in parallel at all material times, the debtor companies would have a right to redeem.

A right to redeem is to be contrasted with refinancing which involves a third party acquiring RBS’s debts and security. That latter arrangement could only be achieved consensually with RBS and it is under no duty to agree to allow a third party to take over its finance and step into its shoes (a fortiori when such proposals involved RBS abating some of its debt).

That is enough to dispose of the Former Owners’ original application to amend the Defence and Counterclaim.

I refer to my observation on these amendments which are dealt with in a separate confidential ruling as part of this overall judgment.

I now come to consider the principles applicable to these applications in the light of my consideration of the evidence as now put forward.

An overwhelming number of authorities have been produced to me during the course of the hearing. I mean no discourtesy to the advocates in not referring to them in any great way.

The principles as regards summary judgment or strike out for abuse are well known.

I refer in summary to the commentary at paragraph 24.2.3 of the current White Book.

I do not think it is appropriate at this stage to accede to RBS’ application for judgment on its Claim because the matters raised by the Former Owners in my view have some prospect of success. This is the more so because in my view one has to be careful in dealing with a Claim for negative declaratory relief. It appears to obviate the need for a party to prove its case at a stage when they might have difficulties in so doing. It was for that reason that I ordered the disclosure. Even now RBS has not adduced any detailed witness evidence from the main people who were involved in the relevant period between April 2010 and October 2010. I accept of course that would not necessarily enhance RBS’ position and would probably be fastened upon by the Former Owners as showing there is a dispute as to all the testimony which cannot be resolved at this summary stage. The absence of such evidence however does not mean that is not the correct conclusion. As I have said I am firmly of the view that these issues require to be determined by oral testimony.

What RBS is trying to do is to have in effect a mini trial which has always been inappropriate at this stage.

For a similar reason in my view its abuse application similarly fails.

Under CPR 24.2 (b) it is provided that a Court on hearing an application for summary judgment against the Claimant or a Defendant can give summary judgment if:-

“(b)

There is no other compelling reason why the case or issues should be disposed of at a trial.”

In my view the existence of the English Directors’ proceedings is a compelling reason why this action should go to trial to be heard at the same time as those proceedings. Whatever the result of the present applications and even if the English Defendants apply to challenge the Former Owners’ Defences as regards implied terms at the moment there will be a trial the allegations against the English Directors and Sir Martin Broughton of breach of fiduciary duty. I accept that the Former Owners do not allege that RBS dishoneslty participated in those breaches of fiduciary duty.

Nevertheless it is quite clear that (willingly or otherwise) RBS employees will inevitably be witnesses in that trial. The trial will involve an examination of the events between April 2010 and October 2010. It will examine how the April arrangements came into place, what was done pursuant to those and whether there were any feasible finance options or sale options. It is difficult to see how a trial can sensibly take place in the English Directors’ action where the conduct of RBS’ officers will be under consideration without consideration of their evidence as to what RBS did during the period.

If I accede to RBS’ application now the Former Owners will forever (subject of course to an appeal) lose their right to have this matter tested. It would be an injustice if they are shut out now when there is going to be a judicial examination of the events albeit in a separate action. It is not impossible that matters might come out during the course of that evidence which might assist the Former Owners. Given the close proximity of the two actions as I observed earlier in this year (and as the parties accepted) the close nexis between the causes of action inevitably requires them to have one trial where the evidence is heard applicable to both actions. Therefore it would be quite wrong to shut the Former Owners out for this reason.

It seems to me that it is not necessary for the Former Owners to pray in aid of sub rule (b) that they have a Defence which has a real prospect of success. If they can show that they get home under sub rule (a). The alternative rule in my view does not require them to show a case to that level.

I refer to paragraph 24.6.6 of the White Book. A conditional order can be made “if it appears to the Court that, in respect of some claim or defence or issue, it is possible that the claim, defence or issue may succeed but it is improbable that it would do so”.

In my view the matters raised by the Former Owners fall within that category. In other words whilst I accept they establish an argument which has a real prospect of success that was in the words of the Duke of Wellington “a close run thing”. I am sceptical of the matters but I do not believe justice will be served by shutting them out.

Against that I bear in mind that scepticism and also the fact that the Former Owners are beyond the jurisdiction and have ventilated matters at earlier stages in the proceedings in an inappropriate way. It seems to me that I should make a conditional order whereby the Former Owners are required to supplement the security previously ordered from time to time to cover RBS’ costs of this trial.

I raised this with Mr Malek QC and on instructions he said that he would not oppose such a conditional order. Clearly the amount and the regularity of such payments will have to be subject to agreement or orders of the Court. However I will only grant them permission to amend the Defence and Counterclaim on the basis that an order is made in terms that they provide security for RBS’ costs of taking this matter to trial.

At the moment the documentation is confidential and my rulings are confidential. I do not believe that as the action is proceeding the confidentiality ought to be maintained. I will hear submissions on that. In that context of course if it is established at a later stage that the Former Owners break their obligations in respect of disclosed documents RBS will have substantial protection as regards the sums deposited with their solicitors as envisaged by this judgment and will be able to apply for sanctions against them. I do not see that any of the material referred to in the Amended Defence and Counterclaim is of such confidence that it needs to be protected. Of course I appreciate that a significant amount of other documentation was provided which has not been disclosed to me. If there are confidentiality issues as regards those I would hope that the parties’ lawyers can agree a method of preserving any such confidentiality. If not the matter will have to be brought back to Court.

This matter should be brought to a speedy conclusion. I would wish directions to be agreed if possible with a view to this action (together with the English Directors’ action) being heard early in 2013. I would appreciate the parties’ representations in that regard.

I am as always grateful for the cogent, compelling and vigorous way in which Counsel put forward their arguments on behalf of their clients.