Sharp & Ors v Blank & Ors

In these actions the Defendants applied for summary judgment under CPR 24.2 on particular issues pleaded by the Claimants and/or that certain parts of the Particulars of Claim be struck out under CPR 3.4(2)(a). I dealt orally with certain aspects of the application during the hearing, but was not able to deal with all of them. This judgment concerns one particular aspect of the hearing which is the Defendants’ application for summary judgment on what has been referred to as the LIBOR allegation. (There is in this respect no alternative application under CPR 3.4).

It is not necessary to rehearse the claims in the actions in any detail. They concern the acquisition in early 2009 by the 6^th Defendant, now called Lloyds Banking Group plc but then called Lloyds TSB plc (“Lloyds”), of Halifax Bank of Scotland plc (“HBOS”). An EGM of Lloyds shareholders was called to approve, and did approve, the proposed acquisition on 19 November 2008. Before the EGM the directors of Lloyds published a Circular to shareholders. In essence the claim is that this Circular (and various other communications to shareholders) contained material misrepresentations and omissions, and that the 1^st to 5^th Defendants, who were directors of Lloyds, were in breach of tortious and fiduciary duties owed to the Claimants, who are, or claim to be, some of the shareholders in Lloyds.

As set out in more detail below, among the matters which it is said that the Defendants knew, but did not disclose to the shareholders, was that HBOS was manipulating its LIBOR submissions. It is now clear, and accepted, that such manipulation was indeed going on, but the question is whether the Claimants have a realistic prospect of success on their allegation that the directors of Lloyds knew this at the time.

There are in fact 7 actions before the Court but there are generic Particulars of Claim. The relevant paragraphs where the LIBOR allegation is pleaded are as follows:

Paragraph 107(8)

Paragraph 108(6)

Paragraph 115(2)(h)

Paragraph 115(6)(h)

It can be seen that paragraph 107(8) pleads “full knowledge” by the Defendants that HBOS, through Bank of Scotland (“BoS”), was manipulating its LIBOR submissions, and paragraph 115(6)(h) is again a plea that the Defendants knew of the manipulation. The other two paragraphs do not refer to knowledge as such, but paragraph 108(6) refers to the Defendants taking “positive steps to conceal” certain matters including the manipulation, which contains an implicit allegation of knowledge as one cannot positively conceal what one is unaware of; and paragraph 115(2)(h) pleads the fact of the manipulation as part of an allegation that the Circular was misleading and disingenuous and again seems to me to be premised squarely on the basis that the Defendants knew of the manipulation, as it is not disingenuous to fail to refer to something if one is unaware of it.

It seems to me therefore that the LIBOR allegation is dependent on the Claimants establishing that the Defendant directors actually knew that the LIBOR submissions were being manipulated. At one stage in the argument Mr Steinfeld suggested that a plea of actual knowledge encompassed “Nelsonian” knowledge on the basis that the reason Nelson put the telescope to his blind eye was because he knew what he was going to see. That suggests that Nelsonian knowledge is confined to the case where a person does not ask a question because they already know what the answer is. I agree that that would be a case of actual knowledge, but whatever the historical position as to Nelson’s state of mind at the Battle of Copenhagen (where he may indeed have known exactly what the signal was), the concept of Nelsonian or blind-eye knowledge as I understand it is usually regarded as indicating a state of mind where the person concerned chooses not to ask a question because they fear that the answer may not be what they want to hear. Indeed if that is not what it means it does not seem to me a concept that has much practical utility. I do not regard the current pleading as encompassing such a case; it is as I say a plea of actual knowledge.

The Defendants sought further information from the Claimants as to the facts and matters relied upon in support of the LIBOR allegation. The response referred to two matters:

It was said that on or shortly after 18 September 2008 the Director Defendants would have been aware that HBOS was incapable of borrowing from or lending to other banks, and that they therefore would have appreciated that its GBP and USD LIBOR rates were:

Reference was made to the outcome of an investigation by the Financial Conduct Authority (“FCA”) into both Lloyds and BoS as set out in a Final Notice addressed to them dated 28 July 2014 (“the Final Notice”). This found that directions were given by certain Lloyds managers to manipulate the LIBOR rates. It was said that:

There was no dispute before me as to the relevant principles. As already referred to in my oral judgment on the recapitalisation allegation, I was referred to the oft-cited summary by Lewison J in Easy Air Ltd v Opal Telecom Ltd [2009] EWHC 339 (Ch) at [15], the judgment of Lord Woolf MR in Swain v Hillman [2001] 1 AER 91, and the speech of Lord Hope in Three Rivers District Council v Bank of England (No 3) [2001] UKHL 16. I will come back to the application of the principles at the end of this judgment.

There is no doubt (as I said in that judgment) that CPR 24.2 confers a power on the Court to grant summary judgment on a particular issue. In the case of the recapitalisation allegation I nevertheless declined to grant summary judgment, primarily because it was bound up with matters that would remain in issue at trial, and I was not satisfied that to strike out the particular allegation complained of would substantially reduce the burden of preparation for trial or the trial itself. In the case of the LIBOR allegation however the position seems to me to be different. Although allied with a more general allegation as to what the Defendants knew of HBOS’s allegedly parlous financial state at the time of the acquisition, and although I accept that this more general allegation will have to be examined at trial, the LIBOR allegation is a discrete allegation that the Defendants had knowledge of a specific fact. If it remains in issue, I accept that this will involve what is bound to be a significant disclosure exercise – I do not have any firm evidence as to quite how significant but I do not really have any doubt that it is bound to be substantial – and this by itself is enough to satisfy me that if it is struck out the burden of preparation for trial will be significantly reduced. It is not necessary in addition to consider how much it would add to the burden of the trial itself, but if pursued at trial it would inevitably require some exploration in the evidence. In these circumstances I am satisfied that if the Defendants persuade me that the Claimants have no real prospect of succeeding on the LIBOR allegation, then this is an appropriate case to use the powers in CPR 24.2 to grant summary judgment.

It is not the function of the Court under CPR 24.2 to conduct a mini-trial on the documents. But it is impossible to discuss the application without some statement of the facts, so far as they appear to be on the various documents put before me.

The most useful of these is the Final Notice addressed to both Lloyds and BoS (described as “the Firms”) which gave the FCA’s reasons for imposing substantial fines on them. It explains what LIBOR is (the London Inter-Bank Offered Rate, the most frequently used benchmark for interest rates globally), and how it was set. At the relevant time it was published by the British Bankers’ Association (“BBA”) for a number of currencies, including sterling (GBP) and US dollars (USD), with different maturities, including 3 and 6 month maturities. The BBA had a number of banks on its LIBOR panel, including Lloyds and BoS, and each panel bank contributed rate submissions each business day. The submissions were not averages of actual transactions carried out by the panel banks, but required each bank to exercise its subjective judgment as to:

In the relevant period, the FCA found that both Firms had manipulated their LIBOR submissions (and another rate called the GBP Repo Rate). As with other banks, there were two different types of manipulation of LIBOR, for two different purposes, conveniently labelled “trader manipulation” and “lowballing” respectively. Trader manipulation was where submissions had been made to try and influence the overall LIBOR rate in order to improve the profitability of transactions in the money market. Both Firms had been guilty of this. Lowballing, which the FCA found that BoS had been guilty of, was where a lower rate had been submitted than should have been, in order to avoid negative media comment and market perception about the submitting bank’s financial strength. Since the BBA reported not only the overall rate but the submissions of the individual panel banks, it would be readily apparent to commentators if a particular bank’s reported rates were markedly out of line with those of other banks. The FCA detailed 2 specific examples of BoS managers instructing traders to bring their submitted rates down, one in relation to USD 3 month rates where after 2 days on 24 and 25 September 2008 on which BoS’s submitted rate was noticeably higher than that of other banks, a manager instructed a trader to “bring my rates down into line with everyone else”; and the other in relation to 3-6 month GBP rates where on 21 October 2008 the same manager told traders with responsibility for making LIBOR submissions that he did not want to be an outlier, and that they should “submit 3-6 months Libors at the expected BBA level for the time being.” In both cases BoS’s rate fell from being out of line with that of other banks to being “within the pack” and remained there until the acquisition by Lloyds on 19 January 2009.

As set out above, the Claimants’ Further Information sought to rely on the Final Notice for the FCA’s finding that certain managers at Lloyds were responsible for or aware of rate manipulation. The particular passage relied on was as follows:

Ms Davies however drew my attention to the findings by the FCA that a total of 16 individuals at the Firms, of whom 7 were managers, were directly involved in or aware of the LIBOR misconduct, and that the manipulation of submissions was “not detected by the Firms until after they had been asked to investigate potential issues in 2010.” This draws a distinction, as I accept, between the manipulation being known to certain traders and managers at Lloyds and BoS, and being known to the banks themselves. In these circumstances I agree that the FCA’s findings in the Final Notice do not establish, or even really begin to suggest, that the Defendant directors were aware that Lloyds was manipulating its own LIBOR submissions; so it is no basis for the assertion that they would have been “aware of the possibility that HBOS would have been doing the same thing as Lloyds was doing at the time”. This is quite aside from the point that a director being aware of a possibility that HBOS might be manipulating its submissions is not the same as a director having actual knowledge that it is.

The other matter relied on in the Claimants’ Further Information is the fact that at the relevant time HBOS, as the Defendants would have been aware, was unable to borrow from other banks, and hence that the submitted rates were a fiction, as the Defendants would have appreciated.

The Defendants’ evidence is that it is not quite right to say that HBOS was entirely unable to borrow, but even the Defendants’ evidence refers to HBOS finding itself faced with the closure of wholesale markets except the overnight market, and Ms Davies accepted in terms that there was evidence suggesting that HBOS was not in fact able to borrow for the terms for which its LIBOR submissions were made, and said that for the purposes of the application she was not suggesting that that was unarguable.

Her point was rather that an inability to borrow was not regarded by anyone as suggesting that LIBOR submissions were therefore necessarily fictitious. She pointed out that difficulties in accessing the wholesale market were not confined to HBOS. She referred to the Final Notice where the FCA had relied for its findings of lowballing on specific evidence of instructions from managers, and there is no suggestion that the mere fact that HBOS was having difficulties accessing the wholesale market meant that their submissions were concocted. Indeed the FCA note that liquidity in the London interbank market reduced significantly following the onset of the financial crisis, that interbank lending came to a virtual standstill in the latter half of 2007 and throughout 2008, and that this “reduced the information available to LIBOR submitters when determining submissions, especially in the longer tenors”; but they do not draw any inference from these facts alone that BoS’s submissions, or anyone else’s, were being manipulated.

Ms Davies also referred to the fact that the Bank of England and the Financial Services Authority (“FSA”) were closely monitoring the liquidity of the major UK banks during this period. (The FSA, I was told, was then both the prudential and conduct regulator; in 2013 its responsibilities were split, with the Bank of England becoming the prudential regulator and the FSA, now renamed the FCA, being left as the conduct regulator). She showed me a report of the Treasury Select Committee published on 18 August 2012 called “Fixing LIBOR: some preliminary findings” which concerned among other things lowballing by Barclays. This included statements by the Governor of the Bank of England (Mr Mervyn King) that although there was deliberate misrepresentation by Barclays “we had no evidence of wrongdoing” and it took the regulators 3 years to work out and find the evidence of wrongdoing; and by Mr Paul Tucker (in 2012 Deputy Governor of the Bank of England but at the relevant time Executive Director of Markets) that although there was evidence of LIBOR fixings being lower than actual traded interbank rates, he did not read this as cheating; there were several reasons why there might be a difference between actual transactions in the market and an individual bank’s LIBOR submissions including the fact that there were fewer, more sporadic and smaller transactions, particularly at longer maturities, which meant that banks had to rely more on judgment in formulating their LIBOR submissions and market conditions made the exercise of that judgment increasingly difficult.

She also showed me an Internal Audit Report published by the FSA in March 2013 following the uncovering of lowballing by Barclays which reviewed the extent of awareness within the FSA of inappropriate LIBOR submissions. Among other things this noted what it referred to as “LIBOR dislocation”, that is a dislocation between LIBOR and other indicators. Among the ways in which this manifested itself was a divergence between LIBOR submissions and actual rates that could be obtained in the market; and among the causes was the difficulty that banks had in providing accurate LIBOR submissions because some markets became very illiquid with very few transactions occurring at some maturities. Again the conclusion was not that banks must have been making up their submissions but:

Ms Davies also showed me a Management Response to the Internal Audit Report also dated March 2013 where the FSA management said that the UK authorities were acutely aware that there was significant ‘dislocation’ in the LIBOR market in 2007-8, but that clear evidence of this dislocation “did not in itself, however, carry any implication that ‘lowballing’ was occurring.”

On the basis of this material Ms Davies submitted that the Claimants’ case involved the proposition that although neither the Bank of England nor the FSA drew the inference that lowballing was going on, that is how it must have been perceived by the Defendant directors. She submitted that it was fanciful to suppose that the directors had more insight than the regulators.

Mr Steinfeld sought to downplay the significance of the evidence as to what the Bank of England and the FSA did or did not know by pointing out that they were each trying to excuse their own failure to identify that lowballing was occurring, and that they were not conducting due diligence into HBOS in the way that Lloyds was. Neither of these really met Ms Davies’ point that unless there was some reason to alert the directors to the risk of lowballing, there is no basis for supposing that it formed part of due diligence. She identified the Claimants’ case as involving 3 steps: (i) the Defendant directors must have been aware that there was at least a prospect that BoS was lowballing its LIBOR submissions; (ii) that this must have been something that Lloyds asked about in the due diligence exercise; and (iii) that if Lloyds asked about it, it must have been disclosed. Her argument was that the Claimants’ case did not get off the ground but broke down at the first stage. The two facts which Mr Steinfeld relied on in support of the inference that the directors must have been aware that there was at least a risk of lowballing were the fact that HBOS did not have the ability to borrow in the market and the fact that they were still making LIBOR submissions, but these two facts were known to the Bank of England and the FSA and neither drew the conclusion that there must have been manipulation.

I accept that the material put before me by Ms Davies does, to put it at its lowest, cast real doubt on whether there is any sound basis for drawing the inference that the Claimants have pleaded in their Further Information, namely that the fact that the Defendant directors were aware that HBOS could not borrow means that it is to be inferred that they would have appreciated that the rates HBOS were publishing were a fiction designed to disguise its financial circumstances.

The question however is whether the case meets the requirements for summary judgment under CPR 24.

CPR 24.2 enables the Court to give summary judgment on an issue if it considers that the claimant has “no real prospect of succeeding” on that issue (and there is no other compelling reason for the issue to be disposed of at trial – it is not suggested here that there is any such reason). The most authoritative guidance on how this question is to be approached is in Three Rivers, particularly in the speech of Lord Hope at [95]. This is a very familiar passage but it is worth reminding myself of it. Having said that the method by which issues of fact are tried in our courts is well settled (that is by oral evidence after disclosure), he referred first to cases where it was clear as a matter of law that even if the facts relied on were proved the claim could not succeed, and then said:

The question for me therefore is not whether I think it probable that the Claimants will be able to make out their case, but whether the Defendants have shown (it being established that the onus under CPR 24.2 is on the applicant) that one can confidently say that the Claimants’ case is fanciful or lacking in reality or inconceivable. And in assessing this question, I should have regard not just to the evidence actually placed before me but to the evidence that can reasonably be expected to be available at trial; the Court should hesitate about making a final decision without a trial where reasonable grounds exist for believing that a fuller investigation into the facts would add to the evidence available to a trial judge: see paragraphs (v) and (vi) in Lewison J’s summary of the principles in Easy Air.

I have come to the conclusion that I cannot say with confidence at this stage that the Claimant’s case will turn out at trial to be without substance. I will try and explain why as briefly as possible.

The central thrust of Ms Davies’ argument is that the contemporary material which she has shown me makes it fanciful to suppose that the director Defendants appreciated that BoS’s LIBOR submissions were fictitious when the Bank of England and the FSA did not, and in circumstances where the FCA later did not rely on BoS’s inability to borrow as part of their basis for concluding that there had been manipulation; and hence that there is no reason to infer that the directors asked any questions about it in due diligence. But this does not answer the question whether the directors, or more realistically those who decided what inquiries to make in the course of due diligence, thought it worth asking any questions about BoS’s LIBOR submissions. I have no evidence before me, and no feel for, the scope of the inquiries which one bank acquiring another in the circumstances as they were in 2008-9 would regard as appropriate for due diligence, let alone what Lloyds’ due diligence actually asked questions about. One can speculate that Lloyds was likely to be more interested in many things other than LIBOR, such as the quality of HBOS’s loan book, but the fact remains that I simply do not know what due diligence one could expect to have been carried out or was in fact carried out. I asked Ms Davies in the course of her submissions whether I had any evidence as to what questions (if any) were asked about LIBOR in the course of due diligence, to which she answered that she had no such evidence, and accepted that she was in effect making a submission that it was obvious, or rather that it was not properly arguable that it was to be inferred that the questions must have been asked in due diligence.

That rather exposes the difficulty that I feel. Ms Davies may well be right that it turns out at trial that there is no basis for supposing that any questions were asked in due diligence about LIBOR at all, as there was no reason to query the submissions. But whether that is so or not must depend on the sort of questions that are usually asked, and the sort of inquiries that are usually made. I can speculate about that, but I cannot proceed on the basis that I have before me all the material that might be available at trial on that point. Disclosure has not yet taken place, and I do not feel confident that I can say that disclosure is unlikely to make any difference. Indeed disclosure of what due diligence was carried out may make it entirely clear one way or the other whether any questions were in fact asked in due diligence about BoS’s LIBOR submissions.

I can test the proposition this way: suppose that it turns out at trial that someone at Lloyds, knowing that HBOS was having even greater difficulties than other banks in accessing interbank lending, noticed that BoS was continuing to make LIBOR submissions in line with other banks (‘in the pack’), and wondered on what basis it was able to do so, and that questions about this had indeed been asked in due diligence. That might make a very material difference to whether the inference that the Claimants invite the Court to draw should be drawn. Does the material currently before me enable me to conclude with confidence that that would be an inconceivable or fanciful or unrealistic scenario ? On the material before me I do not think I can dismiss it as such.

It might be different if the Defendants had already done the exercise of looking at the due diligence and were able to give evidence that they had found no documents which suggested that any questions had been asked about LIBOR at all. But the Defendants as I understand it, have not done that exercise; and I do not have evidence from the Defendants explaining what they did or did not ask about LIBOR, or indeed what they did or did not know about BoS’s LIBOR submissions (beyond the bare fact that the Defence, supported by a statement of truth signed by a partner in the Defendants’ solicitors, denies the allegations of knowledge of LIBOR manipulation).

Ms Davies reminded me of what was said in paragraph (ii) of Lewison J’s summary of the principles in Easy Air, that a ‘realistic’ case is one that carries some degree of conviction, which means a claim that is more than merely arguable. That is taken from ED & F Man Liquid Products v Patel [2003] EWCA Civ 472 at [8]. I was not specifically referred to the case but in order to understand the principle I have reminded myself of it. In that case the defendant was seeking to set aside a default judgment under CPR 13.3(1) (where the wording is similar to that in CPR 24.2), the claim being one for the price of goods sold and delivered. There had originally been an agreement for a joint venture between the parties but the claimants’ case was that it had been replaced by a straight sale by the claimants at an invoiced price, the defendant’s case being that the parties’ relations were still governed by joint venture arrangements. The defendant’s case suffered however not only from the fact that various features of the account put forward by his solicitor were inconsistent with the joint venture arrangements continuing, but also with the fact that he had made a number of unqualified admissions as to the debt. It was in that context that Potter LJ said that the defence that was sought to be run must carry some degree of conviction, and that the judge was entitled to reject the defendant’s explanation for the admissions as “devoid of substance or conviction”. I regard that as a rather different type of case, and an illustration of the danger of taking statements of principle, however eminent their source, out of context. Potter LJ’s gloss on the language of the rule makes good sense where what is in issue is a defence belatedly put forward by a defendant who has not previously disputed his indebtedness: in such a case the Court is entitled to test how realistic the defendant’s assertions are against the background that he has not mentioned them before (although if there was any truth in them he must have known that there was), and can reject them if they carry no degree of conviction.

The present case is not like that. It is a case where the Claimants are necessarily piecing together a case from such material as is already available to them, in circumstances where a great deal more material is available to the Defendants, and a great deal more material will in due course be available at trial. The fact that the Claimants’ case may seem thin at this stage, before disclosure, does not therefore indicate what it will look like at trial. My understanding of the principles to be derived from the authorities is that it is only if the Court can at this stage say with confidence that there is nothing of substance in the claim that summary judgment can be given. I have rehearsed what appear to be some of the difficulties in the Claimants’ case on the material currently before me, although I have tried to avoid being too definite as this can cause its own problems where an issue is not being summarily disposed of and I am quite likely to be the trial judge. But whatever the apparent problems with the Claimants’ case as matters stand, I do not feel able to conclude with confidence that the claim will ultimately prove to be unsustainable.

There is one other consideration that I have borne in mind. If summary judgment is given under CPR 24.2, that would I apprehend mean that judgment was entered against the Claimants on that issue with the result that the matter would then become res judicata as between the Claimants and the Defendants. In a case where the Court is persuaded at the interlocutory stage that there really is nothing in a claim this does not seem an unreasonable consequence of entering judgment. But in a case like the present what the Defendants are saying is that the Claimants do not have the material to establish their case. If I acceded to their application it seems to me that the judgment would operate as a res judicata even if it came to light on disclosure that there might be something in the claim after all. That does not seem so obviously right or just. It seems to me to be another reason why the Court should be slow in a complex factual case which is going to go to trial in any event to pick off one of the allegations on the basis that it can be confident that that particular allegation is fanciful.

I should perhaps make it clear that I am not to be taken as suggesting that a claimant can properly put forward a case where he knows of no facts to support it and hope to survive a summary judgment application or strike out simply on the basis that “something might turn up”. There is a well established line of authority which holds that it is an abuse of process for a claimant to make a claim where he does not know of anything to support it. If however the position is that the Court can see from the material before it at the summary stage that it is not fanciful or unrealistic to suppose that the fuller material that is likely to be available at trial might support the case, then this seems to me to be different, and to grant summary judgment in such a case would run the risk of injustice in shutting out the claimant from running a case which might have something in it. Whether a case falls into the first or second of these categories is necessarily very fact-sensitive but the present case in my judgment falls into the second.

In these circumstances I decline to grant summary judgment on the LIBOR allegation under CPR 24.2.