Standish & Ors v The Royal Bank of Scotland Plc & Anor

Judgment Approved

Chief Master Marsh:

“… It is not appropriate to strike out a claim in an area of developing jurisprudence, since, in such areas, decisions as to novel points of law should be based on actual findings of fact.”

Reference is made in the notes to a number of authorities to support that proposition, including the decision of the Court of Appeal in Richards v Hughes.

“The facts of the present case must be, at the very least arguably, shocking to the conscience of the court. A company which [the defendants] assessed as viable, which needed a modest degree of forbearance, and which had put forward a credible CVA (of the very type agreed to by [the defendants] once they had obtained control of the company) was acquired by [the defendants] for themselves. Whether equity and the common law are impotent in the face of such unabashed profiteering by banks from good businesses in temporary distress is a matter of considerable public importance.”

“There has been no case in which it has been held that the acquisition by the bank of a shareholding in a company large enough to enable the bank both to the control the company and to squeeze out the other shareholders does not give rise to any claims known to law. This is a fact-pattern specific to the actions of GRG which needs to be fully explored at trial. The court ought not to come to premature conclusions in advance of disclosure and evidence.”

“At a date or dates presently unknown to the Claimants, RBS, West Register and (subsequently) Mr Cooper (“the Conspirators”) combined with the object of maximising their own equity in the Company and minimising the equity share of the Claimants.”

“(1) RBS would perform the Customer Agreement and/or any sub- agreements entered into during the course of the relationship, in good faith and not in a commercially unacceptable or unconscionable way.

(2) RBS would exercise its powers or discretion under the Customer Agreement and/or any sub- agreements entered into during the course of the relationship, in good faith and not arbitrarily or capriciously or for an improper purpose. This obligation extended to include RBS’s power or discretion to:

“14. … From the outset of the relationship and all material times subsequently, the Company and RBS shared certain understandings about the relationship, including that:

“18A. As the agent of the mortgagee and/or chargeholder, RBS owed to the Company and to the Claimants, as persons interested in the business, duties in equity:

The Customer Agreement and the implied terms

“… I agree that the boundaries of the doctrine are not clear. I would not expect them to be so. As the question whether or not any such contract is to be implied is one of fact, its answer must depend upon the circumstances of each particular case - and the different sets of facts which arise for consideration in these cases are legion. I also agree that no such contract should be implied on the facts of any given case unless it is necessary to do so: necessary, that is to say, in order to give business reality to a transaction and to create enforceable obligations between the parties who are dealing with one another in circumstances in which one would expect that business reality and those enforceable obligations to exist.”

“It must, surely, be necessary to identify conduct referable to the contract contended for or, at the very least, conduct inconsistent with there being no contract made between the parties to the effect contended for. Put another way, I think it must be fatal to the implication of a contract if the parties would or might have acted exactly as they did in the absence of a contract.”

“59. For a contract to come into existence, there must be both (a) an agreement on essentials with sufficient certainty to be enforceable and (b) an intention to create legal relations.

60. Both requirements are normally judged objectively. Absence of the former may involve or be explained by the latter. But this is not always so. A sufficiently certain agreement may be reached, but there may be either expressly (i.e. by express agreement) or impliedly (e.g. in some familiar situations) no intention to create legal relations.

61. An intention to create legal relations is normally presumed in the case of an express or apparent agreement satisfying the first requirement … It is then for the party asserting such a contract to show the necessity for implying it. As Morison J said in his para 12(1), if the parties would or might have acted as they did without any such contract, there is no necessity to imply any contract. It is merely putting the same point another way to say that no intention to make any such contract will then be inferred.”

34. The law relating to implied terms was restated by the Supreme Court in Marks & Spencer v BNP Paribas Securities Services Trust Co [2015] 3 WLR 1843. Mr Casey who appeared for the defendants extracted the following propositions from that decision and I adopt his helpful formulation:

(1) The default position is that nothing is to be implied into a contract; the more detailed the contract, the stronger that presumption will be.

(2) The court needs to construe the express words first and then consider implied terms. Until it has been decided what the parties have expressly agreed, it is difficult to see what, if anything, they each have impliedly agreed.

(3) It is impossible to imply into a contract any term or condition inconsistent with the express provisions and, even if there is no necessary inconsistency, an express term in a contract excludes the possibility of implying any term dealing with the same subject matter.

(4) A term can only be implied if it reflects the only meaning consistent with the other provisions of the instrument. If the omission to include an express provision may have been deliberate, no term will be implied.

(5) The implied term must be reasonable and equitable. On the other hand, it is not enough that a term is reasonable or appears fair or equitable for it to be implied. These are necessary but not sufficient grounds. The sufficient ground is that the implied term must be necessary to give business efficacy to the contract and is so obvious that it goes without saying. Moreover, a term can only be implied if, without the term, the contract would lack commercial or practical coherence.

(6) Because the implication of terms is potentially so intrusive, the law imposes strict constraints on the exercise of the power.

35. The Customer Agreement must have come into being at some point before the company was referred to the GRG in June 2010. It follows that the facility agreed in February 2009 must be, on the claimants’ case, subsidiary to it. It is instructive to consider its principal terms. Unsurprisingly, it is a dense document running to 17 pages. It provides for a loan of £16.5 million to refinance the company’s borrowing, with the loan repayable by specified instalments with the final instalment of £12 million payable on 24 April 2012. The loan is secured against the company’s properties, by inter-company guarantee and, inter alia, by the assignment of a life policy on the life of Tracy Standish. It has all the terms that might be expected to be contained in a facility agreement of this type. It is an unremarkable agreement, save perhaps that it does not contain an ‘entire agreement’ clause. The closest it comes to such a provision is clause 16.7 which provides that the agreement supersedes all prior agreements with the bank about the loan.

36. The claimants point to two clauses which they say contain contractual discretions:

(1) Clause 4 deals with interest. Clause 4.1 provides that the interest payable by the borrower is to be the aggregate of three elements including “the margin” which is a defined term meaning 2.75% initially and thereafter the sum calculated in accordance with clause 4.2. Clause 4.2 permits the bank to review the margin in accordance with a formula. Clause 4.4 gives the bank the right to charge interest at a higher rate in the event of a default. The rate is specified to be 4.75% above BBA LIBOR and Mandatory Costs “or such other rate as may be determined by the bank.

(2) Clause 13 defines twelve events of default. Most are defined events. However, the “material adverse change” event is defined by reference to the opinion of the bank. The claimants also point to the provision that applies in relation to all the events of default that the bank may by written notice declare all sums due to be immediately payable.

37. Little more needs to be said about the Customer Agreement. It is common ground that the company dealt with NatWest through a series of standard banking agreements throughout the period in question. There is no obvious reason why the court should conclude that there was an additional overarching agreement, without express terms, that came into being at some unspecified stage.

38. The claimants’ case falls at two initial fences.

(1) The circumstances of its creation are wholly unparticularised. The claimants say they are at a disadvantage in pleading their case because they no longer control the company and do not have access to its papers. Whilst there is some truth in this assertion, it is not open to the claimants to avoid setting out their claim in general terms. After all, the first claimant, Mr Tracy Standish, dealt with NatWest and he must know of their dealings. There is simply no basis put forward from which the court might be able to conclude that the parties turned their minds at any stage to the question of whether or not their business relationship, beyond the black letters of their written agreements, gave rise to an additional agreement with wider duties and responsibilities placed upon the bank (which themselves were to be implied into the implied contract).

(2) The contract fails the necessity test. The parties were already dealing with each other in accordance with written contracts and there was no need for another contract to govern their relationship. The claimants are unable to point to any conduct that might have been different had the contract been in place.

39. The Customer Agreement is a completely artificial construct that is divorced from the commercial realities of the dealings between the parties. I am in no doubt that this element is bound to fail. It appears to me that it is a transparent device attempting to circumvent the difficulty in implying a duty of good faith in the operative written agreements.

40. I would add that the failure to provide particulars explaining how the Customer Agreement came into being is not just a technical pleading point. It suffices on its own to provide a ground to strike out this element of the claim because it is essential that the defendants are able to understand the case they have to meet.

41. It is therefore strictly unnecessary for me to consider whether the claimants’ case based on contractual duties, based as it is on terms to be implied in the Customer Agreement, could assist them. The claimants, realistically, do not say that terms are to be implied into the facility agreements. It is unnecessary for me to consider the discussion by Leggatt J (as he then was) in Sheikh Tahnoon v Kent [2018] EWHC 333 (Comm) at [167] to [172] or the discussion about implied terms in a similar context to the present by Asplin J (as she then was) in Property Alliance Group Ltd v RBS [2016] EWHC 3342 (Ch) [275] to [281].

42. I will however record briefly the conclusions I have reached on this aspect of the application:

(1) The shared assumptions are put forward at a high level of abstraction and they cannot provide a basis for implying additional terms.

(2) Equally, the policy known as TCF does not form a basis for implying terms. TCF is one of the rules of the “Principles for Business” of the FCA Handbook (“PRIN”). Compliance with TCF is mandatory for RBS’ regulated business. The decision to extend compliance to the non-regulated side of the bank’s business was voluntary. In swaps cases claimants have unsuccessfully argued that terms could be implied in their derivative contracts that the bank would comply with PRIN. A recent example of this is the decision of HHJ Waksman QC (as he then was) in Flex-E-Vouchers v RBS [2016] EWHC 2604. It would be anomalous if terms could not be implied in a regulated context but were to be implied in an unregulated case where the bank, unknown to its customer, voluntarily extends TCF to them. All the more so if the term is to be implied into a contract which itself arises by implication.

(3) The implied terms the claimants rely on would not achieve their objective. It is necessary to distinguish the exercise of a discretion as opposed to the exercise of a contractual right that involves making an assessment or choosing from a range of options: per Jackson LJ in Mid-Essex Hospital Services NHS Trust v Compass Group UK [2013] EWCA Civ 200 at [83]. The claimants rely on five contractual discretions at paragraph 15.2 of the particulars of claim (set out above). Taking them briefly in turn:

(a) There is no contractual term upon which what is said to be the exercise of RBS’ discretion to remove the company’s management can bite.

(b) The discretion to waive any covenant breach by the company is not the type of discretion that engages a ‘Socimer’ type term. The discretion is merely that the bank could make a choice about whether to enforce a breach of the terms of lending.

(c) The bank did not demand repayment of its loan facilities so the exercise of a discretion to do so does not arise. The claimant’s reliance on clause 13 of the facility agreement, which refers to there being a material adverse change, does not assist them.

(d) The bank had only a very limited right to vary interest rates under clause 4 of the facility in the event of a default. This is not the sort of contractual discretion that could be the basis for an implied term.

(e) The facility agreement does not deal with the terms of a refinance package.

Equitable duties

43. The claimants seek to add this element of unlawfulness by their draft amendment:

“18A. As the agent of the mortgagee and/or chargeholder, RBS owed to the company and to the claimants, as persons interested in the business, duties in equity:

44. The claimants’ position starts with reliance on the maxim: “Equity will not suffer a wrong to be without a remedy”. They say the equitable duties pleaded at paragraph 18A are necessary in order to prevent the first defendant from abusing its position as mortgagee. But as the authors of Snell’s Equity 33^rd Ed. point out: “… the maxim operates at such a high level of abstraction, it is of limited practical use.”

45. The claimants also rely on a passage in Medforth v Blake [2000] Ch 86 at page 101G. The claimant in that case brought a claim against receivers who were appointed by a bank pursuant to an agricultural charge in favour of the bank. The claimant alleged that the receivers had been negligent in their conduct of the claimant’s pig farming business. The issue on the appeal concerned the existence and scope of the receivers’ duties:

“The equity of redemption was a Chancery invention, introduced in order to ensure that a conveyance by way of mortgage remained a security for the repayment of money whether or not the date fixed for repayment and reconveyance had passed. The duties imposed on a mortgagee in possession, and on a mortgagee exercising his powers whether or not in possession, were introduced in order to ensure that the mortgagee dealt fairly and equitably with the mortgagor. The duties of a receiver towards the mortgagor have the same origin. They are duties in equity imposed in order to ensure that a receiver, while discharging his duties to manage the property with a view to repayment of the secured debt, nonetheless in doing so takes account of the interests of the mortgagor and others interested in the mortgaged property. These duties are not inflexible. What a mortgagee or a receiver must do to discharge them depends upon the particular facts of the particular case.

…

… the duty in equity appropriate to have been owed by a mortgagee selling in 1888 is not necessarily of the same weight as the duty appropriate to have been owed by a mortgagee selling in 1967. Equity is at least as flexible as the common law in adjusting the duties owed so as to make them fit the requirements of the time.” [my emphasis]

46. The claimants draw the following propositions from Medforth v Blake:

(1) Equitable duties are owed by the mortgagee to the mortgagor and any other interested party;

(2) The mortgagee is subject to equitable duties when exercising its powers, whether or not the mortgagee is in possession;

(3) The equitable duties include, butt are not necessarily confined to, a duty of good faith;

(4) Equity is flexible in adjusting the duties owed so as to make them fit the requirements of the time;

(5) The extent and scope of any duty beyond a duty of good faith is dependent on the facts and circumstances of the particular case.

47. The claimants submit that the court cannot conclude that their case based on equitable duties is bound to fail in light of the conclusions they draw from the decision in Medforth v Blake. They point to the words I have emphasised in the judgment of the Vice Chancellor submit it is clear from this passage that it is at least arguable that a mortgagee owes duties of good faith and a duty to act fairly, whether or not it is in possession. They say that this can be properly regarded as a developing area of law and, all the more so, in light of the discussion in the judgment of Lord Sumption in JSC BTA Bank v Ablyazov and another (No 14) [2018] 2 WLR 1125 at paragraphs [11] to [15] concerning unlawful means.

48. The difficulty for the claimants, as Mr Casey appearing for the defendants points out, is that the decision in Medforth v Blake related to the actions of a receiver in possession. The court concluded that a receiver owes similar duties to the mortgagor when managing the mortgagor’s business as when a receiver conducts the sale of mortgaged property. The claimants seek to adapt the general statements made by the Vice Chancellor to a situation in which a bank with security by way of mortgage has not exercised its powers under that security. They have latched onto the words I emphasised in the passage I have cited as a basis for submitting that the duties apply generally. The difficulty for the claimants, however, is that the remarks they rely on were made in the context of a discussion about the equity of redemption. To my mind it is quite impossible to extrapolate from the very specific facts in Medforth v Blake, and the context of the Vice Chancellor’s observations, a wide-ranging proposition that will apply to a lender, if it happens to have security by way of mortgage of land but has not exercised, or threatened to exercise, that security. The duties that arise are connected with the security and only indirectly with the lending. Put another way, in this case the security provided by the company was an incident of the facility terms. The claimants’ complaint in substance is wholly unrelated to the security.

49. It seems to me there is no basis upon which the claimants’ radical proposition about the equitable duties owed by a bank with security has any prospect of success. It has no proper or indeed principled legal (or equitable) foundation and is bound to fail. I do not consider it can be said that there is a developing area of law concerning a decision of the Court of Appeal from nearly 19 years ago without any indication in the intervening period of the principles being taken forward. The claimants do not point to any other case, comment in a textbook or academic article to support this submission. Equally, in this context and more widely in the claimants’ case, there is nothing in the judgment of Lord Sumption which disturbs the basic proposition that unlawful conduct, for the purposes of an unlawful means conspiracy, must be unlawful.

Shadow directorship and fiduciary duties

50. It is necessary first, to set out the basis upon which it is said that Mr Sondhi acted as a shadow director, secondly, to set out the duties alleged to have been owed and, thirdly, to set out the breaches that are relied on.

51. At paragraph 30 of the particulars of claim, it is said that Mr Sondhi’s role at board meetings went well beyond that of an observer as he gave instructions to the directors that the directors felt obliged to follow. There are nine particulars of Mr Sondhi’s actions as a shadow director, which were added as proposed amendments:

“(1) Mr Sondhi demanded to see board meeting agendas in advance and

added items to the said agendas;

(2) Mr Sondhi intervened during board meetings to require information and explanation to his satisfaction with regard to each item;

(3) Mr Sondhi imposed new and onerous contracts of employment on [Mr Standish] and Mr Cullaney as part of the First Restructuring;

(4) In around October 2011, required the instruction of KPMG in lieu of MCR to advise the company as to the terms of a CVA;

(5) In around November 2011, decided, on behalf of the Company, that the Company would engage a turnaround consultant;

(6) In around November 2011, decided, on behalf of the Company, the terms on which a turnaround consultant would be engaged by the Company;

(7) Mr Sondhi insisted, in around December 2011, that the Company appoint a turnaround consultant from a shortlist of three candidates identified by RBS;

(8) In around 2012, Mr Sondhi insisted that the Company appoint Mr Cooper, the turnaround consultant who had been selected, as the chairman of the Company;

(9) In around May 2012, Mr Sondhi instructed Mr Cooper to dismiss [Mr Standish] as managing director of the Company.”

52. The defendant’s original objection was that the particulars of claim did not provide any details about the basis upon which it was said that Mr Sondhi became a shadow director. That objection has now been removed and, for the purposes of the application, I proceed on the basis that the claimants have a prospect of establishing at a trial that Mr Sondhi (or West Register) was a shadow director.

53. The fiduciary duties that are relied upon by the claimants are set out at paragraph 50 of the particulars of claim:

“(1) A duty to act in the way it/he considers, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole.

(2) A duty to avoid a situation in which it/he has an interest that conflicts, or possibly may conflict, with the interest of the Company.”

54. The breaches of fiduciary duty are set out at paragraph 51 of the particulars of claim:

“(1) In breach of the duty to promote the success of the Company West Register (acting together with RBS):

(2) In breach of the no conflict duty, West Register (alternatively Mr Sondhi) allowed itself to assume a position where the board were accustomed to acting in accordance with its instructions, in circumstances where West Register (and Mr Sondhi) was improperly influenced by the Unconscionable Purpose [the defendants’ goal of obtaining 80% of the shares of the company].

(3) In breach of both the duty to promote the success of the company and of the no conflict duty, Mr Sondhi, acting as the employee of West Register and/or as the agent of RBS, who are therefore vicariously liable for his actions;

(a) Promoted the Second Restructure;

(b) Refused to agree to alternatives to the Second Restructure.”

55. Following the judgment of Newey J (as he then was) in Vivendi SA V Richards [2013] BCC 771, it has become settled law that shadow directors may owe fiduciary duties based upon the analysis at paragraph [142] of his judgment. (In any event, it is right to proceed on that basis for the purposes of the defendants’ application). At the outset of that analysis he says he has concluded that shadow directors “… commonly owe fiduciary duties to at least some degree…”. At paragraph [143] he addressed the scope of such duties:

“In the end, my own view is that Ultraframe understates the extent to which shadow directors owe fiduciary duties. It seems to me that a shadow director will typically owe such duties in relation at least to the directions or instructions that he gives to the de jure directors. More particularly, I consider that a shadow director will normally owe the duty of good faith … when giving such direction or instructions. The shadow director can, I think, reasonably be expected to act in the company’s interests rather than his own separate interests when giving such directions and instructions.”

56. Support for the limited scope of a shadow director’s fiduciary duties can be found in the earlier decision of David Richards J (as he then was) in McKillen v Misland (Cyprus) Investment Ltd and others [2012 EWHC 521 (Ch) at 142 at [75].

57. The main difficulty for the claimants in its breach of fiduciary duty claim is that the directions or instructions that are relied upon as making Mr Sondhi and/or West Register a shadow director are unrelated to the breaches of fiduciary duty they have pleaded. No other directions or instructions to the board of directors are relied upon. The defendants submit that, absent such a correlation, this aspect of the claim is bound to fail.

58. Turning to the breaches of fiduciary duty that are relied upon:

(1) The defendants say that the allegations at paragraphs 51(1)(a) and 51(3) (failing to accept reasonable proposals to enable the company to trade through the difficult period and acting in breach of a conflict of interest by promoting the second restructure and by refusing to agree alternatives to it) are defective because the claimants have not identified the alternative proposals which they say the defendants should have accepted. Absent the ‘counterfactual’, the allegation of breach of duty is empty.

(2) In relation to the same allegations, disregarding the defect the defendants identify, they say they are bound to fail because:

(a) The de jure directors of the company were fully aware of Mr Sondhi’s conflict of interest.

(b) No duties were owed in relation to the Second Restructure because it is not alleged that either Mr Sondhi or West Register gave any instructions or directions to the company concerning the Second Restructure. What in fact happened was that Mr Sondhi participated in negotiations with the company on behalf of West Register of terms that the claimants disliked. There is no claim that the claimants’ will was overborne. They accepted the terms pressed on them by West Register. This outcome does not involve a breach of fiduciary duty by Mr Sondhi or West Register as a shadow director.

(c) These allegations expose failings on the part of the board of directors that are in equal measure to the failings alleged against the shadow director.

(3) As to the allegation that, in breach of the duty to promote the best interests of the company, excessive interest was charged, there is no allegation, nor could there be, that the bank had no right to charge the interest it levied.

(4) The allegation that Mr Sondhi behaved in a way that was distracting at board meetings overlooks the time the directors were able to spend outside board meetings improving the fortunes of the company and, in any event, it is fanciful to suggest that such behaviour caused loss.

(5) The allegation that there was a breach of the no conflict rule while thinking of a plan to increase West Register’s shareholding misses the point that merely thinking about action that may be a breach of duty is not a breach of duty.

59. The claimants say there is some uncertainty about the extent of the duties that are owed by a shadow director and the duties are not limited merely to the directions and instructions given by the shadow director. They rely on part of the passage from Vivendi I have cited where Newey J says: “… a shadow director will typically owe such duties in relation at least to the directions and instructions that he gives …”. To my mind the words I have emphasised do not help the claimants. It is an unsurprising proposition that if West Register is to be liable for breaches of duty, it can only be for breaches of duty that arise from steps taken qua shadow director. It matters not, for example, that Mr Sondhi demanded information at board meetings, or pushed through the appointment of a turnaround consultant. These are not in themselves said to be breaches of duty. They merely evidence why the claimants say Mr Sondhi and/or West Register was a shadow director. The claimants have not made out a case that there is a connection between the shadow directorship and the actions about which they complain that is capable of amounting to a breach of fiduciary duty.

60. The overall difficulty for the claimants is that they agreed to, and the company entered into through its board of de jure directors, the First and Second Restructures of their own free will. Neither the claimants, nor the company, were directed or instructed by Mr Sondhi or West Register to do so.

Conclusions

61. The court is naturally cautious before striking out a claim that has been fully pleaded and where serious allegations are made. As I have already indicated, the test is a demanding one. I am satisfied here that the defendants have established that the claim is bound to fail. The claimants have had an opportunity to revise and improve their claim, but it has not assisted them.

62. I remarked earlier in this judgment that an application to strike out a claim under CPR 3.4(2) does not require the court to consider a back-stop test, unlike CPR 24.2. Nevertheless, the court is asked to exercise a discretion on a strike out application. The court may exercise its discretion to decline to strike out a claim despite being satisfied that the claim is bound to fail where the claim is brought in an area of developing jurisprudence. I need only say that despite the criticisms that have been directed towards the GRG by Promontory, and others, the claimants have neither identified a basis for their claim under the current law, or a relevant area of developing jurisprudence. I can see no proper basis for declining to strike out the claim.

63. I will make the order sought on the defendants’ application and dismiss the claimants’ application.