The Disclosure Duties Owed By Banks As Agents To Lenders

The Chancery Division recently handed down its judgment on a hedge fund law suit brought against an agent bank for failing to disclose certain information regarding the borrower's declining financial health and the occurrence of certain purported events of default. The High Court focussed on the duties specifically delegated to the agent in the finance documents and found in favour of the agent. It held that there are no clearly defined set of general duties as a matter of common law that are automatically imposed upon the agent and there is limited scope for implying additional obligations into detailed finance contracts between sophisticated parties. However, it warned that an agent's role is not merely that of a postal service and will require the exercise of some level of judgment. In addition if the agent acts outside its agency role it might impose upon itself a heightened duty of care to the lenders.

In syndicated lending, the role of agent is generally considered to be one of a functionary acting for the lenders, whose duties under the finance documents are (as expressly set out in the Loan Market Association (LMA) recommended forms of facilities agreement) "solely mechanical and administrative in nature". Nevertheless, as the Court pointed out in Torre Asset Funding Ltd v The Royal Bank of Scotland Plc [2013] EWHC 2670 (Ch) (Torre v RBS), this provision has to be read subject to the specific terms in the relevant agreements which impose duties or confer discretions on the agent. This qualification is important because it means that, in relation to the discharge of its agency functions for the lenders, the agent's role is not merely, for example, to act as a postal service to transmit documents or communications to the lenders that are clearly labelled as such. The agent is usually required to exercise some level of discretion in relation to how it discharges its functions.

Where the agent has discretion to act, it may choose to take action or refrain from taking action. However, in Torre v RBS the Court confirmed that the agent must exercise that discretion in accordance with the principles stated by the Court of Appeal in Socimer International Bank ltd v Standard Bank London Ltd [2008] EWCA Civ 116 (Socimer). Those principles are that a decision maker's discretion will be limited by concepts of honesty, good faith and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality.

Importantly, Sales J in Torre v RBS stipulates that what will qualify as an arbitrary, capricious, perverse or irrational decision will be conditioned by the contract. In the context of a syndicated facilities agreement, where the agent's role is to facilitate the exercise of certain rights and powers of the lenders, it is open to the lenders to claim that the discretion to act in question was exercised perversely where the act was clearly not in their best interest. However, importantly, the claimant lenders in Torre v RBS did not claim any improper exercise of an express discretion by the agent.

The Background

The finance structure in this case involved, among other things, super senior, senior, senior mezzanine, junior mezzanine (B1 and B2 loans initially provided by RBS) debt lent to Dunedin Property Industrial Fund (Holdings) Limited (the Borrower) in connection with its commercial property portfolio. In 2007, RBS sold on the mezzanine B1 loans to the claimants (two hedge fund vehicles (Torre)) and to a related company, but continued to hold the B2 debt. Unusually, RBS also continued to be the agent for the B1 lenders (including Torre) and the agent for itself as B2 lender.

In early 2007, the income stream from the property portfolio was lower than the expectations set out in the business plan. The Borrower approached RBS to discuss restructuring the payment structure. It appeared that the cashflow would be insufficient to meet all interest payments. Eventually, the Borrower submitted a new business plan and cashflow statement to RBS. These were recalibrated on the basis that the entirety of the B2 interest should be deferred and...