Agency—the tricky business of disclosing what you know or don't know

Agency—the tricky business of disclosing what you know or don't know
Should the agent have disclosed information relating to an event of default and/or a revised business plan and cashflow to other junior lenders that would have alerted them to the financial difficulties of the borrower?


Torre Asset Funding Ltd v Royal Bank of Scotland Plc [2013] EWHC 2670 (Ch), [2013] All ER (D) 27 (Sep)

How did the issue arise in this case?

The claim arose out of structured lending to a property company that defaulted on its lending and went into administrative receivership in September 2008. The structured lending included senior debt, three tranches of mezzanine debt (tranche A, B1 and B2) and loan notes together with securitised mortgage-backed notes issued by a special purpose vehicle. The Royal Bank of Scotland Plc (RBS ) initially lent the whole sum required and sold certain tranches of debt and the notes in the market. The claimants acquired a portion of B1 mezzanine debt and RBS remained the agent for this tranche.

In July 2007, the borrower fell behind its original business plan expectations for improving the income stream from the property portfolio. The slippage was not major but would have a significant effect on the operation of the financing structure and the borrower’s ability to meet interest payments. Accordingly, the borrower approached RBS with a view to restructuring the financing structure in place. For this purpose, the borrower presented a new business plan and cash flow to RBS, which included rolling up interest on the B2 loan (which was held by RBS).

The claimants argued that:

  • events that occurred in July 2007 constituted an event of default and that RBS was under a duty as agent to inform the claimants (the event of default claim)
  • a revised business plan and cash flow prepared by the borrower should have been distributed by RBS as agent (the business plan claim)

The third limb of the claimants’ case concerned statements made by RBS regarding the reason why it (as lender) was seeking the claimants’ consent to the rolling up of interest due to be paid on the B2 tranche of mezzanine debt (the negligent mis-statement claim). The claimants were informed by RBS that it was to allow the borrower extra cash for capital expenditure when in fact it was to avoid a situation where the borrower would have had insufficient cash to pay the interest.

If the claimants had received notice of the financial position of the company as a result of the above, the claimants would have sold their participation or sought a restructuring of the debt.

What did the court decide?

The court rejected the claimants’ case.

In respect of the event of default claim, the court found that an event of default had taken place in July 2007 but that the duty of RBS as agent to disclose the event of default was limited. RBS were saved by the wording in the intercreditor deed which required RBS as agent to ‘promptly notify each other agent of becoming aware of any default’. The court accepted RBS’ argument that they had not become aware of a default since the wording requires the relevant person to actually appreciate a default had occurred (and RBS did not believe an event of default had occurred). In addition, RBS was appointed ’to act as [the lenders’] agent under and in connection with the Finance Documents’ so did not owe any general, wider duties at common law as an agent. Further no term could be implied into the relevant facility agreement requiring RBS as agent to disclose the event of default based on the already established principles of when a term may be implied, and in particular, it was not necessary in this situation to imply the term.

The court considered that the business plan claim failed because the borrower did not put forward the business plan and cashflow as part of the annual budget which the agent was required to distribute under the terms of the relevant facility agreement. RBS were not asked by the borrower to treat and approve the business plan and cashflow as the annual budget nor did the borrower supply copies for distribution to the lenders as required under the documentation. This aspect of the agent’s role was mechanical and administrative in its nature.

In respect of the negligent mis-statement claim, the court held that RBS (as B2 lender rather than agent) assumed responsibility to the claimants to take reasonable care as to the accuracy of the statements. However, the sole purpose of the discussions between RBS and the claimants was to persuade the claimants to give their consent to roll up of B2 interest and the claimants were not seeking the information for the purposes of a wider review of the transaction and the information was not given for such purpose. RBS had assumed an obligation to exercise reasonable care to protect the claimants against such loss as they might suffer by reason of their giving consent to the rolling up of B2 interest but the court did not consider the claimants had suffered any such loss (in the event, the other mezzanine lenders did not consent so the proposed amendments did not take effect).

Why is the issue important to restructuring professionals?

The case raises questions regarding duties of disclosure between the finance parties in a restructuring situation and the position of a lender or agent that has information that would be useful to lenders but that does not distribute the information more widely. Lenders that do not have a relationship with the borrower prior to acquiring debt will be at a disadvantage and should be wary of relying solely on the information flow from the agent (given the agent’s limited role). The court has shown that it will not help junior lenders by interpreting clauses more widely or implying terms (see also Saltri III Ltd v MD Mezzanine SA Sicar [2012] EWHC 3025 (Comm), [2013] 1 All ER (Comm) 661 and Practice Note: Role of security trustees). This will be particularly important in a restructuring situation where junior lenders are at risk of failing to recover their loans as happened in this case.

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