Trust and confidence - a critical review of the Tomlinson Report

Anis Waiz is a banking and finance litigator at Curtis Law Solicitors. In this article he looks at the recent Tomlinson report which highlights a number of serious allegations made against lenders and clarifies a few key important issues raised.

How many people do you trust? Not many I suspect. My natural response is very few, but that’s because I tend to pursue fraudsters.

It is fair to say that our confidence in banks and lenders is under daily scrutiny and a great concern for any business. A recent report titled ‘Banks’ Lending Practices: Treatment of Businesses in Distress,’ makes a number of very serious allegations against one particular lender and its treatment of customer’s assets.

The report clearly forces businesses to question the trust they have with lenders, but in this article I would like to highlight three important issues raised that need further explanation.

Lenders ‘engineering’ defaults

The report looks at certain ways lenders may in effect treat customers as being ‘distressed’ and therefore subject to ‘insolvency’. It does not state how this is achieved but the implications are clear. The idea is that a lender is able to ‘engineer’ a default so that a customer is no longer a viable business.

Firstly it is important to note that a contract between customer and lender will set out the grounds for a customer being in default. This is usually the failure to pay monies on demand; however there are other circumstances that will be listed in the terms of a mortgage, signed by the customer.

Generally it is the demand from a lender that triggers the default and allows action to be taken against a customer. No matter what the motive from the lender, the real issue is a legal one, for example, is the lender entitled to make a demand? In simple terms, that all depends on the terms of a contract.

Sale of assets

A key concern highlighted is that some lenders will simply undervalue assets before selling them off. It’s suggested this is done to distress the business, allowing another party to buy the assets at a discount. Whether or not this is the case, there are some important issues to address.

In general terms, a lender has a duty to obtain a true market value of a property, which is the value that a purchaser is prepared to pay to a willing vendor, after the property has been on the market for a suitable amount of time. As it’s a complex area of law, the case law must be properly considered.

An allegation of undervalue is a serious matter and must be dealt with properly. From the outset it’s important to understand the issue and the need for careful expert evidence as simply alleging that a sale is made at a lower value than appropriate is not sufficient.

Access to legal advice

The report notes that “Any law firm that does business with the banks will have a clause in their contract, preventing them from taking action against the banks. This means that for businesses the pool of solicitors available to give them advice and take their case is extremely limited”.

Firstly, a firm could not act against a bank under the Solicitors Code of Conduct if there is a conflict of interests. Secondly, it states that there are a limited amount of solicitors available to act, however this is not the case as there’s a wealth of highly experienced solicitors who can and will act for such a business.

I began by asking the simple question; who do you trust? When it comes to professionals, we place significant trust and confidence in them. We trust that a pilot will land a place safely; a doctor will prescribe the right medicine and that our banks details are secure.

Our daily lives revolve around trusting others and having confidence in their ability, whether that is in our personal or professional lives. Businesses simply could not function without it.

The report by Mr Tomlinson paints a worrying picture that should be of real concern to the lending industry and lawyers acting in such claims. I hope the issues highlighted help increase the understanding of the wider legal context and emphasise that any allegation requires serious consideration and advice before it’s acted on. If you have concerns with any of these aspects, the first thing you need to do is speak to someone you can trust. Here at Curtis Law, we pride ourselves on being just that.