Torre Asset Funding Ltd & Anor v The Royal Bank of Scotland Plc

An agent’s duties in a complex syndicated lending transaction are determined primarily by the detailed finance documents. A general duty to pass on all relevant information will not ordinarily be implied where the documents allocate responsibility for independent credit appraisal to the lenders and give the agent defined, largely administrative functions. Contractual discretions must nevertheless be exercised honestly, rationally and without capriciousness. A borrower’s negotiations to defer debt payments may constitute an event of default where they arise from substantial anticipated financial difficulties. A lender who gives an explanation to induce consent to a variation may assume a duty to take reasonable care over its accuracy, but liability is confined to loss within the scope of that duty. Investment loss caused principally by market decline remains outside that scope where no advisory duty was undertaken.

Torre and Torre II acquired junior mezzanine loans in a highly leveraged property-finance structure arranged and partly retained by RBS. RBS acted in several capacities, including agent for the claimants’ lending tier, lender at a subordinated tier and equity participant.

The claims concerned three matters: alleged failure to notify the claimants of an event of default in July 2007; alleged failure to circulate a business plan and cash-flow documents in October 2007; and alleged negligent explanations given when RBS sought consent to roll up subordinated interest. The claimants sought damages for the loss of their loans after the borrower entered receivership. The central issues were the construction of the finance documents, implication of contractual terms, scope of any duty of care and causation.

1. Event of default. The borrower’s July 2007 negotiations with RBS to roll up subordinated interest constituted an event of default under clause 23.5(a) of the JMFA. They involved negotiations to reschedule indebtedness by reason of substantial anticipated financial difficulties. The negotiations did not constitute an event of default under the insolvency-proceedings or material-adverse-effect provisions.
2. Agent’s duties. The agent’s duties were defined by the JMFA and Inter-Creditor Deed. No general common-law duty or broader implied term required RBS to notify the claimants of every event of default or relevant financial development. Clauses 26.6(e) and 26.7(d), read with the principles in Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116, supplied a discretionary framework requiring rational, good-faith and non-capricious decision-making. A specific notice of default might ordinarily have to be passed on where no rational alternative existed, but that pleaded case was not advanced.
3. Inter-Creditor Deed. Clause 6.7 required actual awareness that the relevant facts qualified, or would qualify, as an event of default. It did not require an agent or creditor to make difficult evaluative judgments about underlying facts. Since nobody appreciated that the July negotiations constituted an event of default, clause 6.7 was not triggered.
4. Business Plan claim. The business plan and October cash-flow were not put forward as an annual budget prepared by the borrower and submitted for the agent’s approval under clause 19.1(c). RBS therefore had no duty to circulate them. No wider implied obligation existed to obtain, assess or distribute financial information.
5. Negligent misstatement. By giving explanations to induce consent to the interest roll-up, RBS assumed responsibility to take reasonable care as to their accuracy, applying Hedley Byrne v Heller & Partners [1964] AC 465. The explanation was materially inaccurate and misleading. However, the duty was confined to loss caused by consenting to the proposed variation. The variation never took effect because another lender withheld consent, so no recoverable loss resulted.
6. Exclusion and causation. Clause 26.9(a) covered acts and omissions by the agent acting in that capacity, but not statements made by RBS in its separate capacity as lender or equity participant. The claims also failed because the losses were investment losses caused principally by falling property values, worsening economic conditions and inadequate security, outside the scope of the asserted information duties. The claimants also failed to prove that they would have sold their loans or achieved a viable restructuring.
7. Disposition. Each claim failed. Judgment was entered for RBS. It was unnecessary to decide contributory negligence.