Obligation on banks to assess creditworthiness of borrowers

In 2012 the High Court awarded KBC Bank €17,694,130 in damages against Dublin based law firm BCM Hanby Wallace (now Byrne Wallace) over failures to ensure the bank had security for the loans.

The Supreme Court has directed the High Court to reconsider findings that there was no contributory negligence by KBC Bank in how the bank suffered muti-million euro losses to struck-off solicitor Thomas Byrne and property developer John Kelly.

KBC Bank incurred the losses due to the failure in having security for €25m loans advanced to Mr. Byrne and Mr. Kelly.

The Supreme Court ruling addressed seminal issues relating to the duties of banks to the shareholders when advancing loans, including the responsibility to investigate the financial standing of borrowers.

Mr. Justice Brian McGovern in the High Court found the matter was about ‘multiple failures’ repeated across several separate loan transactions. He rejected arguments of contributory negligence by KBC Bank on the grounds that the bank was entitled to rely on assurances from professionals retained by KBC Bank. The Supreme Court ruled Mr. Justice McGovern had erred in how the issue of contributory negligence by KBC Bank was addressed.

Mr. Justice Nial Fennelly said that while BCM Hanby Wallace negligence related to obtaining security for the loans was a direct and proximate cause of the loss, there was an issue as to whether it was the only effective cause of the loss. It was important in this context to distinguish between the two types of contributory negligence alleged against KBC Bank. The first type of contributory negligence is the want of care in making decisions to lend. The second type of contributory negligence is the failing to verify or supervise the solicitors’ performance of their duties.

On the assumption KBC Bank failed to exercise due care in lending, Mr. Justice Fennelly was satisfied KBC Bank was exclusively responsible for those decisions.

Mr. Justice Fennelly found it was not the task of BCM Hanby Wallace to check the financial soundness or reliability of Mr. Byrne and Mr. Kelly. He also found that the High Court erred in finding there was no contributory on grounds of finding the actions of the borrowers were merely an inevitable or necessary cause, and not a proximate cause, of the loss.

Mr. Justice Fennelly noted the effective cause of the loss was the decision to lend to Mr. Byrne and Mr. Kelly, combined with the negligence of BCM Hanby Wallace.

Mr. Justice McGovern remarked that aspects of the loans to Mr. Byrne were "highly questionable". He noted the "somewhat careless" approach of KBC Bank in its actions.

On the second type of contributory negligence, the failure to verify or supervise the solicitors’ performance of their duties, KBC Bank was entitled to rely on the expertise of BCM Hanby Wallace to put in place security. Although it may be argued that the responsibility of KBC Bank in this context was so small it should not be fixed with any responsibility, there is no absolute rule.

Mr. Justice McGovern argued that if evidence showed the errors of BCM Hanby Wallace were so obviously the errors could not have been overlooked, there was a fault on the part of KBC Bank and it was open to BCM Bank Wallace to argue the obligations KBC Bank had in accordance with European Union Regulations on Licensing and Supervision of Credit Institutions. Also see 2009 and 2013.

The European Union Regulations requires the banks to manage business in accordance with ‘sound administrative and accounting principles’. The banks are also required to put in place and maintain internal control and reporting arrangement to ensure  business in managed.

Mr. Justice Fennelly directed that Byrne Wallace appeal  be allowed on the issue of contributory negligence and the matter should be reconsidered by the High Court.   

Prison authorities have duty of care to inmates

A recent High Court ruling could have implications for prisoners attacked in custody, after a former prisoner sued for negligence and a breach of duty. Almost four times the amount awarded in 2009.

Peter Creighton was serving a sentence in Wheatfield Prison when he was attacked with a knife in January 2003. Mr. Creighton needed 120 stitches for two-and-a-half feet of lacerations to his body.

Mr. Creighton claimed the prison and the state failed to take reasonable precautions for his safety. He said he did not know his attacker, and the system for bringing prisoners from the cells to receive methadone was dangerous.

Counsel for the state argued that it was not possible in a prison to guarantee the safety of a prisoner and ensure his protection.

Mr. Justice Iarfhlaith O’Neill said there could be few tasks more difficult than the management of the prison system. Mr. Justice O’Neill added that the courts would not impose on prison authorities a duty of care that was not capable of being preformed, but said it was necessary for the courts to intervene were there were systems or practices that have obvious deficiencies and foreseeable risks.

The case of Mr. Creighton previously came before the High Court in October 2009. The state appealed the High Court ruling. The Supreme Court ruled the case should be re-heard.

UK: Assets vested in a company may belong beneficially to the controller, if the arrangement in respect of the assets are such as to make the company its controller's trustee for that purpose

The Supreme Court has ruled that assets vested in a company may belong beneficially to the controller, if the arrangement in respect of the assets are such as to make the company its controller's trustee for that purpose.

In November 2011, Mr. Justice Moylan, sitting in the High Court, ordered the husband, Michael Prest, to procure the conveyance of the matrimonial home to his wife, Yasmin Prest. Mr. Justice Moylan also ordered that Mr. Prest make a lump sum payment and periodical payments at a rate of two percent of that sum while it remained outstanding, together with school fees for the children. In addition Mr Justice Moylan awarded costs in favour of Ms. Prest, with a payment on account. He also ordered Mr. Prest to procure the transfer of seven UK properties owned by Mr. Prest's companies, Petrodel Resources Ltd and Vermont. The transfer of these seven properties to Ms. Prest is in partial satisfaction of the lump sum order.

Mr. Justice Moylan concluded that there was no general legal principle of law which entitled him to reach the companies' assets by piercing the corporate veil. This is because precedent shows that the separate legal personality of a company cannot be disregarded expect where it is being abused. While accepting there is no relevant impropriety, Mr. Justice Moylan found that in applications for financial relief ancillary to a divorce there exists a wider jurisdiction to pierce the corporate veil. 

However, the majority of the Court of Appeal disagreed with Mr. Justice Moylan. Lord Justice Rimer held that the practice developed by the Family Division was beyond the jurisdiction of the Court except where either the corporate personality was being abused, or on the particular facts of the case it could be shown that an asset legally owned by the Company was held in trust for Mr. Prest. Lord Justice Rimer considered that Mr. Justice Moylan had rejected both of these possibilities on the facts, and therefore should not have made the order.   

The question before the Supreme Court was whether the Court has the power order the transfer of seven properties to his wife given that the properties legally belong to the companies.

In his written judgment Lord Sumption outlined three possible legal bases on which the assets of the companies may be able to satisfy the lump sum order against Mr. Prest.

The first basis is where a court is at liberty to disregard to corporate veil in order to provide effective relief. On this point, Lord Sumption agreed with Mr. Justice Moylan. While Lord Sumption acknowledged that Mr. Prest has acted improperly in many ways, he found no evidence that Mr. Prest was seeking to avoid any obligation relevant to the divorce proceedings.

However Lord Sumption disagreed with Mr. Justice Moylan that the legislation on property adjustment orders in connection with divorce proceedings might be regarded as conferring a distinct power to disregard the corporate veil in matrimonial cases:

I do not accept this, any more than the Court of Appeal did. [Mr. Justice Moylan] was entitled to take account of [Mr. Prest's] ownership and control of the companies and his unrestricted access to the companies' assets in assessing what his resources were for the purpose of section 25(2)(a). But he was not entitled to order the companies' assets to be transferred to [Ms. Prest] in satisfaction of the lump sum order simply by virtue of section 24(1)(a). (emphasis added)

Lord Sumption outlined three reasons for not giving the legislation the same effect as Mr. Justice Moylan did. The first reason is because it is axiomatic that the words in the statute are not read in a way that departs from the general system of law without expressing the intention of the legislation with "irresistible clearness". The second reason is the type of transfer in this case is ordinarily unnecessary to achieve a fair distribution of the assets. The third reason is because there is legislation on the avoidance of transactions intended to prevent or reduce financial relief. This is designed, in certain circumstances, to remedy a situation where a party attempts to frustrate proceedings by disposing of assets.

The third basis is on which the companies can be ordered to convey the properties to Ms. Prest is if the properties may belong beneficially to Mr. Prest. However Mr. Justice Moylan did not feel the need to make any decision on this issue.

In respect of the matrimonial home Lord Sumption concluded that, because the Prest family were not paying rent to Petrodel Resources Limited, this is a clear case of Mr. Prest using the company as a vehicle to hold legal title on the trust for himself. While the other five properties, Lord Sumption observed, were acquired by Petrodel Resources Limited in each case for a nominal consideration of one pound. As no explanation was provided to the Court for the "gratuitous transfer", there was nothing to rebut the presumption of equity that the company was not intended to acquire a beneficial interest in the properties.

The question for Lord Sumption now, was, who did hold the beneficial interest.

Of the seven properties, two of which were acquired in the name of Vermont, Lord Sumption concluded that Mr. Prest is the beneficial owner.

Therefore, in a unanimous verdict, the Supreme Court held that all seven properties should be transferred to Ms. Prest.