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.
