Duty disclosure banks workout situation

By Jeremy Sharman


In a recent decision of the English High Court, the Court considered the important question of the extent to which banks involved in a workout were under an obligation to disclose to each other information that was material to the other’s decision-taking. In the case National Westminster Bank PLC v Rabobank Nederland [2007] EWHC 1056 (Comm) Colman J concluded that, although it was good practice for banks involved in a workout to disclose to each other information which they considered material, there was no legal obligation to do so. Moreover, the test of what was “material” was subjective.

The Facts

Rabobank and NatWest each agreed to provide Yorkshire Food Group plc (“YFG”) with an unsecured credit facility of US$50m thereby providing a total facility of US$100m. The business of YFG was largely based in the US and was concerned with the sale and processing of dried fruit and nuts. YFG’s financial position deteriorated and Rabobank and NatWest put the company into workout in order to try and minimise losses. Subsequently NatWest’s debt in YFG was assigned to a subsidiary of Rabobank at a discount of £11.3m under a transfer agreement (“the Transfer Agreement”). Under the terms of the Transfer Agreement, Rabobank agreed to release NatWest and not to bring any claim against it in its capacity as agent under the credit facility.

Rabobank and its subsidiary subsequently brought proceedings against NatWest in the US alleging, among other things, breach of fiduciary duty by NatWest as agent for Rabobank. The US proceedings were subsequently dismissed and NatWest commenced proceedings in the English High Court against Rabobank claiming an indemnity for breach of the Transfer Agreement in respect of the costs totalling £5.5m which it had incurred in defending the US proceedings.

In its defence and counterclaim Rabobank alleged that it was entitled to rescind the Transfer Agreement and claim damages because of misrepresentations made by NatWest during the workout. These misrepresentations were alleged to stem from the fact that, at the time NatWest entered into the credit facility up until the Transfer Agreement, NatWest had made substantial personal loans to the directors of YFG secured on their shareholdings in the company; at the time of the workout these loans were overdue or in default. Rabobank maintained that these facts were material and should have been disclosed by NatWest on the basis that it was common practice between banks involved in a workout to disclose to each other all known facts that were material to the other’s decision-taking in the course of the workout. The failure to do so effectively constituted a representation that no such facts existed.

Rabobank maintained that, if it had known of the directors’ indebtedness, it would not have entered into the Transfer Agreement.

The Judgment

Rabobank’s counterclaim was dismissed for a variety of reasons, including that it had failed to make good its case on misrepresentation, whilst NatWest’s claim for damages based on breach of the Transfer Agreement succeeded. What is of particular interest in Colman J’s lengthy judgment (running to approximately 150 pages) are the conclusions that he reaches concerning market practice with regard to the disclosure of information between banks involved in workout situations. These can be summarised as follows:

  1. At the relevant time (the mid 1990s) it was good practice for workout banks to disclose information known to them which related to the debtor corporation which had been obtained for the purpose of the workout. However, in the absence of an express contractual framework, the banks recognised no legal duty to adhere to that practice or to exercise reasonable care to do so.

  2. Banks gave effect to that practice by disclosing those facts which each considered to be material to the decisions that a co-workout bank would need to take in the course of the workout. What was material was not to be determined objectively; rather it was to be left to the judgment of the workout banker in possession of the information.

  3. Although a workout bank was entitled to assume that relevant information known to another co-workout bank would probably (but not necessarily) be disclosed to it, it was up to each bank to make its own enquiries and conduct its own due diligence in relation to the debtor corporation. This was because it was not entitled to assume that all relevant information would be disclosed to it.

Practical Points

In addition to the Judge’s analysis of market practice, the case emphasises a number of practical points of importance. Where a party wishes to obtain comfort with regard to particular facts before entering into an agreement, it is highly desirable to obtain express contractual representations. Without representations being clearly documented a party in the position of Rabobank will face many difficulties, in particular:

  • The difficulty of trying to establish a relevant market practice;

  • The evidential difficulties of establishing what was said in previous conversations between the parties. In this case, some of the events relied on by Rabobank had taken place 10 years before the case came to trial and, not surprisingly, the witnesses had difficulty in recalling what had been said.

  • In the absence of express representations, a party will have little choice but to rely on implied representations. Implied representations will always be more difficult to establish than express terms and will be less persuasive to the court, particularly in a case involving sophisticated parties with legal representation.

  • The case is a useful reminder that arguments based on good faith will almost certainly fail. Rabobank argued that the parties had agreed to negotiate in good faith and that NatWest had breached this agreement by failing to disclose material information. However, as the Judge found, any such “good faith” agreement would be unenforceable for lack of certainty on the basis of the House of Lords decision in Walford v Miles [1992] AC 128.

The case also emphasises the importance of obtaining the services of a well qualified expert. It is clear that NatWest’s arguments found favour with the Judge not least because he preferred the evidence of its banking expert on market practice.

For further information on this issue, please contact Jeremy Sharman on 020 7415 6000 or by email jeremy.sharman@twobirds.com