FML Timeline: The Royal Bank of Scotland Plc v Highland Financial Partners Ltd and others

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This case concerned a Court of Appeal decision in which it was held that the Royal Bank of Scotland (RBS) had, through the actions of its employee, fraudulently misrepresented a key issue to the court. Accordingly the previous judgments, having been largely determined on the basis of that employee’s evidence, were set aside on the grounds of fraud.

The court also refused RBS’s appeal against the High Court’s refusal to grant an anti-suit injunction, deciding the High Court had been correct in refusing RBS the equitable relief as it had not come to the court with "clean hands".

Facts

The case concerned RBS and various entities in the Highland Group (a US based hedge fund) (Highland). In 2007, RBS and Highland entered into a collateralised debt obligation (CDO) transaction. RBS provided Highland with the funding for Highland to purchase, through a special purpose vehicle, a portfolio of loans out of which Highland would issue securities from.

As the financial crisis hit there was no market for the securities and so RBS terminated the transaction in accordance with the interim serving deed (which set out the parties respective obligations). The termination clause required that the loans in the portfolio be offered for sale by auction. For 36 of the 88 loans, RBS instead transferred these loans from their trading book to their banking book in order to take advantage of a change in the International Accounting Standards rules. In doing so, RBS booked an increase in income of £1.4bn.

RBS were left with a shortfall between the value realised from the sale of the loans and the original finance they had provided Highland. In March 2009, RBS brought a claim for the shortfall against Highland. Highland contend that if RBS had followed the termination provisions properly, the value they would have received for the loans would have been much higher and thus no shortfall would have been present.

RBS applied for summary judgment on the issue of liability. The application was supported by Sam Griffiths (SG), an RBS employee who had been closely involved in the liquidation process. Summary judgment was granted to RBS in February 2010 on the issue of liability.

At the hearing on quantum held in December 2010, the court held that RBS had breached its contractual duties in relation to the liquidation (as well as its equitable duties as a mortgagee in possession).

In May 2012 the court held that SG had lied and given misleading evidence. Accordingly RBS had acted against the equitable maxim of clean hands. The court therefore refused RBS’s application for an anti-suit injunction which would have prohibited Highland from bringing proceedings in Texas. The court however held that the summary judgment on liability should not be set aside as SG’s misconduct would not have altered the decision on quantum.

Decision

The Court of Appeal in April 2013 heard arguments on two main issues. (1) RBS’s appeal against the refusal of the High Court to grant an anti-suit injunction and (2) Highland’s appeal against the refusal of the High Court to set aside the liability judgment.

Anti-suit injunction

RBS argued that SG was a mere witness and any actions he took individually should not be attributed to RBS. They cited Odyssey Re (London) Ltd v OIC Run-Off Ltd [2000] EWCA Civ 71 in which the court held that “a person who gives evidence on behalf of a company does not do so as its agent”. The court however rejected this argument. The proper test was whether the individual had the status necessary to make his evidence the evidence of the company.

It was found that owing to SG’s position as part of RBS’s litigation team at the time he adduced the evidence, he had sufficient standing to make his evidence the evidence of RBS. There had thus been misconduct on the part of RBS in seeking to suppress the sham-auction in respect of the 36 loans that RBS had in fact, bought themselves.
An injunction, as an equitable remedy, is subject to equitable maxims. The court found that RBS, through SG, had deliberately tried to mislead Highland and the court and thus had violated the equitable maxim of clean hands. Accordingly RBS’s appeal against the refusal to grant it an anti-suit injunction was refused.

Setting aside liability judgment

The court found that if the deliberate concealment of the true events surrounding the sale of the 88 loans had been revealed by SG, then RBS would never have applied for summary judgment on the liability issue. This was because Highland would have used the actions of SG, who told Highland the loans were going to be part of an auction process, as the basis of its defence.

Further, had the truth been revealed RBS’s lawyers would not have advised that SG state in a witness statement that he believed there was no defence to the liability issue and thus no reason for it wait to be disposed of at trial. Accordingly, the court ruled that the liability judgment must set aside as it was obtained by fraud.

Noteworthy/ Novel points

This case provides a useful reminder of the importance equitable maxims can play when a party asks the court to provide equitable relief. It further highlights the importance attached to the statement of truth when using the summary judgment procedure. That statement provides that the witness “knows of no other reason why the disposal of the claim or issue should await trial”. It is paramount that solicitors do everything they can to ensure the veracity of that statement.