QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
- and –
MR JUSTICE MITTING
| THE QUEEN ON THE APPLICATION OF HOLMCROFT PROPERTIES LIMITED
|- and -
|- and -
|FINANCIAL CONDUCT AUTHORITY
||First Interested Party
|- and -
|BARCLAYS BANK PLC
||Second Interested Party
JAVAN HERBERG QC and HANIF MUSSA (instructed by Herbert Smith Freehills LLP)
for the Defendant
MONICA CARSS-FRISK QC, DANIEL BURGESS and KERENZA DAVIS (instructed by Baker & McKenzie) for the First Interested Party
DINAH ROSE QC and BEN JAFFEY (instructed by Linklaters LLP) for the Second Interested Party
Hearing dates: 25, 26 January 2016
Crown Copyright ©
Elias LJ and Mitting J:
The factual background
"Before any redress is provided to Relevant Category B Customers, the Skilled Person will review each of the Firm's assessments of the appropriateness of redress and the fair and reasonable nature of the Firm's redress proposals, if relevant. If the Skilled Person does not agree with any of the Firm's assessments, the Skilled Person will provide the Firm with reasons for that disagreement and an explanation of why, in the Skilled Person's opinion, an alternative approach is needed. The Firm will then put forward an alternative redress proposal for the Skilled Person to review. The Firm will not issue a redress determination to a Relevant Category B Customer until the Skilled Person has agreed with the appropriateness of the redress and the fair and reasonable nature of the Firm's redress proposal."
"The Firm will issue a provisional redress determination to each Relevant Category B Customer on the basis of the proposals agreed with the Skilled Person in paragraph 3.12. The provisional redress determination will explain the basis for the conclusion on redress being due (or not due) and (where relevant) how the redress has been determined. The provisional redress determination will refer to the fact that the redress proposal has been reviewed by an independent third party"
"In all cases the Firm will issue a final redress determination to each [relevant customer.]"
The operation of the redress exercise
The basis of the claim
Amenability to judicial review
"I do not agree that the source of the power is the sole test whether a body is subject to judicial review… Of course the source of the power will often, perhaps usually, be decisive. If the source of power is a statute, or subordinate legislation under a statute, then clearly the body in question will be subject to judicial review. If, at the other end of the scale, the source of power is contractual, as in the case of private arbitration, then clearly the arbitrator is not subject to judicial review…
But in between these extremes there is an area in which it is helpful to look not just at the source of the power but at the nature of the power. If the body in question is exercising public law functions, or if the exercise of its functions have public law consequences, then that may… be sufficient to bring the body within the reach of judicial review… The essential distinction is between a domestic or private Tribunal on the one hand and a body of persons who are under some public duty on the other."
"... the law has now been developed to the point where, unless the source of power clearly provides the answer, the question whether the decision of a body is amenable to judicial review requires a careful consideration of the nature of the power and function that has been exercised to see whether the decision has a sufficient public element, flavour or character to bring it within the purview of public law. It may be said with some justification that this criterion for amenability is very broad, not to say question-begging. But it provides the framework for the investigation that has to be conducted. …"
"A body whose birth and constitution owed nothing to any exercise of governmental power may be subject to judicial review if it has been woven into the fabric of public regulation or into a system of governmental control (per Sir Thomas Bingham at pp.921C and 923H) or is integrated into a system of statutory regulation (per Hoffmann LJ at p.931H) or is a surrogate organ of government (per Hoffmann LJ at p.932D) or but for its existence a governmental body would assume control (per Farquaharson LJ at 930B and Hoffmann LJ at 932B) …"
"KPMG as the Independent Reviewer has provided oversight of the Bank's review of your case in accordance with their obligations to the FCA."
"In my judgment, it does not necessarily follow that because the regulatory decisions of LAUTRO are susceptible to judicial review, the decisions of public bodies set up by LAUTRO pursuant to its regulatory powers are likewise susceptible."
"even if it can be said that [the IOB] has now been woven into a governmental system, the source of its power is still contractual, its decisions are of an arbitrative nature in private law, and those decisions are not, save very remotely, supported by any public law sanction."
Two additional points
The nature of any public law duties
"The duty of fairness does not exist in a vacuum…the starting point for any consideration of [a person's] duty of fairness is the task which he was appointed to perform ..."
Was there an error in the particular case?
Barclays and Holmcroft: the relationship
"First rate opportunity to acquire quality new business in an attractive sector. Highly profitable and with experienced management who are already running the business." (5/5/1292).
"As discussed …we have given the customer his last chance in our meeting in January to
- Put four flats and four houses on market for sale at prices recommended by agents – with a view of repaying all debt except loan related to nursing home.
- Provide Bank with authority to liaise with agents.
- Ensure all interest and loan repayments met.
- Provide evidence of amounts outstanding to Revenue.
- Provide management accounts for home.
- In return, Bank to restructure expired loans onto an on demand basis and extend the overdrafts."
"All the rental monies are still not making it to the bank account each month – our agreement was he would pay in a minimum amount of £8,500 per month – so far August £4,500, September £4,400, October £5,750, November £6,255, December £7,250, January £6,150, February £5,250, March £7,575 and £5,728 April – so getting better, but still a long way to go.
The company had also agreed to market the four flats and four houses with two agents – one chosen by them and one chosen by us at prices recommended by the agents. I have received an authority to liaise with both agents, but neither agent has been able to confirm that they have instructions to market the properties – the customer is insistent that he has issued the instructions, but his story isn't consistent with previous conversations and the matter has been outstanding since our meeting in January.
The customer also talked about his preference to sell the nursing home rather than the rental properties, but advises that he has turned aside an offer of £5.7 million (which is £1 million above our valuation) preferring to get the occupancy above 45 and get a price in excess of £6 million. This has further confirmed my thoughts that he has no intention of selling the rental properties and I believe that if he did put them on the market today, he still has no intention of letting a sale proceed."
"This case has now been with me for the last 18 months and no progress has been made in improving the management information, account conduct or repayment of our facilities. If we don't take control, we will never see repayment of our facilities.
As a two stage approach I recommend:
Formal demand on Holmcroft Properties Limited.
Begbies appointed as LPA receiver on all the properties to collect the rental income and sell the properties.
Depending how the customer reacts to this we may need to upgrade the appointment to full administration on both companies to protect the assets – but that would be subject to further discussion and credit sanction down the line.
I will review the options for repayment of the nursing home facilities when we see how the customer reacts to the LPA receiverships". (5/5/1405 and 1407).
i) HNHL was, by May 2011, in serious financial difficulty. Its difficulties were not, to any extent, caused by the payments made under the hedging agreements.
ii) HNHL's position could only have been rescued by an immediate sale of the nursing home or by the immediate provision by Holmcroft to it of a sum of the order of £300,000. To do so, Holmcroft would have had to have sold some of its development properties immediately.
iii) Fiona McDonald and her colleagues had lost confidence in the willingness or ability of Holmcroft to take the steps necessary to rectify the situation, in particular, to collect rent from the development properties and to sell some of them; or alternatively to sell the nursing home.
iv) Because of the manner in which the accounts of both Holmcroft and HNHL had been conducted, she and her colleagues intended substantially to reduce Barclays' commitment to them – so as to limit it to the outstanding 20 year loan.
v) The payments made under the hedging agreements were a significant contributory factor to the overall adverse financial position of Holmcroft, but even had they not been made, the problems set out above would still have been acute; and it is unlikely that Barclays would or should have acted differently.
"Bank records from July 2009 note that an inspection by the Care Quality commission ("CQC") at the Property had resulted in two deficiencies being identified. The records note that this adverse report led to a disagreement between Mr Kibble and his brother, who was manager at HNHL and which resulted in his departure from the care home business. In the absence of a manager for the care home, the CQC requested that no new residents were admitted, which in tandem with some resident deaths, resulted in the occupancy rate falling to 75%. At the same time HNHL experienced difficulties with processing criminal record checks via the Police and Local Authorities which delayed employment of staff and placed a higher reliance on more expensive agency staff.
The above factors resulted in a strain on cash flow with some excesses on the Holmcroft overdraft, resulting in a request for a temporary increase in the overdraft from £50,000 to £150,000 until 30 September 2009. The Bank approved the short-term limit increase to £75,000. (Ultimately this limit remained until the appointment of Administrators in June 2011). HNHL also benefited from an overdraft limit of £150,000.
As at 28 October 2009 you had made net cumulative payments in respect of IRHP1 of £66,078.25. However, after deducting the cost of the Replacement IRHP, your net payments in respect of IRHP1 would have been £54,811.53 (being £66,087.25 - £11,266.72). In respect of IRHP2, as at 28 October 2009 you had made net cumulative payments of £53,856.18.
Bank records from October 2009 note that a referral of the management of your account to BBS was requested (and sanctioned) on the basis of:
- the accrual of three years of unpaid HM Revenue & Customs ("HMRC") liabilities of circa £400,000 to HNHL without an agreed repayment programme;
- a poor one star CQC rating and five statutory requirements for improvement issued to the care home;
- serviceability concerns as all surplus funds from the care home were being utilised to service the other borrowings on Holmcroft;
- delays in selling properties in Holmcroft resulting in the pursuit of a rental strategy which had further affected serviceability and placed a greater reliance on the performance of the care home
- excesses on some accounts and the existence of 'hardcore' debt in the Holmcroft and HNHL overdrafts;
- the IRHPs creating more pressure on the Holmcroft overdraft;
- a County Court judgment being lodged against the care home;
- Mr Kibble was looking for additional funding via Holmcroft to purchase property on a 'quick turnaround' to ease the overall position;
- the care home effectively supporting too much debt, whilst encountering its own operational issues.
Bank records from October 2009 note that Mr Kibble had met with another lender to explore alternative funding.
Bank records from February 2010 note that following the transfer of your accounts to BBS, you had regularly exceeded certain facility limits. Mr Kibble did not wish to use suggested external accountancy advice to provide a focused cash flow review, and intimated that he had decided to close the care home. Work on the cash flow position was subsequently agreed to be undertaken by Begbies Traynor Group, which concluded that even at a lower level of profitability, HNHL and Holmcroft could service the existing borrowing commitments. However it was noted that not all rental income was being received into the accounts of Holmcroft. Other concerns were noted such as:
- the general operational and financial management of the care home;
- lack of understanding/management as to the position regarding property rental income;
- the significant accrued HMRC debt which resulted in attempted distraint of physical assets at the care home;
- continued requests to switch all borrowings to interest only, when the financial information provided demonstrated existing serviceability; and
- continued high personal expenditure by Mr Kibble when the two businesses were in financial distress.
Bank records from May 2010 note that:
- management information in respect of the care home remained poor, however the account was operating within the facility;
- following a recent CQC inspection at the care home an improvement to two stars was anticipated;
- there was ongoing liaison with the HMRC regarding a repayment plan for the arrears;
- investigations were ongoing as to the discrepancies in respect of rental income;
- some items were being returned to maintain the limit in respect of the property account;
- in respect of Holmcroft, there was a potential buyer for a site known as Highbanks (which Mr Kibble wanted to develop, but which the Bank was unwilling to finance).
Bank records from December 2010 note that along with the continuing occupancy, management information and HMRC issues, the properties in Holmcroft had been re-valued, with a substantial reduction in the value of the care home, resulting in an overall loan to value position of 74%.
Below is a brief summary of the financial position of Holmcroft and HNHL noted in Bank records from December 2010:
|Turnover (rental income)||-||291||285|
|Profit/(loss) before tax||-||(144)||(14)|
|Turnover (care home income)||1,597||1,724||1,781|
|Profit/loss after tax||74||365||346|
It was noted that the financial results for HNHL for 2010 suffered due to regulatory issues with the Local Authority which resulted in improvement expenditure in the region of £300,000 and lost revenue of up to £100,000 when the care home was unable to take on any new residents. In addition, due to the untimely production of the financial statements, Corporation Tax liabilities had accrued for the years ended 2007, 2008 and 2009 in the region of £376,000.
IRHP2 expired after 3 years, with your final payment being made on 11 April 2011, after total net cumulative payments of £146,424.64. No further scheduled monthly payments were made.
As at 28 April 2011 you had made net cumulative payments in respect of IRHP1 of £167,592.44. However, after deducting the cost of the Replacement IRHP, your net payments in respect of IRHP1 would have been £156,325.72 (being £167,592.44 - £11,266.72). No further scheduled monthly payments were made.
Bank records from May 2011 noted that:
- the Bank was not being fully appraised of the ongoing payment position in respect of the HMRC debt;
- all rental income was still not being received into the agreed Holmcroft accounts;
- despite assurances that agents would be instructed to market and sell certain properties in Holmcroft, this had not progressed;
- an offer for £5.7m had been rejected for the care home, with HNHL, preferring to attempt to increase occupancy and achieve a sale price in excess of £6m;
- no progress had been made in respect of the timely receipt and improvement of management information; and
- given the various ongoing issues and concerns, and the passage of time with no progress in respect of the relationship between Holmcroft, HNHL, Mr Kibble and the Bank, the appointment of LPA Receivers was appropriate.
The Bank appointed LPA Receivers over various properties owned by Holmcroft on 17 May 2011."
i) But for the hedging payments, Holmcroft would have had a credit balance on its current account.
ii) Barclays and KPMG were wrong to treat the financial difficulties of HNHL as having any material impact on the position of Holmcroft.
They advanced it, and gave detailed reasons to support it. They did not then (or now in reality) take issue with the accuracy or content of the summary of the Zeus records set out in the consequential loss decision. If they had wanted to they had ample opportunity to do so. They did not need copies of the Zeus records to permit them to do so.