Banks are “hungry monsters”

New figures released by the Ministry of Justice show recession-related litigation in the High Court has rocketed in the last 12 months.

Clive Zietman
Clive Zietman

There were almost 1,000 contract claims issued in the Chancery Division in 2011, with sharp rises of almost 50 per cent in agreement, debt and breach of contract actions in the Commercial Court and Queens Bench Division.

Commercial dispute lawyers say that these statistics are an accurate reflection of their workload, with one partner admitting that he’s the busiest he’s been in 27 years of law.

But ‘recession-related litigation’ is such a broad brush – so where are these cases coming from?

Banks acting like “hungry monsters” are behind a lot of economic downturn litigation, say Stewarts Law partners Sean Upson and Clive Zietman.

Desperate for cash to improve their balance sheets, boost their capital and appease shareholders and taxpayers alike, banks are calling in loans on minor technical breaches of contract or agreement that they would have previously ignored.

But people “have their backs to the wall” says Upson and are fighting back in the High Courts in a way they haven’t before.

Some of the cases are such big claims – for example foreclosing on huge property portfolios – that large legal fees are relatively small in comparison to potential damages and therefore less of a deterrent to issuing claims.

Breach of contract claims can be anything from somebody trying to enforce a £5,000 loan agreement, right the way through to a trial over hundreds of millions of pounds of unpaid bonuses.

There are also a lot of firesales leading to litigation, where a company goes to the wall and there is a legal dispute about who gets priority payment from a limited pot.

And then there is political pressure playing its part, where organisations have to be seen to be fighting and not settling, particularly where it involves a taxpayer-owned bank such as Lloyds or RBS.

Upson says that when the economy gets tough at every level, people start reaching for their contracts and their lawyers to see what they can enforce.

“When things go wrong, people look to sue someone with insurance, such as accountants or lawyers, for example the Innovator One claimants who went after Collyer Bristow,” adds Upson.

Zietman adds that the fragmentation of companies in a recession sees shareholders in dispute with each other, with partnerships and companies “playing the blame game”.

Nick Rowles-Davies, of third party litigation funding vehicle Vannin Capital, says that Vannin is increasing its funding pot to £100m because of the number of approaches it’s had from people in “difficult situations” opting to go through the courts.

The figures show that of all proceedings starting in the Queens Bench Division of the Royal Courts of Justice in 2011, a quarter were debt-related. There was a 10 per cent rise in bankruptcy applications to 12,121.

Bank failures such as Kaupthing, Landsbanki and Lehman Brothers continue to create insolvency applications, with each case like a ‘mini-trial’ of at least a day.

Commercial litigators believe these figures may rise again in the next 12 months.

In the early 1990s there was a wave of litigation on the back of the downturn of the late 1980s, which gave rise to mega-frauds such as the Robert Maxwell case.

It is too early to predict the consequences of the Libor and mis-selling scandals (2 July 2012) in these terms. But as further evidence emerges from the FSA and SFO investigations, they may lead to a raft of professional negligence claims feeding through to the High Court.