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City Litigation

Limiting professional liability; Lending to local authorities; Disqualification of directors; Enforcing an assigned debtBy Neil Mirchandani, City Litigation Group, Lovell White Durrant, London

Limiting professional liability

A landmark House of Lords decision has addressed the extent of loss which can be recovered by lenders from negligent valuers whose valuations of property when the loans were taken out proved hopelessly optimistic following the property market crash at the end of the 1980s (South Australia Asset Management v York Montague). The principles laid down have wider significance, particularly where professional advice has been given as to the value of assets.

The Court held that where valuers had been negligent in overvaluing property on which lenders advanced money, and between the date of valuation and the date on which the borrower subsequently defaulted the market fell significantly, the valuers were liable to the lenders only for the consequences of the information being wrong. They were not to be regarded as responsible for all the consequences of the course of action taken by the lenders, ie advancing the money.

The Court distinguished between a duty to provide information to enable someone to decide on a course of action, and a duty to advise someone what course of action to take. In the latter situation, the adviser must take reasonable care to consider all the potential consequences of that course of action and, if the advice is negligent, will be responsible for all the foreseeable loss which is a consequence of that course of action. If, however, the adviser's duty is only to supply information, he or she must take reasonable care to ensure the information is correct and, if he or she does not and the information is incorrect, the adviser will be responsible for the foreseeable consequences of the information being incorrect.

In these cases, the lenders were entitled to recover their losses up to the difference between the negligent valuation and what the accurate valuation would have been. The valuers were not liable for losses resulting from the property crash. As for the impact of the decision on other professional advisers, it will be important to consider the precise scope of the advisers' role: are they advising on what course of action should be taken or simply providing information for their client to decide on a course of action? The extent of losses that can be claimed will differ according to this analysis of their role.

Lending to local authorities

The Court of Appeal's decisions in Credit Suisse v Waltham Forest LBC and Credit Suisse v Allerdale BC highlighted the risks involved in local authority lending (see International Financial Law Review, July 1996, page 47). In those cases, the local authorities relied in effect on their own abuse of power to avoid having to pay Credit Suisse in respect of guarantees given by each of them.

Now that there will be no appeal to the House of Lords, the Department of the Environment has been urged to clarify the position, particularly as continuing uncertainty may affect Private Finance Initiative (PFI) projects and the issuing of guarantees by councils in that respect.

The overall effect of the law as it stands is that parties dealing with local authorities must ensure that proposed commercial transactions fall clearly within the powers of the local authorities, including the giving of guarantees and indemnities by way of security. To assist in this, the Financial Law Panel (an advisory body established by the Bank of England) reissued its recommendations to the government that a tribunal should be established with the power to give clearance certificates in advance for proposed transactions. These certificates would be conclusive in favour of third parties.

Given the growing overlap of commercial activity between the public and private sector, the Panel's suggestions, if implemented, may help to alleviate the concerns of lenders in dealing with local authorities and other public bodies which may be affected by the decisions in the Credit Suisse cases.

Disqualification of directors

In In re Continental Assurance Company of London, the High Court considered whether incompetence, not amounting to dishonesty, in a director could be regarded as unfitness so as to justify disqualifying him under the Company Directors Disqualification Act 1986. Disqualification proceedings were brought against Mr B (an experienced banker and corporate financier) in respect of unsecured interest-free loans made by Continental Assurance to its parent company, Yorkdale Holdings, to enable Yorkdale to service bank loans made specifically for the purpose of acquiring shares in Continental Assurance. The DTI alleged those loans constituted financial assistance by Continental Assurance for the acquisition of its shares contrary to section 151 of the Companies Act 1985.

The judge accepted Mr B's evidence that, although he was a director of Continental Assurance during the relevant period, he did not know that the loans were being made. However, he found that Mr B's failure to know displayed very serious incompetence. Mr B's failure to read and understand Continental Assurance's accounts amounted to such incompetence as to make a finding of unfitness appropriate. Mr B was disqualified for three years. It is believed that this is the first case in which a banker acting as a non-executive director of a company has been disqualified.

In another important case, the High Court held that where a person was a director of both a holding and a subsidiary company, it would be artificial to isolate his conduct with respect to each company where he had taken steps which affected the interests of both companies. Thus, where the director's conduct in connection with the affairs of a subsidiary also inflicted harm on the parent of which he was a director, that director was in breach of his duty to both the holding and subsidiary companies (Re Dominion International Group plc (No 2)).

Enforcing an assigned debt

The decision of the Court of Appeal in Camdex International v Bank of Zambia concerned the assignment by the Central Bank of Kuwait to Camdex of debts due under a 1988 deposit agreement. Written notice of the assignment was given to the Bank of Zambia, which did not dispute its debt to the Central Bank of Kuwait, or the amount due, but contested the validity and enforceability of the assignment under English law in circumstances where Camdex knew, or ought to have known, at the date of the assignment that the underlying debts (in which Camdex had no pre-existing interest) would have to be recovered by means of litigation.

The Court held that this did not make the assignment invalid or unenforceable. If a debt was bona fide, it did not become unassignable merely because the debtor chose to dispute it. In the absence of bad faith, suing on an assigned debt was not contrary to public policy, even if the assignor retained an interest. The Bank of Zambia's petition for leave to appeal to the House of Lords was dismissed.

Neil Mirchandani
City Litigation Group
Lovell White Durrant, London

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