High Court strikes out claim against banks in their capacity as lenders to investors of a tax deferral scheme

The High Court has struck out claims brought by former investors in the Ingenious Media tax deferral schemes against lending banks who advanced sums to the investors for the purpose of investing in the scheme: Mr Anthony Barness & Ors v Ingenious Media Limited & Ors [2019] EWHC 3299 (Ch).

In the context of the current wave of tax deferral scheme litigation (including in respect of the film financing schemes Samarkand, Proteus, Imagine and Timeless Releasing), the interlocutory decision in Barness provides reassurance to banks which acted as lenders to the investors in those schemes. This is particularly welcome in circumstances where investors are increasingly pursuing claims against such lenders where the independent financial advisers ("IFA”) and promoters who provided advice to investors directly have either collapsed or do not have sufficiently deep pockets.

The most important aspects of the case which are likely to be of relevance to similar claims, and more generally to financial institutions selling products on an execution-only basis, are as follows:

1. The claimant investors in Barness sought to establish that their relationship with the banks went above and beyond a standard lending relationship, and that they were owed duties (both in contract and in tort) by their lenders relating to the suitability of the investment for which the loan was advanced. The court firmly rejected this avenue of reasoning, referring to the decision of the Court of Appeal in Green v The Royal Bank of Scotland plc [2013] EWCA Civ 1197 and of the High Court in Carney v N M Rothschild & Sons Ltd [2018] EWHC 958 (Comm) that there is no general obligation on a lending bank to give advice about the prudence or otherwise of the transaction which the loan is intended to fund.
2. For claims based on implied contractual terms or duties of care to succeed, it remains paramount for claimants to point to very specific words or conduct. In this case, it was asserted by the investors that the lending banks had agreed (or acquiesced) to the investors' IFA "packaging” together the investment proposition with available financing. The court found that - even if this assertion was accepted - it was insufficient to establish an implied term as to the suitability of the investment, or to find that the banks had assumed a similar duty of care in tort or had otherwise endorsed the investment.
3. The court was unconvinced by the argument that there existed an implied "umbrella contract” based on the "private banking and wealth management relationship” between the claimants and the lenders. We have previously considered a similar (unsuccessful) attempt at such an argument advanced in Standish v RBS [2018] EWHC 1829 (Ch) in our blog post. There has been a noticeable uptick in claimants asserting the existence of an implied umbrella or overarching agreement as a vehicle by which to advance arguments based on implied contractual terms. The court's robust rejection of such claims in this case and Standish will be welcomed by financial institutions.
4. The court also rejected a claim that the IFA promoting the scheme had acted as the lending banks' agent, and that the banks were therefore vicariously liable for its negligent advice. The court held that the IFA and the banks had conducted their separate businesses throughout (of providing financial advice and financing respectively), such that the activities of the financial adviser could not be said to have been an integral part of the banks' business. Evidence regarding the close relationship between the financial adviser and the banks was submitted to no avail. Again, the court's robust rejection of this line of argument is helpful not only in the context of other tax deferral scheme litigation, but more generally where banks act on an execution-only basis alongside an IFA.

We consider the decision in more detail below.

Background

From 2002 to 2007 a number of tax schemes were promoted under the name "Ingenious” as tax-efficient vehicles through which investors could contribute funds to a limited liability partnership ("LLP”) for investing in films/video games and set off their share of the LLP's losses against other taxable income. HMRC did not accept that the schemes worked as intended and, following a series of appeals, the outcome for the individual investors was that they lost both the sums invested in the schemes and the anticipated tax relief (and may be exposed to claims by HMRC for arrears of tax with interest and penalties). A number of the investors have issued claims to seek to recover their losses from a range of defendants, including claims against the banks which advanced the funds to cover some (or all) of the investors' capital contribution to the relevant LLP.

The present claims were brought by investors who borrowed sums from Coutts & Co and National Westminster Bank plc (the "Banks”). All of the claimants received independent advice on their investments in the Ingenious schemes from the same IFA.

The claims against the Banks are part of a much larger litigation brought against financial and tax advisers, the promoters of the scheme and lenders. In relation to their claims against the lender Banks, the claimants relied on three separate causes of action:

1. Claims for breach of contract, based on terms said to be implied into contracts between the claimants and the relevant Bank. In particular, an implied term relating to the suitability of the loans (i.e. that the Banks would not provide loan finance, introduce products or allow a loan to be packaged with an investment product, unless they were suitable for the claimants having regard to their financial position, needs, objectives and attitude to risk).
2. Claims for negligence, predicated on duties of care of a similar nature to the (alleged) implied suitability terms, owed both (a) concurrently with the implied contractual duties; and (b) in tort arising from a non-contractual assumption of responsibility.
3. Claims alleging that the Banks were vicariously liable for breaches of duty by the IFA, on the basis that the IFA acted as the Banks' agent.

Decision

The court struck out the contractual and tortious claims pursuant to CPR 3.4(2)(a) and granted reverse summary judgment on the vicarious liability claims pursuant to CPR 24.2. The court's analysis is considered in further detail below.

1. Breach of contract

The claimants asserted that the term relating to the suitability of the loan (and a number of other terms) were implied into either: (a) an unwritten umbrella or overarching contract on the basis that the claimants and the relevant Bank had entered into a "private banking and wealth management relationship”; or (b) the existing loan documentation.

Umbrella contract

As to whether there was a wider umbrella agreement, the Banks submitted that the claimants had failed to comply with CPR Practice Direction 16, which requires that claims based on oral agreements and conduct must specify the words spoken and conduct in sufficient detail. The court agreed that no facts had been pleaded which supported the existence of an umbrella contract between the claimants and either of the Banks.

Having noted that not every breach of Practice Direction 16 would lead to a claim being struck out, the court considered the claimants' argument that the umbrella contract arose on the basis of the Banks' conduct, specifically in offering the "package” presentation of the investment and loans. In the court's view, this did not provide the requisite support for the umbrella contract. It said there was no logical connection between the alleged "packaging” of the loans and investments, and the suggestion that the Banks offered to undertake an overarching responsibility for management of the claimants' wealth which was over and above the particular services provided by the Banks (loans and current accounts etc.). The court likewise held that statements in one of the Bank's internal documents that the claimants had a "full banking relationship” did not suggest that the Bank had entered into an umbrella contract to provide not only banking but also wealth management services.

The court concluded that there was no pleaded basis for the suitability terms to be implied into an umbrella contract and this was sufficient to justify strike out in the circumstances, noting that it would have alternatively granted reverse summary judgment.

Loan documentation

The court paraphrased the test for implying terms into a contract (clarified in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2015] UKSC 72, although without citation in the judgment). It found that the alleged contractual duty on the Banks not to package loans with an unsuitable investment was neither so obvious as to go without saying, nor necessary to give business efficacy to the contract.

The court accepted that it was well established that a bank which sells a product to its customer is not under a (tortious) duty to advise as to the nature of the risks inherent in the transaction (Green v RBS). In those circumstances, the court could not see any sustainable case pleaded (or that could realistically be pleaded) that the suitability terms were to be implied into the contracts of loans between the Banks and the claimants.

The court therefore struck out the claims (and noted it would have alternatively awarded reverse summary judgment).

2. Negligence

As noted above, the allegation that the Banks owed the claimants a duty of care in tort was argued firstly on the basis that it was concurrent with a like duty in contract. This duty was not considered further, given the court's rejection of the contractual claims.

Accordingly, the court proceeded to consider whether the relevant Bank assumed responsibility towards each of the claimants giving rise to a duty of care in tort of a similar nature to the (alleged) implied suitability terms. The court accepted that to find a duty of care in tort required some communication between the Banks and the claimants to the effect that the Banks were assuming responsibility for the tasks in question; and reliance by the claimants.

The claimants could not point to anything in terms of advice that crossed the line between the Banks and the claimants, but relied - once again - on the "packaging” of the loans with the investments to give rise to the duty of care. Without more, the court found this was insufficient to give rise to a duty of care. The court noted that a bank does not "assume an advisory role simply because it agrees to lend to the customer for a particular purpose” (Carney) and could not, therefore, be said to have assumed an advisory role simply because it agreed to its loans being "packaged" together with an investment. This was particularly so where there was an IFA advising the customer.

The court rejected the claimants' attempts to draw comparisons with cases in which a duty of care had been found and reliance was not required, such as White v Jones [1995] 2 AC 207 (where a solicitor instructed by a testator was held to have owed duties of care in tort to the intended legatees). The court distinguished such cases on the basis that they related to whether an established contractual duty of reasonable skill and care can be said to be owed not only to a client of the defendant, but also to the person intended to benefit from the defendant's advice. That was different to the present case, in which the question was whether there was a relevant duty of care at all, rather than widening the class of people who can sue for breach of duty.

The court therefore found that there were no reasonable grounds for bringing the claims and ordered strike out, noting that it would equally have granted reverse summary judgment.

3. Vicarious liability

The claimants alleged that the IFA had acted as the Banks' agent in "introducing, explaining and advising upon the packaged investment”. The court said that the relevant question was whether the IFA was acting on behalf of the Banks, which required them to have either:

1. told the claimants that the IFA was advising on their behalf, or otherwise held the IFA out as doing so (which was not the case, due to the fact that the loan documentation explicitly stated that the claimants were not relying on advice provided by the Banks); or
2. used the IFA to discharge a duty to advise owed to the claimants (and the court found that there was no such duty to advise). In relation to the final claim based on vicarious liability, the court therefore granted reverse summary judgment in favour of the Banks.

An argument based on the rule in Cox v Ministry of Justice [2016] UKSC 10 which was advanced by the claimants also failed. This test expands the scope of agency to situations in which a person carries on activities as an integral part of the business activities of the principal and for its benefit. The court found that the business activities of the IFA in providing financial advice were neither an integral part of the business of the Banks, nor were they for their benefit. Despite the close commercial relationship between the IFA and the Banks, the commission paid by the former to the latter and the "packaged” presentation of the investment and the loan, each party was carrying out its own business, namely that of providing financial advice and providing banking and lending services respectively.

In relation to the final claim based on vicarious liability, the court therefore granted reverse summary judgment in favour of the Banks.