RBS Pursue Former Halliwells Partner

December saw the handing down of judgment in the case of RBS v Michael McCarthy.  Mr McCarthy was a former partner of the law firm Halliwells and had been sued by RBS for repayment of a professional practice loan. 

Mr McCarthy joined Halliwells in 2007 and was required to pay capital into the firm.  The firm banked with RBS who offered to provide Mr McCarthy with a professional practice loan. 

As a condition of the loan, RBS required an undertaking from Halliwells that it would pay off the partner’s loan should he leave the firm.  In 2009 Halliwells ran into financial difficulties and called on its partners to pay in further capital.  Mr McCarthy declined and in October 2009 was given 12 months’ notice to terminate his position with the firm and was put on garden leave.

In March 2010 Halliwells entered into a Retirement Deed with Mr McCarthy bringing forward his retirement date to 31 May 2010.  This also brought forward the date for repayment of his capital and therefore the date that Halliwells were liable to pay off Mr McCarthy’s professional practice loan. 

RBS had however made it a condition of the banking facility that no payment of capital could be made to any partner or former partner of the firm without the Bank’s written consent.

Mr McCarthy left Halliwells on 31 May 2010 but Halliwells failed to make the payment to RBS to clear the loan and RBS did not enforce the undertaking requiring repayment.  The firm went into administration on 14 July 2010 leaving the loan unpaid.

RBS issued proceedings against Mr McCarthy to recover the outstanding loan.

Mr McCarthy claimed that the Bank had prevented Halliwells repaying his practice loan. The Court found however that Mr McCarthy had not produced documentary evidence to prove that Halliwells had requested consent for repayment of Mr McCarthy’s capital or that RBS had refused.  In the absence of a request,  RBS could not consent. 

The Court held it was for the firm and not the Bank to decide whether the capital should be repaid to discharge the loan and it could not be concluded with any certainty that even if the Bank had consented, that the firm would have paid off the loan.

The Court also decided that it could not be concluded that the Bank knew its actions would cause Halliwells to breach the Retirement Deed with Mr McCarthy and nor could it be concluded that the target or aim of the Bank was for the firm to breach its obligations to repay Mr McCarthy’s loan.

The Court went further finding that even if the Bank had caused the firm to breach the terms of the Retirement Deed that the Bank’s defence of justification would have succeeded.  The Court commented that the Bank, as a secured lender of the law firm, enjoyed rights superior to the Defendant’s rights and where the Bank possessed an equal or superior right it was justified in taking steps to protect the value of their rights even if they knew the effect would be to cause Halliwells to breach its agreement with Mr McCarthy.

The Court also decided that the undertaking given by Halliwells to the Bank to repay the loan did not provide Mr McCarthy with any enforceable rights, that no term could be implied into arrangements which would prevent the Bank from recovering payment of the loan as there was no tripartite contract and the fact that RBS had insisted on having the undertaking from Halliwells before it released payment of the practice loan placed no obligation on the Bank to call upon Halliwells to repay the loan under the terms on the undertaking.

In the circumstances Judgment was awarded in favour of the Bank for the full value of its claim.

Given that arrangements for the provision of practice loans are commonly arranged through the bank funding the business the decision highlights the dangers for a partner where the business goes bust and the bank and the partner have conflicting claims. Following this decision the bank is justified in acting in it’s own best interests.

If you have a dispute with your bank then Turner Parkinson can help.  Please contact Mark Lund on 0161 833 1212.