The Daily Telegraph - Saturday - Money
Lloyds wins Supreme Court battle against its bondholders
Lloyds bondholders have lost in their final attempt to have the bank’s forced repurchase of their bonds at face value declared unlawful. The Supreme Court announced this week that the bank had been entitled to buy back the bonds, also called “enhanced capital notes” (ECNs), at “par” value, depriving investors of valuable income at interest rates of up to 16pc.
The bank had said the bonds’ terms and conditions allowed it to buy back the bonds at par value in certain circumstances concerned with their role as reserve capital.
Bondholders, led by Mark Taber, a veteran campaigner for investors, disputed its claims that the bonds had been disqualified as capital and took the case to the High Court.
The High Court found for the bondholders, who were formally represented by the bonds’ trustee, BNY Mellon, but the Appeal Court overturned its verdict. Five Supreme Court judges supported that decision by a majority of three to two.
Announcing the judgment, Lord Neuberger, with whom Lord Mance and Lord Toulson agreed, said: “I would dismiss the trustee’s appeal, on the basis that I consider that a capital disqualification event has arisen.”
The dissenting judges, Lord Sumption and Lord Clarke, said: “These were long-dated securities, which cannot have been intended to be redeemed early except in some extreme event undermining their intended function and requiring their replacement with some other form of capital.”
Mr Taber said: “Such a close split decision raises massive issues over the role of the regulators in this. In particular, the full judgment makes no reference to the arguments made in court over the statutory requirements that [bond] prospectuses should be accurate and contain all the information investors need to make an informed decision.
“If the courts will not consider these statutory requirements in interpreting prospectuses then it must fall on the Financial Conduct Authority [the City regulator].
“Despite my repeated requests to Andrew Bailey [the head of the FCA] to make the information available to the Supreme Court, the regulators have refused to disclose exactly what they and Lloyds knew about forthcoming changes to capital requirements at the time the ECNs were issued.
“I believe the changes they knew about, which were not disclosed in the ECN prospectus, meant that a capital disqualification event was a certainty at the time the ECNs were issued. If the court had been told this I think it would have made a difference.”
Alexis Brassey of Cavendish Legal Group, who was involved in the bondholders’ fight, said: “The 3:2 result shows the issues in this case were far from clear. It is surprising that the court allowed Lloyds to deprive investors of their return on what can only be described as a convoluted technicality based on a conceded drafting error in the document [admitted by Lloyds at the High Court].
“The broader issue for the bond market, which was not raised in this case, relates to the fact that additional contract uncertainty must now be factored into pricing of certain financial instruments. [Lloyds] investors will now be considering options in respect to further action relating to the prospectus.”
A Lloyds Banking Group spokesman said: “Throughout this process, the group has sought to balance the interests of all stakeholders, including our 2.6million shareholders, as it takes steps to meet the requirements of the changing regulatory landscape and manage its capital requirements efficiently.”