High Court directed to reconsider ruling over bank negligence on loans

The Supreme Court has directed the High Court to reconsider its findings there was no contributory negligence by KBC Bank in how it suffered multi-million losses on loans to Thomas Byrne and a property developer.

The losses were incurred due to the bank having no security for €25m loans advanced to Mr Byrne, a struck-off solicitor, and developer John Kelly.

The judgment of the three judge court today addresses important issues relating to the duties of banks to their shareholders when advancing loans, including the responsibility to investigate the financial standing of borrowers.

The High Court last July awarded KBC some €17.7m damages against Dublin law firm BCM Hanby Wallace (now Byrne Wallace) over “most serious” failures to ensure the bank had security for the loans. The bank sought security on 30 properties but only got security on three.

Mr Justice Brian McGovern found this matter was not about a single act of negligence but “multiple failures” repeated across four separate loan transactions.

He rejected arguments of contributory negligence by KBC on grounds including it had failed to properly check out the creditworthiness of either Mr Byrne or developer John Kelly, Hunter’s Moon, Kilquade, Co Wicklow, before agreeing to advance loans of some €9m and some €16m to them respectively on dates from 2005 to 2007. The bank was entitled to rely on assurances from professionals retained by it, he said.

KBC had sought some €25m damages but the judge assessed the total damages recoverable at €17,694,130.

The judge’s ruling was appealed to the Supreme Court by both sides and that court today unanimously ruled the High Court had erred in how it addressed the issue of contributory negligence by KBC.

While the law firm's negligence related to obtaining security for the loans was a direct and proximate cause of KBC's loss, there was an issue as to whether it was he only effective cause of the loss, Mr Justice Nial Fennelly said. It was important to distinguish between two types of contributory negligence alleged against the bank - want of care in making the decisions to lend and failing to verify or supervise the solicitors' performance of their duties.

On the assumption the bank failed to exercise due care in making the loans, he was satisfied the bank was exclusively responsible for those decisions.

It was not the law firm’s task to check the financial soundness or reliability of the borrowers and the High Court was mistaken in finding there was no contributory negligence on grounds of finding the borrower’s own acts were merely an inevitable or necessary cause, and not a proximate cause, of the bank’s loss, he found.

It is obvious the decision to lend to Mr Byrne and Mr Kelly was effective cause, combined with the negligence of the solicitors, of he loss suffered by the bank, he said. The High Court had remarked that aspects of the loans to Mr Byrne were “highly questionable” and that KBC was “somewhat careless” in its approach, he noted.

On the second category of acts of contributory negligence, the bank was entitled to rely on the solicitors’ expertise to ensure security was put in place. While it might be argued the bank’s responsibility in that regard was so small it should not be fixed with any responsibility, there was no absolute rule.

If evidence showed the errors of the solicitors were so obvious they could not have been overlooked, there was fault on the part of the bank and it was open to the solicitors to argue the bank was obliged to manage its business in accordance with EU regulations on Licensing and Supervision of Credit Institutions, the judge said.

Those regulations required banks to manage their business in accordance with “sound administrative and accounting principles” and to put in place and maintain internal control and reporting arrangements to ensure the business is so managed.

In those circumstances, Mr Justice Fennelly directed that the solicitors appeal be allowed on the contributory negligence issue and that matter should be reconsidered by the High Court. It was for that court to decide if there was contributory negligence by KBC on the basis of the Supreme Court’s assessment of the law in that regard, he outlined.

He also found the High Court decision could not be read as attributing any intentional dishonesty or deliberate misleading to any partner or officer of the law firm.