Banks on edge over loan ruling

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The Independent Online
A LEGAL action coming before the Court of Appeal on Wednesday could lead to fundamental changes in the way banks lend money and much larger losses for banks if companies collapse.

The three judges will hear an appeal by 3i, the venture capital group, against a ruling in February that it was not entitled to a preferential mortgage, known as a fixed charge, on the future income of a company that had collapsed. The court found against 3i because it was not the company's banker.

The venture capitalist argues that it is receiving unfair treatment as high-street banks are allowed the same sort of mortgage. As a result, they are repaid ahead of other preferred creditors when debtors pay an insolvent company. 3i claims that if it is not entitled to the first charge, the banks should not be allowed it either.

The case, Re: New Bullas Trading, threatens to undermine the basis of bank lending, which was first established in the last century.

The omens are not good for the high-street banks. Two Appeal Court judges are already on record as saying they do not think it is right for banks to exercise such controls. Lord Browne-Wilkinson, a Law Lord, said at a conference of insolvency lawyers earlier this year that the bank's preference cast a 'black cloud'. And Lord Justice Hoffman, recently promoted to the Court of Appeal, raged against the practice when he was a High Court judge.

If the practice is thrown out, banks will rejoin the queue behind the Inland Revenue and Customs and Excise in any payout from a receivership or liquidation. The banks would lose more from any future collapses, but the change could also prevent many highly borrowed companies being forced into receivership.

It would also mean that the banks would have to reappraise their lending agreements and consider stipulating other forms of security for their loans.