Bank's local relationship manager had no ostensible authority to write off borrower debts (High Court)
The High Court (John Kimbell QC ) has held that a bank's agent had no authority to write off its borrowers' £3m of debts.
Interesting case, because the defending bank witness stated:
"I know exactly what he did. He found someone who was working at the bank. He found a disgruntled employee. Phytos gave him ten thousand to go and make a letter to accept one million six hundred and fifty thousand in full and final settlement of all these debts".
This is interesting for those of us working in mortgages and insurance world. It was not a case of alleged fraud, so much as whether a relatively junior employee could bind the bank by initially a statement to say that the debt would be written off.
Of particular interest is the court's decision that the agent had no ostensible authority because:
- The principal had never said that the agent had authority to write off debts of any scale. On the contrary, the bank had said that the authority of the bank's employees was “circumscribed†- any significant decisions require referral up to general manager level.
- Even if the bank official had signed it, it was unreasonable for the borrowers to rely on it. The borrowers were familiar with the principal's approval processes, that on its own was enough to put the borrowers on notice of the agent's lack of authority.
The decision is a reminder that where you may have suspicions about an employee's authority then it is advisable to request proof of authority from the principal. All MGI / IFA firms deal with large providers and lenders, and we need to be aware of this sort of misunderstanding.
My own experience running a network involved quite a sizeable IFA who relied on a junior compliance administrator’s assent, to launch a daft investment scheme for about 20 SIPP clients. The scheme actually made money, but when compliance file checkers failed the files the scheme had to stop, and that case too ended up in the High Court. If you are employing staff, and empowering them to make decisions, a clear job profile stating limitations on authority is required. This protects you against the employee who is “disgruntledâ€. The dangers these staff represent are huge. It is well known that on the Friday afternoon before leaving bitter employees may sign almost anything outside parties place in front of them – loans / advertising contracts / debt write off and so on. Most in the business community have one or other funny story about this sort of thing happening – from advertising contracts to DB transfers and authorizing bank loans to likeable rogues. This is why garden leave is so popular in the financial services community.
The case largely involved the Cypriot community, and light relief to the court was provided when one witness described his colleague in heavily accented English as "big rascal".