Small businesses could soon hit back at dishonest banks with lawsuits

Banks might soon be able to be sued by small businesses in the UK who were victims of their predatory lending practices.

According to smallbusiness.co.uk, banks such as Clydesdale and RBS allegedly drove thousands of businesses to bankruptcy after making inappropriate loans, and then supposedly stripped those businesses of their assets for millions of pounds once they were insolvent.

News broke earlier this month that Clydesdale Bank and former owner National Australia Bank were being sued by about 150 businesses in a lawsuit in London for unfair small business lending practices nearly two decades ago.

And it seems there might be more businesses joining the lawsuit. RGL Management, a claims management company that represents SME businesses, told Reuters it expected to add hundreds more claimants. The number could increase to at least 700 by the end of the year.

The lawsuit alleges Clydesdale deliberately or recklessly misrepresented a contractual ability by the banks to charge a break cost to end the loan early, and deliberately added hidden margins into interest charges on fixed-rate loans.

Besides Clydesdale, RBS admitted earlier this year that its Global Restructuring Group had unfairly treated many small and medium-sized companies placed into the unit, which was supposed to support struggling businesses but allegedly have foreclosed on many in order to seize their assets to strengthen the bank’s balance sheet.

The banks could easily seize the assets of the small businesses because of a legal loophole called "reflective loss". This means once a business goes into insolvency and an administrator is appointed, directors and shareholders no longer have recourse to the law. So even if the shareholders believe the insolvency was caused by a third party, they have no rights to pursue this party for their losses.

Currently only the administrator has the power to sue a third party. But because the administrator often comes in after a bank makes insolvency orders, those companies are reluctant to sue that financial institution.

Kevin Hollinrake MP, co-chair of the APPG on Fair Business Banking, told smallbusiness.co.uk: "If you’re a shareholder of a business and your company goes into administration, and you believe somebody’s at fault, currently there’s nothing you can do about it. If your bank has unfairly sold you an expensive loan and the payments rose and rose, eventually putting your SME into administration, then you as a shareholder have no action against the bank."

Members of Parliament have petitioned the Supreme Court to change the "reflective loss" regulation, giving the opportunity for small businesses to sue banks for the first time.