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Charity wins funding case against Lloyds TSB

30 December 2011

A charitable foundation funded by the Lloyds TSB banking group has won a legal battle against the bank over its funding entitlement for the 2009 accounting reference period.

Three Court of Session judges upheld an appeal by Lloyds TSB Foundation for Scotland and held that it was entitled in terms of the covenant between it and the bank to a total of £3,543,433 based on the bank's pre-tax profits for the year, rather than the minimum payment of £38,920 con tended for by the bank.

The difference centred on whether account fell to be taken of the "negative goodwill" arising through Lloyds' acquisition of the HBOS group in that year. This figure derived from the fact that HBOS was acquired for a consideration significantly below the net value of its assets, and in Lloyds' accounts it converted a loss of £10bn into a profit of £1bn.

At first instance the Lord Ordinary held that although on a construction of the covenant deed the natural meaning of the words used supported the foundation's position, when regard was had to the "relevant background" the parties "did not intend that [the foundation] should receive a percentage of profits which included a figure for negative [goodwill] which was neither realised, subject to tax nor capable of distribution".

"Violence"

The Lord President, however, with Lords Carloway and Kingarth, ruled that a particular "dramatic" outcome in one year could not affect the meaning of the parties' agreement. "It is impossible, in our view," the court said, "even bearing in mind the background to which the Lord Ordinary refers, to avoid the conclusion that they must be understood as meaning that the figure in the line 'group profit before taxation' was to be definitive of what was to be used in the calculation".

The Lord Ordinary's approach, which he had described as doing "some slight violence" to the language of the deed, in fact involved "flying in the face of the clear and unambiguous wording and cannot be supported".

"It is not legitimate," the judges added, "in the light of the perceived 'purposes and values' of the contract, to create an ambiguity (by disregarding the critical words 'shown in the Audited Accounts') and then to construe the remainder of the expression against these purposes and values."

On an alternative argument for the bank, rejected by the Lord Ordinary, the court agreed that there was in Scots law no general doctrine of "equitable adjustment" which would allow the court to moderate the obligation contractually owed.

Click here to view the opinion.

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