Empty Spinning Merry-go-round

The Times reported earlier this year the Insolvency Service was preparing to issue guidance to IPs over SWAPs mis-selling claims. The article suggested the Insolvency Service was likely to direct IPs that they should bring such claims against banks and report to former business owners about their work.

These claims arise out of interest rate hedging products that companies bought from banks to limit their exposure to increases in the interest rates charged on loans.  In very basic terms, where interest rates increased above a certain fixed point, the companies could claim the increased costs under the SWAPs contract. However – where the interest rate fell below a certain point, the companies had to pay the “gain” to the SWAPs provider. These contracts are complicated financial products – and the losses sustained by some companies have lead to claims that the contracts were not always suited to the businesses they were sold to.

We have not seen the guidance yet – but perhaps that is because someone’s trying to solve the problem of where the money from these claims will go. It’s worth noting that there have not been any reported successful cases against banks so far for SWAPs mis-selling. So – even if the claims were to succeed – who gets the money?

Well – after paying the lost costs of any litigation (such as the office-holders’ fees and unrecovered part of lawyers’ fees), usually, most of the winnings will go to the unsuccessful defendant… the company’s lender – the bank.

Obviously – if the value of the claim exceeds the amount the company owes to the bank (excluding the SWAPs), the company’s unsecured creditors would share in that surplus in every case.

If the bank’s security pre-dates 15 September 2003 (when the prescribed part was introduced), then, assuming there is no surplus, the proceeds of any SWAPs litigation will typically be caught by the bank’s charge and paid back to the bank.  If the bank’s security is more recent, the unsecured creditors may be entitled to share in the money through the prescribed part – but the lion’s share would still go to the bank.


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.