Class action spotlights valuation and director conduct in court battle over Lloyds-HBOS acquisition


Accounting valuation and questions over whether directors blatantly misled shareholders will be at the centre of a High Court class action today over Lloyds’ acquisition of HBOS in January 2009, pitting 6,000 claimants against the former directors of Lloyds, writes Penny Sukhraj

The matter is an ongoing case in which the 6,000 claimants have circled around the valuation of HBOS at the time, saying that they were misled as to the true financial circumstances of HBOS during the second half of 2008, and the merits of both Lloyds acquisition of HBOS and its participation in the Government Recapitalisation Scheme.

The hearing, which is set down for three days from today [21 October 2015] before Mr Justice Nugee, is to focus on the valuation of HBOS, with a claim for compensation - brought by group litigation specialists Harcus Sinclair on behalf of shareholders - due to the losses that thousands of shareholders - comprising over 300 corporate entities including pension funds and other large investment funds domiciled primarily in the UK, Europe, the USA, Canada and Asia, as well as around 5,700 private shareholders - suffered through Lloyds’ takeover of HBOS.

In court papers, the claimants argue that the approval by Lloyds’ shareholders of the HBOS acquisition and the ‘Placing and Open Offer (P&OO) was procured by the bank’s directors through ‘misrepresentations, omissions, concealment of material information and/or negligent advice’.

Further, they assert that the conduct of the directors amounts to breaches of fiduciary and tortious duties.

At the last hearing in July, the claimants were successful in requesting the court to order Lloyds to disclose documents related to the acquisition including the legal advice that they were given at the time.

Lloyds asked for permission to appeal this decision and they have subsequently dropped their appeal.


The claimants are expected to produce expert evidence from a senior accounting expert from a mid tier firm in order to highlight the valuation issues within the financial reports, in relation to HBOS’s value.

So far, several of the bank’s directors cited in the case – including Lloyds former FD Timothy Tookey and Helen Weir (who was head of retail banking and director), Lloyds former chairman Sir Maurice Victor Blank, Lloyds’ former chief executive John Eric Daniels and George Truett Tate (Lloyds former head of wholesale division) - have said that HBOS was not overvalued at the time that is was acquired.

They claim that Lloyds, in fact, made a ‘net gain’ on the acquisition of HBOS of £11.173bn. To support this, the directors are relying on a figure recorded in the Lloyds Banking Group’s 2009 annual report and accounts.

However the claimants are challenging this figure and are expected to submit expert accounting evidence prepared by a mid tier accounting firm which suggests that the net gain was in fact illusory and did not provide an indication of the true value of HBOS.

Lloyds’ 2009 accounts

The claimants have put a spotlight on the manner in which the bank’s 2009 accounts were prepared and are seeking disclosure in relation to this, to understand the accounting decisions taken by Lloyds’s directors and their accountants, PwC, as well as to gain a fuller understanding of the real financial circumstances of HBOS and the state of knowledge of Lloyds.

The directors are relying on the Lloyds Banking Group’s 2009 accounts to demonstrate that the bank’s acquisition of HBOS generated a significant profit for Lloyds.

The claimants however assert that the ‘accountancy’ presentation of the transaction contradicts the fact that HBOS was in fact on the verge of collapse and needed to be propped up by funding by the Bank of England, the US Federal Reserve and Lloyds itself at the time of acquisition.

Director duties

Furthermore, it was a breach of the directors’ duties to the Lloyds shareholders for the directors of Lloyds to permit an EGM to take place on 19 November 2008, on the basis of what they knew to be incomplete and misleading information, statements and advice.

The claimants argument about the failure of the directors to fulfil their fiduciary obligations revolve around the directors’ alleged ‘concealment’ of crucial information of HBOS’s financial position months before the acquisition.

‘The [directors] took positive steps to conceal from the Lloyds shareholders and the market generally the true financial circumstances of HBOS and, in particular, the covert financial support that HBOS had been receiving from the Federal Reserve, the Bank of England and Lloyds,’ the claimants say in court papers.

HBOS’s covert support comprised billions injected from the US Federal Reserve, a £10bn loan from Lloyds on 16 September 2008, as well as covert emergency liquidity assistance (ELA) from the Bank of England which was £10bn on 1 October 2008 and increased to £25.4bn on 13 November 2008.

‘Had the market become aware of the covert financial support provided to HBOS by the Federal Reserve and/or the Bank of England and/or Lloyds itself, HBOS’s share price would have collapsed.

‘The concealment of the said covert financial support being provided to HBOS was distorting the market for HBOS shares by artificially inflating the price of those shares. In reality those shares were valueless,’ the claimants argue.

Highlighting the details of concealment, the claimants point out that the directors applied to the UK Listing Authority (UKLA, part of the former Financial Services Authority) for permission to exclude the ‘working capital statement’ within its financial reporting in the shareholder circular and prospectus.

‘A working capital statement would have revealed the fact that HBOS was covertly receiving ELA from the Bank of England and financial support from the Federal Reserve and may have revealed that Lloyds made a £10bn loan to HBOS on 16 September 2008,’ they state in court papers.

The directors also failed to make mention of the ELA, Federal Reserve or Bank of England injections or its loan agreements with Lloyds within the shareholder.

‘The purpose of this untruthful statement was to conceal the existence of the ELA, receipt of which was crucial to the continued solvency and trading of HBOS,’ the claimants state.


The claimants have also said that the directors ‘failed to disclose to the Lloyds shareholders and/or the market generally that HBOS, through its Bank of Scotland subsidiary, was manipulating its GBP and USD LIBOR submissions to bring them into line with other LIBOR panel banks and give the impression that the financial circumstances of HBOS were better than was actually the case and, in particular, that it was able to borrow funds on the London inter-bank market.’

The case continues.

Penny Sukhraj |Content editor, Accountancy - (up to 2016)

Penny Sukhraj, former content editor and writer for Accountancy and Accountancy Live, responsible for commissioning and editing news...

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