Who is responsible for the global credit crunch? No doubt the true answer is complex and will be debated for years to come. However, at the moment, the Royal Bank of Scotland and Sir Fred Goodwin seem to be at the top of many peoples list. Indeed, they are the defenders in an action brought by a number of Pension Funds in the US seeking recovery of losses incurred due the collapse in the RBS share price.

In America, Securities Class Actions are common and increasing. No doubt the ability to litigate as a class (i.e. one action which binds a number of pursuer), the ability to obtain punitive damages, and no costs penalty if you lose, makes the US an attractive jurisdiction within which to litigate these cases, but what of the UK?

Since the coming into force of the Companies Act 2006, it may be easier to sue the directors of a failed company. Firstly Part 11 of the Act sets out a statutory procedure for bringing “derivative actions”, which is an action by a minority shareholder against the directors for wrong doing. Secondly, section 172 of the Act requires a director to act in good faith and in a way which would be most likely to promote the success of the company. He or she must also exercise reasonable skill and care in their actings on behalf of the company. Could it be argued that taking over ABN Ambro at the height of the market (not to mention investment in complex financial products like Collateralised Debt Obligations) breached these duties?

The answer will turn on what is sometimes referred to as the “business judgment” defence, i.e., it is “OK” to get a judgment call wrong, provided the decision was made in good faith. There is, however, clearly a line beyond which a poor judgment call becomes negligent – did the take over of ABN Ambro cross the line? Did Northern Rock’s reliance on wholesale money markets to fund a massive expansion of mortgage lending cross the line?

At the time of writing, the action which would have answered that question (brought by Iain Hamilton QC in Oban Sheriff Court) has been abandoned due to lack of funds. However, there is surely an institutional share holder out there who has lost a fortune due to the collapse of the RBS share price and who wants an answer to that question?

For further information please contact David Calder on 0131 226 8215
or email david.calder@mbmcommercial.co.uk