Recovery of losses in a distress scenario: Professional Negligence claims

It’s often when lenders (or insolvency practitioners) turn to enforcement of security that underlying issues emerge – for instance, that a property may have been overvalued when the original lending decision was made; that there are issues with title; or that actual progress on a site development does not reflect what had been reported in the context of further loan drawdowns. The prevalence of such issues increases when there is a downwards trend in property values – overvaluations in particular can ‘come out in the wash’ in an upwardly mobile market, but become problematic in a market downturn.

In some circumstances these issues are indicative of a potential professional negligence claim against those who had advised the lender in the context of its lending decision – whether on the original loan advance, its monitoring and release of later drawdowns, or in the context of subsequent decision making (additional advances, granting waivers, standstills or other forbearance decisions). Where the obvious objective in any distressed debt situation is on recovery of funds and mitigation of losses, such claims can be a route towards improving the overall outcome for the lender.

Professional negligence claims can be advanced where an adviser owes the relevant claimant a duty of care, which has been breached (i.e. the advice provided has fallen short of a reasonably competent standard); and where that breach has caused a recoverable loss. The most obvious example is that of a property valuation outside a reasonable margin of error, leading to a loan having been advanced in circumstances where – had the lender been given competent valuation advice – no loan would have been offered. The first step in establishing whether there may be a viable claim is usually to enlist expert input, to opine on what the advice given at the relevant time should have been, and how this compares to the advice actually given.

As a result of current market conditions we are seeing an increase in professional negligence claims for lenders. Recovery prospects are generally better where swift action is taken. Primarily, in an area where it can take some time for issues to emerge, this avoids any problems caused by the expiry of the relevant time within which to bring a claim. This can be nuanced but is usually six years from the relevant events (for example, the date of the advice), though this time period can differ in particular circumstances. Acting quickly will also mitigate any risk that a defendant, facing multiple claims, will seek to restructure, or that available insurance cover is exhausted.

Practical steps for lenders will include proactive monitoring of the loan book to identify any issues early; and careful record-keeping of decisions made during the life of the loan including any enforcement and sale process, together with reasoning, to ensure that any steps taken to mitigate losses can be adequately evidenced.

The Burges Salmon Professional Negligence team is recognised as market-leading in acting for lenders against professionals who have advised negligently. We work alongside our Restructuring and Insolvency team to ensure the litigation strategy is aligned with the overall enforcement strategy to maximise value in all distressed situations.  Please contact Caroline Brown or Andrew Burnette if you would like to discuss any aspect of this article.