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A fine example of that old legal maxim ''[[anus matronae parvae malas leges faciunt]]'': Little old ladies | A fine example of that old legal maxim ''[[anus matronae parvae malas leges faciunt]]'': Little old ladies (and, in this case, aggrieved Welsh hotel owners) make bad law, {{casenote|Greenclose|National Westminster Bank plc}} opines on the apparently harmless {{isdaprov|Notices}} Section (Section {{isdaprov|12}}) of the {{1992ma}}. In particular it considers what counts as “an [[electronic messaging system]]” and more to the point what does ''not''. In the opinion of learned Justice Andrews, that includes [[email]]. | ||
I'll say it again: in the eyes of the law, [[email]] is not an [[electronic messaging system]]. | |||
===Facts=== | ===Facts=== | ||
====The Loan and the interest rate hedge==== | ====The Loan and the interest rate hedge==== | ||
Mr. Leach, of [[Greenclose]], was | Mr. Leach, of [[Greenclose]], was a little old lady of the law. He was also, the court found, a sophisticated and successful owner of family business running small luxury hotels in and around Wales. But not sophisticated enough to avoid being the wrong end of the [[interest rate swap mis-selling scandal]], wherein banks lent to unwitting merchants on condition that they hedge their interest rate risk with derivatives. In this case NatWest required Greenclose to buy an interest rate collar for five years with an option to extend it for a further seven. | ||
The | The point of the hedge was to guard against rising interest rates. Being at an uncommonly low 4.5% in 2006, rates were generally expected to rise. Weren’t they just the days. | ||
Now the bank’s theory here is interesting: “We will lend to you at a floating rate for ten years,” it said. “But, if interest rates rise, you may default on your loan. In that case, ''we'' lose. So therefore you must hedge your interest rate risk.” You might think the Bank could better manage that risk by lending at a ''fixed'' rest rate and hedging its own interest rate risk. But it’s so easy to be wise in hindsight. | |||
So to cut a long story short, NatWest charged Greenclose to reduce its own risk to Greenclose’s insolvency. With a kicker: Of course, capping exposure to rates that you expect to rise is an expensive business: To reduce the cost, NatWest suggested Greenclose limit its ''downside'' interest rate risk also, and make it a collar - thus limiting Greenclose’s exposure to interest rates between 5.07% and 6%. This locked in a rate of at least 5.07% on the loan. (You might think the bank could just as easily have lent at a fixed int ... Oh. I've already made this point, haven't I?) | |||
Greenclose therefore borrowed entered an extendable collar transaction under a 1992 {{isdama}} - the edition is important - which would expire on 30 December 2012 unless NatWest gave proper notice of its extension before that time. | |||
Greenclose therefore borrowed | |||
====The collar renewal in 2012==== | ====The collar renewal in 2012==== | ||
If interest rates were | If interest rates were low in 2006, they were even lower in 2012. The collar was massively out of the money for poor old Greenclose, and there was this prospect that it might be extended for seven more years. NatWest wanted to extend its collar, notwithstanding that interest rates presented no real risk to Greenclose (as I write, four years later, interest rates are even lower), but because they would make a ton of money. Ironically, because it significantly increased Greenclose's running interest costs, extending the collar would increase the very risk of insolvency the bank at required it to guard against. | ||
Now ignoring for a moment the fact that Greenclose was a little old lady, let’s be clear here: this is fair enough. NatWest had priced its lending operation so as to avoid this risk. But it still managed to look like a big, bad bank. | |||
{{Box|'''Learning Number 1''': Don’t set | =====NatWest's errors===== | ||
Schoolboy error no.1 was to have notice deadline which expired during the Christmas holiday period, when Greenclose was highly likely to be out of the office. But that’s as may be. In fairness, it's not outlandish to expect a hotel to be open in the Christmas holidays. But generally, don't have your options expire between Christmas and New Year. | |||
{{Box|'''Learning Number 1''': Don’t set options that expire in when everyone's likely to be out of the office.}} | |||
Error no. 2 | Error no. 2 – less of a schoolboy one, in this reviewer’s opinion – was to presume that an [[email]], being, after all, an '''electronic''' mail '''message''' sent over a computer '''system''' (so sayeth [https://en.wikipedia.org/wiki/Email Wikipedia]) fell within the meaning of an “[[electronic messaging system]]”. Not so, thought Andrews J. because: | ||
{{box|“In 1992, email was not in common use and thus the reference to “[[electronic messaging system]]” is unlikely to have been intended to include it.”}} | {{box|“In 1992, email was not in common use and thus the reference to “[[electronic messaging system]]” is unlikely to have been intended to include it.”}} | ||