Lloyds’ bondholders have been dealt a major blow after the Supreme Court announced that the bank had acted lawfully in forcibly repurchasing £3.3bn of their bonds at ‘par’, or face value, thereby depriving investors of valuable income at interest rates of up to 16%.


The bank had always maintained that the bonds, or enhanced capital notes’ terms and conditions permitted it to buy back the bonds in certain circumstances concerned with the assets’ role as reserve capital.

Veteran campaigner for investors’ rights, Mark Taber, disputed Lloyds’ claims that the bonds had been disqualified as capital and took the case to the High Court.

The High Court originally found for the bondholders, but its verdict was overturned by the Appeal Court; five Supreme Court judges supported that decision by a majority of three to two.

Announcing the judgement Lord Neuberger said: ‘I would dismiss the trustee’s appeal, on the basis that I consider that a capital disqualification event has arisen.’

The dissenting judges said: ‘These were long-dated securities, which cannot have been intended to be redeemed early except in some extreme event undermining their intended function and requiring their replacement with some other form of capital.’

Mr Taber said: ‘Such a close split decision raises massive issues over the role of the regulators in this. In particular, the full judgment makes no reference to the arguments made in court over the statutory requirements that [bond] prospectuses should be accurate and contain all the information investors need to make an informed decision.

‘If the courts will not consider these statutory requirements in interpreting prospectuses then it must fall on the Financial Conduct Authority [the City regulator].

‘Despite my repeated requests to Andrew Bailey [the head of the FCA] to make the information available to the Supreme Court, the regulators have refused to disclose exactly what they and Lloyds knew about forthcoming changes to capital requirements at the time the ECNS were issued.

‘I believe the changes they knew about, which were not disclosed in the ECN prospectus, meant that a capital disqualification event was a certainty at the time the ECNs were issued. If the court had been told this I think it would have made a difference.’

Alexis Brassey of Cavendish Legal Group, working on behalf of the bondholders believes that the close verdict shows that the issues in this case were far from clear: ‘It is surprising that the Supreme Court allowed Lloyds to deprive investors of their return on what can only be described as a convoluted technicality based on a conceded drafting error in the document [which Lloyds admitted in the High Court].

‘It was a David and Goliath battle, but in this instance the giant won’

‘The broader issue for the bond market, which was not raised in this case, relates to the fact that additional contract uncertainty must now be factored into pricing of certain financial instruments. [Lloyds] investors will now be considering options in respect to further action relating to the prospectus.’

In announcing the verdict in its favour to the Stock Exchange, Lloyds Banking Group said: ‘The Court held that a capital disqualification event (CDE), as defined in the conditions of the ECNs, has occurred.

‘Throughout the process the group has sought to balance the interests of all stakeholders and the group welcomes this decision from the Supreme Court, which confirms the occurrence of a CDE and supports the group’s redemption of all series of ECNs earlier this year.’

Asim Bajwa, head of advisory at Canaccord Genuity Wealth Management, said: ‘Today is a sad day for the rights of bondholders. It was a David and Goliath battle, but in this instance the giant won.

‘The problem for the retail investors who have been hit by this ruling is that many are elderly with a low risk appetite – they were relying on this income and their living standards will be hit in many cases. It will certainly make investors considering investing in corporate bonds think twice.’

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