Neutral Citation Number: [2010] EWHC 3119 (Comm)
Case No: 2009 Folio 605
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 7 December 2010

Before :

MR JUSTICE BURTON
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Between :

	ROYAL BANK OF SCOTLAND PLC	
Claimant	
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	(1) HIGHLAND FINANCIAL PARTNERS LP
(2) HFP CDO CONSTRUCTION CORP
(3) HIGHLAND CDO OPPORTUNITY MASTER FUND LP	

Defendants	
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MR ADAM JOHNSON AND MS KERRY STARES (both of Herbert Smith LLP) for the Claimants
MR STEPHEN AULD QC AND MR BENJAMIN STRONG (instructed by Cooke, Young & Keidan) for the Defendants

Hearing dates: 14, 15, 16, 17 September and 6 October 2010
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Judgment

Mr Justice Burton : 

1.	This has been a hearing to assess quantum in the light of the summary judgment I granted to the Claimants (“RBS”) on 10 February 2010 ([2010] EWHC 194 (Comm)) (the “Liability Judgment”), as upheld by the Court of Appeal on 14 July 2010 ([2010] EWCA Civ 809), against the Second and Third Defendants (“Highland”) as borrowers and the First Defendant as guarantor. I do not propose to rehearse the full history of the Collateralised Debt Obligation transaction (“CDO”) between RBS and Highland which led to such judgment, for details of which I refer to the Liability Judgment. Suffice it to say that I concluded that there had been lawful termination by RBS on 31 October 2008 of the relationship between them and Highland constituted by a Mandate Letter (as amended on 25 March 2008) and the Interim Servicing Deed (“ISD”) between them dated 5 April 2007, such as to terminate the arrangements whereby Highland borrowed from RBS via a Special Purpose Vehicle or SPV (“the Issuer”) funds for the purpose of acquiring a portfolio or ‘Warehouse’ of Loans, with a view to issuing, to subscribing third parties, securities, for which those Loans would be collateral.
2.	Unfortunately the autumn 2008 financial crash ended any chance of public interest in such securities, and, after two extensions of the proposed closing date, and the provision of substantial collateral by Highland, RBS served notice pursuant to the Mandate Letter and the ISD, triggering the repayment provisions of the ISD. Thereafter RBS purported to operate those provisions so as to liquidate the existing loans, in part by selling them to third parties and in part by purchasing them themselves, and to set off against the outstanding balance of advances by RBS the sums credited in respect of such disposal, leaving a shortfall calculated by RBS as some €35m.
3.	There is no dispute about the outstanding balance of the advances. The dispute arises in respect of the sum which RBS has sought to credit against it.  RBS asserts that it has correctly operated the provisions of Clause 4.2 of the ISD (to which I shall turn) and is not in breach of any obligation. Highland claim that RBS has not correctly operated the terms of that Clause, and is in breach of its equitable obligations as mortgagee, which are implied into or inform its obligations under Clause 4.2, such that Highland deny that, on a proper accounting, had RBS not been in breach of its obligations, any sum would be or is due, or indeed assert that monies would be or are owed by RBS. Each side called two expert witnesses, one as to valuation and the workings of the syndicated loan market, Mr Michael Constant for Highland and Mr Simon Hood for RBS, and one in relation to accounting treatment, Mr David Lawler for the Defendant and Mr Peter Chidgey for RBS. RBS called one factual witness live, Mr Sam Griffiths, who was the RBS leveraged loan trader responsible for the Highland portfolio at the material time, and one whose statement was read, namely Mr Simon Lowe, the then Global Controller, Credit Markets, for RBS, responsible for relevant accounting treatment. Highland called no factual witnesses, and the examination has been simply of the conduct and performance of RBS. The trial lasted four full days (after reading time) between 14 and 17 September, and then a day’s oral submissions, after delivery of written arguments, on 6 October 2010, which was followed by further written submissions from the parties on 12 and 15 October. I have been greatly assisted by Mr Johnson and Ms Stares, of Herbert Smith, for RBS, and Mr Auld QC and Mr Strong for Highland.
4.	The only material clause of the amended Mandate Letter relied upon before me (by RBS) provides simply that “[RBS] agrees that, subject to obtaining its internal approval, the [Second and Third Defendants] will participate in the risk of the Warehouse Facility. If the transaction does not close, the economics will be 7.5% for the account of [the Third Defendant] and 92.5% for the account of [the Second Defendant].”  So far as that is concerned, there is no doubt that 100% of the loss (if any) resulting from the transaction is to be carried by Highland.  The issue is how that loss (if any) is calculated.  
5.	The crucial provision of the ISD, which took centre stage before me, is Clause 4.2, headed “No Closing Date”, i.e. it arose in the event that, as in fact occurred, the contractual arrangements between the parties came to an end without there having been a closing date when the securities were issued to the public (from which it was intended that RBS would have been repaid). In quoting such clause, I shall substitute “Highland” for the “Interim Servicer”, and “RBS” for the “Funding Note Holder”. The “Acquired Loans” referred to are, in the event, the 88 Loans which had been acquired by the Issuer with funds advanced by RBS, and which were now to be disposed of so as to fund and enable repayment to RBS upon the termination, there having been no Closing Date:
“4.2 If the Closing Date does not occur on or prior to the Termination Date the Acquired Loans shall be sold in accordance with the provisions set out below:
(a) [Highland] shall have the right to purchase all Acquired Loans from the Issuer at market prices as determined by readily available quotes from independent, internationally recognised broker/dealers on commercially reasonable terms so long as there is no loss to the Loan Portfolio or as otherwise agreed between the parties, provided that in respect of any Acquired Loans not sold or agreed to be sold by the Issuer to [Highland] within 3 Business Days of the Termination Date, [RBS] will have the option to direct the Issuer to sell one or more of the Acquired Loans remaining in the Portfolio in such manner as specified below and as [RBS] shall determine in a commercially reasonable manner, which (for the avoidance of doubt) may include a sale of any such Acquired Loans to [RBS] or (if [Highland] so agrees) [Highland] at a price equal to the sum of the market values for such Acquired Loans provided:
(i) if both [RBS] and [Highland] wish to purchase an Acquired Loan, then the party that makes the higher bid thereof shall purchase such Acquired Loan at such price;
(ii) if both [RBS] and [Highland] wish to purchase an Acquired Loan and both offer the same price thereof, then [Highland] shall purchase 100 per cent of such Acquired Loan at such price;
(iii) if neither [RBS] nor [Highland] wish to purchase an Acquired Loan, then such Acquired Loan will be sold in accordance with the procedures (i) mutually agreed between [RBS] and [Highland] within 5 Business Days, or else [(ii)] determined by [RBS] acting in a commercially reasonable manner.
… 
(c) if the actions specified in this clause 4.2 above are not completed to the commercially reasonable satisfaction of [RBS] within 30 calendar days after the Termination Date in the event of the occurrence of any event specified in paragraphs (b), (c) or (e) of the definition of Termination Date, an event of default shall be deemed to have occurred under the Variable Funding Note and [RBS] is hereby authorised to take whatever action it determines appropriate to sell each of the Acquired Loans still  held by the Issuer.”
6.	The following clarifications should be made at this stage:
i)	There is a definition of “Market Value” in Clause 1.1 of the ISD: as can be seen above, the words used in Clause 4.2(a) are “market values” (with no capital letters). The words “Market Value” are used in the ISD only in Clause 4.1, which relates to removal of Acquired Loans from the portfolio during the subsistence of the ISD. There is a dispute between the parties as to how far the definition of Market Value assists in the construction of “market values” in Clause 4.2.
ii)	The words “or else” in Clause 4.2(a)(iii) seem to me plainly (and the  contrary was not argued) to mean “or in the absence of such mutual agreement”.  
iii)	The provisions of Clause 4.2(c) only arise where termination was as a result of the occurrence of one of the events therein specified, and it is common ground that none of those apply, so that the 30-day period does not arise. There is again a dispute between the parties as to whether such 30-day provision has any relevance in relation to the events which happened.
iv)	It is common ground that RBS was in effect mortgagee of the Loans and in a position to procure them to be sold, so as to recover debts owed to it. There is no doubt that, unlike the normal position in equity of a mortgagee who would not be entitled to purchase the mortgaged property itself, Clause 4.2 expressly enables such to occur, in accordance with its terms, and, although there was some discussion early in the hearing, I am satisfied that the “avoidance of doubt” provision means that it may (notwithstanding) be commercially reasonable for the loans to be sold to RBS, not that such sale is automatically commercially reasonable.  Subject to that important difference, it is also common ground that (a) the equitable duties of a mortgagee arise and are in play (as so adjusted) (see e.g. Bishop v Bonham [1988] 1 WLR 742 at 753, Medforth v Blake [2000] Ch 86 at 102D) and (b) so far as establishing breach or no breach of such obligations is concerned, the onus in respect of those Loans which were sold to third parties is on Highland, and the onus in respect of those purchased by RBS itself is on RBS (see e.g. Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 P.C. at 1356B, Australia and New Zealand Banking Group Ltd v Bangadilly Pastoral Co Pcy Ltd (“Bangadilly”) [1978] 139 CLR 195 at 201-3), such burden thus falling heavily on the only live witness called, Mr Griffiths.
The Events Subsequent to 31 October
7.	The notice served by RBS dated 30 October 2008, terminating the Mandate Letter and the ISD as of 31 October, gave to Highland until close of business on 5 November to state which (if any) of the Loans were to be sold to them, no doubt by reference to the 3 Business Days, set out in Clause 4.2(a). As will be seen, in the event, of the 88 Loans, RBS itself purchased a total of 59, and 29 were sold to third parties. RBS did not take any step for the procedures to be mutually agreed in respect of such sale to third parties within 5 Business Days or at all in accordance with Clause 4.2(a)(iii) set out above. What occurred is that RBS devised what has been called a BWIC, which is the acronym for an informal quasi-auction known as “Bids Wanted In Competition”. Mr Griffiths gives this description in his witness statement:
“We decided to use a Bids Wanted In Competition (“BWIC”) process to liquidate the portfolio. This process, in broad terms, means that a list of loans is presented to the market and potential buyers are invited to submit bids for the individual names on the list. Bids are requested within a specific timeframe and the highest bidder purchases the specific loan or portfolio (subject, in this case, to RBS matching the highest bid and acquiring a Loan or Loans itself, as contemplated by Clause 4.2 of the ISD). 
24. … We had previously used a BWIC to sell a large amount of assets and, given the falling market, we decided that the best values would be obtained by going to the market quickly and with a BWIC open for a limited period of time.”
8.	On 5 November 2008, Mr Griffiths sent an internal memo to a number of his colleagues at RBS, which reads as follows:
“Here is our proposed liquidation procedure for the Highland warehouse assets. Comments/feedback welcome.
1.	RBS will obtain, where available, bid side quotes for the Highland assets from Mark-It, Reuters LPC, Merrill Lynch and Deutsche Bank for Nov 6th 2008 and record them in a spreadsheet.
2.	RBS will notify Highland of this procedure on the morning of Nov 6th, in order to give them a head start if they would like to bid for any assets in the liquidation procedure.
3.	On Nov 7th RBS will send out a list of all the assets in the portfolio to the market, requesting bids.
4.	Highland will be invited to bid for assets as part of the auction.
5.	RBS will also submit their bids in the auction.
6.	Auction deadline to be 2pm Nov 11th.”
9.	It is to be noted that, by paragraph 5, it was at that stage proposed that RBS would “submit their bids in the auction”. 
10.	By email of 6 November 2008, RBS, for the first time, notified Highland what it intended to do:
“We refer to the Interim Servicing Deed and our letter dated 30 October 2008 terminating the Interim Servicing Deed. As you have not informed us that you have purchased or agreed to purchase any of the Acquired Loans in accordance with the opening lines of clause 4.2(a) of the Interim Servicing Deed, we are writing to inform you of the process we intend to follow in accordance with the proviso in clause 4.2, which process we consider to be commercially reasonable. This is set out below.
1.	Today (6 November) we are seeking indicative prices or quotes for each Acquired Loan in the portfolio from Mark-it, Reuters LPC, and other third party market makers in order to gauge its market value.
2.	Tomorrow (7 November) we will send out a list of the Acquired Loans to market participants (including Highland) and seek firm bids in respect of each of them
3.	Bids must be submitted by 2pm on 11 November
4.	RBS shall also be entitled to bid
5.	Each Acquired Loan will be sold to the highest bidder
6.	If there is no bid for an Acquired Loan, RBS shall purchase it at fair market value which shall be determined by RBS using the indicative quotes/prices referred to in 1 above, but taking into consideration factors such as the liquidity of the loan in question and market conditions.”
11.	It is to be noted that the BWIC was to open the following day, Friday 7 November, and terminate at 2pm on Tuesday 11 November and that RBS is now simply to be “entitled to bid”, and that “each acquired loan will be sold to the highest bidder”, which at least would appear to imply that it would be sold to the party who places the highest bid in the BWIC, be it a third party or be it RBS itself, which will be entitled to bid. The reference to “seeking indicative prices or quotes from Mark-It, Reuters LPC and other third party market makers” is a reference to the obtaining of prices from what have been referred to as “Price Sources” or “Data Services” (including Mark-It and Reuters, but also, as in paragraph 8 above, Merrill Lynch and Deutsche Bank), which are described as using market information to provide the best estimate of quoted prices. In the event, Mr Griffiths explains in his statement (at paragraph 38) that they decided to include in the BWIC “an indicative mark for each loan based on Mark-It prices, one of the Price Sources.”
12.	Highland’s reaction, by email of 6 November 2008, was to “reiterate and emphasise our vigorous objection to RBS proceeding with its liquidation of the collateral as outlined in your correspondence. We consider not only … the process you outline to be unreasonable (commercially or otherwise), but the decision to liquidate at this time to be commercially unreasonable”. 
13.	RBS decided to include in the BWIC not only the 88 Highland Loans, but also some 40 loans from other sources. There was thus a total of some 120 loans included in the BWIC, which was notified, on RBS’s evidence, to at least 200 potential bidders. The published terms included the following:
“• Bids are requested on individual names for the entire position shown on the spreadsheet and/or for the entire portfolio. Bids need to be received by us by email by 2pm (GMT) on Tuesday 11 November 2008 and shall be irrevocable and binding on the bidders until 3.30pm (GMT) on that day.
• We reserve the right not to sell all or some of the positions according to bids received and/or to sell any individual positions in the secondary market at any time, although our current intention is to sell the majority of the portfolio by way of the BWIC.”
14.	The BWIC (known, by way of codename, as the “Shingle BWIC”) was thus open for a total of 4½ days, including a weekend, and a Tuesday which was Veterans Day in the United States, a public holiday. RBS has compiled a list of at least 117 clients with whom RBS sales people communicated about the BWIC. A number of transcripts has been disclosed and considered in evidence, of telephone conversations between some of those sales people and representatives of financial institutions.
15.	Notwithstanding enquiries by RBS to Highland by two emails dated 11 November, Highland did not bid. Nor did RBS. 
16.	The result of the BWIC was as follows:
i)	36 Loans (“the 36”) were bought by RBS by matching the price or, if more than one price, the higher or highest price, bid by third parties in the BWIC (that applies to 27 of them); as to the 9 where there were no bids in the BWIC, RBS calculated the price as set out in (iii) below. 
ii)	Mr Griffiths, in his statement prepared for this hearing (although not in any explanation given at the time) gave the following exposition as to why RBS decided to acquire those 36:
“52. One relevant consideration was whether RBS already owned part of the same Loan. If it did, there would be little additional work involved in monitoring the investment which made it a more attractive acquisition than a Loan which was unknown to RBS. By contrast, if RBS did not know the Loan, or already had sufficient concentration in that asset, a sale to the highest third party bidder might be preferable. Another factor taken into consideration was whether the relevant Loan qualified for particular accounting treatment under a global amendment published by the International Accounting Standards Board to International Accounting Standard 39 (“IAS39”). This amendment, which came into force on 13 October 2008, permitted banks to transfer, on a one-off basis, certain assets on their trading books to the banking books. The effect (in accounting terms) was that assets that were marked in the trading book on a mark to market basis could instead be accounted for on an accruals basis. Under IAS39, assets could be moved to the banking book at their 30 June 2008 mark to market value.”
He continued as follows:
“54. 	Post-acquisition by RBS:
54.1 	36 of the 59 Loans were transferred to RBS’ banking book under IAS39 and were therefore accounted for on an accruals basis. Some of these Loans may subsequently have been sold by RBS from its banking book but there are information barriers in place between RBS’ trading and banking divisions which mean that I cannot or cannot readily access information in connection with any such sales.”
iii)	Of the remaining 52, 29 were sold (via RBS) to the third party bidder, or the highest third party bidder. As to 23, no third party bids had been received when the BWIC closed, and RBS purchased those 23 themselves at prices calculated in the following way. In relation to 19 of the 23, there were quotes available from the Price Sources referred to above, and RBS took an “average bid side quote” of all those figures, as at 6 November 2008, and then applied what Mr Griffiths called a “Weighted Average Difference” (“WAD”). This, a figure which was subsequently recalculated as 3.45%, was arrived at (he explains in paragraph 48.2 of his statement) by taking Loans where firm bids had been received in the BWIC, and then comparing those bids with the average prices obtained for the same Loans from the Pricing Sources, which produced an average percentage reduction, which was then applied to these 19 Loans for which there had been no firm bids. Mr Auld has taken no specific objection to this method of calculation. As for the four Loans for which there had not been any bids in the BWIC, and for which there were no quoted prices supplied by any of the Pricing Sources, RBS arrived at a purchase price for those four Loans by applying the WAD to the price which RBS had itself kept in its books by way of what is called the “RBS mark”, as of 15 October 2008: Mr Griffiths explains that, by virtue of the need to watch the value of the collateral consisting of the Highland Loans, he had himself, every few weeks, been responsible for marking each of the Highland Loans to market in the RBS books, and the last such mark was on 15 October 2008. 
17.	RBS has consequently totalled, as being the proceeds of the 88 loans, the prices for the 36, calculated as above, plus the proceeds of the 29 Loans which were sold to third parties, plus the sums in respect of the 23 which neither they nor any third parties wished to purchase (by applying the WAD to the average bidside quote from the Pricing Sources, where there were such, and to the RBS mark of 15 October 2008, where there were not).  After subtracting that sum from the uncontroversial figure owed in respect of RBS’ advances plus interest and fees, there is a shortfall of some €35m, which is what RBS claims. In making its claim for that sum in March 2009, RBS asserted on 26 March that it had “followed the process set out in [its] email of 6 November [referred to in paragraph 10 above]” and gave the account - though without any distinction between the 36 and the 52 and without reference to any such explanation as was eventually given by Mr Griffiths (to which I shall return) - set out in paragraph 16(i) and (iii) above.  More information was sought by Highland by email of 30 March 2009, but none was given.
18.	Proceedings were commenced by RBS for the full amount of the shortfall as calculated by RBS on 11 May 2009; and summary judgment for liability was obtained by RBS, as described in paragraph 1 above, after a contested hearing before me on 21 and 22 January 2010. It was only after that that, on the basis of disclosure by RBS, Highland was able to put forward, in their Particulars of Defendants’ Case Regarding Quantum on 4 June 2010, the case which has formed the basis of issues upon which the experts on each side have opined, and which I now have to resolve, but even that was still on the understanding by Highland, perpetuated right up to the hearing by Mr Griffiths’ statement (cited above) that the 36 loans were transferred to RBS’ banking books after the BWIC .
What is now known to have occurred
19.	What was described by Mr Griffiths in paragraph 52 of his witness statement (set out in paragraph 16 (ii) above) as “another factor taken into consideration” was in fact central to the course of action taken by RBS, both in relation to its determination of the CDO and the steps it took in relation to liquidation of the Loans. The true position was not revealed at the time by RBS, and has only become clear during the course of this hearing.
20.	IAS/39, or more particularly the “global amendment” to it referred to by Mr Griffiths, was an answer to the real and pressing financial and accounting problems caused by the crash of autumn 2008. RBS, like other banks, took advantage of it, as they were entitled to do, immediately after its publication on 13 October 2008. On that same day, as may or may not have been coincidental, RBS received an effective injection from HM Treasury, by way of underwriting of new shares and subscription for preference shares, of £20 billion. This rendered it even more significant for RBS to be able to take advantage of the new provisions of IAS/39, which required very speedy action indeed, as the necessary steps had to be taken, in order for benefit to accrue, by 31 October 2008, i.e. 18 days later. What was permitted by IAS/39 was for assets, such as loans, held by banks like RBS on their trading book, to be reclassified, on a one-off basis, as long term investments and transferred to their banking book, provided that they were to be held long term (i.e. in the case of loans until maturity or at least for 12 months). The enormous benefit  of this was that, instead of having to write down the value of such loans on their books, as RBS had already been doing, to take in the substantial diminution of value of such assets as a result of the crash, they would be entitled to value the asset at a date which could be adopted retrospectively by the bank but could not be earlier than 30 June/1July 2008, thus reconstituting the value that the asset had had as at the chosen date, retrospectively, by valuing the assets as at that date. This would have the effect of enabling the bank to write back the losses for which it would otherwise have had to account.  
21.	Mr Lawler (in paragraph 71 of his report) said that “the accounting treatment adopted by RBS means that it increased the value of the recategorised loans on its balance sheet back to their 30 June 2008 values, and it follows … that the increase between the [decreased] carrying value at November and at June will have been booked as profit”. This new value credited in the RBS books would then be subject to amortisation, but would not (unless the loans became positively impaired) require regular reduction in its books by reference to its falling value, as it would have done if the loans had remained on trading account.  
22.	An exercise was immediately carried out by RBS, to see which loans could be so recategorised and transferred, by a team which included Mr Griffiths, on strict instructions from on high (a Mr Hourican) both to comply with the time limit and also to achieve as great a recoupment of losses, and hence increase in profits, as could be arrived at. Included in the loans so considered, indeed constituting a very significant part of them, were the Highland Loans, which had been properly carried on RBS’ books, even though strictly not owned by them, because of their collateralised status under the CDO.  
23.	This exercise became, for obvious reasons, a manifest priority for RBS and Mr Griffiths, and, given that a decision had to be made as to which, if any, loans were to be capable of such classification as being investments held long term by RBS, not only did the Highland Loans have to be considered for that purpose, but it was plain that the only way in which RBS could conclude that any of the Highland loans were to be held long term would be if the CDO were terminated. Hence (although this was not revealed at the time of the summary judgment application) the motivation for the termination, albeit termination which was in the event a lawful one, was that the CDO had to be terminated by 31 October, because otherwise if the loans remained under the control of the Issuer and in accordance with the CDO, RBS could not confirm that they would be held long term. Hence, notwithstanding that Highland had been led to believe that the CDO would be continued at least until January 2009, simultaneously with the accounting exercise preparation had to be and was made for the service of the notice to terminate, to which I refer in paragraph 7 above.
24.	By an email from Mr Lowe to a large number of colleagues in RBS of 15 October, he laid down the ground rules for which loans should be selected for reclassification, making it clear that “once reclassified out of the fair value category an asset may not be reclassified back in. In other words this is a one-way action”. He made it plain that “in practice assets should only be reclassified if 
•	there is no intention to sell or dispose of the assets in the foreseeable future
•	there is no intention to ever reclassify these assets back as this is specifically prohibited …
•	[they] are not impaired or a poor credit risk”
25.	On 22 October a Mr Berry from RBS Global Banking and Markets circulated an email confirming that:
“(1) this is a top down process i.e. it has been mandated by John Hourican, thus it is not a case of shall we do this but how we will do this (2) he recognises that there is no way we can undergo our normalised approval process for the names in the time allotted, so therefore looks to us to devise a fast-track approach … The main driver here is clear, that an opportunity arises for assets to be transferred from trading book to banking book with valuation as at end June. This has several attractions for the business, primary one being that the anticipated transfer value will allow the business to write back some profits, given that most assets have reduced in value since end June.”
26.	The loans that were examined were categorised, and the two classes which were concluded to be appropriate for such reclassification were Category A, where the loans were “bullet proof, money good at par” or Category B “money good at the transfer price [i.e. value as at 30 June]”. The 36 Loans were those selected by Mr Griffiths and his team from amongst the Highland Loans as fitting that description, most of them indeed being Category A.  
27.	By 31 October, a Mr Fulford of RBS was sending to (among others) Mr Lowe the “Final spreadsheets … evidencing assets being transferred to Loans and Receivables as of 31 October 2008”. The aim was what was called a “P & l Reversal”, and, as the calculations continued, the gain, or rather avoidance of loss, in RBS’ accounts as a result of the exercise was referred to as a “windfall”. The “Highland Sum of Windfall” was calculated first as at 21 October as £28,513,074.67: this, it seems, was arrived at by calculating how much the values would otherwise have fallen as between the June 30 and October 15 marks. In an email from a Mr Gulliver of RBS dated 24 October, the “windfall gain” was described as by reference to 46% of the Highland Warehouse.  
28.	By 4 November, four days after the precise loans transferred from trading books to banking books had had to be identified in order to capture the benefit of IAS/39, an email was sent by a Ms Sue Barnett to (among others) Mr Griffiths saying “we also need a decision as to whether to put the … sales to the banking book through our database at the current mark or the June 30th price. … It isn’t totally irreversible, we can amend the sale price later if necessary so what’s the consensus “best” way …?”  
29.	None of this was explained or deposed to by Mr Griffiths, as is apparent from his witness statement quoted above. The impact was just as Mr Hourican would have wished, namely (as set out in the published Circular supporting the placement of new shares in RBS in November 2008) that “as a result of the reclassification, total income for the three months to 30 September 2008 was £1,442 million higher”; and in the Annual Accounts for the year ending 31 December 2008 there was, by virtue of reclassification of the leveraged finance, an increase in the profit and loss account of some £1.7 billion.  
30.	The following is thus entirely clear:
i)	By 31 October 2008, i.e. 7 days prior to the opening of the BWIC, it had already been decided, and indeed by reference to a transfer from trading book to banking book put into effect, that the 36 Loans would be retained by RBS in order to take advantage of IAS/39.  They plainly had to be held on a long term basis, i.e. such that there was “no intention to sell or dispose of the assets in the foreseeable future” (see Mr Lowe’s email of 15 October cited in paragraph 24 above) and thus there was no question whatever of their being sold to third parties, whether in or as a result of the BWIC or at all.
ii)	Insofar as the 36 Loans were among the 88 Highland Loans included in the BWIC, that rendered the BWIC a sham exercise, at least so far as the 36 Loans were concerned. Mr Griffiths was driven to concede in the witness box that, so far as the 36 was concerned, it was only a “pricing exercise”. There was no question of RBS bidding for them, because they had already transferred them to their banking books, nor any question of their allowing them to be sold to a third party – contrary to the impression given in his witness statement (paragraph 7 above).
iii)	This caused real problems for RBS’s salesmen, who were tasked with operating the BWIC, and communicating with the 117 or so institutional clients of RBS. Mr Griffiths’ evidence was that the salesmen were not told which of the loans ostensibly in the BWIC were for sale, so that they did not know of the 36, or which they were. This inevitably led to deception and difficulty. One relevant email communication has been disclosed. It shows a Mr Owens of RBS, asking Mr Griffiths, by email of 11 November, whether a bid by Nomura was successful.  Mr Griffiths’ response was “Unlikely that it will be – this is one of the assets that have already gone …”. When Mr Owens responded “Ok – give me that kind of feedback and I’ll go back to her [at Nomura] with the reasons and where the [market] is”, Mr Griffiths replied “You cannot say the asset has already gone, but you can say we also have an 80 bid”. Mr Griffiths accepted in evidence that this was untrue. The Loan in question (Autobar Term D) had not “already gone”, save to the extent that it was one of the 36 which were never for sale; and there had not been a bid of 80. Mr Griffiths accepted in evidence that similar examples must have happened on other occasions, and in the transcript conversations, to which I referred in paragraph 14 above, there are examples of misleading statements to similar effect, by Mr Watkins and on two occasions Mr Woods, of the RBS sales force. Mr Griffiths was driven to say in evidence that it was:
“possible that we had worked out a story that there was … an initial interest from a buyer who was unnamed … a story to use in this eventuality, i.e. if an account wanted an asset that was one of the 36, then that asset – one could say, well there is already a buyer who has expressed an interest in that asset i.e. it’s already gone.”
Mr Griffiths accepted that these lies, which he was knowingly putting out, and which he was causing his sales force perhaps unknowingly to put forward, did not constitute a sales process which is commercially reasonable. 
iv)	It is important to note what RBS had said in the emails of 5 and 6 November 2008, set out in paragraphs 8 and 10 above. So far as the former is concerned, both paragraphs 2 and 4 of the email mask the sham and/or misleading process, insofar as it is suggested that Highland would be in a position to bid for the 36 Loans; while it was quite apparent that RBS, contrary to paragraph 5, was not going to submit any bids in the auction, certainly not for the 36, which they had already pre-allocated, and indeed not for any others, as RBS had carried out its exercise and decided that it did not wish to acquire any other Loans than the 36. So far as the latter email is concerned, which was what RBS was putting forward to Highland as an express indication of what it intended to do, the statement that RBS would be “entitled to bid” was somewhat disingenuous, on the basis that RBS knew that it would not be doing so, but in particular it was entirely incorrect to state that “each Acquired Loan will be sold to the highest bidder”. The 36 were certainly not going to be sold to the highest bidder. The statement in RBS’s later 26 March 2009 email (quoted in paragraph 17 above) was incorrect.
v)	Quite apart from the failure to disclose the true position at any time in relevant correspondence, whether by RBS or by solicitors on their behalf, at any time prior to start of this hearing, there is the significant factor of the witness statement of Mr Griffiths, set out in material part in paragraph 16(ii) above, which was not only served and relied upon prior to the hearing, but which was affirmed by him on oath as correct, when Mr Griffiths went into the witness box.  I have already referred to the disingenuous nature of his paragraph 52 in paragraph 19 above.  But his paragraph 54 is plainly wholly incorrect, if and insofar as, as was plainly its intention, it was stating that the 36 loans were transferred after the BWIC. This is plainly what “post–acquisition by RBS” was intended to mean. He is referring to the transfers to banking book, which are now known to have occurred prior to 31 October, as having been after the BWIC in November: RBS’s case (addressed below), on ‘acquisition’ is and always has been that the sales/ acquisitions by RBS of the 36 (and of the 52) all took place after the BWIC, i.e., in relation to the 36, when the prices were calculated, as appears in paragraph 16(i) above. His statement was therefore untrue. For good measure I should add that I do not accept, at all, the statement which Mr Griffiths made in evidence, after the true position was revealed, in a somewhat half hearted way, when he suggested that if there had been a particularly good bid in the BWIC, some of the 36 Loans might, after all, not have been transferred or might have been transferred back. This would have been wholly inconsistent with the IAS/39 exercise which I have described, and the windfall gain which had already been accrued, and in any event would have been well nigh pointless, so far as RBS is concerned, as it would have lost them that very substantial windfall gain, in return only for increasing the return to Highland (with possible eventual impact on the amount of Highland’s debt).  
vi)	But there is another paragraph of Mr Griffiths’ statement upon which the revelation of the true position has considerable impact. In paragraph 22 he said as follows:
“In devising the liquidation process we had two basic objectives. First, the basic commercial objective for the bank was to generate as high a market price as was reasonably possible for the Loans. The lower the prices obtained on liquidation, the greater the uncollateralised shortfall RBS would have to recover from Highland and therefore the bigger the bank’s credit risk. The second was to make the process transparent so that we could demonstrate that the liquidation was a fair and reasonable way of obtaining market prices for the Loans.”
It is quite clear that in fact so far as the 36 is concerned the commercial objective for the bank was to secure the 36 Loans for themselves, and simply use the BWIC, as Mr Griffiths has now accepted, as a “price-fixing exercise”. As for the suggestion that the process of liquidation was to be transparent, if this was ever in the mind of RBS, it was soon discarded and, in any event, was not complied with.
vii)	The reality, therefore, was that the 36 Loans were and were to be purchased by RBS. On the face of it, clause 4.2(a) entitles RBS to direct the Issuer to sell them to RBS in such manner as RBS shall determine in a commercially reasonable manner, at a price equal to the sum of the market value of such Loans. As for the 52 which RBS decided it did not wish to purchase, then pursuant to clause 4.2(a)(iii) such Loans were to be sold in accordance with the procedures mutually agreed between RBS and Highland, within 5 Business Days or else determined by RBS acting in a commercially reasonable manner. RBS did not seek to mutually agree such procedure. They did not propose for agreement that 88 Loans should be included in a BWIC, of which 36 were not intended to be sold (with the inevitable consequences referred to in paragraph 30(ii) to (iv) above), nor that the remaining 52 would be included in such BWIC, or in a BWIC of the duration referred to in paragraph 14 above, and including the indicative marks drawn from Mark-It. 
The contractual impact
31.	Although at no time prior to the hearing was any analysis of events possible by reference to clause 4.2 by Highland, nor in any event carried out by RBS, because of its failure to disclose the true position, it became apparent on the first day of the hearing that the treatment by RBS of the 88 Loans would need to be justified by reference to two different aspects of clause 4.2.  
32.	The 36 would have to be justified by reference to clause 4.2(a) itself, without recourse to its subparagraphs, colloquially called in the course of the hearing 4.2(a)(0) - given that what occurred in relation to the 36 did not fall within any of those subparagraphs. It was not a case in which both RBS and Highland wished to purchase an acquired loan ((i) and (ii)) nor a case in which neither RBS nor Highland wished to purchase the loans ((iii)). In relation to the 36, RBS is on the face of it permitted to sell (or direct the Issuer to sell) direct to itself, provided that (i) the manner in doing so is determined in a commercially reasonable manner and (ii) the price is at market value and that (iii), as is common ground (see paragraph 6(iv) above), RBS complied with its equitable duties as a mortgagee upon sale of such collateral, as enlarged by the right to sell to itself given by clause 4.2(a)(0), the onus being on RBS to establish that there was no breach of such duties.  
33.	So far as concerned the sale of the 52, which, given that neither RBS nor Highland wished to buy, were to be offered to third parties (although in the event RBS took those that had not been bid for in the BWIC), there are similarly equitable duties quae mortgagee on RBS (but in this case RBS does not bear the onus), the procedures must be mutually agreed and if not mutually agreed then must be determined by RBS in a commercially reasonable manner.  
34.	In the circumstances of non-disclosure, given that there were 88 Loans to be disposed of as of 30 October when the notice of termination was given (and the 3 Business Days for Highland to take them up pursuant to clause 4.2(a) started to run), there was not any such different treatment expressed or explained. Even without an immediate declaration by RBS, which there was not, that it intended to retain the 36 (which might well have led to a counter-bid by Highland in accordance with 4.2(a)(i) and (ii)), then in any event mutual agreement ought to have been sought in relation to the procedure for the whole 88. It was not. In the absence of such prior attempt at mutual agreement, the BWIC was launched for all 88, which was bound to involve the sham pricing exercise and the uncommercially reasonable procedure referred to in paragraph 30 (iii) and (iv) above.
35.	Consideration was given in the course of the hearing to the provision in clause 4.2(a) that RBS will have the option to direct the Issuer to sell the Loans. This caused me some concern, because, on the face of it, it is not what happened when RBS decided which Loans it should keep and which it should sell and how. But in reality the Issuer was, being an SPV, a nominee company, and it could not have been the expectation of either party that it would be in a position to market the Loans or take any active steps in relation to their sale: hence my initial reaction that it would have been for the Issuer to hold some kind of auction, in which RBS could be expected to bid, was an unrealistic construction. I am satisfied that in reality what occurred is that it was indeed RBS which directed the Issuer to sell the Loans in the various ways spelt out in paragraph 16 above, not least because RBS held a power of attorney to act on behalf of the Issuer.
36.	Such consideration is a suitable stepping off point for addressing an issue which was also examined at an early stage in the hearing, namely as to whether the right course would have been for RBS to have bid in some kind of auction, whether it be the BWIC or not. After all, it is what Mr Griffiths’ initial email said (at paragraph 5) that RBS would do (paragraph 8 above), albeit then palliated it to their being entitled to bid, in the email sent to Highland on 6 November. Neither Mr Griffiths nor (there being none) any other witness for RBS has given any evidence as to what lay behind, or occurred during, the IAS/39 exercise, the determination of the CDO and the choice and implementation of the BWIC. Although there therefore is not any such evidence, it is possible that what lay behind the pricing exercise contained in the BWIC, was some reflection of clause 1.1 of the ISD, to which I have referred in paragraph 6(i) above. As I have there set out, there is a definition of Market Value, which is expressly made relevant for the different exercise in clause 4.1 of the ISD there referred to. This definition reads as follows:
““Market Value” means, with respect to any Acquired Loan, an amount equal to the highest of at least one bid … from counterparties in the relevant market for firm commitments to purchase such Acquired Loan … minus all direct costs, fees and expenses.”
37.	As I have said, there is no evidence that this was in RBS’ mind, and, although I agree with Mr Auld QC that the incorporation of this definition into clause 4.1 cannot dictate the meaning of clause 4.2, nevertheless, all other things being equal (commercially reasonable manner, compliance with equitable duties etc), such clause might give relevant background. However, what is utterly clear is that there could not have been an auction of that kind on this occasion in which RBS could have bid:
i)	As discussed in paragraph 30(i) above, they could not have permitted anyone else to buy, and had already decided to buy themselves, the 36 Loans. There is no room for the hypothetical auction, with the special purchaser willing to beat any other bid, such as was postulated by Peter Gibson LJ in Greenbank v Pickles [2001] 1 EGLR 1, but whose relevance was doubted by Lord Romer in Raja Vyricherla Narayana Gajapatiraju v Revenue Divisional Officer [1939] AC 302 P.C.
ii)	In a telling admission of conflict of interest, to which I shall return, Mr Griffiths stated in evidence that in such a situation “RBS would inherently at that point have been conflicted … because if I was bidding I would have not had any of the information about what the best bid was”. 
Such an artificial auction with RBS bidding is and was thus not an option. 
38.	Before considering and analysing further the impact of the contractual and equitable obligations on the parties, I should set out the simple propositions which were effectively articulated by Mr Johnson on behalf of RBS as his starting and, indeed, finishing points:
i)	If RBS pay market value, they get the assets.
ii)	By reference to the amended Mandate Letter, set out in paragraph 4 above, it is clear that RBS carries none of the risks arising out of the success or failure of the CDO. So far as liquidation is concerned, Mr Johnson began by asserting that RBS was entitled to the immediately realisable values of the loans, but he was, after argument, prepared, and rightly, to amend such proposition, not least in the light of the equitable obligations admittedly owed, to entitlement to the value of the loans realisable straightaway but within a reasonable time. That meant that if, after buying in the Loans at market value at say a mark of 70, by dint of holding them until maturity in say 3 years time, and in the event, say, of the economy recovering, RBS managed to recover 100% of the loan, paid out at par, then RBS would not be obliged to give any credit for such subsequently acquired profit: just as if the value fell, whether by virtue of the economy deteriorating still further or by dint of the particular financial circumstances of a borrower, such that the value of the loan was entirely lost, RBS would not be able to recover such loss.
39.	The issue was plainly how far such simple propositions are able to get Mr Johnson and RBS home in this case. But Mr Auld QC submitted that the purpose of clause 4.2 is to enable fair disposal, and not to achieve a windfall gain for RBS.  Mr Constant, in his expert’s report, described the position, as he saw it, thus (at paragraph 70):
“In my view, RBS appears to have taken advantage of this accounting treatment to generate a significant windfall profit at the expense of Highland by soliciting ‘market’ ‘prices’ and then buying the loans from Highland at these low prices while simultaneously planning to sell the loans internally to their banking book at a much high price.”
Equitable obligations
40.	I turn to the question of equitable obligations. So far as concerns the ascertainment of the price for the sale of the 52 Loans out of the 88 which RBS had not concluded it would retain as a result of the IAS/39 exercise, there is no difference between the parties as to the obligations: obligation to take reasonable (and reasonably expeditious) steps to ascertain and obtain the market price: no obligation to delay a sale until a more opportune moment. It is really all said in the authorities to which brief reference was made in paragraph 6(iv)(a) above and in McHugh v Union Bank of Canada [1913] AC 299 PC at 311 per Lord Moulton: “It is well settled law that it is the duty of a mortgagee when realising the mortgaged property by sale to behave in conducting such realisation as a reasonable man would behave in a realisation of his own property, so that the mortgagor may receive credit for the fair value of the property sold”: and in Cuckmere Brick Co. Ltd v Mutual Finance Ltd [1971] 1 Ch 949 per Salmon LJ especially at 966C “In addition to the duty of acting in good faith, the mortgagee is under a duty to take reasonable care to obtain whatever is the true market value of the mortgaged property at the moment he chooses to sell it.”    
41.	As for the 36, that is a different matter, in that there was a sale by the mortgagee to itself, not permitted to a mortgagee ordinarily, but provided for, in accordance with its terms, by this contract. The fact here is that when RBS exercised its power (i) it knew that it had already decided to take for itself the 36 in any event – IAS/39 would not permit a disposal by RBS (ii) the price at which it had transferred the Loans on its own book was by reference to the RBS internal mark, arrived at in accordance with its regular valuation of the Loans as at 30 June 2008, since which time the most recent such mark (as at 15 October 2008), had substantially fallen, and the Mark-It prices ascribed to the loans in the BWIC as their “indicative prices” had fallen still further.
42.	There was considerable discussion in the course of the hearing as to whether RBS should be treated as a special purchaser, and so the special purchaser cases were considered. Many of these cases were taxation cases, in which inevitably the question is much more hypothetical and speculative, being of a ‘what if’ variety. In particular in such cases, it will be important whether the alleged special purchaser was a party of whom potential purchasers of an asset were unaware. In IRC v Clay [1914] 3KB 466, at 475 Swinfen Eady LJ concluded that “a value, ascertained by reference to the amount obtainable in an open market, shews an intention to include every possible purchaser”, so that the probability of a special buyer purchasing, above the price which but for his needs would have been the market price, fell to be taken into consideration (see 476). In IRC v Crossman [1937] AC 26 HL, there were unfortunately different views expressed by their Lordships, even leaving aside the fact that the case was resolved by a majority of three (Viscount Hailsham LC, Lord Blanesburgh and Lord Roche) to two (Lord Russell and Lord Macmillan). Viscount Hailsham (at 44) drew the conclusion from the judgment of the judge below that “the extra sum which could be obtained from Trust Companies was not an element of the value in the open market, but rather a particular price beyond the ordinary market price which a Trust Company would give for special reasons of its own”. Lord Roche (at 75) agreed with Viscount Hailsham. But he also agreed with Lord Russell, who at 69, like Lord Blanesburgh at 62, appears to have concluded that “any possible bid for the shares by a Trust Company was allowed for” by the judge below, and he had thus excluded no one from the open market; and Lord Macmillan agreed with Lord Russell. Lord Reid in Lynall v IRC [1972] AC 680 concentrated on the facts that were known to or could be obtained by a seller (694-5). Peter Gibson LJ in Walton’s Executors v IRC [1996] 21 EG 144 at 161 indicated, in considering the concept of the open market, that each of the seller and the buyer “will have prepared himself for the sale, the seller by bringing the sale to the attention of all likely purchasers, and honestly giving as much information to them as he was entitled to give (Lynall v IRC … at 694 per Lord Reid) and the buyer by informing himself as much as he can properly do … Because the market is the open market, the whole world is to be assumed to be free to bid. But the valuer will enquire into what sort of person will be in the market for the property in question and what price the possible purchaser would be likely to pay”.  
43.	The really significant factors appear to me to be the following:
i)	There is no dispute that the mortgagee owes a duty of good faith: see not only Cuckmere Brick (above) but also Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295 P.C. at 312F-G per Lord Templeman and Palk v Mortgage Services Funding Plc [1993] Ch 330 per Nicholls V–C at 337:
“In the exercise of his rights over his security the mortgagee must act fairly towards the mortgagor. His interest in the property has priority over the interest of the mortgagor, and he is entitled to proceed on that footing. He can protect his own interest, but he is not entitled to conduct himself in a way which unfairly prejudices the mortgagor.”
ii)	Perhaps the most significant warning light for a mortgagee, albeit one who is entitled, in this case, to sell to itself, is the cautionary account of Jacobs J in Bangadilly, a case where the mortgagee sold to an associated company, at 201-2:
“It is true that bona fides in this connexion is not concerned with the motive for exercising power of sale but, once the decision to sell has been made, it is concerned with a genuine primary desire to obtain for the mortgaged property the best price obtainable consistently with the right of a mortgagee to realise his security … When there is a possible conflict between that desire and a desire that an associate should obtain the best possible bargain, the facts must show that the desire to obtain the best price was given absolute preference over any desire that an associate should obtain a good bargain … The closer the association, the greater the conflicts and the greater the possibility of unconscious preference.”
iii)	In this case, RBS had knowledge and intention, which it did not disclose to the mortgagor, when it carried out, as it happens without any consultation with that mortgagor notwithstanding its contractual obligation, the BWIC exercise which this court is now considering.
RBS obligations
44.	In those circumstances, the significant obligations on RBS, when setting out to take reasonable steps to obtain the market price for the Loans, fall to be considered differently as between the 36, which they were committed to purchase themselves, and the 52, which they had not decided to buy and were setting out to sell to third parties (though they subsequently purchased 23 of them themselves, when there were no bids for them in the BWIC).  It is plain that, in respect of the 36, where they were exercising, unusually for a mortgagee, their right to sell to themselves, they inevitably had to act the more carefully. 
The 36
45.	They chose 36 out of the 88 to retain, and had done so before setting out the “proposed liquidation procedure” on 5 November. They were obliged to seek from Highland mutual agreement with regard to the 52. In my judgment it is plain that no genuine mutual agreement could be obtained if the true position were concealed from Highland. That required disclosure to Highland in order for them to be in a position to agree the procedure which was actually being carried out, namely (as now known) a BWIC (leaving aside the other factors of timing etc, to which I shall return when I deal with the 52) which would on the face of it consist of 88 Loans, but would in fact be a sale exercise in relation to only 52, while in regard to 36 it was to be a price fixing exercise, relating to assets not for sale. Unless this picture were given, indeed if agreement were sought on the basis of a BWIC for all 88 assets without disclosing it, any mutual agreement which had been obtained would have been obtained on a misleading basis.
46.	Such duty to disclose, the equitable obligations of RBS as mortgagee seller and the duty to determine the manner of sale in a commercially reasonable manner (which applied both as to sales to itself (clause 4.2(a)(o) and sales to third parties (clause 4.2(a)(iii))) combine to lead to the following consequences and conclusions:
i)	In arriving at the market values of the 36, RBS alone, as sellers, had knowledge of a special purchaser - themselves. It is not a question of the majority view – if it was the majority - in Crossman (discussed in paragraph 42 above) as to whether the market value of an asset should be appreciated by reason of the special value of that asset to certain third parties (the Trust Companies), nor is it a question of what could or should have been discovered about possible purchasers in the market. This was information, namely information that RBS itself had already decided to acquire the 36 Loans, which was within the knowledge of the very mortgagee seller itself. RBS would thus not need to make the enquiries referred to by Peter Gibson LJ in Walton: it knew the answers already.
ii)	Even after the expiry of the 3 Business Days during which Highland had (and did not take up) the opportunity to purchase all the Acquired Loans, Highland had the opportunity to buy any Loans, though one that carried with it what I shall call the ‘competitive provisions’ of clause 4.2(a)(i) and (ii). RBS denied this opportunity to Highland, by keeping quiet about the 36, and failing to attempt mutual agreement.
iii)	In any event, irrespective of this opportunity, the failure to afford the opportunity to Highland of such mutual agreement was, I am satisfied, deliberate (Mr Griffiths gave no explanation) because RBS recognised, as was the case, that unless they told Highland about the 36 and that the BWIC was to be only a price fixing exercise for them, Highland would not have been giving mutual agreement as to what was actually to happen. 
iv)	As a result of the failure to disclose that the 36 were preordained, the procedure for the 88, without even the semblance of mutual agreement, was bound to be not commercially reasonable. In respect of 36 of them, the BWIC was a ‘sham’. Lies had to be told, and there could be no possibility of high pressure salesmanship to force up the prices by the RBS sales force, because there would be a real risk of losing or offending clients and contacts, if, after such an exercise in respect of the 36, they were not in the event going to be sold: and given that (on the evidence of Mr Griffiths) the sales force did not know which of the 88 were ‘not for sale’, then that would in the event inhibit high pressure salesmanship in respect of any of the 88.
v)	Irrespective of whether the sales force knew which Loans were and which were not for sale, the bifurcated exercise of simply price fixing for the 36 (which were to be purchased by RBS, in whose interest clearly a lower price would be advantageous) and doing an actual sale exercise with regard to the 52, particularly if it was indeed coupled, as Mr Griffiths “postulated”, with a false backup story fed to the sales force (as set out in paragraph 30(iii) above), was bound to involve a serious conflict of interest. This was in part acknowledged by Mr Griffiths (though he did not appreciate the full consequence of his acknowledgment) in his evidence, set out in paragraph 37(ii) above.  But it is further established:
a)	by the very description of the bifurcated exercise by Mr Griffiths, in response to a question by Mr Johnson in re-examination:
“Q:  Highland in these proceedings seem to criticise you for using the BWIC as a pricing exercise, and at the same time criticise you for telling market participants it was not. What’s your reaction to that?
A:  Um – it’s a bit of damned if you do, damned if you don’t scenario. It was our opinion that this needed to be – look like a real BWIC in order to gain the best price achievable and a market price.  
A “damned if you do, damned if you don’t scenario” is perhaps the archetypal indication of a conflict.
b)	by the inevitability of the lies told during the course of the BWIC (referred to in paragraph 30(iii) above).
c)	by the havering as to whether RBS were to bid in the BWIC or not (see paragraph 30(iv) above).
d)	above all by the continuing deception. The best evidence that RBS knew that they should have disclosed (and that they could not have done so) is the deception of Highland, which continued in correspondence, and indeed right through to the incorrect or disingenuous witness statement of Mr Griffiths, which he affirmed on oath in the witness box (see paragraphs 19, 30(ii), 30(v) and 30(vi) above). This is not simply a breach of contractual obligations, whether (express) in relation to commercially reasonable manner or (implied) failing to make material disclosure to enable a mutual agreement, or to take reasonable steps to ascertain or obtain market value, but constitutes, in my judgment, a breach of the equitable obligation of good faith admittedly owed by RBS, as mortgagee exercising the power of sale.
The breach of duty can be well illustrated by the very obligations of reasonableness and transparency which Mr Griffiths perversely insisted to be his objective (paragraph 30(vi) above). 
47.	Highland make a number of other criticisms in relation to the BWIC, to which I shall refer below. But, irrespective of them, I am satisfied that the implementation of the sham BWIC, the lack of mutual agreement as to the BWIC, the lack of commercially reasonable manner in relation to its processes, renders this BWIC wholly unsustainable as a method of arriving at the sale prices, the market values, of the 36 Loans. RBS was in breach of its contractual obligations and has not satisfied the onus of complying with its equitable obligations: the simple propositions of Mr Johnson set out in paragraph 37 above do not apply in those circumstances.  
48.	I must, therefore, ask myself what the consequence is of that conclusion.   
Sale on 31 October?
49.	Highland’s case is that the 36 Loans were ‘sold’ by the Issuer to RBS at the time when they were transferred from trading book to bank book, at the IAS/39 valuation. If that is right then the prices for which RBS must account to Highland are those values. Mr Constant said as follows:
“72.  What is more, as a banker, I would regard the transfer of loans from RBS’ trading book to its banking book as a sale.  Of course, I recognise that that transfer did not involve the sale from one entity to another (although the loans had originally been legally owned by the Issuer and became the property of RBS). But the Portfolio group of RBS (which ran the banking book) was a separate department to the group which booked the loans when they were required by the Issuer. … in my experience, when one department in a bank transfers an asset to another department the individuals involved treat the transfer very much in the same way as a sale to a third party because the transfer affects the results of their part of the business.”
50.	Mr Lawler said in evidence:
“What I am saying [is that] on the transfer – either on the transfer of the loan to the banking book or the sale from the trading book to the banking book, the double entry would effectively be the same.  If the transfer is made at an increased value, the trading book would have a profit.  The difference between the carrying value and the trading book and the transfer value would be booked as a profit.  So the double entry is exactly the same whether it’s a transfer or a purchase in the market.”
51.	As referred to in paragraph 28 above, Ms Barnett of RBS in an internal email referred to putting “the sales to the banking book”.   
52.	But was there a sale? RBS submit that the sales of the Loans took place after the BWIC, when they activated the power of attorney, and when all the Loans were sold, both those sold to third parties and those (the 36 and those unsold in the BWIC) sold to RBS. Mr Auld submits that there is no sufficient paperwork evidencing this, and that what occurred in the BWIC took place after the Loans had been sold. Mr Griffiths’ evidence was that, in the pre-31 October  exercise, he and his team were determining which loans would repay at par: that “we never took into account the price in our exercise … the exercise was not concerned with price; it was concerned with a question that was: is this asset going to default?”.
53.	I am satisfied as follows:
i)	The pre-31 October exercise was for the purpose of establishing which of the Highland Loans were appropriate for consideration within IAS/39. If they qualified, then they would be transferred over to the banking books, with a 30 June transfer date (as permitted by IAS/39) and consequently adopting the 30 June RBS mark as their value. It was not an exercise of buying and selling.
ii)	In carrying out the exercise, RBS did not purport to act under the power of attorney and I suspect (although there is, of course, no evidence from any other RBS witness, and none from Mr Griffiths) that they did not have the power of attorney in mind.  
iii)	The Warehouse Loans kept on trading book were (as set out in paragraph 22 above) not their loans, but they were in the circumstances permissibly included as if they were RBS’s assets. Such Loans could be transferred by virtue of IAS/39 from trading book to banking book, without change of ownership: the issue was one of reclassification. 
iv)	Mr Lawler describes the IAS/39 events in his report as follows:
“45. The amendment to IAS/39 states that reclassification of financial assets to a date between 1 July and 31 October 2008 must be made before 1 November 2008.  … Therefore those entities wishing to take advantage of the amendment to reclassify financial assets retrospectively had to do so before 1 November 2008 as any reclassifications made on or after this date could only take effect from the date of the reclassification.
46. Applied to the present case, this means that, in order to take loans onto its banking book at their 1 July 2008 values, RBS had to take that decision prior to 1 November 2008.
47. A financial institution cannot redesignate an asset as a Loan and Receivable if it has an intention of selling it in the foreseeable future.”
54.	It is plain to me that the priority for RBS was to terminate the CDO, so that they would be in a position to control the Loans, and know that they would be in a position to retain, and thus safely transfer to banking book, those Loans (36 in the event) which they felt qualified within IAS/39.  They did not, at that stage, buy them: to that extent I agree with Mr Griffiths when he said: “For me, a sale or a trade happens when a price is determined”. Of course, there can be circumstances in which a sale is complete, but with a price to be determined. Further, if Mr Auld be right, this was a sale where the price was determined, namely the IAS/39 value. But I am satisfied that this was not such a sale, but rather that RBS had decided that they would buy, and that they would need to conclude what market value was, and that, misguided though their procedure was, it was intended to arrive at the price through the mechanism of the price-fixing BWIC, and that the sale took place at that price, after the BWIC.
June 30 Value?
55.	The alternative case for Highland is that in fact, irrespective of when the sale took place, the market value of the Loans was the IAS/39 value, the June 30 RBS mark.  This is not based on any reliance on RBS as a special purchaser, or as being prepared to pay over the odds, but the argument rests simply on the evidence of Mr Constant in his report:
“57. … the 30 June 2008 prices are in my view a good guide as to the prices … which banking book buyers would pay for such loans and fairly reflect their value to a banking book buyer.  RBS itself ought to have been prepared to pay up to those prices for the loans it wanted on its banking book, since it was going to value them at those prices in its accounts.”
56.	The case that is made is that there was no real market after 30 June, and consequently that the best valuation is that by reference to the value at the last date that there was a real market. Another way of putting this, which certainly featured in the Defendant’s arguments, is that if RBS included the loans which they had already been satisfied were good loans (see paragraph 26 above) in their accounts at the IAS/39 30 June valuations, then those must have been the fair values, and hence the market values.
57.	It is necessary to understand what the IAS/39 exercise (to which I have already made some reference in paragraph 20 above) involved and constituted.  In paragraph 40 of his report Mr Lawler explains that if a Loan and Receivable previously held on a bank’s trading book is to be transferred to its banking book and retained, then “the current fair value of the Trading Asset becomes the new amortised cost of the Loan and Receivable”. However, Mr Lawler proceeds at paragraph 41 to point out that “as a concession, the amendment to IAS/39 allowed companies if they so wished, to backdate this re-designation to 1 July 2008”. Mr Chidgey says as follows:
“8.33 Mr Lawler states that implicit in the IASB’s decision to let companies look back to 1 July 2008 “… is that it is a time when quoted prices were unlikely to have diverged materially from underlying value”.
8.34 There is nothing that the IASB has issued which either explicitly or implicitly supports this view and it seems to be countered by the fact that companies had the ability to choose any date in the period up to 1 November 2008 to use as the reclassification date and indeed could reclassify after that …
8.35	The only stated reason I have found for the suggested use of the 1 July date is that for many companies it was the last period to which they had drawn up statements that had been reported in the market and thus it allowed for less complexity.”
58.	I am satisfied that the retrospectivity was indeed a concession, and that what it, in fact, achieved was allowing banks to write back profits to a date just prior to the crash, in order to alleviate what would otherwise have been a massive accounting problem. But that does not mean that what was fair value as of 30 June 2008 was deemed to have remained fair value at all time thereafter. It quite plainly was not the case. Trading continued. The Pricing Sources continued to gather in and to give out information on trading. Both RBS and Highland continued to mark to market the values of their Loans. It is quite plain from all the evidence that the value of loans in the market fell after June, as did the value of so many other assets, tradeable or otherwise. Even as between October 15 and November 11, it is common ground in these proceedings (see paragraph 16(iii) above) that a percentage reduction in value (the WAD) occurred. It is clear from Mr Hood’s evidence that there was “steady volume of secondary market trading” and the Shingle BWIC itself obtained a notably large response (some $700 million of bids). I am satisfied that the values of the Loans in November 2008 were not the same as, and were on any basis less than, their values as at 30 June 2008. 
Consequence of Breach by RBS re the 36 
59.	 What then is the consequence in my judgment of the breach by RBS of their equitable and contractual obligations? Plainly they should, in order to comply with those obligations, have disclosed that they had already decided to acquire the 36 Loans, such that there were only 52 to be sold. I am satisfied that there would have been no agreement with Highland to put the 36 into the BWIC. RBS would have had to disclose to Highland that the purpose of putting the 36 into the BWIC would be to arrive at a price to be paid by them for the Loans which they had already determined to buy. It seems to me inevitable that in such circumstances the reason why they had decided to buy those 36 loans would have had to be disclosed. Indeed it would have been in their interest to do so, because they would then have been able to explain, and powerfully so, why it is that, although they were to take the benefit of a June 30 2008 valuation into their accounts, because of the retrospective operation of IAS/39, nevertheless the contractual obligation was only to pay market value as of November 2008, which would, inevitably, be less (as Highland’s own marks to market would show).
60.	The following factors would then come into play:
i)	Highland would know of RBS’ determination to keep the 36 loans, and would no doubt attempt to hold them to ransom.  However
ii)	whatever the negotiating position of Highland might have been, RBS would in my judgment have been correct in asserting that market value as at November 2008 meant what it said (i.e. not market value as at 30 June), and if necessary could be so resolved by a court.  
iii)	Mr Johnson in opening described (without contradiction from Mr Auld) as appearing to be “common ground” that “at least in what the Defendants call normal market conditions, data from … Pricing Sources were used by banks by funds and by investors to mark portfolios of trading assets to market for accounting purposes”. Those Pricing Sources were indeed available, even in the abnormal and falling market.
iv)	Highland plainly made use of those and, perhaps, other sources in order to arrive at their own marks as at 11 November 2008, which are, as was pointed out in the course of argument, not greatly different from RBS’ 15 October marks.
v)	What seems to me to be an important factor is that the price at which Highland has the opportunity during the “3 Business Days” to buy is expressly defined in clause 4.2(a) as “market prices as determined by readily available quotes from independent, internationally recognised brokers/dealers” - presumably a reference to the Pricing Sources.
vi)	Once RBS disclosed the position as to its desire to purchase the 36 loans, as I conclude they should have done, then what I have in paragraph 45(ii) above called the ‘competitive provisions’ – 4.2(a)(i) and (ii) - could come into play. Highland have chosen to call no evidence as to whether they would or could have bid for any of these Loans, but Mr Auld has invited me to decide on the basis of what he called a loss of a chance, but which is really the assessment of what is likely to have happened. I am entirely satisfied that I should consider issues of causation and consequence: this is not (and was hardly, if at all, argued to be) a case where a trust or a liability to account for profit arises.
61.	Doing the best I can, I conclude that, had there been compliance with RBS’s obligations and a full disclosure with regard to the 36, the outcome would have involved consideration of RBS’s October 15 mark - which is plainly what RBS was considering when it carried out the IAS/39 exercise (and worked out the windfall gain), but which it would have no doubt argued by November fell to be reduced - and the Highland November 11 mark, which would have been its best calculation of the value of the 36 Loans. Taking into account (i) the desire of RBS to buy, (ii) the negotiating position of Highland and (iii) the reality of what was plainly a falling market, I am satisfied that the market value of the 36 Loans was and would have been agreed to be, in the light of the above, one point over the October 15 2008 RBS mark for each Loan. There is no point in considering alternative methods to a BWIC, or targeted sales to third parties, or any other of the exercises canvassed between the parties primarily by reference to the 52 Loans, to which I now turn, because there was never any prospect of any other result than purchase by RBS.
The 52 Loans 
62.	There has been a considerable critique of the BWIC by Highland. Mr Constant and Mr Hood were both impressive witnesses. Mr Constant had experience of selling off a loan book in the second half of 2008 on behalf of his then principals Natixis, but his considerable experience has been in the primary loan market, not in the secondary or leveraged loan market, which is where Mr Hood’s equally considerable experience lies, and whereas Mr Constant emphasised the existence of what he called “bankers book buyers”, namely banks which would buy loans for long term investment in their books,  Mr Hood had considerable experience of trading with banks and institutions in loans on the leveraged market, and was much more supportive of the reliability of the Pricing Sources, upon which he made it clear he relied in marking his portfolios weekly. Mr Constant regarded BWICs with suspicion and scepticism, and referred to press releases sceptical of them; but he was prepared to accept that they would be suitable for some (21) of the Loans. Mr Hood regarded them as “an established process, with a real explosion in BWICs occurring in October 2008”. The contentions of each side were obviously informed by the opinions of these two experts. 
Highland critique of the BWIC 
63.	First. The BWIC was not genuine for the reasons which I have discussed at length above.
64.	Second: Targeting. A BWIC, even if otherwise appropriate, was not appropriate for those Loans which were more saleable, because more bullet proof, namely 31 out of the 52. As to those 31, they should not have been in a BWIC at all, but should have been the subject of a targeting exercise carried out by RBS’ sales force over a period of weeks, or if necessary months, as described by Mr Constant. The 30 day period in clause 4.2(c) of the ISD, even if not expressly applicable, showed that the kind of speed adopted was not essential and was in fact to be ascribed to the urgency to implement the IAS/39 reclassifications. His recommended exercise would have involved a carefully structured and prepared approach, on a geographical basis by reference to the location of the various Loans, to bankers book buyers, who would, Mr Constant considered, have paid more than those purchasing for trade, if carefully addressed and targeted. Several bankers book buyers were identified by Mr Constant as not having been approached in the BWIC, and in any event he submitted that bankers book buyers should, and no doubt but for the inhibition of the presence of the 36 loans (referred to in paragraph 46(iv) above) would, have been more efficiently targeted.
65.	Third: Timing and Duration. The BWIC was not long enough: 4½ days would be insufficient in Mr Constant’s view for banks to take a proper view as to whether to invest, banks taking longer than institutions to obtain authority. There was a number of references in the transcripts of telephone calls made by the sales force to the shortness of time. In particular there were four examples of recipients of telephone calls pointing out that the existence of the Veterans Day holiday on the Monday in the United States had seemingly been ignored and would or might cause problems.
66.	Fourth: Indicative Prices. Mr Constant was critical of the inclusion in the BWIC (as referred to in paragraph 11 above) of the Mark-It prices as indicative prices or reserve prices, which he considered would amount to a discouragement to bidders, inhibiting them from offering more, or at any rate much more.
67.	Five: The inclusion of other loans. Mr Constant criticised the inclusion of the extra 40 or so loans from other sources. If they had not been included (and of course if the 36 had not been included) in Mr Constant’s opinion there would have been a much more focused approach to the BWIC.
RBS’s Response
68.	There was close engagement by RBS with the last four of these five criticisms.  I have already dealt with, and made findings in respect of, the first, both as to the inappropriate inclusion of the 36 Loans and as to the inevitable damaging knock-on effect on the operation of the entire BWIC exercise.
69.	I take RBS’ response to the second and third points together. So far as the time and duration of the BWIC is concerned, Mr Hood has no criticisms. If a bank or institution wished further time, he explains, they would have, in his experience, asked for it. As for the Veterans Day point, in his experience that would have caused no problem to American banks and institutions, who would either have in fact been open, or have had relevant European branches, or would have made sure they caught up over the weekend, particularly at such a difficult time for the markets. So far as the duration of the BWIC is concerned, not only did he indicate that he had had experience of a number of BWICs and did not consider this to be of unsuitable duration, but a schedule was produced by Mr Johnson of what were called “Non-Shingle BWIC’s communicated to RBS”, and by reference to the considerable number of those BWICs, and to other RBS BWICs, the period of this duration was, in fact, longer than most if not all, even allowing for the loss of the Veterans Day holiday.  
70.	Mr Hood was of the view that a BWIC was an entirely suitable way to approach sales, indeed (paragraph 161 of his Report) better than Mr Constant’s ‘bilateral’ marketing approach, and if some bankers book buyers were not specifically approached, he was of the view that they would not have offered anything over the kind of price at which the Pricing Sources showed the loans to be traded. I was certainly wholly unpersuaded by the Highland argument that buyers would be inhibited from buying at a lower price more of loans which they had previously purchased at a higher price before the market fell.  
71.	Both Mr Griffiths and Mr Hood emphasised the question of timing in a rapidly falling market, such as was the case in autumn 2008. It was, RBS submit, a perfectly rational view that there was no time to allow for what Mr Constant, perhaps unfortunately, described Natixis as having done, namely “dribbling out” sales over a period of months. The 30 day period referred to in clause 4.2(c) did not apply (as set out in paragraph 6(iii) above), but in any event the process which Mr Constant referred to, of assessing the loans and then planning a programme of approaches to them, while perfectly sensible, was not a course which RBS could be described as being unreasonable not to have followed in the falling market, given the nature of its obligations as described in (for example) Cuckmere Brick: see per Salmon LJ at 965G:
“Once the power has accrued, the mortgagee is entitled to exercise it for his own purposes whenever he chooses to do so. It matters not that the moment may be unpropitious and that by waiting a higher price could be obtained.”
Mr Constant accepted in cross-examination that “the decline in risk appetite in the secondary market would … have been a factor that it was legitimate [for RBS] to take into account in formulating the process to be adopted for liquidation of the Highland portfolio.”
72.	As for the fourth point, relating to the indicative prices, Mr Hood did not conclude that including them was unreasonable. They would deter unacceptably low bids, and would encourage competition at the right level: and he did not accept Mr Constant’s view that there would be potential bidders who would not have had access to the Pricing Sources.
73.	As to the fifth point, Mr Hood’s view was that adding in extra loans into the BWIC would not be detrimental, indeed it might well “spice up” what was on offer: adding non-Highland assets to the BWIC “broadened potential investor interest”.
Conclusion as to the 52
74.	The reality is, however, that the first point, the sham nature of the BWIC, is enough to destroy any prospect of reliance on it by RBS. Insofar as there were bids from third parties in the BWIC which were accepted as being the highest bid by RBS, there could be no confidence whatever that such prices were the market values, given the unsupportable nature of the BWIC. I am satisfied that the result is as unacceptable in relation to the prices bid for the 52 as it was for the prices bid for the 36.  
75.	I am, however, unpersuaded by Highland that RBS was unreasonable in not following a targeted process in respect of 31 of the 52 loans, as is suggested.  For the reasons set out above, I am satisfied that RBS was entitled to expect a speedy closure, and that they are not to be concluded to have been unreasonable in entering into an exercise (had it been a genuine one) which arrived at market values within a short time, rather than indulging in the hypothetical exercise of marketing (not to speak of dribbling out) loans over a period. I am also unpersuaded by Mr Constant, experienced though he may be in relation to the primary loan market, as compared with the more relevant experience of Mr Hood, that there would indeed have been sales available to bankers book buyers at considerably over the price at which loans were being traded. I accept Mr Hood’s evidence that “the likelihood of many [such] bankers buying loans of the type that were in this portfolio is very, very limited”.  
76.	I have to do my best to conclude what the market values of the 52 loans would have been, had reasonable steps been taken to sell to third parties, or, if not sold, then for RBS to buy the loans in (as in the event they did). I remain persuaded by Mr Hood as to the utility of the Pricing Sources - which may indeed, for the reasons he gives, be too high, because of the “lagging effect” of reports to them in a falling market. I also remain persuaded by the provision for the use of those Pricing Sources in the contract, at clause 4.2(a) (referred to in paragraph 60(v) above), and by the existence and relevance of the contemporaneous marks to market by RBS as at 15 October 2008 and Highland as at 11 November 2008.
77.	I conclude, in the light of all the evidence I have heard, that in this difficult and falling market, these Loans - albeit that most of them (though not selected by RBS) would have been regarded as reasonable bets in the long term - would not have been valued on the basis of a possible acquisition by a hypothetical bankers book buyer after a possibly lengthy period of marketing, but by reference to the market views at the time. I conclude that the liquidation values in accordance with clause 4.2(a)(iii) ought to be - sums I suspect considerably more than those arrived at by reference to the BWIC - now calculated by taking, in relation to each Loan, the average of the RBS 15 October mark, less the WAD to allow for the passage of a further month, and the Highland 11 November mark. 
Conclusion     
78.	I must, therefore, ask counsel and solicitors to carry out the calculations as a result of my conclusion that the 36 Loans should be calculated in accordance with paragraph 61 above and the 52 Loans in accordance with paragraph 77 above. Given that all the other figures, save for the amount for which RBS should give Highland credit in respect of the liquidation of the 88 Loans, are agreed, that will enable a sum to be arrived at.