Lloyds facing £280m Arena claim

Lloyds Banking Group and the Bank of Scotland have failed to persuade the High Court to throw out a case brought by Kroll, liquidators to the collapsed TV equipment leasing company Arena, which leaves the lenders potentially facing a trial on issues relating to the extent of the banks’ responsibility to act on warning signs of serious fraud.

The High Court heard three linked applications as part of long-running litigation relating to an alleged multi-million pound asset based lending (ABL) fraud at Arena TV and the associated company Arena Holdings, centred on fake equipment serial numbers and multiple loans against the same item.

The court heard that “investigations to date suggest that in excess of £1.2bn of ABL was obtained for at least 8,196 purported pieces of equipment but only 66 pieces of equipment actually existed. Of the sums procured by the ABL fraud the majority (over £1 billion) was paid into the Arena accounts.”

Much of the legal argument in the case centred on whether or not Arena’s directors –  Richard Yeowart and Robert Hopkinson – had the authority to give instructions for payment to the company, and whether or not the banks should have refused to make payments.

Lawyers for liquidators Kroll argued that Bank of Scotland and Lloyds “had notice of facts and matters which would cause a reasonably skilful and careful banker in their position to make inquiries and failed to make such inquiries”.

In particular, they claimed that periodic reviews by the relationship management team, when fresh credit was requested or extended to the Arena Group, when the Arena accounts went into excess/overdrawn positions and/or from internal reporting systems, should have revealed that “the manner and volume of ABL and the use of the Arena Accounts was inconsistent with the Arena Group’s legitimate business activities and revenues or the legitimate acquisition or use of the equipment”; and that “substantial payments were going out of the Arena Accounts to or for the personal benefit of Mr Yeowart and Mr Hopkinson.”

For their part, the banks argued that, save for the specific payments through which the directors allegedly extracted money for their own personal benefit, all relevant instructions were given with the companies’ actual authority. The banks said that if a company’s directors choose to run a fraud against lenders, those acts are still treated as acts of the company itself, because the directors were authorised to conduct its business – even if they did so dishonestly.

The High Court did not agree to strike out the claims, and concluded “there is clearly a triable issue” as to whether the directors “were acting honestly in pursuit of the interests of their principal(s), or were exercising powers against the interests of their principal(s)”.

Lloyds Banking Group said: “We are continuing to robustly defend the claim, and we intend to seek permission to appeal part of the judgment. We believe the claim wrongly seeks to hold Lloyds Banking Group liable for the financial consequences of a complex alleged fraud perpetrated against more than 50 lenders.”

The Arena fraud was uncovered in November 2021. Yeowart and Hopkinson fled the country, and Yeowart’s whereabouts remain unknown. The Serious Fraud Office opened an investigation which has so far involved a raid, three arrests and the search of three properties, as well as the seizure of around £11,000 in cryptocurrency belonging to Yeowart, the first time the agency has used its new powers to freeze cryptocurrency.

The High Court case can be found here.