Small firms to turn on Barclays

A baker's court victory over bank likely to spur other companies to challenge the interest rates charged on loans

THOUSANDS of small businesses may be able to get better terms on bank loans following a landmark court victory by a south London baker against Barclays Bank last week.

Lawyers predict that the case brought by Romano Barca, a baker from Kennington, south London, could prompt similar claims from thousands of other small business owners who, as base rates have more than halved over the last five years, have not seen their monthly payments change. During the recession, the clearing banks twice faced investigations prompted by the Chancellor into claims by small businesses that they failed to pass on base-rate cuts, but were cleared. This case is expected to revive small business owners' concerns.

Mr Barca, owner of Barca's Bakery, won an appeal on Monday against Barclays Mercantile Business Finance, the leasing and commercial lending arm of the big clearing bank, and was awarded costs.

Barclays tried to defend itself, according to Mr Barca, by saying in court that thousands of small businesses had used the same form of contract as he had but had never had a complaint before.

That is set to change, according to Eddie Weatherill, chief executive of the Independent Banking Advisory Service. Mr Weatherill said the judgment "should be a real ball breaker. There must be thousands of cases like this, where banks manipulate loan agreements to suit themselves".

Mr Barca, who represented himself, is preparing an action for damages against Barclays for pounds 60,000. That, he claims, is the amount of overpayments he made on a commercial loan which he thought was variable rate but turned out in effect to be fixed rate.

A Barclays spokesman said at the weekend: "We reject utterly these claims. We are taking legal advice and considering an appeal." The bank claims it did recalculate the interest but, rather than reducing the monthly payments, shortened the life of the loan.

"We believe this is an isolated case, and we don't accept that we arbitrarily change the terms and conditions of contracts. We do listen to our customers and are always trying to find ways to improve our general terms and conditions."

At issue was a pounds 110,000 commercial loan Mr Barca took out in 1990 to buy his present business. The interest rate on the 20-year loan was set at 17.5 per cent, which meant a monthly payment of pounds 1,730.75.

Mr Barca expected this rate to be periodically reviewed in line with interest rates, probably yearly. But Barclays said it was only required under the agreement to review it once in the 20-year term of the loan and refused to reduce the repayments as interest rates fell.

Mr Barca refused to make any more repayments after June 1994. He calculated that by then he should have been paying pounds 859 per month if the repayments had fallen in line with interest rates. He calculated that he had overpaid Barclays by pounds 11,000 last year alone.

Barclays Mercantile served a repossession order on the property in January. Last week, Circuit Judge Harris upheld Mr Barca's appeal at Lambeth county court.

The judge ordered that Barclays' warrant be discharged. He declared that "on its true construction the loan letter (of) 27 November 1990 requires the lender on each anniversary of the loan to re-calculate the monthly repayments so as to reflect the prevailing interest rate and the period remaining outstanding on the 240-month term."

The confusion over the loan agreement appears to have arisen over the term "constant rate" used in the contract and the way repayments are split into capital and interest payments. Barclays points out that the interest rate did fall in line with general interest rates, down to 10.5 per cent currently. But in common with its usual practice it increased the actual interest repaid, thereby keeping the total repayments constant and shortening the life of the loan.

Mr Barca is now compiling a claim for his costs and preparing an action for damages against Barclays for pounds 60,000. Mr Barca faces a bankruptcy petition by the Inland Revenue which is claiming pounds 40,000, which Mr Barca says has only come about because of the financial strain of paying off the Barclays loan. He is fighting to save his business. "After 17 years in baking, I'm now facing a bankruptcy petition from other creditors," he said.