Small business owners who feel they’ve been unfairly treated by high-street banks may be able to sue them for the first time.

Banks including Clydesdale, Lloyds and RBS allegedly drove thousands of businesses to the wall after making inappropriate loans, and then supposedly asset stripped those businesses for millions of pounds once they were insolvent. RBS in particular has been singled out for criticism — its department set up to help businesses in trouble in fact dismantled 90pc of SMEs referred to it.

In an unprecedented move, MPs have petitioned the Supreme Court to change the law on “reflective loss”. If successful, many business owners will be able to sue their banks for pushing them into insolvency.

The All-Party Parliamentary Group (APPG) on Fair Business Banking intervened in an ongoing Supreme Court case on Tuesday, the first time an APPG has made such a move.

Kevin Hollinrake MP, co-chair of the APPG on Fair Business Banking, told Small Business: “SMEs may be able to sue banks that put them in an unwinnable situation.”

Grossly unfair

The APPG has intervened because of what it sees as a grossly unfair situation. At present, if a company falls into insolvency it moves into the hands of an insolvency practitioner (IP); often it’s the lenders themselves which make these winding up orders. Although the IP can in theory sue the bank, in practice they do not want to bite the hand that feeds it.

Hollinrake said: “If you’re a shareholder of a business and your company goes into administration, and you believe somebody’s at fault, currently there’s nothing you can do about it. If your bank has unfairly sold you an expensive loan and the payments rose and rose, eventually putting your SME into administration, then you as a shareholder have no action against the bank.”

If the Supreme Court agrees with the MPs’ lawyers, it raises the potential for many SME business owners to sue their banks, which they cannot do at the moment.

Hollinrake said: “It would be a huge step forward, a real milestone in commercial case law, because it allows small businesses to fight back against being unfairly treated.”

Of course, it would cost a lot of money for an entrepreneur to sue a bank and they would have to pay costs if they lose. The APPG is also lobbying for a financial services tribunal, a new court which would have the bank pay legal costs even if the SME does lose the case, levelling the playing field against a bank’s deep pockets.

High-street banks have already agreed to implement a dispute resolution service, which will rule on more complex cases holding the bank to account, due to be established by end-2019.

The APPG hopes for a Supreme Court ruling in the coming weeks.

Hollinrake said: “We were pleased how it went. We’ve had fantastic support from our pro-bono legal representatives.”