Shareholders suing the combined organisation, Lloyds Banking Group, and five former directors for £600 million alleged that Sir Victor Blank, Lloyds' chairman at the time, misled shareholders by concealing secret loans to HBOS that were keeping it afloat.
The allegation was made by the barrister representing a group of 5,803 former Lloyds TSB shareholders at the start of a trial aimed at recovering more than £550m from the bank.
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They knew that HBOS had suffered a funding failure, could not meet its obligations and was on "emergency life support" from the Bank of England and Lloyds. He added that investors "should never have been kept in the dark".
"HBOS was facing catastrophic impairment", the lawyer pointed out.
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"So, although it had reached the same situation as Northern Rock, shareholders were not told that".
Additionally, the bank had also received covert financial support from the US Federal Reserve, then totalling £11bn.
A series of claims brought by Royal Bank of Scotland shareholders - which would have seen Fred Goodwin, the bank's former boss, take the stand - were settled before the case came to trial earlier this year.
The information that would have disclosed it was a bust failed bank was omitted deliberately.
Mr Daniels was informed by Lloyds then chief risk officer Carol Sergeant on 1 October 2008 that the £10 billion loan to HBOS "would not be supportable in the normal course of business" but was part of a systemic rescue package and explaining that the FSA should "explicitly endorse the position".
A spokesman for Lloyds, which is due to open its case on Thursday, has said: "The group's position remains that we do not consider there to be any merit to these claims and we will robustly contest this legal action".
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