Part I

THE REGULATORY FRAMEWORK

1
Chapter 1

THE REGULATION OF BANKS

1 INTRODUCTION 1.1
2 THE EUROPEAN CONTEXT 1.2
3 THE GENERAL PROHIBITION AND
REGULATED ACTIVITIES
(a) The General Prohibition 1.3
(b) Regulated activities and regulated investments 1.4
(c) Accepting deposits 1.5
(d) ‘By way of business’ 1.6
(e) ‘In the UK’ 1.7
(f) Breach of the general prohibition 1.8
4 AUTHORISATION, PERMISSION AND DUAL
REGULATION
(a) Authorisation and permission 1.9
(b) Dual regulation 1.10
5 THE REGULATORS
(a) The FCA 1.11
(b) The PRA 1.12
(c) Co-ordination between regulators and the PRA’s power of direc-
tion 1.13
6 RELEVANT REQUIREMENTS, RULES AND GUIDANCE
(a) Qualifying EU provisions and relevant requirements 1.14
(b) Rules 1.15
(c) Breach of Rules 1.16
(d) Actions for damages 1.17
(e) Guidance 1.18
7 THE FCA HANDBOOK AND THE PRA RULEBOOK
(a) The FCA Handbook of Rules and Guidance 1.19
(b) The PRA Rulebook 1.20
(c) A note of caution regarding directly applicable provisions of EU
law 1.21
8 KEY ELEMENTS OF BANKING REGULATION
(a) Threshold conditions for authorisation 1.22
(b) PRA threshold conditions 1.23
(c) FCA threshold conditions 1.24
(d) FCA Principles for Business and PRA Fundamental Rules 1.25
(e) PRA systems and controls requirements 1.26
(f) Prudential requirements for UK banks 1.27
(g) FCA conduct of business requirements for banks 1.29
(h) The Approved Persons regime 1.30
(i) Changes of control over authorised persons 1.33
(j) Information gathering and investigation 1.34
9 FINANCIAL PROMOTION 1.38
10 THE FINANCIAL SERVICES COMPENSATION SCHEME 1.39
11 THE FINANCIAL OMBUDSMAN SCHEME 1.40

3
1.1 The Regulation of Banks

1 INTRODUCTION TO THE REGULATION OF BANKS

1.1 The UK’s statutory regime for the regulation of banks and banking was first
established under the Banking Act 1979. That Act constituted the Bank of
England as statutory banking regulator and discharged, in part, the UK’s obli-
gation under EU legislation (in particular the First Banking Directive 19771) to
establish a formal system for the authorisation and supervision of banking
business carried on in or from the UK. At that time, the Bank of England was
only one of a number of different regulatory agencies, each responsible for a
different sector of financial services business, under different legal regimes. The
Labour Government that came to power in 1997 proposed the establishment of
a single regulatory regime for most financial services business. In pursuit of that
policy, the regulatory functions of the Bank of England were transferred to the
Financial Services Authority (‘the FSA’) from 19982. From 1 December 2001 the
FSA assumed full regulatory powers in relation to banking, insurance and
investment business, under the Financial Services and Markets Act 2000
(‘FSMA 2000’).
Following the global financial crisis that began in 2007, the Government
initiated a review of the UK’s system of financial regulation. That review came
to fruition as the Financial Services Act 2012 (‘FSA 2012’), which substantially
amended FSMA 2000. The principal change introduced by FSA 2012 was to
establish the Financial Conduct Authority (‘the FCA’) and the Prudential
Regulation Authority (‘the PRA’) as the statutory successors of the FSA and to
give each new regulator separate but partially overlapping statutory functions
and objectives under FSMA 2000 as amended3.
1
First Council Directive 77/780/EEC of 12 December 1977 on the coordination of the laws,
regulations and administrative provisions relating to the taking up and pursuit of the business
of credit institutions.
2
Bank of England Act 1998, s 21.
3
See para 1.4 and following.

2 THE EUROPEAN CONTEXT OF BANKING REGULATION

1.2 The substance of banking regulation in the UK has in large part been
shaped by European legislation in the form of directives and regulations aimed
at creating ‘an internal market characterised by the abolition, as between
Member States, of obstacles to the free movement of goods, persons, services
and capital’, as envisaged by art 3(3) of the Treaty Establishing the Euro-
pean Community.
Two particular articles of the Treaty on the Functioning of the European Union
(formerly the Treaty of Rome) have been fundamental to the establishment of
the internal market. Article 49 provides for the removal of restrictions on the
freedom of establishment on nationals of one Member State in the territory of
another Member State. Article 56 provides for the freedom of nationals of
Member States to provide services in other Member States. With respect to
banks (referred to as ‘credit institutions’ in European legislation1), these free-
doms have translated into the concept of the ‘passport’, namely the right of a
credit institution authorised in one Member State (the ‘home state’) to set up a
branch in, or provide cross-border services into, other Member States subject
only to notification of the ‘host state’ regulator.

4
 The European context 1.2

A necessary corollary of the right to ‘passport’ has been the harmonisation of

requirements relating to the taking up of the activity of credit institutions and
their prudential supervision. Host states have only been permitted to impose
additional requirements on passporting credit institutions in areas not harmon-
ised at EU level and where the requirements imposed fulfil certain criteria,
namely that they pursue an objective of the ‘general good’, are non-
discriminatory, are objectively necessary, are proportionate to the objective
pursued and address an objective not safeguarded by rules to which the firm is
already subject in its home state. However, given that recent EU legislation in
relation to credit institutions has taken the form of maximum harmonisation
directives accompanied by detailed directly applicable regulations expanding
across the full spectrum of bank regulation, the scope for host state measures
imposed in this way is very small indeed.
Guiding the process of legislative and supervisory harmonisation amongst
Member States, the European Banking Authority was established2. Its objec-
tives are to maintain financial stability in the EU and to safeguard the integrity,
efficiency and orderly functioning of the banking sector. Its competencies
include the prevention of regulatory arbitrage, strengthening international
supervisory coordination, promoting supervisory convergence and providing
advice to the EU institutions in the areas of banking, payments and e-money
regulation as well as on issues related to corporate governance, auditing and
financial reporting.
The principle pieces of European legislation relating to the authorisation and
supervision of credit institutions are the Capital Requirements Directive3 (‘the
CRD’) and accompanying Capital Requirements Regulation4 (‘the
CRR’). Collectively these are known as ‘CRD IV’, reflecting the numerous
iterations that the legislation has been through, largely as a result of the 2008
financial crisis.
The CRD has been implemented into English law largely through FSMA 2000.
The provisions now found in the CRR had formerly been at directive level and
were thus implemented into English law through the FSA’s GENPRU and
BIPRU handbooks. Given that the CRR is directly applicable in all Mem-
ber States – and is indeed referred to as ‘the Single Rulebook’ – it does not
require implementation into English law. The Prudential Regulation Authority
has thus disapplied most of BIPRU and GENPRU to firms within the scope of
the CRR. CRD IV further provides for the preparation by the EBA of over one
hundred ‘Regulatory Technical Standards’, which contain even greater detail
than the CRR and which will themselves be directly applicable as regulations
once adopted by the European Commission.
The CRD first contains the minimum requirements for access to the taking up
and pursuit of the business of credit institutions. These include authorisation
from a Member State regulator, a programme of operations5, robust gover-
nance arrangements and minimum initial capital, along with directors and
controlling shareholders considered fit and proper by the regulator. As de-
scribed further in section 8, these requirement are implemented in the United
Kingdom by the Threshold Conditions stated in Schedule 6 to FSMA 2000.
The ongoing regulation of credit institutions under CRD IV is based on three
‘pillars’. Pillar One imposes minimum capital requirements. Historically this
has involved the highly technical quantification of the risks arising from the

5
1.2 The Regulation of Banks

institution’s trading and credit businesses. More recently requirements have

been introduced for banks to maintain a certain level of liquidity, limiting
banks’ overall level of leverage and restricting the level and type of remunera-
tion that banks are permitted to pay certain employees. Pillar Two concerns
supervisory review: the ongoing dialogue between the institution and its regu-
lator as to the risks it runs and the level of capital over and above the minimum
capital requirements needed to support them. Pillar Three adds an element of
market discipline through public disclosures intended to ensure a stronger role
for the market itself in ensuring that institutions hold capital appropriate to
their business. The prudential content of CRD IV is discussed further in
paragraph 1.27 and following.
Complementing CRD IV, the Deposit Guarantee Schemes Directive6 requires
Member States to establish a scheme under which depositors are guaranteed
that if a bank fails they will recover up to €100,000 per authorised deposit
taker, with payouts happening within 20 days. As described in section 10, this
has been achieved in the United Kingdom through the Financial Services Com-
pensation Scheme which guarantees deposits up to £85,000.
On 29 March 2017, pursuant to Article 50 of the Treaty on European Union,
the UK notified its intention to withdraw from the EU; a decision commonly
referred to as ‘Brexit’. Other things being equal, that decision is set to take effect
on ‘exit day’, presently defined7 as 11pm on 29 March 2019, but subject in
practice to whatever transitional arrangements may be negotiated between the
UK and the EU.
The European Union (Withdrawal) Act 2018 (‘the EUWA 2018’), s 1 provides
for the repeal the European Communities Act 1972 on exit day. In broad terms,
that will end the primacy of EU law in the UK. However, (a) EUWA 2018, s 2(1)
provides that ‘EU-derived domestic legislation8, as it has effect in domestic law
immediately before exit day, continues to have effect in domestic law on and
after exit day’; and (b) EUWA 2018, s 3(1) provides that ‘Direct EU legislation9,
so far as operative immediately before exit day, forms part of domestic law on
and after exit day’. In outline, therefore, these provisions of the EUWA 2018
will, if they are brought into force10, convert into UK domestic law the existing
body of EU law as it applies in the UK, with the overall purpose of providing a
functioning statute book on the day the UK leaves the EU.
On 24 July 2018, HM Treasury published draft secondary legislation11 which,
if implemented, would, amongst other things, put in place a ‘temporary
permissions regime’, to enable EEA firms (including deposit takers) and funds
operating in the UK by way of a financial services passport to continue their
activities in the UK for a limited period after exit day in order to allow them to
obtain UK authorisation or transfer business to a UK entity, as necessary. At the
time of writing (August 2018) it is unclear whether (and if so, to what extent)
UK credit institutions (or indeed any other UK financial institution) will retain
the right ‘passport’ into the EU after exit day.
1
See art 4(1) of the Capital Requirements Regulations (Regulation (EU) No 575/2013): ‘“credit
institution” means an undertaking the business of which is to take deposits or other repayable
funds from the public and to grant credits for its own account’.
2
Regulation (EC) No 1093/2010 of the European Parliament and of the Council of 24 November
2010. It officially came into being on 1 January 2011.

6
 The General Prohibition and Regulated Activities 1.5
3
Directive 2013/36/EU of the European Parliament and of the Council on the access to the
activity of credit institutions and the prudential supervision of credit institutions and investment
firms.
4
Regulation (EU) No 575/2013 of the European Parliament and of the Council on prudential
requirements for credit institutions and investment firms.
5
CRD, Article 10 indicates that a programme of operations must set out ‘the types of business
envisaged and the structural organisation of the credit institution’.
6
Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on
deposit-guarantee schemes.
7
In the European Union (Withdrawal) Act 2018, s 20.
8
Defined in EUWA 2018, s 2(2).
9
Defined in EUWA 2018, s 3(2)(a), subject to specified exceptions, as ‘any EU regulation, EU
decision or EU tertiary legislation, as it has effect in EU law immediately before exit day’.
10
EUWA 2018, s 25(4): ‘The provisions of this Act, so far as they are not brought into force by
subsections (1) to (3), come into force on such day as a Minister of the Crown may by
regulations appoint’.
11
The EEA Passport Rights (Amendment, etc, and Transitional Provisions) (EU Exit) Regulations
2018.

3 THE GENERAL PROHIBITION AND REGULATED ACTIVITIES

(a) The general prohibition

1.3 The ‘general prohibition’ in FSMA 2000, s 19 (read with FSMA 2000, s 22)
provides that no person may lawfully carry on a regulated activity by way of
business in the UK unless he is an authorised person or an exempt person.

(b) Regulated activities and regulated investments

1.4 The range of ‘regulated activities’ is specified in general terms in FSMA
2000, Schedule 2 and in detail in the Financial Services and Markets Act 2000
(Regulated Activities) Order 2001 (SI 2001/544), (‘the RAO’). Most (but not
all) regulated activities can be carried on only in relation to ‘regulated invest-
ments’, which are also specified in FSMA 2000, Schedule 2 and in the RAO.

(c) Accepting deposits

1.5 The core regulated activity connected with banking business is ‘accepting
deposits’1, although many banking businesses will in addition have permission
for other regulated activities, such as investment business, regulated mortgage
business and insurance distribution. RAO, art 5(1) provides that:
‘(1) Accepting deposits is a . . . [regulated] activity if—
(a) money received by way of deposit is lent to others; or
(b) any other activity of the person accepting the deposit is financed
wholly, or to a material extent, out of the capital of or interest on
money received by way of deposit.’
RAO, arts 5(2) and (3) elaborate that:
‘(2) In paragraph (1), “deposit” means a sum of money, other than one excluded
by any of articles 6 to 9A, paid on terms
(a) under which it will be repaid, with or without interest or premium,
and either on demand or at a time or in circumstances agreed by or on

7
1.5 The Regulation of Banks

behalf of the person making the payment and the person receiving it;
and
(b) which are not referable to the provision of property (other than
currency) or services or the giving of security.
(3) For the purposes of paragraph (2), money is paid on terms which are
referable to the provision of property or services or the giving of security if,
and only if—
(a) it is paid by way of advance or part payment under a contract for the
sale, hire or other provision of property or services, and is repayable
only in the event that the property or services is or are not in fact sold,
hired or otherwise provided;
(b) it is paid by way of security for the performance of a contract or by
way of security in respect of loss which may result from the non-
performance of a contract; or
(c) without prejudice to sub-paragraph (b), it is paid by way of security
for the delivery up or return of any property, whether in a particular
state of repair or otherwise.’
The general scheme of the RAO is to define a regulated activity widely, subject
to a range of exclusions. In the case of accepting deposits, the exclusions cover
both (a) specific types of person – for example, under RAO, art 6(a)(i), a sum of
money is not a ‘deposit’ if it is paid by any of the Bank of England, the central
bank of an EEA State other than the United Kingdom, or the European Central
Bank; and (b) payments received for specific purposes – for example, a sum is
not a deposit if it is received as consideration for the issue of certain kinds of
debt securities (RAO, art 9); if it is received in exchange for electronic money
(RAO, art 9A); or if it is received by an authorised payment institution (RAO,
art 9AB).
Since the language in which the activity of accepting deposits is defined in the
RAO substantially reflects the language of earlier legislation, there is a body of
case law, pre-dating FSMA 2000, setting out the view of the Court as to the
scope and limits of this regulated activity2. Insofar as the regulator’s view may
be relevant or of assistance3, the FCA Perimeter Guidance Manual, Chapter 24,
sets out the FCA’s5 analysis of the scope of ‘accepting deposits’, amongst other
activities.
1
To which UK legislation also refers as ‘deposit taking’.
2
See, for example the following cases under the Banking Act 1979: SCF Finance Co Ltd v Masri
(No 2) [1987] QB 1002 (CA) (a commodity broker’s receipt of money from his investor client
was not regulated deposit taking. See also RAO, art 8 – sums received by persons authorised to
deal); A-G’s Reference (No 1 of 1995) (B and F) [1996] 1 WLR 970 (mens rea for ‘consent’ to
the acceptance of a deposit contrary to the Act).
3
Bearing in mind that, although the regulators’ view of the breadth of their own remit is likely to
be relevant, only Parliament or the Courts may give a definitive view as to the scope of
regulation by or under FSMA 2000.
4
Published online, alongside the FCA’s Handbook of Rules and Guidance, on which see para
1.19 and following.
5
The PRA has not published equivalent guidance. It must therefore be guided by the common
law, and by the FCA view, to the extent that it is the FCA that will enforce any breach of the
regulatory perimeter. (See FSMA 2000, s 401(3B), which provides that proceedings in respect
of an authorisation offence may only be instituted by the FCA. See also the Memorandum of
Understanding, which the PRA and FCA are required to maintain under FSMA 2000,
s 3E(1)(a)).

8
 The General Prohibition and Regulated Activities 1.6

(d) ‘By way of business’

1.6 The effect of the general prohibition in FSMA 2000, s 19, read with FSMA
2000, s 22 is that authorisation or exemption is required only if a person carries
on a regulated activity ‘by way of business’, which is a question of fact1. FSMA
2000, s 419 provides that HM Treasury may specify in subordinate legislation,
the circumstances in which a person who would otherwise not be regarded as
carrying on a regulated activity ‘by way of business’ is to be regarded as doing
so (or as not doing so). The relevant order is the Financial Services and Markets
Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 (SI
2001/1177) (‘the Business Order’). Article 2 of the Business Order makes
particular provision for ‘deposit taking business’:
‘(1) A person who carries on . . . [the regulated activity of accepting deposits]
is not to be regarded as doing so by way of business if—
(a) he does not hold himself out as accepting deposits on a day to day
basis; and
(b) any deposits which he accepts are accepted only on particular
occasions, whether or not involving the issue of any securities.
(2) In determining for the purposes of paragraph (1)(b) whether deposits
are accepted only on particular occasions, regard is to be had to the
frequency of those occasions and to any characteristics distinguishing
them from each other.
(3) A person (“B”) who carries on an activity of the kind specified by
article 5(1)(b) of the Regulated Activities Order (accepting deposits) is not to
be regarded as doing so by way of business if—
(a) the activity is facilitated by a person (“A”);
(b) in facilitating the activity, A was operating an electronic system in
relation to lending;
(c) B is not a credit institution or an authorised person;
(d) B is not carrying on the business of accepting deposits;
(e) B does not hold themselves out as accepting deposits on a day to day
basis, other than where the holding-out is facilitated by persons
engaged in operating an electronic system in relation to lending.
(4) For the purposes of paragraph (3)(d), if B uses the capital of, or interest on,
money received by way of deposit solely to finance other business activity
carried on by B, this is to be regarded as evidence indicating that B is not
carrying on the business of accepting deposits.’2
Business Order, arts 2(3) and (4)3, set out above, are a recent addition, in force4
from 22 March 2018. Their effect is that a person to whom these provisions
apply does not accept deposits ‘by way of business’ (and accordingly does not
carry on a regulated activity under FSMA 2000) when borrowing money
thorough an electronic system in relation to lending (ie a ‘peer to peer’ or ‘P2P’
lending platform).
1
In FSA v Anderson [2010] EWHC 599 (Ch), per Lewison J at [49] to [52], the factors that
pointed to the conclusion that deposits were taken by way of business were that the deposits
were taken with a view to making money; they were taken over a substantial period of time at
regular intervals; the number of deposits taken was substantial; the amounts involved in each
case were very large; the deposits taken were paid into business bank accounts; and the
deposit-takers themselves referred to their activities in terms of a business. This approach was
applied in R v Napoli [2012] EWCA Crim 1129 (CA). Anderson should be approached with
caution insofar as it apparently holds that only unsecured loans are capable of constituting
deposits at [46]. It is submitted that this is erroneous and that Lewison J was probably led into
error by failing to take into account the definition of ‘referable to . . . the giving of security’
at art 5(3) RAO.

9
1.6 The Regulation of Banks
2
As to the application of this provision in a criminal context, see R v Napoli [2012] EWCA Crim
1129 (CA).
3
Which are elaborated by definitions in Business Order, art 2(4) and (5).
4
By the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of
Business) (Amendment) Order 2018, SI 2018/394.

(e) ‘In the UK’

1.7 The effect of the general prohibition in FSMA 2000, s 19, read with FSMA
2000, s 22 is that authorisation or exemption is required only if a person carries
on a regulated activity ‘in the UK’. FSMA 2000, s 418 specifies seven cases in
which a person who is carrying on a regulated activity is deemed to be carrying
on that activity in the UK. In the majority of the specified cases, the deeming
provision is triggered when a person or firm has his registered office, head office
or establishment in the UK1. In particular, a person is to be regarded as carrying
on business in the UK when his registered office or head office is in the UK and
he exercises passporting rights under an EU single-market directive to carry on
business in another EEA State2.
1
FSMA 2000, ss 418(2) to (5A).
2
FSMA 2000, s 418(2).

(f) Breach of the general prohibition

1.8 FSMA 2000, s 23(1) provides that a person who contravenes the general
prohibition is guilty of an offence. Under FSMA 2000, s 26, the general
consequences of such an ‘authorisation offence’ are that (subject to relief by
the Court) an agreement made in contravention of the general prohibition is
unenforceable against the other party (usually a consumer), who may also
recover losses and monies paid under the agreement. However, FSMA 2000,
s 26(4) provides that s 26 does not apply if the regulated activity in question is
accepting deposits. Instead, there is separate and more limited provision as to
the enforceability of agreements ‘the making or performance of which consti-
tutes, or is part of, [the regulated activity of] accepting deposits’1. FSMA 2000,
s 29 provides in part:
‘(2) If the depositor is not entitled under the agreement to recover without delay
any money deposited by him, he may apply to the court for an
order directing the deposit-taker to return the money to him.
(3) The court need not make such an order if it is satisfied that it would not be
just and equitable for the money deposited to be returned, having regard to
the issue mentioned in subsection (4).
(4) The issue is whether the deposit-taker reasonably believed that he was not
contravening the general prohibition by making the agreement.’

1
FSMA 2000, s 29(5)(b).

10
 Authorisation, Permission and Dual Regulation 1.10

4 AUTHORISATION, PERMISSION AND DUAL REGULATION

(a) Authorisation and permission

1.9 There are two principal1 ways of becoming an ‘authorised person’2 under
FSMA 2000. First, by exercising either (a) rights under the EU Treaty3; or (b)
passporting rights under an EU Directive4, to carry on business in the UK on a
services basis or an establishment basis. Second, by applying for and obtaining5
a FSMA 2000 ‘Part 4A permission’6, which is the route to authorisation
followed by domestic UK entities and entities incorporated outside the EU7. In
the case of a domestic ‘firm’8, therefore, authorisation under FSMA 2000 is
obtained indirectly, by applying for ‘permission’ to carry on specific regulated
activities9. The specific regulated activities for which each domestic or third
country firm has permission, or which each incoming EEA firm is entitled to
carry on in the UK, are published on the Financial Services Register10, available
online.
1
The residual category in FSMA 2000, s 31(1)(c) is ‘persons who are otherwise authorised by a
provision of, or made under, FSMA 2000’. These include, for example, the Society of
Lloyd’s under and operators etc of recognised collective investment schemes, under FSMA
2000, Schedule 5, paragraph 1.
2
See FSMA 2000, s 417(1), read with FSMA 2000, s 31.
3
Pursuant to FSMA 2000, Schedule 3.
4
Pursuant to FSMA 2000, Sch 4.
5
As to the threshold conditions that an applicant must meet in order to obtain a permission, see
para 1.22 and following.
6
FSMA 2000, s 55A(5).
7
The corollary, in FSMA 2000, s 55A(4), is that an EEA firm may not apply for permission to
carry on a regulated activity which it is, or would be, entitled to carry on in exercise of an EEA
right, whether through a United Kingdom branch or by providing services in the United
Kingdom.
8
In the FCA Handbook of Rules and Guidance and the PRA Rulebook the defined term ‘firm’
generally refers to a person that is authorised under FSMA 2000 (albeit in the PRA Rulebook,
the term refers to a ‘PRA-authorised person’, as to which see paras 1.26 and 1.27).
9
See, for example, FSMA 2000, s 31(1)(a), which provides that an ‘authorised person’ under
FSMA includes ‘a person who has a Part 4A permission to carry on one or more regulated
activities’.
10
Maintained by the FCA, both for itself and for the PRA.

(b) Dual regulation

1.10 FSMA 2000, s 55A(1) provides that an application for permission may be
made to ‘the appropriate regulator’. The appropriate regulator means1 the
PRA, in a case where the regulated activities to which the application relates
‘consist of or include a PRA-regulated activity’; or the FCA, in any other case.
A regulated activity is a ‘PRA-regulated activity’ only if it is designated as such
in subordinate legislation2 made by HM Treasury under FSMA 2000, s 22A.
FSMA 2000, ss. 417 and 2B(5) then define a ‘PRA authorised person’ as a
person that has permission to carry on a regulated activity that is designated as
a PRA-regulated activity. Authorisation by the PRA subjects a firm to regulation
by the PRA in respect of matters relevant to the PRA’s statutory objectives, but
does not relieve the firm of regulation by the FCA in respect of matters relevant
to the FCA’s separate statutory objectives. Accordingly, FSMA 2000 uses the

11
1.10 The Regulation of Banks

term ‘PRA authorised person’ as shorthand for a firm that is dual-regulated by

both the PRA and the FCA.
As of August 2018, only the following activities have been designated3 as
PRA-regulated activities: (a) the regulated activity of accepting deposits; (b) the
regulated activities of effecting or carrying out contracts of insurance; (c) the
regulated activity of an insurance transformer vehicle4; (d) the regulated activi-
ties of investment firms specifically designated5 for prudential supervision by
the PRA; and (e) the regulated activities specific to the operation of the
insurance market at Lloyd’s of London. As a consequence, the PRA’s regulatory
remit extends in summary only to deposit taking business (ie banking business),
insurance business and the very largest investment firms6.
1
FSMA 2000, s 55(2).
2
The Financial Services and Markets Act 2000 (PRA-regulated Activities) Order 2013 (SI
556/2013).
3
Under the Financial Services and Markets Act 2000 (PRA-regulated Activities) Order 2013 (SI
556/2013) (‘the PRA-regulated Activities Order’), Art 2.
4
Defined in FSMA 2000, s 284A as a vehicle that (a) assumes risk from another undertaking; and
(b) fully funds its exposure to that risk by issuing investments under which the repayment rights
of the investors are subordinated to the obligation to cover the risk.
5
Designation is provided for in the PRA-regulated Activities Order, art 3. In broad terms, an
investment firm will be designated for prudential regulation by the PRA it exceeds specified size
and scale thresholds and if its activities are such as would potentially have a material impact on
the ability of the PRA to advance any of its regulatory objectives, on which see para 1.12. As of
December 2017 there were eight such firms.
6
One consequence is that both the FCA and the PRA are inaptly named: the PRA is a prudential
regulator, but only for the sub-set of dual-regulated firms authorised under FSMA 2000; the
FCA is the conduct regulator for all firms authorised under FSMA 2000, but also the single
prudential regulator for all authorised firms that do not fall within the PRA’s limited remit.

5 THE REGULATORS

(a) The FCA

1.11 The FCA’s ‘general functions’1 under FSMA 2000 are its function of
making rules; its function of preparing and issuing codes; its function of giving
of general guidance; and its function of determining the general policy and
principles by reference to which it performs the particular functions, allocated
to it under FSMA 2000 and other legislation.
The FCA’s ‘strategic objective’2 is ‘ensuring that relevant markets function well.’
‘Relevant markets’ are widely defined3 and include the financial markets and the
markets for regulated financial services. The FCA’s ‘operational objectives’4 are
(a) securing an appropriate degree of protection for consumers5; (b) protecting
and enhancing the integrity6 of the UK financial system7; and (c) promoting
effective competition in the interests of consumers, including in the markets for
regulated financial services8. In considering what degree of protection for
consumers may be appropriate in order to achieve the consumer protection
objective, the FCA must9 have regard to ‘the general principle that those
providing regulated financial services should be expected to provide consumers
with the level of care that is appropriate having regard to the degree of risk
involved in relation to the investment or other transaction and the capabilities

12
 The Regulators 1.13

of the consumers in question’.

1
FSMA 2000, s 1B(6).
2
FSMA 2000, s 1B(2).
3
FSMA 2000, s 1F.
4
FSMA 2000, s 1B(3).
5
FSMA 2000, s 1C.
6
Widely defined in FSMA 2000, s 1D to include soundness, stability and resilience; the absence
financial crime; the absence of market abuse; orderly operation; and transparency of price
formation.
7
FSMA 2000, s 1D.
8
FSMA 2000, s 1E.
9
Under FSMA 2000, s 1C(2)(e).

(b) The PRA

1.12 The PRA’s general functions under FSMA 2000 are1 its function of
making rules; its function of preparing and issuing codes; and its function of
determining the general policy and principles by reference to which it performs
the particular functions, allocated to it under FSMA 2000 and other legislation.
The PRA’s general objective is to promote the safety and soundness of PRA-
authorised persons2. It is to advance that objective primarily by (a) seeking to
ensure that the business of PRA-authorised persons is carried on in a way which
avoids any adverse effect on the stability of the UK financial system3; (b) seeking
to minimize the adverse effect (in particular, disruption of the continuity of
financial services) that the failure of a PRA-authorised person could be expected
to have on the stability of the UK financial system4; and (c) discharging its
general functions so as to achieve the protective outcomes expected of the UK
ring-fencing regime, implemented by or under FSMA 2000, Part 9B5.
1
FSMA 2000, s 2J.
2
FSMA 2000, s 2B(2).
3
Widely defined in FSMA 2000, s 1T.
4
FSMA 2000, s 2B(3)(b) read with s 2B(4).
5
FSMA 2000, s 2B(3)(c), read with s 2B(4A). In broad outline, the UK bank ring-fencing regime
(which is one of a number of responses to the financial crisis of 2008) requires UK banking
groups holding retail deposits in excess of a substantial threshold to separate the retail banking
activities from their wholesale and investment banking activities.

(c) Co-ordination between regulators and the PRA’s power of direction

1.13 The FCA and the PRA are required to ensure the co-ordinated exercise of
their functions1. The duty to co-ordinate2 is not absolute: it applies only to the
extent that compliance is compatible with the advancement by each regulator of
any of its objectives and does not impose a burden on the regulators that is
disproportionate to the benefits of compliance3. The duty to co-ordinate is
underpinned by a statutory requirement4 for the FCA and the PRA to publish a
memorandum5 which describes (a) the role of each regulator in relation to the
exercise of functions conferred by or under FSMA which ‘relate to matters of
common regulatory interest’6; and (b) how the regulators intend to comply with
the duty to co-ordinate in relation to the exercise of those functions.
Dual regulation raises the possibility of conflicting action by the regulators.
FSMA 2000 addresses this problem by giving the PRA a limited7 power8 of

13
1.13 The Regulation of Banks

direction, by which it can require the FCA not to exercise a power, or require the
FCA to exercise a power in a specified manner. The PRA may give a direction if
in the PRA’s opinion, (a) the exercise of the FCA’s power in the manner
proposed may threaten the stability of the UK financial system, or result in the
failure9 of a PRA-authorised person in a way that would adversely affect the UK
financial system10, or threaten the continuity of ‘core services’ (ie broadly, retail
banking services within the protective scope of the UK bank ring-fencing
regime11) and (b) a direction is necessary to avoid that possible consequence12.
1
FSMA 2000, s 3D(1).
2
Note, not a duty to co-operate.
3
FSMA 2000, s 3D(2).
4
FSMA 2000, s 3E(1)
5
Available online.
6
Defined in FSMA 2000, s 3D(3).
7
The two limitations are, firstly, that the PRA may not direct the exercise of the FCA’s power to
consent (or not) to the PRA’s decision to grant an application for permission to carry on a
PRA-regulated activity. Secondly, the PRA may not direct the exercise of the FCA’s power to
consent (or not) to the PRA’s proposed variation of the permission of a PRA-authorised person.
The FCA therefore retains its autonomy as to who may be authorised under FSMA and as to the
scope of permission of an authorised person. More generally, the FCA is not required to comply
with a direction if or to the extent that in the opinion of the FCA, compliance would be
incompatible with any EU obligation or any other international obligation of the UK.
8
FSMA 2000, s 3I(6).
9
For this purpose, ‘failure’ is defined in FSMA 2000, s 2J(3) to include entry into insolvency
(itself widely defined in FSMA 2000 s 2J(4)); the application of stabilization options under the
Banking Act 2009, Part 1; or inability to meet claims such that the Financial Services Compen-
sation Scheme may be engaged. See FSMA 2000, s 3I(9).
10
FSMA 2000, s 3I(4).
11
As to which, see FSMA 2000, s 2B(2).
12
FSMA 2000, s 3I(5).

6 RELEVANT REQUIREMENTS, RULES AND GUIDANCE

(a) Qualifying EU provisions and relevant requirements

1.14 A wide range of normative provisions apply to authorised firms and other
persons, by or under FSMA 20001. The two most common types of normative
provision are, first, rules made by the FCA or the PRA; and second, directly
applicable provisions of EU law2. Directly applicable provisions designated by
HM Treasury, by Order3 are defined4 as ‘qualifying EU provisions’. In addition,
FSMA 2000 uses the collective noun ‘relevant requirements’5 to refer to
requirements to which authorised firms and other persons are subject, both (a)
by or under FSMA 2000; (b) by virtue of qualifying EU provisions; and (c) by
virtue of other specified directly applicable provisions of EU law.
Breach of a relevant requirement engages the regulators’ powers to impose
disciplinary measures6 on an authorised person, under FSMA 2000, Part 147. A
reasonable likelihood that any person (a) will contravene a relevant require-
ment; or (b) has contravened a relevant requirement and will continue or repeat
that contravention, engages the regulators’ powers to apply to the Court for an
injunction8. For example, the Court may make an order requiring any person
who appears to have been knowingly concerned in the contravention9 to
remedy the contravention10 and restraining him from disposing of or dealing
with relevant assets11. Breach of a relevant requirement also engages

14
 Relevant Requirements, Rules and Guidance 1.15

the Court’s and the regulators’ powers to require restitution12. The corollary to
each of these propositions is that a person’s failure to follow guidance13 made or
given by either regulator does not by itself trigger any statutory powers.
1
Including, amongst others, requirements imposed on qualifying parent undertakings, under
FSMA 2000, Part 12A.
2
Directly applicable provisions do not apply only to authorised persons. They also apply for
other purposes, for example in defining the functions and powers of the Regulators.
3
The Financial Services and Markets Act 2000 (Qualifying EU Provisions) Order 2013 (SI
2013/419).
4
FSMA 2000, s 204A(2)(b).
5
FSMA 2000, s 204A(2).
6
See para 1.30 and following for disciplinary powers in relation to ‘approved persons’.
7
The measures include public censure, financial penalty, the suspension of permission to carry on
a regulated activity, or the imposition of limitations or restrictions on permission to carry on a
regulated activity.
8
FSMA 2000, ss 380 (Injunctions) and 381 (Injunctions in cases of market abuse). See for
example Financial Services Authority v Fitt [2004] EWHC 1669 (Ch); Financial Services
Authority v Martin and another [2005] EWCA Civ 1422; Financial Services Authority v
Shepherd and another [2009] EWHC 1167 (Ch); Financial Services Authority (a company
limited by guarantee) v Sinaloa Gold plc and others [2013] UKSC 11 (FSA not required to give
any cross-undertaking in order to obtain an injunction under FSMA 2000, s 380).
9
Note, therefore, that the injunctive power goes wider than ‘authorised persons’ and extends in
principle to un-regulated entities ‘knowingly concerned’ in the breach, including parent
companies.
10
FSMA 2000, s 380(2).
11
FSMA 2000, s 380(3).
12
FSMA 2000, ss 382 and 383.
13
On which, see para 1.18.

(b) Rules
1.15 FSMA 2000 gives both the FCA and the PRA the function of making
subordinate legislation, in the form of rules, statements and codes1. FSMA
2000, Part 9A specifies the types2 of rules that may be made and in some cases
allocates the power to make specified types of rules between the regulators.
Part 9A also specifies the statutory processes surrounding rule-making3. The
definitive version of a rule is that contained in a rule-making instrument.
Rule-making instruments must be published by the regulator concerned and
must specify the legislative provision under which the rules contained in the
instrument are made4. A person who wishes to rely on a rule-making instrument
in legal proceedings may require the regulator that made it to certify its
contents5, though in practice the evidential status of a rule-making instrument
is seldom challenged.
In addition to its particular rule-making powers, each regulator may make such
‘general rules’ as appear to it to be necessary or expedient for the purpose of
advancing any of its specified objectives’6. FCA general rules may apply to
authorised persons generally7. PRA general rules apply only to PRA-authorised
persons8. General rules may in either case apply with respect to both the
regulated and unregulated activities of an authorised person. Either regulator
may waive or modify most, but not all, rules that is has made, on specified
grounds and on the application of, or with the consent of, a person subject to
the rules9.
1
See paras 1.11 and 1.12.

15
1.15 The Regulation of Banks
2
These include rules addressing particular issues, for example rules about remuneration (pro-
hibiting persons of a specified description, from being remunerated in a specified way) (FSMA
2000, s 137H); rules about recovery plans and resolution packs (FSMA 2000, ss 137J and
137K); ‘price stabilising rules’ (FSMA 2000, s 137Q) and financial promotion rules (FSMA
2000, s 137S), but also generic types of rules with particular legal effects – see in particular
FSMA 2000, s 138C, dealing with ‘evidential provisions’. These are rules, breach of which, or
compliance with which, carries no consequence other than as an indicator of breach of or
compliance with another specified rule.
3
For example, the requirement for consultation before rules are made (FSMA 2000, s 138I (FCA)
and FSMA 2000, s 138J (PRA).
4
FSMA 2000, s 138G.
5
FSMA 2000, s 138H.
6
FSMA 2000, ss 137A (FCA) and 137G (PRA). The FCA general rules may only be made to
advance its operational objectives, on which see para 1.11.
7
FSMA 2000, s 137A(1).
8
FSMA 2000, s 137G(1).
9
FSMA 2000, s 138A.

(c) Breach of rules

1.16 While breach of a rule may engage the regulators’ disciplinary and other
powers1 a person is not guilty of an offence by reason of a contravention of a
rule made by either regulator2. In addition, with four exceptions3, no contra-
vention of a rule makes any transaction void or unenforceable4.
1
See para 1.14.
2
FSMA 2000, s 138E(1).
3
The exceptions, in FSMA 2000, s 138E(3), are FCA general rules relating to the cost of credit
and the duration of credit agreements under FSMA 2000, s 137C; FCA product intervention
rules, under FSMA 2000, s 137D; FCA general rules on early exit pension charges, under FSMA
2000, s 137FBB; and (once FSMA 2000, s 137FD comes into force), FCA rules on charges for
claims management.
4
FSMA 2000, s 138E(2).

(d) Actions for damages

1.17 With five exceptions1, a contravention of a rule by an authorised person is
potentially actionable2 at the suit of a private person who suffers loss as a result
of the contravention, subject to the defences and other incidents applying to
actions for breach of statutory duty. Breach of a rule made by the PRA does not
attract a private right of action unless the PRA so provides3. By contrast, breach
of a rule made by the FCA attracts a private right of action unless the FCA
provides otherwise4.
If breach of a rule is actionable, it is usually actionable only at the suit of a
‘private person’. However, in ‘prescribed cases’5, a breach may be actionable by
persons generally6. ‘Private person’ has ‘such meaning as may be prescribed’7.
HM Treasury has set out the definition of a ‘private person’ in regulations8.
1
FSMA 2000, s 138D(5): there is no private right of action for breach of (a) rules under FSMA
2000, s 64A (rules of conduct applicable to approved persons and employees of authorised
persons); (b) rules under FMSA 2000, Part 6 (Listing Rules); (c) rules under section 137O
(threshold condition code); (d) rules under section 192J (provision of information by parent
undertakings); or (e) a rule requiring an authorised person to have or maintain financial
resources.

16
 Relevant Requirements, Rules and Guidance 1.18
2
‘Actionable’ means ‘giving rise to a cause of action in court of law’. Breach of a rule which is not
actionable in this sense (for example because the right of action has been removed) may
nevertheless give rise to obligations, breach of which can lead to compensation. See R (on the
application of British Bankers Association) v Financial Services Authority [2011] EWHC 999
(Admin), per Ouseley J, at [71]. An action for breach of statutory duty is an action in tort. As
to the relationship between a right of action under FSMA 2000, s 138D and rights of action or
duties of care at common law, see CGL Group Ltd v Royal Bank of Scotland plc [2018] 1 WLR
2137 (CA), per Beatson LJ, at [85] to [87]: ‘the overall regulatory regime is a clear pointer
against the imposition of a duty of care [at common law]’.
3
FSMA 2000, s 138D(1).
4
FSMA 2000, ss 138D(2) and (3).
5
That is, prescribed by the regulator that made the rules in question.
6
FSMA 2000, s 138D(4).
7
FSMA 2000, s 138D(6).
8
The Financial Services and Markets Act 2000 (Fourth Motor Insurance Directive) Regulations
2002, (SI 2002/2706) and the Financial Services and Markets Act 2000 (Rights of Action)
Regulations 2001 (SI 2001/2256), regulation 3, read with Regulation 6(1). A private person is
generally ‘an individual’ or ‘any person who is not an individual, unless he suffers the loss in
question in the course of carrying on business of any kind’, as to which, see Titan Steel
Wheels Ltd v Royal Bank of Scotland plc [2010] EWHC 211 (Comm), per David Steel J, at [44]
to [76] and Camerata Property Inc v Credit Suisse Securities (Europe) Ltd [2012] EWHC 7
(Comm). See also the discussion at Chapter 30.

(e) Guidance
1.18 Like the FSA before it, the FCA has a statutory power1 to give guidance,
consisting of such information and advice as the FCA considers appropriate
with respect to any matters, including (a) the operation of specified parts of
FSMA 2000; and (b) any rules made by the FCA. At the time of writing the FCA
appears set to continue the FSA’s practice of supplementing its rules with
detailed guidance.
Broadly, FCA guidance is of three types (a) general guidance; (b) individual
guidance; and (c) other normative material. ‘General guidance’2 is guidance
(and recommendations3) given to ‘FCA-regulated persons’4 generally, or to a
class of FCA-regulated persons, which is intended to have continuing effect and
which is in writing. The majority of the material identified as guidance in the
FCA Handbook5 falls into this category, as do ‘Statements of Finalised Guid-
ance’, published by the FCA. Statutory duties6 of consultation and publication
attach to the making of general guidance.
As to the legal status of material identified as general guidance in the FCA
Handbook, the FCA has indicated that:
‘Guidance in the Handbook is made under section 139A of FSMA and is mainly used
to:
• explain the implications of other provisions
• indicate possible means of compliance, or
• recommend a particular course of action or arrangement.
Guidance is not binding and need not be followed to achieve compliance with the
relevant rule or requirement. However, if a person acts in accordance with general
guidance in circumstances contemplated by that guidance, we will treat that person as
having complied with the rule or requirement to which that guidance relates.7’.
As a corollary, where the FCA indicates in guidance that it will behave in a
particular way (for example as to the matters that it will take into account in

17
1.18 The Regulation of Banks

reaching a decision), the Court will expect it to act in accordance with that
guidance8, but giving the regulator the full benefit of any discretion included in
that guidance.
In general, the Court has been unwilling to criticise the regulator for failing to
give an individual firm guidance as to the meaning or effect of regulatory
requirements in the particular circumstances of that firm. In Financial Services
Authority v Fox Hayes the Court of Appeal held that
‘Regulators may often find themselves in a somewhat difficult position when they are
expressly asked for advice or guidance. It cannot be a legitimate criticism of a
regulator that he decides not to give advice or guidance. It is the duty of the
authorised person to comply with any relevant rule not the duty of the regulator to
advise whether conduct of a particular kind does or does not constitute compliance
with or contravention of a rule. The most that can, in my view, be said is that, if advice
or guidance is given and it subsequently transpires that it was wrong, that may have
an effect on the penalty for any transgression. One can only say that it “may” have an
effect upon penalty because it is likely to be only the authorised person who knows
the full factual picture; usually the regulator will not. Any advice or guidance given
can only be relied on if the full facts are before the regulator when the advice or
guidance is given.9’
Notwithstanding the absence of any general legal duty to give guidance, the
FCA has (like the FSA before it) indicated10 that it is open to ‘reasonable
requests’11 for ‘individual guidance’ from those that are subject to FCA rules,
and that
‘If a person acts in accordance with current individual written guidance given to him
by the FCA in the circumstances contemplated by that guidance, then the FCA will
proceed on the footing that the person has complied with the aspects of the rule or
other requirement to which the guidance relates12’.
The FSA adopted the practice13 (which the FCA has continued) of from time to
time ‘confirming’ guidance produced by financial services industry bodies, as an
alternative to making FCA guidance. An example14 of the usual confirmation
wording, is as follows:
‘The FCA has reviewed this Industry Guidance . . . and has confirmed that it will
take it into account when exercising its regulatory functions . . . This Guidance is
not mandatory and is not FCA Guidance. This FCA view cannot affect the rights of
third parties.’
Finally, during its lifetime, the FSA published a mass of normative material on
a wide range of topics, much of which was expressly identified as not having the
status of general guidance. The FCA has adopted a substantial part of that
material and has begun to publish similar material of its own. As to the legal
status of both industry guidance and other normative material, the FCA has
indicated that:
‘The FCA will not take action against a person for behaviour that it considers to be
in line with guidance, other materials published by the FCA in support of the
Handbook or FCA-confirmed Industry Guidance which were current at the time of
the behaviour in question.’15
In stark contrast to the FCA, the PRA has no statutory power to give guidance
under FSMA 2000.16 Consistent with that omission, the PRA at first indicated
that it did not in future intend to issue detailed guidance to clarify its policy, but

18
 Relevant Requirements, Rules and Guidance 1.18

might issue ‘supervisory statements’ if guidance material was required’17. The

PRA’s current position is similar, but somewhat more nuanced:
‘The PRA intends to limit strictly the use of guidance material in the [PRA]
Rulebook18. Rules are stand alone and purposive where possible, without supporting
guidance, although supervisory statements play a role in supporting Rules alongside
the Approach Documents. Other relevant types of material, for example procedures
manuals and information on how the PRA itself will act, will be published separately.
. . . The PRA does not plan to issue significant amounts of detailed guidance to
clarify its policy, whether in the form of general guidance issued publicly or advice
given by supervisors to individual firms. Where the PRA judges that general guidance
material is required, this is issued in a consistent format as papers entitled supervisory
statements. Such material is focused on the PRA’s expectations, aimed at facilitating
firms’ judgement in determining whether they meet these expectations, and will not
be overly detailed’19

1
FSMA 2000, s 139A, supplemented by a separate power (see FSMA 2000, ss 139A(1A) and
333P) to give guidance in relation to the FCA’s functions under FSMA 2000, Part 20A
(Pensions Guidance).
2
FSMA 2000, s 139B(5).
3
FSMA 2000, s 139A(7).
4
FSMA 2000, s 139A(9): ‘an authorised person or a person otherwise subject to rules made by
the FCA’.
5
On which see para 1.19.
6
See FSMA 2000, ss 139A and 139B.
7
Financial Conduct Authority, ‘Reader’s Guide: An introduction to the Handbook’, September
2017, page 11, published online. Previous versions of the Guide made clear that this statement
of the effect of guidance in the FCA Handbook is itself guidance under FSMA 2000. The current
version does not repeat that indication, but it is a reasonable inference that the status of the
Guide is unchanged.
8
R (on the application of Davies and others) v Financial Services Authority [2003] EWCA Civ
1128 The regulator ‘is required to discharge its statutory responsibilities in accordance with the
provisions of the 2000 Act and its Handbook of Rules and Guidance.’
9
Financial Services Authority v Fox Hayes [2009] EWCA Civ 76, per Longmore LJ, at [44].
10
In Chapter 9 of the Supervision Manual (‘SUP’), which forms part of the FCA Handbook of
Rules and Guidance.
11
SUP 9.25G.
12
SUP 9.4.1G.
13
Set out in Financial Services Authority, ‘Policy Statement PS 07/16 FSA confirmation of
Industry Guidance’, September 2007.
14
Taken from Confirmed Industry Guidance for FCA Banking Conduct of Business Sourcebook,
January 2017.
15
The FCA Decision Procedures and Penalties Manual (‘DEPP’), forming part of the FCA
Handbook of Rules and Guidance, DEPP 6.2.1G(4).
16
The PRA may of course, publicise its view of particular issues, in the same way as any other
person. Any such statements will not have a formal status under FSMA 2000, but are
nevertheless likely to be of weight in the construction of the PRA’s rules and may be the basis
of legitimate expectations in public law.
17
PRA March 2013 Letter to firms and The PRA’s approach to banking supervision (April 2013),
para 209.
18
As to which, see para 1.20.
19
Prudential Regulation Authority. ‘The Prudential Regulation Authority’s approach to banking
supervision’, March 2016, paragraph 222 and ff.

19
1.19 The Regulation of Banks

7 THE FCA HANDBOOK AND THE PRA RULEBOOK

(a) The FCA Handbook of Rules and Guidance

1.19 The FSA1 maintained and published online a ‘Handbook of Rules and
Guidance’ (‘the FSA Handbook’). From April 2013, the FCA designated and
adopted as its own (with consequential amendments), those parts of the FSA
Handbook relevant to the functions of the FCA under FSMA 2000 as modified
by the FSA 2012.
Accordingly, the FCA Handbook of Rues and Guidance (‘the FCA Handbook’,
or just ‘the Handbook’) now contains a version2 of current3 legislative provision
adopted or made by the FCA, together with selected4 UK and EU legislative
material relevant to the discharge by the FCA of its functions under FSMA
2000. The Handbook contains a number of ‘modules’ (often referred to as
‘Sourcebooks’) covering different topics. Each module consists predominantly
of rules and guidance.5 Each module of the Handbook has a name, usually
abbreviated to an acronym. Each Handbook provision has a ‘status letter’,
indicating its legal status. For example, rules have the status letter ‘R’ and
guidance has the status letter ‘G’. A module of the Handbook may apply to a
number of different types of firm: for example, the FCA’s high-level Principles
for Businesses (in the PRIN module of the Handbook) apply to all firms
regulated by the FCA. Each module of the Handbook therefore contains
provisions specifying the scope of application of the provisions in that module.
The convention is to refer to numbered provision of a named sourcebook,
including the status letter. So, for example, the first provision in the Bank-
ing Conduct of Business module of the Handbook (the general application rule)
is cited as ‘BCOBS 1.1.1R’.
Readers of the Handbook are recommended to review both the ‘General
Provisions’ (‘GEN’) module of the Handbook, which sets out amongst other
things the interpretative provisions6 applicable to Handbook material, and the
Readers’ Guide7 to the Handbook, also published online, which sets out an
explanation of the different types of provision to be found in the Handbook and
their effect. In addition, the FCA has published alongside its Handbook a
substantial volume of guidance on various topics, including its view of the range
and scope of regulated activities and regulated investments under FSMA 20008.
1
The statutory predecessor of the FCA and the PRA: see para 1.1.
2
Note that the definitive version of an FCA rule is not the version in the Handbook (which may
reflect non-substantive editorial amendments or other changes designed to aid readability) but
the version contained in the rule-making instrument by which it was made. See para 1.15.
3
The online version of the Handbook includes a useful ‘time-travel’ facility. This enables the user
to view the Handbook at a past or future date of the user’s choice.
4
Note the warning in paragraph 1.21.
5
On which see paragraphs 1.14 and following.
6
Including, for example, the use of defined terms in the Glossary to the Handbook (GEN
2.2.7R), the requirement for purposive interpretation of Handbook provisions (GEN 2.2.1R)
and the ‘de-confliction’ of provisions made by both the FCA and the PRA (GEN 2.2.23R to
2.2.25G).
7
See FSMA 2000, s 139A(7).
8
This material is part of the FCA Perimeter Guidance Manual (‘PERG’) referred to in paragraph
1.5.

20
 FCA Handbook and PRA Rulebook 1.21

(b) The PRA Rulebook

1.20 Between 2013 and 2015 some PRA rules and other PRA normative
material appeared in a handbook shared with the FCA. From 2015, however,
no Handbook provisions are shared. Instead, the PRA maintains and publishes
online the ‘PRA Rulebook’ (or, simply ‘the Rulebook’), containing a version1 of
current2 legislative provision adopted or made by the PRA. The Rulebook
reflects, amongst other things, the PRA’s pared-down approach to rule-making
and giving guidance3.
The Rulebook is divided in three main blocks: (i) Banking and Investment
Rules; (ii) Insurance Rules; and (iii) Other Rules. These blocks are then divided
into five business/regulatory Sectors. Each Sector contains a complete set of
PRA rules applicable to firms in that Sector4. One result is that high-level PRA
rules applicable to all PRA-regulated firms are repeated in each Sector. The
Sectors are:
‘(a) Capital Requirement Regulation firms (“CRR Firms”) – broadly, banks and
building societies, together with systemically important investment firms
designated by the PRA for supervision by it, in each case falling within the
scope of the Capital Requirements Regulation;
(b) Non-Capital Requirement Regulation firms (“Non-CRR Firms”) – a firm
that has permission to accept deposits, but which is outside of the scope of
the Capital Requirements Regulation , for example a credit union;
(c) Solvency II firms (“SII Firms”) – insurance and reinsurance undertakings
falling within the scope of the Solvency II Directive;
(d) Non-Solvency II firms (“Non-SII Firms”) – insurance and reinsurance
undertakings falling outside scope of the Solvency II Directive; and
(e) Non-authorised persons – for example, the Financial Services Compensation
Scheme’5.
Each Part of the Rulebook has a name, usually abbreviated to an acronym. The
convention is to refer to the numbered paragraphs of a named part, for example
‘Market Risk (or MR) 3.1’.
1
Note that the definitive version of a PRA rule is not the version in the Rulebook (which may
reflect non-substantive editorial amendments or other changes designed to aid readability) but
the version contained in the rule-making instrument by which it was made. See para 1.15.
2
The online version of the PRA Rulebook includes a useful ‘time-travel’ facility. This enables the
user to view the Rulebook at a past or future date of the user’s choice.
3
See para 1.18.
4
But note that some Sectors apply to more than one kind of firm (for example, the CRR Sector
applies both to banks and investment firms), in which case, application provisions indicate the
scope of each part of the Sector.
5
On which, see para 1.18.

(c) A note of caution regarding directly applicable provisions of EU law

1.21 Readers should note carefully that the FCA Handbook and the PRA
Rulebook do not usually set out directly applicable provisions of EU law, or
related guidance issued by European Supervisory Authorities. EEA (including
UK) firms are subject to directly applicable provisions independently of any
measure of reception into the law of their home state. Accordingly, it should not
be assumed without investigation that the Handbook or Rulebook (whether
separately or together) comprise the complete set of normative requirements

21
1.21 The Regulation of Banks

applicable on any given topic1.

1
See for example the PRA’s list of ‘frequently asked questions’ relating to its Rulebook,
published online: ‘Relevant EU Regulations, including binding Technical Standards that apply
directly to UK firms, will not be reproduced in the PRA’s Rulebook but will be part of the
PRA’s requirements of firms. Firms are also subject to guidance issued by the European
supervisory authorities.’ The FCA’s practice is less minimalist, in that the Handbook some-
times, but not always, includes guidance pointing to directly applicable material.

8 KEY ELEMENTS OF BANKING REGULATION

(a) Threshold conditions for authorisation

1.22 In the jargon of FSMA 2000, the ‘threshold conditions’ are a series of
statutory conditions, set out in FSMA 2000, Schedule 6 that an applicant for
authorisation must meet if it is to be authorised and which, once authorised, it
must continue to meet if it is to remain authorised. In large part, the threshold
conditions reflect (and are an important means by which the UK implements)
the fundamental requirements of EU financial services directives.
FSMA 2000, s 55B(3) provides that:
‘In giving or varying permission, imposing or varying a requirement, or giving
consent, under any provision of this Part, each regulator must ensure that the person
concerned will satisfy, and continue to satisfy, in relation to all of the regulated
activities for which the person has or will have permission, the threshold conditions
for which that regulator is responsible.’
The ‘threshold conditions’ in relation to a regulated activity, means the condi-
tions set out in or specified under FSMA 2000, Schedule 6, as read with any
‘threshold condition code’ made by either regulator under FSMA 2000,
s 137O1.
Consistent with the notion of dual regulation, a firm carrying on banking
business must comply with two sets of threshold conditions: one set, for which
the PRA is responsible, relevant to the discharge by the PRA of its functions
under FSMA 2000; and one set, for which the FCA is responsible2, relevant to
the discharge by the FCA of its functions under FSMA 2000.
Several observations can be made about the threshold conditions. First, they
underpin the regulators’ decision as to whether or not to give permission for an
applicant to carry on a regulated activity. More specifically, in relation to an
application for permission to carry on banking business, the threshold condi-
tions underpin the PRA’s decision to grant or withhold permission, and the
FCA’s decision to grant or withhold its consent to that decision3.
Second, an authorised firm is under a continuing obligation to comply with the
applicable threshold conditions, which are accordingly essential to the regula-
tors’ ongoing supervision of a firm, once authorised. In particular, a firm’s fail-
ure, or likely failure, to comply with one or more of the applicable threshold
conditions is an important ground4 for the exercise by either regulator of the
power to cancel or vary5 a firm’s existing permission or to impose6 a ‘require-
ment’ on the firm’s permission. A firm’s permission may be varied or cancelled,
or a requirement imposed, at the initiative7 of either regulator, in respect of a
threshold condition for which that regulator is responsible and in each case in

22
 Key Elements of Banking Regulation 1.23

consultation with the other regulator. The range of possible variations or

requirements is very wide8, but in relation to a PRA-authorised firm with
permission to accept deposits, the PRA has a limited power to restrain a
proposed action by the FCA9.
Third, substantial parts of the regulatory requirements imposed by the regula-
tors under FSMA 2000 either explicitly refer, or can be traced back, to one or
more threshold conditions10. Accordingly, the threshold conditions are an
essential road map of the basic regulatory requirements of the PRA and the
FCA.
1
FSMA 2000, s 55B(1).
2
See generally, FSMA 2000, s 55B(2).
3
FSMA 2000, s 55F, noting that the PRA cannot restrain the FCA’s decision to withhold consent
to the grant of permission: see FSMA 2000, s 3I(3)(a).
4
The other grounds in FSMA 2000, s 55J are (a) that the firm has failed during a period of at least
12 months, to carry on a regulated activity to which its Part 4A permission relates; and (b) that
it appears to either regulator that it is desirable to exercise the power in order to advance its
specified statutory objectives.
5
Under FSMA 2000, s 55J.
6
Under FSMA 2000, ss 55L or 55M.
7
In the regulatory jargon, such an ‘own initiative variation of permission’ is described as an
‘OIVOP’, as distinct from a variation of permission at the firm’s request, under FSMA 2000,
ss 55H or 55I.
8
The regulators may, for example, require a firm to limit the scope or extent of its business, to
close to new business, or to hold assets on trust for the benefit of customers.
9
See para 1.13.
10
In addition, the threshold conditions might be expected to be less liable to amendment than the
requirements of the individual regulators – but note that HM Treasury has the power under
FSMA 2000, s 55C, to amend FSMA 2000, Schedule 6 by Order.

(b) PRA threshold conditions

1.23 Consistent with the notion that the threshold conditions are the funda-
mental requirements for authorisation (on which see para 1.22, above), the
threshold conditions for PRA-authorised firms focus primarily on the funda-
mental conditions relevant to the PRA’s general objective1 of promoting the
safety and soundness of PRA-authorised persons.
If the person concerned (ie an applicant for authorisation, or an authorised
firm, referred to as ‘D’ in the relevant part of FSMA 2000, Schedule 6) carries
on, or is seeking to carry on, PRA-regulated activities which consist of or
include the regulated activity of accepting deposits2, the threshold conditions
which are relevant to the discharge by the PRA of its functions in relation to D
are as follows.
(i) Legal status
‘If D carries on or is seeking to carry on a regulated activity which
consists of or includes accepting deposits or issuing electronic money,
D must be—
(a) a body corporate, or
(b) a partnership3.’
(ii) Location of offices
‘(1) If D is a body corporate incorporated in the United Kingdom—
(a) D’s head office, and

23
1.23 The Regulation of Banks

(b) if D has a registered office, that office, must be in the

United Kingdom.
(2) If D is not a body corporate but D’s head office is in the United
Kingdom, D must carry on business in the United Kingdom4.’
(iii) Business to be conducted in a prudent manner:
‘(1) The business of D must be conducted in a prudent manner.
(2) To satisfy the condition in sub-paragraph (1), D must in particular
have appropriate financial and non-financial resources5.’
To have ‘appropriate financial resources’, a person’s assets6 must7 be appropri-
ate given its liabilities8, and the liquidity of its resources must be appropriate
given its liabilities and when its liabilities fall due or may fall due.
A person’s ‘non-financial resources’ include any systems, controls, plans or
policies that the person maintains, any information that the person holds and
the human resources that the person has available9. Five conditions10 determine
the adequacy of a person’s non-financial resources. These include a willingness
to manage its business to a reasonable standard of effectiveness; and the
availability of resources sufficient to comply with any requirement imposed by,
or any disciplinary measure11 liable to be enforced by, the PRA.
In determining whether a person has adequate financial or non-financial
resources, the relevant considerations include12 the nature and complexity of
the regulated activities that the person carries on or seeks to carry on; and the
nature and scale of the person’s actual or prospective business; and the risks that
the business poses to the stability of the UK financial system.
(iv) Suitability:
‘(1) D must be a fit and proper person, having regard to the
PRA’s objectives13.’
The matters which are relevant in determining whether a person is fit and
proper include whether those who manage the person’s affairs have adequate
skills and experience and have acted and may be expected to act with probity14.
(v) Effective supervision:
‘(1) D must be capable of being effectively supervised by the PRA15.’
The matters that are relevant to the question of whether a person is capable of
being effectively supervised by the PRA include six specific factors. The first five
are: (a) the nature and complexity of the person’s regulated activities; (b) the
complexity of any products that the person will provide in carrying on those
activities; (c) the way in which the person’s business is organised; (d) if the
person is a member of a group, whether membership of the group is likely to
prevent the PRA’s effective supervision; and (e) whether the person is subject to
consolidated supervision16 under the EU Capital Requirements Directive and
other relevant directives.17
The sixth factor is relevant if the person has ‘close links’18 with another entity.
In that case the issue is whether the existence of the close links or the nature of
the relationship between the person and the linked entity is likely to prevent
effective supervision by the PRA19. In addition, if the linked entity is subject to

24
 Key Elements of Banking Regulation 1.24

the laws, regulations or administrative provisions of a territory which is not an

EEA State, whether those foreign provisions, or any deficiency in their enforce-
ment, would prevent the PRA’s effective supervision20.
1
FSMA 2000, s 2B(3)(a). See para 1.12 above.
2
Or, indeed any regulated activity that is not effecting or carrying out contracts of insurance, the
assumption of insurance risk by a transformer vehicle, or a regulated activity connected with the
operation of the insurance market at Lloyd’s of London.
3
FSMA 2000, Sch 6, para 5B.
4
FSMA 2000, Sch 6, para 5C.
5
FSMA 2000, Sch 6, para 5D.
6
Including its contingent assets: FSMA 2000, Sch 6, para 1A(1).
7
FSMA 2000, Sch 6, para 5D(3).
8
Including its contingent liabilities: FSMA 2000, Sch 6, para 1A(1).
9
FSMA 2000, Sch 6, para 1A(2).
10
FSMA 2000, Sch 6, para 5D(4).
11
Under FSMA 2000, Part 14.
12
FSMA 2000, Sch 6, para 5D(5).
13
FSMA 2000, Sch 6, para 5E.
14
FSMA 2000, Sch 6, para 5E(2).
15
FSMA 2000, Sch 6, para 5F.
16
Including supplementary supervision. See FSMA 2000,Sch 6, para 1A(1) read with FSMA
2000, s 3M(2).
17
FSMA 2000, Sch 6, para 1A(1) read with FSMA 2000, s 3M(3), FSMA 2000, s 425(a) and
FSMA 2000, Sch 3 (EEA Passport Rights), para 2.
18
Broadly defined in FSMA 2000, Sch 6, para 5F(3), to include (in summary) parent and
subsidiary relationships; group relationships; and relationships arising as a result of ownership
or control of 20% or more of voting rights or capital.
19
FSMA 2000, Sch 6, para 5F(2)(f)(i) and (ii).
20
FSMA 2000, Sch 6, para 5F(2)(f)(iii).

(c) FCA threshold conditions

1.24 Consistent with the notion that the threshold conditions are the funda-
mental requirements for authorisation (on which see para 1.22), the threshold
conditions for FCA-authorised firms focus primarily on the fundamental con-
ditions relevant to the FCA’s objectives (on which see para 1.11), which include
the operational objective of securing an appropriate degree of protection for
consumers.
If the person concerned (ie an applicant for authorisation or an authorised firm,
referred to as ‘B’ in the relevant part of FSMA 2000, Schedule 6) carries on, or
is seeking to carry on, regulated activities which consist of or include a
PRA-regulated activity (such as accepting deposits), the threshold conditions
which are relevant to the discharge by the FCA of its functions in relation to B
are as follows. The FCA Handbook includes a Threshold Conditions Code
(‘COND’) which includes limited guidance on the interpretation of each FCA
threshold condition.
(i) Effective supervision
(i) ‘B must be capable of being effectively supervised by the FCA having
regard to all the circumstances1.’
The matters that are relevant to the question of whether a person is capable of
being effectively supervised by the FCA include the same six specific factors
relevant to effective supervision by the PRA and set out in para 1.23. The

25
1.24 The Regulation of Banks

outcome of the FCA’s evaluation may of course be different from that of the
PRA, not least because the two regulators have different statutory objectives.
(ii) Appropriate non-financial resources
(ii) ‘The non-financial resources of B must be appropriate in relation to the
regulated activities that B carries on or seeks to carry on, having regard
to the operational objectives2 of the FCA3.’
The particular matters relevant to the FCA’s assessment of non-financial re-
sources include (a) the nature and scale of the person’s actual or intended
business; (b) the risks to the continuity of the services that the person provides
or intends to provide; (c) the person’s membership of a group and any effect
which that membership may have; (d) the skills and experience of those who
manage the person’s affairs; and (e) whether the person’s non-financial re-
sources are sufficient to enable it to comply with requirements imposed or likely
to be imposed by, or any disciplinary measure4 liable to be enforced by the FCA.
(iii) Suitability
(iii) ‘(1) B must be a fit and proper person, having regard to the operational
objectives5 of the FCA6.’
The particular matters relevant to the FCA’s assessment of suitability include
the nature and complexity of the person’s actual or intended regulated activi-
ties; the need to ensure that the person’s affairs are conducted in an appropriate
manner, having regard to the interests of consumers and the integrity of the UK
financial system; and the need to minimise financial crime.
(iv) Business model
(iv) ‘B’s business model (that is, B’s strategy for doing business) must be
suitable for a person carrying on the regulated activities that B carries on
or seeks to carry on, having regard to the FCA’s operational objectives7.’8
1
FSMA 2000, Sch 6, para 3B(1).
2
The FCA’s operational objectives are as set out in paragraph 1.30.
3
FSMA 2000, Sch 6, para 3C(1).
4
Under FSMA 2000, Part 14.
5
The FCA’s operational objectives are as set out in para 1.30.
6
FSMA 2000, Sch 6, para 3D.
7
The FCA’s operational objectives are as set out in para 1.30.
8
FSMA 2000, Sch 6, para 3E.

(d) FCA Principles for businesses and PRA fundamental rules

1.25 Turning to the FCA Handbook and PRA Rulebook1, the most general
statement of each regulator’s requirements are (a) the FCA ‘Principles for
Businesses’; (b) and the PRA ‘Fundamental Rules’. In each case, these are high
level rules of general application. In the case of the FCA, they are set out in the
PRIN module of the Handbook. In the case of the PRA, the Fundamental Rules
are repeated in each Sector2 of the Rulebook, including the CRR Sector, which
is most likely to be relevant to a bank.
Most FCA enforcement action is based on, or includes, an allegation that the
firm has breach one or more Principles for Businesses. That is not least because
enforcement of the Principles enables early regulatory intervention, even if the
regulator cannot yet demonstrate that a more specific or detailed rule has been

26
 Key Elements of Banking Regulation 1.25

breached. However, although the Principles are central to enforcement by the

regulator, breach of the Principles is not actionable as a breach of statutory
duty3.
The Principles ‘express the main dimensions of the ‘fit and proper’ standard set
for firms in threshold condition 5’4. Because the Principles are general state-
ments of regulatory requirements, a particular pattern of conduct may breach a
Principle even if the same conduct does not breach more detailed rules covering
the same issue. As the FCA Handbook puts it:
‘Some of the other rules and guidance in the Handbook deal with the bearing of the
Principles upon particular circumstances. However, since the Principles are also
designed as a general statement of regulatory requirements applicable in new or
unforeseen situations, and in situations in which there is no need for guidance, the
FCA’s other rules and guidance or EU regulations should not be viewed as exhausting
the implications of the Principles themselves’5.
The complete set of Principles for Business is as follows:
‘1 Integrity: A firm must conduct its business with integrity.
2 Skill, care and diligence: A firm must conduct its business with due skill, care
and diligence.
3 Management and control: A firm must take reasonable care to organise and
control its affairs responsibly and effectively, with adequate risk
management systems.
4 Financial prudence: A firm must maintain adequate financial resources.
5 Market conduct: A firm must observe proper standards of market conduct.
6 Customers’ interests: A firm must pay due regard to the interests of its
customers and treat them fairly.
7 Communications with clients: A firm must pay due regard to the information
needs of its clients, and communicate information to them in a way which is
clear, fair and not misleading.
8 Conflicts of interest: A firm must manage conflicts of interest fairly, both
between itself and its customers and between a customer and another client.
9 Customers: relationships of trust: A firm must take reasonable care to ensure
the suitability of its advice and discretionary decisions for any customer who
is entitled to rely upon its judgment.
10 Clients’ assets: A firm must arrange adequate protection for clients’ assets
when it is responsible for them.
11 Relations with regulators: A firm must deal with its regulators in an open and
cooperative way, and must disclose to the appropriate regulator
appropriately anything relating to the firm of which that regulator would
reasonably expect notice.’6
The PRA’s Approach to Banking Supervision characterises the PRA’s Funda-
mental Rules in a the following way:
‘The PRA has made Fundamental Rules which set out at a high level, the require-
ments placed on firms. These are supported by more detailed rules and directly
applicable EU regulations. A firm must comply with these requirements and must
understand what they mean for its business. A failure to comply with the Fundamen-
tal Rules may be relevant to a firm’s ongoing compliance with the Threshold Condi-
tions and may result in enforcement or other actions.’7.
The full set of Fundamental Rules (as set out in FR 2) is as follows:
‘Fundamental Rule 1: A firm must conduct its business with integrity.

27
1.25 The Regulation of Banks

Fundamental Rule 2: A firm must conduct its business with due skill, care and
diligence.
Fundamental Rule 3: A firm must act in a prudent manner.
Fundamental Rule 4: A firm must at all times maintain adequate financial resources.
Fundamental Rule 5: A firm must have effective risk strategies and risk management
systems.
Fundamental Rule 6: A firm must organise and control its affairs responsibly and
effectively.
Fundamental Rule 7: A firm must deal with its regulators in an open and cooperative
way and must disclose to the PRA appropriately anything relating to the firm of
which the PRA would reasonably expect notice.
Fundamental Rule 8: A firm must prepare for resolution so, if the need arises, it can
be resolved in an orderly manner with a minimum disruption of critical services’.
It can be seen that the Fundamental Rules closely reflect some of the FCA
Principles for Businesses. However, in relation to a dual-regulated firm8 such as
a bank, the FCA can be expected to apply the Principles only in relation to
matters properly within its own statutory remit – that is, in relation to the
regulation of the conduct of the firm’s business9.
1
On which, see para 1.19 and following
2
As to which see para 1.20.
3
See PRIN 3.4.4R and para 1.10.
4
PRIN 1.1.4G.
5
PRIN 1.1.9G – a proposition affirmed in R (on the application of British Bankers Association)
v Financial Services Authority [2011] EWHC 999 (Admin).
6
PRIN 2.1.1R.
7
Prudential Regulation Authority, ‘The Prudential Regulation Authority’s approach to banking
supervision’, March 2016, paragraph 14.
8
On which, see para 1.10.
9
See GEN 2.2.23R(2): ‘Where a Handbook provision (or part of one) goes beyond the
FCA’s powers or regulatory responsibilities, it is to be interpreted as applied to the extent of the
FCA’s powers and regulatory responsibilities only.’

(e) PRA Systems and Controls requirements

1.26 The key elements of the PRA Rulebook relevant to a bank’s systems and
controls comprise:
(a) general organisational requirements, including PRA Rulebook, GR 2.1:
‘a firm must have robust governance arrangements, which include a
clear organisational structure with well defined, transparent and consis-
tent lines of responsibility, effective processes to identify, manage, moni-
tor and report the risks it is or might be exposed to, and internal control
mechanisms, including sound administrative and accounting procedures
and effective control and safeguard arrangements for information pro-
cessing systems’;
(b) requirements as to the skills, knowledge and expertise, of personnel and
the segregation of functions, including PRA Rulebook, SKE 3.2: ‘a firm
must ensure that its senior personnel define arrangements concerning the
segregation of duties within the firm and the prevention of conflicts of
interest’;

28
 Key Elements of Banking Regulation 1.27

(c) requirements as to compliance and internal audit, including PRA Rule-

book, CIA 2.1: ‘a firm must establish, implement and maintain adequate
policies and procedures sufficient to ensure compliance of the firm
including its managers, employees and appointed representatives . . .
with its obligations under the regulatory system and for countering the
risk that the firm might be used to further financial crime’;
(d) requirements as to risk control, including PRA Rulebook, RC 2.3: ‘a
firm must ensure that the management body approves and periodically
reviews the strategies and policies for taking up, managing, monitoring
and mitigating the risks the firm is or might be exposed to . . . ’; and
(e) requirements as to Outsourcing, Record Keeping and Notifications.

(f) Prudential requirements for UK banks

(i) CRD IV

1.27 From 1 January 20141 most provisions of the package of EU legislation

known as ‘CRD IV’ came into operation. CRD IV consists of two EU legislative
instruments. First, the Capital Requirements Regulation2 (‘the CRR’). Second,
the Capital Requirements Directive3 (‘the CRD’).
As a package, CRD IV is intended to be a ‘single rulebook’4 implementing the
Basel III agreement in the EU, in respect of the ‘credit institutions’5 and
investment firms to which the CRD IV measures apply. In broadest outline,
implementation includes enhanced requirements for the quality and quantity of
capital, and a basis for new liquidity requirements. CRD IV also makes changes
to rules on corporate governance, including remuneration, and introduces
standardised EU regulatory reporting - referred to as ‘COREP’ and ‘FINREP’.
These reporting requirements specify the information firms must report to
supervisors in areas such as own funds (ie capital), large exposures and financial
information.
The CRR lays down uniform rules concerning general prudential requirements,
with which all credit institutions and investment firms supervised under the
CRD must comply. The CRR requirements that came into force from 1 January
2014 cover: (a) ‘own funds’ (ie capital) requirements in respect of standardised
measures of the risk to which a bank is exposed; (b) requirements limiting large
exposures; (c) reporting requirements; and (d) public disclosure requirements.
In UK regulatory terminology, the standardised minimum capital requirements
mandated under CRR Part Three are generally referred to as ‘Pillar I capital
requirements’. The Pillar 1 capital requirement may include specific capital
buffers, mandated under the CRR6.
1
CRR, art 521(2).
2
Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013
on prudential requirements for credit institutions and investment firms and amending Regula-
tion (EU) No 648/2012.
3
Directive 2013/36/EU of The European Parliament and of The Council of 26 June 2013 on
access to the activity of credit institutions and the prudential supervision of credit institutions
and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC
and 2006/49/EC.
4
Prudential Regulation Authority, ‘Consultation Paper CP 5/13 Strengthening Capital Stan-
dards: implementing CRD IV’, August 2013, paragraph 1.11.

29
1.27 The Regulation of Banks
5
Defined in CRR, art 4(1)(1) as ‘undertakings the business of which is to take deposits or other
repayable funds from the public and to grant credits for its own account’; a definition closely
analogous to that of the UK regulated activity of ‘accepting deposits’, on which see para 1.5.
6
Generally referred to as ‘CRD IV buffers’ and to which automatic distribution constraints may
apply.

(ii) PRA prudential requirements

1.28 Under the founding treaties of the EU1, the CRR became directly effective
in all Member States of the EU, independently of any measure of reception into
national law. Accordingly, the PRA did not transpose the CRR into the PRA
Rulebook2. The CRD, however, required transposition into the law of each
Member State, which leaves a margin of discretion for Member States as to the
form and method of implementation. The prudential requirements for UK
banks set out in the PRA Rulebook therefore consist only3 of the PRA require-
ments4 implementing the CRD and applying to firms within the scope of the
CRR (defined as ‘CRR firms’). In addition, the PRA has published its general
approach to banking supervision under FSMA 20005 and a range of supervisory
statements6 relating to its prudential rules.
The PRA’s prudential requirements include (a) a statement of the ‘base’ or
minimum capital resources requirement for different types of CRR firm; (b)
additional measures as to the definition of capital7, where permitted under the
CRR; and (c) an ‘overall financial adequacy rule’ in the following terms:
‘a firm must at all times maintain overall financial resources, including own funds and
liquidity resources, which are adequate both as to amount and quality, to ensure there
is no significant risk that its liabilities cannot be met as they fall due’8.
In addition, the PRA’s prudential requirements impose on CRR firms, the
‘Overall Pillar 2 rule’9. This rule requires CRR firms to have in place sound,
effective and comprehensive strategies, processes and systems to enable it to
assess and manage the major risks to which it is exposed. The relevant risks
include financial risks, such as credit risk, market risk and the risk of excessive
leverage, but also non-financial risks, such as operational risk and business risk.
The range of financial risks includes specifically ‘securitisation risk’, defined as
including the risk that the capital held by a firm in respect of assets which it has
securitised are inadequate ‘having regard to the economic substance of the
transaction including the degree of risk transfer achieved’.
A firm that complies with the Overall Pillar 2 Rule, together with the PRA’s in-
ternal capital adequacy assessment process (‘ICAAP’) rules more generally, will
produce its own assessment of the capital required to support the risks in its
business. In UK regulatory jargon the resulting capital requirement is usually
referred to as the ‘Pillar 2 capital requirement’. That individual assessment and
the firm’s Pillar 2 figure will then be the subject of supervisory review and
evaluation process (‘SREP’) by the PRA, as mandated by the CRD10.
There are two main areas that the PRA considers when conducting a supervi-
sory review. First, risks to the firm which are either not captured, or not fully
captured, by the standardised Pillar 1 capital requirement (for example interest
rate risk in the non-trading book). The PRA refers to this area of risk as ‘Pillar
2A’. Second, risks to which the firm may become exposed in future (for
example, due to changes in the economic environment). The PRA refers to this

30
 Key Elements of Banking Regulation 1.28

area of risk as ‘Pillar 2B’11. On the basis of the SREP, the PRA will determine
whether the arrangements implemented by a firm and the capital held by it
provide sound management and adequate coverage of its risks.
Following the SREP and any further interactions with the firm, the PRA will
normally set the firm a Pillar 2A capital requirement on an individual basis,
specifying the amount and quality of capital that the PRA considers the firm
should hold, in addition to the capital it must hold to comply with the CRR (ie
Pillar 1 capital) to meet the overall financial adequacy rule. The combination of
the Pillar 1 and Pillar 2A requirements will form the firm’s Total Capital
Requirement (‘TCR’). The PRA may also notify the firm of an amount of capital
that it should hold as a ‘PRA buffer’, over and above the level of capital required
to meet its TCR and over and above any CRD IV buffers. The PRA buffer, based
on a firm-specific assessment, generally reflects Pillar 2B risks and should be of
a sufficient amount to allow the firm to continue to meet the overall financial
adequacy rule, even in adverse circumstances, after allowing for realistic
management actions that a firm could, and would, take in a stress scenario.
If a firm holds the level of capital required under its TCR, that does not
necessarily mean that it is complying with the overall financial adequacy
rule. Conversely, a failure to hold capital at the level of the TCR does not
automatically mean that the firm is in breach of the overall financial adequacy
rule, or that the PRA will consider the firm is failing, or likely to fail, to satisfy
the Threshold Conditions. However, if the PRA concludes that a firm is failing
to hold sufficient capital, the PRA may take supervisory action or, in a more
extreme case, exercise powers12 under FSMA 2000 to impose a requirement on
the firm’s permission, requiring it to hold capital at the appropriate level, or to
take other steps13.
1
Treaty on the Founding of the EU, Art 288.
2
This was necessary minimalism, since Member States are under a positive obligation not to
obstruct the implementation of the CRR, even by glossing its provisions. See Amsterdam
Bulb BV v Produktschap voor Siergewassen (ECJ, Case C–50/76).
3
Hence the warning in para 1.21, above.
4
Breach of which is not actionable as a breach of statutory duty: see para 1.10 as to the
non-actionability of rules requiring an authorised person to have or maintain financial re-
sources.
5
Prudential Regulation Authority, ‘The Prudential Regulation Authority’s approach to banking
supervision’, March 2016.
6
See para 1.18.
7
PRA Rulebook, DC.
8
PRA Rulebook, ICAA 2.1. Note that this rule closely tracks the wording of PRA Thresh-
old Condition 3 (on which see para 1.23 and following) that a firm must have ‘appropriate
financial and non-financial resources’.
9
PRA Rulebook, ICAA 3.1.
10
See generally, Prudential Regulation Authority, ‘Supervisory Statement SS31/15 The Internal
Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation
Process (SREP)’, December 2017, from which this overview is taken.
11
See generally, Prudential Regulation Authority, ‘Statement of Policy: The PRA’s methodologies
for setting Pillar 2 capital’, December 2017.
12
See para 1.22.
13
The PRA may also expect firms routinely to apply for requirements on their permission in
connection with capital adequacy – for example a requirement preventing a firm from meeting
CRD IV buffers with capital maintained to meet other requirements. The opportunity to agree
and apply for a requirement gives the firm a degree of control over the resulting requirement
that it would not have if the regulator were to impose a requirement of its own motion.

31
1.29 The Regulation of Banks

(g) FCA conduct of business requirements for banks

1.29 The FCA Handbook includes the Banking Conduct of Business Source-
book (‘BCOBS’). These requirements1 amplify FCA threshold condition 3
(suitability)2. The requirements apply3 with respect to (a) the regulated activity
of accepting deposits4 from banking customers, carried on from an establish-
ment maintained by the firm in the UK; and (b) activities connected with that
activity. ‘Banking customers’5 are consumers6; micro-enterprises7; or charities
that have an annual income of less than £1 million.
The requirements under BCOBS also regulate how banks conduct business with
their customers. These include (a) provisions as to communications with
customers, including that a firm must take reasonable steps to ensure that its
communications or financial promotions are ‘fair, clear and not misleading’8;
(b) extended communication requirements in relation to promotions of struc-
tured deposits9; (c) provisions as to distance marketing and e-commerce10; (d)
an obligation to make available appropriate pre-contract information about a
retail banking service11 and any deposit made in relation to that retail banking
service, so that the banking customer can make decisions on an informed
basis12; (e) an obligation to provide a customer with regular statements of
account13; (f) an obligation to provide retail banking services that are ‘prompt,
efficient and fair’ and consistent with previous communications;14; and (g)
obligations as to the customer’s right to cancel a contract for a retail banking
service15.
The ‘post sale’ requirements in (f) include in particular, guidance as to the
exercise of rights of set-off16; a reminder17 that in relation to customers in
financial difficulty, FCA Principle for Businesses 618 requires a firm to have due
regard to its customers’ interests and treat them fairly; requirements regarding
liability for unauthorised payments19; and requirements governing the non-
execution of payments or defective payments20.
1
Breach of which is generally actionable by a private person as a breach of statutory duty,
see BCOBS, Schedule 5 and para 1.17.
2
See para 1.24 and following.
3
BCOBS 1.1.1R.
4
On which, see para 1.5.
5
As defined in the Glossary to the FCA and PRA Handbook.
6
As widely defined in the Glossary to the FCA and PRA Handbook. In addition, a natural person
acting in a capacity as a trustee is a banking customer if he is acting for purposes outside his
trade, business or profession.
7
Having fewer than ten employees or a turnover or annual balance sheet that does not exceed
Euro 2 million.
8
BCOBS 2.2.1R.
9
BCOBS 2.4. A ‘structured deposit’ is a deposit paid on terms that any interest payable is
determined according to a formula involving the performance of stocks, indices or commodi-
ties.
10
BCOBS 3.
11
As defined in the Glossary to the FCA Handbook, ‘retail banking services’ are ‘arrangements
with a banking customer, under which a firm agrees to accept a deposit from a banking
customer on terms to be held in an account for that customer, and to provide services in relation
to that deposit including but not limited to repayment to the customer.
12
BCOBS 4.1.
13
BCOBS 4.2.
14
BCOBS 5.1.1R
15
BCOBS 6.1.
16
BCOBS 5.1.3A G and ff.

32
 Key Elements of Banking Regulation 1.30
17
BCOBS 5.1.4G.
18
See para 1.25 and following.
19
BCOBS 5.1.11R and 5.1.12R.
20
BCOBS 5.1.14R.

(h) The Approved Persons regime

(i) Introduction
1.30 Legal persons (including corporate entities) that are not individuals only
ever act through their (legal or de facto) directors, officers, employees and other
agents. Accordingly, the fundamental purpose of the regime imposed by or
under FSMA 2000, Part 5 is to ensure that persons (whether individual or
corporate) who direct the affairs of authorised firms meet minimum standards
of honesty, probity and competence. The obligations imposed by or under
FSMA 2000, Part 5 do not displace any other obligations to which a person
may be subject in the performance of that function, for example at common
law.
At the time of writing, the regime under FSMA 2000, Part 5 applies in different
ways to different types of authorised person. First, ‘relevant authorised per-
sons’, are subject to the Senior Managers Regime (‘the SMR’). Relevant
authorised persons include (a) PRA-authorised banks and investment firms1;
and (b) PRA-authorised non-UK2 banks and non-UK investment firms that do
business in the UK through a branch here, including by the exercise of passport
rights or Treaty rights3. For the PRA-authorised banks and investment firms
within its scope, the SMR replaces the former ‘approved persons regime’ under
FSMA 2000, Part 5, outlined in the previous edition of this work. Second,
PRA-authorised insurers are subject to the Senior Insurance Managers Regime,
(‘the SIMR’), which is broadly similar to the SMR. Third, FCA-authorised firms
remain, for the time being, subject to the ‘approved persons regime’.
The SMR was put in place by the Financial Services (Banking Reform) Act
2013, which amended FSMA 2000, Part 5. Those amendments, which form
part of the UK’s response to the financial crisis of 2008, came fully in to force
from 7 March 2016. It is likely that the scope of the SMR will be extended in the
relatively near future, so that it applies to all authorised persons4.
FSMA 2000, Part 5 requires a firm to take reasonable care to ensure that the
persons (including directors, significant employees and contractors) who will
perform ‘controlled functions’ under an ‘arrangement’5 with the firm, do not do
so unless each such person or contractor is acting in accordance with an
approval given by the appropriate regulator6. A contravention of these require-
ments by a firm is actionable at the suit of a private person who suffers loss as
a result of the contravention, subject to the defences and other incidents
applying to an action for breach of statutory duty7.
‘Controlled functions’ in relation to the carrying on of a regulated activity by a
PRA-authorised person, are functions ‘of a description specified in rules made
by the FCA or the PRA’8. To allow for the parallel operation of the SMR and the
approved persons regime, certain controlled functions may be, or must be,
designated as ‘senior management functions’, to which the SMR then applies. In
summary (a) the PRA may only specify a function as a controlled function if it

33
1.30 The Regulation of Banks

is satisfied that function is a senior management function9; and (b) if the FCA
specifies a controlled function, it must10 designate that function as a senior
management function if it is satisfied that it is a senior management function
relevant to the carrying on of a regulated activity by a person within the scope
of the SMR11.
1
FSMA 2000, s 71A.
2
But noting that the SMR may have a more limited application to non-UK firms than it does to
UK firms.
3
FSMA 2000, s 71A(4) and the Financial Services and Markets Act 2000 (Relevant Authorised
Persons) Order 2015, art 2.
4
The Bank of England and Financial Services Act 2016 provides for that extension, but the
relevant provisions are not yet in force.
5
FSMA 2000, s 59(10): any kind of arrangement, including a person’s appointment to an office,
his becoming a partner or his employment (whether under a contract of service or otherwise).
6
FSMA 2000, s 59.
7
FSMA 2000, s 71. As to the scope of this private right of action and its availability, this section is
in substantially the same terms as FSMA 2000, s 138D, discussed at paragraph 1.17 above.
Claims based upon breaches of procedural rules, such as these, can face particular difficulties
when it comes to establishing that the breach caused the claimant’s loss. See, for example,
Wilson v MF Global [2011] EWHC 138 at [20]. However, it has been remarked that purely
procedural breaches may increase the likelihood of a substantive failure: Rubenstein v HSBC
[2012] EWCA Civ 1184 at [59].
8
FSMA 2000, s 59(3)(a).
9
FSMA 2000, s 59(6).
10
FSMA 2000, s 59(6A).
11
That is, ‘a relevant person’, on which, see above.

(ii) Senior management functions

1.31 A function is a senior management function (‘an SMF’), if (a) the function
will require the person performing it to be responsible for managing one or
more aspects of an authorised person’s affairs relating to regulated activities;
and (b) those aspects ‘involve, or might involve, a risk of serious consequences
(i) for the authorised person, or (ii) for business or other interests in the UK’1.
‘Managing’ an aspect of an authorised person’s affairs includes ‘taking deci-
sions, or participating in the taking of decisions, about how one or more aspects
of those affairs should be carried on’2.
The PRA3 and the FCA have between them specified 21 SMFs. The SMFs
specified by the PRA are set out in PRA Rulebook, SMF, 3 to 7, which includes
an indication of the content of each function. The PRA SMFs include executive
functions, for example, The Chief Executive function (SMF1); oversight func-
tions, for example the Chairman of Risk Committee Function (SMF10); group
entity functions, for example the Group Entity Senior Manager Function
(SMF7); and ‘UK Branch of Overseas Firm’ functions, for example the Head of
Overseas Branch Function (SMF 19), which is the function of ‘having respon-
sibility for the conduct of all activities of the UK establishment of a third
country firm which are subject to the UK regulatory system’4. PRA Rulebook,
SMF 8 specifies permitted and prohibited combinations of PRA SMF.
The SMFs specified by the FCA are set out in the FCA Handbook, SUP 10C
4.1R and following. They include ‘FCA governing functions’, for example the
Executive Director function (SMF 3); and ‘FCA required functions’, for ex-
ample the Money Laundering Reporting Function (SMF 17). As with PRA
SMFs, the applicable FCA functions vary if the authorised person in question is

34
 Key Elements of Banking Regulation 1.32

an EEA firm or a third-country firm. As to the content of each SMF, the PRA and
the FCA have between them prescribed5 some thirty responsibilities that must
be assigned to the individuals who perform SMFs.
Firms within scope of the SMR are required to maintain a ‘management
responsibilities map’. As the FCA describes it, this is a comprehensive and
up-to-date document that describes the firm’s management and governance
arrangements, including details of the reporting lines and the lines of responsi-
bility; and reasonable details about: (a) the persons who are part of those
arrangements; and (b) their responsibilities6.
1
FSMA 2000, s 59ZA(2).
2
FSMA 2000, s 59ZA(3).
3
As to the PRA approach to implementation of the SMR generally, see Prudential Regulation
Authority, ‘Supervisory Statement SS28/15 Strengthening individual accountability in bank-
ing’, May 2017.
4
PRA Rulebook, SMF 7.2.
5
PRA Rulebook, Allocation of Responsibilities, 4.1. This includes for example, AR 4.1(6)
‘responsibility for overseeing the adoption of the firm’s culture in the day-to-day management
of the firm; and AR 4.1(7) ‘responsibility for managing the allocation and maintenance of the
firm’s capital, funding and liquidity’. FCA Handbook, Systems and Controls 4.7.7R. This
includes for example SYSC 4.7.7R(4) ‘Overall responsibility for the firm’s policies and
procedures for countering the risk that the firm might be used to further financial crime’.
6
FCA Handbook, SYSC 4.5.4R. The equivalent PRA description is PRA Rulebook, AR 7.1.

(iii) Application for approval

1.32 Individuals performing an SMF specified by the PRA require pre-approval
by the PRA1, with the FCA’s consent. Individuals performing an SMF specified
by the FCA require pre-approval by the FCA only2. An application for approval
to perform any controlled function (including a SMF), may only3 be made by
‘the authorised person concerned’, namely the firm for which the candidate will
perform the function, if approved.
Before that authorised person may make an application for approval it must vet
the candidate. That requires the applicant firm to be satisfied4 that the candidate
is a fit and proper person to perform the function to which the application
relates5. In deciding that question, the applicant firm must6 have regard, in
particular, to whether the candidate, has obtained a qualification, has under-
gone, or is undergoing, training, possesses a level of competence, or as the
personal characteristics, required by general rules made by the regulator in
relation to persons performing functions of the kind to which the application
relates. The ‘fit and proper’ standard is elaborated by both regulators. As the
PRA puts it:
‘In deciding whether a person is fit and proper pursuant to . . . [PRA rules and],
where applicable, section 60A(1) of FSMA, a firm must be satisfied that the person:
(1) has the personal characteristics (including being of good repute and
integrity);
(2) possesses the level of competence, knowledge and experience;
(3) has the qualifications; and
(4) has undergone or is undergoing all training, required to enable such person to
perform his or her function effectively and in accordance with any relevant
regulatory requirements, including those under the regulatory system, and to
enable sound and prudent management of the firm7’

35
1.32 The Regulation of Banks

Applications for approval to perform a SMF must be accompanied by a

‘statement of responsibilities’ in the prescribed form8, setting out ‘the aspects of
the affairs of the authorised person concerned which it is intended that the
candidate will be responsible for managing in performing the function’9.
The relevant regulator’s approval of the candidate, if given, may be subject to
conditions, or time-limited, if desirable to advance that regulator’s relevant
statutory objectives10. FSMA 2000, s 62 sets out procedural provisions in
relation to applications for approval, including the applicant firm’s right to refer
to the Upper Tribunal a refusal, the imposition of a condition, or the imposition
of a time limitation.
If an application for authorisation is approved, the applicant firm is then
required to provide, every 12 months, a certificate (a) stating that it is satisfied
that the approved person is fit and proper to perform the function to which the
certificate relates; and (b) setting out the aspects of the affairs of the authorised
person in which the approved person will be involved in performing his
function11. In addition, in any event, any significant change in the aspects of the
authorised person’s affairs which the approved person is responsible for man-
aging requires the firm to provide the appropriate regulator with a revised
statement of responsibilities12.
FSMA 2000, s 64A empowers the FCA and the PRA (if it appears expedient to
either of them do so in order to advance their relevant statutory objectives) to
make rules of conduct applicable to approved persons (whether performing
SMFs or not), employees of firms within scope of the SMR and directors of
authorised persons and PRA-authorised persons. The PRA’s individual conduct
rules and senior manager conduct rules are set out in PRA Handbook, CR 2 and
3. The relevant FCA individual and senior manager conduct rules are in
the Code of Conduct (‘COCON’) module of the FCA Handbook. The FCA
senior manager conduct rules are as follows (the PRA senior manager conduct
rules are substantially the same, with editorial variations):
‘SC1: You must take reasonable steps to ensure that the business of the firm for which
you are responsible is controlled effectively.
SC2: You must take reasonable steps to ensure that the business of the firm for which
you are responsible complies with the relevant requirements and standards of the
regulatory system.
SC3: You must take reasonable steps to ensure that any delegation of your respon-
sibilities is to an appropriate person and that you oversee the discharge of the
delegated responsibility effectively.
SC4: You must disclose appropriately any information of which the FCA or PRA
would reasonably expect notice.’
A firm within scope of the SMR must13 notify all relevant persons of the conduct
rules that apply in relation to them, and take all reasonable steps to secure that
those persons understand how those rules apply in relation to them. If a firm
within scope of the SMR takes disciplinary action in relation to a relevant
person, and one of the reasons, for taking that action is a reason specified in
conduct rules made by the appropriate regulator, the firm must notify the
relevant regulator of that fact.
‘Misconduct’ by a relevant person14 triggers the regulators’ disciplinary pow-
ers15 under FSMA 2000, s 66. Misconduct is of three kinds. First, failure to

36
 Key Elements of Banking Regulation 1.32

comply with conduct rules made by the FCA or the PRA under FSMA 2000,
s 64A16. Second, knowing concern in a contravention by an authorised person
of a ‘relevant requirement’17. Third, (a) where a person has at any time been a
senior manager in relation to a firm within scope of the SMR; (b) there has at
that time been (or continued to be) a contravention of a relevant requirement by
the authorised person; (c) the senior manager was at that time responsible for
the management of any of the authorised person’s activities in relation to which
the contravention occurred, and (d) the senior manager did not take such steps
as a person in the senior manager’s position could reasonably be expected to
take to avoid the contravention occurring (or continuing)18.
Personal culpability is likely to arise where an approved person’s conduct was
deliberate or where the approved person’s standard of conduct was below that
which would be reasonable in all the circumstances. Note, however that the
Financial Services (Banking Reform) Act 2013, s 36 introduces (from 7 March
2016) a criminal offence in the following terms:
‘A person (“S”) commits an offence if—
(a) at a time when S is a senior manager19 in relation to a financial institution
(“F”), S—
(i) takes, or agrees to the taking of, a decision by or on behalf of F as to
the way in which the business of a group institution20 is to be carried
on, or
(ii) fails to take steps that S could take to prevent such a decision being
taken,
(b) at the time of the decision, S is aware of a risk that the implementation of the
decision may cause the failure of the group institution,
(c) in all the circumstances, S’s conduct in relation to the taking of the decision
falls far below what could reasonably be expected of a person in S’s position,
and
(d) the implementation of the decision causes the failure of the group institution.’
1
PRA Rulebook, SMR Applications and Notifications, 2.1.
2
FCA Handbook, SUP 10C.10.3G.
3
FSMA 2000, s 60(1).
4
And in practice, to be able to demonstrate, that it has good reason to be satisfied, including for
example by taking up appropriate references - see, for example PRA Rulebook, FP 2.7
5
FSMA 2000, s 60A(1), specifying the scope of the required references.
6
FSMA 2000, s 60A(2).
7
PRA Rulebook, Fitness and Propriety, 2.6. The equivalent FCA material can be found in the FIT
module of the FCA Handbook. See SUP 10C.10.14G.
8
FCA Handbook, SUP 10.C.11; PRA Rulebook SMR Applications and Notifications 2.7.
9
FSMA 2000, s 60(2A).
10
FSMA 2000, s 61(2B) and (2C).
11
FSMA 2000, ss 63E and 63F.
12
FSMA 2000, s 62A(2).
13
FSMA 2000, s 64B(2).
14
That is, under FSMA 2000, ss 66A(2) and 66B(2): an approved person (whether approved by
the PRA or by the FCA), an employee of a firm within scope of the SMR, or a director of an
authorised person or a PRA-authorised person.
15
FSMA 2000, s 66(3): financial penalty, suspension of approval, imposition of limitations or
restrictions and public censure.
16
FSMA 2000, s 66A(2) (FCA); FSMA 2000, s 66B(2) (PRA).
17
FSMA 2000, s 66A(3) (FCA); and FSMA 2000, s 66B(3) (PRA). ‘Relevant requirements’
include (under FSMA 2000, s 66A(4) and 66B(4)) requirements imposed under FSMA 2000 or
under qualifying EU provisions, as to which, see para 1.14.
18
FSMA 2000, s 66A(5) (FCA); FSMA 2000, s 66B(5) (PRA).

37
1.32 The Regulation of Banks
19
That is, the person performs a SMF for a UK firm within the scope of the SMR: see FS(BR)A
2013, s 37(7) and (8).
20
Defined in FS(BR)A 2013, s 36(2) to mean ‘F or any other financial institution that is a member
of F’s group for the purpose of FSMA 2000 . . . ’.

(i) Changes of control over authorised persons

1.33 Entities or individuals that have legal or de facto control over authorised
firms may impede or prevent that authorised firm from complying with UK
regulatory requirements, for example if the controllers’ interests compel a
withdrawal of capital from the regulated entity, or if the controller wishes the
regulated entity to pursue a course of action that UK regulatory requirements
would not permit. Accordingly, FSMA 2000, Part 12 requires a person who
decides to acquire or increase control1 over a ‘UK authorised person’2 to give the
appropriate regulator notice in writing before making the acquisition3.
The regulator must4 assess the notice without regard to the economic needs of
the market5, but by reference to (a) the suitability of the person intending to
acquire or increase control; (b) the financial soundness of the acquisition – in
order to ensure the sound and prudent management of the UK authorised
person; and (c) the likely influence that the person intending to acquire or
increase control will have on the UK authorised person.
The regulator must, within a period of 60 days,6 approve the change in control
unconditionally7, approve it with conditions8 or object to it. The regulator may
object if the information provided is incomplete9; or if there are reasonable
grounds for objecting, by reference to six specified criteria10. The relevant
criteria include the reputation and experience of any person who will direct the
business of the UK authorised person as a result of the proposed acquisition;
whether the UK authorised person will be able to comply with its prudential
requirements and whether there are reasonable grounds to suspect that in
connection with the proposed acquisition, money laundering or terrorist fi-
nancing is being or has been committed or attempted; or the risk of such activity
could increase.
In the case of a UK authorised deposit taking business, the appropriate
regulator is the PRA, which must act in consultation with the FCA11 and, if the
person proposing to acquire or increase control is an EEA firm, in consultation
with the competent regulatory authority in that firm’s home state12. The FCA
has the right to make representations to the PRA. If the FCA considers that
there are reasonable grounds to object to the proposed acquisition of control on
the basis of matters relating to money laundering or terrorist financing, it may
direct the PRA to object to the change in control, or to approve it subject to
specified conditions13.
1
Under FSMA 2000, s 181(2) (and subject to any amendment of the definition by HM Treasury
under FSMA 2000, s 192) a person acquires control over a UK authorised person (‘B’) as soon
as he holds (a) 10% or more of the relevant shares in B or in a parent undertaking of B (‘P’); (b)
10% or more of the relevant voting power in B or P; or (c) relevant shares or relevant voting
power in B or P as a result of which A is able to exercise significant influence over the
management of B. See also the related definition of a reduction in control or cessation of control,
under FSMA 2000, s 183. ‘Relevant’ shares or voting power comprise holdings that are not
disregarded under FSMA 2000, s 184.

38
 Key Elements of Banking Regulation 1.35
2
Under FSMA 2000, s 191G, an authorised person (other than a person automatically autho-
rised as an operator, trustee or depositary of a recognised collective investment scheme, under
FSMA 2000, Schedule 5, paragraph 1), who is a body incorporated in, or an unincorporated
association formed under the law of, any part of the United Kingdom. As to authorised persons
generally, see para 1.9 and following.
3
FSMA 2000, s 178(1).
4
FSMA 2000, s 185(2).
5
FSMA 2000, s 185(2)(c).
6
FSMA 2000, s 189(1). Unless the period is shortened under FSMA 2000, s 189(1ZB).
7
FSMA 2000, s 185(1)(a).
8
FSMA 2000, s 187.
9
FSMA 2000, s 185(3).
10
FSMA 2000, s 185(3)(a) and s 186.
11
FSMA 2000, s 187A(1).
12
FSMA 2000, s 188. See also the definition of ‘home state regulator’ in FSMA 2000, s 425(1)(b)
and Schedule 3, paragraph 9.
13
FSMA 2000, s 187A(3). In order to avoid circularity, any such FCA direction is subordinate to
a direction given by the PRA to the FCA, under FSMA 2000, s 3I or 3J. See FSMA 2000,
s 187A(7). As to the PRA’s power of direction generally, see para 1.13.

(j) Information gathering and investigation

1.34 The regulators’ powers to impose sanctions or seek other relief (or indeed
simply to take supervisory action short of a formal exercise of powers) are
supported by a substantial suite of investigative and information gathering
powers in FSMA 2000, Part 11. The principal powers are (a) to require the
production of information or documents; (b) to require the appointment of a
skilled person to produce a report; and (c) to appoint investigators.

(i) The power to require the production of information and documents

1.35 The FCA or the PRA or their authorised officer1 may, by notice in writing
under FSMA 2000, s 165, require2 a current or former authorised person (or a
person ‘connected with’3 such an authorised person) to produce specified
information or documents, or documents and information of a specified de-
scription. The primary limitation on the scope of this power is that it applies4
‘only to information and documents reasonably required in connection with the
exercise by either regulator of functions conferred on it by or under’ FSMA
2000, or by the Bank of England in connection with its functions in pursuance
of its financial stability objective. Under FSMA 2000, s 165A, the PRA has a
related power5 to compel the production of documents and information ‘that
the PRA considers are, or might be, relevant to the stability of one or more
aspects of the UK financial system.’
1
FSMA 2000, s 165(3).
2
FSMA 2000. s 165(1).
3
FSMA 2000, s 165(7). For this purpose, ‘connected’ persons include, under FSMA 2000,
s 165(11), persons who are or have been the controller of an authorised person and a member
of the authorised person’s group.
4
FSMA 2000, s 165(4).
5
Subject to safeguards in FSMA 2000, s 165B.

39
1.36 The Regulation of Banks

(ii) The power to require the appointment of a skilled person

1.36 If a person who is or was carrying on a business1 (in the jargon of FSMA
2000 ‘the person concerned’) may be compelled under FSMA 2000, s 1652 to
produce information or documents with respect to a particular matter, then
either regulator has the additional power, under FSMA 2000, s 166, also to
appoint3 or require the person concerned to appoint4 a ‘skilled person’ to make
a report with respect to the same matter5.
The skilled person must be a person ‘appearing to the regulator to have the skills
necessary to make a report on the matter concerned’6. Once the skilled person
is appointed, both the person concerned and ‘any person who is providing (or
who has at any time provided) services to . . . [him] in relation to the matter
concerned’ come under a statutory duty7 to give the skilled person ‘all such
assistance as . . . [the skilled person] may reasonably require.’ That duty is
enforceable by injunction8.
The appointment of skilled persons is a power that is frequently used by both
the FCA and the PRA, both as part of normal supervision9 and in the context of
enforcement proceedings10. From the perspective of the regulators, the attrac-
tion of the ‘s 166 power’ is obvious: it enables the regulator to gather additional
information on what are often complex issues, without the expenditure of
significant investigative effort by the regulator itself. Moreover, so far as
financial resources are a consideration, the requirement to appoint a skilled
person carries with it the obligation to pay the skilled person’s fees. The
regulators’ practice is generally to engage with the person concerned as to the
terms of reference under which a skilled person is to be appointed, but to have
a relatively limited panel of persons (usually professional services firms) whom
the regulator will approve as a skilled person. The applicable FCA and PRA
rules stipulate, amongst other matters, the contractual terms on which the
skilled person must be appointed.
1
FSMA 2000, s 166(2).
2
See para 1.14.
3
FSMA 2000, s 166(3)(a).
4
FSMA 2000, s 166(3)(b).
5
FSMA 2000, s 166(1). There is a related power in FSMA 2000, s 166A to appoint or require the
appointment of a skilled person to collect or update information which should have been
collected or updated by an authorised person.
6
FSMA 2000, s 166(6)(a).
7
FSMA 2000, s 166(7).
8
FSMA 2000, s 166(8).
9
The FCA rules and guidance on the use of this power in the context of supervision are in
Chapter 5 of the Supervision Manual (‘SUP 5’) of the FCA Handbook. PRA rules are in PRA
Rulebook, Use of Skilled Persons. PRA guidance is set out in PRA, ‘Supervisory Statement SS
7/14 Reports by Skilled Persons’, updated in September 2015.
10
The FCA’s guidance on the use of this power in the context of enforcement proceedings is at
Chapter 3 of the FCA Enforcement Guide, published alongside the FCA Handbook. PRA
guidance is set out in PRA, ‘Supervisory Statement SS 7/14 Reports by Skilled Persons’, updated
in September 2015.

40
 Key Elements of Banking Regulation 1.37

(iii) The appointment of investigators

1.37 FSMA 2000 permits either the FCA or the PRA to appoint investigators in
two cases. First, FSMA 2000, s 168 provides for the appointment of a compe-
tent person to conduct an investigation where it appears to the regulator (in the
jargon of FSMA 2000, ‘the investigating authority’) that one or more of a
number of specified breaches or offences may have taken place. The range of
breaches and offences1 is very wide. It includes, for example (a) offences under
FSMA 2000, such as a breach of the general prohibition; (b) offences under
other legislation, such prescribed regulations relating to money laundering or
market abuse; and (c) simple contravention of a rule made by the investigating
authority.
Second, under FSMA 2000, s 167, if it appears to the investigating authority
that there is good reason2 for doing so, a competent person may be appointed to
investigate a range of matters3, including the nature, conduct or state of the
business4 of an authorised person5, a particular aspect of that business; or the
ownership or control of an authorised person.
In either case, FSMA 2000, ss 171 to 176 make provision as to the powers of
investigators6 and FSMA 2000, s 170 makes provision as to the conduct of
investigations. The relevant conduct provisions include (a) that the investigat-
ing authority must generally give notice of the appointment of an investigator7
and of any material change in the scope of investigation8; (b) that the investi-
gator must make a report9 of his investigation; and (c) that the investigating
authority may control the investigation by giving directions as to, amongst
other things, the scope, conduct or termination of the investigation10.
A failure (by a person other than an investigator) to comply with a requirement
imposed under FSMA Part 11 may be dealt with as a contempt of Court11. It is
an offence for a person who knows or suspects that an investigation under
Part 11 is being or is likely to be conducted intentionally to falsify, conceal,
destroy or otherwise dispose of a document which he knows or suspects is or
would be relevant to such an investigation, or to cause or permit the falsifica-
tion, concealment, destruction or disposal of such a document12. It is also an
offence for a person, in purported compliance with a requirement imposed on
him under Part 11 to provide information which he knows to be false or
misleading in a material particular, or recklessly to provide information which
is false or misleading in a material particular13.
1
Set out in FSMA 2000, s 168(2) and (4).
2
FSMA 2000, s 167(1).
3
FSMA 2000, s 167(1)(a) to (c).
4
Including part of a business, even if it does not consist of carrying on regulated activities: FSMA
2000, s 167(5).
5
Including in some circumstances a former authorised person: FSMA 2000, s 167(4).
6
Including entry of premises under warrant, in FSMA 2000, s 176.
7
FSMA 2000, s 170(2) to (4).
8
FSMA 200, s 170(9).
9
FSMA 2000, s 170(6).
10
FSMA 2000, s 170(7) and (8).
11
FSMA 2000, s 177(1) and (2).
12
FSMA 2000, s 177(3).
13
FSMA 2000, s 177(4).

41
1.38 The Regulation of Banks

9 FINANCIAL PROMOTION
1.38 A substantial part of the FCA’s conduct of business regulation under
FSMA 2000 is directed at ensuring that the information provided by authorised
firms to consumers about financial products and services is clear, fair and not
misleading, with the aim that consumer choices as to whether to enter into a
new relationship with a financial services provider (such as a bank), or purchase
a new financial services product, or exercise rights under an existing product,
are made in the light of full information. The ‘financial promotion regime’
under FSMA 2000 pursues essentially the same aim, by requiring that financial
products and services cannot lawfully be promoted or marketed to ordinary
consumers or purchasers unless the promotional material has first been ap-
proved by a person with authorisation and permission under FSMA 2000.
The ‘financial promotion restriction’ in FSMA 2000, s 21 provides that a person
must not, in the course of business, communicate1 an invitation or inducement
to engage in investment activity. To ‘engage in an investment activity’ means2 (a)
‘to enter or offer to enter into an agreement the making or performance of
which by either party constitutes a controlled activity’; or (b) ‘to exercise any
rights conferred by a controlled investment to acquire, dispose of, underwrite or
convert a controlled investment.’ The range of ‘controlled activities’ and
‘controlled investments’ is specified3 in subordinate legislation under FSMA
2000, in particular the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005, (SI 2005/1529), (‘the FPO’).
FPO, art 4 provides that ‘controlled activities’ are those activities which fall
within any of FPO, Schedule 1, paragraphs 1 to 11; and that ‘controlled
investments’ are those investments that fall within any of FPO, Schedule 1,
paragraphs 12 to 27. FPO, art 2 provides that a ‘“deposit” means a sum of
money which is a deposit for the purposes of article 5 of the Regulated Activities
Order’. FPO, Schedule 1, paragraph 12 then defines a ‘deposit’ as a controlled
investment and FPO, Schedule 1, paragraph 1 provides that:
‘Accepting deposits is a controlled activity if—
(a) money received by way of deposit is lent to others; or
(b) any other activity of the person accepting the deposit is financed wholly, or to
a material extent, out of the capital of or interest on money received by way
of deposit,
and the person accepting the deposit holds himself out as accepting deposits on a day
to day basis.’
It can be seen therefore that in relation to banking business, the scope of the
relevant ‘controlled activities’ and ‘controlled investments’ under the FPO is
closely congruent to the scope of the regulated activity of ‘accepting deposits,
discussed in para 1.5.
In summary, therefore, to promote a deposit taking business in the UK (includ-
ing by making or causing to be made from outside the UK, a communication
capable of having an effect here4) is in principle within the scope of the financial
promotion restriction. Such a promotion is an offence5 unless there is an
available exclusion from the scope of the restriction. In addition an unlawful
promotion renders any resulting agreement with (or exercise of rights by) a
consumer unenforceable6 against the consumer and confers on the consumer a

42
 The Financial Services Compensation Scheme 1.39

right to recover money or property transferred and to claim damages, unless

the Court is satisfied that it is just and equitable to enforce the agreement7.
The most obvious available exclusion from the financial promotion restriction
appears in FSMA 2000, s 21(2), which provides that the restriction does not
apply if either (a) the promotion is made by an authorised person (ie a person
with authorisation and permission under FSMA 2000); or (b) the content of the
promotion is approved for the purposes of FSMA 2000, s 21 by an authorised
person. In addition, pursuant to FSMA 2000, s 21(5), the FPO provides for a
range of detailed exclusions from the scope of the financial promotion restric-
tion, the availability of which will depend on the facts of the particular case.
1
Or cause a communication to be made: FSMA 2000, s 21(13).
2
FSMA 2000, s 21(8).
3
FSMA 2000, s 21(9) and (10), read with s 21(15).
4
FSMA 2000, s 21(3).
5
Under FSMA 2000, s 25.
6
FSMA 2000, s 30(2) and (3).
7
FSMA 2000, s 30(4).

10 THE FINANCIAL SERVICES COMPENSATION SCHEME

1.39 The Financial Services Compensation Scheme (‘the FSCS’) is the
UK’s compensation fund of last resort for customers of firms authorised under
FSMA 2000. The FSCS is funded primarily by levies on authorised firms and
may (subject to the rules under which it operates) pay compensation if an
authorised firm is unable, or likely to be unable, to meet claims against it. The
FSCS covers a wide range of regulated financial services business, including
banking, insurance and investment business. However, in respect of deposit-
taking businesses including banks, the creation and operation of the FSCS
discharges the UK’s obligation under the Deposit Guarantee Schemes Directive1
(‘the DGS Directive’) to establish a deposit guarantee scheme.
The FCS is established under FSMA 2000, Part 15. Under FSMA 2000,
s 213(1), the FCA and the PRA must by rules2 establish a scheme for compen-
sating persons, including in cases where:
‘(a) relevant persons are unable, or likely to be unable, to satisfy claims against
them, [or]
(b) persons who have assumed responsibility for liabilities arising from acts or
omissions of relevant persons . . . (“successors”) are unable, or likely to
be unable, to satisfy claims against the successors that are based on those acts
or omissions.’
Subject to one exception, a deposit-taking business will be a ‘relevant person’3
and automatically within the scope of the FSCS if it was an authorised person4
under FSMA 2000 at the time of the act or omission giving rise to the claim
against it, or its successor. The exception relates to credit institutions estab-
lished elsewhere in the EEA that qualify for UK authorisation by exercising
rights under the EU Treaty to establish a branch in the UK, pursuant to FSMA
2000, Schedule 35. Such firms will be ‘relevant persons’ only if they elect6 to
participate in the FSCS. They may elect to do so provided that they are a
member of a deposit-guarantee scheme in their Home Member State and the

43
1.39 The Regulation of Banks

scope or level (including percentage) of the protection afforded to depositors by

the FSCS exceeds that afforded by the Home State deposit-guarantee scheme7.
The compensation scheme must8 provide for the scheme manager9 (a) to assess
and pay compensation, in accordance with the scheme, to claimants in respect
of claims made in connection with regulated activities carried on (whether or
not with permission) by relevant persons; and (b) to have power to impose
levies on authorised persons, or any class of authorised person, for the purpose
of meeting its expenses (including in particular expenses incurred, or expected
to be incurred, in paying compensation, borrowing or insuring risks). The
compensation scheme may10 provide for the scheme manager to have power to
impose levies on authorised persons, or any class of authorised person, for the
purpose of recovering the cost (whenever incurred) of establishing the scheme.
In enabling the FSCS to impose levies, the regulators must11 take account of the
desirability of ensuring that the amount of the levies imposed on a particular
class of authorised person reflects, so far as practicable, the amount of the
claims made, or likely to be made, in respect of that class of person.
The legislative provisions (including rules) governing the operation of the FSCS
in relation to deposit taking businesses (ie banks) are set out in the Deposit
Guarantee Scheme Regulations 2015 (SI 2015/486) (‘the DGS Regulations’)
and the PRA Rulebook, Depositor Protection Part. Regulation 2 designates the
PRA as the UK competent authority for the purposes of the DGS Directive.
The essential conditions for the payment of compensation by the FSCS in
respect of deposit-taking business are set out at PRA Rulebook, DP, 3.2:
‘The FSCS must pay compensation in accordance with this Part in respect of an
eligible deposit if it is satisfied that the eligible deposit is a deposit with either:
(1) a DGS member12 which is in default; or
(2) a firm which is in default and which:
(a) had a Part 4A permission to accept such deposits at the time the
deposit was accepted but no longer has permission to accept eligible
deposits, or is subject to a requirement preventing it from doing so;
and
(b) is not a member of a non-UK scheme which covers such deposits.’
Readers should note that in this rule (and in related PRA rules), the terms
‘deposit’ and ‘protected deposit’13 have a restricted14 meaning, which reflects
the language of the DGS Directive. Accordingly, for the purposes of depositor
protection by the FSCS, the core definition of a deposit is ‘a credit balance which
results from funds left in an account or from temporary situations deriving from
normal banking transactions and which a credit institution is required to repay
under the legal and contractual conditions applicable’.
For the purposes of protection by the FSCS a firm is ‘in default’ following a
determination that its deposits are ‘unavailable’, as defined in DGSD, Art
2(1)(8):
‘ . . . [the] deposit . . . is due and payable but has not been paid by a DGS
member under the applicable legal or contractual conditions where either:
(1) (in accordance with . . . [the DGS Regulations15]) the PRA, or the FSCS in
the case of a credit union or a Northern Ireland credit union, has determined
that in its view the DGS member appears to be unable for the time being, for
reasons which are directly related to its financial circumstances, to repay the
deposit and has no current prospect of being able to do so; or

44
 The Financial Ombudsman Scheme 1.40

(2) a judicial authority has made a ruling for reasons which are directly related to
the DGS member’s financial circumstances and the ruling has had the effect of
suspending the rights of depositors to make claims against it.’
At the time of writing, the maximum payment ordinarily available from the
FSCS in respect of an protected deposit is £85,00016, but (a) compensation of up
to £1 million may be available in respect of a ‘temporary high balance’17; and (b)
no limit applies to the compensation payable for a temporary high balance
arising from a payment in connection with personal injury or incapacity18. The
detailed rules for calculating the amount of compensation payable are set out in
PRA Rulebook, DP 5.
1
Directive 2014/49/EU of 16 April 2014 on deposit-guarantee schemes recast).
2
These rules, taken together, are ‘the Financial Services Compensation Scheme’: FSMA 2000,
s 213(2).
3
FSMA 2000, s 213(9).
4
As to which, see para 1.9.
5
As to which, see para 1.9.
6
FSMA 2000, s 213(10).
7
Financial Services and Markets Act 2000 (Compensation Scheme: Electing Participants) Regu-
lations 2001 (SI 2001/1783), art 3.
8
FSMA 2000, s 213(3).
9
A body corporate, the Financial Services Compensation Scheme Limited, established under
FSMA 2000, s 212.
10
FSMA 2000, s 213(4).
11
FSMA 2000, s 213(5).
12
Defined as ‘(1) a UK bank; (2) a building society; (3) a credit union; (4) a Northern Ireland credit
union; or (5) an overseas firm that is not an incoming firm and has a Part 4A permission that
includes accepting deposits’.
13
Defined in PRA Rulebook, DP 2.2.
14
As compared with the definition of a ‘deposit’ in the Regulated Activities Order, on which see
para 1.5.
15
Including DGS Regs, Reg 6, which imposes a five day time limit within which the FSCS or the
PRA (once satisfied that a compensation scheme member has failed to repay a deposit which is
due and payable), must make a determination that the member’s deposits are ‘unavailable’.
16
PRA Rulebook, DP 4.2.
17
Defined widely and in detail in PRA Rulebook, DP 10.2, to include high balances comprising for
example, ‘monies deposited in preparation for the purchase of a private residential property (or
an interest in a private residential property) by the depositor’; or ‘sums paid to the depositor in
respect of benefits payable under an insurance policy’.
18
PRA Rulebook, DP, 4.3.

11 THE FINANCIAL OMBUDSMAN SCHEME

1.40 The Financial Ombudsman Service (‘the FOS’) is set up under FSMA
2000, Part 16, to provide a mechanism for the resolution of complaints by
customers against financial services businesses authorised under FSMA 2000.
The FOS has jurisdiction once a customer complaint has been rejected by a firm
and the customer refers that complaint to the FOS. The FOS is required to
determine the complaint based on what in its view is fair and reasonable in the
circumstances of the case and to make an award (in respect of which there is a
financial limit of £150,000) accordingly. A FOS determination may, but need
not, reflect the strict legal position as between the firm and its customer and
must take account of the regulators’ rules, guidance and standards and (where
appropriate) good industry practice. The customer has an election as to whether

45
1.40 The Regulation of Banks

or not to accept a FOS determination. If accepted, the determination binds the

firm and is enforceable through the Courts.
FSMA 2000, Part 16 provides for an ‘ombudsman scheme1’ under which
certain disputes may be resolved quickly and with minimum formality by an
independent person’2. The scheme is to be administered by a body corporate,
identified as ‘the scheme operator’3. FSMA 2000, Schedule 17 makes constitu-
tional and other provision in connection with the ombudsman scheme and the
scheme operator.
FSMA 2000 provides for the FOS to have a ‘compulsory jurisdiction’4 and a
‘voluntary jurisdiction’5. In each case, FOS is required to make rules (which
require the approval of the FCA), specifying the activities to which the relevant
jurisdiction applies, and under FSMA 2000, Schedule 17, to make rules pro-
viding for the operation of that part of the ombudsman scheme. The relevant
rules are set out in the Dispute Resolution: Complaints Sourcebook (‘DISP’),
forming part of the FCA Handbook of Rules and Guidance.
A complaint falls within the compulsory jurisdiction of the FOS if it relates to an
act or omission by an authorised firm in carrying on one or more of the
following activities, set out at DISP 2.3.1R:
‘(1) regulated activities6 (other than . . . [the regulated activity of bidding in
emissions auctions – a type of investment business] and administering a
benchmark);
(1A) payment services;
(1C) [consumer buy-to-let mortgage] . . . business;
(3) lending money secured by a charge on land;
(4) lending money (excluding restricted credit where that is not a credit-related
regulated activity);
(5) paying money by a plastic card (excluding a store card where that is not a
credit-related regulated activity);
(6) providing ancillary banking services7;
(7) offering and/or issuing of investments by . . . [insurance special purpose
vehicles];
(8) giving non-personal recommendation advice;’
or any ancillary activities, including advice, carried on by the firm in connection
with them.’
The territorial scope of the compulsory jurisdiction is set out in DISP 2.6. As
regards deposit-taking activity, the jurisdiction extends to complaints about the
activities of a firm (including an incoming EEA firm8) carried on from an
establishment in the UK9, but does not extend to complaints about business
conducted in the UK on a services basis from an establishment outside the UK10.
The location of the complainant does not affect the scope of the compulsory
jurisdiction11.
A ‘complaint’ is widely defined12 to include any oral or written expression of
dissatisfaction, whether justified or not, from, or on behalf of, a person about
the provision of, or failure to provide, a financial service which (a) alleges that
the complainant has suffered (or may suffer) financial loss, material distress or
material inconvenience; and (b) relates to an activity of that respondent, or of
any other respondent with whom that respondent has some connection in
marketing or providing financial services or products, which comes under the
jurisdiction of the FOS.

46
 The Financial Ombudsman Scheme 1.40

A complaint may only be dealt with by the FOS if that complaint is brought by
or on behalf of an ‘eligible complainant’13 who has a complaint arising from one
of a wide range of specified relationships with the respondent. A person will in
principle be an eligible complainant if he or it is (a) a consumer (which, for this
purpose means14 any natural person acting for purposes outside his trade,
business or profession); (b) a micro-enterprise (that is15, any person engaged in
an economic activity, that employs fewer than 10 persons and has a turnover or
annual balance sheet that does not exceed €2 million); (c) a charity which has an
annual income of less than £1 million at the time the complainant refers the
complaint to the respondent; or (d) a trustee of a trust which has a net asset
value of less than £1 million at the time the complainant refers the complaint to
the respondent.
The requisite relationships include16, for example, that (a) the complainant was
an existing or potential customer of the respondent; (b) the complainant is the
recipient of a banker’s reference given by the respondent; (c) the complainant
gave the respondent a guarantee or security for a mortgage or loan.; or (d) the
complainant is a person about whom information relevant to his financial
standing is or was held by the respondent in providing credit information.
The FOS may only deal with a complaint if the respondent has been sent the
complaint and has either (a) given a final response rejecting it; or (b) failed to
respond within eight weeks of receiving the complaint17. The FOS cannot deal
with a complaint that is referred to the FOS more than six months after a final
response from the respondent, which alerts the complainant to the six month
time limit18. The FOS will only exceptionally deal with a complaint referred to
it more than six years after the event complained or, or more than three years
from the date on which the complainant ought reasonably to have become
aware that he had cause to complain19.
The complaints handling rules in DISP 3.3 give the FOS wide discretion to
dismiss a claim without consideration of its merits, for reasons which include
that the complaint clearly does not have any reasonable prospect of success;
that it would be more suitable for the subject matter of the complaint to be dealt
with by a court, arbitration or another complaints scheme; or that it is a
complaint about the legitimate exercise of a respondent’s commercial judg-
ment20.
Once the FOS decides to accept a complaint under the compulsory jurisdiction,
the complaint is usually determined by an individual ombudsman, on paper and
without an oral hearing21. The complaint must be determined by reference to
what is, in the opinion of the individual ombudsman, fair and reasonable in all
the circumstances of the case22. The factors that the ombudsman must take into
account in deciding what is fair and reasonable are set out in DISP 3.6.4R. They
include relevant law and regulations; regulators’ rules, guidance and standards;
codes of practice; and (where appropriate) what the ombudsman considers to
have been good industry practice at the relevant time. However,
‘the scheme does not require the ombudsman to make a decision in accordance with
English law. If the ombudsman considers that what is fair and reasonable differs from
English law, or the result that there would be in English law, he is free to make an
award in accordance with that view, assuming it to be a reasonable view in all the
circumstances.’23

47
1.40 The Regulation of Banks

It follows that the ombudsman scheme will necessarily involve an element of

subjectivity, which is consistent with the resolution of disputes ‘quickly and
with minimum formality’24. That subjectivity may be amplified given that
although an ombudsman has the power to call for evidence25 and to compel the
production of documents and information26, he can where appropriate rely
upon his own knowledge and expertise when deciding a complaint27. Never-
theless,
‘the effect of these provisions is not to leave the Ombudsman’s determination to his
entirely subjective views, as though he was operating according to the length of his
foot, so to speak. That, it seems to me, is not the effect of the statutory language
which defers to the “opinion of the Ombudsman”. Rather, that is typical language to
emphasise that the decision is for the Ombudsman, not for a judge. However, the
Ombudsman remains amenable, through the ordinary process of judicial review, to a
challenge on such grounds as perversity or irrationality’28.
When the ombudsman has determined a complaint he must give a written
statement of his determination to the respondent and to the complainant. If the
complainant notifies the ombudsman that he accepts a determination under the
compulsory jurisdiction, it is binding on the respondent and the complainant
and final29. If the complaint is determined in favour of the complainant, the
determination may include (a) an award against the respondent of such amount
as the ombudsman considers fair compensation for loss or damage suffered by
the complainant (‘a money award’); or (b) a direction that the respondent take
such steps in relation to the complainant as the ombudsman considers just and
appropriate (whether or not a court could order those steps to be taken).30
A money award may not exceed the maximum amount specified in scheme
rules. At the time of writing, the maximum money award which the FOS may
make is £150,00031, but the ombudsman may, if he considers that fair compen-
sation requires payment of a larger amount, make a non-binding recommen-
dation that the respondent pay the complainant the balance32. Once a com-
plainant accepts a FOS award, he cannot thereafter bring court proceedings (for
example, to recover an amount in excess of £150,000) based on a cause of
action that that in substance involves the same matter as the complaint33. A
money award may include an award of interest34 and costs (against the
respondent but not against the complainant35). A money award made under the
compulsory jurisdiction is enforceable as if it were payable under an order of
the County Court36. Compliance with a direction to take other steps, made
under the compulsory jurisdiction, is enforceable by an injunction at the suit of
the complainant37.
1
FSMA 2000, s 225(3).
2
FSMA 2000, s 225(1).
3
FSMA 2000, s 225(2).
4
FSMA 2000, s 226.
5
FSMA 2000, s 227.
6
So including the regulated activity of accepting deposits, on which see para 1.5 above.
7
Defined in DISP 2.1.5G as including ‘for example, the provision and operation of cash
machines, foreign currency exchange, safe deposit boxes and account aggregation services
(services where details of accounts held with different financial service providers can be accessed
by a single password).’
8
DISP 2.6.2G(1).
9
DISP 2.6.1R.
10
DISP 2.6.2G(2).
11
DISP 2.6.5G.

48
 The Financial Ombudsman Scheme 1.40
12
In the Glossary to the FCA Handbook.
13
DISP 2.7.3R.
14
In the Glossary to the FCA Handbook.
15
In the Glossary to the FCA Handbook.
16
DISP 2.7.6.R.
17
DISP 2.8.1R.
18
DISP 2.8.2R(1) and DISP 2.8.3G.
19
DISP 2.8.2R(2) and DISP 2.8.4G.
20
DISP 3.3.4R.
21
But an oral hearing is perfectly possible if the ombudsman thinks it is appropriate: DISP 3.5.5R
and DISP 3.5.6R.
22
FSMA 2000, s 228(2).
23
R (IFG Financial Service Ltd) v Financial Ombudsman Service [2005] EWHC 1153 (Admin),
[2006] 1 BCLC 534, at [74], affirmed by the Court of Appeal in R (on the application of
Heather Moor & Edgecomb Ltd) v Financial Ombudsman Service [2008] EWCA Civ 642,
per Stanley Burnton LJ at [41].
24
FSMA 2000, s 225(1).
25
DISP 3.5.8R: The Ombudsman may give directions as to: (1) the issues on which evidence is
required; (2) the extent to which evidence should be oral or written; and (3) the way in which
evidence should be presented.
26
FSMA 2000, s 231.
27
R (Williams) v Financial Ombudsman Service [2008] EWHC 2142 (Admin), per Irwin J at
paras 26 and 45.
28
R (on the application of Heather Moor & Edgecomb Ltd) v Financial Ombudsman Service
[2008] EWCA Civ 642, per Rix LJ at [80].
29
FSMA 2000, s 228(5). Correspondingly, by FSMA 2000, s 228(6) if, by the date specified in the
written statement, the complainant has not notified the ombudsman of his acceptance or
rejection of the determination he is to be treated as having rejected it.
30
FSMA 2000, s 229(2).
31
DISP 3.7.4R.
32
FSMA 2000, s 229(5). See Bunney v Burns Anderson plc and another; Cahill v Timothy James
& Partners Ltd [2007] EWHC 1240 (Ch), per Lewison J, at [68]: ‘the Ombudsman does not
have power to make a direction that would require a firm to make a payment that exceeds the
statutory cap. If the cost of compliance with a direction is unknown at the time when the
direction is made, it is, in my judgment, subject to an implicit limitation that it will not be
enforceable beyond the statutory cap, once reached.’
33
Although the FOS deals with complaints, not causes of action, the doctrine of res judicata
nevertheless applies to prevent a complainant from litigating a cause of action that is substan-
tially the same as a complaint in respect of which the FOS process has produced a final and
binding determination. See Clark and another v In Focus Asset Management & Tax Solu-
tions Ltd [2014] EWCA Civ 118, per Arden LJ, at [77] and ff.
34
FSMA 2000, s 229(8)(a).
35
FSMA 2000, s 230 and DISP 3.7.9R.
36
FSMA 2000, s 229(8)(b) and Sch 17, Part 3, para 16.
37
FSMA 2000, s 229(9) and (10).

49
Chapter 2

MONEY LAUNDERING

1 INTRODUCTION
(a) Background 2.1
(b) The legislation 2.2
(c) Money laundering 2.3
2 THE PROCEEDS OF CRIME ACT 2002
(a) Key concepts 2.6
(b) The principal offences (ss 327–329) 2.10
(c) Defences 2.16
(d) The disclosure offences 2.21
3 TIPPING OFF AND PREJUDICING AN INVESTIGATION
(a) Section 333A – Tipping off 2.28
(b) Section 342 – prejudicing an investigation 2.29
4 THE ANTI-TERRORISM LEGISLATION 2.30
5 THE MONEY LAUNDERING, TERRORIST FINANCING
AND TRANSFER OF FUNDS (INFORMATION ON THE
PAYER) REGULATIONS 2017 2.32
(a) Risk assessment and controls 2.34
(b) Customer due diligence 2.35
(b) Record-keeping and training 2.36

1 INTRODUCTION TO MONEY LAUNDERING

(a) Background

2.1 Legislation aimed at combating the laundering of the proceeds of criminal

(and terrorist) conduct has a profound effect on the relationship between banks
and their customers.
It is the concept of facilitating the movement of the proceeds of crime which
unavoidably places credit institutions at the forefront of the detection and
prevention of criminal activity. Credit institutions bear onerous duties, but
without their assistance the proceeds of crime would be freely transferable.
However, at times the demands of statutory compliance and contractual
obligation to a customer can conflict. Banks and their employees need to be
familiar with the obligations imposed on them by the relevant statutes.

(b) The legislation

2.2 Since the last edition of this book, there has been a considerable volume of
new legislation. However, the legislative initiatives of recent years have not
given rise to a wholesale re-casting of the regime. Rather, the changes largely
represent an evolution (and in some cases, re-stating) of the existing framework.

1
2.2 Money Laundering

The UK’s money laundering legislation remains at present largely driven by EU

law1. This has given rise to three principal strands of statutory obligations. This
chapter deals with the obligations imposed on banks and individuals by those
rules in the following order:
(1) The Proceeds of Crime Act 20022 (‘POCA 2002’): this provides for a
range of offences which may be committed by a bank whose customer is
engaged in criminal activities or in receipt of criminal property.
(2) The Terrorism Act 2000 (‘TA 2000’): this provides for a range of
offences similar to those under POCA 2002 and aimed at preventing the
retention and control of terrorist property.
(3) The Money Laundering, Terrorist Financing and Transfer of Funds
(Information on the Payer) Regulations 20173 (‘the 2017 Regulations’):
these impose a specific set of procedures targeted against money laun-
dering which must be put in place and implemented by banks and other
similar institutions. Failure to do so may lead to conviction for the
commission of a criminal offence or the imposition of a civil penalty.
Whether and to what extent EU law will continue to determine or influence the
UK’s money-laundering regime after the UK leaves the EU remains, at the time
of writing, uncertain. Even after leaving the EU, however, the UK will still be
obliged to maintain and enforce an anti-money-laundering regime as a member
of the Financial Action Task Force (‘FATF’), an inter-governmental body
established in 1989. The objectives of the FATF are to set standards and
promote effective implementation of legal, regulatory and operational mea-
sures for combating money laundering, terrorist financing and other related
threats to the integrity of the international financial system.
1
In particular, the Directive on the prevention of the use of the financial system for the purposes
of money laundering or terrorist financing (2015/849/EU) (‘the Fourth Directive’). The Fourth
Directive repealed and replaced the Directive on the Prevention of the Use of the Financial
System for the Purpose of Money Laundering and Terrorist Financing (2005/60/EC) (‘the Third
Directive’) with effect from 26 June 2017. The Third Directive had in turn superseded
the Council Directive on the Prevention of the Use of the Financial System for the Purpose of
Money Laundering (1991/308/EEC) (‘the First Directive’) which had been substantially ex-
tended by the Second European Commission Money Laundering Directive (2001/97/EC) (‘the
Second Directive’). Member States were required to implement the Fourth Directive by 26 June
2017.
2
The 2002 Act gave effect in UK law to the First and Second Directives.
3
SI 2017/692. These came into force on 26 June 2017. They replaced the Money Laundering
Regulations 2007, SI 2007/2157.

(c) Money laundering

2.3 Money laundering is defined in art 1(3) of the Fourth Directive to mean the
following conduct when committed intentionally:
(1) The conversion or transfer of property, knowing that such property is
derived from criminal activity or from an act of participation in such
activity, for the purpose of concealing or disguising the illicit origin of
the property or of assisting any person who is involved in the commis-
sion of such activity to evade the legal consequences of that per-
son’s action.

2
 The Proceeds of Crime Act 2002 2.6

(2) The concealment or disguise of the true nature, source, location, dispo-
sition, movement, rights with respect to, or ownership of, property,
knowing that such property is derived from criminal activity or from an
act of participation in such activity.
(3) The acquisition, possession or use of property, knowing, at the time of
receipt, that such property was derived from criminal activity or from an
act of participation in such activity.
(4) Participation in, association to commit, attempts to commit, and aiding,
abetting, facilitating and counselling the commission of any of the
actions mentioned in the foregoing paragraphs.
This replicates the original definition first set down in the First Directive. The
First and Second Directives were given effect in UK law by POCA 2002, which
came into force in March 2003.
2.4 Money laundering for the purposes of POCA 2002 is given a wide
meaning. Section 340(11) of POCA 2002 provides as follows:
‘Money laundering is an act which—
(a) constitutes an offence under section 327, 328, or 329,
(b) constitutes an attempt, conspiracy or incitement to commit an offence
specified in paragraph (a),
(c) constitutes aiding, abetting, counselling or procuring the commission of an
offence specified in paragraph (a), or
(d) would constitute an offence specified in paragraph (a), (b) or (c) if done in the
United Kingdom.’
POCA 2002 applies to all proceeds of crime, however small. However, given the
inconvenience of this for credit institutions, the Serious Organised Crime and
Police Act 2005 (‘SOCPA 2005’) introduced a ‘threshold amount’ for deposit-
taking bodies in operating an account of £250 (s 339A).

2 THE PROCEEDS OF CRIME ACT 2002

2.5 The money laundering offences are contained in Part 7 of POCA 2002 and
can be divided into three categories, all of which may be relevant to banks and
similar institutions:
(1) the principal offences;
(2) the disclosure offences; and
(3) tipping off.

(a) Key concepts

(i) Criminal conduct

2.6 The offences under POCA 2002, ss 327–329 include reference to ‘criminal
conduct’, which is conduct which constitutes an offence in the UK or would
constitute an offence if it occurred here (s 340(2)). In relation to ss 327–329,
this definition has been slightly modified by SOCPA 2005 because a person does
not commit an offence under these sections if:
(a) he knows, or believes on reasonable grounds, that the relevant criminal
conduct occurred in a particular country or territory outside the United
Kingdom; and

3
2.6 Money Laundering

(b) the relevant criminal conduct:

(i) was not, at the time it occurred, unlawful under the criminal law
then applying in that country or territory; and
(ii) is not of a description prescribed by an order made by the
Secretary of State1.
1
SOCPA 2005, s 102.

(ii) Criminal property

2.7 Reference is also made in POCA 2002, ss 327–329 to ‘criminal property’.
Property is ‘criminal property’ if:
(a) it constitutes a person’s benefit from criminal conduct or it represents
such a benefit (in whole or part and whether directly or indirectly); and
(b) the alleged offender knows or suspects that it constitutes or represents
such a benefit (s 340(3)).
In R v GH (Respondent) the Supreme Court considered the meaning of
‘criminal property’ in POCA 2002. Lord Toulson held that:
‘There is an unbroken line of Court of Appeal authority that it is a pre-requisite of the
offences created by sections 327, 328 and 329 [of POCA 2002] that the property
alleged to be criminal property should have that quality or status at the time of the
offence. It is that pre-existing quality which makes it an offence for a person to deal
with the property, or to arrange for it to be dealt with, in any of the prohibited ways.
To put it in other words, criminal property for the purposes of sections 327, 328 and
329 means property obtained as a result of or in connection with criminal activity
separate from that which is the subject of the charge itself. In everyday language, the
sections are aimed at various forms of dealing with dirty money (or other property).
They are not aimed at the use of clean money for the purposes of a criminal offence,
which is a matter for the substantive law relating to that offence.’
As criminal property is property that is already criminal property at the time of
the offence, it follows that its ‘criminality’ must have arisen from criminal
conduct distinct from the conduct alleged to constitute the money laundering
offence. The Supreme Court in R v GH1 concluded that this view accorded with
the natural meaning of ss 327 to 329, and approved the line of Court of Appeal
authority dealing with this question. See for example: R v Loizou and others2;
Kensington International Ltd v Republic of Congo3; R v Geary4.
‘Criminal property’ does not embrace property which is merely intended to
become criminal property: R v Akhtar5. Furthermore, the prosecution must
prove, amongst other things, at least the type of criminal conduct that has
generated the alleged criminal property. It is not sufficient to show that the
circumstances were such that the property could have had no lawful origin: see
R v W and anor6.
Section 340(4) provides that it is immaterial who carried out the conduct, who
benefited from it, and whether the conduct occurred before or after the passing
of POCA 20027. If an item of criminal property is sold to a bona fide purchaser,
then it is no longer criminal property (consistent with section 329(2), discussed
further below). However, the proceeds of that sale will be criminal property: see
R v Afolabi8.
1
[2015] UKSC 24.

4
 The Proceeds of Crime Act 2002 2.9
2
[2006] EWCA Crim 1719, [2006] All ER (D) 215 (Jul).
3
[2007] EWCA Civ 1128, [2008] 1 WLR 1144, [2008] 1 Lloyd’s Rep 161 at [67].
4
[2010] EWCA Crim 1925.
5
[2011] EWCA Crim 146.
6
[2008] EWCA Crim 2, [2009] 1 WLR 965.
7
A person benefits from conduct if he obtains property as a result of or in connection with the
conduct: POCA 2002, s 340(5).
8
[2009] EWCA Crim 2879.

(iii) Suspicion
2.8 The concept of ‘suspicion’ makes numerous appearances in the money
laundering provisions of POCA 2002, and is an important concept given the
role that banks may play as a potential conduit for funds.
It is therefore critical to appreciate when ‘suspicion’ for these purposes is
deemed to arise. Fortunately, its meaning in this context is clear from the
authorities.
Suspicion is something less than prima facie proof. Specifically, the meaning of
‘suspicion’ was considered by the Court of Appeal in R v Da Silva1 in the
context of an alleged offence under s 93A of the Criminal Justice Act 1988,
where Longmore LJ said2:
‘It seems to us that the essential element in the word “suspect” and its affiliates, in this
context, is that the defendant must think that there is a possibility, which is more than
fanciful, that the relevant facts exist. A vague feeling of unease would not suffice. But
the statute does not require the suspicion to be “clear” or “firmly grounded and
targeted on specific facts”, or based upon “reasonable grounds”. To require the
prosecution to satisfy such criteria as to the strength of the suspicion would, in our
view, be putting a gloss on the section.’
It follows that a person must make disclosure of a suspicion even if the suspicion
has no reasonable foundation (see further below). The Court went on to
confirm that this possibility must be more than fleeting. It must be of a settled
nature, in contrast to a case in which, for example, a person did entertain a
suspicion but, on further thought, dismissed it from his mind as being unworthy
or contrary to the evidence or as outweighed by other considerations.
1
[2006] EWCA Crim 1654, [2006] 4 All ER 900, (2006) Times, 4 August, [2006] All ER (D) 131
(Jul).
2
At [16].

2.9 As for ‘suspicion’ under s 328, in Squirrell Ltd v National Westminster

Bank plc1 the court adopted the definition of Lord Devlin in Hussien v Chong
Fook Kam2 that:
‘Suspicion in its ordinary meaning is a state of conjecture or surmise where proof is
lacking; I suspect but I cannot prove. Suspicion arises at or near the starting point of
an investigation of which the obtaining of prima facie proof is the end.’
In K Ltd v National Westminster Bank plc3, the Court of Appeal followed the
test in R v Da Silva (see para 2.8 above) and thereby adopted it for the purposes
of civil cases and specifically in respect of POCA 2002.
The position was again confirmed in Shah v HSBC4 by Longmore LJ at
paragraph 21:

5
2.9 Money Laundering

‘I need not set out again the reasoning in Da Silva on which this court founded its
conclusion that the relevant suspicion need not be based on reasonable grounds. We
are, in any event, bound by both it and K Ltd. To allow a claim based on rationality
(even in the Wednesbury sense) or negligently self-induced suspicion would be to
subvert those decisions . . . .’
The existence of suspicion is a subjective fact5. There is no legal requirement
that there should be reasonable grounds for the suspicion. The relevant bank
employee either suspects or he does not. If he does suspect he must inform the
authorities, either himself, or through the bank’s nominated officer6. The
subjective nature of suspicion leads to the irony that, whereas a person cannot
be guilty of, for example, transferring criminal property unless the property is in
fact criminal property7, a person can be guilty of a failure to report a suspicion
even though the suspicion relates to property which is not in fact criminal
property.
Guidance as to what constitutes ‘suspicion’ is also contained in the Guidance
issued by the Joint Money Laundering Steering Group (‘the JMSLG Guidance’).
This states that suspicion is more subjective than knowledge and falls short of
proof based on firm evidence. It also states that a person who considers a
transaction to be suspicious would not be expected to know the exact nature of
the criminal offence or that the particular funds were definitely those arising
from crime8.
1
[2005] 2 All ER 784. See below for the facts of this case. See also Bowman v Fels [2005] EWCA
Civ 226, [2005] 4 All ER 609.
2
[1970] AC 942, [1969] 3 All ER 1626, PC, at 948 and 1630 respectively.
3
[2006] EWCA Civ 1039 at [16], [2006] 4 All ER 907.
4
[2010] EWCA Civ 31. See also Parvizi v Barclays Bank plc [2014] EWHC B2 (QB), in which the
claimant’s claim for loss said to have arisen because the bank had frozen his accounts was struck
out as an analyst on the bank’s monitoring team said in a witness statement that suspicion had
arisen in her mind because of large gambling activities seen on the claimant’s account. The
Master held that there was no real prospect of the claimant establishing at trial that the analyst
had not had a relevant suspicion that was more than fanciful (even if, the Master noted, certain
aspects of the analyst’s evidence were open to attack).
5
This is to be contrasted with offences under section 17 of the TA 2000, discussed further below,
of which one element is that the defendant ‘knows or has reasonable cause to suspect’ that an
arrangement will or may be used for the purposes of terrorism. The test for ‘reasonable cause to
suspect’ is, it seems, an objective one: see Menni (Nasserdine) v HM Advocate [2014] SCL 191.
6
[2006] EWCA Civ 1039 at [21], [2006] 4 All ER 907.
7
See R v Montila [2004] UKHL 50, [2005] 1 All ER 113.
8
Joint Money Laundering Steering Group, Guidance for the UK Financial Sector (December
2017), Part I, paragraphs 6.11 to 6.14. Available at http://www.jmlsg.org.uk/industry-guidan
ce/article/jmlsg-guidance-current.

(b) The principal offences (ss 327–329)

2.10 As already noted, money laundering is defined to include an offence under
ss 327–329 of POCA 2002. These offences are known as the principal offences.
These sections, particularly s 328, are of considerable importance to banks
accepting deposits from their customers (subject to the threshold amount
referred to above). It should be noted that the Supreme Court held in 2010 that
at that time the FSA had, and now the Financial Conduct Authority (‘FCA’)
retains, the power to prosecute offences of money laundering under these

6
 The Proceeds of Crime Act 2002 2.12

sections, in spite of these offences not being expressly mentioned in ss 401 and
402 of the Financial Services and Markets Act (‘FSMA 2000’) — see R v
Rollins1.
In each case, the alleged offender must be shown to know or suspect that the
funds in question constitute or represent a person’s benefit from criminal
conduct.
1
[2010] UKSC 39, [2010] 4 All ER 880, [2010] 1 WLR 1922.

(i) Section 327 – concealing, disguising, converting, transferring

or removing
2.11 By section 327 of POCA 20021, a person commits an offence if he
conceals, disguises, converts, transfers or removes from the UK ‘criminal
property’ (s 327(1)).
Concealing or disguising criminal property includes concealing or disguising its
nature, source, location, disposition, movement or ownership or any rights
with respect to it (s 327(3)).
‘Conversion’ of criminal property for the purposes of s 327 (which is not
defined in POCA 2002) is not a reference to the civil tort of conversion, but
the Court of Appeal has indicated that it ‘cannot be far removed from its
nature . . . . [and it] only requires a dealing with someone else’s property so as
to question, deny or interfere with the owner’s title to it’: R v Fazal2. In the same
case, it was also held that even though someone else had made the deposits into
the offender’s bank account, the offender had given his full co-operation
throughout the period of the conversions and that was sufficient to convict.
However, it seems likely that the meaning of ‘conversion’ in this context is wider
than in the context of the civil tort of conversion3, potentially encompassing any
deliberate change, alteration, substitution or transformation of the nature,
form, or quality of property.
Property is ‘criminal property’ for the purposes of POCA 2002 if it constitutes
or represents a person’s benefit from ‘conduct’, provided the alleged offender
knows or suspects that it does so4. This is discussed further above at para 2.7.
‘Criminal conduct’ is conduct which constitutes an offence in any part of the
UK or would constitute an offence in any part of the UK if it occurred there. It
is immaterial who carried out the conduct, who benefited from it and whether
the conduct occurred before or after the passing of the legislation: POCA 2002,
s 340(2) and (4).
1
Which replaced s 93C of the Criminal Justice Act 1988 and s 49 of the Drug Trafficking Act
1994.
2
[2009] EWCA Crim 1697, [2010] 1 WLR 694 per Rix LJ.
3
See for example R v Montila [2004] UKHL 50, R v Middleton [2008] EWCA Crim 233, R v
Fazal [2010] 1 WLR 694, R v Martin [2012] EWCA Crim 902 and R v Rogers [2014] EWCA
Crim 1680.
4
POCA 2002, s 340(3).

2.12 The relevance of POCA 2002, s 327 to banks is that the payment of the
proceeds of crime into a bank account is a transfer of criminal property within

7
2.12 Money Laundering

s 327(1) and, in a similar vein, a transfer out by a bank would also constitute
such an offence assuming the appropriate mens rea is present.

(ii) Section 328 – arrangements

2.13 By s 328(2) of POCA 2002, a person commits an offence if he enters into

or becomes concerned in an arrangement which he knows or suspects facilitates
(by whatever means) the acquisition, retention, use or control of criminal
property by or on behalf of another person1. In order for there to be a
contravention to this section, it need not be shown that there was any form of
shared purpose in the arrangement to facilitate the money laundering: see
Bowman v Fells at paragraph 982.
This has important implications for financial institutions. For example, the
opening of an account which the customer intends to be a repository for the
proceeds of crime would be sufficient to constitute an arrangement within
s 328. Similarly, the provision of financial advice or other forms of professional
advice and services could amount to an arrangement and so constitute a
prohibited act.
Indeed, the need for vigilance by banks and other similar institutions is
emphasised by the fact that an arrangement need not be derived from an
institution’s own clients. For example, a broker might be legitimately ‘con-
cerned in an arrangement’ selling shares owned by a legitimate vendor, but if it
received funds from an illegitimate purchaser into its client account such an
arrangement would likely constitute one that facilitated the retention, use or
control of criminal property. However, such an illegitimate purchaser must be
identified or identifiable — see Dare v Crown Prosecution Service3.
The purpose of section 328:
‘is not to turn innocent third parties like NatWest into criminals. It is to put them
under pressure to provide information to the relevant authorities to enable the latter
to obtain information about possible criminal activity and to increase their prospects
of being able to freeze the proceeds of crime4.’

1
It should be noted that the Fraud Act 2006 has removed the privilege against self-incrimination
in respect of an offence under s 328 of POCA 2002. This means that a defendant to a disclosure
application (perhaps in support of a freezing injunction) cannot rely on this privilege in that
context: JSC BTA Bank v Ablyazov [2009] EWCA Civ 1124, [2010] 1 WLR 976. It seems likely
that the same would apply in relation to all the money-laundering offences.
2
[2005] EWCA Civ 226, [2005] 1 WLR 3083, [2005] 4 All ER 609.
3
[2012] EWHC 2074 (Admin).
4
Squirrell Ltd v National Westminster Bank plc [2005] EWHC 664 (Ch), [2005] 1 All ER
(Comm) 749 at [16] per Laddie J.

2.14 Indeed, this purpose makes the effect of s 328 on banks plain, an
illustration of which is the case of Squirrell Ltd v National Westminster
Bank plc1. The defendant bank froze a customer’s account on the ground that
the bank suspected that the account was being used for money laundering. The
bank refused to inform its customer why it had blocked the account because to
have done so would have involved committing the offence of tipping off. Nine
days later, the customer applied to court for an order unblocking the account.
Laddie J first expressed sympathy with the customer’s position2:

8
 The Proceeds of Crime Act 2002 2.15

‘It is not proved or indeed alleged that it or any of its associates has committed any
offence. It, like me, has been shown no evidence raising even a prima facie case that
it or any of its associates has done anything wrong. For all I know it may be entirely
innocent of any wrongdoing. Yet, if POCA has the effect contended for by Natwest
and HMCE, the former was obliged to close down the account, with possible severe
economic damage to Squirrell. Furthermore it cannot be suggested that either
Natwest or HMCE are required to give a cross-undertaking in damages. In the result,
if Squirrell is entirely innocent it may suffer severe damage for which it will not be
compensated. Further, the blocking of its account is said to have deprived it of the
resources with which to pay lawyers to fight on its behalf. Whether or not that is so
in this case, it could well be so in other, similar cases. Whatever one might feel were
Squirrell guilty of wrongdoing, if, as it says, it is innocent of any wrongdoing, this can
be viewed as a grave injustice.’
Laddie J then noted that the purpose of s 328(1) is to put innocent third parties
under pressure to provide information to the relevant authorities to enable the
latter to obtain information about possible criminal activity and to increase
their prospects of being able to freeze the proceeds of crime. To this end, a party
caught by s 328(1) can avoid liability if he brings himself within the statutory
defence created by s 328(2), which provides that a person does not commit such
an offence if he makes an authorised disclosure under POCA 2002, s 338 and (if
the disclosure is made before he does the act mentioned in subsection (1)) he has
the appropriate consent under POCA 2002, ss 335 or 336 (see further below).
Laddie J held3 that the course adopted by the bank had been unimpeachable; it
had done precisely what the legislation intended it to do. There could be no
question of ordering the bank to operate the account in accordance with its
customer’s instructions because that would have required the bank to commit a
criminal offence. The form of protection which the legislation confers on a
customer whose account has been frozen is that the appropriate consent is
treated as having been given if:
(a) an authorised disclosure is made to a constable or customs officer; and
(b) the 7 day notice period has expired without a notice of refusal, or the 31
day moratorium period (which follows on from the notice period) has
expired without a freezing order having been obtained.
1
[2005] EWHC 664 (Ch), [2005] 1 All ER (Comm) 749.
2
See fn 1 at [16].
3
See fn 1 at [21].

(iii) Section 329 – acquisition, use and possession

2.15 By s 329(1) of POCA 2002, a person commits an offence if he acquires,
uses or has possession of criminal property.
In R v Gabriel1, Gage LJ gave guidance to prosecutors on the proper approach
to proving an offence under s 329:
‘There can be no doubt that the money laundering provisions of the Proceeds of
Crime Act 2002 are draconian. The scope of s 329 is wide. It requires proof of no
more mens rea than suspicion. The danger is that juries will be tempted to think that
it is for the defence to prove innocence rather than the prosecution to prove guilt. In
R v Loizou and others2 the prosecution had set out the factors upon which it relied
and from which it submitted the jury could draw proper inferences. In our judgment
it is a sensible practice for the prosecution, as was done in Loizou, either by giving

9
2.15 Money Laundering

particulars, or at least in opening, to set out the facts upon which it relies and the
inferences which it will invite the jury to draw as proof that the property was criminal
property. In doing so it may very well be that the prosecution will be able to limit the
scope of the criminal conduct alleged.’
In saying that s 329 requires proof of no more mens rea than suspicion, Gage LJ
was not referring to anything in s 329 itself, but to the fact that the definition of
criminal property in POCA 2002, s 340(3) includes a requirement that the
alleged offender knows or suspects that the property constitutes or represents a
benefit from criminal conduct.
1
[2006] EWCA Crim 229 at [26].
2
[2005] EWCA 1579.

(c) Defences
2.16 The main statutory defences to all three of the principal offences are:
(i) that the person makes an authorised disclosure under POCA 2002, s 338
(see below) and (if the disclosure is made before he does the prohibited
act) he has ‘appropriate consent’ (under POCA 2002, ss 335 or 336).
(ii) that the person intended to make such disclosure, but had a ‘reasonable
excuse’ for not doing so (POCA 2002, ss 327(2), 328(2) and 329(2)).
(iii) in completing the actus reus of the offence, the person was in fact
carrying out a function relating to the enforcement of POCA 2002 or
any other Act whose aim is to tackle criminal conduct or the benefit from
criminal conduct (POCA 2002, ss 327(2), 328(2) and 329(2)).
(iv) the person knows or believes on reasonable grounds that the relevant
criminal conduct occurred in a particular country or territory outside the
UK and the relevant criminal conduct was not, at the time it occurred,
unlawful under the criminal law then applying in that country or
territory, and is not of a description prescribed by an order made by the
Secretary of State (POCA 2002, ss 327(2A), 328(2A) and 329(2A) as
inserted by s 102 of the Serious Organised Crime and Police Act 2005
(‘SOGPA 2005’).
The third defence listed above is unlikely to be of relevance to banks or similar
institutions. The purpose of the fourth defence was to avoid the ‘driving on the
right problem’ — were this provision not to exist, relevant criminal conduct
outside the UK (on the basis that it is criminal in the UK) might have included
(for example) driving on the right, but even in a country where that was
allowed. The other, important, defences are considered in detail below.
2.17 In addition, exclusive to the POCA 2002, s 329 offence is the defence of
adequate consideration. Section 329(2)(c) provides that a person does not
commit an offence if ‘he acquired or used or had possession of the property for
adequate consideration’. Curiously, but as a plain reading of the provision
would suggest, this defence is even available where the defendant who acquired
the property knows it to be stolen: Hogan v DPP1. However, s 329(3) defines
what constitutes inadequate consideration. Specifically, s 329(3) provides that
this defence will not be available where the value of the consideration is
significantly less than the value of the property, use or possession, nor where the
person knows or suspects that the provision of goods or services may help

10
 The Proceeds of Crime Act 2002 2.18

another to carry out criminal conduct. It has been held, for example, that the
granting of a mortgage over a property amounts to adequate consideration for
the purposes of s 329: R v Kausar2.
1
[2007] EWHC 978 (Admin), [2007] 1 WLR 2944.
2
[2009] EWCA Crim 2242.

(i) Sections 335 and 338 – authorised disclosures and appropriate consent
2.18 In essence, POCA 2002 provides for a consent regime which enables the
continuation of transactions if it is followed. This is important for banks, as if
complied with it will allow the performance of a customer’s instructions (for
example to transfer funds) without criminal liability.
POCA 2002, s 3381 provides that:
‘(1) For the purpose of this Part a disclosure is authorised if—
(a) it is a disclosure to a constable, a customs officer or a nominated
officer by the alleged offender that property is criminal property,
(b) [repealed] and
(c) the first, second or third condition set out below is satisfied.
(2) The first condition is that the disclosure is made before the alleged offender
does the prohibited act.
(2A) The second condition is that—
(a) the disclosure is made while the alleged offender is doing the
prohibited act,
(b) he began to do the act at a time when, because he did not then know
or suspect that the property constituted or represented a
person’s benefit from criminal conduct, the act was not a prohibited
act, and
(c) the disclosure is made on his own initiative and as soon as is
practicable after he first knows or suspects that the property
constitutes or represents a person’s benefit from criminal conduct.
(3) The third condition is that—
(a) the disclosure is made after the alleged offender does the prohibited
act,
(b) he has a reasonable excuse for his failure to make the disclosure
before he did the act, and
(c) the disclosure is made on his own initiative and as soon as it is
practicable for him to make it.
(4) An authorised disclosure is not to be taken to breach any restriction on the
disclosure of information (however imposed).
(4A) Where an authorised disclosure is made in good faith, no civil liability arises
in respect of the disclosure on the part of the person by or on whose behalf it
is made.
(5) A disclosure to a nominated officer is a disclosure which—
(a) is made to a person nominated by the alleged offender’s employer to
receive authorised disclosures, and
(b) is made in the course of the alleged offender’s employment ...
(6) References to the prohibited act are to an act mentioned in section 327(1),
328(1) or 329(1) (as the case may be).’
The new s 338(4A) is an amendment to this section which will be important for
banks2. As explained in this chapter, Part 7 of POCA 2002 obliges an individual
to report to the NCA where there are reasonable grounds to know or suspect
that a person is engaged in money laundering. The submission of a suspicious

11
2.18 Money Laundering

activity report removes the risk of prosecution for an offence in relation to

money laundering. A bank can also remove the risk to them of committing a
money-laundering offence by seeking the consent of the NCA, under sec-
tion 335 of POCA 2002, to conduct a transaction or activity about which they
have suspicions. The NCA has seven days to respond.
Whilst the bank awaits the NCA’s decision on consent, the activity or trans-
action must not proceed. Furthermore, the bank cannot disclose to the cus-
tomer the fact that a report has been submitted, or any other information that
may prejudice the NCA’s investigation into the reported activity or transaction,
as doing so would constitute a ‘tipping off’ offence under section 333A of
POCA. This can place the bank in a difficult position in not informing the
customer of the reasons for suspension of their requested activity or trans-
action, and could result in the collapse of a financial or commercial deal. This
potentially exposes a bank to the risk of civil litigation for breach of contract or
breach of mandate, and there have been cases where customers have even
sought to issue winding up petitions.
The courts (see Shah v HSBC Private Bank (UK) Ltd (No 2)3 discussed below)
have, however, held that whilst customers can require such institutions to prove
that the suspicion that gave rise to the report was reasonable, provided the
suspicion is so proved, the institution cannot be held liable for loss suffered by
the customer as a consequence of the institution’s failure to carry out promptly
the customer’s instructions.
The new s 338(4A) makes express statutory provision in relation to the
UK’s obligation under the Third Directive to ensure that persons who make
disclosures to relevant authorities in good faith must be protected from civil
liability for doing so.
1
As amended by SOCPA 2005 and the Proceeds of Crime (Amendment) Regulations 2007/3398.
2
Introduced by section 37 of the Serious Crime Act 2015.
3
[2012] EWHC 1293 (QB); [2013] 1 All ER (Comm) 72.

2.19 By POCA 2002, s 335:

‘(1) The appropriate consent is—
(a) the consent of a nominated officer to do a prohibited act if an
authorised disclosure is made to the nominated officer;
(b) the consent of a constable to do a prohibited act if an authorised
disclosure is made to a constable;
(c) the consent of a customs officer to do a prohibited act if an authorised
disclosure is made to a customs officer.
(2) A person must be treated as having the appropriate consent if—
(a) he makes an authorised disclosure to a constable or a customs officer,
and
(b) the condition in subsection (3) or the condition in subsection (4) is
satisfied.
(3) The condition is that before the end of the notice period he does not receive
notice from a constable or customs officer that consent to the doing of the act
is refused.
(4) The condition is that—
(a) before the end of the notice period he receives notice from a constable
or customs officer that consent to the doing of the act is refused, and
(b) the moratorium period has expired.

12
 The Proceeds of Crime Act 2002 2.19

(5) The notice period is the period of seven working days starting with the first
working day after the person makes the disclosure.
(6) The moratorium period is the period of 31 days starting with the day on
which the person receives notice that consent to the doing of the act is
refused.
(6A) Subsection (6) is subject to:
(a) section 336A, which enables the moratorium period to be extended
by court order in accordance with that section, and
(b) section 336C, which provides for an automatic extension of the
moratorium period in certain cases (period extended if it would
otherwise end before determination of application or appeal
proceedings etc).
(7) A working day is a day other than a Saturday, a Sunday, Christmas Day,
Good Friday or a day which is a bank holiday under the Banking and
Financial Dealings Act 1971 (c 80) in the part of the United Kingdom in
which the person is when he makes the disclosure.
(8) References to a prohibited act are to an act mentioned in section 327(1),
328(1) or 329(1) (as the case may be).
(9) A nominated officer is a person nominated to receive disclosures under
section 338.
(10) Subsections (1) to (4) apply for the purposes of this Part.’
In short, a person will avoid commission of an offence if he has made an
authorised disclosure and (if the disclosure is made before the act) he has
obtained appropriate consent.
Authorised disclosures may be made to a constable, to a customs officer or to a
nominated officer. In practice, such disclosures (other than to a nominated
officer) are made by Suspicious Activity Report to the NCA. Where a disclosure
is made to a constable or an officer of Revenue and Customs, it must be
disclosed by the recipient in full to a person authorised for the purpose by the
NCA as soon as possible1.
No issue of confidentiality vis-à-vis the customer arises. POCA 2002 s 338(4)
provides that an authorised disclosure is not taken to breach any restriction on
the disclosure of information, however imposed.
On authorised disclosure being made, the constable or customs officer may give
appropriate consent, in which case a bank will be free to carry out the otherwise
prohibited act.
These are important provisions because a bank which makes disclosure, but is
not given notice of refusal within the 7 day notice period, or, having received
such notice, does not receive before the expiry of the moratorium period (of 31
days starting on the day on which the notice is received) notice of an or-
der freezing the account, is bound to act in accordance with its custom-
er’s instructions. The moratorium procedure should avoid the difficulties which
arose under the former legislation when the authorities could sit back and do
nothing for an indefinite period knowing that banks could not safely honour
their customers’ instructions2. That said, the Criminal Finances Act 2017 has
introduced a new sub-section (6A) which enables the moratorium period to be
extended in the circumstances specified in ss 336A and 336C. Should consent be
required in the interim, it is possible for a bank to apply for an interim
declaration against the NCA permitting it to process payments back to its

13
2.19 Money Laundering

customer; however such relief is only available in exceptional circumstances3.

1
POCA 2002, s 339ZA.
2
See Bank of Scotland v A Ltd [2001] EWCA Civ 52, [2001] 3 All ER 58 at [22].
3
N v Royal Bank of Scotland plc [2017] EWCA Civ 253.

(ii) Sections 327(2), 328(2) and 329(2) — reasonable excuse

2.20 The defence of ‘reasonable excuse’, while on the face of it potentially
relevant to banks, in reality must be of limited application. Sections 327–329
each concern activities in relation to criminal property. Property is not criminal
property unless the alleged offender knows or suspects that it constitutes or
represents a benefit from criminal conduct (see above). It is therefore difficult to
see how disclosure made after a person does the prohibited act could ever of
itself provide a defence. That said, it has been suggested that the defence is of
reasonably wide application, as a ‘reasonable excuse’ might arise in circum-
stances of duress and coercion, necessity or mistake1. Even if it can, banks will
almost always rely on the defence of appropriate consent under ss 335 or 336.
1
See Butterworths Money Laundering Law, Division 3 at para [1194].

(d) The disclosure offences

2.21 In relation to the principal offences, banks are generally only exposed to
criminal liability if they facilitate some positive action by a person who is
laundering money. But it is perfectly possible to have a situation in which a
money launderer takes no positive step at all, but the bank comes into
possession of information which causes it to suspect money laundering. The
bank then comes under a duty to report. Appropriate disclosure is therefore not
only a defence to the offences listed above. It is also an independent obligation
in its own right.
In particular, ss 330, 331 and 332 of POCA 2002 create disclosure offences.
Sections 330 and 331 apply only in relation to the ‘regulated sector’ which
includes businesses engaging in accepting deposits, such as banks1.
1
Pursuant to Sch 9 to POCA 2002 and Pt 4 of FSMA 2000.

(i) Section 330 – failure to disclose: regulated sector

2.22 Banks fall within the regulated sector and thus are under a duty to disclose
known or suspected money laundering by virtue of POCA 2002, s 3301, which
provides in sub-sections (1) to (4):
‘(1) A person commits an offence if the conditions in subsections (2) to (4) are
satisfied.
(2) The first condition is that he: (a) knows or suspects, or (b) has reasonable
grounds for knowing or suspecting, that another person is engaged in money
laundering.
(3) The second condition is that the information or other matter (a) on which his
knowledge or suspicion is based, or (b) which gives reasonable grounds for
such knowledge or suspicion, came to him in the course of a business in the
regulated sector.

14
 The Proceeds of Crime Act 2002 2.24

(3A) The third condition is (a) that he can identify the other person mentioned in
subsection (2) or the whereabouts of any of the laundered property, or (b)
that he believes, or it is reasonable to expect him to believe, that the
information or other matter mentioned in subsection (3) will or may assist in
identifying that other person or the whereabouts of any of the laundered
property.
(4) The fourth condition is that he does not make the required disclosure to (a) a
nominated officer, or (b) a person authorised for the purposes of this Part by
the Director General of the National Crime Agency, as soon as is practicable
after the information or other matter mentioned in subsection (3) comes to
him.’
The section refers to ‘another person’. It follows that the duty to disclose is not
limited to knowledge or suspicions of money laundering by a customer. If
information supplied by a customer gives rise to knowledge or suspicion of
money laundering by a non-customer, disclosure must also be made in those
circumstances.
Importantly, by contrast with ss 327 to 329 of POCA 2002, the necessary
mental element of the offence is knowledge or suspicion of money laundering or
the presence of reasonable grounds for suspicion. There is therefore in part an
objective test of what a person should know or suspect. This places a significant
onus on banks and other similar institutions to be vigilant in light of the
information that is available to them. Either subjective knowledge or suspicion,
or in the absence of that the presence of reasonable grounds for knowledge or
suspicion, is sufficient (subject to sub-sections (3) and (3A)) to engage the duty
to disclose.
1
As amended by SOCPA 2005, the Crime and Courts Act 2013, the Proceeds of Crime Act 2002
and Money Laundering Regulations 2003 (Amendment) Order, SI 2006/308 and the Terrorism
Act 2000 and Proceeds of Crime Act 2002 (Amendment) Regulations, SI 2007/3398.

2.23 The required disclosure is disclosure of the identity of the other person
mentioned in subsection (2) in para 2.22 above and the whereabouts of the
laundered property (insofar as he knows those facts), and the information or
other matter mentioned in subsection (3) in para 2.22 above (POCA 2002,
s 330(5)).
Section 330 also refers to the concept of ‘laundered property’ rather than
criminal property (s 330(5A)) which is not a concept used by the other
provisions in Part 7. This is defined as the ‘property forming the subject-matter
of the money laundering that he knows or suspects, or has reasonable grounds
for knowing or suspecting, that other person to be engaged in’.
2.24 A person who fails to make disclosure does not commit an offence under
POCA 2002, s 330 if:
(i) the person has a reasonable excuse for not making the required disclo-
sure (s 330(6)(a));
(ii) he is a professional legal adviser or other relevant professional adviser
and the information came to him in privileged circumstances
(s 330(6)(b));

15
2.24 Money Laundering

(iii) he does not know or suspect money laundering and he has not been
provided by his employer with ‘such training as is specified by the
Secretary of State by order for the purposes of this section’ (s 330(6)(c),
s 330(7)11);
(iv) he is employed by, or is in partnership with, a professional legal adviser
or a relevant professional legal adviser to provide the adviser with
assistance or support, the information comes to the person in connection
with the provision of such assistance or support and the information
came to him in privileged circumstances (s 330(6)(c), s 330(7B)); or
(v) he knows or believes on reasonable grounds that the money laundering
is occurring in a particular country or territory outside the UK, the
money laundering is not unlawful under the criminal law applying in
that country or territory and is not of a description prescribed in an
order made by the Secretary of State (s 330(7)).
1
For the specified training, see the Proceeds of Crime Act 2002 (Failure to Disclose Money
Laundering: Specified Training) Order 2003, SI 2003/171.

2.25 Banks will frequently have to deal with disclosure issues, and this provi-
sion applies to all bank employees. The required disclosure is to be made either
to a bank’s own nominated officer or to the NCA. A disclosure to a nominated
officer (commonly referred to as the ‘Money Laundering Reporting Officer’ or
‘MLRO’) is a disclosure which is made to a person nominated by the alleged
offender’s employer to receive disclosures and which is made in the course of the
alleged offender’s employment. Therefore an individual employee’s liability will
be discharged under this section by reporting to the bank’s MLRO and then
following that person’s instructions. The responsibility then passes to the
MLRO, who has to decide whether to report on to the authorities.
Section 11 of the Criminal Finances Act 2017 has amended POCA 2002 to
introduce ss 339ZB to 339ZG which (in essence) permit companies who
operate in the regulated sector to share information when one party believes
that the other may have information they need to determine whether or not an
entity they deal with is engaged in money laundering. If information is ex-
changed, then both parties must jointly submit a joint disclosure report of their
activities to the FCA, explaining the reasoning behind the sharing of informa-
tion and whether there is cause for further investigation.

(ii) Section 331 – failure to disclose: nominated officers in the

regulated sector

2.26 The MLRO is subject to a similar offence under POCA 2002, s 331 where
the information on which his knowledge or suspicion is based, or which gives
reasonable grounds for such suspicion, came to him in consequence of a
disclosure made under POCA 2002, s 330. The same defences are available as
in s 330 with one exception which may not be material to banks, namely the
protection afforded to legal advisers in certain privileged circumstances (con-
trast s 330(6)(b) and s 330(7B) with the absence of equivalent provisions in
s 331).
2.27 In deciding whether an offence has been committed under POCA 2002,
ss 330 or 331 the court must consider whether the alleged offender followed

16
 Tipping Off and Prejudicing an Investigation 2.28

any relevant guidance which was at the time concerned issued by a supervisory
authority, approved by the Treasury, and published in a manner appropriate to
bring the guidance to the attention of persons likely to be affected by it
(ss 330(8), 331(7)). Of relevance here is the guidance issued by the JMLSG and
approved by the Treasury1.
1
See www.jmlsg.org.uk for the most recently updated version of this guidance.

3 TIPPING OFF AND PREJUDICING AN INVESTIGATION

(a) Section 333A – Tipping off

2.28 By section 333A(1) of POCA 2002, a person commits the offence of
tipping off if: (i) he or another person has made a disclosure to the authorities
under Pt 7 of POCA 2002 of information that came to that person in the course
of a business in the regulated sector; and (ii) he discloses this (ie to someone
other than the authorities) in circumstances in which this is likely to prejudice
any investigation that might be conducted and the information on which the
disclosure is based came to the person in the course of a business in the regulated
sector1.
The suggestion that it is unlawful only to disclose the fact that an authorised
disclosure has been made, but not the information passed over in that autho-
rised disclosure, has been rejected: see Becker v Lloyds TSB Bank plc2.
The offence can only be committed once a disclosure has been made. While this
may appear to be an important limitation on the scope of liability, in practice a
bank should never tip off a customer prior to making an authorised disclosure.
However, by section 333A(3) it is also an offence to disclose that an investiga-
tion into allegations that an offence under Part 73 has been committed, is being
contemplated or is being carried out, if the disclosure is likely to prejudice that
investigation and the information on which the disclosure is based came to the
person in the course of a business in the regulated sector.
In neither case, however, is it an offence unless the person knows or suspects
that the disclosure is likely to prejudice any investigation: ss 333D(3) and (4).
Section 333A is a critically important provision for banks. POCA 2002 has
attempted to strike a balance between the competing interests of banker and
customer. However, these offences can place banks in a difficult position
vis-à-vis their customers following disclosure to the authorities of suspected
money laundering. In practice, a bank has to freeze its customer’s account
without being able to give any explanation to the customer save to the extent
that the authorities consent4. This can place a bank on the horns of a dilemma,
as to give any explanation runs the risk of prejudicing an investigation that
might be conducted and so amount to an offence.
To some extent the potential difficulties that arise in this situation have been
resolved by the new s 338(4A) which protects a bank from civil liability to its
customers in the circumstances that a disclosure has been made to the authori-
ties and it cannot give the customer reasons for its apparent failure to perform
its obligations to the customer.

17
2.28 Money Laundering

Prior to the introduction of s 338(4A), one analysis which resolved that

dilemma and allowed the bank to avoid civil liability to its customer whilst still
complying with its obligations under POCA 2002 was that suggested in Shah v
HSBC Private Bank (UK) Ltd (No 2)5. In that case, the claimants transferred
$28m to the defendant bank. The bank suspected that the funds represented the
proceeds of crime and made a suspicious activity report to (at the time) SOCA,
asking for consent to perform transfers requested by the claimants. Consent
was eventually obtained, but delays occurred and the bank’s explanation to its
customers that it was complying with its statutory obligations did not satisfy the
claimants, who commenced proceedings for breach of contract. Supperstone J,
dismissing the claim, held that there was an implied term in the contract
between bank and customer permitting the bank to refuse to provide informa-
tion when to do so might break a legal or other duty. Citing the case of Crema
v Cenkos Securities plc6 on the general principles for implication of contractual
terms, Supperstone J concluded as follows:
‘Having regard to the principles outlined in Crema, and in particular to the second
principle, I am led to the conclusion that the term for which the Defendant contends
is to be implied by reason of the statutory provisions. In my judgment the “precise
and workable balance of conflicting interests” in POCA that Longmore LJ noted in K
Limited Parliament has struck (see para 38 above), requires the implication of this
term in the contract between a banker and his customer.’
Supperstone J also rejected the claimants’ contention that the bank was under a
duty to provide the claimants with the information as to the facts causing the
delayed payment, on the basis that such an implied term would cut across the
statutory regime.
In a similar vein, in K Ltd v National Westminster Bank plc7, the Court of
Appeal stated that where POCA 2002 made it temporarily illegal to perform the
contract, no legal rights exist upon which the parties may rely. However, such
illegality would only in reality arise if the funds in question were actually
criminal property, rather than (as in Shah, and as may arise more commonly)
simply being property about which the bank had a relevant suspicion.
However, in some situations, it may not be realistic to avoid giving some form
of explanation, even with the protection now afforded to banks by s 338(4A).
For example, where a customer issues a winding-up petition seeking the return
of a debt from the bank (constituted by funds which are in effect frozen), in
order to obtain an injunction against the advertisement of such a petition, the
bank will need to demonstrate to the Court that there is a genuine and
substantial dispute about the debt which in fact arises from the fact funds have
been frozen pending an investigation. It can rely on s 338(4A) in demonstrating
to the Court that there is a dispute about the debt and that it is protected by that
provision, but a practical issue remains; ie how it can express that position to
the Court without tipping off the customer.
One approach may be to seek an ex parte hearing so that the customer is not
tipped off, together with a direction that any material relied on by the bank in
that context does not have to be disclosed. It has been suggested that the better
course for the bank in such circumstances is to seek agreement with the NCA as
to what it may tell the customer (and so the Court on an open basis)9. If
agreement cannot be reached, then it is possible for the bank to seek an interim
declaration against the NCA. However, the recent case of N v Royal Bank of

18
 Tipping Off and Prejudicing an Investigation 2.28

Scotland plc10 has clarified that such a declaration may be available only in
relatively exceptional circumstances. The Court of Appeal indicated that in
order to grant an interim declaration, it requires ‘the high degree of assurance
which is generally required before mandatory injunctive relief will be granted’.
That said, in that case, the declaration sought against the NCA concerned the
return of funds to N by the bank, rather than relief permitting the bank to give
an explanation to its customer. The Court of Appeal indicated that the previous
guidance set out in the case of Governor and Company of the Bank of Scotland
v A11 is to be treated as being confined to its facts, though given that case, which
was decided under the legislation in existence prior to POCA 2002, involved the
tipping-off provisions (rather than relating to returning funds), it may be that it
remains relevant to the Court’s approach in a case engaging those provisions.
That said, ss 333B to 333D provide for various sets of disclosures which are
permitted and do not amount to tipping off. In particular:
• Disclosure to an employee, officer or partner of the same undertaking:
s 333B(1).
• Disclosure by a credit or financial institution within the same group,
situated either in an EEA state or a country or territory with equivalent
money laundering requirements: s 333B(2).
• Disclosure by a credit institution to another credit institution or by a
financial institution to another financial institution situated in an EEA
state or in a country or territory with equivalent money laundering
requirements, relating to a mutual client or former client or a transaction
or service involving them both and which is made for the purpose only of
preventing an offence under Part 7 (s 333C), or in specified circum-
stances to the FCA (s 333D).
In other circumstances, a bank may simply be able to rely on its express terms
and conditions without recourse to any implied term or to s 338(4A). In Becker
v Lloyds TSB Bank plc12, a bank had reasonably believed that accounts were
being used illegally or outside the agreed terms. It blocked an account, and
stated that it was investigating the matter. Proceedings were commenced by the
customer, and the bank said it was still investigating the matter, and that it
believed that the accounts might have been used fraudulently and might have
contained the proceeds of crime, and that it had complied with its legal and
regulatory obligations under POCA 2002. Richards J held that it was entitled to
rely on its terms and conditions which provided that in such circumstances it
could refuse to transfer money from those accounts.
1
Section 333A replaced the previous offence under s 333, which was repealed by the Terrorism
Act 2000 and Proceeds of Crime Act 2002 (Amendment) Regulations 2007/3398.
2
[2013] EWHC 3000 (Ch).
3
The offences under Part 7 are in essence those at ss 327–333A of POCA 2002; ie those discussed
in this chapter.
4
Where an investigation into money laundering creates conflicts between the public interest in
combating crime and the entitlement of a private body to obtain redress from the courts, see
Bank of Scotland v A Ltd [2001] EWCA Civ 52, [2001] 3 All ER 58; Amalgamated Metal
Trading Ltd v City of London Police Financial Investigation Unit [2003] EWHC 703 (Comm),
[2003] 1 All ER (Comm) 900. See also Tayeb v HSBC Bank plc [2004] EWHC 1529, [2004]
4 All ER 1024.
5
[2012] EWHC 1293 (QB); [2013] 1 All ER (Comm) 72.
6
[2011] 1 WLR 2066.
7
[2007] Bus LR 26; [2007] 1 WLR 311.
9
Hewetson and Mitchell, Banking Litigation (4th edn, 2017) at 9-047.

19
2.28 Money Laundering
10
[2017] EWCA Civ 253.
11
[2001] EWCA Civ 52.
12
[2013] EWHC 3000 (Ch).

(b) Section 342 – prejudicing an investigation

2.29 This arises where a person ‘knows or suspects that a proper person is
acting (or proposing to act) in connection with a confiscation investigation, a
civil recovery investigation, a detained cash investigation, a detained property
investigation, a frozen funds investigation, an exploitation proceeds investiga-
tion or a money laundering investigation which is being or about to be
conducted’. In such circumstances it is an offence for a person to make a
disclosure which is likely to prejudice the investigation, or to falsify, conceal,
destroy or otherwise dispose of documents relevant to the investigation.

4 THE ANTI-TERRORISM LEGISLATION

2.30 In addition to the three categories of offences under POCA 2002, there are
certain other money laundering offences under the Terrorism Act 2000 (‘TA
2000’). This has been amended by the Anti-terrorism, Crime and Security Act
2001 (‘ATCSA 2001’) and by the Terrorism Act 2006. Section 1 of the TA 2000
now defines terrorism as follows:
‘(1) In this Act “terrorism” means the use or threat of action where –
(a) The action falls within subsection (2),
(b) The use or threat is designed to influence the government or an
international governmental organization or to intimidate the public
or a section of the public, and
(c) The use or threat is made for the purpose of advancing a political,
religious or ideological cause.
(2) Action falls within this subsection if it –
(a) Involves serious violence against a person,
(b) Involves serious damage to property,
(c) The use or threat is made for the purpose of advancing a political,
religious or ideological cause.
(d) Creates a serious risk to the health or safety of the public or a
section of the public, or
(e) Is designed seriously to interfere with or seriously to disrupt an
electronic system.’
2.31 Part III of the TA 2000 sets out a number of offences that relate to
‘terrorist property’.
Section 14(1) of the TA 2000 defines ‘terrorist property’ as: (a) money or other
property which is likely to be used for the purposes of terrorism (including any
resources of a proscribed organisation1); (b) proceeds of the commission of acts
of terrorism; and (c) proceeds of acts carried out for the purposes of terrorism.
By virtue of s 1(4)(a) to (c) of the TA 2000, actions threatened or perpetrated
both within and outside the UK that fulfil the criteria in s 1(1) to (3) are
‘terrorist’ actions for these purposes. Accordingly, for example, acts committed
abroad designed to intimidate the public in a foreign country will constitute
terrorism for the purposes of the TA 2000.

20
 Money Laundering, Terrorist Financing etc Regs 2017 2.32

The offences that relate to money laundering activity and that will be of most
relevance to banks are as follows:
(1) Section 17 of the TA 2000 provides that a person commits an offence if
(a) he enters into or becomes concerned in an arrangement as a result of
which money or other property is made available or is to be made
available to another and (b) he knows or has reasonable cause to suspect
that it will or may be used for the purposes of terrorism. Plainly, this is
aimed at those who facilitate terrorism by arranging funding which is
directed to terrorist activities. This is plainly of relevance to banks.
Caution is needed because the test for ‘reasonable cause for suspicion’ is
an objective one.
(2) By s 18 of the TA 2000, a person commits an offence if he enters into or
becomes concerned in an arrangement which facilitates the retention or
control by or on behalf of another person of terrorist property by (a)
concealment; (b) removal from the jurisdiction; (c) transfer to nominees;
or (d) in any other way. Terrorist property is defined in TA 2000, s 14 as
money or other property which is likely to be used for the purposes of
terrorism (including any resources of a proscribed organisation), pro-
ceeds of the commission of acts of terrorism, and proceeds of acts carried
out for the purposes of terrorism. It is a defence to prove that the
defendant did not know and had no reasonable cause to suspect that the
arrangement related to terrorist property (s 18(2)).
(3) TA 2000, s 21A, inserted by ATCSA 2001, creates an offence which
mirrors that of POCA 2002, s 330 (failure to disclose in the regulated
sector).
(4) There are tipping off offences in the regulated sector at TA 2000, ss 21D
to 21G, which parallel the equivalent sections under POCA 2002.
TA 2000, ss 21–21ZC set out defences of disclosure and consent similar to that
contained in POCA 2002: it is a defence that the person has made a disclosure
of his knowledge or suspicion. The disclosure must be made ‘after he becomes
concerned’ in the transaction, or on his own initiative and ‘as soon as reason-
ably practicable’.
As in the context of POCA 2002 (discussed above), the Criminal Finances Act
2017 (s 36) has introduced into the TA 2000 at ss 21CA to 21CF a regime by
which businesses operating in the regulated sector may share information
without falling foul of the tipping off provisions in the circumstances that the
disclosures are made in the manner provided for in those new provisions.
1
The Home Secretary has the power under s 3 of the TA 2000 to proscribe certain organisations
where he or she believes they commit or participate in terrorism, prepare for terrorism, promote
or encourage terrorism or are otherwise concerned in terrorism. Schedule 2 to the TA 2000 lists
the organisations proscribed by the Home Secretary.

5 THE MONEY LAUNDERING, TERRORIST FINANCING AND

TRANSFER OF FUNDS (INFORMATION ON THE PAYER)
REGULATIONS 2017
2.32 The Money Laundering, Terrorist Financing and Transfer of Funds (In-
formation on the Payer) Regulations 2017 provide a detailed code for credit
institutions and financial institutions as regards the procedures they must have

21
2.32 Money Laundering

in place, and implement, in order to prevent the use of the financial system for
the purposes of money laundering and terrorist financing. The 2017 Regula-
tions implement the Fourth Directive1, having replaced the Money Laundering
Regulations 2007, and cover a broad range of activities which are not limited to
financial services. Compared to the 2007 Regulations they are replacing, the
2017 Regulations introduce a number of significant changes, including: (i)
written risk assessments which have to be translated into written policies; (ii)
written training records for training of relevant employees; (iii) a restriction the
circumstances when ‘simplified’ due diligence is applicable (and it is no longer
automatic); (iv) a widening in the scope of ‘enhanced’ due diligence to include
among other things a wider range of politically exposed persons; (v) more
prescriptive conditions for reliance on third parties; and (vi) the creation of a
new criminal offence of prejudicing investigations.
The relevant parts of the Regulations apply to ‘relevant persons’ acting in the
course of business carried on by them in the UK (reg 8). These include banks
when accepting deposits or other repayable funds from the public, and also
financial institutions as defined (reg 8(2)). Banks and other relevant persons
must establish and maintain policies, controls and procedures to mitigate and
manage effectively the risks of money laundering and terrorist financing
(regs 18–19).
1
Directive on the prevention of the use of the financial system for the purposes of money
laundering or terrorist financing (2015/849/EU).

2.33 Banks must apply customer due diligence measures where they establish a
business relationship, carry out an occasional transaction, suspect money
laundering or terrorist finance or doubt the accuracy of customer identification
information. In addition, they must undertake ongoing monitoring of their
business relationships. Furthermore, the Regulations provide for a regime on
record-keeping, procedures and training.
Failure to comply with the Regulations is a criminal offence (reg 86). Where an
offence is committed by a bank with the consent or connivance of an officer, or
where such offence is attributable to any negligence on the part of an officer, the
officer as well as the bank is guilty of the offence (reg 92). In deciding whether
a person has committed an offence, the court must consider whether that person
has followed any relevant guidance which was at the time issued by the FCA or
a supervisory authority or other appropriate body, approved by the Treasury
and published in a manner approved by the Treasury as suitable in their opinion
to bring the guidance to the attention of persons likely to be affected by it
(reg 86(2). Of relevance will be the guidance issued by the Joint Money
Laundering Steering Group (JMLSG) and approved by the Treasury1. A defence
is available if the person in question took all reasonable steps and exercised all
due diligence to avoid committing the offence (reg 86(4)).
Regulation 87 introduces a new offence of prejudicing an investigation. This
can arise where a person knows or suspects that an appropriate officer is acting
(or proposing to act) in connection with an investigation into a potential
contravention of a relevant requirement which is being or is about to be
conducted.
A person commits an offence in those circumstances if: (a) he or she makes a
disclosure which is likely to prejudice the investigation; or (b) he or she falsifies,

22
 Money Laundering, Terrorist Financing etc Regs 2017 2.35

conceals, destroys or otherwise disposes of, or causes or permits the falsifica-

tion, concealment, destruction or disposal of, documents which are relevant to
the investigation (reg 87(2)).
1
See www.jmlsg.org.uk for the most recently updated and approved version of this guidance.

(a) Risk assessment and controls

2.34 Banks and other relevant persons are required to take appropriate steps to
identify and assess the risks of money laundering and terrorist financing to
which its business is subject (reg 18(1)) and to keep an up-to-date record of all
the steps taken (reg 18(4)).
Against the background of that risk assessment, banks and other relevant
persons are required to establish and maintain policies, controls and procedures
to mitigate and manage effectively the risks of money laundering and terrorist
financing identified (reg 19). They must be maintained in writing, and regularly
reviewed and updated. Regulation 19(3) prescribes certain contents that they
must include, such as risk management practices, internal controls (see regs 21
to 24), customer due diligence (see regs 27 to 38), and reliance and record
keeping (see regs 39 and 40).

(b) Customer due diligence

2.35 Banks are obliged to apply customer due diligence measures in respect of
both business relationships and occasional transactions. Such measures must
also be applied when a bank suspects money laundering or terrorist financing or
doubts the veracity or adequacy of documents, data or information previously
obtained for the purposes of identification or verification (reg 27).
These measures mean: identifying the customer and verifying the custom-
er’s identity; identifying the beneficial owner (defined in reg 5(1)), if different
from the customer, and taking adequate measures to verify his identity; and
obtaining information on the purpose and intended nature of the business
relationship (reg 28).
As to timing, under Regulation 30 such measures must generally be undertaken
prior to the establishment of a business relationship or the carrying out of an
occasional transaction. However, they may be completed during the establish-
ment of a business relationship if this is necessary not to interrupt the normal
conduct of business and there is little risk of money laundering or terrorist
financing, provided that the verification is completed as soon as practicable
after contact is first established. Verification of a bank account holder can take
place after the account is opened so long as there are adequate safeguards
ensuring that an account is not closed or transactions carried out before
verification has been completed. Evidence of identity is not required where a
transaction involves less than EUR 10,000.
Ongoing monitoring of a business relationship between bank and customer
must also take place. This means scrutinising transactions undertaken through-
out the course of the relationship to ensure that the transactions are consistent
with the bank’s knowledge of the customer and that the documents, data or

23
2.35 Money Laundering

information obtained for the purposes of applying customer due diligence

measures remains up to date (reg 28(11)).
Enhanced customer due diligence measures and enhanced monitoring may be
required in certain circumstances (reg 33), for example: (a) in any case identified
as one where there is a high risk of money laundering or terrorist financing; (b)
in any business relationship or transaction with a person established in a high
risk third country1; (c) in relation to correspondent relationships with a credit
institution or a financial institution (in relation to which further obligations are
set out in reg 34); (d) where the customer or potential customer is a politically
exposed person (‘PEP’) or family member or known close associate of a PEP (in
relation to which new detailed requirements are provided for in reg 35); (e) in
any case where the customer has provided false or stolen identification docu-
mentation or information and the relevant person proposes to continue to deal
with that customer2; (f) in any case where a transaction is complex and
unusually large or there is an unusual pattern of transactions and the trans-
action or transactions have no apparent economic or legal purpose; and (g) in
any other case which by its nature can present a higher risk of money laundering
or terrorist financing. This must be applied on a risk-sensitive basis.
Conversely, simplified due diligence may be sufficient in other circumstances.
However, in a departure from the previous regime as set out in the 2007
Regulations, the 2017 Regulations do not permit automatic simplified due
diligence for any transaction. Rather, a bank or other relevant person may apply
simplified due diligence measures in relation to a particular business relation-
ship or transaction if it determines that the business relationship or transaction
presents a low degree of risk of money laundering and terrorist financing
(reg 37).
If a bank is unable to complete due diligence measures, it must not establish a
business relationship, or carry out any transaction with or for the customer
through a bank account (whether occasional or otherwise). The bank must also
terminate any existing business relationship and consider whether any disclo-
sure is required under POCA 2002 or TA 2000.
Reliance on due diligence undertaken by third parties is permitted in certain
specified circumstances (reg 39). For example, it is permissible to rely on due
diligence undertaken by a person who carries on business in another EEA state
who is subject to the Fourth Directive and local requirements implementing that
and supervised as such, or a person who carries on business in a third country
who is subject to requirements in relation to due diligence which are equivalent
to those laid down in the Fourth Directive. In order to rely on a third party in
this way, the bank or other institution must enter into arrangements with the
third party which enable it to obtain from that third party immediately on
request any copies of any identification and verification data and any other
relevant documentation on the identity of the customer, customer’s beneficial
owner or any person acting on behalf of the customer, and require the third
party to retain copies of the data and documents in question. Ultimately,
however, even if a relevant person is permitted to rely on a third party, the
relevant person remains liable for any failure to apply such measures
(reg 39(1)).
1
Ie any country identified by the European Commission in delegated acts adopted under
article 9(2) of the Fourth Directive.

24
 Money Laundering, Terrorist Financing etc Regs 2017 2.36
2
Though banks and other institutions should note that where satisfactory evidence of identity is
not obtained, this fact in itself may warrant a suspicion report to be made to the NCA
(reg 31(1)(d)).

(c) Record-keeping and training

2.36 Regulation 19 requires a bank to maintain a copy of any documents and
information obtained to satisfy the due diligence requirements and supporting
records in respect of a transaction which is the subject of due diligence measures
or ongoing monitoring to enable the transaction to be reconstructed (reg 40(1)
to (2)). These must be maintained for at least five years from the date the
relevant person knows, or has reasonable grounds to believe, that an occasional
transaction is completed or the end of the business relationship (reg 40(3)).
Appropriate measures must also be taken so that all relevant employees of a
bank are made aware of the law relating to money laundering and terrorist
financing and are regularly given training in how to recognise and deal with
transactions and other activities which may be related to money laundering or
terrorist financing: (reg 24).

25
Chapter 3

PROTECTING AND
DISCLOSING INFORMATION

1 INTRODUCTION 3.1
2 DATA PROTECTION
(a) Introduction to data protection legislation 3.2
(b) Definitions 3.3
(c) The duty to protect data 3.6
(d) The duties to disclose, remove and correct data 3.12
(e) Sanctions for breaches of data-protection legislation 3.14
3 BANK CONFIDENTIALITY
(a) The contractual duty and other duties of confidence 3.16
(b) The four qualifications of the contractual duty 3.19
4 BANK REFERENCES
(a) Introduction 3.23
(b) Liability to the recipient 3.24
(b) Liability to the customer 3.27

1 INTRODUCTION TO PROTECTING AND

DISCLOSING INFORMATION
3.1 This chapter concerns three commercially similar but legally distinct areas:
(a) data protection;
(b) confidentiality; and
(c) bank references.
All three areas govern a bank’s duty to protect information it holds, usually
about its customers, and conversely they determine when a bank may disclose
information. A bank may also come under a positive duty to disclose informa-
tion about its customers in certain circumstances. In the broadest terms, the
customer has rights to privacy and to accuracy of data, and the bank has rights
(and, sometimes, responsibilities) to record and share information in the course
of its business. The law therefore seeks to strike a balance between these
interests.
The legal origins of the three areas are distinct: primarily statute and EU
legislation in the case of data protection; and primarily contract, tort and equity
in relation to confidentiality and bank references. Accordingly, the obligations
they impose differ. Data protection in principle applies only to information
relating to individuals, including employees, whereas the other areas apply to
all customers (not just individuals) and to some third parties.

1
3.2 Protecting and Disclosing Information

2 DATA PROTECTION

(a) Introduction to data-protection legislation

3.2 Data protection across the European Union has, since 25 May 2018, been
governed directly by the General Data Protection Regulation (‘GDPR’)1, and
supported in the UK by the Data Protection Act 2018 (‘DPA 2018’).The statute
previously in force, the Data Protection Act 1998 (‘DPA 1998’), brought into
effect Council Directive 95/46/EC (the Data Protection Directive)2. All this
legislation concerns the use of ‘personal data’ about a ‘data subject’ by a
‘controller’ (or, in the old law, a ‘data controller’). In the present context, the
‘data subject’ will typically be a customer or an employee of the bank; and the
‘controller’ will be the bank.
The legislation regulates the obtaining, holding, use and disclosure of informa-
tion, with consequent protections for data subjects where it is followed, and
sanctions against controllers where it is not. Put simply, a controller such as a
bank must take appropriate measures to limit the recording and storage of
personal data and to protect data relating to its customers and employees.
The legislation also allows data subjects to access and (where necessary) correct
data relating to them held by a controller.
This chapter discusses the current law, that is, the GDPR and the DPA 2018,
from the perspective of banks. For a fuller explanation of the old law, please
refer to the fourteenth edition of this book.
The law in respect of data protection is constantly developing3 and in particular
it remains to be seen how the GDPR and DPA 2018 will be applied in case law.
Even after the UK leaves the EU, data-protection legislation is likely to remain
in much the same form, so that businesses in the UK can receive transfers of the
personal data from the EU (see para 3.6 below)4.
1
Regulation 2016/679 of 27 April 2016.
2
OJ L 281 23.11.1995 p 31. The DPA 1998 fell to be construed in accordance with this directive:
Durant v FSA [2003] EWCA Civ 1746, [2004] FSR 28 at [3]–[4].
3
For updates, see the European Commission’s website: ec.europa.eu/info/law/law-topic/data-p
rotection_en.
4
The background notes for the Queen’s Speech in 2017 (p 46) explained that implementing the
GDPR would help ‘to put the UK in the best position to maintain our ability to share data with
other EU member states and internationally after we leave the EU’: www.gov.uk/government/
publications/queens-speech-2017-background-briefing-notes.

(b) Definitions
(i) Personal data
3.3 The GDPR defines ‘personal data’1 to be ‘any information relating to an
identified or identifiable natural person’, being the data subject (art 4(1)
GDPR). The word ‘identifiable’ indicates that all available information, not just
the data in question, determines whether the data subject can be identified
(recital (26)). The GDPR lists various possible ‘identifiers’, including ‘a name,
an identification number, location data, an online identifier or . . . factors
specific to the physical, physiological, genetic, mental, economic, cultural or
social identity’ of the data subject.

2
 Data Protection 3.3

Importantly, personal data only fall within the GDPR if they are processed
‘wholly or partly by automated means’ or by non-automated means ‘which
form part of a filing system or are intended to form part of a filing system’
(art 2(1)). A ‘filing system’ means ‘any structured set of personal data which are
accessible according to specific criteria’ (art 4(6), cf recital (15)).
While the old case law must be treated with some caution in light of the GDPR,
it is instructive to consider the approach of the Court of Appeal in Durant v
FSA2. The Court concluded that the term ‘relevant filing system’ in DPA 1998,
s 1(1) would only apply to manual records where those records are similar to
computerised filing3. The High Court later held that unstructured bundles of
documents kept in boxes do not constitute ‘data’ even if they could be easily
scanned and turned into digital information4.
The term ‘personal data’ caused difficulty under the old law because the
definition in DPA 1998, s 1(1) diverged slightly from that in the Data Protection
Directive (the latter definition now appears with small changes in the GDPR).
Hence the Court of Appeal in Durant adopted a narrow interpretation, holding
that ‘personal data’ must be ‘information that affects [the data subject’s]
privacy, whether in his personal or family life, business or professional capac-
ity’5. In 2004, the European Commission opened infringement proceedings
against the UK, arguing that this interpretation did not comply with the Data
Protection Directive6. In the meantime, a decision of the House of Lords in a
Scottish freedom-of-information case7 suggested that Durant should be con-
fined to its facts.
Guidance under the old law helps to explain the concept of ‘personal data’. In
2007, an advisory body established under article 29 of the Data Protection
Directive suggested a wide interpretation of ‘personal data’8. For example, a
taxi operator may collect information about the location of its taxis in order to
provide an efficient service; but if it also uses the information to check whether
the drivers are complying with speed limits, then the information becomes
personal data9. The Information Commissioner’s Office (‘ICO’) provided guid-
ance in 201210, which explains that personal data can ‘relate to’ a data subject
in various ways, some obvious, some less so. Data relate to a data subject where
they are used to learn or record something about him, or in a way that (actually
or potentially) impacts on his personal, family, business or professional life11.
Accordingly, the same data may be personal data in one context and not in
another.
Art 9 of the GDPR makes provision for processing of ‘special categories of
personal data’, roughly corresponding to ‘sensitive personal data’ under DPA
1998, s 2. The categories include ethnic origin, political opinions, religious
beliefs, genetic data, biometric data, data concerning health and data concern-
ing a person’s sex life or sexual orientation. Processing of such data is prohib-
ited, subject to a number of exceptions including explicit consent12 from the
data subject and the exercise of legal claims.
Art 10 of the GDPR makes further provision for processing of personal data
relating to criminal convictions, which is to be regulated by EU or national law.
In particular, such processing is only allowed if it meets a condition in Part 1, 2
or 3 of DPA 2018, Sch 1 (DPA 2018, ss 10–11). Those conditions relate to
matters such as employment, health, equal opportunities, the prevention of

3
3.3 Protecting and Disclosing Information

unlawful acts and legal proceedings.

1
The word ‘data’ is treated as plural in the data-protection legislation, except DPA 2018, and this
work follows that (sometimes infelicitous) convention. The editors express no opinion as to
whether Latin plurals (such as ‘opera’ and ‘agenda’) are necessarily plural in English.
2
[2003] EWCA Civ 1746, [2004] FSR 28.
3
[2003] EWCA Civ 1746 at [47]–[48].
4
Smith v Lloyds TSB Bank Plc [2005] EWHC 246 (Ch), [2005] IP & T 646, [2005] All ER (D)
358 (Feb).
5
[2003] EWCA Civ 1746 at [28]–[29].
6
The proceedings apparently focused on the definition of a ‘relevant filing system’ rather than
‘personal data’. It seems, however, that most concerns were resolved by 2010. For further
detail, see Rosemary Jay Data Protection Law and Practice (4th edn 2012), para 4-14, and EC
press release IP/10/811.
7
Common Services Agency v Scottish Information Commissioner [2008] UKHL 47, [2008] 1
WLR 1550, [2008] 4 All ER 851 at [20].
8
Opinion 4/2007 of the Working Party on the Protection of Individuals with regard to the
Processing of Personal Data.
9
Opinion 4/2007, p 11, example 10.
10
Determining what is personal data, 12 December 2012.
11
Determining what is personal data, pp 9–10. The mere mention of a name is not enough to
constitute personal data, but it is enough that the data are ‘obviously about’ an individual:
Ittihadieh v 5-11 Cheyne Gardens RTM Co Ltd [2017] EWCA Civ 121, [2018] QB 256 at
[63]–[66].
12
As in the Data Protection Directive, the term ‘explicit consent’ is not defined in the GDPR. It
appears to envisage an express warning to the data subject that the ‘special categories of
personal data’ will be processed, followed by express confirmation by the data subject. The ICO
says it requires ‘a very clear and specific statement of consent’: see the ICO’s GDPR guidance on
consent at ico.org.uk/for-organisations/guide-to-the-general-data-protection-regulation-gdpr/l
awful-basis-for-processing/consent/.

(ii) Data subject

3.4 A data subject is simply a living1 individual who is the subject of personal
data (art 4(1) GDPR). Accordingly, a company does not directly benefit from
the rights of a data subject; but its individual directors and employees do.
1
DPA 2018 and 1998 expressly require the data subject to be living (in the definition of ‘personal
data’) but the Data Protection Directive did not. Recital (27) of the GDPR provides that the
GDPR does not apply to deceased persons.

(iii) Controller
3.5 A controller (or ‘data controller’ under the old law) is a person who, alone
or with others, ‘determines the purposes and means of the processing of
personal data’ (art 4(7) GDPR). This need not be the person who actually
processes the personal data; that function may be delegated to another person,
called a ‘processor’ (art 4(8) GDPR; the old law uses the term ‘data processor’)1.
There was formerly a requirement for data controllers to register with the ICO
in accordance with DPA 1998, ss 17 and 18. Under the new law, there is no such
requirement (but there remains an obligation on controllers to pay charges to
the ICO2). Controllers must instead notify data subjects, either at the time of
obtaining personal data from the data subject or within one month of obtaining
the personal data elsewhere. The notification must state the details of the
controller, the purposes and legal basis of the processing (including any ‘legiti-
mate interests’ relied on to justify the processing), the source of the data (if that

4
 Data Protection 3.6

is not the data subject), any recipients of the personal data, and any intention to
transfer the personal data outside the EU (arts 13–14). The notification must
also explain for how long the personal data will be stored3 and whether they
will be used to satisfy a statutory or contractual requirement or for automated
decision-making. Finally, the notification must set out the data subject’s rights
in respect of data processing.
1
The onus is then on the controller to ensure compliance by the processor. See para 3.6(6) below.
2
Regulations can be made under DPA 2018, s 137. By Sch 20, para 26, those regulations are the
Data Protection (Charges and Information) Regulations 2018 (SI 2018/480), which were
originally made under the Digital Economy Act 2017. The regulations provide for (increased)
charges payable to the ICO. Note that the ICO remains the UK’s ‘supervisory authority’ for the
purpose of data-protection legislation (art 51 GDPR; DPA 2018, s 115(1)).
3
This gives rise to a vexed question as to what the retention period should be. The fifth
data-protection principle (below) provides for limits on retention. Recital (39) indicates that the
retention period should be ‘a strict minimum’ with time limits set by the controller for erasure
or periodic review. The ICO has given extensive guidance (see also below). It says that the
controller should be able to justify the retention period based on the purposes for holding the
data, and should have a retention policy where possible. It gives an example of a bank keeping
personal data to identify customers in security procedures. It comments: ‘Even after the account
has been closed, the bank may need to continue holding some of this information for legal or
operational reasons for a further set time.’ Another example concerns CCTV images recorded
at an ATM machine, which may need to be retained for several weeks to prevent fraud.
Importantly, the ICO recognises that data may be retained to defend possible future legal
claims, while data that could not possibly be relevant to such claims should be deleted. The ICO
does not consider the question of the relevant limitation period; in particular, a bank that has
deleted data after the primary six-year limitation period may receive little sympathy in court if
the limitation period is extended or deferred. Finally, the ICO refers to industry standards, such
as its agreement that credit reference agencies may keep consumer credit data for six years. See:
ico.org.uk/for-organisations/guide-to-the-general-data-protection-regulation-gdpr/principles/s
torage-limitation. Note also that the FCA Handbook sets a minimum retention period for
MiFID business of five years (SYSC 9.1.2R); whereas for non-MiFID business ‘the general
principle is that records should be retained for as long as is relevant for the purposes for which
they are made’ (SYSC 9.1.5G).

(c) The duty to protect data

(i) The duty in general
3.6 The heart of the GDPR is the set of principles for processing personal data.
‘Processing’ has a very broad definition, including ‘collection, recording, organ-
isation, structuring, storage, adaptation or alteration, retrieval, consultation,
use, disclosure . . . , alignment or combination, restriction, erasure or de-
struction’ (art 4(2)). By GDPR art 5, a controller must comply with six
‘principles relating to processing of personal data’:
(1) Personal data must be processed ‘lawfully’, fairly and transparently. Art
6 lists exhaustively six grounds for ‘lawful’ processing. The first is that
the data subject has given consent, which is defined to mean ‘any freely
given, specific, informed and unambiguous indication of the data sub-
ject’s wishes by which he or she, by a statement or by a clear affirmative
action, signifies agreement to the processing of personal data relating to
him or her’ (art 4(1)). A pre-ticked box on a form will not constitute
consent (recital (32)). The controller must be able to demonstrate such
consent (art 7(1)) and consent may be withdrawn at any time (art 7(3)).
The second ground is necessity for the performance of a contract with

5
3.6 Protecting and Disclosing Information

the data subject or at the request of the data subject prior to entering a
contract. The third is necessity for compliance with the controller’s legal
obligations. The fourth is necessity to protect a natural person’s ‘vital
interests’1. The fifth is necessity to perform a task in the public interest or
in the exercise of official authority. The sixth is necessity for the purposes
of ‘the legitimate interests pursued by the controller or by a third party,
except where such interests are overridden by the interests or fundamen-
tal rights and freedoms of the data subject which require protection of
personal data’2. As noted above, arts 9 and 10 provide for processing of
special categories of personal data and personal data relating to criminal
convictions.
(2) Personal data must only be collected for specified, explicit and legitimate
purposes.
(3) Personal data must be adequate, relevant and limited to what is neces-
sary in relation to the specified purposes (‘data minimisation’).
(4) Personal data must be accurate and, where necessary, kept up to date. It
suffices for the data controller to take every reasonable step to ensure the
accuracy of the data and to rectify or erase inaccurate data.
(5) Personal data must not be kept in a form that permits identification of
data subjects for longer than is necessary for the specified purposes
(except for limited archiving purposes).
(6) The controller must take appropriate technical or organisational mea-
sures to ensure appropriate security of personal data, including prevent-
ing unauthorised or unlawful processing and accidental loss or damage.
Such measures should be appropriate to the risk involved and may
include pseudonymisation and encryption (art 32). In the event of a
material ‘personal data breach’ (ie a breach of security of personal data),
the controller must notify the ICO and do so, where feasible, within 72
hours of becoming aware of the breach (art 33). In cases of high risk, the
data subject must also be informed without undue delay (art 34).
While ultimate responsibility for compliance lies with the controller (art 24),
the controller may delegate to a processor that provides ‘sufficient guarantees’
of data protection (art 28). In particular, the data processing must be governed
by a written contract with the processor setting out specified terms for the
processing (art 28(3) and (9))4. Each controller and processor, except some
organisations employing fewer than 250 persons, must keep a written record of
the processing that is carried out (art 30).
Where the controller intends to use a type of processing that is ‘likely to result
in a high risk to the rights and freedoms of natural persons’, the processor must
first carry out a ‘data protection impact assessment’ under GDPR art 35. This
applies in particular in cases of automated decision-making based on a system-
atic and extensive evaluation of ‘personal aspects’ (art 35(3)(a)). Such cases
include, for example, automatic processing of online credit applications (recital
(71)). As well as assessing the risks, the assessment should contain measures to
address the risks and should consider whether the residual risks are justified. If
the assessment shows that, absent mitigation, the processing would result in a
high risk, the controller must consult the ICO before carrying out the process-
ing; the ICO will then advise accordingly and may also use its powers, for
example to limit the processing (art 36).

6
 Data Protection 3.7

Special provisions apply to transfers of personal data to countries outside the

EU, to ensure that the protection of data subjects is not undermined (arts 44–
50). Such transfers are always allowed where the European Commission has
decided that the destination country ensures an adequate level of protection
(art 45)5. Alternatively, transfers are allowed with ‘appropriate safeguards’
(art 46), including standard data-protection clauses provided by the Euro-
pean Commission (and any that may be provided by the ICO) and general
contractual clauses. Otherwise, transfers are only allowed in specified circum-
stances, such as where the data subject gives informed, explicit consent to the
proposed transfer or where the transfer is necessary to perform a contract with
the data subject (art 49).
The ICO publishes extensive guidance on its website, including general guid-
ance about the GDPR6 and specific guidance for financial organisations7. Flaux
J held, in the context of credit-reference agencies, that the ICO’s views are
entitled to considerable weight and respect8.
Formerly, there were eight data-protection principles in DPA 1998, Schedule 1,
corresponding to the six principles above, the rights of data subjects to access
and control their data (below), and the provision for data transfers out of the
European Economic Area (above).
Data-protection issues arise in specific situations that affect banks, the most
important of which are now discussed.
1
Vital interests may have a narrow meaning because recital (46) gives as examples of legitimate
processing the monitoring of epidemics and humanitarian emergencies.
2
The meaning of legitimate interests is not entirely clear. Recital (47) says that such an interest
may exist ‘where the data subject is a client or in the service of the controller’. It requires a
controller to assess carefully what a data subject would reasonably expect would be done with
the personal data before relying on this ground. Recitals (47)–(49) give examples of legitimate
interests, such as the prevention of fraud, intra-group data transfers for administrative pur-
poses, and the ensuring of network security.
4
The FCA Handbook makes a similar provision in SYSC 8.1.8R(10), after MiFID art 13(5).
5
The Commission has made such findings in respect of jurisdictions including Canada (commer-
cial organisations), Switzerland, Argentina, Israel, New Zealand, Jersey, Guernsey and the Isle
of Man. Transfers to the United States are permitted under the ‘EU-US Privacy Shield’, but
many large US companies have not signed up to it (those that have are listed at www.privacys
hield.gov/list). See generally the Commission’s material on data transfers outside the EU:
ec.europa.eu/info/law/law-topic/data-protection/data-transfers-outside-eu_en.
6
See ico.org.uk/for-organisations/guide-to-the-general-data-protection-regulation-gdpr.
7
At ico.org.uk/for-organisations/finance.
8
McGuffick v RBS [2009] EWHC 2386, [2010] 1 All ER 634 at [115].

(ii) Direct marketing

3.7 Direct marketing may fall within the ‘legitimate interests’ ground for
lawful processing of personal data (recital (47) of the GDPR). But a data subject
has the right to require the data controller to cease processing personal data for
the purposes of direct marketing, and that right must be explicitly brought to
the data subject’s attention at the outset (GDPR art 21(2)–(4), formerly DPA
1998, s 11). Moreover, the ICO is required to prepare a code of practice dealing
with direct marketing (DPA 2018, s 122), although the details are beyond the
scope of this work. Of particular relevance for banks are the FCA’s rules on
financial promotions and communications with customer in CONC 3 (see para
9.7 below).

7
3.8 Protecting and Disclosing Information

(iii) Credit-scoring and other automated decision-making

3.8 A data subject has the right to require the data controller to ensure that no
decision is taken that (a) produces legal effects concerning him or similarly
significantly affects him and (b) is based solely on automated processing of
personal data (GDPR art 22, formerly DPA 1998, s 12). Specific examples given
include decisions about creditworthiness and performance at work (the latter
being an example of ‘profiling’, defined at GDPR art 4(4)). Exclusions include
decisions necessary for entering or performing a contract with the data subject,
and decisions based on the explicit consent of the data subject. A further
exclusion relates to other decisions required or authorised by law (DPA 2018,
s 14).
In cases of automated decision-making, the controller must, as soon as reason-
able practicable, notify the data subject in writing. The data subject then has
one month in which to ask the controller to reconsider the decision or to make
the decision without automated processing.

(iv) Credit-reference agencies

3.9 Lenders commonly share customer information through credit-reference

agencies, which are defined as businesses that furnish persons with information
relevant to the financial standing of individuals or relevant recipients of credit,
having collected the information for that purpose1. This activity potentially
engages all of the data-protection principles2. The credit industry has drawn up
detailed ‘Principles of Reciprocity’ to govern the activity; and the credit industry
in collaboration with the ICO has published guidance for customers as ‘Prin-
ciples for the Reporting of Arrears, Arrangements and Defaults at Credit
Reference Agencies’3.
Customers cannot impliedly consent to their personal data being passed to a
credit-reference agency, so they must consent expressly in their contract4.
Nonetheless, once consent has been given, the lender may continue to report
personal data to credit-reference agencies even when the credit agreement
becomes temporarily unenforceable under the Consumer Credit Act 1974; and
the lender need not report the latter fact to the credit-reference agency. The
reason is that such reporting pursuant to the credit industry’s Principles of
Reciprocity is in the interests of responsible lending5. But if the agreement is
irremediably unenforceable, that fact must be reported to the credit-reference
agency6.
Borrowers could try to bring claims in respect of adverse (but accurate) credit
references by using causes of action outside data-protection legislation7; but
such claims would face difficulties. Thus, the Court of Appeal has held that
there is no tortious duty of care coextensive with the duties under DPA 19988.
In principle, a borrower could bring a claim in defamation or malicious
falsehood in respect of a credit reference. The courts have held in other contexts
that those causes of action can be advanced in parallel with data-protection
claims because they protect different aspects of the right to a private life9. But
those causes of action would not obviously add much in the context of credit

8
 Data Protection 3.11

references, where data protection is the most natural jurisdiction.

1
Consumer Credit Act 1974, s 145(8), and Financial Services and Markets Act 2000 (Regulated
Activities) Order 2001 (SI 2001/544), art 89B(1).
2
Credit references also engage the legal principles relevant to bank references more generally; see
para 3.27 below.
3
Both documents are available at www.scoronline.co.uk/key-documents.
4
Turner v RBS [1999] 2 All ER (Comm) 664 (CA); see para 3.27 below. Since, as in that case, the
situation engages the bank’s contractual duty of confidentiality, it would be unwise to rely on
the ‘legitimate interests’ ground for processing personal data rather than the customer’s express
consent.
5
McGuffick v RBS [2009] EWHC 2386, [2010] 1 All ER 634 at [113].
6
Grace v Black Horse Ltd [2014] EWCA Civ 1413, [2015] 3 All ER 223 at [42]. Briggs LJ
suggested at [43] that the same conclusion may follow in cases of remediable unenforceability,
but did not refer expressly to the decision to the contrary in McGuffick. For the position where
the credit agreement may be void, see para 3.27 below.
7
As to the cause of action under data-protection legislation, see para 3.15 below.
8
Smeaton v Equifax Plc [2013] EWCA Civ 108, [2013] 2 All ER 959 at [74].
9
See the discussion and authorities cited in Prince Moulay Hicham Ben Abdullah Al Alaoui of
Morocco v Elaph Publishing Ltd [2017] EWCA Civ 29, [2017] 4 WLR 28 at [42]–[44].

(v) Debt recovery and customers’ insolvency

3.10 Lenders often use debt-collection agencies, to which naturally they must
transfer information about the debt and the debtor. The lender nonetheless
remains responsible as the controller, and in particular it must ensure that the
agency safeguards the data in accordance with the sixth data-protection prin-
ciple.
Where the debtor is a company that is to be wound up, the liquidator’s position
varies depending on the activity he performs. He will be a controller when
acting as principal (such as by adjudicating upon proofs of debt) but not when
acting as agent for the company. In the latter case, the company retains
responsibility as the controller and must ensure that the liquidator complies
with the sixth data-protection principle1. Further, it is in the public interest for
the company to transfer data to its parent company’s liquidator in order to
unravel a fraud2.
A more complex situation arises where the company or its business is to be sold.
The detail of such a situation is beyond the scope of this work. In brief, however,
the vendor should take care to limit the type and use of data provided to
potential purchasers or their financiers. If the company itself is to be sold, it
remains the data controller; if the business is to be sold, a question will arise as
to whether the data subjects’ consent to data processing extends to its new
owner.
1
Southern Pacific Personal Loans Ltd, Re Smith v Information Commissioner [2013] EWHC
2485 (Ch), [2014] Ch 426, [2014] 1 All ER 98.
2
Bernard L Madoff Investment Securities LLC, Re [2009] EWHC 442 (Ch). Recital (47) of the
GDPR recognises fraud-prevention as a ‘legitimate interest’.

(vi) Internal data-transfers and outsourcing

3.11 A group of companies may, for the purposes of data-protection legis-
lation, contain either a single controller or many, depending on how their
functions are divided. Thus, even a data transfer within the group can engage

9
3.11 Protecting and Disclosing Information

the sixth data-protection principle and the rules on transfers out of the EU,
including provisions such as the requirement for a written contract and respon-
sibility remaining with the controller (and recital (48) of the GDPR recognises
that controllers may have a legitimate interest in such a transfer). Those
principles are more obviously engaged when the processing of personal data is
outsourced to an external service-provider, such as BACS.
Data processed in the UK will also normally be subject to the GDPR even if the
controller or processor is established outside the EU (art 3(2), formerly DPA
1998, s 5(1)(b)). Conversely, data transferred out of the EU are subject to the
special provisions of GDPR arts 44–50 relating to international transfers of
data (see para 3.6 above).

(d) The duties to disclose, remove and correct data

(i) Disclosing data

3.12 A data subject has a number of rights under the GDPR, the most
significant of which for present purposes is the right to make a ‘subject access
request’1 of a controller (art 15 GDPR, formerly DPA 1998, ss 7–9). That
request provides access to the personal data as well as to information about the
processing of the data, such as the purpose of the processing and the logic in any
automated decision-making. In particular, the controller must provide a copy of
the data, which should be in electronic form where the request was made
electronically (art 15(3)).
The requirements for subject access requests are as follows. The controller must
provide the information without undue delay and in any event within one
month of receipt of the request, with a possible extension of two months for
complex or numerous requests (art 12(3))2. The information must be provided
free of charge except that the controller may charge a reasonable fee or refuse
the request where the controller can demonstrate that the requests from a data
subject are ‘manifestly unfounded or excessive, in particular because of their
repetitive character’ (art 12(5))3. The previous requirement for the request to be
in writing has been removed, and the controller merely has the right to request
further information to confirm the data subject’s identity (art 12(6)).
Subject only to the safeguards mentioned in the last paragraph, the require-
ments for subject access requests appear ripe for abuse by data subjects. For
example, a customer could request all data about himself in order to pursue a
vexatious claim or simply to put the bank to the trouble of providing it.
Moreover, there is no requirement that the reason for the subject access request
be a concern about the accuracy of the data held. Thus, the Court of Appeal
upheld a subject access request under the old law, even though its purpose was
not to verify the data being held but to support overseas proceedings4. The
controller should, however, only be required to make a reasonable and propor-
tionate search in response to a request5.
Further, the controller must not disclose any data which also relate to another
individual, if the disclosure would adversely affect that individual’s rights
(art 15(4), formerly DPA 1998, s 7(4)–(6)). Such other individuals might be
joint holders of a bank account or the bank’s employees. It may be possible to
obtain their consent. Another possibility is to redact or anonymise the data, but
this will create additional work in complying with the request. Otherwise, the

10
 Data Protection 3.13

controller will need to carry out a difficult balancing exercise to weigh the
competing rights to privacy and to disclosure6.
If a subject access request is refused, the data subject may be able to seek
enforcement by court order (DPA 2018, s 167, as to which see para 3.15 below;
formerly DPA 1998, s 7(9)). Another possibility is to seek disclosure under the
CPR, which was the situation in Johnson v Medical Defence Union7, a claim for
remedies under DPA 1998, ss 13 and 14. Laddie J saw no reason why disclosure
relevant to those remedies should not be available despite the failure of the
subject access request; but in that situation the data subject may only use the
disclosure for the purpose of those proceedings8.
A new right under the GDPR is the ‘right to data portability’, namely the right
‘to receive the personal data . . . in a structured, commonly used and
machine-readable format’ and to have the data transmitted to another control-
ler (art 20). This applies where the ground for processing is based on consent or
a contract, and where the processing is carried out by automated means (which
includes processing by computer). A possible example would be a data subject
asking to have details of bank transactions provided to a service that assists
with budgeting.
1
The ICO uses this term, although it does not appear in the data-protection legislation.
2
Formerly, under DPA 1998, ss 7(8) and (10), the time limit was 40 days. The time limit was 7
working days where the request was made to a credit-reference agency for information only
about the individual’s financial standing: The Data Protection (Subject Access) (Fees and
Miscellaneous Provisions) Regulations 2000, SI 2000/191, reg 4. Under the new law, the time
limit is the same for credit-reference agencies, but DPA 2018, s 13 makes provision for the
information they must provide.
3
Under the new law, fees may be limited by regulations made under DPA 2018, s 12. Formerly,
there was a maximum fee for all requests of £10 under the Data Protection (Subject Access)
(Fees and Miscellaneous Provisions) Regulations 2000, SI 2000/191, reg 3. The fee was limited
to £2 where the request was made to a credit-reference agency for information only about the
individual’s financial standing (reg 4) (DPA 1998, s 7(2)).
4
Dawson-Damer v Taylor Wessing LLP [2017] EWCA Civ 74, [2017] 1 WLR 3255 at
[106]–[112]. Note that the court retained the discretion to refuse to enforce the subject access
request, as is also the case under the new law, but the most material considerations were the
validity of the request and the failure to comply with it: [114]. See also the discussion in
Ittihadieh v 5-11 Cheyne Gardens RTM Co Ltd [2017] EWCA Civ 121, [2018] QB 256 at
[104]–[110]. An abuse of process will be a ground to refuse to enforce the request: Ittihadieh at
[88] and [110].
5
Ittihadieh at [95]–[100].
6
For an example, see DB v General Medical Council [2016] EWHC 2331 (QB). The starting
point is that there should be no disclosure absent consent, and where the sole or dominant
purpose of the subject access request is to obtain a document for litigation, that can be a weighty
factor against disclosure: [88].
7
[2004] EWHC 2509 (Ch), [2005] 1 WLR 750, [2005] 1 All ER 87.
8
[2004] EWHC 2509 (Ch) at [28]. A further concern was that confidential information relating
to third parties should not be disclosed: see [29].

(ii) Removing and correcting data

3.13 A data subject has the right to object to data processing on ‘public
interest’ and ‘legitimate interests’ grounds (art 21(1); formerly there were
broader provisions under DPA 1998, s 10). Where these apply, the controller
must cease to process the personal data unless it can demonstrate ‘compelling
legitimate grounds’ for doing so. There is also a right to obtain a temporary

11
3.13 Protecting and Disclosing Information

cessation of data processing, subject to limited exceptions, principally where

the accuracy of the data is contested or the processing is unlawful (art 18).
The data subject also has the right to require the controller to rectify inaccurate
personal data without undue delay (art 16; formerly there was a court proce-
dure under DPA 1998, s 14). There is an accompanying right to have incom-
plete data completed.
A new right under the GDPR is the ‘right to be forgotten’, namely to have
personal data erased without undue delay, principally where the data are no
longer required or where the consent relied on is withdrawn (art 17).

(e) Sanctions for breaches of data-protection legislation

(i) Penalties and criminal sanctions

3.14 The ICO may impose monetary penalties of up to €20 million or 4%1 of
worldwide annual turnover (whichever is higher) for certain failures to comply
with data-protection legislation (GDPR, art 83, DPA 2018, ss 155–157; for-
merly the limit was £500,000 under DPA 1998, ss 55A–55D). Under the old
law, the ICO considered that such penalties were only appropriate in the most
serious situations, and that they should act as both a sanction and a deterrent;
but its position under the new law remains to be seen2. The recipient of the
penalty must first be given a ‘notice of intent’ and then have an opportunity to
make written representations before the penalty is imposed (DPA 2018, Sch 16,
paras 2–4). An appeal lies to the First-tier Tribunal3 or the Upper Tribunal (DPA
2018, s 162). Once due, the penalty is enforceable as a court order, if a court so
orders (DPA 2018, Sch 16, para 9(2)).
The monetary penalties also apply for failure to comply with an ‘enforcement
notice’ served by the ICO on a controller or processor under DPA 2018,
ss 149–153 (formerly DPA 1998, s 40(1))4. The notice may specify steps to be
taken or avoided in response to a failure to comply with data-protection
principles or to honour data subjects’ rights. It may include a ban on processing
of personal data or a requirement to rectify or erase inaccurate data. The
recipient may again appeal to the First-tier Tribunal or the Upper Tribunal
(ss 162–163). Under the old law, failure to comply with the notice was an
offence (DPA 1998, s 47).
Criminal sanctions apply to any person who obtains, discloses, procures the
disclosure of, or retains personal data without the consent of the controller
(subject to certain defences); and a person who obtains data in that way
commits a further offence by selling them or offering to do so (DPA 2018, s 170,
formerly DPA 1998, s 55). One new offence under DPA 2018 is ‘knowingly or
recklessly to re-identify information that is de-identified personal data without
the consent of the controller responsible for de-identifying the personal data’; it
is also an offence to process such data (ss 171–172). Another new offence is ‘to
alter, deface, block, erase, destroy or conceal information with the intention of
preventing disclosure of all or part of the information’ to a person making a
subject access request (s 173). A person guilty of any of these offences is liable
to a fine (s 196).
1
Lower figures of €10 million and 2% apply in respect of more minor breaches: art 83(4) GDPR
and DPA 2018, s 157(2)(b) and (3)(b).

12
 Data Protection 3.15
2
See Information Commissioner’s guidance about the issue of monetary penalties prepared and
issued under section 55C(1) of the Data Protection Act 1998, 2012, p 5. At the time of writing,
the ICO has yet to issue the guidance required under the new law (DPA 2018, s 160). There is,
however, a list of factors to consider at GDPR, art 83(1) and (2).
3
Originally the Data Protection Tribunal, then the First-tier Tribunal (Information Rights), now
the First-tier Tribunal (General Regulatory Chamber).
4
There is also a system of information notices and assessment notices in DPA 2018, Part 6, which
is beyond the scope of this work.

(ii) Civil sanctions

3.15 The main civil sanction is compensation for material damage or non-
material damage (including distress), caused by an infringement of the GDPR
(GDPR, art 82, DPA 2018, s 168; formerly DPA 1998, s 13). This sanction
applies to controllers and also to processors who have not complied with the
specific rules for processors or with the lawful instructions of the controller. It
is a defence for the controller or processor to prove that it was ‘not in any way
responsible for the event giving rise to the damage’. Where the infringement is
committed by an employee, the usual principles of vicarious liability apply1.
The authorities on the old law dealt with the difficulty that DPA 1998,
s 13(2)(a), provided that liability for distress could normally only arise if there
was also liability for damage. It had been held that damage means pecuniary
loss2 albeit that may be of a nominal sum. Thus, in Halliday v Creation Con-
sumer Finance Ltd3, a finance company disclosed data to a credit-reference
agency in breach of a consent order for the data to be deleted. The customer
received £1 for nominal damage and £750 for distress. The Court explained its
award as modest compensation for frustration resulting from a single error;
there was no evidence of damage to reputation or credit, nor of malice or fraud4.
It was later held, however, that damage includes both material and non-material
damage, and that s 13(2) should be disapplied because it was inconsistent with
the Data Protection Directive5. The new law makes clear that distress without
other damage can create liability.
Another civil sanction is a ‘compliance order’ under DPA 2018, s 167. This is
available if a court is satisfied that there has been an infringement of a data
subject’s rights under data-protection legislation. The court may then require a
controller or processor to take or avoid specified steps in order to secure
compliance.
There may be similar or overlapping claims under the general law. For example,
English law now recognises misuse of private information as a specific tort6.
Breach of confidence is actionable in equity7, but not as a tort8. Breach of the
article 8 right to privacy may be actionable under the Human Rights Act 19989.
In March 2017, the Media and Communications List was created in the
Queen’s Bench Division of the High Court to deal with data-protection and
similar claims arising from publications and other communications. Data-
protection claims in different contexts can, of course, be issued in other courts.
1
Various Claimants v Wm Morrisons Supermarket Plc [2017] EWHC 3113 (QB), [2018] EMLR
12 at [153]–[161] (decided under the DPA 1998).
2
Johnson v Medical Defence Union Ltd (No 2) [2007] EWCA Civ 262, [2008] Bus LR 503,
[2007] 3 CMLR 9 at [74].
3
[2013] EWCA Civ 333, [2013] 3 CMLR 4.
4
[2013] EWCA Civ 333 at [33]–[36].

13
3.15 Protecting and Disclosing Information
5
Vidal-Hall v Google Inc [2015] EWCA Civ 311 , [2016] QB 1003 at [76]–[79] and [105].
6
Vidal-Hall at [43] and [51].
7
See para 3.16 below.
8
Kitechnology BV v Unicor GmbH Plastmaschinen [1995] FSR 765, 777–778, CA.
9
See para 3.16 below.

3 BANK CONFIDENTIALITY

(a) The contractual duty and other duties of confidence

(i) Different duties of confidence
3.16 Banks have a specific, contractual duty of confidence to their customers,
which is discussed in the remainder of this section. First, however, it is necessary
to mention two more general duties of confidence. English law has long
recognised an equitable duty of confidence, even where no contractual duty
exists1. More recently, the Human Rights Act 1998 created a statutory duty to
protect individuals’ article 8 right to privacy. In principle, that duty applies only
to public authorities, but the courts are public authorities (s 6(3)(a)) and must
act in a way compatible with human rights2. These duties extend more widely
than the contractual duty discussed below; for example, they are owed to a
bank’s employees and potential customers. They are, however, beyond the
scope of this work.
1
See the discussion and authorities cited in the banking case of CF Partners (UK) LLP v Barclays
Bank Plc [2014] EWHC 3049 (Ch) at [119]–[142]. In that case, the bank was found liable for
breaching an equitable duty of confidence to a customer: see [877] and following. The customer
had approached the bank for finance and M&A advice regarding a proposed acquisition; but
the bank made the acquisition itself, using a spreadsheet provided by the customer to identify
the available profits. For another example of a bank’s equitable duty of confidence, see Primary
Group (UK) Ltd v Royal Bank of Scotland Plc [2014] EWHC 1082 (Ch), [2014] 2 All ER
(Comm) 1121, discussed at para 3.21 below.
2
Cf Chitty on Contract, 32nd edn, 1-082.

(ii) The nature and extent of the contractual duty

3.17 The Court of Appeal defined a bank’s duty of confidence to its customers
in Tournier v National Provincial and Union Bank of England 1. The duty is a
legal one arising out of contract, not merely a moral one, so that breach of the
duty gives rise to a claim for damages2. Bankes LJ, however, held that the duty
is qualified:
‘On principle I think that the qualifications can be classified under four heads: (a)
where disclosure is under compulsion by law; (b) where there is a duty to the public
to disclose; (c) where the interests of the bank require disclosure; (d) where the
disclosure is made by the express or implied consent of the customer’3.
These four qualifications are discussed in detail later in this section.
1
[1924] 1 KB 461.
2
The duty can, of course, also arise by an express contractual term, as it did in United
Pan-Europe Communications NV v Deutsche Bank AG [2000] EWCA Civ 166,
[2000] 2 BCLC 461.

14
 Bank Confidentiality 3.18
3
[1924] 1 KB 461 at 472. These principles are not open to doubt: Lipkin Gorman v Karpnale Ltd
[1989] 1 WLR 1340 at 1357G per May LJ; Turner v Royal Bank of Scotland plc [1999]
2 All ER (Comm) 664 at 667 per Sir Richard Scott V-C.

3.18 The duty of confidence arises once the relationship of banker and cus-
tomer is established. It does not cease when the customer closes his account, nor
presumably after the customer’s death. Bankes LJ said:
‘Information gained during the currency of the account remains confidential unless
released under circumstances bringing the case within one of the classes of qualifica-
tion I have already referred to1’.
The duty applies whether the account is in credit or overdrawn. Further, the
confidence is not confined to the actual state of the customer’s account, but
extends to information derived from the account itself. It is wide enough to
cover all information acquired by the bank in its character as such, though,
according to Scrutton LJ, not to:
‘knowledge which the bank acquires before this relation of banker and customer was
in contemplation or after it ceased; or to knowledge derived from other sources
during the continuance of the relation2’.
Similarly, Atkin LJ thought that the obligation did extend:
‘to information obtained from other sources than the customer’s actual account, if the
occasion upon which the information was obtained arose out of the banking relations
of the bank and its customers3’.
Naturally, the duty does not preclude disclosure of information to a person who
already has the information or who should have it. Thus, in Christofi v Barclays
Bank plc4, a bank disclosed to a trustee in bankruptcy the fact that the
trustee’s caution over the claimant’s home had been warned off. The Court of
Appeal held that the bank had committed no breach of confidence because the
trustee would already have received notice of the application to warn off the
caution under the relevant statutory scheme5.
The duty applies to disclosures by the bank to other companies in the same
group6. In order to prevent such disclosures, it may suffice for the bank to erect
a Chinese Wall between its different operations7.
Finally, where a trustee succeeds to a trusteeship previously held by a bank, the
bank’s duty of confidence should not put the trustee in a worse position as
regards the obtaining of information concerning the trust bank account and the
production of documents than if the bank had not held the trusteeship8.
1
Tournier v National Provincial and Union Bank of England [1924] 1 KB 461 at 473.
2
[1924] 1 KB 461 at 481. This passage suggests that the duty arises even when the relationship
of banker and customer is merely contemplated.
3
[1924] 1 KB 461 at 485.
4
[2000] 1 WLR 937.
5
[2000] 1 WLR 937 at 945–947.
6
See further para 3.21 below.
7
See Neate and Godfrey Bank Confidentiality (6th edn 2015), [13.45].
8
Tiger v Barclays Bank Ltd [1952] 1 All ER 85 at 88ff.

15
3.19 Protecting and Disclosing Information

(b) The four qualifications of the contractual duty

(i) Compulsion by law
3.19 The first qualification of the duty of confidence is where disclosure is
compelled by law. Disclosure orders against banks are usually made (a) in aid of
a third-party tracing-claim, or (b) pursuant to a specific statutory jurisdiction,
of which there are now several. The former would include disclosure under the
CPR and Norwich Pharmacal orders (see for example Bankers Trust v
Shapira1). As to the latter (statutory disclosure), the Report of the Jack Com-
mittee in February 1989 found that the growth of statutory regulation consti-
tuted a ‘massive erosion’ of the Tournier principle2. Accordingly, this qualifica-
tion is now the most significant one that allows unauthorised disclosures. The
subject of compulsory disclosure is considered below in Chapter 33.
1
[1980] 1 WLR 1274 (a Norwich Pharmacal order requiring disclosure by a bank in aid of a
third party’s claims in fraud against its customers). See also Santander UK Plc v National
Westminster Bank Plc [2014] EWHC 2626 (Ch), [2014] All ER (D) 02 (Aug) (orders for
disclosure in aid of a bank’s claims to recover payments made by the bank’s own mistake to
unintended beneficiaries, on the ground of unjust enrichment).
2
Cmnd 622 (1989). The Report notes that at the time of Tournier instances of compulsion by law
were rare. Bankes LJ cited the Bankers’ Books Evidence Act, s 7, and the only other instance
known to the Committee was the Extradition Act 1873, s 5 (Report, para 5.06). The statutory
provisions that require or permit disclosure by banks now include: the Proceeds of Crime Act
2002, Part 7 and Money Laundering, Terrorist Financing and Transfer of Funds (Information
on the Payer) Regulations 2017; Competition Act 1998, ss 25–27; Financial Services and
Markets Act 2000, Part XI; Police and Criminal Evidence Act 1984, s 9; Income Tax Act 2007,
s 748 and Finance Act 2008, Sch 36; Insolvency Act 1986, s 236; and Criminal Justice Act 1987,
s 2 (concerning the Serious Fraud Office). See Neate and Godfrey Bank Confidentiality (6th edn
2015), [13.15] and following.

(ii) Duty to the public

3.20 Public duty is, perhaps, the most difficult to define of the qualifications of
the duty of confidence. In Tournier itself, Scrutton and Atkin LJJ spoke of a duty
to prevent fraud or crime1. Bankes LJ noted that ‘Danger to the state or public
duty may supersede the duty of the agent to the principal’2; but he held that
giving information to the police would be unwarranted under this head3. Since
then, statute has grown into these areas (as discussed above), rendering this
qualification to the Tournier principle less relevant, albeit still conceptually
correct.
The qualification has particular relevance in relation to foreign parties, where
domestic statute may not allow for disclosure. Thus, apparently the only
reported case where a bank has thought itself under a duty to the public to
disclose was Libyan Arab Foreign Bank v Bankers Trust Co4. There, the
defendant bank invoked the qualification in relation to a disclosure made by it
to, and at the request of, the Federal Reserve Bank of New York, in connection
with US sanctions against Libya. Staughton J, by analogy to the Bank of
England’s statutory power to obtain disclosure, reached a tentative conclusion
that the qualification applied; but he did not find it necessary to reach a final
conclusion on the point5. Similarly, it was held in Pharaon v Bank of Credit
and Commerce International SA (in liquidation)6 that the public interest in
upholding the duty of confidence is subject to being overridden by the greater
public interest in making confidential documents relating to the alleged fraud of

16
 Bank Confidentiality 3.21

an international bank available to the parties to private foreign proceedings for

the purpose of uncovering that fraud. However, such disclosure should be
limited to what is reasonably necessary to achieve the purpose of the public
interest in disclosure.
1
[1924] 1 KB 461 at 481 and 486.
2
Citing Lord Finlay in Weld-Blundell v Stephens [1920] AC 956 at 965.
3
[1924] 1 KB 461 at 474.
4
[1989] QB 728, [1989] 3 All ER 252.
5
[1989] QB 728 at 771D, [1989] 3 All ER 252 at 286a.
6
[1998] 4 All ER 455.

(iii) The bank’s interest

3.21 The cases where the bank’s own interest justifies disclosure are usually
those in which the bank asserts its rights against its customer. In Tournier,
Bankes LJ gave as an example a bank suing for payment of an overdraft, thereby
stating the amount of the overdraft; a necessary statement in a defence would
similarly be justified. A bank may also make disclosures in order to enforce its
rights under a charge1. But, as Atkin LJ put it in Tournier, disclosure under this
head must be limited to what is ‘reasonably necessary for the protection of the
bank’s own interests2’.
The use of this qualification of the duty of confidence in Sunderland v Barclays
Bank Ltd3 is harder to explain. There, the bank had told the claimant’s husband
that the claimant was betting, that being its reason for dishonouring her
cheques; but the bank was in any event entitled to dishonour the cheques
because the claimant’s account contained insufficient funds to meet them. Du
Parcq LJ thought that in the circumstances the interests of the bank required
disclosure.
Contrast the much stricter approach in X AG v A Bank4, where a bank was not
permitted to answer a New York subpoena. Its duty of confidence outweighed
its interests of avoiding foreign contempt proceedings.
A question of particular interest is when a bank may pass information about a
customer to another company in the same group, often a subsidiary or parent.
In Bank of Tokyo Ltd v Karoon5, the Court of Appeal held that a bank’s dis-
closure of information about a customer’s account to the bank’s parent com-
pany raised an arguable case of breach of contract, despite the fact that the
customer was suing the parent company. But the case is of limited assistance
because the court had only to consider whether the claim for breach of duty was
arguable; it made no final determination.
More recently, in Primary Group (UK) Ltd v Royal Bank of Scotland Plc, a
bank passed a customer’s confidential business information to a subsidiary
operating in the same market as the customer, so that the subsidiary could
advise the bank about the customer’s business. Arnold J held that this disclosure
did not fall within the qualification to the Tournier duty; but the holding was
obiter because an express contractual term displaced the Tournier duty6.
This qualification might be relied on in two other situations to justify passing
information about customers to other companies in the same group, although
there has been little judicial guidance on these situations:

17
3.21 Protecting and Disclosing Information

(1) Certain banks once permitted disclosure for marketing purposes on the
ground that it was in their interests. That practice ended with the issue of
the (now defunct) Banking Code, which discouraged it. In any event,
marketing hardly seems serious enough to justify disclosure.
(2) A more serious interest is to protect group companies by informing them
of a customer’s default. For example, it may be in the interests of a parent
company to disclose the default to a subsidiary, because the parent has a
financial interest in the subsidiary’s profitability. By contrast, it may not
be in the interests of a company to disclose the default to a sister
company for the benefit of their common parent company. In short, a
bank should be permitted to disclose information to protect its own
interests, but not (without more) those of another legal entity7. In any
event, the point seems unlikely to arise because the bank will ordinarily
obtain the customer’s consent for disclosure within the group.
It remains to be seen whether, and if so how, this qualification will develop in
light of data-protection legislation. Banks could argue that individual custom-
ers are adequately protected by that legislation, while the same rules should
apply to corporate customers by analogy. But such an approach would be a
marked departure from the current law, which takes a stricter approach in the
context of banking, particularly in X AG v A Bank.
1
Kaupthing Singer & Friedlander v Coomber and Burrus [2011] EWHC 3589 (Ch) at [52].
2
[1924] 1 KB 461 at 486.
3
(1938) 5 LDAB 163.
4
[1983] 2 All ER 464.
5
[1987] AC 45 at 53, 54, [1986] 3 All ER 468 at 475, 476, CA; cf Bhogal v Punjab National
Bank [1988] 2 All ER 296 at 305, CA.
6
[2014] EWHC 1082 (Ch); [2014] 2 All ER (Comm) 1121 at [189] and [192]. The court found
that the bank had breached its express contractual duty of confidence, while the subsidiary had
not breached an equitable duty of confidence that it owed to the customer.
7
The 13th edition of this work expressed the view that disclosure of a customer’s default should
be permitted in the bank’s interest provided that the recipient companies share with the bank a
commercial interest in being so informed. It was suggested that there will often be a sufficient
common interest to justify disclosure, so that the qualification to Tournier should, if necessary,
be broadened to accommodate it. Note, however, (1) the cautious approach of the Court of
Appeal in Bank of Tokyo Ltd v Karoon (above) and (2) the approach to intra-group transfers
of data under the data-protection legislation (discussed above at para 3.11), which is likely to
inform decisions in this field as well.

(iv) Authorised disclosure

3.22 Disclosure with the customer’s consent needs little comment. In Tournier,
Bankes LJ gave the most common example, namely a bank reference, which is
discussed below. A question may arise, although it has not yet arisen in case law,
as to how the consent should be obtained. It is at least arguable that the bank
should specifically draw attention to the potentially widespread use of the
customer’s information1. So, for example, the Lending Code (before it was
replaced in July 2016 by the Standards of Lending Practice) provided that a
customer’s consent to disclosure for marketing purposes may be given ‘by way
of a clear and unambiguous clause above a signature box on an application
form, or a positive “click” on an internet application, or a positive reply to a
specific question on the telephone’2. That approach is consistent with the

18
 Bank References 3.24

approach to consent under the current data-protection legislation3.

1
Cf the ‘red hand’ principle in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd
[1989] QB 433, [1988] 1 All ER 348.
2
Para 24. The Standards of Lending Practice for business customers simply refer to the
requirement under the Data Protection Act 1998 to seek the customer’s consent before sharing
business or personal details.
3
See para 3.6 above.

4 BANK REFERENCES

(a) Introduction
3.23 Banks are particularly well placed to comment on their customers’
creditworthiness. Thus, a bank reference can be valuable both to the recipient
and to the customer who is seeking credit for the purpose of a transaction with
the recipient. Equally, the bank can harm the recipient or the customer either by
providing an incorrect or unfavourable reference, or by failing to provide a
reference on request. The bank may then incur liability to the recipient or
customer, usually in breach of contract or negligence (sometimes in deceit or
misrepresentation)1. It may, however, be able to disclaim some liability for
negligence.
1
Compare banks’ liability to market participants in connection with untrue or misleading
statements made in listing particulars, and with dissemination of information that gives a false
or misleading impression as to a financial instrument. See Financial Services and Markets Act
2000, s 90(1) and the EU Market Abuse Regulation (No 596/2014), art 12(1)(a), (c).

(b) Liability to the recipient

(i) Negligence
3.24 The landmark decision of the House of Lords in Hedley Byrne & Co Ltd
v Heller & Partners Ltd1 established that there can be tortious liability for
negligent misstatements where the parties are in a special relationship resulting
from the defendant’s assumption of responsibility towards the claimant. The
facts were that the claimant had enquired of the defendant bank as to the
financial stability of one of the bank’s customers; then, acting on the answer
received, the claimant incurred liabilities that ended in loss. The House of Lords
unanimously held that the defendant’s disclaimer of responsibility precluded
any assumption of a legal duty of care in giving the reference2. More important,
however, are the (strictly obiter) comments as to the duty of care that would
have arisen in the absence of a disclaimer. Such a duty could arise by contract3,
but their Lordships held that it could also arise by a ‘special relationship’
between the bank and the recipient of the reference4. Such a special relationship
could come from an assumption of responsibility5; but on the facts of the case,
the disclaimer negatived any assumption of responsibility.
Subsequent decisions have debated the principle on which the decision in
Hedley Byrne was founded. Lord Goff, in particular, championed the test of
‘assumption of responsibility’ described above, and added that the test is an

19
3.24 Protecting and Disclosing Information

objective one: the defendant’s intentions are irrelevant6. Some decisions fa-
voured ‘proximity’, following Lord Atkin’s neighbour principle, to which were
added ‘foreseeability’ and ‘fairness, justice and reasonableness7’. Lord Oliver
gave a four-part test for negligent advice, holding that a duty of care typically
exists where:
‘(1) the advice is required for a purpose . . . which is made known, either
actually or inferentially, to the adviser at the time when the advice is given;
(2) the adviser knows, either actually or inferentially, that his advice will be
communicated to the advisee, . . . in order that it should be used by the
advisee for that purpose;
(3) it is known either actually or inferentially, that the advice so communicated
is likely to be acted upon by the advisee for that purpose without
independent inquiry, and
(4) it is so acted upon by the advisee to his detriment8’.
Other decisions focused on ‘special knowledge and skill’ on the part of the
defendant9. Yet another approach is the ‘incremental test’ of developing new
categories of negligence by analogy with established categories10. Ultimately,
Lord Hoffmann declared that the terms used in such tests are just ‘practical
guides’ rather than binding rules: each applies more to some circumstances than
to others11. Nonetheless, the three principal tests, namely (1) assumption of
responsibility, (2) the threefold test of proximity, foreseeability and fairness,
justice and reasonableness and (3) the incremental test, usually lead to the same
answer and can be used as cross-checks on each other12.
Despite these debates, it is clear that, in the absence of an effective disclaimer, a
bank reference will entail a duty of care, those being the circumstances consid-
ered obiter in Hedley Byrne. It makes no difference if the reference is requested
anonymously through a third party (the claimant’s bank in Hedley Byrne),
provided that the bank knows that the third party is not making the request
solely on its own account, and provided that the bank understands the purpose
of the request (entering advertising contracts in Hedley Byrne)13. The standard
of care required of the bank is presumably judged by the standards of the
profession, although the point has not arisen in case law.
A bank may, by the same principles, incur liability for other representations
about its customers made to third parties. Thus, in So v HSBC Bank Plc14, the
bank owed a duty of care to defrauded investors when its employee stamped
and signed various letters of instruction put forward by certain customers, who,
it transpired, were fraudsters. The investors were thus entitled to rely on a
representation that the bank had accepted and would carry out the fraudsters’
instructions. But the bank escaped liability because the claimants relied instead
on assurances they received from the fraudsters.
Where breach of the duty is established, the damages recoverable will depend
on the usual issues of causation and contributory negligence: for example, such
sum actually paid by the claimant as was attributable to the inaccuracy of the
information provided15.
An issue may arise as to whether a reference negligently given by an employee
of a bank gives rise to vicarious liability on the part of the bank. The touchstone
for the bank’s liability is whether the wrongful conduct is so closely connected
with acts the employee was authorised to do that the wrongful conduct may
fairly and properly be regarded as done by the employee in the course of the

20
 Bank References 3.24

employee’s employment16.
1
[1964] AC 465, [1963] 2 All ER 575.
2
Such disclaimers are now subject to the Unfair Contract Terms Act 1977; see para 3.25 below.
3
Hedley Byrne cites Woods v Martins Bank Ltd [1959] 1 QB 55, [1958] 3 All ER 166 in this
category.
4
All their Lordships agreed on the existence of the new category: Lord Reid (by implication as he
did not ‘attempt to decide what kind of degree of proximity is necessary before there can be a
duty . . . ’); Lord Morris (‘irrespective of any contractual or fiduciary relationship and
irrespective of any direct dealing, a duty may be owed by one person to another . . . ’); Lord
Hudson (‘a banker like anyone else may find himself involved in a special relationship involving
liability’); Lord Devlin (‘wherever there is a relationship equivalent to contract there is a duty of
care . . . ’); and Lord Pearce (‘there is also in my opinion a duty of care created by special
relationships which, though not fiduciary, give rise to an assumption that care as well as honesty
is demanded’).
5
‘Responsibility can attach to the single act, that is, the giving of the reference, and only if the
doing of that act implied a voluntary undertaking to assume responsibility.’ [1964] AC 465 at
529 per Lord Devlin.
6
Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, 178–181, [1994] 3 All ER 506,
518–521; Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830, [1998] 2 All ER 577;
Spring v Guardian Assurance plc [1995] 2 AC 296, [1994] 3 All ER 129, HL (duty of care owed
by employer to former employee in preparing reference for new employer).
7
Smith v Eric S Bush [1990] 1 AC 831 at 864-865, [1989] 2 All ER 514, per Lord Griffiths;
Caparo Industries Plc v Dickman [1990] 2 AC 605, [1990] 1 All ER 568, HL.
8
Caparo Industries Plc v Dickman [1990] 2 AC 605, 638. The test is cited with apparent
approval in Playboy Club London Ltd v Banca Nazionale Del Lavoro SPA [2018] UKSC 43 at
[9].
9
Esso Petroleum Co Ltd v Mardon [1976] QB 801, [1976] 2 All ER 5, CA following the minority
opinion in Mutual Life and Citizens’ Assurance Co Ltd v Evatt [1971] AC 793, [1970] 2
Lloyd’s Rep 441, PC.
10
Sutherland Shire Council v Heyman (1985) 157 CLR 424, 481, per Brennan J, approved by
Lord Bridge in Caparo Industries Plc v Dickman [1990] 2 AC 605, 618.
11
Commissioners of Customs & Excise v Barclays Bank [2006] UKHL 28, [2007] 1 AC 181,
[2006] 4 All ER 256 at [35].
12
Playboy Club London Ltd v Banca Nazionale Del Lavoro SPA [2016] EWCA Civ 457, [2016]
1 WLR 3169, [2017] 1 All ER (Comm) 309 at [17].
13
See Playboy Club London Ltd v Banca Nazionale Del Lavoro SPA [2016] EWCA Civ 457,
[2016] 1 WLR 3169, [2017] 1 All ER (Comm) 309 at [19], [20] and [24]. There, a casino made
an inquiry as to its customer’s creditworthiness through a related company’s bank, and made no
reference to gambling, in order to preserve customer confidentiality. The inquiry named the
related company but not the casino. The Court of Appeal held, reversing the decision below,
that there was no duty of care to the casino: the bank had not assumed responsibility, there was
no special relationship, and there was no proximity (nor was it fair, just and reasonable to
impose a duty). The Supreme Court dismissed the appeal [2018] UKSC 43. Lord Sumption
noted at [10] that, in Hedley Byrne, it would ‘probably’ have been enough to explain the
purpose of the request as a business transaction, rather than an advertising contract (and Lord
Mance at [22]–[23], in a minority concurring judgment, held that a reference to ‘business’
sufficed in the Playboy case itself). A further requirement is that ‘part of the statement’s known
purpose [must be] that it should be communicated [to] and relied upon by [the claimant]’: see
[11]. It also follows from part (2) of Lord Oliver’s test above that the bank needs to know that
the third party is not making the request solely on its own account.
14
[2009] EWCA Civ 296, [2009] 1 CLC 503, CA.
15
See Grosvenor Casinos Ltd v National Bank of Abu Dhabi [2008] EWHC 511 (Comm), [2008]
2 All ER (Comm) 112, [2008] 1 CLC 399 (a claim in deceit), per Flaux J at 160 to 161 (citing
Smith New Court Securities v Citibank NA [1997] AC 254). This case was followed at first
instance in Playboy Club London Ltd v Banca Nazionale Del Lavoro SPA [2014] EWHC 2613
(QB) at [78], where a deduction from damages awarded was made because of contributory
negligence (see [63] to [74]); since the decision on liability was reversed on appeal, the question
of contributory negligence did not fall to be considered there.
16
So v HSBC Plc [2009] EWCA Civ 296, [2009] 1 CLC 503, CA, per Etherton LJ at [55]. The test
was established in English law in Lister v Hesley Hall Ltd [2001] UKHL 22, [2002] 1 AC 215,
[2001] 2 All ER 769, HL at [28].

21
3.25 Protecting and Disclosing Information

(ii) Disclaimer of liability for negligence

3.25 A bank reference is usually accompanied by an intimation that it is given

in confidence and without responsibility on the part of the bank. Such a
disclaimer of responsibility succeeded in protecting the bank in Hedley Byrne1.
That case was, however, decided before the Unfair Contract Terms Act 1977
(UCTA 1977)2, which controls the effect of such disclaimers.
The provisions relevant to negligence are in s 2. In short, ‘a person cannot by
reference to any contract term or to a notice . . . exclude or restrict his
liability for negligence except in so far as the term or notice satisfies the
requirement of reasonableness3.’ The ‘requirement of reasonableness’ is defined
in ss 11(1) and (3). The term or notice must be ‘a fair and reasonable one’,
having regard to the circumstances when the contract was made or (in the case
of a non-contractual notice) when the liability arose.
In Smith v Eric S Bush4, the House of Lords held that a disclaimer of liability by
a valuer who had prepared a valuation for mortgage purposes was ineffective
because it failed the requirement of reasonableness. Lord Griffiths stressed,
among other things, the weak bargaining position of the claimant and the
unreasonableness of requiring the claimant to seek a further valuation5. By
contrast, the recipient of a bank reference is likely to be in a commercially
stronger position, although it may not be able to procure a reference elsewhere.
Also relevant is the fact that the recipient will not usually be required to pay for
the advice, as the claimant in Smith v Bush was. Thus, a sufficiently prominent
and properly worded disclaimer should be effective, either by negativing the
assumption of responsibility or by excluding any consequent liability. Both
matters, however, depend on the circumstances of the case.
1
See para 3.24 above.
2
UCTA 1977 is discussed further at para 4.12 ff below.
3
Liability for death or personal injury can never be excluded or restricted: see s 2(1).
4
[1990] 1 AC 831, [1989] 2 All ER 514, HL.
5
[1990] 1 AC 831 at 857; cf UCTA 1977, Sch 2, para (a).

(iii) Fraud or deceit

3.26 To be able to express an opinion without responsibility gives the bank a
wide licence; but if the bank does so fraudulently, it will not escape liability1.
Since the case of Pasley v Freeman in 17892, a party can incur liability for loss
resulting from a fraudulent statement about a third party’s creditworthiness.
Indeed, where the evidence makes it out, the tort of fraud (also called deceit)
may be a more attractive cause of action for a claimant than negligence, in that
it does not require a duty of care, nor does it allow contributory negligence, and
the rules on remoteness of loss are more generous.
The restriction is that an action for deceit as to a party’s creditworthiness must
be founded on a signed, written representation, by s 6 of the Statute of Frauds
Amendment Act 1828 (Lord Tenterden’s Act)3:
‘No action shall be brought whereby to charge any person upon or by reason of any
representation or assurance made or given concerning or relating to the character,
conduct, credit, ability, trade, or dealings of any other person, to the intent or purpose

22
 Bank References 3.27

that such other person may obtain . . . money or goods upon [credit]4, unless such
representation or assurance be made in writing, signed by the party to be charged
therewith.’
Subsequent case law establishes the following propositions, confining the
general application of this section and adapting it to modern circumstances:
(1) The section applies to fraudulent misrepresentations and likewise to
negligent misrepresentations under the Misrepresentation Act
19675. Conversely, the section has no application to negligent misstate-
ment, that is, the Hedley Byrne tort6.
(2) The representation upon which the action is based must relate in some
way to the credit or creditworthiness of a person7.
(3) The word ‘person’ includes a corporation8. A written representation is
made by a company if it is signed by a duly authorised agent of the
company acting within the scope of his authority9.
(4) An email constitutes a written representation provided that it includes a
written indication of the sender’s identity, either as an electronic signa-
ture or by concluding words such as ‘regards’ accompanied by the typed
name of the sender10.
1
Commercial Banking Co of Sydney v R H Brown & Co [1972] 2 Lloyd’s Rep 360, (1972) 126
CLR 337, High Court of Australia.
2
(1789) 3 TR 51.
3
Lord Tenterden’s Act was a response to creditors who, after Pasley v Freeman, sought to get
around the Statute of Frauds Act 1677, s 4, by suing on an unwritten representation of
creditworthiness, since they could not sue on an unwritten guarantee. See Roder UK Ltd v West
[2011] EWCA Civ 1126, [2012] QB 752, [2012] 1 All ER 1305, CA at [1].
4
The original text is ‘credit, money, or goods upon’, which makes no sense. The Court of Appeal
favoured the emendation shown: Roder UK Ltd v West [2011] EWCA Civ 1126, [2012] QB
752, [2012] 1 All ER 1305, CA at [16].
5
In respect of fraudulent misrepresentations, see Banbury v Bank of Montreal [1918] AC 626,
HL, which also held that the section does not apply to innocent misrepresentations. The
reasoning there is broad enough to encompass all kinds of deceit, whether or not amounting to
a misrepresentation in the sense of a false representation that induces a contract with the
representor or with someone else with notice of the representation: see pp 692–693 (per Lord
Atkinson), pp 706–707 (per Lord Parker) and pp 712–713 (per Lord Wrenbury). In respect of
negligent misrepresentations under s 2(1) of the Misrepresentation Act 1967, the point was
common ground in UBAF Ltd v European American Banking Corp [1984] QB 713, [1984]
2 All ER 226, CA and was confirmed by Asplin J in LBI HF v Stanford [2014] EWHC 3921
(Ch) at [184]. The explanation is that, by s 2(1), the person making the misrepresentation is
liable only if he ‘would be liable to damages in respect thereof had the misrepresentation been
made fraudulently’.
6
WB Anderson & Sons Ltd v Rhodes (Liverpool) Ltd [1967] 2 All ER 850 per Cairns J. As to
negligent misstatement, see para 3.24 above.
7
Diamond v Bank of London and Montreal Ltd [1979] QB 333, [1979] 1 All ER 561, CA.
8
Banbury v Bank of Montreal [1918] AC 626, HL, approving Hirst v West Riding Union
Banking Co Ltd [1901] 2 KB 560, CA.
9
Diamond v Bank of London and Montreal Ltd [1979] QB 333, [1979] 1 All ER 561, CA.
10
Lindsay v O’Loughnane [2010] EWHC 529 (QB), [2012] BCC 153 at [95].

(c) Liability to the customer

3.27 A bank that gives an accurate reference without its customer’s consent
may incur liability to the customer for breach of contract, negligence, breach of
confidence and breach of data-protection principles1. Remarkably, the question
of whether customers impliedly consent to the provision of bank references

23
3.27 Protecting and Disclosing Information

remained undecided until the decision in 1999 in Turner v Royal Bank of

Scotland plc2. There, the defendant bank had given an unfavourable credit
reference to another bank without its customer’s express consent, and in general
the bank concealed from its customers the fact that it was giving references
about their creditworthiness. The Court of Appeal held that the bank had
breached its contractual duty of confidence; Sir Richard Scott V-C commented
that customers cannot be deprived of their rights by banks establishing a
practice among themselves.
Similarly, a bank that gives an inaccurate reference is potentially liable to the
customer for breach of contract, negligence, defamation3 and breach of data-
protection principles.
The question of negligence here follows the same legal principles discussed
above in respect of liability to the recipient4. The Supreme Court recently held
in a Scottish case that the bank also has a tortious duty to investigate an
assertion made by a customer that he had rescinded the credit agreement of
which it believed him to be in default. If the bank reasonably reached the view
that the assertion was unfounded, it could report the customer’s default to
credit-reference agencies. Conversely, if it reported the default without making
enquiries, it would be negligent5.
A bank that refuses or otherwise fails to give a reference on request can also
cause loss to its customer. The intended recipient may infer that the customer is
not creditworthy or may simply be unable to reach a conclusion as to the
customer’s creditworthiness. Where the bank’s duties to its customer require it
to answer the request, it could incur liability for breach of contract and
negligence as a result.
The bank’s duty of care can extend beyond the customer. Thus, on the facts of
Gatt v Barclays Bank Plc6, the bank owed a duty in respect of a credit reference
not only to the subject of the reference but also to his wife, who was a joint
account holder and co-director of a family business that was dependent on his
credit.
A bank can incur liability to its customer for other negligent misstatements. For
example, in Box v Midland Bank Ltd7, a branch manager told a customer that
he had no doubt that Head Office would approve a loan advance; the customer
acted on this opinion and suffered loss. Lloyd J pointed out that the manager
was not obliged to predict the outcome of the application but, having done so,
he was under a duty to take reasonable care since he knew that his prediction
would be relied on.
Liability for breach of contract and negligence in the above situations may be
limited by an inability to show that the bank caused any loss or by remoteness
of damage. Where a bank gives an accurate, unfavourable reference without
consent, it is difficult to see what foreseeable loss the customer will suffer
because, if the giving of the reference causes loss, the bank’s failure to give a
reference would probably have caused the same loss. But where the reference is
inaccurate, or where an accurate, favourable reference is withheld, it is reason-
ably foreseeable that the customer may suffer economic loss.
1
As to breach of confidence and data protection, see paras 3.16 and 3.15 above, respectively.
Data-protection law makes specific provisions concerning credit references: see para 3.9 above.
2
[1999] 2 All ER (Comm) 664, [1999] Lloyd’s Rep Bank 231, CA.

24
 Bank References 3.27
3
Liability for defamation only arises if the reference is inaccurate, because the truth of a
statement is a complete defence. It has, however, been held in general terms that qualified
privilege may apply to non-malicious communications between people who share a legitimate
common interest: Waller v Loch (1881) 7 QBD 619; Robshaw v Smith (1878) 38 LT 423;
Macintosh v Dun [1908] AC 390, PC; London Association for Protection of Trade v Green-
lands Ltd [1916] 2 AC 15, HL; Gatt v Barclays Bank Plc [2013] EWHC 2 (QB).
4
See para 3.24 above.
5
Durkin v DSG Retail Ltd [2014] UKSC 21, [2014] 1 WLR 1148, [2014] 2 All ER 715 at [33]
to [35]. Contrast the position where the credit agreement is unenforceable under the Consumer
Credit Act 1974; see para 3.9 above.
6
[2013] EWHC 2 (QB) at [34] to [35].
7
[1979] 2 Lloyd’s Rep 391 (reversed as to costs: [1981] 1 Lloyd’s Rep 434); cf The Royal Bank
Trust Co (Trinidad) Ltd v Pampellonne [1987] 1 Lloyd’s Rep 218, PC.

25
Part II

BANKS AND CUSTOMERS

1
Chapter 4

THE RELATIONSHIP
AND CONTRACT OF BANKER
AND CUSTOMER

1 BANKERS AND CUSTOMERS

(a) The meaning of banker and banking business [4.1]
(b) When does someone become a customer? [4.3]
2 THE CONTRACT BETWEEN BANKER AND CUSTOMER
(a) Introduction [4.6]
(b) The debtor-creditor relationship [4.7]
3 BANKING CONTRACT EXPRESS TERMS [4.8]
(a) Clauses permitting variation of the contract [4.9]
(b) Unfair terms [4.11]
4 IMPLIED DUTIES
(a) Implied duties owed by the bank: duties of care [4.25]
(b) Duty owed by paying bank to beneficiaries of a trust? [4.27]
(c) Other implied duties owed by the bank? [4.28]
(d) Implied duties owed by the customer [4.33]
(e) Statutory duties [4.34]
5 MISSTATEMENTS AND COLLATERAL CONTRACTS [4.35]
(a) General principles of pre-contractual misstatements and misad-
vice [4.35]
(b) Implied pre-contractual statements [4.36]
(c) Actionable misstatements during the life of the contract [4.37]
6 THE STANDARDS OF LENDING PRACTICE [4.38]
7 BUSINESS DAYS AND HOURS [4.39]
(a) Days of business [4.40]
(b) Hours of business [4.41]
8 TERMINATION OF THE RELATIONSHIP [4.42]
9 LIMITATION OF ACTIONS
(a) Credit balances in favour of customer [4.43]
(b) Contracts of loan [4.44]
(c) Overdrafts [4.45]
10 PROPER LAW AND BANK ACCOUNTS [4.46]

1 BANKERS AND CUSTOMERS

(a) The meaning of banker and banking business

4.1 Since the Banking Act 1979, ‘bank’, ‘banker’ and ‘banker’s books’ have
usually been defined simply as referring to institutions authorised to accept
deposits (primarily under Part 4A of FSMA 2000)1.
The common law meaning of these terms retains a residual relevance, although
of relatively minor importance, for two main reasons. First, certain statutes

3
4.1 Relationship of Banker and Customer

refer to ‘banks’, ‘bankers’ and ‘the business of banking’ without definition, or

with a definition which begs the meaning of banking business. The main
examples are the Bills of Exchange Act 1882, s 2 of which provides: ‘In this Act,
unless the context otherwise requires, “Banker” includes a body of persons
. . . who carry on the business of banking’, and the Cheques Act 1957, s 6(1)
of which provides that the Act is to be construed as one with the Bills of
Exchange Act 18822.
Second, there may be common law instances where it is necessary to determine
the meaning of these terms other than by reference to authorised institutions.
For example, a banker within the common law meaning enjoys the bank-
er’s right of lien and set-off.
1
See the Bankers’ Books Evidence Act 1879, s 9; the Solicitors Act 1974, s 87(1); the Companies
Act 2006, s 1164(2); the Income Tax Act 2007, s 991; the Banking Act 2009, s 2; the Corpo-
ration Tax Act 2010, s 1120.
2
See also the Banking Act 2009, s 209 (a bank note is issued when it passes from one carrying on
the business of banking to a person taking as bearer) and the Companies Act 2006 s 1132(4)
(orders for inspection of a company’s documents where an offence suspected can be made
against those carrying on the business of banking).

4.2 The leading authority on the common law meaning is the Court of
Appeal’s decision in United Dominions Trust Ltd v Kirkwood1, where the
claimant’s loan would be void under the Moneylenders Acts unless it was ‘bona
fide’ carrying on the ‘business of banking’, and so not a moneylender. Clearly
for the purposes of this act, lending alone could not be enough to amount to
banking, but the case presents difficulties of interpretation because the three
judgments differ on the law and on its application to the particular facts.
Lord Denning MR held2 that the usual characteristics of banking are much as
stated in the 6th edition of Paget in 1961, ie:
(1) the conduct of current accounts;
(2) the payment of cheques;
(3) the collection of cheques for customers.
He concluded that UDT’s business did not satisfy these criteria. UDT did not
maintain current accounts. Its conduct of hire-purchase finance did not make it
a banker even though finance was provided by discounting bills or promissory
notes. Nor did its acceptance of term deposits from City institutions or its
making of stocking, industrial and other loans.
Harman LJ noted that it is notoriously difficult to define the business of banking
and that no statute had attempted it. He adopted the definition in Bank of
Chettinad Ltd of Colombo v IT Comrs, Colombo3 that a banker is one who
carries on as his principal business the accepting of deposits of money on
current account or otherwise, subject to withdrawal by cheque, draft or order.
Like Lord Denning, he concluded that UDT had not established that it main-
tained current accounts.
Diplock LJ held that it was essential to the business of banking that a banker
should accept money from his customers upon a running account into which
sums of money are from time to time paid by the customer and from time to
time withdrawn by him (ie the first of the above characteristics). He was also
inclined to agree that the second and third characteristics are also essential4.

4
 Bankers and Customers 4.3

Lord Denning and Diplock LJ also placed some importance on reputation.

Although UDT did not maintain current accounts (it conducted hire-purchase
finance by discounting bills or promissory notes, and accepted term deposits
and made stocking, industrial and other loans) and so satisfy these require-
ments, the evidence adduced by UDT established its reputation, and hence its
status, as a bank. For Lord Denning, reputation appeared sufficient on its own,
whereas for Diplock LJ it was only evidence as to which the satisfaction of the
list of characteristics could be demonstrated. Harman LJ, dissenting, held that
reputation alone is not enough and, accordingly, that UDT was not carrying on
a banking business.
Where a statute refers to the carrying on of the business of banking, it is a matter
of construction whether the description only applies if banking is the primary
object of the business carried on. It was held in UDT v Kirkwood that for a
person to fall within the definition in the Moneylenders Acts, banking need not
be the primary object of the business carried on by him: he might carry on a
composite business of which the accepting of deposits might be only a minor
part5.
The words ‘bona fide’, which are perhaps implicit in every statutory reference to
carrying on a banking business, were held in UDT v Kirkwood to involve two
requirements. First, that the banking transactions must not be negligible in size
when compared to the rest of the business; second, that the transactions relied
upon as constituting the acceptance of deposits of money from customers must
be genuinely of this legal nature and not a mere disguise for transactions of a
different legal nature6. It was emphasised in Re Roe’s Legal Charge7 that the
court is not concerned to compare the number of clearances of an alleged bank
with the number of clearances of other recognised banks.
1
[1966] 2 QB 431, [1966] 1 All ER 968, CA. A review of most of the authorities preceding the
decision in UDT v Kirkwood can be found in Paget (1972, 8th edn), pp 8–12.
2
[1966] 2 QB 431 at 447, [1966] 1 All ER 968 at 975.
3
[1948] AC 378, 383. See also Hafton Properties Ltd v McHugh (1986) 59 TC 420.
4
[1966] 2 QB 431 at 465, [1966] 1 All ER 968 at 986–987.
5
[1966] 2 QB 431 at 466, [1966] 1 All ER 968 at 987, CA, per Diplock LJ. Cf Halifax Union v
Wheelwright (1875) LR 10 Exch 183; Re Shield’s Estate [1901] 1 IR 172 at 199; Paget (1972,
8th edn), pp 12–13.
6
UDT v Kirkwood [1966] 2 QB 431, [1966] 1 All ER 968, CA.
7
[1982] 2 Lloyd’s Rep 370 at 381, CA

(b) When does someone become a customer?

4.3 The law of banking proper is the law of the relationship between a banker
and its customer. Basically the relationship is that of mandator (the customer)
and mandatory (the bank), but it is nonetheless a relationship which embraces
mutual duties and obligations. It is a relationship peculiar to banking, giving
rise to a contract between the two parties. The relationship is enjoyed by no one
but a bank with reference to a customer and thus it is necessary to know what
in law is a customer. Nowhere is it specifically defined, not even in the Bills of
Exchange Act 1882, which to a large extent is based on the relationship, nor in
the Cheques Act 1957, which in its entirety is dependent upon it.

5
4.3 Relationship of Banker and Customer

‘Customer’ is probably impossible to define with exactness, and moreover the

scope of the term will depend upon the reason why it is important and the
context in which the term is being used.
In Woods v Martins Bank Ltd1, the question was whether a bank has assumed
an advisory duty to someone by agreeing to take care of his affairs, Salmon J
held that the relationship of banker and customer existed between the parties
from the time when the bank accepted instructions from the claimant to collect
monies from a building society, to pay part to a company he was going to
finance and ‘retain to my order the balance of the proceeds’, although there was
at that time no account. The judge confirmed that even if he was wrong as to
when the claimant became a customer, that was not determinative, as the duty
of care itself arose when the bank had assumed it by agreeing to advise. In other
words, when determining whether a duty of care has arisen, the ordinary
question of assumption of responsibility must be applied and the label of
customer may or may not follow from that but has no legal significance.
1
[1959] 1 QB 55 at 63, [1958] 3 All ER 166 at 173, approved in Warren Metals Ltd v Colonial
Catering Co Ltd [1975] 1 NZLR 273.

4.4 The most common context in which the question of whether a person is a
customer arises, and in which the label of customer does have legal significance,
is that of the collection of cheques, in which the bank’s statutory defence of
reasonable care under s 4 of the Cheques Act 1957 (or its predecessor s 82 of the
Bills of Exchange Act 1882) only arises if the payer in was a customer. In this
context, as one would expect, ‘customer’ is construed broadly such that the
collection of the cheque is itself usually enough to render the payer a customer
for these purposes, thus affording the bank the defence of reasonable care
providing the other requirements are met1.
Thus it was held by the Privy Council in Taxation Comrs v English, Scottish and
Australian Bank Ltd2 that the duration of the relationship was not of the
essence to identifying the relationship of customer and bank, holding that (for
the purposes of a colonial statutory provision akin to s 82 of the English
1882 Act) a person whose only connection with the bank at the material date
was the payment in of a single cheque for collection was a customer, although
may not be if the bank was cashing the cheque not as a service to the payer in
directly but because they have been introduced by one of the bank’s customers3.
1
The main restriction in s 82, other than that reasonable care was taken, was that the bank
received the payment and collected ‘for’ a customer of a cheque, ie as agent. If the payer in had
no account and the cheques were collected for the bank’s customers then the cheques may fall
outside s 82: Great Western Rly Co v London and County Banking Co Ltd [1901] AC 414 at
425, HL; cf Mathews v Brown & Co (1894) 63 LJQB 494.
2
[1920] AC 683, PC, contra Mathews v Brown & Co (1894) 63 LJQB 494; Lacave & Co v
Crédit Lyonnais [1897] 1 QB 148; Great Western Rly Co v London and County Bank-
ing Co Ltd [1901] AC 414, HL.
3
[1920] AC 683 at 687. See also Bailhache J in Ladbroke & Co v Todd (1914) 19 Com Cas 256.

4.5 It is the business relation, the facilities for depositing monies, the conve-
nience of the cheque book on the one hand and the beneficial use of the money
deposited on the other hand, which is at the root of the conception of a
customer. This was recognised in Great Western Rly Co v London and County
Banking Co Ltd1, though Lord Brampton was inclined to hold any pecuniary
interest immaterial. It is immaterial that the account to which cheques are

6
 The Contract Between Banker and Customer 4.6

credited is overdrawn; that, per se, does not render the account-holder any less
a customer2. A continued practice of getting bills discounted by a bank would
probably be enough and similarly the keeping of a deposit account3, and where
an English bank, acting as agent for a foreign bank, habitually collected cheques
drawn on other English banks and paid into the foreign bank by that bank’s cus-
tomers, the English bank so collecting a crossed cheque was held by the Court
of Appeal in Importers Co Ltd v Westminster Bank Ltd to be collecting for a
customer within the predecessor to the Cheques Act 1957, s 4 (Bills of Exchange
Act 1882, s 82)4. Atkin LJ said5:
‘ . . . it seems to me that if a non-clearing bank regularly employs a clearing bank
to clear its cheques, the non-clearing bank is the “customer” of the clearing bank.’
Bankes LJ said6:
‘In this case this class of business of collecting cheques was done between bank and
bank, and it seems to me impossible to contend, as a matter of law, that the bank for
which the respondents were doing business were not, in reference to that business,
their customer.’
The deposit of a sum of money by a foreign bank with an English bank, with
instructions that it be transferred to another foreign bank, does not, without
more, make the person at whose request the transfer is made a customer of the
English bank7.
The banker-customer relationship does not arise where an account is opened on
false documents and without authority8. Banks seek to minimise this risk by
verifying the identity of a prospective customer when the account is opened.
The Money Laundering Regulations 2017 prescribe rules relating to such
verification (a detailed account of which can be found in Chapter 2).
1
[1901] AC 414, HL.
2
Clarke v London and County Banking Co [1897] 1 QB 552.
3
Per Lord Davey, Great Western Rly Co v London and County Banking Co Ltd [1901] AC 414
at 421.
4
[1927] 2 KB 297.
5
[1927] 2 KB 297 at 310.
6
[1927] 2 KB 297 at 305.
7
Aschkenasy v Midland Bank Ltd (1934) 50 TLR 209; cf also Kahler v Midland Bank Ltd [1948]
1 All ER 811, CA; affd [1950] AC 24, [1949] 2 All ER 621, HL.
8
See Robinson v Midland Bank Ltd (1925) 41 TLR 402, CA; Stoney Stanton Supplies
(Coventry) Ltd v Midland Bank Ltd [1966] 2 Lloyd’s Rep 373, CA.

2 THE CONTRACT BETWEEN BANKER AND CUSTOMER

(a) Introduction
4.6 The relationship of banker to customer is one of contract1. It consists of a
general contract, which is basic to all transactions, together with special
contracts which arise only as they are brought into being in relation to specific
transactions or banking services. The essential distinction is between obliga-
tions which come into existence upon the creation of the banker-customer
relationship and obligations which are subsequently assumed by specific agree-
ment; or, from the standpoint of the customer, between services which a bank is
obliged to provide if asked, and services which many bankers habitually do, but
are not bound to, provide. Services such as banker’s drafts, letters of credit and

7
4.6 Relationship of Banker and Customer

foreign currency for travel abroad probably fall into the second category of
services which the bank is not bound to supply, but this has not been judicially
determined2. A request for an unauthorised overdraft that is accepted probably
also gives rise to a special contract, although that contract is governed by the
terms of the general contract3.
1
Foley v Hill(1848) 2 HL Cas 28.
2
The point was expressly left open by Staughton J in Libyan Arab Foreign Bank v Bankers
Trust Co [1989] QB 728 at 749E, [1989] 3 All ER 252 at 269b.
3
OFT v Abbey National plc and others [2008] EWHC 875 (Comm) (Andrew Smith J) at
paras 418-420 (considering this passage in an earlier edition of this text).

(b) The debtor-creditor relationship

4.7 The classic description of the contract constituted by the relation of banker
and customer is that of Atkin LJ in Joachimson v Swiss Bank Corpn1:
‘The bank undertakes to receive money and to collect bills for its customer’s account.
The proceeds so received are not to be held in trust for the customer, but the bank
borrows the proceeds and undertakes to repay them2. The promise to repay is to
repay at the branch of the bank where the account is kept, and during banking hours3.
It includes a promise to repay any part of the amount due against the written order of
the customer addressed to the bank at the branch, and as such written orders may be
outstanding in the ordinary course of business for two or three days, it is a term of the
contract that the bank will not cease to do business with the customer except upon
reasonable notice4. The customer on his part undertakes to exercise reasonable care
in executing his written orders so as not to mislead the bank or to facilitate forgery5.
I think it is necessarily a term of such a contract that the bank is not liable to pay the
customer the full amount of his balance until he demands payment from the bank at
the branch at which the current account is kept.’
The debtor-creditor relationship, and the need for a demand by the customer
before the bank is obliged to repay the debt, is discussed further in Chapter 5
below. For present purposes, it suffices to note that the case advanced by the
customer in Joachimson was essentially that the relation of banker and cus-
tomer is that of debtor and creditor with super-added obligations, and that the
customer enjoys the right of a lender to sue for his debt whenever he pleases.
Atkin LJ rejected altogether this conception of a dual relation with the emphatic
pronouncement that there is only one contract made between the bank and its
customer6. This rejection did not of itself determine the point at issue — indeed,
Bankes LJ reached the same decision as Atkin LJ whilst adhering to the notion
of implied superadded obligations7. But Atkin LJ’s concept of a single contract
is the more convincing, and it is this concept which has prevailed.
In practice, the point appears to be of limited importance. In particular, it does
not follow from the concept of an indivisible contract that the relation between
a bank and a customer maintaining accounts with it in different jurisdictions is
embodied in one contract governed by one proper law. It was held in Libyan
Arab Foreign Bank v Bankers Trust Co8 that such a contract may be governed
in part by one law and in part by another. This case is considered more fully at
para 4.46 below.
1
[1921] 3 KB 110 at 127.
2
See Foley v Hill (1848) 2 HL Cas 28; and see ‘Current Accounts’, Chapter 5 below.

8
 Banking Contract Express Terms 4.9
3
See Woodland v Fear (1857) 7 E & B 519; Prince v Oriental Bank Corpn (1878) 3 App Cas 325
at 332–333, PC; R v Lovitt [1912] AC 212 at 219; Garnett v McKewan (1872) LR 8 Exch 10.
4
See Prosperity Ltd v Lloyds Bank Ltd (1923) 39 TLR 372; and see further ‘Termination’ at para
4.42 below.
5
See London Joint Stock Bank Ltd v Macmillan and Arthur [1918] AC 777.
6
[1921] 3 KB 110 at 127.
7
[1921] 3 KB 110 at 119.
8
[1989] QB 728, 748C, [1989] 3 All ER 252, 268b.

3 BANKING CONTRACT EXPRESS TERMS

4.8 The modern contract governing a bank account is largely expressed by the
written standard terms and conditions of the bank. These terms provide for
express duties and obligations, as well as informing the implication of duties
and obligations described in Section 4 below (para 4.25).

(a) Clauses permitting variation of the contract

4.9 In Lombard Tricity Finance Ltd v Paton1, the Court of Appeal held that
clear words are necessary if a contract is to give one party power unilaterally to
vary its terms, but modern standard terms and conditions usually do so by just
such clear words. However, it will usually be implicit that the bank cannot do so
dishonestly, for an improper purpose, capriciously, arbitrarily or irrationally.
Such a fetter was held in Paragon Finance plc v Nash2 to be implied into the
bank’s express right to vary a mortgage interest rate.
It will also usually be expressed, else implied, that the bank must give reason-
able notice of any variation. What constitutes reasonable notice was considered
in Burnett v Westminster Bank Ltd3, where a bank issued its customer with a
cheque book containing cheque forms for a branch operating the magnetic ink
character recognition system (which automatically directs a cheque to the
drawee branch). On the front cover of the cheque book, there were printed two
sentences in clear and easily legible black type:
‘The cheques and credit slips in this book will be applied to the account for which
they have been prepared. Customers must not, therefore, permit their use on any
other account.’
It was held that these sentences had not varied the contract. The relevant factors
were that:
(a) the defendant could not establish that the claimant had read the printed
words;
(b) cheque book covers had not previously been used for the purpose of
containing contractual terms and therefore the recipient could reason-
ably assume that they contained none; and
(c) the claimant had maintained an account with the defendant for some
time under different systems which had prevailed down to the issue of
the new cheque book4.
1
[1989] 1 All ER 918.
2
[2002] 1 WLR 685 (CA). See also Paragon Finance plc v Pender [2005] EWCA Civ 760, [2005]
1 WLR 3412. Contrast, Sterling Credit Ltd v Rahman [2002] EWHC 3008 (Ch), where Park J
held that Paragon Finance plc did not require a lender to reduce interest rates from time to time
as prevailing market rates fell. See further para 8.11 below.

9
4.9 Relationship of Banker and Customer
3
[1966] 1 QB 742, [1965] 3 All ER 81.
4
The earlier systems are described at [1966] 1 QB 745,[1965] 3 All ER 83–84; the relevant
factors appear at 763 and 87 respectively.

4.10 As for regulated consumer credit agreements, s 82(1) of the Consumer

Credit Act 1974 provides that if the bank varies such an agreement under a
power contained in it, the variation does not take effect before notice of it is
given to the customer in the prescribed form1. Notice must generally be given
seven days before the variation takes effect, although in certain circumstances
notice of a variation in the rate of interest may be given in the press.
Furthermore, the indicative and non-exhaustive list of terms that may be
regarded as unfair under the Consumer Rights Act 2015, discussed below at
paras 4.16–4.24, includes terms allowing unilateral variation of the contract
terms without a valid reason specified in the contract (paragraph 11 of Schedule
2) and terms allowing unilateral determination of the subject matter of the
contract after the consumer has become bound by it (paragraph 12). This does
not mean that such terms are automatically unfair, but does give some weight to
an argument that the terms are unfair in a particular case. However, the scope
of paragraphs 11 and 12 are restricted by paragraphs 22 to 24. In particular,
paragraph 22 disapplies paragraph 11 to terms under which a supplier of
financial services reserves the right to alter the rate of interest payable by the
consumer or due to the latter, or the amount of other charges for financial
services without notice where there is a valid reason, provided that the supplier
is required to inform the other contracting party at the earliest opportunity and
the latter is free to dissolve the contract immediately. Furthermore, para-
graph 23 disapplies paragraphs 11 and 12 to any term under which a seller or
supplier reserves the right to alter unilaterally the conditions of a contract of
indeterminate duration (which includes a bank account contract), provided
that he is required to inform the consumer with reasonable notice of the
variation and that the consumer is free to dissolve the contract2.
The question of what amounts to a valid reason has not been tested in the higher
courts. Plainly a rate change to reflect a change in the cost of borrowing (eg
following a rise in the Bank of England or money market costs), or as a result of
legal or regulatory changes, would be for a valid reason and reasonable parties
would have understood this to be permitted. It is less clear whether a right to
change in an interest rate in order to encourage customers to move to another
more profitable product would be fair, although where the bank had a right
instead to simply terminate the contract and the customer also had a right to
terminate rather than accept the new rate, it is hard to see what could be unfair
about this3.
1
Prescribed by Consumer Credit (Notice of Variation of Agreements) Regulations 1977, SI
1977/328, as amended by SI 1979/661 and SI 1979/667.
2
In 2012 the Financial Services Authority issued guidance on the application of the Regulations
to terms permitting unilateral variations of contracts (FSA, ‘Unfair contract terms: improving
standards in consumer contracts’, January 2012, section 3 issue 1), however, its successor, the
Financial Conduct Authority, has stated that this guidance no longer reflects its view on unfair
contract terms, and the guidance has been removed while the Financial Conduct Authority
considers how it should be updated in light of the Consumer Rights Act 2015, published
guidance from the Competition and Markets Authority and the case law of the European Court
of Justice. It has no current intention of publishing updated guidance: https://www.fca.org.uk
/firms/unfair-contract-terms/library.

10
 Banking Contract Express Terms 4.13
3
Cf RWE Vertrieb AG C-92/11 (2013).

(b) Unfair terms

4.11 Express terms of the banking contract, like those of any other contract,
are subject within limits to challenge by customers for unfairness under the
statutory rules proscribing such unfair terms.

(i) Business customers: The Unfair Contract Terms Act 1977

4.12 Despite its name, the Unfair Contract Terms Act 1977 does not seek to
control unfair terms generally. In the main1 it applies only to terms which
purport to exclude or restrict liability, ie exemption clauses2. There are restric-
tions on its scope, a few of which are relevant in the banking context,
particularly those by which ss 2 and 34 of the Act are disapplied to contracts
relating to the transfer of interests in land, and contracts relating to the transfer
of securities or rights in them3. The Act also does not apply to contracts for
which English law would not, but for a choice of law clause, be the applicable
law4.
Moreover, since the enactment of the Consumer Rights Act 2015 (see below),
the 1977 Act only applies to business-to-business contracts5.
1
But see UCTA 1977, ss 3(2)(b) and 4.
2
But note that by UCTA 1977, s 13(1) a variety of terms are treated as exemption clauses, eg a
term purporting to exclude a duty of care giving rise to liability in negligence may be treated as
a term excluding or restricting liability: see Smith v Eric S Bush [1990] 1 AC 831. But certain
clauses will be treated as duty-defining rather than exemptions: see the discussion in Camerata
Property Inc v Credit Suisse Securities (Europe) Ltd [2011] 2 BCLC 54 at [186]. See also para
30.12.
3
UCTA 1977, s 1(2) and Sch 1 para 1(b) and (e).
4
UCTA 1977, s 27(1).
5
UCTA 1977, ss 2(4), 3(3), 6(5) and 7(4A).

4.13 Sections 2 and 3 of the Act are most relevant in the banking contract
context. Section 2(2) provides that a person cannot exclude or restrict liability
for negligence unless the term purporting to do so satisfies the requirement of
reasonableness1. Section 3(2) provides that, as between contracting parties,
where one of them deals on the other’s written standard terms of business
(which is likely to apply to most banking contracts, although not those which
adopt an external model contract or where the terms have been substantially
varied after negotiation2), then as against that party, the other cannot by
reference to any contract term:
‘(a) when himself in breach of contract, exclude or restrict any liability of his in
respect of that breach; or
(b) claim to be entitled–
(i) to render a contractual performance substantially different from that
which was reasonably expected of him, or
(ii) in respect of the whole or any part of his contractual obligation, to
render no performance at all,

11
4.13 Relationship of Banker and Customer

(ii) except in so far as . . . the contract term satisfies the requirement of

reasonableness.’

1
Liability for death or personal injury resulting from negligence cannot be excluded at all
(s 2(1)).
2
A loan facility agreement on a Loan Market Association model form with some variations was
not subject to the 1977 Act in African Export-Import Bank v Shebah Exploration and
Production Co Ltd [2017] EWCA Civ 845.

4.14 In relation to a contract term, the requirement of reasonableness for the

purposes of the Act is that ‘the term shall have been a fair and reasonable one to
be included having regard to the circumstances which were, or ought reason-
ably to have been, known to or in the contemplation of the parties when the
contract was made’1. The time for determining the reasonableness of the term is
the time at which the contract was made.
1
UCTA 1977, s 11(1).

4.15 By s 11(2) of the Unfair Contract Terms Act 1977, five guidelines are set
out in Schedule 2 to the Act and regard is to be had to them in determining
whether a term satisfies the requirement of reasonableness. Although the
guidelines are only made expressly applicable for the purposes of s 6 (sale of
goods and hire-purchase) and s 7 (other contracts for the supply of goods) of the
Act, they are regarded as being of general application1. The guidelines cover the
following: the relative bargaining positions of the parties; whether the customer
received an inducement to agree to the term; whether he could have bought
elsewhere without being subject to a similar term; the customer’s knowledge or
means of knowledge of the existence and extent of the term; where the term
excludes or restricts liability for breach of some condition, whether it was
reasonable at the time of the contract to expect that compliance with that
condition would be practicable; and whether the goods were manufactured,
processed or adapted to the special order of the customer2.
In each case the burden of proving that the term is fair and reasonable lies on the
person relying on it3.
By way of example, in Earles v Barclays Bank plc4, a clause excluding liability
for lost profits and other consequential losses was held, obiter, to be reasonable.
The customer was (as will now always be the case for the 1977 Act to apply at
all) a commercial one (a property developer) with significant bargaining power
and potentially large and unpredictable losses that it was reasonable for the
bank to exclude when providing its ordinary banking facilities. In United Trust
Bank Ltd v Dohil5 conclusive evidence and no set-off clauses in loan and
guarantee arrangements were held after a detailed analysis by Picken QC to be
reasonable. In Deutsche Bank (Suisse) v Khan6 it was (obiter) held that standard
loan clauses providing for no set-off, default interest, a condition precedent of
satisfactory provision of valuations and other documents, and professional
valuation of security were reasonable. And in Chopra v Bank of Singapore Ltd7,
a Singapore law clause was held not to exclude liability so as to be subject to the
reasonableness test, but it was held (obiter) that it was in any case reasonable as
there were sensible connections with that law such as that the bank and its
account were Singapore-based.
1
Singer Co (UK) Ltd v Tees and Hartlepool Port Authority [1988] 2 Lloyd’s Rep 164 at 169.

12
 Banking Contract Express Terms 4.18
2
The guidelines are certainly not exhaustive: see Smith v Eric S Bush [1990] 1 AC 831 at 858;
Overseas Medical Supplies Ltd v Orient Transport Services Ltd [1999] 2 Lloyd’s Rep 273 at
276–7.
3
UCTA 1977, s 11(5).
4
[2009] EWHC 2500 (Mercantile) at [59].
5
[2011] EWHC 3302 (QB) at [19] and [61]–[66].
6
[2013] EWHC 482 (Comm) at [323]–[339] and [370].
7
[2015] EWHC 1549 (Ch) at [131]–[132].

(ii) Consumers: The Consumer Rights Act 2015

4.16 The Consumer Rights Act 2015 has replaced the Unfair Terms in Con-
sumer Contracts Regulations 19991 as the domestic law implementation of
the EC Directive on unfair terms in consumer contracts2. The Regulations were
first enacted as the Unfair Terms in Consumer Contracts Regulations 19943,
which came into force on 1 July 1995. The 1994 Regulations were revoked and
replaced by the 1999 Regulations, which came into force on 1 October 1999.
The Consumer Rights Act 2015 came into force on 1 October 2015.
1
SI 1999/2083.
2
EC Council Directive 93/13/EEC (OJ 1993, L95, p 29).
3
SI 1994/3159.

4.17 The Consumer Rights Act 2015 applies, with certain exceptions, to unfair
terms in contracts concluded between consumers on the one hand and traders
(such as banks) on the other1. A ‘consumer’ is defined to mean any individual
who is acting for purposes that are wholly or mainly outside that individu-
al’s trade, business, craft or profession2. Accordingly, only human and not
corporate customers can rely on the 2015 Act against banks.
1
CRA 2015, s 61.
2
CRA 2015, s 2(3).

4.18 Whereas the Unfair Contract Terms Act 1977 (which only applies to
business contracts) is mainly concerned with contract terms which exclude or
restrict liability, the 2015 Act can invalidate contract terms of any type which
are deemed ‘unfair’. Where the term in question is declared to be unfair it will
not bind the consumer, but the remainder of the contract continues to bind the
parties if it is capable of continuing in existence without the unfair term1.
According to section 62(4):
‘[a] contractual term shall be regarded as unfair if, contrary to the requirement of
good faith, it causes a significant imbalance in the parties’ rights and obligations
arising under the contract, to the detriment of the consumer.’
There are three elements to this test (a) an absence of good faith; (b) a significant
imbalance in the parties’ rights and obligations under the contract; and (c)
detriment to the consumer2.
In fact, element (c) may not add much to the test, save that it serves to make
clear that the Act is aimed at significant imbalance against the consumer, rather
than the trader3. There is a large area of overlap between the concepts of good
faith and significant imbalance4.

13
4.18 Relationship of Banker and Customer

The other two elements should be approached taking into account the nature of
the subject matter of the contract, and by reference to all the circumstances
existing when the term was agreed and to all the other terms of the contract or
of any other contract on which it is depends5.
1
CRA 2015, s 67.
2
Director General of Fair Trading v First National Bank plc [2001] UKHL 52, [2002] 1 AC 481,
at [36], per Lord Steyn.
3
See fn 2.
4
See fn 2 at [37].
5
CRA 2015, s 62(5).

4.19 The 1994 Regulations identified four matters to be taken into account
when determining whether a term satisfied the requirement of ‘good faith’: the
strength of the bargaining position of the parties, whether the consumer had
any inducement to agree to the term, whether the goods or services were sold or
supplied to the special order of the consumer, and the extent to which the seller
or supplier had dealt fairly and equitably with the consumer1. There was no
similar guidance as to the meaning of ‘good faith’ in the 1999 Regulations, and
the same is true of the 2015 Act, although this does not prevent a court taking
these matters, as well as others, into account. The concept of ‘good faith’ is
based on the notion of objective fair and open dealing2. The House of Lords
indicated that it extended to both procedural and substantive unfairness3.
1
Unfair Terms in Consumer Contracts Regulations 1994, reg 4(2) and Sch 2. These matters were
very similar to the guidelines set out in Sch 2 to the Unfair Contract Terms Act 1977 for
assessing the ‘reasonableness’ of a term.
2
Director General of Fair Trading v First National Bank plc [2001] UKHL 52,[2002] 1 AC 481
at [17] per Lord Bingham, and at [36] per Lord Steyn.
3
See fn 2.

4.20 The unfairness of a contractual term is to be assessed by taking into

account various matters, including the nature of the subject matter of the
contract, the surrounding circumstances at the time the contract was made, and
all the other terms of the contract or of another contract on which it is
dependent1. An appreciation of how the term will affect each party when the
contract is put into effect will also be part of the exercise2.
In Aziz v Caixa d’Estalvis de Catalunya, Tarragona i Manresa, the Euro-
pean Court of Justice focussed the assessment on whether the trader3: ‘dealing
fairly and equitably with the consumer, could reasonably assume that the
consumer would have agreed to such a term in individual contract negotia-
tions.’ This approach was approved by a majority of the Supreme Court in
Cavendish Square Holding BV v Makdessi, though some judges did not find this
element of the test easy to address and disagreed on its application4. This helps
to focus on the question of what inducement the customer had to agree to the
term, and possibly on whether alternative products or providers included
different terms, but may ultimately depend upon what it is reasonable to
suppose about the predictive powers of consumers (as to what they expect to
happen and therefore how significant they expect the clause to be) and therefore
raises more questions than it answers.
1
CRA 2015, s 62(5).
2
Director General of Fair Trading v First National Bank plc [2001] UKHL 52, [2002] 1 AC 481
at [13] per Lord Bingham, and at [45] per Lord Hope.

14
 Banking Contract Express Terms 4.22
3
C-26/13 (2013) at [69].
4
Cavendish Square Holding BV v Makdessi [2015] UKSC 67, [2016] AC 1172 at [104] and
[108]–[109] per Lord Neuberger and Lord Sumption, at [208]–[212] per Lord Mance, at
[308]–[315] per Lord Toulson. The court also considered that unfairness was related to whether
the term proportionately and in a suitable manner achieved a result the party relying on it had
a legitimate interest in achieving.

4.21 Under the 2015 Act, there is no longer any exemption from the test of
fairness by terms which were individually negotiated, as had been the case
under the 1999 Regulations reflecting the Directive. (In other words, the
2015 Act goes beyond the Directive in this respect.)
4.22 However, in so far as the term is transparent and prominent1, the
assessment of fairness of a term does not apply (a) to terms specifying the main
subject matter of the contract; or (b) where the assessment is of the appropri-
ateness of the price payable under the contract by comparison with the goods or
services supplied under it2. The basic justification for this is probably that the
core terms of the bargain (such as the price) are those selected by the consumer,
and so even if not negotiated, are subject to competition. Where competition
fails to ensure fair core terms, it is to competition law that litigants must turn,
not unfair terms legislation.
The similarly (but not identically) worded predecessor provision under the
1999 Regulations was interpreted broadly in Office of Fair Trading v Abbey
National plc3, the bank overdraft charges test case, where it was held that fees
payable in the case of unauthorised overdrafts were part of the composite
remuneration received by the bank in return for the package of services
provided by the bank. Accordingly, the clauses imposing such fees were exempt,
as were all clauses relating to the consideration or defining the services under
the contract, however central or ancillary.
However, since the 2014 and 2015 European Court of Justice decisions in the
consumer credit disputes Kásler4 and Matei5, the broad ‘package’ approach to
what constitutes a forbidden assessment because it is of the appropriateness of
the price in OFT v Abbey National must be doubted. In Kásler a clause deter-
mining that instalments on a Hungarian consumer loan in Swiss Francs was
calculated based on currency conversion at the bank’s selling rate, even though
the outstanding amount was converted at the bank’s buying rate, was found not
to be excluded. In Matei, a clause allowing unilateral variation of the rate of
interest was found not to be excluded, and one permitting the imposition of a
risk charge (which formed a large part of the APR) may not be excluded (it was
a matter for the Romanian court). It was confirmed in Kásler that the core terms
exclusion must be read restrictively and (in relation to the price leg) limited to
excluding assessments that would require determination of what something
should cost, for which no legal scale or criterion exists6. Merely being part of the
composite remuneration or related to it was not enough, as was made clear in
Matei7.
In keeping with this approach, in Director General of Fair Trading v First
National Bank plc8 it was held that a default provision in a loan agreement,
allowing the lender to recover interest at the contractual rate after as well as
before judgment, was susceptible to the test of fairness, although the default

15
4.22 Relationship of Banker and Customer

provision was held not to be unfair.

1
The first element, of transparency, merely means legibility plus the requirement under the
predecessor regulations that the term is ‘in plain intelligible language’: see section 64(3). The
element of ‘prominence’ (which is new to the Consumer Rights Act 2015) means ‘brought to the
consumer’s attention in such a way that an average consumer would be aware of the term’:
section 64(4), and see section 64(5) as to the meaning of average consumer.
2
CRA 2015, s 64.
3
[2009] UKSC 6, [2009] 3 WLR 1215. See further para 8.21 below.
4
C-26/14.
5
C-143/13.
6
Kásler para 55, also Matei paras 55 and 63.
7
Matei para 47–9 and 56.
8
[2001] UKHL 52, [2002] 1 AC 481.

4.23 Schedule 2 of the 2015 Act contains an indicative and non-exhaustive list
of the terms which may be regarded as unfair. Some of the most important of
that list to the banking contract are the following1:
‘(2) inappropriately excluding or limiting the legal rights of the consumer in
relation to the trader or another party in the event of total or partial non-
performance or inadequate performance by the trader of any of the
contractual obligations; . . .
(8) enabling the trader to terminate a contract of indeterminate duration
without reasonable notice except where there are serious grounds for doing
so;
(10) irrevocably binding the consumer to terms with which the consumer had no
real opportunity of becoming acquainted before the conclusion of the
contract;
(20) excluding or hindering the consumer’s right to take legal action or exercise
any other legal remedy, in particular by . . . unduly restricting the
evidence available to the consumer, or imposing on the consumer a burden of
proof which, according to the applicable law, should lie with another party
to the contract.’
Various public bodies have powers under the 2015 Act (section 70 and Schedule
3) to take action in the courts against those employing unfair terms. There is
overlap between the roles of those bodies, but, in general terms, the Competi-
tion and Markets Authority and Financial Conduct Authority address systemic
use of unfair terms, including in the banking or other financial context2.
1
See also CRA 2015, Sch 2, paras 11, 12 at paras 4.9, 4.10 above in relation to unilateral
variation by the bank.
2
For further guidance see the CMA’s ‘Unfair contract terms guidance’ of July 2015.

4.24 In addition, the seller or supplier must ensure that any written term of a
contract which falls within the 2015 Act is expressed in plain, intelligible
language1. If there is any doubt about the meaning of a term, the interpretation
which is most favourable to the consumer prevails2.
1
CRA 2015, s 68.
2
CRA 2015, s 69.

16
 Implied Duties 4.26

4 IMPLIED DUTIES

(a) Implied duties owed by the bank: duties of care

4.25 It is impossible to give an exhaustive list of the duties of care owed by

banker and customer to each other because in any given case the court is
concerned with the particular contract (largely expressed in a bank’s standard
terms) or, in the case of an alleged duty of care in tort, the proximity of the
parties, reasonableness and justice on the particular facts. However, reported
decisions give guidance about situations where a duty of care will or will not be
found to exist.
4.26 The duties of care owed by a bank to its customer include the following
(cross-references are to chapters where the duties are considered more fully):
(1) A bank owes a duty of care in giving information (about a product or
otherwise) to a customer (Chapter 29 or providing a reference to a third
party about a customer (Chapter 3).
(2) A bank owes a duty of care in giving financial and investment advice,
and in explaining the effect of security documents (Chapter 29).
(3) Where providing a service, a bank owes a statutory duty to exercise
reasonable care and skill that is implied by section 13 of the Supply of
Goods and Services Act 1982.
(4) A paying bank owes a duty of care (the ‘Quincecare duty’) to protect the
customer from the fraud of agents such as directors and partners in
issuing cheques and other payment orders (Chapter 23), arising out of
the general duty of care owed when executing the customer’s orders1.
(5) Various statutory protections in favour of the paying and the collecting
bank depend on the absence of negligence or gross negligence. (Chapters
26 and 27).
Cases where a bank has been held not to owe a duty of care to its customer
include:
(1) No duty is generally owed by a bank to its customer to give advice in
relation to a product offered by the bank or the terms of that product
(although if advice is given or things said then they may well give rise to
a duty of care, as set out earlier in this paragraph)2.
(2) No duty is generally owed by a bank to its commercial borrowing
customer to ensure the wisdom of the customer’s project or, if it values
security property, in the obtaining of that valuation3.
(3) In Schioler v National Westminster Bank Ltd4 the defendant bank was
held not to owe a duty of care to advise or warn its customer of the
possible tax repercussions of remitting to England for realisation a
warrant denominated in Malaysian dollars. However, it was held by
the Court of Appeal that the fact the bank accepts a request for advice
would be strong evidence of an assumption of responsibility, although
an antecedent request for advice is not necessary where the advice is
given within the scope of the bank’s business5. Where a bank assumes a
duty to exercise reasonable care in giving advice and complies with that
duty, it does not assume a further continuing obligation to keep the
advice under review and, if necessary, correct it in the light of superven-
ing events6.

17
4.26 Relationship of Banker and Customer

(4) In Redmond v Allied Irish Banks plc7 where the defendant bank was
held not to owe the claimant customer a duty of care to advise or warn
him of the risks of paying in for collection a cheque crossed ‘not
negotiable – account payee only’ in circumstances where he was not the
named payee.
(5) In CGL Group Ltd v RBS plc8 where the defendant bank was held not
to owe the claimant customer a duty of care in the performance of the
interest rate hedging products mis-selling review and redress scheme
being conducted pursuant to the agreement between the bank and its
regulator (the FCA) and pursuant to the underlying regulatory duties
owed by the bank to the regulator and its customers9.
Cases where a bank has been held not to owe a duty of care to a third party
include:
(1) Wells v First National Commercial Bank10, where the Court of Appeal
held that a bank which receives and acknowledges an irrevocable
instruction from its customer to transfer funds owes no tortious duty of
care to the intended beneficiary of the payment and will not be liable to
him should the bank fail to execute the payment instruction.
(2) Yorkshire Bank plc v Lloyds Bank plc11, where a bank which was the
payee of a cheque drawn in payment for shares issued on an IPO was
held not to owe a duty of care to protect the drawee bank from loss
caused by the theft and fraudulent alteration of the cheque.
(3) Customs and Excise Comrs v Barclays Bank plc12, where a bank was
held not to owe a duty to the obtainer of a freezing injunction over the
customer’s accounts not to facilitate dissipation of the customer’s assets
from the account.
1
Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363; Singularis Holdings Ltd v Daiwa
Capital Markets Europe Ltd [2018] EWCA Civ 84.
2
Eg Finch v Lloyds TSB Bank plc [2016] EWHC 1236 (QB) and the cases cited by the Judge at
para 52.
3
Eg Rehman v Santander UK plc [2018] EWHC 748 (QB) and the cases cited by the Judge at
para 23.
4
[1970] 2 QB 719, [1970] 3 All ER 177.
5
Morgan v Lloyds Bank plc [1998] Lloyd’s Rep Bank 73 CA at 80.
6
Fennoscandia Ltd v Clarke [1999] 1 All ER (Comm) 365, CA.
7
[1987] 2 FTLR 264. See also Rix J in Honourable Society of the Middle Temple v Lloyds
Bank plc [1999] 1 All ER (Comm) 193.
8
[2017] EWCA Civ 1073. And cf Day v Barclays Bank plc [2018] EWHC 394 (QB), and also
Elite Property Holdings Ltd v Barclays Bank plc [2018] EWCA Civ 1688 (as to the lack of a
contract with the customer requiring the bank to conduct the review carefully).
9
And similarly a duty of care does not arise to give common law echo to FSMA 2000 duties owed
by a bank: Green & Rowley v RBS plc [2013] EWCA Civ 1197.
10
[1998] PNLR 552, CA.
11
[1999] 2 All ER (Comm) 153.
12
[2006] 3 WLR 1 (HL), below at para 32.27.

(b) Duty owed by paying bank to beneficiaries of a trust?

4.27 This issue of whether a bank which makes payment on a custom-
er’s behalf can owe a duty of care to beneficiaries under a trust was addressed,
obiter, in Royal Brunei Airlines v Tan1. First, taking the more usual case where
the trustee has not been dishonest, his or her rights against a negligent agent

18
 Implied Duties 4.30

such as a paying bank form part of the trust property and as such they can be
enforced by the beneficiaries if the trustee is unable or unwilling to do so. That
being so, there is no compelling reason why the agent should owe a duty of care
directly to the beneficiaries2. Second, where the trustee has acted dishonestly, he
has no claim against a negligent agent because the trust suffers no loss by reason
of the agent’s failure to discover what was going on. Notwithstanding the
trustee’s inability to bring a claim based on the duty owed to him, as a general
proposition the agent owes no duty of care directly to the beneficiaries. They
cannot reasonably expect that all the world dealing with their trustee should
owe them a duty to take care lest the trustee is behaving dishonestly. However,
there may be cases where in the light of the particular facts a duty of care will be
owed3.
1
[1995] 2 AC 378, [1995] 3 All ER 97, PC.
2
[1995] 2 AC 378 at 391G, 108c.
3
[1995] 2 AC 378 at 392C, 108g.

(c) Other implied duties owed by the bank

4.28 It is not uncommon for a customer to assert that the contract with his or
her bank contains an implied term other than a duty of care.
A term will not be implied into a contract unless it is so obvious it goes without
saying and/or is necessary to give business efficacy to the contract, is capable of
clear expression, and does not contradict and is consistent with the express
terms1.
1
Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72,
[2016] AC 742.

(i) The bank’s decision to demand repayment or not extend finance

4.29 In Socomex Ltd v Banque Bruxelles Lambert SA1 it was held that there
was no implied term that the bank would give reasonable notice before
withholding further margin finance in respect of futures contracts entered into
by the claimant to hedge its open positions. Similarly, in Barclays Bank plc v
Green2 it was held that there was no implied term obliging the bank to continue
to advance funds up to a reasonable limit having regard to commitments
entered into by the defendants with the bank manager’s knowledge. And in Hall
v Royal Bank of Scotland plc3 it was held that there was no implied duty to act
fairly and reasonably when deciding whether to continue or extend an on-
demand agricultural loan facility.
1
[1996] 1 Lloyd’s Rep 156 (Mance J).
2
(13 November 1995, unreported) (New Law Fax, Commercial Communication 183).
3
[2009] EWHC 3163 (QB). See also Chapman v Barclays Bank plc (26 March 1997, unreported)
(CA).

(ii) The bank’s duty to give information

4.30 In Cunnington v Barclays Bank plc1 it was held that the bank owed an
implied contractual duty to forward information to its customer where it knew

19
4.30 Relationship of Banker and Customer

that the customer was relying on it to do so in connection with a proposed

transaction of which the bank was aware. However, in Suriya & Douglas v
Midland Bank2, the Court of Appeal rejected the argument of the claimant firm
of solicitors that there should be implied into the contract between banker and
customer a term requiring the bank to inform its customers of the introduction
by the bank of new and more advantageous forms of account.
1
(3 April 1996, unreported).
2
[1999] 1 All ER 612, CA.

(iii) When is the bank required to exercise a discretion in good faith and
rationally?
4.31 A body of law establishes that in many cases where a contract reserves to
a bank a discretion in relation to a matter that impacts upon the customer, it will
be implied that the discretion will be exercised rationally, not capriciously and
in good faith. This is not a duty of care (and any requirement of ‘reasonableness’
is of having a rational reason, not having taken reasonable care), but more akin
to an administrative law fetter on public decision-making. However, it bears
repeating that this arises not through any principle of legal policy but as an
implied term, on the basis that unless they said otherwise the parties must have
intended that any such discretion would be so limited. Key examples of rights
subjected in the case law to such a fetter include:
(1) The right to determine how much margin a bank requires1.
(2) The right to vary interest rates2.
(3) The right to close out a portfolio (as regards the manner of closing out)3.
(4) The right to require a valuation of a counterparty’s security4.
(5) There is no such fetter on the option to extend an interest rate collar5.
(6) There is no such fetter on the right to terminate an ISDA swap for a
specified event of default6, or, probably, on the right to terminate a
contract or call in a loan for default more generally7.
Similarly (although not with the same origin), there is a well-established
equitable duty requiring a mortgagee to exercise its powers (including power of
sale) in good faith and for proper purposes8, which may also apply to the
appointment of a receiver, and that when the decision to sell has been taken
there is a duty of reasonable care owed to the mortgagor and those interested in
the equity of redemption to obtain a proper price9.
1
Ludgate Insurance Co Ltd v Citibank NA [1998] Lloyd’s Rep IR 221.
2
Paragon Finance v Staunton [2002] 1 WLR 685, CA, and see para 4.9.
3
Euroption Strategic Fund Ltd v Skandinaviska Enskilda Banken AB [2012] EHHC 584
(Comm) 22 (Gloster J); Marex Financial Ltd v Creative Finance Ltd [2013] EWHC 2155
(Comm) (Field J).
4
Property Alliance Group Ltd v RBS plc [2018] EWCA Civ 355, CA; Socimer International
Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116, CA.
5
Greenclose Ltd v National Westminster Bank plc [2014] EWHC 1156 (Ch).
6
Lomas v JFB Firth Rixson Inc [2012] EWCA Civ 419, CA.
7
Eg Monde Petroleum SA v WesternZagros Ltd [2016] EWHC 1472 (Comm) (affirmed [2018]
EWCA Civ 25, CA).
8
See para 17.72 et seq below.
9
See above at para 4.29 and below at para 17.74. And as to the appointment of a receiver, see
para 14.25 and Shamji v Johnson Matthew Bankers Ltd [1986] BCLC 278 (Hoffman J).

20
 Implied Duties 4.33

(iv) A general duty of good faith?

4.32 The (non-banking) decision of Yam Seng Pte Ltd v International

Trade Corporation Ltd has given oxygen to the idea that there may be a general
duty of good faith, or generalised principle of good faith from which many
specific duties can be derived, in a banking contract1. This gains some support
from the characteristics of the banking contract—often long-term, broadly
cooperative—which might be said to fit the description of ‘relational contract’
identified by Leggatt J in Yam Seng from the academic literature as to the
contracts where it is most reasonable to think that the parties implicitly agreed
to act in good faith. The central case of the relational contract is one with a
shared goal for mutual benefit and cooperative obligations to achieve it, such as
the joint venture or franchise, which are very different to the typical banker-
customer contract for the supply of services, although Yam Seng itself con-
cerned a long-term distributorship agreement which sits somewhere in between
a contract for supply and a joint venture as regards these characteristics2. Cold
water has rightly been poured on the idea that a general duty of good faith is
likely to apply to commercial banking contracts3.
This area is likely to see some development but, for example, it was agreed
between the parties in Property Alliance Group Ltd v RBS plc4 that various
swap contracts would include an (unpleaded in that case) implied term that the
bank would not dishonestly manipulate the LIBOR interest rate that was being
hedged in those contracts5.
1
[2013] EWHC 111, and see below para 11.29.
2
At [143]–[144].
3
Greenclose Ltd v National Westminster Bank plc [2014] EWHC 1156 (Ch) at [150].
4
[2018] EWCA Civ 355, CA.
5
[2018] EWCA Civ 355, CA, para 141.

(d) Implied duties owed by the customer

4.33 The main and perhaps only implied duties of care owed by the customer
to his bank are those laid down in Macmillan’s case and in Greenwood’s case,
which are considered more fully in Chapter 23 below. The orthodox view of
these duties is that they do not take effect as duties of care enforceable by the
bank at all, but only as duties the breach of which estops the customer from
claiming against the bank.
Any wider duty of care on the part of the customer will not be recognised unless
the term contended for satisfies the strict requirements for the implication of a
contractual term. This appears from Tai Hing Cotton Mill Ltd v Liu Chong
Hing Bank Ltd1, where the Privy Council rejected a submission that a wider
duty than that upheld in Macmillan is to be implied as a necessary incident of
the legal relationship between banker and customer2.
1
[1986] AC 80, [1985] 2 All ER 947, PC; considered in Patel v Standard Chartered Bank
[2001] All ER (D) 66 (Apr), QBD.
2
[1986] AC 80 at 105H and [1985] 2 All ER 947 at 956e per Lord Scarman. As to the rejection
of the specific argument that the customer owes a duty carefully to check his bank statements,
see para 5.6 below.

21
4.34 Relationship of Banker and Customer

(e) Statutory duties

4.34 The statutory duties owed by a bank are now legion and the reader is
referred to specific sections of this work, in particular Chapter 3 in relation to
data protection and the Data Protection Act 1998; Chapter 9 in relation to
consumer credit legislation; Chapter 24 in relation to payments and the
Payment Services Regulations 2017; Chapters 29 and 30 in relation to financial,
insurance and mortgage advice and mis-selling and the FCA Rules applicable to
it.

5 MISSTATEMENTS AND COLLATERAL CONTRACTS

(a) The general principles of pre-contractual misstatements and misadvice

4.35 It is common for discussions between customers and banks to lead to

allegations of actionable misstatements by the bank (proof of which requires a
tortious assumption of responsibility and negligent breach), or collateral oral
contracts.
At the time of sale of a new banking product, an assumption of responsibility is
not uncommonly found, the bank being liable in tort if the statements are
carelessly untrue (as well as often liable under the bank’s obligations imposed
by the Financial Services and Markets Act 2000). These allegations may sit on
a scale that ranges from positive misstatements to the giving of negligent advice
or failure to give a fair presentation. There is extensive case law from recent
years in these ‘mis-selling’ areas on the sale of financial products that is
discussed further in Chapters 29 and 30. The points made there as to the law of
actionable misstatements and collateral contracts applies equally to the pre-
contractual interactions before any financial transaction.

(b) Implied pre-contractual statements

4.36 Just as there has been an increasing focus on implied good faith standards
and duties within the banking contract, so there has been increasing focus on
implied representations said to have been made by the bank prior to the entry of
a banking contract.
The general test of implying statements in the banking context was reviewed by
the Court of Appeal in Property Alliance Group Ltd v RBS plc and two versions
of it were cited with approval: (i) that the reasonable person would understand
the other party to have impliedly represented a statement of facts was/was not
the case, and (ii) that the reasonable person would understand that a true state
of facts did not exist and that if it did he would necessarily have been informed
of it1. Both are problematic. Generally there is no duty of disclosure and no
prohibition on keeping secrets, providing that one does not actively mislead by
what is said. Yet the two formulations both assume that sometimes, contrary to
this usual position, a person can be expected (‘necessarily’) to reveal something,
without explaining the circumstances in which this is the case.
In Property Alliance Group Ltd v RBS plc itself it was found (obiter, because the
statements were found not to be false) that prior to the entry of swap contracts

22
 The Standards of Lending Practice 4.38

hedging LIBOR interest rate movements, RBS impliedly represented that it was
not manipulating and did not intend to manipulate sterling LIBOR2. In that case
the Court relied upon lengthy discussions in which the bank proffered the
swaps as options for the customers to consider to fulfil their obligations under
the loan contracts to take out LIBOR hedges, although also indicating that the
representation could probably be implied simply from the proposal of the swap
transaction, without more3.
1
[2018] EWCA Civ 355, CA, paras 129–132. Note that the fact that something is impliedly
promised in the contract is no bar to a finding that it was also impliedly represented
pre-contractually: see paras 124–5.
2
[2018] EWCA Civ 355, CA, paras 133 and 141. See also Graiseley Properties Ltd v Barclays
Bank plc [2013] EWCA Civ 1372, CA paras 27–8.
3
Para 133.

(c) Actionable misstatements during the life of the contract

4.37 It is much rarer for the customer to succeed when alleging such actionable
misstatements and collateral contracts during the life of the account or other
product, although as a matter of law there is no reason why in the appropriate
case an actionable misstatement or collateral contract may not arise. However,
in particular, where a customer contends that the bank has assured him or her
that a particular overdraft or loan would not be called on until a certain time or
unless certain unwritten conditions had been satisfied, courts are typically
sceptical as to there being sufficiently firm commitments in such cases1.
1
Carey Group plc v AIB Group (UK) plc [2011] EWHC 514 (Ch) (Briggs J); Paragon
Mortgages Ltd v McEwan-Peters [2011] EWHC 2491 (Comm) (Steel J); Rahman v HSBC
[2012] EWHC 11 (Ch) (Behrens J).

6 THE STANDARDS OF LENDING PRACTICE

4.38 In a constructive response to pressure for greater consumer protection,
the British Bankers’ Association, The Building Society’s Association and the
Association for Payment Clearing Services drew up and published in 1992 the
Good Banking Code of Practice. This voluntary code of good banking practice
for dealing with personal customers was revised from time to time, and a
Business Banking Code was added. The last versions were issued in 2008, and
the body that was responsible for them (the Banking Code Standards Board)
closed in 2009.
The successor to these Codes and this body is the Standards of Lending Practice
(formerly the Lending Code) maintained by the Lending Standards Board. The
latest amendments date to July 2016. The Standards of Lending Practice apply
to unsecured lending only, when made to micro-enterprises (a defined term for
small businesses) and smaller charities.
The Standards of Lending Practice are voluntary codes which set minimum
standards of good lending practice for financial institutions to follow (see its
para 1). The Lending Standards Board monitors serious breaches of the Code,
but the main avenue for complaints including of breaches of the Code remains
the Financial Ombudsman Service.

23
4.38 Relationship of Banker and Customer

The Standards of Lending Practice is not part of the contract between the bank
and customer, and does not give rise to direct obligations by the bank to the
customer. In the modern era of increasing regulation by the FCA under BCOBS
sourcebook (see paragraph 1.29 above), the Standards have diminishing impor-
tance, although there may be at least some evidence of what constitutes
reasonable standards of commercial conduct (for example, when considering
allegations of an unfair relationship)1.
1
Compare Plevin v Paragon Personal Finance Ltd [2014] UKSC 61 at para 39 in relation to the
Finance & Leasing Association Lending Code and the FISA Codes and Disciplinary Procedures.

7 BUSINESS DAYS AND HOURS

4.39 An element in the relationship of banker and customer consists of their
respective rights and obligations in regard to the days and hours during which
business is transacted. A customer is entitled to know when he may expect his
or her business to be dealt with. Atkin LJ’s formulation in Joachimson includes
the banker’s promise to repay at the branch of the bank where the account is
kept during banking hours, and, a fortiori, on days on which the bank is open
for business.

(a) Days of business

4.40 It is probably an implied term of the contract that the banker will be open
for business from Monday to Friday inclusive subject to:
(i) statutory bank holidays;
(ii) variation of the contract by agreement; or
(iii) reasonable notice of closing to the customer.
Certain banks do now open specified branches on Saturday mornings, and this
may create a contractual duty to transact business on Saturdays at branches
which have announced Saturday opening, but not at other branches.

(b) Hours of business

4.41 Hours of business are no longer published on behalf of the clearing banks
as a whole. Each bank sets its own hours of opening. A bank is probably entitled
to depart from its published hours upon reasonable notice to its customers.
The significance of hours of business lies in the right of customers in relation to
cheques they have issued – the right to compliance with their mandate and the
right to countermand it. The peculiar nature of banking places the banker as
mandatory under risk of failing to comply with the mandate by paying someone
other than the intended payee. Against this risk he or she is protected by the Bills
of Exchange Act 1882 and the Cheques Act 1957, but the right to protection
depends on his or her paying in the ordinary course of business or without
negligence, into both of which conditions enters the question of hours of
business. Payment out of business hours is not in the ordinary course of
business. In Baines v National Provincial Bank Ltd1, Lord Hewart LCJ found in
favour of a bank which had paid a cheque five minutes after the advertised
closing time. He said:

24
 Termination of the Relationship 4.42

‘The general question of the limits of time within which a bank may conduct business
having prescribed, largely for its own convenience, a particular time at which the
doors of the building will be closed, is a large question, not raised here.’
It remains for the duties of the bank to be tested in the context of payment
systems or other computerised services interrupted by unplanned crashes or
hacking attacks.
Bank business hours were considered in Lehman Brothers International
(Europe) v Exxonmobil Financial Services2, where the standard Global Master
Repurchase Agreement (governing repo transactions) provides that notices
received after close of business for commercial banks in the place of receipt take
effect on the next day. In London, close of business for commercial banks was
found to be 7pm.
1
(1927) 96 LJKB 801.
2
[2016] EWHC 2699.

8 TERMINATION OF THE RELATIONSHIP

4.42 The relationship may terminate:
(i) by agreement between the parties;
(ii) by unilateral act, as where the customer or the banker gives notice to
terminate; or
(iii) by death of the customer.
Termination by agreement does not require comment. As to termination by
notice, where it is the banker who gives notice to terminate an account in credit,
such notice must be reasonable, ie adequate to enable the customer to make
other banking arrangements, save where the agreement provides other-
wise1. Conversely, save if the contract says otherwise, the bank need not have or
give a good reason to terminate2.
However, where a banker closes an account without giving reasonable notice,
an application by the customer for an injunction restraining closure pending the
period of reasonable notice is unlikely to succeed. A customer’s application for
such an injunction failed in Prosperity Ltd v Lloyds Bank Ltd3 on the grounds,
inter alia, that (a) an order would have amounted to specific performance of a
contract to provide personal services of a most confidential character, and
would have been a direction to the bank to constitute itself a borrower of the
customer’s money as and when paid in; and (b) damages were an adequate
remedy. In modern banking, personal services have been so far superseded by
computerisation that the first ground above may no longer carry weight. But
damages remain as adequate a remedy as they ever were, and this ground of the
decision represents a substantial hurdle to a successful application for an
injunction.
1
Prosperity Ltd v Lloyds Bank Ltd (1923) 39 TLR 372; and see Cumming v Shand(1860) 5 H
& N 95; Buckingham & Co v London and Midland Bank (1895) 12 TLR 70; Joachimson v
Swiss Bank Corpn [1921] 3 KB 110 per Warrington LJ at 125, and per Atkin LJ at 127;
National Commercial Bank of Jamaica v Olint Corp Ltd [2009] 1 WLR 1405 (PC) at [1].
2
National Commercial Bank of Jamaica v Olint Corp Ltd [2009] 1 WLR 1405 (PC) at [1].
3
As above.

25
4.43 Relationship of Banker and Customer

9 LIMITATION OF ACTIONS

(a) Credit balances in favour of customer

4.43 Atkin LJ pointed out in Joachimson v Swiss Bank Corpn1 that:
‘The practical bearing of this decision [as to the necessity for a demand] is on the
question of the Statute of Limitations . . . The result of this decision will be that
for the future bankers may have to face legal claims for balances on accounts that
have remained dormant for more than six years.’
By s 5 of the Limitation Act 1980, an action founded on simple contract may
not be brought after the expiration of six years from the date on which the cause
of action accrued. In an action for the recovery of a debt, time does not begin to
run until there is a debt presently due and payable. It follows from Joachimson
v Swiss Bank Corpn that in the case of a credit balance on current account, time
does not begin to run against the customer until demand for payment has been
made. Accordingly, as Atkin LJ pointed out in that case, a claimant may be able
to claim after an account has been inactive for many years2.
As an unauthorised debit by the bank is simply a nullity and of no effect on the
balance owing by the bank to the customer, it may follow that the customer can
challenge such a debit more than six years after it is made, since the customer is
at that time entitled to demand the repayment of the true balance owing3.
1
[1921] 3 KB 110 at 130 and 131.
2
At 130-1.
3
See National Bank of Commerce v National Westminster Bank plc [1990] 2 Lloyd’s Rep 514
and the discussion below at para 22.79.

(b) Contracts of loan

4.44 Section 6 of the Limitation Act 1980 introduced a provision applicable to
any contract of loan (‘a qualifying loan’) which (1) does not provide for
repayment of the debt on or before a fixed or determinable date; and (2) does
not effectively (whether or not it purports to do so) make the obligation to repay
the debt conditional on a demand for repayment made by or on behalf of the
creditor or on any other matter. Where a demand in writing for repayment of
the debt due under any such contract of loan is made by or on behalf of the
creditor (or, where there are joint creditors, by or on behalf of any one of them)
s 5 of the Act applies as if the cause of action to recover the debt had accrued on
the date on which the demand was made1. This reverses the position at common
law2.
A loan is not a qualifying loan where, in connection with taking the loan, the
debtor enters into any collateral obligation to pay the amount of the debt or any
part of it (as, for example, by delivering a promissory note as security for the
debt) on terms which would exclude the application of s 6 to the contract of
loan if those terms applied directly to repayment of the debt3.
In Boot v Boot4 the plaintiff had sold a property to his son and daughter-in-law
and at completion had agreed to accept a down payment of £25,000, leaving a
balance of £8,000 outstanding by way of a loan which was clearly a qualifying
loan. The loan was secured by a promissory note under which the makers
promised to pay to the claimant or to his order on demand the sum of £8,000.

26
 Proper Law and Bank Accounts 4.46

It was held that the terms of the promissory note would not, if applied directly
to the repayment of the debt, exclude the application of s 6. Accordingly, the
loan retained its status as a qualifying loan.
1
Limitation Act 1980, s 6(3).
2
See, eg Re Brown’s Estate [1893] 2 Ch 300; Reeves v Butcher [1891] 2 QB 509.
3
Limitation Act 1980, s 6(2). ‘Promissory note’ has the same meaning as in the Bills of Exchange
Act 1882: Limitation Act 1980, s 6(4).
4
[1996] 2 FCR 713, CA. See also Von Goetz v Rogers [1998] EWCA Civ 1328 (29 July 1998),
CA.

(c) Overdrafts
4.45 The limitation period in respect of a claim for repayment of an overdraft
appears to commence from the date on which demand for repayment is made
and not from the date on which the overdraft was granted. The contrary view
was taken by the Court of Appeal in Parr’s Banking Co Ltd v Yates1, where a
claim against a guarantor was held to be time-barred in respect of advances
made more than six years before the issue of the writ. However, in modern
banking practice, overdrafts are treated as repayable on demand, and it is
thought that Parr’s case does not represent the law today. In any event an
unsecured overdraft which creates a debt the repayment of which is not
conditional on demand appears to fall within s 6 of the Limitation Act 1980,
and the cause of action would accrue on the date on which written demand was
made2.
1
[1898] 2 QB 460, CA.
2
For examples of the application of this section see Boot v Boot and Von Goetz v Rogers at para
4.44.

10 PROPER LAW AND BANK ACCOUNTS

4.46 The bank’s promise to repay is to repay at the branch where the account
is kept. Accordingly, in the absence of an express choice of law, the proper law
of the contract between the bank and its customer is generally the law of the
branch where the account is kept. This is the test at both common law and
under art 4(1) of the Rome Convention, which became part of English law
when the Contracts (Applicable Law) Act 1990 came into effect on 1 April
1991, and which apply a ‘closest connection’ test, and also, for accounts opened
after 17 December 2009, the Rome I Regulation, which provides more detail as
to how to identify the relevant law but broadly reaches the same result in bank
account cases1.
Where a customer maintains only one account with a bank, the court is likely to
require solid grounds for displacing the law of that place as the proper law.
Where a customer maintains two or more accounts with branches of a bank in
different jurisdictions, the position is more complex. This problem arose in
Libyan Arab Foreign Bank v Bankers Trust Co2, where two banks in a
correspondent relationship set up a managed account arrangement comprising
(1) a call account in London for investment of liquid funds, and (2) a demand
(current) account in New York for daily dollar-clearing activity. It was submit-
ted by the customer that there existed:

27
4.46 Relationship of Banker and Customer

(a) two separate contracts, of which one related to the London account and
was governed by English law; or
(b) one contract, governed in its entirety by English law; or
(c) one contract governed by two proper laws, namely English law and the
law of New York.
It was submitted by the bank that there was one contract only, governed by New
York law. It was accepted by the bank that it is possible, although unusual, for
a contract to have a split proper law. The notion of two separate contracts was
rejected by Staughton J as superficial and unattractive. He held instead that
there was one contract, governed in part by the law of England and in part by
the law of New York3. In so holding, he expressly rejected a submission that
difficulty and uncertainty would arise if different parts of the same contract
were governed by different laws. The decision is consistent with the provision in
art 4(1) of the Rome Convention that a severable part of a contract which has
a closer connection with another country may by way of exception be governed
by the law of that other country4, although the Rome I Regulation does not have
any similar provision expressly contemplating severance in this way and it is
more likely that the main branch would determine the applicable law.
In Shamil Bank of Bahrain v Beximco Pharmaceuticals Ltd5, financing agree-
ments contained a choice of law clause stipulating that ‘Subject to the principles
of the Glorious Sharia’a, this Agreement shall be governed by and construed in
accordance with the laws of England’. It was common ground that there could
not be two governing laws in respect of the same agreements. Although it is
possible to incorporate into a contract governed by English law identified
specific provisions of a foreign law or international code, the Court of Appeal
held that the general reference to principles of Sharia afforded no reference to,
or identification of, those aspects of Sharia law which were intended to be
incorporated into the contract, let alone the terms in which they were framed.
Accordingly the agreements were to be construed by reference to English law
alone.
1
Article 19 provides that the test is as to the place of central administration but where the
contract is concluded or operated through a branch, the law of the place of the branch is the
applicable law. Consumer bank accounts will be governed by the special rules of art 6, which
will probably have the same result in most cases, as that article selects the place of residence of
the customer but only if the bank directs its services to that place.
2
[1989] QB 728, [1989] 3 All ER 252. See also X AG v A Bank [1983] 2 All ER 464, [1983] 2
Lloyd’s Rep 535.
3
[1989] QB 728 at 748C, 268b. Cf Libyan Arab Foreign Bank v Manufacturers Hanover
Trust Co [1988] 2 Lloyd’s Rep 494, (No 2) [1989] 1 Lloyd’s Rep 608.
4
See Sierra Leone Telecommunications Co Ltd v Barclays Bank plc [1998] 2 All ER 821.
5
[2004] EWCA Civ 19, [2004] 2 All ER (Comm) 312, [2004] 4 All ER 1072.

28
Chapter 5

TYPES OF ACCOUNT

1 INTRODUCTION 5.1
2 CURRENT ACCOUNTS 5.2
(a) Passing of title to monies paid into a current account 5.3
(b) Relation of debtor and creditor under a current account 5.4
(c) Need for demand by the current account customer 5.5
(d) Periodic bank statements for a current account 5.6
(e) Credits to a current account made in error 5.11
(f) Assignment of a current account credit balance 5.12
(g) Overdrafts on current accounts 5.14
3 DEPOSIT ACCOUNTS 5.15
4 JOINT ACCOUNTS
(a) Privity of contract between bank and each joint account holder 5.16
(b) Nature of the bank’s obligation in relation to joint accounts 5.17
(c) The principle of survivorship and joint accounts 5.21
(d) Borrowing on joint accounts 5.22
5 DORMANT ACCOUNTS 5.23

1 INTRODUCTION TO TYPES OF ACCOUNT

5.1 Banks today offer a wide variety of accounts. They are mainly current or
deposit accounts.
Bank accounts can be held jointly by more than one account holder, and the
special features of such an arrangement are considered later in this chapter.
Trust accounts are considered in Chapter 6.

2 CURRENT ACCOUNTS
5.2 The current account, despite the many mutual duties engrafted on the
relation of banker and customer since 1848, the date of Foley v Hill1, is still the
basic and predominant element in dealings between the parties. The essence of
the current account is that it provides a running bank account, usually with the
opportunity for an overdraft (enabling it to operate both in credit or as a flexible
loan facility in debit), with a variety of methods for deposit into and payment
out of the account (such as electronic payment, cash machine withdrawal, and
by cheque). Current accounts are primarily designed for easy and frequent
access to funds, rather than the earning of credit interest. (In contrast, the
earning of credit interest, along with security, is the main purpose of a deposit
account, which will often have restrictions on the means, notice period and
frequency of permitted withdrawals.)2
1
(1848) 2 HL Cas 28.
2
A useful and detailed description of the nature and facilities of a current account was provided
by Andrew Smith J in the first instance decision of the bank charges test case, OFT v Abbey
National plc and others [2008] EWHC 875 (Comm) at [42]–[50].

1
5.3 Types of Account

(a) Passing of title to monies paid into a current account

5.3 The current account may be either a credit account or an overdrawn
account. A credit account is made up of monies paid in by the customer, the
proceeds of instruments collected for him or her, and interest and dividends paid
direct to the banker and from various other sources, less any monies properly
paid out. Monies from different sources, once they have found their way into
the current account, are treated as one entire debt1.
Property in money generally passes with possession2. When monies are paid
into an account at a branch they are reckoned as belonging to the bank and, if
paid in cash, title does not pass from the customer paying them in to the bank
until they are received on the bank side of the counter and accepted by the
cashier or teller who gives a receipt for them. So long as the monies are on the
customer’s side of the counter, the property does not pass and the bank is not in
any way responsible for them3. Similarly once money is paid over the counter to
the presenter of a cheque, for instance, the money ceases to be the property of
the bank and becomes that of the presenter.
1
Except, for instance, where the customer’s monies are mixed with trust monies; see Re
Hallett’s Estate, Knatchbull v Hallett (1880) 13 Ch D 696.
2
Sinclair v Brougham [1914] AC 398 at 418.
3
Balmoral Supermarket Ltd v Bank of New Zealand [1974] 2 Lloyd’s Rep 164.

(b) Relation of debtor and creditor under a current account

5.4 It was settled in Foley v Hill1 that the purely debtor and creditor relation-
ship excludes any element or suggestion of trusteeship on the part of or
fiduciary relation with the banker with regard to a current account. The implied
agreement between banker and customer as stated by Atkin LJ in Joachimson’s
case is that all money coming to the banker’s hands for the credit of a current
account is to be taken as lent to the banker2. In Hirschhorn v Evans (Barclays
Bank Ltd garnishees)3 Mackinnon LJ said that there is never any question of
property in the credit balance of a bank account; that the relation between the
parties is simply that of debtor and creditor. Thus, as summarised by Staughton
J in Libyan Arab Foreign Bank v Bankers Trust Co4:
‘It is elementary, or hornbook law to use an American expression, that the customer
does not own any money in a bank. He has a personal and not a real right. Students
are taught at an early stage of their studies in the law that it is incorrect to speak of
“all my money in the bank”.’
Save where the bank has accepted the money as trustee under Quistclose trust5,
the bank is free to use the money as its own, like any other borrower; the
customer has parted with all control over it, like any other lender, retaining only
his right to repayment. And as a consequence the bank is not as a general
rule concerned to inquire into the sources whence his customer derived the
money, or to pay heed to the claims of third parties seeking to reach it in his
hands as being by right theirs6. However, this general proposition is subject to
important qualifications arising out of a bank’s potential liability:
(i) as a person who knows or suspects of money laundering (see Chapter 2);
and

2
 Current Accounts 5.5

(ii) as constructive trustee (see Chapter 28).

1
(1848) 2 HL Cas 28. See also Joachimson v Swiss Bank Corpn [1921] 3 KB 110 at 127, quoted
above at para 4.8.
2
This of course only applies where the account is in credit. A payment into an account in
overdraft is (up to the amount of that overdraft) a repayment of the bank’s loan to the customer,
not a loan by the customer to the bank.
3
[1938] 2 KB 801 at 815, [1938] 3 All ER 491 at 498, and see per Devlin J in Baker v Barclays
Bank Ltd [1955] 1 WLR 822 at 831–832.
4
[1989] QB 728, 748, [1989] 3 All ER 252.
5
See Chapter 15.
6
Cf Bodenham v Hoskins (1852) 21 LJ Ch 864; Thomson v Clydesdale Bank Ltd [1893] AC
282, HL on the first point; Calland v Loyd (1840) 6 M & W 26; Gray v Johnston (1868) LR 3
HL 1, on the second; and see also John Shaw (Rayners Lane) Ltd v Lloyds Bank Ltd
(1944) 5 LDAB 396, and Banque Commerciale Arabe SA v République Algérienne Démocra-
tique et Populaire [1974] 2 BGE 200.

(c) Need for demand by the current account customer

5.5 It was held in Joachimson v Swiss Bank Corpn that the banker is not liable
to repay the customer until demand is made. Until then, there is no presently
due debt owed by the banker to his customer. The ground of implication is not
stated, but it is apparent from the judgment that the term was regarded as
necessary to give the contract business efficacy and/or so obvious it goes
without saying1. If the doctrine of an immediately recoverable right were
accepted, consequences would follow which the parties cannot reasonably
intend and which would render banking a non-business proposition. One
consequence would be to entitle the banker to tender the amount of a credit
balance to the customer at any moment, and at any place, and then dishonour
outstanding cheques to the detriment of the customer, a position inconsistent
with the customer’s established right not to have his account summarily closed.
The earlier cases which suggested that demand was not necessary2 were
explained in Joachimson on the ground that the point was not directly in issue
or necessarily involved in their decisions.
It was further stated in Joachimson that in most cases where the question will in
practice arise, the issue of a writ by the customer is a sufficient demand without
any previous request for payment3.
1
See, in particular, [1921] 3 KB 110 at 121 per Bankes LJ (‘It seems to me impossible to imagine
the relation between banker and customer, as it exists today, without the stipulation that, if the
customer seeks to withdraw his loan, he must make application to the banker for it’); and at
130, per Atkin LJ (‘A decision to the contrary would subvert banking practice’). See also Libyan
Arab Foreign Bank v Bankers Trust Co [1989] QB 728 (Staughton J) at 749.
2
The earlier cases include Foley v Hill(1848) 2 HL Cas 28; Pott v Clegg (1847) 16 M & W 321;
Schroeder v Central Bank of London Ltd (1876) 34 LT 735; Re Tidd, Tidd v Overell [1893] 3
Ch 154; Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833, especially per Scrutton LJ at 848.
It was, however, well established that a debt could be stipulated to be not payable except on
demand – see Walton v Mascall(1844) 13 M & W 452 at 455.
3
[1921] 3 KB 110 at 115 per Bankes LJ.

3
5.6 Types of Account

(d) Periodic bank statements for a current account

(i) No implied duty to check periodic bank statements

5.6 The bank will usually send periodic bank statements giving details of the
state of the current account in the light of the transactions since the last
statement. The bank’s obligations in this regard will often be set down in the
express terms and conditions of the account.
The relationship of banker and customer does not give rise either in contract (by
way of an implied term) or in tort to a duty owed by the customer to the bank
to check his monthly (or other periodic) bank statements so as to be able to
notify the bank of any items which were not, or may not have been, authorised
by him. It was so held by the Privy Council in Tai Hing Cotton Mill Ltd v Liu
Chong Hing Bank Ltd1.
The importance of this ruling is readily appreciated from the facts of Tai Hing
itself2. The claimant company maintained with each of the three defendant
banks a current account. The banks honoured by payment on presentation
some 300 cheques totalling approximately HK $5.5m which on their face
appeared to have been drawn by the company and to bear the signature of Mr
Chen, the company’s managing director, who was one of the authorised
signatories to its cheques. The banks in each instance debited the com-
pany’s current account with the amount of the cheque. The cheques, however,
were not the company’s cheques, because on each of them the signature of Mr
Chen had been forged by an accounts clerk. Upon discovery of the fraud, the
company brought proceedings for a declaration that the banks were not entitled
to debit its accounts with the amounts of the forged cheques. On appeal there
was no challenge to the finding of the trial judge that, if there existed a duty to
check bank statements, the company was in breach of that obligation3.
The Privy Council held against the banks on the alleged duty to check bank
statements, so that there was no liability of the customer available for set-off
against the liability of the banks. It was further held that, as the company was
not in breach of any duty owed to the banks, it was not possible to establish an
estoppel from the company’s mere silence and failure to act4. The reasoning by
which an estoppel was rejected is clearly of general application.
It would be open to a bank to set down in its terms and conditions an express
obligation to check bank statements, which would, subject to challenge as an
unfair term, disapply Tai Hing in a particular case, as discussed in the next
section.
1
[1986] AC 80, [1985] 2 All ER 947, PC. The numerous authorities (both English and foreign)
for and against this proposition of law can be found in the report of counsels’ submissions in Tai
Hing [1986] AC 80 at 86–96. In Canadian Pacific Hotels Ltd v Bank of Montreal (1987) 40
DLR (4th) 385, the Supreme Court of Canada, having considered Tai Hing, came to the same
conclusion. As to the other duties discussed in Tai Hing, see paras 22.77 and 23.7 — 23.10
below.
2
This statement of facts is taken from the judgment of Lord Scarman at [1986] AC 80 at 97A,
[1985] 2 All ER 947 at 949h.
3
[1986] AC 80 at 103A, [1985] 2 All ER 954c.
4
Mere silence or inaction cannot amount to a representation unless there exists a duty to disclose
or act: Greenwood v Martins Bank Ltd [1933] AC 51, HL.

4
 Current Accounts 5.8

(ii) Bank statements not an account stated (ie binding) in the absence of
express agreement such as a conclusive evidence clause

5.7 Bank statements are statements of what the debt position is believed by the
bank to be. They are not ordinarily conclusive as to what that debt position is, ie
as to how much the bank or customer owes to the other.
Challenges by customers to entries in bank statements tend to arise in one of
two situations. In the first, the customer challenges the accuracy of an entry. For
example, he may dispute that any payment was in fact made such as to justify
a particular debit entry. In the second situation, of which Tai Hing is an
example, the dispute is not whether a debit entry reflects an actual payment, but
whether the bank is entitled to debit the account at all.
In both situations the question arises whether there is an account stated. In the
strict sense of the term, an account stated describes the position where an
account contains items both of credit and debit, and the figures are adjusted
between the parties and a balance struck1. In Laycock v Pickles2, Blackburn J
explained that the consideration for the payment of the balance is the discharge
of the items on each side, and continued:
‘It is then the same as if each item was paid and a discharge given for each, and in
consideration of that discharge the balance was agreed to be due.’
1
See Camillo Tank Steamship Co Ltd v Alexandria Engineering Works (1921) 38 TLR 134 per
Viscount Cave at 143; Siqueira v Noronha [1934] AC 332 per Lord Atkin at 337.
2
(1863) 4 B & S 497, cited with approval by Lord Atkin in Siqueira v Noronha [1934] AC 332
at 338.

5.8 There being no duty on the part of the customer to check his statements, the
continued payment in and withdrawal of monies from a current account after
the receipt of a bank statement does not constitute the customer’s agreement,
express or implied, to the balance shown on the statement. In no sense can it be
said that a balance is struck between the parties.
It is, of course, always open to a bank to refuse to do business save upon express
terms which incorporate an account stated provision. Such provisions have
come to be called conclusive evidence clauses.
Although reliance on a conclusive evidence clause can be forensically unattract-
ive, there is clear authority that, as a matter of principle, such a provision is
binding according to its terms: see Bache & Co (London) Ltd v Banque Vernes
et Commerciale de Paris SA1, applying a decision of the High Court of
Australia, Dobbs v National Bank of Australasia Ltd2. In both cases, a
conclusive evidence clause was claimed to be contrary to public policy as
tending to oust the jurisdiction of the court and in both, the submission was
rejected. However, both cases involved claims against guarantors, and as was
observed by all three members of the Court of Appeal in the Bache case, the
decision did not lead to any injustice because if the figure certified to be due was
erroneous, it was always open to the principal debtor to have it corrected by
instituting proceedings against the creditor.
Support for the validity of conclusive evidence clauses can also be found in Tai
Hing (above) where the defendant banks relied upon printed terms and condi-
tions pursuant to which the company’s current accounts were operated. The

5
5.8 Types of Account

relevant terms, and the facts relating to the three accounts, are set out below.
1
[1973] 2 Lloyd’s Rep 437, CA. But see the discussion in North Shore Ventures Ltd v Anstead
Holdings Inc [2012] Ch 31.
2
(1935) 53 CLR 643.

5.9 In the case of the account in Tai Hing held with Chekiang First Bank Ltd,
the bank’s terms provided:
‘A monthly statement for each account will be sent by the bank to the depositor by
post or messenger and the balance shown therein may be deemed to be correct by the
bank if the depositor does not notify the bank in writing of any error therein within
10 days after the sending of such statement . . . ’
The company returned, upon receipt of its periodic bank statement, a confir-
mation slip signed by two authorised signatories. No cleared cheques were ever
returned to the company.
In the case of the account with Bank of Tokyo Ltd, the bank’s terms provided:
‘The bank’s statement of my/our current account will be confirmed by me/us without
delay. In case of absence of such confirmation within a fortnight, the bank may take
the said statement as approved by me/us.’
Periodic bank statements were sent by the bank, but cleared cheques were not
returned. No bank statement relevant to the case was ever confirmed by the
company.
In the case of the account with Liu Chong Hing Bank Ltd, the bank’s terms
provided:
‘A statement of the customer’s account will be rendered once a month. Customers are
desired: (1) to examine all entries in the statement of account and to report at once to
the bank any error found therein, (2) to return the confirmation slip duly signed. In
the absence of any objection to the statement within seven days after its receipt by the
customer, the account shall be deemed to have been confirmed.’
However, the bank never did send any confirmation slips to the company.
It was held by the Privy Council in Tai Hing that none of the above contractual
terms constituted a conclusive evidence clause. They were not such as to bring
home to the customer either the intended importance of the inspection it was
being invited to make or that they were intended to have conclusive effect if no
query was raised on the bank statements. In the words of Lord Scarman,
delivering the judgment of the Privy Council1:
‘If banks wish to impose upon their customers an express obligation to examine their
monthly statements and to make those statements, in the absence of query, unchal-
lengeable by the customer after expiry of a time limit, the burden of the objection [sic]
and of the sanction imposed must be brought home to the customer. In their
Lordships’ view the provisions which they have set out above do not meet this
undoubtedly rigorous test. The test is rigorous because the bankers would have their
terms of business so construed as to exclude the rights which the customer would
enjoy if they were not excluded by express agreement. It must be borne in mind that,
in their Lordships’ view, the true nature of the obligations of the customer to his bank
where there is not express agreement is limited to the Macmillan and Greenwood
duties. Clear and unambiguous provision is needed if the banks are to introduce into
the contract a binding obligation upon the customer who does not query his bank

6
 Current Accounts 5.11

statement to accept the statement as accurately setting out the debit items in the
accounts.’
The Macmillan and Greenwood duties are explained in Chapter 23.
1
[1986] AC 80 at 110A, [1985] 2 All ER 947 at 959d.

5.10 A similarly restrictive construction of such clauses was taken by the

Privy Council in Financial Institutions Services Ltd v Negril Negril Hold-
ings Ltd1. However, banks can achieve the effect of conclusive evidence by
appropriately worded clauses. Such clauses have been held effective in Canada2
and Singapore3. In consumer contracts they may, however, be subject to
challenge in England and Wales under the Consumer Rights Act 20154.
1
[2004] UKPC 40, [2005] 2 LRC 351, [2004] All ER (D) 426 (Jul).
2
Stewart v Royal Bank of Canada [1930] 4 DLR 694; Keech v Canadian Bank of Commerce
[1938] 2 WWR 291; B and G Construction Co Ltd v Bank of Montreal [1954] 2 DLR 753;
Arrow Transfer Co Ltd v Royal Bank of Canada [1972] SCR 845, discussed in argument in Tai
Hing but not commented upon by the court.
3
Pertamina Energy Trading Ltd v Credit Suisse [2006] SGCA 27 and the cases cited therein.
4
See para 4.17.

(e) Credits to a current account made in error

5.11 It was noted above that one of the situations which can give rise to an issue
whether there is an account stated is where the customer challenges a long-
standing debit to his account. The inverse situation is that where the bank
claims reversal of a credit made in error to an account, for example where an
account is mistakenly credited with the same sum twice. The problem, at least
after the money has been withdrawn, is essentially one of the recovery of money
paid under a mistake of fact, and is considered in that context at Chapter 28. It
may be noted at this point:
(1) that the principle of account stated appears not to extend to an obvious
clerical error, the bank being prima facie entitled to reverse a credit made
in error if it has not been acted upon; but
(2) that a bank is not entitled to dishonour cheques drawn bona fide and
without negligence on the faith of an incorrect entry.
In Holland v Manchester and Liverpool District Banking Co Ltd1 the claimant,
a customer of the defendant bank, finding on examining his passbook that it
showed a balance of £70 17s 9d in his favour, drew a cheque for £67 11s in
favour of a firm to whom he owed that amount. On the cheque being presented
by that firm, it was dishonoured by the bank, as a result of which the claimant
suffered damage, in respect of which he sued the defendants. From the evidence
it appeared that at the time the claimant drew the cheque for £67 11s he had a
balance at the bank of £60 5s 9d only, but that in his passbook one of the bank
clerks had, in error, entered to the claimant’s credit a sum of £10 12s twice, with
the result that from the passbook the claimant appeared to be in credit to the
amount of £70 17s 9d. Lord Alverstone CJ said that the bank had the right to
have the entry subsequently corrected but not to dishonour cheques drawn on
the faith of it so long as it remained uncorrected, and awarded damages for
dishonour of the cheque. The passbook was prima facie evidence against the

7
5.11 Types of Account

bank, on which the customer, in the absence of negligence or fraud on his part,
was entitled to rely.
The legal result in this position appears to be: (i) the bank is liable for any
damage caused to the customer when relying on the misstated account; (ii) the
bank cannot recover any money withdrawn if the customer changed its position
in reliance on the mistake2; and (iii) the bank may be estopped from going back
on the mistaken statement of the account if the customer relied upon it.
1
(1909) 25 TLR 386, 14 Com Cas 241.
2
See United Overseas Bank v Jiwani [1976] 1 WLR 605 (CA) and paras 28.9–28.13 below.

(f) Assignment of a current account credit balance

(i) Assignment of the whole balance on a current account
5.12 Normally a credit balance on current account is much more readily
transferred by cheque or electronic payment than by assignment; it is only when
what is to be transferred is not readily available for repayment, such as monies
on ‘time’ or ‘notice’ deposit, that an electronic payment or the issue of a cheque
(unless it is post-dated) is unavailing. Generally in these circumstances an
assignment pursuant to the Law of Property Act 1925, s 136 may be the
appropriate method of transfer. A cheque does not operate as an assignment of
the sum for which it is drawn1.
In Walker v Bradford Old Bank Ltd2, the court held that the customer may
assign the present or future debt owed by the bank on the account in credit
under the Judicature Act 1873.
The above is, however, subject to modification by the express terms of the
contract, which frequently include prohibitions on assignment.
As to the effect of assignment on rights of set-off, see Chapter 14 below.
1
Bills of Exchange Act 1882, s 53(1).
2
(1884) 12 QBD 511, applied in Bank of Nova Scotia and Diversified Industrial Services Ltd v
Royal Bank of Canada [1975] 5 WWR 610 — money in second bank account a book debt for
purposes of an assignment of book debts.

(ii) Assignment of part of the balance on a current account

5.13 The law on assignment of part of a debt was reviewed by the Court of
Appeal in Kapoor v National Westminster Bank plc1, where the following
principles were confirmed: Part of a debt (including, in this context, the credit
balance on a bank account) can be assigned, but such an assignment will take
effect in equity only. An action on the assigned debt by the assignee will usually,
as a procedural requirement, require the assignor to be joined in order to ensure
the debtor was not exposed to double recovery, but the court could dispense
with this requirement2. An action on such a debt by the assignor will always
require that the assignee is joined, unless the assignor expressly sued as trustee
and with the assignee’s consent.
In Bank of Liverpool and Martins Ltd v Holland3 an assignment of debt for
£285 included a promise that ‘the amount recoverable . . . shall not at any

8
 Current Accounts 5.14

time exceed £150’. Wright J held that on its proper construction the assignment
was an absolute legal assignment of the whole debt but that if the bank should
recover more than the amount assigned it would hold the balance as trustee for
the assignor.
1
[2012] 1 All ER 1201. Also Re Steel Wing Co Ltd [1921] 1 Ch 349, Williams v Atlantic
Assurance Co Ltd [1933] 1 KB 81 per Greer LJ.
2
William Brandt’s Sons & Co v Dunlop Rubber Co Ltd [1905] AC 454, HL; Weddell v JA
Pearce & Major [1988] Ch 26.
3
(1926) 43 TLR 29, 32 Com Cas 56.

(g) Overdrafts on current accounts

5.14 An overdraft is money lent: ‘a payment by a bank under an arrangement
by which the customer may overdraw is a lending by the bank to the customer
of the money’1.
An overdraft limit will often be expressly agreed: this is called a ‘planned’ or
‘authorised’ overdraft.
If, however, a customer gives a payment instruction (including by a cheque that
is presented for payment) that would take the customer beyond the agreed
overdraft limit (if any), then that is treated as an implied request for a further
overdraft2. The bank is not obliged to honour the request and permit further
borrowing3, although it may have an obligation not to act irrationally4. If the
request is within the mandate, and the bank chooses to honour it, then that is an
acceptance of the request and an agreement to provide a further overdraft5.
Such a further overdraft is often called an ‘unplanned’ or ‘unauthorised’
overdraft, and will often attract higher interest and charges (see further para
4.22 above and para 8.21 below).
An overdraft is repayable on demand and standard forms of charge over
security invariably provide accordingly6. Nevertheless the right to repayment
on demand should be exercised so as not unduly to prejudice the borrow-
er’s interests, in the shape, for example, of outstanding cheques drawn in the
belief that the overdraft is available. The position was summarised by Ralph
Gibson J in Williams and Glyn’s Bank Ltd v Barnes7:
‘There is an obligation upon the bank to honour cheques drawn within the agreed
limit of an overdraft facility and presented before any demand for payment or notice
to terminate a facility has been given. That obligation, however, does not by itself
require any period of notice beyond the simple demand. The bank may, by the
contract, be required to honour cheques drawn within the agreed facility before the
demand for repayment or notice to terminate but still be free to require payment by
the customer of any sums previously lent, which will be increased by any further
cheques which the bank must honour.’
The drawing of a cheque or the issue of any other form of payment instruction
may be taken as a request for an overdraft.
1
Per Harman J in Re Hone (a bankrupt), ex p Trustee v Kensington Borough Council [1951] Ch
85 at 89, [1950] 2 All ER 716 at 719.
2
Barclays Bank v WJ Simms & Cooke (Southern) Ltd [1980] 1 QB 677 (Goff J) at 699; Lloyds
Bank plc v Independent Insurance Co Ltd [2000] QB 110 (CA) at 118; Lloyd’s Bank v Voller
[2000] 2 All ER (Comm) 978 (CA) at [16]; OFT v Abbey National plc and others [2008]
EWHC 875 (Comm) (Andrew Smith J) at [64].

9
5.14 Types of Account
3
Cunliffe Brooks & Co v Blackburn and District Benefit Building Society (1884) 9 App Cas 857
at 864; Cumming v Shand (1860) 5 H & N 95 (course of business); OFT v Abbey National plc
and others [2008] EWHC 875 (Comm) (Andrew Smith J) at para 45. If the bank has allowed the
customer a cheque guarantee card then the bank is obliged to a third party to grant the
borrowing, but is not so obliged to the customer: OFT v Abbey National plc and others [2008]
EWHC 875 (Comm) (Andrew Smith J) at [66].
4
Barclays Bank v WJ Simms & Cooke (Southern) Ltd [1980] 1 QB 677 (Goff J) at 699; OFT v
Abbey National plc and others [2008] EWHC 875 (Comm) (Andrew Smith J) at [79].
5
Barclays Bank v WJ Simms & Cooke (Southern) Ltd [1980] 1 QB 677 (Goff J) at 699;
Lloyd’s Bank v Voller [2000] 2 All ER (Comm) 978 (CA) at [16].
6
In Titford Property Co v Cannon Street Acceptances Ltd (22 May 1975, unreported), Goff J
said that an ordinary overdraft can be called in at any time; and see Cripps v Wickenden [1973]
2 All ER 606, [1973] 1 WLR 944. See also para 8.1 below.
7
[1981] Com LR 205. See also Johnston v Commercial Bank of Scotland(1858) 20 D 790;
Buckingham & Co v London and Midland Bank (1895) 12 TLR 70.

3 DEPOSIT ACCOUNTS
5.15 Deposit accounts are normally one of three classes:
(1) repayable on demand;
(2) withdrawable on specified notice; or
(3) for a fixed period.
Where a depositor wishes to withdraw without waiting for the expiry of the
agreed period of notice, it is usual to allow him to do so but he may have to
forfeit some interest. He has no right to break the deposit contract.
Money paid into a deposit account (like that in a current account) is a loan to
the banker, not a specific fund held by him in a fiduciary capacity1.
The account is one continuing contract; there is not a new contract every time
money is paid in2, except where the fresh deposit is made the subject of a fresh
contract.
An overdrawn deposit account cannot exist at law3.
1
Pearce v Creswick (1843) 2 Hare 286; cf Re Head, Head v Head [1893] 3 Ch 426; Re Head,
Head v Head (No 2) [1894] 2 Ch 236; and see Lord Atkin in Akbar Khan v Attar Singh [1936]
2 All ER 545 at 548, PC.
2
Per Lord Goddard CJ, in Hart v Sangster [1957] Ch 329, [1957] 2 All ER 208, CA.
3
Per Mocatta J in Barclays Bank Ltd v Okenarhe [1966] 2 Lloyd’s Rep 87.

4 JOINT ACCOUNTS

(a) Privity of contract between the bank and each joint account holder
5.16 It will normally be clear from the account mandate form that the bank is
in privity of contract with each joint account holder.
The question of privity has in the past arisen where there is no signed mandate
form and the account is opened by a deposit made by one of the named account
holders. The position arising from the deposit by one person of money on joint
account was considered in McEvoy v Belfast Banking Co Ltd1. It was held that
where A deposits money with a bank in the names of himself and B, payable to

10
 Joint Accounts 5.19

either or to the survivor, B’s right to claim the deposit and to sue the bank
depends on whether A purported to make B a party to the contract. If he did, he
must either have had authority to act as agent or B must have ratified.
1
[1935] AC 24, HL. See also Young v Sealey [1949] Ch 278, [1949] 1 All ER 92.

(b) Nature of the bank’s obligation in relation to joint accounts

5.17 A joint account is in law simply a debt owed to the account holders
jointly1 and only enforceable by both account holders2. That raises the obvious
question as to the rights of one of the joint creditors if the bank wrongly pays
the other.
1
Re Head, Head v Head (No 2) [1894] 2 Ch 236.
2
Catlin v Cyprus Finance Corp (London) Ltd [1983] QB 759, [1983] 1 All ER 809.

(i) Where both account holders are required to sign

5.18 It was established by Bingham J in Catlin’s case 1, overturning earlier
authority2, that in the case of a joint account with a mandate requiring the
signature of both account holders, the obligation to honour the mandate is
owed to both account holders severally as well as jointly. Accordingly, and as
common sense would suggest, where (as in that case) the bank pays out money
in breach of the mandate on the authority of only one account holder, the other
account holder can sue the bank and recover damages even if the other account
holder is not a claimant or even a party.
1
Catlin v Cyprus Finance Corp (London) Ltd [1983] QB 759, [1983] 1 All ER 809.
2
Brewer v Westminster Bank plc [1952] 2 All ER 650. In that case it had been held that one of
two joint account holders could not, alone, sue the bank following withdrawals made by the
other account holder after forging the innocent account holder’s signature, even though the
forged signature meant that the payments were in breach of mandate and the bank did not
obtain good discharge for them.

(ii) Measure of damages recoverable by one of the joint account holders

5.19 The claimant wife in Catlin’s case1 recovered damages measured by
reference to her one half interest in the account. Similarly in Twibell’s case2 the
claimant recovered damages representing an appropriate proportion of the sum
for which the cheque was drawn. This is the measure of damages which
compensates the claimant for his loss.
Damages are liable to be reduced if the claimant has benefited from the
wrongful payment. Such a deduction can be justified either on the basis that the
claimant did not in fact suffer loss to the extent of any benefit received, or by
parity with the rule in Liggett’s case3.
The bank will often have a right to an indemnity against the joint account
holder who made the withdrawal. In Catlin’s case the bank recovered against
the husband who had authorised the payment in deceit as a result of his
misstatement that he was authorised by his wife to make the payments.

11
5.19 Types of Account

In these joint account cases the ordinary remedy appropriate to breach of

mandate in a sole account holder case, a declaration that the bank was not
entitled to debit, is inapt because the account balance cannot be restored
without benefiting both account holders. (Moreover, in Catlin’s case it appears
the account was no longer extant at the date of the trial.)
1
[1983] QB 759, [1983] 1 All ER 809. See also Jackson v White [1967] 2 Lloyd’s Rep 68.
2
Twibell v London Suburban Bank [1869] WN 127.
3
[1928] 1 KB 48. An example of the application of the principle in the present context is Jackson
v White [1967] 2 Lloyd’s Rep 68 at 80–81.

(iii) Either to sign

5.20 A joint account is no less a joint account where the mandate under which
it is operated provides for the bank to act on the sole signature of either account
holder. This was accepted as the position in Hirschhorn v Evans1
Under such a mandate on an account held jointly by a husband and wife, in
Fielding v The Royal Bank of Scotland plc2, the husband made withdrawals and
payments taking the account into overdraft by over £3 million. The bank
successfully sued the wife for the sum. The Court of Appeal confirmed that,
absent notice of fraud or of an expressly agreed restriction on the purposes for
which the account could be used, the bank was entitled to act on the hus-
band’s instructions and no limit on the mandate or the authority to request
extensions to the overdraft would be implied.
1
[1938] 2 KB 801, [1938] 3 All ER 491, CA.
2
[2004] EWCA Civ 64, (2004) Times, 26 February, [2004] All ER (D) 183 (Feb).

(c) The principle of survivorship and joint accounts

5.21 Each holder of a joint account co-owns the entirety of the chose in action
against the bank. Where an account is a joint account and one party dies, the
survivor is in ordinary cases entitled to the whole amount, either under the law
of devolution between joint owners or by custom of bankers or by express (and
such a clause is common) or implied agreement. The banker obtains a good
discharge by paying the survivor.
However, although the joint holders will in law be joint tenants, the beneficial
interest remains a matter of debate in any particular case. With some assistance
from the presumptions of resulting trust and advancement, depending upon the
relationship between the joint holders1, trusts law must determine whether the
beneficial interest was also jointly held or whether it was held by only one of the
account holders. If one account holder dies, and the beneficial interest was
jointly held, then the survivor will be the sole legal and beneficial owner and
nothing will pass into the estate. If the account holders were holding the
account on trust for only one of them, then if that beneficially owning holder
dies the survivor will hold on trust for the deceased’s estate, although if the
non-beneficially owning trustee dies then the survivor will be sole legal and
beneficial owner.
In Marshal v Crutwell2 the husband was failing in health at the time of the
opening of the joint account and it was held by Sir George Jessel MR that the

12
 Dormant Accounts 5.23

intention was not to make provision for the wife, but merely to manage the
husband’s affairs conveniently, and thus she had no claim to the balance of the
joint account when he died.
In contrast, in Russell v Scott3 in the High Court of Australia, it was found that
an account jointly held by aunt and nephew vested in the nephew on the
aunt’s death. This was the intention of the parties. The same type of trust was
found in Drakeford v Cotton4, where the deceased holder was a mother and the
survivor her daughter. Morgan J confirmed that it was entirely possible to have
such a joint account, with only the first holder contributing to and withdrawing
from the account during her life, and yet for the beneficial interest to be held
jointly such that the account would pass upon the first holder’s death to the
second holder and not to the first holder’s estate5. It may also be the case that,
although the account is held jointly and intended to pass to the survivor in this
way, any withdrawals are still intended to accrue solely to the party making the
withdrawal6.
1
Russell v Scott (1936) 55 CLR 440. As for bank accounts held on trust more generally, see
Chapter 6.
2
(1875) LR 20 Eq 328.
3
(1936) 55 CLR 440.
4
[2012] EWHC 1414 (Ch).
5
See also Re Figgis, Roberts v MacLaren [1969] 1 Ch 123, [1968] 1 All ER 999, Aroso v Coutts
& Co [2001] All ER (Comm) 241, and the many 19th and early 20th century cases discussed in
those cases.
6
Re Bishop, National Provincial Bank Ltd v Bishop [1965] Ch 450, [1965] 1 All ER 249.

(d) Borrowing on joint accounts

5.22 The default position is that borrowing on joint accounts is owed jointly, in
which case both borrowers must be sued. The contract may, however, provide
that the borrowers’ liability is joint and several, in which case the bank may sue
either of the borrowers separately in the alternative to suing them both1.
1
However, the court may seek to join the other debtor if convenient: Civil Procedure Rules,
r 19.2. If the action does proceed against only one debtor, judgment will not bar an action
against the other jointly and severally liable debtor: Civil Liability (Contribution) Act 1978, s 3.

5 DORMANT ACCOUNTS
5.23 By the Dormant Bank and Building Society Accounts Act 2008, the
balance in any bank and building society account that has not had a transaction
for fifteen years1 may be transferred to a central reclaim fund or in some cases
a local charity, with the right of the customer to the balance in either case
becoming a right against the reclaim fund2. That fund will therefore seek to hold
enough money to meet claims that it is likely to face from the owners of the
dormant balances, but otherwise the money shall be used (by grants or loans)
for social or environmental purposes by the Big Lottery Fund3. A 2014 review
indicated that major banks have opted into this scheme and by then transferred
£600m to the fund4.
1
Section 10, the definition of ‘dormant’.
2
Sections 1(2) and 2(2) Dormant Bank and Building Society Accounts Act 2008.
3
Sections 5 and 16.

13
5.23 Types of Account
4
HM Treasury Review of the Dormant Bank and Building Society Accounts Act 2008, March
2014.

14
Chapter 6

SPECIAL CUSTOMERS

1 COMPANIES 6.1
(a) Capacity 6.2
(b) Authority to exercise the company’s powers for a particular
purpose 6.3
(c) Form of company cheques and other negotiable instruments 6.7
2 PARTNERSHIPS
(a) Partnerships other than Limited Liability Partnerships 6.11
(b) Limited Liability Partnerships 6.12
3 MINORS 6.13
(a) Capacity to operate a current account 6.14
(b) Lending to minors 6.17
4 EXECUTORS 6.18
5 TRUSTEES
(a) Trust accounts generally 6.19
(b) Delegation 6.20
(c) Borrowing 6.21
(d) Deposit of documents for safe custody 6.22
(e) Charity trustees 6.23
6 NOMINEES 6.24
7 UNINCORPORATED BODIES 6.25
(a) Capacity 6.25
(b) Liability 6.26
(c) Ownership of property 6.27
(d) Operation of bank accounts and borrowing 6.28
8 SOLICITORS
(a) Rules as to opening and keeping of accounts 6.29
(b) Interest on clients’ money 6.30
(c) Statutory protection for the banker 6.31
(d) Bankers’ Books Evidence Act 1879 6.32
(e) Collection of cheques for a solicitor 6.33
9 ESTATE AGENTS 6.34
10 Local Authorities 6.35
(a) The power to borrow 6.36
(b) Protection for lenders 6.37
(c) Swaps and other financial transactions 6.38
(d) Authority to act 6.41
11 SCHOOLS 6.42
(a) Maintained schools 6.43
(b) Academies and Free Schools 6.44
(c) Independent schools 6.47
12 MENTALLY INCAPACITATED CUSTOMERS 6.48

1
6.1 Special Customers

1 COMPANIES
6.1 In its dealings with a company1, a bank is generally concerned with one or
more of three matters:
(a) the company’s capacity to maintain an account, to borrow and to create
security;
(b) the authority of persons purporting to act on behalf of the company to
exercise its powers for the purpose of a particular transaction;
(c) the form of the company’s cheques.
1
The term ‘company’ is used to mean a company as defined by the Companies Act 2006, s 1.

(a) Capacity
6.2 An ultra vires transaction is one which it is beyond the capacity of a
company to enter into. It is to be distinguished from an unauthorised trans-
action, ie a transaction which, although within the capacity of the company, is
carried out otherwise than through the proper exercise by the company’s agents
of their powers. It has been stated by the Court of Appeal that in the interest of
avoiding confusion, the use of the phrase ultra vires should be rigidly confined
to describing acts which are beyond the corporate capacity of a company1.
The law in this area is governed by s 39 in the Companies Act 2006, which
applies to any act done by a company on or after 1 October 20092.
Section 39(1) of the Companies Act 2006 provides that the validity of an act
done by a company (as defined in s 1) shall not be called into question on the
ground of lack of capacity by reason of anything in the company’s constitution
(s 39(1)3). The effect of s 39 is that a third party dealing with a company need
not concern himself with the capacity of a company governed by the Companies
Act 20064 to enter into the transaction.
1
Rolled Steel Products (Holdings) Ltd v British Steel Corpn [1986] Ch 246 at 297B (per
Slade LJ) and 303A (per Browne-Wilkinson LJ), CA.
2
Companies Act 2006 (Commencement No 8, Transitional Provisions and Savings) Order 2008,
SI 2008/2860, Sch 2 para 15.
3
Section 39(1) replaced s 35(1) of the Companies Act 1985 without material change. The
2006 Act refers to the company’s constitution in place of the company’s memorandum (as in
s 35 of the 1985 Act) because from 1 October 2009 no existing or new memorandum contains
an objects clause or any other restrictions. The relevant provisions of the memorandum are
treated instead as provisions of the articles pursuant to s 28. See also s 31(1), which provides
that unless a company’s articles specifically restrict the objects of the company, its objects are
unrestricted. Section 31(2) of the 2006 Act replaced s 35(4) of the 1985 Act. There are no
equivalent provisions in respect of ss 35(2) and (3); the explanatory notes to the 2006 Act
explain that it was ‘considered that the combination of the fact that under the [2006] Act a
company may have unrestricted objects (and where it has restricted objects the directors’
powers are correspondingly restricted), and the fact that a specific duty on directors to abide by
the company’s constitution is provided for in section 171, makes these provisions unnecessary’
(para 123).
4
Arguments have been advanced that s 39 (and 40) should be construed or applied by analogy to
companies of other Member States: See Credit Suisse International v Stichting Vestia Groep
[2014] EWHC 3103 (COMM) at paragraph 255 ff. Other facts prevented the argument being
explored further in that case, but the other party had conceded that such might be justified by
the so-called Marleasing principle (Marleasing SA v La Comercial Internacional de Alimenta-
cion SA (C-108/89), [1990] ECR I-4135), particularly since the definition of a company in CA
2006, s 1 is not applicable if the context otherwise requires.

2
 Companies 6.4

(b) Authority to exercise the company’s powers for a particular purpose

6.3 The validity of acts which are within a company’s corporate capacity or
which cannot be called into question on the ground of lack of capacity by virtue
of s 39 depends in part on s 40 of the Companies Act 2006 and in part on the
law of agency.

(i) Section 40 of the Companies Act 2006

6.4 This section came into effect on 1 October 2009, but not so as to affect the
validity or invalidity of any act or transaction entered into by the company prior
to that date.
Section 40(1) provides that, in favour of a person dealing with a company in
good faith, the power of the board of directors to bind the company, or
authorise others to do so, is deemed to be free of any limitation under the
company’s constitution (s 40(1)). For this purpose, a person ‘deals with’ a
company if he is a party to any transaction or other act to which the company
is a party (s 40(2)(a)).
To obtain the protection of s 40(1) a third party must satisfy three requirements.
First, he must have dealt with the company ‘in good faith’. There is a presump-
tion of good faith and a person is not to be regarded as acting in bad faith by
reason only of his knowing that an act is beyond the powers of the directors
under the company’s constitution (s 40(2)(b) (ii) and (iii)). A party to a
transaction with a company is not bound to enquire as to any limitation on the
powers of the board of directors to bind the company or to authorise others to
do so (s 40(2)(b)(i)).
The second requirement is that the company must have purported to bind itself
to the transaction or other act through its board of directors or by someone
authorised by the board of directors. This follows from the language of s 39(1).
The third requirement is that the transaction or act would be binding on the
company but for a limitation under the company’s constitution. These include
limitations deriving (a) from a resolution of the company or any class of
shareholders and (b) from any agreement between the members of the company
or of any class of shareholders (s 40(3)).
Although the wording of s 40 is not explicit as to whether it extends to
procedural failings (as well as substantive limitations), Robert Walker LJ in
the Court of Appeal in Smith v Henniker-Major & Co1 considered (obiter) that
s 40’s predecessor (s 35A of the Companies Act 1985) would extend to a
decision taken by a company at an inquorate meeting, and in Ford v Polymer
Vision Ltd2 Blackburne J held that a failure to fulfil notice requirements and a
breach of jurisdiction provisions were within the scope of the expression
‘limitation under the company’s constitution’ in s 40(1).
Where a company is a charity, ss 39 and 40 are subject to s 42, which contains
a modified regime for such companies. Section 42 provides that where a
company is a charity, ss 39 and 40 only apply in favour of a person who (a) does
not know at the time that the act is done that the company is a charity, or (b)

3
6.4 Special Customers

gives full consideration in money or money’s worth in relation to the act in

question and does not know (as the case may be) (i) that the act is not permitted
by the company’s constitution, or (ii) that the act is beyond the powers of the
directors.
1
[2002] EWCA Civ 762.
2
[2009] EWHC 945 (Ch).

(ii) Agency principles

6.5 Where an alleged vitiating factor is something other than a limitation under
the company’s constitution, the third party’s rights are determined by the law of
agency. The principles were summarised by Slade LJ in Rolled Steel Products
(Holdings) Ltd v British Steel Corpn1 as follows:
‘(4) At least in default of the unanimous consent of all the shareholders ... the
directors of a company will not have actual authority from the company to
exercise any express or implied power other than for the purposes of the
company as set out in its memorandum of association.
(5) A company holds out its directors as having ostensible authority to bind the
company to any transaction which falls within the powers expressly or
impliedly conferred on it by its memorandum of association. Unless he is put
on notice to the contrary, a person dealing in good faith with a company
which is carrying on an intra vires business is entitled to assume that its
directors are properly exercising such powers for the purposes of the
company as set out in its memorandum. Correspondingly, such a person in
such circumstances can hold the company to any transaction of this nature.
(6) If, however, a person dealing with a company is on notice that the directors
are exercising the relevant power for purposes other than the purposes of the
company, he cannot rely on the ostensible authority of the directors and, on
ordinary principles of agency, cannot hold the company to the transaction.’
It is clear from an earlier passage in the judgment2 that the entitlement to
assume in relation to intra vires business that a company’s directors are
properly exercising the company’s powers derives both from the rule in Tur-
quand’s case3 and from more general principles in the law of agency.
As a result of the changes effected by the Companies Act 2006 the memoran-
dum will for most companies no longer be relevant in establishing proper
purpose4.
However the principle that a director of a company only has actual authority to
act in a manner which is in the interests of the company (unless specifically
authorised by the members) holds true5.
A counterparty can only rely upon the doctrine of apparent authority provided
that he does not know that the director has no actual authority: ‘if a person
dealing with an agent knows or has reason to believe that the contract or
transaction is contrary to the commercial interests of the agent’s principal, it is
likely to be very difficult for the person to assert with any credibility that he
believed the agent did have actual authority. Lack of such a belief would be fatal
to a claim that the agent had apparent authority’6.
So, for example, where fraud was alleged and a transaction was held to be
abnormal, and to have been entered into in circumstances that gave rise to
suspicion as to the propriety of the conduct, the third party was not entitled to

4
 Companies 6.6

rely upon apparent authority7.

1
[1986] Ch 246, at page 296.
2
[1986] Ch 246 at 291H–292F, and see also 307D.
3
(1856) 6 E & B 327, Ex Ch.
4
Section 8 of the Companies Act 2006 provides that the memorandum simply records that the
subscribers wish to form a company and agree to become members of it, and s 31 provides that
unless a company’s articles specifically restrict the objects of the company, its objects are
unrestricted. For companies formed under predecessor legislation, s 28 provides that provisions
of the memorandum going beyond the new s 8 style memorandum will now be treated as
provisions of the company’s articles of association.
5
In Re Capital Films Ltd [2010] EWHC 2240 (Ch); [2011] 2 BCLC 359 at [53]; Lexi Holdings
(In Administration) v Pannone and Partners [2009] EWHC 2590 (Ch); Hopkins v TL Dallas
Group Ltd [2004] EWHC 1379 (Ch); [2005] 1 BCLC 543 at [88].
6
Criterion Properties v Stratford UK Properties [2004] 1 WLR 1846 at [31].
7
See Hopkins v TL Dallas Group Ltd [2004] EWHC 1379 (Ch); [2005] 1 BCLC 543 at [95]. See
also In Re Capital Films Ltd [2010] EWHC 2240 (Ch) paras [49]–[62], where the com-
pany’s insolvency meant that the directors should have had paramount regard to the interest of
creditors when acting on behalf of the company (and the third party was held to have known
that the transaction was not in the interests of the creditors).

6.6 The application of the above common law principles in the context of
borrowing by companies is illustrated by two cases decided within a short time
of each other. The first is Charterbridge Corpn Ltd v Lloyds Bank Ltd1. The
claimant company sought a declaration that a legal charge made between a
third party company (Castleford) and Lloyds Bank was void. Castleford, a
company within a large group of companies, gave the charge to secure its
liabilities to Lloyds Bank under a guarantee of all moneys and liabilities owing
or incurred by another company within the group (Pomeroy). The objects
clause in Castleford’s memorandum included a sub-clause:
‘To secure or guarantee by mortgages, charges or otherwise the performance and
discharge of any contract, obligation or liability of [Castleford] or of any other
person or corporation with whom or which [Castleford] has dealings or having a
business or undertaking in which [Castleford] is concerned or interested whether
directly or indirectly.’
The granting of the charge was therefore clearly within the capacity of Castl-
eford and the claim that it was ultra vires was rejected. An alternative claim was
advanced based on an allegation that in granting the guarantee and legal charge
the directors had not acted with a view to the benefit of Castleford, ie that they
had acted for an improper purpose. Pennycuick J held that the test to be applied
was whether an intelligent and honest man in the position of a director of
Castleford would, in the whole of the existing circumstances, have reasonably
believed that the transactions were for the benefit of the company2. Applying
that test, the allegation of improper purpose failed.
The second case is Re Introductions Ltd3, where a liquidator sought to set aside
debentures granted by a company in favour of its bankers to secure a loan made
for the purpose of a pig-breeding business, which was not a purpose authorised
by its memorandum. The objects clause included a sub-clause ‘to borrow or
raise money in such manner as the company shall think fit and in particular by
the issue of debentures’. It was held by the Court of Appeal that the debentures
were void. Harman LJ, who gave the leading judgment, observed that borrow-
ing is not an end in itself, and concluded4:

5
6.6 Special Customers

‘ . . . it is a necessary implied addition to a power to borrow, whether express or

implied, that you should add “for the purposes of the company”. This borrowing was
not for a legitimate purpose of the company: the bank knew it and therefore cannot
rely on its debenture.’
As analysed by the Court of Appeal in Rolled Steel, the ground on which
Harman LJ based his judgment was not that the debentures had been granted by
the company in excess of its corporate capacity, but that the bank knew that the
directors of the company, in purporting to grant the debentures, had exceeded
their authority by entering into a transaction for an improper purpose5.
Where the protection of s 40 is unavailable, a lender may nevertheless be
protected by the rule in Turquand’s case6.
1
[1970] Ch 62, [1969] 2 All ER 1185.
2
[1970] Ch 62 at 74E, [1969] 2 All ER 1185 at 1194E.
3
[1970] Ch 199, [1969] 1 All ER 887, CA.
4
[1970] Ch 199 at 211B, [1969] 1 All ER 887 at 890D, CA.
5
[1986] Ch 246 at 293G, 396E, [1985] 3 All ER 52 at 84g, 93h, CA.
6
(1856) 6 E & B 327, Ex Ch. For cases relating to the validity of bills of exchange or security
where the rule has been successfully invoked, see Re Land Credit Co of Ireland (1869) 4 Ch App
460; Biggerstaff v Rowatt’s Wharf Ltd [1896] 2 Ch 93, CA; Dey v Pullinger Engineering Co
[1921] 1 KB 77; British Thomson-Houston Co Ltd v Federated European Bank Ltd [1932]
2 KB 176, CA. For unsuccessful attempts to invoke the rule, see A L Underwood Ltd v Bank of
Liverpool and Martins [1924] 1 KB 775, CA; Alexander Stewart & Son of Dundee Ltd v
Westminster Bank Ltd (1926) 4 LDAB 40, CA; Kreditbank Cassel GmbH v Schenkers Ltd
[1927] 1 KB 826, CA; B Liggett (Liverpool) Ltd v Barclays Bank Ltd [1928] 1 KB 48.

(c) Form of company cheques and other negotiable instruments

6.7 The provisions in the Companies Act 2006 relating to the form of company
cheques are s 52 and ss 82-85.

(i) Companies Act 2006, s 52

6.8 This is one of a group of sections dealing with formalities of carrying on

business, and in particular the manner in which a company may make con-
tracts, bills of exchange and promissory notes1. By s 52:
‘A bill of exchange or promissory note is deemed to have been made, accepted or
endorsed on behalf of a company if made, accepted or endorsed in the name of, or by
or on behalf or on account of, the company by a person acting under its authority.’
An equivalent provision has existed in the companies legislation since s 47 of
the Companies Act 18622. The effect of the section is that a bill of exchange or
promissory note may be made (ie drawn), accepted or endorsed by a company
in either of two ways. The first is the signing of the company’s name without
more. The view has been expressed in previous editions of Paget (see 9th edn, p
267) that bankers, while admitting that the mere name of a company is a
sufficient indorsement in law, regard it in practice as irregular. This probably
remains true today.
The second way is to sign ‘by or on behalf or on account of’ the company. This
is the most commonly used method. It is not a requirement of the section that
one of the above representative expressions be used, but where a person
intending to sign in a representative capacity omits to use such wording, or an

6
 Companies 6.8

equivalent expression such as ‘per pro’, he runs the risk that he will be held
personally liable on the instrument. This risk is, however, greatly diminished if
the instruments bear the printed name of the company and, in the case of a
cheque, its account number. On this form of instrument there can be no
question of the company and the signatory being jointly liable, the manifest
intention being that the liability is that of the company alone. Even if such an
instrument is signed without the addition of any words indicating a represen-
tative capacity, the signatory can be said to adopt all the wording of the
instrument, including the company’s name and account number, and will in this
event be under no personal liability3.
The signatory must be acting under the authority of the company. It was held in
Dey v Pullinger Engineering Co4 that the section is not limited to express
authority, but includes implied authority and what is now usually described as
ostensible authority. The facts of the case were that a company’s articles of
association empowered the directors to authorise the managing director to
draw bills of exchange. The managing director drew a bill on behalf of the
company without having in fact received any authority from the directors to do
so. In an action on the bill against the company as drawer, the company was
held liable. By the application of the rule in Royal British Bank v Turquand5,
persons contracting with the company were entitled to assume that the manag-
ing director had been acting lawfully in what he did.
In practice, want of authority in the drawing of a cheque would be difficult, if
not impossible, to establish against a bank where it has acted in accordance
with the mandate governing the account. A company’s mandate confers an
express authority on the named signatories. Even where the bank pays a cheque
drawn by a company in a manner which does not comply with the mandate, the
bank is protected if it can establish that the company did in fact authorise or
ratify the particular payment6.
Reference must also be made to the Bills of Exchange Act 1882, s 91(2), which
provides:
‘(2) In the case of a corporation, where, by this Act, any instrument or writing is
required to be signed, it is sufficient if the instrument or writing be sealed with the
corporate seal. But nothing in this section shall be construed as requiring the bill or
note of a corporation to be under seal.’

1
It should be noted that the Electronic Communications Act 2000 provides for the making of
regulations permitting documents to be signed and sent electronically. It remains to be seen
whether this will in future enable bills to be drawn and signed electronically. For the view that
it will not, see Elliott, Odgers & Phillips Byles on Bills of Exchange and Cheques, (29th edn,
2013) paragraphs 2-005 to 2-007.
2
The legislative history of the section is reviewed in Dey v Pullinger Engineering Co [1921] 1 KB
77, decided under s 77 of the Companies (Consolidation) Act 1908. The section was re-enacted
in s 30 of the Companies Act 1929, s 33 of the Companies Act 1948, s 37 of the Companies Act
1985 and s 52 of the Companies Act 2006.
3
See Chapman v Smethhurst [1909] 1 KB 927, CA; Bondina Ltd v Rollaway Shower Blinds Ltd
[1986] 1 All ER 564, [1986] 1 WLR 517, CA.
4
[1921] 1 KB 77.
5
(1856) 6 E & B 327, Ex Ch.
6
See London Intercontinental Trust Ltd v Barclays Bank Ltd [1980] 1 Lloyd’s Rep 241, followed
in Symons (HJ) & Co v Barclays Bank plc [2003] EWHC 1249 (Comm) at [23], where Cooke
J rejected as untenable a submission that a bank is only protected if there is a board resolution
approving the transfer: see [53].

7
6.9 Special Customers

(ii) Companies Act 2006, ss 82-85

6.9 These sections and the Companies (Trading Regulations 20081) concern
the disclosure of company information outside premises and on documents.
Regulation 6 of the 2008 Regulations (made pursuant to the power granted by
s 82 of the 2006 Act) provides, so far as material:
(1) Every company shall disclose its registered name on—
(a) its business letters, notices and other official publications;
(b) its bills of exchange, promissory notes, endorsements and or-
der forms;
(c) cheques purporting to be signed by or on behalf of the company;
(d) orders for money, goods or services purporting to be signed by or
on behalf of the company;
(e) its bills of parcels, invoices and other demands for payment,
receipts and letters of credit;
(f) its applications for licences to carry on a trade or activity; and
(g) all other forms of its business correspondence and documenta-
tion.
These sections and regulations replace s 349 of the Companies Act 1985.
Significantly, s 349(4) previously imposed personal liability on a person signing
or authorising on behalf of a company a cheque or order (or various other
documents) on which the company’s name was not mentioned in accordance
with 349(1). Section 349(4) is not replicated in the 2006 Act2.
Section 85 provides that the following minor variations in form of name are to
be left out of account:
(a) whether upper or lower case characters (or a combination of the two) are
used;
(b) whether diacritical marks or punctuation are present or absent;
(c) whether the name is in the same format or style as is specified under
section 57(1)(b) of the Act for the purposes of registration.
The consequences for failure to comply with these requirements are set out in
ss 83 (civil) and 84 (criminal). Section 83 provides that if a company brings
proceedings to enforce a right arising out of a contract made in the course of a
business in respect of which the company was, at the time the contract was
made, in breach of the requirements, and the defending party can show that he
has a claim arising out of the contract that he has been unable to pursue by
reason of the latter’s breach of the regulations or that he has suffered some
financial loss in connection with the contract by reason of the company’s breach
of the regulations, the proceedings shall be dismissed unless the court is satisfied
that it is just and equitable to permit the proceedings to continue.
1
SI 2008/495.
2
Readers are referred to previous editions of this text for commentary concerning personal
liability under s 349. It should also be noted that s 83(3) of the 2006 Act preserves any other
rights available to a person affected by the company’s failure to comply with the information
requirements under the regulations.

6.10 The court has had to determine whether a particular instrument has stated
the name of a company with sufficient exactitude in a number of cases brought

8
 Companies 6.10

under the predecessor legislation. Whilst these cases invariably concern at-
tempts to hold the signatory personally liable under s 349(4) of the 1985 Act
and equivalent predecessor legislation, they remain relevant insofar as they
consider the question of whether the company name is sufficiently stated on the
cheque.
In F Stacey & Co Ltd v Wallis1, Scrutton J held it to be sufficient that the name
of the company was given on the instrument as addressee and drawee.
In Durham Fancy Goods Ltd v Michael Jackson (Fancy Goods) Ltd2, a bill of
exchange was drawn on a company named Michael Jackson (Fancy Goods)
Limited, but was addressed on the face of the bill to ‘M Jackson (Fancy Goods)
Limited’ and bore an inscription on the left-hand side of the paper: ‘Accepted
payable: . . . For and on behalf of M Jackson (Fancy Goods) Limited,
Manchester’. It was held that the bill did not comply with the predecessor to
s 349(1). In rejecting a submission that just as ‘Ltd’ is an acceptable abbrevia-
tion for ‘Limited’, so ‘M’ is an acceptable abbreviation for ‘Michael’, Donald-
son J stated3:
‘The word “Limited” is included in a company’s name by way of description and not
identification. Accordingly a generally accepted abbreviation will serve this purpose
as well as the word in full. The rest of the name, by contrast, serves as a means of
identification and may be compounded of or include initials or abbreviations. The use
of any abbreviation of the registered name is calculated to create problems of
identification which are not created by an abbreviation of “Limited”. I should
therefore be prepared to hold that no abbreviation was permissible of any part of a
company’s name other than “Ltd” for “Limited” and, possibly, the ampersand for
“and”. However it is not necessary to go as far as this. Any abbreviation must convey
the full word unambiguously and the initial “M” neither shows that it is an
abbreviation nor does it convey “Michael”.’
In Hendon v Adelman4, a company named ‘L & R Agencies Limited’ drew a
cheque on which the company’s name had in error been printed as ‘L R Agencies
Limited’. The court held that there was a failure to comply with section 108 of
the Companies Act 1948.
In British Airways Board v Parish5 a cheque in which the name of the company,
‘Watchstream Limited’, appeared as ‘Watchstream’ with the omission of the
word ‘Limited’ did not comply with section 108 of the Companies Act 1948.
In Maxform SpA v Mariani & Goodville Ltd6, the sole director of a company
named ‘Goodville Limited’ accepted bills drawn on the company’s business
name ‘Italdesign’, which had been registered pursuant to the Registration of
Business Names Act 19167. It was held that ‘name’ means registered corporate
name, with the consequence that the cheque did not comply with section 108 of
the Companies Act 1948.
In Banque de l’Indochine et de Suez SA v Euroseas Group Finance Co Ltd8 two
cheques drawn by Euroseas Group Finance Company Limited were signed by
officers of a company on its behalf beneath printed words ‘Per pro Euroseas
Group Finance Co Ltd’. Robert Goff J stated by way of general principle that9:
‘where there is an abbreviation of a word which is not merely an accepted abbrevia-
tion but is treated as equivalent to that word, and where there is no other word which
is abbreviated to that particular abbreviation, and where there is no question of the
companies registrar accepting for registration two companies, both of which have the
same name, except that one contains the full word and the other the abbreviated

9
6.10 Special Customers

word, then in those circumstances there is absolutely no possibility of any confusion

arising by reason of the abbreviation, and in those circumstances where the abbre-
viation is used it is proper to hold that the company has its name mentioned in the
relevant document in legible characters, as required by [s 349(1)(c) of the 1985 Act].’
In Jenice Ltd & Ors v Dan10 a mis-spelling of the company name that had
neither caused confusion, nor was capable of causing confusion was held not to
constitute a failure to comply with s 349(1) of the 1985 Act.
In Novaknit Hellas SA v Kumar Bros International Ltd11 the defendants had
intended to sign bills on behalf of Kumar Bros International Limited, but the
company’s proper name was not mentioned because the word ‘Limited’ was
omitted.
1
(1912) 106 LT 544. The case was decided under s 63(1) of the Companies Consolidation Act
1908, the wording of which (so far as material) is identical to s 349(1) of the Companies Act
1985.
2
[1968] 2 QB 839, [1968] 2 All ER 987. On the facts the plaintiff was held to be estopped from
asserting breach of the section because it was the plaintiff who had inscribed the words of
acceptance, thereby implying that acceptance of the bill in that form would be accepted by it as
a regular acceptance. Cf Lindholst & Co A/S v Fowler [1988] BCLC 166, CA. In Blum v OCP
Repartition SA [1988] BCLC 170, CA, a director unsuccessfully sought rectification of cheques
which failed to comply with the Companies Act 1948, s 108(1). May LJ at p 175 reserved his
position as to the Durham Fancy Goods Ltd case.
3
[1968] 2 QB 839 at 846, [1968] 2 All ER 987 at 990.
4
(1973) 117 Sol Jo 631.
5
[1979] 2 Lloyd’s Rep 361, CA.
6
[1979] 2 Lloyd’s Rep 385.
7
Repealed by the Companies Act 1981, s 119(5), Sch 4.
8
[1981] 3 All ER 198.
9
[1981] 3 All ER 198 at 202e.
10
[1994] BCC 43.
11
[1998] Lloyd’s Rep Bank 287, CA. See also Fiorentino Comm Giuseppe Srl v Farnesi [2005]
EWHC 160 (Ch), [2005] 2 All ER 737, [2005] 1 All ER (Comm) 575, [2005] 1 WLR 3718,
(2005) Times, 3 March, [2005] All ER (D) 176 (Feb).

2 PARTNERSHIPS

(a) Partnerships other than Limited Liability Partnerships

6.11 A partnership (other than a limited liability partnership) is not a legal
entity. The rights and responsibilities of a partnership are laid down in the
Partnership Act 1890. Any partner has authority to do any act for carrying on
in the usual way business of the partnership1. This includes a prima facie right
to draw on the firm’s banking account in the firm’s name and implied authority
to bind the firm by cheque2, but not to post-date it3. A partner has authority also
to stop a cheque drawn in the name of a firm by another partner4.
A partner has implied authority to borrow money in the name of the firm in the
usual way of the partnership business5 although the firm will not be bound if
borrowing is prohibited by the partnership agreement and the lender has notice
of such limitation6
Each partner has authority to open an account in the firm’s name, but a partner
has, as such, no authority to open a banking account on behalf of the firm but
in his own name7. In Backhouse v Charlton8, Malins V-C laid down that a
surviving partner was entitled to draw on the account. He further held that

10
 Partnerships 6.12

where a bank had a partnership account and accounts of individual partners,

the bank was under no duty to inquire as to the propriety of transfers between
the accounts.
Section 33 of the Partnership Act 1890 provides that, in the absence of
agreement to the contrary, the death of any one partner causes a dissolution of
the partnership, though the surviving partners have power to bind the firm and
continue business so far as is necessary for winding up its affairs9. The bank in
such a case is safe in dealing with the surviving partners only to such an extent
as is clearly within this purpose10.
Similarly, the bankruptcy of one partner dissolves the firm in the absence of any
provision to the contrary in the partnership articles, and the bankrupt partner
has thereafter no authority to bind it11.
Partners are jointly liable for the debts of the Partnership incurred whilst they
were partners12. A bank has no lien on a partner’s private account for an
overdraft on partnership account unless the partnership mandate so provides13.
Most bank mandates now provide for joint and several liability of partners14.
1
Partnership Act 1890 s 5.
2
Laws v Rand(1857) 3 CBNS 442; Backhouse v Charlton (1878) 8 Ch D 444. Ringham v
Hackett (1980) 124 SJ 201; Times, February 9 1980; Central Motors (Birmingham) Limited v
PA & SNP Wadsworth (trading as Pensagain), CA, unreported, 28 May 1982.
3
See Forster v Mackreth (1867) LR 2 Exch 163. Although cf Guildford Trust Ltd v Goss (1927)
136 LT 725, where a post-dated cheque drawn by one partner in favour of another and
fraudulently negotiated was upheld on the ground that there was nothing to put the transferees
on inquiry of the fraud. Branson, J held that it was quite usual for a partnership such as that of
the defendants to repay its loans with post-dated cheques.
4
Gaunt v Taylor (1843) 2 Hare 413.
5
Lane v Williams (1692) 2 Vern. 277; Rothwell v Humphreys (1795) 1 Esp. 406.
6
Partnership Act 1890, ss 5, 8.
7
Alliance Bank Ltd v Kearsley (1871) LR 6 CP 433.
8
(1878) 8 Ch D 444.
9
Partnership Act 1890 s 38.
10
Re Bourne, Bourne v Bourne [1906] 2 Ch 427, CA.
11
Partnership Act 1890, ss 33, 38.
12
Partnership Act 1890 s 9.
13
Watts v Christie (1849) 11 Beav 546.
14
Also of assistance is s 3 of the Civil Liability (Contribution) Act 1978, which provides that
judgment recovered against any person liable in respect of any debt or damage shall not be a bar
to an action against any other person who is jointly liable with him in respect of the same debt
or damage.

(b) Limited Liability Partnerships

6.12 Limited liability partnerships (LLP) were introduced by the Limited
Liability Partnerships Act 2000. In contrast to partnerships under the 1890 Act,
LLPs are bodies corporate with unlimited capacity1. Except where specifically
provided for by statute, the law relating to partnerships does not apply to
limited liability partnerships2. Default provisions setting out the mutual rights
and duties of the members and the limited liability partnership are set out in the
Limited Liability Partnerships Regulations 2001 (SI 2001/1090), but these are
subject to the provisions of the general law and the terms of any limited liability
partnership agreement3.

11
6.12 Special Customers

LLP Members are agents of the LLP and not of each other. In the absence of
express provision in the LLP agreement, they do not owe fiduciary duties to
each other4. They are not, generally, liable for the debts and obligations of the
LLP5. By statute many of the provisions of the Companies Act 2006 and the
Insolvency Act 1986 apply (in amended form) to LLPs6. This includes sec-
tions 52, 82 (including the Companies (Trading Disclosures) Regulations
2008), 83 and 85 of the Companies Act 2006, discussed at paras 6.9 and 6.10
above7.
It follows that the banking relationship will generally be with the LLP, and the
LLP as a customer is more closely aligned with that of a company than a
partnership. The bank will not therefore generally need to be concerned with
issues of capacity.
As concerns authority, s 6 of the Limited Liability Partnerships Act 2000
provides that:
(1) Every member of a limited liability partnership is the agent of the limited
liability partnership.
(2) But a limited liability partnership is not bound by anything done by a
member in dealing with a person if—
(a) the member in fact has no authority to act for the limited liability
partnership by doing that thing, and
(b) the person knows that he has no authority or does not know or
believe him to be a member of the limited liability partnership.
Each member is therefore an agent of the LLP with no statutory limitations on
his or her actual authority. However it is likely that the members and the LLP
will have set out the limits of the actual authority of members to act on the
LLP’s behalf, by way of the LLP agreement. Further, the authority will also be
limited by qualifications implied by law (such as no authority to act dishonestly
or otherwise in breach of fiduciary obligations owed to the LLP).
Where a member acts outside his or her actual authority, section 6(2) will apply.
It remains to be seen what level of knowledge will be required for section 6(2)
to apply, including whether such knowledge extends to constructive know-
ledge8.
1
Limited Liability Partnerships Act 2000, ss 1(2) and 1(3).
2
Limited Liability Partnerships Act 2000, s 1(5).
3
SI 2001/1090, reg 7. This reference to provisions of the general law was relied upon by Newey
J in Hosking v Marathon Asset Management LLP [2016] EWHC 2418 (Ch) in his analysis and
conclusion that the profit shares of a partner or LLP member can potentially be subject to
forfeiture proceedings.
4
F&C Alternative Investments (Holdings) Ltd v Barthelemy [2011] EWHC 1731 (Ch).
5
Pursuant to section 1(4) of the 2000 Act, the members of an LLP may have liability to contribute
to the LLP’s assets in the event of its being wound up.
6
See the Limited Liability Partnerships Regulations 2001 (SI 2001/1090); Limited Liability
Partnerships (Application of Companies Act 2006) Regulations 2009 (SI 2009/1804) and the
Limited Liability Partnerships (Application of Companies Act 2006) (Amendment) Regulations
2013 (SI 2013/618); Limited Liability Partnerships (Accounts and Audit) (Application of Com-
panies Act 2006) Regulations 2008 (SI 2008/1911) and the Companies and Limited Liability
Partnerships (Accounts and Audit Exemptions and Change of Accounting Framework) Regu-
lations 2012 (SI 2012/2301).
7
Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009 (SI
2009/1804), regs 7, 14 and 15.

12
 Minors 6.15
8
Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009 (SI
2009/1804), regs 7, 14 and 15.

3 MINORS
6.13 The age of majority was reduced from 21 years to 18 by the Family Law
Reform Act 1969, s 1. By s 1(2) this applies for the purposes of any rule of law
and, generally, for the construction of ‘full age’, ‘infant’, ‘infancy’, ‘minor’,
‘minority’ etc. By s 12 a person who is not of full age may be described as a
minor instead of an infant.
Two aspects of the relation between a bank and a minor customer call for
special consideration. First, the capacity of a minor to operate an account, even
if kept in credit. Second, the enforceability of loans to a minor and security
taken for such lending.

(a) Capacity to operate a current account

6.14 Arguments against opening or keeping a current account with a minor

have been based on the alleged incapacity of a minor:
(i) to give an effective discharge for a debt; and
(ii) to draw a valid cheque.
Such arguments are, it is submitted, fallacious.

(i) Discharge for a debt

6.15 Per Pearson J in Burnaby v Equitable Reversionary Interest Society1:

‘The disability of infancy goes no further than is necessary for the protection of the
infant.’
No doubt a minor cannot give an effective discharge for an unperformed
obligation; he cannot, even by deed, release an unpaid debt. But where the
discharge is merely the recognition of the performance of the obligation, such as
a receipt, there is no rational ground for importing the disability. The case
usually quoted in support of the proposition that an infant cannot give a valid
discharge, Ledward v Hassells2, possessed exceptional features, turning as it did
on the express words of a will, which made the payment of a legacy to a minor
conditional on his ability to give a valid discharge, so that, in a sense, such
discharge would have had to be given (if at all) for a legacy as yet unpaid.
The capacity of a minor to give a discharge for fulfilled obligations in ordinary
cases appears to have been recognised by James LJ in Re Brocklebank, ex p
Brocklebank3 where he said:
‘Cannot an infant give a receipt for wages or a salary due to him in respect of his
personal labour?’
He went on to say (at 360):
‘I am of opinion that an infant to whom a debt is due has the same rights as any other
person, that he is entitled to enforce the payment of it by means of a debt-
or’s summons and proceedings in bankruptcy based thereon.’

13
6.15 Special Customers

Moreover, it is difficult to see how the question is of practical importance. The

suggested danger is that the minor, after drawing out the whole of his current
account, might, either before or on attaining majority, claim the money over
again from the bank, on the ground of his own inability to give a valid discharge
during minority. This is purely imaginary. Whatever the law where it is sought
to enforce a contract against a minor or make him pay for goods purchased or
repay money lent, when the positions are reversed and the minor is himself the
moving party, the ordinary rules of justice and equity prevail.
‘If an infant was to buy a thing, not being necessaries, he could not be compelled to
pay for it, but having done so, he could not recover back the money4’.
‘If an infant receives rents, he cannot demand them again when of age5.’
Valentini v Canali6 is an authority to the same effect. It was followed in Pearce
v Brain7, though with some hesitation.
1
(1885) 28 Ch D 416 at 424.
2
(1856) 2 K & J 370.
3
(1877) 6 Ch D 358 at 359.
4
Per Lord Kenyon in Wilson v Kearse (1800) Peake Add Cas 196.
5
Per Lord Mansfield in Earl of Buckinghamshire v Drury (1762) 2 Eden 60.
6
(1889) 24 QBD 166.
7
[1929] 2 KB 310; and cf Hamilton v Vaughan-Sherrin Electrical Engineering Co [1894] 3 Ch
589.

(ii) Capacity to draw valid cheques

6.16 The Bills of Exchange Act 1882, s 22(1) provides that capacity to incur
liability as a party to a bill is co-extensive with capacity to contract. By s 22(2):
‘Where a bill is drawn or indorsed by an infant, minor or corporation having no
capacity or power to incur liability on a bill, the drawing or indorsement entitles the
holder to receive payment of the bill, and to enforce it against any other party
thereto.’
Thus a cheque drawn by an infant possesses all the characteristics of a cheque
drawn by a person of full age, save as regards the liability thereon of the drawer.
If the account is opened by a parent or guardian paying in money to be drawn
on by a minor, the banker can incur no risk by applying the money according to
directions1, any more than does a trustee in paying money to a minor by way of
allowance under the terms of a trust.
1
See McEvoy v Belfast Banking Co Ltd [1935] AC 24, HL.

(b) Lending to minors

6.17 The law governing contracts of loan to minors was formerly contained in
s 1 of the Infants Relief Act 1874, which provided that all contracts entered into
by infants for (inter alia) the repayment of money lent or to be lent and all
accounts stated with infants were absolutely void. This provision gave rise to a
body of case law on the enforceability of guarantees of loans to infants which
created fine and somewhat artificial distinctions1.

14
 Executors 6.18

This heavily obsolete law was swept away by the Minors’ Contracts Act 1987.
The Act affects the position of banks in two main respects:
(i) By s 2, where a guarantee is given in respect of an obligation of a party
to a contract, and that obligation is unenforceable against him (or he
repudiates the contract) because he was a minor when the contract was
made, the guarantee is not for that reason alone to be unenforceable
against the guarantor.
(ii) By s 3, where a person (‘the plaintiff’) enters into a contract with another
(‘the defendant’), and that contract is unenforceable against the defen-
dant (or he repudiates it) because he was a minor when the contract was
made, the court may, if it is just and equitable to do so, require the
defendant to transfer to the plaintiff any property acquired by the
defendant under the contract, or any property representing it.
As regards remedies against a minor, the effect of the Act is to place a bank
which has entered a contract of loan in the same position as parties to any other
type of contract with a minor2. Moreover, even if the contract is unenforceable
against the minor (or he repudiates it), the court now appears to have juris-
diction to order restitution of any monies advanced by the bank pursuant to the
contract.
As regards security in the form of guarantees, the Act removes the uncertainty
which existed under the previous law. It is clearly not now a bar to enforceabil-
ity that the principal debtor was a minor when the lending was made.
1
See Wauthier v Wilson (1912) 28 TLR 239, CA; Coutts & Co v Browne-Lecky [1947] KB 104,
[1946] 2 All ER 207; Yeoman Credit Ltd v Latter [1961] 2 All ER 294, [1961] 1 WLR 828, CA;
and see Paget (9th edn), pp 32–33.
2
For a discussion of the enforceability under the general law of contracts made with minors, see
Chitty on Contracts.

4 EXECUTORS
6.18 Executors and administrators in law constitute one person. In the absence
of express provision, any one executor or administrator can operate on the
executorship or administration account, and the death or resignation of one
does not necessitate any modification to the course of administration. An
example of an express provision is to be found in s 2(2) of the Administration
of Estates Act 1925 (AEA 1925)1, which provides that where there are two or
more personal representatives a conveyance or a contract for a conveyance of
real property shall not be made except with the concurrence of all or pursuant
to an order of the court. By s 55 ‘conveyance’ covers a charge or mortgage.
The powers of personal representatives in regard to the raising of money are
governed by AEA 1925, ss 392 and 40. Section 39 would seem to cover the
carrying on of the deceased’s business for as long as may be necessary for the
purpose of winding up the estate, for example, selling a business as a going
concern: and to cover any borrowing necessary to this end3.
For any further carrying on of the business the personal representative must
either have authority from the will by which he was appointed or obtain
authority from all beneficiaries4. Without this he cannot pledge the assets of the
estate for this purpose5 but if authorised by will he may borrow and charge the

15
6.18 Special Customers

assets. The above restrictions do not, however, fetter the normal right of a
personal representative to borrow and charge assets for the payment of death
duties or legacies, but in this latter case no charging is permissible until the
creditors of the estate have been paid.
However the representatives may also be constituted as trustees6 in which case
the additional considerations addressed in Section 6 below will apply.
1
As amended by ss 16(1), 21(1) and Sch 2, of the Law of Property (Miscellaneous Provisions) Act
1994.
2
As amended by the Trusts of Land and Appointment of Trustees Act 1996, s 25(1), (2), Sch 3,
para 6(1), (2), Sch 4, and the Trustee Act 2000, s 40(1), Sch 2, Pt II, para 28.
3
See Marshall v Broadhurst (1831) 1 Cr & J 403; Garrett v Noble (1834) 6 Sim 504; Edwards
v Grace (1836) 2 M & W 190.
4
Barker v Parker(1786) 1 Term Reports 287 99 ER 1098; Kirkman v Booth (1848) 11 Beav 273
at 280.
5
See Kirkman v Booth (1848) 11 Beav 273 at 280; Travis v Milne ( 1851) 9 Hare 141.
6
As to when executors or administrators may develop into trustees, see George Attenborough &
Son v Solomon [1913] AC 76, HL. See further specialist texts on Executors and Administrators.

5 TRUSTEES

(a) Trust accounts generally

6.19 A trust account is one where the beneficial interest in monies held in the
account is vested in a person or persons other than the account holder.
A trust account may be expressly so designated, as where the title is ‘the trustees
of . . . ’; or it may indicate the existence of a trust by being described as an
account held by one person for the account of another, eg ‘Smith a/c Jones’; or
it may indicate a trust in some other less definite way — for instance, in Re
Gross, ex p Kingston1, ‘police account’ was held to constitute a trust account.
If a bank has notice, however received, that an account is affected with a trust,
express or implied, or that the customer is in possession or has control of the
money in a fiduciary capacity, it must regard the account strictly in that light. Of
course, where there is no such notice, the mere fact that, unknown to the bank,
monies are held by the customer in a fiduciary capacity in no way affects the
bank’s right to treat them as the absolute property of the customer2. Nor is the
mere fact that the person opening the account occupies a position which renders
it probable that he has monies of other persons in his hands necessarily
sufficient to put the bank on notice3.
When a bank is fixed with the fiduciary nature of an account, it has to bear in
mind two somewhat conflicting factors. It has to consider the interests of the
persons beneficially entitled4, and it has to recognise the right of its customer to
draw cheques on the account and have them honoured. The bank obviously
must not be a party or privy to any fraud, any misapplication of the trust fund.
It could not, on the mere instruction of the customer, transfer trust monies to
private account, to wipe out or reduce an overdraft5.
A bank which acts on payment instructions given by the holder of a trust
account knowing that those instructions involve a misapplication of trust
money will be liable as a constructive trustee. The circumstances in which such
liability will be imposed, in particular the requisite degree of knowledge, are

16
 Trustees 6.20

considered separately in Chapter 28. If the dishonest signatory is a person other

than the account-holder, then the bank is also likely to be liable to the
account-holder in negligence if it knows or ought to have known that the
signatory was abusing his authority, see para 22.53 below.
1
(1871) 6 Ch App 632.
2
Thomson v Clydesdale Bank Ltd [1893] AC 282, HL; Union Bank of Australia Ltd v
Murray-Aynsley [1898] AC 693; Bank of New South Wales v Goulburn Valley Butter Co
Pty Ltd [1902] AC 543, PC.
3
Greenwood Teale v William Williams, Brown & Co (1894) 11 TLR 56 (a solicitor); Thomson
v Clydesdale Bank Ltd [1893] AC 282, HL (a stockbroker).
4
And, where the trustee is acting as an executor, the interests of the trust’s creditors.
5
Cf John v Dodwell & Co [1918] AC 563, PC. The foregoing paragraphs were cited as a correct
statement of the law by the learned judge in Rowlandson v National Westminster Bank Ltd
[1978] 1 WLR 798.

(b) Delegation
6.20 The appointment of several trustees is a matter of prudence to ensure that
the trust property shall be under their combined control. The general principle
is that unless the settlement so provides, delegation by a trustee of his powers is
not permitted1.
The general principle has to a significant extent been relaxed by statute, most
notably the Trustee Act 1925 and the Trustee Act 2000. Section 25 of the
Trustee Act 19252 allows delegation by trustees individually, which is subject to
conditions. Any delegation under s 25 can last for a maximum of 12 months,
notice of the delegation must be given to each other trustee and to anyone with
the power to appoint a new trustee. The delegating trustee is liable for the acts
and defaults of the delegate3. The Trustee Act 1925 also provides for the
carrying on of trust business for the time being by the surviving trustees or
trustee or the personal representatives of a last surviving trustee4.
Section 11 of the Trustee Act 20005 deals with the employment of agents.
Section 11 provides that the trustees acting collectively may authorise any
person to exercise any or all of their ‘delegable functions’ as their agent6.
‘Delegable functions’ consist of any function other than those listed in s 11(2)7.
The statutory power to appoint agents may be restricted by the trust instrument
or by legislation8.
The signatures of all the trustees should therefore be required on cheques and
other payment instructions unless modification of the rule is authorised by the
terms of the trust. It is unclear whether trustees are able to delegate that
function under the Trustee Act 2000, s 11(1) because the power is limited by
s 11(2)(a), preventing delegation of ‘any function relating to whether or in what
way any assets of the trust should be distributed’. That phrase would appear to
be sufficiently broad to cover the delegation of the mechanics of payment,
including the authority to sign payment instructions, although this has yet to be
determined.
1
See Re C Flower and Metropolitan Board of Works, Re M Flower and Metropolitan Board of
Works (1884) 27 Ch D 592; Pilkington v IRC [1964] AC 612 at 639. Re charity trustees, see
also para 6.22.
2
As substituted by Trustee Delegation Act 1999, s 5(1). The present s 25 of the Trustees Act
1925 governs powers of attorney created after 1 March 2000.

17
6.20 Special Customers
3
Trustee Act 1925 (as substituted by the Trustee Delegation Act 1999) s 25(2), (4), (7).
4
Trustee Act 1925, s 18.
5
The Trustee Act 2000 came into force on 1 February 2001 (Trustee Act 2000 (Commencement)
Order 2001; SI 2001/49).
6
Specific provisions apply to trustees of pension schemes (Trustee Act 2000, s 36), charities
(Trustee Act 2000, ss 11(3)–(5) and 38). Section 11 does not apply at all to trustees of
authorised unit trusts (Trustee Act 2000, s 37).
7
In respect of bare trusts, see also Trustee Act 2000, s 34.
8
Trustee Act 2000, s 26.

(c) Borrowing
6.21 Unless the will or trust deed gives authority or the sanction of s 16 of the
Trustee Act 1925 can be pleaded, a trustee has no authority to borrow1 save for
certain specific purposes such as for purposes of the Settled Land Act 1925 (as
applied to trustees for sale and to personal representatives), and under the
Trusts of Land and Appointment of Trustees Act 1996 (addressed below).
Where borrowing is effected by virtue of the provisions of the trust deed, those
provisions must be strictly construed. Section 16 of the Trustee Act 1925
provides:
‘Where trustees are authorised by the instrument, if any, creating the trust or by law
to pay or apply capital money subject to the trust for any purpose or in any manner,
they shall have and shall be deemed always to have had power to raise the money
required by sale, conversion, calling in, or mortgage of all or any part of the trust
property for the time being in possession.
This section applies notwithstanding anything to the contrary contained in the
instrument, if any, creating the trust . . . .’
By s 17 of the Trustee Act 1925:
‘No purchaser or mortgagee, paying or advancing money on a sale or mortgage
purporting to be made under any trust or power vested in trustees, shall be concerned
to see that such money is wanted, or that no more than is wanted is raised, or
otherwise as to the application thereof.’
This may not, however, protect the banker where the borrowing is ultra vires. It
has not been decided whether a banker may be liable, where, without the
authority of the will and creditors of the testator, he allows the continuance of
the account for the purpose of carrying on the business of the deceased. Without
such authority, a trustee can continue the deceased’s business during the process
of administration only, for the purpose of selling the business as a going
concern2. The trustee’s position as regards creditors has been emphasised in
Morton v Marchanton3. It not infrequently happens that where a will gives
authority to carry on a business for the benefit of beneficiaries under a trust, the
trustees borrow for the purpose and charge assets of the trust estate. Unless,
however, the trustees have fulfilled their duties as executors and paid the debts
of the testator, the latter’s creditors will rank before both the indemnity of the
executors (the right to be exempt from liability for their act in continuing the
business) and the mortgagees of the estate. It is essential, therefore, where
bankers are asked to lend against assets of the estate for such a purpose that they
ensure that the debts of the testator have been paid. This applies only to the
creditors of the testator, not to those of the trustees as trustees, and only where
the business is being carried on for the beneficiaries, as opposed to continuance

18
 Trustees 6.23

for the purpose of effecting a sale in the winding-up. Nevertheless, executors

have power to borrow and mortgage for purposes of winding up of the estate.
Where land is concerned, s 6(1) of the Trusts of Land and Appointment of
Trustees Act 1996 provides that trustees of land have in relation to the land all
the powers of an absolute owner. In addition, s 8(1) of the Trustee Act 2000
provides that trustee may acquire freehold or leasehold land in the United
Kingdom as an investment, for occupation by a beneficiary, or for any other
reason and, seemingly, the trustees may purchase the land with the assistance of
a mortgage over it. Once acquired, s 8(3) of the Trustee Act 2000 provides that
a trustee who acquires land under the section has all the powers of an absolute
owner in relation to the land. It is unclear, however, whether such power would
permit the trustees to raise money on mortgage against land so purchased for
the purpose of further investment4.
1
Walker v Southall (1887) 56 LY 882; Re Suenson-Taylor’s Settlement Trusts [1974] 1 WLR
1280.
2
See Dowse v Gorton [1891] AC 190, HL.
3
(1930) 74 Sol Jo 321, (1930) 4 LDAB 238. See also Re Oxley; John Hornby & Sons v Oxley
[1914] 1 Ch 604.
4
The balance of opinion in specialist texts suggests that the powers may not extend to such
‘gearing up’ of the trust fund: See further Hayton, Matthews and Mitchell: Underhill and
Hayton: Law of Trusts and Trustees: (19th edn, 2016), paragraph 48-30 and Lewin on Trusts,
(19th edn), paragraphs 35-132 and 36-127.

(d) Deposit of documents for safe custody

6.22 By s 17 of the Trustee Act 2000 most trustees may appoint a person to act
as a custodian in relation to such of the assets of the trust, including any
documents or records concerning the assets, as they may determine1. The
appointed custodian must fall within s 19 of the Trustee Act 2000, the relevant
provision for banks being s 19(2)(a): the person to be appointed ‘carries on
business which consists of or includes acting as a nominee or custodian.’
Pursuant to s 32 of the Trustee Act 2000, the custodian may be remunerated out
of the trust funds if he is engaged on terms entitling him to be remunerated for
those services, and the amount does not exceed such remuneration as is
reasonable in the circumstances for the provision of those services by him to or
on behalf of that trust. The custodian may also be reimbursed for any expenses
properly incurred by him in exercising functions as custodian2.
1
Section 17 of the Trustee Act 2000 does not apply to any trust having a custodian trustee or in
relation to any assets vested in the official custodian for charities (see s 17(4)), pension schemes
(see s 36), authorised unit trusts (see s 37) or certain charities (see s 38).
2
Trustee Act 2000, s 32. For the terms upon which a custodian may be appointed, see s 20 of the
Trustee Act 2000.

(e) Charity trustees

6.23 Charity trustees may, subject to the trusts of the charity, confer on any of
their body (being not less than two in number) a general authority or an
authority limited in such manner as the trustees think fit to execute in the names

19
6.23 Special Customers

and on behalf of the charity trustees documents for giving effect to transactions
to which the charity trustees are a party1. On its ordinary construction, this
includes cheques and other banking instructions.
1
Charities Act 2011, s 333, in force as of 14 March 2012. Section 333 of the 2011 Act replaces
s 82 of the Charities Act 1993, which was to similar effect.

6 NOMINEES
6.24 There is no distinct concept in English law of a nominee relationship. The
issue therefore arises as to what the relationship in law is between a nominee
account-holder and the person for whom the account-holder acts as nominee.
In Re Willis, Percival & Co, ex p Morier1 James LJ referred to what used to be
called in the Privy Council a Bonamee account, that is, ‘an account put by one
man into the name of another merely for his own convenience’. It is suggested
that these words correctly define a nominee account in modern banking
practice. In Re Hett, Maylor & Co Ltd2, Chitty J stated that ‘Bonamee’ was a
misspelling for ‘Be-nami’. A comparison between benami transactions and
nominee accounts was also drawn by Millett LJ in Tribe v Tribe3.
The concept of benami transactions comes from the Indian subcontinent. The
essential characteristic of benami transactions has been described as being that
there is no intention to benefit the person in whose name the transaction is
made. Whilst the person in whose name the transaction is made has ostensible
title to the property standing in his name, the beneficial ownership of the
property does not vest in him but in the real owner. Benami transactions have
been compared to the English law doctrine of resulting trusts4.
If the comparison to benami transactions is apt, therefore, a nominee account
may be viewed as a form of bare trust account. James LJ’s characterisation of a
nominee account as ‘an account put by one man into the name of another
merely for his own convenience’ also contains strong overtones of trust lan-
guage. Certain cases considering the issue of set-off in the context of nominee
accounts would also support such a view5.
An alternative may be that the nominee acts as an agent for the other party.
The sum is, however, that the mere description of an account holder as a
‘nominee’ does not of itself identify, from the bank’s perspective, what the legal
relationship is between the nominee account holder and the party for whom the
account holder acts as nominee. Where a bank is aware that an account holder
acts as nominee for a third party, the bank should seek instructions as to the
legal nature of the relationship between the nominee and the third party from
the customer to ensure clarity as to the nature of the account and any
restrictions that may apply to the nominee’s use of the funds in the account.
1
(1879) 12 Ch D 491, CA at 496.
2
(1894) 10 TLR 412.
3
[1996] Ch 107, at page 127.
4
See the Law Commission of India 57th Report on Benami Transactions, at paras 1.5 and 3.2.
5
See further paras 14.34–14.36 below.

20
 Unincorporated Bodies 6.26

7 UNINCORPORATED BODIES

(a) Capacity

6.25 Unincorporated associations have no separate legal status. The capacity

of the members is the sum total of their capacities as limited by any restraint to
which they agree to subject themselves. A committee or other governing body
has no power to go outside the authority given to them by the general body of
members as laid down in the constitution and rules1. Their powers are what
they choose to exercise in concert or (subject to having the power to do so) to
delegate to others2.
The rules usually provide for delegation; thus the powers at any given time are
those laid down in the rules in so far as they are by initial agreement given
continuing force and according as, by virtue of their authority, they are
amended. In Flemyng v Hector3 Lord Abinger CB said:
‘It appears to me that this case must stand upon the ground on which the defendant
puts it, as a case between principal and agent . . . It is therefore a question here
how far the committee who are to conduct the affairs of this club as agents are
authorised to enter into such contracts as that upon which the plaintiffs now seek to
bind the members of the club at large, and that depends on the constitution of the
club, which is to be found in its own rules.’
It is therefore impossible, perhaps, to speak of unincorporated bodies generally
with certainty, as they differ in their constitutions and rules, but from the
perspective of legal analysis, the starting point is the application of agency
principles.
1
William Bean & Sons Ltd v Flaxton RDC [1929] 1 KB 450, CA.
2
Bradley Egg Farm Ltd v Clifford [1943] 2 All ER 378, CA.
3
(1836) 2 M & W 172.

(b) Liability
6.26 As it is not a legal entity, an unincorporated body can neither sue nor be
sued in its own name1. The matter will thus generally be approached by the
application of agency principles.
In a trade union case2 Farwell J said:
‘Now, although a corporation and an individual or individuals may be the only entity
known to the law who can sue or be sued, it is competent to the Legislature to give to
an association of individuals which is neither a corporation nor a partnership nor an
individual a capacity for owning property and acting by agents, and such capacity in
the absence of express enactments to the contrary involves the necessary correlative
of liability to the extent of such property for the acts and defaults of such agents. It is
beside the mark to say of such an association that it is unknown to the common law.
The Legislature has legalised it, and it must be dealt with by the courts according to
the intention of the Legislature.’
In Coutts & Co v Irish Exhibition in London3, an account was opened with the
claimants by a group of people interested in the idea of an Irish exhibition,
which account was overdrawn and secured. Later a company was formed for
the purpose of the exhibition and the original group proposed to pass the

21
6.26 Special Customers

responsibility for the account to the company, maintaining that they were not
liable for the overdraft. It was held by the Court of Appeal that they were; the
company could not be and it was absurd to think that the claimants did not look
to the group for the repayment of the advance.
Where the association is a club there may be another factor to take into
consideration, that the liability of members may be limited to the amount of
their subscriptions. Lord Lindley, in Wise v Perpetual Trustee Co4 suggested
that:
‘Clubs are associations of a peculiar nature. They are societies the members of which
are perpetually changing. They are not partnerships; they are not associations for
gain; and the feature which distinguishes them from other societies is that no member
as such becomes liable to pay to the funds of the society or to anyone else any money
beyond the subscriptions required by the rules of the club to be paid so long as he
remains a member. It is upon this fundamental condition, not usually expressed but
understood by everyone, that clubs are formed; and this distinguishing feature has
often been judicially recognised.’
To similar effect, more recently Mann J summarised the position in Davies v
Barnes Webster & Sons Ltd as follows:
‘The basic position is that prima facie members of an unincorporated association
such as this club are not personally made liable for the acts of those who enter into
contracts in the course of the affairs of the club. Exactly who is liable depends on the
constitution of the club and what acts of authority and ratification have occurred. It
is possible for all the members to be liable if they give appropriate authority, either in
terms of the general rules of the club or in respect of particular transactions. But the
general starting point is of course that that is not their intention. A member of a club
is prima facie not liable for more than his or her subscriptions or other regular dues.5’
In Davies v Barnes, the outcome of the application of agency principles was that
liability on a building contact signed by one of the club’s committee members
lay with each of the members of the club’s committee, with the result that a
statutory demand was correctly served on another committee member in his
personal name.
As for internal disputes, members with a grievance which cannot be settled
otherwise have to sue the committee and could, if necessary, bring a class or
representative action6.
1
See eg London Association for Protection of Trade v Greenlands Ltd [1916] 2 AC 15.
2
Taff Vale Rly Co v Amalgamated Society of Railway Servants [1901] AC 426 at 442, HL.
3
(1891) 7 TLR 313, CA.
4
[1903] AC 139, PC.
5
Davies v Barnes Webster & Sons Ltd [2011] EWHC 2560 (Ch) at [16], approving and applying
the decision in Bradley Egg Farm Ltd v Clifford [1943] 2 All ER 378.
6
See M John v Rees [1969] 2 All ER 274.

(c) Ownership of property

6.27 Property of an unincorporated body is usually held in the names of
trustees, who may be the governing body itself. However that may be, a bank
lending against a charge on property must ensure that the power to borrow on
behalf of the membership exists, that the signatories to the charge are autho-
rised and that the purpose of the borrowing is within the authority given to the

22
 Unincorporated Bodies 6.27

trustees, committee or board of management. These may contract only on

behalf of the existing members and new members will not be bound unless by
joining the club they signify their consent.
Difficulties may arise in regard to ownership of club property, when changes in
the constitution of the club take place, as illustrated by the decision in Abbatt v
Treasury Solicitor1.
The question was whether the property of a club which had ceased to function
was held on trust for the Crown as bona vacantia or for the members of the old
club or for the members of a new club which had been formed. Pennycuick J at
first instance held that once the old club had ceased to function the rights of the
existing members crystallised; and that the club property belonged to and was
distributable amongst the members of the club as at that date and the personal
representatives of those of the members who had died since that date.
The Court of Appeal overturned the decision on the basis that the old club had
not been dissolved2. There was no fundamental change between the old club
and the new club. Rather, by virtue of an implied power to amend, the old
rules had simply been varied and the same body continued in existence. The
property was held for the members of the ‘new’ club after all.
Abbatt was distinguished in Marwaha v Singh3, where the ‘old’ rules of the
association contained detailed provisions for amendment, which had not been
followed. Distinguishing Abbatt, Judge Pelling QC stated that he was not
convinced that the outcome in Abbatt would have been the same if there had
been an express procedure available to amend the rules of the old club which
had not been followed (see paragraph 19 of the judgment). Although not a case
concerning property, Marwaha illustrates the caution that needs to be exercised
in identifying where the interests in property may lie when changes to the
constitution take place.
On dissolution of an unincorporated association, property vests in the members
at the time. In Hanchett-Stamford v Attorney General, a case concerning an
unincorporated association with a single surviving member, Lewison J ex-
plained as follows4:
‘The thread that runs through all these cases is that the property of an unincorporated
association is the property of its members, but that they are contractually precluded
from severing their share except in accordance with the rules of the association; and
that, on its dissolution, those who are members at the time are entitled to the assets
free from any such contractual restrictions. It is true that this is not a joint tenancy
according to the classical model; but since any collective ownership of property must
be a species of joint tenancy or tenancy in common, this kind of collective ownership
must, in my judgment, be a subspecies of joint tenancy, albeit taking effect subject to
any contractual restrictions applicable as between members. In some cases (such as
Cunnack v Edwards [1895] 1 Ch 489; [1896] 2 Ch 679) those contractual restric-
tions may be such as to exclude any possibility of a future claim. In others they may
not. The cases are united in saying that on a dissolution the members of a dissolved
association have a beneficial interest in its assets . . . . I cannot see why the legal
principle should be any different if the reason for the dissolution is the permanent
cessation of the association’s activities or the fall in its membership to below two. The
same principle ought also to hold if the contractual restrictions are abrogated or
varied by agreement of the members.’
1
[1969] 1 WLR 561.

23
6.27 Special Customers
2
[1969] 1 WLR 1575.
3
[2013] EWHC B6 (Ch).
4
[2012] EWHC 330 (Ch), at para 47.

(d) Operation of bank accounts and borrowing

6.28 The bank account of an unincorporated body having no legal status need
cause the bank no difficulty if the account is kept in credit. Where the body is a
club or similar association the committee or board of management merely
administers moneys coming into their hands. Cheques are normally drawn on
the account by authorised members of the committee or board and counter-
signed by the secretary.
But if the body wishes to borrow, the consequence of the above identified
principles is that the personal liability of those who operate the account is
necessary or the bank must obtain security from a third party, and the borrow-
ing should be supported by a resolution of the governing committee or board.
If the body has assets which can be charged as cover for a borrowing, further
considerations arise, given that the association cannot sue or be sued in its own
name.

8 SOLICITORS

(a) Rules as to opening and keeping of accounts

6.29 Solicitors’ bank accounts are the subject of legislation in the Solicitors Act
1974. By section 32(1)(a) and 32(1A) of the Act (as amended by the Legal
Services Act 2007) the Law Society is required to make rules as to the opening
and keeping by solicitors of accounts at banks1 or with building societies for
money (including money held on trust) which is received, held or dealt with for
clients or other persons. By s 32(1)(aa), the Society must also make rules as to
the operation by solicitors of accounts kept by their clients or other persons at
banks or with building societies or other institutions, and by s 32(1)(b), the
Society must make rules as to the keeping by solicitors of information as to
money received, held or paid by them for their clients or other persons
(including money received, held or paid under a trust). Until at least April 2019,
those rules are contained in the SRA Accounts Rules 2011 (which replaced the
Solicitors’ Accounts Rules 1998).
Rule 12 of the 2011 Rules specifies that monies held or received in the course of
practice are either ‘client money’ or ‘office money’. ‘Client money’ is defined as
‘money held or received for a client or as trustee, and all other money which is
not office money’. A ‘client account’ is defined in Rule 13 as an account of a
practice kept at a bank or building society for holding client money, in
accordance with the requirements of the rules. The name of the account must
include the word ‘client’ in full.
Rule 14 requires that client money must, without delay, be paid into a client
account and must be held in a client account, except where the rules provide to
the contrary.
Subject to approval from the Legal Services Board, the 2011 Accounts Rules are

24
 Solicitors 6.31

set to be replaced by new SRA Accounts Rules 2018 as of April 2019.

1
‘Bank’ means the Bank of England, a person (other than a building society) who has permission
under Part 4A of FSMA 2000 to accept deposits or an EEA firm of the kind mentioned in
para 5(b) of Sch 3 to that Act which has permission under para 15 of that Schedule (as a result
of qualifying for authorisation under paragraph 12 of that Schedule) to accept deposits:
Solicitors Act 1974, s 87, as amended by SI 2001/3649, art 286(1), (3).

(b) Interest on clients’ money

6.30 In Brown v IRC1, the House of Lords held that the client whose money
was placed on deposit was entitled to the interest which it earned unless
retained by the solicitor with his consent. It is sometimes impracticable for a
solicitor to ascertain to which client such interest should go, and this point is
now dealt with by s 33 of the Solicitors Act 1974 and Part 3 of the 2011 Rules.
The Rules do not directly affect banks, save that they entitle solicitors to hold
clients’ money in a separate designated account (r 13.5), and a solicitor must
account for the interest on money held in a client account or which should have
been so held (r 22(1)).
1
[1965] AC 244, [1964] 3 All ER 119.

(c) Statutory protection for the banker

6.31 By s 85 of the Solicitors Act 1974:
‘Where a solicitor keeps an account with a bank or a building society in pursuance of
rules under section 32—
(a) the bank or society shall not incur any liability, or be under any obligation to
make any inquiry, or be deemed to have any knowledge of any right of any
person to any money paid or credited to the account, which it would not incur
or be under or be deemed to have in the case of an account kept by a person
entitled absolutely to all the money paid or credited to it . . . ’
It was rightly observed of a predecessor to this provision (s 8(1) of the Solicitors
Act 1933) that its effect is that a bank is not to be deemed to have any
knowledge of the rights of third parties which it has not in fact1, ie the words
‘any knowledge of any right’ refer to actual knowledge.
In considering the ambit of the statutory protection conferred by s 85, reference
must be made to its legislative history. Section 8(1) of the Solicitors Act 1933
contained the following proviso:
‘Provided that nothing in this sub-section shall relieve a bank from any liability or
obligation under which it would be apart from this Act.’
This proviso was seemingly in conflict with the body of the section. On the one
hand, banks were to be unaffected by constructive notice of the rights of third
parties. On the other, banks were not to be relieved from any obligation under
which they would have been but for the Act. Thus the proviso appeared to leave
open the possibility of a constructive trusteeship which the main body of the
section appeared intended to eliminate.
Section 8(1) of the Solicitors Act 1933 was re-enacted in s 85(1) of the Solicitors
Act 1957. In 1974, legislation was in preparation to consolidate the Solicitors

25
6.31 Special Customers

Act 1957, the Solicitors Act 1965, and certain other enactments relating to
solicitors. The passage of this consolidating legislation was delayed by a general
election, and instead certain amendments were made to the existing law by the
Solicitors (Amendment) Act 1974, which was subsequently repealed by the
Solicitors Act 1974. By the Solicitors (Amendment) Act 1974, s 19(4) and Sch
2, para 32, there was substituted for s 85 of the Solicitors Act 1957 what is now
s 85 of the Solicitors Act 1974. In other words, the statutory protection was
modified by the deletion of the proviso. The manifest purpose of this deletion
was to eliminate the possibility of banks being held liable as constructive
trustees on the basis of anything less than actual knowledge
Notwithstanding this legislative history, in Lipkin Gorman v Karpnale Ltd2, at
first instance Alliott J held that the intention of the legislature in relation to s 85
of the 1974 Act was not to give banks a special advantage in maintaining and
operating a client’s account, but to ensure that there was no special disadvan-
tage to bankers in so doing. It is submitted that this is not correct. If it were, the
section would serve no purpose. The true position is that banks have been
placed in a special position with respect to solicitors’ client accounts, and for
good reason: in the absence of such protection, the completion of conveyancing
and other transactions might be delayed pending the making of enquiries. It was
for this reason that in 1974 the Law Society advocated the deletion of the
former proviso.
It should be noted that by s 85(b), a bank with which a solicitor keeps an
account in pursuance of rules under s 32 may not have any recourse or right
against money standing to the credit of the account in respect of any liability of
the solicitor to the bank, other than a liability in connection with the account.
1
Per Du Parcq J in Plunkett v Barclays Bank Ltd [1936] 2 KB 107 at 116, [1936] 1 All ER 653
at 657.
2
[1987] 1 WLR 987 at 997. The decision was reversed on appeal [1989] 1 WLR 1340, CA,
without deciding this point.

(d) Bankers’ Books Evidence Act 1879

6.32 By the Bankers’ Books Evidence Act 1879, s 101 an application to, or
enquiry or other proceeding before, the Solicitors Disciplinary Tribunal is made
a legal proceeding for the purposes of the Bankers’ Books Evidence Act
1879 Act.
1
As amended by s 45 of the Building Societies Act 1997.

(e) Collection of cheques for a solicitor

6.33 In considering whether a bank was negligent in collecting for a solicitor
customer a cheque to which he was not entitled, MacKinnon LJ in Penmount
Estates Ltd v National Provincial Bank Ltd1 treated as a relevant consideration
the fact that the customer was a solicitor, taking the view that the need for strict
enquiry was rather less than it might have been for someone other than a
solicitor.
1
(1945) 5 LDAB 418 at 422, where the defendant bank set up a successful defence under the Bills
of Exchange Act 1882, s 82 in relation to a cheque crossed ‘not negotiable’, having admitted

26
 Local Authorities 6.35

liability in relation to other cheques crossed ‘account payee only’. See also New Zealand Law
Society v ANZ Banking Group Ltd [1985] 1 NZLR 280.

9 ESTATE AGENTS
6.34 Estate agents, ie those who perform estate agency work as defined in
s 1(1) of the Estate Agents Act 1979, also are required to keep a client account
(s 14) for moneys ‘held or received by them as agent, bailee, stockholder or in
any other capacity’ (s 12(1)). A ‘client account’ means a current or a deposit
account which, by s 14(2),
(a) is with an institution authorised for the purpose of s 14; and
(b) is in the name of a person who is or has been engaged in estate agency
work; and
(c) contains in its title the word ‘client’.
Section 14(4) authorises the Secretary of State to make regulations which may
specify ‘(a) the institutions which are authorised for the purpose of this section’.
Regulations so made1 have specified (inter alia) ‘recognised banks or a licensed
institution within the meaning of the Banking Act 1979’. This must presumably
now be read as referring to authorised deposit-taking institutions under the
FSMA 20002.
Section 13 provides that clients’ moneys are trust moneys and it would seem
that bankers must hold estate agents’ client accounts in much the same way as
solicitors’ client accounts.
1
Estate Agents (Accounts) Regulations 1981, SI 1981/1520, as modified by the Banking Coor-
dination (Second Council Directive) Regulations 1992, SI 1992/3218, Sch 10, Pt II, para 35,
Pt IX, reg 82(1). The relevant part of the Regulation was revoked by the Financial Services and
Markets Act 2000 (Consequential Amendments and Repeals) Order, SI 2001/3649 Pt 1
art 3(2)(a), but it appears that the text of the Estate Agents (Accounts) Regulations 1981 has not
subsequently been modified. It is considered that this is likely an oversight (see following
footnote).
2
It is possible that the range of institutions that could be authorised under the Banking Act 1979
was narrower than the range of institutions that can now be authorised under the FSMA 2000.
However, pursuant to s 17(2) of the Interpretation Act 1978, where a previous act is repealed
and re-enacted, with or without modification, then unless the contrary intention appears, any
reference in any other enactment to the enactment so repealed shall be construed as a reference
to the provision re-enacted.

10 LOCAL AUTHORITIES
6.35 Local authorities are corporate bodies subject to the direction, control
and supervision of ministers of the Crown to the extent authorised by statutes.
In their relations with banks the questions which arise are mainly the capacity
of a local authority to borrow and create security, and the authority of persons
purporting to act on behalf of the authority in respect of such matters.
Section 1(1) of the Localism Act 2011 provides that:
‘A local authority has power to do anything that individuals generally may do.’
By s 2(1) and (2), if exercise of a pre-commencement power of a local authority
was subject to restrictions or limitations, those restrictions and limitations

27
6.35 Special Customers

apply also to exercise of the general power so far as it is overlapped by the

pre-commencement power. Section 1(1) does not, therefore, override or other-
wise repeal any restrictions on a local authority’s powers stipulated in pre-
existing primary or secondary legislation. So if an existing power requires a
particular procedure to be followed, the same procedure will apply to the use of
the general power to do the same thing. Restrictions in post-commencement
legislation will however only apply to the general power where they are
expressed to do so1. In addition, s 4(2) of the Localism Act 2011 imposes the
further restriction that:
‘Where, in exercise of the general power, a local authority does things for a
commercial purpose, the authority must do them through a company.’
In R (Peters) v Haringey London Borough Council2 Ouseley J considered that,
in view of the purpose of section 1 being to enlarge the range of powers enjoyed
by local authorities, section 4(2) does not have the effect of requiring anything
which could previously be done without a company, to be done through a
company. The analysis of whether an activity is undertaken for a commercial
purpose requires an overall view to be taken of the thing being done and of the
overall purpose. A purpose that is simply incidental to a non-commercial
purpose will not attract the requirements of section 4(2). In examining the
question of purpose, it is the purpose of the local authority that is relevant, not
that of the counterparty3.
1
See s 2(4) of the 2011 Act, and also the Explanatory Notes to the Act, at para 11.
2
[2018] EWHC 192 (Admin).
3
See R (Peters) v Haringey London Borough Council (supra) at paras 132–139, 145–146.

(a) The power to borrow

6.36 The power to borrow is the subject of two key provisions, both of which
predate the 2011 Act. Section 111(1) of the Local Government Act 1972 (LGA
1972) provides:
‘Without prejudice to any powers exercisable apart from this section but subject to
the provisions of this Act and any other enactment passed before or after this Act, a
local authority shall have power to do any thing (whether or not involving the
expenditure, borrowing or lending of money or the acquisition or disposal of any
property or rights) which is calculated to facilitate, or is conducive or incidental to,
the discharge of any of their functions.’
By s 1 of the Local Government Act 2003 (LGA 2003):
‘A local authority may borrow money—
(a) for any purpose relevant to its functions under any enactment, or
(b) for the purposes of the prudent management of its financial affairs.’
The broad powers of borrowing in section 1(1) of the LGA 2003 are subject to
a number of further statutory limitations set out in the Act, including:
A local authority may not, without the consent of the Treasury, borrow in a
foreign currency1
A local authority must determine and keep under review how much money it
can afford to borrow, and may not borrow if such borrowing would cause it
to exceed such limit as it has identified2

28
 Local Authorities 6.37

A local authority may not borrow if to do so would exceed any limit set by the
Secretary of State3
A local authority may not mortgage or charge any of its property as security
for money which it has borrowed or which it otherwise owes4.
1
LGA 2003, s 2(3).
2
LGA 2003, ss 2(1)(a), 3. Section 8 of the LGA 2003 provides that borrowing includes any
‘credit arrangements’ (as defined in s 7).
3
LGA 2003, ss 2(1)(b), 4. Section 8 of the LGA 2003 provides that borrowing includes any
‘credit arrangements’ (as defined in s 7).
4
LGA 2003, s 13.

(b) Protection for lenders

6.37 By s 6 of the LGA 2003:
‘A person lending money to a local authority shall not be bound to enquire whether
the authority has power to borrow the money and shall not be prejudiced by the
absence of any such power.’
Section 6 therefore provides a significant level of protection for lenders where
questions of capacity arise.
Two limitations are to be noted. First, the protection afforded by the sec-
tion appears to be limited to issues of capacity, and not to extend to issues of
authority1.
Second, s 6 does not afford protection where the local authority is located in a
foreign jurisdiction2.
It has further been argued that s 6 does not protect a bank that has been put on
enquiry as to a potential limitation of the local authority’s limited powers, for
example because of the unusual nature of the transaction in question. Section 6
is not expressly so limited, and it is considered that this is an issue that remains
open on the case law3.
Finally, the Local Government (Contracts) Act 1997 also provides a further
limited protection. By ss 2, 3 and 4 of that Act, a local authority may certify that
it has power to enter into a contract. If such certification is given, the local
authority will be deemed to have had the power to enter into the contract.
However by ss 4(3) and 4(4) of the 1997 Act, contracts that may be certified
under the Act are limited to (i) those involving the provision of services for the
purposes of, or in connection with, the discharge by the local authority of any
of its functions and which operate, or are intended to operate, for at least five
years, and (ii) the provision of finance to a party (other than the local authority)
in connection with the provision of such services.
1
See in contrast predecessor provisions such as Schedule 13, para 20 of the LGA 1972, addressed
in previous editions of this text.
2
It has been suggested that this is because capacity is a matter of the relevant foreign law (see
Ellinger’s Modern Banking Law; Ellinger, Lomnicka, Hare, 5th edn (2011) at p 347, referring
to Haugesund Kommune v Depfa ACS Bank [2010] EWCA Civ 579.) However s 6 is more
properly to be considered a provision giving rise to a defence preventing the incapacitated party
from relying on its incapacity, and therefore a matter of the proper law of the contract (see
Haugesund Kommune v Depfa ACS Bank [2009] EWHC 2227 at 123 and 126-127 and [2010]
EWCA Civ 579 at 60 (representing the majority view of Aikens and Pill LJJ)). Nonetheless, s 6
is limited in its application to local authorities in England and Wales (see s 23 of the LGA 2003).

29
6.37 Special Customers
3
See Ellinger’s Modern Banking Law; Ellinger, Lomnicka, Hare, 5th edn (2011) at p. 347 and fn
242. However the cases cited do not relate directly to lending to the local authority. Indeed,
Clarke J in Morgan Grenfell & Co Ltd v the Mayor and Burgess of the London Borough of
Sutton, 93 LGR 554, appeared to consider (albeit obiter) that the issue of whether the
protection extended to ‘the lender who did not know but had reason to think that the contract
was ultra vire’ or ‘the lender who knew all the facts but gave no consideration to the question’
was not answered by predecessor provisions to s 6. Of course a bank’s knowledge of issues
concerning capacity and/or authority may be relevant to other duties owed to its customers
(addressed elsewhere in this text).

(c) Swaps and other financial transactions

6.38 A body of case-law arose during the 1990s concerning a local authori-
ty’s powers to enter into swap transactions. As no statutory provision expressly
provided local authorities with a power to enter into swaps, the issue arose as to
whether swap transactions were ‘calculated to facilitate, or is conducive or
incidental to, the discharge of any of [the local authority’s] functions’ so as to
come within s 111 of the LGA 1972.
In Hazell v Hammersmith and Fulham London Borough Council1, the defen-
dant council had entered into 592 swap transactions of which 297 were still
outstanding when proceedings commenced. The total notional principal sum
involved in all the transactions amounted in aggregate to £6,052m. The issue
was whether, as the bank counterparties contended, these transactions were
intra vires the council, being incidental to the functions of borrowing and debt
management. The House of Lords held that each swap transaction was ultra
vires and void.
1
[1992] 2 AC 1, [1991] 1 All ER 545, HL.

6.39 As to borrowing, the House of Lords rejected the argument that the swap
transactions were incidental to borrowing, for the following reasons:
(1) A swap transaction is a separate collateral contract which may be
undertaken long after a borrowing has been effected1.
(2) If this objection is not in itself fatal, a power is not incidental merely
because it is convenient or desirable or profitable. A swap transaction
undertaken by a local authority involves speculation in future interest
trends with the object of making a profit in order to increase available
resources. There are many trading and currency and commercial swap
transactions which eliminate or reduce speculation. Individual trading
corporations and others may speculate as much as they please or
consider prudent. But a local authority is not a trading or currency or
commercial operator with no limit on the method or extent of its
borrowing or with powers to speculate. The local authority is a public
authority dealing with public monies, exercising powers limited by Sch
132.
(3) When a local authority considers whether to expend money and if so
whether to borrow and on what terms, it must have regard to the
provisions of Sch 13, the method of borrowing and terms of repayment,
the prevailing interest rates and the possibility that interest rates may rise
or fall during the period of the loan. If the local authority finds that after
it has borrowed there has been a violent change in interest rates which

30
 Local Authorities 6.40

affect a particular borrowing, the local authority is not without remedial

action. It can convert a loan taken out with the Public Works
Loans Commissioners from a variable rate of interest into a fixed rate of
interest. It can pay off an expensive loan and take out a new loan. The
fact that the costs of paying off an old loan and taking out a new loan
would be greater than the costs of entering into swap transactions
cannot alone render swap transactions legal3.
(4) Schedule 13 establishes a comprehensive code which defines and limits
the powers of a local authority with regard to its borrowing. The
schedule is inconsistent with any incidental power to enter into swap
transactions4.
The court rejected the argument that the swap transactions were incidental to
the function of debt management on the basis that, per Lord Templeman:
‘it is based on the fallacy that debt management is a function, when in truth it is a
phrase used to describe the activities of a person who enters into the swap market for
the purpose of making profits which can be employed in the payment of interest on
borrowings. The expression “debt management” can be employed to describe the
duty of a local authority to consider from time to time whether it should change a
variable PWLC loan into a fixed interest loan; whether it should redeem one loan to
take out another; whether when a new borrowing is contemplated, the borrowing
should be at a variable or fixed rate taking into account all the other borrowings of
the local authority. Debt management is a phrase which describes prudent and lawful
activities on the part of a local authority. If swap transactions were lawful a local
authority would be under a duty to consider entering into them as part of its duty of
debt management. But if a swap transaction is not lawful then it cannot be lawful for
a local authority to carry out a swap transaction under the guise of debt
management5.’

1
[1992] 2 AC 1 at 30A, [1991] 1 All ER 545 at 555a.
2
[1992] 2 AC 1 at 31E–G, [1991] 1 All ER 545 at 556b–d.
3
[1992] 2 AC 1 at 31F–H, [1991] 1 All ER 545 at 556d–f.
4
[1992] 2 AC 1 at 33H–34A, [1991] 1 All ER 545 at 558d.
5
[1992] 2 AC 1 at 34D–F, [1991] 1 All ER 545 at 558g–j.

6.40 The question arises as to how far the position has been changed by s 1(1)
of the Localism Act 2011 and the provisions of the LGA 2003.
It has been persuasively argued by one commentator that the position is
changed by these two pieces of legislation1 because, first, s 12 of the LGA
2003 gives local authorities an explicit power to invest for any purpose relevant
to its functions or for the purposes of the prudent management of its financial
affairs, and derivatives may in certain circumstances be considered an ‘invest-
ment’2, alternatively may in certain circumstances be considered to facilitate, or
be conducive or incidental to, a local authority’s investment functions3. Second,
because the effect of s 1(1) of the Localism Act 2011 is that a local authority
now has the capacity to enter into derivatives regardless of whether they
facilitate, or are incidental or conducive to, the exercise of a local authori-
ty’s functions (so long as they do not contravene any limitation or restriction
and are not entered into for a commercial purpose)4. That section 1(1) of the
Localism Act 2011 was intended to, inter alia, enable local authorities to enter
into guarantees and ‘engage in speculative activities’ is also indicated by the

31
6.40 Special Customers

2011 impact assessment paper; ‘Localism Bill: general power of competence for
local authorities’ produced by the Department for Communities and Local
Government.
Other limitations on the powers of local authorities were previously empha-
sised in two decisions concerning the validity of local authority guarantees. In
Crédit Suisse v Allerdale Borough Council5, a local authority guaranteed the
liability of a limited company to assist it with the financing of various capital
projects. The company had been established by the local authority as a means
by which swimming pool and time share facilities were to be made available to
the public. The purpose of the scheme was that the company should operate and
incur liabilities independently of the council. Therefore the local authority had
no statutory power to embark on the scheme; both the establishment of the
limited company and the giving of the guarantee were ultra vires.
In Crédit Suisse v London Borough of Waltham Forest6 a local authority had set
up a company with the principal objective of purchasing houses which would
be leased to the local authority to aid the homing of housing applicants. The
local authority provided a guarantee in return for the claimant bank lending
money to the limited company. It was held that the local authority had no power
to guarantee the debts of the limited company. It had attempted to delegate the
function of providing housing accommodation under s 9 of the Housing Act
1985, which was impermissible. Furthermore, the guarantee could not be
properly characterised as calculated to facilitate or as conducive or incidental to
the discharge of any function of the council, since it was too remote from any
such function.
As with the power to enter into derivative products, however, it seems that the
restriction in relation to guarantees has been reversed by s 1(1) of the Localism
Act 2011.
A different potential issue may nonetheless arise in respect of s 4(4)(a) of the
Localism Act 2011; the restriction that any commercial activities engaged in by
a local authority must be undertaken through a company. Whilst lending itself
will in most circumstances attract the protection of s 6 of the LGA 2003, other
transactions (such as derivative transactions, if it is correct that they now fall
within a local authorities’ powers, or investments entered into for the purposes
of the prudent management of the local authorities’ financial affairs) do not
enjoy such a general protection. The purpose of a transaction (which notably
falls to be identified by reference to the purpose of the local authority7) will not
however necessarily be clear to the counterparty.
1
Firth, Derivatives Law and Practice, paras 2.029 to 2.036.
2
There is, to date, little guidance from case-law on the interpretation of ‘invest’ under s 12 of the
LGA 2003. In R (Peters) v Haringey London Borough Council [2018] EWHC 192 (Admin),
Ouseley J considered that ‘Invest . . . has its normal meaning and does not cover spending
money for perceived public benefit long or short-term’ (para 127) and that ‘The “investment”
of land, or obtaining a return on it through the HDV, may not be the “investment” in the sense
of section 12 of the 2003 Act’ (para 147).
3
Firth, Derivatives Law and Practice, paras 2.032 to 2.034.
4
Firth, Derivatives Law and Practice, para 2.034. Firth also argues that the decision in Hazell v
Hammersmith and Fulham LBC would (or should) in any event not be decided the same way
today, on the basis, inter alia, that the use of interest rates swaps has now become a mainstream
part of financial management, see Firth, Derivatives Law and Practice, paragraphs 2.028 and
2.034. See also Banco Santander Totta SA v Companhia De Carris De Ferro De Lisboa SA
[2016] EWHC 465 (Comm) at para 323 (the Court (Blair J) noted the argument made in closing

32
 Schools 6.43

submissions that the result in Hazell was reversed by s 1(1) of the Localism Act 2011, but the
point did not arise for consideration on the facts).
5
[1996] 2 Lloyd’s Rep 241, CA.
6
[1996] 4 All ER 176.
7
See R (Peters) v Haringey London Borough Council [2018] EWHC 192 (Admin).

(d) Authority to act

6.41 The functions of a local authority may be discharged by a committee or
sub-committee of the authority or by any other local authority. Committee and
officers are appointed by the council, which is empowered to delegate
(s 101(10)), for instance, to a finance or similar committee whose duty, inter
alia, is to determine who shall sign on bank accounts and the extent of their
authority in relation to them. The resolution delegating this authority should be
given to the bank and will constitute the bank’s mandate.

11 SCHOOLS
6.42 This section addresses three of the main categories of schools; state
schools, academies and free schools, and independent schools. The primary
issue facing a bank in respect of its dealings with schools is the borrowing
restrictions that the school may be subject to.

(a) Maintained schools

6.43 Pursuant to s 1(3) of the Education Act 2002, maintained schools are
defined as community, foundation or voluntary schools, community or foun-
dation special schools, and maintained nursery schools. Maintained schools are
funded by central government via local authorities.
The borrowing powers of maintained schools are significantly restricted by
statute. Although by Schedule 1, paragraph 3 of the Education Act 2002 the
governing body has the power to borrow and to grant any mortgage, charge or
other security over any land as the governing body thinks fit, such power may
only be exercised with the written consent of the Secretary of State (or the
National Assembly for Wales, as relevant1). The governing body’s power to
borrow is further subject to any provisions of the school’s instrument of
government and any provisions of a scheme under s 48 of the School Standards
and Framework Act 19982.
Section 48 of the 1998 Act requires each local education authority to prepare a
scheme dealing with matters connected with the financing of the schools
maintained by the authority.
1
Education Act 2002, Sch 1, para 3. Pursuant to para 3(5), the Secretary of State/National
Assembly of Wales may by order delegate this function to the relevant local authority.
2
Education Act 2002, Sch 1, para 32(8).

33
6.44 Special Customers

(b) Academies and Free Schools

6.44 Academies are state-funded independent schools, and receive their fund-
ing directly from the Education and Skills Funding Agency (ESFA) rather than
from local authorities1. Academies are charitable companies limited by guaran-
tee, termed an ‘Academy Trust’. The academy trust is responsible for the
running of the academy and has control over the land and other assets. Free
Schools are a form of Academy.
An Academy’s funding is regulated by the terms of an arrangement negotiated
with the Secretary of State upon the establishment of the academy, pursuant to
which the Secretary of State provides financial assistance or makes payments to
a party in consideration of undertakings concerning the establishment and
maintenance of the school2. Each Academy’s powers and ability to borrow is
governed by the terms of its memorandum, articles of association, the Acad-
emies Financial Handbook, and the academy trust’s funding agreement with the
Secretary of State.
1
The EFA was established by the Education Act 2011.
2
Academies Act 2010, s 1.

(i) Model Memorandum and Articles of Association

6.45 A model Memorandum and Articles of Association for Academy Trusts
published by the Department for Education provides that the object of an
Academy Trust is to advance for the public benefit education in the United
Kingdom, and confers on the Academy Trust the power:
‘(l) subject to such consents as may be required by law and/or by any contract entered
into by or on behalf of the Academy Trust to borrow and raise money for the
furtherance of the Object in such manner and on such security as the Academy Trust
may think fit;’

(ii) Academies Financial Handbook and Model Funding Agreement

6.46 The Academies Financial Handbook, published by the ESFA, sets out the
requirements and guidance relating to the financial management of the acad-
emy trust. The handbook is updated for the start of each academic year. The
ESFA’s approval is required for borrowing (including finance leases and over-
draft facilities) from any source, where such borrowing is to be repaid from
grant monies or secured on assets funded by grant monies, regardless of the
interest rate chargeable. The Secretary of State’s general position is that acad-
emy trusts will only be granted permission for borrowing in exceptional
circumstances1.
Restrictions on an academy trust’s power to borrow will be set out in its funding
agreement with the secretary of state. A number of Model funding agreements
have been published by the Department for Education2.
1
Financial Handbook for the year commencing 1 September 2018, paragraphs 3.8.1–3.8.2.
2
Copies of all such model funding agreements can be found on the Department of Educa-
tion’s website.

34
 Mentally Incapacitated Customers 6.48

(c) Independent schools

6.47 Independent schools are defined by s 463 of the Education Act 1996 (as
amended by s 172 of the Education Act 2002). There is no statutory restriction
on the corporate structure to be used by independent schools, which can be run
as either limited companies or registered charities. The relevant considerations
addressed above in respect of those institutions will apply.

12 MENTALLY INCAPACITATED CUSTOMERS

6.48 Where a person is mentally incapacitated and the banker knows of it, he
has no mandate on which to act; though if he collects a cheque for the mentally
incapacitated person, it is likely that he could claim that he collected for a
‘customer’; otherwise any balances and securities he may have with the bank are
tied, to be dealt with on the directions of the Court of Protection or by the
depositor if he recovers and again becomes capable of contracting. Yet difficul-
ties arise. In Scarth v National Provincial Bank Ltd1, the bank paid to the wife
the balance standing to her husband’s credit, he having been certified and she
having paid her husband’s debts to a greater amount. Humphreys J held that the
equitable doctrine as stated by Wright J in B Liggett (Liverpool) Ltd v Barclays
Bank Ltd applied2. This is in line with the decision in Re Beavan, Davies, Banks
& Co v Beavan3, that money lent by a bank to meet necessaries for a mentally
incapacitated person’s household and estate may be recovered by right of
subrogation; but it was further held that claims for interest and charges would
not lie.
For transactions effected after 1 October 2007, the Mental Capacity Act 2005
will be relevant4.
Section 2 of the 2005 Act provides that ‘a person lacks capacity in relation to a
matter if at the material time he is unable to make a decision for himself in
relation to the matter because of an impairment of, or a disturbance in the
functioning of, the mind or brain’.
By s 7, if necessary goods or services are supplied to a person who lacks capacity
to contract for the supply, he must pay a reasonable price for them5.
The Mental Capacity Act also provides for the Court to appoint one or more
‘deputies’ to make decisions on the mentally incapacitated person’s behalf,
including in relation to their property and affairs. A bank may therefore
transact with the deputy in relation to the mentally incapacitated person’s af-
fairs, provided the deputy remains within the scope of his appointment6.
1
(1930) 4 LDAB 241.
2
[1928] 1 KB 48.
3
[1912] 1 Ch 196.
4
Part 1 of the Act came into force on 1 October 2007 for most relevant purposes. For limited
purposes, including the appointment of independent mental capacity advocates, certain sec-
tions came into force on 1 April 2007: SI 2007/563.
5
However see Diann Blankley (by her Litigation Friend Andrew MG Cuswoth) v Central
Manchester, Manchester Children’s University Hospitals NHS Trust [2014] EWHC 168 (Ch),
a case concerning a solicitor’s retainer. Phillips J held that s 7 could have no application in
circumstances where a deputy had been duly appointed and instructions were received through
the deputy rather than directly from the person lacking capacity. The point was not considered
by the court on appeal ([2015] EWCA Civ 18).

35
6.48 Special Customers
6
Mental Capacity Act 2005, ss 16–20.

36
Chapter 7

SAFE CUSTODY

1 INTRODUCTION 7.1
2 THE BAILEE’S DUTY OF CARE 7.2
3 LIABILITY FOR WRONGDOING BY BANK STAFF 7.3
4 CONVERSION
(a) Availability of claim in conversion against bailee 7.4
(b) Knowledge of adverse claims 7.5
5 GENERAL INFORMATION ON SAFE CUSTODY
(a) Joint bailors 7.6
(b) Demand for delivery by transferee 7.7
(c) Removal of goods by banker 7.8
(d) Banker’s lien 7.9
(e) Night safes 7.10
(f) Safe deposit boxes 7.11

1 INTRODUCTION TO SAFE CUSTODY

7.1 For the convenience of customers, banks assume charge of valuables. The
goods are said to be delivered to the banker for ‘safe custody’. The bank thereby
becomes a bailee. Common examples of this service are the provision of storage
in the bank’s vaults, night safes and safe deposit boxes. Depending on the
circumstances, causes of action against the bank may include breach of con-
tract, tort, breach of duty as bailee and conversion.

2 THE BAILEE’S DUTY OF CARE

7.2 A bank which accepts articles for safe custody is probably a bailee for
reward rather than a gratuitous bailee1: see Port Swettenham Authority v T W
Wu & Co (M) Sdn Bhd2.
In practice, the distinction between a gratuitous bailee and a bailee for reward
appears to make little difference to the existence and scope of the bank’s duty of
care, in that:
(1) a gratuitous bailee is liable for want of ordinary care3, as is a bailee for
reward;
(2) where bailed goods are lost from the custody of the bailee, the onus is on
the bailee, whether gratuitous or for reward, to prove that the loss was
not caused by his failure to exercise the care required by law4; and
(3) the standard of care required in providing a service of safe custody is
unlikely to differ much, if at all, as between a gratuitous bailee and a
bailee for reward.
In Houghland v R R Low (Luxury Coaches) Ltd Ormerod LJ held that,
whether the bailment is gratuitous or for reward, the standard of care required
of a bailee is that demanded by the circumstances of the case:

1
7.2 Safe Custody

‘ . . . to try to put a bailment, for instance, into a watertight compartment – such

as a gratuitous bailment on the one hand, and bailment for reward on the other – is
to overlook the fact that there might well be an infinite variety of cases, which might
come into one or the other category. The question we have to consider in a case of this
kind, if it is necessary to consider negligence, is whether in the circumstances of this
particular case a sufficient standard of care has been observed by the defendants or
their servants.’5

1
For a fuller treatment of the law of bailment, see Palmer on Bailment.
2
[1979] AC 580 at 589F, [1978] 3 All ER 337 at 340b, PC.
3
Per Lord Finlay LC in Banbury v Bank of Montreal [1918] AC 626 at 657; see also Hedley
Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 at 526, [1963] 2 All ER 575 at 608,
HL (Lord Devlin).
4
Port Swettenham Authority v T W Wu & Co (M) Sdn Bhd [1979] AC 580 at 589D and 590B,
[1978] 3 All ER 337 at 339 to 340a and 340d, PC, disapproving (as regards gratuitous bailees)
Giblin v McMullen (1868) LR 2 PC 317. See also Matrix Europe Ltd v Uniserve Holdings Ltd
[2009] EWHC 919 (Comm) at [47–50].
5
[1962] 1 QB 694 at 698, [1962] 2 All ER 159 at 161, considered by the Court of Appeal in
Chaudhry v Prabhakar [1989] 1 WLR 29 at 33H to 34D (in which it was held that the standard
of care required must be judged objectively), and in Toor v Bassi [1999] EGCS 9. Cf Port
Swettenham Authority v T W Wu & Co (M) Sdn Bhd [1979] AC 580 at 589C, [1978] 3 All ER
337 at 339h, which suggests that, although the line between the two standards is ‘difficult to
discern and impossible to define’, the standard required of a bailee for reward may in some
circumstances be more exacting than that required of a gratuitous bailee. This is unlikely to
make a difference in the case of a bank offering facilities of safe custody.

3 LIABILITY FOR WRONGDOING BY BANK STAFF

7.3 The bank may be directly liable if it negligently appoints an employee who
is inappropriate for the task of safeguarding the customer’s articles. The bank
may also be vicariously liable for wrongs committed by its employees in the
course of their employment1.
Whether the employee’s conduct falls within the course of employment depends
on whether it is ‘so closely connected with his employment that it would be fair
and just to hold the [employer] vicariously liable’2. The test is broad enough to
allow for vicarious liability in respect of intentional as well as merely negligent
wrongdoing3.
The bank is not vicariously liable if the employee’s employment merely provides
the opportunity for the employee’s tort4. The bank is also not vicariously liable
unless all the features of the relevant wrong which are necessary to make the
employee liable occurred within the course of the employee’s employment5.
Of particular relevance in the context of bailment is the Court of Appeal’s de-
cision in Morris v C W Martin & Sons Ltd6, in which an employee who was
instructed to clean a mink stole made away with it. The employer was held
vicariously liable for the conversion ‘on the ground that the fur was stolen by
the very servant whom the defendants as bailees for reward had employed to
take care of it’7. Accordingly, ‘A theft by any servant who is not employed to do
anything in relation to the goods bailed is entirely outside the scope of his
employment and cannot make the master liable’8.
The matter depends in some degree upon the extent of the authority which the
employee may be reasonably expected to have. The extent of the apparent or

2
 Conversion 7.4

implied authority will depend in part upon the status of the staff officer
concerned; as was said by the Privy Council in Bank of New South Wales v
Owston:
‘The duties of a bank manager would usually be to conduct banking business on
behalf of his employers, and when he is found so acting, what is done by him in the
way of ordinary banking transactions may be presumed, until the contrary is shewn,
to be within the scope of his authority; and his employers would be liable for his
mistakes, and, under some circumstances, for his frauds, in the management of such
business.’9

1
Lloyd v Grace, Smith & Co [1912] AC 716 at 742; United Africa Co Ltd v Saka Owoade
[1955] AC 130 at 144; Morris v CW Martin & Sons Ltd [1966] 1 QB 716; Lister v Hesley
Hall Ltd [2001] UKHL 22, [2002] 1 AC 215; Cox v Ministry of Justice [2016] UKSC 10,
[2016] AC 660 at [15–24]. In Cox the Supreme Court considered the general principles
governing the imposition of vicarious liability. The Supreme Court explained that the doctrine
classically applies where there is a relationship of employment and a tort is committed by the
employee in the course of employment, although the doctrine can also apply to relationships
possessing characteristics similar to those found between employer and employee, subject to
there being a sufficient connection between that relationship and the commission of the tort in
question.
2
Lister v Hesley Hall Ltd [2001] UKHL 22, [2002] 1 AC 215 at [28]; Mohamud v Wm Morrison
Supermarkets Plc [2016] UKSC 11, [2016] AC 677 at [44–46] and [53–54].
3
Lloyd v Grace, Smith & Co [1912] AC 716 at 740 (approved by the Privy Council in Port
Swettenham Authority v T W Wu & Co (M) Sdn Bhd [1979] AC 580 at 591E–G); Morris v CW
Martin & Sons Ltd [1966] 1 QB 716; Lister v Hesley Hall Ltd [2001] UKHL 22, [2002] 1 AC
215 at [19], [75] and [79]; Frans Maas (UK) Ltd v Samsung Electronics (UK) Ltd [2004]
EWHC 1502 (Comm) at [104–112].
4
Lister v Hesley Hall Ltd [2001] UKHL 22, [2002] 1 AC 215 at [45], [59] and [75]; Frederick v
Positive Solutions (Financial Services) Ltd [2018] EWCA Civ 431 at [76].
5
Credit Lyonnais Bank Nederland NV (now known as Generale Bank Nederland NV) v Export
Credits Guarantee Department [2000] 1 AC 486 at 495F; Frederick v Positive Solutions
(Financial Services) Ltd [2018] EWCA Civ 431 at [74].
6
[1966] 1 QB 716, [1965] 2 All ER 725, CA, applied in Leesh River Tea Co Ltd v British
India Steam Navigation Co Ltd [1967] 2 QB 250, [1966] 3 All ER 593, CA, approved in Port
Swettenham Authority v T W Wu & Co [1979] AC 580, [1978] 3 All ER 337, PC. See also the
warehouse cases: Brook’s Wharf and Bull Wharf Ltd v Goodman Bros [1937] 1 KB 534, [1936]
3 All ER 696; Global Dress Co Ltd v W H Boase & Co Ltd [1966] 2 Lloyd’s Rep 72; British
Road Services Ltd v Arthur Crutchley & Co Ltd [1968] 1 All ER 811, [1968] 1 Lloyd’s Rep
271, CA; Mansfield Importers and Distributors Ltd v Casco Terminals Ltd [1971] 2
Lloyd’s Rep 73 (Supreme Court of British Columbia).
7
Morris v CW Martin & Sons Ltd [1966] 1 QB 716 at 737F per Diplock LJ, 740G to 741B per
Salmon LJ and 728B per Lord Denning MR. See also Lister v Hesley Hall Ltd [2001] UKHL 22,
[2002] 1 AC 215 at [45–46], [59–60] and [75].
8
Morris v CW Martin & Sons Ltd [1966] 1 QB 716 at 741A per Salmon LJ.
9
(1879) 4 App Cas 270 at 289. See also Egyptian International Foreign Trade Co v Soplex
Wholesale Supplies Ltd [1985] 2 Lloyd’s Rep 36, CA; Russo-Chinese Bank v Li Yau Sam
[1910] AC 174, PC.

4 CONVERSION

(a) Availability of claim in conversion against bailee

7.4 By s 2(2) of the Torts (Interference with Goods) Act 1977:
‘An action lies in conversion for loss or destruction of goods which a bailee has
allowed to happen in breach of his duty to his bailor (that is to say it lies in a case

3
7.4 Safe Custody

which is not otherwise conversion, but would have been detinue before detinue was
abolished).’
Contributory negligence is no defence in proceedings founded on conversion
(s 11(1))1 and conversion includes the receipt of goods by way of pledge if the
delivery is conversion (s 11(2)).
In Kuwait Airways Corpn v Iraqi Airways Co (Nos 4 and 5) Lord Nicholls
defined the tort of conversion at common law in the following terms2:
‘First, the defendant’s conduct was inconsistent with the rights of the owner (or other
person entitled to possession). Second, the conduct was deliberate, not accidental.
Third, the conduct was so extensive an encroachment on the rights of the owner as to
exclude him from use and possession of the goods.’
The distinction is between commission and omission, between the active
interference with the property involved in the voluntary handing over of the
goods to a person not entitled to receive them, and the mere passive neglect of
duty which may result in their loss. Conversion is independent of blamewor-
thiness. The cases show that conversion will occur if a bailee delivers goods to
the wrong person. In Stephenson v Hart3 Parke J said that conversion would lie
against a bailee that delivered to the wrong person but, drawing a distinction
between misfeasance and nonfeasance, would not lie where a bailee had lost
goods by robbery or theft.
Section 12 of the 1977 Act provides for the bailee’s power of sale in respect of
uncollected goods in its possession, upon the statutory conditions being met
and subject to the terms of the bailment. Section 13 provides that the court may
authorise a sale. The court’s authorisation is (subject to any right of appeal)
conclusive against the bailor and gives good title to the purchaser as against the
bailor. A bank seeking to sell uncollected items (particularly items of high value)
would usually be well-advised to seek authorisation from the court.
1
In Uzinterimpex JSC v Standard Bank plc [2008] EWCA Civ 819, [2008] 2 Lloyd’s Rep 456
the Court of Appeal held that this section did not have a bearing on the existence of any duty to
mitigate and that in principle a duty to avoid or minimise loss arises when goods are converted
in the same way as in the case of other legal wrongs.
2
[2002] UKHL 19, [2002] 2 AC 883 at [39]. See further the definition given by Atkin J in
Lancashire and Yorkshire Rly Co v MacNicoll (1918) 88 LJKB 601 at 605, in terms approved
by Scrutton LJ in Oakley v Lyster [1931] 1 KB 148 at 153, and by Lord Porter in Caxton
Publishing Co Ltd v Sutherland Publishing Co Ltd [1939] AC 178 at 201 to 202, [1938]
4 All ER 389 at 403H to 404A. See further Club Cruise Entertainment & Travelling Services
Europe BV v Department for Transport [2008] EWHC 2794 (Comm), [2009] 1 Lloyd’s Rep
201 at [40–47].
3
(1828) 4 Bing 476 at 482, 130 ER 851 at 854. See also Marcq v Christie Manson & Woods Ltd
[2003] EWCA Civ 731, [2004] QB 286, CA.

(b) Knowledge of adverse claims

7.5 The banker is primarily concerned to comply with the mandate pursuant to
which he accepts the goods for safe custody1. However, the banker is entitled to
show in a claim brought by a depositor that a third party has better right to the
goods2.
It depends entirely on the facts whether a banker is so vested with knowledge of
a valid adverse claim to the property he holds as justifies him in refusing to

4
 General Information on Safe Custody 7.6

redeliver to his bailor. There is no conversion if the bank acts upon the
bailor’s instructions in good faith without notice of defect in the bailor’s title3.
Where anyone other than the original depositor demands redelivery and the
demand is genuine, the bank is guilty of technical conversion of the goods if it
refuses to comply4. There is no conversion however if the banker is able to
convince the court that he had ‘a bona fide doubt as to the title to the goods’ and
had ‘[detained] them for a reasonable time, for clearing up that doubt’: see per
Blackburn J in Hollins v Fowler5.
Similarly, the bank may doubt the validity of a demand for redelivery purport-
ing to come from the original depositor, in which case the bank may retain the
property for such time as is reasonably necessary to clear up that doubt.
Thereafter, subject to the Torts (Interference with Goods) Act 1977, s 8(1), the
bank is liable if it wrongly refuses the depositor’s demand6. The bank would
also be liable if it surrendered the property to an unauthorised person7.
1
This is borne out by the judgment of Martin B in Cheesman v Exall (1851) 6 Exch 341 at 346,
155 ER 574 at 576 (a bailee was at common law generally estopped from denying the title of the
person from whom he received the property; see further Ross v Edwards & Co (1895) 73 LT
100; Biddle v Bond (1865) 6 B & S 225; Blaustein v Maltz, Mitchell & Co [1937] 2 KB 142,
[1937] 1 All ER 497). Cf Torts (Interference with Goods) Act 1977, s 8(1).
2
Torts (Interference with Goods) Act 1977, s 8(1). The section refers to ‘rules of court’ relating
to proceedings for wrongful interference and s 8(2) provides for the creation of such rules. See
further CPR 19.5A, which (amongst other things) (i) requires the claimant in a claim for
wrongful interference with goods to identify in the particulars of claim any person who (to the
claimant’s knowledge) claims an interest in the goods, and (ii) provides that a defendant to a
claim for wrongful interference with goods may apply for a direction that another person be
made a party to the claim to establish whether the other person has a better right to the goods
than the claimant.
3
See Blackburn J in Hollins v Fowler (1875) LR 7 HL 757 at 766-767.
4
As to the definition of demand and refusal, see Schwarzschild v Harrods Ltd [2008] EWHC 521
(QB) at [20–25]. Difficulties may arise where the deposit is made by a foreign bank: see Kahler
v Midland Bank Ltd [1950] AC 24 at 33-34, [1949] 2 All ER 621 at 628A (a true owner’s right
to delivery of items deposited by a third party with a bailee depended on his right to immediate
possession, which could not be established in that case according to the proper law of the
contract between the owner and the foreign bank), applying Gordon v Harper (1796) 7 Term
Rep 9, 101 ER 828 and Bradley v Copley (1845) 1 CB 685. See further Zivnostenska Banka
National Corp v Frankman [1950] AC 57.
5
(1875) LR 7 HL 757 at 766; and see Lord Abinger CB and Parke B in Vaughan v Watt (1860)
6 M & W 492 at 497, 151 ER 506 at 508; Fletcher Moulton LJ in Clayton v Le Roy [1911] 2 KB
1031 at 1051; Bramwell B in Burroughes v Bayne (1860) 5 H & N 296 at 308, 157 ER 1196
at 1201; Marcq v Christie Manson & Woods Ltd [2003] EWCA Civ 731, [2004] QB 286, CA
at [14].
6
Where there are competing claims to the property, the bank may be entitled to interplead,
whereby the court will resolve the rival claims: CPR 86 (replacing RSC Order 17).
7
See further Torts (Interference with Goods) Act 1977, s 5(1) (‘Extinction of title on satisfaction
of claim for damages’).

5 GENERAL INFORMATION ON SAFE CUSTODY

(a) Joint bailors

7.6 Where chattels are deposited jointly by two or more persons, the authority
of all is ordinarily requisite before they can be withdrawn1. The bank is not
entitled to return the chattels to one only of the joint bailors: Brandon v Scott2.

5
7.6 Safe Custody

Banks generally take specific mandates which may require the signature of all
bailors as a prerequisite to withdrawal or give authority for delivery to less than
all. Banks will also generally provide that delivery may be made to the surviving
depositor(s) following the death of a joint depositor.
1
May v Harvey (1811) 13 East 197, 104 ER 345; Atwood v Ernest (1853) 13 CB 881, 138 ER
1449; and Brandon v Scott (1857) 7 E & B 234, 119 ER 1234.
2
(1857) 7 E & B 234 at 236-237, 119 ER 1234 at 1235.

(b) Demand for delivery by transferee

7.7 If delivery is called for by a transferee of a chattel, he has no direct claim
against the bailee until the bailee has attorned to him1 (by accepting directions
to hold the chattel on behalf of the transferee or by acknowledging the
transferee’s title2). The banker is not the debtor immediately affected by the
assignment of a chose in action, nor the person to receive notice if the
assignment is under the Law of Property Act 1925. He is a mere depositary.
1
Cf Dublin City Distillery Ltd v Doherty [1914] AC 823 at 847.
2
See further Laurie & Morewood v Dudin & Sons [1926] 1 KB 223 at 237.

(c) Removal of goods by banker

7.8 The banker must not remove the goods from the premises where they were
received for custody, if it is part of the agreement that they be stored at a
particular place. If he stores them elsewhere, he may be liable for their loss or
destruction, apart from any question of negligence, unless it is shown that the
loss would still have occurred even if the obligation had been complied with1.
He would, however, be justified in removing them if danger threatened, as in a
case of national emergency, but would be wise to obtain the bailor’s consent, if
possible.
1
Lilley v Doubleday (1881) 7 QBD 510 at 511; Gibaud v Great Eastern Rly Co [1921] 2 KB 426
at 431; A/S Rendal v Arcos Ltd (1937) 43 Com Cas 1 at 14, [1937] 3 All ER 577 at 587H-588A;
Yearworth and others v North Bristol NHS Trust [2009] EWCA Civ 37, [2010] QB 1 at [48].

(d) Banker’s lien

7.9 Goods deposited for safe custody are not subject to the banker’s lien. It was
so held in Brandao v Barnett1 and Leese v Martin2. Accordingly, the bank is
obliged to return them, even if the depositor has unpaid indebtedness on his
accounts with the bank. The banker’s lien is discussed in more detail in Chapter
14.
1
(1846) 12 Cl & Fin 787 at 808, 8 ER 1622 at 1630, HL.
2
(1873) LR 17 Eq 224 at 235-236. To the extent that this decision rests upon (i) Giblin v
McMullen (1868) LR 2 PC 317 (which has now been disapproved: see para 7.2 above); and (ii)
the claimant’s failure to plead and prove a general custom amongst bankers to allow their
customers to deposit boxes in their strong rooms, these grounds must be regarded as suspect.
However, the decision further rests upon: (i) a concession made, and approved by Lord

6
 General Information on Safe Custody 7.11

Campbell, in Brandao v Barnett; and (ii) general principle; and these additional grounds appear
sound.

(e) Night safes

7.10 It would appear that the bank receives deposits from customers in a night
safe as bailee for reward1. In the case of cash, the bailment relationship ends
when the funds are credited to the customer’s account.
1
Bernstein v Northwestern National Bank (1945) 41 A 2d 440.

(f) Safe deposit boxes

7.11 Banks commonly allow customers to hire safe deposit boxes for the safe
custody of valuables. The rights and liabilities of the parties are likely to be
primarily governed by contract. The bank may also receive items stored in the
safe deposit box as bailee for reward1.
1
For example, see Schwarzschild v Harrods Ltd [2008] EWHC 521 (QB). The bank may not be
a bailee if it does not have the requisite possession of the stored goods (see for example Fairline
Shipping Corp v Adamson [1975] QB 180 at 189-190 and Kamidian v Holt [2008] EWHC
1483 (Comm), [2009] Lloyd’s Rep IR 242 at [75]); however, the bank would commonly reserve
a right to inspect the contents of the safe deposit box or access it in an emergency.

7
Part III

BANK LENDING

1
Chapter 8

LOANS: DEMAND, INTEREST,

CHARGES AND COSTS

1 DEMAND
(a) Entitlement to make demand 8.1
(b) Requirements for a valid demand 8.2
(c) Demand following an event of default 8.6
2 INTEREST
(a) Express contract for interest 8.7
(b) Implied contract for interest 8.12
(c) Equitable jurisdiction to award interest 8.15
(d) Statutory interest to date of judgment 8.16
(e) Statutory interest from date of judgment 8.19
(f) Interest as damages 8.20
3 BANK CHARGES 8.21
4 COSTS AND EXPENSES 8.22

1 DEMAND

(a) Entitlement to make demand

8.1 Monies lent to a customer may be stipulated as being repayable ‘on
demand’1. This is generally the case with overdrafts. Overdrafts for a fixed term
and term loans may also contain repayment on demand clauses.
Where the bank reserves the right to make prior demand in respect of a facility
that is otherwise expressed to be for a fixed period or for a specific purpose, the
agreement may present difficulties of construction. This occurred in Titford
Property Co Ltd v Cannon Street Acceptances Ltd2, where the defendant
merchant bank had granted the claimant companies fixed term overdrafts to
finance their property development business. There was a separate account and
overdraft facility for each project. Each facility letter contained the following
clause:
‘9. All monies due by you, whether by way of capital or interest, shall be payable on
demand, and you shall have the right to re-pay all monies due without notice.’
The lenders demanded repayment before the fixed expiry date of certain of the
facilities and appointed receivers on default in repayment. The claimants
applied for injunctive relief. Goff J viewed the construction of the facility letters
as an issue which did not depend on disputed facts and which he was therefore
bound to decide. He held (i) that ‘due’ in the first part of cl 9 meant ‘due,
whether presently payable or not’, this being clear from the second part of the
clause; but (ii) that cl 9 so construed was ‘completely repugnant to the whole
facility’ and accordingly, it had to be modified, by reading it as subject to the
provision as to the duration of the facility, or ignored altogether3.

3
8.1 Loans: Demand, Interest, Charges and Costs

The Titford case may be compared with Williams and Glyn’s Bank v Barnes4,
where a bank granted an overdraft facility which it knew was to be used to
finance a particular transaction. However, the overdraft was expressly repay-
able on demand and was not granted for a fixed period. Peter Gibson J held that
the bank was entitled to demand repayment at any time.
In Lloyds Bank plc v Lampert5 a facility letter provided that the loan would be
‘repayable in full on demand’ but that the bank intended to make the facility
available until a specific date. After citing the Titford case and the Williams and
Glyn’s Bank case, Kennedy LJ said (at 167–168):
‘I am wholly unpersuaded that the words “repayable on demand” used in the facility
letter do not mean what they say. It is in no way inconsistent for a bank, or any other
lender to grant a facility which it and the borrower both envisage will last for some
time, but with the caveat that the lender retains the right to call for repayment at any
time on demand.’
This decision was followed in Bank of Ireland v AMCD (Property
Holdings) Ltd6 in which the defendants had arranged funding of £1.4m from
the claimant bank for a property development venture. The facility letter
provided for a term of 12 months from the first use of the facility, and for
repayment ‘on demand’ or, ‘in the expected ordinary course of events’, ‘from the
sale of the development within 12 months’. The letter also provided that in the
event of the non-payment of any money due which had not been rectified to the
satisfaction of the bank, the bank would be entitled to make demand for
immediate repayment. The court held that it was not arguable that the provi-
sions of a facility letter which envisaged (i) that the facility would be available
for a period of 12 months; and (ii) that the bank was entitled to demand
immediate repayment in the event of non-payment, were repugnant to or
overrode in any way a clear statement that repayment was to be made ‘on
demand’. Further, it was trite law that parties to a contract were free to
determine for themselves what primary obligations they would accept7. In the
instant case there was no warrant for treating the repayment provision other-
wise than in accordance with its terms. No business person could have under-
stood that provision in any sense other than that for which the bank contended,
namely that the amounts advanced were repayable on demand, but that, if all
went well, the bank would expect to receive repayment from the sale of the
development.
1
In the absence of express provision, a loan or overdraft is repayable on demand, unless a
contrary agreement must be implied: Williams and Glyn’s Bank v Barnes [1981] Com LR 205,
applied in Hall v Royal Bank of Scotland Plc [2009] EWHC 3163 (QB) at [35] and [52].
2
(22 May 1975, unreported).
3
In support of his ruling, Goff J relied on Ex p Walton (1881) 17 Ch D 746, 750, CA; Firestone
Tyre and Rubber Co Ltd v Vokins & Co Ltd [1951] 1 Lloyd’s Rep 32, 39; Neuchatel
Asphalte Co Ltd v Barnett [1957] 1 WLR 356, 360, [1957] 1 All ER 362, 365, CA;
Mendelssohn v Normand Ltd [1970] 1 QB 177, [1969] 2 All ER 1215, CA.
4
[1981] Com LR 205.
5
[1999] 1 All ER (Comm) 161, CA, applied in Hall v Royal Bank of Scotland Plc [2009] EWHC
3163 (QB) at [36] and [52].
6
[2001] 2 All ER (Comm) 894 at [15–17] (Lawrence Collins J).
7
See further Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 at 848F; and Carey
Group plc v AIB Group (UK) plc [2011] EWHC 567 (Ch), [2012] Ch 304 at [39], per Briggs J:
‘The court will not lightly find that an important provision in a banking facility, such as for
repayment on demand, is repugnant, although the particular facts of the Titford case afforded
a powerful basis for that conclusion.’

4
 Demand 8.4

(b) Requirements for a valid demand

8.2 The making of a valid demand is of practical importance in two contexts.
First, the date of demand is normally the date from which interest is claimed on
overdue amounts. Demand may cause interest to be claimable either de novo,
and/or on an increased sum (as where demand causes outstanding principal and
interest to capitalise), and in some cases at an increased rate, often described as
a default rate. Second, the making of a valid demand is normally a pre-
condition to the right to realise security.

(i) Peremptory character and unconditional

8.3 In Re A Company1 Nourse J accepted as a fair working definition of a valid

demand that given by Walker J in the Australian case of Re Colonial Finance,
Mortgage, Investment and Guarantee Corpn Ltd2:
‘ . . . there must be a clear intimation that payment is required to constitute a
demand; nothing more is necessary, and the word ‘demand’ need not be used; neither
is the validity of a demand lessened by its being clothed in the language of politeness;
it must be of a peremptory character and unconditional, but the nature of the
language is immaterial provided it has this effect.’
This definition has since been approved by the Court of Appeal3.
1
[1985] BCLC 37 at 41.
2
(1905) 6 SRNSW 6 at 9.
3
In Bank of Credit and Commerce International SA v Blattner (20 November 1986, unreported),
CA (Civil Division) Transcript No 1176 of 1986. See also County Leasing Ltd v East [2007]
EWHC 2907 (QB) at [124], in which it was held that the validity of a demand must ‘depend
upon proper construction of the document by which the demand is made, and not upon
circumstances arising after the production of the document’.

(ii) Amount due need not be specified

8.4 The calculation of the precise amount due on a particular date can be an
expensive and futile exercise. In Bank of Baroda v Panessar1, two associated
companies executed in favour of the claimant bank a debenture which secured
all monies owed. The claimant later made demand by a letter which simply
stated:
‘We hereby demand all monies due to us under the powers contained in the debenture
mortgage dated 22 September 1981.’
Proceedings were then brought against guarantors of the companies who
submitted that the demand, and the subsequent appointment of a receiver, were
invalid because the demand had failed to specify the amount due. It was held by
Walton J, following the Australian case of Bunbury Foods Pty Ltd v National
Bank of Australasia Ltd2, that the demand was valid. The claimant had done
precisely what, by the terms of his security he was entitled to do, ie to demand
repayment of all monies secured by the debenture. It was further observed that
knowledge of the precise amount of the sum outstanding is only required in the
exceptional case, because in most cases, the debtor has no real means of paying
off the sum, and it would be idle to put the creditor to what might be very
considerable expense in ascertaining the precise amount due when there is no

5
8.4 Loans: Demand, Interest, Charges and Costs

likelihood that the sum will represent a realistic target at which the debtor can
aim3. Although these observations were made in the context of a debenture
which by its terms secured all monies owing, they are of wider application.
1
[1987] Ch 335, [1986] 3 All ER 751.
2
(1984) 51 ALR 609.
3
[1987] Ch 335 at 347B, [1986] 3 All ER 751 at 759b. See also County Leasing Ltd v East
[2007] EWHC 2907 (QB) at [121–124] and Bank of New York Mellon v GV Films Ltd [2009]
EWHC 3315 (Comm), [2010] 2 All ER (Comm) 285 at [20].

(iii) Time for payment

8.5 An additional ground on which the receiver’s appointment was challenged
in Bank of Baroda v Panessar1, was that the companies had been given
insufficient time for payment. The receiver had in fact been appointed only an
hour after the making of the demand. Having reviewed the authorities Walton
J concluded that English law has adopted a ‘mechanics of payment’ test, a clear
statement of which is contained in the dictum of Blackburn J in Brighty v
Norton2:
‘I agree that a debtor who is required to pay money on demand, or at a stated time,
must have it ready, and is not entitled to further time in order to look for it.’
The court in Bank of Baroda v Panessar specifically rejected the approach
which has been adopted in certain other common law jurisdictions, that the
debtor must be given a ‘reasonable time’ for payment, regarding it as unfair to
the creditor that the period should depend on all the circumstances of the case,
some of which he may not know and may lack the means of knowing3.
In Sheppard & Cooper Ltd v TSB Bank plc4, Blackburne J held that the time
available to the debtor to effect payment depends on the circumstances of the
case. If, however, the debtor has made it clear to the creditor that the necessary
monies are not available then, provided that a proper demand has been made,
the creditor need not allow any time to elapse before being at liberty to treat the
debtor as in default. On the facts of the case, he held that an interval of one hour
between demand and the appointment of a receiver was sufficient.
1
[1987] Ch 335 at 348F, [1986] 3 All ER 751 at 760c.
2
(1862) 3 B & S 305 at 312, 122 ER 116 at 118, followed by Goff J in RA Cripps
(Pharmaceutical) and Son Ltd v Wickenden [1973] 1 WLR 944 at 955B, [1973] 2 All ER 606
at 616d. The issue of whether, instead of a ‘mechanics of payment’ test, the debtor should be
given a ‘reasonable time’ to pay was left open (because unnecessary to decide) by the Court of
Appeal in Lloyds Bank plc v Lambert [1999] 1 All ER (Comm) 161 at 168c to 169c.
3
[1987] Ch 335 at 349C, [1986] 3 All ER 751 at 760g.
4
[1996] 2 All ER 654 at 659e to 660b.

(c) Demand following an event of default

8.6 Term loans usually list events of default on the occurrence of which (i)
repayment can be demanded before the date on which it would otherwise fall
due and (ii) the bank has the option to treat the contract as repudiated1. It is
open to the parties to agree what these events of default are, even if the

6
 Demand 8.6

stipulated default is only ‘slight’2. When the bank’s contractual right to termi-
nate arises, the courts have rejected attempts to imply terms limiting the exercise
of that right3.
A bank may purport to give notice of an event of default when, in fact, no such
default had occurred. Such a notice would be ineffective. The mere giving of an
ineffective notice of default will not cause the bank to be in breach of contract,
unless there is an express or implied obligation on the bank not to give such an
invalid notice4.
If a bank proceeds on the incorrect basis that a certain event of default occurred,
it may be able subsequently to justify its actions by reference to facts then
existing but not expressly relied on, even if only discovered later, which
constituted an event of default5. The bank would in any event be well-advised to
draft its termination notices broadly6.
1
The bank must make a ‘clear and unequivocal choice between inconsistent legal rights’, as in the
case where an event of default gives it the right to terminate the contract: Standard Bank Plc v
Agrinvest International Inc [2010] EWCA Civ 1400 at [17–18]. In The Angelic Star [1988] 1
Lloyd’s Rep 122 at 126 Neill LJ said that ‘I know of no rule that prevents a lender from
stipulating that in the event of a failure to make an instalment payment on the due date the
whole loan becomes due and repayable forthwith’. In ZCCM Investments Holdings Plc v
Konkola Copper Mines Plc [2017] EWHC 3288 (Comm), [2017] All ER (D) 132 (Dec), at
[33–34] the High Court rejected an argument that an acceleration provision constituted a
penalty.
2
Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75, [2010] QB 27, [2009]
2 All ER (Comm) 1129 at [15]. Further, at [22–23], it was held that such provisions are in
addition to rights arising at common law, short of sufficiently clear terms to the contrary.
3
Lomas v JFB Firth Rixson Inc [2012] EWCA Civ 419, [2012] 2 All ER (Comm) 1076 at [46];
Monde Petroleum SA v Westernzagros Ltd [2016] EWHC 1472 (Comm), [2017] 1 All ER
(Comm) 1009 at [247–275] (decision affirmed at [2018] EWCA Civ 25).
4
Such an implied obligation was rejected by the House of Lords in Concord Trust v The Law
Debenture Trust Corpn Plc [2005] UKHL 27, [2005] 1 WLR 1591 at [36–37] per Lord Scott.
See further BNP Paribas SA v Yukos Oil Co [2005] EWHC 1321 (Ch) at [23–24]; Jafari-Fini v
Skillglass Ltd [2007] EWCA Civ 261 at [113–115]; Verizon UK Ltd (formerly MCI
WorldCom Ltd) v Swiftnet Ltd [2008] EWHC 551 (Comm) at [55]. It appears to be implicit in
Concord Trust that the position would be different if the bank was not acting in good faith. This
would also reflect the principle identified by Lord Wilberforce in Woodar Investment Devel-
opment Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277 at 280H, [1980] 1 All ER 571
at 574d (absent bad faith or abuse, relying on a contractual provision is not a repudiation of the
contract simply because such reliance is wrong in law). It can also be noted that, in Concord
Trust, service of the notice of event of default was not accompanied by non-performance of any
contractual obligations. See further per Lord Scott at [41] and E Peel, ‘No liability for service of
an invalid notice of “event of default”’ (2006) 122 LQR 179.
5
See Byblos Bank SAL v Al-Khudhairy [1987] BCLC 232 at 249e; Glencore Grain Rotter-
dam BV v Lebanese Organisation for International Commerce [1997] 4 All ER 514 at 526f;
Brampton Manor (Leisure) Ltd v McLean [2006] EWHC 2983 (Ch), [2007] BCC 640 at [43]
and [52].
6
For examples (in a non-banking context) of the difficulties that can arise in practice concerning
the distinction between purporting to (i) exercise a contractual right to terminate and (ii) accept
a repudiatory breach, see Imperial Chemical Industries Ltd v Merit Merrell Technology Ltd
[2017] EWHC 1763 (TCC), 173 Con LR 137 at [188–191]; Phones 4u Ltd v EE Ltd [2018]
EWHC 49 (Comm), [2018] 1 Lloyd’s Rep 204 at [132].

7
8.7 Loans: Demand, Interest, Charges and Costs

2 INTEREST

(a) Express contract for interest

(i) Methods of computation

8.7 An express contract for the payment of interest will normally specify the
rate, and it may further specify the method of computing interest and whether
interest is to be compounded.
There are three generally recognised bases of computing annual interest1:
(1) 365/365 – Under this method the annual rate of interest is divided by
365 to produce a daily interest factor. The number of days that the loan
is outstanding is then multiplied by this factor. Under this method
different amounts of interest are charged for months of different lengths.
(2) 360/360 – Under this method each month is treated as having 30 days,
with the consequence that interest for each month is the same. However,
for a calendar year the interest is exactly the same as that calculated by
using the 365/365 method.
(3) 365/360 – This method is a combination of the first two. The annual
interest rate is divided by 360 days (30 days for each month) to create a
daily factor. The number of days that a loan is outstanding is then
multiplied by this factor. Interest charged for months of different lengths
is different, and interest charged for a calendar year is greater than
interest charged under the 365/365 or the 360/360 methods.
The computing of interest must be distinguished from compounding, which is
the capitalisation of interest so that interest itself yields interest2. It has been
held in the law of mortgage that, in the absence of special agreement, simple
interest only can be charged in a mortgage account3. This principle was applied
by the Court of Appeal in holding that a mortgage under which the mortgagor
covenanted to pay to a mortgagee bank all monies due ‘so that interest shall be
computed according to agreement or falling agreement to the usual mode of the
bank’ did not entitle the bank to charge compound interest, notwithstanding
evidence that it was the bank’s practice to do so4.
1
This description is taken from American Timber and Trading Co v First National Bank of
Oregon, 551 F 2d 980 at 982 (US Ct of App, 9th Circ, 1974).
2
See Kitchen v HSBC Bank plc [2000] 1 All ER (Comm) 787 at 792b, CA. Capitalisation of
interest does not alter its quality as interest: Whitbread Plc v UCB Corporate Services Ltd
[2000] 3 EGLR 60 at 62, CA.
3
Daniell v Sinclair (1881) 6 App Cas 181, PC.
4
Bank of Credit and Commerce International SA v Blattner (20 November 1986,
unreported) Court of Appeal (Civil Division) Transcript No 1176 of 1986. See further Kitchen
v HSBC Bank plc [2000] 1 All ER (Comm) 787 at 792h.

(ii) Default rates of interest

8.8 It is common for loan agreements to specify a default rate of interest, ie a
higher rate which applies after the borrower’s default. In Lordsvale Finance plc
v Bank of Zambia1, Colman J had to decide whether a default rate of interest is
a penalty as being a stipulation for payment of money in terrorem of the
offending party rather than a genuine pre-estimate of damage (propositions 2

8
 Interest 8.9

and 3 in the speech of Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New
Garage and Motor Co Ltd2). He held that it was not.
The trend in the authorities following Lordsvale is that provisions in loan
agreements for uplifting the interest rate for the future after a default should not
be regarded as penalties (unless the uplift is evidently extravagant), such
provisions being commercially justifiable because the default bears on the credit
risk and the cost of administering the loan. This development of the law was
approved by the Supreme Court in Makdessi v Cavendish Square Hold-
ings BV3. In that case the Supreme Court took the opportunity to review the law
on penalties generally, and held that the ‘true test is whether the impugned
provision is a secondary obligation which imposes a detriment on the contract-
breaker out of all proportion to any legitimate interest of the innocent party in
the enforcement of the primary obligation’4.
It was observed by the Court of Appeal in The Angelic Star5 that a clause which
provided that in the event of any breach of contract, a long-term loan would
immediately become repayable and that interest thereon for the full term would
not only still be payable, but would be payable at once, would constitute a
penalty as being a payment of money stipulated in terrorem of the offending
party.
In Office of Fair Trading v Abbey National plc6 Andrew Smith J reviewed the
law on penalties in the context of bank charges for unauthorised overdrafts: see
further 8.21 below.
1
[1996] QB 752 at 767C, [1996] 3 All ER 156 at 170a. Colman J also stressed the importance
of the distinction between a retrospective increase in the interest rate on default and a
prospective increase.
2
[1915] AC 79 at 86-87, HL.
3
[2015] UKSC 67, [2016] AC 1172 at [26–28], [145–152] and [222]. See further Holyoake v
Candy [2017] EWHC 3397 (Ch) at [467] and [486].
4
Makdessi v Cavendish Square Holdings BV [2015] UKSC 67, [2016] AC 1172 at [32] per Lord
Neuberger and Lord Sumption.
5
[1988] 1 Lloyd’s Rep 122 at 125, CA, per Sir John Donaldson MR. The Angelic Star was
followed in County Leasing Ltd v East [2007] EWHC 2907 (QB) at [115–117], Maple Leaf
Macro Volatility Master Fund v Rouvroy [2009] EWHC 257 (Comm), [2009] 2 All ER (Comm)
287, [2009] 1 Lloyd’s Rep 475 at [264] and BNP Paribas v Wockhardt EU Operations (Swiss)
AG [2009] EWHC 3116 (Comm) at [38]. In National Bank of Greece SA v Pinios Shipping Co
No 1 ‘The Maira’, [1989] 1 All ER 213, [1988] 2 Lloyd’s Rep 126, the Court of Appeal awarded
simple interest pursuant to a default interest provision. However, no point was taken on the
default interest provision being penal. See also Export Credits Guarantee Department v
Universal Oil Products Co [1983] 2 All ER 205 at 224a, [1983] 1 WLR 399 at 403E, HL.
6
[2008] EWHC 875 (Comm), [2008] 2 All ER (Comm) 625 and [2008] EWHC 2325 (Comm),
[2009] 1 All ER (Comm) 717. See further Makdessi v Cavendish Square Holdings BV [2015]
UKSC 67, [2016] AC 1172 at [41].

(iii) Reduced rate for punctual payment

8.9 It is common for mortgages to provide for a reduction in the rate of interest
in the event of punctual payment. This transparent device for circumventing the
doctrine of penalties received the approval of the House of Lords in Wallingford
v Mutual Society, where Lord Hatherley said1:
‘It is not a penalty on non-payment (though it seems a fine distinction) when you say
that your contract shall be made for interest at 5% to be reduced, in the event of your
punctual payment, to 4%; but it is a relaxation of the terms of that original contract,

9
8.9 Loans: Demand, Interest, Charges and Costs

not taking it by way of penalty at all, but a relaxation of your contract which you
would merit and purchase by paying at a definite and fixed time.’

1
(1880) 5 App Cas 685 at 702. This was followed by the High Court in Aodhcon LLP v
Bridgeco Ltd [2014] EWHC 535 (Ch), [2014] 2 All ER (Comm) 928 at [222–224].

(iv) ‘As well before as after judgment’

8.10 Bank lending is funded by bank borrowing, much of it on inter-bank
markets. It is therefore of considerable commercial importance to banks that
they should be able to charge their borrowers a rate of interest related to the
bank’s own cost of funds until the date of actual repayment, whether it be
before or after judgment.
This can be achieved by providing that contractual interest is to be paid ‘as well
before as after judgment’. The use of this language is based on the decision of
the House of Lords in Economic Life Assurance Society v Usborne1, which
upheld the distinction between:
(i) a covenant for interest which is merely ancillary to, and merges in any
judgment for payment of, the principal sum; and
(ii) an independent covenant for interest which does not merge in the
judgment.
The phrase ‘as well before as after judgment’ is conventional language for the
creation of an independent covenant which does not merge in a judgment for
the principal sum.
The House of Lords has held that a clause in a standard form credit agreement
which provided:
(1) that interest on the amount that became payable would be charged at the
contractual rate until payment, after as well as before judgment; and
(2) that such obligation was to be independent of and not to merge with the
judgment;
was not unfair within the meaning of the Unfair Terms in Consumer Contracts
Regulations 19942.
1
[1902] AC 147 at 152, HL, and see 149 (Earl of Halsbury LC). See also Re Sneyd, ex p Fewings
(1883) 25 Ch D 338, CA; Ealing London Borough Council v El Isaac [1980] 2 All ER 548 at
551h, [1980] 1 WLR 932 at 937F, CA; Director General of Fair Trading v First National
Bank plc [2001] UKHL 52, [2002] 1 AC 481, [2002] 1 All ER 97 at [3–4], HL.
2
Director General of Fair Trading v First National Bank plc [2001] UKHL 52, [2002] 1 AC 481,
[2002] 1 All ER 97, HL. The 1994 Regulations were replaced by the Unfair Terms in Con-
sumer Contracts Regulations 1999, which were in turn replaced by the Consumer Rights Act
2015. However, the House of Lords’ reasoning remains sound in principle.

(v) The bank’s power to vary interest rates

8.11 A loan agreement may provide that the interest rate is variable at the
discretion of the bank. Such unilateral variation clauses are effective, provided
sufficiently clear wording is used1. However, the bank’s discretion is not
unlimited. In Paragon Finance Plc v Nash the Court of Appeal held that in these
circumstances a term will be implied that ‘the rates of interest would not be set

10
 Interest 8.12

dishonestly, for an improper purpose, capriciously or arbitrarily’ and that the

bank would not exercise its discretion ‘in a way that no reasonable lender,
acting reasonably, would do’2. This is a negative obligation only3. The bank
would not breach such an implied term if its decision to vary interest rates is
motivated by commercial considerations.
In addition to any general contractual discretion to vary interest rates, contracts
of loan will often contain market disruption clauses, which may entitle the bank
to vary interest rates in certain circumstances. Such a clause was considered in
Blackwater Services Ltd v West Bromwich Commercial Ltd4. This entitled the
lender to determine and certify an alternative basis for calculating interest if, in
the lender’s opinion, its costs of funding exceeded LIBOR. The High Court held
that the particular clause in question (i) did not require notification of the event
giving rise to the adoption of an alternative basis for calculating interest, (ii) did
not impose any separate obligation to ‘certify’ formally that an alternative basis
for calculating interest had been determined, and (iii) by using the expression
‘an alternative basis for calculating the interest rate’ was not employing a term
of art and allowed the lender to adopt a rate that reflected its actual cost of
funding.
1
Alexander v West Bromwich Mortgage Co Ltd [2016] EWCA Civ 496, [2017] 1 All ER 942 at
[69] and [92].
2
Paragon Finance Plc v Nash [2001] EWCA Civ 1466, [2002] 1 WLR 685, [2002] 2 All ER 248
at [36] and [41]. See further Paragon Finance Plc v Pender [2005] EWCA Civ 760, [2005] 1
WLR 3412 at [120]; Socimer International Bank Ltd v Standard Bank London Ltd [2008]
EWCA Civ 116, [2008] 1 Lloyd’s Rep 558 at [66]; Braganza v BP Shipping [2015] UKSC 17,
[2015] 1 WLR 1661 at [18–27]; Alexander v West Bromwich Mortgage Co Ltd [2016] EWCA
Civ 496, [2017] 1 All ER 942 at [56–57]; Property Alliance Group Limited v The Royal Bank
of Scotland Plc [2018] EWCA Civ 355 at [163–169].
3
For example, in Sterling Credit Ltd v Rahman [2002] EWHC 3008 (Ch) at [5] and [13] it was
held that a lender was under no implied obligation to lower interest rates when prevailing
market rates fell.
4
[2016] EWHC 3083 (Ch).

(b) Implied contract for interest

(i) The decision in Pinios
8.12 Before the decision of the House of Lords in National Bank of Greece v
Pinios Shipping Co1, it was widely thought:
(i) that a bank was entitled by virtue of an implied contract or by the
customer’s acquiescence to capitalise interest accruing on an account,
subject to the restriction that the account had to be ‘current for mutual
transactions’ (the expression used by Lord Cottenham LC in Fergusson
v Fyffe); and
(ii) that an account ceased to be current for mutual transactions after
demand for repayment, on the closing of the account, or on the insol-
vency or death of the customer2.
These propositions were largely moulded before the repeal of the usury laws in
1854 and had appeared to survive that repeal even though the underlying
rationale for their existence had disappeared.

11
8.12 Loans: Demand, Interest, Charges and Costs

In Pinios the House of Lords took the opportunity to restate the law in terms
which remove the distorting effect of the usury laws. Pinios is authority for the
following propositions:
(1) It is no longer relevant to ask whether an account is current for mutual
transactions. The concept can only have referred to the state of affairs
before the repeal of the usury laws and it has no application to the usage
of bankers now well recognised by English law3.
(2) The basis of any implied contractual right to capitalise interest is the
custom and usage of banks4. Resort to the customer’s supposed acqui-
escence was ‘an agreeable fiction’ whose only function was to circum-
vent the usury laws. Once those laws were repealed in 1854, there was
no sensible basis on which the fiction should have been allowed to
survive5.
(3) The usage is not restricted to accounts which are current for mutual
transactions. It prevails as between bankers and customers who borrow
from them and do not pay interest as it accrues6.
(4) An implied right to capitalise interest is not terminated by the bank-
er’s demand for payment, the commencement of legal proceedings7 or
the closing of the account8.
1
[1990] 1 AC 637, [1990] 1 All ER 78, HL. The older authorities are reviewed in Lord
Goff’s speech.
2
Ex p Bevan (1803) 9 Ves Jr 223, per Lord Eldon; Lord Clancarty v Latouche (1810) 1 Ball &
B 420; Gwyn v Godby (1812) 4 Taunt 346, Ex Ch; Fergusson v Fyffe (1841) 8 Cl & Fin 121 at
140, HL, per Lord Cottenham LC; Crosskill v Bower (1863) 32 Beav 86; Williamson v
Williamson (1869) LR 7 Eq 542; London Chartered Bank of Australia v White (1879) 4 App
Cas 413 at 424, PC; Spencer v Wakefield (1887) 4 TLR 194; Yourell v Hibernian Bank Ltd
[1918] AC 372, HL; Deutsche Bank v Banque des Marchands de Moscou (1931) 4 LDAB 293,
CA; IRC v Holder [1931] 2 KB 81, CA (affd sub nom Holder v IRC [1932] AC 624, HL); Paton
v IRC [1938] AC 341, [1938] 1 All ER 786, HL.
3
[1990] 1 AC 637 at 678B, 684B, [1990] 1 All ER 78 at 84e, 89c.
4
[1990] 1 AC 637 at 681F–683F, [1990] 1 All ER 78 at 87b–88h. It was held in Halliday v
HBOS Plc [2007] EWHC 1780 (QB) that the customer had no implied right to compound
interest where the bank made unauthorised deductions from his account.
5
[1990] 1 AC 637 at 675D–676A, [1990] 1 All ER 78 at 82c–82h.
6
[1990] 1 AC 637 at 683G–684A, [1990] 1 All ER 78 at 88j–89b.
7
[1990] 1 AC 637 at 684C–685E, [1990] 1 All ER 78 at 89c–90c.
8
This is implicit in the rejection of the relevance of an account being current for mutual
transactions and is further evident in Lord Goff’s criticisms of the reasoning in Crosskill v
Bower: [1990] 1 AC 637 at 679C, [1990] 1 All ER 78 at 85d.

8.13 The following further propositions established by earlier cases appear to

remain good law:
(1) An implied contract for compound interest will come to an end if the
relation of banker and customer is completely superseded by the relation
of mortgagor and mortgagee. This is the correct analysis of Crosskill v
Bower1 and, analysed in this way, the case can be accepted2. Any right to
capitalise interest thereafter must be found in the mortgage.
(2) The relation of banker and customer is not superseded for this purpose
merely because the bank takes a mortgage as security for the custom-
er’s indebtedness3.

12
 Interest 8.14

(3) There is no general rule of law that on a contract for the payment of
money borrowed for a fixed period with interest at a certain rate down
to that day, a further contract is to be implied for the continuance of the
same rate of interest after that day until actual payment4.
It is suggested that the effect of a customer’s insolvency or death is as follows:
(1) In principle, a customer’s insolvency does not terminate an implied
contract for compound interest any more than an unsatisfied demand for
repayment5.
(2) As to a customer’s death, the decision in Fergusson v Fyffe6 was that the
death of Mr Fyffe brought to an end any entitlement to compound
interest (in that case, Mr Fyffe’s entitlement to compound interest on his
credit balance with his bankers). Although the decision may have been
affected by the existence of the usury laws, it was not questioned in
Pinios. Nor was Williamson v Williamson7, which is a decision to the
same effect after the repeal of the usury laws. These decisions appear
right in principle because the customer’s death terminates the relation of
banker and customer8.
1
(1863) 32 Beav 86.
2
[1990] 1 AC 637 at 679F, [1990] 1 All ER 78 at 85f.
3
National Bank of Australasia v United Hand in Hand Band of Hope Co (1879) 4 App Cas 391
in which the Privy Council remarked (at 409) that the Master ‘seems to have acted correctly in
allowing compound interest with half yearly rests on the mortgage debt, that debt being the
balance of a current banking account kept in that way’. Cf Corinthian Securities Ltd v Cato
[1970] 1 QB 377 at 384E, [1969] 3 All ER 1168 at 1171F, CA, where it was held, in the words
of Cross LJ, that the claimants ‘were not bankers giving a client overdraft facilities’ but lenders
making a loan on the security of property.
4
Per Lord Selborne in Cook v Fowler (1874) LR 7 HL 27 at 37; see also Re Anderson’s Seeds Ltd
[1971] 2 NSWLR 120.
5
In practice, however, it makes little difference whether or not the contract continues because the
bank will be unable to prove in the insolvency for contractual interest after the insolvency
cut-off date.
6
(1841) 8 Cl & Fin 121, HL.
7
(1869) LR 7 Eq 542, cited with apparent approval at [1990] 1 AC 637, 679F, [1990] 1 All ER
78, 85g.
8
See also Lord Goff’s rejection of any analogy between death and closing an account: [1990]
1 AC 637 at 679C, [1990] 1 All ER 78 at 85d.

(ii) The custom and usage of bankers

8.14 English law has recognised the custom and usage of bankers in capitalis-
ing interest with yearly, half-yearly and quarterly rests1.
In the case of overdrafts, the custom of banks is to charge monthly compound
interest. The compounding of interest on overdrawn accounts was held legiti-
mate by the House of Lords in Yourell v Hibernian Bank Ltd2. The rests in that
case were half-yearly, but the custom today is to compound with monthly rests.
In Lloyds Bank plc v Voller3, the Court of Appeal held that if a customer with
no express overdraft facility draws a cheque which causes his account to go into
overdraft, the customer, by necessary implication, requests the bank to grant an
overdraft on its usual terms as to interest and other charges. In Emerald Meats
(London) Ltd v AIB Group (UK) plc the Court of Appeal held that Voller
established ‘the principle that, in the absence of express agreement, the

13
8.14 Loans: Demand, Interest, Charges and Costs

bank’s standard terms as to interest are incorporated into the contract’4.

1
Examples of interest capitalised with yearly and half-yearly rests can be found in the cases
reviewed in Pinios. The Pinios is an example of interest capitalised with quarterly rests. See also
Kitchen v HSBC Bank plc [2000] 1 All ER (Comm) 787 at 791j.
2
[1918] AC 372, per Lord Atkinson at 385, cited with approval by Lord Goff in Pinios [1990]
1 AC 637 at 682F, [1990] 1 All ER 78 at 87j.
3
[2000] 2 All ER (Comm) 978, CA at [16].
4
[2002] EWCA Civ 460 at [12], [14] and [16].

(c) Equitable jurisdiction to award interest

8.15 Equity has jurisdiction to award compound interest where money has
been obtained and retained by fraud or where it has been withheld or misap-
plied by a trustee or anyone else in a fiduciary position1.
1
President of India v La Pintada Cia Navigacion SA [1985] AC 104 at 116A, [1984] 2 All ER
773 at 779b, HL; Westdeutsche Landesbank Girozentrale v Islington London Borough Coun-
cil [1996] AC 669 at 700H-702E, [1996] 2 All ER 961 at 984a-985f. See also Sempra
Metals Ltd (formerly Metallgesellschaft Ltd) v Inland Revenue Commissioners [2007] UKHL
34, [2008] 1 AC 561, [2007] 4 All ER 657 at [4].

(d) Statutory interest to date of judgment

(i) The statutory jurisdiction to award interest
8.16 In the absence of a contractual right to interest, interest is awardable
pursuant to statute. The statutory jurisdiction is now contained in s 35A of the
Senior Courts Act 19811. A claim for interest must be specifically pleaded (CPR,
Pt 16.4(2))2.
In President of India v La Pintada Cia Navegacion SA3 Lord Brandon distin-
guished three cases in which loss or damage may be caused by the late payment
of a debt. Case 1 is where a debt is paid late, but before any proceedings for its
recovery have been begun. Case 2 is where the debt is paid late, after proceed-
ings for its recovery have been begun, but before they have been concluded.
Case 3 is where a debt remains unpaid until, as a result of proceedings for its
recovery being brought and prosecuted to a conclusion, a money judgment is
given in which the original debt becomes merged. The Law Reform (Miscella-
neous Provisions) Act 1934, s 3 provided a discretionary remedy only in
relation to Case 3. The 1981 Act extended the law to provide a discretionary
remedy to cover Case 2 in addition to Case 3, but not Case 1.
The 1981 Act appears to have further extended the law by permitting simple
interest to be awarded on overdue contractual interest, such as an unpaid
instalment of loan interest. This is a consequence of the change in wording from
the prohibition in the 1934 Act upon the giving of interest upon interest to the
permissive provision in the 1981 Act that ‘there may be included in any sum for
which judgment is given simple interest . . . ’ (s 35A(1)). Interest in respect of
a debt shall not be awarded under s 35A for a period during which, for
whatever reason, interest on the debt already runs (s 35A(4))4.
Although the 1981 Act has extended the jurisdiction to award interest, there
remains the important and somewhat out-dated limitation that under s 35A the

14
 Interest 8.17

court can award only simple interest5.

1
See also the County Courts Act 1984, s 69.
2
The courts have power to award interest notwithstanding that such a claim is not pleaded:
El-Ajou v Stern [2006] EWCA Civ 165 at [34–39].
3
[1985] AC 104 at 122C, [1984] 2 All ER 773 at 783h, HL.
4
See further Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v Inland Revenue Commis-
sioners [2007] UKHL 34, [2008] 1 AC 561, [2007] 4 All ER 657 at [98]. Section 35A permits
an award of interest from the date when the cause of action accrued. For the difficulties in
ascertaining that date in the context of a claim by a lender against a negligent valuer, see
Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627, [1998]
1 All ER 305, HL.
5
The same limitation applies to ‘statutory interest’ carried under a contractual term implied by
s 1(1) of the Late Payment of Commercial Debts (Interest) Act 1998. This Act only applies to
contracts for the supply of goods or services where both parties are acting in the course of a
business (mortgages and consumer credit are expressly excepted): s 2.

(ii) The rate of interest

8.17 The rate of interest under s 35A is in the court’s discretion. There is a
welcome trend in commercial cases to award interest at a commercial rate. The
court looks not at the profit which the defendant has wrongfully made out of
the money withheld, but at the cost to the claimant of being deprived of the
money which he should have had1. In giving effect to the principle of resitutio in
integrum, the court is guided in deciding the appropriate rate of interest by the
rate at which claimants with the general attributes of the actual claimant could
have borrowed the relevant sum. The rate is usually fixed by reference to base
rate or LIBOR from time to time. Historically, a commonly awarded rate was
base rate plus one per cent2. However, a different rate may be awarded
depending on the circumstances of the case3.
For claims in foreign currencies, interest will be awarded in that currency4. For
claims in US dollars, the choice lies between LIBOR (in US dollars) and
US prime rate. In Kuwait Airways Corpn v Kuwait Insurance Co SAK (No 2)5,
Langley J accepted expert evidence to the following effect:
(1) US prime rate is the rate commercial banks charge their most creditwor-
thy business borrowers. It includes an element of profit to the banks,
which is why such borrowers can borrow at prime itself. The British
equivalent is base rate, except that a bank’s profit element is expressed as
a percentage over base rate, so that the rate to the customer, however
creditworthy, will be base rate plus an agreed percentage. US prime is
analogous to base rate plus 1%.
(2) LIBOR is a rate quoted in both sterling and US dollars. It is generally
used for term borrowings, and often for secured loans the subject of
facility agreements.
(3) In general terms, US prime rate was some 2.5% higher than LIBOR over
the period 1990–2000.
In the event, Langley J awarded interest at US prime rate, even though the
interest was for a period in excess of nine years. He could see no justification for
awarding a rate (LIBOR) which applies only to term or secured lending. This
would involve applying hindsight in the knowledge of how long it might take

15
8.17 Loans: Demand, Interest, Charges and Costs

the losing party to honour the claim.

1
Tate & Lyle Food Distribution Ltd v Greater London Council [1981] 3 All ER 716 at 722d,
[1982] 1 WLR 149 at 154B (Forbes J). It has been held that, rather than simply looking at the
actual claimant, the court is concerned with looking at ‘the class’ to which the claimant belongs:
see Sycamore Bidco Ltd v Breslin [2013] EWHC 174 (Ch) at [45–46]. See further the Court of
Appeal’s summary of principles in Carrasco v Johnson [2018] EWCA Civ 87 at [17], in which
Hamblen LJ said that ‘In relation to commercial claimants the general presumption is that they
would have borrowed less and so the court will have regard to the rate at which the persons with
the general attributes of the claimant could have borrowed’.
2
Buckingham v Francis [1986] 2 All ER 738 at 744b, [1986] BCLC 353 at 360h, per Staughton
J. See also Shearson Lehman Hutton Inc v Maclaine Watson & Co Ltd (No 2) [1990] 3 All ER
723 at 732g–734c, per Webster J.
3
For helpful summaries of recent developments see Ahmed v Jaura [2002] EWCA Civ 210 at
[20–28] (in the context of small businesses), Persimmon Homes (South Coast) Ltd v Hall
Aggregates (South Coast) Ltd [2012] EWHC 2429 (TCC) at [10–17] (in the context of lower
than average base rates) and Sycamore Bidco Ltd v Breslin [2013] EWHC 174 (Ch) at [49–51].
4
The Texaco Melbourne [1994] 1 Lloyd’s Rep 473 at 476-477.
5
[2000] 1 All ER (Comm) 972 at 988d-992f. See further Fiona Trust and Holding Corp v
Privalov [2011] EWHC 664 (Comm) at [15]; Kazakhstan Kagazy Plc v Baglan Abdullayevich
Zhunus [2018] EWHC 369 (Comm) at [71–81].

(iii) Interest on bills of exchange

8.18 Interest on bills of exchange, cheques and promissory notes is recoverable
under the Bills of Exchange Act 1882, s 57(1)(b) which provides that where a
bill is dishonoured, the holder may recover interest thereon from the time of
presentment for payment if the bill is payable on demand, and from the
maturity of the bill in any other case.

(e) Statutory interest from date of judgment

8.19 By s 17 of the Judgments Act 1838, every judgment debt carries interest
from the time of entering up the judgment until the same shall have been
satisfied, and such interest may be levied under a writ of execution. The rate of
interest is fixed from time to time by statutory instrument1. Where a judgment
is given for a sum expressed in a currency other than sterling and the judgment
debt is one to which s 17 of the Judgments Act 1838 applies, the court may
order that the interest rate applicable to the debt shall be such rate as the court
thinks fit2.
1
Currently 8% per annum under the Judgment Debts (Rate of Interest) Order 1993, SI
1993/564. See also the County Courts Act 1984, s 74 and the County Courts (Interest on
Judgment Debts) Order 1991, SI 1991/1184.
2
Section 44A of the Administration of Justice Act 1970. See further Novoship (UK) Ltd v
Mikhaylyuk [2014] EWCA Civ 908, [2015] QB 499 at [132–136].

(f) Interest as damages

8.20 The decision of the House of Lords in London, Chatham and Dover
Rly Co v South Eastern Rly Co1 was for a long time understood to have
established that general damages are not recoverable at common law for the
loss of the use of money (the loss of interest) caused by late payment of a debt.
This understanding was shown not to represent the law by the House of Lords

16
 Bank Charges 8.21

in Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v Inland Revenue Com-

missioners2. Lord Nicholls said that ‘the court has a common law jurisdiction to
award interest, simple and compound, as damages on claims for non-payment
of debts as well as on other claims for breach of contract and in tort’3. It is open
to the claimant ‘to plead and prove his actual interest losses caused by late
payment of a debt’, subject to normal limiting rules such as remoteness and
mitigation4. The House of Lords further held that a money award reversing
unjust enrichment had to take into account the value of the use of money over
time, so a claim was available in restitution for compound interest5. However,
on this point, Sempra Metals was reversed by the Supreme Court in Prudential
Assurance Co Ltd v Revenue and Customs Commissioners6.
1
[1893] AC 429, HL. See also President of India v La Pintada Cia Navegacion SA [1985] AC 104
at 127C, [1984] 2 All ER 773 at 787f.
2
[2007] UKHL 34, [2008] 1 AC 561, [2007] 4 All ER 657.
3
At [100].
4
At [94]. See generally at [74–100] per Lord Nicholls, at [15–17] per Lord Hope, at [164–165]
per Lord Walker and at [215–224] per Lord Mance.
5
See at [33–35] per Lord Hope and at [101–119] per Lord Nicholls.
6
[2018] UKSC 39, [2018] WLR 652 at [54–79].

3 BANK CHARGES
8.21 The custom and usage of banks is to levy charges for certain of their
services. Charges that are not payable on the customer’s breach of contract are
not unenforceable as penalties1. The rule against penalties only regulates the
remedies available for breach of a party’s primary obligation, not the primary
obligations themselves (although whether a contractual provision falls within
the scope of the rule is a question of substance not form)2.
The Supreme Court has held that charges for unauthorised overdrafts are
‘monetary consideration for the package of banking services supplied to per-
sonal current account customers’3. Such charges are primary obligations under
contract and, in so far as the relevant terms are in plain intelligible language, are
not subject to assessment of fairness under the Unfair Terms in Consumer Con-
tracts Regulations 1999 in relation to their adequacy as against the services
supplied in exchange. The 1999 Regulations were replaced by the Consumer
Rights Act 2015, although the Supreme Court’s reasoning should continue to
apply4.
1
Office of Fair Trading v Abbey National plc [2008] EWHC 875 (Comm), [2008] 2 All ER
(Comm) 625 at [295] and on appeal to the Supreme Court [2009] UKSC 6, [2010] 1 AC 696,
[2010] 1 All ER 667 at [114]. See also Office of Fair Trading v Abbey National plc [2008]
EWHC 2325 (Comm), [2009] 1 All ER (Comm) 717.
2
Makdessi v Cavendish Square Holdings BV [2015] UKSC 67, [2016] AC 1172 at [12–15],
[129], [241] and [258].
3
Office of Fair Trading v Abbey National plc [2009] UKSC 6, [2010] 1 AC 696, [2010] 1 All ER
667 at [47] and [51].
4
See for example Casehub Ltd v Wolf Cola Ltd [2017] EWHC 1169 (Ch), [2017] 5 Costs LR 83
at [44–49].

17
8.22 Loans: Demand, Interest, Charges and Costs

4 BANK COSTS AND EXPENSES

8.22 Bank documentation often provides that the bank is entitled to be paid on
demand all its costs, charges and expenses incurred in enforcing or obtaining
payment of sums of money owed to it. In the law of mortgage, the mortgag-
ee’s entitlement to add to the mortgage debt all costs, charges and expenses
reasonably incurred is well established1. In relation to non-proprietary security,
the efficacy of such provisions remained untested until Bank of Baroda v
Panessar2, where the point arose for decision in an action on two guarantees. It
was held by Walton J:
(1) that the contractual provision in each guarantee for payment of all costs
meant costs on an indemnity basis; but
(2) that the provision was not binding on the court, which retained the
discretion in any particular case to decide that it ought not to be given
effect3.
1
See generally Fisher and Lightwood’s Law of Mortgage.
2
[1987] Ch 335, [1986] 3 All ER 751.
3
[1987] Ch 335 at 355E, [1986] 3 All ER 751 at 765e. It has been held that the cause of action
for costs under an indemnity is only complete on judgment. However, the court can properly
deal with such a claim as part of existing proceedings, even when it has not been pleaded: see
AstraZeneca UK Ltd v International Business Machines Corp [2011] EWHC 3373 (TCC) at
[32]. See also CPR 44.5 (‘Amount of costs where costs are payable under a contract’).

18
Chapter 9

THE REGULATION OF
BANK LENDING

1 INTRODUCTION 9.1
2 CONSUMER CREDIT 9.3
(a) Introduction 9.3
(b) Authorisation by the FCA 9.4
(c) CONC 9.5
(d) Financial promotions and communications with customers 9.7
(e) Enforcement by the FCA 9.8
(f) The Financial Ombudsman Service 9.9
3 UNFAIR RELATIONSHIPS
(a) Introduction 9.10
(b) Limitation period 9.11
(c) How may an application be made? 9.12
(d) The test for an unfair relationship 9.13
(e) Applying the test 9.14
(f) Remedies 9.16
(g) Summary judgment 9.17
4 THE REGULATION OF MORTGAGE LENDING 9.18
(a) Introduction 9.18
(b) The concept of a ‘regulated mortgage contract’ 9.19
(c) Key stages contemplated by MCOB 9.22
5 KEY STATUTORY PROTECTIONS FOR BORROWERS
AGAINST LENDERS IN RELATION TO UNFAIR TERMS 9.24
(a) Introduction 9.24
(b) UCTA 1977 9.25
(c) The Misrepresentation Act 1967 9.27
(d) Consumer Rights Act 2015 9.28
6 IMPLIED TERMS CONTROLLING THE EXERCISE OF
CONTRACTUAL RIGHTS IN LOANS 9.32
(a) Introduction 9.32
(b) The Socimer-type of implied term 9.33
(c) Other types of implied restrictions 9.34
7 LIABILITY OF CREDITOR AS THIRD PARTY 9.35
(a) Section 56 of CCA 1974 9.35
(b) Section 75 of CCA 1974 9.38
(c) Section 75A of CCA 1974 9.39

1 INTRODUCTION TO THE REGULATION OF BANK LENDING

9.1 The regulation of bank lending is a general theme of Paget, so it is necessary
to begin by cross-referring to related chapters, and then identify which specific
issues are to be addressed in this chapter. The banker/customer relationship is
covered in Chapter 4, on which this chapter builds. However, this chap-
ter focuses on the lender/borrower relationship rather than the more general

1
9.1 The Regulation of Bank Lending

banker/customer relationship, and does not deal with BCOBS (see para 1.29).
This chapter may also intersect at times with Chapter 13 (taking of security),
and Chapter 17 (mortgages of land), and part 9 of Chapter 29 (advice on
mortgages: MCOB).
9.2 One point which is probably self-evident but bears repeating: practitioners
should note that definitions vary according to context. Even the definition of a
basic concept such as ‘individual’ or ‘consumer’ may vary according to the
particular statutory regime. Under the CCA 1974, an ‘individual’ includes (a) a
partnership consisting of two or three persons not all of whom are bodies
corporate; (b) an unincorporated body of persons which does not consist
entirely of bodies corporate and is not a partnership1. So far as the FCA’s Con-
sumer Credit sourcebook, ‘CONC’, is concerned, the definition of ‘customer’ in
the FCA Handbook in relation to a credit-related regulated activity is generally
the same definition of ‘individual’ as given in the CCA 1974, but regard must be
had to fuller definition given in the Handbook. In relation to a ‘regulated
mortgage contract’, the borrower must be an individual (meaning natural
person) or a trustee for an individual or related person2. What it means to have
been ‘dealing as a consumer’ for the purpose of UCTA 1977 (superseded as
regards consumers from 1 October 2015 by the CRA 2015) is sui generis.
‘Private person’ in s 138D of FSMA 2000 is defined by secondary legislation in
such a way that it will usually cover only individuals (meaning natural
persons)3. The definition of a ‘consumer’ under the UTCCR 19994 (superseded
from 1 October 2015 by the CRA 2015) is narrower than what it means to be
a ‘consumer’ under the CRA 20155. The various statutory definitions may be
subject to exceptions and exemptions and the above survey is given only to
illustrate the importance of closely attending to the particular regime.
1
CCA 1974, s 189.
2
Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, SI 2001/544,
art 61(3).
3
Reg 3 of the Financial Services and Markets Act (Rights of Action) Regulations 2001/2256:
Sivagnanam v Barclays Bank Plc [2015] EWHC 3985 (Comm).
4
Reg 3 of the Unfair Terms in in Consumer Contracts Regulations 1999 (SI 1999/2083)
(UTCCR 1999), as explained in Overy v Paypal (Europe) Ltd [2012] EWHC 2659 (QB);
Ashfaq v International Insurance Co of Hannover Plc [2017] EWCA Civ 357.
5
CRA 2015, s 2(3). This definition is derived from the EU’s Consumer Rights Directive
2011/83/EC.

2 CONSUMER CREDIT

(a) Introduction
9.3 From 1 April 2014 the FCA assumed responsibility as regulator of con-
sumer credit or, more specifically, ‘credit-related regulated activities’1. The
activities falling within the scope of ‘credit-related regulated activities’ are
similar to those activities which formerly required a licence from the OFT. They
include entering into a regulated credit agreement as a lender, entering into a
regulated hire agreement as an owner, credit broking, debt adjusting, debt-
counselling, debt collecting, debt administration, providing credit information
services and providing credit references. The scope of the FCA’s regulation is
therefore broadly the same as was applied under the OFT regime. However the
nature of the regulation underwent three major changes: (1) licensing by the

2
 Consumer Credit 9.3

OFT was replaced by authorisation by the FCA (2) the FCA’s high-level
standards including Principles for Business (‘PRIN’), General Provisions
(‘GEN’) and Senior Management Arrangements, and Systems and Controls
(‘SYSC’) will apply (with some modification) to consumer credit firms2 and (3)
the FCA has promulgated a new sourcebook known as ‘CONC’ with which all
those engaged in ‘credit-related regulated activities’ must comply. Some CCA
1974 provisions continue to apply in their own right, some provisions were
carried across into CONC, and some were repealed. Those practising in this
area will therefore need to have regard primarily to the current version of
CONC, but also to all relevant primary and secondary legislation and associ-
ated case law. In view of the complexities in this area, practitioners should
consult specialist works3.
The present state of the law of consumer credit is not a model to which a
rational system of law should aspire. Successive waves of piecemeal and
overlapping regulation have left the law puzzling to the consumer, expensive for
those engaged in consumer credit related activities to understand, and difficult
for practitioners to advise upon. For four decades the Consumer Credit Act
1974 (CCA 1974), itself a notoriously difficult piece of legislation4, sat at the
apex of a sprawling patchwork of legislation, secondary legislation and regu-
latory guidance. In addition to the CCA 1974 and legislation amending it5,
practitioners needed to have regard to secondary legislation6, guidance issued
by the regulator7, and European law8. From 1 February 2011 practitioners were
required to draw a distinction between matters to which the Consumer Credit
Directive applied (essentially consumer credit up to a prescribed limit), and
matters outside it (essentially consumer hire and the remainder of consumer
credit). From 1 April 2014, the level of complexity increased with the introduc-
tion of a new regulatory framework under the FCA. The FCA umbrella has
been superimposed upon the existing framework, but has not replaced it
entirely. In this regard the FCA is required to review the retained provisions of
the CCA 1974 and report to HM Treasury by 1 April 2019. As a result of the
evolving state of the law, it is necessary carefully to consider which version of
any regulation is applicable on any given date and any relevant transitional
provisions.
1
See the amendments to the Financial Services and Markets Act 2000 (Regulated Activities)
Order 2001, SI 2001/544. For a general description of the FSMA 2000 umbrella in the banking
context, see para 1.3 ff above.
2
So too will the FCA’s Client Asset Sourcebook (‘CASS’), which deals with the handling of client
money and assets.
3
D Rosenthal Consumer Credit Law and Practice – A Guide (5th edn 2018). R Goode (Ed.)
Goode: Consumer Credit Law and Practice, Looseleaf Service.
4
Lord Hoffmann described emerging from ‘statutory thickets’: Dimond v Lovell [2002] 1 AC
384 at [394], and Lord Justice Clarke described the CCA 1974 as ‘certainly not comprehensible’
to the layman and ‘scarcely comprehensible’ to the lawyer: McGinn v Grangewood Securi-
ties Ltd [2002] EWCA 522 at [1].
5
The Consumer Credit Act 2006 (the CCA 2006) being the most prominent. See Smith and
McCalla Consumer Credit Act 2006: A Guide to the New Law (2006); Mawrey and Riley-
Smith Blackstone’s Guide to the Consumer Credit Act 2006 (2006).
6
A search indicates some 94 statutory instruments made under the CCA 1974.
7
Until 2014 the Office of Fair Trading (OFT). For example, in relation to irresponsible lending,
debt collection, and the duty to give information to debtors. Before the Enterprise Act 2002, the
OFT’s predecessor was the Director General of Fair Trading.
8
Principally, the Consumer Credit (EU Directive) Regulations 2010, SI 2010/1010 implementing
the Consumer Credit Directive 2008/48/EC (OJ L133/66). In August 2010, the Department for

3
9.3 The Regulation of Bank Lending

Business and Skills published guidance on the regulations implementing the Consumer Credit
Directive.

(b) Authorisation by the FCA

9.4 The authorisation process is the regulatory gateway to the market. Subject
to a transition regime, all firms engaged in ‘credit-related regulated activities’1
may only do so with prior authorisation from the FCA, unless they qualify for
an exemption or exclusion. Perhaps the most important exemption is that
which is available for appointed representatives. In broad terms, an appointed
representative is a business which is not itself authorised, but which has a
contract with an authorised firm (called ‘the principal’) that allows it to carry on
certain activities under the permission of the principal. The principal takes
responsibility for the regulated activities carried on by the appointed represen-
tative2.. However, the ability to act as an appointed representative is not
available in respect of all ‘credit-related regulated activities’ and practitioners
will need to check to determine whether this exemption is available3.
Authorisation may be granted on one of two bases. It may be either ‘full credit
authorisation’ or ‘limited permission’, depending on the level of risk associated
with the proposed activities. A higher risk will require full credit authorisation.
Most firms previously licensed by the OFT will require full authorisation. To
obtain authorisation the applicant needs to show that it satisfies the ‘threshold
conditions’, and will need to continue to meet these conditions whilst operat-
ing4. Carrying on a regulated activity without authorisation is a breach of the
general prohibition5 and may lead to a custodial sentence6.
In addition to the authorisation of the firm by the FCA, for each individual
whom the firm wishes to carry out a ‘significant influence function’7, it must
apply to the FCA to have that person deemed an ‘approved person’8. Before
granting approval the FCA must be satisfied that the individual is a fit and
proper person to exercise the function. Once approved person status is ob-
tained, approved persons are subject to the FCA’s Statements of Principle
and Code of Conduct, contravention of which may result in enforcement action
against the approved person personally. The FCA’s powers include the ability to
issue fines and to ban an approved person from working within the industry for
any length of time9.
1
See para 9.3 above.
2
FSMA 2000, s 39(3).
3
See FSMA 2000, s 39 and Financial Services and Markets Act 2000 (Appointed
Representatives) Regulations 2001 (SI 2001/1217).
4
Financial Services and Markets Act 2000 (Threshold Conditions) Order 2013.
5
FSMA 2000, ss 19, 23.
6
R v John Geoffrey Cooper [2013] EWCA Crim 2703 (CA).
7
Subject to a transition regime.
8
See para 1.30 ff above.
9
See DEPP 6 and DEPP 6A of the FCA Handbook.

4
 Consumer Credit 9.5

(c) CONC

9.5 From 1 April 2014 firms are subject to an elaborate Consumer Credit
sourcebook, known as ‘CONC’, included in the FCA Handbook1. The territo-
rial scope of CONC is found in CONC 3.1.9R. Every provision in the FCA
Handbook must be interpreted in the light of its purpose2. CONC sets out the
detailed obligations that are specific to ‘credit-related regulated activities’ and
connected activities. These detailed obligations build on the high-level obliga-
tions in PRIN, GEN and SYSC. In many instances, the rules and guidance set
out in CONC were carried across from a provision of the CCA 1974 or its
secondary legislation. Further, certain OFT guidance was converted into bind-
ing rules. Importantly, many provisions of the CCA 1974 and its secondary
legislation continue to apply independently of CONC3. Accordingly, under-
standing the application of the new FCA regime will require detailed analysis in
each case and firms will need to comply with any applicable provisions of the
CCA 1974 and its secondary legislation as well as CONC. By way of example
of the overlap, CONC 13 gives guidance on the duties to provide information
under the CCA 1974, ss 77–79.
CONC is divided into chapters as follows:
CONC 1 – Application and purpose and guidance on financial difficulties
CONC 2 – Conduct of business standards: general
CONC 3 – Financial promotions and communications with customers
CONC 4 – Pre-contractual requirements
CONC 5 – Responsible lending
CONC 5A – Cost cap for high-cost short-term credit
CONC 6 – Post-contractual requirements
CONC 7 – Arrears, default and recovery (including repossessions)
CONC 8 – Debt advice
CONC 10 – Prudential rules for debt management firms
CONC 11 – Cancellation
CONC 12 – Requirements for firms with interim permission for credit-
related regulated activities
CONC 13 – Guidance on the duty to give information under ss 77, 78 and 79
of the Consumer Credit Act 1974
CONC 14 – Requirement in relation to agents
CONC 15 – Agreements secured on land
CONC App 1 – Total charge for credit rules; and certain exemptions
CONC TP 5-8 and Schedules 1-6 – Transitional Provisions and Schedules
A contravention by an authorised person of a rule set CONC may give rise to a
right of action for damages under s 138D of FSMA. The relevant rules are
identified in CONC, Schedule 5. It is worth highlighting CONC 2.2.2G which
refers to the general principle that firms should pay due regard to the interests
of its customers and treat them fairly. The FCA’s position is that all firms must
be able to show consistently that fair treatment of customers is at the heart of
their business model4. The Principles for Businesses are set out in PRIN 2.1, and
include the need for a firm to ‘pay due regard to the interests of its customers
and treat them fairly’ (Principle 6) and to ‘pay due regard to the information
needs of its clients, and communicate information to them in a way which is
clear, fair and not misleading.’ (Principle 7). A breach of the Principles is not of

5
9.5 The Regulation of Bank Lending

itself actionable under s 138D of FSMA 2000, but can render a firm liable to
disciplinary sanction5. The Principles are the overarching framework for spe-
cific rules, an indication of what is fair and reasonable, and can be taken into
account by the FOS when assessing complaints6. Finally, the application to
consumer credit of the rules concerning financial promotions and communica-
tions with customers is a significant development, and is dealt with separately
below7.
1
See www.handbook.fca.org.uk/handbook/CONC/.
2
GEN 2.2.1R.
3
The provisions of the CCA which are being repealed are in article 20 of the Financial Services
and Markets Act 2000 (Regulated Activities) (Amendment) (No 2) Order 2013 (SI 2013/1881).
The secondary legislation which is being revoked is set out in article 21 of that Order.
4
This reflects Principle 6: ‘A firm must pay due regard to the interests of its customers and treat
them fairly.’: PRIN 2.1.1.
5
See para 9.7 below.
6
R (on the application of British Bankers Association) v Financial Services Authority [2011]
EWHC 999 (Admin); [2011] Bus LR 1531.
7
PRIN 1.1.7.

9.6 The CCA 1974 created a new set of concepts (eg. debtor-creditor-supplier
agreements, debtor-creditor agreements, restricted-use credit, unrestricted-use
credit). The advantage of using these new statutory concepts was that it was less
likely for the law to be evaded by clever drafting or to be superseded by new
forms of consumer credit as commercial practices evolved over time. The
majority of these concepts have simply been carried across into CONC, but
sometimes using slightly different nomenclature. Practitioners will need to take
care to consider which set of definitions are applicable in the circumstances.
Finally, it is important to note that the guidance and rules set out in CONC are
without prejudice to the application of the CCA 1974, the Consumer Rights
Act 2015 or any other applicable consumer protection legislation1. However,
with some limited exceptions, CONC does not apply to agreements secured on
land2.
1
CONC 2.2.5.
2
CONC 1.2.7.

(d) Financial promotions and communications with customers

9.7 The FCA’s rules concerning financial promotions and communications
with customers generally apply to consumer credit as from 1 April 20141. The
detailed provisions of Chapter 3 of CONC adopt concepts from the more
general restrictions on financial promotions2. The starting point is the general
prohibition under the FCA umbrella which prohibits financial promotions
being made by unauthorised persons3. This means that authorisation must be
obtained or the content of the communication be approved by an authorised
person or an exemption applies4.
More detailed provisions are set out in Chapter 3 of CONC. The key rule is that
a firm must ensure that a communication or a financial promotion is clear, fair
and not misleading (CONC 3.3.1R(1)). A contravention of that rule will give
rise to a right of action under FSMA 2000, s 138D unless the firm can show that

6
 Consumer Credit 9.9

it took reasonable steps to comply with the rule (CONC 3.3.1R(2)). A firm
must ensure that a communication or a financial promotion (CONC 3.3.2R):
• uses plain and intelligible language;
• communicates in a way that is easily legible or clearly audible;
• specifies the name of the person making the communication or commu-
nicating the financial promotion or the person on whose behalf the
financial promotion is made; and
• where the communication or financial promotion is in relation to credit
broking, specifies the name of the lender (where it is known).
The FCA’s guidance as to what is ‘clear, fair and not misleading’ is potentially
quite onerous. A firm is expected to ensure, amongst other things, that commu-
nications or financial promotions (i) are clearly identifiable as such; (ii) are
accurate; (iii) are balanced (and do not emphasise any potential benefits of a
product or service without also giving a fair and prominent indication of any
relevant risks); (iv) are sufficient for, and presented in a way that is likely to be
understood by, the average member of the group to whom they are directed, or
by whom they are likely to be received; and (v) do not disguise, diminish or
obscure important information, statements or warnings. There are additional
rules for specific types of communications5.
1
For a general description of the FCA’s financial promotion regime, see para 1.38 ff above. Prior
to the application of these principles to consumer credit, the relevant law is to be found in the
CCA 1974 and secondary legislation, including in particular the Consumer Credit
(Advertisements) Regulations 2004 and Consumer Credit (Advertisements) Regulations 2010.
2
CONC 3.2.1.
3
FSMA 2000, s 21.
4
FSMA 2000, ss 21, 25 and 30. Financial Conduct Authority v Capital Alternatives Ltd (Ch D,
26 March 2018).
5
By way of example, in relation to high-cost short-term credit (CON 3.4), credit agreements not
secured on land (CONC 3.5), and credit agreements secured on land (CONC 3.6).

(e) Enforcement by the FCA

9.8 The FCA’s enforcement role extends to enforcement actions in respect of
acts or omissions under the CCA 1974 and its secondary legislation. The FCA
is also responsible for supervising consumer credit firms subject to the Money
Laundering Regulations except where supervised by another regulator. The
FCA has stated that the two main objectives of the new FCA regime are to
protect consumers and to deliver a proportionate risk-based approach to the
supervision of firms. By contrast with the OFT, the FCA has greater enforce-
ment powers, and has indicated that the new regime will be more stringent than
that which existed before. In March 2018 the FCA launched a consultation on
its approach to supervision, the final results of which are expected in late 20181.
1
See https://www.fca.org.uk/publication/corporate/our-approach-supervision.pdf.

(f) The Financial Ombudsman Service

9.9 All firms engaging in ‘credit-related regulated activities’1 now fall within
the FSMA umbrella and are subject to the Compulsory Jurisdiction of the
Financial Services Ombudsman2. The FCA’s complaints handling rules, found

7
9.9 The Regulation of Bank Lending

in a section of the Handbook known as ‘DISP’, generally will apply to consumer

credit complaints. These rules impose requirements for acknowledging and
responding to complaints, treating complainants fairly, time limits for respond-
ing to complaints, and keeping full records of complaints received. The
FCA’s Principles for Businesses (set out in PRIN 2.1) give indications as to what
is fair and reasonable, and can be taken into account by FOS when assessing
complaints3. On a related topic, there have been some modest expansions to the
scope of the Financial Services Compensation Scheme to particular aspects of
consumer credit activities.4
1
See para 9.4 above.
2
See para 1.40 above.
3
R (on the application of British Bankers Association) v Financial Services Authority [2011]
EWHC 999 (Admin), [2011] Bus LR 1531.
4
See para 1.39 above.

3 UNFAIR RELATIONSHIPS

(a) Introduction
9.10 The unfair relationship regime (CCA 1974, s 140A–140C) enables
the Court to give wide-ranging relief if it concludes that an ‘unfair relationship’
has arisen in connection with a credit agreement, of itself or taken with any
‘related agreement’1. The regime was enacted by the CCA 20062 and applies to
‘credit agreements’ made from 6 April 2007, and to those made before 6 April
2007 that had not completed before 6 April 20083. The meaning of ‘credit
agreement’ extends to any agreement between an individual (as defined)4 ie ‘the
debtor’, and a ‘creditor’ (s 140C(1)). A ‘creditor’ may be bound by the conduct
of any ‘associate’ or former associate, as defined in s 184. The regime also
encompasses assignees of either party, and if there is more than one debtor or
creditor it applies to any one or more of them (s 140C(2)). A guarantor may be
able to rely on the existence of an unfair relationship between debtor and
creditor (CCA 1974, s 140B(2) and (9)).
The unfair relationships regime does not apply to credit agreements which are
entered into by a person carrying on an activity of the kind specified in
article 60C(2)5. Nor does the unfair relationships regime apply directly to
guarantees, because they are not credit agreements: Paragon Mortgages Ltd v
McEwan-Peters6.
1
Related agreement is defined in CCA 1974, s 140C(4) to include a former credit agreement
which has been consolidated, a linked transaction or a security provided in relation to the credit
agreement or a linked transaction.
2
The previous law was designed to prevent ‘extortionate credit bargains’ but was seldom used.
See the previous edition of this work.
3
See Barnes v Black Horse Ltd [2011] 2 All ER (Comm) 1130.
4
Conventionally, an ‘individual’ is a natural person, but in this context the concept also includes
certain partnerships and unincorporated bodies of persons: CCA 1974, s 189.
5
CCA 1974, s 140A(5).
6
[2011] EWHC 2491 (Comm) at [53].

8
 Unfair Relationships 9.13

(b) Limitation period

9.11 It has been held that the debtor’s cause of action is a continuing one which
accrues from day to day until the relevant relationship ends: Patel v Patel1.
However, it may be that in a future case such a broad brush approach will be
revisited. For example, it may be possible to identify a date by which the
relevant unfairness came to an end. A determination of unfairness may be made
notwithstanding that the relationship has ended (CCA 1974, s 140A(4)). An
additional complication is that the applicable limitation period depends on the
nature of the relief sought. If the debtor brings an action to recover any sum
recoverable by virtue of an enactment (the CCA 1974), subject to the usual
exceptions, the limitation period is six years2. If however the relief sought is not
to recover a sum, the claim may be characterised as an action on a specialty, for
which the usual limitation period is twelve years3. It is an important feature of
this cause of action that, provided the claim is issued within the limitation
period, the limitation period does not constitute a cut-off as regards the
temporal scope of the matters the Court may consider when assessing the
fairness of the relationship4.
1
[2010] 1 All ER (Comm) 864 at [66]; [2010] Bus LR D73.
2
Limitation Act 1980, s 9; Patel v Patel [2010] 1 All ER (Comm) 864 at [66]; [2010] Bus LR
D73.
3
Scotland v British Credit Trust Ltd [2014] Bus LR 1079 at [82].
4
Axton v GE Money Mortgages Ltd [2015] EWHC 1343 (QB), [2015] GCCR 13105.

(c) How may an application be made?

9.12 A person may commence proceedings based upon a claim of unfair
relationship, since an order may be made in the County Court on an application
by the debtor or by a surety (CCA 1974, s 140B(2)). The Civil Procedure Rules
make special provision for the procedure to be followed when a claim of unfair
relationship is made in this way (CPR PD 7B). Perhaps more commonly, the
party alleging an unfair relationship does so as a defence and counterclaim in
proceedings brought to enforce a debt (s 140B(2)). Any person who might be
the subject of the order giving relief can be made a party to the proceedings
(s 140B(8)).

(d) The test for an unfair relationship

9.13 The Court’s discretion to make an order arises if it determines that the
relationship is unfair.
According to the statutory test, the relevant aspects of the relationship which
must give rise to the unfairness are (s 140A(1)):
(a) any of the terms of the agreement (or any related agreement);
(b) the way in which the creditor has exercised or enforced its rights under
the agreement or any related agreement; and
(c) any other thing done or not done by or on behalf of the creditor before
or after the making of the agreement (or related agreement).

9
9.13 The Regulation of Bank Lending

The breadth of those factors is only confirmed by the accompanying stipulation

(s 140A(2)) that the Court ‘shall have regard to all matters it thinks relevant’.
While broadly drawn, these statutory considerations all derive from an impor-
tant first step: the identification of a credit relationship between a creditor and
a debtor. A ‘debtor’ is an individual. So if there are multiple credit relationships
in any given dispute it is necessary first to isolate the relevant credit relationship
for analysis, and then consider whether the statutory criteria for an agreement
related to the main agreement are met (s 140C(4)). The scope of the Court’s re-
view includes a related agreement even if it has been completed1. A ‘related
agreement’ includes (1) a credit agreement which has been consolidated by a
later credit agreement (2) a linked transaction and (3) any security provided in
relation to any such agreement or linked transaction (CCA 1974, s 140C(4)). A
linked transaction would ordinarily include the purchase of payment protection
insurance2.
Further, the Court (except where not appropriate) is required to consider the
creditor responsible for anything done or not done by, on behalf of, or in
relation to, an associate or former associate of the creditor (CCA 1974,
s 140A(3). ‘Associate’ is defined by s 184, and includes family members,
partnerships and related bodies corporate.
Finally, a creditor may be bound for the purpose of s 140A(1)(c) by a statutory
agency arising under CCA 1974 s 56, which deems an intermediary having been
involved in certain ‘antecedent negotiations’ as acting as agent for the creditor.
See further paras 9.35 to 9.37 below. However, the Supreme Court has made
clear that a creditor is not responsible in this context for the acts of someone
merely because the ‘played some material part in the bringing about of the
transaction’, overruling the Court of Appeal on this point3.
1
Barnes v Black Horse Limited [2011] 2 All ER (Comm) 1130.
2
See the definition of ‘linked transaction’ in CA 1974, s 19.
3
Plevin v Paragon Personal Finance Ltd [2014] Bus LR 1257 at [27]–[34].

(e) Applying the test

9.14 When considering the statutory framework, the central feature to recog-
nise is its indeterminacy1. The result in practice has been some judicial tenta-
tiveness involving long lists of potentially relevant factors2. Practitioners now
have the benefit of the Supreme Court’s decision in Plevin v Paragon Personal
Finance Ltd3. Although the decision in Plevin owes much to its particular PPI
(payment protection insurance) commission context, it is the logical place to
commence the analysis of how the test should be applied. Lord Sumption JSC,
with whom the rest of the Court agreed, gave the following general guidance (at
[10]):
‘Section 140A is deliberately framed in wide terms with very little in the way of
guidance about the criteria for its application, such as is to be found in other
provisions of the Act conferring discretionary powers on the courts. It is not possible
to state a precise or universal test for its application, which must depend on the
court’s judgment of all the relevant facts. Some general points may, however, be made.
First, what must be unfair is the relationship between the debtor and the creditor. In
a case like the present one, where the terms themselves are not intrinsically unfair, this
will often be because the relationship is so one-sided as substantially to limit the

10
 Unfair Relationships 9.14

debtor’s ability to choose. Secondly, although the court is concerned with hardship to
the debtor, subsection 140A(2) envisages that matters relating to the creditor or the
debtor may also be relevant. There may be features of the transaction which operate
harshly against the debtor but it does not necessarily follow that the relationship is
unfair. These features may be required in order to protect what the court regards as
a legitimate interest of the creditor. Thirdly, the alleged unfairness must arise from
one of the three categories of cause listed at sub-paragraphs (a) to (c). Fourthly, the
great majority of relationships between commercial lenders and private borrowers
are probably characterised by large differences of financial knowledge and expertise.
It is an inherently unequal relationship. But it cannot have been Parliament’s inten-
tion that the generality of such relationships should be liable to be reopened for that
reason alone.’
This passage, with its emphasis on the width of the Court’s discretion and the
need to have regard to all relevant facts, is destined to be repeatedly cited.
However it is of limited utility to a first instance court because it does little more
than re-state the basic features of the statutory test, which are themselves
open-textured. Of potentially more assistance is Lord Sumption’s subsequent
reasoning on the particular facts in Plevin. Mrs Plevin borrowed money from
Paragon and purchased PPI, which was a ‘linked transaction’, therefore a
‘related agreement’ and therefore within the scope of the Court’s review. Of the
premium paid for the PPI, 71.8% was allocated to commissions. Mrs Plevin
must have known some commission was to be paid but did not know the
amount. Paragon owed no legal duty to Mrs Plevin under the ICOB Rules to
disclose the existence or amount of the commissions. The absence of such a duty
had led the Courts below to conclude that her claim must fail by reason of the
decision of the Court of Appeal in Harrison v Black Horse4. In Harrison,
Tomlinson LJ considered a situation in which an 87% commission on PPI had
not been disclosed and stated (at [58]):
‘the touchstone must in my view be the standard imposed by the regulatory authori-
ties pursuant to their statutory duties, not resort to a visceral instinct that the relevant
conduct is beyond the Pale. In that regard it is clear that the ICOB regime, after due
consultation and consideration, does not require the disclosure of the receipt of
commission. It would be an anomalous result if a lender was obliged to disclose
receipt of a commission in order to escape a finding of unfairness under section 140A
of the Act but yet not obliged to disclose it pursuant to the statutorily imposed
regulatory framework under which it operates.’
In the Supreme Court, Lord Sumption rejected that reasoning, and instead held
that the ICOB rules and the unfair relationship regime were concerned with
different questions. The unfair relationship regime invited attention to a wider
range of considerations including (at [17]):
‘the characteristics of the borrower, her sophistication or vulnerability, the facts
which she could reasonably be expected to know or assume, the range of choices
available to her, and the degree to which the creditor was or should have been aware
of these matters.’
Having decided that the regulatory framework was not a decisive consider-
ation, Lord Sumption turned to the question of whether the failure to disclose
the amount of the commission to Mrs Plevin gave rise to an unfair relationship,
and reasoned (at [18]):
‘A sufficiently extreme inequality of knowledge and understanding is a classic source
of unfairness in any relationship between a creditor and a non-commercial debtor. It
is a question of degree... at some point commissions may become so large that the

11
9.14 The Regulation of Bank Lending

relationship cannot be regarded as fair if the customer is kept in ignorance. At what

point is difficult to say, but wherever the tipping point may lie the commissions paid
in this case are a long way beyond it.’
A number of comments may be made about Lord Sumption’s reasoning.
First, in so far as this particular fact pattern is concerned, Plevin will ensure that
the unfair relationship regime will be used as one potential avenue for the
recovery by debtors from creditors of non-disclosed fees and commissions. The
statutory cause of action has the advantage that it does not depend on the
existence of a fiduciary relationship5.
Second, from the perspective of regulatory certainty, the decision in Plevin is not
helpful. Lord Sumption did not identify the ‘tipping point’ which requires a
commission to be disclosed and it is unclear whether any court is equipped to
evaluate what percentage of commission requires disclosure. The FCA com-
mented that the decision ‘introduced a significant new uncertainty into an
already uncertain landscape’6. As a result, the FCA has promulgated in its DISP
rules a presumptive tipping point of 50% in the PPI context, so that if the
undisclosed commission on the sale exceeds 50%, a rebuttable presumption
arises that the relationship is unfair7.
Third, there is tension between Lord Sumption’s simultaneous views that (i)
‘that the great majority of relationships between commercial lenders and
private borrowers are probably characterised by large differences of financial
knowledge and expertise. It is an inherently unequal relationship. But it cannot
have been Parliament’s intention that the generality of such relationships should
be liable to be reopened for that reason alone’ and (ii) ‘inequality of knowledge
and understanding is a classic source of unfairness’. Lord Sumption does not
explain how first instance courts should resolve this tension, but it would seem
that the Courts are going to need to develop a jurisprudence of ‘unfairness’.
Fourth, in developing a jurisprudence to deal with these open-textured issues, it
is likely that the courts will draw on the concepts of good faith and fair dealing.
The House of Lords has engaged with these concepts in cases concerning unfair
terms8, and they have also assumed prominence in the English legal landscape
via debates concerning the meaning of contractual duties of good faith9. Com-
parison may also be made to language of the old extortionate credit bargain
regime which permitted the Court to re-open a transaction where it ‘grossly
contravenes ordinary principles of fair dealing’10. At present, it is difficult for
appellate courts to interfere with the first instance decision, even in a ‘troubling
case’11 because of the broad discretion given to a trial judge. Further decisions
are needed to settle this area of the law.
1
Contrast the more helpful list of indicative terms which may be regarded as unfair: Consumer
Rights Act 2015, Sch 2.
2
See, in particular, Deutsche Bank (Suisse) SA v Khan [2013] EWHC 482 (Comm) at [343] to
[346].
3
[2014] UKSC 61, [2014] Bus LR 1257.
4
[2011] EWCA Civ 1128; [2009] CTLC 103.
5
See generally William v Norton Finance (UK) Ltd (In Liquidation) [2015] 1 All ER (Comm)
1026; Nelmes v NRAM Plc [2016] CTLC 106; Commercial First Business Limited v Pickup
and Vernon [2017] CTLC 1.
6
FCA PS 17/3 at [1.8]. It appears that the FCA’s approach to the difficulties presented by the
prospect of future court decisions is to wait for the Courts’ proposals and then regulate:
‘Concerning potential future decisions in the courts that might, for example, address the scope

12
 Unfair Relationships 9.15

of s.140A-B, we will consider the issues and case law on a case by case basis in light of our
statutory objectives and regulatory priorities’: FCA PS17/3, at [4.67].
7
DISP Appendix 3, Handling Payment Protection Insurance complaints.
8
See Director General of Fair Trading v First National Bank Plc [2002] 1 AC 481 at [17] per
Lord Bingham and at [36] per Lord Steyn; Canvendish Square Holding BV v Makdessi
[2016] AC 1172 at [102]-[114], especially [104] per Lord Neuberger PSC and Lord Sumption
JSC (Lord Carnwath JSC agreeing).
9
Al Nehayan v Kent [2018] EWHC 333 (Comm).
10
This phrase was found in the now repealed CCA 1974, s 138(1)(b).
11
McMullon v Secure the Bridge Limited [2015] EWCA Civ 884 at [93].

9.15 In Deutsche Bank (Suisse) SA v Khan1 Hamblen J compiled lists of matters

of potential relevance to each limb of s 140A(1), and these lists have proved
influential2.
The lists are a helpful reminder that the unfair relationship jurisprudence
extends beyond the information asymmetry before the Supreme Court in
Plevin. Four other fact patterns are worthy of specific comment.
First, high interest rates. The unfair relationship regime was intended to replace
the old provisions which permitted the Court to re-open exorbitant credit
bargains. Today, in common with many other jurisdictions around the world,
the FCA has imposed a cap on pay-day lending rates. Outside that specific
context, very high interest rates are capable of triggering a finding of an unfair
relationship3. However, it would seem that other factors may be required to
help the Court along to the conclusion of an unfair relationship because it is not
ordinarily unfair to charge a higher interest rate than a competitor4. A very high
return in a short period of loan may be justified in the light of credit risk
assumed in making the loan5. Whether the credit was advanced in a business,
social or familial context is important6. The Court will have regard to whether
the parties were in a commercial negotiation and able to look after their own
interests7.
Second, the unfair relationship regime may overlap with other regimes. We have
seen its interaction with ICOBS in Plevin. It may also interact with common law
claims for misrepresentation and/or contract. In Carney v NM Rothschild &
Sons Limited, HHJ Waksman QC was mindful of not diluting the requirements
of the common law causes of action, lest ‘the analysis of their significance or
otherwise becomes blurred and uncertain’8. This is particularly so in relation to
the question of causation. Ordinarily there will not be unfairness in the relevant
sense where the conduct complained of is causally unrelated to the loss alleged
to have been suffered9. Where the pleaded particulars of unfairness are parasitic
upon other causes of action, it is likely they will meet the same fate10.
Third, the unfair relationship regime may overlap with other statutory protec-
tions for the borrower11. In particular, it is entirely possible for contractual
terms to be challenged under s 140A(1)(a) at the same time as they are
challenged under, for example, the CRA 2015. In Carney v NM Rothschild &
Sons Limited12, HHJ Waksman QC reasoned (at 97]–[100]) that a term which
was not unfair under the UTCCR 1999 could still give rise to an unfair
relationship.
Fourth, another frequent source of complaint specifically identified by
s 140A(1)(b) as relevant to the assessment of the relationship concerns steps
taken to enforce the agreement. However any system of secured or unsecured

13
9.15 The Regulation of Bank Lending

lending depends on certainty and efficacy when it comes to enforcement. It is

not ordinarily unfair for a creditor to enforce its rights, and that sentiment is
reflected in numerous cases considering this limb of the test. In Rahman v HSBC
Bank plc13 the Court rejected a complaint that the bank had refused to accede
to requests to change the terms of an arrangement or had acted improperly by
seeking to enforce in circumstances where the borrower had only partially
complied with his obligations. An argument that the enforcement of ‘on
demand’ debt gave rise to an unfair relationship similarly was rejected: Paragon
Mortgages Limited v McEwan-Peters14. In Graves v Capital Home Loans Ltd15
the Court of Appeal held that it would have to be an exceptional case before
a Court would conclude that a mortgagee had acted unfairly in deciding to
realise its security when the power of sale had become exercisable due to
non-payment. However a delay in enforcing an agreement may contribute to
unfairness.
1
[2013] EWHC 482 (Comm) at [343] to [346].
2
Nelmes v NRAM Plc [2016] CTLC 106; Commercial First Business Ltd v Pickup [2017] CTLC
1; Holyoake v Candy [2017] EWHC 3397 (Ch); Carney v NM Rothschild & Sons Limited
[2018] EWHC 958 (Comm).
3
Patel v Patel [2010] 1 All ER (Comm) 864; [2010] Bus LR D73.
4
Cf Harrison v Black Horse Ltd [2011] EWCA Civ 1128; [2009] CTLC 103 at [59]; Tamimi v
Khodari [2009] EWCA Civ 1109; [2009] CTLC 288; Consolidated Finance Ltd v Hunter
[2010] BPIR 1322.
5
Khodari v Tamimi [2008] EWHC 3065 (QB) at [46], upheld on appeal [2009] EWCA Civ
1109; [2009] CTLC 288.
6
Tamimi v Khodari [2009] EWCA Civ 1109; [2009] CTLC 288; Rahman v HSBC Bank Plc
[2012] EWHC 11 (Ch).
7
Holyoake v Candy [2017] EWHC 3397 (Ch) at [524].
8
Carney v NM Rothschild & Sons Limited [2018] EWHC 958 (Comm) at [50].
9
Carney v NM Rothschild & Sons Limited [2018] EWHC 958 (Comm) at [51], referring to the
Supreme Court’s approach in Plevin to the claimant’s attitude towards the PPI commission.
10
For example, Hodell v Clydesdale Bank plc [2018] EWHC 1009 (QB).
11
As to which, see further Part 5 of this chapter below.
12
[2018] EWHC 958 (Comm) at [54]–[100].
13
[2012] EWHC 11 (Ch).
14
[2011] EWHC 2491 (Comm).
15
[2014] GCCR 12047 at [31].

(f) Remedies
9.16 If the Court determines that an unfair relationship has arisen, it has a
discretion as to whether to give relief and a further discretion as to the form of
that relief. The Court’s powers are extensive (CCA 1974, s 140B).
The Court’s basic approach is to design the relief in such a way as to remove the
effect of the unfairness by crafting an order which approximates what the
position would have been in the absence of the unfairness1. The creditor (which
for this purpose includes any associate or former associate) may be required for
example: (i) to repay any sum paid by the debtor or by a surety by virtue of the
agreement or any related agreement (whether paid to the creditor or any other
person); (ii) to do, or not do or to cease doing anything in connection with the
agreement or any related agreement; (iii) to reduce or discharge any sum
payable by the debtor or by a surety under the agreement or any related
agreement; or (iv) to return to a surety any property provided by him for the

14
 The Regulation of Mortgage Lending 9.18

purposes of security. Any duty imposed on the debtor or surety by the agree-
ment or any related agreement may be set aside. The terms of the agreement
may be altered and a direction may be made for accounts to be taken. Further,
an order may be made even if its effect is to place on the creditor a burden in
respect of an advantage enjoyed by another person (CCA 1974, s 140B(3)).
1
Carney v NM Rothschild & Sons Limited [2018] EWHC 958 (Comm) at [101].

(g) Summary judgment

9.17 As already stated, the focus of the statutory test is upon the relationship as
a whole, not just the terms of the agreement. Post-contract interactions between
the parties may be relevant. Indeed, once an unfair relationship is alleged, the
full history of the debtor/creditor relationship may fall to be reviewed depend-
ing on the nature of the allegations: Patel v Patel1. For this reason, Courts will
need to be particularly astute to ensure that an allegation of unfair relationship
is not used as a vehicle for an unwarranted attempt at resisting summary
judgment. Attempts to resist summary disposal may draw strength from the fact
that once the debtor or a surety alleges that the relationship between the
creditor and the debtor is unfair, the burden is on the creditor to prove the
contrary (CCA 1974, s 140B(9)). However a bare assertion made without
proper particulars or evidence to support it is unlikely to have a real prospect of
success: Re M2; Carey v HSBC Bank Plc3. A court may be able to approach an
application for summary disposal relying on factual assumptions made in
favour of the debtor and reasoning that the facts taken at their highest do not
disclose unfairness in the relevant sense4.
1
[2010] 1 All ER (Comm) 864 at [68]; [2010] Bus LR D73.
2
[2010] EWHC 2324 (Admin).
3
[2010] Bus LR 1142 at [134], [193]–[194], [2010] Bus LR 1142 at [134], [193]–[194]. The
suggestion in Bevin v Datum Finance Ltd [2011] EWHC 3542 (Ch) at [60] that the assessment
of fairness at the summary disposal stage was ‘virtually impossible’ should be treated with
caution, because each case will turn on its own facts. In Axton v GE Money Mortgages Ltd
[2015] EWHC 1343 (QB), [2015] GCCR 13105, Swift J distinguished Bevin and upheld the
order of the judge below granting summary judgment.
4
Axton v GE Money Mortgages Ltd [2015] EWHC 1343 (QB), [2015] GCCR 13105.

4 THE REGULATION OF MORTGAGE LENDING

(a) Introduction
9.18 Chapter 17 (Mortgages of Land) gives an introduction to the nature and
effect of a mortgage of land together with an explanation of priorities, overrid-
ing interests, registration requirements, and the remedies of a mortgagee1.
Chapter 13 (The Taking of Security) sets out some of the common grounds on
which security interests may be challenged. Chapter 29 (Advising on Financial
Products) describes certain obligations which may arise under MCOB when
giving mortgage advice. The narrower purpose of this Part of Chapter 9 is to
introduce the conduct regulation by the FCA of mortgage lending and associ-
ated activities, which is to be found in the Mortgages and Home Finance: Con-
duct of Business Sourcebook of the FCA Handbook, or ‘MCOB’. It is not
possible to give a full account of the complexities of these provisions in Paget,

15
9.18 The Regulation of Bank Lending

and specialist works should be consulted. MCOB applies to every firm that
carries on a home finance providing activity or communicates or approves a
financial promotion2. Advising, arranging, entering and administering3 a regu-
lated mortgage contract are all types of activity which when carried on by way
of business4 require a firm to first obtain authorisation from the FCA5. If the
agreement is a ‘regulated mortgage contract’ and therefore within the scope of
MCOB, it ordinarily falls outside the scope of CONC, which does not apply to
credit agreements secured on land, except in very limited circumstances6.
1
See also Megarry and Wade: The Law of Real Property (9th edn); Cousins On The Law of
Mortgages (4th edn, 2017); Fisher and Lightwood’s Law of Mortgage (14th edn, 2014).
2
MCOB 1.2.
3
For a discussion of what constitutes administering, see Fortwell Finance Ltd v Halstead [2018]
EWCA Civ 676.
4
Financial Services and Markets Act 2000, s 22(1). See further Financial Services and Markets
Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001, SI 2001/1177. For
cases exploring the complexities of assessing whether an activity was ‘carried on by way of
business’, see Newmafruit Farms Ltd v Pither [2016] EWHC 2205 (QB); Helden v Strath-
more Ltd [2011] Bus LR 1592.
5
So too entering, administering or arranging home reversion plans, home purchase plans and
regulated sale and rent back agreements: see the Regulated Activities Order for full details.
6
CONC 1.2.7.

(b) The concept of a ‘regulated mortgage contract’

9.19 Understanding the regulation of mortgages under MCOB may be helped
by an appreciation of the way in which MCOB expanded to accommodate the
Mortgage Credit Directive1 (MCD) in 2016. Prior to the implementation date
of 21 March 2016, MCOB applied to those mortgages falling within the
definition of a ‘regulated mortgage contract’. From 21 March 2016, a slightly
broader definition emerged of a new creature known as the ‘MCD regulated
mortgage contract’, which was granted or promised by a ‘MCD mortgage
lender’. A host of new provisions in MCOB derived from the Mortgage Credit
Directive were promulgated to regulate these ‘MCD regulated mortgage con-
tracts’ and ‘MCD mortgage lenders’. This is a complicated area and one which
requires close attention to MCOB. However, the majority of retail mortgages
(subject to the categories of exemptions) will be both ‘regulated mortgage
contracts’ and (so long as entered into on or after 21 March 2016) also ‘MCD
regulated mortgage contracts’. Accordingly, they will be subject to both sources
of regulation under MCOB.
1
Mortgage Credit Directive 2014/17/EU. See further the Mortgage Credit Directive Order 2015,
SI 2015/910; PERG 4.10A – ‘Activities regulated under the Mortgage Credit Directive’.

9.20 A ‘regulated mortgage contract’ is a mortgage that complies with the three
conditions set out in article 61(3), and does not fit within any of the exemptions
in article 61A, of the Regulated Activities Order. The three conditions are that
at the time of entry into the contract (i) the lender provides credit to an
individual or trustee; (ii) with security by a mortgage on land in the European
Economic Area; and (iii) at least 40% of that land is used or intended to be used,
in the case of credit provided to an individual, as or in connection with a
dwelling; or (in the case of credit provided to a trustee who is not an individual),
as or in connection with a dwelling by an individual who is a beneficiary of the

16
 The Regulation of Mortgage Lending 9.22

trust, or by a related person. The exemptions in article 61A include a contract

which is a home purchase plan, a limited payment second charge bridging loan,
a second charge business loan, an investment property loan, an exempt con-
sumer buy-to-let mortgage contract, an exempt equitable mortgage bridging
loan, an exempt housing authority loan or a limited interest second charge
credit union loan, as those concepts are defined in article 61A of the Regulated
Activities Order. An ‘MCD regulated mortgage contract’ is a ‘regulated mort-
gage contract’ entered into on or after 21 March 2016, under which the
borrower is a ‘consumer’ (as defined) and which is not an ‘exempt MCD
regulated mortgage contract’.

9.21 Three broad consequences of the expansion in regulation occasioned by

the MCD may be noted. First, there are now additional disclosure requirements
in MCOB for ‘MCD regulated mortgage contracts’ that are described in the
next paragraph below. Second, FCA regulation is no longer confined to first
mortgages but extends to second and subsequent mortgages. Third, there is a
complicated transition regime by which some mortgages entered into before
21 March 2016 which were not regulated, or were regulated under the CCA
1974, have been brought into the new regime1.
1
PERG 4.4A.

(c) Key stages contemplated by MCOB

9.22 The rules and guidance in MCOB relate to, among other topics, how a
lender communicates with its customers, the disclosure of key risks and
features, and the minimum standards of any advice given. The nature of the
lender’s obligations in relation to advice1 is explored in more detail in Chapter
29. For illustrative purposes, it is possible to analyse MCOB by reference to the
main stages a lender proposing to grant a standard retail mortgage will proceed
through. At each stage, the pre MCD regulation applies to ‘regulated mortgage
contracts’ and this is then supplemented by additional requirements which
apply when the contract is a ‘MCD regulated mortgage contract’. The stages
may be described as follows. First, a firm may only communicate information or
issue financial promotions in a way which is fair, clear and not misleading2.
Second, the prospective borrower will be given initial disclosure about the
lender’s products and, in the case of MCD regulated mortgage contracts, the
new European Standard Information Sheet (ESIS), which is a standard form
document3. Third, the borrower will make a formal application for the mort-
gage. Fourth, the firm will carry out an affordability assessment4. Fifth, the
lender will issue a clear offer document, which, in the case of a MCD regulated
mortgage contract, will need to comply with the prescribed additional require-
ments5 (in particular, the consumer must be given a seven day period to reflect
on the offer6). Sixth, following entry into the mortgage there are additional
disclosure requirements which continue after the sale7. Finally, MCOB also
regulates the lender’s charges8 and imposes certain requirements concerning
arrears, payment shortfalls, and repossessions9.
1
MCOB 4.7A.
2
MCOB 3A, with additional requirements at 3A.5 for MCD financial promotions.
3
MCOB 4, 4A, 5, 5A.
4
MCOB 11, 11A.

17
9.22 The Regulation of Bank Lending
5
MCOB 6, 6A.
6
MCOB 6A.3.4.
7
MCOB 7, 7A, 7B.
8
MCOB 12.
9
MCOB 13.

(d) Regulatory remedies

9.23 The borrower has a cause of action under s 138D of FSMA for any
contravention of MCOB. The FCA policy literature also emphasises the impor-
tance of firms complying with the FCA’s Principles for Businesses (set out in
PRIN 2.1), including in particular the need for a firm to ‘pay due regard to the
interests of its customers and treat them fairly’ (Principle 6) and ‘pay due regard
to the information needs of its clients, and communicate information to them in
a way which is clear, fair and not misleading.’ (Principle 7). A breach of the
Principles is not of itself actionable under s 138D of FSMA 2000, but can render
a firm liable to disciplinary sanction1. The Principles are the overarching
framework for specific rules, an indication of what is fair and reasonable, and
can be taken into account by FOS2. The jurisdiction of the Financial Ombuds-
man Service extends to regulated mortgage agreements.
1
PRIN 1.1.7.
2
R (on the application of British Bankers Association) v Financial Services Authority [2011]
EWHC 999 (Admin), [2011] Bus LR 1531.

5 KEY STATUTORY PROTECTIONS FOR BORROWERS AGAINST

LENDERS IN RELATION TO UNFAIR TERMS

(a) Introduction
9.24 Loan agreements are frequently asymmetric, in the sense that the lender
has more power than the borrower to influence the terms on which the loan is
to be advanced. They are therefore a class of contracts which are particularly
susceptible to challenge on the ground of unfairness. However, traditionally the
common law has emphasised the importance of contractual certainty and
exhibited scepticism towards open-textured complaints of unfairness. The
rule relating to contractual penalties is a possible exception to the traditional
approach but it has ‘not weathered well’1 and is of limited utility in challenging
the terms of loan agreements2. That leaves the question of statutory interven-
tion designed to deprive unfair terms of their enforceability, which has gained
considerable impetus from European law. On 1 October 2015 the Consumer
Rights Act 2015 (CRA 2015) entered into force. It consolidates much, but not
all, of the law concerning consumer rights. It is intended to replace the UTCCR
19993 and the UCTA 1977 insofar as it concerns consumers. Business borrow-
ers must continue to rely on the UCTA 1977. A fuller description of how these
statutory provisions operate is set out in Chapter 4. The present chapter con-
siders the application of these provisions to bank lending. The scope of any
statutory protections is not diminished by CONC, which is expressed to apply
without prejudice to other consumer protection legislation4. This is a nuanced
area to which only a brief introduction can be given here, and practitioners

18
 Key Statutory Protections for Borrowers 9.25

should consult specialist works5.

1
Makdessi v Cavendish Square Holdings BV [2016] AC 1172 at [3] per Lord Neuberger PSC and
Lord Sumption JSC (Lord Carnwath JSC agreeing).
2
Following the review and restatement of the law of penalties in Makdessi v Cavendish Square
Holdings BV [2016] AC 1172, see Holyoake v Candy [2017] EWHC 3397 (Ch) at [466]–[488].
See also Edgeworth Capital (Luxembourg) SARL v Ramblas Investments BV [2017] 1 All ER
(Comm) 577 at [7] which affirms the distinction between a sum payable on a breach of contract
and a sum payable on the happening of a specified event.
3
Prior to the UTCCR 1999, the relevant statutory instrument was the UTCCR 1994.
4
CONC, 2.2.5.
5
Chitty on Contracts (33rd edn, 2018), chapter 38. One of the most controversial aspects of the
statutory protections concerns the extent to which they can be invoked in relation to contractual
estoppels, particularly those estoppels arising as a result of so-called basis clauses: Peekay
Intermark Ltd v Australia & New Zealand Banking Group Ltd [2006] EWCA Civ 386; [2006]
2 Lloyd’s Rep. 511; Raffeisen Zentralbank v. Royal Bank of Scotland plc [2011] 1 Lloyds Rep
123, at [271]–[315]; First Tower Trustees Ltd v CDS (Superstores International) Ltd [2018]
EWCA Civ 1396; Carney v NM Rothschild & Sons Limited [2018] EWHC 958 (Comm). That
issue is beyond the scope of this chapter.

(b) UCTA 1977

9.25 As already stated, with the advent of the CRA 2015, the application of the
UCTA 19771 is confined to (i) business to business lending and (ii) business to
consumer contracts made before 1 October 2015. In broad terms, the UCTA
1977 has three main features. First, certain types of avoidance clauses are
simply not acceptable, and ineffective. These include, by way of example,
exclusion clauses which exclude or restrict liability for death or personal injury
resulting from negligence2 or for breach of implied terms arising under s 12 of
the Sale of Goods Act3. Second, a reasonableness requirement is imposed upon
certain attempts to exclude or restrict liability for negligence for other types of
loss4, whether those attempts are contractual or by notice5. Third, where the
parties deal on one party’s written standard terms of business6 the UCTA 1977
imposes a reasonableness requirement on those terms which exclude or restrict
liability for breach of contract (s 3(2)(a)), or justify rendering a contractual
performance substantially different from that which was reasonably expected
of him or no performance at all (s 3(2)(b)). This third feature is perhaps the
most likely to arise in the context of bank lending. However, the second limb
mentioned (s 3(2)(b)) concerns the contractual performance of the party
affected by the relevant term. Therefore if the contractual term in question
concerns the scope of the borrower’s performance, the second limb cannot be
relied on against the lender7.
1
The anti-avoidance provision in s 3 of the Misrepresentation Act 1967 will also continue to
apply.
2
UCTA 1977, s 2(1).
3
UCTA 1977, s 6(1)(a).
4
UCTA 1977, s 2.
5
As regards the ability to rely on notice, see Taberna Europe CDO plc v Selskabet AF1
[2017] QB 633 (CA).
6
UCTA 1977, s 3(1). In a lending context, see: African Export-Import Bank v Shebah Explora-
tion and Production Co Ltd [2018] 2 All ER 144.
7
Paragon Finance v Nash [2002] 2 All ER 248.

19
9.26 The Regulation of Bank Lending

9.26 The test for what is ‘reasonable’ is found in s 11 of the UCTA 1977, which
directs the Court to, inter alia, the circumstances which were, or ought
reasonably to have been, known to or in the contemplation of the parties when
the contract was made, and to a list of matters specified in Schedule 2. In
agreements made between commercial organisations in a commercial context
the Courts are less likely to disturb the contractual allocation of risk1. Three
examples show that the Courts will not readily accept that standard lending
terms fail to satisfy the reasonableness requirement. First, courts generally
regard ‘no set-off’ clauses as a normal feature of commercial life2. Second,
conclusive evidence clauses are normally acceptable if they provide for the
possibility of challenge in the event of manifest error3. Third, provisions for
default interest are common and not intrinsically unfair4.
1
AXA Sun Life Services plc v Campbell Martin Ltd (CA) [2012] Bus LR 203.
2
Skipskredittforeningen v Emperor Navigation [1997] CLC 1151; Deutsche Bank (Suisse) SA v
Khan [2013] EWHC 482 (Comm); cf Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] 1 QB
600.
3
United Trust Bank Limited v Dohil [2011] EWHC 3302 (QB).
4
Deutsche Bank (Suisse) SA v Khan [2013] EWHC 482 (Comm) at [330]–[333].

(c) The Misrepresentation Act 1967

9.27 The Misrepresentation Act 1967 (MA 1967) imposes a reasonableness
requirement upon contractual terms which would exclude or restrict liability or
remedy for a misrepresentation made before the contract was made1. It is for the
party seeking to rely on the term to show that it satisfies the test of reasonable-
ness under s 11 of the UCTA 19772. For contracts made on or after 1 October
2015 the MA 1967, like the UCTA 1977, does not apply to terms in a consumer
contract which are now regulated by the CRA 20153. As set out further below,
there are anti-avoidance provisions in the CRA 2015: a significant feature of the
new regime under the CRA 2015 is the inability to contract out of specified
statutory rights4.
1
MA 1967, s 3(1).
2
MA 1967, s 3(1).
3
CRA 2015, Schedule 4.
4
CRA 2015, s 31 (goods), s 47 (digital content contract), s 57 (services contract).

(d) Consumer Rights Act 2015

9.28 The CRA 2015 is divided into three parts: consumer contracts for goods,
digital content and services (Part 1); unfair terms rendered unenforceable
(Part 2); and Miscellaneous and General (Part 3).1 Part 1 inter alia imposes
statutory terms on particular types of contract. By contrast, Part 2 concerns
contracts between certain types of parties. In this regard Part 2 follows
the CJEU jurisprudence which interprets the application of the Unfair Terms
Directive by reference to the status of the parties, ie it is for the protection of
someone acting as ‘consumer’ against someone acting for the purpose of their
trade, business or profession2. The definition of a ‘consumer’ is as ‘an individual
acting for purposes which are wholly or mainly outside that individual’s trade,
business, craft or profession’3. This definition of ‘consumer’ therefore includes

20
 Key Statutory Protections for Borrowers 9.29

an individual acting ‘mainly’ outside her trade, business, craft or profession.

This is a broader definition of a consumer than existed under the UTCCR 1999,
which had been confined to an individual acting wholly outside her trade,
business or profession4. For contracts made before 1 October 2015, practitio-
ners should consider more detailed works on the UCCTR 19995. In circum-
stances where Part 2 of the CRA 2015 is a second implementation of the Unfair
Terms Directive, the case law associated with the UCCTR 1999 will continue to
be relevant. In addition to the rights and remedies conferred on consumers, both
the CMA and the FCA, among others, have enforcement functions and inves-
tigatory powers under the CRA 20156. The FCA has produced online an ‘unfair
contract terms library’7 and has issued guidance under s 139A of FSMA, which
is to be found in the Handbook8.
1
See further below.
2
Brusse v Jahani BV (C-488/11) [2013] 3 CMLR 45; Siba v Devenas (C-537/13) [2015] Bus LR
291.
3
CRA 2015, s 2(3).
4
Reg 3 of the UTCCR 1999, as explained in Overy v Paypal (Europe) Ltd [2012] EWHC 2659
(QB); Ashfaq v International Insurance Co of Hannover Plc [2017] EWCA Civ 357.
5
See, eg, Chitty on Contracts (33rd edn, 2018), chapter 38.
6
CRA 2015, ss 70,77. There is a memorandum of understanding between the FCA and the
CMA: https://www.fca.org.uk/publication/mou/fca-cma-consumer-protection-mou.pdf.
7
See www.fca.org.uk/firms/unfair-contract-terms/library.
8
The Unfair Terms and Consumer Notices Regulatory Guide or ‘UNFCOG’.

9.29 Like the UTCCR 1999, the CRA 2015 subjects certain terms of consumer
contracts to a fairness test. Indeed the scope of the CRA 2015 is wider, in that
it applies to contracts, notices, and communications with consumers. However,
also like the UTCCR, not all terms are assessed for unfairness1. There is a core
exemption. By s 64 of the CRA 2015 a term is excluded from assessment (i) ‘if
it is transparent and prominent’; and (ii) it specifies the main subject matter of
the contract or requires assessment of the appropriateness of the price.
A term is unfair under the CRA 2015 if contrary to the requirement of good
faith it causes a significant imbalance in the parties’ rights and obligations under
the contract to the detriment of the consumer2. Whether a term is fair involves
considering the nature of the subject matter of the contract, the circumstances
existing when the term was agreed, the other terms of the contract and any
other contract on which the contract depends3. Like its predecessor the UTCCR
1999, the CRA 2015 supplies an indicative and non-exhaustive list of terms
which may be regarded as unfair for the purpose of the CRA 20154. Of
particular relevance to loan contracts are the indicative terms on the list which
(i) exclude or limit set offs5; (ii) permit the trader to decline to provide services
and/or to retain sums paid by the consumer6; (iii) have the object or effect of
automatically extending a contract of fixed duration where the consumer does
not indicate otherwise, when the deadline fixed for the consumer to express a
desire not to extend the contract is unreasonably early; (iv) have the object or
effect of enabling the trader to alter the terms of the contract unilaterally
without a valid reason which is specified in the contract7; and (v) have the object
or effect of excluding or hindering the consumer’s right to take legal action or
exercise any other legal remedy including by unduly restricting the evidence
available to the consumer8. It will be apparent that the entries on this ‘grey list’
potentially describe rights given to lenders in facility agreements. By way of
example, banks often reserves to themselves the right to cancel a facility in

21
9.29 The Regulation of Bank Lending

whole or part, or stipulate that certain liability may be conclusively determined

by a certificate produced by the bank. Lenders should take particular care as to
assess whether lending falls within the scope of the CRA 2015 and, if so, to take
steps to ensure its requirements are met.
1
Office of Fair Trading v Abbey National Plc [2010] 1 AC 696.
2
CRA 2015, s 62.
3
CRA 2015, s 62(5).
4
CRA 2015, Sch 2, Pt 1.
5
CRA 2015, Sch 2, Pt 1, para 2.
6
CRA 2015, Sch 2, paras 3, 4.
7
CRA 2015, Sch 2, Pt 1, para 11.
8
CRA 2015, Sch 2, Pt 1, para 20.

9.30 The Court of Justice of the European Union has grappled with the balance
between consumer rights and standard lending terms. In its decision in Aziz1,
the Court of Justice considered three provisions in a loan agreement: (i) the
acceleration of the repayment schedule in the event of the borrower’s default,
(ii) the charging of default interest, and (iii) the unilateral certification by the
lender of the amount due for the purpose of legal proceedings. None of those
terms was considered unfair. The key point to emerge from the CJEU’s decision
is that a significant imbalance in the parties’ rights is not of itself contrary to the
requirement of good faith. The parties may have a legitimate interest in
organising their relationship in such a way that there is such an imbalance (for
example, to ensure the availability of loans to consumers in an efficient credit
market).
1
Aziz v Caixa d’Estalvis de Catalunya, Tarragona i Manresa (Catalunyacaixa) (Case C-415/11)
[2013] 3 CMLR 5.

9.31 A series of decisions1 culminating in Andriciuc2 suggests that the CJEU

has adopted an approach the Unfair Terms Directive which is challenging for
English law and the CRA 2015. Put shortly, the CJEU has held that the quality
of information supplied to the consumer pre-contract, and whether as a result
the consumer can foresee the economic consequences of the terms not just the
terms themselves, are fundamentally important to the Directive. The facts in
Andriciuc were that a Romanian consumer (earning Romanian lei) had bor-
rowed in a foreign currency (Swiss francs) and was obliged to repay in Swiss
francs. He was exposed to exchange rate risk if the Romanian lei depreciated
against the Swiss franc, which would make the loan more expensive to repay.
The CJEU decided that the currency of the loan related to the main subject
matter of the contract and therefore the currency term was not assessable for
fairness provided it was ‘in plain intelligible language’. The noteworthy feature
of the decision is that the CJEU found that before a term could be considered to
be ‘in plain intelligible language’ the lender had to provide the borrower with
sufficient information to enable the borrower to take a prudent and well-
informed decision about its effect, which focuses attention on information
supplied beyond the terms themselves. The CJEU stated (at para 51):
‘In the light of the foregoing, the answer to the second question is that Article 4(2) of
Directive 93/13 must be interpreted as meaning that the requirement that a contrac-
tual term must be drafted in plain intelligible language requires, in the case of loan
agreements, financial institutions to provide borrowers with sufficient information to
enable them to take prudent and well-informed decisions. In that connection, that

22
 Implied Terms Controlling Exercise of Contractual Rights 9.33

requirement means that a term under which the loan must be repaid in the same
foreign currency as that in which it was contracted must be understood by the
consumer both at the formal and grammatical level, and also in terms of its actual
effects, so that the average consumer, who is reasonably well informed and reason-
ably observant and circumspect, would be aware both of the possibility of a rise or
fall in the value of the foreign currency in which the loan was taken out, and would
also be able to assess the potentially significant economic consequences of such a term
with regard to his financial obligations. It is for the national court to carry out the
necessary checks in that regard.’
Andriciuc has not yet been considered by an English court, but it may have
implications for the approach adopted to three issues: (i) whether s 68 of the
CRA 2015 is satisfied, (ii) whether a term is within the core exemption or falls
for review under s 64 of the CRA 2015, and (iii) the assessment of fairness
under s 62 of the CRA 2015. The FCA has identified, and is consulting on, a
particular area of uncertainty arising from the CJEU’s decisions, namely terms
permitting unilateral variation in financial services consumer contracts3.
1
Including RWE Vertrieb AG v Verbraucherzentrale Nordrhein-Westfalen eV (C-92/11)
[2013] 3 CMLR 10 at [44], [49], [53]; Matei v SC Volksbank Romania SA (C-143/13) [2015]
1 WLR 2385 at [74]; Van Hove v CNP Assurances SA (C-96/14) [2015] 3 CMLR 31 at
[40]–[41].
2
Andriciuc v Banca Româneascg SA (C-186/16) [2018] 1 CMLR 45.
3
See Guidance Consultation GC18/2, May 2018.

6 IMPLIED TERMS CONTROLLING THE EXERCISE

OF CONTRACTUAL RIGHTS IN LOANS

(a) Introduction
9.32 By their nature, most loan facility agreements involve standardised terms
that have developed over decades, if not longer, of banking practice. But of
course that is no bar to a contention for an implied term, and the Courts are
willing to find implied terms when it is appropriate to do so. The question is
always whether the alleged implied term is necessary to give the contract
business efficacy or so obvious that it goes without saying1. In the analysis
which follows, a distinction is drawn between two different types of implied
restriction. The first category of restriction arises in relation to what are
described as Socimer-type terms. The second category of restriction involves
attempts to impose restrictions on the exercise of absolute rights.
1
Marks & Spencer plc v BNP Paribas Securities Services [2016] AC 742.

(b) The Socimer-type of implied term

9.33 In certain circumstances, a contract will confer on one party a contractual
discretion. The exercise of this discretion is not unregulated1. Perhaps the most
well-known type of restriction on the exercise of a contractual discretion is
found in Rix LJ’s judgment in Socimer International Bank Ltd v Standard Bank
London Ltd2 wherein his Lordship reviewed the authorities and stated:

23
9.33 The Regulation of Bank Lending

‘It is plain from these authorities that a decision-maker’s discretion will be limited, as
a matter of necessary implication, by concepts of honesty, good faith, and genuine-
ness, and the need for the absence of arbitrariness, capriciousness, perversity and
irrationality.’
The categories of relevant contractual discretion attracting this type of implied
restriction are not closed, but may be identified from the fact that they often
involve one party to the contract undertaking a fact-finding exercise3; carrying
out a valuation exercise4; awarding a bonus to an employee5; or choosing from
a range of possible options6. In Deutsche Bank (Suisse) SA v Khan7, the bank
accepted that its assessment of whether the conditions precedent to a loan
facility were satisfied was subject to a Socimer-type of implied term. But not
every power conferred by the contract on one party alone involves a contractual
discretion in the relevant sense. Sometimes, on a proper construction of the
agreement, the contract will supply the machinery by which the power is to be
exercised8. In those circumstances, there is no need for sweeping implied
restrictions on the exercise of the discretion, because the means of controlling
the exercise of the discretion is already to be found in the contract.
1
Abu Dhabi National Tanker Co v Product Star Shipping Ltd (The Product Star) (No 2) [1993]
1 Lloyd’s Rep 397 at p.404.
2
[2008] Bus LR 1304.
3
Braganza v BP Shipping Ltd [2015] UKSC 17; 4 All ER 639.
4
Socimer International Bank Ltd v Standard Bank London Ltd [2008] Bus LR 1304.
5
Horkulak v Cantor Fitzgerald International [2005] ICR 402.
6
Paragon Finance plc v Nash [2002] 1 WLR 685.
7
[2013] EWHC 482 (Comm) at [334]–[338].
8
Compass Group UK and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services NHS Trust
[2013] BLR 265; Brogden v Investec Bank Plc [2017] IRLR 90.

(c) Other types of implied restrictions

9.34 Loan agreements frequently confer unilateral rights on the lender. Bor-
rowers have sometimes invited the court to find implied restrictions on the
exercise of those rights. Such attempts often involve invocation of a Socimer-
type of restriction. However, there is an important difference between absolute
contractual rights, which do not attract a Socimer-style restriction, and con-
tractual discretions, which do attract a Socimer-style restriction1. Courts have
repeatedly held that where the lender is exercising absolute rights, it is inappro-
priate to impose implied restrictions2. Examples may illustrate this: a bank was
not under any contractual obligation to consider all relevant matters before
appointing receivers3; a bank’s ability to demand repayment was not restricted
by a duty to consider all relevant factors or to act fairly and reasonably4; a
bank’s right to extend the term of an agreement was not qualified by implied
terms5; a bank’s right to cancel a facility in whole or part was not subject to an
implied term6; a bank’s ability to revalue its security did not give rise to a
‘Socimer-type’ of implied term7. The last mentioned example is taken from
the Court of Appeal’s decision in Property Alliance Group Ltd v RBS Plc8,
which is a helpful illustration of how the courts are likely to approach many
rights conferred on the lender under loan facilities. The Court of Appeal
reasoned (at [161]–[169]) that there was no room for the implication of a
Socimer-type of implied term, but suggested that the Bank’s exercise of its right
was not completely unfettered and could not be for a purpose unrelated to its

24
 Liability of Creditor as Third Party 9.36

legitimate commercial interests, or simply to vex its counterparty.

1
Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (Trading As
Medirest) [2013] EWCA Civ 200; [2013] BLR 265 at [83].
2
This is a different issue from that which arises when there is an inconsistency between general
and specific terms, as in Alexander v West Bromwich Mortgage Co Ltd [2017] 1 All ER 942.
3
Shamji v Johnson Matthey Bankers (1986) 2 BCC 98910.
4
Hall v RBS plc [2009] EWHC 3163 (QB).
5
Greenclose Ltd v National Westminster Bank plc [2014] 2 BCLC 486 at [144]–[154].
6
Hodell v Clydesdale Bank plc [2018] EWHC 1009 (QB) at [56]–[64].
7
PAG v RBS [2018] All ER (Comm) 695.
8
[2018] All ER (Comm) 695.

7 LIABILITY OF CREDITOR AS THIRD PARTY

(a) Section 56 of CCA 1974

9.35 In certain circumstances a credit broker or supplier will be deemed to have
acted as agent for a creditor who proposes to provide credit under a regulated
agreement (CCA 1974, s 56). It may be helpful to begin by noting the usual
position in the absence of this statutory agency. At common law, the nature and
extent of the credit broker or supplier’s authority to act for the creditor is a
question of fact, requiring an examination of any agreement and course of
dealing between the creditor and the alleged agent: Branwhite v Worcester
Works Finance Limited1. Also, a creditor may be estopped from denying an
agency if it made representations to the debtor concerning a third party’s au-
thority: Purnell Secretarial Services Ltd v Lease Management Services Ltd2.
However it is relatively rare for a common law agency to arise in this context.
Accordingly, this statutory deeming provision exposes banks and other lenders
to the risk of liability to the debtor or hirer in respect of things said or done by
the person conducting the negotiations with the debtor.
As regards the circumstances in which the statutory agency will arise, there are
two fact patterns. The first concerns negotiations by credit-brokers ‘in relation
to’ the supply of goods sold or proposed to be sold by the credit-broker to the
creditor before becoming the subject of a debtor-creditor-supplier agreement
(s 56(1)(b)). A common type of credit-broker is a car dealer. The dealer may
negotiate with a debtor in relation to a vehicle which is then the subject of a
finance agreement or hire-purchase agreement. The second fact pattern con-
cerns negotiations between the consumer and a supplier in relation to a
transaction financed or proposed to be financed by a debtor-creditor-supplier
agreement (s 56(1)(c)). Finally, hire-purchasers can avail themselves of s 56, but
consumer hire negotiations are not covered: see Lloyds Bowmaker Leasing Ltd
v MacDonald3.
1
[1969] 1 AC 552.
2
[1994] CCLR 127.
3
[1993] CCLR 65.

9.36 The statutory agency is limited in scope. For example, it may be open to
the creditor to contend that the negotiations were not undertaken ‘in relation
to’ the goods or not ‘in relation to’ the transaction but in relation to some other
topic. In Forthright Finance Ltd v Ingate1, this argument was run but the Court
of Appeal held that negotiations culminating in a transaction in which the

25
9.36 The Regulation of Bank Lending

credit-broker promised to settle an earlier transaction were part of the negotia-

tions ‘in relation to’ the new agreement. In British Credit Trust v Scotland2,
the Court of Appeal reasoned that representations about PPI were made as part
of the negotiations of the primary transaction because the PPI was described as
necessary for that transaction. By way of further example, it may also be open
to the creditor to contend that the relevant negotiations were not undertaken by
the specific credit-broker for which it is deemed principal, but another party
entirely. In Black Horse Limited v Langford3, the Court concluded that
s 56(1)(b) did not apply because the credit-broker who made the representation
was not the entity that actually sold or proposed to sell the car to the claimant.
1
[1997] 4 All ER 99.
2
[2014] Bus LR 1079 at [49].
3
[2007] CTLC 75.

9.37 Where the statutory agency applies, all ‘antecedent negotiations’ will be
deemed to have been undertaken by the negotiator as agent for the creditor, as
well as in his original capacity (CCA 1974, s 56(2)). ‘Antecedent negotiations’
begin when the negotiator and the debtor first enter into communication
(including by advertisement) and include any representation made by the
negotiator to the debtor and any dealings between them (CCA 1974, s 56(4)).
The creditor is thereby exposed to the risk of a number of different causes of
action including breach of contract, misrepresentation, and fraudulent misrep-
resentation: Mal’ouf v MBNA Europe Bank Ltd (t/a Abbey Cards)1.
Attempts to contract out of the statutory agency are void (CCA 1974, ss 56(3),
173). Even so, there is an interesting question as to the extent to which,
notwithstanding that attempts to preclude the agency arising must fail, it may
be nevertheless possible to contractually regulate the consequences of the
agency arising, for example, through the use of contractual estoppels and
limitation clauses2.
1
[2014] EW Misc 1 (Chester CC), 27 January 2014.
2
To the extent that this is permitted by the Misrepresentation Act 1967, the Unfair Contract
Terms Act 1977 and the UTCCR 1999 and CCA 1974, s 56(3).

(b) Section 75 of CCA 1974

9.38 In certain circumstances a creditor will be deemed jointly and severally
liable with the supplier in respect of a misrepresentation or breach of contract
committed by the supplier (CCA 1974, s 75). This liability will arise in relation
to debtor-creditor-supplier agreements falling within CCA 1974, s 12(b) or (c)1,
but not in relation to non-commercial agreements2. Since debtor-creditor-
supplier agreements within s 12(a) are not included, liability under s 75 will not
arise in relation to hire-purchase and conditional sale agreements: Renton v
Hendersons Garage3. The original rationale for this provision was that, in the
Crowther Committee’s perception, a creditor and supplier may have a relation-
ship akin to that of joint venture. Whether this is true today is unclear, but it is
anomalous that purchasers using a credit card receive the benefit of s 75, but
those paying by debit card or charge card do not4. In practice, the protection is
usually invoked by consumers using UK issued credit cards to purchase goods
or services5. Further, the House of Lords has held that s 75 applies in relation to

26
 Liability of Creditor as Third Party 9.38

foreign transactions using a UK issued card: Office of Fair Trading v Lloyds

TSB Bank plc6. This situation may give rise to difficult conflict of law issues
because the underlying claim against the supplier may be based upon a contract
or misrepresentation claim governed by foreign law.
A claimant seeking to rely on s 75 must satisfy a number of conditions. The
claim must relate to goods or services to which the supplier has attached a cash
price of at least £100 and not more than £30,000 (s 75(3)(b))7. There may be an
issue as to how one defines an ‘item’ so as to bring it within or without the
financial limits, but if the item is within the scope of the protection, there is no
limit on the quantum of the claim. By reason of the definition of ‘financed’ in
s 189, it may also apply where a credit card is used to finance only part of a more
sizeable transaction: MBNA Limited v Lee Ankers8. The liability arises even if
the debtor, in entering into the transaction, exceeds the credit limit or otherwise
contravenes the credit agreement (s 75(4)).
The proper claimant is the ‘debtor’ which in the credit card context is the
account-holder. That raises the interesting issue of additional card holders who
are not account-holders. Can they sensibly be regarded as the ‘debtor’? It is
sometimes suggested that an additional card-holder should be treated as the
agent of the debtor, so that the protection remains available. This is a doubtful
analysis but it is possible to see its attraction as a means to expand the scope of
the consumer protection.
If s 75 applies, the debtor may pursue either or both of the supplier and creditor.
Attempts to contract out of the statutory agency are void (CCA 1974, s 173).
The usual limitation period for an action against the creditor is six years9. The
fact that the debtor has obtained judgment against the supplier would not
prevent him from obtaining a judgment against the creditor (unless the judg-
ment against the supplier has been satisfied) but the debtor would not be
entitled to the costs of the second action unless he could show reasonable
grounds for bringing it10. The debtor’s claim against the creditor may be met by
the same defences available to the supplier. It also follows from the nature of
joint and several liability that if the supplier has limited or compromised its
liability to the debtor, the creditor’s liability may be reduced or extinguished.
There has been controversy as to what types of claim may be encompassed by
the expression ‘misrepresentation or breach of contract’. In Durkin v DSG
Retail Limited11, the Supreme Court decided that the statutory protection of
s 75 did not permit a consumer who was entitled to terminate a contract made
with a supplier to terminate a different contract he had with the creditor. The
protection of s 75 only extends to breaches of the contract made with the
supplier. However, the Supreme Court also held that in such circumstances the
debtor was not left without a solution: there was a term implied by law into the
contract made with the creditor that the credit agreement is conditional upon
the survival of the supply agreement.
A creditor who suffers a loss by satisfying its statutory liability to the debtor is
entitled to be indemnified by the supplier, subject to any agreement between
them (s 75(2)). For this purpose the creditor is ordinarily entitled to have the
supplier made a party to the proceedings (s 75(5)). If the supplier is insolvent, it
will be necessary for the creditor to consider whether there is a claim against the
supplier’s insurers relying upon the Third Parties (Rights Against Insurers) Act
201012. The scope of the creditor’s indemnity includes any costs reasonably

27
9.38 The Regulation of Bank Lending

incurred in defending proceedings instituted by the debtor (s 75(2)). It has been

held that this extends to the costs of successfully defending a claim which could
not be recovered from the debtor on the small claims track: Parker v Black
Horse Ltd13. In circumstances where the creditor is normally a stranger to the
underlying complaint, fixing the supplier with this loss appears right in prin-
ciple. For similar reasons, the indemnity is likely to cover a creditor’s losses
incurred in compromising a claim.
1
See Renton v Hendersons Garage (Nairn) Ltd [1994] CCLR 29. Charge cards are also
excluded: CCA 1974, s 75(3)(c).
2
CCA 1974, s 75(3)(a), as defined in s 189.
3
[1994] CCLR 29.
4
CCA 1974, s 75(3)(c).
5
Even if the creditor and supplier only have a relationship via a network: Office of Fair Trading
v Lloyds TSB Bank plc [2007] QB 1 (CA).
6
[2008] 1 AC 316.
7
The financial limits are set out the Consumer Credit (Increase of Monetary Limits) Order 1983,
SI 1983/1878 and see also the slightly different Consumer Credit Directive (2008/48/EC),
art 2(c).
8
Coventry CC, 28 August 2013.
9
Limitation Act 1980, s 9.
10
Civil Liability (Contribution) Act 1978, ss 3 and 4.
11
[2014] 1 WLR 1148.
12
Replacing the Third Party (Rights Against Insurers) Act 1930.
13
Dec 17, 2010, Unreported (DDJ John Austin); The White Book Service Civil Procedure 2018,
Vol 2, pp.1685-1686, [3H-129.1].

(c) Section 75A of CCA 1974

9.39 Section 75A incrementally expands the protection offered by s 75 in
order to implement the Consumer Credit Directive. It applies to ‘linked credit
agreements’ made on or after 11 June 20101. The qualifying conditions largely
derive from the fact that the purpose of the new provision is to implement the
requirements of the Directive. There are four broad matters to note: First, it
applies only where the debtor has taken steps to exhaust her remedies against
the supplier by satisfying one of the following conditions: (a) the supplier
cannot be traced; (b) the debtor has contacted the supplier but there has been no
response; (c) the supplier is insolvent; or (d) the debtor has taken reasonable
steps to pursue the supplier but has not obtained satisfaction2. This condition is
relatively easily satisfied. Secondly, s 75A applies only to claims in respect of a
breach of contract3. Thirdly, it applies only to ‘linked credit agreements’ as that
concept is defined in s 75A(5), which is a more specific and narrower category
of credit agreement than the ‘debtor-creditor-supplier agreements’ to which s 75
refers. A ‘linked credit agreement’ must serve exclusively to finance the supply
of specific goods and services4. Fourthly, it applies only where certain technical
requirements are met: (i) the cash value of the goods or services must be more
than £30,0005; (iii) the linked credit agreement is for credit which does not
exceed £60,2606; (iv) the linked credit agreement is not wholly or predomi-
nantly for a business purpose7; and (v) the agreement is not secured on land8.
1
And sometimes before that date: see Consumer Credit (EU Directive) Regulations 2010, SI
2010/1010, reg 100(3)(a) and 4(a) for the transitional provisions.
2
CCA 1974, s 75A(2).
3
CCA 1974, s 75A(1).
4
CCA 1974, s 75A(5).

28
 Liability of Creditor as Third Party 9.39
5
CCA 1974, s 75A(6)(a).
6
CCA 1974, s 75A(6)(b).
7
CCA 1974, s 75A(6)(c).
8
CCA 1974, s 75A(8).

29
Chapter 10

APPROPRIATION OF PAYMENTS

1 INTRODUCTION 10.1

1 INTRODUCTION TO APPROPRIATION OF PAYMENTS

10.1 This chapter provides an overview of the common law rules regarding the
appropriation of payments. This issue arises where there are several debts owed
by a debtor to a creditor and a part-payment made by the debtor falls to be
appropriated to a particular debt. The law as to appropriation of payments, so
far as it concerns banks, is summarised in Deeley v Lloyds Bank Ltd in which
Lord Shaw of Dunfermline adopted the statement by Eve J at first instance, to
the effect that1:
‘According to the law of England, the person paying the money has the primary right
to say to what account it shall be appointed; the creditor, if the debtor makes no
appropriation, has the right to appropriate; and if neither of them exercises the right,
then one can look on the matter as a matter of account and see how the creditor has
dealt with the payment, in order to ascertain how in fact he did appropriate it.’
As this passage demonstrates, in general the debtor has the first right to
appropriate. To exercise this right, the debtor must (expressly or implicitly)
communicate to the creditor the intention to appropriate the payment to the
particular debt. The creditor may refuse to accept the payment (or return it
within a reasonable time), but it has been held that the right to appropriate is
akin to a unilateral right and it is not open to a creditor to defeat the
debtor’s appropriation by challenging it, or disagreeing with it, before the
payment is made2. Where the debtor makes no appropriation, the creditor has
the right to appropriate. There are two aspects of appropriation which were not
fully addressed in Deeley v Lloyds Bank Ltd, but which appear to be based on
sound authority3:
(1) that a creditor’s right of appropriation is exercisable ‘up to the very last
moment’4; and
(2) that a creditor’s appropriation does not bind him unless communicated
to the debtor5.
Particular considerations apply in the case of current accounts. The facts in
Deeley v Lloyds Bank Ltd were that the bank had a mortgage as security for an
overdraft on a current account. The bank received notice of a second mortgage
on the same property. It did not break the account, and monies were subse-
quently paid in. In the absence of specific appropriation, these payments in were
attributed under the rule in Devaynes v Noble, Clayton’s case6 to the earlier
drawings out. Accordingly, they extinguished the secured debt and left the bank
unsecured with regard to subsequent advances. The moral for banks is that,
where it is desired to preserve a security on which further advances cannot be
charged, the account should be ruled off, and a new account opened if further
business is contemplated7.

1
10.1 Appropriation of Payments

The rule in Clayton’s case only applies to ‘one unbroken account’8. The rule is
a presumption of fact rebuttable by evidence that the parties did not intend for
it to apply9. In practice, banks will generally contract out of the rule. For
example, by providing that security given by the customer will apply in respect
of the customer’s indebtedness for the time being, or by providing in a guarantee
that, upon determination, subsequent payments into or out of an account will
not affect the guarantor’s liability10.
A further issue that may affect banks is appropriation of part-payments
between principal and interest. This raises distinct considerations from appro-
priation as between several debts because the issue may arise in the case of a
single interest-bearing debt. In Parr’s Banking Company Ltd v Yates Rigby LJ
said that ‘where both principal and interest are due, the sums paid on account
must be applied first to interest’11. It was held that this did not apply in the case
of a running account where interest was added to the principal due. Rigby LJ
seems to use the language of a mandatory ‘rule’, which (absent contractual
provision to the contrary) would prevent a debtor from applying payments
against capital before interest12. However, the authorities do not all speak with
one voice on this point and some cases take the position to be that, where there
is no appropriation by the debtor or the creditor, there is merely a legal
presumption that payments will apply to discharge interest before principal13.
In practice, banks will often provide in credit agreements that partial payments
will be appropriated against interest before capital, or that the bank may
appropriate partial payments as it sees fit.
1
[1912] AC 756 at 783; see also Cory Bros & Co Ltd v Turkish SS Mecca (Owners), The Mecca
[1897] AC 286 at 293; Re Footman, Bower & Co Ltd [1961] Ch 443 at 448, [1961] 2 All ER
161 at 163I; and Siebe Gorman & Co v Barclays Bank Ltd [1979] 2 Lloyd’s Rep 142 at 164.
2
Thomas v Ken Thomas Ltd [2006] EWCA Civ 1504, [2007] Bus LR 429 at [22–23].
3
Some of the cases on which these propositions are based were referred to in Deeley v Lloyds
Bank Ltd but no very definite ruling was given with regard to them.
4
See Cory Bros & Co Ltd v Turkish SS Mecca (Owners), The Mecca [1897] AC 286 per Lord
Macnaghten at 294; Seymour v Pickett [1905] 1 KB 715 at 724, 725 and 727.
5
Simson v Ingham (1823) 2 B & C 65; London and Westminster Bank v Button (1907) 51 Sol
Jo 466; Customs and Excise Commissioners v British Telecommunications Plc [1996] 1 WLR
1309 at 1314E; cf Rekstin v Severo Sibirsko Gosudarstvennoe Akcionernoe Obschestvo
Komseverputj and the Bank for Russian Trade Ltd [1933] 1 KB 47, CA.
6
(1816) 1 Mer 529, 572 at 608. The rule in Clayton’s Case has not escaped criticism, and it has
often not been applied in cases where there are two or more claimants to the same fund. In such
a case, it will normally be appropriate for the parties to be entitled to the mixed fund rateably.
For a helpful review of the authorities on this, see Commerzbank Aktiengesellschaft v IMB
Morgan plc [2004] EWHC 2771 (Ch), [2005] 2 All ER (Comm) 564, [2005] 1 Lloyd’s Rep 298
at [43–48]. The rule in Clayton’s Case will also not apply when a trustee mixes his beneficia-
ry’s funds with his own, in which case the trustee on drawing out funds for his own purposes
will be treated as having exhausted his own funds first: Re Hallett’s Estate (1880) 13 Ch D 696
at 728.
7
See per Lord Shaw in Deeley v Lloyds Bank Ltd [1912] AC 756 at 785 and per Slade J in Siebe
Gorman & Co v Barclays Bank Ltd [1979] 2 Lloyd’s Rep 142 at 164.
8
Per Lord Atkinson, in Deeley v Lloyds Bank Ltd [1912] AC 756 at 771, citing Lord
Selborne LC in Re Sherry (1884) 25 Ch D 692 at 702, CA. Accordingly, if there are multiple
current accounts, the rule in Clayton’s Case applies separately to each one. A bank is not
required under the rule in Clayton’s Case to apply monies deposited in a current account to
discharge indebtedness on another account: Royal Bank of Canada v Bank of Montreal (1976)
67 DLR (3d) 755 at [36] (CA of Saskatchewan).
9
Deeley v Lloyds Bank Ltd [1912] AC 756 at 771.
10
See for example Westminster Bank Ltd v Cond (1940) 46 Com Cas 60, 5 LDAB 263.

2
 Introduction 10.1
11
[1898] 2 QB 460 at 466 (this passage was cited with approval by the Privy Council in Meka
Venkatadri Appa Row Bahadur Zemindar Garu v Raja Parthasarathy Appa Row Bahadur
Zemindar Garu [1921] UKPC 32).
12
One reason for such a rule appears to be that, if a debtor could appropriate his part-payment
first to capital, it would generally be to his advantage to do so (and to the detriment of the
creditor) where outstanding interest is not capitalised. See further Bower v Marris (1841) Cr &
Ph 351 at 354-355, (1851) 41 ER 525 at 526. For a helpful review of the authorities in this area,
see West Bromwich Building Society v Crammer [2002] EWHC 2618 (Ch) at [12–30]. It was
not necessary to resolve in that case whether the statement of Rigby LJ represented a mandatory
rule, or whether the debtor could in principle have chosen to appropriate against capital before
interest.
13
Saigol v Cranley Mansions Ltd (23 February 2000 unreported, CA) at transcript page 27;
Potomek Construction Ltd v Zurich Securities Ltd [2003] EWHC 2827 (Ch), [2004] 1 All ER
(Comm) 672 at [69]; Re Lehman Brothers International (Europe) (In Administration) [2015]
EWHC 2269 (Ch), [2016] BCC 239 at [40–42] (upheld on appeal at [2017] EWCA Civ 1462,
[2017] BCC 759). However, the analysis on the particular point referred to above in these cases
was obiter.

3
Chapter 11

TIERS OF LENDING

1 INTRODUCTION 11.1
2 INVOLUNTARY LENDING TIERS 11.2
3 VOLUNTARY LENDING TIERS 11.5
(a) Lending tiers from creditor-borrower dealings 11.5
(b) Lending tiers from creditor-creditor dealings 11.6
4 MINORITY AND JUNIOR CREDITOR PROTECTION 11.21
(a) Marshalling of securities 11.22
(b) Senior creditor’s duties to junior creditors 11.23
(c) ‘Tacking’ of further advances 11.25
(d) Limits on lender majority voting power 11.28
(e) A Wider theory of inter-creditor good faith? 11.29

1 INTRODUCTION TO TIERS OF LENDING

11.1 The phrase, ‘tiers of lending’, is not a legal term of art, but might be
broadly defined to include any hierarchical relationship between two or more
creditors whereby one creditor’s entitlement to be paid (and the associated legal
protections) ranks above other lenders’ equivalent entitlement. Accordingly, the
lower a creditor in a particular hierarchy and the larger the number of creditors
ranking above it, the greater the risk of not receiving anything by way of
payment. That risk may, however, by affected by whether the debtor is subject
to a formal insolvency proceeding or not.
This chapter is divided into three sections. The first section focuses on ‘invol-
untary’ tiers of lending, which generally involve legal rules (whether applying
mandatorily or by way of default) ranking creditor claims against a particular
debtor1, rather than the ranking being determined by some voluntary arrange-
ment between the debtor and creditor or the creditors inter se. As there is a wide
variety of ‘involuntary’ lending tiers2, two leading examples are discussed
below: first, the legal default rules used to determine the ranking or priority
between different types of claim or security interest over the same asset3; and,
secondly, the circumstances when the ranking between creditors is adjusted by
statute4.
The second section focuses on ‘voluntary’ tiers of lending, which are far more
common than the ‘involuntary’ type. A ‘voluntary’ lending tier may result from
an arrangement between a particular lender and the borrower, such as when the
lender takes security or enters into a security-like arrangement (for example a
‘Quistclose trust’, a retention of title clause, a hire-purchase and conditional
sale arrangement, a right of combination or set-off, a flawed asset arrangement
or charge-back) or inserts a negative pledge clause into the loan agreement or
security documents. Alternatively, the necessary arrangement could be between
several of the creditors themselves (whether or not the borrower is also party to
the arrangement), as occurs with deeds of priority, deeds of postponement,
inter-creditor agreements and the various forms of subordination arrangement.

1
11.1 Tiers of Lending

The final section examines the various mechanisms (whether contractual or

legal) that can be deployed to protect creditors lower down the lending tier from
undue prejudice or oppression at the hands of senior creditors. In the secured
creditor context, the equitable doctrine of marshalling, the restriction on
tacking advances and the principles governing the realisation of a senior
creditor’s security may all achieve this aim. As well as being protected by
various aspects of insolvency law, unsecured creditors are also protected from
the oppressive exercise of majority voting power in lending syndicates and bond
issues.
1
As well as being the product of legal rules, involuntary lending tiers may also be ‘functional’,
resulting from the circumstances in which the lenders find themselves, such as where a
syndicated lender or bondholder finds itself in the minority when voting on issues relating to the
acceleration or restructuring of the loans. For the protections afforded to junior creditors in
such circumstances, see paras 11.21–11.28 below.
2
Less obvious examples of ‘involuntary’ lending tiers include the mandatory creditor classifica-
tion utilised by the courts when approving a scheme of arrangement and the judicial recharac-
terisation of security (and other types of) arrangement, so as to alter its priority as against other
lenders.
3
See para 11.2 below.
4
A leading example of such legislative adjustment is when a company is wound up and some
creditors (such as preferential unsecured creditors) are advanced and others are subordinated by
the Insolvency Act 1986.

2 INVOLUNTARY LENDING TIERS

11.2 As a result of the voluntary actions of the borrower and its lenders in
creating consensual security interests or security-like structures, a lending tier
will often arise (whether between secured creditors and unsecured creditors or
between a number of secured creditors who have a claim against the same
asset). Unlike most common law jurisdictions nowadays, England still lacks a
comprehensive personal property registration system under which the first to
register a security interest generally has priority1. Whilst the priority of mort-
gages over land will generally be determined by reference to the date of
registration under the Land Registration Act 2002, the registration require-
ments in the Companies Act 2006 only impact upon the question of priority to
the extent that a failure to register a relevant company charge2 within 21 days
of its creation3 will render that security void against the borrower’s liquidator
or administrator and its other creditors4.
As registration of a company charge under the Companies Act 2006 does not
provide a ‘priority point’ with respect to the competing claims of secured
creditors over the same assets, the common law has developed certain priority
default rules, although (as considered in detail below) it is extremely common
for a borrower and its lenders or the lenders inter se to agree to other priority
arrangements5. As between competing legal interests, priority is determined by
reference to the maxim, nemo dat quod non habet, so that, unless the subse-
quent lender or claimant is able to bring itself within some relevant exception to
the nemo dat principle, it is likely to lose priority to the earlier interest6. As
regards competition between equitable interests, the ‘first in time’ rule applies,
so that a later equitable interest will take subject to any earlier interests. There
are, however, a number of exceptions to this basic position.

2
 Involuntary Lending Tiers 11.2

First, with respect to competition between a legal and equitable interest, a

subsequent legal interest can take priority over an earlier equitable interest
provided that the subsequent lender acquires its interest in good faith and
without notice of the earlier equitable interest7. Secondly, where the secured
asset takes the form of a debt or account receivable, priority between competing
assignments (whether absolute or by way of security) is determined by the
rule in Dearle v Hall8, so that the first lender to give notice to the borrower has
priority over other assignments of the same debt (assuming that, at the time of
giving notice, that lender did not have notice of any prior assignment). Thirdly,
a purchase-money security interest (in other words, a security interest designed
to secure the purchase price of a particular asset acquired by the borrower)
ought generally to have priority over an earlier global security9, but this will
depend upon whether the purchase-money lender secures its position by way of
a retention of title clause (in which case it will have priority) or by way of a
charge (in which case it will lose priority to the earlier lender by virtue of a
scintilla temporis)10. Fourthly, as a borrower that has granted a floating charge
over its undertaking retains the power to dispose of assets in the ordinary course
of business11, a subsequent fixed charge takes priority over the earlier floating
security (even if the charged assets are debts or accounts receivable)12, provided
that the fixed chargeholder does not have notice of the floating charge contain-
ing a negative pledge clause13. This default rule is not altered by the crystallisa-
tion of the earlier floating charge14. Fifthly, the borrower’s authority to create
further security interests over assets that are already subject to a prior floating
charge does not appear to extend to the creation of a second floating charge
over the same assets, with the result that the later floating charge takes subject
to the prior charge15. Whilst this position is consistent with the basic ‘first in
time’ rule discussed above, it appears to be subject to an exception where the
subsequent floating charge is over a narrower class of assets than the earlier
charge, in which case the more limited subsequent security will have priority16.
Sixthly, an execution creditor will only take priority over a prior floating charge
if execution is completed before the charge crystallises17; any execution post-
crystallisation takes subject to the floating charge, even if the execution creditor
has no notice of crystallisation18. In contrast, a landlord levying distress is
unaffected by a prior floating charge’s date of crystallisation19.
1
For suggested reform to introduce a ‘first to file’ system, see Law Commission of England &
Wales, Company Security Interests (Report No 296, August 2005), [3.1]–[3.231], [6.1]–[6.56].
2
Companies Act 2006, s 859A(1), (6).
3
Companies Act 2006, s 859A(4).
4
Companies Act 2006, s 859H.
5
L Gullifer & J Payne, Corporate Finance Law: Principles and Policy (Hart Publishing, 2nd edn,
2015), [7.4.4].
6
See, for example, Sale of Goods Act 1979, ss 21–25.
7
Whilst notice for these purposes will clearly include actual notice of the earlier security interest,
the issues surrounding the relevance of constructive notice by virtue of registration under
the Companies Act 2006 remain obscure: see L Gullifer & J Payne, Corporate Finance Law:
Principles and Policy (Hart Publishing, 2nd edn, 2015), [7.4.3.2].
8
Dearle v Hall (1828) Russ 1, 23–25.
9
L Gullifer & J Payne, Corporate Finance Law: Principles and Policy (Hart Publishing, 2nd edn,
2015), [7.4.4].
10
Consider Abbey National Building Society v Cann [1991] 1 AC 56, 86–93, 96–97, 101–102.
11
Ashborder BV v Green Gas Power Ltd [2004] EWHC 1517 (Ch), [192]–[227]; Koza Ltd v
Akçll [2017] EWHC 2889 (Ch), [39]–[40].
12
Re Ind Coope & Co Ltd [1911] 2 Ch 223, 231–235. Re Rayford Homes Ltd [2011] BCC 715,
[97].

3
11.2 Tiers of Lending
13
English & Scottish Mercantile Investment Co v Brunton [1892] 2 QB 700, 708–718. Such
notice is more likely after the recent amendments to the Companies Act 2006, since a
charge’s ‘registrable particulars’ now includes any relevant negative pledge clause: see Com-
panies Act 2006, s 859D(2)(c).
14
L Gullifer & J Payne, Corporate Finance Law: Principles and Policy (Hart Publishing, 2nd edn,
2015), [7.4.4].
15
Re Benjamin Cope & Sons Ltd [1914] Ch 800, 805–807; Re Automatic Bottle Makers Ltd
[1926] Ch 412, 427; SAW (SW) 2010 Ltd v Wilson [2018] Ch 213, [28].
16
Re Automatic Bottle Makers Ltd [1926] Ch 412, 420, 423, 427.
17
Evans v Rival Granite Quarries Ltd [1910] 2 KB 979, 987–990, 994–997, 1001–1002.
18
Robson v Smith [1895] 2 Ch 118, 124–126.
19
Cunliffe Engineering Ltd v English Industrial Estates Corporation [1994] BCC 972, 977–981.

11.3 These rules of priority as between secured creditors are generally re-
spected if the borrower enters into a liquidation or administration process and
those without proprietary protection will generally share the unencumbered
assets pari passu1, with the borrower’s shareholders sharing the residue2.
There are, however, exceptions to the basic respect that insolvency law pays to
pre-insolvency entitlements. For example, a floating charge becomes susceptible
to challenge by a liquidator to the extent that it does not secure new value3 and
the assets subject to a floating charge become available for payment of the
preferential unsecured creditors in priority to the floating chargeholder4. Fur-
ther, since the Enterprise Act 20025, a ‘prescribed part’ of the assets subject to a
floating charge must be made available to satisfy the claims of general unse-
cured creditors.
Furthermore, there are circumstances in which some creditors are statutorily
subordinated to other creditors6. For example, where a member is owed money,
in his character of a member, then that money is not treated as a debt due from
the company, so that the shareholder will not be entitled to claim that money in
the borrower’s insolvency as an unsecured creditor, in competition with other
unsecured creditors7. Whilst this effectively prevents a shareholder from dress-
ing up its claim for the return of its investment in the company as an unsecured-
creditor claim and from competing with unsecured creditors in respect of claims
to dividends or other profits8, the provision is intended to be wider than that9
and has received a duly broad interpretation. The limits of the provision were
highlighted, however, in Soden v British & Commonwealth Holdings plc10, in
which a parent company’s claim that it had purchased the entire shareholding in
its subsidiary as a result of negligent misrepresentations made on behalf of the
subsidiary was classified as a claim by an unsecured creditor, rather than a
membership claim. Whilst it is important that what is effectively an anti-
avoidance provision should be construed liberally, the result in Soden seems
intuitively correct, as there would otherwise be a risk that a lender or other
creditor might be unnecessarily prejudiced simply because it also happened to
be a shareholder in the borrower. In any event, whilst a member may not
compete with unsecured creditors in respect of debts due to it qua member, that
debt may nevertheless ‘be taken into account for the purpose of the final
adjustment of the rights of the contributories among themselves’11.
Similarly, where a director or shadow director is found liable for fraudulent12 or
wrongful trading,13 a court may direct that the whole or any part of any debt
owed by the liquidating company to the director ‘shall rank in priority after all
other debts owed by the company and after any interest on those debts’14. The

4
 Voluntary Lending Tiers 11.5

rationale is to punish insiders whose conduct has been dishonest and/or has
contributed to the borrower’s losses in the twilight period before insolvency by
preventing them from recovering any loans made to the borrower until all other
lenders and creditors have been repaid.
1
Insolvency Act 1986, s 107.
2
Insolvency Act 1986, s 74(1)–(2).
3
Insolvency Act 1986, s 245(1).
4
Insolvency Act 1986, s 175(1)–(2). See also Insolvency Act 1986, s 40(1)–(2). The preferential
status of the Inland Revenue and Customs and Excise was revoked by the Enterprise Act 2002,
s 251(1). For the current list of preferential unsecured creditors, see Insolvency Act 1986,
s 386(1), Sch 6. The assets subject to a floating charge are also available for the payment of the
liquidation expenses: see Insolvency Act 1986, s 176ZA.
5
Enterprise Act 2002, s 252, inserting Insolvency Act 1986, s 176A.
6
Alternatively, some forms of liability may cease to be payable in a winding-up, such as
contractual interest: see Insolvency Act 1986, s 189. For the impact of a contractual subordi-
nation to such a claim: see Re Lehman Brothers International (Europe) (No 4) [2018] AC 465,
[46]–[67].
7
Insolvency Act 1986, s 74(2)(f).
8
Re Maxwell Communications Corporation plc (No 2) [1993] 1 WLR 1402, 1412.
9
In particular, the Insolvency Act 1986, s 74(2)(f) does not just cover claims to dividends and
profits but any sum due ‘otherwise’.
10
Soden v British & Commonwealth Holdings plc [1998] AC 298, 323–324, 327. See also Sons
of Gwalia Ltd v Margaretic (2007) 231 CLR 160, 175–185, 192–214, 225–235, 246–254.
11
Insolvency Act 1986, s 74(2)(f).
12
Insolvency Act 1986, s 213(1)–(2).
13
Insolvency Act 1986, s 214(1).
14
Insolvency Act 1986, s 215(4). See also Re Maxwell Communications Corporation plc (No 2)
[1993] 1 WLR 1402, 1412.

11.4 Whilst the above rules establish involuntary default rules for creating
lending tiers, it is also important to maintain the integrity of those structures,
particularly as the borrower moves towards insolvency when there might be a
greater incentive to adjust the ranking of claims. To this end, there are a number
of mechanisms designed to avoid such advantage-taking as insolvency ap-
proaches, namely classifying objectionable transactions as voidable prefer-
ences1, transactions at an undervalue2 or as violating the common law anti-
deprivation rule3. These principles are considered in more detail elsewhere4.
1
Insolvency Act 1986, s 239.
2
Insolvency Act 1986, s 238.
3
Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2012] 1 AC 383,
[1], [6]–[15], [59], [64], [75]–[83], [148]–[149].
4
See paras 15.11, 20.49–20.59 below.

3 VOLUNTARY LENDING TIERS

(a) Lending tiers from creditor-borrower dealings

11.5 Lending tiers can be the product of an arrangement between a borrower
and one or more lenders. The most obvious example of creditor-borrower
dealings giving rise to tiered lending is when the borrower grants security
(whether by way of mortgage, charge, pledge or lien) over its assets, as this
immediately creates a hierarchy between those creditors with and those without
security interests. Granting security is not, however, the only type of situation
that produces this effect, since there is a range of transactions that, despite not

5
11.5 Tiers of Lending

taking the form of a traditional security interest, nevertheless perform a

security-like function, including the ‘Quistclose trust’1, retention of title
clauses, hire-purchase and conditional sale arrangements, rights of combina-
tion or set-off, flawed asset arrangements and charge-backs. It is not just the
competition between secured and unsecured creditors that creates a ‘tiering’
effect, however, since competing proprietary interests over the same asset will
usually produce a junior secured creditor and senior secured creditor according
to the default priority rules considered above2.
Moreover, a borrower and its creditors do not necessarily need to create a
proprietary interest in order to produce a lending tier, as it is also possible to do
so by contractual means. One possibility, which is considered in detail below3,
is to enter into a contractual subordination agreement or some other type of
subordination arrangement, whereby one creditor postpones its right to pay-
ment until one or more identified creditors are paid in part or in full. Another
alternative is to include in the charge instrument a ‘negative pledge clause’,
which operates to restrict the borrower’s ability to create new security ranking
equally or ranking more highly than existing security interests. As such
clauses now constitute a registrable particular under the Companies Act 20064,
a subsequent lender that has searched the register will have knowledge of the
negative pledge clause and accordingly lose priority to the earlier security. There
may even be an argument, although the point is far from clear, that a subsequent
lender would be deemed to have constructive notice of the earlier charge and the
restriction contained therein. Unfortunately, constructive notice alone may be
insufficient to found injunctive relief by the earlier lender against the subsequent
lender. The impact of such clauses is considered in more detail subsequently5.
1
Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, 580; Twinsectra Ltd v
Yardley [2002] 2 AC 164, [69]–[76], [81], [87], [92], [100]; Latimer v Commissioner of Inland
Revenue [2004] UKPC [13], [41]; Menelaou v Bank of Cyprus UK Ltd [2016] AC 176,
[133]–[140].
2
See para 11.2 above.
3
See para 11.15 below.
4
Companies Act 2006, s 859D(2)(c).
5
See para 12.33 below.

(b) Lending tiers from creditor-creditor dealings

11.6 When it comes to lenders and other creditors organising their priority
inter se, the arrangements will generally take one of four basic forms1, although
the parties are obviously free to depart from these paradigms to suit their
particular needs and aims. These are the deed of priority, the deed of postpone-
ment, the subordination agreement and the inter-creditor agreement. The
borrower may or may not be party to the arrangement, whatever its form2,
although the more straightforward the arrangement the less the commercial
need to make the borrower privy to the agreement3. Although there is no
watertight distinction between these various types of arrangement for the
ranking of creditors’ claims, the usual practice is to use deeds of priority for
straightforward priority arrangements between secured creditors, deeds or
letters of postponement when a secured creditor wishes to subordinate its claim
to those of the unsecured creditors and subordination agreements or deeds to
determine priority between a relatively small number of unsecured creditors4. In

6
 Voluntary Lending Tiers 11.7

more complex arrangements involving the ranking of numerous secured and/or

unsecured liabilities, the parties will often use an inter-creditor agreement along
the lines of the standard-form template produced by the Loan Market Associa-
tion5. Each type of arrangement is considered separately below.
1
See generally Lexis PSL, ‘Deeds of Priority, Subordination Deeds and Inter-creditor Agree-
ments: What’s in a Name?’ (2013) 9 JIBFL 602.
2
Ex p Villiers; In re Carbon Developments (Pty) Ltd 1993(1) SA 493, 504.
3
Certainly, the borrower and its parent company are ordinarily parties to the more complex form
of inter-creditor agreement.
4
For support for this terminology, see H Beale, M Bridge, L Gullifer & E Lomnicka, The Law of
Security and Title-based Financing (Oxford University Press, 3rd edn, 2018), [8.102]–[8.104],
[14.123]–[14.124].
5
For example, reference will be made throughout this chapter to the provisions of the Loan
Market Association Inter-creditor Agreement for Leveraged Acquisition Finance Transactions
(Senior/Mezzanine), 18 July 2017 (‘LMA.ICA.05’). See generally M Campbell, ‘The LMA
Recommended Form of Primary Documents’ (2000) 15 JIBFL 53. Whilst the Loan Market
Association (‘LMA’) has consented to the quotation of, and referral to parts of its documents
for the purpose of this book chapter, it assumes no responsibility for any use to which its
documents, or any extract from them, may be put. The views and opinions here expressed are
the views of the author and do not necessarily represent those of the LMA. Furthermore, the
LMA cannot accept any responsibility or liability for any error or omission. © 2017 Loan
Market Association. All rights reserved.

(i) Deeds of priority

11.7 A deed of priority is a straightforward document that seeks to rank the
competing claims of different creditors (whether just in respect of the original
loans or also for any further advances that might be made)1, but, unlike the
subordination agreements considered further below2, a deed of priority is
usually used for secured rather than unsecured debt3. In just the same way as a
subordination agreement, the borrower may or may not be party to the deed of
priority4. Whilst such arrangements are commonplace, their legal validity was
considered only relatively recently by the Privy Council in Cheah Theam Swee
v Equiticorp Finance Group Ltd5. Although Cheah Theam did not directly
involve a deed of priority between two secured creditors, Lord Browne-
Wilkinson nevertheless indicated that the short question of principle before the
Board was whether ‘where there are two mortgages of the same property . . .
the mortgagees can effectively agree to alter the priorities of the mortgages
without the consent of the debtor’6. This issue arose in the context of two
mortgages granted to different lenders over the same parcel of 14 million
shares. Following both mortgages becoming vested in the same mortgagee, the
mortgagee obtained judgment in respect of the debt secured by the first
mortgage. Subsequently, the shares were sold pursuant to a power of sale in the
second mortgage and the proceeds were used to discharge that mortgage. As the
sale did not purport to be subject to the first mortgage, the mortgagee was
treated as having waived the first mortgage’s priority vis-à-vis the second
mortgage7. The mortgagor objected to this on the ground that it was entitled to
have the shares’ proceeds applied to the mortgages in their original order of
priority, which would have had the effect of discharging the judgment debt
secured by the first mortgage8. Although Wylie J at first instance had accepted
the view that two secured creditors could not, by a private arrangement

7
11.7 Tiers of Lending

between themselves, prejudice the mortgagor’s position9, the New Zea-

land Court of Appeal stressed the alternative and cumulative nature of a
mortgagee’s remedies10.
In answer to the question before the Board, Lord Browne-Wilkinson stated
that, as a mortgagor is not ordinarily affected by the order in which the debts
secured over a particular piece of property are satisfied, and as the borrower is
bound to satisfy all the secured debts before being able to recover the mortgaged
property, the mortgagor is not usually prejudiced by a variation in the order of
priority arranged between the secured creditors11 and accordingly the mortgag-
or’s consent is not generally required to effect such a change12. Indeed, the only
interests that are ordinarily affected by a deed of priority are those of the
secured creditors themselves13. Moreover, as a secured creditor is generally free
(subject to the limitations identified below)14 to pursue its remedies against the
borrower in whatever order it chooses (for example, whether by first enforcing
the security interest over the property or the borrower’s underlying personal
obligation to pay)15, such a creditor is equally free to elect not to pursue a
particular remedy and to abandon or waive the benefit of any security in favour
of a junior creditor16. That said, the proposition in Cheah Theam that a deed of
priority is effective without the borrower’s consent is not an absolute rule, since
the borrower may contract with one or more of the secured creditors requiring
their claims to be satisfied in a particular order17 (although Cheah Theam
appears to suggest that such an entitlement on the part of the borrower requires
more explicit language than simply a reference in the security documentation to
the lender’s interest being a ‘first charge’ or ‘second charge’)18. An example of a
situation where the borrower will have a ‘genuine interest’ in contractually
restricting the secured creditors’ ability to adjust their priority is when the
interest on the different secured claims accrues at different rates19. In the
absence of such contractual protection, however, the implication from Cheah
Theam is that a deed of priority will not generally be invalidated even where the
borrower is prejudiced by the alteration to the lenders’ priority or has some
legal or financial interest in maintaining the status quo ante. As well as
representing the position in New Zealand20, the sensible bright-line rule estab-
lished in Cheah Theam represents the position in other common law jurisdic-
tions, including the United Kingdom21, the United States22 and Australia23.
1
To the extent that the rule in Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514 still survives
(on which see para 11.27 below), a deed of priority will provide an important mechanism for a
senior secured creditor, who has notice of junior encumbrancers, to maintain the priority of any
future advances made to the borrower: see J Porteous & L Shackleton, ‘A Question of Great
Importance to Bankers, and to Mercantile Interests of the Country’ (2012) 7 JIBFL 403, 406.
2
See para 11.15 below.
3
See generally Lexis PSL, ‘Deeds of Priority, Subordination Deeds and Inter-creditor Agree-
ments: What’s in a Name?’ (2013) 9 JIBFL 602. For use of the terminology of ‘priorities
agreement’ in relation to the ranking of unsecured creditors, see Re SSSL Realisations
(2002) Ltd [2004] EWHC 1760 (Ch), [25]. Equally, for the use of the terminology of
‘inter-creditor agreement’ in respect of what was essentially just a deed of priority, see Re
Rayford Homes Ltd [2011] BCC 715, [8].
4
For a deed of priority to which the borrower was a party, see Re Portbase Clothing Ltd [1993]
Ch 388, 393.
5
Cheah Theam Swee v Equiticorp Finance Group Ltd [1992] AC 472.
6
Cheah Theam Swee v Equiticorp Finance Group Ltd [1992] AC 472, 474–475.
7
Cheah Theam Swee v Equiticorp Finance Group Ltd [1992] AC 472, 475.
8
Cheah Theam Swee v Equiticorp Finance Group Ltd [1992] AC 472, 475.
9
Cheah Theam Swee v Equiticorp Finance Group Ltd [1992] AC 472, 475–476.
10
Cheah Theam Swee v Equiticorp Finance Group Ltd [1992] AC 472, 476.

8
 Voluntary Lending Tiers 11.8
11
Cheah Theam Swee v Equiticorp Finance Group Ltd [1992] AC 472, 476–477.
12
Cheah Theam Swee v Equiticorp Finance Group Ltd [1992] AC 472, 476.
13
Cheah Theam Swee v Equiticorp Finance Group Ltd [1992] AC 472, 476.
14
See paras 11.23–11.24 below.
15
China Shandong Investment Ltd v Bonaseal Co Ltd [1996] HKCFI 467, [23].
16
Cheah Theam Swee v Equiticorp Finance Group Ltd [1992] AC 472, 476. Whilst Cheah Theam
involved the ordering of priority between two fixed security interests, its reasoning is equally
applicable to a deed of priority between fixed and floating chargeholders or between floating
chargeholders inter se: see Re Portbase Clothing Ltd [1993] Ch 388, 398. Whilst a mortgagor
cannot insist upon the mortgagee exercising its rights in any particular manner, the mortgagor
can insist upon the return of the secured property following redemption by payment: see Palmer
v Hendrie (1859) 27 Beav 349, 350–351; Ellis & Co’s Trustee v Dixon-Johnson [1925] AC
489, 491.
17
Cheah Theam Swee v Equiticorp Finance Group Ltd [1992] AC 472, 477.
18
Cheah Theam Swee v Equiticorp Finance Group Ltd [1992] AC 472, 477.
19
Cheah Theam Swee v Equiticorp Finance Group Ltd [1992] AC 472, 477.
20
Stotter v Ararimu Holdings Ltd [1994] 2 NZLR 655, 662.
21
Re Portbase Clothing Ltd [1993] Ch 388, 398–399, 401. See also In re Camden Brewery Ltd;
Forder v The Company (1911) 106 LT 598, 599; In re Robert Stephenson & Co Ltd; Poole v
The Company [1913] 2 Ch 201, 205; Re Real Meat Co Ltd [1996] BCC 254, 255–256.
22
Lord Browne-Wilkinson supported his conclusion in Cheah Theam Swee v Equiticorp Finance
Group Ltd [1992] AC 472, 477 by reference to the equivalent position in the United States.
23
Fisher v Rural Adjustment & Finance Corporation (WA) (1995) 57 FCR 1, 20–21.

11.8 Whilst the impact of a deed of priority upon the borrower is not a basis for
its invalidation, more problematic has been the impact that such an arrange-
ment might have on the priority of third party creditors who have not executed
the deed of priority1. In particular, where the third party creditor would
ordinarily have priority over the creditor whose claim has been advanced by the
deed of priority, but not over the creditor whose claims have been subordinated,
a so-called ‘circularity problem’2 potentially arises. Just such a situation arose in
Re Portbase Clothing Ltd3, in which a borrower had granted (in order of
priority)4 a fixed and floating charge over its entire undertaking in favour of its
bank to secure all monies owing; a second floating charge to secure an advance
by its directors; and a second fixed and third floating charge5 to secure an
advance by the trustees of a pension fund, which was intended to repay some of
the borrower’s liabilities to its bank. As a condition of the pension fund’s ad-
vance, the borrower and the three secured creditors executed a deed of priority
postponing the bank’s and directors’ security interests to that of the trustees.
After the borrower was placed into creditors’ voluntary liquidation, the liqui-
dator referred the question to the court6 of whether the tax authorities (as
preferential creditors)7 and the liquidation expenses ranked ahead of the
trustees’ floating charge8 and also, as a result of the deed of priority, the other
subordinated security interests, in particular the bank’s fixed charge over the
realised book debts9.
The practical significance of the issue in Portbase was that the borrow-
er’s realised book debts were only sufficient to meet either the claims of the
preferential unsecured creditors and the liquidator in relation to its expenses, on
the one hand, or the trustees’ floating charge over the book debts, on the other10.
The commercial and theoretical importance of Portbase is whether a fixed
chargee’s claim becomes subject to the claims of preferential unsecured credi-
tors and the liquidator (in respect of the liquidation expenses)11 by subordinat-
ing its interest to the claim of a floating chargee over the same asset, given that
the fixed12, but not the floating,13 charge would ordinarily have priority over

9
11.8 Tiers of Lending

such preferential claims14. In this regard, Chadwick J held that, as there was
nothing in section 175(2)(b) of the Insolvency Act 1986 indicating that a
preferential unsecured creditor would lose its priority over the assets subject to
the floating charge simply because that charge had secured priority over a fixed
charge15, the statutory policy of protecting preferential unsecured creditors16
could only be respected if such creditors (and the liquidator in respect of its
expenses)17 ranked ahead of both the floating and fixed charges18. In essence,
‘[t]he existence of the subsequent fixed charge is immaterial’19.
Respecting the general policy of protecting preferential unsecured creditors is
not an unreasonable justification for the conclusion in Portbase, given that it
would be unacceptable for the preferential unsecured creditors to be prejudiced
by a deed of priority to which they were not party and for secured creditors to
be provided with an easy mechanism for setting the rights of such preferential
creditors at naught. Moreover, Chadwick J appeared to justify the result in
Portbase by reference to the effect of the particular deed of priority in that case.
Two aspects of that deed might arguably support his Lordship’s analysis. First,
as the deed of priority in Portbase was executed not only by the secured
creditors but also by the borrower, Chadwick J interpreted the instrument as
requiring that ‘the proceeds of any realisation of any asset subject to both the
fixed charges should be paid to the trustees rather than to the bank, and that the
debt secured by the trustees’ charge . . . should be satisfied out of the
proceeds of the charged asset before any part of those proceeds was applied
towards the satisfaction of the debt secured by the bank’s charge’20.
Accordingly, the deed of priority obliged the borrower to hand over the assets
subject to the trustees’ floating charge directly to the trustees, or to allow the
trustees to collect those assets directly, rather than paying them to the bank on
behalf of the trustees. One consequence of the borrower’s obligation to hand
the charged assets to the trustees first is that, if an administrative receiver were
to be appointed pursuant to their floating charge21, those assets would be
treated by s 40(2) of the Insolvency Act 1986 as ‘coming to the hands of the
receiver’ and accordingly would be subject to the preferential unsecured credi-
tors’ claims. In such circumstances, it would not be unreasonable to suggest that
the preferential unsecured creditors should be accorded priority over not only
the floating chargeholder, but also any subordinated security, in order for
s 40(2) to operate effectively22. If this argument were to be accepted, it would
then be strange if a different position applied under s 175 of the Insolvency Act
1986 when the borrower is in liquidation (although this was the position in
Portbase, after a receiver had initially been appointed)23. Secondly, although it
is normally only the equity of redemption in property subject to a prior fixed
charge that is comprised in or subject to a subsequent floating charge24,
Chadwick J interpreted the deed of priority as having the effect that the fixed
charge ‘must be treated as if, when made, it had been expressed to be subject to
[the floating charge]’25 with the result that ‘the property subject to the floating
charge is the charged property itself and not an equity of redemption associated
with the fixed charge’26. On this interpretation of the assets comprised within
the trustees’ floating charge, Chadwick J’s approach may be just about defen-
sible (although a convincing critique of this argument has been made)27.
1
As a deed of priority only adjusts the priority between secured creditors, it is not generally
objectionable on the ground that it prejudices the claims of general unsecured creditors or
infringes the pari passu principle: see L Gullifer, Goode on Legal Problems of Credit and

10
 Voluntary Lending Tiers 11.8

Security (Sweet & Maxwell, 6th edn, 2017), [5–35], [5–61]. The same cannot necessarily be
said for a deed of postponement, whereby a secured creditor subordinates his claim to some, but
not all, of the borrower’s unsecured creditors: see para 11.10 below.
2
L Gullifer, Goode on Legal Problems of Credit and Security (Sweet & Maxwell, 6th edn, 2017),
[5–62]. Consider G Gilmore, Security Interests in Personal Property (Boston: Little, Brown,
1965), [39.1].
3
Re Portbase Clothing Ltd [1993] Ch 388. For the suggestion that the type of problem in
Portbase is less likely to happen in future following Re Spectrum Plus Ltd [2005] 2 AC 680, see
L Gullifer, Goode on Legal Problems of Credit and Security (Sweet & Maxwell, 6th edn, 2017),
[5–62], fn 283. Indeed, the absence of significant judicial discussion after Spectrum supports
that view.
4
Re Portbase Clothing Ltd [1993] Ch 388, 398.
5
There was initially an issue concerning the characterisation of the trustees’ security interest over
the borrower’s book debts, but Chadwick J concluded in Re Portbase Clothing Ltd [1993] Ch
388, 394–395 that the current authorities indicated that the charge was floating in nature.
6
Insolvency Act 1986, s 112(1).
7
Insolvency Act 1986, s 175(1)–(2). See also Insolvency Act 1986, s 40(1)–(2). Whilst, at the time
of Portbase, both the Inland Revenue and Customs and Excise were preferential unsecured
creditors, this preferred status was revoked by the Enterprise Act 2002, s 251(1). For the current
list of preferential unsecured creditors, see Insolvency Act 1986, s 386(1), Sch 6.
8
As a floating charge is defined as ‘a charge which, as created, was a floating charge’,
crystallisation is generally irrelevant to the issue of priority: see Insolvency Act 1986, s 251. See
also Buchler v Talbot [2004] 2 AC 298, [83]–[89].
9
Re Portbase Clothing Ltd [1993] Ch 388, 394. In Portbase, Chadwick J was prepared to
assume (at 395–396) that the bank’s charge over the book debts was fixed, although this
characterization may be susceptible to challenge following Re Spectrum Plus Ltd [2005] 2 AC
680 if the reality in Portbase was that the borrower was able to use the proceeds of the book
debts once they had been paid into the relevant account.
10
Re Portbase Clothing Ltd [1993] Ch 388, 393, 396–397. According to Chadwick J, there were
no assets available to satisfy the claims of either the subordinated secured creditors or the
general unsecured creditors.
11
Insolvency Act 1986, ss 115, 175(2)(a). See also Buchler v Talbot [2004] 2 AC 298, [83]–[89].
12
In re Lewis Merthyr Consolidated Collieries Ltd; Lloyd’s Bank Ltd v The Company [1929] 1
Ch 498, 511–512; Re Portbase Clothing Ltd [1993] Ch 388, 397, 401.
13
Insolvency Act 1986, s 175(2)(b).
14
A further practical implication of the Portbase decision is that nowadays a ‘prescribed part’ of
the assets subject to a floating charge are made available to the general unsecured creditors: see
Insolvency Act 1986, s 176A. Taking Portbase to its logical conclusion, a subordinated fixed
charge would also potentially be subject to the claims of the general unsecured creditors to the
extent of the ‘prescribed part’.
15
Re Portbase Clothing Ltd [1993] Ch 388, 401. The solution in Portbase has been described as
being based upon ‘a quite simple point of statutory interpretation’: see H Beale, M Bridge, L
Gullifer & E Lomnicka, The Law of Security and Title-based Financing (Oxford University
Press, 3rd edn, 2018), [14.116].
16
In re Lewis Merthyr Consolidated Collieries Ltd; Lloyd’s Bank Ltd v The Company [1929] 1
Ch 498, 507: ‘ . . . it may well be said that this particular class of [preferential unsecured]
debts which may perhaps have contributed to produce the very assets upon which the floating
charge will crystallise, are proper to be paid out of those assets before the debenture holder takes
his principal and interest out of them’. See also Stein v Saywell (1969) 43 AJLR 183, 188;
Waters v Widdows [1984] VR 503, 513–514.
17
Re Portbase Clothing Ltd [1993] Ch 388, 407–409. See also Insolvency Act 1986, ss 115,
175(2)(a). See further Buchler v Talbot [2004] 2 AC 298, [83]–[89].
18
Re Portbase Clothing Ltd [1993] Ch 388, 399–401, 407. See also Re H&K Medway Ltd [1997]
1 WLR 1422, 1427–1428. For a similar policy-based approach to this issue in Australia, see
Waters v Widdows [1984] VR 503, 512–514.
19
Re Portbase Clothing Ltd [1993] Ch 388, 401.
20
Re Portbase Clothing Ltd [1993] Ch 388, 398, 406. Chadwick J (at 401) also stated that when
a fixed charge is subordinated to a floating charge, ‘the proceeds of realization must be paid to
the holder of the floating charge; the holder of the fixed charge can have no claim upon those
proceeds until the claims under the floating charge have been paid out’ and ‘the charged
property, or the proceeds of realisation, are payable to the floating chargee and not to the fixed
chargee’. See also Re Spectrum Plus Ltd [2004] Ch 337, [26].

11
11.8 Tiers of Lending
21
The circumstances in which the holder of a floating charge can appoint an administrative
receiver have been severely curtailed by the Enterprise Act 2002, s 250, inserting Insolvency Act
1986, s 72A.
22
Re Portbase Clothing Ltd [1993] Ch 388, 399. See also Waters v Widdows [1984] VR 503,
514.
23
Re Portbase Clothing Ltd [1993] Ch 388, 393.
24
Re Portbase Clothing Ltd [1993] Ch 388, 397.
25
Re Portbase Clothing Ltd [1993] Ch 388, 407.
26
Re Portbase Clothing Ltd [1993] Ch 388, 401.
27
L Gullifer, Goode on Legal Problems of Credit and Security (Sweet & Maxwell, 6th edn, 2017),
[5–62].

11.9 Although it is possible to justify the solution in Portbase in policy terms

and by reference to the form of the deed of priority in that case1, that decision
nevertheless produces some surprising commercial consequences, in particular
the ‘extraordinary promotion’ of preferential unsecured creditors ahead of a
fixed chargeholder contrary to the scheme of priority in the Insolvency Act
1986, so that those preferential creditors obtain a windfall as a result of the
deed of priority despite not having executed it2. Accordingly, it is necessary to
find a more nuanced solution to the ‘circularity problem’ that strikes the right
balance between, on the one hand, respecting the scheme of the Insolvency Act
1986 by ensuring that preferential unsecured creditors are not unduly preju-
diced by a deed of priority between two secured creditors whilst, on the other
hand, not conferring an uncovenanted benefit upon preferential unsecured
creditors at the expense of creditors who have contracted for proprietary
protection that ought to rank first in terms of priority according to the statutory
insolvency regime. One solution to a case like Portbase would have been to
allow the trustees to claim first as floating chargeholder in place of the
bank’s fixed charge, but only to the extent of the bank’s security; next would
rank the preferential unsecured creditors; then the remainder of the trustees’
secured claim; and only then the bank’s claim pursuant to its fixed charge3. This
solution not only ensures that the preferential unsecured creditors are not
prejudiced by any deed of priority, but also avoids the windfall problem
described above.
Indeed, it was precisely this approach that Nourse J suggested in Re Woodroffes
(Musical Instruments) Ltd4, in which the borrower granted an all-monies
floating charge (convertible into a fixed charge by giving notice to the borrower)
to a bank and subsequently granted an identical convertible charge to one of its
directors. The security documentation expressly stipulated that the later charge
‘should be subject to and rank immediately after’ the earlier charge5. Following
the director serving a notice crystallising its security, the bank appointed an
administrative receiver pursuant to its charge. The borrower’s liquidator sought
judicial guidance on the issue of whether (and, if so, when) the bank’s earlier
floating charge crystallised and the impact that this would have on the priority
between the two floating chargeholders and the preferential unsecured credi-
tors. Whilst Nourse J’s reasoning in relation to the crystallisation date of the
bank’s floating charge is largely irrelevant for present purposes6, that conclu-
sion produced another ‘circularity problem’ with the bank’s floating charge
ranking ahead of the director’s fixed charge (by virtue of the latter’s terms), but
with the preferential unsecured creditors ranking ahead of the former charge
and behind the latter. Nourse J concluded that:

12
 Voluntary Lending Tiers 11.9

‘If the bank’s charge did not crystallise until 1 September, then the result, although a
rather an odd one, is not in dispute. The order of priority is (1) the bank to the extent
of [the director’s] £25,000 plus interest to date (about £9,500); (2) the preferential
creditors; (3) the bank as to the balance of its claim; and (4) [the director]. The reason
for this rather odd result is that the bank, although a floating chargee, ranks prior to
[the director] who, as a fixed chargee, ranks prior to the preferential creditors.’
In effect, the bank’s floating charge, by virtue of its priority over the direc-
tor’s fixed charge, was permitted to take advantage of the fixed charge’s priority
over the preferential unsecured creditors to the extent of that priority. Although
this is not subrogation in the strict legal sense of that word (since the floating
chargeholder does not satisfy the fixed chargeholder’s claim), this solution
clearly involves subrogation-type reasoning7.
As indicated in Portbase8, however, there may exist some doubt as to the
reliability of Woodroffes regarding the impact of a deed of priority on prefer-
ential unsecured creditors, given that the latter case did not in fact involve a
separate deed of priority between the parties (but rather priority determined by
the respective charges’ date of creation and the terms of the charge
documentation)9; did not consider the modern provision dealing with the
priority of preferential unsecured creditors over floating charges10; and did not
involve detailed arguments on the priority issue being made by counsel11. That
said, Chadwick J’s criticism of the Woodroffes approach appears to be limited
to that decision’s application to the particular type of deed of priority at issue in
Portbase12. Indeed, Chadwick J did not rule out the appropriateness of the
solution in Woodroffes when the deed of priority took effect in other ways13,
such as where ‘two secured creditors [entered] into an arrangement by which
they exchanged the rights under their respective securities’ or where a fixed
chargeholder has assigned to a subsequent floating chargeholder the right to
receive some or all of its payment under the fixed charge or the proceeds of that
payment14. Alternatively, although this possibility was not considered in Port-
base15, the deed of priority could operate by the fixed chargeholder declaring
itself trustee over its rights against the borrower or the proceeds of its secured
claim to the extent necessary to satisfy the floating chargeholder’s claim16. Such
alternative arrangements (whether by way of exchange, assignment or declara-
tion of trust) do not necessarily require the borrower to execute the deed of
priority in order for it to be effective. Furthermore, whilst it is possible that the
means by which a deed of priority operates to subordinate one secured
creditor’s claim to that of another might produce different legal consequences in
some regards17, it is unclear why the particular method chosen for altering the
secured creditors’ priority should impact upon the priority or standing of
preferential unsecured creditors or why such creditors deserve a windfall in the
circumstances of Portbase, but not in other situations. Accordingly, the better
view is that, as regards the impact of a deed of priority upon the preferential
unsecured creditors, the approach in Woodroffes should be adopted, regardless
of the particular deed’s precise form and effect.
1
H Beale, M Bridge, L Gullifer & E Lomnicka, The Law of Security and Title-based Financing
(Oxford University Press, 3rd edn, 2018), [14.119]–[14.120].
2
L Gullifer, Goode on Legal Problems of Credit and Security (Sweet & Maxwell, 6th edn, 2017),
[5–62]; H Beale, M Bridge, L Gullifer & E Lomnicka, The Law of Security and Title-based
Financing (Oxford University Press, 3rd edn, 2018), [14.117]–[14.119].
3
L Gullifer, Goode on Legal Problems of Credit and Security (Sweet & Maxwell, 6th edn, 2017),
[5–62]. See also Law Commission of England & Wales, Company Security Interests (Report No
296, 2005), [3.181]–[3.187].

13
11.9 Tiers of Lending
4
Re Woodroffes (Musical Instruments) Ltd [1986] 1 Ch 366.
5
Re Woodroffes (Musical Instruments) Ltd [1986] 1 Ch 366, 373.
6
For subsequent discussion of this aspect of Woodroffes, see SAW (SW) 2010 Ltd v Wilson
[2018] Ch 213, [54]–[55].
7
L Gullifer, Goode on Legal Problems of Credit and Security (Sweet & Maxwell, 6th edn, 2017),
[5–62].
8
Re Portbase Clothing Ltd [1993] Ch 388, 402–403.
9
Re Portbase Clothing Ltd [1993] Ch 388, 406.
10
Companies Act 1948, s 94(1). The principal difference between this provision and Insolvency
Act 1986, s 175 appears to be that, under the former provision, crystallisation had the effect of
denying priority to the preferential unsecured creditors, whereas the latter provision gives
priority to preferential unsecured creditors over security interests that are floating charges when
created, regardless of whether the charge subsequently crystallises or not: see Insolvency Act
1986, ss 251, 386. See also Re Portbase Clothing Ltd [1993] Ch 388, 403.
11
Re Fablehill Ltd [1991] BCLC 830, 843.
12
For an analysis of the form of the Portbase deed of priority, see para 11.8 above.
13
To this extent, it has been suggested that the Portbase decision might be ‘wrong’: see H Beale,
M Bridge, L Gullifer & E Lomnicka, The Law of Security and Title-based Financing (Oxford
University Press, 3rd edn, 2018), [14.120].
14
Re Portbase Clothing Ltd [1993] Ch 388, 407. Consider Meretz Investments NV v ACP Ltd
[2006] 3 All ER 1029, [13]–[14], [83]. See also L Gullifer, Goode on Legal Problems of Credit
and Security (Sweet & Maxwell, 6th edn, 2017), [5–63]. Doubt has been cast over the
possibility of the subordinated creditor’s priority position itself being the subject-matter of a
valid assignment: see H Beale, M Bridge, L Gullifer & E Lomnicka, The Law of Security and
Title-based Financing (Oxford University Press, 3rd edn, 2018), [14.122].
15
H Beale, M Bridge, L Gullifer & E Lomnicka, The Law of Security and Title-based Financing
(Oxford University Press, 3rd edn, 2018), [14.118], [14.122]
16
It may be preferable for the proposed subordinated creditor to declare a trust over their rights
or the proceeds of their claim against the borrower if there are restrictions upon the assignability
of that creditor’s rights: see Don King Productions Inc v Warren [2000] Ch 291, 319–322;
Barbados Trust Co Ltd v Bank of Zambia [2007] 1 Lloyd’s Rep 495, [29]–[47], [74]–[89];
Masri v Contractors International UK Ltd [2007] EWHC 3010 (Comm), [126]; First Abu
Dhabi Bank PJSC v BP Oil International Ltd [2018] EWCA Civ 14, [26]–[29].
17
In Re Portbase Clothing Ltd [1993] Ch 388, 407, Chadwick J gave as an example the situation
where the floating charge in question might be susceptible to challenge under the Insolvency Act
1986, s 245: if the floating chargeholder claims prior payment from the liquidator by virtue of
the rights under its own security being advanced, then its claim may lose priority by virtue of
s 245, whereas if the floating chargeholder is claiming in lieu of a fixed chargeholder or by virtue
of a claim against the fixed chargeholder (such as in a trust arrangement), s 245 may not
necessarily affect the priority of its claim.

(ii) Deed or letter of postponement

11.10 A deed or letter of postponement may be used in circumstances where a
secured creditor wishes to subordinate its security interest to the claims of the
borrower’s unsecured creditors1 by undertaking not to seek recovery of its
payment until the relevant unsecured creditor is repaid in full. Such an arrange-
ment is most likely to arise in the context of intra-group loans, where a related
company subordinates its security interest in order to convince an external
lender to provide new funds on an unsecured basis. Such was the situation in
Banque Financière de la Cité v Parc (Battersea) Ltd2, in which the borrower
sought short-term financing from the claimant Swiss bank in relation to the
acquisition of development land. In addition to a pledge of certain bearer shares
in the borrower’s parent company, the claimant required the borrower to
execute a deed of postponement subordinating the secured and unsecured
claims of any companies in the borrower’s corporate group to the claim-
ant’s loan. Although there was some dispute before Robert Walker J as to
whether various members of the corporate group had consented to the deed and

14
 Voluntary Lending Tiers 11.10

whether the deed was intended to have legal effect, all three instances in Parc
(Battersea), including the House of Lords, assumed in principle the legal
validity of an arrangement whereby a security interest is postponed to some of
the borrower’s unsecured creditors3.
Certainly, where a letter or deed of postponement subordinates a secured
creditor to all of the borrower’s unsecured creditors, the argument accepted by
Lord Browne-Wilkinson in Cheah Theam Swee v Equiticorp Finance
Group Ltd4, to the effect that a secured creditor is free to abandon or waive the
benefit of any security in favour of junior creditors, ought to apply with equal
force regardless of whether that junior creditor happens to be a secured or
unsecured creditor. Similarly, there ought to be no objection to such an
arrangement on the ground that it violates the pari passu principle5, since all
unsecured creditors will share rateably in the assets that are subject to the
subordinated security interest6. Such a conclusion is consistent with Re Max-
well Communications Corporation plc (No 2)7, which is considered subse-
quently8. The same cannot necessarily be said, however, of an arrangement
whereby a secured creditor subordinates its claim to only some of the borrow-
er’s unsecured creditors9: not only would such an arrangement potentially
violate the pari passu principle10, but the deed of postponement (together with
any payments actually made pursuant to that agreement) may also be suscep-
tible to challenge as an unlawful preference11 (subject to establishing the
problematic requirement of a ‘desire’ to prefer on the part of the borrower)12.
Whilst it may be considered regrettable that creditors cannot readily achieve a
more complex ordering between their respective claims by subordinating a
security interest to some, but not other, unsecured creditors, accepting such a
possibility could prove fatal to the notion of pari passu distribution more
generally. Indeed, if a borrower and its creditors wish to achieve a more
complicated ordering of priorities, the solution may lie in adopting a trust
structure or agreeing a court-sanctioned scheme of arrangement13.
1
The judicial and commercial usage of the terms, ‘letter of postponement’ or ‘deed of postpone-
ment’, is not uniform and those terms have also been used to describe a document to be signed
by those in occupation of premises (usually the family home) acknowledging a bank’s mortgage
(see, eg, The Cyprus Popular Bank Ltd v Michael (Unreported, 30 April 1986, CA); National
Bank of Abu Dhabi v Mohamed (1998) 30 HLR 383, 385) and an agreement between two
secured creditors determining the respective priority of their security interests (see, eg, Chelten-
ham & Gloucester plc v Appleyard [2004] EWCA Civ 291, [11], [91]; The Mortgage
Business plc v Green [2013] EWHC 4243 (Ch), [43]).
2
Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221. See also Khan v Permayer
(Unreported, 22 June 2000, CA); Halifax plc v Omar [2002] EWCA Civ 121, [43]–[60];
Cheltenham & Gloucester plc v Appleyard [2004] EWCA Civ 291, [46]–[49]; Filby v Mortgage
Express (No 2) Ltd [2004] EWCA Civ 759, [41]–[55]; Primlake Ltd v Matthews Associates
[2009] EWHC 2774 (Ch), [18]–[22]; NHS Commissioning Board v Bargain Dentist.Com
[2014] EWHC 1994 (QB), [51].
3
Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221, 226–227, 229–230,
234–235, 239–240.
4
Cheah Theam Swee v Equiticorp Finance Group Ltd [1992] AC 472, 476.
5
Insolvency Act 1986, s 107, Insolvency (England and Wales) Rules 2016 (SI 2016/1024),
r 14.12.
6
In Re British & Commonwealth Holdings plc (No 3) [1992] 1 WLR 672, 676, in which Vinelott
J upheld the legal validity of a trust subordination arrangement, the trust deed provided that
‘ . . . the claims of the stockholders will be subordinated in right of payment to the claims of
all other creditors of the company (other than subordinated creditors) . . . ’.
7
Re Maxwell Communications Corporation plc (No 2) [1993] 1 WLR 1402, 1416.
8
See para 11.15 below.

15
11.10 Tiers of Lending
9
Whilst the text assumes that the security is subordinated by means of a binding agreement, the
same broad effect may be achieved through an informal waiver of the senior creditor’s security
(see L Gullifer, Goode on Legal Problems of Credit and Security (Sweet & Maxwell, 6th edn,
2017), [5–55]–[5–58]), although such a technique may be no less problematic in terms of the
pari passu principle.
10
There may be a difference in the extent to which the pari passu principle applies in a particular
case depending upon the identity of the relevant office-holder: see H Beale, M Bridge, L Gullifer
& E Lomnicka, The Law of Security and Title-based Financing (Oxford University Press, 3rd
edn, 2018), [14.126]–[14.130].
11
Insolvency Act 1986, s 239. See also H Beale, M Bridge, L Gullifer & E Lomnicka, The Law of
Security and Title-based Financing (Oxford University Press, 3rd edn, 2018), [14.130].
12
Re MC Bacon Ltd [1990] BCC 78, 80–90.
13
Companies Act 2006, ss 895–901.

(iii) Subordination agreements and deeds

11.11 Like deeds of priority and postponement, subordination agreements or
deeds are relatively short and straightforward documents that can be used to
rank the rights of certain unsecured or secured creditors inter se and are often
used in leveraged deals to regulate the ranking of intra-group debt1. As
indicated above2, the analysis of subordination agreements and deeds will be
limited to the subordination of unsecured debt (the subordination of secured
debt having been considered already in relation to deeds of priority and
postponement)3. Subordination arrangements can, however, take a number of
different legal forms4, each of which will be considered in turn below.
1
See generally Lexis PSL, ‘Deeds of Priority, Subordination Deeds and Inter-creditor Agree-
ments: What’s in a Name?’ (2013) 9 JIBFL 602.
2
See para 11.6 above.
3
See paras 11.7–11.10 above.
4
Subordination arrangements do not always conform to the paradigm examples, but may
contain elements of different types of structure: see Re SSSL Realisations (2002) Ltd [2004]
EWHC 1760 (Ch), [27].

11.12 Before the important decision of Vinelott J in Re Maxwell Communica-

tions Corporation plc (No 2)1, there were only three forms of subordination
arrangement recognised by English law. The first type is structural subordina-
tion2, which is frequently employed in private equity or project finance trans-
actions. The notion of structural subordination covers any arrangement
whereby the parties, rather than formally ranking the claims of creditors inter se
by way of contractual or trust mechanisms, utilise the borrower’s corporate
structure to achieve a ranking between creditors that has the same practical
effect as subordinating one creditor’s claim to that of another. Accordingly,
where a parent company operates through one or more subsidiaries that hold
strategically important assets, a creditor that lends to the parent company will
be structurally subordinated in relation to those assets to a creditor which lends
directly to the subsidiary, since the latter creditor may prove directly in the
subsidiary’s liquidation whereas the former creditor is limited to its claims
against the parent company.
1
Re Maxwell Communications Corporation plc (No 2) [1993] 1 WLR 1402.
2
Consider Re Auto-Train, 810 F 2d 270 (DC Cir 1987); Re Owens Corning, 419 F 3d 195 (3rd
Cir 2005).

16
 Voluntary Lending Tiers 11.14

11.13 The second form of subordination is the contingent debt subordination1,

in which the subordinated creditor agrees (usually with the borrower) that its
claim should be unenforceable2 or that no sums should be paid in respect of its
claim until the claims of other creditors have been partially or fully satisfied.
The imposition of such a contingency upon the subordinated debt’s enforce-
ment will be respected in the borrower’s insolvency. Whilst this technique was
once popular3, Vinelott J significantly reduced the importance of this subordi-
nation method in Maxwell Communications by casting doubt on ‘whether in
English law a subordinated debt is accurately described as a contingent liability’
and by expressing the view that ‘[i]n English law subordinated debt would not
. . . be accurately described as a “contingent liability” even if the debt is
expressed to be payable only in the event of a winding up and is to be
subordinated to other unsecured debts in a winding up’4. Whilst Maxwell Com-
munications makes clear that the courts will not generally construe a subordi-
nation arrangement as involving contingent debt subordination, it nevertheless
must remain possible for parties to adopt this method of subordination pro-
vided they are sufficiently explicit about that being their intention.
1
The Bell Group Ltd v Westpac Banking Corporation (No 9) [2008] WASC 239, [2586].
2
Ex p Villiers; In re Carbon Developments (Pty) Ltd 1993(1) SA 493, 504–505.
3
Ex p Villiers; In re Carbon Developments (Pty) Ltd 1993(1) SA 493, 504–505.
4
Re Maxwell Communications Corporation plc (No 2) [1993] 1 WLR 1402, 1418.

11.14 The third ranking mechanism is the trust subordination1, whereby the
subordinated creditor declares a trust in favour of another creditor over its
rights against the borrower and/or the proceeds of those claims once collected
from the borrower. Such an arrangement will usually be made between the
creditors themselves2. A trust subordination has three principal advantages: it
may be used to achieve a more complex ordering between creditors (without
infringing the pari passu principle)3 than might otherwise be achieved through
other subordination mechanisms4; the creditor-beneficiary under the trust has
proprietary protection against the subordinated creditor’s insolvency5; and the
creditor-beneficiary may benefit from a ‘double dividend’6. The validity of trust
subordinations was recognised by Vinelott J in Re British & Commonwealth
Holdings plc (No 3)7, which involved an application for directions by admin-
istrators in relation to the distribution of realised assets as part of a scheme of
arrangement under s 425 of the Companies Act 1985, which had to be voted on
by creditors and sanctioned by the court. The difficulty encountered by the
administrators was that the trustee under a trust deed, which was entered into
between the borrower and Law Debenture Trust Corporation governing the
terms of issue of convertible subordinated unsecured loan stock, claimed that
the holders of the subordinated stock were entitled to a vote in relation to the
scheme of arrangement. In rejecting the stockholders’ claim to vote on the basis
that they had no interest in the borrower’s assets (there being insufficient assets
to satisfy claims ranking ahead of the stockholders’ claims)8, Vinelott J accepted
that the effect of the trust deed was ‘to subordinate the holders of the [stock] to
the claims of other creditors’9. Whilst effective to achieve its subordination
purpose, Vinelott J was more equivocal about the mechanism whereby that
result was achieved, namely whether the trust deed took effect ‘as a contract by
the trustee on behalf of the holders of [the stock] not to claim any payment
towards satisfaction of [the stock] until other creditors have been paid in full’ or
operated ‘by imposing a trust on any payment received in the winding up of the

17
11.14 Tiers of Lending

company’10. Given that the trust deed explicitly referred to any recoveries by the
trustee for the stockholders as being held ‘on trust’ for other creditors, treating
British & Commonwealth Holdings as a trust subordination case is more
consistent with the precise wording of the trust deed. Indeed, this is consistent
with how later decisions have viewed that case11.
1
A further mechanism for subordinating one creditor’s interest to that of another involves the
assignment of the former creditor’s rights: see Re Maxwell Communications Corporation plc
(No 2) [1993] 1 WLR 1402, 1406, 1416. According to Vinelott J (at 1416), an assignment
would not affect ‘the ordinary process of proof in the liquidation or the application of the
company’s assets pari passu amongst creditors whose proofs have been submitted’.
2
Re SSSL Realisations (2002) Ltd [2004] EWHC 1760 (Ch), [26].
3
Re Maxwell Communications Corporation plc (No 2) [1993] 1 WLR 1402, 1416.
4
Re SSSL Realisations (2002) Ltd [2006] Ch 610, [65].
5
A possible disadvantage of the trust structure, however, is that the proprietary rights of the
creditor whose claim has been advanced may in some circumstances amount to a charge over
the subordinated creditor’s book debts, which would be void against third parties unless
registered under the Companies Act 2006, ss 859A–859Q, although whether the trust structure
has this effect will depend upon the proper construction of the trust deed: see Re SSSL
Realisations (2002) Ltd [2004] EWHC 1760 (Ch), [25], [36], [49]–[55].
6
The Bell Group Ltd v Westpac Banking Corporation (No 9) [2008] WASC 239, [2587].
7
Re British & Commonwealth Holdings plc (No 3) [1992] 1 WLR 672.
8
Re British & Commonwealth Holdings plc (No 3) [1992] 1 WLR 672, 680. See also Re
Tea Corporation Ltd [1904] 1 Ch 12, 23–24; Re Oceanic Steam Navigation Co Ltd [1939] Ch
41, 47; Re Maxwell Communications Corporation plc (No 2) [1993] 1 WLR 1402, 1404–
1405; Re Mytravel Group plc [2005] 1 WLR 2365, [71].
9
Re British & Commonwealth Holdings plc (No 3) [1992] 1 WLR 672, 681. See also Re
Barings plc (Unreported, 18 June 2001, Ch D), 15; Re SSSL Realisations (2002) Ltd [2004]
EWHC 1760 (Ch), [23]; Re Kaupthing Singer & Friedlander Ltd [2010] EWHC 316 (Ch), [10].
10
Re British & Commonwealth Holdings plc (No 3) [1992] 1 WLR 672, 678, 680.
11
Re Maxwell Communications Corporation plc (No 2) [1993] 1 WLR 1402, 1405, 1416; Re
SSSL Realisations (2002) Ltd [2004] EWHC 1760 (Ch), [24]–[26]; Re Lehman Brothers
International (Europe) (in admin) (No 4) [2014] 3 WLR 466, [81], [84].

11.15 The primary reason for the development of the above subordination
structures derived from the fact that the simplest method of subordination,
namely a contractual subordination1 involving an agreement between the
relevant creditors and/or the borrower2, was for many years the most contro-
versial method of subordination, given the fear that contractual subordination
might infringe the insolvency principles relating to the pari passu distribution of
a borrower’s assets amongst unsecured creditors3 and the efficient administra-
tion of insolvent estates4. These concerns were authoritatively laid to rest by Re
Maxwell Communications Corporation plc (No 2)5, which (like British
& Commonwealth Holdings)6 involved an application for directions by the
borrower’s administrators regarding whether the holders of convertible subor-
dinated bonds could be excluded from a scheme of arrangement under sec-
tion 425 of the Companies Act 1985.
According to Vinelott J, the answer to the question depended upon the effec-
tiveness of ‘an agreement between a debtor and a creditor postponing or
subordinating the claim of the creditor to the claims of other unsecured
creditors’7. His Lordship gave three primary reasons why English law should
recognise subordination agreements as effective8. First, according to Vinelott J,
subordination agreements do not conflict with fundamental insolvency law
policies9. Although his Lordship accepted the view that allowing parties to
contract out of insolvency set-off10 might ‘hinder the rapid, efficient and
economical process of bankruptcy’11, he did not think that the same concern

18
 Voluntary Lending Tiers 11.15

arose in the context of contractual subordination12. Vinelott J considered that,

as a creditor can (post-liquidation) waive its claim (either entirely or partially)
to prove in a liquidation or can decline to submit a proof at all, there should be
even less objection to a creditor agreeing pre-liquidation ‘with the debtor that
his debt will not be payable or will be postponed or subordinated in the event of
a bankruptcy or winding up’13. In having to deal with such subordination
agreements, his Lordship did not consider that there would be any undue
impact on the liquidator in terms of efficient administration of the insolvent
estate, given that the liquidator would already have to consider cases of
statutory subordination14, as considered above15. Nor, for largely the same
reasons, did Vinelott J consider that subordination agreements violated the pari
passu principle, since the subordinated creditor would be putting itself in a
worse position than the other unsecured creditors, rather than seeking to obtain
some advantage in the borrower’s liquidation16.
Secondly, Vinelott J considered that it ‘would represent a triumph of form over
substance’ to deny legal validity to contractual subordinations, whilst simulta-
neously recognising contingent debt and trust subordinations17.
Thirdly, international developments (in particular the increasing international-
isation of corporate liquidations and administrations) militated strongly in
favour of English law accepting the validity of contractual subordination18: not
only do other jurisdictions (such as the United States19, South Africa20, Austra-
lia21, Malaysia22, New Zealand23, Canada24 and Switzerland25) enforce subor-
dination agreements, but trust subordinations are not generally recognised by
civilian jurisdictions. Indeed, the commercial significance26 of recognising and
upholding subordination agreements was stressed more recently in Re SSSL
Realisations (2002) Ltd27, in which Chadwick LJ stated that it was ‘commer-
cially important that, if group companies enter into subordination agreements
of this nature with their creditors while solvent, they and the creditors should be
held to the bargain when the event for which the agreement was intended to
provide (insolvency) occurs’28. This view of subordination agreements has been
further reinforced by Lord Mance’s endorsement of Maxwell Communications
in Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd29.
1
A contractual subordination may be ‘complete’, in that the junior debt is postponed from the
time that the subordination agreement is reached and may not be paid for as long as the senior
debt is outstanding, or ‘springing’ or ‘inchoate’, in that the junior creditor may not be paid until
a specified event occurs: see The Bell Group Ltd v Westpac Banking Corporation (No 9) [2008]
WASC 239, [2572], [2582].
2
Re SSSL Realisations (2002) Ltd [2004] EWHC 1760 (Ch), [26], [45].
3
British Eagle International Air Lines Ltd v Compagnie Nationale Air France [1975] 1 WLR
758, 771–772, 778, 780–781. See also International Air Transport Association v Ansett
Australia Holdings Ltd (2008) 234 CLR 151, [74]–[76]; Belmont Park Investments Pty Ltd v
BNY Corporate Trustee Services Ltd [2012] 1 AC 383, [1], [6]–[15], [59], [64], [75]–[83],
[148]–[149]. See further R Goode, ‘Perpetual Trustee and Flip Clauses in Swap Transactions’
(2011) 127 LQR 1, 3–4.
4
Halesowen Presswork & Assemblies Ltd v National Westminster Bank Ltd [1972] AC 785,
805, 808–809, 818, 824. See also Rolls Razor Ltd v Cox [1967] 1 QB 552, 570, 573.
5
Re Maxwell Communications Corporation plc (No 2) [1993] 1 WLR 1402. In contrast, David
Richards J, in Re Rayford Homes Ltd [2011] BCC 715, [53], stated that the complexity of the
inter-creditor agreement in that case ‘is made necessary because a simple contractual subordi-
nation is not effective in a liquidation’.
6
Re Maxwell Communications Corporation plc (No 2) [1993] 1 WLR 1402, 1404.
7
Re Maxwell Communications Corporation plc (No 2) [1993] 1 WLR 1402, 1404, 1411. A
creditor may subordinate its claims even more deeply so that it ranks behind statutory interest
payments: see Re Lehman Brothers International (Europe) (No 4) [2018] AC 465, [46]–[67].

19
11.15 Tiers of Lending

For the application of Insolvency Act 1986, s 178 to subordination arrangements, see Re SSSL
Realisations (2002) Ltd [2006] Ch 610, [49]–[54].
8
Re Maxwell Communications Corporation plc (No 2) [1993] 1 WLR 1402, 1406. See also Re
Barings plc (Unreported, 18 June 2001, Ch D), [15]; Re Kaupthing Singer & Friedlander Ltd
[2010] EWHC 316 (Ch), [10]; Belmont Park Investments Pty Ltd v BNY Corporate Trustee
Services Ltd [2012] 1 AC 383, [148]; Re Lehman Brothers International (Europe) (in admin)
(No 4) [2014] 3 WLR 466, [82]–[85].
9
Re SSSL Realisations (2002) Ltd [2004] EWHC 1760 (Ch), [24].
10
Insolvency (England and Wales) Rules 2016 (SI 2016/1024), rr 14.24–14.25. Consider Stein v
Blake [1996] 1 AC 243, 255.
11
Re Maxwell Communications Corporation plc (No 2) [1993] 1 WLR 1402, 1411.
12
Re Maxwell Communications Corporation plc (No 2) [1993] 1 WLR 1402, 1411.
13
Re Maxwell Communications Corporation plc (No 2) [1993] 1 WLR 1402, 1412.
14
Re Maxwell Communications Corporation plc (No 2) [1993] 1 WLR 1402, 1412.
15
See para 11.3 above.
16
Re Maxwell Communications Corporation plc (No 2) [1993] 1 WLR 1402, 1416.
17
Re Maxwell Communications Corporation plc (No 2) [1993] 1 WLR 1402, 1416–1417; Re
SSSL Realisations (2002) Ltd [2004] EWHC 1760 (Ch), [43]; Re Lehman Bros International
(Europe) (in admin) (No 4) [2014] 3 WLR 466, [82]–[85]. A contractual subordination has the
disadvantage (compared to the trust subordination) that the creditor whose claim has been
advanced takes an insolvency risk in relation to both the subordinated creditor and the
borrower. Unlike trust subordination, contractual subordination is not apt to deal with the
complex ordering of creditor claims without risking infringing the pari passu principle: see Re
SSSL Realisations (2002) Ltd [2004] EWHC 1760 (Ch), [26].
18
Re Maxwell Communications Corporation plc (No 2) [1993] 1 WLR 1402, 1417–1421.
19
First National Bank of Hollywood v American Foam Rubber Corporation, 530 F.2d 540 (2d
Cir, 1976), 454. See also Re Maxwell Communications Corporation plc (No 2) [1993] 1 WLR
1402, 1406, 1420.
20
Ex p Villiers; In re Carbon Developments (Pty) Ltd 1993(1) SA 493, 504–505.
21
Horne v Chester & Fein Property Developments Pty Ltd (1986) 11 ACLR 485, 488–489; Re
NIAA Corporation Ltd (1993) 33 NSWLR 344, 361; United States Trust Co of New York v
Australia & New Zealand Banking Group Ltd (1995) 37 NSWLR 131, 139–143; The Bell
Group Ltd v Westpac Banking Corporation (No 9) [2008] WASC 239, [2568]–[2605];
Westpac Banking Corporation v The Bell Group Ltd (No 3) (2012) 270 FLR 1, [648]–[649].
22
Malaysian Trustees Bhd v Transmile Group Bhd [2012] 3 MLJ 679, [24]–[26].
23
Stotter v Ararimu Holdings Ltd [1994] 2 NZLR 655, 659–663.
24
Canada Deposit Insurance Corporation v Canadian Commercial Bank (1993) 97 DLR (4th)
385.
25
Re Maxwell Communications Corporation plc (No 2) [1993] 1 WLR 1402, 1405–1406.
26
Debt subordination may have particular relevance to the capital adequacy of banks and other
credit institutions under the applicable regulatory regime: see Re SSSL Realisations (2002) Ltd
[2004] EWHC 1760 (Ch), [20].
27
Re SSSL Realisations (2002) Ltd [2006] Ch 610, [66].
28
For the application of the rule in Cherry v Boultbee (1839) 4 My & Cr 442 to the group liability
subordination context, see Re SSSL Realisations (2002) Ltd [2006] Ch 610, [68]–[117].
29
Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2012] 1 AC 383,
[148].

(iv) Inter-creditor agreements

11.16 An inter-creditor agreement is usually a much more complex document
than a deed of priority or a deed of postponement1, which may contain little
more than the new order of priority between the creditors. As inter-creditor
agreements are normally used in connection with much more sophisticated
lending arrangements2, such as a syndicated loan3, and are designed to regulate
both the secured and unsecured claims of multiple lenders, much more detail is
required in terms of their provisions4. Fortunately, the complexity of drafting

20
 Voluntary Lending Tiers 11.17

such agreements is largely reduced by the availability of standard-form docu-

mentation produced by the Loan Market Association5. Similarly, any complex-
ity that arises out of the administration of such loans is helped by the inter-
creditor agreement recognising a series of agent banks that act on behalf of
different lending groups: the ‘security agent’ holds the security provided by the
borrower on behalf of all the lenders in common and each facility covered by
the agreement is represented by its own agent bank, so that ordinarily there is a
‘senior facility agent’ and a ‘mezzanine agent’6. As discussed subsequently7, in
relation to each facility, these latter agents perform the important role of
co-ordinating the actions and decision-making of the syndicate members, as
well as taking responsibility for administering the loans on a day-to-day basis.
1
For example, there are detailed and complicated requirements regarding the amendment of an
inter-creditor agreement or the security arrangements, see LMA.ICA.05, cls 28.1–28.15. The
precise nature of the amendment will determine whether majority or unanimous lender consent
is required: see The Bank of New York Mellon (London Branch) v Truvo NV [2013] EWHC
136 (Comm), [76]–[95].
2
For consideration of the use of inter-creditor agreements in the context of leveraged buy-outs,
see R Hooley, ‘Release Provisions in Inter-creditor Agreements’ [2012] JBL 213, 213–214.
3
See generally Chapter 12 below. The relative complexity of the transaction also means that
conflict of laws issues are more likely to arise in the context of inter-creditor agreements,
although many (but certainly not all) of the relevant issues are likely to be resolved by the
inter-creditor agreement containing an English choice of law clause covering both contractual
and non-contractual disputes (see LMA.ICA.05, cl 30), an English exclusive jurisdiction
clause (see LMA.ICA.05, cl 31.1(a)) and a clause precluding jurisdictional challenges on forum
non conveniens grounds (see LMA.ICA.05, cl 31.1(b)).
4
A notable example would be the fact that a deed of priority is unlikely to state anything about
the transfer of rights to the security, relying upon the general law of assignment and novation,
whereas the inter-creditor agreement contains an exclusive code for the assignment of rights and
the transfer of rights and obligations by way of novation: see LMA.ICA.05, cl 22.1. There are
general restrictions upon assignments and transfers by the borrower’s parent company (see
LMA.ICA.05, cl 22.2) and the various forms of subordinated lender (see LMA.ICA.05,
cls 22.3–22.4).
5
There might also have been a degree of legal complexity regarding whether the invalidity or
unenforceability of certain provisions of an inter-creditor agreement affects the entire agree-
ment, but this is generally resolved by providing that partial invalidity or unenforceability does
not infect the whole agreement: see LMA.ICA.05, cls 27.1–27.2.
6
Any change in a facility agent requires the successor to accede to the terms of the inter-creditor
agreement: see LMA.ICA.05, cl 22.7.
7
See paras 12.22–12.25 below.

11.17 In essence, the fundamental purpose of the inter-creditor agreement is to

rank the various groups of lenders1 that have advanced funds pursuant to
different types of (often syndicated) arrangement2, ordinarily providing that the
‘senior facility creditors’ (together with any ‘hedge counterparties’3) will rank in
priority to the ‘mezzanine creditors’, but pari passu between themselves4. The
respective claims of the senior facility creditors and mezzanine creditors are also
enforceable against the security provided by the borrower in relation to the
transaction (usually termed the ‘common transaction security’)5 in the same
order of priority6. The borrower’s subordinated liabilities, intra-group liabili-
ties and the claims of its parent company usually rank after the mezzanine
lenders7, although the inter-creditor agreement does not always purport to rank
the subordinated, intra-group and parent company liabilities inter se8. Having
ranked the various lenders, a standard-form inter-creditor agreement will
usually then deal with the borrower’s ability to make payments to the different
groups of creditors. As regards the senior facility creditors9, the borrower may

21
11.17 Tiers of Lending

make payments ‘at any time’ in accordance with the senior facility agreement10.
The senior facility creditors may also take fresh, additional security from the
borrower’s group provided it is also offered to the security agent on behalf of all
the creditors11.
As regards the mezzanine lenders12, whilst their claims will be secured upon the
‘common transaction security’, they are precluded from obtaining any further
security or guarantees from the borrower’s group unless approved by a majority
of the senior facility creditors13. Prior to the senior facility creditors being
discharged, the borrower may only make payment to the mezzanine lenders
where there has not been any default on the senior facilities (and only then in
narrowly defined circumstances)14 or where the senior creditors have consented
to the mezzanine payment15. In contrast, once the senior facility creditors have
been paid, payments may be made to the mezzanine creditors without equiva-
lent restrictions16. Where there is a ‘mezzanine payment stop event’ (essentially
an event of default under the senior creditor facility that does not involve a
failure to pay)17, the security agent (acting upon the instructions of a majority of
the senior facility creditors) can issue a ‘mezzanine payment stop notice’,
thereby suspending payments to the mezzanine creditors until a specified date
or event occurs18. Such a notice must usually be served within a six-month
period from the event of default19 and only so many notices may be issued each
year20, but this does not prevent an event of default being declared in relation to
the mezzanine facility and enforcement action being taken21 (although the
borrower does have the ability to ‘cure’ any event of default by making
payments to the mezzanine creditors once the stop notice is no longer
outstanding)22. Nor does a mezzanine payment stop notice prevent the capital-
isation of interest on the loan facility23.
In the event that the mezzanine lenders wish to take ‘enforcement action’24
against the borrower, they are prima facie prohibited from doing so25. This is
subject to a number of exceptions, such as where the senior facility is being
accelerated as a result of an event of default under that facility26; the mezzanine
agent has notified the security agent of an event of default in relation to the
mezzanine facility and this has not been cured within the time-frame stipulated
in the notice27; or a majority of the senior facility creditors has consented to
mezzanine enforcement action28. Enforcement action may be restricted, how-
ever, where the security agent has given the mezzanine agent notice that it is
enforcing the common transaction security (unless the mezzanine lenders have
instructed those enforcement steps)29. Each individual mezzanine lender has
more freedom in relation to enforcement if an ‘insolvency event’ has occurred
(essentially where any formal step has been taken in relation to the
borrower’s insolvency)30, in which case the mezzanine lender can accelerate the
loan, make demand under any guarantee or other third party liability, exercise
any right of set off or claim and/or prove in the borrower’s liquidation31.
Similar (albeit somewhat more stringent) restrictions upon payment, the taking
of new security and enforcement action exist in relation to the liabilities ranking
below the mezzanine lenders in terms of priority. As regards intra-group
liabilities, the borrower cannot generally make payments in respect of those
liabilities32, although payments can be made ‘from time to time when due’
provided that no event of default has occurred or is continuing; provided the
senior facility creditors, or in some circumstances, the mezzanine lenders, have
consented to the payment; or provided the intra-group payment is ‘made to

22
 Voluntary Lending Tiers 11.17

facilitate’ payments to senior creditors or mezzanine lenders33. The standard-

form LMA inter-creditor agreement also provides a mechanism for intra-group
liabilities to be transferred within the corporate group, provided that such
transfer does not constitute a breach of the senior or mezzanine lending facilities
and provided there is no continuing event of default at the time34 (although the
senior facility lenders (or, in some circumstances, the mezzanine lenders) may
consent to such an intra-group payment)35. As one would imagine, an even
more restrictive approach is taken to new security or guarantees in relation to
intra-group liabilities: no such security or third party rights can be acquired
unless specifically permitted by both the senior and mezzanine facility agree-
ments or the specific consent of both lending tiers has been obtained36. Similarly,
there is a prohibition on intra-group lenders taking enforcement action before
the senior facility and mezzanine creditors’ liabilities have been discharged37,
although each individual intra-group lender may accelerate its loan, make
demand under any guarantee or other third party liability, exercise any right of
set off or claim and/or prove in the borrower’s liquidation where an ‘insolvency
event’ has occurred38 (essentially where any formal step has been taken in
relation to the borrower’s insolvency)39.
The position is largely the same in respect of parent company liabilities:
payments to the parent company are prohibited unless permitted by the senior
and mezzanine facility agreements or approved by those creditors40; parent
company liabilities cannot be acquired by other members of the borrow-
er’s corporate group unless senior and/or mezzanine lender consent (depending
upon the circumstances) is first obtained41; in the absence of senior or mezza-
nine creditor consent, the parent company cannot waive or amend the terms of
the agreement pursuant to which those liabilities arise unless ‘the amendment or
waiver is of a minor and administrative nature’ and not prejudicial to the senior
or mezzanine lenders42; the parent company may not acquire new security,
guarantees or like claims from the borrower’s corporate group unless expressly
permitted by the senior and mezzanine facility agreements43; and, like intra-
group lenders, the parent company is prohibited from taking enforcement
action,44 unless an insolvency event has occurred in which case the parent
company can take certain specified steps45. Similar provisions apply mutatis
mutandis to vendor and subordinated loans46.
1
Subject to a number of exceptions, senior facility creditors and mezzanine lenders are generally
permitted to assign their rights and transfer their rights and obligations by novation as long as
this is permitted by the relevant facility agreement: see LMA.ICA.05, cl 22.5. For the detailed
procedures that must be followed in relation to assignments or transfers under syndicated loan
facilities, see paras 12.28–12.30 below. Hedge counterparties (see LMA.ICA.05, cl 22.6) and
intra-group lenders (see LMA.ICA.05, cls 22.8–22.9) may also assign their rights or enter into
a novation with respect to rights and obligations. A lender that makes an ancillary facility
available to the borrower must accede to the inter-creditor agreement, if it wishes to take
advantage of the transaction security in respect of that facility: see LMA.ICA.05, cl 22.10.
Accession to the inter-creditor agreement depends upon the execution and delivery to the
security agent of a ‘creditor accession undertaking’ in due form: see LMA.ICA.05, cl 22.11.
From the date of the ‘creditor accession undertaking’, the transferring lender is relieved of any
further obligations towards the security agent and other parties, whilst the new lender assumes
those obligations: see LMA.ICA.05, cls 22.11(a)–(b). For the accession of new debtors to the
inter-creditor agreement and the resignation of debtors, see LMA.ICA.05, cls 22.12, 22.14.
2
The possible impact of the Contract (Rights of Third Parties) Act 1999 is expressly excluded: see
LMA.ICA.05, cl 1.3.
3
LMA.ICA.05, cl 1.1. The hedging transaction must be on an ISDA Master Agreement or other
framework agreement (see LMA.ICA.05, cl 4.12(b)) and must comply with the restrictions on
the costs of such a transaction (see LMA.ICA.05, cls 4.13). Any sums due to the borrower from

23
11.17 Tiers of Lending

the hedge counterparty once the transaction has come to an end must generally be paid to the
security agent: see LMA.ICA.05, cls 4.11(a)–(b). Hedge counterparties are not entitled to
enforce the security provided in relation to the lending transactions (see LMA.ICA.05, cl 4.1)
and there are restrictions on the payments that the borrower can make to such a party (see
LMA.ICA.05, cls 4.2–4.3) and the enforcement steps that the hedge counterparty can take (see
LMA.ICA.05, cls 4.8–4.10). These restrictions do not provide the borrower with an excuse for
not paying the lenders: see LMA.ICA.05, cl 4.4.
4
LMA.ICA.05, cl 2.1(a). In Trimast Holding Sarl v Tele Columbus GmbH [2010] EWHC 1944
(Ch), [5], Norris J explained that hedging parties rank alongside senior facility creditors, since
‘they were not third party commercial risk takers’.
5
LMA.ICA.05, cl 1.1.
6
LMA.ICA.05, cl 2.2.
7
LMA.ICA.05, cl 2.3(a).
8
LMA.ICA.05, cl 2.3(b).
9
The senior facility creditors are entitled ‘at any time’ to amend or waive the terms of the senior
creditor facility (see LMA.ICA.05, cl 3.2), although there are explicit restrictions upon their
ability to do so (see LMA.ICA.05, cls 3.3–3.4).
10
LMA.ICA.05, cl 3.1.
11
LMA.ICA.05, cl 3.6(a)(i). The fresh security can be offered to the other secured lenders directly
if the events occur in a jurisdiction unfamiliar with the concept of a trust: see LMA.ICA.05,
cl 3.6(a)(ii). Subject to exceptions, the position is more restrictive where a senior facility creditor
is seeking additional security in respect of some ancillary facility made available to the
borrower, as the consent of the majority of the senior lenders is then required: see LMA.ICA.05,
cl 3.7. There is a prima facie restriction on enforcement action by senior facility creditors in
respect of such an ancillary facility (see LMA.ICA.05, cl 3.8), although there are a number of
permitted exceptions (see LMA.ICA.05, cl 3.9).
12
The mezzanine lenders are generally free to amend or waive the terms of the mezzanine lending
facility (see LMA.ICA.05, cl 5.8(a)), but there are limits to what may be amended (see
LMA.ICA.05, cl 5.5(b)). There is also a mechanism for designating documents as a ‘mezzanine
finance document’, but this requires majority approval from the senior facility creditors: see
LMA.ICA.05, cl 5.9.
13
LMA.ICA.05, cl 5.10. Like the senior facility creditors, the mezzanine lenders have the
advantage of representations deemed to be given by any intra-group lenders regarding inter alia
their corporate form, the legal validity and enforceability of the intra-group loans and the fact
that entering those loans will not constitute an event of default in relation to the senior or
mezzanine facility agreements: see LMA.ICA.05, cl 6.8.
14
LMA.ICA.05, cl 5.2(a)(i), (iii).
15
LMA.ICA.05, cl 5.2(a)(ii).
16
LMA.ICA.05, cl 5.2(b).
17
LMA.ICA.05, cl 1.1.
18
LMA.ICA.05, cl 5.3(a).
19
LMA.ICA.05, cl 5.3(b).
20
LMA.ICA.05, cl 5.3(d).
21
LMA.ICA.05, cl 5.4.
22
LMA.ICA.05, cl 5.6.
23
LMA.ICA.05, cl 5.5.
24
The notion of ‘enforcement action’ is defined widely to include acceleration of a loan, declaring
facilities to be repayable on demand, the making of a demand on a borrower, requiring a
member of the borrower’s corporate group to acquire any liability, exercising a right of set off
or combination, enforcing any security, entering into a compromise or arrangement with the
borrower or taking any steps pursuant to an insolvency proceeding: see LMA.ICA.05, cl 1.1.
According to Norris J in Trimast Holding Sarl v Tele Columbus GmbH [2010] EWHC 1944
(Ch), [24(c)], [31(e)], neither the seeking of declaratory relief from the courts, nor the borrower
and lenders entering into a ‘standstill’ agreement in relation to the borrower’s obligations,
generally constitutes ‘enforcement action’ for the purposes of an inter-creditor agreement. A
specific step that a mezzanine lender might take as a pre-cursor to enforcement is to acquire
some of the senior debt, allowing it to vote in favour of mezzanine enforcement action: see
LMA.ICA.05, cl 5.14.
25
LMA.ICA.05, cl 5.11.
26
LMA.ICA.05, cl 5.12(a)(i).
27
LMA.ICA.05, cl 5.12(a)(ii).
28
LMA.ICA.05, cl 5.12(a)(iii).

24
 Voluntary Lending Tiers 11.18
29
LMA.ICA.05, cl 5.13(a)–(b).
30
LMA.ICA.05, cl 1.1.
31
LMA.ICA.05, cl 5.12(b).
32
LMA.ICA.05, cl 6.1.
33
LMA.ICA.05, cls 6.2(a)–(b). The borrower’s other lending obligations are not affected by any
permitted intra-group payment: see LMA.ICA.05, cl 6.3.
34
LMA.ICA.05, cls 6.4(a)–(b).
35
LMA.ICA.05, cl 6.4(c).
36
LMA.ICA.05, cls 6.5(a)–(b). Obviously, if the senior facility creditors have been paid by the
borrower, only the consent of the mezzanine lenders need be sought: see LMA.ICA.05, cl 6.5(c).
37
LMA.ICA.05, cl 6.6.
38
LMA.ICA.05, cl 6.7.
39
LMA.ICA.05, cl 1.1.
40
LMA.ICA.05, cls 7.1–7.2. Such payments do not affect the borrower’s other payment obliga-
tions: see LMA.ICA.05, cl 7.3.
41
LMA.ICA.05, cl 7.4.
42
LMA.ICA.05, cl 7.5.
43
LMA.ICA.05, cl 7.6.
44
LMA.ICA.05, cl 7.7.
45
LMA.ICA.05, cl 7.8.
46
LMA.ICA.05, cls 8.1–8.9.

11.18 As well as performing a co-ordination function within the lending group

that they represent, the senior facilities agent and the mezzanine agent also
provide the exclusive channel whereby the senior facility creditors and mezza-
nine lenders respectively can communicate in writing1 with the security agent2
and vice versa3. In essence, the security agent has the challenging task of
co-ordinating the different lending groups inter se and holding the security on
trust for the lenders under the various facilities covered by the inter-creditor
agreement4. The security agent’s early costs, expenses and fees in relation to the
drafting, negotiation, execution and perfection of the facility agreements and
security documentation will usually be borne by the borrower or its parent
company5. Thereafter, the security agent’s paymaster depends upon the particu-
lar task that it is being required to perform6. As regards the discharge of the
security agent’s functions more generally7, the security agent is given a fairly
wide margin of appreciation, as it is authorised by each lender ‘to perform the
duties, obligations and responsibilities and to exercise the rights, powers,
authorities and discretions’ specifically conferred on the security agent8. Those
‘rights, powers, authorities and discretions’, which are in addition to anything
in the Trustees Act 1925 and 20009, include the ability to rely upon any
representation, notice or document that the security agent believes to be
genuine, correct and appropriately authorised10; to assume (unless it has notice
to the contrary) that any instructions from the ‘instructing group’ or any group
of creditors are in accordance with the facility agreements11; to rely upon any
certificate as to any fact or matter that would reasonably be within the
knowledge of the person providing that certificate and to assume that the
certificate is true and accurate12; to assume that no default has occurred under
the facility agreements13, that any ‘right, power, authority or discretion’ vested
in an individual lender or the majority lenders has not been exercised14 and that
any notice or request from the borrower (or its parent company) has been made
with all the borrowers’ knowledge and consent15; to engage professional
advisors16 and to act through its own personnel and agents17; to disclose any
information that it reasonably believes it has received as trustee18; and to refuse

25
11.18 Tiers of Lending

to do anything that would involve a breach of the general law or any fiduciary
obligation or confidentiality undertaking19.
With respect to the exercise of those rights, powers, authorities and discretions,
the security agent is generally obliged (subject to being provided with proper
indemnification)20 to act upon any instructions received from a majority of the
senior facility lenders or the mezzanine lenders21 (and, in the context of
enforcement matters, the security agent can only act upon the instructions of the
relevant lenders)22. In the absence of such lender instructions23, however, the
security agent can act ‘as [it] sees fit’24 or as the security agent considers ‘in its
discretion to be appropriate’25. Indeed, such is the importance of the security
agent’s co-ordination role to the proper functioning of the inter-creditor agree-
ment that each creditor provides an undertaking to comply with any requests
made by the security agent in the performance of its functions26 and to supply
the security agent with any information considered ‘necessary or desirable’27.
This creditor commitment to collectivism is further evidenced by the fact that
each creditor28 (and the agent acting on its behalf) undertakes to turn over to the
security agent29 any sums received in discharge of its liability whether by way of
payment, distribution or set-off or as a result of enforcing any security or
bringing any proceedings30. Furthermore, any rights of subrogation that one
creditor has in respect of any other creditor are also suspended until all
non-subordinated creditors have been paid31. The turn-over obligation extends
also to any non-cash consideration received by a creditor32, although this must
first be valued by a financial adviser appointed by the security agent33.
Any sums turned over in this manner must then be redistributed by the security
agent in the same way as if funds had been received directly from the borrower
in the first place34. All amounts received by the security agent pursuant to the
terms of the various facilities or in connection with the enforcement of the
transaction security are held by the security agent on a discretionary trust for
the various lenders35, until the trust funds are distributed to satisfy claims
according to the following order of priority in the inter-creditor agreement36:
first, any sums owing to the security agent37; secondly, any costs or expenses
incurred by the senior facility creditors or the mezzanine creditors in realising
the transaction security or complying with a security agent’s request38; thirdly,
the borrower’s liabilities towards the senior facility creditors, the senior facility
agent and any hedging liabilities on a pro rata basis39 (the relevant funds to be
distributed by the senior facility agent)40; fourthly, the borrower’s liabilities
towards the mezzanine lenders and the mezzanine agent (the relevant funds to
be distributed by the mezzanine agent)41; fifthly, the borrower’s liabilities to any
other parties (such as intra-group lenders, the borrower’s parent company and
any subordinated lenders) to whom the security agent is obliged to distribute
recoveries42 and, sixthly, the borrower or other relevant debtor in respect of any
balance remaining43. That said, following the acceleration of any loan or the
enforcement of the transaction security, the security agent may retain cash
recoveries in a suspense account to cover any prospective expenses or liabilities
incurred by the security agent, any receiver or delegate44 or any tax liabilities45.
This role of ensuring that payments are distributed to the facility lenders in the
required manner continues in the insolvency of any member of the borrow-
er’s corporate group, since the security agent will act as the recipient on behalf
of the creditors collectively for (cash and non-cash46) distributions made by the

26
 Voluntary Lending Tiers 11.18

liquidator or other office-holder47 and for sums recovered by lenders by way of

insolvency set off48.
Besides providing the mechanism to ensure that any payments are distributed
amongst the creditors according to the ‘waterfall clause’ before insolvency or in
accordance with the rules of the relevant insolvency regime, arguably the most
important collective function of the security agent relates to enforcement
action. This can include instructing the creditors generally on how to vote in a
court-sanctioned restructuring so as to give effect to the wishes of the senior
facility creditors49, and (after the occurrence of an ‘insolvency event’)50 petition-
ing for the winding up of the borrower, proving in the borrower’s liquidation,
collecting any distributions made by the liquidator, filing any claims and
commencing any proceedings51. In particular, the security agent is given a
monopoly over the realisation of the security provided to the creditors collec-
tively to secure the various facilities covered by the inter-creditor agreement,
and no individual creditor has any right to realise the transaction security
independently52. In this regard, the security agent does not have to take any
steps to realise the transaction security until instructed to do so by the ‘instruct-
ing group’53, which is defined as a majority (often two-thirds by value at the
time) of the senior facility creditors or, in the event that the senior claims have
been satisfied, a majority of the mezzanine lenders54. To the extent that those
instructions indicate the manner in which the transaction security must be
realised, the security agent is bound to comply, although, in the absence of such
an indication, the security agent may realise the security in what the agent
‘considers in its discretion to be appropriate’55.
The sale of secured assets as part of realising the transaction security will qualify
as a ‘distressed disposal’ for the purposes of the standard-form LMA inter-
creditor agreement and, in that regard, the security agent is ‘irrevocably
authorise[d]’56 to facilitate the disposal by inter alia releasing the assets from the
security or issuing any letters of non-crystallisation57. Whilst releasing secured
assets from the lenders’ claims facilitates the sale of those assets on behalf of the
senior facility creditors, the mezzanine and more junior lenders may find this
objectionable on the ground that it effectively deprives them of their secured
status in relation to those assets and that they may receive nothing by way of the
proceeds of sale if these are not sufficiently large to satisfy the senior facility
creditors’ claims58. In Barclays Bank plc v HHY Luxembourg Sarl,59 the Court
of Appeal had to deal with a challenge by junior creditors to the exercise of a
security agent’s powers under a security release provision in an inter-creditor
agreement – in effect that the clause, upon its proper construction, did not
extend to the transfer of subsidiaries’ liabilities and the release of security
granted by subsidiaries as part of a debt restructuring60. Whereas, at first
instance, Proudman J had adopted a more restrictive literal approach to the
security release provisions, Longmore LJ indicated that a broader interpreta-
tion was justified by their context, namely that the inter-creditor agreement in
that case ‘is one part of a complex financial structure and is itself a complex
document. The Group is a complex Group of pan-European companies and
subsidiaries; the lenders to the Group probably knew, and would anyway have
assumed, that the substantial assets would be likely to lie in the companies in the
various jurisdictions where business was done’61. On this basis, his Lordship
indicated that, ‘in the context of the company structure and the scheme of the
[inter-creditor agreement], together with the Facilities Agreements’62, it was

27
11.18 Tiers of Lending

unlikely that the parties would have intended (and it would be an ‘exercise in
futility’)63 that the security agent should be compelled to enter into a series of
separate transactions in order to sell the charged shares when this could have
been achieved more efficiently in a single transaction64, and it would ‘stand the
whole concept of primary creditors and deferred creditors on its head’ if junior
creditors were given too much control over the disposal of the charged assets65.
Whilst Longmore LJ accepted that Proudman J’s construction of the inter-
creditor agreement’s security release provisions did not ‘flout common sense’,
his Lordship indicated that, where two sensible (but conflicting) interpretations
of a contractual provision are possible66, it is appropriate to adopt ‘the more,
rather than the less, commercial construction’67. This indicates that the courts,
without exceeding the bounds of contractual interpretation, will quite correctly
treat it as being ‘most consistent with business common sense’68 that the
interests of the senior facility creditors in the ready realisation of any security
should take precedence over the possible prejudice that mezzanine or more
junior lenders might suffer as a result69.
Whilst the courts have been willing in some contexts (considered further below
and elsewhere)70 to protect junior creditors from the more egregious forms of
oppression by senior creditors, Rimer J, in Redwood Master Fund Ltd v TD
Bank Europe Ltd71, declined to extend this protection to circumstances where
it was ‘almost inevitable’ that a decision by one group of lenders ‘could be
viewed as favouring one class over another’. This restraint upon judicial
intervention applies directly to the context of the relationship between the
senior facility creditors and mezzanine lenders72.
When disposing of the secured assets, the security agent must obtain ‘a fair
market price having regard to the prevailing market conditions’ and is not
required to postpone any sale in order to achieve a higher price73. In that regard,
the duties owed by the security agent (and any receiver appointed) are usually
stated to be ‘no different to or greater than the duty that is owed . . . under
general law’74. In Saltri III Ltd v MD Mezzanine SA SICAR75, Eder J explained
the reference in this provision to the ‘general law’ as incorporating into the
inter-creditor agreement the duties owed by a mortgagee to a mortgagor ‘in
equity (and not tort) . . . to take reasonable precautions to obtain ‘the fair’
or ‘the true market’ value of or the ‘proper price’ of the mortgaged property at
the date of sale’76 and ‘to exercise the power of sale bona fide and for its proper
purpose’77. The detailed content of these duties is considered further below78,
but the standard-form LMA inter-creditor agreement provides that the security
agent will be treated as having complied with these duties79 where the sale
process is supervised by the court80, takes place at the direction of a liquidator
or other office-holder81, occurs by way of auction or other competitive sales
process82, or is viewed as fair from a financial point of view taking into account
all the relevant circumstances by an independent financial adviser83. Accord-
ingly, the senior facility lenders are in the driving seat with respect to realising
the security84: not only do they make the decision whether to realise the
transaction security, but they are also equally entitled to take no action
whatsoever or to cease any action, even though the transaction security is
capable of realisation85. Indeed, in accordance with the general legal position,86
the senior facility creditors are entitled to act ‘as they see fit’87. As a decision not
to enforce the transaction security could be prejudicial to the mezzanine

28
 Voluntary Lending Tiers 11.18

lenders, however, the security agent is entitled to act upon instructions from a
majority of the mezzanine lenders as to whether to realise the security or not88.
As well as realising the transaction security when the lending arrangements turn
sour, the security agent also performs an important role in preserving the value
of the secured assets or any other strategic unencumbered assets while the
lending facilities remain extant, whilst, at the same time, respecting the borrow-
er’s need sometimes to dispose of assets during the course of its business. Such
a disposal can only occur where the senior facility agent and the mezzanine
agent have notified the security agent of the relevant lenders’ consent to that
action89 and it falls to the security agent to facilitate the disposal by executing a
release of the relevant assets from the transaction security, issuing certificates of
non-crystallisation or taking other action that the security agent in its discretion
considers to be ‘necessary or desirable’90. Similarly, where the borrower has a
claim under an insurance policy, the security agent is ‘irrevocably authorised’ to
facilitate that claim by releasing the insurance policy document from the scope
of the transaction security and by doing anything else that the security agent
considers to be ‘necessary or desirable’91. The proceeds of any such disposal will
usually be applied in reduction of the senior creditor facilities and then the
mezzanine facilities92.
1
LMA.ICA.05, cl 26.1. For the purposes of the inter-creditor agreement, ‘writing’ may include
electronic means of communication: see LMA.ICA.05, cl 26.6. Communications must gener-
ally be in English: see LMA.ICA.05, cl 26.7. For the formal and administrative details
concerning the delivery of notices between the facility and security agents, see LMA.ICA.05,
cls 26.3–26.5.
2
LMA.ICA.05, cl 25.1(a). In this regard, the facility agents play a particularly important role in
passing information about the borrower (which it has agreed to disclose) between the lenders
and the security agent: see LMA.ICA.05, cl 25.2. The facility agents and security agent also deal
with each other in relation to the notification of certain ‘prescribed events’: see LMA.ICA.05,
cls 25.3(a)–(o).
3
LMA.ICA.05, cl 26.2(a).
4
LMA.ICA.05, cl 21.1(a). The security agent also plays an important role in the accession of new
lenders and borrowers to the inter-creditor agreement, since any ‘debtor accession deed’ or
‘creditor accession undertaking’ must be delivered to the security agent: see LMA.ICA.05,
cls 22.13(a)–(b).
5
LMA.ICA.05, cl 23.1. The parent company will also generally bear the costs of any amend-
ments or waivers to the loan and security documentation: see LMA.ICA.05, cl 23.2. Those costs
include any stamp duty payable: see LMA.ICA.05, cl 23.4. Interest may be charged on late
payments: see LMA.ICA.05, cl 23.5.
6
LMA.ICA.05, cl 21.17(a). In certain circumstances (usually involving the borrower’s default or
the borrower’s parent company requesting some extraordinary service), the security agent is
entitled to additional remuneration: see LMA.ICA.05, cl 21.17(b). Any dispute concerning the
amount of such additional remuneration or the circumstances in which it is owed may be
subject to binding expert determination: see LMA.ICA.05, cl 21.17(c).
7
A security agent is entitled to appoint custodians and nominees in relation to any charged shares
(see LMA.ICA.05, cl 21.21) and may delegate its functions upon whatever terms and conditions
that the security agent in its discretion thinks fit (see LMA.ICA.05, cls 21.22(a)–(b)). The
security agent is not required to supervise any custodian, nominee or agent and is not liable for
their defaults: see LMA.ICA.05, cls 21.21, 21.22(c).
8
LMA.ICA.05, cl 21.1(b). The discharge of the security agent’s functions includes appointing
additional security agents if necessary: see LMA.ICA.05, cls 21.23(a)–(c).
9
LMA.ICA.05, cl 21.26.
10
LMA.ICA.05, cl 21.8(a)(i).
11
LMA.ICA.05, cl 21.8(a)(ii).
12
LMA.ICA.05, cl 21.8(a)(iii). A particular example of this might be a certificate or report from
the borrower’s auditors: see LMA.ICA.05, cl 21.18.

29
11.18 Tiers of Lending
13
LMA.ICA.05, cl 21.8(b)(i). This statement operates as a contractual estoppel against the facility
lenders, even if the security agent is aware of an event of default (unless the event of default
involves non-payment by the borrower): see Torre Asset Funding Ltd v Royal Bank of
Scotland plc [2013] EWHC 2670 (Ch), [192].
14
LMA.ICA.05, cl 21.8(b)(ii).
15
LMA.ICA.05, cl 21.8(b)(iii).
16
LMA.ICA.05, cl 21.8(c).
17
LMA.ICA.05, cl 21.8(f).
18
LMA.ICA.05, cl 21.8(g).
19
LMA.ICA.05, cl 21.8(h).
20
LMA.ICA.05, cls 21.3(g), 21.8(i). The risk or liability against which indemnity is sought must
be ‘more than merely a fanciful one’: see Concord Trust v The Law Debenture Trust Corpo-
ration plc [2005] 1 WLR 1591, [34]. See also The Law Debenture Trust Corporation plc
v Concord Trust [2007] EWHC 1380 (Ch), [49(ix)]. The security agent also has a joint and
several indemnity from the borrower and other debtors in defined circumstances: see
LMA.ICA.05, cl 24.1.
21
LMA.ICA.05, cl 21.3(a)(i). For the security agent’s ‘mandatory obligation’ to act upon
instructions received, see Concord Trust v The Law Debenture Trust Corporation plc [2005] 1
WLR 1591, [24]–[29], [31]. For the qualifications to this principle, see LMA.ICA.05, cl 21.3(d).
If the security agent acts in accordance with the majority will of the particular class, it will not
be liable for any act or omission that causes loss or damage: see LMA.ICA.05, cl 21.3(a)(ii). In
general, instructions from a majority of senior or mezzanine lenders will be treated as overriding
any inconsistent instructions from any other parties to the facility agreements: see
LMA.ICA.05, cl 21.3(c). As regards those other parties, the security agent has an irrevocable
power of attorney to act on behalf of the borrower and the intra-group lenders: see
LMA.ICA.05, cl 21.28.
22
LMA.ICA.05, cls 9.7(a), 12.2–12.3.
23
If the security agent would prefer to receive instructions from the lenders on a particular matter
or would like clarification of existing instructions, it may request this from the lenders: see
LMA.ICA.05, cl 21.3(b).
24
LMA.ICA.05, cl 9.7(b). This freedom is curtailed slightly by the fact that the security agent must
have regard to the interests of all the creditors or, where there is a conflict between the various
creditor interests, the security agent must have regard to the interests of all the senior facility
lenders: see LMA.ICA.05, cl 21.3(f).
25
LMA.ICA.05, cl 21.3(h). The security agent’s discretion is likely to be curtailed by the ‘Socimer
implied terms’, on which see para 11.29 below. See generally Braganza v BP Shipping Ltd,
[2015] UKSC 17, [2015] 4 All ER 639, [2015] 1 WLR 1661. See further R Hooley, ‘Release
Provisions in Inter-creditor Agreements’ [2012] JBL 213, 222–224.
26
LMA.ICA.05, cls 9.6(a), 17(a)–(b). Each borrower or other debtor usually gives a similar
undertaking to the security agent: see LMA.ICA.05, cls 17(a)–(b).
27
LMA.ICA.05, cl 21.15.
28
Any borrowers or other debtors are similarly under an obligation to turn over any sums that
ought properly to have been paid to the security agent in the first instance and they hold those
funds on trust for the security agent until turned over: see LMA.ICA.05, cl 10.5. Where the trust
fails or is otherwise unenforceable, the borrower remains under a personal obligation to turn
over any receipts to the security agent, which then holds the funds on trust ‘for application in
accordance with the terms of the [inter-creditor agreement]’: see LMA.ICA.05, cl 10.6.
29
Where the security agent and/or the senior facilities agent is legally prevented from distributing
recoveries amongst the lenders, then the relevant payments can be made directly to the creditors
in question: see LMA.ICA.05, cl 19.4. In ordinary circumstances, payment by the security agent
to a facility agent constitutes a good discharge in relation to the debtor’s and security
agent’s payment obligations: see LMA.ICA.05, cls 18.7(b), 19.4
30
LMA.ICA.05, cl 10.2. There are exceptions to the creditors’ obligation to turn over receipts
inter alia when these receipts result from the operation of various types of netting arrangement:
see LMA.ICA.05, cl 10.3. Moreover, the creditors’ turn-over obligations do not prevent a
lender from transferring its interest in a loan by way of participation or sub-participation or
from protecting itself by means of a credit-default swap or other form of insurance-like
arrangement: see LMA.ICA.05, cl 10.4.
31
LMA.ICA.05, cl 11.3.
32
LMA.ICA.05, cl 10.7.
33
LMA.ICA.05, cl 15.2.

30
 Voluntary Lending Tiers 11.18
34
LMA.ICA.05, cl 11.1. In the event that the sums turned over by a creditor are found not to have
been owing in the first place, there is a mechanism for the security agent to recover the funds it
has distributed, but the security agent is under no obligation to hand any funds back until it has
in turn received them back from the party to whom the funds were distributed: see
LMA.ICA.05, cl 11.2.
35
LMA.ICA.05, cl 18.1.
36
The order of priority in the ‘waterfall’ clause is not affected by a creditor’s date of accession to
the inter-creditor agreement, the date upon which funds were advanced or the amount of any
further advances: see LMA.ICA.05, cl 27.5(a)–(c). Pending distribution according to the
‘waterfall clause’, the security agent can hold cash recoveries in a suspense account held in its
name ‘for so long as the security agent shall think fit’: see LMA.ICA.05, cl 18.4. The security
agent has the power to convert recoveries into other currencies (see LMA.ICA.05, cls 18.5,
18.8) and is not required to make any payments to the lenders in the same currency as the
denominated currency in the facility agreements (see LMA.ICA.05, cl 18.7(c)).
37
LMA.ICA.05, cl 18.1(a). The security agent’s right to first payment would cover any matters in
respect of which it is entitled to any indemnity: see LMA.ICA.05, cl 24.1(c). The security agent
may also look to the transaction security for payment of its costs and expenses and has a security
interest over the proceeds of the transaction security until paid in full: see LMA.ICA.05,
cl 24.1(c).
38
LMA.ICA.05, cl 18.1(b).
39
To the extent that there are differences between the relative levels of recovery by the senior
facility creditors on the date of any enforcement action, the security agent may require the
senior lenders and hedge counterparties to undergo a process of ‘equalisation’ in order to
eliminate those differences: see LMA.ICA.05, cl 19.3. Before implementing equalisation
mechanisms, the security agent should obtain the information regarding each senior facility
lender’s current exposure: see LMA.ICA.05, cl 19.5. Where equalisation does not in fact occur,
the security agent may take action on behalf of the relevant lender: see LMA.ICA.05, cl 19.6.
Payment by the security agent to a facility agent constitutes a good discharge in relation to the
debtor’s and security agent’s payment obligations: see LMA.ICA.05, cl 18.7(b).
40
LMA.ICA.05, cls 18.1(c), 18.7(a). Payment by the security agent to a facility agent constitutes
a good discharge in relation to the debtor’s and security agent’s payment obligations: see
LMA.ICA.05, cl 18.7(b).
41
LMA.ICA.05, cls 18.1(d), 18.7(a). Payment by the security agent to a facility agent constitutes
a good discharge in relation to the debtor’s and security agent’s payment obligations: see
LMA.ICA.05, cl 18.7(b).
42
LMA.ICA.05, cl 18.1(e).
43
LMA.ICA.05, cl 18.1(f).
44
LMA.ICA.05, cl 18.2.
45
LMA.ICA.05, cl 18.6.
46
Where the security agent receives non-cash assets on behalf of the lenders, it must follow any
instructions from the ‘instructing group’ whether to distribute the non-cash recoveries as such,
to ‘hold, manage, exploit, collect, realise and dispose’ of the non-cash recoveries or to act in the
same way with respect to the cash proceeds of any sale of non-cash recoveries: see LMA.ICA.05,
cl 15.1. The security agent is entitled to refuse to accept non-cash assets or to dispose of them,
if these ‘would have an adverse effect on [the security agent]’: see LMA.ICA.05, cl 15.5. Where
non-cash recoveries are distributed by the security agent, the facility agents must then determine
how to distribute those non-cash recoveries amongst the creditors that they represent so as to
reflect the terms of the particular facility agreement: see LMA.ICA.05, cl 15.3. The cash value
of any non-cash recoveries must be determined by an independent financial adviser: see
LMA.ICA.05, cl 15.2. For the procedure to be adopted by the security agent where a creditor
is not permitted to receive non-cash recoveries, see LMA.ICA.05, cl 15.4. In Saltri III Ltd v MD
Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [122], Eder J considered that there was
nothing in the inter-creditor agreement before the court ‘which prevents a sale or disposal from
being made for nominal consideration or being made for non-cash consideration’.
47
LMA.ICA.05, cls 9.2, 9.4, 9.5.
48
LMA.ICA.05, cl 9.3. For the jurisdictional and voting issues that may arise when a scheme of
arrangement is used to restructure an inter-creditor agreement, see generally Re Hibu
Group Ltd [2016] EWHC 1921 (Ch); Re Far East Capital SA [2017] EWHC 2878 (Ch).
49
LMA.ICA.05, cl 12.4.
50
LMA.ICA.05, cl 1.1.
51
LMA.ICA.05, cl 9.5. The security agent is ‘irrevocably authorise[d]’ by each creditor to take
such steps in a liquidation: see LMA.ICA.05, cl 9.5.

31
11.18 Tiers of Lending
52
LMA.ICA.05, cl 12.7.
53
LMA.ICA.05, cls 12.2(a), (d). Any failure to exercise rights in relation to the transaction
security does not amount to a waiver of rights: see LMA.ICA.05, cls 27.3–27.4.
54
LMA.ICA.05, cl 1.1.
55
LMA.ICA.05, cls 12.3, 14.7(a). Where the distressed disposal does not involve assets subject to
the transaction security, the security agent must act on the instructions of the ‘instructing group’
or, alternatively, as the agent ‘sees fit’: see LMA.ICA.05, cl 14.7(b). The borrower’s parent
company usually undertakes to indemnify the lenders in respect of any costs, expenses or losses
suffered as a result of a distressed disposal: see LMA.ICA.05, cl 24.2.
56
For a convincing explanation regarding the conceptual and theoretical underpinnings of
irrevocable authority in the context of inter-creditor agreements, see R Hooley, ‘Release
Provisions in Inter-creditor Agreements’ [2012] JBL 213, 220–222. As Hooley indicates (at
220), any attempt by a mezzanine or other lender to revoke the security agent’s irrevocable
authority to release assets from the scope of the inter-creditor security (or to do other acts) could
justifiably be restrained by injunction.
57
LMA.ICA.05, cl 14.1. The consideration received by the security agent may take the form of
cash or a non-cash asset (see LMA.ICA.05, cl 14.2) and will be distributed by the security agent
amongst the creditors in the manner required for all other types of distribution (see
LMA.ICA.05, cl 14.3).
58
R Hooley, ‘Release Provisions in Inter-creditor Agreements’ [2012] JBL 213, 213–214.
59
Barclays Bank plc v HHY Luxembourg Sarl [2010] EWCA Civ 1248.
60
In contrast to the inter-creditor agreement in HHY Luxembourg, LMA.ICA.05, cl 14.1(b)(i)
explicitly refers to ‘the Debtor and any Subsidiary of that Debtor’: see R Hooley, ‘Release
Provisions in Inter-creditor Agreements’ [2012] JBL 213, 218. For the application of the
security release provisions to the assets of, or shares in, a company that was a subsidiary at the
time of its accession to the inter-creditor agreement, but that had subsequently moved up the
corporate structure, see Re Christophorus 3 Ltd [2014] EWHC 1162 (Ch), [33]–[40].
61
Barclays Bank plc v HHY Luxembourg Sarl [2010] EWCA Civ 1248, [22].
62
Barclays Bank plc v HHY Luxembourg Sarl [2010] EWCA Civ 1248, [24].
63
Barclays Bank plc v HHY Luxembourg Sarl [2010] EWCA Civ 1248, [25].
64
This is particularly likely to be the case when, as in Barclays Bank plc v HHY Luxembourg Sarl
[2010] EWCA Civ 1248, [25], the inter-creditor agreement was ‘intended to be a co-operative
document between parties with similar interests, who would want to maximise recovery if at all
possible’. See also Re Christophorus 3 Ltd [2014] EWHC 1162 (Ch), [37].
65
Barclays Bank plc v HHY Luxembourg Sarl [2010] EWCA Civ 1248, [25].
66
In Re Rayford Homes Ltd [2011] BCC 715, [73]–[85], where there were two equally plausible
interpretations of a provision in an inter-creditor agreement, with each interpretation being
equally consistent with commercial commonsense, David Richards J resolved the impasse by
concluding that the language revealed that the parties must have made a mistake in expressing
their agreement, such that the court could engage in the exercise of ‘verbal rearrangement or
correction’ endorsed in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, [25]. See
also R Hooley, ‘Release Provisions in Inter-creditor Agreements’ [2012] JBL 213, 219–220.
67
Barclays Bank plc v HHY Luxembourg Sarl [2010] EWCA Civ 1248, [26], following Inves-
tors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896;
Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101; Re Sigma Finance Corporation
[2010] 1 All ER 571. The approach in HHY Luxembourg was explicitly endorsed by Lord
Clarke in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, [29]. See further Arnold v
Britton [2015] AC 1619, [14]–[15], [76]–[77], [108]–[115]; Wood v Capita Insurance Ser-
vices Ltd [2017] AC 1173, [8]–[15]; Taurus Petroleum Ltd v State Oil Marketing Co of the
Ministry of Oil, Republic of Iraq [2017] UKSC 64, [2018] AC 690, [2018] 2 All ER 675,
[86]–[117].
68
Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, [30]; Wood v Capita Insurance
Services Ltd [2017] AC 1173, [11], [28]–[30].
69
Re Bluebrook Ltd [2009] EWHC 2114 (Ch), [49]–[51]; Re Christophorus 3 Ltd [2014] EWHC
1162 (Ch), [37]. See also R Hooley, ‘Release Provisions in Inter-creditor Agreements’ [2012]
JBL 213, 218–219.
70
See paras 11.21–11.29 below.
71
Redwood Master Fund Ltd v TD Bank Europe Ltd [2006] 1 BCLC 149, [94]. See further paras
12.40–12.42 below.
72
R Hooley, ‘Release Provisions in Inter-creditor Agreements’ [2012] JBL 213, 224–226. Whilst
the security release mechanism in the inter-creditor agreement could be seen as involving an
expropriation of the mezzanine creditors’ security interest (which might arguably, therefore,

32
 Voluntary Lending Tiers 11.19

fall within Assénagon Asset Management SA v Irish Bank Resolution Corp Ltd [2012] EWHC
2090 (Ch)), there appears to be a difference between an expropriation of rights that is imposed
unilaterally on a minority after their relationship has commenced and an expropriation that
accords with the procedures envisaged from the outset by the contractual relationship between
the parties: see Re Charterhouse Capital Ltd [2014] EWHC 1410 (Ch), [230]–[237], affd
[2015] EWCA Civ 536.
73
LMA.ICA.05, cl 14.4.
74
LMA.ICA.05, cl 12.6.
75
Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm).
76
Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [127(g)], [135], [144].
77
Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [135], [144]. Eder J
also rejected (at [136]–[138], [149]) the suggestion that a duty should be implied into the
inter-creditor agreement to the effect that, where the security agent sells property to a connected
or affiliated third party, there should be an absolute obligation to take and act upon indepen-
dent expert advice in relation to such matters as the method of sale and the steps that ought
reasonably to be taken to make the sale a success.
78
See paras 11.23–11.24 below.
79
Standard-form LMA inter-creditor agreements conclusively presume that the security agent has
complied with its legal duties if it effects the sale under certain defined circumstances: see
LMA.ICA.05, cl 14.5(b).
80
LMA.ICA.05, cl 14.5(b)(i). A sale by an administrator will be treated as a ‘court approved
process’ under an inter-creditor agreement: see Re Christophorus 3 Ltd [2014] EWHC 1162
(Ch), [41]–[44].
81
LMA.ICA.05, cl 14.5(b)(ii).
82
LMA.ICA.05, cl 14.5(b)(iii).
83
LMA.ICA.05, cl 14.5(b)(iv). For the security agent’s powers to appoint such a financial adviser,
see LMA.ICA.05, cl 14.7.
84
Any costs and expenses related to the acceleration of the loan, the realisation of the security or
other enforcement action are often borne by the borrower’s parent company: see LMA.ICA.05,
cl 23.3.
85
LMA.ICA.05, cl 12.2(b).
86
For the general freedom afforded to a secured creditor in respect of the enforcement or
otherwise of their security, see para 11.22 below.
87
LMA.ICA.05, cl 12.2(b). Given the broad discretion conferred upon the senior facility lenders,
a court may be prepared to subject the exercise of that discretion to implied terms requiring the
lenders to act honestly and not act arbitrarily, capriciously, perversely or irrationally: see Abu
Dhabi National Tanker Co v Product Star Shipping Ltd (The ‘Product Star’ (No 2)) [1993] 1
Lloyd’s Rep 397, 404; Ludgate Insurance Co Ltd v Citibank NA [1998] Lloyd’s Rep IR 221,
[35]; Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] EWCA Civ 107, [64];
Paragon Finance plc v Nash [2002] 1 WLR 685, [41]; Socimer International Bank Ltd
v Standard Bank London Ltd [2008] EWCA Civ 116, [66]; Do-Buy 925 Ltd v National
Westminster Bank plc [2010] EWHC 2862 (QB), [37]; McKay v Centurion Credit Resources
LLC [2011] EWHC 3198 (QB), [50], affd [2012] EWCA Civ 1941, [17], [21]–[22]; Westlb AG
v Nomura Bank International plc [2010] EWHC 2683 (Comm), [72]–[74], [81], [102], affd
[2012] EWCA Civ 495, [30]–[32], [58]–[60]. This approach of the lower courts has received the
approval of the Supreme Court in Braganza v BP Shipping Ltd [2015] 1 WLR 1661. Compare
Barclays Bank plc v Unicredit Bank AG [2012] EWHC 3655 (Comm), [48], [62]–[73]. See
generally R Hooley, ‘Controlling Contractual Discretion’ (2013) 72 CLJ 65; C Hare, ‘The
Expanding Judicial Review of Contractual Discretion: Carte Blanche or Carton Rouge?’ [2013]
BJIBFL 269; J Morgan, ‘Resisting Judicial Review of Discretionary Contractual Powers’ [2015]
LMCLQ 483.
88
LMA.ICA.05, cl 12.2(c).
89
LMA.ICA.05, cl 13.1.
90
LMA.ICA.05, cl 13.2(a).
91
LMA.ICA.05, cl 16.1.
92
LMA.ICA.05, cl 13.3.

11.19 Given the array of functions delegated to the security agent, the risk of
liability at first sight seems high, but the standard-form LMA inter-creditor
agreement (largely in response to the difficulty and complexity of the security
agent role) alleviates much of that risk by defining the security agent’s express

33
11.19 Tiers of Lending

duties in a restrictive manner1, namely promptly forwarding documents be-

tween the parties to the inter-creditor agreement2, promptly notifying the
lenders of any notice received regarding any default by the borrower under the
facility agreements3, and notifying the relevant party of the security agent’s spot
rate for currency exchange4. Indeed, the standard-form LMA inter-creditor
agreement provides that the security agent only has the duties expressly
imposed upon it by the inter-creditor agreement and other documentation and
‘no [other duties] shall be implied’5. In this regard, one particular source of
implied duties, namely the Trustee Act 2000, is disapplied to the extent of any
inconsistency with the express terms of the inter-creditor agreement6 and the
‘heightened’ duty of skill and care that the legislation applies to trustees
generally7 does not apply to security agents8. Instead, the ordinary, generalised
common law standard of reasonable care and skill will apply to the security
agent’s conduct9, although (as stated further below) breach of this duty is likely
to be excluded by other terms in the inter-creditor agreement.
Further, unless provision is made to the contrary, the security agent has no
obligation ‘to review or check the adequacy, accuracy or completeness of any
document it forwards’,10 which largely negates any potential argument that the
security agent owes disclosure or advisory obligations11.
Similarly (and largely out of an abundance of caution), the standard-form LMA
inter-creditor agreement expressly provides that the security agent is neither an
‘agent, trustee or fiduciary of any [borrower]’12 nor under any obligation to
account to the lenders in respect of any profits made13, thereby effectively
precluding the imposition of fiduciary obligations14. In Saltri III Ltd v MD
Mezzanine SA SICAR,15 where the inter-creditor agreement provided that the
security agent owed no duties ‘other than those which are specifically provided
for in the Finance Documents’ and is free of ‘any restrictions on representing
several persons and self-dealing under any applicable law’16, Eder J rejected the
argument that the security agent had failed to act in the mezzanine lenders’ best
interests, had failed to avoid conflicts of interests, and had favoured the
interests of other creditors over the mezzanine lenders’ interests17. This conclu-
sion was based upon the inter-creditor agreement’s express terms and the now
well-established position that where ‘sophisticated parties have chosen to
govern their relationship through arms-length commercial contracts, the scope
and nature of the duties owed between the parties are shaped by the terms of,
and the language used in, those contracts’18. Further, in relation to the mezza-
nine lenders’ more particular argument that the security agent owed fiduciary
duties specifically in relation to the enforcement of the security held on trust,
Eder J considered that accepting this suggestion would be inconsistent with the
inter-creditor agreement subordinating the mezzanine lenders’ interests to the
senior facility creditors’ interests; with the fact that the senior facility creditors
had control over the process of enforcing the security, which decisions bound
both the security agent and the mezzanine lenders (even if those decisions were
detrimental to the latter’s interests); and with the fact that the security
agent’s only duties to the mezzanine lender were the ordinary duties owed by
mortgagee to mortgagor, which had never been considered fiduciary in nature19.
Indeed, even in those rare circumstances where it might be possible to demon-
strate that the security agent has acted as a fiduciary in one respect, it does not
necessarily follow that the security agent acts as a fiduciary in respect of all its
activities20.

34
 Voluntary Lending Tiers 11.19

Similarly, the standard-form LMA inter-creditor agreement expressly provides

that the security agent has no responsibility for the ‘adequacy, accuracy or
completeness’ of any information supplied in connection with the inter-creditor
or facility agreements21; for the ‘legality, validity, effectiveness, adequacy or
enforceability’ of any document or agreement produced in connection with the
financing arrangements22; for any assessment of whether any information
supplied is ‘non-public information’, the use of which might give rise to liability
(such as for insider trading)23; for the perfection of the transaction security24; for
securing effective insurance over the secured assets25; or for investigating the
borrower’s title to the charged assets26. Moreover, the security agent normally
has no duty to monitor the dealings between the parties or to enquire whether
there has been any default or other breach of the various agreements or whether
any other relevant event has occurred27.
As regards confidential information, it is clear that there exists an equitable
obligation to keep that information confidential28, but the security agent is
protected from such liability in two ways: first, the security agent is deemed to
be acting as trustee through its trustee division, which is deemed to be a separate
entity, so that the security agent is not taken to have any knowledge of
confidential information received29; and, secondly, the security agent is relieved
of any obligation to disclose confidential information if this would involve
criminal liability or liability for breach of fiduciary duty30. In essence, the
limited scope that exists for imposing liability on the security agent whether in
contract, tort or equity is reflected in the usual statement found in inter-creditor
agreements to the effect that the security agent’s duties are ‘solely mechanical
and administrative in nature’31. This phrase has been interpreted in the syndi-
cated loan context to mean that the substantive content of the duties imposed
upon the agent bank are ‘minimise[d] so far as is possible’32, confirming the
position that, unless the basis of liability is expressly set out in the contractual
documentation, a litigant will struggle to hold the security agent liable on any
wider basis.
In case these provisions are not sufficiently effective to reduce the scope of the
security agent’s obligations from the outset, inter-creditor agreements usually
also contain a range of exclusion clauses that protect the security agent from
liability33. One example of a particularly widely drawn clause provides that the
security agent is not liable for ‘any damages, costs or losses to any person, any
diminution in value or any liability whatsoever arising as a result of taking or
not taking any action’ and the only limitation upon the breadth of that
exclusion is that losses must not be directly attributable to the security
agent’s ‘gross negligence or wilful misconduct’34. The security agent’s officers,
employees and agents also benefit from equally expansive contractual protec-
tions35. Additionally, even in those circumstances in which the security agent is
liable, it is entitled to be indemnified by the lenders (in proportion to their
‘share’ of the overall lending to the borrower) in respect of ‘any cost, loss or
liability’ incurred by the security agent in that capacity within three days of
demand36. The clear position is, therefore, that the security agent represents a
difficult target to hit with liability.
1
Consider, albeit decided in a different context, Sumitomo Bank Ltd v Banque Bruxelles
Lambert SA [1997] 1 Lloyd’s Rep 487, 493.
2
LMA.ICA.05, cls 21.4(b)(i)–(ii).
3
LMA.ICA.05, cl 21.4(d).

35
11.19 Tiers of Lending
4
LMA.ICA.05, cl 21.4(e).
5
LMA.ICA.05, cl 21.4(f). See also Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC
3025 (Comm), [123(f)], [129(c)]. A similar conclusion about the courts’ reluctance to imply
additional duties may be derived from the reference in LMA.ICA.05, cl 21.4(a) to the fact that
the security agent’s duties arise ‘under the Debt Documents’ and accordingly do not arise
beyond the four corners of the inter-creditor and facility agreements: see Torre Asset Fund-
ing Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch), [142]–[157], [163(i)].
6
LMA.ICA.05, cl 21.27.
7
Trustees Act 2000, s 1. The trustee’s duty of care is ‘heightened’ because it has to be assessed by
reference to any ‘special knowledge or experience’ possessed by the trustee or, where the trustee
acts in the course of a business or profession, the ‘special knowledge and experience’ that it
would be reasonable to expect of a person acting in the course of the particular type of business.
8
LMA.ICA.05, cl 21.27.
9
The general negation of implied terms in the inter-creditor agreement would likely also be
effective to exclude the duty to exercise reasonable skill and care in section 13 of the Supply of
Goods and Services Act 1982: see Supply of Goods and Services Act 1982, s 16.
10
LMA.ICA.05, cl 21.4(c).
11
Consider Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch),
[211].
12
LMA.ICA.05, cl 21.5. As there is no fiduciary relationship between the security agent and the
borrower, there is no problematic conflict of interest that arises if the security agent also
provides banking, lending or other types of service to the borrower’s corporate group: see
LMA.ICA.05, cl 21.7.
13
LMA.ICA.05, cl 21.6.
14
For a similar conclusion in respect of the arranging and agent banks in the syndicated loan
context, see Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch),
[28]–[30], [34], [163(ii)], [179]–[180], [192], [204]; Barclays Bank plc v Svizera Holdings plc
[2014] EWHC 1020 (Comm), [8]–[9].
15
Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [221]–[222].
16
Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [31].
17
That said, in Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [222],
Eder J was prepared to assume (without deciding the point) that the security agent had breached
its duties to the mezzanine lenders by ‘failing to put in place “Chinese walls” and in sharing
information with one or more Senior Lenders to the exclusion of the Mezzanine Lenders’.
18
Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [123(f)]. Eder J
considered that this was consistent with the view of the Supreme Court in Belmont Park
Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2012] 1 AC 383, 421 that there is
a particularly strong case, when dealing with complicated financial transactional documents,
for giving effect to the literal meaning of what the parties have agreed.
19
Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [123(h)].
20
Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [123(c)].
21
LMA.ICA.05, cl 21.9(a).
22
LMA.ICA.05, cl 21.9(b).
23
LMA.ICA.05, cl 21.9(c).
24
LMA.ICA.05, cl 21.19.
25
LMA.ICA.05, cl 21.20(a). A security agent is also not responsible for any non-disclosure in
relation to an insurance policy, unless it had been specifically requested by the ‘instructing
group’ to disclose the matter in question: see LMA.ICA.05, cl 21.20(b).
26
LMA.ICA.05, cl 21.24.
27
LMA.ICA.05, cl 21.10. In this connection, the security agent is not responsible for carrying out
any ‘know your customer’ checks on any of the parties or for verifying the legality of any
proposed agreement or course of action: see LMA.ICA.05, cl 21.11(c). Rather, the lenders will
usually provide a contractual confirmation of the fact that they are responsible for such matters
and do not rely upon the security agent in that regard: see LMA.ICA.05, cl 21.11(c). Similarly,
the lenders will usually provide the security agent with confirmation that they are ‘solely
responsible for making [their] own independent appraisal and investigation of all risks’
associated with the particular lending: see LMA.ICA.05, cls 21.16(a)–(e).
28
See, for example, A-G v Guardian Newspapers Ltd (No 2) [1990] 1 AC 109, 281.
29
LMA.ICA.05, cls 21.14(a)–(b).
30
LMA.ICA.05, cl 21.14(c).
31
LMA.ICA.05, cl 21.4(a).

36
 Minority and Junior Creditor Protection 11.21
32
Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch), [34]. In this
regard, Sales J rejected (at [28]–[30], [142]–[148], [163(i)]) the ‘extreme’ submission that these
words had the effect of making the agent bank little more than ‘a postal service to transmit
documents or communications from [the borrower] . . . to [the lenders]’.
33
LMA.ICA.05, cls 21.11(a)–(b), (d).
34
LMA.ICA.05, cl 21.11(a)(i). The specific exclusion clauses are often combined with an
overarching limitation clause restricting the heads of loss for which the security agent will be
liable: see LMA.ICA.05, cl 21.11(d).
35
LMA.ICA.05, cl 21.11(b).
36
LMA.ICA.05, cl 21.12(a). Subject to one exception, any lender that is required to indemnify the
security agent can usually seek indemnification in turn from the borrower’s parent company:
see LMA.ICA.05, cls 21.12(c)–(d). The security agent also has an indemnity from the borrower
and other debtors on a joint and several basis: see LMA.ICA.05, cl 24.1.

11.20 A security agent’s primary role is largely fulfilled once the liabilities
secured upon the transaction security are satisfied by the borrower and, in those
circumstances, the trust over the transaction security will be wound up and the
secured assets released back to the borrower or other debtor parties1. Moreover,
a security agent may resign its role by giving notice to the senior and mezzanine
lenders that it will appoint an affiliate as its successor2 or by giving 30 days’
notice to the lenders and the borrower’s parent company, in which case the
‘instructing group’3 may appoint the security agent’s replacement4. Similarly,
the instructing group can require the security agent to resign following the same
notice period5. If there has been no new appointment within 20 days of the
security agent’s notice of resignation, then the retiring security agent may
appoint its successor6. However the security agent’s replacement is chosen, its
resignation only takes effect once the successor is in post and once the assets
subject to the lenders’ security have been transferred7. Once the security
agent’s resignation takes effect, it is at that point discharged of any further
obligations pursuant to the inter-creditor agreement8. The retiring security
agent is required to hand over to its successor any documents or records and to
provide such assistance as may reasonably be requested9.
1
LMA.ICA.05, cl 21.25.
2
LMA.ICA.05, cl 21.13(a).
3
LMA.ICA.05, cl 1.1.
4
LMA.ICA.05, cl 21.13(b).
5
LMA.ICA.05, cl 21.13(g).
6
LMA.ICA.05, cl 21.13(c).
7
LMA.ICA.05, cl 21.13(e).
8
LMA.ICA.05, cl 21.13(f).
9
LMA.ICA.05, cl 21.13(d).

4 MINORITY AND JUNIOR CREDITOR PROTECTION

11.21 In circumstances where a formal lending tier arises, there is always the
risk that the borrower’s assets will be insufficient to satisfy the claims of the
junior creditors. Similarly, in cases where a lender’s interest is functionally
subordinated because it represents the minority voice in a syndicated loan
structure or bond issue, there is the risk of being outvoted on certain crucial
issues. As a general rule, the law does not intervene in such circumstances, since
the risk of being unpaid or outvoted is inherent in the junior or minority
position of the creditor and is part of the commercial risk that that particular
creditor has assumed. Occasionally, however, judicial or legislative intervention

37
11.21 Tiers of Lending

in favour of such creditors may be forthcoming. Such protection can take one of
several forms, including conferring additional proprietary rights on the junior
creditor (as occurs in the marshalling context), imposing enforceable duties
upon the senior creditor vis-à-vis the junior creditor (as occurs in the enforce-
ment context), restricting the senior creditor’s freedom to act (as occurs in the
context of tacking further advances) or invalidating some action taken by the
senior creditor (as occurs in the context of lender voting structures in syndicated
loans and bond issues).

(a) Marshalling of securities

11.22 It is a fundamental principle that a creditor with security over a number

of different assets should be free to choose how to enforce its security1. In
circumstances where one of those assets is also subject to a junior security
interest, there is a risk that, if the senior creditor chooses to enforce its security
over that particular asset, there may be insufficient equity left in that asset to
enable the junior creditor to recover any or all of its claim through enforcement
of its security. This would appear particularly unfair when both the senior and
junior secured creditors could have recovered the entirety of their claims if the
senior creditor had only chosen to enforce its security against other assets.
There will always be a degree of unfairness in requiring a creditor that has
contracted for security, and that might otherwise have enforced its claim against
the secured assets, to sue the borrower to judgment instead and then enforce
that judgment in the same way as any ordinary unsecured creditor. That
unfairness is obviously heightened when the borrower is insolvent2. Whilst a
junior creditor could always promote its second-ranking security to a first-
ranking security by redeeming the higher-ranking security and enforcing the
redeemed security against the other assets available for that purpose,3 this only
benefits those junior creditors that have sufficient resources and unfairly
prejudices those that do not4. As well as potential unfairness to the junior
creditor, allowing such conduct could lead to an unwarranted and
uncovenanted-for benefit to the senior creditor, since its right to choose how to
enforce its security would have a substantial value and might be auctioned as
between the junior secured creditor and the general unsecured creditors5.
In order to avoid such unfairness to the junior creditor, equity6 has developed
the doctrine of marshalling, the availability of which depends upon an exercise
of the court’s discretion7. In Bank of Credit & Commerce International SA (No
8)8, Lord Hoffmann described that equitable doctrine in the following terms:
‘ . . . a principle for doing equity between two or more creditors, each of whom are
owed debts by the same debtor, but one of whom can enforce his claim against more
than one security or fund and the other can resort to only one. It gives the latter an
equity to require the first creditor to satisfy himself (or be treated as having satisfied
himself) so far as possible out of the security or fund to which the latter has no claim.’
According to Lord Hoffmann, therefore, marshalling appears to operate by
equity compelling the senior creditor to have recourse first to the other assets
over which it has security, rather than to the asset against which the junior
creditor also has a claim. This has certainly been the traditional understanding
of the way that marshalling works9 and is a view that continues to persist
nowadays. For example, in Highbury Pension Fund Management Co v Zirfin

38
 Minority and Junior Creditor Protection 11.22

Investments Ltd10, Lewison LJ stated that marshalling ‘gives the second credi-
tor a right in equity to require that the first creditor satisfy himself or be treated
as having satisfied himself so far as possible out of the security or fund to which
the latter has no claim’. The correctness of this ‘coercion model’ of marshalling
has now been questioned by the Supreme Court in National Crime Agency
(formerly Serious Organised Crime Agency) v Szepietowski,11 as Lord Neuber-
ger (with whom Lord Sumption’s judgment is consistent on this point)12
doubted whether a court was entitled to interfere with the senior credi-
tor’s freedom to realise its security ‘in such manner and order as he thinks fit’13.
Accordingly, his Lordship viewed marshalling as operating, not by restricting
the senior creditor’s freedom of choice regarding the enforcement of its security,
but rather by making the other assets subject to the senior creditor’s security
available pro tanto to satisfy the junior secured creditor’s claim14 (by a process
akin to subrogation)15. Although Lord Hughes appeared to explain the opera-
tion of marshalling in similar terms to Lord Neuberger16, Lord Carnwath
explained the doctrine in the more traditional terms of ‘an equity to require that
the first creditor satisfy himself . . . out of the security or fund to which the
latter has no claim’17 and Lord Reed (by reference to the equivalent Scottish
doctrine) was equivocal on the point18.
To the extent that their Lordships intended to take a different theoretical
approach to the operation of marshalling19, that difference could have signifi-
cant practical implications: first, the traditional approach to marshalling would
leave open the possibility that a junior creditor might enjoin the senior creditor
from enforcing its security in a manner detrimental to the former or might seek
to compel the senior creditor to exercise its rights in a manner more beneficial
to the junior creditor20; and, secondly, the traditional approach would open up
the possibility of a damages claim by the junior creditor against the senior
creditor in the event that the latter causes loss to the former by enforcing its
security against the common property or surrendering part of its security to the
borrower21. Neither of these consequences appealed to the Australian Fed-
eral Court in Naxatu Pty Ltd v Perpetual Trustee Company Ltd,22 lending some
support to Lord Neuberger’s view of marshalling. Certainly, that approach is
more consistent with the view expressed in cases like China & South Sea
Bank Ltd v Tan Soon Gin23 that a secured creditor has a fundamental freedom
of choice in enforcement matters and, in Downsview Nominees Ltd v First
City Corporation Ltd, that ‘powers conferred on a [senior creditor] may be
exercised although the consequences may be disadvantageous to the [junior
creditor]’24. In any event, a junior creditor is already adequately protected by
the senior creditor’s duty to exercise its power of sale in good faith and for a
proper purpose and by the ‘economic torts’, without there being any need to
open the senior creditor up to any wider form of liability. Accordingly, the
approach of Lord Neuberger in Szepietowski ought to be preferred. That said,
there may be an argument for not being too dogmatic in this context: given the
equitable and discretionary nature of marshalling, it may not be appropriate to
be too prescriptive about how that doctrine should operate25, as situations may
arise in future where it is entirely appropriate to restrict the senior credi-
tor’s freedom of enforcement.
However marshalling operates in practice, its effect will usually be to improve
the junior creditor’s position as against that of the borrower’s unsecured
creditors (to which group the secured creditor would belong wholly or in part

39
11.22 Tiers of Lending

if it were not for the equitable doctrine), but the doctrine does not operate either
to improve the junior creditor’s position vis-à-vis the borrower or to prejudice
the borrower’s overall position26—‘[m]arshalling is neutral in its impact upon
the residue available to the debtor following the discharge of its creditors’
claims’27. Moreover, as stated by Lord Hatherley in Dolphin v Aylward28, ‘the
doctrine of marshalling shall not be applied to prejudice third parties’.
As regards the requirements for a valid marshalling claim, these were recently
restated authoritatively by the Supreme Court in Szepietowski29, which arose
out of the National Crime Agency (‘NCA’) asserting claims under the Proceeds
of Crime Act 2002 to a number of properties registered in the name of the first
defendant, but that were subject to a first charge in favour of the second
defendant, Royal Bank of Scotland. As the bank also had security over the first
defendant’s family home and other properties to which the NCA had no
entitlement, the latter sought to invoke the marshalling doctrine so as to be
entitled to enforce its security against the first defendant’s home. Whilst the
Supreme Court was unanimous in rejecting the NCA’s marshalling claim, it
divided over the reasons for that conclusion30. Lord Neuberger, leading the
majority view in Szepietowski, held that the court’s equitable jurisdiction to
marshal securities depends upon the claimant satisfying a number of precondi-
tions31: first, the claimant must have a second-ranking security over the bor-
rower’s property in respect of an underlying debt32, (although, in Szepietowski,
Lord Neuberger was not prepared to foreclose entirely an ‘exceptional case’
where marshalling might be available without any underlying indebtedness to
the claimant)33; secondly, the defendant must be a creditor of the same borrower
with a first-ranking security over the same property as the claimant; thirdly, the
defendant must also have security for its claim over other property belonging to
the same debtor34 and to which the claimant cannot have recourse35; fourthly,
the first-ranking secured creditor must have been repaid from the sale of the
property over which the claimant also has security; fifthly, the claimant’s debt
must remain unpaid; sixthly, the other property subject to the defendant’s se-
curity must not be required at all (or must only be required in part) to satisfy the
borrower’s liability to the first-ranking secured creditor.
As the equitable doctrine protects the junior creditor from the senior credi-
tor’s caprices36, it has no role when the senior creditor has limited its options by
contractually obliging itself to look to its other security first37 or to enforce first
against the assets over which the junior creditor also has security38. Similarly,
the doctrine has no application where the terms of the second-ranking charge
itself39 (or some collateral arrangement40 to which the junior secured creditor is
a party (when properly construed against all the admissible background
circumstances))41 either expressly or impliedly exclude the right to marshal
securities42. In Szepietowski, Lord Neuberger refused, however, to introduce a
further limitation43 to a junior creditor’s ability to marshal securities based
upon the fact that the charged property included the borrower’s home44. The
existence of other encumbrances over the assets to which the junior creditor
initially has no claim may also limit (although not necessarily exclude entirely)
the availability of marshalling, since the doctrine will only apply to the extent
that third party encumbrancers are not prejudiced45. In Flint v Howard46,
Kay LJ articulated the difficulty faced by the courts in such cases, and its
solution, in characteristically clear terms:

40
 Minority and Junior Creditor Protection 11.22

‘ . . . if a person having two estates mortgaged both to A and then one only to B,
who had not notice of A’s mortgage, B might, as against the mortgagor, compel the
payment of the first mortgage out of the estate on which he had no charge, according
to the ordinary doctrine of marshalling. . . . But if there was a second mortgage of
one estate to B, and also subsequently a second mortgage of the other estate to C, the
matter is more complicated. C, although he had no notice of the prior mortgage on
both properties to A, would not then be able to throw it on the property mortgaged
to B, but the equity between B and C would be to apportion the first mortgage
between the two properties according to their respective values.’
This power of rateable apportionment does not appear to depend upon whether
one or other of the junior creditors had notice of the senior creditor’s security47,
although if the instrument creating the first junior creditor’s security contains a
negative pledge clause then the existence of a subsequent junior security over
different assets should not affect the marshalling ability of the junior secured
creditor that comes first in time48.
1
China and South Sea Bank Ltd v Tan Soon Gin [1990] 1 AC 536, 545; Cheah Theam Swee v
Equiticorp Finance Group Ltd [1992] AC 472, 476. See also Walton v Allman [2016] 1 WLR
2053, [63].
2
National Crime Agency (formerly Serious Organised Crime Agency) v Szepietowski [2014] AC
338, [1]–[2].
3
Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, 315; Silven Proper-
ties Ltd v Royal Bank of Scotland plc [2004] 1 WLR 997, [18].
4
National Crime Agency (formerly Serious Organised Crime Agency) v Szepietowski [2014] AC
338, [36].
5
National Crime Agency (formerly Serious Organised Crime Agency) v Szepietowski [2014] AC
338, [36].
6
Highbury Pension Fund Management Co v Zirfin Investments Ltd [2013] EWCA Civ 1283, [1],
[18]. See also Aldrich v Cooper (1803) 8 Ves 382, 389; Dolphin v Aylward (1869–1870) LR 4
HL 486, 505; The Eugenie (1872–1875) LR 4 A&E 123, 126; Duncan, Fox & Co v The North
& South Wales Bank (1880) 6 App Cas 1, 12–13; Wegg-Prosser v Wegg-Prosser [1895] 2 Ch
449, 451. For the historical background to marshalling, see C Hare, ‘Marshalling Marshalling’,
in P Davies, S Douglas and J Goudkamp (eds), Defences in Equity (Hart Publishing, 2018), ch
11. For a useful comparative analysis of the similarities between the English marshalling
doctrine and the Scottish doctrine of catholic securities, see National Crime Agency (formerly
Serious Organised Crime Agency) v Szepietowski [2014] AC 338, [81]–[84].
7
National Crime Agency (formerly Serious Organised Crime Agency) v Szepietowski [2014] AC
338, [55], [58]. Although the equitable principle has traditionally been viewed as depending
upon an exercise of the court’s discretion, Lord Neuberger (at [54]) appeared to conceptualise
the marshalling principle ‘as an incident of the second mortgage when it is granted’ and
suggested that ‘[i]t is normally easy to imply a common intention on the part of the parties to the
second mortgage . . . that there should be a right to marshal’. Viewing the ability to marshal
as being based upon a term implied in law is tantamount to treating the principle as a
contractual entitlement rather than a matter for the court’s discretion. The Australian courts are
prepared to marshal securities sua sponte, without any specific request from the parties: see
Westpac Banking Corporation v Daydream Islands Pty Ltd [1985] 2 Qd R 330, 332; Naxatu
Pty Ltd v Perpetual Trustee Company Ltd [2012] FCAFC 163, [61].
8
In re Bank of Credit & Commerce International SA (No 8) [1998] AC 214, 230–231. See also
National Crime Agency (formerly Serious Organised Crime Agency) v Szepietowski [2014] AC
338, [1]–[2]. See further C Hare, ‘Marshalling Marshalling’, in P Davies, S Douglas and J
Goudkamp (eds), Defences in Equity (Hart Publishing, 2018), ch 11.
9
Lanoy v Duke and Duchess of Athol (1742) 2 Atk 444, 446; Attorney-General v Tyndall (1764)
Ambler 614, 615–616; Aldrich v Cooper (1803) 8 Ves 382, 388, 391, 395; Ex p Kendall (1811)
17 Ves 514, 527; Webb v Smith (1885) 30 Ch D 192, 199–200; Flint v Howard [1893] 2 Ch 54,
72; Mallott v Wilson [1903] 2 Ch 494, 505; Public Trustee v Allder [1922] 1 Ch 154, 159–160.
This has been termed the ‘coercion theory’ of marshalling: see P Ali, Marshalling of Securities:
Equity and the Priority-Ranking of Secured Credit (Oxford University Press, 1999), [3.03]–
[3.17], [3.30]–[3.39].
10
Highbury Pension Fund Management Co v Zirfin Investments Ltd [2013] EWCA Civ 1283, [1],
[18]. In contrast, Lewison LJ appears (at [15], [18]) to provide an explanation of marshalling in

41
11.22 Tiers of Lending

terms of the second mortgagee being ‘entitled to stand pro tanto in the place of the first
mortgagee in relation to the property over which the second mortgagee has no legal security.
. . . It is in this sense that we can say that the second mortgagee is in effect subrogated to the
rights of the first mortgagee’.
11
National Crime Agency (formerly Serious Organised Crime Agency) v Szepietowski [2014] AC
338.
12
National Crime Agency (formerly Serious Organised Crime Agency) v Szepietowski [2014] AC
338, [79].
13
National Crime Agency (formerly Serious Organised Crime Agency) v Szepietowski [2014] AC
338, [34]. See also Wallis v Woodyear (1855) 2 Jur NS 179, 180; Marks v Whiteley [1911] 2 Ch
448, 466. See further L Gullifer, Goode on Legal Problems of Credit and Security (Sweet &
Maxwell, 6th edn, 2017), [5–36].
14
National Crime Agency (formerly Serious Organised Crime Agency) v Szepietowski [2014] AC
338, [32]. See also Petterson v Ross [2013] EWHC 2724 (Ch), [86]. The Australian approach
to marshalling is consistent with this view: see Miles v Official Receiver in Bankruptcy (1963)
109 CLR 501, 510–511; Bank of New South Wales v City Mutual Life Assurance Society Ltd
[1969] VR 556, 557; Commonwealth Trading Bank v Colonial Mutual Life Assurance
Society Ltd [1970] Tas SR 120, 130; Mir Projects Pty Ltd v Lyons [1977] 2 NSWLR 192, 196;
Across Australia Finance Pty Ltd v Kalls (2008) 3 BFRA 205, [30]; Naxatu Pty Ltd v Perpetual
Trustee Company Ltd [2012] FCAFC 163, [62]–[70], [73]–[84]. This has been termed the
‘post-realisation theory’ of marshalling: see P Ali, Marshalling of Securities: Equity and the
Priority-Ranking of Secured Credit (Oxford University Press, 1999), [3.18]–[3.29].
15
There is authority supporting the notion that the junior secured creditor is ‘subrogated’ to the
senior secured creditor’s claim against the assets over which the junior creditor had no original
claim: see In re Mower’s Trusts (1869) LR 8 Eq 110, 114; Nuclear Cameron (PX) v AMF
International [1982] 16 NIJB (14 August 1980, Murray J); Highbury Pension Fund Manage-
ment Co v Zirfin Investments Ltd [2013] EWCA Civ 1283, [15], [18]. See also Miles v Official
Receiver in Bankruptcy (1963) 109 CLR 501, 510–511; Naxatu Pty Ltd v Perpetual
Trustee Company Ltd [2012] FCAFC 163, [68], [83]; McLean v Berry [2017] Ch 422, [17],
[25]–[26].
16
National Crime Agency (formerly Serious Organised Crime Agency) v Szepietowski [2014] AC
338, [107].
17
National Crime Agency (formerly Serious Organised Crime Agency v Szepietowski [2014] AC
338, [101].
18
National Crime Agency (formerly Serious Organised Crime Agency v Szepietowski [2014] AC
338, [81]–[86].
19
It is too early to tell whether subsequent courts will treat Lord Neuberger’s speech as
representing a fundamental and generally applicable restatement as to how marshalling
operates or as being limited to the specific context of Szepietowski, where the claimant was
invoking that doctrine precisely to enforce its security against assets not previously subject to
that security.
20
For the rejection of an argument that the marshalling doctrine gives the junior creditor an
immediate equitable proprietary interest (even before the matter is subject to judicial
determination) in the other assets subject to the senior creditor’s security, see Commonwealth
Trading Bank v Colonial Mutual Life Assurance Society Ltd [1970] Tas SR 120, 128–130. See
also Naxatu Pty Ltd v Perpetual Trustee Company Ltd [2012] FCAFC 163, [84]. Rather the
marshalling doctrine is best viewed as involving a discretionary proprietary remedy that arises
for the first time following judicial declaration: see Commonwealth Trading Bank v Colonial
Mutual Life Assurance Society Ltd [1970] Tas SR 120, 128; Sarge Pty Ltd v Cazihaven Homes
Pty Ltd (1994) 34 NSWLR 658, 655.
21
For support in Australia for such a damages claim, see Sarge Pty Ltd v Cazihaven Homes
Pty Ltd (1994) 34 NSWLR 658, 665; Chase Corporation (Australia) Pty Ltd v North Sydney
Brick & Tile Company Ltd (1994) 35 NSWLR 1, 20–21; Oamington Pty Ltd v Commissioner
of Land Tax (1997) 98 ATC 5051, 5051.
22
Naxatu Pty Ltd v Perpetual Trustee Company Ltd [2012] FCAFC 163, [83]–[84].
23
China & South Sea Bank Ltd v Tan Soon Gin [1990] 1 AC 536, 545. See also Cheah Theam
Swee v Equiticorp Finance Group Ltd [1992] AC 472, 476; Highbury Pension Fund Manage-
ment Co v Zirfin Investments Ltd [2013] EWCA Civ 1283, [22]–[23].
24
Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, 312.
25
Support for this may be drawn from Lord Reed’s comparison with the Scottish doctrine of
catholic securities in National Crime Agency (formerly Serious Organised Crime Agency) v
Szepietowski [2014] AC 338, [81]–[86]. For example, in Littlejohn v Black (1855) 18 D 207,

42
 Minority and Junior Creditor Protection 11.22

212, Lord President McNeill indicated that ‘the primary creditor will be compelled either to
take his payment in the first instance out of that one of the subjects in which no other creditor
holds a special interest, or to assign his right to the second creditor, from whom he has wrested
the only subject of his security’. Similarly, in Nicol’s Trustees v Hill (1889) 16 R 416, 421, Lord
Adam indicated that ‘the prior creditor is bound either to adopt that course [that is less injurious
to the junior creditor], or by assignation to put the postponed creditor into his right’. See further
C Hare, ‘Marshalling Marshalling’, in P Davies, S Douglas and J Goudkamp (eds), Defences in
Equity (Hart Publishing, 2018), ch 11.
26
National Crime Agency (formerly Serious Organised Crime Agency) v Szepietowski [2014] AC
338, [32]–[33], [46], [57], [66], [79], [84], [86], [102], [107]. See also Ex p Kendall (1811) 17
Ves 514, 527.
27
P Ali, Marshalling of Securities: Equity and the Priority-Ranking of Secured Credit (Oxford
University Press, 1999), [4.48], adopted in National Crime Agency (formerly Serious Organised
Crime Agency) v Szepietowski [2014] AC 338, [32].
28
Dolphin v Aylward (1869–1870) LR 4 HL 486, 501–503. See also The Edward Oliver
(1865–1867) LR 1 A&E 379, 382.
29
National Crime Agency (formerly Serious Organised Crime Agency) v Szepietowski [2014] AC
338.
30
In National Crime Agency (formerly Serious Organised Crime Agency) v Szepietowski
[2014] AC 338, a majority of the Supreme Court (Lords Neuberger, Sumption and Reed)
denied the availability of marshalling inter alia on the basis that, whilst the National Crime
Agency (‘NCA’) could recover certain properties to the extent that they represented the
proceeds of crime, once the properties in question had been sold there was no underlying debt
that the NCA could enforce against the debtor. Nor did the settlement deed between the parties
in that case create or acknowledge any debt. According to Lord Neuberger (at [46], [49],
[53]–[54]), the justification for insisting that there be an underlying indebtedness between the
junior creditor and the person against whose property the security can be enforced is that
otherwise the doctrine of marshalling would operate to the latter’s detriment. Dissenting on the
issue, Lord Carnwath (at [99]–[104]) did not consider that the absence of any underlying
indebtedness to the NCA precluded marshalling, although his Lordship did doubt the signifi-
cance of the division in the Supreme Court’s reasoning outside the immediate context of cases
like Szepietowski, given that ‘the concept of a charge without an underlying personal debt seems
sufficiently unusual’ so as not to be of wide application. Lord Hughes (at [107]–[108]) agreed.
Lord Carnwath justified (at [103]) the irrelevance of an underlying debt by looking at matters
from the chargor’s perspective and enquiring ‘whether [marshalling] is within the scope of the
risk which the charger has undertaken at the time the charges were granted’.
31
National Crime Agency (formerly Serious Organised Crime Agency v Szepietowski) [2014] AC
338, [31]. See also Highbury Pension Fund Management Co v Zirfin Investments Ltd [2013]
EWCA Civ 1283, [1].
32
In re Bank of Credit & Commerce International SA (No 8) [1998] AC 214, 230–231; National
Crime Agency (formerly Serious Organised Crime Agency) v Szepietowski [2014] AC 338,
[40]–[56], [65], [79], [85]–[86]. A mere unsecured creditor has no right to marshal: see In re
International Life Assurance Society (1876) 2 Ch D 476, 482–483.
33
National Crime Agency (formerly Serious Organised Crime Agency) v Szepietowski [2014] AC
338, [58]–[59]. Lord Neuberger (at [58]) found it hard to conceive of what such ‘an exceptional
case’ might be ‘absent express words which permit or envisage marshalling’.
34
Where the creditors do not have a common debtor or where the property sought to be
marshalled belongs to different persons, the doctrine is inapplicable: see The Chioggia [1898] P
1, 5–6.
35
Marshalling is not available where a senior secured creditor can only assert a personal claim
against other property, such as a right of set off or a right of combination in respect of accounts:
see Webb v Smith (1885) 30 Ch D 192, 198–203. The position is a fortiori when the senior
creditor’s only alternative course of action is to bring a personal claim against a particular
defendant. There is, however, a ‘surety exception’ or an ‘extended’ marshalling principle that
applies where one only of the creditors may have recourse against a third-party guarantor: see
Ex p Kendall (1811) 17 Ves 514, 527; In re Stratton (1884) LR 25 Ch D 148, 152–153;
Highbury Pension Fund Management Co v Zirfin Investments Ltd [2013] EWCA Civ 1283,
[2]–[4], [15]–[17].
36
Aldrich v Cooper (1803) 8 Ves 382, 389, 395; Trimmer v Bayne (1903) 9 Ves 209, 211;
Highbury Pension Fund Management Co v Zirfin Investments Ltd [2013] EWCA Civ 1283,
[18].

43
11.22 Tiers of Lending
37
National Crime Agency (formerly Serious Organised Crime Agency) v Szepietowski [2014] AC
338, [38], applying In re Holland (1928) 28 SR (NSW) 369; Miles v Official Receiver in
Bankruptcy (1963) 109 CLR 501.
38
National Crime Agency (formerly Serious Organised Crime Agency) v Szepietowski [2014] AC
338, [75]. Lord Neuberger (at [75]) appears to accept the possibility that estoppel principles
might operate to negate any right to marshal securities.
39
In National Crime Agency (formerly Serious Organised Crime Agency) v Szepietowski
[2014] AC 338, [61]–[63], [68]–[72], Lord Neuberger held that, in determining whether it is
equitable or not to marshal securities in a particular case, the starting point must be the terms
of the second-ranking security at the time of its creation, although a court can also have regards
to ‘what passed between the parties prior to its execution’ and ‘relevant subsequent develop-
ments’.
40
In Highbury Pension Fund Management Co v Zirfin Investments Ltd [2013] EWCA Civ 1283,
[18], [20]–[21], Lewison LJ considered that the ability to marshal could be excluded by a
contract between the senior and junior creditors, but not between the senior creditor and a
guarantor of the debtor’s liability.
41
See generally Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1
WLR 896; Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101; Re Sigma Fi-
nance Corporation [2010] 1 All ER 571; Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900;
Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2012] 1 AC 383.
42
National Crime Agency (formerly Serious Organised Crime Agency) v Szepietowski [2014] AC
338, [61]–[62], [88]–[92], [107].
43
The argument that there should be some ‘home exception’ to the marshalling doctrine was
based upon a combination of the Administration of Justice Act 1970, s 36 and Human Rights
Act 1998, Sch 1, Art 8: see National Crime Agency (formerly Serious Organised Crime Agency)
v Szepietowski [2014] AC 338, [75].
44
National Crime Agency (formerly Serious Organised Crime Agency) v Szepietowski [2014] AC
338, [73]–[77].
45
Dolphin v Aylward (1869–1870) LR 4 HL 486, 501–503.
46
Flint v Howard [1893] 2 Ch 54, 72. See also Barnes v Racster (1842) 1 Y&C Ch 401, 409–410;
Bugden v Bignold (1843) 2 Y&C Ch 377, 398. In Gibson v Seagrim (1885) 20 Beav 614, 619,
Lord Romilly stated: ‘ . . . if two estates are mortgaged to A, and one is afterwards mortgaged
to B and the remaining estate is afterwards mortgaged to C, B has no equity to throw the whole
of A’s mortgage on C’s estate, and so destroy C’s security. As between B and C, A is bound to
satisfy himself the principal, interest and costs due to him out of the two estates rateably,
according to the respective values of such two estates, and thus to leave the surplus proceeds of
each estate to be applied in payment of the respective incumbrances thereon’.
47
Flint v Howard [1893] 2 Ch 54, 73.
48
Flint v Howard [1893] 2 Ch 54, 73.

(b) Senior creditor’s duties to junior creditors

11.23 Whilst a secured creditor is generally free to manage and enforce its
security however it wishes1, a secured creditor may sometimes come under
extremely limited duties to its borrower and any junior encumbrancers2.
Otherwise, if either of these parties wishes to achieve an enhanced level of
protection against the senior creditor, they must bargain for it3. The present
discussion is not concerned with the potential duties owed to the borrower
(although much of the discussion will be equally applicable to that scenario, as
the senior lender’s duties considered below are owed to anyone interested in the
remaining equity in the secured assets, whether the borrower or a subsequent
encumbrancer)4. The present focus is the inter-creditor position. Moreover, the
sole concern is the duties owed by the senior creditor itself, rather than the
wider duties5 owed by a receiver whom might be appointed by a senior creditor,
as these are considered elsewhere6.

44
 Minority and Junior Creditor Protection 11.23

In considering this question, it is not generally relevant what form the particular
security takes, as for these purposes ‘there is no material difference between a
mortgage, a charge and a debenture’7. Whatever the form of security, in
Downsview Nominees Ltd v First City Corporation Ltd, Lord Templeman
rejected as ‘untenable’ the suggestion that a senior secured creditor owes no
duties to a junior secured creditor over the same property8. Whilst rejecting the
existence of a general common law duty upon senior creditors to exercise
reasonable care not to prejudice junior creditors when exercising their rights9,
Lord Templeman did accept that, when a secured creditor exercises its powers
in that capacity, an equitable duty arises to exercise those powers ‘in good faith
for the purpose of obtaining repayment’10. In this regard, the senior creditor is
not required to demonstrate a ‘purity of purpose’, but need only show that one
of the purposes behind it exercising its powers ‘is a genuine purpose of
recovering, in whole or in part, the amount secured by the mortgage’ or ‘of
protecting [its] security’11. Where the senior creditor does not pursue either
purpose when exercising its power of sale, it will be liable even if not dishon-
est12. That said, a secured creditor is neither under any positive duty to enforce
its security in a timely fashion or to adopt any particular course when realising
its security13 – ‘[the senior creditor] is entitled to remain totally passive’14 – nor
under any duty to improve the secured assets or increase their value15. Accord-
ingly, a senior creditor need not act immediately upon the borrower’s default in
realising its security, but has ‘an unfettered discretion’16 to determine a suitable
time to enforce its rights solely by reference to its own interests17, even if this is
prejudicial to the junior security-holder18 or a better price might be achieved by
waiting to sell19, provided that in doing so the senior creditor acts in good
faith20. A senior creditor will act in breach of its duty of good faith if it abuses
its powers by exercising them ‘otherwise than for the special purpose of
enabling the assets comprised in the debenture holders’ security to be preserved
and realised for [its benefit]’21. For example, the senior creditor in Downsview
breached its duty of good faith by appointing a receiver, not for the purpose of
enforcing its security, but in order to prevent enforcement action by the junior
creditor22. In the event of such a breach, the senior creditor must account to the
junior creditor (and potentially also the borrower) for what it would have
received on their behalf, but for its default23.
1
China & South Sea Bank Ltd v Tan Soon Gin [1990] 1 AC 536, 545; Cheah Theam Swee v
Equiticorp Finance Group Ltd [1992] AC 472, 476.
2
Tomlin v Luce (1889) 43 Ch D 191; Downsview Nominees Ltd v First City Corporation Ltd
[1993] AC 295, 311.
3
Silven Properties Ltd v Royal Bank of Scotland plc [2004] 1 WLR 997, [18]; Saltri III Ltd v MD
Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [127(f)].
4
Silven Properties Ltd v Royal Bank of Scotland plc [2004] 1 WLR 997, [19]. For a discussion
of the mortgagee’s duties to the mortgagor, see para 17.67 below.
5
Silven Properties Ltd v Royal Bank of Scotland plc [2004] 1 WLR 997, [22]–[24]; O’Kane v
Rooney [2013] NIQB 114, [5]–[6]; Law Society of Northern Ireland v Bogue [2013] NICh 15,
[18].
6
See paras 17.68, 17.79, 20.38 below.
7
Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, 311. For the
application of the relevant principles to a ship mortgage, see Close Brothers Ltd v AIS (Marine)
2 Ltd [2018] EWHC B14 (Admlty), [12].
8
Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, 311; Silven Proper-
ties Ltd v Royal Bank of Scotland plc [2004] 1 WLR 997, [27]; Anton Durbeck GmbH v Den
Norske Bank ASA [2005] EWHC 2497, [61]; Alpstream AG v PK Airfinance Sarl [2013]
EWHC 2370 (Comm), [8], revsd on a different point [2015] EWCA Civ 1318. The mortgag-
ee’s duty similarly extends to other creditors of the mortgagor with an actual or contingent

45
11.23 Tiers of Lending

interest (such as a guarantor of the mortgagor’s debt) in the proceeds of the encumbered assets,
but not ‘to a party with whom the mortgagee has no contractual connection and who is not a
fellow incumbrancer’: see Anton Durbeck GmbH v Den Norske Bank ASA [2005] EWHC
2497, [61]; Airfinance Sarl v Alpstream AG [2015] EWCA Civ 1318, [115]–[148]. Similarly, a
receiver appointed by the senior secured creditor owes duties to the junior creditor with respect
to the exercise of the powers of sale and management conferred by the security: see Downsview
Nominees Ltd v First City Corporation Ltd [1993] AC 295, 312. Although the receiver will
normally act as the borrower’s agent by virtue of the security documents (see Silven Proper-
ties Ltd v Royal Bank of Scotland plc [2004] 1 WLR 997, [3]), appointing a receiver in the
knowledge that he will abuse his powers may amount to bad faith on the part of the senior
creditor: see Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, 317.
9
Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, 315; Edenwest Ltd v
CMS Cameron McKenna [2012] EWHC 1258 (Ch), [70]; Law Society of Northern Ireland v
Bogue [2013] NICh 15, [21]–[22]. Any general wider duty of care would run into the inevitable
difficulty that it would relate to the recovery of pure economic loss, which is nowadays generally
irrecoverable in the tort of negligence: see generally Caparo Industries plc v Dickman [1990]
2 AC 605; Murphy v Brentwood District Council [1991] 1 AC 398; Macfarlane v Tayside
Health Board [2000] 2 AC 59. Depending upon the circumstances, there may be a duty of care
between senior and junior creditors based upon a voluntary assumption of responsibility by the
former to the latter: see generally Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC
465; Customs & Excise Commissioners v Barclays Bank plc [2007] 1 AC 181.
10
Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, 312, 316, 317;
Yorkshire Bank plc v Hall [1999] 1 WLR 1713, 1728; Anton Durbeck GmbH v Den Norske
Bank ASA [2005] EWHC 2497, [61]; Law Society of Northern Ireland v Bogue [2013] NICh
15, [22].
11
Meretz Investments NV v ACP Ltd [2006] EWHC 74 (Ch) 197, 271–272; Saltri III Ltd v MD
Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [142]–[143]; Alpstream AG v PK
Airfinance Sarl [2013] EWHC 2370 (Comm), [81], revsd on a different point [2015] EWCA Civ
1318.
12
Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [143].
13
Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, 314.
14
Silven Properties Ltd v Royal Bank of Scotland plc [2004] 1 WLR 997, [13]–[14], [20], [23]. See
also Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949, 969; Raja v Austin Gray
[2003] 1 EGLR 91, [59]; Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025
(Comm), [127(a)]; Airfinance Sarl v Alpstream AG [2015] EWCA Civ 1318, [198].
15
Silven Properties Ltd v Royal Bank of Scotland plc [2004] 1 WLR 997, [16]–[17], [20], [28];
Law Society of Northern Ireland v Bogue [2013] NICh 15, [18]. The senior creditor is,
however, under a duty to preserve the value of the charged assets: see McHugh v Union Bank
of Canada [1913] AC 299, 312.
16
Silven Properties Ltd v Royal Bank of Scotland plc [2004] 1 WLR 997, [14]. See also Den
Norske Bank ASA v Acemex Management Co Ltd [2003] EWCA Civ 1559, [25]; Anton
Durbeck GmbH v Den Norske Bank ASA [2005] EWHC 2497, [61]; Saltri III Ltd v MD
Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [127(b)]; Airfinance Sarl v Alpstream AG
[2015] EWCA Civ 1318, [198].
17
The principal reason why the senior lender is entitled to act in its own best interests results from
the fact that it ‘is not a trustee of the power of sale for the mortgagor’ (or presumably for any
junior creditor): see Nash v Eads (1880) 25 Sol Jo 95; Farrar v Farrars Ltd (1888) 40 Ch D 395,
410–411; Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [123(g)–
(h)], [124], [127(b)–(c)].
18
China and South Sea Bank Ltd v Tan Soon Gin [1990] 1 AC 536; Den Norske Bank ASA v
Acemex Management Co Ltd [2003] EWCA Civ 1559, [24]; Saltri III Ltd v MD Mezzanine SA
SICAR [2012] EWHC 3025 (Comm), [123(g)], [127(d)].
19
Standard Chartered Bank v Walker [1982] 1 WLR 1410, 1418; Tse Kwong Lam v Wong Chit
Sen [1983] 1 WLR 1349, 1355; Meftah v Lloyds TSB Bank plc (No 2) [2001] 2 All ER Comm
741, [9]; Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [127(e)].
Although it has been suggested that a senior creditor cannot ignore the fact that a short delay in
enforcement might result in a higher level of recovery (see Standard Chartered Bank v Walker
[1982] 1 WLR 1410, 1415–1416; Meftah v Lloyds TSB Bank (No 2) [2001] 2 All ER Comm
741, [9]), this view has since been repudiated: see Silven Properties Ltd v Royal Bank of
Scotland plc [2004] 1 WLR 997, [15].
20
Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, 312–313. See also In
re B Johnson & Co (Builders) Ltd [1955] Ch 634, 661–663.

46
 Minority and Junior Creditor Protection 11.24
21
Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, 314.
22
Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, 314, 317. Lord
Templeman considered (at 318) that the senior creditor would have complied with its equitable
duty to act in good faith by accepting the junior creditor’s offer to take an assignment of the
senior creditor’s rights against the debtor.
23
Silven Properties Ltd v Royal Bank of Scotland plc [2004] 1 WLR 997, [27]. In Law Society of
Northern Ireland v Bogue [2013] NICh 15, [21], it was held that ‘if there was [a breach of good
faith] damages would be approached on the same basis as if it was a breach of duty of care’.

11.24 Beyond this general duty to act in good faith, Lord Templeman in
Downsview recognised that there are certain additional narrower duties that
the senior creditor may owe to the junior creditor in certain specific circum-
stances1. Accordingly, if the senior creditor ‘enters into possession he is liable to
account for rent on the basis of wilful default; he must keep mortgage premises
in repair; he is liable for waste’2. This is tantamount to a duty on the mortgagee
in possession ‘to take reasonable care of the property secured’, which requires
the mortgagee to be ‘active in protecting and exploiting the security, maximis-
ing the return, but without taking undue risks’3. Further, if the senior creditor
exercises a power to sell the charged assets, it has a specific duty ‘to behave as
a reasonable man would behave in the realisation of his own property’4 and to
take reasonable precautions to obtain the ‘proper price’5 (or ‘fair price’6, ‘true
market value’7 or ‘best price reasonably obtainable’8) at the date of sale9. To
achieve this, the senior creditor must usually take steps to expose the property
to the market in a fair and proper manner10, will usually take valuation advice
from a duly qualified agent11 and may choose to sell the property by private
treaty or public auction12.
As regards the precise mechanics of the marketing and sale processes, the senior
creditor is given a margin of appreciation13. What the senior creditor may not
do, however, is simply sell the charged assets hastily, at a knock-down price
sufficient to pay off its debt14. As the situation where the senior creditor
purchases the charged assets itself is potentially equally problematic15, the
burden of proof is reversed16 so that it falls to the senior creditor to discharge the
‘heavy onus’ of showing that it ‘used its best endeavours to obtain the best price
reasonably obtainable for its mortgaged property’17. The same is true where a
senior creditor sells to an affiliate or associated party18. Given the patent conflict
of interest that exists in ‘self-sales’, the senior creditor must demonstrate that
the desire to obtain the best price for the secured assets was given ‘absolute
preference’ over any desire to obtain a good bargain for itself19, although, in the
context of related-party sales, the courts have not gone as far as imposing an
absolute obligation on the mortgagee to take and act upon independent expert
advice, with respect to such matters as the method adopted for selling the
secured property and the steps that must be taken to ensure the sale is
successful20. Like the duty to act in good faith, the senior creditor’s duties when
exercising a power of sale are equitable in nature and origin, rather than based
upon the common law. Those duties are not actionable without proof of
damage21, but (where such damage can be demonstrated) the junior credi-
tor’s remedy is to require the senior creditor to account not only for what the
latter actually did receive from the sale, but also what it ought to have received
if the sale had been conducted in accordance with its duty22.
1
Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, 315. Although it may
not be possible to exclude these duties entirely, the senior creditor may be able to limit its
liability to ‘wilful misconduct’: see Alpstream AG v PK Airfinance Sarl [2013] EWHC 2370

47
11.24 Tiers of Lending

(Comm), [7], [92]–[100], revsd on a different point [2015] EWCA Civ 1318. In the context of
enforcement by a security trustee/agent, its duties ‘[fall] to be considered against the contractual
structure’ of the inter-creditor agreement: see Saltri III Ltd v MD Mezzanine SA SICAR [2012]
EWHC 3025 (Comm), [127].
2
Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, 315.
3
Silven Properties Ltd v Royal Bank of Scotland plc [2004] 1 WLR 997, [13]. See also Palk v
Mortgage Services Funding plc [1993] Ch 330, 338. For detailed discussion of the duties of the
mortgagee in possession, see para 17.67 below.
4
McHugh v Union Bank of Canada [1913] AC 299, 311 See also R Hooley, ‘Release Provisions
in Inter-creditor Agreements’ [2012] JBL 213, 228–232.
5
Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, 315; Yorkshire
Bank plc v Hall [1999] 1 WLR 1713, 1728.
6
Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [127(g)].
7
Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949, 966.
8
Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349, 1355; Michael v Miller [2004] 2 EGLR
151, [131]; Bell v Long [2008] EWHC 1273 (Ch), [14]; Edenwest Ltd v CMS Cameron
McKenna [2012] EWHC 1258 (Ch), [71]; Saltri III Ltd v MD Mezzanine SA SICAR [2012]
EWHC 3025 (Comm), [128(a)].
9
Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949. See also Meftah v Lloyds TSB
Bank plc (No 2) [2001] 2 All ER Comm 741, [9]; Michael v Miller [2004] 2 EGLR 151, [131];
Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [124]; Alpstream AG
v PK Airfinance Sarl [2013] EWHC 2370 (Comm), [71], revsd on a different point [2015]
EWCA Civ 1318.
10
Predeth v Castle Phillips Finance Company Ltd [1986] 2 EGLR 144, 148; Silven Properties Ltd
v Royal Bank of Scotland plc [2004] 1 WLR 997, [19]. There is no absolute duty to advertise
the property widely, but what is appropriate in terms of exposure to the market depends upon
the facts of the particular case: see Michael v Miller [2004] 2 EGLR 151, [132].
11
Michael v Miller [2004] 2 EGLR 151, [134]; Airfinance Sarl v Alpstream AG [2015] EWCA Civ
1318, [199].
12
Michael v Miller [2004] 2 EGLR 151, [132]–[133]; Saltri III Ltd v MD Mezzanine SA SICAR
[2012] EWHC 3025 (Comm), [128(b)].
13
Meftah v Lloyds TSB Bank (No 2) [2001] 2 All ER Comm 741, [9]; Michael v Miller
[2004] 2 EGLR 151, [132], [135], [138]. See also Cuckmere Brick Co Ltd v Mutual Finance Ltd
[1971] Ch 949, 968; Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295,
315; Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [128(c)–(e)];
Alpstream AG v PK Airfinance Sarl [2013] EWHC 2370 (Comm), [80], revsd on a different
point [2015] EWCA Civ 1318.
14
Palk v Mortgage Services Funding plc [1993] Ch 330, 337–338; Airfinance Sarl v Alpstream AG
[2015] EWCA Civ 1318, [211].
15
At one time a sale by a mortgagee to itself was considered void, but this view may now have been
replaced by the extra safeguards that developed around ‘self-sales’ by mortgagees: see Alp-
stream AG v PK Airfinance Sarl [2013] EWHC 2370 (Comm), [91], affd on this point [2015]
EWCA Civ 1318, [211]–[221]. See also Royal Bank of Scotland plc v Highland Financial
Partners LP [2010] EWHC 3119 (Comm).
16
Alpstream AG v PK Airfinance Sarl [2013] EWHC 2370 (Comm), [71], affd on this point
[2015] EWCA Civ 1318, [82], [260]–[261].
17
Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349, 1355. See also Farrar v Farrars Ltd
(1888) 40 Ch D 395; Australia & New Zealand Banking v Bangadilly (1978) 139 CLR 195,
201; Airfinance Sarl v Alpstream AG [2015] EWCA Civ 1318, [213].
18
Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [132]–[133]. See also
Bradford & Bingley v Ross [2005] EWCA Civ 394, [20]–[21].
19
Airfinance Sarl v Alpstream AG [2015] EWCA Civ 1318, [221]. See also Australia & New
Zealand Banking v Bangadilly (1978) 139 CLR 195, 201: ‘ . . . when there is a possible
conflict between that desire [to sell at the highest price possible] 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’ (emphasis added).
20
Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [135]–[138], [150].
See also Medforth v Blake [2000] Ch 86, 102: ‘These duties are not inflexible. What a
mortgagee or receiver must do to discharge them depends on the particular facts of each case’.

48
 Minority and Junior Creditor Protection 11.25
21
Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [139]–[141], applying
Newport Farm Ltd v Damesh Holdings Ltd [2004] NZLR 721, [22]; Airfinance Sarl v
Alpstream AG [2015] EWCA Civ 1318, [149]–[161].
22
Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349, 1360; Silven Properties Ltd v Royal
Bank of Scotland plc [2004] 1 WLR 997, [19]; Alpstream AG v PK Airfinance Sarl [2013]
EWHC 2370 (Comm), [83], [88], revsd on a different point [2015] EWCA Civ 1318. For
detailed discussion of the lender’s duties when exercising a power of sale, see 17.72–17.75
below.

(c) ‘Tacking’ of further advances

11.25 Just as a senior creditor can prejudice the rights of a junior creditor with
security over the same asset by the manner in which it realises its security1, so it
could potentially affect the junior creditor’s position by the making of further
advances to the borrower in the ordinary course of business. If a senior secured
creditor were able to ‘tack’ those further advances onto its original loan, with
the result that the further advances and the original loan alike would be secured
by its first-ranking security, this would have the effect of eroding any equity in
the secured assets that might otherwise have been available to satisfy the claims
of any junior encumbrancers upon those assets. Whilst the junior creditor might
secure the senior creditor’s agreement to not making further advances or to
subordinating any such advances, this will not always be possible. The junior
secured creditor will then be largely powerless to prevent itself being ‘squeezed
out’ of its security in this way.
The potential iniquity to the junior creditor is heightened further if the senior
creditor has notice of the junior creditor’s security when making those further
advances, especially as it would always be open to the senior creditor to enquire
as to the state of account between the mortgagor and junior security holder2 and
to decide on that basis whether or not to make the further advances3.
Allowing ‘tacking’ of further advances could also potentially create unfairness
for the borrower, since it may discourage other entities from lending to the
borrower with the result that the senior secured creditor effectively acquires a
monopoly over the borrower’s financing4. In practical terms, this would be
tantamount to a clog or fetter on the mortgagor’s ability to encumber its equity
of redemption5.
On the other hand, it might be argued that a junior secured creditor (at least one
with notice of the existence of a prior security interest, even if not of its terms)6
should be alert to the possibility of the senior creditor making further advances
and accordingly should be treated as assuming the risk of losing priority by
‘tacking’. Moreover, there is a reasonably compelling argument that denying
the ability to ‘tack’ creates unfairness for the senior secured creditor, at least
where that creditor is under an obligation to make further advances7 – the
senior creditor will then have to choose between the Scylla of breaching the loan
agreement with the borrower and the Charybdis of losing priority to junior
encumbrancers with respect to further advances. This position is arguably a
fortiori when the junior creditor has notice of the senior creditor’s obligation to
make further advances8. In practice, however, it is likely that a suitably worded
negative pledge clause in the senior creditor’s loan agreement and security
instrument might provide a degree of protection, since the granting of the junior
security would itself probably amount to an event of default giving the senior

49
11.25 Tiers of Lending

creditor the option to terminate its obligation to make further advances9 and
allowing the creditor to enforce its security or renegotiate improved terms with
the borrower. Clearly, if the senior creditor chooses to affirm the lending
arrangement, then it remains obliged to make the further advances10.
Given the difficulty of balancing the competing interests of the borrower, senior
security-holder and junior security-holder, it is no surprise that the position
with respect to ‘tacking’ and the priority of further advances has become so
confused. At first, the common law prioritised the interests of the first-ranked
secured creditor by adopting a strict rule, whereby further advances could
always be tacked onto the senior creditor’s security. This view was originally
attributed11 to Lord Chancellor Cowper in Gordon v Graham12, the full report
of which states13:
‘A mortgage to B for a term of years, to secure the sum of £ [ ] already lent to the
mortgagor, as also such other sums as should hereafter be lent or advanced to him.
Afterwards A makes a second mortgage to C for a certain sum, with notice of the first
mortgage, and then the first mortgagee, having notice of the second mortgage, lends
a farther sum. The question was, on what terms the second mortgagee shall redeem
the first mortgage. Per Cowper C. The second mortgagee shall not redeem the first
mortgage without paying all that is due, as well the money lent after, as that lent
before the second mortgage was made; for it was the folly of the second mortgagee,
with notice, to take such security. But upon the importunity of counsel, it was ordered
that the Master should report what money was lent by the first mortgagee after he had
notice of the second mortgage.’
The potential iniquity created by Gordon of allowing a first mortgagee with
notice of the second mortgage to ‘tack’ future advances because of the second
mortgagee’s perceived ‘folly’ was subsequently addressed by the House of Lords
in Hopkinson v Rolt14, which concerned a second mortgage over the borrow-
er’s land to secure his current account borrowings up to £20,000, albeit that
that mortgage was only redeemable upon the borrower paying ‘all monies’
owed to the second mortgagee. Although the second mortgage covered both
present and future advances15, the second mortgagee was under no obligation to
make them16. The mortgagor then granted over the same premises a third
mortgage, which recited the two earlier mortgages and similarly covered
present and future advances17. Both the second and third mortgagees had notice
of each other’s security18. The second mortgagee made a further advance of
£8,000 on the current account, which was then closed. Despite a request from
the third mortgagee that the second mortgagee not make any further advances
to the borrower, the second mortgagee advanced a further £7,500 and the
borrower executed a further mortgage in favour of the second mortgagee
securing that sum and any further sums advanced. When the borrower became
bankrupt, the mortgaged properties were insufficient to satisfy the mortgagees’
claims. The issue before the House of Lords was whether ‘the prior mortgagee
[is] entitled to priority for these [further] advances over the antecedent advance
made by the subsequent mortgagee’19.
Lords Campbell and Chelmsford (with Lord Cranworth dissenting) explained
the earlier Gordon decision as turning upon the first mortgagee’s lack of notice
of the second mortgage20 and held that, to the extent the first mortgagee did
have notice of the junior security, that decision should be overruled21. With
Gordon out of the way, the majority adopted what has since become known as
the ‘rule in Hopkinson v Rolt’ or the ‘rule against tacking’22, namely that a first

50
 Minority and Junior Creditor Protection 11.25

mortgagee making further advances to the mortgagor can no longer ‘tack’ those
further sums onto the first mortgage in order to maintain their priority against
a second (or subsequent) mortgagee, if the first mortgagee had notice of the
subsequent encumbrance(s)23. Nor, as the facts of Hopkinson demonstrate,
does it matter to the application of the rule against tacking that the prior-
ranking security contained a limit upon the amount of further advances that
might be made by the senior secured creditor24. By way of exception to the
rule against tacking, however, a first mortgagee may retain its priority with
respect to further advances if it is a party to an agreement with the borrower and
the second mortgagee to that effect25, or if the subsequent encumbrance
specifically states that it takes subject to any further advances made by the
senior encumbrancer26.
According to the majority in Hopkinson, the practical justifications for the loss
of priority for the senior creditor’s further advances, once it has notice of the
junior creditor’s security, are twofold: first, the rule against tacking respects the
mortgagor’s freedom to deal with the equity of redemption by granting security
to further mortgagees, to whom the mortgagor can then look for further
advances27, since otherwise lenders might be discouraged from lending to a
mortgagor who had already granted a mortgage by the risk of losing priority to
that first mortgagee28 (or, in the words of Lord Chelmsford, ‘a perpetual curb is
imposed on the mortgagor’s right to encumber his equity of redemption’29);
and, secondly, the rule against tacking encourages any senior creditor to carry
out checks concerning the extent of the mortgagor’s borrowings before exercis-
ing its option whether or not to make further advances that might risk losing
priority to existing subsequent encumbrancers30. Indeed, as to the second
justification, Lord Chelmsford made clear31 that the first mortgagee in Hopkin-
son itself was at liberty to make further advances, but was not obliged to do so.
The implication from Hopkinson was that it might be unfair to the senior
creditor to prohibit further advances from being ‘tacked’ onto a first-ranking
security where the senior creditor was obliged to make them32. Doubt was,
however, subsequently cast upon this suggestion in West v Williams33, where
Lindley MR applied the rule against tacking to advances made by a first
mortgagee who was under an obligation to make those advances34. His Lord-
ship justified this view on the ground that the first mortgagee would be released
from its obligation to make further advances when the mortgagor granted the
second mortgage35. Similarly, Chitty LJ agreed as to the application of the
rule in Hopkinson v Rolt to the further advances in West36, adding that, where
the mortgagor grants a second mortgage over property, the first mortgagee is
not liable for damages or subject to an order for specific performance for
refusing to make further advances37.
Whilst this might address the legal difficulties that might otherwise be faced by
a senior creditor who is obliged to make further advances, it does not take
account of the reputational damage that such a creditor may suffer by refusing
further advances that it has undertaken to make. Indeed, as demonstrated by
Deeley v Lloyds Bank Ltd38, particularly harsh treatment is meted out to a
senior creditor who takes security in respect of an overdraft or revolving loan
facility in the knowledge that there exists one or more junior encumbrancers
over the secured assets: on the one hand, the rule in Hopkinson v Rolt39 will
prevent any further withdrawals from the overdrawn account securing priority
over the lower-ranking securities and, on the other hand, the operation of the

51
11.25 Tiers of Lending

rule in Clayton’s Case40 results in payments into the account discharging the
earlier withdrawals first, with the result that the senior secured creditor might
lose its priority over any amounts outstanding on the current account simply by
virtue of allowing the borrower to operate that account. Arguments against
Hopkinson v Rolt41, based upon its ‘harshness in operation as against bank-
ers’42 have, however, received short shrift in this context43.
Whilst the House of Lords in Hopkinson was able to suggest practical reasons
for favouring the junior secured creditor’s interests over those of the senior
secured creditor when it comes to the priority of any further advances made on
notice, it is only really later courts that have attempted to provide a conceptual
or theoretical justification for the rule against tacking. Two theories have
dominated the discourse. The first theoretical justification is based upon the
nemo dat principle, in the sense that, once the mortgagor has created a
second-ranking security over the equity of redemption, he no longer has the
power to give any further subsequent right over the property (whether to the
first-ranking security-holder or some other third party) that takes priority over
the second-ranking security. As Lord Lindley MR stated in West v Williams44:
‘ . . . the principle which underlies the rule established in Hopkinson v Rolt is
simply this, that an owner of property, dealing honestly with it, cannot confer upon
another a greater interest in that property than he himself has. . . . When a man
mortgages his property he is still free to deal with his equity of redemption in it, or in
other words, with the property itself subject to the mortgage. If he creates a second
mortgage he cannot afterwards honestly suppress it, and create another mortgage
subject only to the first.’
According to his Lordship, as the first mortgagee in that case knew about the
second mortgage, ‘any one who knows of the second mortgage [cannot] obtain
from the mortgagor a greater right to override it than the mortgagor himself
has’. Chitty LJ in West agreed with this45. Whilst the nemo dat theory and the
limitation based upon notice will satisfactorily explain many cases concerning
the priority of further advances under a first-ranking security vis-à-vis a
second-ranking security (including the paradigm situation of a competing first
legal mortgage and a second equitable mortgage as in Hopkinson and West)46,
such a theory might have difficulty explaining the application of the rule against
tacking in circumstances where the security is a floating charge, since the
chargor will have an implied authority to create in the ordinary course of
business other security over the charged assets (whether by way of mortgage or
charge)47, which can acquire priority over the prior floating charge even if the
subsequent encumbrancer has notice of that floating charge’s existence48.
1
See 11.23–11.24 above.
2
Naxatu Pty Ltd v Perpetual Trustee Company Ltd [2012] FCAFC 163, [101].
3
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514, 553. See also Naxatu Pty Ltd v Perpetual
Trustee Company Ltd [2012] FCAFC 163, [143].
4
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514, 553. See also Naxatu Pty Ltd v Perpetual
Trustee Company Ltd [2012] FCAFC 163, [148]: (‘A mortgagor should not be captive to a first
mortgagee who may or may not make further advances.’); Urban Ventures Ltd v Thomas
[2016] EWCA Civ 30, [1]. See further L Gullifer, Goode on Legal Problems of Credit and
Security (Sweet & Maxwell, 6th edn, 2017), [5–10], [5–24]; H Beale, M Bridge, L Gullifer & E
Lomnicka, The Law of Security and Title-based Financing (Oxford University Press, 3rd edn,
2018), [14.86].
5
Naxatu Pty Ltd v Perpetual Trustee Company Ltd [2012] FCAFC 163, [148]. The courts have
traditionally been protective of the mortgagor’s ability to deal with the equity of redemption:

52
 Minority and Junior Creditor Protection 11.25

see, for example, Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd [2013]
UKPC 20, [15]–[20].
6
A junior creditor could reasonably be expected to assume that the first-ranking security might
secure ‘all monies’ and that there might be the possibility of further advances being made.
7
J Porteous & L Shackleton, ‘A Question of Great Importance to Bankers, and to Mercantile
Interests of the Country’ (2012) 7 JIBFL 403, 405–406.
8
H Beale, M Bridge, L Gullifer & E Lomnicka, The Law of Security and Title-based Financing
(Oxford University Press, 3rd edn, 2018), [14.87].
9
L Gullifer, Goode on Legal Problems of Credit and Security (Sweet & Maxwell, 6th edn, 2017),
[5–10]. A negative pledge clause must now be included in the statement of particulars relating
to a charge that must be registered: see Companies Act 2006, s 859D(2)(c). Other techniques
that the senior creditor might adopt is noting a restriction upon the creation of further security
on the land register so that no junior security will be registered without the prior encumbranc-
er’s consent: see J Porteous & L Shackleton, ‘A Question of Great Importance to Bankers, and
to Mercantile Interests of the Country’ (2012) 7 JIBFL 403, 406.
10
H Beale, M Bridge, L Gullifer & E Lomnicka, The Law of Security and Title-based Financing
(Oxford University Press, 3rd edn, 2018), [14.96].
11
Given the brevity and inconsistency of the reporting of the Gordon decision, there have long
been doubts expressed as to its true ratio: see Blunden v Desart (1842) 2 Dru & War 405, 431;
Shaw v Neale (1858) 6 HL Cas 581, 597; Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514,
524–533, 536, 540–541, 549–553; Campbell’s Judicial Factor v National Bank of Scotland
1944 SC 495, 498.
12
Gordon v Graham (1716) 2 Eq Cas Abr 598, p 16; 7 Vin Abr 52, pl 3. See also Johnson v
Bourne (1843) 2 You & Col Ch Cas 268. In Hopkinson v Rolt (1861) 11 HL Cases (Clark’s)
514, 548, Lord Cranworth, in a dissenting minority judgment, supported the principle
established in Gordon and applied it to the facts of Hopkinson.
13
As there are two conflicting reports of the decision, despite being written by the same reporter,
the text has set out the slightly longer report to be found in 7 Vin Abr 52, pl 3.
14
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514.
15
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514, 523.
16
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514, 553.
17
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514, 523.
18
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514, 523–524.
19
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514, 524.
20
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514, 533. Lord Cranworth expressed the view
that the first mortgagee must have had notice, otherwise Gordon would be an entirely
unremarkable case with no real issue for the court to decide: see Hopkinson v Rolt (1861) 11
HL Cases (Clark’s) 514, 541–542.
21
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514, 536.
22
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514, 533–535, 538–539. See also Burgess v
Eve (1871–1872) LR 13 Eq 450, 459–460; Dawson v Bank of Whitehaven (1877) 4 Ch D 639,
649–650, 726–729, 738; The London and County Banking Company Ltd v Ratcliffe (1881) 6
App Cas 722, 726–728, 738; The Bradford Banking Co Ltd v Henry Biggs, Son & Co (1886)
12 App Cas 29, 35–37, 39–40; Union Bank of Scotland Ltd v National Bank of Scotland (1886)
12 App Cas 53, 95–96, 99–100; The Government of Newfoundland v The Newfoundland
Railway Company (1888) 13 App Cas 199, 212; Hughes v Britannia Permanent Benefit
Building Society [1906] 2 Ch 607, 613–614; Deeley v Lloyds Bank Ltd [1912] AC 756, 774,
780–782, 784–785; Re Morris [1922] 1 Ch 126, 137; Naxatu Pty Ltd v Perpetual
Trustee Company Ltd [2012] FCAFC 163, [142]–[144]. In Naxatu Pty Ltd v Perpetual
Trustee Company Ltd [2012] FCAFC 163, [140], [146]–[147], Jagot J explained Hopkinson as
being about priority between competing advances made by a first and second mortgagee.
23
The requisite notice on the part of the first mortgagee must relate to the existence of the junior
encumbrance rather than to any advances made pursuant to that security: see Hopkinson v Rolt
(1861) 11 HL Cases (Clark’s) 514, 523–524, 539; West v Williams [1899] 1 Ch 132, 142. See
also Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293; Commonwealth Bank of Australia
v Grubic (Unreported, 27 August 1993, Debelle, Cox & Duggan JJ); Naxatu Pty Ltd v
Perpetual Trustee Company Ltd [2012] FCAFC 163, [96]–[101]. Although the position is
unclear, it would be preferable to limit the concept of notice for the purposes of the rule in
Hopkinson v Rolt to actual (rather than constructive) notice of the second mortgage: see H
Beale, M Bridge, L Gullifer & E Lomnicka, The Law of Security and Title-based Financing
(Oxford University Press, 3rd edn, 2018), [14.90]–[14.92].
24
Menzies v Lightfoot (1870–1871) LR 11 Eq 459, 464–466.

53
11.25 Tiers of Lending
25
Although the House of Lords divided in Hopkinson as to the impact upon the first mortgag-
ee’s further advances of its having notice of subsequent encumbrancers, their Lordships were
unanimous that the prima facie position could be altered by agreement between the parties: see
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514, 536, 539, 544–545, 554. See also Menzies
v Lightfoot (1870–1871) LR 11 Eq 459, 466–467; Naxatu Pty Ltd v Perpetual Trustee Com-
pany Ltd [2012] FCAFC 163, [93], [112], [165]. Alternatively, an estoppel might operate to
prevent the junior creditor disputing the senior creditor’s priority in respect of further advances:
see Deeley v Lloyds Bank Ltd [1912] AC 756, 776. A court will be slow to displace the
rule against tacking on the basis of an alleged custom operating between the senior and junior
security-holders: see Daun v City of London Brewery Company (1869) LR 8 Eq 155, 160–162;
Menzies v Lightfoot (1870–1871) LR 11 Eq 459, 467–469.
26
Menzies v Lightfoot (1870–1871) LR 11 Eq 459, 465–466, 468–469. A provision to this effect
will not be implied from the mere fact that first- and second-ranking securities are created on the
same day: see Menzies v Lightfoot (1870–1871) LR 11 Eq 459, 466.
27
H Beale, M Bridge, L Gullifer & E Lomnicka, The Law of Security and Title-based Financing
(Oxford University Press, 3rd edn, 2018), [14.86], [14.88].
28
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514, 534–535, 553.
29
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514, 553. See also Menzies v Lightfoot
(1870–1871) LR 11 Eq 459, 466.
30
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514, 534–535, 553. See also Naxatu Pty Ltd
v Perpetual Trustee Company Ltd [2012] FCAFC 163, [143].
31
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514, 553.
32
For a similar view, see The Bradford Banking Co Ltd v Henry Biggs, Son & Co (1886) 12 App
Cas 29, 37. See also Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293. Whilst it would be
relatively straightforward to apply this limitation in the case of a term loan, which will usually
make clear whether or not there is an obligation to make further advances, it is not so clear
whether the making of further advances pursuant to an overdraft facility would constitute the
making of such advances pursuant to an obligation to do so: see H Beale, M Bridge, L Gullifer
& E Lomnicka, The Law of Security and Title-based Financing (Oxford University Press, 3rd
edn, 2018), [14.96].
33
West v Williams [1899] 1 Ch 132, 142–144.
34
This decision has been criticised as ‘undermin[ing] the rationale of Hopkinson, which was that
the first mortgagee could decline to make further advances once it had notice of the second
mortgage’: see L Gullifer, Goode on Legal Problems of Credit and Security (Sweet & Maxwell,
6th edn, 2017), [5–10].
35
West v Williams [1899] 1 Ch 132, 143–144.
36
West v Williams [1899] 1 Ch 132, 146.
37
West v Williams [1899] 1 Ch 132, 146.
38
Deeley v Lloyds Bank Ltd [1912] AC 756, 769–774, 780–785.
39
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514.
40
Devaynes v Noble (1816) 1 Mer 572. See also H Beale, M Bridge, L Gullifer & E Lomnicka, The
Law of Security and Title-based Financing (Oxford University Press, 3rd edn, 2018), [14.101],
[14.105]–[14.107].
41
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514, 535.
42
Deeley v Lloyds Bank Ltd [1912] AC 756, 785–786. See also L Gullifer, Goode on Legal
Problems of Credit and Security (Sweet & Maxwell, 6th edn, 2017), [5–24].
43
These arguments have not fared well primarily because the rule in Hopkinson v Rolt can largely
be avoided by the senior secured creditor engaging in effective monitoring of the borrower and
as the impact of Clayton’s Case can be avoided by ‘ruling off’ the account or striking a balance
of what is already due on the current account: see L Gullifer, Goode on Legal Problems of
Credit and Security (Sweet & Maxwell, 6th edn, 2017), [5–20]; H Beale, M Bridge, L Gullifer
& E Lomnicka, The Law of Security and Title-based Financing (Oxford University Press, 3rd
edn, 2018), [14.96], [14.105]. See also R Coleman, ‘Further Advances under a Secured Loan:
Land Registration Act 2002 s 49’ [2014] Conv 430.
44
West v Williams [1899] 1 Ch 132, 143. See also Deeley v Lloyds Bank Ltd [1912] AC 756,
781–782; Naxatu Pty Ltd v Perpetual Trustee Company Ltd [2012] FCAFC 163, [91].
45
In West v Williams [1899] 1 Ch 132, 143, 146, Chitty LJ stated: ‘The principle on which these
decisions are founded appears to me to be, that a mortgagee cannot obtain a charge on property
which is no longer the mortgagor’s to charge, and which the mortgagee knows at the time when
he makes his further advance is no longer the property of the mortgagor.’
46
Notice does frequently play a role in the application of the nemo dat principle to competing
legal interests, since it is central to the bona fide purchaser defence, which determines the extent

54
 Minority and Junior Creditor Protection 11.26

to which subsequent legal interests may take priority over prior equitable interests: see Pitcher
v Rawlins (1872) LR 7 Ch App 259. See also L Gullifer, Goode on Legal Problems of Credit and
Security (Sweet & Maxwell, 6th edn, 2017), [5–05]–[5–09].
47
Re Hamilton’s Windsor Ironworks (1879) 12 Ch D 707, 711–714; Cox Moore v Peru-
vian Corporation Ltd [1908] 1 Ch 604, 611–614. See also L Gullifer, Goode on Legal Problems
of Credit and Security (Sweet & Maxwell, 6th edn, 2017), [5–42].
48
English & Scottish Mercantile Investment Co v Brunton [1892] 2 QB 700, 707–718; Re Castell
& Brown Ltd [1898] 1 Ch 315, 319–322. See also L Gullifer, Goode on Legal Problems of
Credit and Security (Sweet & Maxwell, 6th edn, 2017), [5–42]. The position would be different
if the subsequent security-holder had notice of some restriction upon the chargor’s ability to
deal with the charged assets, such as a negative pledge clause in an earlier charge: see para 11.2
above.

11.26 The second theoretical justification for the rule in Hopkinson v Rolt1,
which arguably has greater judicial support, is based upon notions of equity,
fair dealing and good faith between senior and junior creditors. In fact, the
‘equity theory’ has significant House of Lords’ support: Lord Blackburn, in The
Bradford Banking Co Ltd v Henry Biggs, Son & Co2, considered the
rule against tacking ‘to depend entirely on what I cannot but think a principle
of justice, that a mortgagee . . . cannot give that credit after he has notice
that the property has so far been parted with by the debtor’; Lord Halsbury, in
Union Bank of Scotland Ltd v National Bank of Scotland3, held that allowing
a first mortgagee priority in respect of further advances made with knowledge
of a junior encumbrancer ‘is contrary to good faith, and the decision of your
Lordships’ House in Hopkinson v Rolt establishes it upon the broadest grounds
of natural justice’ and Lord Watson in the same decision agreed that Hopkinson
‘does not rest upon any rule or practice of English conveyancing, but upon
principles of natural justice’4; and Lord Shaw, in Deeley v Lloyds Bank Ltd5,
stated that ‘if a second mortgage is granted and notice given to the first
mortgagee, it is contrary to good faith upon the part of the bank as first
mortgagee to make in its own favour encroachments upon that remanent estate
which would in effect enlarge the scope of the first mortgage and make it stand
as cover for fresh advances’. A similar theoretical approach has been approved
in Australia6.
Besides enjoying greater judicial support, the advantages of the ‘equity theory’
are twofold. First, that theory is capable of more general application than the
nemo dat theory and accordingly could be used to justify the application of the
rule against tacking to priority disputes between chargees, particularly if one
has a floating charge. Secondly, the ‘equity theory’ provides consistency in this
area, as it is also capable of explaining the other form of ‘tacking’7, namely the
tabula in naufragio8 doctrine. As Lord Cranworth explained in Hopkinson9,
this ancient equity10 establishes ‘the right of a third mortgagee without notice to
secure himself against the second mortgagee by buying in a first mortgage,
laying hold, as it was said, of the tabulam in naufragio’. Whilst that doctrine
was established in the context of competing mortgages, it is not limited to that
context and can apply ‘in favour of all equitable owners or incumbrancers for
value without notice of prior equitable interests’11, although the view has been
expressed that only a fixed equitable security-holder can take advantage of the
doctrine, since a floating security is ‘too nebulous’ to be promoted ahead of
prior fixed interests12. As regards the time when the third mortgagee’s absence
of notice should be assessed for the tabula in naufragio doctrine, this appears to
be when the third mortgagee makes its advance, rather than when it redeems the

55
11.26 Tiers of Lending

first mortgage13. Although this result creates obvious harshness for the second
mortgagee14, since, as Millett J stated in Macmillan Inc v Bishopsgate Invest-
ment Trust plc15, ‘[t]he result might be to squeeze out [the second mortgagee]
altogether’, the tabula in naufragio does seek to afford protection to the even
more junior third mortgagee. The doctrine has no application, however, where
the legal title to the property is vested in a bare trustee16, as this could potentially
prejudice the interests of the beneficiaries under that trust and make the
subsequent mortgagee an accessory to a breach of trust17.
1
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514.
2
The Bradford Banking Co Ltd v Henry Biggs, Son & Co (1886) 12 App Cas 29, 37.
3
Union Bank of Scotland Ltd v National Bank of Scotland (1886) 12 App Cas 53, 95. See also
Nelson v National Bank 1936 SC 570, 593.
4
Union Bank of Scotland Ltd v National Bank of Scotland (1886) 12 App Cas 53, 99.
5
Deeley v Lloyds Bank Ltd [1912] AC 756, 781–782. See also West v Williams [1899] 1 Ch 132,
143, 146.
6
In Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293, 300, Holland J expressed the view
‘that the rule [in Hopkinson v Rolt] is founded on principles of justice and fair dealing as
between the mortgagor and the mortgagees, and as between the competing mortgagees’. See
also Mercantile Credits Ltd v Australia & New Zealand Banking Group Ltd (1988) 48 SASR
407, 408–409; Naxatu Pty Ltd v Perpetual Trustee Company Ltd [2012] FCAFC 163, [89],
[103], [150], [153], [165]. The issue is sometimes put in terms of the first mortgagee acting
‘fraudulently’ vis-à-vis the second mortgagee: see Westpac Banking Corporation v Adelaide
Bank Ltd (2005) 12 BPR 22,919, [75]; Naxatu Pty Ltd v Perpetual Trustee Company Ltd
[2012] FCAFC 163, [165].
7
In Macmillan Inc v Bishopsgate Investment Trust plc [1995] 1 WLR 978, 1002, Millett J
described the tabula in naufragio doctrine ‘as a form of tacking’ or as ‘quasi-tacking’.
8
Literally, ‘the plank in the shipwreck’, so called because it is the last hope for those whose other
arguments have foundered on the rocks: see, eg, Donoghue v Stevenson [1932] AC 562, 573;
Berger & Co Inc v Gill & Duffus SA [1984] AC 382, 392.
9
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514, 541–542. See also Frere v Moore (1820)
8 Price 475, 487–488; Lacey v Ingle (1847) 2 Phillips 413, 422–423; Rooper v Harrison (1855)
2 Kay & Johnson 86, 108–109; Prosser v Rice (1860) 28 Beav 68, 74–75; Cooke v Wilton
(1860) 29 Beav 100, 102–103; Selby v Pomfret (1861) 3 De GF&J 595, 597–598; Phillips v
Phillips (1861) 4 De GF& J 208, 216–218; Blackwood v London Chartered Bank of Australia
(1873–1874) LR 5 PC 92, 111; Taylor v Russell [1892] AC 244, 253–255, 259.
10
Marsh v Lee (1669) 2 Vent 337; 1 Chan Cas 162; Brace v Duchess of Marlborough (1728) 2 P
Wms 491, 492; Belchier v Renforth (1764) 5 Bro PC 292, 296–298; Re Russell Road Purchase
Moneys (1871) LR 12 Eq 78, 85–86; Macmillan Inc v Bishopsgate Investment Trust plc [1995]
1 WLR 978, 1002.
11
Bailey v Barnes [1894] 1 Ch 25, 37. See also Blackwood v London Chartered Bank of Australia
(1874) LR 5 PC 92, 111; Powell v London and Provincial Bank [1893] 1 Ch 610, 615, affd on
a different point: [1893] 2 Ch 555; McCarthy & Stone Ltd v Julian S Hodge & Co Ltd [1971]
1 WLR 1547, 1556–1557; Macmillan Inc v Bishopsgate Investment Trust plc [1995] 1 WLR
978, 1002–1003.
12
L Gullifer, Goode on Legal Problems of Credit and Security (Sweet & Maxwell, 6th edn, 2017),
[5–09].
13
Blackwood v London Chartered Bank of Australia (1874) LR 5 PC 92, 111; Taylor v Russell
[1892] AC 244, 253, 259–260; Bailey v Barnes [1894] 1 Ch 25, 34–37; Macmillan Inc v
Bishopsgate Investment Trust plc [1995] 1 WLR 978, 1002.
14
Brace v Duchess of Marlborough (1728) 2 P Wms 491, 492; Pilcher v Rawlins (1872) LR 7 Ch
App 259, 268; Jennings v Jordan (1881) 6 App Cas 698, 714–715; Harpham v Shacklock
(1881) 19 Ch D 207, 215; Taylor v Russell [1892] AC 244, 249; Bailey v Barnes [1894] 1 Ch
25, 36. In Macmillan Inc v Bishopsgate Investment Trust plc [1995] 1 WLR 978, 1002, Millett
J described the tabula in naufragio doctrine as a ‘harsh one’ that ‘was much criticized’. There
have been calls for the complete abolition of the tabula in naufragio doctrine: see L Gullifer,
Goode on Legal Problems of Credit and Security (Sweet & Maxwell, 6th edn, 2017), [5–24].
15
Macmillan Inc v Bishopsgate Investment Trust plc [1995] 1 WLR 978, 1002. See also L
Gullifer, Goode on Legal Problems of Credit and Security (Sweet & Maxwell, 6th edn, 2017),
[5–10].

56
 Minority and Junior Creditor Protection 11.27
16
Harpham v Shacklock (1881) 19 Ch D 207, 214: ‘Nothing is better settled than that you cannot
make use of the doctrine of tabula in naufragio by getting in a legal estate from a bare trustee
after you have received notice of a prior equitable claim.’ See also Taylor v Russell [1892] AC
244, 253, 259. Although Lindley MR’s statement in Harpham suggests that the inapplicability
of the tabula in naufragio stems in part from the lack of notice of the prior equitable claim, other
decisions have stressed that notice is irrelevant when the legal title is vested in a trustee: see
Sharples v Adams (1863) 32 Beav 213, 216; Cory v Eyre (1863) 1 De GJ&S 149, 167; Mumford
v Stohwasser (1874) LR 18 Eq 556, 562–564; Bradley v Riches (1878) 9 Ch D 189, 192; Taylor
v Russell [1892] AC 244, 248–249, 253; Macmillan Inc v Bishopsgate Investment Trust plc
[1995] 1 WLR 978, 1003.
17
For liability as a knowing recipient, see generally Bank of Credit and Commerce International
(Overseas) Ltd v Akindele [2001] Ch 437. For liability for dishonest assistance, see Barlow
Clowes International Ltd v Eurotrust International Ltd [2006] 1 WLR 1476.

11.27 Although both the rule in Hopkinson v Rolt1 and the tabula in naufragio
doctrine are based upon a desire to protect junior secured creditors against the
potentially prejudicial conduct of more senior secured creditors, the impact of
subsequent legislative intervention is unclear. There can be no doubt that those
common law rules no longer apply to determine the priority of further advances
in respect of mortgages over unregistered land2, since there are now special
statutory rules in the Law of Property Act 1925 governing that issue3. Similarly,
the common law principles considered above4 have been displaced by priority
rules in the Land Registration Act 2002 for further advances made pursuant to
a mortgage over registered land5. Beyond these two scenarios, however, it is
unclear how much (if any) of the rule in Hopkinson v Rolt6 and the tabula in
naufragio doctrine survive7, since section 94(3) of the Law of Property Act 1925
(‘LPA 1925’) states that ‘[s]ave in regard to the making of further advances as
aforesaid, the right to tack is hereby abolished’8. Nevertheless, given that
section 94(4) of the LPA 1925 provides that ‘[t]his section applies to mortgages
of land’9, it certainly remains arguable that the common law tacking principles
still govern the priority of further advances pursuant to equitable charges and
mortgages over personalty (although, even at common law, the tabula in
naufragio does not appear ever to have been applied to competing assignments
of a debt10).
Support for this interpretation can be found in McCarthy & Stone Ltd v Julian
S Hodge & Co Ltd11, where Foster J held that section 94(3) only ‘abolish[ed]
the doctrine [of tabula in naufragio] in so far as it applied to mortgages’ and
Macmillan Inc v Bishopsgate Investment Trust plc12, where Millett J appeared
to suggest that the impact of the LPA 1925 upon tacking was limited to land13,
so that the tabula in naufragio could be applied to resolve a priority dispute
between equitable interests in shares14. These statements will apply mutatis
mutandis to the rule in Hopkinson v Rolt15. In contrast, in Re Rayford
Homes Ltd16, David Richards J suggested that s 94 of the LPA 1925 could apply
to a ‘fixed charge on goodwill or intellectual property rights’. Whilst McCarthy
and Macmillan arguably adopt the correct literal interpretation of the statutory
language used by Parliament in s 94 of the LPA 192517, that does not necessarily
mean that the resulting situation is a desirable one. Indeed, the current position
has been criticised academically18. Besides the absence of any logical reason for
adopting different approaches to tacking in the context of realty and person-
alty19, there are significant practical difficulties that result from such a differen-
tiated approach. For example, the difficulty of distinguishing between fixtures
and fittings means that it will not always be clear whether the common law or
statutory tacking rules will apply. Equally unclear will be the position where the

57
11.27 Tiers of Lending

priority dispute is between a mortgage and an equitable charge or where a

global security purports to cover a corporate borrower’s entire undertaking,
including its land and other personal assets20. Unfortunately, the solution to
these difficulties lies in statutory amendment.
1
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514.
2
Macmillan Inc v Bishopsgate Investment Trust plc [1995] 1 WLR 978, 1002.
3
According to the Law of Property Act 1925, s 94(1), a prior mortgagee’s further advances will
rank in priority to any subsequent legal or equitable mortgage where there is either an
arrangement between the mortgagees giving those further advances priority, the prior mort-
gagee had no notice of the subsequent mortgage when the further advances are made or when
the prior mortgagee is under an obligation to make the further advances, irrespective of whether
the subsequent mortgagee had notice of the prior interest. See also Re Rayford Homes Ltd
[2011] BCC 715, [55], [90], [94]. For the protection afforded to banks in respect of the
registration of any second or subsequent mortgage over land, see the Law of Property Act 1925,
s 94(2). For the lacuna in the Law of Property Act 1925, s 94(1) in relation to the making of
further advances by both the first and the second mortgagee, see H Beale, M Bridge, L Gullifer
& E Lomnicka, The Law of Security and Title-based Financing (Oxford University Press, 3rd
edn, 2018), [14.94]. For further consideration of this provision, see paras 17.27–17.34 below.
4
See paras 11.25–11.26 above.
5
In respect of registered land, according to the Land Registration Act 2002, ss 49(1)–(2), a prior
mortgagee’s further advances will have priority if it does not have notice (whether actual or
constructive) of the subsequent mortgage. For consideration of what amounts to a ‘further
advance’ for these purposes, see Urban Ventures Ltd v Thomas [2016] EWCA Civ 30, [26]. A
prior mortgagee will also have priority in respect of further advances over a subsequent
registered mortgage if it is obliged to make such advances, if the borrower and the prior
mortgagee have agreed a maximum amount for which the first mortgage is security or if the
mortgagees have agreed between them that the first mortgagee’s further advances will have
priority: see Land Registration Act 2002, ss 49(3)–(6). For criticism of the fact that the senior
secured creditor can monopolise the borrower’s financing by the simple expedient of stating a
maximum amount secured by its mortgage, see L Gullifer, Goode on Legal Problems of Credit
and Security (Sweet & Maxwell, 6th edn, 2017), [5–21]. For further consideration of this
provision, see paras 17.27–17.34 below.
6
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514.
7
H Beale, M Bridge, L Gullifer & E Lomnicka, The Law of Security and Title-based Financing
(Oxford University Press, 3rd edn, 2018), [14.99]; L Gullifer, Goode on Legal Problems of
Credit and Security (Sweet & Maxwell, 6th edn, 2017), [5–10].
8
As the term ‘tack’ is not defined in the Law of Property Act 1925, it is unclear whether the
intention was to change the rule in Hopkinson v Rolt alone or also the tabula in naufragio
doctrine: see L Gullifer, Goode on Legal Problems of Credit and Security (Sweet & Maxwell,
6th edn, 2017), [5–17]; H Beale, M Bridge, L Gullifer & E Lomnicka, The Law of Security and
Title-based Financing (Oxford University Press, 3rd edn, 2018), [14.99].
9
According to the Law of Property Act 1925, s 205(1)(xvi), the term ‘mortgage’ includes ‘any
charge or lien on any property for securing money or money’s worth’.
10
L Gullifer, Goode on Legal Problems of Credit and Security (Sweet & Maxwell, 6th edn, 2017),
[5–08]–[5–10].
11
McCarthy & Stone Ltd v Julian S Hodge & Co Ltd [1971] 1 WLR 1547, 1556–1557.
12
Macmillan Inc v Bishopsgate Investment Trust plc [1995] 1 WLR 978.
13
Macmillan Inc v Bishopsgate Investment Trust plc [1995] 1 WLR 978, 1002.
14
Macmillan Inc v Bishopsgate Investment Trust plc [1995] 1 WLR 978, 1003–1005, applying
Dodds v Hills (1865) 2 H&M 424; cf Ireland v Hart [1902] 1 Ch 522. For the commercial
justification for the continued application of the tabula in naufragio doctrine to competing
security interests over shares, see H Beale, M Bridge, L Gullifer & E Lomnicka, The Law of
Security and Title-based Financing (Oxford University Press, 3rd edn, 2018), [14.100].
15
Hopkinson v Rolt (1861) 11 HL Cases (Clark’s) 514. Regardless of whether McCarthy and
Macmillan are correct regarding the continued existence of the tabula in naufragio doctrine,
section 94(3) of the Law of Property Act 1925 contains language that would appear consistent
with the continued existence of the common law rule against tacking, since the sub-sec-
tion provides that ‘nothing in this Act shall affect any priority . . . in respect of further
advances made without notice of a subsequent incumbrance or by arrangement’.
16
Re Rayford Homes Ltd [2011] BCC 715, [31].

58
 Minority and Junior Creditor Protection 11.28
17
L Gullifer, Goode on Legal Problems of Credit and Security (Sweet & Maxwell, 6th edn, 2017),
[5–17]; R Calnan, Taking Security (LexisNexis, 4th edn, 2018), [7–68]–[7–70]; H Beale, M
Bridge, L Gullifer & E Lomnicka, The Law of Security and Title-based Financing (Oxford
University Press, 3rd edn, 2018), [14.95]. See also R Calnan, ‘Reforming Priority Law’
(2006) 1 JIBFL 4.
18
L Gullifer, Goode on Legal Problems of Credit and Security (Sweet & Maxwell, 6th edn, 2017),
[5–17].
19
H Beale, M Bridge, L Gullifer & E Lomnicka, The Law of Security and Title-based Financing
(Oxford University Press, 3rd edn, 2018), [14.95].
20
In Re Rayford Homes Ltd [2011] BCC 715, [31], David Richards J suggested that such
situations would not be subject to section 94 of the Law of Property Act 1925.

(d) Limits on lender majority voting power

11.28 As indicated previously1, whilst a lending tier is most commonly char-
acterised by a legal ranking of claims to payment from the borrower (whether
according to the terms of the agreement or upon breach or insolvency), lending
tiers can also be created in functional or factual terms as a result of the ability
of certain lenders (and the comparative inability of other lenders) to direct or
influence collective action or to restructure the terms of the loan. The most
common type of transaction in which such functional subordination occurs is
the syndicated loan and the bond issue, both of which involve the provision of
finance by multiple lenders dealing with the borrower on common terms2. The
terms of such agreements contain provisions discouraging individual lender
action3, requiring key decisions (such as the decision whether to accelerate a
syndicated loan)4 to be taken by a majority of the lenders5 and for those
resolutions to be implemented through the collective administrative mecha-
nisms, namely the agent bank in a syndicated loan6 and the bond trustee in a
bond issue7. Such collectivism certainly improves the efficiency of administering
the loan or bond issue, but the principal consequence is to bind the dissenting
lenders to a decision that they do not support8.
The downside of any power vested in a majority to bind a minority is that the
former can use its superior voting power to oppress the latter. The courts have
controlled the more extreme forms of oppression (particularly cases involving
the expropriation of the minority’s rights) by invalidating the majority’s deci-
sion if its votes have not been exercised bona fide in the best interests of the
lending group as a whole. Although originally developed to control majority
shareholders voting for alterations to the corporate constitution9, this principle
has been applied to control majority lender voting in the context of syndicated
loans10, bond issues11 and schemes of arrangement12. The scope of this juris-
diction is considered in more detail elsewhere13.
1
See para 11.1 above.
2
Shencourt Sdn Bhd v Aseambankers Malaysia Bhd [2011] 6 MLJ 236, [14], revsd on a different
point: [2014] 4 MLJ 619. See also Chapter 12 below. For a detailed consideration of bond
issues, see L Gullifer & J Payne, Corporate Finance Law: Principles and Policy (Hart Publish-
ing, 2nd edn, 2015), Ch 8.
3
Loan Market Association Multicurrency Term and Revolving Facilities Agreement, 18 July
2017 (‘LMA.MTR.09’), cl 26.2. Consider the use of the ‘no action’ clause in the context of
bond issues: see Elliott International LP v Law Debenture Trustees Ltd [2006] EWHC 3063
(Ch), [44]. See further L Gullifer & J Payne, Corporate Finance Law: Principles and Policy
(Hart Publishing, 2nd edn, 2015), [8.3.2.3.1].
4
LMA.MTR.09, cl 23.13.
5
LMA.MTR.09, cl 26.2.

59
11.28 Tiers of Lending
6
See paras 12.22–12.25 below.
7
See generally L Gullifer & J Payne, Corporate Finance Law: Principles and Policy (Hart
Publishing, 2nd edn, 2015), Ch 8.
8
LMA.MTR.09, cl 26.2(c).
9
Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656, 671–672; Brown v British Abrasive
Wheel Co Ltd [1919] 1 Ch 290, 295–296; Sidebottom v Kershaw, Leese & Company Ltd
[1920] 1 Ch 154, 159–162, 164–168, 169–173; Dafen Tinplate Co Ltd v Llanelly Steel Co
(1907) Ltd [1920] 2 Ch 124, 137–139; Shuttleworth v Cox Brothers & Company
(Maidenhead) Ltd [1927] 2 KB 9, 18, 23; Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286,
291; Re Charterhouse Capital Ltd [2014] EWHC 1410 (Ch), [230]–[237], affd [2015] EWCA
Civ 536, [90]; Staray Capital Ltd v Cha [2017] UKPC 43, [33]–[34].
10
Redwood Master Fund Ltd v TD Bank Europe Ltd [2006] 1 BCLC 149, [92].
11
Shaw v Royce Ltd [1911] 1 Ch 138, 150; Goodfellow v Nelson Line (Liverpool) Ltd [1912] 2
Ch 324, 333; British America Nickel Corporation Ltd v MJ O’Brien Ltd [1927] AC 369, 371;
Cadbury Schweppes plc v Somji [2001] 1 WLR 615, [21]–[24]; The Law Debenture Trust Cor-
poration plc v Concord Trust [2007] EWHC 1380 (Ch), [123]; Assénagon Asset Management
SA v Irish Bank Resolution Corp Ltd [2012] EWHC 2090 (Ch), [41]–[48], [69]–[86]; Azevedo
v Imcopa Importação, Exportação E Indústria De Olos Ltda [2013] EWCA Civ 364,
[51]–[72].
12
Re Dee Valley Group plc [2018] Ch 55, [27]; Re Co-operative Bank plc [2017] EWHC 2269
(Ch), [44]–[48].
13
See paras 12.40–12.42 below.

(e) A wider theory of inter-creditor good faith?

11.29 Whilst the various protections afforded to junior and minority creditors,
as considered above1, have developed separately, those instances in which the
courts have intervened in favour of the weaker creditor all appear to be based
upon a unifying notion of honesty or good faith. This raises the question of
whether the courts might be prepared to develop a more generalised notion of
inter-creditor good faith. Certainly, there has been a traditional hostility in
English law to the introduction of a general doctrine of good faith into
contractual and commercial relationships2, albeit that partnership relationships
and insurance contracts are already classified as being uberrimae fidei3 and
other relationships (such as joint ventures)4 are capable of being classified as
fiduciary relationships. Besides respect for contractual autonomy, the primary
objection has been in relation to how a court can be expected to apply such a
subjective concept5.
Yet there is a counter-current, where the courts are forced (or are choosing) to
come to terms with the application of a broad notion of good faith, including
the application of legislation that employs good faith concepts6, the enforce-
ment of express contractual terms requiring a party to act in ‘good faith’7, the
implication of terms requiring a party to exercise a unilateral discretion
honestly and not arbitrarily, capriciously, perversely or irrationally8, and the use
of good faith as a constructional aide in commercial and financial arrange-
ments9. More recently, in Yam Seng Pte Ltd v International Trade Corpora-
tion Ltd10, Leggatt J held that there was ‘nothing novel or foreign to English law
in recognising an implied duty of good faith in the performance of contracts’
and, although his Lordship doubted that the law had reached the stage where a
duty of good faith could be implied as a matter of law, ‘even as a default rule,
into all commercial contracts’, he did consider that such a duty could be implied
in fact ‘in any ordinary commercial contract’11. The development in Yam Seng
has been received at best cautiously,12 with responses ranging from overt

60
 Minority and Junior Creditor Protection 11.29

approval13 to downright hostility at what is seen as an attempt to imply a duty

of good faith into contracts ‘between two sophisticated commercial parties
negotiating at arm’s length’14. Whilst the development of any wider notion of
good faith to subsume the principles considered above must await the impri-
matur of a higher court15, any step in that direction would only have a
wide-reaching impact on inter-creditor relations if the good faith principle took
the form of a non-derogable, mandatory rule of law, since a mere implied term
to that effect would often be negated by express terms in any inter-creditor
agreement16.
1
See paras 11.21–11.28 above.
2
Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433, 439; Walford
v Miles [1992] 2 AC 128, 138; Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd
[2003] 1 AC 459 [45].
3
Bell v Lever Brothers Ltd [1932] AC 161, 227–228.
4
See, for example, Chirnside v Fay [2007] 1 NZLR 433, [72]–[80].
5
Walford v Miles [1992] 2 AC 128, 138.
6
See, for example, Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053) (as
amended), regs 3–4; Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083),
reg 5(1); Consumer Rights Act 2015, s 62. See also Director General of Fair Trading v First
National Bank plc [2002] 1 AC 481, [17], [36]–[37], [45], [54].
7
See, for example, Petromec Inc v Petroleo Brasilieiro SA Petrobas (No 3) [2005] EWCA Civ
891, [117]–[121]; Berkeley Community Villages Ltd v Pullen [2007] EWHC 1330 (Ch), [97];
Butters v BBC Worldwide Ltd [2009] EWHC 1954 (Ch), [148]–[151]; Mid-Essex Hospital
Services NHS Trust v Compass Group UK & Ireland Ltd [2013] EWCA Civ 200, [105]–[112],
[150]–[151]; Sainsbury’s Supermarkets Ltd v Bristol Rovers (1883) Ltd [2015] EWHC 2002
(Ch), [119]; BP Gas Marketing Ltd v La Societe Sonatrach [2016] EWHC 2461 (Comm), [382];
Health & Case Management Ltd v The Physiotherapy Network Ltd [2018] EWHC 869 (QB),
[108]. Consider also Rosalina Investments Ltd v New Balance Athletic Shoes (UK) Ltd [2018]
EWHC 1014 (QB).
8
Abu Dhabi National Tanker Co v Product Star Shipping Ltd (The ‘Product Star’) (No 2) [1993]
1 Lloyd’s Rep 397, 404; Ludgate Insurance Co Ltd v Citibank NA [1998] Lloyd’s Rep IR 221,
[35]; Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] EWCA Civ 107, [64];
Paragon Finance plc v Nash [2002] 1 WLR 685, [41]; Socimer International Bank Ltd
v Standard Bank London Ltd [2008] EWCA Civ 116, [66]; JML Direct Ltd v Freestat UK Ltd
[2010] EWCA Civ 34, [14]; Do-Buy 925 Ltd v National Westminster Bank plc [2010] EWHC
2862 (QB), [37]; McKay v Centurion Credit Resources LLC [2011] EWHC 3198 (QB), [50],
affd [2012] EWCA Civ 1941, [17], [21]–[22]; Westlb AG v Nomura Bank International plc
[2010] EWHC 2683 (Comm), [72]–[74], [81], [102], affd [2012] EWCA Civ 495, [30]–[32],
[58]–[60]. Compare Barclays Bank plc v Unicredit Bank AG [2012] EWHC 3655 (Comm),
[48], [62]–[73]; Euroption Strategic Fund Ltd v Skandinaviska Banken AB [2012] EWHC 584
(Comm), [115]–[118]; Deutsche Bank (Suisse) SA v Khan [2013] EWHC 482 (Comm),
[189]–[190]; Hayes v Willoughby [2013] UKSC 17, [14]. This line of authority has now been
approved by the Supreme Court in Braganza v BP Shipping Ltd [2015] 1 WLR 1661. See
generally R Hooley, ‘Controlling Contractual Discretion’ (2013) 72 CLJ 65; C Hare, ‘The
Expanding Judicial Review of Contractual Discretion: Carte Blanche or Carton Rouge?’ [2013]
BJIBFL 269; J Morgan, ‘Resisting Judicial Review of Discretionary Contractual Powers’ [2015]
LMCLQ 483.
9
Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2012] 1 AC 383,
[74]–[79], [98], [108]–[109]; Gul Bottlers (PVT) Ltd v Nichols plc [2014] EWHC 2173
(Comm), [86]–[87].
10
Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111, [146]. For a
similar approach adopted by Leggatt J in subsequent cases, see Astor Management AG
(formerly known as MRI Holding AG) v Atalaya Mining plc [2017] EWHC 425 (Comm);
Nehayan v Kent [2018] EWHC 333 (Comm).
11
Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111, [132].
12
Mid-Essex Hospital Services NHS Trust v Compass Group UK & Ireland Ltd [2013] EWCA
Civ 200, [105], [150]. In particular, Jackson LJ stated (at [105]) that ‘there is no general
doctrine of good faith in English contract law’. See also TSG Building Services plc v South
Anglia Housing Ltd [2013] EWHC 1151 (TCC), [45]–[51]; Hamsard 3147 Ltd v Boots UK Ltd

61
11.29 Tiers of Lending

[2013] EWHC 3251 (Pat), [86]–[87]; Roadchef (Employee Benefits Trustees) Ltd v Hill [2014]
EWHC 109 (Ch), [139]; Carewatch Care Services Ltd v Focus Caring Services Ltd [2014]
EWHC 2313 (Ch), [108]–[112].
13
Bristol Groundschool Ltd v Whittingham [2014] EWHC 2145 (Ch), [196]. See also Globe
Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396, [67]–[68].
14
Greenclose Ltd v National Westminster Bank plc [2014] EWHC 1156 (Ch), [150]–[151]. See
also MSC Mediterranean Shipping Co v Cottonexe [2016] EWCA Civ 789, [45]; Property
Alliance Group Ltd v Royal Bank of Scotland plc [2016] EWHC 207 (Ch), although the point
was not considered on appeal: [2018] EWCA Civ 355.
15
Some tentative support for a wider notion of good faith could arguably be derived from Lord
Sumption’s reference in Hayes v Willoughby [2013] UKSC 17, [14] to the fact that a test of
rationality in a contract ‘imports a requirement of good faith’, although this may be drawing
too long a bow.
16
Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111, [131], [149].

62
Chapter 12

SYNDICATED LENDING

1 THE FUNCTIONS OF SYNDICATED LENDING 12.1

2 MECHANICS OF SYNDICATION 12.4
3 THE ARRANGING BANK’S LIABILITY 12.8
(a) Arranger’s Liability to the Borrower 12.9
(b) Arranger’s Liability to the Syndicate Banks 12.17
4 THE ROLE OF THE AGENT BANK 12.22
5 THE RELATIONSHIP BETWEEN THE SYNDICATE
LENDERS AND BORROWER
(a) Individualism and Collectivism 12.26
(b) Parties to the Syndicated Loan Agreement 12.28
(c) Terms of the Syndicated Loan Agreement 12.31
(d) Performance and Breach of the Syndicated Loan Agreement 12.35
6 THE RELATIONSHIP BETWEEN THE SYNDICATE
LENDERS INTER SE 12.38
(a) The Juridical Nature of the Loan Syndication 12.39
(b) Relief from Oppression of Minority Lenders 12.40

1 THE FUNCTIONS OF SYNDICATED LENDING

12.1 Ordinarily, a corporate customer that is unable to fund its operations
through retained profits can secure the necessary external funding by negotiat-
ing an overdraft or term loan with its relationship banker. Where the funding
required by the customer is particularly significant, however, the custom-
er’s own bank (or indeed any individual bank) may be unwilling to assume the
default risks associated with such a large loan1 or may be unable to make a loan
of the requisite size if this would infringe the particular bank’s regulatory
requirements2. In such circumstances, a corporate borrower could try to meet
its financing needs by simply taking out a series of unconnected loans with
different lenders, but, on the one hand, this might involve the borrower in the
significant costs associated with negotiating and monitoring a series of distinct
loan agreements and, on the other hand, a lender may be nervous about being
in competition with so many other lenders in relation to such sizeable loans in
the event of the borrower’s default. An alternative might be for the corporate
borrower to access an even wider funding base by issuing bonds to the market.
Whilst the tradeability of such instruments is attractive to potential investors,
there are not-insignificant cost implications of having to satisfy the disclosure
and formality requirements associated with a public issue of securities3. Where
such costs cannot be justified (or, alternatively, where the advantages of trans-
ferability are not quite as pressing), then the borrower may instead seek to raise
the requisite funds from an identified syndicate of banks rather than through
the capital markets generally4. In essence, a syndicated loan involves two or
more banks each making separate loans to a borrower on common terms
governed by a single loan agreement, which provides for the proportions in
which each member of the syndicate is to contribute to the overall loan and

1
12.1 Syndicated Lending

operates to co-ordinate the respective positions of the syndicate members5.

1
A Hudson, The Law of Finance (Sweet & Maxwell, 2nd edn, 2013), [33–01]; E Ferran & L Ho,
Principles of Corporate Finance Law (Oxford University Press, 2nd edn, 2014), 271.
2
See generally EU Regulation No 575/2013 of 26 June 2013 on Prudential Requirements for
Credit Institutions and Investment Firms [2013] OJ L 176/1, as amended; EU Directive
2013/36/EU of 26 June 2013 on Access to the Activity of Credit Institutions and the Prudential
Supervision of Credit Institutions and Investment Firms [2013] OJ L 176, as amended
(implemented into the Financial Conduct Authority’s Prudential Sourcebook for Banks
(‘BIPRU’)). Consider J Berman, D Winick, A Young & M Lewis, ‘Regulation W Hazards in
Syndicated and Other Loan Transactions’ (2018) 33 BJIB&FL 94.
3
E Ferran & L Ho, Principles of Corporate Finance Law (Oxford University Press, 2nd edn,
2014), 458–463; L Gullifer & J Payne, Corporate Finance Law: Principles and Policy (Hart
Publishing, 2nd edn, 2015), [13.2]–[13.3].
4
For the differences and similarities between syndicated loans and bond issues, see L Gullifer &
J Payne, Corporate Finance Law: Principles and Policy (Hart Publishing, 2nd edn, 2015),
[8.4.1]. For the suggestion that a loan agreement may constitute a ‘debenture’, see Fons HF
v Corporal Ltd, Pillar Securitisation Sarl [2014] EWCA Civ 304, [24]–[44], [47]–[53].
5
Shencourt Sdn Bhd v Aseambankers Malaysia Bhd [2011] 6 MLJ 236, [14], rev’d on a different
point: [2014] 4 MLJ 619. Compare the ‘Club Deal Loan’, which (although the term has no fixed
meaning and the form of documentation lacks uniformity) usually involves the making of
parallel bilateral loans simultaneously to the borrower with the various banks executing an
inter-creditor agreement that establishes a looser form of association between them than a
formal syndicated loan agreement. The principal difference between the ‘Club Deal Loan’ and
a syndicated loan is that the former requires unanimity on the part of the lenders, whereas the
latter frequently requires only majority decision-making: see A Mugasha, The Law of Multi-
Bank Financing (Oxford University Press, 2007), [1.31]–[1.34]. ‘Top-up lending’ is a further
example of collaborative lending, where one or more banks ‘make the riskiest part of the
lending in that their loans were to be repaid only after [any other lender] had obtained
repayment of its capital’: see Horn v Commercial Acceptances Ltd [2011] EWHC 1757 (Ch),
[2]; [2012] EWCA Civ 958, [3].

12.2 Whilst many of the legal issues arising out of ordinary loans will apply
equally to syndicated loans,1 the size of the loan, the high level of interest
payments required to service the loan and the difficulty of co-ordinating
different lenders adds a level of complexity2 and means that syndicated loans
will only be made available to the largest corporates, sovereign states and public
authorities3. The syndicate may provide the borrower with a range of possible
facilities, including a term loan, a revolving facility, the issuance of letters of
credit and performance bonds/guarantees4, a swingline facility or any combi-
nation of these. The common terms to which the syndicate members agree will
ordinarily be on one of the recommended forms of primary loan documentation
first adopted by the Loan Market Association5 (‘LMA’), the Association of Cor-
porate Treasurers, and major City law firms in October 1999, and amended
subsequently at regular intervals6. Obviously, these can be adapted to suit the
parties’ particular needs7. The amount and purpose of the loan will usually
determine the size of the syndicate and whether the syndicated loan will be
made on an unsecured or secured basis8, although, in the latter case, a security
trustee or security agent will need to be appointed to hold the security on behalf
of the lenders collectively9. An added level of complexity arises when (as often
occurs in private equity transactions) the syndicated loan agreement covers a
number of different types of facility and the intention is that lenders under the
various facilities should have different rights of enforcement against the bor-
rower and any security that the borrower has provided. In such transactions, as
well as appointing a security agent to hold the secured assets on trust for all the
lenders as a whole, it will be necessary to execute an inter-creditor agreement

2
 The Functions of Syndicated Lending 12.3

that sets out the respective rights of enforcement (and other entitlements) of the
senior facility lenders, the mezzanine lenders and any subordinated lenders
(usually intra-group and parent company liabilities).
1
A Hudson, The Law of Finance (Sweet & Maxwell, 2nd edn, 2013), [33–01]–[33–04].
2
It is possible that some of that complexity may be addressed by the development of blockchain
technology in the syndicated loan context: see S Obie, ‘Blockchain and the Syndicated Loan
Market – A Closer Look’ (2017) 32 BJIB&FL 711.
3
E Ferran & L Ho, Principles of Corporate Finance Law (Oxford University Press, 2nd edn,
2014), 271.
4
See, eg, Uzinterimpex JSC v Standard Bank plc [2008] EWCA Civ 819, [1]. See further G
Hisert, ‘Letters of Credit in Syndicated Credit Facilities’ (2012) 27 JIBLR 33.
5
Whilst the Loan Market Association (‘LMA’) has consented to the quotation of, and referral to
parts of its documents for the purpose of this book chapter, it assumes no responsibility for any
use to which its documents, or any extract from them, may be put. The views and opinions
expressed in the book chapter are the views of the author and do not necessarily represent those
of the LMA. Furthermore, the LMA cannot accept any responsibility or liability for any error
or omission. ©2017 Loan Market Association. All rights reserved.
6
For example, reference will be made throughout this chapter to the provisions of the Loan
Market Association Multicurrency Term and Revolving Facilities Agreement, 18 July 2017
(‘LMA.MTR.09’). See generally M Campbell, ‘The LMA Recommended Form of Primary
Documents’ (2000) 15 JIBFL 53.
7
For a salutary warning against the risk of over-generalisation in any discussion of syndicated
lending, see A Hudson, The Law of Finance (Sweet & Maxwell, 2nd edn, 2013), [33–05].
8
The security instrument will usually specify closely the facilities that it is intended to cover and
it is not common for security in the syndicated loan context to cover ‘all monies’, as the agent
bank/security trustee will not want to be concerned with obligations that might arise between
the borrower and the lenders outside of the syndicated loan agreement: see R Hooley, ‘Security,
Security Trusts and the Amendment of Syndicated Credit Agreements: Lessons from Australia’
[2012] LMCLQ 145, 147.
9
L Gullifer & J Payne, Corporate Finance Law: Principles and Policy (Hart Publishing, 2nd edn,
2015), [8.4.1].

12.3 From the borrower’s perspective, a syndicated loan has the advantage of
allowing access to funds despite no individual lender being prepared to lend it
the amount it seeks. It also has the advantage of saving on the costs associated
with a public issue of securities1 and saving the customer the time and expense
of having to negotiate and administer each loan on an individual basis, since the
syndication mechanism enables the borrower to do this on a collective basis
with all the members of the syndicate simultaneously. From an individual
lender’s perspective, the syndication mechanism allows a lender to earn fees and
interest by lending some funds to the borrower in question without having to
assume the entire risk that would be associated with lending the full amount
required. Moreover, the collective administration of the syndicated loan
through a common agent and the restrictions on acceleration by individual
lenders2 not only makes syndication a particularly cost-effective way of lending
money, but also reduces the risk of an inter-creditor race to pull the borrower
apart in the event of its default.
In any event, there exists a healthy secondary market for trading syndicated
debt3, so that a lender may earn commitment fees from being party to the initial
syndication of the loan, but then may divest itself of its rights and/or obligations
under the loan agreement, whether for commercial or regulatory reasons, by
entering into one or more participation agreements with other banks or
financial institutions (termed ‘participants’)4. Participation agreements might
prove similarly useful where there is neither the time nor the commercial
appetite to syndicate a particular loan5, since an individual bank, instead of

3
12.3 Syndicated Lending

lending just a proportion of the overall amount required by the borrower as

part of a syndicate, may lend the entire amount of the loan from the outset (as
‘lead bank/lender’) and then negate or offset some or all of the risks associated
with a particularly large borrowing by a single corporate customer by allowing
other lenders to participate in the loan. As considered further below6, such
participation can occur by means of an assignment or novation and has the
effect of introducing new lenders to the syndicate.
As the original loan agreement will often restrict the circumstances in which an
effective novation or assignment can occur7, or as the original lender may wish
to continue earning fees and interest from the borrower, a lender/lead bank has
at its disposal other techniques to shift the risk associated with a loan without
altering the parties, terms or structure of the original loan agreement. One
option is for the lender/lead bank to enter into one or more ‘sub-participation’
agreements, whereby one or more sub-participants deposits funds with the lead
bank equivalent to the ‘stake’ it wishes to take in the original loan and in return
the lead bank undertakes to transfer to the sub-participant a proportionate
share of any payments made by the borrower8. In the event of the borrow-
er’s default, however, the sub-participant has no direct claim against the
borrower and is liable to forfeit its deposit to the lender/lead bank9. A variation
on the sub-participation agreement is the ‘risk participation’ agreement,
whereby the risk-participant agrees in return for a fee to guarantee some or all
of the borrower’s obligations under the original loan agreement, thereby
assuming some or all of the risk of the borrower’s default10. As an alternative,
such unloading of risk can also be achieved synthetically by entering into a
hedging derivative transaction11, such as a credit default swap.
The remainder of this chapter focuses on the syndication process, and whilst
some of the legal difficulties arising out of participation agreements will be
discussed12, sub-participations and derivative transactions will not be discussed
further. Although the potential international mix of syndicate members could
lead to significant conflict of laws issues, the analysis below will make the
somewhat naïve assumption that these are resolved by the syndicated loan
agreement containing an English choice of law clause (covering both contrac-
tual and non-contractual disputes),13 an English exclusive jurisdiction clause14
and a clause precluding jurisdictional challenges on forum non conveniens
grounds15.
1
A Hudson, The Law of Finance (Sweet & Maxwell, 2nd edn, 2013), [33–25].
2
A Hudson, The Law of Finance (Sweet & Maxwell, 2nd edn, 2013), [33–12].
3
Clearly, the secondary market for trading syndicated debt will not be as liquid as the corporate
bonds market, since the participant’s rights will not be a tradeable security in the same manner
as a bond: see A Hudson, The Law of Finance (Sweet & Maxwell, 2nd edn, 2013), [33–41].
4
Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1995] 2 All ER 769, 802. Con-
versely, the existence of a secondary market will enable a lender with a minority interest under
the syndicated loan agreement to purchase further participations in order to acquire a majority
voting bloc: see British Energy Power & Trading Ltd v Credit Suisse [2008] EWCA Civ 53,
[23].
5
P Wood, International Loans, Bonds and Securities Regulation (London, 1995), 104. See also
Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1995] 2 All ER 769, 802.
6
See paras [12.29] and [12.30] below.
7
LMA.MTR.09, cls 24, 25.
8
P Wood, International Loans, Bonds and Securities Regulation (London, 1995), [7–18]. In
Lloyds TSB Bank plc v Clarke [2002] 2 All ER (Comm) 992, [16], Lord Hoffmann stated: ‘A
sub-participation appears to be a transaction generally used by banks in connection with loans
rather than bonds, for the purpose of enabling a lending bank to pass on all or part of the debtor

4
 Mechanics of Syndication 12.4

risk in a loan it has made’. As his Lordship indicated (at [15], [18]), the term ‘sub-participation’
is not, however, a legal term of art and its precise meaning may alter from one jurisdiction to
another.
9
British Energy Power & Trading Ltd v Credit Suisse [2008] EWCA Civ 53, [6].
10
P Wood, International Loans, Bonds and Securities Regulation (London, 1995), [7–35]. For the
debtor-creditor nature of the relationship created between the lead bank and the sub-
participant by a sub-participation agreement, see Interallianz Finanz AG v Independent
Insurance Co Ltd [1997] EGCS 91; Lloyds TSB Bank plc v Clarke [2002] 2 All ER (Comm)
992, [16], [22]–[25]; VTB Capital plc v Nutritek International Corp [2011] EWHC 3107 (Ch),
[155]; Titan Europe 2006-3 plc v Colliers International UK plc [2015] EWCA Civ 1083,
[35]–[37].
11
Lomas v JFB Firth Rixon Inc [2012] EWCA Civ 419, [2]. See generally J Benjamin, Financial
Law (Oxford University Press, 2007), [4.51]–[4.65], [5.140]–[5.144].
12
See paras 12.29–12.30 below.
13
LMA.MTR.09, cl 39. For the effectiveness of such a clause, see EC Regulation No 593/2008 of
17 June 2008 on the Law Applicable to Contractual Obligations [2008] OJ L 177/6, Art
3(1); EC Regulation No 864/2007 on the Law Applicable to Non-contractual Obligations
[2007] OJ L 199/40, Art 14(1).
14
LMA.MTR.09, cl 40.1(a). For the effectiveness of such a clause, see EC Regulation No
1215/2012 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil
and Commercial Matters [2012] OJ L 351, Art 25(1). Only the borrowers appear to be obliged
to sue in England as the contractually agreed jurisdiction, whereas the lenders are able to sue in
any other jurisdiction: see LMA.MTR.09, cl 40.1(c). For the validity of such ‘lop-sided’
jurisdiction clauses, consider Case 22/85 Anterist v Crédit Lyonnais [1986] ECR 1951; cf
Societe Banque Privee Edmond de Rothschild Europe v X [2013] ILPr 181. Consider Collins et
al (eds), Dicey, Morris and Collins on the Conflict of Laws (Sweet & Maxwell, 15th edn, 2012),
[12–133]; A Briggs, Civil Jurisdiction and Judgments (Informa, 6th edn, 2015), [2.140].
15
LMA.MTR.09, cl 40.1(b). See, eg, Lornamead Acquisitions Ltd v Kaupthing Bank HF [2011]
EWHC 2611 (Comm), [122]; Nomura International plc v Banca Monte Dei Paschi Di
Siena SpA [2014] 1 WLR 1584, [13].

2 MECHANICS OF SYNDICATION
12.4 There are no fixed or mandatory procedures that must be followed in
order to syndicate a loan1. The initial phase is termed ‘originating’ the loan2.
After assessing the state of the lending market and the position of the borrower,
a single bank or group of banks will ordinarily seek to obtain a mandate from
the borrower to act as the lead bank or banks (termed the ‘arranging bank(s)’ or
‘arranger’) in arranging the syndication of the loan sought by the borrower3.
Such a mandate may result from either the borrower approaching a single bank
(usually its own bank) to act as arranger; the borrower selecting the most
competitive bid for the role following a competitive tendering process involving
a number of banks; or a particular bank or group of banks approaching the
borrower directly with an offer to arrange the syndicate.
However the arranging bank(s) is selected, it will have to decide at an early stage
upon the scope of its undertaking to the borrower to syndicate the loan and in
particular whether it is prepared to underwrite the loan – in other words,
whether the arranging bank provides the borrower with an undertaking either
to lend a certain portion of the funds sought itself and to make ‘best efforts’ to
syndicate the remainder (in a ‘partly underwritten offer’) or to lend the full
amount sought (in a ‘fully underwritten offer’) in the event that it does not
prove possible to form a bank syndicate willing to lend. Such a commitment will
often be given when the funds are required swiftly and in circumstances where
the borrower insists on confidentiality. An arranging bank that has fully
underwritten a proposed syndicated loan may not, however, be comfortable

5
12.4 Syndicated Lending

assuming the entire risk of the syndication failing. In such circumstances, before
attempting to syndicate the loan, the arranging bank may form a sub-
underwriting group consisting of banks that are prepared to assume some of the
arranging bank’s risk associated with a failure to syndicate and that agree to
lend a proportion of the necessary funds in the event that syndication proves
impossible.
1
For a detailed consideration of the syndication process, see A Mugasha, The Law of Multi-Bank
Financing (Oxford University Press, 2007), [3.01]–[3.141].
2
A Mugasha, The Law of Multi-Bank Financing (Oxford University Press, 2007), [3.14]–[3.47].
3
L Gullifer & J Payne, Corporate Finance Law: Principles and Policy (Hart Publishing, 2nd edn,
2015) [8.4.2].

12.5 Regardless of whether the arranger underwrites the syndication or not, its
principal function following appointment will be to negotiate or ‘structure’ the
terms of the proposed loan by balancing the borrower’s requirements against
the lending market prevailing at that time1. If one or more of the syndicate
banks have already been identified, it would be usual to seek to address their
concerns at this early stage. Where the borrower wishes to access a wider pool
of potential lenders, the procedure for ‘marketing’ the loan will generally follow
the same pattern from one syndication to another. The initial step is for the
arranger to gauge interest in the proposed loan amongst potential syndicate
members by sending out a ‘term sheet’ to some or all of the lending community.
The ‘term sheet’ sets out brief, but essential, details concerning the terms and
purpose of the proposed facility, the identity and status of the borrower and the
relevant fees and interest that the borrower will undertake to pay. The aim is to
solicit commitments (usually on a ‘subject to satisfactory documentation’ basis)
from potential syndicate members2. This is termed the ‘book-runner’ function3.
At the same time, the arranging bank will work with the borrower (together
with any necessary professional advisers) to prepare a more detailed informa-
tion memorandum about the borrower and the loan that will then be used to
market the loan to any banks that subsequently express an interest in being part
of the proposed syndicate. Any banks that respond favourably to the ‘term
sheet’ are then (after giving appropriate confidentiality undertakings) sent a
‘placement memorandum’ or ‘information memorandum’, giving much more
detailed information about the borrower and any economic or political factors
that might affect the lending decision. The information memorandum often
contains disclaimers aimed at absolving the arranger from liability for any
inaccuracy in its contents. The arranger will then proceed to solicit those banks
to participate in the syndicate, which may ultimately also include the arranging
bank itself.
After this time, it will fall to the arranging bank to negotiate the final terms of
the loan agreement with both the borrower and those banks still interested in
lending following receipt of the placement memorandum and to secure those
banks’ agreement to the proposed terms. Obviously, if the arranging bank itself
is considering lending as part of the syndicate, it must make its own assessment
of the credit risk on the basis of the available information at the same time as
negotiating the loan’s terms with the other parties. Once those terms are
negotiated to the satisfaction of the borrower and the syndicate banks, the
arranging bank must ensure the proper execution of the loan documentation.
Traditionally, execution took place with the parties meeting physically at a

6
 The Arranging Bank’s Liability 12.8

formal ‘signing ceremony’, but increasingly it is possible to arrange for execu-

tion by electronic or other remote means4.
Following execution of the syndicated loan agreement, the role of the arranging
bank formally ceases: the arranger ‘drops out’ of the picture as agent and direct
contractual relations arise between the borrower and each of the syndicate
banks. Thenceforth, the relations between the parties are governed by the terms
of the loan agreement, which is discussed in more detail below5.
1
A Mugasha, The Law of Multi-Bank Financing (Oxford University Press, 2007), [3.48]–[3.49].
2
G Fuller, Corporate Borrowing: Law and Practice (Jordans Publishing, 5th edn, 2016), [13.2].
3
A Mugasha, The Law of Multi-Bank Financing (Oxford University Press, 2007), [3.50].
4
For the multiple roles that the arranging bank may need to perform and the fact that different
arranging banks may undertake distinct and discrete aspects of the arranger role, see A
Mugasha, The Law of Multi-Bank Financing (Oxford University Press, 2007), [3.06], [3.52].
5
See paras 12.31–12.34 below.

12.6 As an alternative to the procedure described in the preceding paragraph,

it is possible for the syndicated loan to be ‘self-arranged’1. In such circum-
stances, the borrower dispenses with the need for an arranging bank and
assumes responsibility for forming the bank syndicate, negotiating the
loan’s terms and securing the execution of the necessary documentation. To a
significant degree, the possibility of ‘self-arranging’ a syndicated loan results
from the standardization of the necessary documentation by the LMA and,
from the borrower’s perspective, has the obvious advantage of saving on the
arranging bank’s fees2. That said, only borrowers with previous experience of
syndication or with access to expert legal advice should consider a ‘self-
arranged’ loan.
1
A further alternative, when time is pressing, is for the loan agreement to be signed with a core
group of banks and for syndication to take place subsequently: see G Fuller, Corporate
Borrowing: Law and Practice (Jordans Publishing, 5th edn, 2016), [13.2].
2
LMA.MTR.09, cl 17.1.

12.7 Whilst the arranging bank’s role formally terminates upon the execution
of the loan agreement, the bank that has performed that particular role may
nevertheless continue to be involved with the loan, whether as a member of the
lending syndicate1 or as the bank appointed to act as agent of the syndicate
banks collectively in dealing with the borrower and administering the loan
facility (termed the ‘agent bank’)2 or both. The agent bank’s functions com-
mence with its appointment and are considered in more detail below3.
1
L Gullifer & J Payne, Corporate Finance Law: Principles and Policy (Hart Publishing, 2nd edn,
2015), [8.4.2]–[8.4.3].
2
P Ellinger, E Lomnicka & C Hare, Ellinger’s Modern Banking Law (Oxford University Press,
5th edn, 2011), 782.
3
See paras 12.22–12.25 below.

3 THE ARRANGING BANK’S LIABILITY

12.8 Given the arranging bank’s pivotal role in putting together the loan, it is
likely to be the primary target for any party who suffers losses as a result of
statements or omissions made before the execution of the loan documentation1.
There are two potential sources of liability for the arranging bank in the

7
12.8 Syndicated Lending

pre-lending period: (1) the borrower, and (2) the potential members of the loan
syndicate who receive and base their lending decision upon the ‘term sheet’
and/or ‘information memorandum’2. Each will be considered in turn.
1
If the arranger obtains professional advice or valuation reports ahead of marketing the loan, it
may have a claim against those professionals, although it may struggle to show what loss it has
suffered unless it has lent funds to the borrower on the strength of that advice or valuation:
see, eg, Standard Chartered Bank v Coopers & Lybrand [1993] 3 SLR (R) 29, [1]–[4]; Helmsley
Acceptances Ltd v Lambert Smith Hampton [2010] EWCA Civ 356, [1]–[13]. For the potential
circumvention of the ‘no loss’ principle, see N Goh, ‘Syndicated Loans, Recovery of Third-party
Loss and the Res Inter Alios Acta Principle’ [2016] LMCLQ 367.
2
As a syndicated loan is not a security covered by securities regulations, any liability on the part
of the arranger arises at common law: see A Hudson, The Law of Finance (Sweet & Maxwell,
2nd edn, 2013), [33–25].

(a) Arranger’s liability to the borrower

(i) Arranger’s contractual liability
12.9 As the arranging bank will generally act pursuant to the borrower’s man-
date when marketing the proposed syndicated loan1, the arranger’s primary
form of liability is likely to be contractual in nature. As considered above, in
circumstances where the arranging bank has partly or fully underwritten the
syndication, this will amount to a binding contractual undertaking to lend in
the event that the syndication does not ultimately prove possible2. Accordingly,
the arranger assumes the risk that the terms of the proposed syndicated loan
may prove unacceptable to the lending market, whether as a result of the
arranger having misjudged the current market or having failed to anticipate
changes in market conditions. Where that risk materializes, the arranger will
face an unpalatable choice between either lending to the borrower upon
uncommercial terms or incurring contractual liability by refusing to lend in the
circumstances.
An arranger will seek to mitigate such risks by drafting certain contractual
protections into the mandate, underwriting or fee letters3. For example, a
‘market flex clause’4 will entitle the arranging bank to change the pricing,
structure or terms of the loan agreement in order to take account of prevailing
loan market conditions, although, as a general rule, the arranger is not usually
entitled to rely upon such a clause in order to reduce the amount of its lending
commitment or to avoid that obligation entirely5. Such a drastic step may be
possible, however, if the arranging bank has included a ‘material adverse
change’ clause in the preliminary documents6 and circumstances falling within
the scope of that clause (such as a sudden, unexpected and dramatic change in
national or international financial markets; in the political or legal stability of
the jurisdiction whose law governs the loan agreement; or in the status,
solvency or business of the borrower) have arisen. Such clauses must be clearly
drafted and exercised with care, since their wrongful invocation may constitute
a repudiatory breach of the arranger’s lending commitment7. As specific perfor-
mance of a lending commitment is not presently thought to be available,8
damages is the most that a borrower faced with a wrongful refusal to lend can
hope for9.
1
The arranger is entitled to an indemnity from the borrower in respect of ‘all costs and expenses
(including legal fees) reasonably incurred by any of them in connection with the negotiation,

8
 The Arranging Bank’s Liability 12.10

preparation, printing, execution and syndication’ of the loan agreement and associated docu-
mentation: see LMA.MTR.09, cl 17.1.
2
An alternative method to underwriting the syndication is for the arranging bank simply to lend
the full amount required by the borrower and then to ‘syndicate’ the loan by substituting other
lenders for itself under the loan agreement by means of a series of participation agreements: see
Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland plc [2010] EWHC 1392
(Comm), [77]. Such a practice may be best viewed, however, as a secondary market practice,
rather than a primary market syndication.
3
For detailed discussion, see A Mugasha, The Law of Multi-Bank Financing (Oxford University
Press, 2007), [3.41]–[3.45].
4
See P Rawlings, ‘Avoiding the Obligation to Lend’ [2012] JBL 89, 109–110. See also ACP
Capital Ltd v IFR Capital plc [2008] EWHC 1627 (Comm), [3]–[6].
5
Other protective clauses include the ‘margin ratchet’ clause and the ‘market disruption’ clause,
which largely replace the need for ‘force majeure’ clauses in loan agreements: see P Rawlings,
‘Avoiding the Obligation to Lend’ [2012] JBL 89, 92, 95, 110. See also P Rawlings, ‘Market
Disruption Clauses in Syndicated Loans’ [2009] BJIBFL 446.
6
Such ‘material adverse change’ (or ‘MAC’) clauses are significant given the limited reach of the
common law doctrine of frustration in this context: see DVB Bank SE v Shere Shipping Com-
pany Ltd [2013] EWHC 2321 (Comm), [60]. As frustration requires performance of the loan
agreement to have become impossible, this will only generally be the case where advancing
funds to the borrower has become illegal or where the agreement stipulates that the funds must
be obtained from a particular source that is no longer available: see P Rawlings, ‘Avoiding the
Obligation to Lend’ [2012] JBL 89, 94–96. If the illegality only affects part of the syndicated
loan agreement, it may not frustrate the entire agreement: see LMA.MTR.09, cl 33. See further
R Hooley, ‘Material Adverse Change Clauses After 9/11’, in S Worthington (ed), Commercial
Law and Commercial Practice (Oxford: Hart, 2003), 305.
7
Honest reliance on such a clause may not always amount to a repudiation: see Woodar
Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277, 280. A
borrower may challenge reliance upon a material adverse change clause if ‘the lender acted in
bad faith and so did not exercise its discretion’: see P Rawlings, ‘Avoiding the Obligation to
Lend’ [2012] JBL 89, 96–97.
8
South African Territories v Wallington [1898] AC 309, 312–315, 318, 320. This absolute
rule has increasingly come under pressure: see Loan Investment Corp of Australasia v Bonner
[1970] NZLR 724, 741–745; Miliangos v George Frank (Textiles) Ltd [1976] AC 443, 476,
496. An agreement to subscribe for corporate debentures is now specifically enforceable:
see Companies Act 2006, s 740. For convincing criticism of the absolute nature of the
Wallington principle, see P Rawlings, ‘Avoiding the Obligation to Lend’ [2012] JBL 89,
106–107.
9
For a useful discussion of the issues that a borrower may face when claiming damages from a
syndicate for failing to lend in accordance with its commitments, see P Rawlings, ‘Avoiding the
Obligation to Lend’ [2012] JBL 89, 100–105.

12.10 In the absence of an undertaking to underwrite the syndication, the

extent of the arranging bank’s contractual liability to the borrower depends
upon the scope of its mandate and the existence of any unequivocal undertaking
by the arranging bank in its correspondence with the borrower to arrange the
syndication of the loan1. Where the ‘offer’ by the arranging bank (contained in
the parties’ correspondence) to syndicate the borrower’s loan is couched in
tentative or conditional language (including phrases such as ‘agreement subject
to contract’2, ‘agreement in principle’3 and ‘agreement subject to further
documents’4), a court may treat such an ‘offer’ as being ‘indicative only’ and as
imposing no contractual obligation whatsoever on the arranging bank5, since
the language of the parties’ correspondence may simply be inconsistent with
any objective intention to enter into a binding legal commitment with respect to
the syndication process6.
The presence or absence of such phrases is not, however, determinative7 and it
may be possible for a court to spell out of the parties’ correspondence a
‘committed offer’ on the part of the arranging bank to syndicate the loan8.

9
12.10 Syndicated Lending

Whether this is the case or not ultimately depends upon a pragmatic assess-
ment9, on the facts of the particular case, as to whether there is an enforceable
agreement or mere ongoing negotiations10. Even where such a committed offer
exists, it is not usual for the arranging bank to guarantee that syndication will
occur, so that the risk in this regard remains with the borrower. Instead, the
arranging bank’s contractual undertaking will usually be limited to using ‘best
efforts’11 (or the synonyms ‘best endeavours’ or ‘best energies’)12 or ‘reasonable
endeavours’ to achieve syndication. The former type of undertaking is more
demanding than the latter13, since ‘best endeavours’ means ‘what the words say;
they do not mean second-best endeavours . . . [t]he words mean [one
should] leave no stone unturned [to fulfill the contract]’14. The notion that no
stone should be left unturned will not generally require the arranger to go to
commercially unreasonable lengths to syndicate the loan15 or to act contrary to
its own commercial best interests in order to achieve that result16.
An obligation to use ‘best efforts’ or ‘best endeavours’ will generally be
sufficiently certain to constitute an enforceable contractual obligation17, pro-
vided that the object intended to be procured by those efforts or endeavours is
not too vague or elusive and that the parties have provided criteria on the basis
of which it is possible to assess whether best endeavours have been or can be
used18. There is a consistent line of authority, however, supporting the view that
an undertaking to use one’s best endeavours to reach further agreement with the
other party involves the pursuit of an objective that is too vague and elusive and
is accordingly unenforceable as a mere agreement to agree19. Potentially more
certain, however, is an undertaking to use reasonable endeavours to procure an
agreement with a third party20. Such a distinction is problematic in the present
context, however, since it would potentially mean that the enforceability of the
arranger’s obligation to use best endeavours to syndicate the loan would turn
upon whether or not the arranger ultimately becomes one of the lending
syndicate banks. As such a situation would be no credit to the law, it is
submitted that the arranger’s obligation to exercise ‘best endeavours’ to achieve
syndication should always be enforceable since the object of that obligation
(namely, to achieve an agreement between the borrower and identified syndi-
cate members) is clearly identified from the outset and there will be ‘a yardstick
by which to measure the endeavours’ given that the term sheet and information
memorandum identify the essential terms of the proposed syndicated loan in
advance21.
1
It is possible for an arranger to enter into a contract that is collateral to the mandate letter and
imposes wider contractual obligations, although the court will require convincing evidence that
this was intended: see Barclays Bank plc v Svizera Holdings plc [2014] EWHC 1020 (Comm),
[64]–[67].
2
Consider Winn v Bull (1877) 7 Ch D 29, 32; British Steel Corp v Cleveland Bridge and
Engineering Co Ltd [1984] 1 All ER 504, 509–511. Even if the words ‘subject to contract’
negate any binding obligation upon the arranger to syndicate the loan, it would still be sensible
for both the arranger and borrower to take any commitments in the mandate letter seriously: see
A Mugasha, The Law of Multi-Bank Financing (Oxford University Press, 2007), [3.27]–[3.31],
[3.39].
3
An agreement in principle would amount to little more than an unenforceable agreement to
agree: see Foley v Classique Coaches Ltd [1934] 2 KB 1, 9–16; May and Butcher v The King
[1934] 2 KB 17n, 19–22.
4
Consider Meehan v Jones (1982) 149 CLR 571, 577–582, 587–592. For the suggestion that
references in the mandate letter to ‘usual’, ‘standard’ or ‘customary’ documents establish a
formula that permits the court to cure any uncertainty or incompleteness, see A Mugasha, The
Law of Multi-Bank Financing (Oxford University Press, 2007), [3.32]–[3.36].

10
 The Arranging Bank’s Liability 12.10
5
In Sumitomo Bank v Xin Hua Estates [2000] HKCFI 661, [28]–[30], [72]–[75], [90], Stone J
described letters, in which Sumitomo Bank referred to the possibility of arranging long-term
finance with a bank syndicate, as merely containing ‘indicative proposals’ on Sumitomo’s part,
since the letters stated that the offer to arrange finance was ‘for indication purposes only, based
on the current market situation and subject to our Head Office’s approval. It shall not constitute
as a commitment from us’.
6
Although there is generally a strong presumption in the commercial context that parties intend
to create legal relations (see Edwards v Skyways Ltd [1964] 1 WLR 349, 355), the wording and
context of the particular agreement might indicate otherwise (see Kleinwort Benson Ltd v
Malaysia Mining Corp Bhd [1989] 1 WLR 379, 388–391, 393–394). See also Foley v
Classique Coaches Ltd [1934] 2 KB 1, 9–16.
7
E Peel, Treitel’s The Law of Contract (Sweet & Maxwell, 14th edn, 2015), [2–086], [2–093].
See also RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG [2010] UKSC 14,
[60]–[89].
8
See, eg, Kluang Wood Products Sdn Bhd v Hong Leong Finance Bhd [1999] 1 MLJ 193, 210,
220–221.
9
Barbudev v Eurocom Cable Management Bulgaria EOOD [2011] EWHC 1560 (Comm), [90].
See also P Rawlings, ‘Avoiding the Obligation to Lend’ [2012] JBL 89, 90.
10
RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG [2010] UKSC 14,
[54]–[56].
11
See, eg, Barclays Bank plc v Svizera Holdings BV [2014] EWHC 1020 (Comm), [15].
12
A Mugasha, The Law of Multi-Bank Financing (Oxford University Press, 2007), [3.21]. See
also E Peel, Treitel’s The Law of Contract (Sweet & Maxwell, 14th edn, 2015), [2–100]–[2–
101].
13
Rhodia International Holdings v Huntsman International [2007] EWHC 292 (Comm), [35].
14
Sheffield District Railway Co v Great Central Railway Co (1911) 27 TLR 451, 452; IBM
United Kingdom Ltd v Rockware Glass Ltd [1980] FSR 335, 339, 343; Jet2.com Ltd v
Blackpool Airport Ltd [2012] EWCA Civ 417, [20], [70]; cf Terrell v Mabie Todd & Co [1952]
2 TLR 574 (defining ‘best efforts’ in terms of the reasonableness of the obligor’s efforts). In the
United States, however, the case law indicates that the arranger’s ‘best efforts’ in the syndication
context is closer to a ‘real and active effort that is reasonable in the circumstances’: see A
Mugasha, The Law of Multi-Bank Financing (Oxford University Press, 2007), [3.21]. See also
K Langton & L DeMarco, ‘Is an ‘All Reasonable Endeavours’ Obligation the Best?
(2010) 10 JIBFL 602.
15
CPC Group Ltd v Qatari Diar Real Estate Investment Co [2010] EWHC 1535 (Ch),
[249]–[254]. See also P Rawlings, ‘Avoiding the Obligation to Lend’ [2012] JBL 89, 92–93.
16
Terrell v Mabie Todd & Co [1952] 2 TLR 574. In Jet2.com Ltd v Blackpool Airport Ltd [2012]
EWCA Civ 417, [31]–[33], Moore-Bick LJ stressed that it was not an absolute rule that an
obligation to use ‘best endeavours’ did not require the obligor to act contrary to their own
interests; rather it depended upon the context in which the issue arose. The lesser obligation to
use ‘reasonable endeavours’ will not generally require the obligor to act in such a way: see
Yewbelle Ltd and London Green Developments Ltd v Knightsbridge Green Ltd [2007] EWCA
Civ 475, [29]–[33], [92]–[107]; EDI Central Ltd v National Car Parks Ltd [2012] SLT 421,
[28]; Dany Lions Ltd v Bristol Cars Ltd [2014] EWHC 817 (QB), [52].
17
Walford v Miles [1992] 2 AC 128, 138.
18
Jet2.com Ltd v Blackpool Airport Ltd [2012] EWCA Civ 417, [18]–[31], [66]–[70]; Dany
Lions Ltd v Bristol Cars Ltd [2014] EWHC 817 (QB), [17]–[19]; Astor Management AG v
Atalya Mining plc [2017] EWHC 425, [62]–[72].
19
Little v Courage Ltd [1995] CLC 164, 169; Phillips Petroleum Co (UK) Ltd v Enron
Europe Ltd [1997] CLC 329, 343; London & Regional Investments Ltd v TBI plc [2002]
EWCA Civ 355; Multiplex Constructions (UK) Ltd v Cleveland Bridge UK Ltd [2006] EWHC
1341 (TCC), [633]–[639]; Yewbelle Ltd and London Green Developments Ltd v Knightsbridge
Green Ltd [2007] EWCA Civ 475, [29]–[33]; Barbudev v Eurocom Cable Management
Bulgaria EOOD [2012] EWCA Civ 548, [43]–[46]; Dany Lions Ltd v Bristol Cars Ltd [2014]
EWHC 817 (QB), [20]–[23].
20
Rae Lambert v HTV Cymru (Wales) Ltd [1998] FSR 874, 879–881; R&D Construction Ltd v
Hallam Land Management Ltd 2011 SC 286, [39]; cf The Scottish Coal Company Ltd v Danish
Forestry Company Ltd [2009] CSOH 171, [62]; Jet2.com Ltd v Blackpool Airport Ltd [2012]
EWCA Civ 417, [28]; Shaker v Vistajet Group Holding SA [2012] EWHC 1329 (Comm), [7];
Dany Lions Ltd v Bristol Cars Ltd [2014] EWHC 817 (QB), [24]–[37].
21
Dany Lions Ltd v Bristol Cars Ltd [2014] EWHC 817 (QB), [34]–[37]. Support for the
conclusion in the text may also be derived from the courts’ general unwillingness to strike down

11
12.10 Syndicated Lending

contracts on the ground of uncertainty or incompleteness (see Hillas & Co v Arcos Ltd (1932)
147 LT 503, 514) and the fact that there is a degree of uniformity in the wording of mandate
letters, which may arguably engender certain market expectations in terms of the enforceability
of such documents. See also Astor Management AG v Atalya Mining plc [2017] EWHC 425,
[70]–[71].

(ii) Arranger’s liability for misrepresentation

12.11 Whatever the scope of its contractual undertaking to syndicate, how-
ever, the arranger may additionally be liable to the borrower for any actionable
misrepresentations1 that ultimately induce the latter to enter into the syndicated
loan agreement2. The risk of such liability may be negated, however, by the
terms of the mandate letter, which frequently provide that no relevant repre-
sentations have been made by the arranger to the borrower; that the borrower
has not relied upon any such representations; and/or that the borrower has
exercised its own independent judgement in entering into the loan transaction3.
As Flaux J held in Barclays Bank plc v Svizera Holdings plc4, even if both parties
know that a pre-contractual representation has been made, or that such a
representation has in fact been relied on, such ‘no representation’, ‘non-
reliance’ or ‘independent judgement’ clauses may prevent a borrower from
establishing the constitutive elements of an actionable misrepresentation by
virtue of the contractual estoppel doctrine5 (although there is probably an
exception to that doctrine in the context of fraudulent misrepresentations or
deliberate concealment)6. This development was summarised recently in Tab-
erna Europe CDO II plc v Selskabet AF1 (formerly Roskilde Bank) A/S7, in
which Moore-Bick LJ indicated that ‘the authorities show that there has been
an increasing willingness in recent years to recognise that parties to commercial
contracts are entitled to determine for themselves the terms on which they will
do business’.
One controversial issue concerns whether clauses defining the parties’ primary
obligations and the basis upon which the parties are transacting business with
each other (termed ‘basis clauses’) are subject to control under the Unfair Con-
tract Terms Act 1977, as extended to misrepresentations by s 3 of the Misrep-
resentation Act 1967 (collectively ‘UCTA 1977’), given that the legislation
largely8 covers only exclusion and limitation clauses, but not duty-defining
clauses. Early authorities tended to apply UCTA 1977 not only to provisions
that were exclusion or limitation clauses in form, but also ‘basis’ and ‘duty-
defining’ clauses that in substance had the same effect – the concern being that
the ‘ingenuity of the draftsman’ should not set UCTA 1977 at naught9.
However, in Raiffeisen Zentralbank Österreich AG v Royal Bank of Scot-
land plc10, Clarke J, in line with a trend in modern authority11, held that ‘basis’
or ‘duty-defining’ clauses operating by way of contractual estoppel fall outside
the scope of UCTA 1977, unless ‘the clause attempts to rewrite history or [part]
company with reality’ so that it is tantamount to an exclusion or limitation
clause12. His Lordship concluded that, when sophisticated commercial parties
knowingly include such a clause in their contract, both parties assume that that
clause defines the basis of their relationship and accordingly neither party seeks
to ‘re-write history’ or ‘parts company with reality’ by invoking such a clause13.
Indeed, there are signs of the same approach being adopted judicially in the
context of unsophisticated parties14. Accordingly, in Raiffeisen, Clarke J ap-
peared to suggest that whilst a ‘no representation’ clause would escape the

12
 The Arranging Bank’s Liability 12.11

application of UCTA 1977, the same might not be true of a ‘non-reliance’

clause15. In contrast, in Barclays Bank plc v Svizera Holdings plc16, Flaux J
adopted the contrary position with respect to ‘non-reliance’ clauses. The reality
is that it is probably not possible to be too categorical in this regard, so that
whether ‘no representation’, ‘non-reliance’ and ‘independent judgement’
clauses (usually contained in the arranger’s mandate letter from the borrower)
escape scrutiny under UCTA 1977 will depend upon the precise drafting of the
clause17. If UCTA 1977 does apply, it is then necessary to answer the further
question concerning the ‘reasonableness’ of the clause according to the statu-
tory test18. On this issue, Flaux J in Svizera Holdings rejected as ‘hopeless’ the
suggestion that the terms of the arranger’s mandate letter might be struck down
as unreasonable19. This view is entirely consistent with the general judicial
willingness to uphold terms agreed between sophisticated commercial parties as
reasonable20.
1
For the elements of an actionable misrepresentation, see E Peel, Treitel’s The Law of Contract
(Sweet & Maxwell, 14th edn, 2015), [9–005]–[9–031]. See also MCI Worldcom Inter-
national Inc v Primus Telecommunications Inc [2004] EWCA Civ 957, [30].
2
See, eg, Barclays Bank plc v Svizera Holdings plc [2014] EWHC 1020 (Comm), [5], [18]–[21],
[56], where Flaux J ultimately held that no misrepresentation had been made by the arranger to
the effect that it would procure for the borrower an Indian rupee/US dollar currency swap at
ordinary commercial rates to operate as a hedge to the borrower’s position under the syndicated
loan agreement.
3
For an example of such clauses in a mandate letter, see Barclays Bank plc v Svizera Holdings plc
[2014] EWHC 1020 (Comm), [15].
4
Barclays Bank plc v Svizera Holdings plc [2014] EWHC 1020 (Comm), [58].
5
See, eg, Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006] 2
Lloyd’s Rep 511, [56]–[57], [70]; Trident Turboprop (Dublin) Ltd v First Flight Couriers Ltd
[2008] EWHC 1686 (Comm), [36]; Springwell Navigation Corp v JP Morgan Chase Bank
[2010] EWCA Civ 1221, [141]–[171]; Titan Steel Wheels Ltd v Royal Bank of Scotland plc
[2010] EWHC 211 (Comm), [77]–[92]; Raiffeisen Zentralbank Österreich AG v Royal Bank of
Scotland plc [2010] EWHC 1392 (Comm), [228]–[256]; Cassa di Risparmio della Repubblica
di San Marino SpA v Barclays Bank Ltd [2011] EWHC 484 (Comm), [505]–[507], [525]; Bank
Leumi (UK) plc v Wachner [2011] EWHC 656 (Comm), [168]–[184]; Standard Chartered
Bank v Ceylon Petroleum Corp [2011] EWHC 1785 (Comm), [526]–[534]; Prime Sight Ltd v
Lavarello [2013] UKPC 22, [47]; Bakim Ood v Adria Cable Sarl [2013] EWHC 1985 (Comm),
[160]; Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch), [192];
Matchbet Ltd v Openbet Retail Ltd [2013] EWHC 3067 (Ch), [129]–[132]; HSH Nordbank
AG v Intesa Sanpaolo SpA [2014] EWHC 142 (Comm), [61]; Crestsign Ltd v National
Westminster Bank plc [2014] EWHC 3043 (Ch), [114]–[116]; Thornbridge Ltd v Barclays
Bank plc [2015] EWHC 3430 (QB), [111]; Property Alliance Group Ltd v The Royal Bank of
Scotland plc [2016] EWHC 3342 (Ch), [175], [199]; First Tower Trustees Ltd v CDS
(Superstores International) Ltd [2018] EWCA Civ 1396, [47]–[48]; cf Lowe v Lombank [1960]
1 WLR 196, 204–207. Such clauses may also take effect by way of estoppel by representation:
see EA Grimstead & Son Ltd v McGarrigan [1999] EWCA Civ 3029, [27]–[32].
6
Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland plc [2010] EWHC 1392
(Comm), [337]. See also HIH Casualty and General Insurance Ltd v Chase Manhattan Bank
[2003] UKHL 6, [16], [68]–[82], [118]–[127].
7
Taberna Europe CDO II plc v Selskabet AF1 (formerly Roskilde Bank) A/S [2017] 2 WLR 803,
[26].
8
For the extended notion of an exclusion or limitation clause for the purposes of statutory
control, see Unfair Contract Terms Act 1977, s 13(1).
9
See generally Creamden Properties Ltd v Nash [1977] 2 EGLR 80; Thomas Witter Ltd v TBP
Industries Ltd [1996] 2 All ER 573; EA Grimstead & Son Ltd v McGarrigan [1999] EWCA Civ
3029; Government of Zanzibar v British Aerospace (Lancaster House) Ltd [2000] 1 WLR
2333.
10
Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc [2010] EWHC 1392
(Comm) [274]–[318].
11
Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317, [31]–[58]; IFE Fund SA
v Goldman Sachs International [2007] 2 Lloyd’s Rep 449, [18]; JP Morgan Chase Bank v

13
12.11 Syndicated Lending

Springwell Navigation Corp [2008] EWHC 1186 (Comm), [601], [669]–[671], [675]; Ti-
tan Steel Wheels Ltd v Royal Bank of Scotland plc [2010] EWHC 211 (Comm), [98]–[108];
Camerata Property Inc v Credit Suisse Securities (Europe) Ltd [2011] EWHC 479 (Comm),
[184]–[186]; Standard Chartered Bank v Ceylon Petroleum Corp [2011] EWHC 1785
(Comm), [556]; Avrora Fine Arts Investment Ltd v Christie, Manson & Woods Ltd [2012]
EWHC 2198 (Ch), [136]–[146]; Barclays Bank plc v Svizera Holdings plc [2014] EWHC 1020
(Comm), [61]; Taberna Europe CDO II plc v Selskabet AF1 (formerly Roskilde Bank) A/S
[2017] 2 WLR 803, [23]–[26].
12
Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland plc [2010] EWHC 1392
(Comm), [314].
13
Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland plc [2010] EWHC 1392
(Comm) [313]–[318].
14
Crestsign Ltd v National Westminster Bank plc [2014] EWHC 3043 (Ch), [120]; Thorn-
bridge Ltd v Barclays Bank plc [2015] EWHC 3430 (QB), [109]; Property Alliance Group Ltd
v The Royal Bank of Scotland plc [2016] EWHC 3342 (Ch), [175], [199].
15
Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland plc [2010] EWHC 1392
(Comm) [286], [316].
16
Barclays Bank plc v Svizera Holdings plc [2014] EWHC 1020 (Comm), [61].
17
In JP Morgan Chase Bank v Springwell Navigation Corp [2010] EWCA Civ 1221, [179]–[182],
Aikens LJ concluded that ‘no representation’ and ‘non-reliance’ clauses in the ‘DDCS letters’
and GKO-linked notes, which set out the basis upon which the defendant bank was to purchase
emerging market securities for the claimant investor, fell within section 3 of the Misrepresen-
tation Act 1967 and so were subject to the UCTA 1977 regime. See also Axa Sun Life
Services plc v Campbell Martin Ltd & Co [2011] EWCA Civ 133, [48]–[51] (accepting the
possibility of applying section 3 of the Misrepresentation Act 1967 to an ‘entire agreement
clause’); First Tower Trustees Ltd v CDS (Superstores International) Ltd [2018] EWCA Civ
1396, [63]–[67]. See further Raiffeisen Zentralbank Österreich AG v Royal Bank of Scot-
land plc [2010] EWHC 1392 (Comm) [307]–[308]. For further discussion, see para 30.12
below.
18
Misrepresentation Act 1967, s 3, incorporating Unfair Contract Terms Act 1977, s 11(1).
19
Barclays Bank plc v Svizera Holdings plc [2014] EWHC 1020 (Comm), [61].
20
Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 844; EA Grimstead &
Son Ltd v McGarrigan [1999] EWCA Civ 3029, [29]; Watford Electronics Ltd v Sanderson
CFL Ltd [2001] EWCA Civ 317, [55]; Granville Oil & Chemicals v Davis Turner [2003] 2
Lloyd’s Rep 356, [31]; JP Morgan Chase Bank v Springwell Navigation Corp [2010] EWCA
Civ 1221, [183]–[184]; Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland plc
[2010] EWHC 1392 (Comm), [319]–[327].

12.12 In terms of the borrower’s remedies for misrepresentation, whilst rescis-

sion of the loan facility may in principle be available, in the syndicated loan
context, it may not often be possible in practice to rescind the loan agreement,
since the continued payment of interest and/or principal by the borrower may
constitute an affirmation of the loan agreement1 and the borrower will be
required to effect substantial counter-restitution by repaying the entire princi-
pal amount originally loaned as a precondition to rescission2. Nevertheless, the
advantages conferred by section 2(1) of the Misrepresentation Act 19673, both
in terms of the reversal of the burden of proof on the issue of whether the
misrepresentor had ‘reasonable grounds’ to believe the truth of the statement4
and the generous (deceit-like) measure of damages available,5 means that a
misrepresentation claim will always be an attractive option for a borrower
seeking to impose liability on the arranger. That said, this generous statutory
cause of action will only be available when the arranger subsequently becomes
a member of the lending syndicate and accordingly party to the loan agree-
ment6.
1
Barclays Bank plc v Svizera Holdings plc [2014] EWHC 1020 (Comm), [6].
2
Barclays Bank plc v Svizera Holdings plc [2014] EWHC 1020 (Comm), [6].
3
See generally E Peel, Treitel’s The Law of Contract (Sweet & Maxwell, 14th edn, 2015),
[9–043]–[9–049].

14
 The Arranging Bank’s Liability 12.13
4
The burden of proof imposed upon the misrepresentor by the Misrepresentation Act 1967,
s 2(1) is not easy to discharge: see Howard Marine and Dredging Co Ltd v Ogden & Sons
(Excavations) Ltd [1978] QB 574, 592–593, 595–599, 601; cf Sumitomo Bank Ltd v Banque
Bruxelles Lambert SA [1997] 1 Lloyd’s Rep 487, 515 where Langley J indicated that there
would effectively be no reversal in the burden of proof when the representation was that the
arranger had ‘taken proper care to do X’.
5
Royscot Trust v Rogerson [1991] 2 QB 297, 304–308, 309–310 (applying to Misrepresentation
Act 1967, s 2(1) the deceit measure of recovery established in Doyle v Olby [1969] 2 QB 158,
167 and confirmed in Smith New Court Securities Ltd v Citibank NA [1997] AC 254, 263–266,
269, 281–282); Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland plc [2010]
EWHC 1392 (Comm), [386]–[388]; cf Avon Insurance plc v Swire Fraser Ltd [2000] CLC 665,
[200]–[201].
6
Section 2(1) of the Misrepresentation Act 1967 provides a statutory cause of action ‘where a
person has entered into a contract after a misrepresentation has been made to him by another
party thereto . . . ’ (emphasis added). Where the arranger does not subsequently become a
principal party to the syndicated loan agreement by advancing funds to the borrower, any claim
for misrepresentation must be brought under the torts of deceit or negligence. Consider, in the
context of claims in the secondary bond market, Taberna Europe CDO II plc v Selskabet AF1
(formerly Roskilde Bank) A/S [2017] 2 WLR 803.

(iii) Arranger’s negligence liability

12.13 Where the arranger has underwritten the syndication or has undertaken
an absolute contractual obligation to syndicate the loan, it is conceptually
possible for it also to owe a concurrent common law duty to exercise reasonable
care to achieve syndication of the loan, but in practice the borrower would
rarely seek to enforce such a lesser tortious obligation, absent some procedural
advantage to be gained1. The same is largely true of the situation where the
arranger undertakes a contractual obligation to exercise reasonable skill and
care to syndicate the loan.
In contrast, where the arranger’s offer to syndicate is ‘indicative only’2, the
existence of a common law duty of care will be particularly significant for the
borrower given the absence of contractual liability on the arranger’s part. Any
such alleged common law duty will usually take one of two basic forms, both of
which are likely to prove difficult for the borrower to establish. First, the
borrower may allege a duty that the arranger exercise reasonable care to achieve
a successful syndication of the loan or to take some specific step as part of
establishing the syndicated loan3. Since courts are reluctant to impose tortious
liability where this would contradict or undermine the contractual allocation of
risk4, the fact that the arranger’s mandate is framed in tentative or conditional
language may not only prevent any contractual liability from arising between
arranger and borrower but may also negate any tortious duty of care, especially
one based upon notions of voluntary assumption of responsibility5. As it is not
an absolute rule that the tort of negligence must always play second fiddle to
contract law, the courts may on rare occasions be prepared to impose tortious
liability that is at odds with the relevant contractual framework6 or even wider
than the parties’ contractual undertakings7. A court will only be persuaded to
take such a radical step, however, where the borrower can clearly demonstrate
that the arranger had voluntarily assumed responsibility for the particular
matter in question in a manner going above and beyond its limited contractual
undertaking8.
Secondly, the borrower may allege that the arranger assumed a duty to advise it
either generally or specifically about how best to protect or secure its position in

15
12.13 Syndicated Lending

its dealings with the lenders9. Such a situation arose in Svizera Holdings10, in
which the arranger was alleged to owe a duty to advise the borrower as to the
best way to hedge its currency risks and a duty to procure an appropriate
hedging transaction. Flaux J denied any such duty on the basis that there was no
written advisory agreement whereby the arranger expressly undertook to
provide such advice11. Nevertheless, a court may be prepared to impose an
advisory duty on the arranging bank depending upon such circumstances as the
borrower’s level of sophistication12, the precise functions discharged by the
arranger13 and the terms of the parties’ relationship14. In Svizera Holdings, all
these factors pointed against any advisory relationship, since the borrower was
a large commercial entity, the arranger performed its services to the borrower
on an ‘execution only’ basis15 and without any advisory element16 and the
mandate letter contained terms which operated to estop the borrower contrac-
tually from asserting that the arranger was acting as an advisor17. As these
factors will be present in virtually every case involving a dispute between a
borrower and an arranger, rather unusual facts would be required for a court to
impose an advisory duty on an arranging bank in this context absent an express
undertaking to that effect.
1
For the borrower, this might take the form of being able to rely upon a more generous limitation
period or more extensive principles of remoteness, but the downside for the borrower may be
that contributory negligence becomes available to the arranger as a basis for reducing its
liability. Consider Kluang Wood Products Sdn Bhd v Hong Leong Finance Bhd [1999] 1 MLJ
193, 223–225.
2
See para 12.10 above.
3
In Barclays Bank plc v Svizera Holdings plc [2014] EWHC 1020 (Comm), [53]–[55], Flaux J
rejected an argument that the arranger was under a common law duty to take reasonable care
in securing a currency swap for the borrower in order to hedge the latter’s position under a
syndicated loan agreement.
4
See, eg, Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80, 107–108; IFE
Fund SA v Goldman Sachs International [2007] 1 Lloyd’s Rep 264, [71], aff’d on this point:
[2007] 2 Lloyd’s Rep 449, [28]; JP Morgan Chase Bank v Springwell Navigation Corp [2008]
EWHC 1186 (Comm), [474]–[475], [479]; Titan Steel Wheels Ltd v Royal Bank of Scotland plc
[2010] EWHC 211 (Comm), [85]–[92]; Grant Estates Ltd v Royal Bank of Scotland plc [2012]
CSOH 133, [71]–[72].
5
See, eg, Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, 486–487, 502–503,
511, 529–530, 539; Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, 180; White v Jones
[1995] 2 AC 207, 262; Williams v Natural Life Health Foods Ltd [1998] 2 All ER 577, 583;
Customs & Excise Commissioners v Barclays Bank plc [2007] 1 AC 181, [4], [52], [83];
NRAM Ltd v Steel [2018] 1 WLR 1190, [19]–[24]; Playboy Club London Ltd v Banca
Nazionale del Lavoro SpA [2018] 1 WLR 4041, [6]–[10].
6
See, eg, Riyad Bank v Ahli United Bank plc [2006] 2 Lloyd’s Rep 292, [27]–[33], [37]–[50],
[137].
7
See, eg, Holt v Payne Skillington and De Groot Collis (1995) 77 BLR 51, 73; Sumitomo
Bank Ltd v Banque Bruxelles Lambert SA [1997] 1 Lloyd’s Rep 487, 513; Weldon v GRE
Linked Life Assurance Ltd [2000] 2 All ER (Comm) 914, [63].
8
Sumitomo Bank Ltd v Banque Bruxelles Lambert SA [1997] 1 Lloyd’s Rep 487, 493, 514.
9
Shencourt Sdn Bhd v Aseambankers Malaysia Bhd [2011] 6 MLJ 236, [173] rev’d on a different
point: [2014] 4 MLJ 619.
10
Barclays Bank plc v Svizera Holdings plc [2014] EWHC 1020 (Comm), [31].
11
Barclays Bank plc v Svizera Holdings plc [2014] EWHC 1020 (Comm), [69]–[70].
12
JP Morgan Chase Bank v Springwell Navigation Corp [2008] EWHC 1186 (Comm), [264],
[432], [448], [455]. See also Bankers Trust International plc v PT Dharmala Sakti Sejahtera
[1995] Bank LR 381, 392, 419; Titan Steel Wheels Ltd v Royal Bank of Scotland plc [2010]
EWHC 211 (Comm), [94]–[96].
13
JP Morgan Chase Bank v Springwell Navigation Corp [2008] EWHC 1186 (Comm), [101]–
[105], [373]–[374], [445]–[459]; Titan Steel Wheels Ltd v Royal Bank of Scotland plc [2010]
EWHC 211 (Comm), [93]–[94].

16
 The Arranging Bank’s Liability 12.14
14
JP Morgan Chase Bank v Springwell Navigation Corp [2008] EWHC 1186 (Comm), [236],
[263], [474]–[490]. See also Valse Holdings SA v Merrill Lynch International Bank Ltd [2004]
EWHC 2471 (Comm), [69]; Peekay Intermark Ltd v Australia and New Zealand Banking
Group Ltd [2006] 2 Lloyd’s Rep 511, [43]; IFE Fund SA v Goldman Sachs International [2007]
2 Lloyd’s Rep 449, [28]; Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland plc
[2010] EWHC 1392 (Comm), [97], [230]–[256]; Bank Leumi (UK) plc v Wachner [2011]
EWHC 656 (Comm), [185]–[210].
15
Barclays Bank plc v Svizera Holdings plc [2014] EWHC 1020 (Comm), [34].
16
Barclays Bank plc v Svizera Holdings plc [2014] EWHC 1020 (Comm), [70].
17
Barclays Bank plc v Svizera Holdings plc [2014] EWHC 1020 (Comm), [32], [70]–[71].

(iv) Arranger’s liability as the borrower’s fiduciary

12.14 In principle, any claim by the borrower that the arranging bank is its
fiduciary1 and has breached its attendant duties should prove as difficult to
establish as the tortious claims described above. An arranger is not generally
viewed as operating in an agency capacity in its dealings with the borrower2, but
rather acts as a middleman or broker between the borrower and lenders in
forming the lending syndicate and settling the terms of the loan agreement3.
Accordingly, an arranger is not a ‘per se fiduciary’4. Support for this view exists
in Barclays Bank plc v Svizera Holdings plc5, where Flaux J rejected as
‘hopeless’ the argument that Barclays Bank, which had acted as the ‘lead
mandated arranger’, a facility agent and ultimately a member of the lending
syndicate, was the borrower’s agent at any point in their dealings. Moreover, his
Lordship stressed that ‘save in special circumstances’6, the English courts had
firmly resisted attempts to import fiduciary concepts into the banker-customer7,
the lender-borrower8 and even the investment adviser-client relationships9.
Given that this reluctance is manifest even when the customer, borrower or
client is an individual or unsophisticated counterparty,10 the position is a
fortiori as between the arranging bank and borrower since they are commercial
parties dealing with each other at arm’s length11.
Nevertheless, the Court of Appeal has provided some scope for argument
against that view in United Pan-Europe Communications NV v Deutsche Bank
AG12, in which the claimant, a Dutch telecommunications giant, complained
that the defendant bank had inter alia breached its fiduciary duties to the
claimant by successfully bidding against the claimant for the acquisition of the
shares in a German telecommunications company. The claim was based upon
the fact that the defendant bank had previously participated in three syndicated
loans to the claimant (one of which was also arranged by the bank), pursuant to
which the claimant provided documents containing its long-term business plan
and strategy in exchange for the defendant bank’s undertaking to keep the
information contained therein confidential. Morritt LJ, on behalf of a unani-
mous Court of Appeal, held that there was a ‘seriously arguable case for breach
of fiduciary duty’ based upon the previous ‘key banking relationship’ between
the parties, the mutual trust and confidence between them and the provision of
confidential information.
1
In other jurisdictions, as an alternative to classifying the arranger as a fiduciary, litigants have
attempted to imply an obligation to act in good faith into the arranger’s mandate from the
borrower, but this has not met with success: see Shencourt Sdn Bhd v Aseambankers Malaysia
Bhd [2014] 4 MLJ 619, [72], [80]–[81], [126], [329].
2
A Mugasha, The Law of Multi-Bank Financing (Oxford University Press, 2007), [3.46]. In any
event, any agency is likely to relate to specific and defined tasks, will probably be limited in

17
12.14 Syndicated Lending

scope and nature and accordingly is unlikely to attract fiduciary obligations: see, eg, Torre Asset
Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch), [142]–[148].
3
The explanation of the arranger as a ‘middleman’ may accommodate the fact that during the
arranging process, the arranger appears to switch from acting for the borrower to acting for the
members of the lending syndicate: see A Hudson, The Law of Finance (Sweet & Maxwell, 2nd
edn, 2013), [33–20]; L Gullifer & J Payne, Corporate Finance Law: Principles and Policy (Hart
Publishing, 2nd edn, 2015), [8.4.3].
4
For the distinction between ‘per se fiduciaries’ and fiduciaries who assume ‘a position of
protection and advancement of the other party’ on the particular facts, see J Getzler, ‘Excluding
Fiduciary Duties: the Problems of Investment Banks’ (2008) 124 LQR 15, 18. See also
Australian Securities and Investments Commission v Citigroup Global Markets Australia
Pty Ltd [2007] FCA 963. A bank will be a ‘per se fiduciary’ where it has specifically undertaken
to act as trustee or agent: see Space Investments Ltd v Canadian Imperial Bank of Commerce
Trust Co (Bahamas) Ltd [1986] 3 All ER 75.
5
Barclays Bank plc v Svizera Holdings plc [2014] EWHC 1020 (Comm), [9].
6
Barclays Bank plc v Svizera Holdings plc [2014] EWHC 1020 (Comm), [8].
7
Governor & Company of the Bank of Scotland v A Ltd [2001] 1 WLR 751, [25]; Bournemouth
& Boscombe Athletic Football Club Ltd v Lloyds TSB Bank plc [2003] EWHC 834 (Ch), [28];
Murphy v HSBC Bank plc [2004] EWHC 467 (Ch), [101]; Forsta Ap-Fonden v Bank of New
York Mellon SA [2013] EWHC 3127 (Comm), [173]; Barclays Bank plc v Svizera Holdings plc
[2014] EWHC 1020 (Comm), [8]; Rehman v Santander UK plc [2018] EWHC 748 (QB),
[41]–[42].
8
See, eg, Tamimi v Khodari [2009] EWCA Civ 1042, [42]; Kotonou v National Westminster
Bank plc [2010] EWHC 1659 (Ch), [136].
9
See, eg, JP Morgan Chase Bank v Springwell Navigation Corp [2008] EWHC 1186 (Comm),
[571]–[577].
10
See, eg, Wright v HSBC Bank plc [2006] EWHC 930 (QB), [61]–[63].
11
See generally P Millett, ‘Equity’s Place in the Law of Commerce’ (1998) 114 LQR 214. See also
Manchester Trust v Furness [1895] 2 QB 539, 545.
12
United Pan-Europe Communications NV v Deutsche Bank AG [2000] 2 BCLC 461. See also
Shencourt Sdn Bhd v Aseambankers Malaysia Bhd [2011] 6 MLJ 236, [145]–[170], rev’d on a
different point: [2014] 4 MLJ 619.

12.15 Given that a borrower will often have a prior banking relationship with
the arranger and will frequently have to disclose confidential information to the
arranging bank about the purpose of the loan or the details of the project being
financed, the reasoning in Pan-Europe Communications has the potential to
cover a large number of arranging banks. Four factors may, however, mitigate
its reach. First, Pan-Europe Communications concerned an application for an
interim injunction to prevent the defendant bank from disposing of the shares
that it had acquired (allegedly in breach of fiduciary duty) in the German
telecommunications company. Accordingly, the Court of Appeal’s decision is
limited to whether there was a ‘serious issue’ to be tried regarding the alleged
breach of fiduciary duty. Secondly, as the complaint did not directly relate to the
defendant bank’s conduct as arranger, but rather to its conduct (after the
syndicated loans had been repaid) in relation to an unconnected transaction,
Pan-Europe Communications does not provide any clear support for the
possibility of a borrower suing the arranger for breach of fiduciary duty within
the context of the syndicated loan itself1. Thirdly, as considered further below2,
the existence of prior authority suggesting that an arranging bank might owe
fiduciary duties to the proposed members of the lending syndicate3 undermines
Pan-Europe Communications, as arrangers would otherwise be expected to
serve two different masters (often with competing interests) with undivided
loyalty4. Fourthly, it is common practice to include in the arranger’s mandate
letter a clause (usually repeated in the syndicated loan agreement itself)5 stating
expressly that the arranger is not acting in any fiduciary capacity6. It is now well

18
 The Arranging Bank’s Liability 12.16

established that such a duty-defining clause operates to prevent fiduciary

obligations arising in the first place7. Accordingly, save for the most exceptional
circumstances, an arranging bank should not be treated as the borrower’s fidu-
ciary.
1
A Mugasha, The Law of Multi-bank Financing (Oxford University Press, 2007), [3.46].
2
See para 12.21 below.
3
See UBAF Ltd v European American Banking Corpn [1984] QB 713, 728.
4
L Gullifer & J Payne, Corporate Finance Law: Principles and Policy (Hart Publishing, 2nd edn,
2015) [8.4.3].
5
See LMA.MTR.09, cl 26.5(a): ‘Nothing in any Finance Document constitutes . . . the
Arranger . . . as a trustee or fiduciary of any other person.’ See also Barclays Bank plc v
Svizera Holdings plc [2014] EWHC 1020 (Comm), [45]–[46].
6
For an example of such a clause in an arranger’s mandate letter, see Barclays Bank plc v Svizera
Holdings plc [2014] EWHC 1020 (Comm), [15].
7
See, eg, Kelly v Cooper [1993] AC 205, 213–214; Henderson v Merrett Syndicates Ltd [1995]
2 AC 145, 206; Silven Properties Ltd v Royal Bank of Scotland plc [2004] 1 WLR 997, [25]; JP
Morgan Chase Bank v Springwell Navigation Corp [2008] EWHC 1186 (Comm), [734]; Saltri
III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [123(f)]. For the application
of this principle in the syndicated lending context, see Torre Asset Funding Ltd v Royal Bank of
Scotland plc [2013] EWHC 2670 (Ch), [143]–[148]; Barclays Bank plc v Svizera Holdings plc
[2014] EWHC 1020 (Comm), [8].

(v) Arranger’s liability for breach of confidence

12.16 As indicated above1, in order to enable the arranger to market the
syndicated loan to potential lenders, the borrower will often have to reveal
confidential information to the arranger concerning, for example, the particular
project to be financed or the borrower’s future business strategy. Ordinarily, the
mandate letter will contain an express contractual undertaking on the arrang-
er’s part to maintain the confidentiality of the borrower’s information2. Alter-
natively, the arranger may enter into a separate confidentiality agreement with
the borrower, as occurred in Pan-Europe Communications3. The syndicated
loan agreement itself usually contains a further confidentiality undertaking by
the arranger4, which is stated to supersede any prior undertakings to similar
effect5. Breach of such a confidentiality undertaking arguably provides a more
secure basis for the interim injunction in Pan-Europe Communications than the
claim based upon a breach of fiduciary duty, considered in the preceding
paragraph6.
Absent such an express undertaking, the borrower’s confidential information is
nevertheless likely to be protected by the court being prepared to imply a
confidentiality undertaking into the mandate letter7 or by the equitable wrong
of breach of confidence8. Whatever the obligation’s source, the borrower may
obtain an injunction to prevent the disclosure or use of any confidential
information or, where disclosure has already occurred, damages.
1
See para 12.5 above.
2
Barclays Bank plc v Svizera Holdings plc [2014] EWHC 1020 (Comm), [15].
3
United Pan-Europe Communications NV v Deutsche Bank AG [2000] 2 BCLC 461.
4
LMA.MTR.09, cl 36.1, which provides that each ‘Finance Party’ (defined in LMA.MTR.09,
cl 1.1 to include the arranger) ‘agrees to keep all Confidential Information confidential and not
to disclose it to anyone’ and ‘to ensure that all Confidential Information is protected with
security measures and a degree of care that would apply to its own confidential information’.
There are exceptions to this obligation in LMA.MTR.09, cl 36.2 covering inter alia disclosure
to affiliates, officers and advisers (if the arranger considers such disclosure ‘appropriate’); to
assignees, transferees or sub-participants; to subsequent lenders; pursuant to a court order; for

19
12.16 Syndicated Lending

the purposes of judicial or arbitration proceedings; and with the borrower’s consent. In certain
circumstances, notification of disclosure should be sent to the borrower: see LMA.MTR.09,
cl 36.6. The obligation of confidentiality generally continues for 12 months after the repayment
of the loan monies: see LMA.MTR.09, cl 36.7.
5
LMA.MTR.09, cl 36.4. Where the confidential information is also ‘price-sensitive’, parties will
have to ensure that use of that information does not amount to insider dealing under the
Regulation (EU) No 596/2014 on Market Abuse, OJ L 173, Art 7–8: see LMA.MTR.09,
cl 36.5.
6
Certainly, Morritt LJ in Pan-Europe Communications considered there to be ‘a seriously
arguable case that [Deutsche Bank, as arranger] did obtain confidential information’. See
further A Berg, ‘UK Court Ruling Imposes Fiduciary Duty on Capital Markets’, International
Financial Law Review, July 2000.
7
If the arranger and borrower have a pre-existing banker-customer relationship, then any
information (even if not confidential in itself) supplied to the arranger in its capacity as the
borrower’s banker may be caught by the confidentiality term implied in law into the account
contract: see Tournier v National Provincial and Union Bank of England [1924] 1 KB 461,
473–474, 481, 485. Even when there is no pre-existing banker-customer relationship, the
courts have demonstrated a willingness (albeit in the different context of transferable letters of
credit) to imply a confidentiality undertaking: see Jackson v Royal Bank of Scotland plc [2005]
1 WLR 377, [20].
8
See A-G v Guardian Newspapers Ltd (No 2) [1990] 1 AC 109, 281: ‘ . . . a duty of
confidence arises when confidential information comes to the knowledge of a person (the
confidant) in circumstances where he has notice, or is held to have agreed, that the information
is confidential, with the effect that it would by just in all the circumstances that he should be
precluded from disclosing the information to others . . . ’. For recent discussion of this
doctrine, see also Douglas v Hello! Ltd (No 3) [2008] 1 AC 1, [272]–[278]; Vestergaard
Frandsen A/S v Bestnet Europe Ltd [2013] 1 WLR 1556, [23]–[28]; Marathon Asset Manage-
ment LLP v Seddon [2017] EWHC 300 (Comm), [121]–[123].

(b) Arranger’s liability to the syndicate banks

12.17 In the event of the borrower’s insolvency, the arranger is a particularly
attractive, deep-pocketed target for the members of the lending syndicate1.
Most claims brought by the syndicate banks against the arranger involve
allegations that there were errors in the term sheet, information memorandum
or other pre-contractual documentation or that the arranger failed to disclose
some material fact about the borrower or the terms of the loan agreement
itself2. Given that there is no contractual relationship between the arranger and
the banks that become party to the syndicated loan agreement3 (although an
arranging bank may subsequently become a party to that agreement either as
agent bank or as a member of the lending syndicate), the syndicate banks’
claims will by necessity be non-contractual4, whether based on liability for
misrepresentation, for negligence, breach of fiduciary duty or breach of confi-
dence. Each type of claim will be considered in turn.
1
L Gullifer & J Payne, Corporate Finance Law: Principles and Policy (Hart Publishing, 2nd edn,
2015) [8.4.3].
2
As the arranger does not act as the borrower’s agent, the latter will not be vicariously liable for
the former’s wrongdoing: see Barclays Bank plc v Svizera Holdings plc [2014] EWHC 1020
(Comm), [9].
3
Such a contractual relationship might exist if the relevant documentation revealed that the
arranger had undertaken to act as the agent of the potential syndicate members in putting the
loan agreement together (see A Hudson, The Law of Finance (Sweet & Maxwell, 2nd edn,
2013), [33–23]), but, in the ordinary case, the arranger is best viewed as acting on its own
account, albeit in an intermediary capacity.
4
Although there is no direct contractual relationship, it is usual for the information memoran-
dum to evidence an undertaking on the part of the potential syndicate members to protect the
borrower’s confidential information provided to them by the arranger: see, eg, Raiffeisen

20
 The Arranging Bank’s Liability 12.18

Zentralbank Österreich AG v Royal Bank of Scotland plc [2010] EWHC 1392 (Comm),
[63]–[64]. Whilst the arranger may be entitled to enforce this undertaking by injunction, it will
prove difficult to establish any loss suffered as a result of an unauthorized disclosure given that
the confidential information belongs to the borrower. As the arranger does not act as the
borrower’s agent (see Barclays Bank plc v Svizera Holdings plc [2014] EWHC 1020 (Comm),
[9]), the borrower would not be a direct party to the lenders’ confidentiality undertaking, but
may be able to enforce it as a third party under the Contract (Rights of Third Parties) Act 1999,
s 1(1)(b) (although see LMA.MTR.09, cl 1.4). Alternatively, the borrower may be able to bring
a claim for the equitable wrong of breach of confidence directly against the lenders: see A-G v
Guardian Newspapers Ltd (No 2) [1990] 1 AC 109, 281–283.

(i) Arranger’s liability for misrepresentation

12.18 Where it can be shown that the arranger has misstated some material
fact or expressed some unfounded opinion1 in the loan term sheet or informa-
tion memorandum, then it may prima facie be liable for misrepresentation if the
lender can demonstrate that it was induced by the misstatement to enter into the
loan agreement2. Alternatively, the alleged misrepresentation may arise out of
statements made by the arranger during the course of ‘marketing’ the syndica-
tion to potential lenders and soliciting their participation in the syndicated loan.
For example, in Sumitomo Bank Ltd v Banque Bruxelles Lambert SA3, the
members of a lending syndicate sought to recover their losses upon the borrow-
er’s default from the arranger on the basis that the latter had misrepresented
that it would, firstly, procure ‘mortgage indemnity guarantees’ on the notified
terms in order to protect the lenders from the borrower’s default and, secondly,
that it would exercise proper and reasonable care in making any necessary
disclosures to the insurance company for the guarantees to be valid. Another
example can be found in UBAF Ltd v European American Banking Corp4, in
which the arranger marketed the syndicated loan to the lenders on the basis that
it involved ‘attractive financing of two companies in a sound and profitable
group’.
UBAF also highlights5 that, as misrepresentations made by an arranger to the
syndicate banks will often relate ‘to the character, conduct, credit, ability, trade
or dealings’ of the borrower with a view to the borrower obtaining ‘credit,
money or goods’, the arranger will not be liable (either in the tort of deceit or
under section 2(1) of the Misrepresentation Act 1967) unless the misrepresen-
tation is ‘made in writing, signed by the party to be charged therewith’6.
Moreover, as discussed above7, the statutory cause of action and its significant
advantages8 are only available to a syndicate lender where the arranger subse-
quently becomes party to the syndicated loan agreement, otherwise the lend-
er’s claim must be brought in the torts of deceit9 or negligence depending upon
the arranger’s level of fault10. As also discussed above in relation to the
arranger’s mandate letter11, the term sheet and the information memorandum
will ordinarily contain a number of provisions designed to immunize the
arranger from potential liability for misrepresentation, such as ‘no representa-
tion’, ‘non-reliance’, ‘own/independent judgement’ and ‘entire agreement’
clauses. Such clauses can operate to estop the syndicate members from alleging
any actionable misrepresentation and, at least in a context such as the present,
may escape control under section 3 of the Misrepresentation Act 1967 or the

21
12.18 Syndicated Lending

UCTA 197712.
1
See generally Smith v Land & House Property Corp (1884) 28 Ch D 7, 12–17; Bisset v
Wilkinson [1927] AC 177, 181–185; Brown v Raphael [1958] Ch 636, 641–644, 649;
Highlands Insurance Co v Continental Insurance Co [1987] 1 Lloyd’s Rep 109, 112–113;
Bankers Trust International plc v PT Dharmala Sakti Sejahtera (No 2) [1996] CLC 518,
530–531.
2
For the elements of an actionable misrepresentation, see E Peel, Treitel’s The Law of Contract
(Sweet & Maxwell, 14th edn, 2015), [9–005]–[9–031].
3
Sumitomo Bank Ltd v Banque Bruxelles Lambert SA [1997] 1 Lloyd’s Rep 487, 515. See also
Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch), [23].
4
UBAF Ltd v European American Banking Corp [1984] QB 713, 717.
5
UBAF Ltd v European American Banking Corp [1984] QB 713, 718–725. The signature of a
duly authorized agent of the arranger counts as the arranger’s signature for the purposes of
the Statute of Frauds Amendment Act 1828, s 6: see UBAF Ltd v European American
Banking Corp [1984] QB 713, 724–725.
6
Statute of Frauds Amendment Act 1828, s 6.
7
See para 12.12 above.
8
Consider Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland plc [2010] EWHC
1392 (Comm), [386]–[388].
9
Consider Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland plc [2010] EWHC
1392 (Comm), [338]–[342].
10
IFE Fund SA v Goldman Sachs International [2007] 2 Lloyd’s Rep 449, [28].
11
See para 12.11 above.
12
See para 12.11 above.

12.19 Syndicate lenders have not always limited their claims to the making of
positive misrepresentations by the arranger, but have also sought to impose
liability on the arranger for effectively failing to disclose information about the
borrower1. Although initial non-disclosure of information by the arranging
bank does not generally constitute a misrepresentation2, lenders have tried to
circumvent this particular restriction in a number of ways: by arguing that the
arranger has impliedly represented certain material facts, such as that the
information in the term sheet or information memorandum remains accurate
and accordingly constitutes a ‘continuing representation’ until the signing of the
loan agreement3; by arguing that the arranger has a common law duty of care to
update such information at any time before the loan agreement is executed; or
by arguing that the arranger is a fiduciary and obliged to disclose material
information to its principal. The latter two arguments will be considered in
subsequent paragraphs.
An example of the first argument, however, can be found in IFE Fund SA v
Goldman Sachs International4, in which the claimant alleged that the arranging
bank had failed to disclose two negative reports about the financial perfor-
mance of the target company that the borrower required financing to acquire.
Those reports were produced between the date of the information memoran-
dum and the claimant’s investment and were prepared by the same accountants
who had initially prepared the report about the target company’s finances
(which had initially been attached to the information memorandum). Accord-
ing to Gage LJ, the only representation made by the arranging bank when
sending the information memorandum to potential syndicate members was an
implied representation of good faith, so that the arranging bank would only be
liable if it ‘actually knew that it has in its possession information which made
the information in the [memorandum] misleading . . . this would amount to
an allegation of dishonesty’5. The Court of Appeal, however, rejected any
further or wider implied representation, to the effect that the information

22
 The Arranging Bank’s Liability 12.19

memorandum remained accurate after its issue, on the basis that such a
representation would conflict with the express terms of the information memo-
randum and associated documentation, namely that the arranger assumed no
responsibility for the accuracy or completeness of the memorandum6 and did
not undertake to review any parties’ financial condition7 or to update the
information memorandum after its date of issue.8
Whilst IFE Fund largely rejected the arranger’s liability for failure to disclose
relevant information by reference to the specific terms of the information
memorandum and other documents, more recently a wider basis for refusing to
impose such liability on an arranger is discernible from Raiffeisen Zentralbank
Österreich AG v Royal Bank of Scotland plc9. This decision involved a
syndicate member seeking to convert an arranging bank’s failure to disclosure
certain matters relating to the borrower’s financial position and the syndicated
loan agreement itself into actionable positive ‘implied’ representations. In this
regard, Clarke J highlighted that, in determining whether the arranger has made
an actionable misrepresentation to the syndicate banks, a court should have
regard to a number of contextual factors10 (besides the contents of the standard-
form term sheet or the information memorandum that might contractually
estop a lending bank from alleging any misrepresentation on the
arranger’s part)11: the fact that the parties were ‘sophisticated participants in the
syndicated loans market’12; the fact that ‘whilst a bank could reasonably expect
that the principal credit issues were addressed [in the information memoran-
dum], it could not reasonably assume that the [information memorandum]
contained everything that anyone might think relevant (even on credit issues)’13;
and the fact that certain matters might be subject to an obligation of confiden-
tiality between the arranger and the borrower and accordingly might be
undisclosable14. Even without reference to the terms of the standard-form
documentation (which have often proved decisive, even in the context of
express misrepresentations)15 the factors identified by Clarke J in Raiffeisen will
make it extremely difficult for the syndicate banks to hold the arranger liable for
any ‘implied’ representations, let alone an outright failure to disclose certain
information.
1
In November 2012, the Japanese Supreme Court held that the principle of good faith compelled
an arranger to disclose to the potential members of a lending syndicate any material information
relating to the borrower’s fraudulent accounting practices.
2
E Peel, Treitel’s The Law of Contract (Sweet & Maxwell, 14th edn, 2015)), [9–136].
3
With v O’Flanagan [1936] 1 Ch 575, 584–585. For a discussion of the two possible interpre-
tations of With, see R Bigwood, ‘Pre-contractual Misrepresentation and the Limits of the
Principle in With v O’Flanagan’ (2005) 64 CLJ 96.
4
IFE Fund SA v Goldman Sachs International [2007] 2 Lloyd’s Rep 449.
5
IFE Fund SA v Goldman Sachs International [2007] 2 Lloyd’s Rep 449, [74]–[76].
6
IFE Fund SA v Goldman Sachs International [2007] 2 Lloyd’s Rep 449, [67].
7
IFE Fund SA v Goldman Sachs International [2007] 2 Lloyd’s Rep 449, [34], [68].
8
IFE Fund SA v Goldman Sachs International [2007] 2 Lloyd’s Rep 449, [38], [74]–[75].
9
Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland plc [2010] EWHC 1392
(Comm).
10
Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland plc [2010] EWHC 1392
(Comm), [81], [85]. See also MCI WorldCom International Inc v Primus Telecommunica-
tions Inc [2004] EWCA Civ 957, [30]. Clarke J, in Raiffeisen (at [126]), did not consider that
an arranging bank would necessarily make any implied representation in the information
memorandum with respect to the legality of the particular transaction. See also Property
Alliance Group Ltd v Royal Bank of Scotland plc [2018] 1 WLR 3529, [122]–[134].
11
Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland plc [2010] EWHC 1392
(Comm), [95], [97].

23
12.19 Syndicated Lending
12
Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland plc [2010] EWHC 1392
(Comm), [81], [92].
13
Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland plc [2010] EWHC 1392
(Comm), [93].
14
Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland plc [2010] EWHC 1392
(Comm), [96].
15
Where the allegation is that there has been a fraudulent misrepresentation or deliberate
concealment, the provisions of the term sheet or information memorandum may not contrac-
tually estop the other party in the usual way: see Raiffeisen Zentralbank Österreich AG v Royal
Bank of Scotland plc [2010] EWHC 1392 (Comm), [337].

(ii) Arranger’s negligence liability

12.20 As an alternative to framing their claim as an express or implied
misrepresentation, the syndicate banks may allege that the arranger breached a
common law duty to exercise reasonable care and that this caused the syndicate
banks’ losses1. In order to establish that the arranger owes the syndicate banks
a relevant duty of care2, the lenders will usually have to demonstrate that the
arranger voluntarily assumed responsibility towards them for the particular
matter in question3, although (like claims based upon misrepresentation)
negligence-based claims have generally (with a few exceptions) failed due to the
wording of the term sheet or information memorandum irrespective of how the
particular claim has been framed. Negligence-based arguments by the syndicate
banks have generally taken three forms. First, the syndicate lenders may allege
that the arranger assumed responsibility for a particular task or for achieving a
particular result. An example of such a case is Sumitomo Bank Ltd v Banque
Bruxelles Lambert SA4, where (exceptionally) Langley J held that the arranger
had assumed responsibility to the syndicate banks for ensuring that valid
‘mortgage indemnity guarantees’ were in place to protect the banks against the
borrower’s default and that all necessary disclosures had been made in respect
of those guarantees. Significantly, the documentation and the loan agreement in
Sumitomo contained nothing that was inconsistent with or precluded the
imposition of a common law duty of care on the arranger, in particular the fact
that the arranging bank owed only limited contractual duties as agent bank
under the terms of the loan agreement did not preclude a wider tortious duty
applying to its acts as arranging bank5.
Secondly, the lenders’ claim may be based upon a duty to disclose certain
information. This occurred in IFE Fund SA v Goldman Sachs International6,
where the Court of Appeal rejected an argument that the arranger owed the
bondholders a duty to disclose subsequently acquired information that might
affect the accuracy of the information memorandum or associated documenta-
tion. Waller LJ concluded that the arranger could not be taken to have assumed
responsibility to the claimants for updating the information memorandum
when the documentation provided to the bondholders expressly stated that the
arranger provided no undertaking in that regard7.
Thirdly, the syndicate members may allege that the arranger had a duty to
advise them generally or in relation to a particular aspect of the loan agreement.
As considered above in the context of whether the arranger has a duty to advise
the borrower8, the courts have been particularly reluctant to impose advisory
duties on parties in the absence of an express undertaking to advise, especially
when the dispute is between sophisticated commercial entities, the relevant

24
 The Arranging Bank’s Liability 12.21

services are provided on an ‘execution only’ basis and the terms of the
arrangement negate the existence of any such duty9. All or most of these factors
are usually present in the dealings between an arranger and the syndicate banks.
1
Indeed, in Sumitomo Bank Ltd v Banque Bruxelles Lambert SA [1997] 1 Lloyd’s Rep 487, 512,
Langley J expressed some concern about allowing claimants to avoid bearing the burden of
proving negligence by framing their claim as one based upon a misrepresentation (within the
Misrepresentation Act 1967, s 2(1)) in circumstances where the ‘substantial representation’ is
essentially that the defendant would take proper care over a particular task. For similar
concerns about parties seeking to sidestep the requirements and limitations of the tort of
negligence by pleading a misrepresentation within the Misrepresentation Act 1967, s 2(1), see
Avon Insurance plc v Swire Fraser Ltd [2000] CLC 665, [200]–[201]; Raiffeisen Zentralbank
Österreich AG v Royal Bank of Scotland plc [2010] EWHC 1392 (Comm), [85].
2
If the arranger is not responsible for putting the ‘information memorandum’ together, but
rather acts as a ‘mere conduit’ for passing the information provided by the borrower to the
syndicate lenders, then there is likely to be a reluctance to impose liability for negligent
misstatement upon the arranger: see Re Colocotronis Tanker Securities Litigation 420 F Supp
998 (1976); Royal Bank Trust Co (Trinidad) Ltd v Pampellone [1987] 1 Lloyds Rep 218,
[19]–[23].
3
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, 486–487, 502–503, 511,
529–530, 539; Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, 180; White v Jones
[1995] 2 AC 207, 262; Williams v Natural Life Health Foods Ltd [1998] 2 All ER 577, 583;
Customs & Excise Commissioners v Barclays Bank plc [2007] 1 AC 181, [4], [52], [83];
NRAM Ltd v Steel [2018] 1 WLR 1190, [19]–[24]; Playboy Club London Ltd v Banca
Nazionale del Lavoro SpA [2018] 1 WLR 4041, [6]–[10]. Although it is also possible to impose
a duty of care for negligently caused ‘pure’ economic loss by applying the ‘three-step’ test in
Caparo Industries plc v Dickman [1990] 2 AC 605, 617–618, 629, 633, 639–640, 659, this can
only generally be used in ‘novel factual scenarios’ and has been doubted as a useful test: see
Customs & Excise Commissioners v Barclays Bank plc [2007] 1 AC 181, [71]–[72], [93]; cf
Van Colle v Chief Constable of Hertfordshire Police [2008] 3 All ER 977, [42]. In Sumitomo
Bank Ltd v Banque Bruxelles Lambert SA [1997] 1 Lloyd’s Rep 487, 512, Langley J did not
consider that it mattered which approach was taken in that particular case.
4
Sumitomo Bank Ltd v Banque Bruxelles Lambert SA [1997] 1 Lloyd’s Rep 487, 512–514. See
also S Sequiera, ‘Syndicated Loans – Let the Arranger Beware!’ (1997) 12 JIBFL 117.
5
Sumitomo Bank Ltd v Banque Bruxelles Lambert SA [1997] 1 Lloyd’s Rep 487, 493.
6
IFE Fund SA v Goldman Sachs International [2007] 2 Lloyd’s Rep 449, [28], [79]. See also
NatWest Australia Bank Ltd v Tricontinental Corp Ltd [1993] ATPR (Digest) 46–109, where
the Supreme Court of Victoria held the defendant arranging bank liable in the tort of negligence
(and under the Trade Practices Act 1974 (Cth)) to the claimant syndicate member for failing to
disclose in the information memorandum that the borrower had given related-party guarantees
and a guarantee in favour of the arranging bank itself, despite the claimant having specifically
enquired about the borrower’s contingent liabilities before agreeing to lend. The imposition of
liability in this case, however, ‘depended heavily on the facts’ and was ‘fact-specific’: see L
Gullifer & J Payne, Corporate Finance Law: Principles and Policy (Hart Publishing, 2nd edn,
2015) [8.4.4].
7
IFE Fund SA v Goldman Sachs International [2007] 2 Lloyd’s Rep 449, [28]. See also
LMA.MTR.09, cl 26.8: ‘ . . . the Arranger is [not] responsible or liable for . . . the
adequacy, accuracy or completeness of any information (whether oral or written)’ supplied by
it in connection with the loan agreement or the information memorandum.
8
See para 12.13 above.
9
See LMA.MTR.09, cl 26.4: ‘Except as specifically provided in the Finance Documents, the
Arranger has no obligations of any kind to any other Party under or in connection with any
Finance Document.’

(iii) Arranger’s breach of fiduciary duty

12.21 Given the difficulties of demonstrating that the arranger has assumed
responsibility sufficient to give rise to a common law duty to disclose informa-
tion or provide advice, some syndicate banks have tried to argue that the
arranger has become their fiduciary and in that capacity has failed to disclose

25
12.21 Syndicated Lending

information that would have materially affected their decision to join the
syndicate. In principle, such an argument should be no more successful than
seeking to impose a common law duty of disclosure on the arranger, since many
of the reasons, discussed above1, for refusing to impose fiduciary duties on
arranging banks towards corporate borrowers apply mutatis mutandis to the
arranging bank’s position vis-à-vis the members of the lending syndicate.
Nevertheless, the opposite was suggested in UBAF Ltd v European American
Banking Corp2, where the arranging bank applied to set aside the service out of
the jurisdiction of a writ (now claim form), which alleged that the arranging
bank was liable for deceit, misrepresentation under section 2(1) of the Misrep-
resentation Act 1967, and negligence in marketing the syndicated loan as being
‘attractive financing to two companies in a sound and profitable group’, when
in fact the borrower subsequently defaulted on the loan. In considering the
arranging bank’s relationship with the syndicate banks, Ackner LJ stated3:
‘The transaction into which [the claimant bank] was invited to enter, and did enter,
was that of contributing to a syndicate loan where, as seems to us, quite clearly [the
defendant bank was] acting in a fiduciary capacity for all the other participants. It
was [the defendant bank] who received [the claimant bank’s] money and it was [the
defendant bank] who arranged for and held, on behalf of all the participants, the
collateral security for the loan. If, therefore, it was within [the defendant bank’s]
knowledge at any time whilst they were carrying out their fiduciary duties that the
security was as [the claimant bank] allege, inadequate, it must we think, clearly have
been their duty to inform the participants of that fact and their continued failure to do
so would constitute a continuing breach of their fiduciary duty.’
Although there is some low-level support for this view in New Zealand4, it is
submitted that it would be unwise to place too much reliance on the above
dictum5, particularly as the weight of United States’ authority points in the
opposite direction6.
Indeed, as discussed above7, UBAF runs contrary to the general judicial
reluctance in the United Kingdom to introduce fiduciary concepts into commer-
cial relationships8 and there are several aspects of UBAF that undermine its
authority as a general guide to the fiduciary status of the arranger9: first, as
UBAF involved an interlocutory appeal on a jurisdictional point, the Court of
Appeal did not hear full argument on the fiduciary issue and would only have
had to determine whether there was a ‘good arguable’ case on the merits10;
secondly, no allegation of breach of fiduciary duty was formally advanced in
UBAF11 and Ackner LJ only raised the issue within the context of deciding that
the limitation point in the proceedings should go to trial12; and, thirdly, as the
defendant bank in UBAF was also acting as security trustee for the benefit of all
the syndicate banks, there was a ready basis for the imposition of fiduciary
obligations in that case13, but such an explanation of UBAF assumes that the
arranger was a fiduciary qua security trustee rather than qua arranger14.
Accordingly, UBAF should not be viewed as carte blanche for treating all
arrangers as the syndicate banks’ fiduciary.
In practice, however, UBAF should not produce too much difficulty, since the
information memorandum will usually expressly negate any fiduciary relation-
ship15 and the LMA standard-form syndicated loan agreement provides that
‘[n]othing in any Finance Document constitutes . . . the Arranger . . . as
a trustee or fiduciary of any other person’16. As discussed previously17, such
clauses are a legitimate and perfectly effective technique for preventing

26
 The Arranging Bank’s Liability 12.21

fiduciary obligations from arising between contracting parties18.

1
See para 12.14 above.
2
UBAF Ltd v European American Banking Corp [1984] QB 713. See also A Hudson, The Law
of Finance (Sweet & Maxwell, 2nd edn, 2013), [33–08]. See further Y Yao, ‘A Legal Snapshot
of the Lead Bank: the Position and Responsibilities in Arranging a Syndicated Loan’
(2010) 25 JIBLR 148, 149–151.
3
UBAF Ltd v European American Banking Corp [1984] QB 713, 728. See also Shen-
court Sdn Bhd v Aseambankers Malaysia Bhd [2011] 6 MLJ 236, [26], rev’d on a different
point: [2014] 4 MLJ 619.
4
NZI Securities Ltd v Unity Group Ltd (Unreported, HC Auckland, 11 February 1992), where
Wylie J stated: ‘Much argument was avoided by [counsel] having conceded, very properly in my
view, that [the bank] was in a fiduciary relationship to the plaintiffs in respect of its function as
a member of and agent for the syndicate. . . . On the face of all that I do not think it is shown
clearly and unanswerably that there was a breach of a fiduciary duty . . . Something more
than what is presently shown on the affidavits seems to me to be necessary to render it
inappropriate for [the bank] to have acted as it did in apparent conformity with its rights under
the very agreement which created, but at the same time confined, the fiduciary relationship.’
5
P Ellinger, E Lomnicka & C Hare, Ellinger’s Modern Banking Law (Oxford University Press,
5th edn, 2011), 784–785; R Cranston, E Avgouleas, K van Zwieten, C Hare & T van Sante,
Principles of Banking Law (Oxford University Press, 3rd edn, 2017), 249. See also D Halliday
& R Davies, ‘Risks and Responsibilities of the Agent Bank and the Arranging Bank in
Syndicated Credit Facilities’ (1997) 12 JIBL 182, 183.
6
See, eg, Banque Arabe et Internationale d’Investissement v Maryland National Bank, 819 F
Supp 1282 (SDNY 1993); Banco Español de Credito v Security Pacific National Bank, 763 F
Supp 36 (SDNY 1991), affd. 973 F 2d 51 (2d Cir NY 1992), cert denied, 113 S Ct 2992 (1993);
New Bank of New England NA v Toronto-Dominion Bank, 768 F Supp 1017 (SDNY 1991);
Women’s Federal Savings & Loan Association v Nevada National Bank, 811 F 2d 1255 (9th
Cir 1987); First Citizens Federal Savings & Loan Association v Worthen Bank & Trust Co NA,
919 F 2d 510 (9th Cir Ariz 1990); Koken v First Hawaiian Bank, (Unreported, 9th Cir,
5 September 2000). The United States courts recognize that the relationship between the
arranging bank and the lenders is, like the relationship between the lenders themselves, one
involving arm’s-length contractual agreements between sophisticated commercial parties and
that that relationship should primarily be governed by the terms of those contracts: see J
Brooks, ‘Participation and Syndicated Loans: Intercreditor Fiduciary Duties for Lead and Agent
Banks Under US Law’ (1995) 10 JIBFL 275. There are, however, cases supporting the contrary
view: see Chemical Bank v Security Pacific National Bank, 20 F 3d 375 (9th Cir Cal 1994);
Banque Arabe et Internationale d’Investissement v Maryland National Bank, 850 F Supp 1199
(SDNY 1994).
7
See para 12.14 above.
8
The fact that the arranger is entitled to the fee agreed with the borrower in its fee letter may be
an indication that it is acting in its own commercial best interests, rather than acting in the
interests of the borrower: see LMA.MTR.09, cl 12.2.
9
The fact that the defendant bank in UBAF had had a longstanding relationship with the
borrowers may have influenced Ackner LJ in finding a fiduciary relationship with the syndicate
lenders, as the defendant would clearly have had superior knowledge about the financial
standing of the borrowers when compared to the lenders: see P Ellinger, E Lomnicka & C Hare,
Ellinger’s Modern Banking Law (Oxford University Press, 5th edn, 2011), 785. See also G
Bhattacharyya, ‘The Duties and Liabilities of Lead Managers in Syndicated Loans’
(1995) 10 JIBFL 172; G Skene, ‘Syndicated Loans: Arranger and Participant Bank Fiduciary
Theory’ (2005) 20 JIBLR 269, 273.
10
UBAF Ltd v European American Banking Corp [1984] QB 713, 718. Upon a similar
application nowadays, it is enough that there is a ‘serious issue’ to be tried on the merits: see
Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1994] 1 AC 438, 453–457.
11
UBAF Ltd v European American Banking Corp [1984] QB 713, 718.
12
UBAF Ltd v European American Banking Corp [1984] QB 713, 728.
13
In Uzinterimpex JSC v Standard Bank plc [2008] EWCA Civ 819, [41]–[42], Moore-Bick LJ
held that an agent bank, which was also a security agent under a security deed, held the
documents of title relating to goods and their proceeds as trustee for the syndicate members,
despite the syndicated loan agreement containing indications to the contrary.
14
Indeed, the argument put to the Court of Appeal by Kenneth Rokinson QC appears to base the
arranging bank’s duty of disclosure upon the fact that it held security on behalf of the lenders:
see UBAF Ltd v European American Banking Corp [1984] QB 713, 728. See also L Gullifer &

27
12.21 Syndicated Lending

J Payne, Corporate Finance Law: Principles and Policy (Hart Publishing, 2nd edn, 2015),
[8.4.3]. Even a security trustee/agent does not necessarily owe fiduciary duties in respect of all
aspects of its activities, in particular the enforcement of any security: see Saltri III Ltd v MD
Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [123(c)], [123(h)], applying New Zealand
Netherlands Society ‘Oranje’ Inc v Kuys [1973] 1 WLR 1126, 1130.
15
See, eg, Raiffeisen Zentralbank Österreich AG v Royal Bank of Scotland plc [2010] EWHC
1392 (Comm), [65]. Consider Uzinterimpex JSC v Standard Bank plc [2008] EWCA Civ 819,
[41]–[42].
16
LMA.MTR.09, cl 26.5.
17
See para 12.15 above.
18
See, eg, Kelly v Cooper [1993] AC 205, 213–214; Henderson v Merrett Syndicates Ltd [1995]
2 AC 145, 206; Silven Properties Ltd v Royal Bank of Scotland plc [2004] 1 WLR 997, [25]; JP
Morgan Chase Bank v Springwell Navigation Corp [2008] EWHC 1186 (Comm), [734]; Saltri
III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [123(f)]. For the application
of this principle in the syndicated lending context, see Torre Asset Funding Ltd v Royal Bank of
Scotland plc [2013] EWHC 2670 (Ch), [143]–[148]; Barclays Bank plc v Svizera Holdings plc
[2014] EWHC 1020 (Comm), [8].

4 THE ROLE OF THE AGENT BANK

12.22 Central to the relationship between the syndicate lenders and the bor-
rower, on the one hand, and the lenders inter se, on the other, is the ‘agent bank’,
which may in fact be the arranging bank or some other bank specifically
appointed to the position. The essential role and function of the agent bank is to
administer the syndicated loan1: the agent bank ‘is a conduit for fund flows,
handles operational matters and co-ordinates decision making’2. Where the
syndicated loan agreement is secured, the agent bank will often also act as a
security trustee or security agent holding the security provided by the borrower
on trust for the syndicate members3 (which includes both the original lenders
and those who subsequently become parties to the loan agreement)4, although,
in more complex lending arrangements (such as where the lenders are tiered
into senior, mezzanine and subordinated lenders), it is not uncommon to have a
separate bank acting as security agent. The current English practice is for the
terms of any security trust to be set out in the security documentation and the
syndicated loan agreement itself, rather than in a separate security deed or trust
instrument5 and for the trust to be fixed in nature, as each lender’s beneficial
interest is defined in terms of their share of any payments received by the agent
bank from the borrower6.
In performing its functions, the agent bank acts as the syndicate lenders’ agent7
and has their authority ‘to exercise the rights, powers, authorities and discre-
tions’ conferred upon the agent bank by the loan agreement, together with ‘any
other incidental rights, powers, authorities and discretions’8. These include the
ability to rely upon any representation, notice or document that the agent bank
believes to be genuine, correct and appropriately authorised9; to assume (unless
it has notice to the contrary) that any instructions from the majority of
syndicate members are in accordance with the loan agreement10; to rely upon
any certificate as to any fact or matter that would reasonably be within the
knowledge of the person providing that certificate and to assume that the
certificate is true and accurate11; to assume that no default has occurred under
the loan agreement12, that any ‘right, power, authority or discretion’ vested in
an individual lender or the majority lenders has not been exercised and that any
notice or request from the borrower (or its parent company) has been made

28
 The Role of the Agent Bank 12.22

with all the borrowers’ consent13; to engage professional advisors14 and to act
through its own personnel and agents15; to disclose any information that the
agent bank reasonably believes it has received as agent16; and to refuse to do
anything that would involve a breach of the general law or any fiduciary duty or
obligation of confidentiality17. The agent bank is obliged to exercise these
powers and discretions if instructed to do so by the requisite majority of the
syndicate lenders (whether that be unanimity, a simple majority or a ‘super
majority’)18, although the agent bank may insist on an indemnity (or other form
of security) against any liability that may be incurred whilst carrying out the
lenders’ instructions19, provided that the risk of incurring such liability is ‘more
than merely a fanciful one’20. Indeed, Lord Scott in Concord Trust v The Law
Debenture Trust Corp plc21, albeit dealing strictly with a bond issue22, lent
support to the view that once the agent bank has received a direction to act
(such as to accelerate the loan) it comes under a ‘mandatory obligation’ to
comply with it, even if the borrower contends that the basis for the majori-
ty’s instruction is invalid.
In the absence of such instructions from the majority, the agent bank is free to
exercise its powers in a way that ‘it considers to be in the best interests of the
[l]enders’23. In Torre Asset Funding Ltd v Royal Bank of Scotland plc24, Sales J
stressed that the exercise of this discretion (as well as the discretion noted above
concerning the disclosure of information received by the agent bank in that
capacity) would be subject to implied terms requiring the agent bank to act
honestly and not to act arbitrarily, capriciously, perversely or irrationally25, and
that, in assessing the agent bank’s exercise of its discretion, a court should bear
in mind that the agent bank’s raison d’être is ‘to facilitate the [lenders] in the
exercise of their rights and powers under the [syndicated loan agreement]’26.
1
P Ellinger, E Lomnicka & C Hare, Ellinger’s Modern Banking Law (Oxford University Press,
5th edn, 2011), 783–784.
2
Shencourt Sdn Bhd v Aseambankers Malaysia Bhd [2011] 6 MLJ 236, [19]–[21], rev’d on a
different point: [2014] 4 MLJ 619. See also M Hughes, Legal Principles in Banking and Struc-
tured Finance (Tottel Publishing, 2nd edn, 2006), [9.14]. Depending upon the terms of the
syndicated loan agreement, the agent bank may be required to check that the initial conditions
precedent to the loan agreement have been satisfied (see LMA.MTR.09, cl 4.1), to receive
utilization requests (see LMA.MTR.09, cls 4.1, 5.1) to administer interest periods, rates and
costs (see LMA.MTR.09, cls 10.1–10.2), to deal with market disruption events (see
LMA.MTR.09, cl 11.3), to act as a conduit for information and payments, to monitor financial
covenants, to deal with changes to lenders and borrowers (see LMA.MTR.09, cls 24–25), and
to respond to events of default (see LMA.MTR.09, cl 23.13). See further A Mugasha, The Law
of Multi-Bank Financing (Oxford University Press, 2007), [9.38]–[9.57]; G Fuller, Corporate
Borrowing: Law and Practice (Jordans Publishing, 5th edn, 2016), [2.17].
3
R Hooley, ‘Security, Security Trusts and the Amendment of Syndicated Credit Agreements:
Lessons from Australia’ [2012] LMCLQ 145, 146.
4
Amendments to the syndicated loan agreement to permit new lenders to offer additional
facilities to the borrower can be validly brought within the existing security trust arrangements:
see Public Trustee of Queensland v Fortress Credit Corp (Aus) II Pty Ltd [2010] HCA 29,
[22]–[26]. For the questions that this decision raises for English law, see R Hooley, ‘Security,
Security Trusts and the Amendment of Syndicated Credit Agreements: Lessons from Australia’
[2012] LMCLQ 145, 151.
5
R Hooley, ‘Security, Security Trusts and the Amendment of Syndicated Credit Agreements:
Lessons from Australia’ [2012] LMCLQ 145, 146, 167.
6
R Hooley, ‘Security, Security Trusts and the Amendment of Syndicated Credit Agreements:
Lessons from Australia’ [2012] LMCLQ 145, 167–168. As Hooley correctly states (at 167–
170), there is no difficulty over the certainty of objects for such a fixed trust, since, even though
the identity of the lenders may alter by an assignment of rights, a novation or an amendment to
the syndicated loan agreement, it will be possible at any particular moment up to the time of

29
12.22 Syndicated Lending

distribution to draw up a ‘complete list’ of the syndicate members. Where the security agent
realises the security, however, the Loan Market Association Inter-creditor Agreement for
Leveraged Acquisition Finance Transactions (Senior/Mezzanine), 18 July 2017
(‘LMA.ICA.05’), cl 18.1, provides that the proceeds are to be held by the security agent upon a
discretionary trust for the lenders.
7
LMA.MTR.09, cl 26.1(a). For the application of general agency principles to the agent bank,
including the effect of making its authority ‘irrevocable’, see A Mugasha, The Law of
Multi-Bank Financing (Oxford University Press, 2007), [9.23]–[9.31], [9.35]–[9.37]. Depend-
ing upon the documentation’s proper construction, it is possible for the agent bank sometimes
to act as principal vis-à-vis the borrower and third parties, such as when acting as security
trustee/agent: see British Energy Power & Trading Ltd v Credit Suisse [2008] EWCA Civ 53,
[36].
8
LMA.MTR.09, cl 26.1(b). For criticism of the phrase ‘any other incidental rights . . . ’, see M
Hughes, Legal Principles in Banking and Structured Finance (Tottel Publishing, 2nd edn,
2006), [9.15].
9
LMA.MTR.09, cl 32.7(a)(i).
10
LMA.MTR.09, cl 26.7(a)(ii).
11
LMA.MTR.09, cl 26.7(a)(iii).
12
LMA.MTR.09, cl 26.7(b)(i). This assumption in the syndicated loan agreement operates as a
contractual estoppel against the syndicate lenders, even if the agent bank is aware of an event of
default (with the exception of an event of default involving non-payment by the borrower): see
Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch), [192].
13
LMA.MTR.09, cl 26.7(b)(ii)–(iii).
14
LMA.MTR.09, cl 26.7(c).
15
LMA.MTR.09, cl 26.7(f).
16
LMA.MTR.09, cl 26.7(g).
17
LMA.MTR.09, cls 26.7(h), 26.13.
18
LMA.MTR.09, cl 26.2(a). The agent bank may seek clarification of any instructions received
from the requisite majority of lenders (see LMA.MTR.09, cl 26.2(b)) and such instructions
generally override any conflicting instructions (see LMA.MTR.09, cl 26.2(c)).
19
LMA.MTR.09, cl 26.2(d). According to LMA.MTR.09, cl 26.11(a), the lenders must, within
three business days of the borrower’s demand, indemnify the agent bank (in proportion to the
lender’s share of the total lending commitment) in relation to any costs or liability arising in
connection with administering the syndicated loan agreement. According to LMA.MTR.09,
cl 15.3(a), (c), the agent bank is also entitled to an indemnity from the borrower (or its parent
company) in respect of ‘any cost, loss or liability incurred by the [agent bank] (acting
reasonably)’ as a result of investigating any matter believed to be an event of default or relying
upon any ‘notice, request or instruction’ which the agent bank reasonably believes to be
genuine, correct and appropriately authorized. Furthermore, an agent bank is entitled to an
indemnity from the borrower (or its parent company) in respect of the expenses of putting the
syndicated transaction in place or effecting an amendment to its terms: see LMA.MTR.09,
cls 17.1–17.2.
20
Concord Trust v The Law Debenture Trust Corp plc [2005] 1 WLR 1591, [34]. See also The
Law Debenture Trust Corp plc v Concord Trust [2007] EWHC 1380 (Ch), [49(ix)].
21
Concord Trust v The Law Debenture Trust Corp plc [2005] 1 WLR 1591, [24]–[29], [31].
22
That said, Lord Scott expressly recognized the significance of the point for syndicated loans as
well as bond issues: see Concord Trust v The Law Debenture Trust Corp plc [2005] 1 WLR
1591, [9].
23
LMA.MTR.09, cl 26.2(e). The only limitation upon the agent bank’s ability to act on behalf of
a lender without prior instruction is that the former cannot initiate legal or arbitration
proceedings on the latter’s behalf without first obtaining its consent: see LMA.MTR.09,
cl 26.2(f).
24
Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch), [35]–[39]. See
also The Law Debenture Trust Corp plc v Elektrim Finance BV [2005] EWHC 1999 (Ch), [20].
25
See, eg, Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116,
[60]–[66], applied in Braganza v BP Shipping Ltd [2015] UKSC 17, [2015] 4 All ER 639,
[2015] 1 WLR 1661 SC. See generally R Hooley, ‘Controlling Contractual Discretion’ (2013)
72 CLJ 65; C Hare, ‘The Expanding Judicial Review of Contractual Discretion: Carte Blanche
or Carton Rouge?’ [2013] BJIBFL 269; J Morgan, ‘Resisting Judicial Review of Discretion-
ary Contractual Powers’ [2015] LMCLQ 483.
26
Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch), [37].

30
 The Role of the Agent Bank 12.23

12.23 Beyond exercising its discretion in accordance with the above standards,
the agent bank does not have many positive duties or obligations imposed upon
it. Most standard-form syndicated loan agreements impose extremely limited
duties on the agent bank1, such as the prompt forwarding of documents
between parties to the agreement2, promptly notifying the lenders of any notice
received regarding an event of default by the borrower under the loan agree-
ment3, and promptly notifying the syndicate lenders if it becomes aware of any
non-payment by the borrower4. Some commentators have suggested, however,
that as the agent bank is an agent in the true legal sense of the word, it owes a
wider range of duties to the syndicate lenders, including potentially fiduciary
duties, duties of disclosure and advisory duties5. Others have rejected such a
wide approach to the agent bank’s duties given that conflicts of interest on its
part are generally unavoidable and given that its discretion to act is severely
limited by the syndicated loan agreement6. The latter view is preferable. In
Torre Asset Funding7, Sales J considered that the scope of the agent bank’s du-
ties had to be determined by the syndicated loan agreement to which it was
party and that, as its agency was limited to acting ‘under and in connection with
the Finance Documents’8, the agent bank owed no relevant duties beyond those
expressly set out in the loan agreement9.
This position is supported by the general scheme of standard-form syndicated
loan agreements, which (usually) expressly relieve the agent bank of any status
‘as a trustee or fiduciary of any other person’10; any obligation ‘to account to
any [l]ender for any sum or the profit element of any sum received by it for its
own account’11; any responsibility ‘for the adequacy, accuracy or completeness
of any information (whether oral or written) supplied by the Agent . . . in or
in connection with any Finance Document or the Information Memorandum’12
(although, if the relevant information was provided by the agent bank in some
other capacity, such as a lending bank, or related to some matter not covered by
the loan agreement or information memorandum, then there might be at least
the possibility of liability for misrepresentation or negligent misstatement)13;
any obligation ‘to review or check the adequacy, accuracy or completeness of
any document it forwards’14; and any duty to monitor whether there has been
an event of default or whether the other parties to the loan agreement are
performing their obligations15.
Moreover, any liability that does arise on the part of the agent bank under the
syndicated loan agreement is usually subject to swingeing exclusion clauses16,
which exclude liability ‘without limitation, for negligence or any other category
of liability whatsoever’ for any action taken or not taken by the agent bank
under or in connection with the loan agreement, ‘unless directly caused by its
gross negligence or willful misconduct’17; liability on the part of the agent
bank’s officers or agents18; liability for delay in crediting sums to a par-
ty’s account19; liability for failing to carry out any ‘know your customer’
checks20; and/or liability for failing to act in accordance with the majority
lenders’ instructions21. The overall effect of these various provisions is summed
up by standard-form syndicated loan agreements classifying the agent’s duties
as ‘solely mechanical and administrative in nature’22. In Torre Asset Funding23,
Sales J rejected the ‘extreme’ submission that these words had the effect of
making the agent bank little more than ‘a postal service to transmit documents
or communications from [the borrower] for the [lenders]’24, but did consider
that those words ‘minimize[d] so far as is possible . . . the substantive

31
12.23 Syndicated Lending

content of the duties of the Agent’25. Accordingly, syndicate lenders will

generally struggle to impose liability upon the agent bank dehors the four
corners of the syndicated loan agreement26.
1
Sumitomo Bank Ltd v Banque Bruxelles Lambert SA [1997] 1 Lloyd’s Rep 487, 493.
2
LMA.MTR.09, cl 26.3(b). The agent bank is entitled to treat the syndicate bank shown in its
records as the relevant entity to receive payments and any relevant notice: see LMA.MTR.09,
cl 26.14(a). The agent bank may forward the original document or a copy thereof. The
obligation to deliver documents promptly does not apply to documents giving notice to the
borrower of the transfer of a lender’s rights under the loan agreement, as the obligation in such
cases is only to deliver the document ‘as soon as reasonably practicable’: see LMA.MTR.09,
cl 24.7.
3
LMA.MTR.09, cl 26.3(e). Any communications must be in writing: see LMA.MTR.09, cl 31.1.
For these purposes, electronic communications are permitted: see LMA.MTR.09, cl 31.6. For
the various procedural rules on notices, see LMA.MTR.09, cl 31.
4
LMA.MTR.09, cl 26.3(f). According to LMA.MTR.09, cl 26.7(b)(i), the agent bank is entitled
to assume that no default has occurred under the loan agreement and the lenders may well be
contractually estopped from disputing this by alleging that the agent bank has some duty to
inform the lenders about events of default under the loan agreement (although, by the terms of
the loan agreement, the estoppel does not extend to events of default, of which the agent bank
has received notice, or to breaches involving non-payment, of which the agent bank has
knowledge): see Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670
(Ch), [163(iii)], [164], [191]. The primary purpose of the duties on the agent bank regarding the
provision of information to the syndicate lenders is ‘to ensure that [l]enders would be provided
with information regarding the performance of their loans and the underlying business of the
borrower with a view to enabling them to consider how to exercise their rights under the various
facility agreements in relation to accelerating the debt, calling in the security and so forth’, but
those duties are not necessarily designed to enable a lender to decide whether or not to exit the
loan transaction by selling its investment to one or more participants: see Torre Asset
Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch), [206]–[221].
5
P Gabriel, Legal Aspects of Syndicated Loans (Butterworths, 1986), 167–173; R Tennekoon,
The Law & Regulation of International Finance (Butterworths, 2006), 64–67; A Hudson, The
Law of Finance (Sweet & Maxwell, 2nd edn, 2013), [33–37]–[33–38]. See also White v Jones
[1995] 2 AC 207, 271.
6
L Clarke & S Farrar, ‘Rights and Duties of Managing and Agent Banks in Syndicated Loans to
Government Borrowers’ (1982) U Ill L Rev 229, 244–245. See also A Mugasha, The Law of
Multi-Bank Financing (Oxford University Press, 2007), [9.06]–[9.16]; P Wood, Law and
Practice of International Finance (Sweet & Maxwell, 2008), 96. See also C Ajibo, ‘Syndicated
Lending: Re-conceptualising the Role of the Managing Agent and Agent Bank’ (2015) 30 JIBLR
476.
7
Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch), [142]–[148],
[163(i)]. See also Kelly v Cooper [1993] AC 205, 213–214; Saltri III Ltd v MD Mezzanine SA
SICAR [2012] EWHC 3025 (Comm), [123(f)].
8
LMA.MTR.09, cl 26.1(a).
9
In Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch), [149]–
[157], Sales J also considered that the express terms of the syndicated loan agreement restricted
the possibility of implying additional duties that would be incumbent upon the agent bank, such
as a duty to inform the syndicate lenders of any relevant event of default. See also Rosser-
lane Consultants Ltd v Credit Suisse International [2015] EWHC 384 (Ch), [112]–[117].
10
LMA.MTR.09, cl 26.5(a). This provision accords with the general reluctance to allow fiduciary
obligations to intrude into commercial and financial arrangements between sophisticated
parties, especially when the agent in question has been delegated a specific task (as is the case
with an agent bank), rather than being given general authority to represent its principal: see A
Mugasha, The Law of Multi-Bank Financing (Oxford University Press, 2007), [9.15]–[9.16],
[9.19]–[9.22].
11
LMA.MTR.09, cl 26.5(b). As well as not having any liability to account, the agent bank is
expressly permitted to take deposits from the syndicate lenders, to lend to them and to conduct
banking and other business with those banks, in a manner that would be objectionable if the
agent bank were a fiduciary of the syndicate banks: see LMA.MTR.09, cl 32.6.
12
LMA.MTR.09, cl 26.8(a). See also Torre Asset Funding Ltd v Royal Bank of Scotland plc
[2013] EWHC 2670 (Ch), [204]. Generally, the agent bank also has no responsibility for ‘the
legality, validity, effectiveness, adequacy or enforceability of any Finance Document or any

32
 The Role of the Agent Bank 12.24

other agreement, arrangement or document entered into, made or executed in anticipation of or

in connection with any Finance Document’: see LMA.MTR.09, cl 26.8(b). If the agent bank
does indeed act as a ‘mere conduit’ for the passing of information between the borrower and the
syndicate lenders, then the common law would be unlikely to impose liability for negligent
misstatement: see Re Colocotronis Tanker Securities Litigation, 420 F Supp 998 (1976); Royal
Bank Trust Co (Trinidad) Ltd v Pampellone [1987] 1 Lloyds Rep 218, [19]–[23].
13
Sumitomo Bank Ltd v Banque Bruxelles Lambert SA [1997] 1 Lloyd’s Rep 487, 515; Torre
Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch), [184]–[189]. Even
in a case where there is such prima facie liability, by virtue of LMA.MTR.09, cl 26.15, each
syndicate lender ‘confirms to the Agent . . . that it has been, and will continue to be, solely
responsible for making its own independent appraisal and investigation of all risks arising under
or in connection with any Finance Document’, including such things as the borrower’s financial
condition, the ‘legality, validity, effectiveness, adequacy or enforceability of any Finance
Document’, the lender’s potential rights of recourse in the event of default and the ‘adequacy,
accuracy or completeness’ of the information memorandum or any other information provided
by the agent bank. Such statements operate as a contractual estoppel largely preventing the
syndicate banks from contending that they have relied upon, or been induced by, any relevant
representation on the agent bank’s part: see Torre Asset Funding Ltd v Royal Bank of
Scotland plc [2013] EWHC 2670 (Ch), [204].
14
LMA.MTR.09, cl 26.3(d). This provision precludes any duty to advise with respect to the
finance documents or any duty to disclose matters materially affecting those documents: see
Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch), [211].
15
LMA.MTR.09, cl 26.9.
16
It is possible that such clauses would be subject to statutory control under UCTA 1977, but the
possibility of such control may be limited due to the fact that it may operate as a ‘basis’ clause;
may not be unreasonable given the sophisticated nature of the parties; and may not be on one
parties’ written standard terms of business for the purpose of UCTA 1977, s 3: see African
Export-Import Bank v Shebah Exploration and Production Co Ltd [2018] 1 WLR 487.
17
LMA.MTR.09, cl 26.10(a). This exclusion clause is limited to liability arising out of the
agent’s conduct in that role and does not extend to liability incurred in other capacities, eg a
syndicate lender: see Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC
2670 (Ch), [193]–[196]. The exclusion clause in cl 32.10(a) now makes explicit that it covers
both relevant acts and omissions of the agent bank: see Torre Asset Funding Ltd v Royal Bank
of Scotland plc [2013] EWHC 2670 (Ch), [197]–[199]. The difference between ‘negligence’ and
‘gross negligence’ is one of degree: see Armitage v Nurse [1998] Ch 241, 253–254; Spread
Trustee Co Ltd v Hutcheson [2011] UKPC 13, [117]. See further Red Sea Tankers Ltd v
Papachristidis [1997] 2 Lloyd’s Rep 547, 586; Torre Asset Funding Ltd v Royal Bank of
Scotland plc [2013] EWHC 2670 (Ch), [201]. Consider Citibank NA v MBIA Assurance SA
[2006] EWHC 3215 (Ch).
18
LMA.MTR.09, cl 26.10(b). The exclusion of liability on the part of the agent bank’s represen-
tatives and employees ‘should be read together [with the exclusion in LMA.MTR.09,
cl 26.10(a)], as providing a similar level of protection for both the Agent and any officer etc of
the Agent’: see Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch),
[199].
19
LMA.MTR.09, cl 26.10(c).
20
LMA.MTR.09, cl 26.10(d).
21
LMA.MTR.09, cl 32.2(a)(ii).
22
LMA.MTR.09, cl 26.3(a).
23
Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch), [142]–[148],
[163(i)].
24
Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch), [28]–[30].
25
Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch), [34].
26
Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch), [28]–[30],
[34], [163(ii)], [179]–[180], [192], [204].

12.24 In addition to being indemnified in relation to any costs or expenses

incurred in performing its functions under the syndicated loan agreement1, the
agent bank is entitled to the fees for its services as agreed in its fee letter2. Given
the largely administrative functions of the agent bank and its limited duties and
obligations, the fee for acting in that capacity is usually set at a modest level3. If

33
12.24 Syndicated Lending

a syndicate lender owes money to the agent bank in respect of the latter’s right
of indemnity or its entitlement to be paid its fee, the agent bank has the right
(after giving notice) to deduct what it is owed from any sums paid by the
borrower to the syndicate lenders4.
1
Any indemnity to the agent bank will include an amount representing the agent bank’s ‘man-
agement time or other resources’ at a reasonable daily or hourly rate that is in addition to any
fee payable pursuant to the fee letter: see LMA.MTR.09, cl 26.16.
2
LMA.MTR.09, cl 12.3.
3
Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch), [163(ii)]. See
also L Gullifer & J Payne, Corporate Finance Law: Principles and Policy (Hart Publishing, 2nd
edn, 2015), [8.4.5].
4
LMA.MTR.09, cl 26.17.

12.25 The agent bank may resign its role by giving notice to the syndicate
lenders that it will appoint an affiliate as its successor1 or by giving 30 days’
notice, in which case a majority of the syndicate lenders2 (after consultation
with the borrower (or its parent company)) may appoint the agent bank’s re-
placement3. If the majority fails to make an appointment within 20 days of the
agent bank’s notice of resignation, then the retiring agent bank may appoint its
successor4. However the agent bank’s replacement is chosen, its resignation
only takes effect once the successor is in post5 and only then is the agent bank
discharged of any further obligations under the syndicated loan agreement6.
The retiring agent is required to hand over to its successor any documents or
records and to provide such assistance as may reasonably be requested7.
1
LMA.MTR.09, cl 26.12(a).
2
According to LMA.MTR.09, cl 1.1, the ‘majority lenders’ are effectively those lenders holding
two-thirds or more of the total commitments under the syndicated loan agreement.
3
LMA.MTR.09, cl 26.12(b).
4
LMA.MTR.09, cl 26.12(c).
5
LMA.MTR.09, cl 26.12(f). Any new agent bank may be required to accede to any inter-creditor
agreement: see ‘LMA.ICA.05’ cl 22.7.
6
LMA.MTR.09, cl 26.12(g). For the application of UCTA 1977 to such a clause, see African
Export-Import Bank v Shebah Exploration and Production Co Ltd [2018] 1 WLR 487.
7
LMA.MTR.09, cl 26.12(e).

5 THE RELATIONSHIP BETWEEN THE SYNDICATE LENDERS

AND BORROWER

(a) Individualism and collectivism

12.26 The relationship between the borrower and the syndicate lenders is
governed by the terms of the syndicated loan agreement itself1. LMA standard-
form agreements generally start by setting out the facility that the syndicate is
agreeing to provide to the borrower, including such matters as the currency of
the loan, the total loan commitment and the commitment period, and the nature
of the loan being made (namely, whether it is a term loan or a revolving
facility)2. Although the whole point of a syndicated loan is to enable two or
more banks to contribute to an overall amount that is loaned to the borrower,
in strict legal terms, each lender has a separate and distinct contractual/lending
relationship with the borrower3.

34
 Relationship Between Syndicate Lenders and Borrower 12.27

According to the LMA standard-form agreement, this fundamental principle of

loan severability has two aspects. As each lending bank’s obligations are
‘several’, a particular lender’s failure to fulfil its lending obligations does not
absolve the remaining syndicate lenders of their respective obligations4. Nor do
the syndicate lenders underwrite each other’s lending obligations with the result
that no member of the lending syndicate will be liable for the failure of any other
member to lend funds or make future advances as undertaken5. Loan severabil-
ity also means that each individual lender retains its ability to set its own
liquidated liabilities off against the borrower’s liquidated liabilities under the
loan agreement6. The corollary of this principle is that each lender’s rights under
the loan agreement (and accordingly each debt due to a lender) are also
‘separate and independent’ from those of the other lenders7. At least in theory,
therefore, each lender should be entitled to take separate enforcement action
against the borrower in respect of its portion of the overall lending8.
1
As a general rule, any third party rights that might arise under the Contract (Rights of Third
Parties) Act 1999 are excluded by the express terms of the syndicated loan agreement: see
LMA.MTR.09, cl 1.4.
2
LMA.MTR.09, cl 2.1.
3
British Energy Power & Trading Ltd v Credit Suisse [2008] EWCA Civ 53, [6].
4
LMA.MTR.09, cl 2.3(a).
5
LMA.MTR.09, cl 2.3(a).
6
LMA.MTR.09, cl 30. It is not uncommon to exclude the borrower’s ability to set sums due
under the syndicated loan agreement off against monies that it is owed by one of the lenders. For
the application of UCTA 1977 to such a clause, see African Export-Import Bank v Shebah
Exploration and Production Co Ltd [2018] 1 WLR 487.
7
LMA.MTR.09, cl 2.3(b).
8
The ability of each lender to ‘separately enforce its rights under or in connection with the
Finance Documents’ is preserved by LMA.MTR.09, cl 2.3(c), although this right is subject to
anything ‘specifically provided in the Finance Documents’. For an interpretation of
LMA.MTR.09 that negates the possibility of individual enforcement, see Charmway Hong
Kong Investment v Fortunesea (Cayman) Ltd [2015] HKCU 171. See also P Rawlings,
‘Majority Rule and Minority Rights in Syndicated Loans’ (2016) 31 BJIB&FL 70; R Hooley,
‘Enforcing Syndicated Credit Agreements: All for One and One for All?’ (2016) BJIB&FL 74.

12.27 In practice, however, such individual enforcement action is unlikely to be

in the best interests of either the borrower (which would almost certainly be
driven into liquidation as a result of the operation of cross-default provisions)1
or the other lenders (as this will trigger an ugly race between the lenders to seize
the borrower’s assets first). Accordingly, LMA standard-form syndicated loan
agreements nowadays require a high level of co-ordination between the lenders
and mandate collective action on their part. Such collectivism is primarily
achieved through the mechanism of the agent bank, which (as discussed
previously2) is appointed collectively by the syndicate members3 and is autho-
rized by them jointly to exercise all the powers delegated by the syndicated loan
agreement4. Whilst the agent bank has a margin of appreciation when discharg-
ing purely administrative functions5, its authority to act on behalf of the
syndicate in relation to more substantial matters is dependent upon the relevant
course of action being supported by the requisite majority of the syndicate
lenders6. Such expressions of majority will bind the agent bank and dissenting
syndicate members alike7.
The impact of ‘majority lender rule’ is most significant in two particular
instances: not only do most standard-form syndicated loan agreements require
the power of acceleration following an event of default to be exercised by the

35
12.27 Syndicated Lending

agent bank at the direction of a majority of the lending syndicate8, but any
monies received by an individual lender, whether by way of payment of
principal, interest or fees or following legal action, must be shared pro rata
amongst all the syndicate members9. Similarly, with respect to the administra-
tion of the loan – in particular, such matters as waivers of breach of covenant or
consents to the relaxation of covenants – the syndicate banks usually agree to
abide by any instructions given by the majority of lenders to the agent bank10.
Accordingly, by mediating the borrower-lender relationship through the
mechanism of the agent bank, the benefits of collective lender action are secured
and the disadvantages of individual action are largely negated11.
1
See, eg, Abu Dhabi Commercial Bank PJSC v Saad Trading, Contracting & Financial Ser-
vices Company [2010] EWHC 2054 (Comm), [7].
2
See paras 12.22–12.25 above.
3
LMA.MTR.09, cl 26.1(a).
4
LMA.MTR.09, cl 26.1(b).
5
LMA.MTR.09, cls 26.3, 26.7.
6
LMA.MTR.09, cl 26.2. According to LMA.MTR.09, cl 1.1, the ‘majority lenders’ are effec-
tively those lenders holding two-thirds or more of the total commitments under the syndicated
loan agreement. In circumstances where a borrower ‘buys-back’ a particular lender’s loan, if the
loan were not thereby extinguished, the borrower might be able to exercise that lender’s votes:
see S Samuel, ‘Debt Buybacks: Simply Not Cricket?’ (2009) 24 JIBL 24; A Barker, ‘The
Evolution of Debt Buybacks’ (2009) 24 JIBL 359.
7
LMA.MTR.09, cl 26.2(c). In the absence of a specific clause making the majority decision
binding upon the minority, the common law will not automatically give this effect to majority
voting provisions: see Sneath v Valley Gold Ltd [1893] 1 Ch 477, 489.
8
LMA.MTR.09, cl 23.13.
9
LMA.MTR.09, cls 28.1–28.5. It is possible for syndicate members to vary the basic position
regarding pro rata sharing by means of a subordination agreement.
10
LMA.MTR.09, cl 26.2(c).
11
L Gullifer & J Payne, Corporate Finance Law: Principles and Policy (Hart Publishing, 2nd edn,
2015), [8.4.1].

(b) Parties to the syndicated loan agreement

12.28 At the commencement of the syndicated loan agreement, the parties are
easily identified. Besides the ‘original borrowers’ (which usually includes the
borrower and specified subsidiaries) and the ‘original lenders’ (namely the
initial members of the lending syndicate), the arranger and the agent bank will
also usually execute the loan agreement so that they can take advantage of any
protective provisions contained therein. Difficulties arise, however, when the
original parties to the agreement are changed or new parties are introduced.
12.29 Whilst it is generally not possible for the original borrower to transfer its
rights or obligations under the syndicated loan agreement1, the borrower may
request that one or more of its subsidiaries becomes an additional borrower or,
if already party to the syndicated loan agreement, ceases to be party to that
agreement. In the case of the borrower’s subsidiaries acceding to the loan
agreement, the borrower must provide the agent bank with an ‘accession letter’2
and confirm that there is no existing default under the agreement and that a
default is unlikely to occur as a result of the subsidiary becoming party to the
loan agreement3. Further, assuming that a majority of the lending syndicate
does not notify the agent bank of its objections to the addition of further
borrowers4, the agent bank must verify and notify the lenders and original
borrower (or its parent company) whether the conditions precedent in the

36
 Relationship Between Syndicate Lenders and Borrower 12.30

agreement have been satisfied for the new addition5. In the event of the
borrower (or its parent company) requesting that a subsidiary cease to be an
additional borrower, the agent bank can accept the subsidiary’s resignation6,
whereupon that subsidiary ceases to have any further rights or obligations
under the loan agreement7, provided that inter alia there is no existing or likely
default by the borrower under the agreement8 and provided that the subsidiary
is under ‘no actual or contingent obligations’ towards the lending syndicate9.
1
LMA.MTR.09, cl 25.1.
2
LMA.MTR.09, cl 25.2(a)(ii). Much the same procedure and requirements apply to a subsidiary
that wishes to become an ‘additional guarantor’ of the syndicated loan agreement rather than
becoming a primary debtor: see LMA.MTR.09, cl 25.4.
3
LMA.MTR.09, cl 25.2(a)(iii).
4
LMA.MTR.09, cl 25.2(c).
5
LMA.MTR.09, cls 4.1, 25.2(b). Any ‘additional guarantor’ must also confirm that the continu-
ing representations in the syndicated loan agreement are ‘true and correct’: see LMA.MTR.09,
cl 25.6. See further para 12.31 below.
6
LMA.MTR.09, cl 25.3(b). The ability to resign as an additional borrower may be conditioned
upon the consent of some or all of the existing lenders. It is also possible for a subsidiary to
resign as an additional guarantor of the borrower’s obligations under the loan agreement: see
LMA.MTR.09, cl 25.6.
7
LMA.MTR.09, cl 25.3(b).
8
LMA.MTR.09, cl 25.3(b)(i).
9
LMA.MTR.09, cl 25.3(b)(ii).

12.30 In terms of changing the members of the lending syndicate, it certainly

ought to be possible to introduce additional lenders with the consent of all the
existing lenders1, but it may also be possible to bring any facilities made
available to the borrower by a new lender within the scope of the syndicated
loan agreement by the agent bank (acting upon the instructions of a majority of
lenders)2 designating the new facility as a ‘Finance Document’ under the loan
agreement3. Alternatively, rather than bringing in additional lenders, the other
way of introducing new lenders is to seek a total or partial replacement for an
existing lender. As indicated previously4, there is a ready secondary market for
trading syndicated debt, since it is common practice for lenders to transfer some
or all of their rights and/or obligations under the loan agreement to new
participants under participation agreements5. Such participation by third-party
lenders may generally take effect by either of two methods6. The first method
involves the original lender ‘assigning’ its rights under the loan agreement7,
including potentially any security it may have8. In terms of the procedure to be
followed, the assignor and assignee will enter into an ‘assignment agreement’ in
the form specified in the syndicated loan agreement9 and deliver this to the agent
bank, together with the requisite fee10. Once the agent bank has completed any
necessary ‘know your customer’ checks on the assignee11, the agent bank will
execute the ‘assignment agreement’ ‘as soon as reasonably practicable’ after
receiving it12 and then deliver a copy of the agreement to the borrower (or its
parent company)13. Such an ‘assignment agreement’, however, challenges our
traditional understanding of what amounts to a valid assignment in two ways.
First, whilst assignments are ordinarily effective without the borrower’s consent
(albeit that for a valid statutory assignment there is a requirement to give the
borrower notice of the assignment)14, standard-form syndicated loan agree-
ments generally require such consent (or at least the consent of the borrow-
er’s parent company)15 as a precondition of a valid ‘assignment’ under the
agreement, unless the assignee is an existing syndicate member or an affiliate of

37
12.30 Syndicated Lending

such a member16 or unless there is a continuing event of default17. In some

syndicated loan agreements, the original lender will be protected from the more
extreme consequences of borrower or third party consent being required by
virtue of the loan agreement providing that that consent cannot be unreason-
ably withheld or delayed and/or by providing that the relevant consents will be
deemed to have been given if the relevant party does not expressly indicate its
refusal within a specified timeframe. Secondly, in accordance with the tradi-
tional understanding of an assignment’s effect18, an ‘assignment agreement’ can
be used to assign some or all of a particular lender’s rights under the syndicated
loan agreement19. Unless the original syndicated lender is assigning all of its
rights, in which case the assignment may be statutory in nature if it is made in
writing and written notice is given to the borrower20, an assignment of just some
of a lender’s rights will only be effective in equity21. That said, standard-form
syndicated loan agreements do recognize the possibility of an ‘assignment’
(contrary to the traditional understanding of an assignment’s legal effect) also
passing the lender’s obligations under the loan agreement to the assignee,
thereby discharging the assignor from any further commitments, although the
‘assignment agreement’ should make clear that this is its intended effect22.
Indeed, for such a so-called ‘assignment’ to be effective at all, the standard-form
syndicated loan agreement requires that the agent bank receive a written
confirmation (which is normally contained in the ‘assignment agreement’ itself)
from the assignee to the effect that the latter assumes the obligations of the
assignor under the syndicated loan agreement23. The only conclusion that can
be drawn from the above points is that where a syndicate bank seeks to transfer
obligations to a third party, even if the transaction is labelled as an ‘assignment’,
it is better viewed in legal terms as a novation24.
It is precisely because of these traditional limits upon the effect of an assignment
(with the result that an assignor would remain liable to make further advances
under a revolving credit facility or pursuant to a clause to that effect in a loan
agreement) that it became more usual for participation agreements to be
effected by the second method available, namely a ‘transfer’25, which had
always enabled the transfer of both rights and obligations to a transferee. A
‘transfer’ is undoubtedly a novation by another name. A transfer/novation
generally requires a tripartite agreement between the original lender, the new
lender and the borrower. The clause in the syndicated loan agreement permit-
ting transfer/novation is viewed as a standing offer by the original lender to
transfer/novate to a relevant third party26, who then accepts the offer by
delivering a ‘transfer certificate’ in the form specified in the loan agreement27 to
the agent bank. Once the agent bank has completed any ‘know your customer’
checks on the transferee28 and has obtained the borrower’s (and/or the relevant
third party’s) consent to the transfer/novation29, it is obliged to execute the
transfer certificate ‘as soon as reasonably practicable’ after receiving it30 and to
deliver a copy to the borrower31. This procedure is mandatory for an effective
transfer/novation32. The effect of a transfer/novation is to create a new loan
agreement between the transferee and borrower and new rights and obligations
between the transferee, the agent bank, the arranger and the other existing
lenders, whilst simultaneously discharging the equivalent rights and obligations
between the borrower and the transferor33. Given the similarity in procedure
and potential effects of an ‘assignment’ and a ‘transfer’ under a syndicated loan
agreement, it is clear that participation agreements tend to blur the conceptual

38
 Relationship Between Syndicate Lenders and Borrower 12.30

line between assignments and novations34. Whether there is an assignment in

the true legal sense of the word35 or a disguised novation (albeit labelled as an
‘assignment’) will depend upon the proper construction of the assignment
agreement.
Given that both ‘assignments’ and transfers are capable of passing a syndicate
lender’s obligations to a third party, the borrower has a keen interest in the
identity of any assignee or transferee, as they will be called upon to fulfil any
obligation to make further advances and the borrower will wish to verify that
they have the standing and resources to do so effectively. As already discussed,
the borrower is usually protected to a degree from undesirable assignments or
transfers by the need for its consent (or, at least, the consent of a related third
party)36, but another protective technique is to stipulate in advance in the loan
agreement the criteria that a third party must satisfy in order to qualify as an
acceptable assignee or transferee of a particular syndicate member’s obliga-
tions37. Such a situation arose in Argo Fund Ltd v Essar Steel Ltd38, in which the
syndicated loan agreement (adopting the LMA standard-form agreement cur-
rent in 1997) provided that a lender might assign its rights to any third party,
but could only transfer its obligations by novation to ‘a bank or other financial
institution’. Whilst it was common ground that the transferee in Argo did not
constitute a ‘bank’ within the common law definition39, the issue was whether,
as a ‘Global Emerging Markets Debt Hedge Fund’, the purported transferee fell
within the scope of the phrase ‘or other financial institution’. Adopting a liberal
interpretation of that phrase, Auld LJ considered that, to qualify as a ‘financial
institution’, an entity must have ‘a legally recognized form or being, which
carries on its business in accordance with the laws of its place of creation and
whose business concerns commercial finance, and whether or not its business
included the lending of money on the primary or secondary market’40. Accord-
ing to Rix LJ, ‘the essential characteristic of a ‘financial institution’ is that it
provides capital to financial markets . . . regularly makes, purchases or
invests in loans, securities or other financial assets’, is ‘likely to be professional,
more or less regulated, and of a certain size’ and is an entity ‘of a certain
substance’41. Moreover, given that the Court of Appeal in Barbados
Trust Co Ltd v Bank of Zambia42 was also prepared to thwart a similar transfer
restriction by construing the transfer as a declaration of trust (which would
only have been prohibited if the clause had been explicit in that regard)43 it is
hardly surprising that the LMA has, since 200144, liberalized the class of
potential assignees and transferees, which has expanded now to include ‘a trust,
fund or other entity, which is regularly engaged in or established for the purpose
of making, purchasing or investing in loans, securities or other financial
assets’45. This phrase was given a broad interpretation by Briggs J in Carey
Group plc v AIB Group (UK) plc46.
1
LMA.MTR.09, cl 35.2(h).
2
LMA.MTR.09, cl 26.2(a).
3
LMA.MTR.09, cl 1.1. For a useful analysis of this possibility, see R Hooley, ‘Security, Security
Trusts and the Amendment of Syndicated Credit Agreements: Lessons from Australia’ [2012]
LMCLQ 145, 155–159.
4
See para 12.3 above.
5
For detailed treatment of participation agreements, see P Wood, International Loans, Bonds
and Securities Regulation (London, 1995), chs. 6–7; R Rendell, ‘Current Issues in Participation
and Other Co-lending Arrangements’, in J Norton, C.-J Cheng, and I Fletcher (eds), Inter-
national Banking Operations and Practices (Dordrecht, 1994); R Tennekoon, The Law and
Regulation of International Finance (London, Butterworths, 2006 reprint), ch 6; A Mugasha,

39
12.30 Syndicated Lending

The Law of Multi-Bank Financing (Oxford University Press, 2007), [1.14]–[1.53] and ch 6; C
Hewetson & G Mitchell (eds), Banking Litigation (Sweet & Maxwell, 4th edn, 2017),
[3–013]–[3–016].
6
Whatever the precise method adopted, the existing lender assumes no responsibility for such
matters as the validity of the syndicated loan agreement, the borrower’s solvency or due
performance of its obligations or the accuracy of any statements made in the relevant
documentation: see LMA.MTR.09, cl 24.5(a). Similarly, the new lender relies upon his own
judgement with respect to the borrower’s financial position (see LMA.MTR.09, cl 24.5(b)) and
the existing lender undertakes no obligation to accept a re-transfer of the rights and/or
obligations from the transferee or to indemnify the transferee against any losses suffered (see
LMA.MTR.09, cl 24.5(c)). For the sums payable between the original lender and the new
lender, see TAEL One Partners Ltd v Morgan Stanley & Co International plc [2013] EWCA
Civ 473.
7
LMA.MTR.09, cl 24.1(a). See further Irish Bank Resolution Corporation Ltd v Camden
Market Holdings Corporation [2017] EWCA Civ 7.
8
LMA.MTR.09, cl 24.9.
9
LMA.MTR.09, Sch 6.
10
LMA.MTR.09, cl 24.4.
11
LMA.MTR.09, cls 24.3(a)(ii), 24.6(b).
12
LMA.MTR.09, cl 24.6(a).
13
LMA.MTR.09, cl 24.7.
14
Law of Property Act 1925, s 136(1).
15
LMA.MTR.09, cl 24.2(a). See also J Oldnall & M Clark, ‘The Age of Consent’ (2010) 25 JIBLR
89.
16
LMA.MTR.09, cl 24.2(a)(i).
17
LMA.MTR.09, cl 24.2(a)(ii).
18
See, eg, Tolhurst v Associated Portland Cement Manufacturers Ltd [1902] 2 KB 660, 668;
Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85, 103; Don King
Productions Inc v Warren [2000] Ch 291, 318.
19
LMA.MTR.09, cl 24.7(d).
20
Law of Property Act 1925, s 136(1).
21
For a valid equitable assignment, the only pre-requisite is that the assignor demonstrate a clear
intention to assign all or part of its the rights under the syndicated loan agreement (see William
Brandt’s Sons & Co v Dunlop Rubber Co Ltd [1905] AC 454, 461–462; Finlan v Eyton Morris
Winfield [2007] 4 All ER 143, [33]) and there is no requirement of writing or notice to the
debtor (see Gorringe v Irwell India Rubber and Gutta Percha Works (1886) 34 Ch D 128,
132–136), although, in the syndicated loan context, most assignments will be in the form of a
written participation agreement and the syndicated loan agreement will usually require the
borrower (or its parent company) to consent to the assignment (see LMA.MTR.09, cl 24.2(a)).
Moreover, the standard-form assignment agreement usually stipulates that the delivery of the
agreement to the agent bank operates as notice to the borrower: see LMA.MTR.09, Sch 6, [8/9].
One difficulty that the participant might face is that the equitable assignee of a legal chose in
action must generally join the assignor as a party to any enforcement action against the
borrower: see Durham Bros v Robertson [1898] 1 QB 765, 774; Performing Right Society Ltd
v London Theatre of Varieties Ltd [1924] AC 1, 13–14, 18–19, 27–28, 36–37. See also see P
Ellinger, E Lomnicka & C Hare, Ellinger’s Modern Banking Law (Oxford University Press, 5th
edn, 2011), 787–789, 868–871.
22
LMA.MTR.09, cl 24.7(c).
23
LMA.MTR.09, cl 24.3(a)(i).
24
See Don King Productions Inc v Warren [2000] Ch 291, 318: ‘It is not possible (save pursuant
to statutory authority) without a novation to transfer the burden of a contract to a third party.’
25
LMA.MTR.09, cl 24.1(b).
26
Argo Fund Ltd v Essar Steel Ltd [2005] EWHC 600 (Comm), [51]–[52]. See also M Hughes,
‘Contracts, Consideration and Third Parties’ [2000] JIBFL 79, 81.
27
LMA.MTR.09, Sch 5.
28
LMA.MTR.09, cl 24.6(b).
29
LMA.MTR.09, cl 24.2(a). This is subject to exceptions where the transfer is to an existing
lender or its affiliate or where there is an existing default under the syndicated loan agreement:
see LMA.MTR.09, cl 24.2(a)(i)–(ii). Syndicated agreements frequently provide that the bor-
rower cannot unreasonably withhold or delay the giving of its consent to a transfer and will be
deemed to have consented unless the borrower makes its objection explicit within a specified
time.

40
 Relationship Between Syndicate Lenders and Borrower 12.31
30
LMA.MTR.09, cl 24.6(a). In this regard, the agent has no discretion to exercise, but must effect
the transfer or assign once the necessary formalities and checks have been completed: see
Habibsons Bank Ltd v Standard Chartered Bank (Hong Kong) Ltd [2010] EWCA Civ 1335,
[37].
31
LMA.MTR.09, cl 24.8.
32
LMA.MTR.09, cl 24.3(b). The validity of a transfer may also be conditional upon the transferee
acceding to any inter-creditor agreement or other security arrangements: see LMA.MTR.09,
cl 24.9.
33
LMA.MTR.09, cl 24.6(c).
34
Both assignments and transfers by novation bind the assignee or transferee to any variations in
the syndicated loan agreement occurring before the assignment or transfer is completed: see
LMA.MTR.09, cl 24.3(d).
35
See Don King Productions Inc v Warren [2000] Ch 291, 318: ‘The only assignment in respect
of a contract which is legally possible is an assignment of the benefit of the contract (ie the rights
thereby created) or some benefit (eg the profits) derived by the assignor from the contract.’
36
LMA.MTR.09, cl 24.2(a). Given that the existence of this protection depends upon the wording
of the syndicated loan agreement, it is possible to dispense entirely with the need for the
borrower’s consent, particularly as there is increasing acceptance of the effectiveness of
contractual clauses permitting the ‘unilateral transfer’ of obligations involving the borrow-
er’s consent effectively being given in advance: see Habibsons Bank Ltd v Standard Chartered
Bank (Hong Kong) Ltd [2010] EWCA Civ 1335, [20]–[23]; Standard Chartered Bank (Hong
Kong) Ltd v Independent Power Tanzania Ltd [2016] EWHC 2908 (Comm), [46]. See also L
Ho, ‘Unilateral Transfers of Contractual Obligations’ (2013) 129 LQR 491.
37
Whilst it is theoretically possible for the syndicated loan agreement to employ a non-assignment
or non-transfer clause to outlaw assignments and transfers entirely, it is unlikely that the
syndicate members would agree to such a restriction given their interest in being able to dispose
of their rights and obligations under the loan agreement. If such a clause were to be introduced
into a syndicated loan agreement, the courts would give it effect, as restrictions upon the
transfer of contractual rights and obligations are not contrary to public policy: see Linden
Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85, 106–107. See also Ruttle
Plant Ltd v Secretary of State for the Environment, Food & Rural Affairs [2007] EWHC 2870,
[71]–[75]. That said, the courts have shown a willingness to circumvent such restrictions on
assignability or transferability by construing a purported assignment or transfer as taking effect
by some other legal means, such as a declaration of trust: see Don King Productions Inc v
Warren [2000] Ch 291, 319–322; Barbados Trust Co Ltd v Bank of Zambia [2007] 1
Lloyd’s Rep 495, [29]–[47], [74]–[89]; Masri v Contractors International UK Ltd [2007]
EWHC 3010 (Comm), [126]; First Abu Dhabi Bank PJSC v BP Oil International Ltd [2018]
EWCA Civ 14, [24]–[26].
38
Argo Fund Ltd v Essar Steel Ltd [2006] EWCA Civ 241, [2]–[3], [18]–[19]. See also Grant v
WDW 3 Investments Ltd [2017] EWHC 2807 (Ch), [17]–[21]. For detailed consideration of
the Argo decision, see A Hudson, The Law of Finance (Sweet & Maxwell, 2nd edn, 2013),
[33–46].
39
United Dominions Trust Ltd v Kirkwood [1966] 1 QB 431, 447.
40
Argo Fund Ltd v Essar Steel Ltd [2006] EWCA Civ 241, [51].
41
Argo Fund Ltd v Essar Steel Ltd [2006] EWCA Civ 241, [68]. For similar support for a liberal
definition, see Barbados Trust Co Ltd v Bank of Zambia [2007] 1 Lloyd’s Rep 495, [110];
British Energy Power & Trading Ltd v Credit Suisse [2008] EWCA Civ 53, [19]–[24].
42
Barbados Trust Co Ltd v Bank of Zambia [2007] 1 Lloyd’s Rep 495, [21]–[47], [74]–[119],
[128]–[142]; First Abu Dhabi Bank PJSC v BP Oil International Ltd [2018] EWCA Civ 14,
[24]–[26].
43
See, eg, British Energy Power & Trading Ltd v Credit Suisse [2008] EWCA Civ 53, [47].
44
Argo Fund Ltd v Essar Steel Ltd [2006] EWCA Civ 241, [2].
45
LMA.MTR.09, cl 24.1.
46
Carey Group plc v AIB Group (UK) plc [2011] EWHC 567 (Ch), [37]–[43].

(c) Terms of the syndicated loan agreement

12.31 Whilst the lending relationship commences upon the signing of the
formal loan agreement, from which time the lending syndicate is committed to

41
12.31 Syndicated Lending

lend, there is no obligation to fulfil that lending commitment until the condi-
tions precedent stated in the loan agreement (usually in a schedule)1 have been
satisfied2. This will usually occur when the relevant documents3 have been
received ‘in form and substance satisfactory to the [agent bank]’4. When the
agent bank is satisfied in this regard, it will inform both the lenders and the
borrower (and/or its parent company)5, which may then draw down funds in
accordance with the syndicated loan agreement. In order to do so, the borrower
(or its parent company) must deliver a ‘utilization request’ to the agent bank6,
which specifies the facility being drawn upon, the date of utilization (which
must fall within the ‘availability period’ stated in the loan agreement), the
amount and currency and the interest period applicable to the request7. For
their part, each lender should have made available to the agent bank through
that lender’s ‘facility office’8 its portion of the loan monies for disbursement by
the stated utilization date9. The agent bank must make the funds available to the
borrower ‘as soon as practicable after receipt’ by transferring those funds to an
account specified by the borrower10. Although LMA standard-form loan agree-
ments usually indicate the purpose for which the loan is required11, neither the
agent bank nor the syndicate lenders have any obligation to monitor that the
funds have actually been used for the stated purpose12 (although failure to use
the funds for their stated purpose may amount to a misrepresentation consti-
tuting an event of default under the agreement13). Any commitments to lend
that are unutilized by the end of the availability period are immediately
cancelled14.
1
LMA.MTR.09, Sch 2.
2
Shencourt Sdn Bhd v Aseambankers Malaysia Bhd [2011] 6 MLJ 236, [238], rev’d on a
different point: [2014] 4 MLJ 619. See also P Rawlings, ‘Avoiding the Obligation to Lend’
[2012] JBL 89, 97. See further A Hudson, The Law of Finance (Sweet & Maxwell, 2nd edn,
2013), [33–30].
3
LMA.MTR.09, Sch 2.
4
LMA.MTR.09, cl 4.1(a). In deciding whether the documents are satisfactory, the agent
bank’s discretion is limited by the usual concepts of ‘honesty, good faith, and genuineness, and
the need for the absence of arbitrariness, capriciousness, perversity and irrationality’: see
Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116, [66],
applied in Braganza v BP Shipping Ltd [2015] UKSC 17, [2015] 4 All ER 639, [2015] 1 WLR
1661 SC. See also P Rawlings, ‘Avoiding the Obligation to Lend’ [2012] JBL 89, 98–99. See
generally R Hooley, ‘Controlling Contractual Discretion’ (2013) 72 CLJ 65; C Hare, ‘The
Expanding Judicial Review of Contractual Discretion: Carte Blanche or Carton Rouge?’ [2013]
BJIBFL 269; J Morgan, ‘Resisting Judicial Review of Discretionary Contractual Powers’ [2015]
LMCLQ 483.
5
LMA.MTR.09, cl 4.1(a).
6
LMA.MTR.09, cl 5.1.
7
LMA.MTR.09, cl 5.2(a). Some agreements require a fresh utilization request for each advance,
whilst others permit multiple utilisations in a single request: see LMA.MTR.09, cl 5.2(b).
8
Each lender should have notified the agent bank in writing of the office ‘through which it will
perform its obligations’ under the syndicated loan agreement: see LMA.MTR.09, cl 1.1.
9
LMA.MTR.09, cl 5.4(a). A particular lender’s participation following a utilization request will
be determined by the proportion of the total available facility that is made up of that
lender’s commitment under the loan agreement: see LMA.MTR.09, cl 5.4(b).
10
LMA.MTR.09, cl 29.2. The borrower is required to specify an account ‘in the principal
financial centre’ of the country of the currency stipulated in the utilization request at least five
business days’ prior to disbursement: see LMA.MTR.09, cl 29.2.
11
LMA.MTR.09, cl 3.1. One of the potential legal consequences of this provision is that it may
create a Quistclose trust, by virtue of which the borrower will hold the loan monies on a
resulting trust for the relevant lender(s) subject to a mandate from the lender(s) to use those
funds for their stated purpose: see generally Barclays Bank Ltd v Quistclose Investments Ltd
[1970] AC 567, 580; Twinsectra v Yardley [2002] 2 AC 164, [69]–[76], [81], [87], [92], [100];
Latimer v Commissioner of Inland Revenue [2004] UKPC 13, [41]. In the unlikely event that a

42
 Relationship Between Syndicate Lenders and Borrower 12.32

lender has not secured its position (for example, LMA.MTR.09, cl 18 usually sets out the details
of any relevant guarantor), the Quistclose trust may provide that lender with a last-ditch
proprietary argument in the event that the borrower becomes insolvent before the monies are
used for the stated purpose: see generally P Millett, ‘The Quistclose Trust: Who Can Enforce It?’
(1985) 101 LQR 269. In order to succeed, however, a lender will have to demonstrate ‘a mutual
intention that the monies should not fall within the general fund of the [borrower’s] assets’: see
Bieber v Teathers Ltd [2012] EWCA Civ 1466, [13]–[15]; Gabriel v Little [2013] EWCA Civ
1513, [40]–[44].
12
LMA.MTR.09, cl 3.2.
13
LMA.MTR.09, cl 23.4.
14
LMA.MTR.09, cl 5.5.

12.32 Once the funds have been disbursed, the syndicate banks will seek to
monitor the borrower for signs of any financial distress or other difficulties that
might make the loan agreement unenforceable or the loan monies more difficult
to recover1. To this end, the borrower will usually make a number of formal
‘representations’ set out expressly in the loan agreement2, which are stated to
have been made for the first time on the date of the loan agreement’s execution3
and which are then repeated inter alia whenever a fresh utilization request is
made under the loan agreement and on the first day of each new interest period4.
The borrower’s representations relate to such matters as the validity of its
incorporation and its capacity and power to conduct its business5; the validity,
legality and enforceability of the borrower’s obligations under the loan agree-
ment6; the recognition and enforceability of the English choice of law clause and
any English judgment7; the fact that the borrower’s repayments are not subject
to deduction of tax and no finance documents are subject to stamp duty in its
place of incorporation8; there being no current event of default under the loan
agreement nor one that ‘might reasonably be expected to result from the
making of any utilization’9; the accuracy and completeness of the information
contained in the placement or information memorandum10; the fact that the
borrower’s financial statements were prepared in accordance with relevant
accounting standards, fairly represent the borrower’s financial position for the
relevant year and have not been rendered unreliable by any ‘material adverse
change’ in the borrower’s business or financial condition11; and there being no
pending or threatened litigation, arbitration or administrative proceedings that
might have a ‘material adverse effect’ on the borrower12.
In addition, the borrower usually represents that the lenders’ rights under the
syndicated loan agreement and their security rank at least pari passu with the
claims of all other creditors (whether secured, unsecured or subordinated) and
that there is no prior ranking security13. As well as seeking to protect the
lenders’ position in the borrower’s liquidation, such a provision has been
interpreted as requiring the borrower to pay equally ranking debts concurrently
and rateably even outside the insolvency context and may also potentially
provide a pre-insolvency basis for enjoining the borrower from incurring
higher-ranking debt (assuming the lenders hear about such a proposed course of
action ahead of time) or for claiming damages (assuming the lenders can prove
some clear loss resulting from the breach of contract)14. If any of these initial or
continuing representations made by the borrower are proved to be incorrect or
misleading in a material respect, this will constitute an event of default15
entitling a majority of the syndicate lenders to accelerate the loan16.
1
For the borrower’s agreement (or the agreement of its parent company) to indemnify the
syndicate lenders, see LMA.MTR.09, cls 15.1–15.2. A syndicate that provides a term loan to

43
12.32 Syndicated Lending

the borrower may not demand early repayment in the absence of an event of default: see Cryne
v Barclays Bank plc [1987] BCLC 548, 553–557.
2
LMA.MTR.09, cl 19.
3
LMA.MTR.09, cl 19.
4
LMA.MTR.09, cl 19.14.
5
LMA.MTR.09, cls 19.1, 19.4.
6
LMA.MTR.09, cls 19.2–19.3.
7
LMA.MTR.09, cl 19.6.
8
LMA.MTR.09, cls 19.17–19.18.
9
LMA.MTR.09, cl 19.9(a). Most syndicated loan agreements also usually contain a representa-
tion that there is no event of default by the borrower or its subsidiaries under any other
agreement that might have a ‘material adverse effect’ on the syndicated loan agreement itself:
see LMA.MTR.09, cl 19.9(b).
10
LMA.MTR.09, cl 19.10.
11
LMA.MTR.09, cl 19.11.
12
LMA.MTR.09, cl 19.13.
13
LMA.MTR.09, cl 19.12.
14
See, eg, Kensington International Ltd v Republic of Congo [2003] EWCA Civ 709.
15
LMA.MTR.09, cl 23.4.
16
LMA.MTR.09, cl 23.13.

12.33 The representations considered above are bolstered by financial cov-

enants requiring the borrower to maintain, for example, a certain liquidity
ratio, debt-to-equity ratio, profit-to-earnings ratio and/or asset ratio1. These
ratios are clearly intended to operate as indictors of the borrower’s financial
health.
In order to further assist with the lenders’ monitoring of the borrower, the latter
(or its parent company) usually gives certain ‘information undertakings’, which
operate for as long as sums are due under the syndicated loan agreement2. Such
undertakings may not always be strictly necessary given that most borrowers of
a size to require a syndicated loan will usually be publicly traded, meaning that
a significant amount of financial information about them will already be in the
public domain3. Nevertheless, from an abundance of caution, syndicate lenders
frequently demand that the borrower provide significant amounts of informa-
tion directly. Usually, the borrower (or its parent company) will be required to
provide the agent bank with copies of its audited annual financial statements
and half-yearly or quarter-yearly consolidated financial statements4; compli-
ance certificates explaining how the borrower’s financial statements comply
with the financial covenants in the syndicated loan agreement5; any documents
sent by the borrower (or its parent company) to its shareholders or creditors6;
details of any pending or threatened proceedings of which the borrower is
aware and which might have a material adverse effect on the borrower7; and
any information requested by the agent bank regarding the borrower’s (or its
group’s) financial condition8 or concerning the lenders’ need to satisfy any
‘know your customer’ checks9. The borrower also usually undertakes to notify
the agent bank ‘promptly’ of any default on its part, together with any steps
being taken to remedy the breach10, and, if so requested by the agent bank, to
provide a signed statement that there is no continuing default on its part11.
In addition to these ‘information undertakings’, the borrower also usually gives
a number of further ‘general undertakings’ that similarly remain effective for as
long as sums are due from the borrower under the syndicated loan agreement12.
These relate to ensuring inter alia that the borrower has any necessary autho-
rization required by its home jurisdiction in order to repay the loan and carry on

44
 Relationship Between Syndicate Lenders and Borrower 12.33

its business13; complies with any applicable laws breach of which might
materially impair the borrower’s obligations under the loan agreement14; does
not transfer any corporate asset otherwise than in the ordinary course of
business and for equivalent consideration15; does not enter into any merger,
demerger, amalgamation or reconstruction16; and/or does not make any sub-
stantial change to the general nature of its business17. Additionally, most LMA
standard-form syndicated loan agreements contain a ‘negative pledge clause’,
whereby the borrower undertakes (and its parent sometimes undertakes to
monitor the borrower’s compliance with this undertaking) not to create any
security (or ‘quasi-security’18) over its assets in favour of another lender or to
allow such security to subsist19. Whilst the creation of further security will
amount to an event of default giving rise to the ability on the part of the
syndicate lenders to accelerate the loan20 (as well as constituting a breach of
contract enabling the lenders to seek an injunction against, or damages from,
the borrower) what a syndicate lender ideally requires is some form of direct
right against the new lender to whom the offending security has been granted.
At least in circumstances where the new lender can be shown to have actual
knowledge of the negative pledge clause in the syndicated loan agreement, the
syndicate lenders may be able to enjoin the new lender from acquiring fresh
security (or obtaining damages for any loss suffered) on the basis that the new
lender is threatening to commit (or has committed) the tort of inducing breach
of contract21 or some other economic tort. There may be an argument that,
given the standard form of most syndicated loan agreements nowadays, any
new lender is likely to realize that such a loan agreement will contain a negative
pledge clause.
1
LMA.MTR.09, cl 21.
2
LMA.MTR.09, cl 20. The necessary information can be provided by the borrower posting it
upon a shared website (see LMA.MTR.09, cl 31.5(a)), although the parties have to agree
specifically to this method of communication (see LMA.MTR.09, cl 31.5(b)). Where a website
is used to transmit information, a particular lender is entitled to require paper copies of the
relevant information: see LMA.MTR.09, cls 20.6(a), (d).
3
A Hudson, The Law of Finance (Sweet & Maxwell, 2nd edn, 2013), [33–28].
4
LMA.MTR.09, cl 20.1. As to the requirements with which those financial statements must
comply, see LMA.MTR.09, cl 20.3.
5
LMA.MTR.09, cl 20.2(a). As to the formal requirements for a valid compliance certificate, see
LMA.MTR.09, cl 20.2(b).
6
LMA.MTR.09, cl 20.4(a).
7
LMA.MTR.09, cl 20.4(b).
8
LMA.MTR.09, cl 20.4(d).
9
LMA.MTR.09, cl 20.7.
10
LMA.MTR.09, cl 20.5(a).
11
LMA.MTR.09, cl 20.5(b).
12
LMA.MTR.09, cl 22.
13
LMA.MTR.09, cl 22.1. The most obvious example of a restriction upon the movement of
capital is exchange control legislation that remains in force in some jurisdictions: see Articles of
Agreement of the International Monetary Fund, 27 December 1945, 60 Stat 1401, TIAS No
2322, 2 UNTS 39, Art VIII(2)(b). There is also a requirement that the borrower provide copies
of those authorisations: see LMA.MTR.09, cl 22.1(b).
14
LMA.MTR.09, cl 22.2. It is not uncommon to include more specific requirements relating to
compliance with environmental legislation, including obtaining any necessary permits and
maintaining procedures to ensure environmental compliance, and compliance with anti-
corruption legislation.
15
LMA.MTR.09, cls 22.4(a), (b)(i).
16
LMA.MTR.09, cl 22.5(a).
17
LMA.MTR.09, cl 22.6.
18
For the definition of ‘quasi-security’ in this context, see LMA.MTR.09, cl 22.3(b).

45
12.33 Syndicated Lending
19
LMA.MTR.09, cls 22.3(a)–(b). There are certain forms of security and quasi-security excluded
from the scope of the negative pledge clause, including existing security, certain netting and
set-off arrangements, liens arising by operation of law, retention of title clauses and hire-
purchase and conditional sale arrangements: see LMA.MTR.09, cl 22.3(c).
20
LMA.MTR.09, cl 23.3.
21
Lumley v Gye (1853) 2 E&B 216, 232–233, 238; OBG Ltd v Allan [2008] AC 1, [3]–[44],
[168]–[173], [191]–[195], [306]. See also De Mattos v Gibson (1858) De G&J 276, 282, which
has now been explained as the equitable analogue of the common law tort of inducing breach
of contract: see Swiss Bank Corp v Lloyds Bank Corp Ltd [1979] 1 Ch 548, 569–575; Law
Debenture Trust Corp v Ural Caspian Oil Corp Ltd [1993] 1 WLR 138, 143–149. The De
Mattos doctrine may be of limited use, however, as it similarly requires the third party to have
actual knowledge of the negative pledge clause and has traditionally been limited to the
subsequent inconsistent dealing with property rather than the creation of new proprietary
rights: see generally A Tettenborn, ‘Covenants, Privity of Contract and the Purchase of Personal
Property’ [1982] CLJ 58; S Gardner, ‘The Proprietary Effect of Contractual Obligations under
Tulk v Moxhay and De Mattos v Gibson’ (1982) 98 LQR 279; N Cohen-Grabelsky, ‘Interfer-
ence with Contractual Relations and Equitable Doctrines’ (1982) 45 MLR 241; A Tettenborn,
‘Burdens on Personal Property and the Economic Torts’ [1993] CLJ 382.

12.34 The terms of the syndicated loan agreement may generally be altered
with the consent of the borrowers and a majority of the lending syndicate1,
although there are amendments relating to certain important matters that may
require the unanimous consent of all the lenders2. If the amendment to the
syndicated loan agreement affects the rights or obligations of the arranger or
agent bank, it is usual to obtain their consent to the change3.
1
LMA.MTR.09, cl 35.1(a).
2
LMA.MTR.09, cl 35.2.
3
LMA.MTR.09, cl 35.3.

(d) Performance and breach of the syndicated loan agreement

12.35 For the borrower’s part, the key obligation is to repay the loan principal,
together with interest at the agreed rate1, on the last day of each interest period2.
A borrower is free to determine in advance the relevant interest period3, but if
it fails to do so the default position is one month4. A borrower (or its parent
company) is also generally liable to pay a commitment fee for the bank agreeing
to lend in accordance with the syndicated loan agreement5, as well as being
liable for any increased costs incurred by the syndicate lenders as a result of any
relevant legal or regulatory changes6. Although a borrower will often repay the
loan according to the agreed schedule, it does have the right to prepay some or
all of the loan after notifying the agent bank of its intention to do so7, although
it will be liable to pay ‘break costs’ to the syndicate lenders in respect of their
loss of interest resulting from the loan being repaid early8. If the borrower does
not wish to utilize any part of the lending syndicate’s commitment to lend, the
borrower (or its parent company) may voluntarily cancel it9.
1
For the calculation of interest, see LMA.MTR.09, cls 9.1–9.3, 11.1–11.3. For the tax, stamp
duty, VAT and FATCA issues that might arise in respect of repayments, see LMA.MTR.09,
cl 13.
2
LMA.MTR.09, cls 7.2(a), 9.2. There are sometimes restrictions on the ability to re-borrow a
part of a loan facility that has already been repaid: see LMA.MTR.09, cls 8.7(c)–(d). The basis
for the calculation of interest may be affected by a ‘market disruption event’: see LMA.MTR.09,
cls 11.1–11.3.
3
LMA.MTR.09, cl 10.1(a). An interest period will end on the next business day following the
day when it would otherwise have ended: see LMA.MTR.09, cl 10.3.

46
 Relationship Between Syndicate Lenders and Borrower 12.36
4
LMA.MTR.09, cl 10.1(c). In certain circumstances, an agent bank may notify the borrower and
lenders of changes to the relevant interest period: see LMA.MTR.09, cl 10.2.
5
LMA.MTR.09, cl 12.1.
6
LMA.MTR.09, cls 14.1–14.2.
7
LMA.MTR.09, cls 8.4–8.5. For the restrictions applicable to the borrower’s right to prepay, see
LMA.MTR.09, cl 8.7.
8
LMA.MTR.09, cl 11.6.
9
LMA.MTR.09, cl 8.3.

12.36 In the event that the borrower fails to repay the principal, interest or fees
according to the agreed schedule, the borrower will be required to pay imme-
diately (upon the agent bank’s demand) default interest at a higher rate than the
contractual rate from the date that payment was due until actual payment (both
before or after judgment)1. Depending upon its precise wording, however, a
default interest clause may be susceptible to challenge as an unlawful penalty2,
and accordingly void.
More significantly, unless caused by an administrative or technical error or a
‘disruption event’3, a failure to pay any sum under the syndicated loan agree-
ment on its due date amounts to an ‘event of default’4. Other events of default
include any failure to satisfy the financial covenants5 (although the syndicated
loan agreement may provide that some breaches may be remedied within a
particular time-frame); any breach of the information and general undertakings
in the loan agreement6 or a breach of any inter-creditor agreement, especially if
this amounts to a repudiation of the syndicated loan agreement7; any represen-
tation by the borrower that is incorrect or misleading8 (although there may also
sometimes be a requirement that the misrepresentation be material); any
cross-default by the borrower or another member of the same corporate group
in relation to other liabilities or indebtedness9; the borrower (or other group
member) being balance-sheet insolvent10, being subject to a moratorium11,
being unable to pay its debts as they fall due12, actually suspending or threat-
ening to suspend payments on any of its debts13 or commencing negotiations
with one or more creditors with a view to ‘rescheduling’14 any of its indebted-
ness as a result of ‘actual or anticipated financial difficulties’15; any insolvency
proceeding being commenced, any creditor arrangement being concluded or
any enforcement action being taken in respect of the security for the syndicated
loan16; any execution action being taken by a judgment creditor17; or the
borrower’s obligations under the loan agreement becoming unlawful or in-
valid18 or being repudiated or rescinded by the borrower19. A ‘material adverse
change’, which usually covers any significant deterioration in the borrow-
er’s financial position or other important changes, will ordinarily also count as
an event of default20.
An event of default does not operate to cancel or accelerate the syndicated loan
agreement automatically21, but rather provides the syndicate banks with an
option to do so. Any delay in accelerating the loan does not generally amount to
a waiver that would deprive the lender of that option22. That said, acceleration
is not a course to be lightly undertaken as this risks triggering cross-default
undertakings in other loan agreements and ultimately driving the borrower into
liquidation or administration. Accordingly, some lenders may prefer to use the
existence of an event of default as a basis for renegotiating the terms of the
syndicated loan agreement with the borrower or for requiring it to take certain
ameliorative steps. Given that members of a lending syndicate may reasonably

47
12.36 Syndicated Lending

disagree as to the commercial wisdom of acceleration in any particular case, it

is enough that the required majority of syndicate lenders support accelerating
the loan23 and direct the agent bank to give the borrower (or its parent
company) notice to that effect24. Acceleration can involve cancelling any
outstanding lending commitments25, declaring that all or part of the loans
already made are immediately due and repayable, declaring that any of the
borrower’s liabilities are repayable on demand (and accordingly subject to
immediate repayment when demand is made) and/or directing the security
trustee or agent to enforce any security26. The syndicate lenders are entitled to
an indemnity from the borrower (or its parent company) in respect of any costs
and expenses incurred during the course of any enforcement process27.
1
LMA.MTR.09, cl 9.3(a).
2
Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79, 86–88;
Cavendish Square Holding BV v Makdessi [2016] AC 1172, [9]–[13], [28]–[43], [129]–[170],
[218]–[267], [291]–[293]. A default interest clause that requires the borrower to pay a higher
rate of interest with retrospective effect would ‘have all the indicia of a penalty’, whereas a
prospective increase in the interest rate would be ‘commercially justifiable, provided always that
its dominant purpose was not to deter the other party from breach’: see Lordsvale Finance plc
v Bank of Zambia [1996] QB 752, 761–764. See also Jeancharm Ltd v Barnet Football
Club Ltd [2003] EWCA Civ 58, [27]; Euro London Appointments Ltd v Claessens Inter-
national Ltd [2006] EWCA Civ 385, [29]; Murray v Leisureplay plc [2005] EWCA Civ 963,
[105]–[118]; Donegal International Ltd v Republic of Zambia [2007] EWHC 197 (Comm),
[509]–[523]. If the default interest clause is valid, such interest can be compounded if unpaid:
see LMA.MTR.09, cl 14.3(c).
3
A ‘disruption event’ generally includes some event beyond the parties’ control involving a
material disruption of payment or communication systems or financial markets: see
LMA.MTR.09, cl 1.1.
4
LMA.MTR.09, cl 23.1.
5
LMA.MTR.09, cl 23.2.
6
LMA.MTR.09, cl 23.3(a).
7
LMA.MTR.09, cl 23.11.
8
LMA.MTR.09, cl 23.4.
9
LMA.MTR.09, cl 23.5. See also Abu Dhabi Commercial Bank PJSC v Saad Trading, Contract-
ing & Financial Services Co [2010] EWHC 2054 (Comm), [7]–[12].
10
LMA.MTR.09, cl 23.6(b).
11
LMA.MTR.09, cl 23.6(c).
12
LMA.MTR.09, cl 23.6(a)(i).
13
LMA.MTR.09, cl 23.6(a)(ii).
14
See Grupo Hotelero Urvasco SA v Carey Value Added SL [2013] EWHC 1039 (Comm), [574],
where Blair J considered that the notion of ‘rescheduling’ in this context implied ‘a degree of
formality’ and referred to ‘the formal deferment of debt-service payments and the application of
new and extended maturities to the deferred amount’. As his Lordship noted (at [575]), the need
for formality is significantly reduced by the fact that the event of default is triggered by the
borrower commencing negotiations for the rescheduling of its debt, rather than the actual
rescheduling itself. See also Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013]
EWHC 2670 (Ch), [134].
15
LMA.MTR.09, cl 23.6(a)(iii). In Grupo Hotelero Urvasco SA v Carey Value Added SL [2013]
EWHC 1039 (Comm), [576]–[577], Blair J held that, in order for there to be ‘financial
difficulties’ within this provision, the difficulties must be of ‘a substantial nature’. See also Torre
Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch), [136]–[138].
16
LMA.MTR.09, cl 23.7. In Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013]
EWHC 2670 (Ch), [138], Sales J considered that mere negotiations with a creditor did not
involve sufficient formality to fall within this provision, which would require such steps as ‘a
vote upon a resolution to take some corporate action or the launch of legal proceedings’. Such
a provision often expressly excludes any winding-up petition that is frivolous, vexatious or
discharged: see The Law Debenture Trust Corp plc v Elektrim Finance BV [2005] EWHC 1999
(Ch), [60].
17
LMA.MTR.09, cl 23.8. Certain changes to the ownership and management structure of the
borrowers may also count as an event of default: see LMA.MTR.09, cl 23.9.

48
 Relationship Between Syndicate Lenders and Borrower 12.37
18
LMA.MTR.09, cl 23.10.
19
LMA.MTR.09, cl 23.11.
20
LMA.MTR.09, cl 23.12. See, eg, Levison v Farin [1978] 2 All ER 1149, 1157–1158; BNP
Paribas SA v Yukos Oil Co [2005] EWHC 1321 (Ch), [15]–[20]; cf Re TR Technology
Investment Trust plc (1988) 4 BCC 244. For a detailed discussion of the material adverse
changes in Yukos Oil, see A Hudson, The Law of Finance (Sweet & Maxwell, 2nd edn, 2013),
[33–16]–[33–18]. For the approach to construing material adverse change clauses, see P
Rawlings, ‘Avoiding the Obligation to Lend’ [2012] JBL 89, 96.
21
Habibsons Bank Ltd v Standard Chartered Bank (Hong Kong) Ltd [2010] EWHC 702
(Comm), [30].
22
LMA.MTR.09, cl 34.
23
LMA.MTR.09, cl 23.13.
24
LMA.MTR.09, cl 23.13.
25
Besides an event of default by the borrower, the syndicate lenders may also cancel their
commitment to lend when their obligations under the loan agreement become unlawful to
perform (see LMA.MTR.09, cl 8.1) or when there is a change in control of the borrower (see
LMA.MTR.09, cl 8.2). Any notice of cancellation is irrevocable and must state the date of
cancellation and the amount being cancelled: see LMA.MTR.09, cl 8.7(a). In the circumstances
arising under cl 11.1, the syndicate lenders must ‘take all reasonable steps to mitigate any
circumstances which arise and which would result in any amount becoming payable’: see
LMA.MTR.09, cl 16.1(a). This obligation does not impact on the borrower’s obligations (see
LMA.MTR.09, cl 16.1(b)), does not require a lender to act in a manner prejudicial to its own
interests (see LMA.MTR.09, cl 16.2(b)) and is subject to any indemnity from the borrower for
any costs involved (see LMA.MTR.09, cl 16.2(a)).
26
LMA.MTR.09, cl 23.13.
27
LMA.MTR.09, cl 15.2(a)–(b).

12.37 When a majority of the syndicate lenders exercises the right to accelerate
the loan through the agent bank, Lord Scott in Concord Trust v The Law
Debenture Trust Corp plc1 made clear that the agent bank is under a ‘manda-
tory obligation’ to deliver the notice of acceleration to the borrower2. Never-
theless, it is open to the borrower to seek a declaration to the effect that there
has not been any relevant event of default, so that the syndicate is not entitled
to cancel its lending commitment and recall the loan3. If the borrower acts
before any acceleration notice has been served, it may seek an interim, and then
final, injunction enjoining the syndicate banks from declaring an event of
default in the first place4. Such challenges by the borrower largely turn upon the
proper construction of the words used in the syndicated loan agreement to
describe the particular event of default5. The acceleration notice will be valid if
one of the events of default set out therein is shown to have materialized6.
Where this is not the case, the issue arises as to whether the borrower might go
further by seeking to recover damages against the lending syndicate or agent
bank for purporting to accelerate the loan in the absence of an event of default.
In Concord Trust, Lord Scott rejected any contractual liability for wrongful
acceleration, as there was no express or implied term in the syndicated loan
agreement that the lenders or agent bank would breach by giving an invalid
notice of acceleration or by asserting unjustifiably that an event of default had
occurred7. His Lordship similarly rejected any tortious liability arising out of
the lenders’ wrongful acceleration, whether based on the torts of negligence,
unlawful means conspiracy or interference by unlawful means with contractual
relations8. Lord Scott did, however, leave open the possibility that, if a lending
syndicate had assumed an obligation to make further advances or lend up to a
certain commitment level, a refusal on the part of the syndicate lenders to
comply with such lending commitments, as a result of the erroneous belief that

49
12.37 Syndicated Lending

there had been an event of default, would give rise to contractual liability9.
1
Concord Trust v The Law Debenture Trust Corp plc [2005] 1 WLR 1591, [24]–[29], [31]. See
also Strategic Value Master Fund Ltd v Ideal Standard International Acquisition Sarl [2011]
EWHC 171 (Ch), [48].
2
The lending syndicate may also withdraw an acceleration notice, although whether this requires
unanimous or majority support will depend upon the precise wording of the agreement: see
Strategic Value Master Fund Ltd v Ideal Standard International Acquisition Sarl [2011] EWHC
171 (Ch), [51]–[70].
3
Even if the basis for the acceleration notice is disputed by the borrower, this does not diminish
the agent bank’s obligation to act upon the instructions of the syndicate majority: see Concord
Trust v The Law Debenture Trust Corp plc [2005] 1 WLR 1591, [24]–[29]. As Lord Scott
indicated (at [28]) the agent bank is protected by its ability to insist upon being indemnified
against any liability that is ‘more than a merely fanciful one’: see Concord Trust v The Law
Debenture Trust Corp plc [2005] 1 WLR 1591, [34].
4
Concord Trust v The Law Debenture Trust Corp plc [2005] 1 WLR 1591, [24]–[26].
5
See, eg, Concord Trust v The Law Debenture Trust Corp plc [2005] 1 WLR 1591, [22], [32];
BNP Paribas SA v Yukos Oil Company [2005] EWHC 1321 (Ch), [15]–[20]; Elliott Inter-
national LP v Law Debenture Trustees Ltd [2006] EWHC 3063 (Ch), [42]–[43]; Grupo
Hotelero Urvasco SA v Carey Value Added SL [2013] EWHC 1039 (Comm), [573]–[377];
Torre Asset Funding Ltd v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch), [134]–[138].
6
BNP Paribas SA v Yukos Oil Company [2005] EWHC 1321 (Ch), [20]; The Law Debenture
Trust Corp plc v Elektrim Finance BV [2005] EWHC 1999 (Ch), [4].
7
Concord Trust v The Law Debenture Trust Corp plc [2005] 1 WLR 1591, [36]–[37]. See also
BNP Paribas SA v Yukos Oil Company [2005] EWHC 1321 (Ch), [23]–[25]; Jafari-Fini v
Skillglass Ltd [2007] EWCA Civ 261, [112]–[118].
8
Concord Trust v The Law Debenture Trust Corp plc [2005] 1 WLR 1591, [38]–[40], [42]–[43].
There might, however, be liability for defamation: see E Peel, ‘No Liability for Service of an
Invalid Notice of “Event of Default”’ (2006) 122 LQR 179, 183.
9
Concord Trust v The Law Debenture Trust Corp plc [2005] 1 WLR 1591, [41]. See also Dubai
Islamic Bank PJSC v PSI Energy Holding Company BSC [2013] EWHC 3781 (Comm), [155].
For the difficulties that the borrower may face if it chooses to accept the repudiation of one or
more of the syndicate lenders and the problems of trying to resolve these difficulties with a
‘yank-the-bank’ clause, see P Rawlings, ‘Avoiding the Obligation to Lend’ [2012] JBL 89,
107–108.

6 RELATIONSHIP BETWEEN THE SYNDICATE LENDERS

INTER SE
12.38 As indicated previously1, whilst the loans made by each member of the
syndicate are in theory separate and distinct2, the reality is that those individual
rights are generally subordinated to the will of the majority of the syndicate
lenders in relation to the administration, payment and acceleration of the loan
agreement3. Indeed, the agent bank’s primary function is to facilitate such
collective action, since it is authorized by all the lenders jointly to exercise any
powers delegated by the syndicated loan agreement4.
Besides the day-to-day administration of the loan, there are two significant
matters that are affected by the collective nature of the syndicated loan. The first
concerns the requirement that all payments by the borrower in discharge of its
obligations will be shared by the agent bank amongst the syndicate members
pro rata according to their respective commitments to the total amount of the
syndicated loan5. Indeed, if any of the lenders receives a payment directly from
the borrower that lender is generally6 required to notify the agent bank of that
fact7 and the agent bank will then redistribute the payment amongst the other
syndicate members8. Where payments are made to the agent bank according to
the schedule in the loan agreement, sharing amongst the syndicate members is

50
 Relationship Between Syndicate Lenders Inter Se 12.38

unproblematic. Difficulties can arise, however, when the borrower makes a

pre-payment, pays a syndicate lender directly9 or makes a partial payment10, as
there then needs to be a mechanism for appropriating such payments to the
borrower’s various liabilities. This is usually achieved by a ‘waterfall’ clause,
which commonly allocates payments in the following order: first, the unpaid
fees, costs and expenses of the agent bank11; secondly, any accrued interest, fees
or commissions due; thirdly, any principal due; and, fourthly, the payment of
any other sum due under the syndicated loan agreement12.
The second significant issue that is subject to collectivism is acceleration of the
loan, which is a task delegated to the agent bank acting upon instructions from
the majority of the syndicate13. In the event that accelerating the loan does not
lead to full repayment, there is nothing in the LMA standard-form syndicated
loan agreement that prevents each lender from then falling back on its indi-
vidual rights against the borrower and bringing enforcement action14. Indeed, it
is generally provided that, subject to contrary provision, a lender may ‘sepa-
rately enforce its rights’ under the syndicated loan agreement15. That said, the
requirement that recoveries by an individual bank must in general be shared
with the rest of the syndicate will in practice operate as a disincentive to
individual action16, although syndicated loan agreements often provide that
sums recovered by virtue of a compromise agreement17 or following litigation
or arbitration proceedings may not be subject to pro rata sharing18. Even the
latter situation, however, is subject to an attempt to impose collectivism on the
lenders, since an individual lender can often only avoid its sharing obligations if
it gave notice to the other lenders about its intended proceedings and those
other lenders had the opportunity to participate in those proceedings, but chose
not to19.
1
See para 12.26 above.
2
One consequence of this separation is that neither the conduct of the lender’s business in general
nor its tax affairs can be affected by its being party to the syndicated loan agreement: see
LMA.MTR.09, cl 27.
3
LMA.MTR.09, cl 26.2(c): ‘ . . . unless a contrary indication appears . . . any instructions
given to the Agent by the Majority Lenders . . . will be binding on all Finance Parties
. . . ’. Collective action by the syndicate lenders is generally viewed as likely to give rise to
better outcomes for everyone than would be the case following individual lender action: see
Azevedo v Imcopa Importação, Exportação E Indústria De Olos Ltda [2013] EWCA Civ 364,
[32]. See also P Rawlings, ‘The Management of Loan Syndicates and the Rights of Individual
Lenders’ (2009) 24 JIBLR 179, 179–180.
4
LMA.MTR.09, cl 26.1(b).
5
LMA.MTR.09, cl 28.2. See also Azevedo v Imcopa Importação, Exportação E Indústria De
Olos Ltda [2013] EWCA Civ 364, [41]. In practice, the principle embodied in the sharing
clause is more honoured in the breach than in its observance: see M Hughes, ‘Loans Agreements
– Single Bank and Syndicated’ [2000] JIBFL 115, 119.
6
For the relevant exceptions, see LMA.MTR.09, cl 28.4.
7
LMA.MTR.09, cl 28.1(a).
8
LMA.MTR.09, cls 28.1–28.3. One further consequence of pro rata sharing is that any right of
set-off enjoyed by an individual lender will enure to the benefit of all the lenders: see L Gullifer
& J Payne, Corporate Finance Law: Principles and Policy (Hart Publishing, 2nd edn, 2015),
[8.4.1]. See also S Samuel, ‘Debt Buybacks: Simply Not Cricket?’ (2009) 24 JIBFL 24.
9
LMA.MTR.09, cls 28.1–28.3.
10
LMA.MTR.09, cl 29.5(a).
11
Under the waterfall clause, first priority is given to the agent bank in respect of fees and expenses
incurred in that specific capacity, but not in respect of fees and expenses incurred in any other
capacity, eg as a syndicate lender: see Landesbank Hessen-Thuringen Girozentrale v Bayerische
Landesbank [2014] EWHC 1404 (Comm), [27]–[37].

51
12.38 Syndicated Lending
12
LMA.MTR.09, cl 29.5(a). A majority of the syndicate lenders can vary the order of distribution
under the ‘waterfall clause’ (see LMA.MTR.09, cl 29.5(b)), but that clause overrides any
attempted appropriation by the borrower (see LMA.MTR.09, cl 29.5(c)). See also The Law
Debenture Trust Corp plc v Elektrim Finance BV [2005] EWHC 1999 (Ch), [54].
13
LMA.MTR.09, cl 23.13.
14
Courts in the United States have denied any right of enforcement by individual lenders: see
Crédit Français International SA v Sociedad Financiera De Comercio CA, 490 NYS 2d 670
(US Sup Ct 1985); In re Enron, 2005 WL 356985 (SDNY, February 15, 2005); Beal Savings
Bank v Viola Sumner, 8 NY 3d 318 (2007); cf AI Credit Corp v Government of Jamaica, 666
F Supp 629 (SDNY 1987); The Commercial Bank of Kuwait v Rafidain Bank, 15 F 3d 238 (2nd
Cir 1994). See generally P Rawlings, ‘The Management of Loan Syndicates and the Rights of
Individual Lenders’ (2009) 24 JIBLR. 179, 181–183. Consider the use of the ‘no action’
clause in the context of bond issues: see Elliott International LP v Law Debenture Trustees Ltd
[2006] EWHC 3063 (Ch), [44].
15
LMA.MTR.09, cl 2.3(c). In contrast, bonds frequently contain a ‘no action’ clause precluding
individual enforcement action by individual bondholders, unless the bond trustee has failed to
take action: see, eg, Re Colt Telecom Group plc [2002] EWHC 2815, [62]–[77]; Elektrim SA
v Vivendi Holdings I Corp [2008] EWCA Civ 1178, [91]–[101].
16
LMA.MTR.09, cls 28.1–28.2.
17
LMA.MTR.09, cl 28.5(a).
18
LMA.MTR.09, cl 28.5(b).
19
LMA.MTR.09, cl 28.5(b).

(a) The Juridical nature of the loan syndication

12.39 The essentially collectivist nature of the loan syndicate has raised some
questions as to its precise juridical nature1. At first sight, a bank syndicate bears
a superficial resemblance to a partnership between the syndicate members. The
better view, however, is that a bank syndicate does not fall within the statutory
definition of a ‘partnership’ – ‘the relation which subsists between persons
carrying on a business in common with a view of profit’2 – since there is no
sharing of net business profits between the syndicate members. Indeed, there
may be syndicates comprised of members with different rights against the
borrower, since one or more lenders may have subordinated its right to be
repaid its share of the total loan or to enforce any security to the rights of the
remaining syndicate members3. Moreover, the standard provisions in a syndi-
cated loan agreement, which make clear that no syndicate member is liable for
any other member’s failure to perform its obligations under the loan agree-
ment4, is inconsistent with the fundamental principle of partnership law that
each partner is usually jointly liable for the actions and wrongdoing of the other
partners5. Nor, as a matter of principle or policy would it be desirable for the
bank syndicate to be classified as a partnership, since this would lead to the
imposition of fiduciary duties between the member banks, which are effectively
sophisticated parties dealing with each other at arm’s length and ultimately
acting in their own commercial best interests6.
A more promising conceptualization of the bank syndicate might be as a joint
venture, since it provides an explanation for the banks acting in co-ordination
by lending on the same terms to the same borrower without automatically
attracting the fiduciary label7. Doubts have been expressed, however, as to

52
 Relationship Between Syndicate Lenders Inter Se 12.40

whether even a joint venture classification would be consistent with the sever-
able nature of the lenders’ obligations and the terms of standard-form syndi-
cated loan agreements8.
1
A Mugasha, The Law of Multi-Bank Financing (Oxford University Press, 2007), [5.01]–[5.15],
[5.106]–[5.124].
2
Partnership Act 1890, ss 1(1), 2.
3
A Hudson, The Law of Finance (Sweet & Maxwell, 2nd edn, 2013), [33–13].
4
LMA.MTR.09, cl 2.3(a). The tax affairs and general conduct of business by each syndicate
lender is also seen as separate: see LMA.MTR.09, cl 27. See also P Rawlings, ‘The Management
of Loan Syndicates and the Rights of Individual Lenders’ (2009) 24 JIBLR 179, 182; G Fuller,
Corporate Borrowing: Law and Practice (Jordans Publishing, 5th edn, 2016), [2.16].
5
Partnership Act 1890, ss 5–6, 9, 12.
6
P Ellinger, E Lomnicka & C Hare, Ellinger’s Modern Banking Law (Oxford University Press,
5th edn, 2011), 128–131, 784.
7
See, eg, Chirnside v Fay [2007] 1 NZLR 433, [72]–[80].
8
P Ellinger, E Lomnicka & C Hare, Ellinger’s Modern Banking Law (Oxford University Press,
5th edn, 2011), 784–787.

(b) Minority lenders’ relief from oppression

12.40 Whilst it is undoubtedly desirable (in terms of the syndicated loan’s ef-
ficient administration and its effective acceleration) for the agreement to
contain terms preventing a minority from ‘holding out’ on a particular matter
(and thereby barring collective action) or from taking unilateral action against
the borrower to the detriment of the lenders as a whole, such ‘majority rule’
provisions raise the spectre of minority oppression. Whilst a minority right-
holder in general has no automatic protection from, or right of recourse against,
decisions upon which it is outvoted by a properly constituted majority – this is
a downside that is simply inherent in being a minority1 – it is possible for parties
to introduce contractual provisions designed to protect a relevant minority
from being bound by majority decisions that would clearly not have been taken
with the best interests of the relevant group in mind. For example, in a bond or
notes issue, there will frequently be a ‘disenfranchisement’ provision in respect
of any notes held by or on behalf of the issuer, as the votes attached to those
instruments would otherwise be voted to serve the interests of the issuer rather
than those of the bondholders or noteholders generally2.
In the absence of such express contractual protection, a minority will largely be
reliant upon the courts’ powers of contractual interpretation and implication to
preserve it from oppression resulting from the abuse of majority power:
accordingly, courts may construe ambiguous terms contra proferentem3; may
reduce the scope of contractual provisions conferring a discretion or decision-
making power upon one party by implying a requirement that the power must
be exercised honestly and in good faith and must not be exercised arbitrarily,
capriciously, unreasonably, oppressively or perversely4; and (traditionally at
least in the context of the general meeting voting to amend a company’s ar-
ticles of association5 or a borrower seeking bondholder consent to the restruc-
turing of the bonds’ terms6) may invalidate any alteration to the minori-
ty’s rights if it can be demonstrated that the majority, when supporting that
alteration, did not exercise its votes ‘bona fide for the benefit of the group as a
whole’7.

53
12.40 Syndicated Lending

The notable feature of the latter jurisdiction is that the test has long been held
to be a subjective one, turning upon whether the majority shareholders or
bondholders honestly believed that voting for the alteration was in the interests
of shareholders or bondholders generally, rather than being based upon the
courts’ assessment of what might be viewed objectively as being in the best
interests of the wider group8. Given that there will rarely be direct evidence of
the majority’s mismotivations in this regard, the court will usually have to infer
the majority’s mala fides or its absence from circumstantial factors, such as
whether the variation in question operates to the particular disadvantage of the
dissenting minority9, involves the majority giving precedence to competing
interests10, or results in collateral benefits or special inducements for the
majority right-holders11. Full disclosure of such matters by the majority may
negate any basis for the minority to challenge the exercise of the majori-
ty’s votes12.
1
Although nowadays a minority may sometimes enjoy statutory protection from oppression in
particular contexts: see, eg, Companies Act 2006, s 994(1) (relief for minority shareholders who
have been unfairly prejudiced by the manner in which a company’s affairs have been
conducted).
2
Assénagon Asset Management SA v Irish Bank Resolution Corp Ltd [2012] EWHC 2090 (Ch),
[48], [56]. See also Citicorp Trustee Co Ltd v Barclays Bank plc [2013] EWHC 2608 (Ch),
[52]–[62].
3
See, eg, Mercantile Investment and General Trust Co v International Company of Mexico
[1893] 1 Ch 484, 489, considered in Assénagon Asset Management SA v Irish Bank Resolu-
tion Corp Ltd [2012] EWHC 2090 (Ch), [47].
4
See, eg, Abu Dhabi National Tanker Co v Product Star Shipping Ltd (The ‘Product Star’ (No
2)) [1993] 1 Lloyd’s Rep 397, 404; Ludgate Insurance Co Ltd v Citibank NA [1998]
Lloyd’s Rep IR 221, [35]; Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001]
EWCA Civ 107, [64]; Paragon Finance plc v Nash [2002] 1 WLR 685, [41]; Socimer
International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116, [66]; Braganza
v BP Shipping Ltd [2015] UKSC 17, [2015] 4 All ER 639, [2015] 1 WLR 1661 SC. See further
R Hooley, ‘Controlling Contractual Discretion’ (2013) 72 CLJ 65; C Hare, ‘The Expanding
Judicial Review of Contractual Discretion: Carte Blanche or Carton Rouge?’ [2013] BJIBFL
269; J Morgan, ‘Resisting Judicial Review of Discretionary Contractual Powers’ [2015]
LMCLQ 483.
5
Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656, 671–672; Brown v British Abrasive
Wheel Co Ltd [1919] 1 Ch 290, 295–296; Sidebottom v Kershaw, Leese and Company Ltd
[1920] 1 Ch 154, 159–162, 164–168, 169–173; Dafen Tinplate Co Ltd v Llanelly Steel Co
(1907) Ltd [1920] 2 Ch 124, 137–139; Shuttleworth v Cox Brothers and Company
(Maidenhead) Ltd [1927] 2 KB 9, 18, 23; Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286,
291; Re Charterhouse Capital Ltd [2014] EWHC 1410 (Ch), [230]–[237], aff’d [2015] EWCA
Civ 536, [90].
6
Shaw v Royce Ltd [1911] 1 Ch 138, 150; Goodfellow v Nelson Line (Liverpool) Ltd [1912] 2
Ch 324, 333; British America Nickel Corp Ltd v MJ O’Brien Ltd [1927] AC 369, 371;
Assénagon Asset Management SA v Irish Bank Resolution Corp Ltd [2012] EWHC 2090 (Ch),
[41]–[48], [69]–[86]; Azevedo v Imcopa Importação, Exportação E Indústria De Olos Ltda
[2013] EWCA Civ 364, [51]–[72]. For the expansion of this principle to schemes of arrange-
ment, see Re Dee Valley Group plc [2018] Ch 55, [27]; Re Co-operative Bank plc [2017]
EWHC 2269 (Ch), [44]–[48]. See also The Law Debenture Trust Corp plc v Concord Trust
[2007] EWHC 1380 (Ch), [123]. Consider Cadbury Schweppes plc v Somji [2001] 1 WLR 615,
[21]–[24].
7
The present jurisdiction might be subsumed within a generalized doctrine of good faith, if the
English courts were to take that step: see, eg, Yam Seng Pte Ltd v International Trade Corp Ltd
[2013] EWHC 111 (QB), [123]–[153]. See further para 11.29 above.
8
Sidebottom v Kershaw, Leese and Company Ltd [1920] 1 Ch 154, 162–164; Shuttleworth
v Cox Brothers and Company (Maidenhead) Ltd [1927] 2 KB 9, 18, 23–24; Citco Bank-
ing Corp NV v Pusser’s Ltd [2007] UKPC 13, [16]–[17].
9
Redwood Master Fund Ltd v TD Bank Europe Ltd [2006] 1 BCLC 149, [105], although the
apparently discriminatory effect of the variation will be given less weight when the initial rights
are not uniform.

54
 Relationship Between Syndicate Lenders Inter Se 12.41
10
British America Nickel Corp Ltd v MJ O’Brien Ltd [1927] AC 369, 378–379; Re Hold-
er’s Investment Trust Ltd [1971] 1 WLR 583, 589–590.
11
Redwood Master Fund Ltd v TD Bank Europe Ltd [2006] 1 BCLC 149, [105]. The absence of
such collateral benefits may indicate that the majority acted in good faith when voting in favour
of the variation: see Rights & Issues Investment Trust Ltd v Stylo Shoes Ltd [1965] Ch 250,
255–256.
12
Assénagon Asset Management SA v Irish Bank Resolution Corp Ltd [2012] EWHC 2090 (Ch),
[72]–[73]; Azevedo v Imcopa Importação, Exportação E Indústria De Olos Ltda [2013]
EWCA Civ 364, [63], [69].

12.41 The scope of the latter jurisdiction in particular was considered in the
syndicated lending context in Redwood Master Fund Ltd v TD Bank Eu-
rope Ltd1, where lenders representing 2.03% in value of the total lending
commitment under a syndicated loan facility challenged the binding nature of a
decision taken by a significant majority of the lending syndicate (some 81.76%
in value) to vary the terms of the overall loan facility, which was sub-divided
into a revolving Euro-denominated credit facility (‘Facility A’), a Euro-
denominated term facility (‘Facility B’) and a dollar-denominated term facility
(‘Facility C’). The broad effect of the variation contained in the ‘modified
waiver letter’ was to allow the borrower to draw against Facility A, which
would not have been possible under the terms of the original loan facility, for
the sole purpose of prepaying part of its drawings under Facility B. Given the
doubts as to the borrower’s continued solvency, the lenders under Facility A
complained that the variation was manifestly unfair to them as a class and
discriminatory, so as to violate the principle that ‘[a] power must be exercised
bona fides for the benefit of the lenders as a whole’2.
Rimer J recognised that an express power to vary a syndicated loan agreement,
despite being contained in a carefully and professionally drafted commercial
contract3, should be subject to an implied limitation that its exercise should not
be motivated by a subjective lack of good faith on the majority’s part4. As his
Lordship concluded that there was no basis for concluding that the majority
lenders had acted in bad faith, the only remaining basis for challenging the
variation was that ‘viewed objectively, the modified waiver letter was suffi-
ciently discriminatory and unfair [to the Facility ‘A’ lenders] to justify the
finding that the letter was not for the benefit of the lenders as a whole’5. Rimer
J considered, however, that it was unnecessary and ‘misplaced’ to imply such an
objective limitation or control upon the power of majority lenders to vary the
terms of a syndicated loan agreement6, since, in a case like Redwood where
there were different facilities comprised within the overall loan syndication, it
was ‘almost inevitable that any decision by the majority in value of the lenders
would or could be viewed as favouring one class over another’7, with the result
that the power to vary the loan agreement would be paralysed at the time when
it is potentially most needed8. Moreover, his Lordship considered that the court
should be slow to adopt a blunt objective standard that would provide a basis
for striking down a loan variation, the terms of which were the result of an
arm’s-length compromise with the borrower (as opposed to a variation that has
been unilaterally imposed by the majority on the minority) and which involved
a complex and subtle process of give and take between the lenders themselves9.
Whilst the rejection of this lower, objective standard of review is entirely
consistent with the jurisprudence considered above10, Rimer J unfortunately left
open the question of whether a court would reach a different conclusion when

55
12.41 Syndicated Lending

the syndicate lenders could be regarded as ‘one unified class of lenders, all with
a like interest’11 or ‘a single class, all with (in theory) like interests’12. The better
view is that this is a distinction without a difference and that syndicated loan
variations involving a single ‘class’ of lender should be no more subjected to
objective review than the variation in Redwood. Limiting the courts’ juris-
diction to controlling the ‘dishonest abuse’ of majority power within the
syndicate pitches the standard of inter-creditor fair dealing at a more realistic
and commercially acceptable level13.
1
Redwood Master Fund Ltd v TD Bank Europe Ltd [2006] 1 BCLC 149. See also R Hooley,
‘Release Provisions in Inter-creditor Agreements’ [2012] JBL 213, 222–224. For support for
extending the jurisdiction to encompass decision-making in the syndicated loans context, see
F&C Alternative Investments (Holdings) Ltd v Barthelemy (No 2) [2012] Ch 613, [231]–[235];
Assénagon Asset Management SA v Irish Bank Resolution Corp Ltd [2012] EWHC 2090 (Ch),
[45]. See also Re New York Taxi Cab Co [1913] 1 Ch 1.
2
Redwood Master Fund Ltd v TD Bank Europe Ltd [2006] 1 BCLC 149, [92].
3
Redwood Master Fund Ltd v TD Bank Europe Ltd [2006] 1 BCLC 149, [91].
4
Redwood Master Fund Ltd v TD Bank Europe Ltd [2006] 1 BCLC 149, [85]–[86], [105]. The
proposition in the text could be supported by reference either to the line of authority originating
with Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 or the line of authorities including
Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116, applied
in Braganza v BP Shipping Ltd [2015] UKSC 17, [2015] 4 All ER 639, [2015] 1 WLR 1661 SC.
5
Redwood Master Fund Ltd v TD Bank Europe Ltd [2006] 1 BCLC 149, [87].
6
Redwood Master Fund Ltd v TD Bank Europe Ltd [2006] 1 BCLC 149, [105].
7
Redwood Master Fund Ltd v TD Bank Europe Ltd [2006] 1 BCLC 149, [94]. Rimer J (at [99])
drew an analogy between the facts of Redwood and Peters American Delicacy Co Ltd v Heath
(1938–39) 61 CLR 457, where the company’s general meeting was asked to choose between
deleting one constitutional provision that provided for cash distributions calculated by refer-
ence to a member’s paid-up share capital and another that provided for the distribution of
capitalized profits by way of bonus shares calculated by reference to a member’s nominal share
capital. As either course of action would have resulted in a particular shareholder or group of
shareholders suffering especial prejudice, the High Court of Australia upheld the majori-
ty’s decision on which constitutional provision to remove.
8
Redwood Master Fund Ltd v TD Bank Europe Ltd [2006] 1 BCLC 149, [94]–[97]. In cases
involving several ‘classes’ of lender, the seemingly discriminatory consequences of a variation
will not generally provide a basis for questioning the majority’s bona fides when voting for that
variation: see Redwood Master Fund Ltd v TD Bank Europe Ltd [2006] 1 BCLC 149, [105].
9
Redwood Master Fund Ltd v TD Bank Europe Ltd [2006] 1 BCLC 149, [107]–[108].
10
See para 12.40 above.
11
Redwood Master Fund Ltd v TD Bank Europe Ltd [2006] 1 BCLC 149, [94].
12
Redwood Master Fund Ltd v TD Bank Europe Ltd [2006] 1 BCLC 149, [99].
13
P Wood, ‘Syndicated Credit Agreement: Majority Voting’ (2003) 62 CLJ 261, 263. See further
para 11.29 above.

12.42 Whilst in general the courts have trusted to the bona fides of the majority
right-holders when the minority has been compelled to accept an alteration of
its legal rights, there has always been heightened judicial scrutiny and control of
alterations that involve the expropriation or compulsory transfer1 of contrac-
tual or proprietary rights. Examples of such variations in the syndicated loan
context might include the situation where the minority lenders were compelled
to assign their rights or novate their loan agreements to the majority lenders or
where the minority were forced to waive permanently or suspend temporarily
some or all of its payment entitlements from the borrower under the syndicated
loan agreement. Where the variation in question can be classified as having
expropriatory effects, the prospect of a successful challenge by the minority
syndicate members is much better2. Indeed, in the context of amendments to
corporate constitutions, it is generally only expropriated minority shareholders

56
 Relationship Between Syndicate Lenders Inter Se 12.42

who have successfully invoked the equitable principle that the alteration must
be ‘bona fides for the benefit of the company as a whole’3.
The point is further reinforced by the jurisprudence involving minority bond-
holders challenging a bond restructuring. In Assénagon Asset Management SA
v Irish Bank Resolution Corp Ltd4, a recently nationalized bank offered to
exchange €0.20 of new notes for each €1 of its existing subordinated floating
rate notes, but on condition that the noteholder undertook to vote in favour of
a resolution (the ‘exit consent’) at the next noteholders’ meeting allowing the
bank to redeem any non-exchanged notes for a nominal consideration. A
majority of noteholders voted in favour of the ‘exit consent’, after which the
note exchange took place and the minority who did not agree to exchange their
notes were ‘wiped out’ by having their notes redeemed at a tiny fraction of their
face value. The minority successfully challenged the ‘exit consent’. According to
Briggs J, it is ‘entirely at variance with the purposes for which majorities in a
class are given power to bind minorities’ for ‘the majority to lend its aid to the
coercion of a minority by voting for a resolution which expropriates the
minority’s rights under their bonds for a nominal consideration’5.
In contrast, the Court of Appeal in Azevedo v Imcopa Importação, Exportação
E Indústria De Olos Ltda6, rejected a challenge by a minority noteholder to an
extraordinary resolution allowing the restructuring of guaranteed notes by
postponing interest payments thereunder. The basis of the challenge was that
the issuer had ensured the passing of the necessary resolution through a process
of ‘consent solicitation’, which involved making ‘consent payments’ to those
noteholders who voted in favour of the restructuring and denying the benefit of
such payments to those noteholders who did not7. Lloyd LJ concluded that
there was ‘nothing wrong or unlawful, in general terms, in a process of putting
to all members of a class a proposal which offers benefits open to all who vote
in favour of the resolution, but not to the others’ since nobody is ‘excluded from
participation in the offered benefits except by his own choice’8.
It is submitted that the different result in Assénagon and Azevedo can be
justified, despite both cases involving inducements being offered to the majority
to support a bond/note restructuring, on the basis that the former case involved
an expropriation of contractual rights, whereas the latter case did not9. In
essence, the resolution in Assénagon resulted in the minority bondholders being
placed in an inferior position as regards their rights against the bond issuer
when compared to the post-resolution position of the majority bondholders,
whereas the resolution in Azevedo left the minority noteholders in the same
position as the majority in terms of the rights attached to their notes, albeit that
the minority did not receive the additional collateral benefits conferred on the
majority. Alternatively, the difference between Assénagon and Azevedo could
be explained in terms of voluntariness and coercion: in the former case, there
was an element of coercion, so that the minority were left with no practicable
alternative but to accept the proposed restructuring, whereas, in the latter case,
the minority were left to vote freely upon the resolution, albeit that there was an
incentive to choose one option over the other. Indeed, whilst it may be difficult
to identify the bright line that divides Assénagon from Azevedo, it is submitted
that ideas of expropriation and coercion do at least go some way to explaining

57
12.42 Syndicated Lending

why the latter case is less objectionable in practice than the former.
1
The difference between an alteration that ‘expropriates’ rights and one that merely involves the
compulsory transfer of rights lies in whether there has been an offer of fair compensation in
return for the rights in question: see Constable v Executive Connections Ltd [2005] EWHC 3
(Ch), [21].
2
For the particularly interventionist approach to expropriatory alterations in Australia, see
Gambotto v WCP Ltd (1995) 182 CLR 432, 446. This more objective approach has not
escaped criticism in Australia (see Heydon v NRMA Ltd (2000) 51 NSWLR 1) or England (see
Citco Banking Corp NV v Pusser’s Ltd [2007] UKPC 13, [20]).
3
See eg Brown v British Abrasive Wheel Co Ltd [1919] 1 Ch 290; Dafen Tinplate Co Ltd v
Llanelly Steel Co (1907) Ltd [1920] 2 Ch 124. See also Constable v Executive Connections Ltd
[2005] EWHC 3 (Ch), [29]–[30]. The only exception to the statement in the text is Re
Holder’s Investment Trust Ltd [1971] 1 WLR 583.
4
Assénagon Asset Management SA v Irish Bank Resolution Corp Ltd [2012] EWHC 2090 (Ch).
5
Assénagon Asset Management SA v Irish Bank Resolution Corp Ltd [2012] EWHC 2090 (Ch),
[84]–[85]. Given Briggs J’s view (at [86]) that ‘oppression of a minority is of the essence of exit
consents of this kind’, it remains uncertain whether there are any steps that a bond issuer or
bondholder might take to render the process less objectionable: see Assénagon Asset Manage-
ment SA v Irish Bank Resolution Corp Ltd [2012] EWHC 2090 (Ch), [53], [69], [83].
6
Azevedo v Imcopa Importação, Exportação E Indústria De Olos Ltda [2013] EWCA Civ 364.
7
Azevedo v Imcopa Importação, Exportação E Indústria De Olos Ltda [2013] EWCA Civ 364,
[1], [23].
8
Azevedo v Imcopa Importação, Exportação E Indústria De Olos Ltda [2013] EWCA Civ 364,
[63].
9
The basis of distinction between the two authorities was formally left open in Azevedo v Imcopa
Importação, Exportação E Indústria De Olos Ltda [2013] EWCA Civ 364, [36]. Even within
the context of expropriations, however, there appears to be a difference between the situation
where the right to expropriate another’s rights is part of the original bargain between the parties
and where the right to expropriate is subsequently introduced by way of a variation to the
original bargain: see Re Charterhouse Capital Ltd [2014] EWHC 1410 (Ch), [323]–[327], aff’d
[2015] EWCA Civ 536, [90].

58
Part IV

SECURITY

1
Chapter 13

THE TAKING OF SECURITY

13.1
1 UNDUE INFLUENCE
(a) Introduction 13.3
(b) The judgments in Etridge 13.4
(c) The judgment of Lord Nicholls 13.5
(d) Remedies 13.13
(e) Undue influence by bank over borrower 13.14
(f) Voidable security replaced by new security 13.15
2 UNCONSCIONABLE TRANSACTIONS 13.16
3 DURESS 13.17
4 MISREPRESENTATION AND NON-DISCLOSURE
(a) Misrepresentation 13.18
(b) Negligent misstatements 13.19
(c) Duty to proffer explanation 13.20
(d) Entire agreement and non-reliance clauses 13.21
5 ILLEGALITY, INCAPACITY AND MISTAKE 13.23
(a) Illegality 13.24
(b) Incapacity 13.25
(c) Mistake 13.26
6 STATUTORY REGULATION
(a) Registration of Security Interests 13.28
(b) The Financial Services and Markets Act 2000 – MCOB 13.32
(c) The Consumer Credit Acts 13.33
(d) Unfair Terms 13.34

13.1 The issues considered in this chapter principally encompass rules of

common law and principles of equity. The common thread is that each of them
operates so as to affect the enforceability of an agreement creating security.
They concern matters which banks need to consider and guard against when
taking security; a failure so to do may result in the courts setting the security
aside. Challenges to security tend to arise most frequently in the context of
guarantees, and mortgages or charges over property, given by individuals, but
some of the rules and principles considered below can be invoked by a
corporate entity.
In Lloyds Bank Ltd v Bundy1 Lord Denning MR endeavoured to collate the
various categories in which the courts have set aside transactions into a single
principle of:
‘inequality of bargaining power. By virtue of it, the English law gives relief to one
who, without independent advice, enters into a contract upon terms which are very
unfair or transfers property for a consideration which is grossly inadequate, when his
bargaining power is grievously impaired by reason of his own needs or desires, or by
his own ignorance or infirmity, coupled with undue influences or pressures brought to
bear on him by or for the benefit of the other.’

3
13.1 The Taking of Security

The House of Lords in National Westminster Bank plc v Morgan2 disapproved

this approach. The various rules and principles have developed independently
of each other and require separate consideration.
1
[1975] QB 326 at 339, [1974] 3 All ER 757 at 765.
2
[1985] AC 686 at 708, [1985] 1 All ER 821 at 830. See further D Capper (1998) 114 LQR 479.

13.2 The taking of security is also subject to regulation by statute or statutory

instrument. Two of the most important aspects of this regulation are dealt with
at the end of this chapter: first, the registration under the Companies Act 2006
of security interests created by UK registered companies; and, secondly, the
requirements for the creation of security interests in land imposed for the
purposes of consumer protection by the Consumer Credit Acts 1974 and 2006,
the Financial Services and Markets Act 2000 (in particular the Mortgages and
Home Finance: Conduct of Business Sourcebook (MCOB)), the Unfair Terms
in Consumer Contracts Regulations 1999 for contracts prior to 1 October
2015, and the Consumer Rights Act 2015 for contracts entered into from that
date.

1 UNDUE INFLUENCE

(a) Introduction
13.3 The label ‘undue influence’ refers compendiously to circumstances in
which equity, supplementing the common law principle of duress, will treat a
person’s apparent consent as having been procured by improper influence1.
Where such circumstances exist, the consent thus procured is not treated as the
expression of a person’s genuine free will2. Where the consent takes the form of
entering into a security agreement such as a guarantee or a charge, and the
consent was obtained by undue influence, the guarantor or chargor is not
bound by the agreement.
The principle will rarely apply in a commercial context3. Those engaged in
business are regarded as capable of looking after themselves and understanding
the risks involved in the giving of security4.
In the years leading up to the decision of the House of Lords in Royal Bank of
Scotland plc v Etridge (No 2)4 in 2001, the application of the doctrine of undue
influence in the context of lending had become unclear because of differing
interpretations of the principles enunciated by the House of Lords eight years
earlier in Barclays Bank v O’Brien5.
The decision in Etridge greatly clarified the law, partly because there were eight
appeals before the House, each arising out of a transaction in which a wife
charged her interest in the matrimonial home in favour of a bank as security for
her husband’s indebtedness or the indebtedness of a company through which he
carried on business, but each also involving material differences in fact. The
scale of the hearing is reflected in the fact that the judgments refer to 33 cases,
and an additional 56 cases were cited in argument.
It is clear that the reasoning and approach adopted in many pre-Etridge cases
was erroneous. Indeed, it was the existence of conflicting authorities which
made it necessary for the House of Lords to go back to first principles and

4
 Undue Influence 13.5

provide a definitive restatement of the law. Subject to what is said below, the 33
pre-Etridge cases cited in the judgments were expressly or impliedly approved.
1
Cases of undue influence can often also be analysed as ones involving misrepresentation, in
which the principal debtor has (deliberately or otherwise) given an inaccurate account of the
true facts of the transaction to the surety, and the lender knew or ought to have known of this.
See Barclays Bank v O’Brien [1994] 1 AC 180 at 198; Annulment Funding Ltd v Cowey [2010]
EWCA Civ 711 at [64].
2
Although the person does not have to establish that his will was completely overborne, and a
conscious exercise of the will can nonetheless by vitiated by undue influence: Hewett v First Plus
Financial Group plc (2010) 2 FLR 177 at [25].
3
A particular exception being guarantees over a company’s debt offered by the partners and
family members of its directors: see para 13.4 et seq below.
4
Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44, [2002] 2 AC 773, [2001]
4 All ER 449 per Lord Nicholls at para 88.
5
[1994] 1 AC 180, [1993] 4 All ER 417, HL.

(b) The judgments in Etridge

13.4 Of the five judgments in Etridge the only one to command majority (in
fact, unanimous) support was the lengthy judgment of Lord Nicholls. Lord
Scott’s brief additional analysis of the law received qualified support from Lord
Bingham, but was not specifically endorsed by anyone else. Lord Hob-
house’s analysis of the law received no specific endorsement at all. However, it
would not be right to treat the analysis of the law of Lord Hobhouse and Lord
Scott as irrelevant. Both judgments contain important and helpful observations.
The following paragraphs summarise the main points in the judgment of Lord
Nicholls and note the additional points made by Lords Clyde, Hobhouse and
Scott.

(c) The judgment of Lord Nicholls

(i) The two forms of unacceptable conduct

13.5 Equity has identified broadly two forms of unacceptable conduct. The
first comprises overt acts of improper pressure or coercion such as unlawful
threats. Today there is much overlap with the principle of duress as this
principle has subsequently developed. However, it is unclear where an allega-
tion of undue influence could succeed where it is founded on the same facts, and
no more, as an unsuccessful allegation of duress1. The second form arises out of
a relationship between two persons where one has acquired over another a
measure of influence, or ascendancy, of which the ascendant person then takes
unfair advantage (para 9).
The types of relationship within the second category cannot be listed exhaus-
tively because relationships are infinitely various. The question is whether one
party has reposed sufficient trust and confidence in the other, rather than
whether the relationship between the parties belongs to a particular type. The
relation of banker and customer will not normally meet this criterion, but
exceptionally it may: see National Westminster Bank plc v Morgan2 (para 10)3.
1
Holyoake v Nicholas Candy [2017] EWHC 3397 (Ch).
2
[1985] AC 686, 707–709.

5
13.5 The Taking of Security
3
See also The Libyan Investment Authority (incorporated under the laws of the State of Libya)
v Goldman Sachs International [2016] EWHC 2530 (Ch) for an recent (but unsuccessful)
attempt to persuade the Court of the existence of a protected relationship, arising from matter
such as offers of an internship, and alleged naivety of the customer’s staff.

(ii) The burden of proof and presumptions

13.6 The burden of proving undue influence lies on the complainant (para 13).
Proof that the complainant placed trust and confidence in the other party in
relation to the management of the complainant’s financial affairs, coupled with
a transaction which calls for explanation, will normally be sufficient, failing
satisfactory evidence to the contrary, to discharge the burden of proof. On
proof of these two matters the stage is set for the court to infer that, in the
absence of a satisfactory explanation, the transaction can only have been
procured by undue influence. In other words, proof of these two facts is prima
facie evidence that the defendant abused the influence he acquired in the parties’
relationship. He preferred his own interests. He did not behave fairly to the
other. So the evidential burden then shifts to him. It is for him to produce
evidence to counter the inference which otherwise should be drawn (para 14).
This shift in the evidential burden is the equitable counterpart of common law
cases where the principle of res ipsa loquitur is invoked. It is a rebuttable
evidential presumption (para 16).
This evidential presumption of undue influence – which is a matter of fact – is
to be contrasted with the irrebuttable presumption of influence which arises – as
a matter of law – where certain relationships (parent/child, solicitor/client etc)
are proved to exist (although it will remain for the complainant to show that the
transaction was to her manifest disadvantage)1. However, the relationship of
husband and wife is not one of these relationships (paras 18 and 19).
1
Lord Clyde (para 92) and Lord Hobhouse (para 107) questioned the wisdom of the practice
which had grown up since BCCI SA v Aboody [1990] 1 QB 923, [1992] 4 All ER 955, CA of
attempting to make classifications of cases of ‘actual’ and ‘presumed’ undue influence. See also
Argarwal v ABN Amro Bank NV [2017] BPIR 816 in the context of a trustee/beneficiary, where
the Court held that even if the application of the irrebuttable presumption was inappropriate to
the relationship, it could look to the nature of the transaction and the explanation of it.

(iii) Independent advice

13.7 Proof that the complainant received advice from a third party before
entering into the impugned transaction is one of the matters a court takes into
account when weighing all the evidence. Whether it will be proper to infer that
outside advice had an emancipating effect, so that the transaction was not
brought about by the exercise of undue influence, is a question of fact to be
decided having regard to all the evidence in the case (para 20).

(iv) Manifest disadvantage

13.8 Adopting the approach of Lord Scarman in National Westminster

Bank plc v Morgan1, Lord Nicholls treated the question of whether the
impugned transaction was to the manifest disadvantage of the complainant as
potentially relevant to the question whether a transaction is explicable only on

6
 Undue Influence 13.10

the basis that undue influence has been exercised to procure it. But he rejected
both the narrower view (that the grant of security is invariably
disadvantageous), and the wider view (that there are inherent reasons why the
grant of security may well be for the wife’s benefit) (paras 21–30). It follows
that, in the ordinary course, manifest disadvantage is not a useful concept in this
context. There will, however, be cases where a wife’s signature of a guarantee or
a charge of her share in the matrimonial home does call for explanation
(para 31).
1
[1985] AC 686, 704.

(v) Permissible pressure by a husband

13.9 Lord Nicholls added a cautionary note that statements or conduct by a
husband which do not pass beyond the bounds of what may be expected of a
reasonable husband in the circumstances should not, without more, be casti-
gated as undue influence. Similarly, when a husband is forecasting the future of
his business, and expressing his hopes or fears, a degree of hyperbole may be
only natural. Courts should not too readily treat such exaggerations as mis-
statements (para 31). Inaccurate explanations of a proposed transaction are a
different matter (para 33).

(vi) The threshold: when the bank is put on inquiry

13.10 Having discarded ‘manifest disadvantage’ as the test in the ordinary

course, it was necessary for Lord Nicholls to decide when a bank is put on
inquiry as to whether a transaction has been procured by undue influence. He
concluded that a bank is always on inquiry when a wife provides security for her
husband’s debts, or vice versa, or in any case where the bank is aware of a
relationship, whether heterosexual or homosexual (para 47)1. The same applies
where a person in such a relationship provides security for the debts of a
company in which the other party is interested, even if the person providing
security is a director or secretary of the company (paras 44–49)2. At a later point
in his judgment, Lord Nicholls concluded that there is no rational cut-off point,
with certain types of relationship susceptible to the O’Brien principle and others
not. The only practical way forward is to regard banks as put on inquiry in
every case where the relationship between the surety and the debtor is non-
commercial (para 87)3.
1
References to ‘husband’ and ‘wife’ in this Chapter should be read accordingly.
2
It is arguable that the same may be true of a husband/wife partnership, even where in exchange
for the security offered, the wife on the face of it also obtains a share in the land: O’Neill v Ulster
Bank Ltd [2015] NICA 64.
3
Note the Northern Ireland Chancery Division has distinguished cases where a parent and child
are joint borrowers, even where the parent is vulnerable. The bank was not fixed with
constructive notice where there was nothing on the face of the loan that it was for anything
other than its stated purpose, and, if for that purpose, would have benefited both parties.
Bradley v Governor of the Bank of Ireland [2016] NICh 11.

7
13.11 The Taking of Security

(vii) The steps a bank should take

13.11 Having considered the content of the legal advice which a wife should be
given (paras 58–68), and having concluded that a solicitor may act for a wife
even though he is also acting for the bank or the husband, Lord Nicholls set out
the steps which a bank should take for its protection in looking to the fact that
the wife has been independently advised by her solicitor1. His conclusions about
this (at para 79) are crucial and need to be set out in full:
‘(1) One of the unsatisfactory features in some of the cases is the late stage at
which the wife first became involved in the transaction. In practice she had no
opportunity to express a view on the identity of the solicitor who advised her. She
did not even know that the purpose for which the solicitor was giving her advice
was to enable him to send, on her behalf, the protective confirmation sought by
the bank. Usually the solicitor acted for both husband and wife.
Since the bank is looking for its protection to legal advice given to the wife by a
solicitor who, in this respect, is acting solely for her, I consider the bank should
take steps to check directly with the wife the name of the solicitor she wishes to
act for her. To this end, in future the bank should communicate directly with the
wife, informing her that for its own protection it will require written
confirmation from a solicitor, acting for her, to the effect that the solicitor has
fully explained to her the nature of the documents and the practical implications
they will have for her. She should be told that the purpose of this requirement is
that thereafter she should not be able to dispute she is legally bound by the
documents once she has signed them. She should be asked to nominate a solicitor
whom she is willing to instruct to advise her, separately from her husband, and
act for her in giving the necessary confirmation to the bank. She should be told
that, if she wishes, the solicitor may be the same solicitor as is acting for her
husband in the transaction. If a solicitor is already acting for the husband and the
wife, she should be asked whether she would prefer that a different solicitor
should act for her regarding the bank’s requirement for confirmation from a
solicitor.
The bank should not proceed with the transaction until it has received an
appropriate response directly from the wife.
(2) Representatives of the bank are likely to have a much better picture of the
husband’s financial affairs than the solicitor. If the bank is not willing to
undertake the task of explanation itself, the bank must provide the solicitor with
the financial information he needs for this purpose. Accordingly it should become
routine practice for banks, if relying on confirmation from a solicitor for their
protection, to send to the solicitor the necessary financial information. What is
required must depend on the facts of the case2. Ordinarily this will include
information on the purpose for which the proposed new facility has been
requested, the current amount of the husband’s indebtedness, the amount of his
current overdraft facility, and the amount and terms of any new facility. If the
bank’s request for security arose from a written application by the husband for a
facility, a copy of the application should be sent to the solicitor. The bank will, of
course, need first to obtain the consent of its customer to this circulation of
confidential information. If this consent is not forthcoming the transaction will
not be able to proceed.
(3) Exceptionally there may be a case where the bank believes or suspects that the
wife has been misled by her husband or is not entering into the transaction of her
own free will. If such a case occurs the bank must inform the wife’s solicitors of
the facts giving rise to its belief or suspicion.
(4) The bank should in every case obtain from the wife’s solicitor a written
confirmation to the effect mentioned above.’

8
 Undue Influence 13.13

These steps apply to post-Etridge3 transactions4. In respect of pre-Etridge

transactions, the bank will ordinarily be regarded as having discharged its
obligations if a solicitor who was acting for the wife in the transaction gave the
bank confirmation to the effect that he had brought home to the wife the risks
she was running by standing as surety.
However once put on inquiry, where, for example, there is a change in the
wife’s (separate) representation, relying thereafter upon emails from a plausible
email address for the wife and purported new joint representation will not
constitute the taking of reasonable steps to ensure the wife is entering into a
transaction with her eyes open5.
1
Lord Clyde declined to prescribe what practices banks should adopt. These are not matters of
ritual, the blind performance of which will secure the avoidance of doom, but sensible steps
which seek to secure that the personal and commercial interests of the parties involved are
secured with certainty and fairness (para 95).
2
For an example of a case involving unusual features giving rise to particular disclosure issues,
see one of the conjoined appeals heard with Etridge, Bank of Scotland v Bennett.
3
The House of Lords’ decision in Etridge was made on 11 October 2001.
4
See also Lord Scott’s helpful summary of principles and practice (para 191).
5
Hieber v Duckworth (Liquidator of Hieber Ltd) (Unreported 20 June 2017). Distinguishable
from the Etridge guidance in that the ‘new’ representation was unqualified.

(viii) Agency
13.12 In the ordinary case, deficiencies in the advice given by a solicitor
advising the wife are a matter between the wife and her solicitor. The bank is
entitled to proceed on the assumption that a solicitor advising the wife has done
his or her job properly. But this will not be the case if the bank knows this is not
so, or if it knows facts from which it ought to have realised that this is not so
(paras 75–78)1. The Etridge-scheme also resolves the question of what know-
ledge of the solicitor will affect the bank either under the common law or under
s 199 of the Law of Property Act 1925. The solicitor in question will not be
acting for the bank. Any knowledge the solicitor acquires from the wife will be
confidential as between the two of them. If it renders untruthful the statement
or certificate, the solicitor cannot sign them without being in breach of his
professional obligation to the wife and committing a fraud on the bank. The
wife’s remedy will be against the solicitor and not against the bank. If the
solicitor does not provide the statement and certificate for which the bank has
asked, then the bank will not, in the absence of other evidence, have reasonable
grounds for being satisfied that the wife’s agreement has been properly ob-
tained. Its legal rights will be subject to any equity existing in favour of the wife.
1
See also Lord Hobhouse at para 120.

(d) Remedies
13.13 A successful invocation of the principle of undue influence affords an
equitable right to set aside the security completely. The court has no discretion
to set aside the transaction in part or on terms even where for example in a case
of undue influence by reason of misrepresentation by husband to wife that the
extent of her security was to a limited advance (and not as was in fact the case
unlimited) the evidence demonstrates that the wife was fully informed and

9
13.13 The Taking of Security

prepared to consent to provide security for the limited advance and it might
therefore be thought just and equitable to uphold the security to the extent of
the limited advance1. However, the court may occasionally find it possible to
sever material tainted by undue influence from untainted material in an instru-
ment, and set aside only the former, providing this would not amount to
rewriting the contract2.
Where the party seeking to set aside the transaction has derived a tangible
benefit from it, then the court may order that party to make restitution of such
benefit as a condition of the grant of relief3. If a loan transaction is set aside on
the ground of undue influence by the lender, the loan is set aside ab initio, and
this requires a mutual accounting with mutual restitution by both parties. It
would not be just simply to set aside the loan; this would leave the borrower
unjustly enriched. The proper course is to set aside the contract of loan and
require the borrower to account for the moneys received with interest at a rate
fixed by the court. Since the effect is merely to vary the rate of interest, it is not
surprising that it is rare for the borrower himself to challenge the transaction4.
The right to restitution is liable to be defeated by the equitable defences of
laches, acquiescence and affirmation5. It is outside the scope of Paget to outline
the nature of these equitable defences and reference should be made to the
standard textbooks on equity.
1
TSB plc v Camfield [1995] 1 WLR 430. See also Albany Home Loans Ltd v Massey [1997]
2 All ER 609, CA.
2
Barclays Bank plc v Caplan [1998] 1 FLR 532 per Jonathan Sumption QC, sitting as a deputy
judge of the Chancery Division.
3
Dunbar Bank plc v Nadeem [1998] 3 All ER 876, CA. See also Society of Lloyds v Khan [1998]
3 FCR 93, where Tuckey J held that a wife could not rescind the contract by which she became
a Lloyd’s Name since the benefit she received under it, the ability legally to write insurance
business through the institutions of the Lloyd’s market, was not in its nature returnable.
4
National Commercial Bank (Jamaica) Ltd v Hew [2003] UKPC 51 at [43] (Lord Millett),
[2004] 2 LRC 396, [2003] All ER (D) 402 (Jun).
5
Allcard v Skinner (1887) 36 Ch D 145 at 196–199; Goldsworthy v Brickell [1987] Ch 378 at
411.

(e) Undue influence by bank over borrower

13.14 In National Commercial Bank (Jamaica) Ltd v Hew1, a borrower sought
to set aside a loan on the ground that he had been induced to enter the
transaction by the lender’s undue influence. The complainant sought to estab-
lish the bank’s alleged abuse of influence by demonstrating that the transaction
was manifestly disadvantageous to him. One head of alleged disadvantage was
that the bank had taken excessive security. This was firmly rejected by the
Privy Council2:
‘The suggestion that the Bank took excessive security is a surprising basis on which to
make a claim of exploitation. Their Lordships think that the Court of Appeal may
have confused the position of third party sureties with that of the actual borrower.
The cases cited by the Court of Appeal all involved sureties. In such cases the lender
obtains additional security at the expense of the surety, who incurs a liability and
obtains nothing in return. But Mr Hew was not a surety. He was the borrower. He
obtained a loan, or the continuation of a loan facility, in return for his liability to
repay. The extent of his liability was not increased by the furnishing of additional
security. If this was to anyone’s disadvantage, it was to the disadvantage of his other

10
 Unconscionable Transactions 13.16

creditors. There is no reason to suppose that the Bank would have declined to release
land from the security if Mr Hew wished to raise money on it for the purposes of the
project or to repay the Bank.’
The Privy Council also reiterated that the point made in Allcard v Skinner3 that
equity does not save people from the consequences of their own folly; it acts to
save them from being victimised by other people4.
1
[2003] UKPC 51, [2004] 2 LRC 396, [2003] All ER (D) 402 (Jun).
2
[2003] UKPC 51 at [39].
3
(1887) 36 Ch D 145, 182.
4
[2003] UKPC 51 at [33].

(f) Voidable security replaced by new security

13.15 Where voidable security is replaced by new security in favour of the
same lender, the new security will also be voidable if the two securities are
‘inseparably connected’1. It was so held in Yorkshire Bank plc v Tinsley2, where
the Court of Appeal discharged an order for possession made under a
1994 mortgage because that mortgage was inseparably connected with a prior
1991 mortgage which the mortgagor had granted in consequence of undue
influence of which the mortgagee bank had constructive notice3. The two
mortgages were inseparably connected because the bank required the
1994 mortgage to be granted as a condition of the release of the 1991 mort-
gage4. The Court rejected the bank’s submission that the charge should only be
voidable on a remortgage if the bank is actually (rather than constructively)
aware of the undue influence affecting the original mortgage5. The bank’s fur-
ther submission that a decision in favour of the mortgagor would create
significant practical difficulties was also rejected on the ground that a bank
should know from its own records whether or not it protected itself in the
earlier transaction6.
The position is different if the replacement or substitute mortgage is made with
a different lender, because that lender cannot be deemed to be aware of the
matters of which the first lender is deemed to be aware7.
1
The ‘inseparably connected’ test derives from the judgment of Lord Cairns LC in Kempson v
Ashbee (1874) LR 10 Ch App 15 at 20-21.
2
[2004] EWCA Civ 816, [2004] 1 WLR 2380.
3
The bank accepted that it had constructive notice of the undue influence affecting the
1991 mortgage: see [14].
4
See [22], per Longmore LJ.
5
See [21].
6
See [35], per Peter Gibson LJ.
7
See [21].

2 UNCONSCIONABLE TRANSACTIONS
13.16 The equitable jurisdiction to set aside unconscionable transactions is
independent of the principles as to undue influence. Under this jurisdiction a
security taken by a bank may be held to be unenforceable if:
(1) it was taken from a person under a special disadvantage or disability;
(2) the transaction was disadvantageous to such person;

11
13.16 The Taking of Security

(3) independent legal advice was not available.

Once these factors are established, the party seeking to defend the transaction
must prove that it was fair, just and reasonable1.
The invocation of this doctrine is likely to be rare and in modern times
Australian courts have taken it up with greater enthusiasm than English courts2.
The previous edition of this work considered that given that the Etridge
guidelines (see above) apply in every case where the relationship between the
surety and the debtor is non-commercial (per Lord Nicholls at para 87), it was
difficult to see the need for a separate head of relief based on the unconscionable
nature of the transaction. It is notable that in Yorkshire Bank plc v Tinsley,
the Court of Appeal did not find it necessary to consider the alternative case that
the 1994 mortgage was voidable as an unconscionable bargain3. However, in
Mortgage Express v Lambert4 an allegation of undue influence failed, but one
of an unconscionable bargain succeeded in circumstances where the Defendant
was facing repossession, desperate, vulnerable, lacking in any common business
acumen and had had unfair advantage taken of her by the making of an offer
known by the maker to be dishonest.
The position as regards remedies is the same as for undue influence. A right to
set aside an unconscionable bargain is a mere equity, proprietary in nature, and
is therefore capable of being an overriding interest5.
1
Fry v Lane (1888) 40 Ch D 312; Cresswell v Potter [1978] 1 WLR 255n; Commercial Bank of
Australia v Amadio (1983) 151 CLR 447, H Ct of A.
2
Commercial Bank of Australia v Amadio, above; Nobile v National Australian Bank
[1987] ACLD 410. In both cases the special disability of the security giver was a poor
understanding of English. There are signs that the English courts have become more receptive to
the notion of unconscionable transactions: Lloyds Bank plc v Waterhouse [1993] 2 FLR 97,
CA; Credit Lyonnais v Burch [1997] 1 All ER 114, CA.
3
See [2004] 1 WLR 2380 at [29].
4
[2017] Ch 93, first instance decision by HHJ Simpkiss, unchallenged.
5
Ibid, per Lewison LJ, at [18].

3 DURESS
13.17 Unlawful acts or threats to commit unlawful or improper acts directed
against a party in order to induce that party to enter into a transaction may
render the resulting transaction voidable for duress1. There is a clear overlap
between common law duress (especially economic duress) and the equitable
doctrine of actual undue influence2 and it is difficult to see any real scope in the
context of taking of security from an individual for the application of the
doctrine of duress independent of undue influence. Possibly duress may provide
a remedy in damages where the remedy of setting aside a security for undue
influence is inadequate or is liable to be defeated by the equitable defences.
1
Pao On v Lau Yiu Long [1980] AC 614, [1979] 3 All ER 65; Atlas Express Ltd v Kafco
(Importers and Distributors) Ltd [1989] QB 833. See generally Chitty on Contracts (32nd edn,
2015) paras 8-003-056.
2
Cf Williams v Bayley (1866) LR 1 HL 200; Mutual Finance Ltd v John Wetton & Sons Ltd
[1937] 2 KB 389, [1937] 2 All ER 657.

12
 Misrepresentation and Non-Disclosure 13.19

4 MISREPRESENTATION AND NON-DISCLOSURE

(a) Misrepresentation
13.18 A contract of security, like any other contract, is liable to be avoided if
induced by a material misrepresentation of fact made by the bank or its agent1.
In addition, the giver of the security may have a remedy in damages if the
misrepresentation is fraudulent or negligent, but if the misrepresentation is
merely innocent, damages are available only in lieu of rescission2. Statements as
to the terms and effect of the security document, although involving a repre-
sentation as to the effect in law of the security, will nevertheless probably be
classified as a representation of fact. Where it is intended that the terms of such
a document are to be read by the surety, however, representations which
amount to a ‘rough and ready’ description of the agreement are unlikely to
suffice to set aside the transaction3.
1
MacKennzie v Royal Bank of Canada [1934] AC 468 at 475, PC.
2
Misrepresentation Act 1967, s 2(2). See Chitty on Contracts paras 7-045-142.
3
Peekay Interbank Ltd v Australia and New Zealand Banking Group Ltd [2006] EWCA Civ
386; [2006] 2 Lloyd’s Rep 511 at [52].

(b) Negligent misstatements

13.19 Where a banker embarks on an explanation as to the terms and effect of
a security document in circumstances where he knew or ought to have known
that the person to whom the explanation is proffered would rely on it in
deciding whether or not to execute the security, he is likely to come under a duty
to that person to take reasonable care not to misstate the position1. If he does
negligently misstate the position, whether by making a positive misrepresenta-
tion or by omitting to point out a material fact2, the bank may be liable in
damages for negligence. The effect of the award in damages, intended as it is to
return the parties to the position they would have been in but for the negligent
misstatement, is likely to mean in practical terms that the bank loses the benefit
of the security.
There have been attempts to impose a duty on a bank providing information
falling short of advice. Such a bank, which undertakes to explain the nature and
effect of a transaction, has been said to owe a duty to take reasonable care to do
so as fully and properly as the circumstances demand3. This was said to be a less
onerous duty than giving advice, but wider than a duty not to misstate and has
been referred to as a ‘mezzanine’ or ‘intermediate’ duty. The terminology was
criticised by the Court of Appeal in Property Alliance Group v RBS Plc4,
regarding it as ‘best avoided’, together with any notion that there is a sliding
scale of duties owed by a bank. Intervening decisions had considered the
mezzanine duty to be consistent with Hedley Byrne and Bankers’ Trust duties5,
and the Court of Appeal in Property Alliance Group recognised (at [67]) that
the obligation to correct obvious misunderstandings (and indeed to answer
reasonable questions) was consistent with Hedley Byrne. It follows that where
explanations are offered by a bank, or misunderstandings are apparent a bank
may be required to provide corrective information. However, the existence or

13
13.19 The Taking of Security

extent of such a duty is likely to be very fact sensitive.

1
Cornish v Midland Bank [1985] 3 All ER 513 applying Hedley Byrne & Co Ltd v Heller &
Partners Ltd [1964] AC 465 [1963] 2 All ER 575. See also Midland Bank plc v Perry [1988] 1
FLR 161.
2
Cornish v Midland Bank, above at 517a.
3
Crestsign v National Westminster Bank plc [2015] 2 All ER (Comm) 133, per Tim Kerr QC.
4
[2018] EWCA 355.
5
For example Wani LLP v RBS [2015] EWHC 1181 (Ch).

(c) Duty to proffer explanation

13.20 Beyond the situations covered by Etridge, the weight of authority does
not support there being any duty owed by a bank to the prospective giver of
security (whether a customer or not) to proffer an explanation as to the nature
and effect of the security document to be executed1.
1
Barclays Bank plc v Khaira [1992] 1 WLR 623; Union Bank of Finland v Lelakis [1995] CLC
27. See also Shotter v Westpac Banking Corpn [1988] 2 NZLR 316; Westpac Banking Corpn
v McCreanor [1990] 1 NZLR 580. Dicta of Kerr LJ in Cornish v Midland Bank plc [1985]
3 All ER 513 at 522–523 suggesting a duty to explain were criticised in the 10th edition of
Paget. In Barclays Bank plc v Khaira, Mr Thomas Morrison QC, sitting as a deputy judge of the
High Court, approved this criticism of Kerr LJ’s dicta.

(d) Entire agreement and non-reliance clauses

13.21 An entire agreement or non-reliance clause attempts to limit the scope
for claims based on pre-contractual misrepresentations. The extent to which
this is possible was considered by the Court of Appeal in AXA Sun Life
Services plc v Campbell Martin Ltd1, in the context of a clause which includes
the provision that:
‘this Agreement shall supersede any prior promises, agreements, representations,
undertakings, or implications whether made orally or in writing between you and us
relating to the subject matter of this agreement.’
Rix LJ reviewed the authorities and concluded that this provision did not
exclude otherwise actionable misrepresentations2. This was because:
‘the exclusion of liability for misrepresentation has to be clearly stated. It can be done
by clauses which state the parties’ agreement that there have been no representations
made; or that there has been no reliance on any representations; or by an express
exclusion of liability for misrepresentation. However, save in such contexts, and
particularly where the word “representations” takes its place alongside other words
expressive of contractual obligation, talk of the parties’ contract superseding such
prior agreement will not by itself absolve a party of misrepresentation where its
ingredients can be proved.’

1
[2011] EWCA Civ 133; [2012] 1 All ER (Comm) 268.
2
See [78]–[98] and in particular [94].

13.22 The law on non-reliance clauses and on claims for pre-contractual

misrepresentation has been developed considerably in recent years by the Court
of Appeal in two cases: Peekay Intermark Ltd v Australia and New Zealand

14
 Illegality, Incapacity and Mistake 13.26

Banking Group Ltd1; and JP Morgan Chase Bank v Springwell Naviga-

tion Corp2. Full consideration of these and other authorities may be found in
Chapter 30 section 2 in the context of sales of retail derivatives.
1
[2006] EWCA Civ 386.
2
[2010] EWCA Civ 1221.

5 ILLEGALITY, INCAPACITY AND MISTAKE

13.23 These three remaining categories of vitiating factors may be shortly dealt
with together.

(a) Illegality

13.24 Although generally any kind of property can be mortgaged, this rule is
subject to a number of exceptions, mostly on the grounds of public policy. Thus
a public office or the pay of public officers cannot be mortgaged: Grenfell v
Dean & Canons of Windsor1. A mortgage may also be held unenforceable
because of the illegality of the underlying transaction: Fisher v Bridges2.
1
(1840) 2 Beav 544 at 549.
2
(1853) 3 E&B 642.

(b) Incapacity
13.25 Mortgage agreements are subject to the usual rules regarding the capac-
ity of parties. The capacity of companies, minors and mentally incapacitated
persons are discussed in Chapter 6.

(c) Mistake
13.26 As with other contracts, a mortgage agreement may be rectified in a case
of common or mutual mistake as to the true construction of its terms, so as to
give effect to the true intention of the parties. The requirements for a court to be
entitled to grant this (discretionary) equitable remedy are that: (i) there existed
some prior agreement whereby the parties expressed a common intention; (ii)
this common intention continued until the execution of the written contract;
(iii) this written instrument incorrectly recorded the parties’ true agreement;
and (iv) if rectified in the manner claimed, the instrument will give effect to this
intention1. The test appears to be objective, not subjective: Chartbrook Ltd v
Persimmon Homes Ltd, which whilst obiter, was agreed by all their Lordships2.
Rectification may also be ordered in a case of unilateral mistake. The leading
authority is Thomas Bates Son v Wyndhams (Lingerie) Ltd3. Where one party
is mistaken as to the incorporation of the agreement in the document, and the
other knows of the mistake, and does not draw it to the attention of the first
party, it suffices that it would be inequitable to allow the second party to insist
on the binding force of the document, either because this would benefit him or
because it would be detrimental to the mistaken party. Actual knowledge, or the
wilful and reckless shutting of one’s eyes or such failing to make the inquiries as

15
13.26 The Taking of Security

would be made by a reasonable and honest man is required. Furthermore,

‘where A intends B to be mistaken as to the construction of the agreement, so
conducts himself that he diverts B’s attention from discovering the mistake by
making false and misleading statements, and B in fact makes the very mistake
that A intends, then notwithstanding that A does not actually know, but merely
suspects, that B is mistaken, and it cannot be shown that the mistake was
induced by any misrepresentation, rectification may be granted. A’s conduct is
unconscionable and he cannot insist on performance in accordance to the strict
letter of the contract; that is sufficient’ to entitle B to rectification4. The key
distinction is between honest and dishonest conduct5.
1
Swainland Builders Ltd v Freehold Properties Ltd [2002] EWCA Civ 560 [33].
2
[2009] UKHL 38, [2009] 1 AC 1101 at [59]–[66]. See more recently the divergent opinions of
the Court of Appeal in Daventry DC v Daventry and District Housing Ltd [2011] EWCA Civ
1153; [2012] 1 WLR 1333: see [80]–[89] (Etherton LJ), [149] and [157]–[160] (Toulson LJ – to
which Etherton responds at [105]) and [196]–[198] and [207] (Lord Neuberger MR, preferring
Etherton LJ’s approach in principle).
3
[1981] 1 WLR 505. See esp 515 (Buckley LJ), 520–521 (Eveleigh LJ).
4
Commission for New Towns v Cooper [1995] Ch 259 at 280.
5
See also Daventry at [56], [94–97], [173–175], [184].

13.27 A mortgage may also be voidable under the doctrine of non est factum,
whereby a party establishes that the document he executed was so radically and
fundamentally different from that which he thought he signed, that it was not
his intention to execute it. The doctrine is now rarely invoked successfully, and
negligence in failing to ascertain the meaning of the document can prevent its
application. So in Saunders v Anglia Building Society1, an elderly widow failed
to read a document which she executed in the belief that it was a deed of gift of
a property to her nephew, when in fact it was an assignment to a third party. The
House of Lords rejected a plea of non est factum in a dispute between the
claimant widow and a lender who had innocently lent money on the strength of
the document. The claimant had known that she was signing a legal document,
and although she was mistaken as to its terms, she had not taken the trouble to
read it so as to ascertain even its general effect.
1
[1971] AC 1004.

6 STATUTORY REGULATION

(a) Registration of Security Interests

(i) Registration of Security Interests created by Companies
13.28 The Companies Act 2006 was amended in 2013 to create a new regime
for the registration of security interests created by companies1. It broadly
applies to security interests created on or after 6 April 20132. The new regime
maintains the same general approach as the old: registration is still needed to
‘perfect’ the taking of security. In summary, if a company creates a charge which
is not registered at Companies House within 21 days starting the day after the
creation of the charge, the charge is void against a liquidator or administrator
of the company and any creditors of the company3. While this does not
invalidate a creditor’s personal right to repayment, the debtor’s obligation to

16
 Statutory Regulation 13.28

repay is accelerated: the money that had been secured immediately becomes
payable4. An extension to the 21 day period may be ordered by the court in
certain circumstances5.
However, the new regime departs from the old in several important respects.
First, the reforms replace a closed list of security interests which should be
registered with a regime covering all charges subject to a few exceptions. A
charge is defined broadly to include a mortgage but does not include possessory
forms of security (liens and pledges) and forms of security which arise by
operation of law rather than consensually (eg, possessory liens, and equitable
liens and charges arising from a tracing claim)6. Further, financial collateral
arrangements and security taken by central banks are excluded from the
regime7.
Secondly, although it remains the case that registration can be undertaken by
either the company itself or a person ‘interested’ in the charge8, various practical
changes have been made to the process of registration. It is now possible to
register security interests online. A statement of particulars must now be
delivered to Companies House9, together with a certified copy of the instrument
creating the security interest10. Personal information must be redacted from the
instrument before it is delivered11. Both documents are then placed on the
register. Companies House no longer checks for consistency between the
statement of particulars and the underlying instrument12, though the Act still
allows for the company or interested person to apply to court to rectify mistakes
in the statement of particulars13.
Thirdly, the new regime is both wider and narrower in its geographical scope. It
applies to all UK registered companies, now including those registered in
Scotland14. However, in contrast to the old regime, it does not require registra-
tion of security interests by overseas companies. The so-called ‘Slavenburg
register’ created for that purpose has been abolished.
Finally, whereas previously the company and its officers committed a criminal
offence on failure to register company security interests15, that sanction has
been not been replicated in the new regime.
Overall, the new regime makes it easier to perfect the taking of security over
company assets, but leaves open some important questions, especially regard-
ing the extent to which the register can constitute notice of the security interest
for priority purposes16. A more detailed account can be found in specialist
works on company law (eg, Palmer’s Company Law (Looseleaf) Part 13).
1
Companies Act 2006 (Amendment of Part 25) Regulations, SI 2013/600.
2
SI 2013/600, reg 6.
3
Companies Act 2006 (CA 2006), ss 859A and 859H (new regime) and 860(1), 870 and 874 (old
regime).
4
CA 2006, ss 859H(4) (new regime) and 874(3) (old regime). The new regime specifies the dates
on which charges are taken to have been created: s 859E.
5
CA 2006, ss 859F (new regime) and 873 (old regime).
6
CA 2006, s 859A.
7
Banking Act 2009, s 252 and the Financial Collateral Arrangements (No 2) Regulations 2003,
reg 4(4). It also does not apply to charges in favour of landlords over a cash deposit given as
security in connection with a lease of land and a charge created by a member of Lloyd’s to secure
its obligations in connection with its underwriting business at Lloyd’s: Companies Act 2006,
s 859A(6).
8
CA 2006, ss 859A(2) (new regime) and 860(2) (old regime).

17
13.28 The Taking of Security
9
CA 2006, ss 859A(2) and 859D.
10
CA 2006, s 859A(2).
11
CA 2006, s 859G.
12
L Gullifer, Goode and Gullifer on Legal Problems of Credit and Security 6th edn (Sweet &
Maxwell, London, 2017) para 2.24.
13
CA 2006, s 859M (new regime) and 873 (old regime).
14
CA 2006, s 859A(7); the old regime is at ss 878–892.
15
CA 2006, s 860(4).
16
See Goode and Gullifer on Legal Problems of Credit and Security, paras 2.25 to 2.31.

(ii) Bills of Sale

13.29 The Bills of Sale Acts stipulate certain formalities, including registration,
in the context of security given over goods. Consideration of this topic is to be
found at paras 16.13 to 16.14 below.

(iii) Registration of Land Mortgages

13.30 Different regimes apply for the registration of real property depending
on whether the land is registered or unregistered. These are summarised below,
and further consideration of this topic is to be found in Chapter 17.
Where land is registered, a legal mortgage can only be effective if it is registered
as a charge at HM Land Registry. The mortgagee must be entered as proprietor
of the charge in the Charge Register of the mortgagor’s title1. Where registration
is compulsory, it is for the mortgagor to apply for registration, although the
mortgagee may also do this regardless of the mortgagor’s consent2. Registration
gives the charge priority over any prior interest unprotected at the time of
registration3. By contrast, an unregistered mortgage of registered land can take
effect only as an equitable mortgage and may be defeated by any subsequent
disposition of the estate4.
1
LRA 2002 s 27(1), 27(2)(f), 51, 59(2), Sch 2 para 8; Land Registration Rules 2003 r 9(a). The
detailed procedure for registration may be found in the Land Registry Practice Guide.
2
LRA 2002 s 6(1), (2), (6) and r 21 of the Rules.
3
LRA 2002 s 29(1).
4
Mortgage Corporation Ltd v Nationwide Credit Corporation Ltd [1994] Ch 49.

13.31 If the land is unregistered, then registration is governed by the Land

Charges Act 1972, which determines which legal and equitable mortgages
should be registered on the Land Charges Register. The determining factor is
whether the mortgagee holds the title deeds. So a legal or equitable mortgage
accompanied by a deposit of the title deeds does not have to be registered1. But
a legal (‘puisne mortgage’) or equitable mortgage where the mortgagee does not
hold the title deeds must be registered2. Such an unregistered land charge is void
against a purchaser for value of any interest in the land, although the position
as between the parties to an unprotected mortgage is unaffected.
1
There has been some uncertainty as to whether such an equitable mortgage can be registered as
an estate contract, although it is not general conveyancing practice to do so. See United Bank of
Kuwait plc v Sahib [1997] Ch 107.
2
By LCA 1972, ss 2(4)(i) and s 2(4)(iii).

18
 Statutory Regulation 13.33

(b) The Financial Services and Markets Act 2000 – MCOB and The
Mortgage Credit Directive Order 2015

13.32 Since 31 October 2004, the Financial Services and Markets Act 2000
(‘FSMA 2000’) has applied to first legal mortgages made by individuals over
residential property – ie, much domestic lending1. Where FSMA 2000 applies,
the lender must be authorised by the Financial Conduct Authority (formerly the
Financial Services Authority) and must comply with the detailed requirements
of MCOB (the FCA’s mortgage and home finance conduct of business
sourcebook), breach of which may be redressed by the Financial Ombudsman
Service and/or may give rise to a damages claim under s 138D (formerly s 150).
Since 21 March 2016, secured second charge mortgages that were previously
regulated by the Consumer Credit Act 1974 (as amended by the Consumer
Credit Act 2006) are now regulated mortgage contracts2. This change was
driven by the Mortgage Credit Directive (‘MCD’)3 which introduced a new,
specific regime for second charge lending. Second charge lenders have had to be
authorised, and have been subject to MCOB, since that date.
The present definition of a regulated mortgage contract is a mortgage, secured
on land in the EEA (rather than the UK as previously), at least 40% of which is
used or intended to be used as or in connection with a dwelling (and, if the
lending is to a non-individual trustee, where at least 40% of it is to be used by
an individual beneficiary or a related person). The definition is now significantly
wider in scope than it was before the implementation of the MCD.
Pursuant to the Mortgage Credit Directive Order 20154, broking, advisory and
lending activity with a buy-to-let consumer are activities requiring registration
with the FCA, and the FCA supervises, and may take action against, firms
registered with them. However, non-consumer buy-to-let lending is not an
activity falling within the scope of the Order.
1
By s 22 and article 61 of the Financial Services and Markets Act 2000 (Regulated Activities)
Order 2001, SI 2001/544.
2
Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order, SI
2001/3544, art 8.
3
Mortgage Credit Directive Order, SI 2015/910.
4
SI 2015/910, Part 3 and Schedule 3.

(c) The Consumer Credit Acts

13.33 The consequence of the extended scope of FSMA noted in the previous
paragraph is that, for agreements entered into after 21 March 2016, the
application to land mortgages of the Consumer Credit Act 1974 (as amended
by the Consumer Credit Act 2006, the ‘CCA’) is all but removed1. Further, the
expanded scope of FSMA has retrospective effect so that, for example, second
charge mortgages entered into before 21 March 2016 will from 21 March 2016
be regulated under both the CCA and FSMA2.
Prior to 21 March 2016, the CCA’s application was subject to wide-ranging and
numerous exceptions3. Most notably, the CCA did not apply to mortgages
regulated under FSMA 20004. Nor did it apply where the lender was a building
society or a deposit-taker, such as a bank5. Where the Act did apply, for example
to a second mortgage, to a corporate borrower, or where the property was let,

19
13.33 The Taking of Security

it governed both the formalities of the execution of the agreement as well as the
fairness of the relationship between the parties. An improperly executed agree-
ment requires a court order to be valid; and a court has broad powers to remedy
an unfair relationship, eg, by reducing the rate of interest6.
1
CCA 1974, s 8(3)(b).
2
This is a product of the definition of a ‘regulated mortgage contract’ adopted in article 61 of the
Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.
3
See the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No 1)
Order 2003 (SI 2003/1475).
4
By CCA 1974, s 16(6C).
5
By CCA 1974, s 16(1)(g), (h).
6
CCA 1974, ss 60–61, 65; and 140A–B.

(d) Unfair Terms

13.34 2015 saw substantial reform of consumer rights legislation, with
the Consumer Rights Act 2015 (‘CRA’) becoming a single point of reference for
consumer rights previously found in the Unfair Terms in Consumer Contracts
Regulations 1999, SI 1999/2083 (‘UCCTR’), the Sale of Goods Act 1979 and
the Supply of Goods and Services Act 1982. Regrettably, the opportunity was
missed to consolidate control of all unfair terms in contracts into one piece of
legislation, and control of terms in non-consumer contracts remains in the
Unfair Contract Terms Act 1977. In any event, however, that Act does not apply
to mortgages on land1.
For domestic mortgages entered into prior to 1 October 2015, UCCTR will
often apply, since these are typically loans from a lender acting for the purposes
of its business to a borrower who is a consumer (a natural person acting outside
the course of his business)2. These provide that a term which has not been
individually negotiated shall be regarded as unfair if, contrary to the require-
ment of good faith, it causes a significant imbalance in the parties’ rights and
obligations to the detriment of the consumer2. An unfair term is unenforceable3.
But ‘core terms’ – ie, those which relate to the definition of the main subject
matter of the contract or to the adequacy of the price or remuneration for the
services supplied – are excluded, insofar as they are in plain intelligible lan-
guage4.
For mortgages provided to a consumer on or after 1 October 2015, the
equivalent provisions to UCTRR are found in Part 2 of the CRA. The historic
UCCTR provisions described above are in large part re-enacted by the CRA,
but the CRA does differ in some respects. Most notably, it expands the
definition of a consumer to an individual acting for purposes that are wholly or
mainly outside that individual’s trade, business, craft or profession5; applies the
test of unfairness set out above to individually negotiated terms6; and, critically,
has attempted to address the difficulties caused by the interpretation by the
Supreme Court in Abbey National Plc v The Office of Fair Trading7 of the ‘core
term’ exemption permitted by Article 4(2) of the 1993 Directive on Unfair
Terms in Consumer Contracts 93/13/EC.
The ‘core terms’ now excluded are those which pertain to the main subject
matter of the contract or the appropriateness of the price payable under the
contract for the services supplied under it, provided the term(s) in question are

20
 Statutory Regulation 13.34

both transparent and prominent8. This broadening of the requirements to be

satisfied before a term is excluded requires more than the term being expressed
in plain intelligible language, and now additionally requires that the term be
brought to the consumer’s attention in a way that a consumer who is reasonably
well informed, observant and circumspect would be aware of the term.
The previous edition of this book considered that ‘the duration or interest rate
of a loan under a mortgage would not be caught by the Regulations’. Whether
this position is now sustainable in the light of the conflict between the drafting
of section 64(1)(b) of the CRA (as supported by the Law Commission Advice9
and Abbey National Plc) and the ECJ decisions in Kásler v OTP Jelzálogbank
Zrt10 and Matei v SC Volksbank Romania SA11 is unclear.
In Kásler, two different rates were applied in a consumer loan agreement – the
total amount outstanding was calculated on the creditor bank’s buying rate for
foreign currency, but the instalments were based on its selling rate. The ECJ
found that the term setting the exchange rate for repayment of the loan could
not fall within the second limb of the ‘core term’ exclusion in Article 4(2), as the
rate was not part of the service. In Matei the ECJ likewise held that to fall within
the ‘core term’ exclusion, a distinct service, in return for which the price or
remuneration was being paid, had to be identified.
In contrast, the approach of the Supreme Court in Abbey National Plc to what
was Regulation 6(2) of UTCCR, and of the Law Commission (upon which
section 64(1)(b) is based) was all encompassing, examining all sums payable
under the disputed term (whether they were ancillary or essential) as against the
package of services. The ECJ’s construction of Article 4(2) rejects both the
approach adopted by the Supreme Court, and the broader interpretation of
‘price and remuneration’ found in the Law Commission Advice. Today, a court
determining whether the fairness of a term is open to assessment must follow
the interpretation and guidance of the ECJ.
1
Unfair Contract Terms Act 1977, Sch 1, para 1(b).
2
SI 1999/2083, Reg 4(1).
2
Reg 5(1).
3
Reg 8(1).
4
Reg 6(2).
5
CRA 2015, s 2(3) and (4).
6
CRA 2015, s 62.
7
[2010] 1 AC 696.
8
CRA 2015, s 64.
9
(2013) S14.
10
[2014] Bus LR 664.
11
[2015] 1 WLR 2385.

21
Chapter 14

LIEN AND SET-OFF

1 THE BANKER’S LIEN

(a) Existence and nature of the banker’s lien 14.2
(b) Securities subject to the lien 14.4
(c) Relevant liabilities 14.8
(d) Matters excluding lien 14.10
2 THE BANKER’S RIGHT OF SET-OFF
(a) Introduction 14.16
(b) Extent of the banker’s right of set-off 14.19
(c) Matters inconsistent or potentially inconsistent with set-off 14.26
(d) Regulatory aspects 14.31
3 RIGHTS OF SET-OFF UNDER THE GENERAL LAW 14.33
(a) Rights of set-off before insolvency 14.38
(b) Rights of set-off after insolvency 14.37
(c) Third party interference with general rights of set-off 14.46
4 CONTRACTUAL SET-OFF PROVISIONS 14.49
(a) Pre-insolvency provisions 14.50
(b) Post-insolvency set-off provisions 14.55

14.1 From a commercial standpoint, a right of set-off is a form of security for

a lender. It is an attractive security because its realisation does not involve the
sale of an asset to a third party. Furthermore, three rights of set-off (banker’s set-
off, contractual set-off and insolvency set-off) can be executed without an
order of the court. For these reasons, the maximisation of rights of set-off is
often an important factor in how loans are structured and documented.
It is logical to begin not with set-off, but with the banker’s lien (section 1), the
recognition of which led to the subsequent recognition of the banker’s right of
set-off (section 2). This chapter then considers set-off under the general law
(section 3), both before and after insolvency, and including the vulnerability of
rights of set-off to third-party interference. Finally, the chapter deals with
contractual set-off provisions (section 4), meaning provisions that either create
contractual rights of set-off or reinforce rights of set-off arising under the
general law.

1 THE BANKER’S LIEN

(a) Existence and nature of the banker’s lien

(i) Existence of the lien

14.2 Subject to the rules considered in this section, a bank is entitled to a

general lien on all securities deposited on a customer’s account until an
indebtedness of the customer is paid or discharged. This entitlement is known as
the ‘banker’s lien’.

1
14.2 Lien and Set-Off

The banker’s lien was recognised by the Court of King’s Bench as early as 1794
in Davis v Bowsher1. In 1846 the House of Lords regarded its existence as
indisputable in Brandao v Barnett2, where Lord Campbell said:
‘Bankers most undoubtedly have a general lien on all securities deposited with them
as bankers by a customer, unless there be an express contract, or circumstances that
show an implied contract, inconsistent with lien.’
Lord Campbell also stated that the banker’s lien is part of the law merchant3,
which courts of justice are bound to know and recognise4. Consequently the
existence of the general lien is a matter of law which need not normally be
pleaded or proved.
The law merchant is not fixed and stereotyped. It is capable of being expanded
and enlarged so as to meet the wants and requirements of trade in the varying
circumstances of commerce5. Therefore if a bank relies on some aspect of the
lien that is not clearly established on the authorities, it is open to the bank to
plead and adduce evidence of a general usage, and it is open to the court to
recognise such usage as establishing the right relied on.
1
(1794) 5 Term Rep 488, 101 ER 275.
2
(1846) 12 Cl & Fin 787 at 806.
3
For a description of the law merchant (sometimes referred to as the lex mercatoria), see
Halsbury’s Laws of England, Volume 32 (2012) 5th edn, paras 62 to 64. In broad terms, the
law merchant is the customs and usages of trade which have been judicially ascertained and
recognised as forming part of the common law.
4
(1846) 12 Cl & Fin 787 at 805. See also Lord Lyndhurst at 810: ‘There is no doubt that, by the
law-merchant, a banker has a lien for his general balance on securities deposited with him.’
5
Per Cockburn CJ in Goodwin v Robarts (1875) LR 10 Exch 337 at 346; affd (1876) 1 App Cas
476, HL.

(ii) Nature of the lien

14.3 In Brandao v Barnett Lord Campbell stated that the right acquired by a
general lien is an implied pledge1. This observation was made in support of a
ruling that the banker’s lien exists if the banker has acted in good faith, even
though the subject of the lien turns out to be the property of a third party. This
ruling is part of the ratio of Brandao v Barnett. In that case, the subject of the
lien, namely exchequer bills, had been deposited with the respondent bankers,
not by the appellant, who was the owner, but by his London agent. The House
of Lords rejected the appellant’s submission that this circumstance was suffi-
cient to negate a lien.
In modern terms, however, the banker’s lien cannot properly be viewed as an
implied pledge. The difference between a pledge and a lien was explained by
Millett LJ in Re Cosslett (Contractors) Ltd2:
‘A pledge and a contractual lien both depend on delivery of possession to the creditor.
The difference between them is that in the case of a pledge the owner delivers
possession to the creditor as security, whereas in the case of a lien the creditor retains
possession of goods previously delivered to him for some other purpose.’
The banker’s lien undoubtedly extends to securities delivered to a banker for
purposes other than as security. Accordingly, the lien is not a pledge in the strict
sense.

2
 The Banker’s Lien 14.4

The more important issue is whether the lien confers a mere right of retention,
or whether it also carries an implied power of sale, which is a characteristic of
a pledge but not normally of a lien3. It is submitted that it is in this sense that
Lord Campbell described the lien as an ‘implied pledge’, meaning that the
banker’s lien must be taken to confer an authority to sell.
In cases involving bills, notes or cheques, a bank has no need to rely on a power
of sale, because the existence of the lien does not relieve it from the duty to
present the instruments at maturity4. In cases of securities that do not require
presentation, the bank may rely on an implied power of sale. Where the
securities are not to be presented for payment, it is prudent to obtain at the time
of deposit an express power of sale. A genuine lien coupled with a contractual
power of sale is not a charge and is therefore not registrable as such5.
Note, however, that if the bank becomes the holder in its own right of
negotiable securities coming into its possession as banker, its right of lien or
pledge is gone. Such rights are inconsistent with absolute property in the
securities.
1
(1846) 12 Cl & Fin 787 at 806.
2
[1998] Ch 495, CA at 508G.
3
A pledge confers an implied power of sale: see The Odessa [1916] 1 AC 145 at 159, PC; Donald
v Suckling (1866) LR 1 QB 585. A lien ordinarily does not: see Clark v Gilbert (1835) 2 Bing
NC 343.
4
See para 14.13.
5
Great Eastern Rly Co v Lord’s Trustee [1909] AC 109; Re Cosslett (Contractors) Ltd, [1998]
Ch 495, CA; Re Hamlet International plc [1999] 2 BCLC 506, CA.

(b) Securities subject to the lien

(i) Paper securities
14.4 The classes of securities to which the banker’s lien may apply have not
been (and may not be susceptible to being) exhaustively defined. Nevertheless,
judges have expressed the scope of the lien in broad terms and have held it to
apply to a broad range of securities.
According to Lord Campbell in Brandao v Barnett1, the lien applies to ‘all
securities’. In Davis v Bowsher2, however, Lord Kenyon CJ used first the words
‘all the securities’, but later the words ‘paper securities’. In the same case, Gross
J also used the term ‘paper securities’. In Wylde v Radford3, Kindersley V-C
listed examples all fitting that description:
‘The cases refer to a deposit of documents which are in their nature securities, but
there is some ambiguity in the term “securities”. Anything may of course be
deposited, and deeds or plate, after they have been deposited, may be said to be a
security; but what is intended is such securities as promissory notes, bills of exchange,
exchequer bills, coupons, bonds of foreign governments, etc, and the courts have held
that if such securities are deposited by a customer with his banker, and there is
nothing to show the intention of such deposit one way or the other, the banker has,
by custom, a lien thereon for the balance due from the customer.’
The class of securities covered by these definitions is not limited to fully
negotiable securities4. It has been held to extend to share certificates5, an
order to pay money to a particular person6, a species of deposit receipt7, and (it
appeared to have been assumed) a policy of insurance8, though none of these

3
14.4 Lien and Set-Off

securities was negotiable. Nonetheless, the general lien does not extend to all
classes of documents, even though they might otherwise be utilised as security.
1
(1846) 12 Cl & Fin 787 at 808.
2
(1794) 5 Term Rep 488, 101 ER 275.
3
(1863) 33 LJ Ch 51 at 53.
4
See Re London and Globe Finance Corp [1902] 2 Ch 416 at 420, in which Buckley J considered
Wilde v Radford and declined to hold that its effect was to narrow the scope of the lien.
5
Re United Service Co, Johnston’s Claim (1870) 6 Ch App 212. See also Re London and Globe
Finance Corp [1902] 2 Ch 416.
6
Misa v Currie (1876) 1 App Cas 554, HL.
7
Jeffryes v Agra and Masterman’s Bank (1866) LR 2 Eq 674.
8
Re Bowes, Earl of Strathmore v Vane (1886) 33 Ch D 586.

(ii) Documents of title to land

14.5 The lien does not extend to title deeds (or any other property) delivered to
a bank for mere safe custody (see para 14.11 below).
A deposit of title deeds by way of security cannot create a lien, because as noted
at para 14.3 above a lien must be for a purpose other than security. Until the
Law of Property (Miscellaneous Provisions) Act 1989, such a deposit could
create an equitable mortgage. However, by s 2(1) of that Act, a contract for a
mortgage of land must be in writing, so an equitable mortgage can no longer be
created in that way1.
The question of a bank’s lien over title documents arose in Wylde v Radford2,
although the case is of little assistance generally. There, a customer deposited
with his bankers a deed of conveyance of two distinct properties, giving them at
the same time a memorandum charging one of the properties as security both
for a specific sum and also for his general balance. The bankers later claimed a
general lien over the other property. This claim was rejected, but on the basis of
the construction of the memorandum rather than on the ground that the general
lien does not extend to conveyances3.
1
United Bank of Kuwait v Sahib [1997] Ch 107, CA.
2
(1863) 33 LJ Ch 51.
3
Buckley J explained the limited utility of Wylde v Radford in Re London and Globe Fi-
nance Corpn [1902] 2 Ch 416 at 420: ‘All that Kindersley V-C held was that, upon the true
construction of the memorandum, the result of the transaction in that case was that property B
was never intended to be charged at all; that the deed was deposited because it contained
property A, and not because it contained property B; and that as regarded B there was no
security given.’

(iii) Money and credit balances

14.6 Money paid into a bank account becomes the property of the bank1.
Accordingly, that money cannot be subject to the banker’s lien, as such.
Nevertheless there were many statements, some of high authority2, to the effect
that money paid in is subject to the banker’s lien. This misuse of language was
finally laid to rest in Halesowen Presswork and Assemblies Ltd v Westminster
Bank Ltd, where Buckley LJ3, in a passage approved by the House of Lords4,
observed that no man can have a lien on his own property. Statements to the
contrary should, it is submitted, be understood as references to the equitable
charge considered in para 15.8 or the banker’s right of set-off considered in

4
 The Banker’s Lien 14.7

paras 14.16 and following below.

1
See generally Foley v Hill (1848) 2 HLC 28 and Chapter 4.
2
See eg Lord Hatherley in Misa v Currie (1876) 1 App Cas 554 at 569. See also Roxburghe v Cox
(1881) 17 Ch D 520, CA.
3
[1971] 1 QB 1 at 46, [1970] 3 All ER 473 at 487–488, and see also Lord Denning MR at,
respectively, 32 and 477. The facts of Halesowen are detailed in para 14.27 below. And see also
In re Spectrum Plus Ltd (in liquidation) [2005] 2 AC 680 at [60] (Lord Hope): ‘A banker has a
general lien over all bills, notes and negotiable instruments belonging to the customer which his
customer may have deposited with him in security of the customer’s indebtedness to the bank.
But a lien is a right to retain possession of property that belongs to someone else, and the banker
has no lien over funds which, when deposited in its account by the customer, become his own
property.’
4
[1972] AC 785 at 802 (Viscount Dilhorne) and 810 (Lord Cross), [1972] 1 All ER 641 at 646,
653.

(iv) Intangible financial assets

14.7 The banker’s lien does not apply to dematerialised securities or other
intangible financial assets. The reason for this is technical; a lien is a possessory
security and it is not possible, as a matter of common law1, for intangible
property to be possessed2.
The prevalence of intangible financial assets in modern banking practice has led
to suggestions that the scope of the banker’s lien should be expanded to cover
such assets3. In broad terms, the argument is that an expansion in the scope of
the lien would reflect commercial reality, and would be a step analogous to the
relatively recent legal endorsement of charges granted to banks over money
standing to the credit of their own customers’ accounts4.
This argument is undoubtedly attractive. The use of dematerialised securities
and other financial assets in place of their certificated predecessors is now a
settled feature of modern banking practice. The banker’s lien is part of the law
merchant and, accordingly, the scope of its judicial recognition should in
principle keep in step with the fundamental changes to banking practice
brought about by recent technological developments. However, it must be
recognised that any expansion of the lien to cover intangible assets would
involve a significant departure from the existing law that possessory security
rights can attach only to tangible property. That position is not open to
challenge below the Supreme Court, and indeed may have to await the inter-
vention of Parliament5. Furthermore, when the House of Lords was invited in
OBG Ltd v Allan6 to take the analogous step of expanding the tort of
conversion to cover wrongful interferences with intangible property in the form
of contractual rights, a majority of the Lords declined7.
It follows that a bank wishing to take security over dematerialised securities or
other intangible assets should seek the customer’s agreement and use a form of
security (such as a charge) capable of attaching to such assets.
1
Although it appears that it is possible for intangibles to be ‘possessed’ for the specific purpose of
the Financial Collateral Arrangements (No 2) Regulations 2003, SI 2003/3226: see Lehman
Brothers International (Europe) (in administration) [2012] EWHC 2997 at [131] (Briggs J) and
para 15.15 below.
2
Your Response Limited v Datateam Business Media Limited [2014] EWCA Civ 281,
[2015] QB 41. See especially Moore-Bick LJ at [16], [23], [26] and [28], Davis LJ at [39], and
Floyd LJ at [42]. The actual decision in this case was that it is not possible to exercise a common
law possessory lien over an electronic database.

5
14.7 Lien and Set-Off
3
See Re Lehman Brothers International (Europe) (in administration) [2012] EWHC 2997 at
[34], where Briggs J invited the parties to consider whether the time had come for the scope of
the lien to be expanded beyond tangible assets. The invitation was declined.
4
See Re BCCI No 8 [1998] AC 214, considered in para 15.8 below. Such arrangements, known
as ‘charge-backs’, were previously thought to be conceptually impossible, as they involve a
creditor charging in favour of a debtor the debtor’s own indebtedness to the creditor.
5
As Moore-Bick LJ suggested in Your Response Limited v Datateam Business Media Limited
[2014] EWCA Civ 281, [2015] QB 41 at [27].
6
[2008] 1 AC 1.
7
See Lord Hoffman at [94] to [107], Lord Walker at [271], and Lord Brown at [321]. Lord
Nicholls and Baroness Hale dissented; see, respectively, [220] to [241] and [308] to [317].

(c) Relevant liabilities

(i) The customer’s general balance
14.8 The banker’s lien is for the general balance owed by the customer1. The
term ‘general balance’ refers to all sums presently due and payable by the
customer, whether on loan or overdraft or other credit facility2.
1
Brandao v Barnett (1846) 12 Cl & Fin 787, 8 ER 1622, per Lord Campbell at 806 (citing Lord
Kenyon in Davis v Bowsher (1794) 5 Term Rep 488) and Lord Lyndhurst at 810.
2
See Re European Bank (1872) 8 Ch App 41, where it was conceded that the lien extended to a
loan account.

(ii) Future or contingent liabilities

14.9 The principles relating to whether the banker’s lien can be exercised for
future or contingent liabilities have been developed through decisions concern-
ing both the banker’s lien and the banker’s right of set-off1.
The rule is that, save in the event of the customer’s insolvency, a bank is not
entitled to retain money standing on current account to meet the custom-
er’s contingent liabilities to the bank. It is true that in Bolland v Bygrave2,
Abbott LCJ, sitting at Nisi Prius, appears to have thought that the banker’s lien
attached to securities of the customer when the banker had discounted or
accepted bills for the accommodation of the customer. However, in Jeffryes v
Agra and Masterman’s Bank3, Sir Page Wood V-C said:
‘ . . . they say, further, that there were very heavy liabilities outstanding, and that
they would have retained, when they became due, these balances as against those
outstanding bills. I apprehend they never could do that in any court of law, and of
course there is no equity of the kind; you cannot retain a sum of money which is
actually due against a sum of money which is only becoming due at a future time
. . . at all times when the bills became due, they would have been entitled to set off
any moneys actually due from him to the bank, whatever the account should be. As
to mere liabilities, it is equally clear that they could not set them off.’
The point was settled by Bower v Foreign and Colonial Gas Co Ltd, Metro-
politan Bank, Garnishees4, in which the customer had a credit balance of £751.
The bank had discounted bills not yet due, for £500. A garnishee order (a third
party debt order, in modern terms) was served on the bank. The bank claimed
to retain £500 of the current account against the liability on the bills, alleging
that it had a lien to that extent. The court held that it had no lien. The fact that
the bank had discounted bills that were still running was no ground for an

6
 The Banker’s Lien 14.11

implied agreement for lien on the balance; indeed it would be contrary to the
object of such advances. Although Grove J said there was a great difference
between the case of securities, as in the authorities cited (which included
Bolland v Bygrave), and a drawing account, it would not be safe to assume that
in the modern law of banking there is any relevant distinction between the
banker’s lien and the banker’s right of set-off in relation to future and contin-
gent liabilities.
Note that the distinction between a contingent liability and an actual liability
that remains to be quantified can be a fine one. Thus, when a contract is
terminated for anticipatory breach, a future, contingent debt owed under the
contract is accelerated into an actual, unquantified liability to pay damages5.
1
The latter of which used to be referred to inaccurately as a lien; see para 14.6 above.
2
(1825) Ry & M 271. See also Re Keever [1967] Ch 182 at 190, [1966] 3 All ER 631 at 634,
where Ungoed-Thomas J treated Bolland v Bygrave as authority that the lien extends to an
overdraft not yet due for payment but constituting a contingent liability.
3
(1866) LR 2 Eq 674.
4
(1874) 22 WR 740. And see Liverpool Freeport Electronics Limited v Habib Bank Limited
[2007] EWHC 1149 at [135], where Christopher Clarke J treated Bower (and Jeffryes v Agra
and Masterman’s Bank, above) as authority for the proposition that the banker’s lien does not
extend to future or contingent liabilities.
5
See Baker v Lloyd’s Bank Ltd [1920] 2 KB 322. There, the defendant bank had discounted 12
bills of exchange on which its customer was contingently liable. Before the bills fell due, the
customer assigned to the claimant as its trustee all its property on terms that dividends were to
be paid to creditors on a bankruptcy basis, and expressly preserving creditors’ liens. Roche J
held that the customer’s declaration that it was insolvent amounted to a repudiation of its
ability to perform its undertaking that the bills would be paid at maturity. Thus, the custom-
er’s contingent liability on the bills became an actual liability at the date of the assignment.

(d) Matters excluding lien

(i) Express or implied agreement inconsistent with lien
14.10 The lien may be excluded by an express or implied agreement between
the bank and the customer that is inconsistent with the lien.
Express agreements aside, there are two common situations in which an
inconsistent agreement may be found to exist. These are: (a) the deposit of
securities for safe custody (see para 14.11 below); and (b) the deposit of
securities as cover for a specific advance (see para 14.12 below).
Conversely, the remission of instruments for collection is not normally a
purpose inconsistent with a right of lien (see para 14.13 below).
14.11 The deposit of securities for safe custody is normally inconsistent with a
right of lien. This was the position in Brandao v Barnett1, where exchequer bills
were deposited with bankers and kept in a tin box of which the depositor kept
the key. In those circumstances the bills could not be considered as having been
deposited with the bankers as bankers, but as bailees.
However, safe custody does not always exclude lien. The issue ultimately turns
on the intentions of the parties. The possession of anything essential to
collection of a payment, though not surrendered on collection, can be subject to
lien. So, an instrument that is deposited with a bank for the purpose of

7
14.11 Lien and Set-Off

collection of interest, and which has to be produced whenever interest is paid,

would be subject to the lien.
The case of debenture or stock certificates deposited with a bank which is to
receive the interest for the customer seems doubtful. On one view, the posses-
sion of such instruments would not seem to be essential or instrumental to the
receipt of the interest, and would seem more consistent with mere safe custody
until they should be required on transfer. However, in Re United Service Co,
Johnston’s Claim2, James LJ appears to have considered that certificates depos-
ited in such circumstances would be subject to the lien, because they came into
the bank’s custody ‘in the ordinary course of their business as bankers’3.
1
(1846) 12 Cl & Fin 787, 8 ER 1622.
2
(1870) 6 Ch App 212.
3
At 217. The decision in this case that the certificates would have been subject to the lien may
have been influenced by the facts that: (a) the customer had a general banking account with the
bank; and (b) in addition to the certificates, the customer had deposited other instruments with
the bank, including instruments bearing coupons which the bank was to collect. Sir Mackenzie
Chalmers, in an opinion given in 1882, expressed doubt on the point, but inclined to the view
expressed by James LJ, as being the natural inference from the transaction: see the Institute of
Bankers’ Questions on Banking Practice (8th edn) no 1111.

14.12 The deposit of securities to secure a specific advance is normally incon-

sistent with a right of lien. Like the deposit of securities of safe custody,
however, the issue ultimately turns on the intentions of the parties1.
Difficult questions have arisen in cases where securities deposited to secure a
specific advance: (a) are realised at a surplus; or (b) are left with the bank after
the specific advance has been repaid. In such cases the question is whether the
general lien attaches to the surplus or the securities left with the bank in relation
to any other indebtedness of the customer, despite the specific purpose of the
initial deposit. There are cases on either side of the line.
In Wilkinson v London and County Banking Co2, it was assumed that a
customer depositing securities as cover for specific advances was entitled to
have them back on repayment of those advances independent of the state of
account between him and the bank. Conversely in Re London and Globe
Finance Corpn3, Buckley J held that securities deposited as cover for specific
advances, but left in the banker’s hands after discharge of the advances, became
liable to the general lien. Similarly in Baker v Lloyds Bank Ltd4, surplus
proceeds of sale of shares deposited as cover for an advance were held to be
available to discharge the customer’s general balance. The same conclusion was
reached in Jones v Peppercorne5, a case involving the stockbroker’s general lien.
A somewhat strange set of circumstances arose in London and County Bank-
ing Co v Ratcliffe6. An owner of land gave the bank an equitable mortgage by
deposit of deeds to secure the general balance of his account. The memorandum
of deposit declared that the security should not be satisfied by the payment of
any sums due on the account, but should extend to cover all future sums which
should at any time be or become due. The borrower thereafter sold one of the
properties subject to and with notice of the mortgage, the purchaser paying in
instalments. The bank continued to make advances after the purchaser had paid
in full, but did not advise the purchaser. The conveyance to the borrower of the
property he sold could not be given to the purchaser as it covered other
properties also. It was held, on the principle of Hopkinson v Rolt7, that the bank

8
 The Banker’s Lien 14.13

had no charge for the further advances, that the initial advance had been
discharged by the operation of the rule in Clayton’s case8, and that the
purchaser was not bound to ask if further advances had been made. On the
same basis the bank would presumably have had no lien either.
In Re Bowes, Earl of Strathmore v Vane9, a policy of life assurance was
deposited with a bank with a memorandum stating it to be deposited as security
for all moneys then or thereafter due on current account or otherwise, not
exceeding in the whole at any one time the sum of £4,000. The customer died
indebted to the bank for more than £4,000. North J held that the special
agreement was inconsistent with a general lien for the balance of £1,000. This
case and Jones v Peppercorne were, in Re London and Globe Finance Corpn10,
treated as establishing the law. The judgment of Buckley J in the latter case was
thus based on the ground that the securities, being consciously left in the
banker’s hands after satisfaction of the specific advances, could be regarded as
having come into his hands anew in the way of business or as impliedly
repledged or redeposited. It might perhaps be put another way: that where
securities have been charged for an advance which is repaid and the securities
left with the banker, he will have a lien on them for any other advance allowed
subsequently or existing at the time, unless this is expressly excluded either by
the original memorandum of charge (if there was one) or by some other
agreement or arrangement, such as that they had been specifically ‘appropri-
ated’ to the advance, or that they were henceforth to be held for safe custody.
This would be in accord with Brandao v Barnett11.
1
Cuthbert v Robarts, Lubbock & Co [1909] 2 Ch 226, CA.
2
(1884) 1 TLR 63, HL.
3
[1902] 2 Ch 416.
4
[1920] 2 KB 322.
5
(1858) John 430.
6
(1881) 6 App Cas 722.
7
(1861) 9 HL Cas 514.
8
(1816) 1 Mer 529.
9
(1886) 33 Ch D 586.
10
[1902] 2 Ch 416.
11
(1846) 12 Cl & Fin 787.

14.13 The remission of instruments for collection is normally consistent with a

right of lien. In Akrokerri (Atlantic) Mines Ltd v Economic Bank1, Bigham J
used words that might be taken to imply that collection is a special purpose
inconsistent with lien. This is not so. Collection is essentially in the way of a
bank’s business, and the bank’s lien over documents in its hands for that
purpose has been repeatedly recognised2.
It has even been held that, in the absence of special notice, a clearing bank has
a lien over bills remitted for collection by its correspondent bank in respect of a
balance due from the correspondent bank, though the bills were the property of
the latter’s customer3.
1
[1904] 2 KB 465 at 471.
2
See Misa v Currie (1876) 1 App Cas 554 at 565, 569, 573 and Sutters v Briggs [1922] 1 AC 1
at 18.
3
Johnson v Robarts (1875) 10 Ch App 505; Re Dilworth, ex p Armistead (1828) 2 Gl & J 371.

9
14.14 Lien and Set-Off

(ii) Third-party interests

14.14 The lien is excluded if, to the knowledge of the bank at the time of
deposit, the securities in question belong to a third party1. But the lien is not
excluded if the bank receives the securities in good faith and without knowledge
that they in fact belong to a third party. This is illustrated by Brandao v Barnett2
and Jones v Peppercorne3, discussed above.
1
Cuthbert v Robarts, Lubbock & Co [1909] 2 Ch 226, CA.
2
(1846) 12 Cl & Fin 787, 8 ER 1622.
3
(1858) John 430.

14.15 A bank cannot rely on the banker’s lien over property which was its
customer’s property when it first came into the bank’s hands if (a) the bank
knows that the customer has subsequently assigned his full beneficial interest in
the property to a third party; and (b) the purpose of relying on the lien is to
reimburse the bank in respect of advances made by it to the customer after
notice of the assignment1.
1
Per Slade J in Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd’s Rep 142 at 166.
This case was overruled by the House of Lords in In re Spectrum Plus Ltd (in liquidation)
[2005] 2 AC 680, but without reference to this point.

2 BANKER’S RIGHT OF SET-OFF

(a) Introduction
(i) Existence of the right
14.16 Subject to the rules considered in this section, where a customer has two
or more accounts at the bank, the bank is entitled to utilise a credit balance on
one or more account(s) to reduce or cover a debit balance on the other
account(s)1. This entitlement is known as the ‘banker’s right of set-off’ or the
‘banker’s right to combine accounts.’
1
National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785 at
819 (Lord Kilbrandon).

(ii) Relationship between lien and set-off

14.17 The banker’s right of set off has on occasion been treated as an aspect of
the banker’s lien. However, it has already been noted that the inaccurate use of
the term ‘lien’ to describe the banker’s right over money paid into, and credit
balances on, a customer’s account was deprecated in Halesowen Presswork and
Assemblies Ltd v Westminster Bank Ltd1. The judicially approved expressions
are therefore the banker’s right of set-off or the banker’s right to combine
accounts.
The two forms of bankers’ rights are nevertheless connected. As observed by
Roskill J at first instance in Halesowen2:
‘ . . . what is sometimes called the right of set-off and sometimes the right of
combination or of consolidation of accounts is but the manifestation of or a right
analogous to the exercise of the banker’s right of lien, a right which is of general

10
 Banker’s Right of Set-off 14.18

application and not in principle (apart from special agreement whether express or
implied) limited to current or other similar accounts.’
Similarly in the House of Lords, while Lord Cross stated that it would be a
‘misuse of language’ to describe the banker’s right of set off as an example of the
banker’s lien, he nevertheless observed that, as a matter of history, the recogni-
tion by the courts of the former may have been influenced by their earlier
recognition of the latter3.
The close connection between lien and set-off can be seen in the example of a
cheque paid in for collection in circumstances where: (a) a customer has two
accounts, one in credit and one overdrawn; and (b) the combined balance of the
account is in debit. In such a case, the bank has a lien over the cheque (see para
14.13 above), but remains under a duty to present the cheque for payment.
Further, the bank does not lose its lien (it is submitted) by parting with the
cheque for the purpose of presenting it for payment. The instrument remains in
the bank’s constructive possession until it is paid (or, if dishonoured, returned to
its actual possession) and the lien continues for that time4. But once the cheque
is paid and the proceeds are credited to the relevant account, the banker’s lien
falls away and is substituted for a right of set-off in relation to any remaining
debit balance on one of the accounts.
1
See para 14.6. The facts of Halesowen are detailed in para 14.27 below.
2
[1971] 1 QB 1 at 19E.
3
[1972] AC 785 at 810G.
4
This appears to have been Buckley LJ’s reasoning in the Court of Appeal in Halesowen ([1971]
1 QB 1 at 46), when he observed in relation to the cheque in that case that: ‘When that cheque
was cleared . . . it ceased to be a negotiable instrument and also ceased to be in the possession
of the bank. Any lien of the bank on the cheque must thereupon have come to an end.’ This
passage was approved by Viscount Dilhorne in the House of Lords: [1972] AC 785 at 802.

(iii) Nature and description of the right

14.18 The legal nature and description of the banker’s right of set-off is a
matter of some debate. While the term ‘set-off’ is now commonly used, there is
authority and academic support for an alternative view that the banker’s right
describes an accounting procedure by which the customer’s overall indebted-
ness to the bank is established.
For example, in Halesowen, above, Buckley LJ in the Court of Appeal appears
to have conceived of the banker’s right as involving (at least in part) neither lien
nor set-off but ‘an accounting situation, in which the existence and amount of
one party’s liability to the other can only be ascertained by discovering the
ultimate balance of their mutual dealings’1. This analysis seems to have been
premised on a conception of the relationship between bank and customer, for
which there is support in the authorities, as involving a single legal relationship
giving rise to a single debt, regardless of whether the relationship is spread
across multiple accounts2.
On this view, the banker’s right is explained and justified on the ground that the
overall indebtedness of the customer to the bank must be ascertained by a
consideration of all accounts taken together. In Halesowen, Buckley LJ con-
trasted this situation with what he called a ‘set-off situation’, which ‘postulates
mutual but independent obligations between the two parties3.’

11
14.18 Lien and Set-Off

On the other hand, the description of the banker’s right as one of set-off has
been well established since (and in some cases before4) its description as a lien
was disapproved of in Halesowen. Further, while the characterisation of the
banker-customer relationship as involving a singular balance may be appropri-
ate in some contexts (such as where the customer has two current accounts), it
is more strained in cases where the customer’s accounts are of different types or
subject to different terms5.
It may be that the banker’s right is inherently incapable of a single characteri-
sation. Certainly in practice, depending on the types of accounts involved and
the nature of the customer’s banking arrangements, the exercise of the bank-
er’s right can involve processes sometimes resembling accounting and some-
times resembling set-off (or both). This appears to have been recognised by
Buckley LJ in Halesowen, who seemingly qualified his view that the right is a
matter of accounting by saying6 that the authorities nevertheless demonstrate
that:
‘where there is a running account between the parties which in other respects is
governed by the principle under discussion, a particular transaction or series of
transactions can by agreement be segregated from the other dealings between the
parties so as to give rise to a separate indebtedness which is not to be taken into
account in arriving at the balance on the general running account between them. If
the indebtedness on the running account is one way and that in respect of the
segregated dealings is the other way, the one indebtedness may be capable of being set
off against the other, but the latter cannot be taken into account in ascertaining the
amount of the former.’
Further, it is unclear whether this debate matters. It has been argued in the
specialist works that it does7. However, on another view, the banker’s right is a
sui generis right8 arising in favour of banks as a matter of law and subject to its
own specific set of rules. If that view is correct, then the debate over whether it
should be characterised as a matter of accounting or set-off may in truth simply
be about the label to be applied to the right.
The issue therefore awaits judicial clarification in an appropriate case. This
work will, as in previous editions, continue to use the expression ‘banker’s right
of set-off’, despite the argument that a different description may be correct.
1
[1971] 1 QB 1 at 46F.
2
See, for example, In re European Bank (1872) 8 Ch App 41, a decision cited by Buckley LJ. Per
James LJ at 44: ‘In truth, as between banker and customer, whatever number of accounts are
kept in the books, the whole really is but one account.’
3
[1971] 1 QB 1 at 45D to 46F. Aspects of Buckley LJ’s decision were approved on appeal (see
[1972] AC 785 at 802 and 810), but the Lords considered the nature of the right only insofar
as they disapproved of its description as a lien. However, Buckley LJ’s accounting analysis was
applied by Otton J in Re K (Restraint Order) [1990] 2 QB 298 at 303 and, in a somewhat
different context, by Millett J in Re Charge Card Services Ltd [1987] Ch 150 at 173–174. For
academic commentary favouring the accounting view, see McCracken, The Banker’s Remedy
of Set Off, 3rd edn, chapter 1 and Derham, Set Off, 4th edn, [15.03] to [15.40].
4
In the leading case of Garnett v McKewan (1872) LR 8 Exch 10, for example, Kelly CB (at 12)
and Piggott B (at 14) used the expression ‘set off’ in describing the right.
5
For a similar view, see the discussion in Ellinger, Lomnicka and Hare, Ellinger’s Modern
Banking Law, 5th edn, pages 249 to 253 and Beale, Bridge, Gullifer and Lomnicka, The Law
of Security and Title-based Financing, 3rd edn, 8.31. Professor Wood also characterises the
banker’s right as involving a set-off situation: Wood, English and International Set-Off, pages
91 and 92.
6
[1971] 1 QB 1 at 46G.
7
See, for example, McCracken, The Banker’s Remedy of Set Off, 3rd edn, pages 22 and 23.

12
 Banker’s Right of Set-off 14.20
8
As Otton J described it in Re K (Restraint Order) [1990] 2 QB 298 at 303.

(b) Extent of the banker’s right of set-off

(i) Indebtedness available for set-off
14.19 As discussed in para 14.9 above in connection with the banker’s lien, in
the absence of agreement to the contrary, a bank cannot combine a debt
presently due to the customer with either: (a) a debt payable by the customer to
the bank at a future date; or (b) a contingent liability of the customer. Nor may
the bank achieve the same result by retaining money presently payable to the
customer so as to combine accounts at a future date.
The law is as stated by Sir Page Wood V-C in Jeffryes v Agra and Master-
man’s Bank1, namely that ‘you cannot retain a sum of money which is actually
due against a sum of money which is only becoming due at a future time’.
1
(1866) LR 2 Eq 674 at 680. A fuller quotation from the judgment is set out in para 14.9 above.
See also Bower v Foreign and Colonial Gas Co Ltd (1874) 22 WR 740, considered in the same
paragraph.

(ii) Combination of two current accounts

14.20 A bank may combine two current accounts at any time, even if the
accounts are maintained at different branches1. Notice to the customer that the
accounts are to be combined is not required2.
Banker’s set-off is a right, not an obligation. Accordingly, a customer who
maintains two current accounts has, in the absence of agreement to the
contrary, no right to draw a cheque on one on which the balance is insufficient
to meet it and expect the cheque to be paid if the combined balance is sufficient3.
However, again in the absence of agreement to the contrary, the customer does
have a right to call on his bank to combine two accounts4. The existence of this
right is self-evident if the banker-customer relationship remains in existence,
being simply an instruction to transfer a credit balance on one account to
another account in debit. The existence of the right after the determination of
the relationship is less obvious, but the view that the right continues is
supported by Mutton v Peat5. The facts were that stockbrokers deposited with
their bankers securities which were clients’ property. The deposit was made
without authority, but the bankers did not know that the securities belonged to
third parties, and therefore they had a valid security6. The stockbrokers
maintained two accounts, a current account and a loan account. There was no
agreement at the time of deposit that the securities were placed as cover only for
one account, and therefore they stood as security for the general balance on
both accounts. It was held that in dealing with the proceeds of the securities, the
bankers were bound to combine the accounts so as to ascertain the general
balance, and were not entitled to disregard the credit balance on the current
account. Although Mutton v Peat turned on the construction of a particular
agreement, the reasoning is applicable whenever securities are held (whether by

13
14.20 Lien and Set-Off

lien or otherwise) to secure a general balance on two or more accounts.

1
Garnett v McKewan(1872) LR 8 Exch 10, approved by the Privy Council in Prince v Oriental
Bank Corpn (1878) 3 App Cas 325 at 333.
2
This was expressly held in Garnett v McKewan (1872) LR 8 Exch 10. Similarly, in the Court of
Appeal in Halesowen, above, Lord Denning MR held (at [1971] 1 QB 1 at 34-35) that a bank
may combine two current accounts ‘whenever he pleases’ and went on to disapprove a dictum
of Swift J in W P Greenhalgh and Sons v Union Bank of Manchester [1924] 2 KB 153 at 164
that a bank may not combine one account with another without the ‘assent of the customer.’ In
the House of Lords, Lord Kilbrandon agreed with Lord Denning MR’s criticism: [1972] AC
785 at 819.
3
Direct Acceptance Corpn Ltd v Bank of New South Wales (1968) 88 WNNSW 498 per
Macfarlan J.
4
Mutton v Peat [1900] 2 Ch 79, CA; Halesowen Presswork and Assemblies Ltd v Westminster
Bank Ltd [1971] 1 QB 1 at 34E, [1970] 3 All ER 473 at 477h, per Lord Denning MR; revsd on
appeal [1972] AC 785, [1972] 1 All ER 641 without affecting this point.
5
[1900] 2 Ch 79, CA.
6
This accords with the position where a lien is asserted over securities which do not belong to the
customer – see para 14.14 above.

(iii) Combination of current account and loan account

14.21 A bank will usually not be entitled to combine a current account and a
loan account. The leading authority is Bradford Old Bank Ltd v Sutcliffe1, the
effect of which was summarised by Lord Cross in Halesowen, above, as
follows2:
‘If a banker permits his customer to have two accounts, one – sometimes called a
“loan account” – which records the indebtedness of the customer to the bank in
respect of advances made to him and the other a current account which the customer
keeps in credit and uses for the purpose of his trade or business or ordinary
expenditure, then, unless the bank makes it clear to the customer that it is retaining
the right at any moment to apply the credit balance on the current account in
reduction of the debt on the loan account, it will be an implied term of the
arrangement that the bank will not, so long as it lasts, consolidate the two accounts.
As Scrutton LJ pointed out in Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833,
847, unless such a term is implied no customer could feel any security in drawing a
cheque on his current account if he had a loan account greater than the credit balance
on his current account.’
This dictum of Scrutton LJ was applied in Re E J Morel (1934) Ltd3 in which
Buckley J held that the right of set-off was applicable only where the accounts
were current accounts, and did not apply where one of the accounts was a loan
account. In this latter respect he thought that a current account which had been
frozen and was no longer capable of being operated in the ordinary way as a
current account was in the nature of a loan account.
As an implied term of the banker-customer relationship, the rule that loan
accounts cannot usually be combined with current accounts is an example of an
agreement excluding the banker’s right of set-off. Agreements of this nature,
and the circumstances in which they can be terminated, are considered further
in paras 14.26 and 14.27 below, in the context of agreements inconsistent with
the banker’s right of set-off.
1
[1918] 2 KB 833, CA.
2
[1972] AC 785 at 809.
3
[1962] 1 Ch 21.

14
 Banker’s Right of Set-off 14.24

(iv) Combination of other kinds of accounts

14.22 It is an open question as to whether the banker’s right of set-off applies

to accounts other than loan accounts or current accounts, such as accounts
maintained to record profits and losses on foreign exchange dealings or to
record cash deposits placed as cover for liabilities undertaken by the bank to
third parties. There is, in principle, no reason why it should not. The amounts
due on such accounts are part of the general balance between banker and
customer, and therefore ought to be available for combination.
It is submitted that, ultimately, the question is one of determining the intentions
of the parties and construing the terms of their relationship. As Roskill J
observed at first instance in Halesowen, above: ‘The critical question must
always be, “What was the contract?” and not whether a particular account or
accounts bear one title rather than another’1.
1
[1971] 1 QB 1 at 21.

(v) Combination on insolvency

14.23 Subject to agreement to the contrary, a bank can continue to exercise its
right of set-off even if the customer enters bankruptcy or liquidation. The
banker’s right of set-off is independent1 of statutory rights of set-off available to
all creditors of bankrupt individuals2 or companies in liquidation3.
However, the legal significance of there being independent grounds for set-off in
insolvency is much reduced by a further ruling in Halesowen, above, that the
statutory set-off provisions in insolvency are mandatory, and that parties may
not contract out of them4. It is difficult to postulate any cross-claims which
would fall outside the statutory provisions, but would come within the bank-
er’s right of set-off.
1
Halesowen Presswork and Assemblies Ltd v Westminster Bank Ltd [1972] AC 785 at 807, 811
and 820.
2
Insolvency Act 1986, section 323.
3
Insolvency Rules 2016, rule 14.25; and see para 14.39 below.
4
[1972] AC 785 at 805, 809 and 824; contrast Lord Scott, dissenting on this point, at 818.

(vi) Combination of accounts maintained in different jurisdictions

14.24 It is unclear whether the banker’s right of set-off applies to accounts
maintained in different jurisdictions.
It is first necessary to consider whether the accounts are governed by different
contracts. If there are separate contracts, the law applicable to each will need to
be determined in accordance with the usual choice of law principles1. Alterna-
tively, if there is one contract there will be a question of whether its different
aspects are governed by different laws or by a single law (and if so, which law).
Even if both the accounts are governed by English law (either as one or as
separate contracts), there are two matters which make it uncertain whether an
English court would uphold a combination of the accounts. First, this aspect of
the right of set-off has not yet been judicially recognised, and may therefore

15
14.24 Lien and Set-Off

have to be proved by evidence of usage. Second, the fact of the accounts being
in different jurisdictions would provide a ready basis for finding an implied
agreement not to combine.
The prudent course for a bank seeking an entitlement to combine accounts
maintained in different jurisdictions is to obtain the customer’s express agree-
ment at the time of opening the accounts.
1
As to which, see para 4.46.

(vii) Mode of exercise

14.25 The exercise of the banker’s right of set-off will normally be evidenced
by physical combination, ie by debiting one account and crediting another.
However, it appears that physical combination is not required and a set-off may
be effective without any such overt act.
In Halesowen, above, there was no physical combination prior to the customer
entering liquidation, and the bank sought to exercise its right of set-off simply
by proving in the liquidation for the general balance on the accounts. At first
instance, in a ruling that appears not to have been challenged on appeal, Roskill
J held that the absence of physical combination did not defeat the bank’s claim1:
‘ . . . I cannot think that the mechanics by which a bank seeks to exercise its right
of lien are relevant, unless, of course, the bank by its action precludes itself from
thereafter asserting that right. In the present case the bank acted promptly to assert its
right vis-à-vis the liquidator. If it possessed that right, that right was asserted properly
and timeously; if it did not possess that right then it had no right to assert. But the
existence or absence of the right cannot, in a case such as the present, in my judgment
turn upon the actual form in which the entries in the bank’s books were made or upon
the absence from those books of any physical consolidation or combination.’

1
[1971] 1 QB 1 at 19F.

(c) Matters inconsistent or potentially inconsistent with set-off

(i) Express or implied agreement excluding set-off
14.26 The banker’s right of set-off may be excluded by express or implied
agreement.
Examples of cases in which agreements excluding set-off were made are
Bradford Old Bank Ltd v Sutcliffe1, W P Greenhalgh & Sons v Union Bank of
Manchester2, Re E J Morel (1934) Ltd3, Re Keever4 and Halesowen, above5. As
Roskill J observed at first instance in Halesowen6 (and as noted in para 14.22
above), the question to be asked in every case is ‘what was the contract?’ A
further question is ‘what was the duration of the contract?’, which is addressed
in para 14.27 below. In both Re Keever and Halesowen, the agreement was held
not to have been operative at the date of combination.
1
[1918] 2 KB 833, CA.
2
[1924] 2 KB 153. Note the criticism of Swift J’s dictum at p 164 referred to at para 14.20 above.
3
[1962] Ch 21. Note that at first instance in Halesowen [1971] 1 QB 1 at 24, Roskill J declined
to follow Re E J Morel (1934) Ltd on the question of the effect of bankruptcy on an agreement
not to combine, preferring instead to follow the conflicting decision in Re Keever, below.

16
 Banker’s Right of Set-off 14.27
4
[1967] Ch 182.
5
[1972] AC 785, HL.
6
[1971] 1 QB 1 at 21B.

14.27 An express or implied agreement excluding the right of set-off may be

terminated or otherwise cease to operate. This happened in Halesowen1, above.
The facts were that in February 1968 the respondent company’s loan account
(no 1 account) with the appellant bank was overdrawn by £11,339. On 4 April,
it was orally agreed between the company and the bank that the bank should
freeze that account and that the company should open a trading account (no 2
account) to be maintained strictly in credit. The bank agreed that the arrange-
ment should last for a period of four months ‘in the absence of materially
changed circumstances’. On 20 May 1968 the company gave notice to the bank
of a meeting of creditors on 12 June to consider a winding-up resolution. The
bank, however, did not terminate the agreement, and dealings on the no 2
account continued. On the morning of 12 June a cheque for £8,611 drawn in
favour of the company was paid into the no 2 account. That afternoon it was
resolved at the creditors’ meeting that the company be voluntarily wound up.
The company’s liquidator then claimed the credit balance on the no 2 account.
The bank contended that it was entitled to set off the balance on the no 2
account against the company’s indebtedness on the no 1 account.
The liquidator’s case was that he was entitled to the balance of the no 2 account
on the grounds that: (a) the proceeds of the cheque had been collected after the
commencement of winding-up; and (b) the parties had agreed that the bank
would not consolidate the two accounts.
Roskill J dismissed the claim at first instance. He held that, while the agreement
regarding the two accounts was effective to suspend the bank’s right of set-off
for so long as the agreement remained in force, the company’s entry into
liquidation terminated the relationship between the bank and the company. At
that point the bank’s right of set-off became enforceable again2.
The Court of Appeal reversed Roskill J’s decision by a majority. On the point
determined by Roskill J, Lord Denning MR and Buckley LJ held that the
agreement regarding the two accounts was unaffected by the company’s liqui-
dation and was terminable only by notice served by the bank, which had not
been given3. However, the chief point in the Court of Appeal appears to have
been whether the statutory insolvency set-off provision then contained in
section 31 of the Bankruptcy Act 19144 applied, which Roskill J had not
addressed. Only Buckley LJ held that the section applied, and therefore the
appeal was allowed5.
The House of Lords unanimously reversed the Court of Appeal’s decision,
holding: (a) in common with Roskill J and Winn LJ, that the agreement
regarding the accounts was terminated by the company’s liquidation6; and (b) in
common with Buckley LJ, that the statutory insolvency set-off regime applied7.
On the first point, Lord Kilbrandon was clear in stating that the result depended
on the true construction of the agreement8.
Accordingly, the principles governing the termination of agreements excluding
the banker’s right of set-off can perhaps be summarised as follows:

17
14.27 Lien and Set-Off

(1) An agreement to keep two accounts separate will normally operate only
for so long as the accounts are ‘alive’9, that is, while the relation of
banker and customer continues in existence, but not once the relation-
ship has been terminated by death, insanity, liquidation, bankruptcy or
for any other reason10. Whether this is the case is a question of the true
construction of the agreement in question.
(2) It is a question of intention whether an agreement to keep accounts
separate is determinable by notice, and if so whether notice may be given
with immediate effect.
(3) Where notice is required, the bank is prima facie subject to a liability to
honour any cheques drawn up to the limit of the credit balance before
the customer receives notification, and during any period of notice.
1
[1972] AC 785.
2
[1971] 1 QB 1 at 25.
3
[1971] 1 QB 1 at 35-36 (Lord Denning MR) and 47 (Buckley LJ). Contrast Winn LJ at 42-43,
who held that the agreement was terminated by the liquidation but that the bank nevertheless
had no entitlement to combine the account. His judgment in this respect is unclear, as Lord
Cross observed in the House of Lords: [1972] AC 785 at 811.
4
Now contained rule 14.25 of the Insolvency Rules 2016: see para 14.39 below.
5
[1971] 1 QB 1 at 49; contrast Lord Denning MR at 36 and Winn LJ at 44.
6
[1972] AC 785 at 807 (Viscount Dilhorne), 811 (Lord Cross) and 820 (Lord Kilbrandon).
7
[1972] AC 785 at 807 (Viscount Dilhorne), 808 (Lord Simon), 812 (Lord Cross) and 821 (Lord
Kilbrandon).
8
[1972] AC 785 at 820.
9
The term used in British Guiana Bank Ltd v Official Receiver (1911) 27 TLR 454, PC, cited in
Halesowen by Viscount Dilhorne, Lord Cross and Lord Kilbrandon, [1972] AC 785 at 807D,
811B and 820E, [1972] 1 All ER 641 at 651a, 654c and 662f.
10
See also Halesowen at first instance, [1971] 1 QB 1 at 24G, where Roskill J followed Re Keever
[1967] Ch 1 [1967] Ch 182 and declined to follow Re E J Morel (1934) Ltd [1962] Ch 21. In
the House of Lords, Viscount Dilhorne approved the reasoning of Roskill J at [1971] 1 QB 1 at
23–25: see [1972] AC 785 at 807E.

(ii) Joint accounts

14.28 It is unclear whether the banker’s right of set-off applies to joint
accounts. In Re Willis, Percival & Co, ex p Morier, the bankers’ liquidators
sought to set off a debit balance in a customer’s account against a credit balance
in an account that the customer held jointly with his sister. The Court of Appeal
refused the set-off, with Brett LJ holding that set-off would only be available if
‘the brother was so much the person solely beneficially interested that a Court
of Equity, without any terms or any further inquiry, would have obliged the
sister to transfer the account into her brother’s name alone.’1. It has been
suggested that a set-off is permissible in respect of a holder of a joint account in
credit who has the right to withdraw from that account without the signature of
the other holder2.
1
(1879) 12 Ch D 491, 502, CA. Emphasis added by Dillon LJ in Bhogal v Punjab National Bank
[1988] 2 All ER 296, 301.
2
See the discussion in Ellinger, Lomnincka and Hare, Ellinger’s Modern Banking Law, 5th edn,
pages 260 to 261.

18
 Banker’s Right of Set-off 14.30

(iii) Accounts held in different capacities

14.29 The banker’s right of set-off does not exist where, to the bank’s know-
ledge, the accounts are not held in the same capacity, as where one is a trust
account1.
Knowledge of the fiduciary nature of an account, however acquired, will
preclude the banker from utilising the account for his own benefit, whether by
combining it with the customer’s overdrawn private account or asserting a lien
over any securities in the account for the customer’s personal liabilities. Where,
however, the customer has two accounts in his own name, one a purely private
one, the other suggesting that someone else may have a proprietary interest in
it, eg ‘AB account CD’ or ‘AB re CD’, it would seem that a balance on the purely
private account might be utilised to cover a debt on the other2.
The above principle precludes set-off of monies that to the knowledge of the
bank are impressed with a trust by reason of having been paid for a specific
purpose3.
Similarly there is no right of set-off in respect of monies that are recoverable by
a third party as monies paid to the bank’s customer under a mistake of fact, and
to which a claim is made before the set-off4.
1
Re Gross, ex p Kingston (1871) 6 Ch App 632; see also Union Bank of Australia Ltd v
Murray-Aynsley [1898] AC 693, PC; Bank of New South Wales v Goulburn Valley Butter Co
Pty Ltd [1902] AC 543, PC; and The Royal Bank of Scotland Plc v Wallace International Ltd
[2000] All ER (D) 78 (CA). As to the circumstances in which a banker will be held to have had
notice of the fiduciary nature of an account, see Chapter 6.
2
See, by parity of reasoning, Coutts & Co v Irish Exhibition in London (1891) 7 TLR 313.
3
For an example of a set-off which was disallowed on this ground, see Barclays Bank Ltd v
Quistclose Investments Ltd [1970] AC 567.
4
See Admiralty Comrs v National Provincial and Union Bank of England Ltd (1922) 127 LT
452, where Sargant J rejected the defendant bank’s contention that it had incurred an obligation
to its customer to honour cheques to the amount of the mistaken payment in, which obligation
absolved it from any liability to repay the mistaken payment. In modern analysis, the mere
assumption of an obligation to repay does not make the bank a bona fide purchaser for value:
see Quistclose above.

(iv) Accounts maintained in different currencies

14.30 It has not yet been judicially determined whether the banker’s right of
set-off entitles a bank to set off accounts maintained (within the jurisdiction) in
different currencies. This is therefore an aspect of the right which, if disputed,
would require to be proved by evidence of usage. Such a usage may be difficult
to prove because banks that foresee a requirement to combine accounts in
different currencies usually take the obvious precaution of requiring the cus-
tomer to agree expressly to the bank’s right to combine the accounts. In
principle, however, it would seem that the computation of the general balance
owed by a customer should include the balances on accounts maintained in all
currencies1.
Assuming a right to combine accounts in different currencies exists, no doubt
the existence of accounts maintained in foreign currencies may be evidence of
an implied agreement not to combine. But, as explained above, this is not the
end of the matter; it leads to the further issue of the length of time for which
such an agreement is intended to operate. It is submitted that the fact that an

19
14.30 Lien and Set-Off

account is maintained in a foreign currency is not of itself a convincing ground

for holding that the account cannot be combined with another account
(whether maintained in sterling, or in the same or a different foreign currency)
on the termination of the banker-customer relationship or the prior termination
of any implied agreement not to combine.
1
For academic support for the right to combine accounts in different currencies, see Gullifer,
Goode and Gullifer on Legal Problems of Credit and Security, 6th edn, 7-33.

(d) Regulatory aspects

14.31 The manner and circumstances in which the banker’s right of set-off may
be exercised is affected in a number of respects by the rules of the Finan-
cial Conduct Authority Handbook1.
For example, in relation to accounts held by consumers2, FCA guidance
provides that (in summary):
(1) Banks should explain the right of set-off in ‘good time before the
consumer is bound by the contract for the retail banking service’ (such as
in terms and conditions) and, before exercising the right, provide at least
14 days’ notice of their intention to do so: BCOBS 4.1.4A.
(2) Banks should not set off or combine any credit balance which represents
funds needed by the consumer to meet essential living expenses or
priority debts (known as a ‘subsistence balance’) or which the bank
knows or ought to know is beneficially owned by a third party: BCOBS
5.1.3A3.
The Glossary to the FCA Handbooks defines ‘right of set-off’ for these purposes
to include any right of set-off or combination, ‘whether under a contract for a
retail banking service or the general law.’
Separately, banks accepting deposits of client monies from FCA regulated firms
must agree in writing not to exercise any right of set-off, combination or
counterclaim against the deposited funds in relation to any sum owed by the
firm. Absent such an agreement the firm must withdraw the client monies4.
1
See generally Chapter 1.
2
As defined in the Glossary to the Rules.
3
The restriction on setting off credit balances known to be beneficially owned by a third party
reflects the general law: see para 14.29 above.
4
CASS 7.18.2 and Annex 2.

3 RIGHTS OF SET-OFF UNDER THE GENERAL LAW

14.32 This section considers certain aspects of the general law of set-off which
have particular relevance in the context of banking1.
There is an important distinction under English law between:
(1) rights of set-off before insolvency; and
(2) rights of set-off after insolvency.

20
 Rights of Set-off under the General Law 14.33

The distinction arises because the onset of insolvency triggers statutory set-off
provisions which are both mandatory and materially different from pre-
insolvency rights of set-off. In the context of insolvency, rights of set-off confer
valuable protection on lenders. But pre-insolvency rights are also important.
Those rights continue to apply in three situations bordering on insolvency,
namely receivership, administration (before notice of a distribution) and com-
pany voluntary arrangements. Furthermore, pre-insolvency rights of set-off
provide important protection in cases of third-party interference such as
assignment, attachment and freezing injunctions, which are considered at the
end of this section.
1
For an exhaustive treatment of the law of set-off, see Derham, The Law of Set-off (4th edn,
2010).

(a) Rights of set-off before insolvency

(i) Legal set-off
14.33 Legal set-off is the set-off of mutual debts which are due and payable in
the same right. The description ‘legal set-off’ derives from the statutory origin
of this form of set-off in the Statutes of Set-Off 1729 and 17351. Legal set-off is,
of course, available to banks, but this form of set-off has no special application
in the law of banking.
In Stein v Blake2, Lord Hoffmann made the following points about legal set-off
in comparison with insolvency set-off:
(1) Legal set-off does not affect the substantive rights of the parties against
each other, at any rate until both causes of action have been merged in a
judgment of the court. It addresses questions of procedure and cash-
flow. As a matter of procedure, it enables a defendant to require his
counterclaim (even if based on a wholly different subject matter) to be
tried together with the claimant’s claim instead of having to be the
subject of a separate action. In this way it ensures that judgment will be
given simultaneously on the claim and counterclaim and thereby relieves
the defendant from having to find cash to satisfy a judgment in favour of
the claimant before his counterclaim has been determined3.
(2) Legal set-off is confined to debts which at the time when the defence is
filed are due and payable and either liquidated or capable of ascertain-
ment without valuation or estimation4.
(3) Legal set-off is not self-executing. It can be invoked only by the filing of
a defence in an action5.
An unusual example of legal set-off in a banking context is Hong Kong and
Shanghai Banking Corpn v Kloeckner & Co AG6, where the court allowed a
bank to set off its liability under a stand-by letter of credit against the amounts
due from the beneficiary to the bank under the same series of transactions as
had given rise to the credit. Conversely, the court held that the beneficiary had
no right of set-off because it had contracted out of that right7.
1
The Statutes were repealed as part of the reforms surrounding the Judicature Acts, but the
rules they created survived and are recognised in CPR 16.6.
2
[1996] AC 243.
3
[1996] AC 243 at 251C.

21
14.33 Lien and Set-Off
4
[1996] AC 243 at 251F. It has been argued that the relevant time is in fact the time of judgment.
See Derham 2.09-2.12.
5
[1996] AC 243 at 253F.
6
[1990] 2 QB 514, [1989] 3 All ER 513.
7
See para 14.54 below for contracting out of set-off.

(ii) Equitable set-off

14.34 Equitable set-off refers to any form of set-off which before 1873 (the
date of fusion of the systems of law and equity) was available in a court of
equity but not in a court of law. Equity created rights of set-off in two principal
respects:
(1) Equity came to permit a set-off of any cross-claim that impeaches the
legal demand1, including cross-claims for unliquidated damages. Re-
stated in modern terms, equity will permit set-off of mutual cross-claims
that arise out of the same contract or out of closely connected contracts2.
(2) Equity developed rules of set-off to govern tri-partite relationships such
as exist between (a) trustee, beneficiary and third party, and (b) assignor,
assignee and debtor.
Unlike legal set-off, equitable set-off is a substantive defence: it can operate
outside (as well as inside) legal proceedings to prevent a party exercising rights
that would otherwise arise from its claim (except, of course, to the extent that
the claim exceeds the amount sought to be set off). It does not, however,
extinguish or reduce those rights before judgment3.
1
See Rawson v Samuel (1841) Cr & Ph 161, 41 ER 451.
2
See Hanak v Green [1958] 2 QB 9, [1958] 2 All ER 141, CA; Federal Commerce &
Navigation Co Ltd v Molena Alpha Inc [1978] QB 927 at 974–975, [1978] 3 All ER 1066 at
1078, per Lord Denning MR; affd on appeal on different grounds [1979] AC 757, [1978]
1 All ER 307, HL; BICC plc v Burndy Corpn [1985] Ch 232, [1985] 1 All ER 417, CA; Geldof
Metaalconstructie NV v Simon Carves Ltd [2010] EWCA Civ 667, [2010] 4 All ER 847
approving Lord Denning MR’s formulation at [43(vi)].
3
See the authorities cited in Fearns v Anglo-Dutch Paint & Chemical Co Ltd [2010] EWHC
2366 (Ch), [2011] 1 WLR 366 at [21]–[39] and the summary at [50].

14.35 The Court of Appeal considered the application of equitable set-off in

the context of bank accounts in Bhogal v Punjab National Bank1 and Uttam-
chandani v Central Bank of India2. Bhogal comprised appeals in two actions
where the defendant bank claimed to set off in equity a credit balance on one
customer’s account with a debit balance on another customer’s account. The
bank alleged that both customers were nominees of a third party, and in one
action (the Basna action) this allegation was held to raise an arguable issue of
fact, whilst in the other (the Bhogal action) the two-judge Court of Appeal was
divided on whether the evidence disclosed an arguable issue of fact. However, in
both actions the bank’s appeal against summary judgment was dismissed on the
ground that equitable set-off was not available. The reason, as stated by
Lloyd LJ in Uttamchandani, is that a bank is not entitled to refuse payment of
money deposited with it on the basis merely of an arguable case that some other
debtor of the bank has an equitable interest in the money. In Bhogal, both
judges quoted the similar reasoning of Scott J at first instance in one of the
actions (Basna), rejecting the set-off essentially on policy grounds3:

22
 Rights of Set-off under the General Law 14.36

‘The commercial banking commitment that a bank enters with a person who deposits
money with it is just as needful of immediate performance as are a bank’s obligations
under a letter of credit or bank guarantee. I think it would be lamentable if a bank
were able to defeat a claim by a person who had deposited money on such grounds as
the bank is asserting in the present case. It is possible that this action will come to trial
in some two to three years’ time and that the bank will fail to make good the arguable
case that it has set out before me. It would have succeeded in postponing for that
considerable period its obligation to repay a customer who had made a simple deposit
of money with it. That seems to me to be totally contrary to the basis on which banks
invite and get money deposited with them. I hold that a bank is not entitled to refuse
repayment of money deposited with it on the basis merely of an arguable case that
some other debtor of the bank has an equitable interest in the money.’
In both Bhogal and Uttamchandani, however, the Court of Appeal recognised
that equitable set-off may be available where the customer’s nomineeship or
trusteeship is clear and indisputable4.
In Saudi Arabian Monetary Agency v Dresdner Bank AG5, an attempt was
made to distinguish Bhogal on the ground that the customer accepted that he
was not the beneficial owner of the credit balance on its account. This was
rejected as a relevant ground of distinction because the question is not whether
the customer holds the account as a nominee or trustee for another; the question
is whether he holds the account as nominee or trustee for the bank’s debtor6.
Clarke LJ did, however, see force in the criticism that, in general, the existence
or non-existence of a right of set-off in equity should not depend on whether the
necessary mutuality is obvious without investigation. He regarded the critical
feature of a claim to set-off in the Bhogal context as being that the relationship
between the parties is governed by the underlying banking contract to which
they (and they alone) are parties. He explained that the contract could oust the
rule stated by Scott J7:
‘The question whether the banker, say A, is entitled to set-off a debit balance owed by
B against the credit balance on an account in the name of C—on the grounds that C
holds that account as nominee or trustee for B—turns on the contract between A and
C. It is, I think, plain that that contract could provide that there were no circum-
stances in which A could set-off B’s debt against the balance on C’s account. Con-
versely, the contract could provide that A could set-off B’s debt against the balance on
C’s account whenever A had reasonable grounds for a belief that B was beneficially
interested in the monies in that account. But, if the contract is silent on that question,
then—in the light of the decisions of this Court in Bhogal and Uttamchandani—the
rule is that stated by Mr. Justice Scott in the Basna case: a bank is not entitled to refuse
payment of money deposited with it on the basis merely of an arguable case that some
other debtor of the bank has an equitable interest in the money.’

1
[1988] 2 All ER 296, CA.
2
(1989) 133 Sol Jo 262, CA.
3
[1988] 2 All ER 296 at 299 and 306.
4
The court in Bhogal cited Re Willis, Percival & Co, ex p Morier (1879) 12 Ch D 491, CA in
support of that proposition.
5
[2004] EWCA Civ 1074, [2005] 1 Lloyd’s Rep 12, CA.
6
[2005] 1 Lloyd’s Rep 12, CA at [24].
7
[2005] 1 Lloyd’s Rep 12, CA at [23].

14.36 Where the banker and its customer agree that an account is to be treated
as a nominee account, their respective rights of set-off will be determined on the

23
14.36 Lien and Set-Off

basis that the account was in the name of the beneficial owner. This is illustrated
by Re Hett, Maylor & Co Ltd1, where a company which contracted to
construct a railway in one of the Philippine Islands maintained its account with
the Manila Branch of the Chartered Bank of India, Australia and China in the
name of its manager. This was done because by the laws of the Philippine
Islands a public company was not recognisable. The bank agreed to give credit
to the company by crediting the proceeds of certain drafts to the nominee
account. On the company’s winding up, it was held that the credit balance on
the account had to be brought into the statutory insolvency set-off of sums due
in respect of mutual dealings between the bank and the company2. Equally if the
manager had become bankrupt, the bank could not have taken the credit
balance on the nominee account in his name to discharge any debit balance on
his private account.
1
(1894) 10 TLR 412.
2
Then s 38 of the Bankruptcy Act 1883, which applied to company liquidations by virtue of s 10
of the Judicature Act 1875. See now r 14.25 of the Insolvency Rules 2016, below.

14.37 Equitable set-off will not be permitted if its effect would be to give the
party claiming the set-off the very right that it could have exercised if a charge
had been registered. This was the position in Smith v Bridgend County
Borough Council1. The claimant was the administrator of Cosslett
(Contractors) Ltd. Cosslett entered into a contract with the Council on the
Institution of Civil Engineers standard form of contract. This contract con-
ferred on the Council a power to sell Cosslett’s constructional plant and apply
the proceeds in or towards satisfaction of any sums due from Cosslett under the
contract. The power of sale was held to create a floating charge which was void
for want of registration. Cosslett defaulted on its contractual obligations and
the Council, in purported exercise of its power of sale, converted Coss-
lett’s plant. The administrator claimed damages for conversion, and the Council
sought to raise an equitable set-off in respect of sums due from Cosslett to
the Council under the contract. Equitable set-off was refused. Lord Hoffmann
noted that the Council did not have a lien and it could not improve its security
in equity by wrongfully converting Cosslett’s property2. Lord Scott said that it
was no part of equity to provide, via set-off, an alternative security to the invalid
charge3. The same reasoning should apply to all registrable charges and not just
floating charges. In particular, the amended Companies Act 2006 now requires
registration of most charges, including fixed charges (see para 13.28 above).
1
[2001] UKHL 58, [2002] 1 AC 336, HL.
2
[2001] UKHL 58, [2002] 1 AC 336 at [36].
3
[2001] UKHL 58, [2002] 1 AC 336 at [78].

(b) Rights of set-off after insolvency

14.38 Insolvency triggers statutory set-off provisions that are both mandatory
and materially different from pre-insolvency rights of set-off. Set-off in insol-
vency is a matter of considerable importance in the context of banking, in
particular as it concerns the set-off of contingent liabilities. The law described is
that relating to the insolvency of companies within the meaning of the Com-
panies Act 2006.

24
 Rights of Set-off under the General Law 14.40

(i) Rule 14.25

14.39 The mandatory provisions for set-off in insolvency are contained, as

regards companies, in r 14.25 of the Insolvency Rules 20161. That rule ‘applies
in a winding up where, before the company goes into liquidation there have
been mutual2 credits, mutual debts or other mutual dealings between the
company and any creditor of the company proving or claiming to prove for a
debt in the liquidation’ (r 14.25(1)). The effect is that: ‘An account must be
taken of what is due from the company and the creditor to each other in respect
of their mutual dealings and the sums due from the one must be set off against
the sums due from the other’ (r 14.25(2)). Any balance is then provable in the
winding up or payable to the liquidator, as appropriate (r 14.25(3)–(4)).
Rule 14.25(6) provides that ‘mutual dealings’ exclude (a) debts arising out of an
obligation incurred after the creditor had notice of the decision sought from
creditors to nominate a liquidator or notice of a pending winding-up petition;
(b) debts arising out of an obligation incurred after the creditor had notice of an
administration immediately preceding the liquidation; (c) debts arising out of
an obligation incurred during such an administration; and (d) debts acquired by
the creditor under an agreement entered into after the company went into
liquidation or at one of the times referred to in categories (a), (b) and (c). An
‘obligation’ for these purposes means ‘an obligation however arising, whether
by virtue of an agreement, rule of law or otherwise.’
Rule 14.25 also contains provisions for future and contingent debts, as to which
see para 14.43 below. Rules 14.21, 14.22 and 14.23 apply to foreign-currency,
periodical and interest-bearing debts, respectively (r 14.25(8)(b)).
Rule 14.25 applies both in a creditors’ or members’ voluntary winding up and
in a winding up by the court.
Similar provisions for set-off in insolvency apply in respect of individuals (under
the Insolvency Act 1986, s 3233), companies in administration (under r 14.24,
where the administrator has given notice of a proposed distribution under
r 14.29) and banks (under the Bank Insolvency (England and Wales) Rules
2009, SI 2009/356, r 72 and the Banking Act 2009, Pt 2).
1
Previously r 4.90 of the Insolvency Rules 1986, substituted with effect from 1 April 2005 by SI
2005/527, rr 1(2), 23.
2
Mutuality requires that the debts must be between the same parties in the same right: Re BCCI
SA (No 8) [1998] AC 214, [1997] 4 All ER 568, HL. As in the case of other forms of set-off, the
requirement of mutuality is not satisfied unless a person’s beneficial interest in a bank account
can be established without further enquiry: BCCI SA (in liquidation) v Al-Saud [1997] 1 BCLC
457, CA.
3
The same was true before the Insolvency Act 1986, when the Bankruptcy Act 1914, s 31 applied
to both corporate and individual insolvency.

(ii) The date of insolvency

14.40 Rule 14.25 applies where, before the company goes into liquidation,
there have been mutual credits, etc. By the Insolvency Act 1986, s 247(2), a
company goes into liquidation if (a) it passes a resolution for voluntary winding
up, or (b) an order for its winding up is made by the court at a time when it has
not already gone into liquidation by passing such a resolution1. As already

25
14.40 Lien and Set-Off

noted, r 14.25(6) excludes mutual dealings after notice of an imminent winding

up (or of an immediately preceding administration).
There is a further important limitation on rights of set-off arising out of the
Insolvency Act 1986, s 127. This renders void any disposition of the com-
pany’s property made after the commencement of winding up, which is (a) in
the case of a voluntary winding up, the time of the passing of the resolution for
winding up (s 86), or (b) in the case of a winding up by the court, the time of
presentation of the petition for winding up or the time of the passing of any
pre-presentation resolution for winding up (s 129). The general effect of s 127
will be considered in Chapter 20. In the specific context of set-off, it should be
noted that if there is any conflict between s 127 and r 14.25, s 127 appears to
prevail2.
1
SI 2002/1240 inserted a subsection (3), which provides: ‘The reference to a resolution for
voluntary winding up in sub-s (2) includes a resolution deemed to occur by virtue of . . . (b)
an order made following conversion of a voluntary arrangement or administration into winding
up under Article 37 of the EC Regulation.’
2
See Barclays Bank Ltd v TOSG Trust Fund Ltd [1984] BCLC 1 at 25–26. The point did not
arise on appeal; [1984] 1 All ER 628, CA and [1984] AC 626, [1984] 1 All ER 1060, HL. Note
the contrary argument in Derham 6.162.

(iii) Mandatory nature of set-off in insolvency

14.41 The House of Lords held in National Westminster Bank Ltd v Haleso-
wen Presswork and Assemblies Ltd1 that the statutory provisions for set-off in
insolvency (then contained in the Bankruptcy Act 1914, s 31) are mandatory. It
is therefore impossible for parties to contract out of insolvency set-off. The
mandatory language of s 31 (‘an account shall be taken’) is reproduced in
almost identical form in r 14.25(2) (‘an account must be taken’).
In Stein v Blake2, Lord Hoffmann made the following additional points about
the nature of insolvency set-off:
(1) The set-off is self-executing. There is no need for any proof to be lodged
to activate it. It operates without any step being taken by either of the
parties3.
(2) Accordingly, a liquidator or trustee in bankruptcy is not entitled to
assign to a third party the amount owed by the creditor to the insolvent
person as if there had been no set-off of the amount of the credi-
tor’s cross-claim against the insolvent person4.
(3) The liquidator or trustee may, however, assign the net balance5.
1
[1972] AC 785, [1972] 1 All ER 641, HL.
2
[1996] AC 243, HL.
3
[1996] AC 243 at 253C–254H. The epithet ‘self-executing’ appears at 257F and 258D.
4
[1996] AC 243 at 255A–G, approving Farley v Housing and Commercial Developments Ltd
[1984] BCLC 442.
5
[1996] AC 243 at 258G.

(iv) Debts required to be set off

14.42 Rule 14.25(2) requires that sums due from one party shall be set off
against sums due from the other.

26
 Rights of Set-off under the General Law 14.43

The meaning of ‘sums due’ in relation to the liabilities of an insolvent company

depends on the definitions of ‘debt’ in r 14.1(3)–(4)1. In particular, a ‘debt’
means (a) any debt or liability to which the company is subject at the relevant
date or to which it becomes subject after the relevant date by reason of an
obligation incurred before that date; (b) interest provable under r 14.23; and (c)
any liability in tort where the cause of action has accrued at the relevant date or
where the elements of that cause of action existed at that date except for
actionable damage. Here, the ‘relevant date’ is the date on which the company
went into liquidation (or, if applicable, the date it entered an immediately
preceding administration). By r 14.1(6), ‘liability’ includes liabilities in con-
tract, tort and bailment, as well as statutory liabilities, liability for breach of
trust and liability to make restitution.
Further, by r 14.1(5), in references to a ‘debt’ or ‘liability’, ‘it is immaterial
whether the debt or liability is present or future, whether it is certain or
contingent, or whether its amount is fixed or liquidated, or is capable of being
ascertained by fixed rules or as a matter of opinion.’ Thus, the debts in respect
of which a person claiming to be a creditor must submit a proof of debt include
contingent and future liabilities (as discussed in the next paragraph below).
The ‘sums due’ from the creditor to the insolvent company are not limited to
those for which the company could prove if the creditor became insolvent2. The
converse is unclear, that is, whether the ‘sums due’ from the insolvent company
to the creditor are limited to the sums for which the creditor could otherwise
prove in the liquidation.
1
Previously r 13.12, as amended with effect from 6 April 2010 by SI 2010/686, Sch 1, para 498.
2
Re Lehman Brothers International (Europe) (In Administration) [2017] UKSC 38, [2017] 2
WLR 1497, [2018] 1 All ER 205 at [167]–[169]. This case deals with set-off relating to a
company in administration under r 2.85 of the Insolvency Rules 1986, which is similar to
r 4.90, the predecessor to r 14.25 concerning set-off in liquidation. The Supreme Court held
that calls against contributories under the Insolvency Act 1986, s 150, are neither provable by
the insolvent company nor subject to set-off against the insolvent company.

(v) Set-off of contingent and future liabilities

14.43 The availability of set-off in respect of an insolvent customer’s contin-
gent liabilities is a matter of considerable importance in modern banking. It is
an inescapable risk of granting credit facilities that in the event of the custom-
er’s insolvency there may exist an actual debt (whether or not presently payable)
owed by the bank to the customer, and a contingent liability owed by the
customer to the bank. Common transactions giving rise to contingent liabilities
on the part of the customer include the issue of letters of credit and performance
bonds.
In Stein v Blake1, Lord Hoffmann observed that the law employs two tech-
niques for dealing with the insolvent person’s contingent liabilities. The first is
to take account of everything which has actually happened between the
insolvency date and the taking of the account. The second is to make an
estimation of the value of outstanding contingencies2.
Rules 14.25(7)–(8) include within the set-off provisions of r 14.25(2) future or
contingent sums due to or from the company. In respect of sums payable in the
future, r 14.44 provides that the sum due should be discounted at a rate of 5%

27
14.43 Lien and Set-Off

per year. In respect of contingent sums, or any other sums that do not bear a
certain value, r 14.14 imposes on the liquidator a duty to estimate the value.
In any event, a contingent or prospective debt owed to the company may be set
off to the extent required to reduce or extinguish sums owed to the creditor; any
balance owed to the company need only be paid if and when it has become due
and payable (r 14.25(5)). The effect is to accelerate debts owed by the company,
but only to accelerate debts owed to the company to the extent required to
achieve the set-off3.
The position was different before amendments to the Insolvency Rules in 2005.
A long line of decisions had held that liabilities of the solvent creditor which are
future or contingent at the relevant date were only available for set-off if they
had matured into presently due debts by the date of set-off4. In Stein v Blake,
Lord Hoffmann pointed out that it would be unfair on the creditor to have his
liability to pay advanced merely because the liquidator or trustee wants to wind
up the insolvent person’s estate5. Conversely, it might have been thought unfair
to the general body of creditors that the liquidator should pay a dividend that
the recipient creditor would later have to repay; the law now strikes a balance
between these competing interests in r 14.25(5).
1
[1996] AC 243 at 252E–H.
2
See r 14.14, formerly r 4.86 of the Insolvency Rules 1986.
3
See the explanation under the former set-off provisions in respect of administrations (rr 2.85
and 2.105 of the Insolvency Rules 1986) in Re Kaupthing Singer & Friedlander Ltd [2010]
EWCA Civ 518, [2010] Bus LR 1500.
4
See Ex p Prescot (1753) 1 Atk 230, 26 ER 147 (future debt); French v Fenn (1783) 3 Doug KB
257, 99 ER 642 (liability to account for the future sale of pearls); Smith v Hodson (1791) 4 Term
Rep 211, 100 ER 979 (liability as the acceptor of bills payable after date of bankruptcy); Booth
v Hutchinson (1872) LR 15 Eq 30 (liability for rent in respect of post-bankruptcy occupation
of demised premises); Sovereign Life Assurance v Dodd [1892] 1 QB 405 (liability for a future
debt); Palmer v Day & Sons [1895] 2 QB 618 (liability to account for the future sale of
pictures); Re Daintrey, ex p Mant [1900] 1 QB 546 (liability to pay a portion of the future
profits of a business).
5
[1996] AC 243 at 253A. In MS Fashions Ltd v BCCI, Hoffmann LJ (sitting at first instance)
suggested that, where the creditor’s liability is contingent, and the contingency occurs long after
the winding up has been completed, the company could be restored to the register and bring an
action: [1993] Ch 425 at 435G.

(vi) Third-party deposits and guarantees

14.44 Loans are often secured by a third-party deposit placed with and charged
in favour of the lender. Typically, the depositor will be the beneficial owner of
the borrower. In addition to placing the deposit, the depositor may be required
to guarantee the liabilities of the borrower and/or to assume the liabilities of a
principal debtor.
Where the borrower becomes insolvent, the lender will usually have recourse to
the deposit. It makes no difference whether the depositor has assumed a
personal obligation, because the charged deposit can be applied to discharge the
borrower’s liabilities (see Chapter 15).
Alternatively, the lender may be the insolvent party. If the borrower and the
depositor are both solvent, their interests will not coincide with those of the
lender’s liquidator. They will want the amount of the deposit to be set off
against the liability of the depositor under his guarantee or primary debtor

28
 Rights of Set-off under the General Law 14.44

obligation. Conversely, the liquidator will want to recover the loan from the
borrower and leave the depositor to lodge a proof. These two approaches can
produce significantly different results. Assume that the loan and the deposit are
both for £1m and that the dividend in the winding up is likely to be 10p in the
pound. If the liquidator’s approach prevails, he recovers £1m from the bor-
rower, and the depositor recovers only £100,000 on his proof of debt. The
aggregate cost to the borrower and the depositor is £0.9m. But if the deposi-
tor’s approach prevails, he recovers nothing on his deposit (which is set off
against his liability), but the borrower is discharged from liability. The aggre-
gate cost to the borrower and the depositor is nil.
The depositor’s approach prevailed in MS Fashions v BCCI1, where the Court
of Appeal heard two appeals on almost identical facts. In each appeal, the
depositor had by the terms of the security documentation agreed that his
liability should be that of a principal debtor. The Court of Appeal held
that BCCI’s liability to each depositor had to be set off against the deposi-
tor’s liability as principal debtor to BCCI. It made no difference that BCCI had
not made demand on the depositors, because the liabilities of the principal
debtors were enforceable without any need for a demand2.
In BCCI (No 8) the Court of Appeal considered it paradoxical that the insolvent
lender should be better off if it has taken a guarantee without a principal debtor
clause (in which case there can be no set-off unless the liquidator makes demand
under the guarantee) than a guarantee containing such a clause. In the House of
Lords, Lord Hoffmann (who had decided the MS Fashions case in favour of the
depositor at first instance) accepted that the result was rather anomalous, but
noted that it is difficult to find a way of coming to a different answer which
recognises the automatic and self-executing nature of insolvency set-off. One
possibility, which was rejected in MS Fashions, is that the existence of the
charge destroys mutuality because the bank’s claim against the depositor is in its
own right but the depositor’s claim is subject to the equitable interest of the
bank. Another possibility, suggested by the Court of Appeal in BCCI (No 8), is
that the recovery of the debt from the principal debtor could be deemed to take
place immediately before the operation of Rule 14.25 and, by discharging the
debt, prevent set-off from taking place3. MS Fashions has, however, been
followed subsequently4.
BCCI (No 8) also illustrates the requirement for a debt owed by the solvent to
the insolvent person. Unlike the third-party charge document in MS Fashions,
the documentation in BCCI (No 8) did not contain a principal debtor clause or
any other promise by the depositor to pay what might be due from the
borrower. In an attempt to overcome this, the depositor submitted that, to give
the transaction meaning, the document had to be construed as creating a
personal liability on the part of the depositor to pay the borrower’s indebted-
ness. The House of Lords rejected this submission5.
1
[1993] Ch 425.
2
[1993] Ch 425 at 447B.
3
[1998] AC 214, at 224F–225E.
4
Lehman Brothers Commodity Services Inc v Credit Agricole Corporate and Investment Bank
[2011] EWHC 1390 (Comm); [2012] 1 All ER (Comm) 254.
5
[1998] AC 214 at 223H–224E, following Tam Wing Chuen Bank v BCCI [1996] 2 BCLC 69,
PC.

29
14.45 Lien and Set-Off

(vii) Multi-party set-off (‘netting’) in insolvency

14.45 There are many commercial contexts in which the settlement of liabili-
ties between more than two persons is most conveniently achieved by netting off
their respective claims and liabilities pursuant to an agreement made between
all the relevant parties, or between each of them and a clearing house.
The leading authority on the validity of netting agreements in an insolvency is
British Eagle International Airlines Ltd v Cie Nationale Air France1, a decision
of the House of Lords. British Eagle was a member of the IATA clearing house,
which provided a facility to its members by which liabilities arising out of
individual transactions were settled not directly between the members con-
cerned but through a clearing house which effected a clearance every month.
British Eagle went into creditors’ voluntary winding up in circumstances where
(a) airlines had claims against British Eagle, (b) British Eagle had claims against
airlines, including Air France, and (c) British Eagle was on the balance of the
above claims in debit to the clearing house. The liquidator of British Eagle
brought a test action against Air France claiming repayment of the net amount
due from Air France as a result of mutual dealings between the two airlines. By
a majority of 3:2 the House of Lords held that the liquidator was not bound by
the clearing house arrangements and was therefore entitled to recover debts
owed by debtor airlines, leaving creditor airlines to prove in the winding up.
The reasoning of the majority speech delivered by Lord Cross was as follows:
(1) The power of the court to go behind agreements the results of which are
repugnant to insolvency legislation is not confined to cases in which the
parties’ dominant purpose is to evade its operation2.
(2) A contracting out of the Companies Act 1948, s 302 (now the Insolvency
Act 1986, s 107), which provides that the property of a company shall,
on its winding up, be applied in satisfaction of its liabilities pari passu, is
contrary to public policy3.
(3) It was irrelevant that the parties to the clearing house arrangements had
good business reasons for entering into them and did not direct their
minds to the question how the arrangements might be affected by the
insolvency of one or more of the parties4.
(4) It was immaterial whether the obligations of the debtor airlines to British
Eagle were debts in the strict sense5.
(5) The creditor airlines were in substance claiming that they ought not to be
treated in the liquidation as ordinary unsecured creditors but that they
had achieved by the medium of the clearing house agreement a position
analogous to that of secured creditors without the need for the creation
and registration of charges on the book debts in question6.
Note that British Eagle was not decided on the short ground that the ‘mini-
liquidation’, involving as it did a multiple set-off of debts between member
airlines and British Eagle, contravened s 317 of the Companies Act 1948, the
provision for statutory insolvency set-off. The provision on which the rule of
public policy was based was identified instead as s 302 (pari passu distribution
of assets). This was no oversight. The relevance of s 317 was expressly
considered, and rejected, in the majority speech of Lord Cross7:
‘Some reference was made in argument to s 31 of the Bankruptcy Act 1914 – the
mutual credits section – which is made applicable to the liquidation of companies by

30
 Rights of Set-off under the General Law 14.46

s 317 of the Companies Act 1948. The liquidator rightly applied that section in
framing his claim against Air France which he limited to the excess in the value of the
services rendered by British Eagle to Air France over the value of the services rendered
by Air France to British Eagle during the periods in question. But so far as I can see the
section has no bearing on anything that we have to decide in this appeal.’
British Eagle still presents formidable difficulties in structuring clearing houses
for electronic payments made by or to member financial institutions8. The
method commonly used to meet these difficulties is to discard netting and to opt
instead for some form of accounting arrangement under which there is only ever
one amount (‘the single amount’) owed by or to any given member of the
clearing system. For example, instead of having a debt owed by one airline to
another, there could be a debt owed by one airline to the clearing house and a
corresponding debt owed by the clearing house to the other airline. All such
debts could then be aggregated periodically to produce a balance owed by or to
the clearing house in respect of each airline. It is submitted that such arrange-
ments are in principle fundamentally different from the IATA netting arrange-
ments considered in British Eagle. They are founded on the distinction between
set-off and accounting which was recognised and applied by Millett J in Re
Charge Card Services Ltd (see below para 14.50). Furthermore, the High Court
of Australia has held (by a majority) that such arrangements in the revised IATA
rules do comply with insolvency laws9.
1
[1975] 2 All ER 390, [1975] 1 WLR 758.
2
[1975] 2 All ER 390 at 410-411, [1975] 1 WLR 758 at 780F.
3
[1975] 2 All ER 390 at 411c, [1975] 1 WLR 758 at 780H.
4
[1975] 2 All ER 390 at 411b, [1975] 1 WLR 758 at 780B.
5
[1975] 2 All ER 390 at 409d, [1975] 1 WLR 758 at 778H.
6
[1975] 2 All ER 390 at 410h, [1975] 1 WLR 758 at 780E.
7
[1975] 2 All ER 390 at 411, [1975] 1 WLR 758 at 781.
8
The Supreme Court has declined to reconsider British Eagle despite a submission that it should
be overruled or declared inapplicable since the coming into force of the Insolvency Act 1986:
Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] UKSC 38,
[2012] 1 AC 383, [2012] 1 All ER 505.
9
International Air Transport Association v Ansett International Holdings Ltd (2008) 234 CLR
151.

(c) Third party interference with general rights of set-off

(i) Assignment
14.46 The authorities on the debtor’s rights of set-off against an assignee were
exhaustively reviewed by Templeman J in Business Computers Ltd v Anglo-
African Leasing Ltd, who summarised the position as follows1:
‘The result of the relevant authorities is that a debt which accrues due before notice
of an assignment is received, whether or not it is payable before that date, or a debt
which arises out of the same contract as that which gives rise to the assigned debt, or
is closely connected with that contract, may be set off against the assignee. But a debt
which is neither accrued nor connected may not be set off even though it arises from
a contract made before the assignment.’
The meaning of the expression ‘accrues due’ in this citation is clear from the
words ‘whether or not it is payable before that date’. It includes debts that are
presently payable and debts that are payable in the future, but not merely
contingent liabilities2.

31
14.46 Lien and Set-Off

The exclusion of contingent liabilities is important to banks. Consider, for

example, a cash deposit placed as cover for the issue of a letter of credit. Until
the credit is drawn on, the customer’s reimbursement obligation to the issuing
bank is a mere contingent liability. If the customer assigns the benefit of the
deposit and the bank receives notice of assignment before any drawing, then
even if the bank subsequently pays under the credit, it has no right of set-off
against the assignee.
Some idea of the requisite degree of connection can be gleaned from Busi-
ness Computers itself, where the court refused a set-off between: (a) two debts
totalling £6,587 due from the defendant to the assignor in respect of the
defendant’s purchase of two computers; and (b) a debt of £30,000 due from the
assignor to the defendant pursuant to the sale and lease-back of a third
computer.
1
[1977] 2 All ER 741 at 748b, [1977] 1 WLR 578 at 585.
2
See further Watson v Mid Wales Railway Co (1867) LR 2 CP 593; Re Pinto Leite & Nephews
[1929] 1 Ch 221.

(ii) Third-Party debt orders

14.47 The subject of attachment by third-party debt order will be considered in
chapter 31. The principles that apply when a third-party debtor opposes the
making final of an interim third-party debt order on the ground of a right of
set-off against the judgment debtor are fully considered in para 31.19. The
position in summary is that if no debt is due or accruing due from the judgment
debtor to the third party, the order will be made final1; but if there exists a
presently payable debt from the judgment debtor to the third party, or a debt
payable in the future but before the debt attached becomes payable, the
order will not be made final2.
1
Tapp v Jones (1875) LR 10 QB 591.
2
Hale v Victoria Plumbing Co Ltd [1966] 2 QB 746, [1966] 2 All ER 672, CA.

(iii) Freezing injunctions

14.48 The effect of a freezing injunction on rights of set-off will be considered
in para 32.25 below . In summary, the court will not permit a bank’s rights of
set-off to be prejudiced by the grant or continuance of a freezing injunction,
save in most exceptional circumstances.

4 CONTRACTUAL SET-OFF PROVISIONS

14.49 Agreements in modern banking transactions commonly contain provi-
sions which are either contractual rights of set-off or provisions intended to
reinforce rights of set-off under the general law. It is appropriate to consider
here some of the more common provisions, again distinguishing between pre-
and post-insolvency set-off.
Contractual set-off provisions are construed in accordance with the usual
principles of contractual construction1.

32
 Contractual Set-Off Provisions 14.50

It is important to distinguish between contractual rights of set-off and other

forms of consensual security commonly encountered in the banking context,
including in particular charges. Given that a right of set-off is not a proprietary
security per se, the creation by a company of a contractual right of set-off
appears unlikely to give rise to a registrable charge or to infringe typical
negative pledge obligations. But it must always be remembered that a right of
set-off may evidence a charge, being arguably one method by which a charge
over a debt may be realised. Therefore care should always be taken to analyse
the true nature of an arrangement incorporating a contractual right of set-off.
The essential difference is that a charge includes a right for the creditor to realise
the charged asset, in this case the debt against which set-off is available (see para
15.2 below).
1
See, for example, Sinochem v Mobil Sales & Supply Corpn [2000] 1 All ER (Comm) 474, CA.

(a) Pre-insolvency provisions

(i) Provisions that create an accounting situation
14.50 The distinction between contractual set-off provisions and provisions
creating an accounting situation under which a single amount is owed by one
party to the other has been mentioned above (see para 14.45). Within reason-
able limits, the parties to a contract may be able to characterise their situation
as involving accounting rather than set-off, and thereby create what in some
contexts (usually when one party enters insolvency) may be a stronger right
than set-off.
A common type of transaction where there is scope for such characterisation is
the deposit of cash as security (commonly known as ‘cash cover’ or ‘cash
margin’). An early example is the Court of Appeal’s decision in Hutt v Shaw1.
Money had been deposited with a stockbroker as cover for any loss upon
speculations in stocks and shares. A third party obtained judgment against the
depositor and sought a garnishee order (a third party debt order, in modern
terms) against the stockbroker in relation to the deposit. The order was refused
on the ground that there was no debt due from the stockbroker to the depositor;
the share transactions remained open and, accordingly, the account between the
parties had not been settled2. Note that the judgments in the case are not
reported verbatim, and in one of them (Sir James Hannen at 355) there is a
reference to the funds as having been deposited as ‘security’, which would
suggest an arrangement which today might be characterised as a charge-back
(see para 15.8 below).
A more recent example is Re Charge Card Services Ltd, which concerned a
factoring agreement between two parties, one of whom became insolvent. The
agreement contained a guarantee by the insolvent party in favour of the
factoring company that every debtor would duly and fully pay the receivables
due from him before the end of the period of 120 days beginning with the date
of issue of the relevant invoice (clause 3 (c)). The agreement also incorporated
a condition which required the factoring company to maintain a current
account to which there was to be debited, among other things, the amount of
any sum payable by the insolvent party pursuant to the guarantee (clause 3A (ii)
(D)). At the date of going into liquidation, the insolvent party was contingently

33
14.50 Lien and Set-Off

liable to the factoring company under its guarantee. The factoring company
invoked a further condition (clause 3B) which provided, so far as is material:
‘ . . . [the factoring company] shall remit . . . to . . . [the insolvent party] the
balance for the time being standing to the credit of [the insolvent party] in the current
account up to the full amount thereof less any amount which [the factoring company]
shall in its absolute discretion decide to retain as security for . . . (iii) any amount
prospectively chargeable to [the insolvent party] as a debit [under Clause 3A (ii)].’
(Emphasis added).
The insolvent party’s liquidator objected to the validity of the factoring com-
pany’s right of retention under this provision, alleging that it amounted to a
contractual right of set-off which was void as an attempt to contract out of the
statutory rules on the distribution of assets on a winding up3. This argument
was rejected by Millett J4:
‘In my judgment, . . . the short answer to these submissions is that [the factoring
company’s] right of retention under standard condition 3B (iii) in respect of any
amount prospectively chargeable to the company as a debit to the current account is
not a matter of set-off but of account.’
The efficacy of a contractual right to debit amounts prospectively due from a
customer under, for example, a letter of credit is untested, but Re Charge Card
Services suggests that such arrangements may be efficacious.
1
(1887) 3 TLR 354, CA.
2
(1887) 3 TLR 354 at 355.
3
See British Eagle Airlines Ltd v Vie Nationale Air France [1975] 1 WLR 758, discussed in para
14.45 above.
4
[1987] Ch 150 at 173G.

(ii) Provisions that enlarge set-off

14.51 A common purpose of contractual set-off provisions is to extend set-off
to situations in which it is not available under the general law. Such situations
include:
(a) a right of set-off in a tri-partite situation, as where a parent company
agrees that a deposit placed by it with a bank may be set-off against debts
due to the bank from a subsidiary company;
(b) a right to set off presently due debts against future debts or contingent
liabilities, or a right of retention pending the maturing of future debts or
contingent liabilities; and
(c) a right to set off accounts maintained in different currencies and/or
different jurisdictions.
For example, clause 6(f) of the ISDA 2002 Master Agreement allows the set-off
of any amounts ‘whether or not arising under this Agreement, matured or
contingent and irrespective of the currency, place of payment or place of
booking of the obligation’.
Such clauses are generally effective before insolvency, but they are subject to the
considerations discussed at para 14.54 below concerning unfair contract terms.

34
 Contractual Set-Off Provisions 14.52

(iii) Protection against assignees

14.52 A debtor’s right of set-off can be impaired by an assignment by the

creditor of the benefit of the right to payment. As discussed in para 14.46 above,
this is vividly illustrated by Business Computers Ltd v Anglo-African Leas-
ing Ltd1, where the appointment of a receiver by debenture holders under a
floating charge caused the incomplete assignment constituted by the debenture
to become converted into a completed equitable assignment, thereby defeating
a right of set-off.
To protect rights of set-off, a third party who places a deposit with the lender as
security for the borrower’s liabilities is often required to agree that:
(a) the deposit shall be incapable of being assigned, mortgaged, charged or
otherwise disposed of without the consent of the lender; and
(b) the depositor will not attempt to assign, mortgage, charge or otherwise
dispose of the deposit without such consent.
The efficacy of such provisions is confirmed by the decision of the House of
Lords in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd2. The
judgment of Lord Browne-Wilkinson, with whom the other Lords agreed,
contains the following propositions:
(a) Where a contract between A and B prohibits assignment of contractual
rights by A, the effect of such a prohibition is a question of the
construction of the contract3.
(b) There are at least four possible interpretations, viz (i) that the term does
not invalidate a purported assignment by A to C, but gives rise only to a
claim by B against A for damages for breach of the prohibition; (ii) that
the term precludes or invalidates any assignment by A to C but not so as
to preclude A from agreeing, as between himself and C, that he will
account to C for what he receives from B; (iii) that A is precluded not
only from assigning the contractual rights to C, but also from agreeing to
account to C for the fruits of the contract when received by A from B;
and (iv) that a purported assignment from A to C constitutes a repudia-
tory breach of condition entitling B not merely to refuse to pay C but also
to refuse to pay A4.
(c) Cases within categories (i) and (iv) are very unlikely to occur5.
(d) A prohibition on assignment within category (ii) is not void as being
contrary to public policy6.
(e) In a category (ii) case, a purported assignment is ineffective to transfer
the cause of action to the assignee7.
In the case of a category (ii) prohibition, the inefficacy of the assignment does
not seem to depend on the assignee’s knowledge of the prohibition at the date of
assignment. The governing principle is that the assignee is exposed to the risk
that the assignor’s title may be imperfect and, in that event, he is left to his
remedies against the assignor.
The lender’s position can only be stronger if, in addition to requiring a
prohibition on assignment, he obtains an agreement that the deposit shall be
incapable of assignment. In British Eagle International Airlines Ltd v Cie
Nationale Air France8, Lord Cross, delivering the majority speech, stated:

35
14.52 Lien and Set-Off

‘for my part I am prepared to assume in favour of Air France that the legal rights
against Air France which British Eagle acquired when it rendered the services in
question were not strictly speaking “debts” owing by Air France but were innominate
choses in action having some, but not all, the characteristics of “debts”.’
The missing characteristic of the ‘debts’ owed by Air France was the credi-
tor’s right (before insolvency) to be paid them directly rather than through
clearing. If a chose in action can be deprived of the quality of direct enforce-
ability, it ought also to be capable of being deprived of assignability.
1
[1977] 1 WLR 578.
2
[1994] 1 AC 85.
3
[1994] 1 AC 85 at 104E.
4
[1994] 1 AC 85 at 104E–F, approving the classification of Professor Goode in (1979) 42 MLR
553.
5
[1994] 1 AC 85 at 104G.
6
[1994] 1 AC 85 at 106E–107F. Lord Browne-Wilkinson left open the efficacy of a category (iii)
prohibition insofar as it attempts to prohibit A from accounting to C.
7
[1994] 1 AC 85 at 107G–109C.
8
[1975] 2 All ER 390 at 409e, [1975] 1 WLR 758 at 778H.

(iv) Protection against declarations of trust

14.53 It has already been noted that one of the requirements for the application
of legal set-off and of statutory set-off in insolvency is mutuality, which requires
that the debts must be between the same parties in the same right1. Thus a debt
owed to a person as trustee for others cannot be set off against a debt owed by
that person in his personal capacity, for that would result in the beneficiaries
paying the personal debt of the trustee.
Therefore the safest course for lenders is to include an express prohibition on a
declaration of a trust over any relevant deposits, in addition to a prohibition on
assignment of deposited funds.
There have been cases in which creditors have sought to avoid the effect of
contractual anti-assignment provisions by instead declaring a trust in favour of
a third party in relation to the relevant debt or contract. This raises the question
of the inter-relation between a prohibition on assignment and a declaration of
trust.
While this inter-relation is matter of construction in each case, it has been held
that a prohibition on assignments will not extend to preclude a declaration of
trust over the benefit of a debt or of a contract under which monies are or will
become payable2. However, even if effective, a declaration of trust probably
does not prejudice the debtor’s rights, including the right to account to the
trustee (being the creditor) even when the beneficiary is suing3. Thus it is
arguable that where a depositor is contractually precluded from assigning the
right to repayment, the bank’s rights of set-off ought not to be prejudiced by a
declaration of trust. The bank should retain its right to account to the depositor
in the latter’s original capacity and not in the new capacity as trustee.
1
See Re BCCI SA (No 8)[1998] AC 214, HL and paras 14.33 and 14.39 above. It is unclear
whether mutuality is a requirement for equitable set-off: see Derham, The Law of Set-Off, 4th
edn, 4.67 to 4.83.
2
Don King Productions Inc v Warren [2000] Ch 291; Barbados Trust Co v Bank of Zambia
[2007] All ER (Comm) 445, CA.

36
 Contractual Set-Off Provisions 14.54
3
See Don King Productions Inc v Warren [2000] Ch 291 at 321–322 (Lightman J at first
instance); Barbados Trust Co v Bank of Zambia [2007] All ER (Comm) 445 at [28] and [45]
(Waller LJ).

(v) Exclusion of the borrower’s right of set-off

14.54 Loan documentation commonly requires the borrower to repay free of
set-off or counterclaim. The Court of Appeal has confirmed that a party is not
prevented from excluding the right of set-off by the Senior Courts Act 1981,
s 49(2) (which requires the court to give effect to defences and counterclaims) or
by any ground of public policy1. Such clauses are common in commercial
contracts of many different kinds and, where contained in one party’s standard
terms and conditions, will not usually be so onerous as to require to be
specifically and separately drawn to the attention of the other party2. Where the
court gives effect to such a provision, it is unlikely to grant a stay of execution
pending the trial of a counterclaim because that would deprive the claimant of
the benefit of the exclusion3.
There are two caveats. First, clear words are required to rebut the presumption
that a party does not intend to abandon any remedies for breach of contract
which may arise by operation of law4. Second, an exclusion of set-off is capable
of falling within the Unfair Contract Terms Act 1977, section 13(1)(b) because
it restricts a right or remedy. Where that Act applies, the lender must show that
the requirement of reasonableness under section 11 is satisfied5. Where the
borrower is a consumer, the Consumer Rights Act 2015 will apply instead6.
1
Coca Cola Financial Corpn v Finsat International Ltd [1998] QB 43 at 52. The court regarded
the point as supported by dicta in the decisions of the House of Lords in National Westminster
Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785; Gilbert-Ash
(Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689; and Mottram Consul-
tants Ltd v Bernard Sunley Ltd [1975] 2 Lloyd’s Rep 197, HL. And see Re Kaupthing Singer and
Friedlander Ltd [2009] 2 Lloyd’s Rep 154, in which Sir Andrew Morritt C applied Coca Cola
Financial in affirming the validity of a clause excluding set-off in the rules of the CREST
settlement system.
2
FG Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd [2013] 1 All ER (Comm) 223
at [79] (Popplewell J) (reversed on appeal [2013] EWCA Civ 1232, [2014] 1 All ER 785, but
without any appeal against this point).
3
See eg Coca Cola Financial Corpn v Finsat International Ltd [1998] QB 43 at 53.
4
See Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 at 717H;
Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 1 WLR 501, CA.
5
Stewart Gill Ltd v Myer & Co Ltd [1992] QB 600, CA. Clauses excluding set-off were found
to satisfy the requirement of reasonableness in R—hlig (UK) Ltd v Rock Unique Ltd [2011]
2 All ER (Comm) 1161, CA,, FG Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd
[2013] 1 All ER (Comm) 223 (reversed on appeal [2013] EWCA Civ 1232, [2014] 1 All ER
785, but without any appeal against this point), SKNL (UK) Ltd v Toll Global Forwarding
[2012] EWHC 4252, and, in the banking context specifically, Deutsche Bank (Suisse) SA v
Khan [2013] EWHC 482 at [323] to [329]. But for a case in which the contrary result was
reached, see AXA Sun Life Services Plc v Campbell Martin Ltd [2011] 2 Lloyd’s Rep 1, CA. As
to the general effect of the Unfair Contract Terms Act 1977, see para 4.12 and following above.
6
See para 4.16 and following above. Note that Deutsche Bank (Suisse) SA v Khan (above) is the
only case that appears to deal with set-off in the context of the Unfair Terms in Con-
sumer Contracts Regulations 1999 (the precursor to the provisions of the Consumer Rights Act
2015 that are now in force). In that case, the no set-off clause was found to be fair: see
[372]–[382].

37
14.55 Lien and Set-Off

(b) Post-insolvency set-off provisions

14.55 It has already been noted that parties may not contract out of the
mandatory insolvency set-off provisions (see para 14.41 above). Nor is it
possible to enlarge rights of set-off in insolvency by contract. The com-
pany’s assets in a winding up must be distributed in satisfaction of its liabilities
pari passu1, and the court will not give effect to an agreement which purports to
provide for a different distribution2 or deprive the insolvent estate of property
which would otherwise be available for distribution to creditors3.
1
See the Insolvency Act 1986, s 107.
2
See British Eagle International Airlines Ltd v Cie Nationale Air France [1975] 2 All ER 390,
[1975] 1 WLR 758, HL and para 14.45 above.
3
Known as the ‘anti-deprivation’ principle. See Belmont Park Investments Pty Ltd v BNY Cor-
porate Trustee Services Ltd [2012] 1 AC 383, SC; Lomas v JFB Firth Rixson Inc [2012]
2 All ER (Comm) 1076, CA.

38
Chapter 15

NON-POSSESSORY SECURITY,
FLOATING CHARGES AND
FINANCIAL COLLATERAL

1 GENERAL FEATURES OF NON-POSSESSORY SECURITY 15.2

(a) Mortgages and charges generally 15.2
(b) Mortgages and charges of debts in favour of the debtor 15.8
2 CONDITIONAL DEBT OBLIGATIONS 15.9
(a) Nature of conditional debt obligations (‘flawed assets’) 15.9
(b) The validity of flawed assets arrangements 15.10
(c) Insolvency, pari passu distribution and ‘anti-deprivation’ 15.11
3 FINANCIAL COLLATERAL ARRANGEMENTS
(a) Context 15.12
(b) Scope generally 15.13
(c) Meaning of ‘Financial Collateral’ 15.14
(d) The requirement for Possession or Control 15.15
(e) Key Effects 15.16
(f) Appropriation 15.17
4 MONIES PAID FOR A SPECIAL PURPOSE
(a) Quistclose Trusts 15.18
(b) Existence of a trust 15.19
(c) Notice of trust 15.20
(d) Effect of trust 15.21

15.1 It is conventionally said that the law recognises four types of security:
mortgages, charges, pledges and liens1. In addition to these categories there is a
further class of arrangements which are broadly described as ‘flawed asset’ by
which security is in effect taken2.
Pledges and liens properly so described3 depend upon possession and are
restricted to tangible assets and documentary intangibles4. They are addressed
in Chapter 16 below. Security over land is considered in Chapter 175.
1
See In re Cosslet Contractors Limited [1998] Ch 495.
2
See BCCI (No 8) [1996] Ch 245, 263B (Court of Appeal), and Re Lehman Brothers Inter-
national (Europe) (in administration) and others [2012] EWHC 2997 considered further
below.
3
The expression ‘bankers lien’ has been used to refer to rights, for example, to combine accounts
(see Chapter 16) below, and the language of pledge is often used to describe arrangements
which are in fact a charge (see below).
4
See para 16.1.
5
The more specialist matters of security over ships and aircraft are beyond the scope of this work.

1
15.2 Non-Possessory Security

1 GENERAL FEATURES OF NON-POSSESSORY SECURITY

(a) Mortgages and charges generally

(i) Method of creation

15.2 Formal security over a chose in action can be created by a mortgage or by

a charge. The essence of a legal mortgage of a debt is the vesting of the legal title
in the mortgagee by assignment, subject to the mortgagor’s entitlement to a
re-assignment if the secured liabilities are discharged (‘the equity of
redemption’). Such an assignment is absolute for the purposes of s 136 of the
Law of Property Act 19251.
Every charge, whether over a legal or equitable interest, must be equitable, there
being no such thing as a legal charge2. The essence of an equitable charge is that,
without any conveyance or assignment to the chargee, specific property of the
chargor is expressly or constructively appropriated to or made answerable for
the payment of a debt, and the chargee is given the right to resort to the property
for the purpose of having it realised and applied in or towards payment of the
debt. The availability of equitable remedies has the effect of giving the chargee
a proprietary interest by way of security in the property charged3. A classic
description is that of Atkin LJ in National Provincial and Union Bank of
England v Charnley4:
‘It is not necessary to give a formal definition of a charge, but I think there can be no
doubt that where in a transaction for value both parties evince an intention that
property, existing or future, shall be made available as security for the payment of a
debt, and that the creditor shall have a present right to have it made available, there
is a charge, even though the present legal right which is contemplated can only be
enforced at some future date, and though the creditor gets no legal right of property,
either absolute or special, or any legal right to possession, but only gets a right to have
the security made available by an order of the court.’
No particular language is required to create a charge if that is the effect of the
agreement5. Arrangements described as a ‘lien’ may in fact be properly analysed
as a charge6. An arrangement may be held to amount to a charge even if not so
described, and if the parties did not consider it to be a charge, so that (for
example) extended provisions under a retention of title clause have been held to
require registration7.
1
Tancred v Delagoa Bay and East Africa Rly Co (1889) 23 QBD 239, decided under the
predecessor to s 136 (s 25(6) of the Supreme Court of Judicature Act 1873).
2
The only exception is a ‘charge by way of legal mortgage’ over land, which is an interest created
by statute under the 1925 Law of Property Act.
3
Re Charge Card Services Ltd [1987] Ch 150 at 176, [1986] 3 All ER 289 at 309 per Millett, J.
4
[1924] 1 KB 431 at 449. See also Palmer v Carey [1926] AC 703 at 706, PC per Lord Wrenbury;
Re Cosslett (Contractors) Ltd [1998] Ch 495 at 508G per Millett LJ; and BCCI SA (No 8)
[1998] AC 214 at 226F, [1997] 4 All ER 568 at 576 per Lord Hoffmann.
5
And, for example, the deposit of a share certificate, while insufficient to create a pledge over the
shares because not a document of title, may be held to evidence a charge over them, see further
para 16.2 below.
6
See for example Re Lehman Brothers International Europe (in administration) [2012] EWHC
2997.
7
See for example in Re Bond Worth [1980] Ch 228, Pfeiffer Weinkellerei v Arbuthnot Factors
[1988] 1 WLR 150, Compaq Computer Ltd v the Abercorn Group [1991] BCC 484,
[1993] BCLC 602.

2
 General Features of Non-Possessory Security 15.4

(ii) Registration

15.3 Since April 2013 any charge over the property of a company is required to
be registered under the Companies Act 2006 unless it falls within narrow
exceptions, the most important of which for present purposes are Finan-
cial Collateral Arrangements, discussed in the second part of this chapter.
Any attempt to create a mortgage or charge over tangible moveable property of
an individual (as opposed to a company) is liable to be registrable under the Bills
of Sale Acts, the provisions of which are practically unworkable for commercial
purposes1. Despite the formal difficulties, there has been a recent upsurge in
registrations under the Bills of Sale Acts, largely in connection with ‘logbook
loans’, that is lending against the physical security of motor cars. In 2016 some
30,000 transactions were registered in contrast with 3,000 in 2001. The issue
was considered by the Law Commission between 2015 and 2017. In 2016 they
reported at length2 identifying the shortfalls in the current law particularly (but
not only) from the perspective of consumer protection. In 2017 they published
proposals for and commentary on a new Goods Mortgages Bill3. However in
May 2018 the UK Government announced that it would not bring forward any
such bill in the near future.
Section 344 of the Insolvency Act 1986 extends the requirement to register
under the Bills of Exchange Act to general assignments of a trader’s book debts,
or any class of them, But this does not apply where particular debts which are
already due, or arise under specified contracts, are assigned by the trader, nor to
general assignments made upon a business transfer or composition with credi-
tors.
1
See Chapter 16 below.
2
Bills of Sale (2016) Law Com No 369.
3
From Bills of Sale to Goods Mortgages (2017) Law Com No 376.

(iii) Fixed or floating?

15.4 English law continues to recognise an important, but sometimes problem-
atic, distinction between charges which are ‘fixed’ and charges which are
‘floating’. The key analytical difference was described in the ‘Brumark’ case by
Lord Millet in these terms1:
‘The essence of a floating charge is that it is a charge, not on any particular asset, but
on a fluctuating body of assets which remain under the management and control of
the chargor, and which the chargor has the right to withdraw from the security
despite the existence of the charge. The essence of a fixed charge is that the charge is
on a particular asset or class of assets which the chargor cannot deal with free from
the charge without the consent of the chargee. The question is not whether the
chargor has complete freedom to carry on his business as he chooses, but whether the
chargee is in control of the charged assets.’
The importance of the distinction arises from various consequences which
follow in insolvency2.
(1) Preferential creditors as defined3 and a percentage of unsecured credi-
tors4 rank ahead of a floating, but not a fixed, charge holder.
(2) Floating charges are subject to the (wider) avoidance provisions in s 245
of the Insolvency Act 19865.

3
15.4 Non-Possessory Security

(3) Administration and certain liquidation expenses may be paid out of

assets subject to a floating, but not fixed, charge6.
(4) Assets subject only to a floating charge are subject to the control of an
administrator of the company, restricting the chargee’s right to enforce7.
There is a tension between the desire of the lender to obtain the most effective
security over the available assets, which may for example be a rotating pool of
physical stock, or debts due from customers, and the need of the borrower to be
free to deal with those assets as part of its business. Attempts to achieve both
ends have led to complex drafting, much debate and many decisions but the
present position can be taken to be authoritatively stated, at least as a matter of
principle, by the House of Lords decision in Re Spectrum Plus Ltd, National
Westminster Bank plc v Spectrum Plus Ltd (‘Spectrum Plus’)8.
Both Spectrum Plus and the Brumark case concerned the efficacy of a purported
fixed charge over book debts and proceeds, A similar charge had been consid-
ered by the Court of Appeal in Re New Bullas Trading9. The New Bullas charge
was expressed to create a fixed charge over books debts arising in the ordinary
course of trading and over their proceeds, but not those proceeds which were
received by the company before the charge holder required them to be paid into
a designated account (which it never did). Subject to any such requirement, the
proceeds were expressed to be subject to the floating charge over the assets of
the company. The Court of Appeal in New Bullas held that it was possible to
split the book debts from their proceeds, and that the charge should be given
effect according to its clear language. This decision was overruled in Brumark.
Lord Millett, who delivered the judgment of their Lordships, began with a
detailed review of the history and development of the floating charge (paras 5–
16). He then identified the two established methods for creating fixed security
over a debt (a s 136 assignment, and an equitable charge), and confirmed that
it has always been possible to take a fixed charge over a fluctuating class of
present and future book debts (contrary to the generally held view before the
decision in Siebe Gorman & Co Ltd v Barclays Bank Ltd10) (paras 17–19).
Having reviewed the decisions in Re Keenan Bros Ltd11 and Re Brightlife Ltd12,
he confirmed (at para 26) the view which he had previously expressed in
Cosslett (Contractors) Ltd13 that:
‘The essence of a floating charge is that it is a charge, not on any particular asset, but
on a fluctuating body of assets which remain under the management and control of
the chargor, and which the chargor has the right to withdraw from the security
despite the existence of the charge. The essence of a fixed charge is that the charge is
on a particular asset or class of assets which the chargor cannot deal with free from
the charge without the consent of the chargee. The question is not whether the
chargor has complete freedom to carry on his business as he chooses, but whether the
chargee is in control of the charged assets.’
Lord Millett then explained his rejection of the Court of Appeal’s reliance in
New Bullas on the proposition that freedom of contract must prevail. In a
passage of crucial importance to any issue about the categorisation of security,
Lord Millett said as follows (para 32):
‘Their Lordships consider this approach to be fundamentally mistaken. The question
is not merely one of construction. In deciding whether a charge is a fixed charge or a
floating charge, the court is engaged in a two-stage process. At the first stage it must
construe the instrument of charge and seek to gather the intentions of the parties from

4
 General Features of Non-Possessory Security 15.4

the language they have used. But the object at this stage of the process is not to
discover whether the parties intended to create a fixed or floating charge. It is to
ascertain the nature of the rights and obligations which the parties intended to grant
each other in respect of the charged assets. Once these have been ascertained, the
court can then embark on the second stage of the process, which is one of categori-
sation. This is a matter of law. It does not depend on the intention of the parties. If
their intention, properly gathered from the language of the instrument, is to grant the
company rights in respect of the charged assets which are inconsistent with the nature
of a fixed charge, then the charge cannot be a fixed charge however they may have
chosen to describe it.’
Lord Millett concluded that a restriction on disposition which nevertheless
allows collection and free use of the proceeds is inconsistent with the nature of
a charge; it allows the debt and its proceeds to be withdrawn from the security
by the act of the company in collecting it (para 36). Accordingly, he held that the
charge was floating, not fixed.
This left the question whether a debt or other receivable can be separated from
its proceeds for the purpose of creating security. Lord Millett acknowledged
that property and its proceeds are clearly different (para 43), but he asserted
that it does not follow from this that the nature of a charge on uncollected book
debts may not differ according to whether the proceeds are subject to a fixed or
floating charge: ‘The question is not whether the company is free to collect the
uncollected debts, but whether it is free to do so for its own benefit’ (para 45).
What, then, is required in practice to create a fixed charge over present and
future book debts? Lord Millett accepted that it is not necessary to go so far as
to prohibit the company from collecting the debts itself, for it is not inconsistent
with the fixed nature of a charge on book debts for the holder of the charge to
appoint the company as its agent to collect the debts for its account and on its
behalf. However, the proceeds must not be at the company’s free disposal
(para 48).
Lord Millett warned that it is not enough to provide in the debenture that the
account is a blocked account if it is not operated as one in fact (para 48).
The following points are made about the effect of Brumark:
(1) Lord Millett’s warning that a blocked account must be operated as such
contemplates an investigation into how a supposed blocked account is in
fact operated. Given that the first stage in the process of categorisation
involves the construction of the security document, this seems to conflict
with the established rule that the court may not examine post-
contractual conduct to determine the meaning of the contract14. The
answer may be that such conduct can probably be examined where it is
suggested that a document is a sham in the Snook sense, ie, a document
which does not reflect the true intention of either party to the contract15.
Alternatively, the warning may have to be interpreted as creating an
exception to the established rule in this somewhat special context. But
this will create difficulties if the chargee at times exercises his rights as if
he were the holder of a fixed charge, and at other times as if he were the
holder of a floating charge. In Re Lehman Brothers International
Europe (in administration) and others16, Briggs J (at para 151), consid-
ering a similar question under the Financial Collateral Arrangements
Regulations, drew a distinction ‘between taking account of conduct in

5
15.4 Non-Possessory Security

order to identify the parties’ apparent rights in relation to a matter about

which the agreement in question is silent, and doing so where the
agreement in question confers a clear express right of control by retainer,
which is not alleged to have been a sham’,
(2) It seems likely that some lenders may attempt to circumvent the decision
in Brumark by insisting on a dual account mechanism, one account
being a blocked feeder account subject to a fixed charge (coupled with a
fixed charge over book debts and a requirement that the proceeds of
collection be paid into the blocked account), and the other an ordinary
current account subject to a floating charge. Lenders are unlikely to be
willing to assume the burden of considering requests for the withdrawal
of funds from a blocked account on a daily basis, and where this is so,
requests to transfer funds from the blocked account to the current
account would have to be considered on a periodic basis. It is submitted
that, if the apparent intention of the parties at the time of making the
contract was that the lender would ordinarily accede to any request for
a transfer, the dual account mechanism will not achieve its intended
purpose. It should be noted in this context that Lord Millett expressly
approved Hart v Barnes17, where a collateral agreement allowing the
charger to collect the books debts and use the proceeds in its business as
it saw fit was held to render the charge floating (para 23).
(3) Lord Millett recognised that a fixed charge can be created over a wasting
assets, such as a short lease (para 37). An example of such a charge can
be found in Re Atlantic Computer Systems Ltd18, where the char-
gor’s freedom to use the proceeds of computer lease agreements until the
chargee’s intervention was held not to convert a fixed charge over the
leases into a floating charge. Nicholls LJ pointed out that a mortgage of
land does not become a floating charge by reason of the mortgagor being
permitted to remain in possession and enjoy the fruits of the property
charged for the time being19.
(4) The decisions in Siebe Gorman & Co Ltd v Barclays Bank Ltd, Re
Keenan Bros Ltd and Re Brightlife Ltd were implicitly approved, but
Lord Millett noted that Slade J’s construction of the security document
in Siebe Gorman & Co Ltd v Barclays Bank Ltd has been the subject of
criticism. The construction appears to be erroneous because the restric-
tion on assignment which led to the charge being categorised as a fixed
charge is a conventional restriction in any well drawn floating charge20.
(5) It is generally assumed that a legal mortgage of a book debt in favour of
the debtor is ineffective because the assignment operates as a release. A
concession to this effect was made in Re Charge Card Services Ltd21. It
is suggested that this may not be correct, because the assignment would
be subject to the mortgagor’s equity of redemption, and the parties will
not intend to release the debt. However, the point is unlikely to arise in
practice because the established validity of a charge-back, coupled with
the efficacy of a prohibition on assignment, means that in practice a
charge-back provides as good security as a legal mortgage.
1
See Agnew v IRC [2001] UKPC 28, reciting his earlier decision in Re Cosslett Contractors Ltd
[1998] Ch 495 C/A.
2
The maintenance of the distinction is a matter of policy in insolvency originating with the
Preferential Payments in Bankruptcy Amendment Act 1897, and it continues to be kept despite

6
 General Features of Non-Possessory Security 15.5

criticisms that it is a cause of uncertainty in transactions (see for example the discussion paper
published in February 2014 by the Financial Law Committee of the City of London Law
Society).
3
See Insolvency Act 1986 ss 40 and 175(2)(b) and Sch B1, para 65(2); and Companies Act 2006,
s 754.
4
Insolvency Act 1986, s 176A; Insolvency Act 1986 (Prescribed Part) Order 2003, SI 2003/2097.
5
To the extent that it secures debts incurred before it was created, a floating charge entered into
within 12 months of the commencement of insolvency proceedings is liable to be set aside if the
company was insolvent.
6
Insolvency Act 1986, Sch B1, paras 70 and 99; Insolvency Act 1986, s 176 ZA; Insolvency Act
1986, Sch A1, para 20.
7
Insolvency Act 1986, Sch B1 paras 70 and 71.
8
[2005] UKHL 41, sub nom Re Spectrum Plus Ltd (in liquidation) [2005] 2 AC 680, in which the
earlier authorities including the Brumark case are comprehensively reviewed.
9
[1994] 1 BCLC 485, CA.
10
[1979] 2 Lloyd’s Rep 142 (Slade J).
11
[1986] BCLC 242 (Supreme Ct of Ireland).
12
[1987] Ch 200, [1986] 3 All ER 673 (Hoffmann J).
13
[1998] Ch 495, 510, [1997] 4 All ER 115, 127, CA.
14
See James Miller & Partners Ltd v Whitworth Street Estates [1970] AC 573, HL, 603E per Lord
Reid: ‘ . . . it is now well settled that it is not legitimate to use as an aid in the construction
of the contract anything which the parties said or did after it was made.’
15
See Snook v London and West Riding Investments Ltd [1967] 2 QB 786, CA, 802 (Diplock LJ).
16
[2012] EWHC 2997.
17
(1982) 7 ACLR 310.
18
[1992] Ch 505, CA, followed in Re Atlantic Medical Ltd [1993] BCLC 386 (Vinelott J).
19
At 534G.
20
This was noted by Millett LJ in Re Cosslett (Contractors) Ltd [1998] Ch 495, CA, 510A.
21
[1987] Ch 150, 175D.

15.5 The same issue as that determined in Brumark arose in Spectrum Plus1,
although on slightly different facts. The issue had to be considered again by the
House of Lords because Brumark was a decision of the Privy Council, and as
such the decision could not overrule the decision of the Court of Appeal in New
Bullas.
The security created by the debenture in Spectrum Plus was expressed to
include:
‘A specific charge [of] all book debts and other debts . . . now and from time to
time due or owing to [Spectrum] (para 2(v)) and “A floating security [of] its
undertaking and all its property assets and rights whatsoever and wheresoever
present and/or future including those for the time being charged by way of specific
charge pursuant to the foregoing paragraphs if and to the extend that such charges as
aforesaid shall fail as specific charges but without prejudice to any such specific
charges as shall continue to be effective’ (para.2(vii)).
The word ‘specific’ was held to mean ‘fixed’2. Lord Hope concluded that
Spectrum’s continuing contractual right to draw out sums equivalent to the
amounts paid in was wholly destructive of the argument that there was a fixed
charge over the uncollected proceeds because the account into which the
proceeds were to be paid was blocked3. Lord Scott, who delivered the leading
judgment on this issue, agreed with the core propositions in the judgment of
Lord Millett in Brumark4. Lord Walker concluded that the essential difference
between a fixed charge and a floating charge is that under a fixed charge the
assets charged as security are permanently appropriated to the payment of the
sum charged, in such a way as to give the chargee a proprietary interest in the
assets, whereas under a floating charge, although the chargee has a proprietary

7
15.5 Non-Possessory Security

interest, its interest is in a fund of circulating capital, and unless and until the
chargee intervenes (on crystallisation of the charge) it is for the trader, and not
the bank, to decide how to run its business5. As in Brumark it was accepted that
it was permissible, indeed necessary, to enquire to what extent control had in
fact been exercised.

Their Lordships were unanimous in holding that the purported fixed charge
over books debts was to be characterised as floating charge. Siebe Gorman
& Co Ltd v Barclays Bank Ltd6, in which Slade J upheld a fixed charge over
book debts, was overruled, not on the ground that the judge had misstated the
relevant principles of law, but on the ground that he had misapplied those
principles to the facts. The Court of Appeal’s decision in Re New Bullas
Trading7 was also overruled.
1
[2005] UKHL 41, sub nom Re Spectrum Plus Ltd (in liquidation) [2005] 2 AC 680.
2
[2005] 4 All ER 209, HL at [79].
3
At [61].
4
At [106], [107], [110] and [111].
5
At [138] and [139].
6
[1979] 2 Lloyd’s Rep 142.
7
[1994] 1 BCLC 485.

(iv) Priorities
15.6 Where a mortgage or charge is taken without notice of a prior encum-
brance, the priorities between competing mortgages and charges over book
debts appear to be governed by the date on which notice of the mortgage or
charge is given to the debtor. This principle derives from four propositions:
(1) Priority between competing equitable assignments of choses in action is
governed by the date of notice to the debtor1.
(2) By s 136(1) of the Law of Property Act 1925, notice in writing to the
debtor is a requirement for a legal assignment of a chose in action, and
therefore in practice the priority between competing legal assignments is
also governed by the date of such notice.
(3) By s 136(1) a legal assignee takes subject to equities, and accordingly,
even if a legal assignment is effected for value without notice of a prior
equity, priorities between an equitable assignee and a subsequent legal
assignee fall to be determined as if both assignments had been equitable2.
(4) Although an equitable charge over a debt is created without any imme-
diate assignment to the chargee, the chargee obtains an immediate
proprietary interest such that the reasoning which underlies the rule in
Dearle v Hall applies with the same force as to an immediate assignment.
1
E Pfeiffer Weinkellerei-Weineinkauf GmbH & Co v Arbuthnot Factors Ltd [1988] 1 WLR 150
at 162, followed in Compaq Computer Ltd v Abercorn Group Ltd [1993] BCLC 602, 617
(Mummery J).
2
See fn 1 above, followed in the Compaq case at 621.

(v) Further advances

15.7 The existence of a mortgage or charge does not necessarily confer protec-
tion in relation to advances made after notice of a subsequent charge. Whether

8
 General Features of Non-Possessory Security 15.8

a charge has priority in relation to such advances depends upon the char-
gor’s right to ‘tack’ subsequent advances on to his security. The subject of
tacking is more fully considered in Chapter 32 below, in the context of
mortgages over interests in land. The uncertainties over the construction of s 94
of the Law of Property Act 1925 are compounded in relation to mortgages over
book debts by doubts as to the application of s 94 to mortgages other than
mortgages of land.

(b) Mortgages and charges of debts in favour of the debtor

15.8 Despite earlier controversy, it can now be taken to be settled that it is

possible for a person to take security by way of a charge over a debt he owes. In
its simplest form, a bank may take a charge over a credit balance upon an
account held with it by the debtor.
In Re Charge Card Services Ltd1, Millett J held that a creditor cannot create in
favour of a debtor a charge over the debtor’s own indebtedness to the chargor.
A ‘charge’ of this type is sometimes called a ‘charge-back’, ie a charge by a
creditor back in favour of a debtor. Millett J described such a charge as
‘conceptually impossible’.
The decision in Charge Card proved controversial. It generated strong divisions
of opinion among legal writers. It was doubted, obiter, by Dillon LJ in Welsh
Development Agency v Export Finance Co Ltd2, but approved by the Court of
Appeal (in a judgment to which Millett LJ contributed) in BCCI (No 8)3.
The debate was finally resolved by the House of Lords in BCCI (No 8)4. The
charge in question was a charge by a depositor to secure the liabilities of a third
party borrower. The charge provided:
‘In consideration of [BCCI] at our request providing from time to time facilities to
[Rayners] (“the borrower”) from time to time, I . . . hereby give a lien/charge on
the balances maintained by me in my accounts with you for all of the outstanding
liabilities of the borrower in respect of the banking facilities . . . 5.’
Lord Hoffmann, delivering the only judgment, first identified the following
normal characteristics of an equitable charge:
(1) An equitable charge is a species of charge, which is a propriety interest
granted by way of security.
(2) A proprietary interest by way of security entitles the holder to resort to
the property only for the purpose of satisfying some liability due to him
(whether from the person providing the security or a third party).
(3) The method by which the holder of the security will resort to the
property will ordinarily involve its sale or, more rarely, the extinction of
the equity of redemption.
(4) A charge is a security interest created without any transfer of title or
possession to the beneficiary.
(5) An equitable charge can be created by an informal transaction for value
and over any kind of property (equitable as well as legal) but is subject to
the doctrine of purchaser for value without notice applicable to all
equitable interests6.

9
15.8 Non-Possessory Security

Lord Hoffmann then considered whether there were any respects in which the
fact that the beneficiary of the charge was the debtor himself would be
inconsistent with the transaction having the above features. He identified only
one, namely that the method by which the property would be realised would
differ slightly: instead of the chargee having to claim payment from the debtor,
the realisation would take the form of a book entry (ie a debit to the
chargor’s account). In no other respect would the transaction have any conse-
quences different from those attaching to a charge given to a third party.
Accordingly, the charge-back was valid.
Lord Hoffmann identified an important policy factor of general application7:
‘In a case in which there is no threat to the consistency of the law or objection of
public policy, I think that the courts should be very slow to declare a practice of the
commercial community to be conceptually impossible. Rules of law must obviously
be consistent and not self-contradictory; thus in Rye v Rye [1962] AC 496, 505
Viscount Simonds demonstrated that the notion of a person granting a lease to
himself was inconsistent with every feature of a lease, both as a contract and as an
estate in land. But the law is fashioned to suit the practicalities of life and legal
concepts like “proprietary interest” and “charge” are no more than labels given to
clusters of related and self-consistent rules of law. Such concepts do not have a life of
their own from which the rules are inexorably derived.’

1
[1987] Ch 150 at 175D, [1986] 3 All ER 289 at 308d.
2
[1992] BCLC 148 at 166–167.
3
[1996] Ch 245.
4
[1998] AC 214, [1997] 4 All ER 568.
5
At 226, 576.
6
But not in the context of a legal assignment of a debt because even a legal assignee takes subject
to equities: see the Law of Property Act 1925, s 136.
7
At 228, 578.

2 CONDITIONAL DEBT OBLIGATIONS

(a) Nature of conditional debt obligations (‘flawed assets’)

15.9 Conditional repayment obligations are often referred to as ‘flawed asset’
arrangements. If A places with a bank, B, a deposit repayable only upon
performance by a third party, C, of an obligation owed to the bank, the asset
owned by A (the right to repayment of the deposit) is flawed in the sense that its
value is dependent upon the payment of monies by C to A’s debtor, the bank. A
simple flawed asset arrangement might provide that B shall be under no
obligation to repay A unless and save to the extent that C shall have repaid B.
This entitles A to pro tanto repayment in accordance with payments made by C
to B. The agreement does not, however, involve any assignment by B to A. Their
relation is that of debtor and creditor. There can equally be a bi-partite flawed
asset arrangement, as where B’s obligation to repay A is conditional upon the
discharge by A of an obligation owed to B1.
1
More complex provisions are found in sophisticated banking documentation, so, for example,
in considering the Lehman group arrangements before him in Re Lehman Brothers Inter-
national (Europe) (in administration) and others [2012] EWHC 2997 Briggs J canvassed the
possibility that the provisions which he held to give rise to a charge might fall into such a

10
 Conditional Debt Obligations 15.10

category. The expression has also been used in the authorities in an attempt to define
arrangements falling outside the anti-deprivation rule, considered below at para 15.11.

(b) The validity of flawed assets arrangements

15.10 The validity of flawed asset arrangements is put beyond doubt by the
decisions of the Court of Appeal and the House of Lords in BCCI (No 8), where
the security document created the following flaw in the depositor’s right to
repayment:
‘It is understood that the balances held in the accounts under the lien/charge are not
to be released to me, my heirs or assignees unless or until the entire outstanding
liabilities of the borrower whether actual or contingent are fully repaid with interest,
fees, commission etc.’
The Court of Appeal, having erroneously concluded that the charge-back
contained in the same security document was ineffective, then considered the
contractual effect of the charging and flawing provisions. Importantly,
the Court considered their effect in the more common situation of the depositor
(rather than the bank) becoming insolvent. The court concluded1:
‘If the charge-back is a non-recourse collateral security which secures the debt of a
third party, the bank will be unable to set off the amount of the deposit against the
debt owing to it from the third party. But this will be of little if any practical
significance. The bank has the money; the depositor’s trustee or liquidator cannot
obtain payment while the debt of the third party is outstanding. But it will be his duty
to get in the deposit as one of the assets of the estate. It will almost invariably be in the
interests of the general body of creditors for him to permit the bank to recoup itself
out of the deposit, take delivery of any other securities which the bank holds for the
principal debt, and seek to recover from the principal debtor.’
This reasoning in this passage of the judgment implicitly accepts that a contrac-
tual flaw in an insolvent’s right to repayment is binding on a liquidator.
In the House of Lords2, Lord Hoffmann, having noted the Court of Ap-
peal’s view that the bank had perfectly good security by virtue of the flawing
provision, said:
‘I agree and could stop there without commenting on the question of whether a
charge is conceptually possible or not.’
Where there is the necessary mutuality between the obligations of the person
entitled to payment (subject to the ‘flaw’ in the asset) and the person claiming
the benefit, whether because the arrangement is straightforwardly bipartite, or
by virtue of a covenant to pay creating a present obligation on the part of the
depositor, then in the event of insolvency, set-off will arise in accordance with
the statutory scheme3. The independent validity of the ‘flawing’ provision is
material where, as in BCCI (No 8) there is not such a mutual obligation.
Although assumed in that case, the efficacy of the arrangement in so far as it
operates against an insolvent estate will then depend on the principles consid-
ered in the following section.
1
In re Bank of Credit and Commerce International SA [1996] Ch 245, at 263.
2
[1998] AC 214, 225F, [1997] 4 All ER 568.
3
For example, under rule 4.90 of the Insolvency Rules 1986 in the event of liquidation. See BCCI
(No 8) [1996] Ch 245 at 263A, and MS Fashions Ltd v BCCI SA [1993] Ch 425.

11
15.11 Non-Possessory Security

(c) Insolvency, pari passu distribution and ‘anti-deprivation’

15.11 The validity of contractual provisions suspending or determining a right

to receive payment or retain property has to be considered in light of two related
legal principles: first that now known as the ‘anti-deprivation principle’, and
second the policy of pari passu distribution.
‘The relationship between the anti-deprivation principle and the pari passu rule is
both dependant and autonomous. The former is concerned with contractual arrange-
ments which have the effect of depriving the bankrupt estate of property which would
otherwise have formed part of it. The pari passu rule governs the distribution of assets
within the estate following the event of bankruptcy. It therefore invalidates arrange-
ments under which a creditor receives more than his proper share of the available
assets or where (as in the British Eagle International Airlines case [1975] 2 All ER
390, [1975] 1 WLR 758) debts due to the company on liquidation were to be dealt
with other than in accordance with the statutory regime1.’
The anti-deprivation principle was authoritatively considered by the Su-
preme Court in the Belmont Park Investments case2. At issue were provisions
under a ‘synthetic debt repackaged note issuance programme’ promoted by the
Lehman group, by which the priority of parties to collateral in respect of a
complex structured note were revised should there be events of default of
various parties. The identified events of default included insolvency. Lord Col-
lins SCJ gave the lead judgment in which he reviewed the authorities at length,
but rejected any individual test emerging from them, holding ultimately that
while the principle was well established that parties should not evade the policy
of the insolvency laws, the clear trend was to respect party autonomy where
there was a commercially justifiable contractual provision entered into in good
faith, particularly in the context of a complex commercial transaction.
The Belmont Park case was considered and applied by the Court of Appeal in
Lomas v Firth Rixson3. Holding that each transaction needs to be considered on
its merits to see whether ‘the shift in interests complained of could be justified as
a genuine and justifiable commercial response to the consequences of insol-
vency’4, the Court concluded that a provision which suspended one par-
ty’s obligation to make payments5 while the other was subject to an event of
default (including but not limited to insolvency) was justified looking at the
operation of the clause in the context of the contract as a whole. Nor did the
clause offend the pari passu principle: the absence of an event of default was a
pre-condition to the payment obligation arising, so there was no debt due or
comprising part of the property of the insolvent estate to be distributed.
1
Lomas & others (joint administrators of Lehman Brothers International (Europe) v JFB Firth
Rixson Inc and others [2012] EWCA Civ 419, per Longmore LJ giving the judgment of
the Court of Appeal, at paragraph 96.
2
Belmont Park Investments Pty Ltd and others v BNY Corporate Trustee Services Ltd and
another [2011] UKSC 38.
3
Lomas & others (joint administrators of Lehman Brothers International (Europe) v JFB Firth
Rixson Inc and others [2012] EWCA Civ 419.
4
Para 86.
5
The case concerned swaps transactions and the relevant provisions were under the ISDA Master
Agreements, in particular clause 2(iiii).

12
 Financial Collateral Arrangements 15.13

3 FINANCIAL COLLATERAL ARRANGEMENTS

(a) Context
15.12 In 2002 the EU Directive 2002/47/EC on Financial Collateral Arrange-
ments was adopted. Its express aims, recorded in the recitals, include the
promotion of market efficiency, the removal of administrative burdens, and
assisting the rapidity and ease of enforcement of financial securities.
Effect has been given to this Directive within the United Kingdom by the
Financial Collateral Arrangements (No 2) Regulations 20031 as amended2. The
regulations follow closely the language of the Directive and introduce terms and
concepts which are unfamiliar to the common law, and they are to be inter-
preted in light of the scheme and purpose of the Directive3.
1
SI 2003/3226, which came into force on 26 December 2003, an earlier version of the regulations
was revoked before it became effective.
2
Financial Collateral Arrangements (No 2) Regulations (Amendment) Regulations 2009, SI
2009 (reflecting changes in the regime for registration of company charges under the Com-
panies Act 2006) and Financial Markets and Insolvency (Settlement Finality and Finan-
cial Collateral Arrangements) (Amendment) Regulations 2010 (giving effect to Directive
2009/44/EC and addressing other concerns in the language of the original regulations with
effect from 6 April 2011).
3
See for example the observations of Lord Walker giving the judgment of the Court in Cukurova
Finance International Limited v Alfa Telecom Turkey Limited [2009] UKPC 19, at para-
graph 32, and in relation to the remedy of appropriation below.

(b) Scope generally

15.13 The regulations apply only where the person providing the security (‘the
collateral provider’) and the person to whom it is given (‘the collateral taker’)
are both non-natural persons1. Under the Directive it would have been permis-
sible for the English regulations to be restricted to arrangements between
financial institutions or upon markets, but their scope is wider.
The purpose of the ‘agreement or arrangement’ must be to ‘secure the relevant
financial obligations owed to the collateral taker’. The agreement or arrange-
ment must be evidenced in writing.
The regulations, following the Directive, distinguish between a ‘title transfer
collateral arrangement’ and a ‘security financial collateral arrangement’. The
first involves a full transfer of ‘legal and beneficial ownership’ of the security,
subject to an obligation to re-transfer when the relevant financial obligations
are discharged. The latter applies where ‘the collateral-provider creates or there
arises a security interest in financial collateral’ provided that the collateral is
‘delivered, transferred, held registered or otherwise designated so as to be in the
possession or under the control of the collateral-taker . . . ’.
A security interest for these purposes may be a pledge mortgage, fixed charge,
floating charge (provided the requisite control is demonstrated, as to which see
below, and subject to a provision for its replacement), or a lien.
The regulations are not retrospective2.
1
It would appear to be possible under the rules for the security nonetheless to be given in respect
of the obligations of a natural person.

13
15.13 Non-Possessory Security
2
See Re Lehman Brothers International Europe (in administration) [2012] EWHC 2997 (Ch)
per Briggs J at paragraphs 153–160.

(c) Meaning of ‘financial collateral’

15.14 The regulations distinguish and apply to three types of property. First,
financial instruments, which includes shares and equivalent securities in com-
panies, bonds or other forms of instruments giving rise to or acknowledging
indebtedness if these are tradeable on the capital market and ‘any other
securities which are normally dealt in and which give the right to acquire any
such shares, bonds, instruments or other securities’.
Second, the regulations apply to security over ‘cash’, which is defined widely as
‘money in any currency, credited to an account, or a similar claim for repayment
of money and includes money market deposits and sums due or payable to, or
received between the parties in connection with the operation of a financial
collateral arrangement or a close-out netting provision’. It does not however
cover a simple debt.
Third (and since April 2011) the regulations apply to ‘credit claims’, which are
defined as pecuniary claims which arise out of an agreement whereby a credit
institution1, grants credit in the form of a loan.
1
As defined in Article 4(1) of Directive 2006/48/EC of the European Parliament and of
the Council relating to the taking up and pursuit of the business of credit institutions (recast),
including the institutions listed in Article 2 of that Directive.

(d) The requirement for possession or control

15.15 Both ‘title transfer’ and ‘security’ financial collateral arrangements re-
quire that the financial collateral is ‘delivered, transferred, held registered or
otherwise designated so as to be in the possession or under the control of the
collateral-taker’. In the limited decisions to date, this requirement has proved
the most problematic.
The requirement was considered first by Vos J in Gray and others v G-T-P
Group Ltd Re F2G Realisations Ltd (in liquidation) 1. In response to criticisms
of the result in that case2, the regulations were amended3 by the addition of a
new regulation 3(2) which provides that:
‘(2) For the purposes of these Regulations “possession” of financial collateral in
the form of cash or financial instruments includes the case where financial
collateral has been credited to an account in the name of the collateral-taker
or a person acting on his behalf (whether or not the collateral-taker, or
person acting on his behalf, has credited the financial collateral to an account
in the name of the collateral-provider on his, or that person’s, books)
provided that any rights the collateral-provider may have in relation to that
financial collateral are limited to the right to substitute financial collateral of
the same or greater value or to withdraw excess financial collateral.’
That provision, and the requirement for possession or control generally, were
then considered by Briggs J in the Lehman litigation4. He observed that this
amendment ‘gave with one hand but took as much away with the other . . .

14
 Financial Collateral Arrangements 15.16

HM Treasury acceded only to an immaterial and largely theoretical extent to

the FMLC’s invitation to do something by way of ameliorating the restrictive
effect of Vos J’s analysis’5.
The position remains unsatisfactory6. Nonetheless, a few propositions can be
stated. First, in contrast to the general law, for the purpose of the Regulations
the concept of ‘possession’ is, at least in the circumstances identified in
regulation 3(2), relevant to intangible assets7. Second, the question of ‘control’
is related, but not identical to the test for identifying a floating as opposed to
fixed charge: for example the ability to substitute collateral in accordance with
regulation 3(2) means that security provided under such an arrangement would
necessarily be characterised as a floating charge over the pool of security. Third,
mere ‘administrative’ delivery is not sufficient: the crediting of funds or securi-
ties to an account with the collateral-taker will not amount to possession or
control if the collateral-provider retains an unfettered legal right to demand
their return. Fourth, it is probably sufficient for the arrangement to confer
‘negative control’ – that is that the collateral-provider should be deprived of the
right to deal with the subject matter, rather than that it be fully under the
‘positive control’ of the collateral taker.
1
[2010] EWCH 1772 (Ch).
2
Notably in a Report from 2010 of the Financial Markets Law Committee.
3
Financial Markets and Insolvency (Settlement Finality and Financial Collateral Arrangements)
(Amendment) Regulations 2010 (SI 2010/2993).
4
See Re Lehman Brothers International Europe (in administration) [2012] EWHC 2997 (Ch)
Briggs J concluded (on the complex facts before him) as Vos J had done in Gray that the
particular arrangement failed to fall within the Regulations for lack of the relevant degree of
control over some of the assets to which it applied.
5
See para 126.
6
See for example the criticisms to be found in the Financial Markets Law Committee paper of
December 2012, where it is pointed out that the Regulations as interpreted do not reflect well
the practice of financial institutions in leaving securities to be held on terms by a custodian.
7
See para 16.1 below. For earlier criticism of the narrow view taken by Vos J on this see in
particular The Financial Collateral Directive’s Practice in England, by Look Chan Ho [2011]
JIBLR, Issue 4.

(e) Key effects

15.16 The principal features of the regime concern the removal of formal
requirements, measures excluding certain consequences in insolvency and in
particular to preserve the efficacy of netting and close-out provisions, and
specific provisions relating to enforcement.
So (in England), where the Regulations apply s 4 of the Statute of Frauds 1677
does not: a financial collateral arrangement amounting to a guarantee may be
enforced despite the absence of a written memorandum signed by the guarantor
complying with that Act (provided that it is sufficiently evidenced in writing for
the purposes of the Regulations). Similarly no signed written memorandum is
required to effect a disposition of an equitable interest and s 53(1)(c) of the Law
of Property Act 1925 is dis-applied. Nor is a signed written assignment required
to effect a legal assignment of a chose in action even if it would otherwise be
necessary to comply with s 136 of the Law of Property Act 19251.
Charges which would otherwise be registrable under the Companies Act 2006
are, if they amount to financial collateral arrangements within the regulations,

15
15.16 Non-Possessory Security

not required to be registered and the consequences of non-registration under

s 859H do not arise2.
Regulation 8 limits the application of various provisions of the Insolvency Act
1986 as they operate in administration. Importantly the restrictions upon
enforcement of security and the moratorium for that purpose imposed by
paragraphs 43(2) and 44 of Schedule B1 to the Insolvency Act do not apply to
financial collateral arrangements.
Further, in winding-up proceedings whether of the collateral-provider or the
collateral-taker, regulation 10 provides that s 127 of the Insolvency Act 1986
does not apply to any property or security interest created or arising under a
financial collateral arrangement, and that provision shall not prevent a close-
out netting provision operating in accordance with its terms3. Similarly the
liquidator’s power to disclaim onerous property under s 178 of the Insolvency
Act 1986 is excluded4. A transfer of shares under a financial collateral arrange-
ment will not be affected by s 88 of the Insolvency Act 19865. A floating charge
which is a financial collateral arrangement is not subject to the usual weak-
nesses compared with fixed security: s 40 and s 175 of the Insolvency Act 1986
providing for payment of preferential debts do not apply6, nor are expenses of
winding up payable under s 176ZA of the Insolvency Act 19867 nor similarly
does s 196 of the Companies Act apply8. Finally a floating charge which is also
a financial collateral arrangement is not liable to be avoided under s 245 of the
Insolvency Act 19869.
Regulation 13 provides special protection for arrangements entered into on the
day of, but without knowledge on the part of the collateral taker of, the
commencement of winding up proceedings or re-organisation measures.
Regulation 19 introduces a standard test for ascertaining the proper law in
relation to ‘book entry securities financial collateral arrangements’ within the
meaning of the regulation.
1
See reg 4(1)–(3).
2
Reg 4(5). A similar provision excludes the operation of (formerly) section 4 of the Industrial and
Provident Societies Act 1967, which has itself been replaced by Part 5 of the Community Benefit
Societies Act 2014.
3
Reg 10(1).
4
Reg 10(4).
5
Reg 10(2).
6
Reg 10(2A), (3).
7
Reg 10(2B).
8
Reg 10(6).
9
Reg 10(5).

(f) Appropriation
15.17 In addition to the methods of enforcement conventionally available
under English law, the Financial Collateral Arrangements Regulations import
from the Directive the concept of ‘appropriation’ as a procedure to realise the
security. Regulation 17 now1 provides:
‘Appropriation of financial collateral under a security financial collateral arrange-
ment

16
 Financial Collateral Arrangements 15.17

(1) Where a security interest is created or arises under a security financial

collateral arrangement on terms that include a power for the collateral-taker
to appropriate the financial collateral, the collateral-taker may exercise that
power in accordance with the terms of the security financial collateral
arrangement, without any order for foreclosure from the courts (and whether
or not the remedy of foreclosure would be available).
(2) Upon the exercise by the collateral-taker of the power to appropriate the
financial collateral, the equity of redemption of the collateral-provider shall
be extinguished and all legal and beneficial interest of the collateral-provider
in the financial collateral shall vest in the collateral taker.’
This remedy was considered by the Privy Council in the case of Cukurova
Finance International Ltd v Alfa Telecom Turkey Ltd2, an appeal from
the Court of Appeal of the Virgin Islands and in which English law had been the
subject of expert evidence. As originally enacted, and considered in that case,
regulation 17 was then in much shorter form3 and its terms restricted to ‘a legal
or equitable mortgage’. The Privy Council observed:
‘Regulation 17 appears to reflect the Treasury’s view that appropriation was already
a self-help remedy known to the law of England and Wales. Possibly it was in practice
available in respect of charges on funds of cash payable on demand or on short-term
deposits . . . But in relation to shares in a company (and especially unquoted
shares which cannot easily be valued) the notion of appropriation by the unilateral
act of the collateral-taker was a novel concept.4
Had the Treasury realised that appropriation was a novel remedy in English law, the
terms of reg 17 might have been more expansive . . . 5.’
It is in any event now clear that if a right to appropriate is granted to the
collateral-taker under a security financial collateral arrangement, then it may in
accordance with its terms ‘appropriate’ the security, and that this operates
effectively as a sale of the collateral to itself6. Although no prior formalities are
required, there must be an ‘overt act evincing the intention to exercise a power
of appropriation, communicated to the collateral-provider’7.
Under regulation 18 the collateral-taker must value the collateral in accordance
with the terms of the arrangement and in a ‘commercially reasonable manner’;
that value is to be applied to the relevant obligation and any surplus is to be
accounted for to the collateral-provider, and any shortfall remains due.
1
The present regulation was substituted with effect from 6 April 2011 by the Financial Markets
and Insolvency (Settlement Finality and Financial Collateral Arrangements) (Amendment)
Regulations 2010 (SI 2010/2993).
2
[2009] UKPC 19.
3
‘Where a legal or equitable mortgage is the security interest created or arising under a security
financial collateral arrangement on terms that include a power for the collateral-taker to
appropriate the collateral, the collateral-taker may exercise that power in accordance with the
terms of the security financial collateral arrangement, without any order for foreclosure from
the courts’.
4
Paragraph 11.
5
Paragraph 14
6
As noted in Cukurova at paragraph 11, absent the Regulations this would have been open to
criticism as self-dealing or a clog on the equity of redemption, except perhaps in the case of
charges back of cash deposits or similar.
7
Cukurova at paragraph 35.

17
15.18 Non-Possessory Security

4 MONIES PAID FOR A SPECIAL PURPOSE

(a) Quistclose Trusts

15.18 A lender may be able to recoup from the borrower the monies that he has
advanced by retaining equitable ownership of those monies, notwithstanding
that they stand to the credit of an account in the name of the borrower, until
they are applied to a particular purpose for which they were advanced.
Although this is not strictly a security interest1, its practical effect is not
dissimilar.
In Barclays Bank Ltd v Quistclose Investments Ltd2 the question arose as to the
rights of the payer in respect of such a transaction. The facts were that a
company, Rolls Razor Ltd, which was in serious financial difficulties having an
overdraft with Barclays Bank Ltd of some £484,000, needed to borrow a sum
of £209,719 to meet an ordinary share dividend which it had declared. The
company obtained a loan of that sum from Quistclose Ltd, who paid it on
condition that it would be used to pay the dividend. A cheque drawn by
Quistclose was paid into a separate account opened specially for the purpose
with the bank, who knew of the purpose and conditions of the loan. Before the
dividend had been paid, Rolls Razor went into voluntary liquidation. Quist-
close claimed repayment of the £209,719, but this was refused by the bank,
who applied the sum in reduction of the overdraft. It was submitted on behalf
of the bank that the relationship between itself and Rolls Razor was one of loan,
giving rise to a legal action in debt which necessarily excluded the implication of
any trust enforceable in equity in favour of Quistclose. The House of Lords held
that the monies were held by the borrower on a trust, whose primary purpose
was to pay the dividend, failing which they were held on trust for Quistclose.
1
Twinsectra v Yardley [2002] UKHL 12 at paragraph 72.
2
[1970] AC 567, [1968] 3 All ER 651.

(b) Existence of a trust

15.19 It is often a matter of difficulty to determine whether, on any given facts,
the requisites for the creation of a trust are made out1. On one side of the line is
Re Kayford Ltd (in Liquidation)2, where a company which carried on a
mail-order business such that customers either paid the full purchase price or a
deposit when ordering goods, got into financial difficulties. The managing
director, who was concerned to protect customers who had sent and were
sending money, was advised to open a special account to be called a ‘Customers’
Trust Deposit Account’. He accepted this advice, but then agreed with the
company’s bank to use for this purpose an existing, dormant deposit account
with a small credit balance. Megarry J held that a trust in favour of the
customers had been created. There was a sufficient manifestation of an inten-
tion to create a trust; its subject matter was pure personalty, so that writing,
though desirable, was not essential; and each of the so-called ‘three certainties’
was present. This may be compared with Re Multi Guarantee Co Ltd3, where
a company (‘MG’) was incorporated to market warranties for domestic appli-
ances, which warranties provided insurance cover against failure of the goods
after the expiry of the initial manufacturer’s warranty. A company which

18
 Monies Paid for a Special Purpose 15.19

owned a chain of shops operated the MG warranty scheme, and paid to MG

premiums which it collected from its customers. The premiums were held by
MG in a designated bank account. The retailing company became concerned
that MG had not obtained proper insurance cover and, following negotiations,
MG transferred the premium monies into a joint deposit account in the names
of the parties’ solicitors, and agreed to release the monies to the retailer. Before
this could be done, MG went into voluntary winding-up and the retailing
company then claimed that the premiums were held on trust in its favour.
The Court of Appeal rejected this claim, holding that MG had never manifested
a sufficient intention to create a trust, the requisite certainty of words being
absent. Accordingly the premium monies formed part of MG’s general assets.
In Twinsectra v Yardley4, it was held that a lender could have the requisite
intention to create a Quistclose trust notwithstanding that it was not aware that
any trust would arise. The intention to create a trust is judged objectively, not
subjectively. The key question is whether it was intended that the borrower
should be restricted in the use of the monies, so that they had to be used
exclusively for the specified purpose5. Lord Millett analysed the nature of the
trust as being a resulting trust in favour of the lender, whereby the borrower has
a power to apply the money to a specific purpose. If that purpose is insufficiently
clear for the court to be able to determine whether or not it can, or has been,
carried out, the borrower lacks authority to make use of the money at all and
must return it to the lender6. A helpful summary of the principles that emerge
from the judgments in Twinsectra was agreed between the parties and adopted
by the Court in Bieber v Teathers7, paragraph 14, and re-iterated by Briggs LJ
in Bellis & Others v Challinor & Others8.
The application of the wider principles governing whether an effective trust
arose over, or proprietary interest was created in, securities which were the
subject of complex inter-bank transactions was considered at length by Briggs J
in In the Matter of Lehman Brothers International (Europe) (In administration)
(2010)9.
1
See also Re Kayford [1975] 1 All ER 604, [1975] 1 WLR 279; Re Chelsea Cloisters Ltd (1980)
41 P & CR 98, CA; Neste Oy v Lloyds Bank plc [1983] 2 Lloyd’s Rep 658, held to have been
wrongly decided in Bailey v Angove’s PTY Limited [2016] UKSC 47; Carreras Rothmans Ltd
v Freeman Mathews Treasure Ltd [1985] Ch 207, [1985] 1 All ER 155; Re EVTR [1987] BCLC
646, CA; Re BCCI (No 8) [1996] Ch 245 at 271 CA (the depositors’ contention that the
deposits had been paid on trust to be applied for a particular purpose was not pursued in the
House of Lords); Twinsectra v Yardley [2002] 2 AC 164; OT Computers Ltd (in
administration) v First National Tricity Finance Ltd [2003] EWHC 1010 (Ch); Cooper v
Official Receiver [2003] BPIR 55; Re Crown Forestry Rental Trust [2004] 4 All ER 558 (PC);
Templeton Insurance v Penningtons [2006] Lloyd’s Rep 115 (CA); Abou-Rahmah v Abacha
[2006] 1 Lloyd’s Rep 484, affirmed by the Court of Appeal on a different point; Re Farepack
Food and Gifts [2006] EWHC 3272 (Ch); Cooper v PRG Powerhouse [2008] EWHC 498 (Ch);
Global Marine Drillships v Landmark Solicitors [2011] EWHC 2685 (Ch).
2
[1975] 1 All ER 604, [1975] 1 WLR 279.
3
[1987] BCLC 257, CA.
4
[2002] UKHL 12.
5
See, paragraphs 73 and 74, per Lord Millett.
6
Paragraph 101.
7
[2012] EWCA Civ 1466, citing the judgment below of Norris J.
8
[2015] EWCA Civ 59 at paragraphs 56–60.
9
[2010] EWHC 2914, see in particular paragraphs 225 onwards for the discussion of principles.

19
15.20 Non-Possessory Security

(c) Notice of trust

15.20 A bank which receives monies paid for a special purpose without notice
of that purpose and for good consideration will not be affected by the trust. In
Quistclose (above), it was common ground that a mere request to put the
money into a separate account was not sufficient to constitute notice1.
Where a bank does not receive notice until after the payment in of monies
impressed with a trust, the question arises whether the bank, by its promise to
repay, has become a bona fide purchaser for value so as to take priority over the
interests of the beneficiaries. In Quistclose in the Court of Appeal2, Russell LJ
observed that, except in the technical sense of undertaking a repayment
obligation, the bank gave no consideration for the receipt of the money; it gave
no extension of credit to Rolls Razor on the faith of the payment; it did not
credit any interest on the sum. In the House of Lords, Lord Wilberforce said
that the bank had not in any real sense given value when it received the money
or thereafter changed its position3. It appears from these observations that the
bank’s promise to repay will not of itself give the bank the status of a bona fide
purchaser for value.
1
[1970] AC 567 at 582C, [1968] 3 All ER 651 at 656F; and see Union Bank of Australia Ltd v
Murray-Aynsley [1898] AC 693.
2
Quistclose Investments Ltd v Rolls Razor Ltd [1968] Ch 540, [1968] 1 All ER 613, CA.
3
[1970] AC 567 at 582C, [1968] 3 All ER 651 at 656E.

(d) Effect of trust

15.21 Where a bank is on notice that monies paid for a special purpose are
subject to a trust, the bank may not apply such monies to discharge the personal
indebtedness of the customer who is the trustee1, and the monies so paid will not
form part of the customer’s general assets so as to fall within assets charged to
the bank under a debenture2.
1
See, eg Quistclose Investments Ltd v Rolls Razor Ltd [1968] Ch 540, [1968] 1 All ER 613, CA.
2
See, eg Re EVTR [1987] BCLC 646, CA.

20
Chapter 16

PLEDGES OF GOODS, DOCUMENTS

OF TITLE AND
NEGOTIABLE INSTRUMENTS

1 GOODS AND DOCUMENTS OF TITLE TO GOODS

(a) Possession 16.2
(b) Bills of Sale Acts 16.13
(c) Nemo dat quod non habet 16.15
2 DOCUMENTARY INTANGIBLES AND NEGOTIABLE
INSTRUMENTS 16.18
(a) Bills, cheques and notes 16.19
(b) Fully negotiable securities 16.23
(c) Pledge by an agent without, or in excess of, authority 16.24
(d) Negotiability 16.25
3 REALISATION
(a) Power of sale 16.32
(b) Notice to pledgor 16.33
(c) Realisation of pledge held as cover for acceptances 16.34
4 REGISTRATION UNDER THE COMPANIES ACT 16.35

16.1 Pledge and lien are both types of security founded on possession. As noted
in Chapter 14, the difference between them is that in the case of pledge the
owner delivers possession to the creditor as security, whereas in the case of a lien
the creditor retains possession of goods previously delivered to him for some
other purpose1. A pledge also carries with it an implied right of sale, which a lien
does not.
The Court of Appeal has affirmed the conventional view that only tangible
assets and documentary intangibles (such as negotiable instruments, bearer
securities or documents of title) may be the subject of ‘possession’ in the sense
required for the creation of possessory security. It is not therefore possible as the
law presently stands to take possession of information upon a database, or
accordingly for a lien over such information to arise2.
A pledge or lien is a ‘security interest’ within the meaning of the Finan-
cial Collateral Arrangements Regulations discussed more fully in the preceding
chapter3. Provided the other requirements under those Regulations are met, a
pledge created (or lien arising) over a financial instrument may benefit from the
additional protections or savings granted by the Regulations4. The deposit of
(for example) a share certificate, even if sufficient for the purposes of ‘control’
within the Regulations, would operate by way of an equitable mortgage or
charge over the shares and not a pledge of them for the reasons in the following
paragraphs5.
A similar economic purpose is in some cases achieved by a sale and repurchase
transaction known as a repo. Assume that a metal trader wishes to finance a

1
16.1 Pledges of Goods, Docs, Neg Instr.

purchase of metal. Instead of giving the lender a pledge, the trader can sell the
metal and simultaneously agree to repurchase it at a future date. The difference
between the sale price and the repurchase price represents (in effect) the cost of
funds. This type of arrangement does not involve the creation of security at all
and is not considered further in this chapter6.
1
See Re Cosslett (Contractors) Limited [1998] Ch 495 per Millet LJ.
2
Your Response Limited v Datateam Business Media Limited [2014] EWCA CA Civ 281; In In
the matter of Lehman Brothers International (Europe) (in administration) [2012] EWHC 2997
(Ch) Briggs J invited all parties to consider a submission that the law might be developed, but
none acceded to his invitation. See also Chapter 14 above at para 14.7.
3
See para 15.13.
4
Note however that the financial instrument in question must be capable of being the subject of
a pledge or lien.
5
Compare Re City Securities Pte [1990] 1 SLR 468.
6
The key features of repo and stock lending transactions in respect of intangibles were usefully
summarised by Briggs J in In the Matter of Lehman Brothers International (Europe) (In
administration) [2010] EWHC 2914 at paragraphs 78–82. The case includes a lengthy
discussion of the principles by which a proprietary or security interest may be established, see
paragraph 225 onwards.

1 GOODS AND DOCUMENTS OF TITLE TO GOODS

(a) Possession
(i) The requirement for possession
16.2 A pledge, being created by and based on delivery of possession, is a
security limited by the extent of the pledgee’s possession. Thus, if he loses
possession, he loses his security. The security extends only to what is in his
possession, and no further; and the security is incapable of extending to
anything which is not capable of being possessed. Thus, delivery of the title
deeds to land may constitute a pledge of the title deeds, but cannot constitute a
pledge of the land itself; and delivery of a share certificate cannot constitute a
pledge of the underlying shares, not merely because the certificate does not
represent the underlying shares but is merely evidence of title to them, but
because possession of shares (being intangible assets, or choses in action) is an
impossibility. Both transactions may constitute pledges of the relevant docu-
ments, which of themselves are of little or no value to the person in possession
of them, and they may also constitute (or be taken as evidence of an intention to
create) equitable mortgages of the underlying assets (land1 and shares), but they
cannot constitute pledges of those assets.
The pledge is, therefore, a security of limited application, being founded upon
possession. The rule that the pledgee loses his security if he loses possession
considerably limits the usefulness of the pledge as security. Banks are not in the
business of warehousing or trading in goods, and are not equipped to do so.
Furthermore, the bank’s customer will want to retrieve the goods in order to be
able to sell them, and the bank will wish to facilitate this without jeopardising
its security. This would not be easy to achieve if the pledge were limited to actual
physical possession. However, the value of the pledge as a security and the
extent of its application has been increased by a number of legal devices,
notably the concept of constructive possession (and the related concept of
documents which represent the goods themselves), the trust receipt, and the

2
 Goods and Documents of Title to Goods 16.3

concept of negotiability.
1
Note that the creation of an equitable mortgage or pledge by a mere deposit of title deeds is no
longer possible because a contract for the sale or other disposition of an interest in land must be
in a signed document which incorporates all the terms which the parties have expressly agreed:
s 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989; United Bank of Kuwait v
Sahib [1997] Ch 107, CA.

(ii) Constructive possession

A. In general
16.3 A pledge of goods is not complete unless and until there has been actual or
constructive delivery of the goods. Actual delivery to a bank is impractical, so
constructive delivery is what is normally relied on. In the older cases, this is
usually described as the handing over of the key to the warehouse where the
goods are stored. In modern practice, constructive delivery will usually consist
either of delivery of a valid document of title which represents the goods, such
as a bill of lading (as to which see below), or of an acknowledgment (called an
attornment) by the warehouse-keeper that he holds the goods to the order or at
the disposition of the bank. It is by no means clear that any other form of
constructive delivery is effective. The position is lucidly explained by Lord
Wright in Official Assignee of Madras v Mercantile Bank of India Ltd1:
‘At the common law a pledge could not be created except by a delivery of possession
of the thing pledged, either actual or constructive. It involved a bailment. If the
pledgor had the actual goods in his physical possession, he could effect the pledge by
actual delivery: in other cases he could give possession by some symbolic act, such as
handing over the key of the store in which they were. If, however, the goods were in
the custody of a third person, who held for the bailor so that in law his possession was
that of the bailor, the pledge could be effected by a change of the possession of the
third party, that is by an order to him from the pledgor to hold for the pledgee, the
change being perfected by the third party attorning to the pledgee, that is acknowl-
edging that he thereupon held for him; there was thus a change of possession and a
constructive delivery: the goods in the hands of the third party became by this process
in the possession constructively of the pledgee. But where goods were represented by
documents the transfer of the documents did not change the possession of the goods,
save for one exception, unless the custodier (carrier, warehouseman or such) was
notified of the transfer and agreed to hold in future as bailee for the pledgee. The one
exception was the case of bills of lading, the transfer of which by the law merchant
operated as a transfer of the possession of, as well as the property in, the goods. This
exception has been explained on the ground that the goods being at sea the master
could not be notified; the true explanation may be that it was a rule of the law
merchant, developed in order to facilitate mercantile transactions, whereas the
process of pledging goods on land was regulated by the narrower rule of the common
law and the matter remained stereotyped in the form which it had taken before the
importance of documents of title in mercantile transactions was realised. So things
have remained in the English law; a pledge of documents is not in general to be
deemed a pledge of the goods; a pledge of the documents (always excepting a bill of
lading) is merely a pledge of the ipsa corpora of them; the common law continued to
regard them as merely tokens of an authority to receive possession, though from time
to time representations were made by special juries that in the ordinary practice of
merchants transfers of documents were understood to pass possession, as for instance
in 1815, in Spear v Travers2. The common law rule was stated by the House of Lords

3
16.3 Pledges of Goods, Docs, Neg Instr.

in William McEwan & Sons v Smith3. The position of the English law has been fully
explained also more recently in Inglis v Robertson4 and in Dublin City Distillery
etc Ltd v Doherty 5’.

1
[1935] AC 53 at 58.
2
(1815) 4 Camp 251.
3
(1849) 2 HL Cas 309.
4
[1898] AC 616, HL.
5
[1914] AC 823, HL.

16.4 A document issued by the owner of goods which are in his possession,
undertaking to hold the goods to the order of the bank, is likely to fall foul of the
Bills of Sale Acts (see paras 16.13–16.14 below). Where the owner is not in
possession, such an undertaking is not, of itself, sufficient to create a pledge. In
Dublin City Distillery (Great Brunswick Street, Dublin) Ltd v Doherty1, the
owners issued a delivery order to the bank. Lord Atkinson said at 847:
‘ . . . delivery of a warrant such as those delivered to the respondent in the present
case is in the ordinary case, according to Parke B, no more than an acknowledgment
by the warehouseman that the goods are deliverable to the person named therein or
to anyone he may appoint. The warehouseman holds the goods as the agent of the
owner until he has attorned in some way to this person and agreed to hold the goods
for him; then and not till then does the warehouseman become a bailee for the latter,
and then and not till then is there a constructive delivery of the goods. The delivery
and receipt of the warrant does not per se amount to a delivery and receipt of the
goods.’
Lord Parker in the same case summarised succinctly how constructive delivery
can usually be effected2:
‘When the goods are not in the actual possession of the pledger, but of a third party
as bailee for him, possession is usually given by a direction of the pledger to the third
party requiring him to deliver them to or hold them on account of the pledgee,
followed either by actual delivery to the pledgee or by some acknowledgement on the
part of the third party that he holds the goods for the pledgee. The form in which such
direction or acknowledgement is given is immaterial. Where the third party is a
warehouseman, the direction usually takes the form of a delivery order and the
acknowledgement of a warrant for delivery of the goods or an entry in the warehouse
books of the name of the pledgee as the person for whom the goods are held’.
Thus, the bank will only have constructive possession of goods held by a
warehouseman or other bailee after there has been an attornment to the bank.
Any act which notifies the bank of the bailee’s intention to hold the goods on the
bank’s behalf is sufficient to constitute an attornment. It may be that the
delivery by the original holder of a warehouse warrant made out to bearer
sufficiently evidences the bailee’s intention to hold the goods on behalf of the
bearer of the document. Whether or not the warehouseman has attorned to the
bank is ultimately a question of fact.
1
[1914] AC 823, HL.
2
[1914] AC 823 at 852, HL.

B. Documents of title to goods

16.5 Only two classes of documents of title to goods merit specific consider-
ation in the present context, namely statutory warrants and bills of lading. This

4
 Goods and Documents of Title to Goods 16.6

is because they are the only documents recognised by the common law to
represent the goods themselves, so that transfer of the document can, of itself,
constitute a transfer of possession of, or property in, the goods to which it
relates1. Although it may be customary for banks to take, as security, possession
of other documents relating to goods, such as non-statutory warehouse war-
rants or delivery orders, it seems that possession of such a document cannot, of
itself, amount to possession of the goods to which it relates. Other documents,
such as letters of hypothecation and letters of trust, may constitute bills of sale
(see para 16.10 below), in which case they will be of even less value to a bank
looking to possession or constructive possession of goods for its security. Con-
structive possession of goods through possession of documents relating to the
goods can normally be achieved only if the documents in question are statutory
warrants or bills of lading.
Statutory warrants are warrants issued under various special Acts of Parlia-
ment, for example the Port of London Act 1968 (s 146), the Mersey Docks
Acts Consolidation Act 1858 (s 200), the Liverpool Mineral & Metal Stor-
age Company Limited (Delivery Warrants) Act 1921 (s 3) and the Trafford Park
Act 1904 (s 33). Reference must be made to the provisions of the relevant
statute to determine the rights of the holder of such a warrant. However,
statutory warrants are thought to be, in practice, now largely obsolete.
1
It seems possible for a mercantile custom to be proved in relation to other documents – see Kum
v Wah Tat Bank [1971] 1 Lloyds Rep 439 (PC).

16.6 Bills of lading are the only documents recognised by the common law as
having an exceptional status. It is well established that they represent the goods
to which they relate, so that the transfer of the bill of lading (in proper form and
manner) of itself constitutes a transfer of the goods themselves. The transfer
may, of course, be merely a transfer of possession, for example by way of
pledge, or a transfer of property by way of sale, depending upon the parties’
intentions. That said:
‘A bill of lading is not, like a bill of exchange or promissory note, a negotiable
instrument, which passes by mere delivery to a bona fide transferee for valuable
consideration, without regard to the title of the parties who make the transfer.
Although the shipper may have indorsed in blank a bill of lading deliverable to his
assigns, his right is not affected by an appropriation of it without his authority. If it be
stolen from him or transferred without his authority, a subsequent bona fide trans-
feree for value cannot make title under it as against the shipper of the goods. The bill
of lading only represents the goods; and, in this instance the transfer of the symbol
does not operate more than a transfer of what is represented1’.
However, one feature akin to negotiability possessed by bills of lading is their
capacity to defeat the unpaid vendor’s right of stoppage in transit, when
transferred to a bona fide transferee for value. Under s 47(2) of the Sale of
Goods Act 1979, re-enacting in somewhat fuller terms s 10 of the Factors Act
1889:
‘ . . . where a document of title to goods has been lawfully transferred to any
person as buyer or owner of the goods, and that person transfers the document to a
person who takes the document in good faith and for valuable consideration, then (a)
if such last-mentioned transfer was by way of sale, the unpaid seller’s right of lien or
retention or stoppage in transitu is defeated; and (b) if such last-mentioned transfer

5
16.6 Pledges of Goods, Docs, Neg Instr.

was by way of pledge or other disposition for value, the unpaid seller’s right of lien or
retention or stoppage in transitu can only be exercised subject to the rights of the
transferee’.
In addition to proprietary rights, the lawful holder2 of a bill of lading also
acquires contractual rights3 and liabilities4. Banks are, however, effectively
protected from liability as holders of bills provided they do not take or demand
delivery of the goods covered by the document5 or seek to make any claim under
the contract of carriage6. As soon as they do so, they become ‘subject to the
same liabilities under [the contract contained in or evidenced by the bill of
lading] as if [they] had been a party to that contract’7.
1
Gurney v Behrend (1854) 3 E & B 622 at 633.
2
As to the meaning of ‘holder’, see Primetrade AG v Ythan Ltd, The Ythan [2005] EWHC 2399
(Comm), [2006] 1 All ER 367, [2006] 1 All ER (Comm) 157, [2006] 1 Lloyd’s Rep 457.
3
Carriage of Goods by Sea Act 1992, s 2(1).
4
Carriage of Goods by Sea Act 1992, s 3.
5
Carriage of Goods by Sea Act 1992, s 3(1)(a) and (c).
6
Carriage of Goods by Sea Act 1992, s 3(1)(b).
7
Carriage of Goods by Sea Act 1992, s 3(1).

(iii) Trust receipts

16.7 Before payment to the pledgee can be made, the pledgor, often a buyer of
the goods, may need to put the goods to use, for example sell them, in order to
raise funds. The pledgor may therefore ask the bank to release the goods so that
they can be used or sold. In such a case, the bank will have to transfer the goods
to the owner and consequently lose possession, and would thereby ordinarily
lose its security. However, by the use of a trust receipt (also sometimes known as
a ‘letter of trust’) the bank is able to part with possession and yet remain
secured. The trust receipt is a document by which the bank’s customer, the
pledgor, acknowledges that he holds the goods, and the proceeds of sale, on
trust for the bank. The common law rule that relinquishing possession of goods
or the documents of title thereto destroys the pledge to which they were
subjected, does not apply where the redelivery is for a specific limited purpose.
In North Western Bank Ltd v John Poynter, Son and Macdonalds1 the House of
Lords held that the pledgee might hand back to the pledgor, as his agent for the
purpose of sale, the goods pledged without in the ‘slightest degree diminishing
the full force and effect of his security’. However, in practice, the bank’s security
is diminished since the bank is no longer in possession of the subject matter of
the security and thus loses control over it. For example, a bona fide purchaser
for value without notice will obtain good title once he acquires possession of the
goods or the documents of title to them.
A trust receipt does not protect a bank if the pledgor sells the goods and
misapplies the proceeds. It was held in Lloyds Bank Ltd v Bank of America
National Trust and Savings Association2 that, when a bank releases goods to its
customer for the purpose of sale, it constitutes the customer a mercantile agent
so that persons dealing with the customer in good faith will obtain a good title
to the goods pursuant to the Factors Act 1889 (see para 16.16 below). The bank
will, therefore, not be able to enforce its security over the pledged goods once
they have been sold.

6
 Goods and Documents of Title to Goods 16.9

Where the bank’s customer is allowed to take a document of title on the basis of
a trust receipt and then wrongfully pledges it with another bank as security for
a loan, the second bank’s title will defeat the first bank’s, provided the second
bank took the document in good faith. In such a case, the customer will be liable
to the first bank for breach of contract and for conversion3.
If the customer misapplies the proceeds of sale and does not transfer them to the
bank in order to discharge his obligation to the bank under the trust receipt, the
bank has an equitable right to trace the proceeds on the basis that it is the
beneficiary of a trust.
1
[1895] AC 56 at 67–68.
2
[1938] 2 KB 147.
3
Midland Bank Ltd v Eastcheap Dried Fruit Co [1962] 1 Lloyd’s Rep 359.

16.8 A trust receipt does not embody a charge and, therefore, does not require
registration under the Companies Act. This was established in Re David
Allester Ltd1, where a bank had re-delivered bills of lading covering seed to the
borrowers, on their undertaking to hold the goods and the proceeds as trustees
for the bank. The company went into liquidation and the liquidator challenged
the bank’s right to the goods. It was argued by the bank that letters of trust were
‘documents used in the ordinary course of business as proof of the possession or
control of goods’ within the exceptions to the definition of a bill of sale in s 4 of
the Bills of Sale Act 1878 (see paras 16.13 to 16.14 below). Astbury J held that
the documents were not bills of sale at all, and that the bank’s pledge did not
arise from the letters of trust, but existed before they were executed. The letters
of trust were merely records of trust authorities given by the bank setting out the
terms on which the pledgor was authorised to realise the goods on the
pledgee’s behalf. He pointed out that the letters of trust were not issued for the
purpose of creating a security at all; the security already existed. He also held
that the letters of trust did not create a charge on book debts of the company.
The reasoning of Astbury J in Re David Allester Ltd both defines and limits the
scope of the trust receipt. The fundamental requirement is that the documents
must be the subject of a pre-existing pledge in favour of the bank, so that when
they are released on trust, there is something for the trust to bite on, namely the
bank’s right of possession and the special property in the goods conferred by the
pledge. The reasoning is subtle, but arrives at a desirable, practical result. There
are dangers, however, in attempting to extend the reasoning beyond this limited
application. Other documents purporting to create security in goods, some-
times also called trust receipts, more often called letters of hypothecation,
letters of lien or letters of trust, if used in other circumstances, are likely to be
bills of sale, in which case they may have little or no value to the bank as security
(see para 16.14 below) or to be registrable as charges (see para 16.35 below).
1
[1922] 2 Ch 211.

(iv) Letters of hypothecation, lien or trust

16.9 Letters of hypothecation, letters of lien and letters of trust are all docu-
ments used by banks in circumstances where their effectiveness as security is
questionable. There is no generally accepted meaning for any of these terms.

7
16.9 Pledges of Goods, Docs, Neg Instr.

The very narrow basis for the effectiveness of the trust receipt has already been
explained above.

A. Letters of hypothecation

16.10 Hypothecation is a term more often found in the civil law. The contract
of hypothecation is to be distinguished from pledge in that a pledge entails
delivery of possession whereas a hypothecation does not. Both constitute an
equitable charge1. Letters of hypothecation to a bank are often a notification
and promise that the bank shall have a charge on any movables – goods,
documents of title, bills of exchange etc – which come into the hands of the bank
from the signatory or with his consent or approval. Clearly, when this occurs,
the bank will have a lien or pledge by virtue of its possession, but if the
document creates an equitable charge prior to that time, the question must arise
as to whether or not it constitutes a bill of sale or (if created by a company) a
floating charge and should, therefore, be registered2.
1
Re Sleeex p North Western Bank, (1872) LR 15 Eq 69; Dublin City Distillery Ltd v Doherty
[1914] AC 823, 854.
2
For another example of a letter of hypothecation see Ladenberg & Co v Goodwin, Ferreira
& Co Ltd (in liquidation) and Garnett [1912] 3 KB 275.

B. Letters of lien
16.11 A letter of lien has been described as a document by which a bank can
take goods as security which are not in the possession of the owner but, for
instance, in that of someone in possession for processing1. Typically the owner
attempts by agreement to change his possession into that of bailee for the
pledgee by means of a document using the expression ‘we hold on your account
and under lien to you’. Such a document may also be regarded as an equitable
agreement to pledge subsequently. It would certainly appear to be an attempt to
create a pledge without an attornment to the pledgee by the person actually in
possession of the goods or a delivery of actual possession; and since a lien is a
security based on possession, it is difficult to understand the effect of a
document which purports to create such a security without conferring posses-
sion.
1
See Re Hamilton Young & Co, ex p Carter [1905] 2 KB 772, CA.

C. Letters of trust
16.12 A letter of trust, if not a trust receipt falling strictly within the narrow
scope of Re David Allester Ltd1, would seem likely to fall foul of the Bills of Sale
Acts as constituting ‘a declaration of trust without transfer’.
1
[1922] 2 Ch 211.

8
 Goods and Documents of Title to Goods 16.13

(b) Bills of Sale Acts

(i) Definition

16.13 A Bill of Sale is defined in s 4 of the Bills of Sale Act 1878 as follows:
‘The expression “bill of sale” shall include bills of sale, assignments, transfers,
declarations of trust without transfer, inventories of goods with receipt thereto
attached, or receipts for purchase moneys of goods, and other assurances of personal
chattels, and also powers of attorney, authorities, or licences to take possession of
personal chattels as security for any debt, and also any agreement, whether intended
or not to be followed by the execution of any other instrument, by which a right in
equity to any personal chattels, or to any charge or security thereon, shall be
conferred, but shall not include the following documents; that is to say, assignments
for the benefit of the creditors of the person making or giving the same, marriage
settlements, transfers or assignments of any ship or vessel or any share thereof,
transfers of goods in the ordinary course of business of any trade or calling, bills of
sale of goods in foreign parts or at sea, bills of lading, India warrants, warehouse-
keepers’ certificates, warrants or orders for the delivery of goods or any other
documents used in the ordinary course of business as proof of the possession or
control of goods or authorising or purporting to authorise, either by indorsement or
by delivery, the possessor of such document to transfer or receive goods thereby
represented’.
One statutory exception to the definition of a bill of sale in the Bills of Sale Act
1878 which is mentioned for completeness, although of limited application, is
s 1 of the Bills of Sale Act 1890 (as substituted by the Bills of Sale Act 1891)
which provides as follows:
‘An instrument charging or creating any security on or declaring trusts of imported
goods given or executed at any time prior to their deposit in a warehouse, factory or
store, or to their being reshipped for export, or delivered to a purchaser not being the
person giving or executing such instrument, shall not be deemed a bill of sale within
the meaning of the Bills of Sale Acts 1878 and 1882’.
Section 9 of the Bills of Sale Act (1878) Amendment Act 1882 provides:
‘A bill of sale made or given by way of security for the payment of money by the
grantor thereof shall be void unless made in accordance with the form in the schedule
to this Act annexed’.
The purpose of the Bills of Sale Acts was to prevent or avoid the retention of
possession of goods by the owner after he had sold or charged them. The
registration and other formalities required by the Bills of Sale Acts were so
cumbersome that they effectively destroyed the usefulness of the chattel mort-
gage as a basis for securing consumer credit, and thereby in due course led to the
development of hire purchase for this purpose.
So far as companies are concerned, until the changes introduced in April 2013,
as to which see para 16.35 below, successive forms of the provisions requiring
registration of charges given by companies1 since at least 1900 required
registration of:
‘a charge created or evidenced by an instrument which, if executed by an individual,
would require registration as a bill of sale’.

9
16.13 Pledges of Goods, Docs, Neg Instr.

The requirements for registration in respect of companies have now been

de-coupled from the Bills of Sale Acts, though many of the cases still need to be
understood in light of the historic definition.
In practice, banks seldom separately register security taken over goods, so that
the effect of Bills of Sale Acts has been to cast doubt on the effectiveness of any
security over goods taken by a bank other than a pledge or lien founded on
possession (or constructive possession) of the goods themselves.
The bank seeking security on goods should, be cautious about any arrangement
which does not involve the transfer of possession to the bank, although the
strict legal issue in relation to security taken from an individual is whether the
document by which the security is created falls within the definition of a bill of
sale in s 4 of the 1878 Act quoted above. Neither a pledge, nor a document
recording a pledge and setting out the rights of the pledgee as regards sale of the
pledged goods etc, will normally constitute a bill of sale; whereas a document
creating an enforceable right to call for a pledge at a later date may well do so.
Similarly, a validly perfected pledge given by a company is probably not
registrable, but anything less may well be vulnerable if unregistered.
1
See s 860(7)(b) of the Companies Act 2006, before that s 395 of the Companies Act 1985.

(ii) Application to letters of hypothecation, lien or trust

16.14 The issue in relation to letters of hypothecation, lien or trust is whether
or not the document in question (whatever it may be called) is one ‘used in the
ordinary course of business as proof of the possession or control of goods’,
within the exception to the definition of a bill of sale in s 4. The authorities are
confusing: it is difficult to draw out of them any principles of general applica-
tion and dangerous to rely upon them as support for the effectiveness of any
document not strictly on all fours with that considered in the particular case. In
Re Slee1 the facts were that Slee pledged wool in his own warehouse to the bank
and undertook to deliver warrants; he absconded and the bank took the keys of
the warehouse and possession of the wool. The wool belonged to third parties
who did not claim as they were indebted to Slee, who had become bankrupt. It
was held that the letter of pledge created a good equitable charge not registrable
pursuant to the Bills of Sale Acts as it was a document used in the ordinary
course of business; that it was not a declaration of trust without transfer. By way
of contrast, in R v Townshend2 a hypothecation given to a bank, undertaking to
hold goods in trust for it and to hand over the proceeds when received, was held
by Day J to be ‘a declaration of trust without transfer’. However, the document
was nevertheless held to be within the exceptions to the definition in s 4 of the
1878 Act because, in that particular case, the goods were at sea3.
The documents in Re Hamilton Young & Co, ex p Carter4 were what Vaughan
Williams LJ, described as ‘letters of lien’. They arose when traders sent goods to
bleachers and packers for bleaching and packing respectively before export.
The traders drew on their bank for a loan against the goods, and their letter of
notice and request read:
‘As security for this advance we hold on your account and under lien to you the
under-mentioned goods in the hands of . . . as per their receipt enclosed’.

10
 Goods and Documents of Title to Goods 16.14

The word ‘lien’ is an obvious misnomer, for the bank had neither goods nor
documents of title; the goods were in fact hypothecated to it. In this case the firm
became bankrupt and the trustee claimed that the documents (a) were bills of
sale and void for non-registration and (b) that at the crucial date the goods were
‘in the possession, order, or disposition of the bankrupts, by the consent and
permission of the true owners’ within what became s 38(c) of the Bankruptcy
Act 1914 (now repealed).
Both in the lower court5 and the Court of Appeal6 it was held that the
documents came within the exceptions in s 4 of the Bills of Sale Act 1878, being
documents:
‘used in the ordinary course of business as proof of the possession or control of
goods’.
Vaughan Williams LJ held that the bank had control of the goods despite the
fact that Hamilton Young & Co could deal freely with the goods after
processing for shipment to the East. The control of the bank, he thought,
continued all along. Stirling LJ doubted this but nevertheless accepted the view
of Bigham J. It is certainly not easy to see how the bank had any control at all
until attornment. Cozens-Hardy LJ thought that the letter of lien, coupled with
the deposit of the bleachers’ receipt, was a ‘document used in the ordinary
course of business as proof of the control of goods’:
‘It enabled the bank to prevent the bankrupts by injunction from dealing with the
goods in any manner inconsistent with the arrangements contemplated by the parties
– an arrangement which would result in the handing over of bills of lading when
goods were ready for shipment to Calcutta. It thus gave the bank a “control” of the
goods’.
Discussing this case in Official Assignee of Madras v Mercantile Bank of
India Ltd7, Lord Wright said:
‘There was in that case notice by the bank of their lien to the bleachers shortly before
the insolvency, but the statement of the bankers’ rights in equity as against the
debtors, and consequently as against the trustee in bankruptcy, is not made with
reference to any question of notice. The rights between the immediate parties do not
depend on notice, just as in the case of an equitable assignment of a debt notice is not
necessary to complete the equitable right as between assignor and assignee’.
Applying the broad principles of equity, it is easy to understand that documents
of the nature considered in these cases create an equitable charge. It is far less
easy to understand how the courts were able to take them outside the definition
of a bill of sale in s 4 of the 1878 Act. The decisions can only be explained as
being based on a finding of fact that the particular documents in question were
documents ‘used in the ordinary course of business as proof of the possession or
control of goods’ and thus within the exception of s 4. Whether or not that is
correct, such arrangements might well now need to be registered as charges
under the Companies Act 2006, see para 16.35 below.
1
(1872) LR 15 Eq 69.
2
(1884) 15 Cox CC 466.
3
See also Mercantile Bank of India Ltd v Chartered Bank of India, Australia and China
and Strauss & Co Ltd (in liquidation) (No 2) [1937] 4 All ER 651, in which instruments headed
‘trust receipt’ were held by Porter J not to create a trust and, therefore, not to be registrable
under the Indian Trusts Act 1882, but created an equitable charge.
4
[1905] 2 KB 772, CA.
5
[1905] 2 KB 381 (Bigham J).

11
16.14 Pledges of Goods, Docs, Neg Instr.
6
[1905] 2 KB 772, CA.
7
[1935] AC 53 at 65, PC.

(c) Nemo dat quod non habet

16.15 This fundamental principle of English law, that nobody can give a better
title than that which he himself enjoys, is applicable to a pledge in the same way
as it applies to any other disposition of property. Thus, a valid pledge of goods
or of documents can normally be created only by or with the consent of the true
owner. There are, however, exceptions to the rule which are more commonly
encountered in the context of sale than of pledge, but may nevertheless be of
assistance to the person who has taken a pledge without the consent of the true
owner. The principal exceptions fall into two main categories: those arising
under the Factors Act 1889 and Sale of Goods Act 1979, and those arising by
virtue of the concept of negotiability.

(i) The Factors Act 1889

16.16 The Factors Acts (the first was enacted in 1823) were intended to
overcome the weakness arising from the inability of a bona fide transferee of
goods or of documents of title to goods to obtain a good title where his
transferor had none. They made a breach in the common law rule nemo dat
quod non habet by introducing, as Chalmers put it, a partial application of the
French maxim: en fait de meubles, possession vaut titre. It was felt unreason-
able, where goods were entrusted by the owner to someone else who, in fraud
of the owner, sold or pledged them to a third party, that the third party should
suffer if he gave value and took in ignorance of the fraud. As it was put by
Blackburn J in Cole v North Western Bank1:
‘The legislature seem to us to have wished to make it the law, that, where a third
person has entrusted goods or the documents of title to goods to an agent who in the
course of such agency sells or pledges the goods, he should be deemed by that act to
have misled any one who bona fide deals with the agent and makes a purchase from
or an advance to him without notice that he was not authorised to sell or procure the
advance’.
The Acts remedied this weakness where the goods were entrusted to what was
eventually called a ‘mercantile agent’2, which is defined by s 1 of the Factors Act
1889 as:
‘a mercantile agent having in the customary course of his business as such agent
authority either to sell goods or to consign goods for the purpose of sale, or to buy
goods, or to raise money on the security of goods’.
In Lowther v Harris3, Wright J described a mercantile agent as:
‘an agent doing a business in buying or selling, or both, having in the customary
course of his business such authority to sell goods’.
Blackburn J in Lamb v Attenborough4, observed that:
‘the agent contemplated by the statute is an agent having mercantile possession, so as
to be within the mercantile usage of getting advances made’.

12
 Goods and Documents of Title to Goods 16.16

Raising money on the security of goods means pledging them. ‘Pledge’ is

described in s 1(5) as including:
‘any contract pledging, or giving a lien or security on, goods, whether in consider-
ation of an original advance or of any further or continuing advance or of any
pecuniary liability’.
It is s 2 of the Act from which the ‘interest’, the ‘special property’, of the lender
to a mercantile agent derives. Subsection (1) provides:
‘Where a mercantile agent is, with the consent of the owner, in possession of goods or
of the documents of title to goods, any sale, pledge, or other disposition of the goods,
made by him when acting in the ordinary course of business of a mercantile agent,
shall, subject to the provisions of this Act, be as valid as if he were expressly
authorised by the owner of the goods to make the same; provided that the person
taking under the disposition acts in good faith, and has not at the time of the
disposition notice that the person making the disposition has not authority to make
the same’.
It is essential that the agent has ‘authority to sell or consign for sale or buy or
raise money on goods’, per Lord Alverstone CJ in Oppenheimer v Attenbor-
ough & Son5. The consent of the owner is presumed in the absence of evidence
to the contrary (s 2(4)). However, it is clear that the protection s 2 offers to a
lender is limited by conditions the fulfilment of which it would often be difficult,
if not impossible, for a bank to verify. This simply emphasises the necessity, as
always, of knowing the borrower. Section 3 of the Act provides that:
‘A pledge of the documents of title to goods shall be deemed to be a pledge of the
goods’.
According to Lord Herschell in Inglis v Robertson and Baxter6, this applies only
to pledges by mercantile agents.
‘Document of title’ to goods is defined in s 1(4) of the Act as:
‘any bill of lading, dock warrant, warehousekeeper’s certificate and warrant or
order for the delivery of goods and any other document used in the ordinary course
of business as proof of the possession or control of goods, or authorising or
purporting to authorise, either by endorsement or by delivery, the possessor of the
document to transfer or receive goods thereby represented’.
This definition is the same as in s 61 of the Sale of Goods Act 1979 and almost
the same as that found in the list of exceptions to the definition of a bill of sale
in s 4 of the Bills of Sale Act 1878.
The definition is so broad that it seems the legislature intended the combined
effect of ss 1(4) and 2 of the Factors Act 1889 to be to enable a mercantile agent
to create a valid pledge by a method not available to the true owner, eg by
delivery of a warehousekeeper’s warrant without an attornment from the
warehousekeeper. Support for this view can be found in the wording of s 3 of
the Act and it was clearly the view of Lord Wright, albeit obiter, at the end of the
passage quoted above from his judgment in Official Assignee of Madras v
Mercantile Bank of India Ltd. The safer view may nevertheless be that the Act
represents no more than a statutory recognition of the principle of estoppel, in
that the owner by entrusting the goods or documents of title to a mercantile
agent has held him out as entitled to deal with them; but the bank must still
ensure that the pledge is perfected and maintained as if it were dealing with the
owner. In any event, as a practical matter, this is the only safe course for a bank

13
16.16 Pledges of Goods, Docs, Neg Instr.

to adopt, because it cannot be sure that it is dealing with a mercantile agent who
is in possession of goods with the consent of the owner: if it can be sure of this,
then it should be able to take a pledge from the owner as easily as from the
mercantile agent.
Another question arises from the use of the word ‘other’ in the definition of
‘documents of title’ in s 1(4). The implication is clear that the specific docu-
ments mentioned – bills of lading, dock warrants, warehousekeepers’ certifi-
cates and warrants and orders for the delivery of goods – are regarded as
documents ‘used in the ordinary course of business as proof of the possession or
control of goods’. What is not so clear is whether a further implication from the
use of the word ‘other’ is that the category of such documents is closed, or that
it can be expanded to include documents created to fit modern commercial
needs. Even less clear is how broad is the effect of the last words of the
definition, which refer to ‘any other document . . . authorising or purporting
to authorise . . . the possessor of the documents to transfer or receive goods
thereby represented’.
1
(1875) LR 10 CP 354 at 372.
2
National Employers’ Mutual General Insurance Association v Jones [1990] 1 AC 24, [1988]
2 All ER 425, HL per Lord Goff.
3
[1927] 1 KB 393 at 398.
4
(1862) 31 LJQB 41.
5
[1908] 1 KB 221; applied in Newtons of Wembley Ltd v Williams [1965] 1 QB 560, [1964]
3 All ER 532, CA.
6
[1898] AC 616 at 630.

(ii) The Sale of Goods Act 1979

16.17 Sections 24 and 25 of the Sale of Goods Act 1979, provide as follows:
‘24 Seller in possession after sale
‘24 Where a person having sold goods continues or is in possession of the goods,
or of the documents of title to the goods, the delivery or transfer by that
person, or by a mercantile agent acting for him, of the goods or documents of
title under any sale, pledge, or other disposition thereof, to any person
receiving the same in good faith and without notice of the previous sale, has
the same effect as if the person making the delivery or transfer were expressly
authorised by the owner of the goods to make the same.
25 Buyer in possession after sale
(1) Where a person having bought or agreed to buy goods obtains, with
the consent of the seller, possession of the goods or the documents of
title to the goods, the delivery or transfer by that person, or by a
mercantile agent acting for him, of the goods or documents of title,
under any sale, pledge, or other disposition thereof, to any person
receiving the same in good faith and without notice of any lien or
other right of the original seller in respect of the goods, has the same
effect as if the person making the delivery or transfer were a
mercantile agent in possession of the goods or documents of title with
the consent of the owner.
(2) For the purposes of subsection (1) above–
(a) the buyer under a conditional sale agreement is to be taken not
to be a person who has bought or agreed to buy goods, and
(b) “conditional sale agreement” means an agreement for the sale
of goods which is a consumer credit agreement within the
meaning of the Consumer Credit Act 1974 under which the

14
 Documentary Intangibles and Negotiable Instruments 16.18

purchase price or part of it is payable by instalments, and the

property in the goods is to remain in the seller
(notwithstanding that the buyer is to be in possession of the
goods) until such conditions as to the payment of instalments
or otherwise as may be specified in the agreement are fulfilled’.
While it is clear that these provisions may assist a bank which has mistakenly
taken a pledge of goods or documents of title to goods from a person who was
not the true owner, they provide little comfort to a bank which, at the time of
making an advance, wishes to be satisfied as to the value and effectiveness of its
pledge. At that stage, like the buyer of goods, the bank has no alternative but to
take its security from or with the consent of the true owner, and not to extend
credit if in any doubt.
A bank should be mindful of possible prior rights to goods or documents of title
which are pledged to it. A contract of sale may provide that title is to remain in
the seller not only until payment for the goods sold but until any other sums due
from the purchaser to the seller have been paid. Such a clause is known as a
reservation of title or Romalpa clause1. A bank taking a pledge of documents
relating to goods may find its security impaired by reason of such a clause even
though its customer has paid for the goods in full. While purchasers from the
customer may be protected by the sale having been impliedly authorised, banks,
as pledgees, may fall foul of the rule in Paterson v Tash2 that one with authority
to sell does not have an apparent authority to pledge. Consequently, the bank
will have to rely upon Sale of Goods Act 1979, s 25.
1
Aluminium Industries Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676.
2
(1743) 2 Stra 1178.

2 DOCUMENTARY INTANGIBLES AND

NEGOTIABLE INSTRUMENTS
16.18 The common law recognises a limited category of property where
essentially contractual rights become embodied in a document, possession of
which carries with it the associated rights. Such a document is capable of
physical possession, and it, and the associated rights, are therefore capable of
being the subject of possessory security by way of lien or pledge1. The further
characteristic of negotiability is enjoyed by many such instruments. A nego-
tiable instrument is a document which itself embodies a cause of action, title to
which can be transferred by delivery, or by indorsement and delivery, in such a
way that a holder for value without notice can obtain a good title notwithstand-
ing defects in the title of his transferor. Having these characteristics, a negotiable
instrument is peculiarly suitable for a pledge, since the person in possession of
it has, or can have, all the rights embodied in it.
1
See para 16.1 above.

15
16.19 Pledges of Goods, Docs, Neg Instr.

(a) Bills, cheques and notes

16.19 The pledgee of a bill of exchange, negotiable cheque1 or promissory note

has the same rights as he would have had under a lien. Unless the instrument
bears a forged indorsement, he acquires an independent title and right to sue the
obligor and to hold the instrument against the true owner until his debt is
satisfied.
1
Most cheques in England are now drawn in a form which is neither negotiable or transferable
pursuant to s 81A of the Bills of Exchange Act 1882 as introduced by the Cheques Act 1992.

(i) Pledge and discount distinguished

16.20 The discount of a bill is the purchase of it for a sum less than its face
value, normally with a right of recourse against the seller. The discounter having
bought it, is free to deal with the instrument as he pleases. Discount is a
negotiation. There is no practical or legal distinction between the ordinary
negotiation of a bill and its being discounted, save, perhaps, for the amount
paid for it. Discounting is a means of raising money, but is not a borrowing, as
is the case with a pledge. If a surplus is produced on a sale of a pledged bill, the
surplus must be treated in the same way as a realisation under any other pledge:
a bank which is a holder for value of a bill may sue for the whole amount as it
is suing on a negotiable instrument, but if it holds under lien or pledge, it must
account for any amount received in excess of its customer’s debt1.
However, in unusual circumstances, a holder for value may be unable to sue on
a negotiable instrument for the whole amount. In Barclays Bank Ltd v As-
chaffenburger Zellstoffwerke AG2 the defendants had paid for machinery
supplied and erected by the drawers and payees of the bills of exchange by
accepting those bills. The goods were faulty, and payment on the bills by the
acceptors to the payees was subject to a claim for set-off being pursued in
arbitration proceedings overseas. The payees discounted the bills to the claim-
ant bank for just under 75% of their face value. The bank sued the acceptors on
the bills. Judgment was given for the bank for the whole sum, subject to a stay
for 25% pending the outcome of the arbitration proceedings which would
quantify the set-off. This result was reached because there was an agreement
between the bank and the payees under which the bank would recover the first
75% for itself, but pay the remaining 25% over to the payees. So, although the
bank had a better title than the payees, in that the bank’s claim was free of the
set-off, the bank was in fact claiming the 25%, as trustee for the payees, and the
set-off could operate against that proportion.
In Re Firth, ex p Schofield3, bills were indorsed to the bank which, intending to
discount the bills, held them while the status of the acceptors was investigated.
In the meanwhile the bank lent money to the indorser on the security of the bills
held ‘pending discount’. It was held that the bank had not yet bought the bills,
so the indorsement was not by way of transfer, but merely by way of affording
the additional security of the pledgor’s name in a transaction which was really
one of pledge only.
As to the complications which may arise where a ‘stiffening’ indorsement is
taken from a person not a party to the bill, see the series of cases starting with
Steele v M’Kinlay in 18804, down to Gerald McDonald & Co v Nash & Co, in

16
 Documentary Intangibles and Negotiable Instruments 16.23

the House of Lords5.

1
(1879) 12 Ch D 337.
2
[1967] 1 Lloyd’s Rep 387, CA.
3
(1879) 12 Ch D 337.
4
(1880) 5 App Cas 754, HL; and see Byles on Bills of Exchange.
5
[1924] AC 625, HL; see also McCall Bros Ltd v Hargreaves [1932] 2 KB 423; and Yeoman
Credit Ltd v Gregory [1963] 1 All ER 245, [1962] 2 Lloyd’s Rep 302.

(ii) No suspension of remedy on the instrument

16.21 A bill or note deposited as security or pledged to cover an advance or
overdraft does not, as does a bill or note or cheque given for a debt, suspend the
remedy for the debt. There is nothing in law to prevent a bank suing the
borrower for an overdraft before the maturity of a note or bill payable at a fixed
date which it has taken as security1.
1
Peacock v Pursell (1863) 14 CBNS 728.

(iii) Satisfaction of debt not payment of instrument

16.22 Nor is satisfaction of the debt necessarily payment of the bill or note. To
discharge a bill there must be payment to the holder in due course, which must
be by or on behalf of the drawee or acceptor1. Application of moneys by the
holder himself does not constitute payment in due course. For example, in
Glasscock v Balls2, a promissory note was given to secure an advance, and
property mortgaged as further security. The mortgage was realised, and the
mortgagee paid himself the advance out of the proceeds. The Court of Appeal
were of the opinion that this did not constitute payment of the promissory note,
which had been transferred for value to a bona fide transferee.
Lord Esher expressed himself as not being clear what were the rights of the
person giving the bill or note in such a case against the pledgee if it is the pledgee
claiming payment on the instrument. He suggested that he might be entitled to
a perpetual injunction restraining the holder from negotiating or parting with
the instrument.
It is difficult to see why, on satisfaction of the debt, however made, the giver of
the note or bill is not entitled to claim the instrument, like a redeemed pledge. It
is only Lord Esher’s silence as to this obvious course that suggests a doubt.
1
Bills of Exchange Act 1882, s 59.
2
(1889) 24 QBD 13.

(b) Fully negotiable securities

16.23 Fully negotiable securities other than bills or notes may be deposited as
cover with or without an accompanying memorandum. The lender becomes
pledgee; if he takes the instrument bona fide and for value he acquires a title
against all the world and may hold it until the obligation it was given to cover
is discharged1. The test of good faith is the same as is applied in the case of the
transferee of a bill. An antecedent debt forborne by express or implied agree-
ment on deposit of the security is sufficient consideration2.

17
16.23 Pledges of Goods, Docs, Neg Instr.

Fully negotiable instruments such as bonds to bearer are from a legal standpoint
a sound security. No question of forged indorsement can arise; and whether or
not such an instrument was obtained by the pledgor fraudulently is of no
concern to the pledgee. A negotiable security of this class may be stolen from its
true owner, and yet the pledgee, if he takes it bona fide and for value, can hold
it against him. Absolute negotiability admits of no qualifications.
1
London Joint Stock Bank v Simmons [1892] AC 201, HL; Bentinck v London Joint Stock Bank
[1893] 2 Ch 120.
2
Glegg v Bromley [1912] 3 KB 474, CA.

(c) Pledge by an agent without, or in excess of, authority

16.24 Generally a bank which takes a pledge of a fully negotiable security may
assume that the person in possession of it was entitled to grant the pledge unless
there are factors suggesting otherwise1.
The principle emerges clearly from the case of London Joint Stock Bank v
Simmons2 in which the House of Lords held that there was nothing in the nature
of a broker’s business to put the bank on inquiry that it did not have full
authority to pledge the negotiable securities deposited with it3. The decision was
based robustly on the propositions that ‘that whoever is the holder of a
negotiable instrument ‘has power to give title to any person honestly acquiring
it’4 and (per Lord Herschell) that the bank should be no more on inquiry taking
a pledge than purchasing outright, and had taken the subject bonds in good
faith and for value.
Two points have to be noted. First, the decision turned expressly upon a finding
that the instruments in question were negotiable5. As discussed below, there are
instances where a similar result has arisen though the instruments in question
were not strictly negotiable. Second, it depended upon a finding in the particu-
lar context of what should, or should not, be inferred from the possession of the
securities by a broker. While the principles are of general application, that
question is ultimately dependent on context and market practice6.
1
See Jones v Peppercorne (1858) John 430; Eckstein v Midland Bank Ltd(1926) 4 LDAB 91.
2
[1892] AC 201 HL; see also Fuller v Glyn, Mills, Currie & Co [1914] 2 KB 168, 19 Com Cas
186; Lloyds Bank Ltd v Swiss Bankverein (1913) 108 LT 143, 18 Com Cas 79, CA.
3
The earlier decision in Earl of Sheffield v London Joint Stock Bank Ltd (1888) 13 App Cas 333
was explained by reference to its facts.
4
Per Lord Halsbury, in turn quoting Abbot CJ in R v Bishop of Peterborough(1824) 3 B & C 47.
5
Bowen LJ below (at [1891] 1 Ch 270 at 294) had been careful to point out that the bonds might
be transferable but not strictly negotiable. Lord Macnaghten disliked ‘refined distinctions
which are not understood or are uniformly and persistently ignored in the daily practice of
the Stock Exchange’ ([1892] AC 201 at 225).
6
So, for example, the case of a solicitor and his client may well be different, see Jameson v Union
Bank of Scotland (1913) 109 LT 850.

18
 Documentary Intangibles and Negotiable Instruments 16.26

(d) Negotiability
(i) Incidents of negotiability

16.25 The rights and immunities accorded to the bank in the Simmons case
were dependent on the full negotiability of the instruments pledged. It is
necessary, therefore, to consider what are the tests of negotiability.
To be negotiable, an instrument must embody a promise or ground of action in
itself1. Foreign government bonds may embody a promise but there may be no
enforceable ground of action2. A negotiable instrument must purport to be
transferable by delivery or by indorsement and delivery; it must, either by
statute or by the custom of merchants, be recognised as so transferable and as
conferring independent and indefeasible property in, and right of action on, it in
favour of a holder in due course3. In Crouch v Crédit Foncier of England4,
Blackburn J said a negotiable instrument must be ‘transferable, like cash, by
delivery’, but he did not mean it must always pass at its face value; he was
speaking merely of the method of transfer. In the Simmons case it was admitted
in evidence that the bonds in question passed from hand to hand on the
London Stock Exchange. Bowen LJ pointed out the difference between trans-
ferability and true negotiability, and that the admission was consistent with the
bonds being transferable, but not legally negotiable5:
‘A negotiable instrument payable to bearer is one which, by the custom of trade,
passes from hand to hand by delivery, and the holder of which for the time being, if
he is a bona fide holder for value without notice, has a good title, notwithstanding any
defect of title in the person from whom he took it. A contractual document in other
words may be such that, by virtue of its delivery, all the rights of the transferor are
transferred to and can be enforced by the transferee against the original contracting
party, but it may yet fall short of being a completely negotiable instrument, because
the transferee acquires by mere delivery no better title than his transferor’.

1
Jones & Co v Coventry [1909] 2 KB 1029.
2
Goodwin v Robarts (1875) LR 10 Exch 337; Crouch v Crédit Foncier of England (1873) LR
8 QB 374 at 384.
3
See Lord Herschell in London Joint Stock Bank v Simmons [1892] AC 201 at 215.
4
(1873) LR 8 QB 374 at 381.
5
Simmons v London Joint Stock Bank [1891] 1 Ch 270 at 294.

(ii) Recent recognition sufficient

16.26 The recent origin of a mercantile custom to treat a particular class of
instrument as negotiable is no bar to its validity1.
An illustration of comparatively recent origin is the negotiable certificate of
deposit issued by banks in the United Kingdom2. They are on the face of them
stated to be payable to bearer, but normally require presentation through the
medium of a recognised bank as a prerequisite to payment. They pass either by
mere delivery or by indorsement and delivery. There is little doubt that the
courts would today hold these instruments fully negotiable.
1
See Bechuanaland Exploration Co v London Trading Bank Ltd (Kennedy J) [1898] 2 QB 658;
Edelstein v Schuler & Co (Bingham J) [1902] 2 KB 144; and Kum v Wah Tat Bank Ltd
(Malaysia) [1971] 1 Lloyd’s Rep 439, PC.

19
16.26 Pledges of Goods, Docs, Neg Instr.
2
Though the majority of such transactions are now thought to be in de-materialised form.

(iii) Must be negotiable here

16.27 The negotiability of a foreign instrument in the country of its origin is no
evidence that it is negotiable here. As Bowen LJ said in Picker v London
and County Banking Co1:
‘Then is evidence that an instrument or piece of money forms part of the mercantile
currency of another country any evidence that it forms part of the mercantile
currency of this country? Such a proposition is obviously absurd, for, if it were true,
there could be no such thing as a national currency. For the same reason, as it appears
to me, that a German dollar is not the same thing as its equivalent in English money
for this purpose, and that the barbarous tokens of some savage tribe, such as cowries,
are not part of the English currency, evidence that the instrument would pass in
Prussia as a negotiable instrument does not show that it is a negotiable instrument
here2’.
The instruments in Picker’s case were Prussian bonds issued with detached
coupons. The evidence was that they were treated in Prussia as negotiable by
delivery apart from the coupons, but it was not proved that they were so treated
in the English market. The question subsequently arose whether the absence of,
say, one coupon not yet due, from an otherwise negotiable instrument, affects
its negotiability. In Rothschild & Sons v IRC3, Mathew J held coupons
negotiable per se. He did not distinguish between those due and those accruing.
It is conceivable that a man might wish to realise future coupons without
parting with the capital. The independent negotiability of the coupons would
seem to imply that of the bond without them.
Article 1(2)(d) of the Rome I Regulation4 on the law applicable to contractual
obligations excludes obligations arising under bills of exchange, cheques and
promissory notes and other negotiable instruments to the extent that the
obligations under such other negotiable instruments arise out of their nego-
tiable character5. The proper law by which the character and obligations of a
negotiable instrument are to be determined continues to be governed by
common law principles and by s 72 of the Bills of Exchange Act 18826.
1
(1887) 18 QBD 515, CA.
2
See Williams v Colonial Bank (1888) 38 Ch D 388 at 404.
3
[1894] 2 QB 142.
4
Regulation (EC) No 593/2008.
5
As did previously the The Contracts (Applicable Law) Act 1990, applying art 8 of the Conven-
tion of Rome.
6
Byles on Bills of Exchange and Cheques 29th edn, Chapter 25.

(iv) ‘Quasi-negotiability’ and negotiability by estoppel

16.28 There are cases in which a purchase or pledge has been held to be
effective even though the securities in question were not strictly negotiable, and
the title or authority of the vendor/pledgor was flawed or limited. Sometimes
the securities are said to be negotiable by estoppel, or quasi-negotiable. The
phrase ‘negotiable by estoppel’ was used by Bowen LJ in Easton v London
Joint Stock Bank1; but he was careful to explain that it is a mere convenient
figure of speech, and that the real underlying principle is that of personal

20
 Documentary Intangibles and Negotiable Instruments 16.29

estoppel by conduct, representation, or holding out an agent as having certain

authority, of which the instrument is an element of evidence. The principle does
not involve the attribution of partial or fictitious negotiability to the instrument
itself.
There is no case of this nature which is not either actually explained on this basis
or is not so explainable.
In Goodwin v Robarts2, the Plaintif lost title to scrip which had been passed on
by the agent to whom he had delivered it since (as Lord Cairns put it) ‘the form
in which it [the scrip] is prepared, virtually represented that the paper would
pass from hand to hand by delivery only’ so that ‘The scrip itself would be a
representation to anyone taking it – a representation which the Appellant must
be taken to have made, or to have been a party to – that if the scrip were taken
in good faith, and for value, the person taking it would stand to all intents and
purposes in the place of the previous holder’.
Though they vary in form and expression, that is really the substance of all the
cases which have given rise to the theory of quasi-negotiability or negotiability
by estoppel.
1
(1886) 34 Ch D 95 at 113–114.
2
(1876) 1 App Cas 476 at 489.

16.29 That principle was applied by Bowen LJ in Easton v London Joint Stock
Bank1, focusing on the apparent authority with which agents were cloaked
when placed in possession for their disposal of instruments which by their terms
‘purport to create a liability quite independent of anterior equities’.
The rationale was succinctly expressed by Lord Herschell in Colonial Bank v
Cady and Williams2:
‘If the owner of a chose in action clothes a third party with the apparent ownership
and right of disposition of it, he is estopped from asserting his title as against a person
to whom such third party has disposed of it, and who received it in good faith and for
value’.
The decision in Colonial Bank v Cady and Williams indicates factors which
must be present to render the representation effective or justify a person in
acting on it so as to acquire title by estoppel. The instrument must be complete;
no further formality must be required to entitle the taker to full rights and title.
If, for instance, it is a blank transfer, it must, on the face of it, purport to pass
ipso facto, in its then condition, and without the necessity of any further step, all
rights and title to a person taking it bona fide and for value3. Possession by an
agent must, taken in connection with the nature and condition of the instru-
ment, be consistent only with intention on the part of the principal that the
agent shall have power to transfer it by way of sale or pledge. Possession does
not, as in the case of fully negotiable instruments, carry the right to dispose of
the instrument. If the agent’s possession is ambiguous, ie compatible equally
with authority to transfer and another purpose, the taker has no right to assume
the former. As Lord Halsbury pointed out in Colonial Bank v Cady and
Williams4, mere custody, apart from what the instrument on its face represents
to any person to whom it might be exhibited, is not a representation of
authority to transfer. Only when the document itself, in the condition in which
it was entrusted to the agent, represents that the agent is entitled to deal with it

21
16.29 Pledges of Goods, Docs, Neg Instr.

can a transferee rely on the apparent authority. The real test is whether the
principal has represented the agent as invested with disposing power5. It is
liability by the holding out of the instrument, the agent or both.
1
(1886) 34 Ch D 95, CA.
2
(1890) 15 App Cas 267 at 285.
3
See Fuller v Glyn, Mills, Currie & Co [1914] 2 KB 168.
4
(1890) 15 App Cas 267 at 273.
5
Per Lord Halsbury, in Farquharson Bros & Co v King & Co [1902] AC 325 at 330.

16.30 There is a similar line of cases in which an owner who has entrusted an
agent with title deeds for the purpose of raising money on them for his benefit
is estopped from disputing the title of any person who honestly lends money on
the security, notwithstanding that the agent utilised the deeds to borrow money
on his own account and beyond the limit imposed by his principal1.
1
Brocklesby v Temperance Permanent Building Society [1895] AC 173; Rimmer v Webster
[1902] 2 Ch 163; Lloyds Bank Ltd v Cooke [1907] 1 KB 794, CA; Smith v Prosser [1907] 2 KB
735, CA; Re Burge Woodall & Co, ex p Skyrme [1912] 1 KB 393, following Perry-Herrick v
Attwood (1857) 2 De G & J 21 and Rimmer v Webster.

16.31 Estoppel may arise from representation of the character of the document
as conveyed by its terms. If a company, for instance, issues instruments such as
debentures in a form whereby it binds itself to pay the amount to bearer, it may
be estopped by such representation from asserting any equities of its own
affecting a previous holder, as against a person who has taken the instrument
bona fide and for value on the faith of such representation1.
It should be noted that the same principles may operate to deprive a bank of
security. Theoretically a pledgee may part with possession of the securities to a
third party or even to the pledgor himself for a temporary specific purpose not
involving the creation of any conflicting right or interest, the securities being
returned to the pledgee2. He may re-pledge the securities but only to the extent
of his own interest, so long as he does not purport to pledge or charge the whole
property3. But parting with possession may mean loss, for the same conditions
which render them good in the bank’s hands render them good in anybody
else’s hands as against the bank. If they are negotiable, anyone who takes them
bona fide and for value obtains title; if not strictly negotiable, the holder may
claim a holding out. An illustration is provided by Lloyds Bank Ltd v Swiss
Bankverein4, where the claimant bank lent money on bearer bonds to bill
brokers who subsequently repaid the loan by cheque and received back the
bonds which they had charged to the defendant bank. The cheque was dishon-
oured and the claimants sued the defendants, who had received the bonds
honestly. The Court of Appeal held that the question whether value had been
given was immaterial. Notice, if any, was constructive. The alleged ground of
action was that the bonds were impressed with a trust in favour of the
claimants. The Court of Appeal held that it was repugnant to the nature of
negotiable instruments to seek to impress them with a vendor’s lien, an implied
trust or constructive notice, and that the claim failed. Farwell LJ said:
‘the bankers gave up their securities and took the broker’s cheque, and the risk was
theirs on the broker’s cheque’.

1
See Re Imperial Land Co of Marseilles, ex p Colborne and Strawbridge (1870) LR 11 Eq 478,
a case of a promissory note to bearer.

22
 Realisation 16.33
2
See North Western Bank Ltd v John Poynter, Son and Macdonalds [1895] AC 56, HL; See also
Trust receipts para 16.7 and 16.8.
3
Halliday v Holgate (1868) LR 3 Exch 299.
4
(1913) 108 LT 143, 18 Com Cas 79, CA.

3 REALISATION

(a) Power of sale

16.32 Where goods have been pledged, either actually, or constructively by
means of the documents of title, or where securities have been pledged, as by
deposit, with or without a memorandum, the pledgee has on default a power of
sale without the necessity of resorting to the court1. In Burdick v Sewell2,
Bowen LJ said: ‘The pledgee of goods is entitled to sell them upon default’. In Re
Morritt, ex p Official Receiver3, Cotton, Lindley and Bowen LJJ said:
‘A contract of pledge carries with it the implication that the security may be made
available to satisfy the obligation, and enables the pledgee in possession (though he
has not the general property in the thing pledged, but a special property only) to sell
on default in payment and after notice to the pledgor, although the pledgor may
redeem at any moment up to sale’.

1
A pledgee’s only remedy is to sell; he cannot foreclose with a view to acquiring the absolute
property in the thing pledged.
2
(1884) 13 QBD 159 at 174, CA.
3
(1886) 18 QBD 222 at 232, CA. See also Mathew v TM Sutton Ltd [1994] 4 All ER 793.

(b) Notice to pledgor

16.33 Where the debt is repayable at a fixed date, the default occurs on
non-payment at that date, but notice to the pledgor of intention to sell is
apparently also necessary. Where the advance is for an indefinite period,
demand for payment, with notice that if not complied with within a certain
reasonable time the pledged goods will be sold, is sufficient. In Re Richardson,
Shillito v Hobson1, Fry LJ said:
‘The pawnee would have a right to sell the chattel pawned, either in default of
payment at the time fixed, if there be a time fixed, or in default of payment after
reasonable notice if no time be fixed’.
The statement of principle in Re Morritt, ex p Official Receiver quoted above,
is in no way limited to pledges for advances repayable at a fixed date. Deverges
v Sandeman, Clark & Co2 clearly recognises the principle, but suggests that the
notice ought to fix a definite day, at a reasonable future date, for repayment to
obviate sale.
If the pledge does not realise sufficient to cover the debt, the balance of the debt
is still recoverable.
1
(1885) 30 Ch D 396 at 403, CA.
2
[1902] 1 Ch 579, CA.

23
16.34 Pledges of Goods, Docs, Neg Instr.

(c) Realisation of pledge held as cover for acceptances

16.34 Trade finance by banks is usually the subject of detailed express terms. In
the absence of express provision, there is long-standing authority that the bank
which holds bills of lading or other documents of title to goods as cover for
acceptances of a customer’s bills is a pledgee of the goods, the consideration for
the pledge being the liability assumed on the bills at the customer’s request, and
the object of the pledge being indemnification against that liability.
In such a case, there is no particular event which constitutes a default entitling
the bank to realise. Either a default is inferred from the bank having to pay the
acceptances, or a power of sale is implied after payment as being essential to the
indemnity. It is beyond question that, having paid, the bank can realise its
security1. In Inman v Clare2 it was held that any surplus was subject to the
general lien of the bank which paid the acceptances. The drawer’s right is to
have the goods or securities or their proceeds applied to the bills, so that no
liability, either direct or by increased debit, shall accrue to him in respect of
those bills. The drawer’s right is assignable by agreement collateral to and
independent of the bills, but the assignee can clearly take no greater or better
right than his assignor3.
1
See Re Barned’s Banking Co, Banner v Johnston (1871) LR 5 HL 157.
2
(1858) John 769 at 776.
3
Inman v Clare (1858) John 769; Re Suse, ex p Dever (1884) 13 QBD 766, CA.

4 REGISTRATION UNDER THE COMPANIES ACT

16.35 Registration of charges over the property of companies is now governed
by s 859A–Q of the Companies Act 2006, introduced with effect from 6 April
20131. See para 13.28 above for a short description of the effect of the amended
regime.
Under the new regime the requirement for registration applies to any charge,
which includes a mortgage2 and various forms of security under the law of
Scotland3, unless it is specifically excepted by s 859A(6), which excludes
charges over cash deposits in favour of landlords, charges made by a member of
Lloyds in connection with underwriting, and (most importantly) charges ex-
cluded by the section or any other enactment4
A pledge is not a charge, or a mortgage, and in principle ought not to be caught
by the language of the statute. The position is not, however, quite as clear as
might be desired. Under the Companies Act 2006, s 396(2) provided in terms
that the deposit for the purpose of securing an advance to a company of a
negotiable instrument itself given in respect of any book debts was not to be
treated as a charge on a book debt5. Previous drafts of amended regime
introduced by the 2013 regulation expressly excluded pledges while the final
version (except in relation to the defined Scottish law security interests) does
not6. And in Dublin City Distillery v Doherty7, Lord Parker, with whom the
Earl of Halsbury concurred, expressed the view that ‘mortgage or charge’
within the Companies Act 1900 included a common law pledge8.
The better view is nonetheless that a completed pledge, at least where it is
clearly perfected by independent delivery of possession, ought not to be
registrable under the Companies Act9. On the other hand, an arrangement by

24
 Registration under the Companies Act 16.35

which possession is purportedly given by agreement, for example by attorn-

ment by the debtor itself, or by letters of hypothecation or lien or trust, or under
a trust receipt, may be vulnerable to being properly characterised as a charge,
and held to be registrable unless otherwise exempted. The prudent course
would be to register such an arrangement10.
1
The new provisions were introduced by, and are contained in Schedule 1 to, the Companies Act
2006 (Amendment of Part 25) Regulations 2013, SI 2013/600.
2
Section 859A (7)(a).
3
Section 859A (7)(b); a pledge under Scottish law is specifically excluded from the definition.
4
For example, under the Financial Collateral Arrangements Regulations as to which see para
15.13 above.
5
In Chase Manhattan Asia Ltd v Official Receiver [1990] 1 WLR 1181 (PC) it was held that an
equivalent provision under the Hong Kong law did not save the security in that case because the
note had not in fact been delivered; this is right in principle as absent effective delivery there is
no pledge. But the presence of the express statutory exemption is unnecessary if no ‘charge’
within the meaning of the section arises at all.
6
See for example the proposals published in August 2011 by the Department for Business
Innovation and Skills, which proposed to require registration of any pledge where the debtor
remained in possession but otherwise to exclude pledges ‘for the avoidance of doubt’.
7
[1913] AC 823, see above at para 16.4.
8
The key point in that case was that the documents provided did not confer constructive
possession so as to bring the pledge outside the terms of the Bills of Sale Acts. Without
possession there is no pledge at all, but that is not how the language of the statute was analysed.
See also Beale Bridge Gullifer & Lomnicka The Law of Security and Title Based Financing at
paras 5.27 and 10.18.
9
See also Gore Browne on Companies Update 108 Chapter 31.
10
A lien arising wholly by operation of law is not ‘created’ by the company, and is likely not
registrable upon any view. See the discussion in London v Cheshire Insurance Co Ltd v
Laplagrene Property Co Ltd [1971] Ch 499.

25
Chapter 17

MORTGAGES OF LAND

1 INTRODUCTION
(a) Background 17.1
(b) Historical perspective 17.2
2 THE LEGAL CHARGE 17.6
3 EQUITABLE MORTGAGES OF THE LEGAL ESTATE 17.9
4 TRANSFERS OF MORTGAGES 17.14
5 LAND REGISTRATION ACT 2002 17.16
6 PRIORITIES OF MORTGAGES OF LAND
(a) Priority in point of security 17.20
(b) Registered land 17.21
(c) Unregistered land 17.26
7 FURTHER ADVANCES
(a) Priority in point of payment 17.27
(b) Registered land 17.28
(c) Unregistered land 17.35
8 OVERRIDING INTERESTS
(a) Land Registration Act 1925 17.38
(b) Land Registration Act 2002 17.46
9 LEASEHOLD PROPERTY 17.50
10 REMEDIES OF A LEGAL MORTGAGEE 17.59
(a) An action on the covenant to pay 17.61
(b) Possession 17.62
(c) Power of sale 17.69
(d) Appointment of a receiver 17.76
(e) Consolidation 17.80
(f) Foreclosure 17.82
11 REMEDIES OF AN EQUITABLE MORTGAGEE OF THE
LEGAL ESTATE 17.83
(a) Power of sale 17.85
(b) Appointment of a receiver 17.87
(c) Foreclosure 17.88

1 INTRODUCTION TO MORTGAGES OF LAND

(a) Background
17.1 It is inevitable that any account of the modern law of mortgages in
England and Wales1 will have at least a passing reference to the history of
English land law and current conveyancing practices2. This short chapter draws
attention to some of the basic concepts involved in taking security over land and
refers to some areas where the law is uncertain or unsatisfactory. It is equally
inevitable that any such account will note, apologetically, Lord MacNagh-
ten’s observation that no-one, by the light of nature, ever understood an English
mortgage of real estate3 and Maitland’s description of a mortgage as ‘one long

1
17.1 Mortgages of Land

suppressio veri and suggestio falsi’4. The major statutory codification of the law
of mortgage in the Law of Property Act 1925 (LPA 1925) dispelled some of the
confusion, but in 1991 the Law Commission was still compelled to describe the
law as having ‘achieved a state of artificiality and complexity that is now
difficult to defend’5.
1
This chapter is about mortgages of legal estates and interests in land in England and Wales.
Those interested in mortgages of ships and of aircraft are advised to consult specialist works in
those fields: Bowtle and McGuinness, The Law of Ship Mortgages (3rd edn, 2014); Shawcross
and Beaumont, Air Law, (Looseleaf) Chapter 11. For the reason noted in the text, the
chapter concentrates on land the title to which is registered at HM Land Registry. It does not
deal with security taken over equitable interests or the rule in Dearle v Hall which governs the
priority between charges over such interests, as to which see, for example J McGhee Snell’s Eq-
uity (33rd edn, 2017). The regulatory regime established by the Financial Services and Markets
Act 2000 is described in Chapter 1.
2
The standard land law texts all contain sections on mortgages, eg Megarry and Wade, The Law
of Real Property (8th edn, 2012). Gray and Gray, Elements of Land Law (5th edn, 2008),
though somewhat outdated is particularly strong and benefits from including many references
to cases decided in other common law jurisdictions. The leading practitioners’ texts on
mortgages are Fisher and Lightwood’s Law of Mortgage (14th edn, 2014) and E F Cousins, The
Law of Mortgages (4th edn, 2017).
3
Samuel v Jarrah Timber and Wood Paving Corpn [1904] AC 323.
4
Maitland, Equity (1969).
5
The Law Commission’s Working Paper No 99 Land Mortgages (1986) included an analysis of
the defects in the law. The working paper led to the Law Commission’s report Transfer of land
– land mortgages (Law Com no 204) (1991); see 2.1. The Commission’s recommendations for
reform have not been implemented.

(b) Historical perspective

17.2 Before the LPA 1925 there were two principal methods of creating a legal
mortgage of land. The first method involved the borrower transferring the
property to the lender and the lender covenanting to transfer it back again when
the loan was repaid1. Prior to repayment, the lender had the legal estate so it had
all it needed to sell the property free from the borrower’s interest. However, the
outright transfer of the property was not always convenient2. For example, in
the case of leasehold property the lender would not want to take an assignment
of the lease because that would mean it became liable on the covenants in the
lease and responsible for payment of the rent.
1
This form of mortgage had become the usual form of mortgage of land by the time the LPA
1925 was introduced. It is still the usual form of a legal mortgage of many kinds of assets other
than land. Thus any transaction under which one party transfers an asset to another as part of
some financial accommodation on the understanding that the asset can be reclaimed when
obligations have been met is likely to be characterised as a mortgage with the result, in the case
of a transferor/mortgagor company, that it is void as against a liquidator or any creditor of the
company if it is not registered under the Companies Act 2006, s 859H(3) within 21 days of
being created. See Re Curtain Dream plc [1990] BCLC 925; and Welsh Development Agency v
Export Finance Co Ltd [1992] BCLC 148.
2
As far as land is concerned, the mortgage by conveyance and re-conveyance was abolished
by LPA 1925, s 85(2).

17.3 The second method was the mortgage by demise which involved the
borrower granting the lender a lease of the property, again with a proviso that
the lease would cease when repayment was made1. In the case of leaseholds, the
lease to the lender took the form of an underlease. In each case no relationship

2
 Introduction 17.4

was created between the landlord and the lender. Of course, if there was a
default the lender would want to be able to sell not just the lease or the
underlease vested in it but also the borrower’s reversionary interest as well. This
was done by having the borrower declare itself trustee of its reversionary
interest in the property for the lender giving the lender power to appoint itself
as the trustee and thus deal with the entire property. Alternatively, the lender
could be given a power of attorney enabling it to transfer the reversionary
interest in the borrower’s name.
1
The mortgage by demise was used until the early nineteenth century. It had the advantage that
freeholds and leaseholds could be mortgaged by the same instrument. There were however
doubts about whether the lender was entitled to the title deeds and, if the mortgage came to be
enforced, a reversionary interest was left with the borrower unless one of the devices referred to
in the text was employed. The owner of registered land no longer has the power to create a
mortgage by demise so such mortgages will disappear: Land Registration Act 2002 (LRA 2002),
s 23(1)(a).

17.4 The mortgage would state a date on or before which the borrower was to
repay the loan if it wanted to recover the property. This was known as the legal
date for redemption of the loan and was usually six months after the date of the
mortgage. It was a convenient (if highly artificial) way of ensuring that if the
lender ever needed to exercise its enforcement powers it could show that there
had been an event of default and that the powers had arisen1. In practice, the
courts of equity would prevent the lender exercising its enforcement powers so
long as the borrower complied with the real commercial agreement by making
the appropriate payments and complying with the other obligations in the
mortgage. This right of the borrower to recover its property free from the
mortgage was known as the equitable right to redeem and the interest which the
borrower had in the property was the equity of redemption. The courts of
equity would intervene to strike down ‘clogs on the equity of redemption’.
These would include terms in the mortgage which attempted to prevent or delay
the borrower from recovering its property, terms which gave the lender some
unconscionable advantage (especially ones which continued after the loan had
been repaid) and terms which would enable the lender to acquire the property.
This doctrine of clogs was regarded as ‘an anachronism [which] might with
advantage be jettisoned’ as long ago as 19032. Since then, some very uncon-
vincing distinctions have been drawn between provisions which are terms of the
mortgage and are therefore struck down and provisions which are terms of a
separate free-standing collateral agreement and therefore survive. Also since
1903, the jurisprudence on economic duress, unconscionable terms and re-
straint of trade has advanced considerably. But there can be no doubt as to the
continued existence of the doctrine. In Jones v Morgan3 Lord Phillips MR noted
that the anachronistic doctrine was ‘an appendix to our law which no longer
serves a useful purpose and would be better excised’ but nevertheless passed
over the opportunity to wield the knife and indeed went on to decide the case on
the basis of the doctrine rather than the more modern jurisprudence. And in
Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd4 Lord Walker
of Gestingthorpe referred to the right as ‘an old established but not obsolete
doctrine of equity’.
1
The more modern, but no less alarming, practice is for the mortgage to say expressly that the
powers of enforcement arise as soon as the document is executed.
2
Jarrah Timber and Wood Paving Corpn v Samuel [1903] 2 Ch 1.
3
[2001] EWCA Civ 995, [2001] NPC 66.

3
17.4 Mortgages of Land
4
[2009] UKPC 19 at [11].

17.5 Mortgages are still occasionally drafted so as to include a legal date for
redemption although it is rarely called that now. The expression ‘equity of
redemption’ is still used although it is usually shortened to ‘equity’, hence
‘negative equity’ meaning that the value of the property is less than the amount
of the debt secured on it.

2 THE LEGAL CHARGE

17.6 The LPA 1925 provides for the ‘charge by deed expressed to be by way of
legal mortgage’1 more usually referred to as the ‘legal charge’ or the ‘charge by
way of legal mortgage’2. The typical charging clause in a legal charge says that
the borrower ‘with full title guarantee3 hereby charges by way of legal mortgage
[the charged property] with the payment to [the lender] of [the relevant
amounts]’. With the legal charge, there is no concept of an interest being
transferred to the lender which is going to be transferred back again when the
loan is repaid4. The proviso for re-conveyance is therefore not required and
there is frequently no express commitment on the part of the lender to release
the charge when the loan it secures is repaid.
1
LPA 1925, s 85 (1) and (2).
2
The legal charge is a creation of statute and applies only to land. Generally, charges are
equitable in nature and are much weaker than mortgages. They need involve no more than the
appropriation (by one means or another) of the asset to the debt for which it is to stand charged.
See Re Cosslett (Contractors) Ltd [1998] Ch 495. A lender holding such a charge may well need
the assistance of the court to force a sale of the asset because title is not transferred to the lender
at the outset of the transaction. See further Swiss Bank Corpn v Lloyds Bank [1982] AC 584.
3
As to the covenants implied by the borrower charging with ‘full title guarantee’: see the Law of
Property (Miscellaneous Provisions) Act 1994, s 1. Before 1st July 1995, the equivalent was
achieved by the borrower making the charge as ‘beneficial owner’.
4
As to the nature of the interest created by a legal charge see Weg Motors Ltd v Hales [1962] Ch
49; Cumberland Court (Brighton) Ltd v Taylor [1964] Ch 29; and Regent Oil Co Ltd v J A
Gregory (Hatch End) Ltd [1966] Ch 402.

17.7 Prior to 1926, in those cases where a first mortgage was taken by way of
a conveyance with a proviso for reconveyance, second and subsequent mort-
gages were necessarily equitable only. The legal estate was with the original
lender with the consequence that subsequent lenders had to settle for less. By
providing for the legal charge, the LPA 1925 allowed the creation of successive
legal mortgages of the same legal estate. It also allowed freeholds and leaseholds
to be mortgaged in the document without complications and made it easier to
alter the priority to be accorded to the security interest as against other security
interests.
17.8 The rights available to the lender under a legal charge are defined in
the LPA 1925 by reference to the rights available under a mortgage by demise.
The relevant sub-section provides:
‘87.—(1)Where a legal mortgage of land is created by a charge by deed expressed to
be by way of legal mortgage, the mortgagee shall have the same
protection, powers and remedies (including the right to take proceedings
to obtain possession from the occupiers and the persons in receipt of rents
and profits, or any of them) as if–

4
 Equitable Mortgages of the Legal Estate 17.11

(a) where the mortgage is a mortgage of an estate in fee simple, a

mortgage term for three thousand years without impeachment of
waste had been thereby created in favour of the mortgagee; and
(b) where the mortgage is a mortgage of a term of years absolute, a sub-
term less by one day than the term vested in the mortgagor had been
created in favour of the mortgagee.’
The all-important power to realise the mortgaged property is also set out in
the LPA 1925 (see para 17.69 below).

3 EQUITABLE MORTGAGES OF THE LEGAL ESTATE

17.9 An equitable mortgage of the legal estate takes the form of an agreement
by the borrower to create a legal mortgage. Such an arrangement may appear
informal or temporary and may suggest that the lender is not pressing too hard
for security. Nevertheless, the agreement itself is treated as a security interest1 as
well as giving the lender the right to call for a legal mortgage.
1
Ex p Wright (1812) 19 Ves 255.

17.10 Before 27 September 19891, the equitable mortgage could be very

informal. Up until then it was enough for the borrower simply to deposit the
title documents to its property with the lender. The depositing of the title
documents would be taken as showing that there was an intention to create a
mortgage even though nothing had been said about it and there was nothing in
writing2. A prudent lender would have asked the borrower to acknowledge in
writing the purpose of the deposit but, unless the lender wanted to go further
and take a power of sale, nothing else was required. Such flexibility was possible
because the depositing of the documents had long been recognised as giving rise
to a security interest. This was based on the equitable doctrine of part perfor-
mance3.
1
Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 (LP(MP)A 1989) came
into effect on 27 September 1989. Section 2(8) provides that s 40 of the LPA 1925, which
expressly preserved the doctrine of part performance, should cease to have effect.
2
Russel v Russel (1783) 1 Bro CC 269.
3
In United Bank of Kuwait plc v Sahib [1997] Ch 107, a registered land case, the deposit of deeds
was held to have a contractual basis and was therefore subject to s 2 of the LP(MP)A 1989. It
was held obiter that even if the case for an independent equity was made out, it would fall foul
of s 53(1)(c) of the LPA 1925, being a disposition not in writing.

17.11 From 1989, a degree of formality became unavoidable. An agreement to

create a legal mortgage has to be in writing because the agreement amounts to
a contract for the disposal of an interest in land1. The document has to
incorporate all the terms the parties have expressly agreed and it has to be
signed by or on behalf of each party. The agreement will commonly go on to
provide a power of attorney for the lender to execute the legal mortgage on the
borrower’s behalf and a declaration of trust of the property so the agreement
will need to be executed as a deed. The lender will always take possession of the
documents of title.
1
LP(MP)A 1989, s 2(1). In Yeoman’s Row Management Ltd v Cobbe [2008] UKHL 55; [2008]
4 All ER, Lord Scott (at [29]) doubted that proprietary estoppel could be prayed in aid to render
enforceable an agreement which did not comply with the statutory formalities. But these
remarks were obiter, and subsequent decisions have countenanced an estoppel when dealing

5
17.11 Mortgages of Land

with a domestic rather than a commercial dispute: see Thorner v Major [2009] UKHL 18;
[2009] 1 WLR 776; Whittaker v Kinnear [2011] EWHC 1479 (QB); [2011] 2 P & CR DG20.
See also the obiter comments of Master Matthews in Muhammad v ARY Properties Ltd [2016]
EWHC 1698 (Ch), approving the decision of Bean J (and Stanley Burnton LJ on appeal in
Whittaker). And see also s 2(5) which preserves the constructive trust which could be imposed
in circumstances where it was unconscionable for the borrower to deny the existence of an
agreement: Yaxley v Gotts [2000] Ch 162.

17.12 The changes introduced by the Law of Property (Miscellaneous

Provisions) Act 1989 had other implications for lenders. The Act affected the
way in which a borrower could be required to create present security over
unspecified property which may be acquired at some time in the future. The
so-called ‘charge on after-acquired property’ takes effect as an agreement to
create security. In order for the agreement to be enforceable the instrument
containing it has to be executed by the lender as well as the borrower, contrary
to the previous practice.
17.13 The requirement that both parties must execute a document containing
all the terms gives rise to a further effect1. Previously, a mortgage which was
intended to be a legal mortgage but failed because of some technical defect
might very well have been found to constitute a valid agreement to create a legal
mortgage. Now it succeeds as a valid agreement only if it meets the test of
containing or referring to all the terms of the agreement and has been signed by
both parties2. Finally, lenders have to ensure that any variation of an equitable
mortgage complies with the requirements of the LP(MP)A 1989 and contains or
refers to all the terms, otherwise there is a danger that it will vitiate the original
mortgage3.
1
It should, of course, be noted that the requirements of s 2(1) of the LP(MA)A 1989 apply only
to contracts for the creation or sale of legal estates or interests in land, and not with documents
which actually create or transfer such estates or interests: Helden v Strathmore Ltd [2011]
EWCA Civ 542; [2011] Bus LR 1592 at [27]. The distinction is between agreements which
themselves include an immediate disposition of interests in land and those amounting only to a
contract for the disposition of those interests at any future time, the former falling outside s 2(1),
the latter within: Rollerteam Ltd v Riley [2016] EWCA Civ 1291; [2017] Ch 109 at [44–45].
2
At least if it is to constitute an agreement to create a legal mortgage. It may still be possible to
sever the invalid agreement and find an equitable charge: see Murray v Guinness [1998] NPC
79, Ch D.
3
McCausland v Duncan Lawrie Ltd [1997] 1 WLR 38, see also the application of s 2 to the oral
variation of a grant of an option: MP Kemp Ltd v Bullen Developments Ltd [2014] EWHC
2009 (Ch). Compare with Target Holdings Ltd v Priestley (1999) 79 P and CR 305 dealing with
the variation of a legal charge.

4 TRANSFERS OF MORTGAGES
17.14 The interest that the lender has in a mortgage is a proprietary interest
which is capable of being bought and sold. Its value will be the value of the
receivable as that is enhanced by the value of the mortgaged property. A deed
executed by a lender purporting to transfer the mortgage will normally operate
to transfer to the transferee the right to receive the principal and interest, the
benefit of the obligations on the part of the borrower in the mortgage and the

6
 Land Registration Act 2002 17.17

lender’s interest in the mortgaged property1.

1
LPA 1925, s 114(1) subject to registration at HM Land Registry where the mortgage is already
registered. This section appears to mean that such a deed constitutes a legal assignment of the
debt notwithstanding that no notice is given to the borrower: cf LPA 1925, s 136.

17.15 The lender can also charge the mortgage by way of sub-charge1 to secure
funds due from the lender to a third party. The ability to create fixed security
over a pool of residential mortgages lies at the heart of many mortgage
securitisations.
1
LRA 2002, s 23(2) permits the registered proprietor of a mortgage to charge at law with the
payment of money the indebtedness secured by the registered mortgage. Other kinds of legal
sub-mortgage are beyond the powers of the registered proprietor.

5 LAND REGISTRATION ACT 2002

17.16 The Land Registration Act 20021 (LRA 2002) received Royal Assent on
26 February 2002. The 1925 Act (as amended) (LRA 1925) was repealed in its
entirety. The LRA 2002 was completely new and did not replicate verbatim any
part of the previous legislation2. It was preceded by an extensive consultation
exercise based on a consultative document3 published by the Law Commission
and HM Land Registry and the same publishers produced an extensive com-
mentary4 on the Bill which led up to the LRA 2002. A further consultation
process was undertaken by the Law Commission, closing in June 2016, to
consider the operation of the LRA 2002 and areas for reform, in light particu-
larly of the increase seen in fraud on the registered title. The Law Commission
reported in July 20185 making numerous recommendations to amend the LRA
2002. These relate in particular to preventing fraud, rectification of the register,
facilitating electronic conveyancing, and clarifying the scheme governing ad-
verse possession.
1
The leading authority on everything to do with registered land is Ruoff & Roper on the Law and
Practice of Registered Conveyancing 2013 (Looseleaf) (‘R&R’).
2
Like the LRA 1925, the LRA 2002 is not a complete statement of the law and it needs to be read
alongside the LPA 1925, particularly in relation to mortgages.
3
Land Registration for the Twenty-First Century – A Consultative Document (1998) Law Com
no 254.
4
Land Registration for the Twenty-First Century – A Conveyancing Revolution (2001)
Law Com no 271.
5
Law Com No 380.

17.17 The Law Commission and HM Land Registry said:

‘The purpose of the [LRA 2002] is a bold and striking one. It is to create the necessary
legal framework in which registered conveyancing can be conducted electronically.
The move from a paper-based system of conveyancing to one that is entirely
electronic is a very major one and it will transform fundamentally the manner in
which the process is conducted. The [LRA 2002] will bring about an unprecedented
conveyancing revolution within a comparatively short time. It will also make other
profound changes to the substantive law that governs registered land. These changes,

7
17.17 Mortgages of Land

taken together, are likely to be even more far-reaching than the great reforms of
property law that were made by the 1925 property legislation.’1.

1
Law Com no 271, 1.1.

17.18 The ‘e-conveyancing’ revolution, which the LRA 2002 was intended to
facilitate, has had a major impact, with screen-based access to registered titles
and the dematerialisation of most documents. When the system is fully opera-
tional, access to the register will be available to practitioners who have signed
up to network access agreements with HM Land Registry. All transactions will
take place online and in real time and practitioners will be able to make the
consequential changes to the register. While the present position remains that
contracts for the sale of interests in land have to be made in writing and signed
by the parties, it is intended that this requirement will be modified so that
contracts can be made and exchanged electronically1.
1
LP(MP)A 1989 s 2. For a full discussion of the changes both implemented and planned, see
R&R, chapter 19.

17.19 Since 1 December 19901 the whole of England and Wales has been
subject to compulsory registration2. This does not mean that existing landown-
ers are obliged to put their properties on to the land register if they are not
already registered, but it does mean that certain dispositions of land are
required to be registered if they are to be fully effective. Since 1 April 1998 a
legal mortgage of a freehold property which is protected by the deposit of title
deeds is such a disposition3. At this point an application has to be made to HM
Land Registry to register the legal title to the property. One consequence of this
is that, to all intents and purposes, first legal mortgages of unregistered land can
no longer be created and as existing mortgages are redeemed they will become
rarer and rarer. This chapter therefore does not include a detailed examination
of priorities between mortgages of unregistered land.
1
Registration of Title Order 1989, SI 1989/1347.
2
The number of registered titles had reached 23.5 million by 2013 which was approximately
85% of the total land area (Land Registry Annual Report and Accounts 2012/2013).
3
A lender taking a first legal mortgage of unregistered land would in all normal circumstances
take possession of the title deeds so that it would be in a position to make title to the property
if it has to enforce its security and so as to restrict the borrower’s ability to create other security
interests. A legal mortgagee of unregistered land who is not protected by having the title
documents, eg, a second or subsequent mortgagee, would register a C(i) land charge (a puisne
mortgage) on the land charges register operated under the Land Charges Act 1972.

6 PRIORITIES OF MORTGAGES OF LAND

(a) Priority in point of security

17.20 Occasionally, a property will be subject to more than one mortgage and
the aggregate of the amounts secured by the mortgages will exceed the value of
the property. If the property has to be realised and the lenders cannot all be paid
in full, there is no question of the lenders sharing the proceeds between them
and each taking a pro rata proportion of the loss. The way in which they share
the loss is determined by their priorities. In ordinary circumstances, a lender
who ranks first will be entitled to recoup the whole of its debt out of the

8
 Priorities of Mortgages of Land 17.23

proceeds of sale before the lender who ranks second recovers anything. How-
ever, there may be circumstances which disturb this. The original lender may
have advanced further funds to the borrower after it had received notice of a
later mortgage and this can limit its right to recover. The original lender may be
first in terms of the ranking of security but this does not necessarily mean that
it will be first in terms of entitlement to payment.
This section is concerned with how priority of security is to be determined. The
lender which has first priority of security has the ability to control the process if
the borrower is in difficulty and the security has to be enforced. The remedies
available to a lender under a mortgage are considered later, but on a sale, for
example, the original lender will be able to sell free of subsequent mortgages
and a receiver appointed by it will be able to collect all of the future instalments
of rent and apply them in reducing the borrower’s indebtedness to the first
lender.

(b) Registered land

17.21 Registered mortgages on the same registered land rank in the or-
der shown in the register1. It does not matter for this purpose whether they are
legal mortgages or equitable mortgages2. The general rule as to priority can of
course be displaced by agreement between the different lenders but if priority is
to be changed so as to affect third parties it needs to be shown in the register.
The order in which the charges were created is irrelevant.
1
LRA 2002, s 48(1).
2
LRA 2002, s 132(1) defines a charge as ‘any mortgage, charge or lien for security money or
money’s worth’.

17.22 The fundamental objective of the LRA 2002 is that the register should be
a complete and accurate reflection of the state of the title at any given time.
There will not be a lag between the creation of an interest and its registration on
the register because everything will be administered centrally. In the meantime,
the law on dealings which are not recorded on the register will continue to be
relevant1. The law in this area is not straightforward and has been described by
one commentator as ‘a fog of obscure and conflicting detail’2. Put simply,
interests created by dealings off the register take priority in the order in which
they are created. The complications arise when the order of creation is not the
same as the order of registration.
1
Or indeed in cases where, notwithstanding registration, property is fraudulently charged to
multiple lenders: Halifax plc v Curry Popeck (A Firm) [2008] EWHC 1692 (Ch).
2
(1977) 93 LQR 541.

17.23 Taking a specific example:

1 January The customer gives a mortgage to its bank. The bank does
not seek to protect its interest at HM Land Registry in any
way.

9
17.23 Mortgages of Land

1 February The customer sells the property to a purchaser. The pur-

chaser pays over the purchase price and protects the sale
contract by registering it at HM Land Registry in the appro-
priate way.
1 March The bank applies for the registration of the mortgage.

On substantially these facts, the Court of Appeal in a case1 under the LRA 1925
found that the bank’s mortgage had priority over the purchaser’s contract. Both
the mortgage and the sale contract were equitable interests and the decision
follows the rule that, as between competing equitable interests, the first in time
will prevail. Nevertheless, it does seem odd that the purchaser who had looked
at the register and found it clear and who then went on to protect its interest in
the appropriate way should be the one to suffer rather than the bank.
1
Barclays Bank Ltd v Taylor [1974] Ch 137. The normal rule may be displaced if the earlier
unprotected interest arose from a ‘thoroughly artificial transaction’: Freeguard v Royal Bank of
Scotland plc (2000) 79 P and CR 81. Alternatively, the person who is later in time may be
precluded from relying on the lack of registration of the earlier interest if to do so would be
unconscionable.

17.24 Prior to 3 April 1995, a bank which had, or was going to have,
possession of the land certificate would ask its customer to sign the land registry
form known colloquially as a notice of deposit. When the bank lodged the form
at HM Land Registry with the land certificate, the registrar noted the bank’s in-
terest in the register and returned the land certificate to the bank. This operated
under the special mechanism created by the Land Registration Rules 1925,
rules 239–242 and was a cheap and easy way of taking security. This is no
longer possible.
17.25 The appropriate route now for a lender who is prepared to forego the
protection of having a registered legal mortgage is to apply to HM Land
Registry to enter either an agreed notice or a unilateral notice on the register1.
A notice will confer priority but it will not validate a mortgage which is
defective eg, because it fails to comply with statutory requirements.
1
It is no longer possible to register a caution against dealing or an inhibition. See Land Registry
Practice Guide 19. Cautions (other than against first registration) disappeared under the LRA
2002. Mortgage cautions were abolished by the Administration of Justice Act 1977, s 26. Under
the LRA 2002, restrictions have become more important. On minor interests generally see R&R
Part Five.

(c) Unregistered land

17.26 Determining priority between successive legal charges on the same
unregistered legal estate also involves the consideration of registration but here
the registrations appear in the land charges register maintained under the Land
Charges Act 1972 (LCA 1972)1 not on the main land register. As the amount of
unregistered land has declined, the rules governing priority between charges
over it have become less relevant to the day to day business of lenders. Suffice it

10
 Further Advances 17.27

to say for present purposes that any system that depends on registration but is
not completely ruthless with unregistered interests inevitably runs in to diffi-
culties and the system created by the land charges legislation is no exception2.
1
The lack of registration in the land charges register does not mean that the charge is not
enforceable as between the lender and the borrower: Barclays Bank plc v Buhr [2001] 31 EG
103 (CS) by analogy with Independent Automatic Sales Ltd v Knowles and Foster [1962] 1
WLR 974 – charge not registered under s 395 of the Companies Act 1985.
2
For a general account see Megarry & Wade 8-063-112 and in relation to mortgages specifically
the Law Commission’s Working Paper No 99 Land Mortgages (1986).

7 FURTHER ADVANCES

(a) Priority in point of payment

17.27 The principles discussed in the previous section were directed to the issue
of how priority in terms of security is determined between competing mortgages
of the legal estate. The present section is concerned with how priority in for
repayment is determined between them. That is to say, what happens when a
lender which has taken a mortgage advances further funds after the borrower
has mortgaged the property again to someone else.
A common situation would be where a bank allows a customer to increase his
overdraft on a current account. This is usually referred to as lending on a
fluctuating account because the balance on the account is going to be changing
constantly as money flows in and out. Another common situation would be
where a borrower draws down on an existing facility within the limit of that
facility.
A preliminary point to be addressed is a simple one of construction. This applies
whether or not the land is registered. It is necessary to decide exactly what the
original mortgage secures. It is not uncommon to have in a mortgage a
definition of ‘the secured sums’ and to find that they are defined as the amounts
due to the lender on a particular account or under a particular loan agreement.
Clearly, such a mortgage is not going to secure amounts advanced on an entirely
different account or under a different loan agreement. Equally clearly, there are
going to be difficulties if the identified account is closed or the original loan
agreement is amended. The security which a lender takes from a corporate
customer will usually address the issue by defining the secured sums very widely
so as to include all monies due from the customer to the lender on any account,
whatsoever, whether as principal or as surety and will include all costs, charges
and commission. This is commonly known as an ‘all-monies charge’1.
Assuming that the further funds advanced by the original lender are, on a
proper construction, secured by the mortgage, the question then arises of the
priority to be accorded to them as against sums advanced by a later lender
secured by a later mortgage.
In these cases, the original lender is going to want to say that its mortgage,
which is undoubtedly the prior security, entitles it to priority of repayment not
just for its original loan but also for the further funds it advances. It is said to
want to ‘tack’ the further advance onto the original loan to enable the further
advance to be paid off ahead of the sums secured by the later mortgage.

11
17.27 Mortgages of Land

The rules to be applied to determine priority of repayment are not the same for
registered land and unregistered land.
1
The public nature of a registered charge restricts the extent to which extrinsic evidence can be
used as an aid to construction, and collateral documents not made public on the register should
not influence the process of interpretation: Cherry Tree Investments Ltd v Landmain Ltd
[2012] EWCA Civ 736; [2013] Ch 305.

(b) Registered land

17.28 In respect of registered land, the position on tacking further advances is
to be found in s 49 of the LRA 2002. A good deal of the detail required to make
s 49 operate is contained in the Land Registration Rules 2003, SI 2003/1417 (as
amended). Tacking under s 49 is possible in four cases.
The first case where tacking is possible under the LRA 2002 is contained in
s 49(1) and (2):
‘(1) The proprietor of a registered charge may make a further advance on the
security of the charge ranking in priority to a subsequent charge if he has not
received from the subsequent chargee notice of the creation of the subsequent
charge.
(2) Notice given for the purposes of subsection (1) shall be treated as received at
the time when, in accordance with rules, it ought to have been received.’
17.29 In the simple situation, the original lender only has priority in point of
payment for the amount outstanding at the date it receives notice of the later
mortgage. LRA 2002, s 49(1) gives statutory effect to the rule in Clay-
ton’s Case1. Clayton’s Case applies in various situations but in the context of
further advances it makes the date on which the original lender receives notice
of the later mortgage fundamental. Any further funds the original lender
advances after that date will rank after the amount secured by the later charge.
If that were not bad enough, all funds the original lender receives from the
borrower and applies to the account go first to reducing the amount of the
original lender’s priority debt. This process will eventually extinguish the
original lender’s priority of repayment altogether. The original lender will find
that the borrower’s indebtedness to it is still outstanding but it now ranks for
payment after the amount secured by the later mortgage2.
1
(1816) 1 Mer 572. For a more extended treatment of the rule see Chapter 10.
2
If the later lender is also lending on a fluctuating account it is open to the original lender to take
further security and to give notice. On its own, the giving of notice of further lending on the
original security appears not to be enough.

17.30 In these circumstances, if priorities cannot be agreed with the later

lender, all the original lender can do is to rule off the borrower’s original
account when it receives notice of the later mortgage and not to credit any
incoming funds to that account. It is common for lenders’ security documents to
provide that this shall be deemed to have been done even if, in practice, the
lender does not get around to it.
Section 30(1) of the LRA 1925 previously provided that it was for the land
registrar to give notice to the proprietor of the earlier mortgage when an
application was received at HM Land Registry to register a later mortgage. In
practice, most lenders would give notice themselves to the original lender and

12
 Further Advances 17.32

not rely on the registrar. Although s 49(2) of the LRA 2002 is silent on the point,
the 2003 Rules follow the accepted practice and leave it to the later lender to
protect itself by giving notice in accordance with the requirements of r 1071.
1
This does not apply to statutory charges. The registrar remains responsible for giving notice of
overriding statutory charges in accordance with the Rules: LRA 2002, s 50. Statutory charges
are charges created by statute to secure the performance of an obligation by the registered
proprietor. In some cases, for example, under the Housing Act 1990 or the Environmental
Protection Act 1990 the charge may be given priority in point of security and in point of
payment over earlier lenders.

17.31 The second case where tacking is possible under the LRA 2002 is
contained in s 49(3):
‘(3) The proprietor of a registered charge may also make a further advance on the
security of the charge ranking in priority to a subsequent charge if:
(a) the advance is made in pursuance of an obligation, and
(b) at the time of the creation of the subsequent charge the obligation was
entered in the register in accordance with rules.’
The lender who is obliged to make a further advance to the borrower would be
placed in an impossible position if any further advances it had to make ranked
for repayment after amounts secured by a later mortgage. In theory, if the title
to the property had been unregistered the later lender would have seen the
earlier mortgage when it investigated the title and discovered that the original
lender was obliged to make the further advance. Accordingly, the LRA 2002
follows previous practice for registered1 and unregistered land2 and is relatively
generous to the original lender. As long as the original lender is making the
further advance pursuant to an obligation and that obligation is entered in the
register, the original lender will be able to tack its further advance to its original
advance even after it has received actual written notice of the later mortgage.
1
LRA 1925, s 30(3).
2
LPA 1925, s 94(1)(c).

17.32 This is the commercial objective a bank would seek to achieve under any
facility where it expected to be called upon to advance funds in the future, eg,
a loan to enable a developer to meet construction costs as and when they
become due or a facility which the parties agree should be fully revolving with
a notional re-payment and re-drawing on every interest payment date.
Unfortunately, the concept of a bank being obliged to make an advance does not
fit comfortably with reality. In those cases where a bank will give a commitment
to make further advances, the commitment will usually be heavily qualified and
will say at very least that the obligation is subject to there having been no breach
of the loan agreement and no material adverse change in the financial condition
of the borrower. In such circumstances, when the bank retains such a wide
discretion to decide when the obligation comes to an end, a subsequent chargee
might seek to argue that the bank was under no obligation to make further
advances.
Even if the obligation is in existence at the outset, it is likely that technical
defaults occurring during the term of the loan would relieve the bank of the
obligation to make the further advances. Since most secured loans will prohibit
the borrower from creating any further mortgages on the property, it is highly
likely that the creation of the later mortgage will itself relieve the original bank

13
17.32 Mortgages of Land

of any obligation to advance further funds. In these circumstances, the original

bank may make a further advance but it would not be doing so pursuant to an
obligation and the further advance would therefore not have priority. A certain
amount can be achieved by making it clear that the obligation continues to bind
the original bank until the original bank takes some positive step to bring it to
an end but the situation is not satisfactory.
LRA 2002, s 49(3) gives protection to the proprietor of the registered mortgage
who makes further advances. This may be appropriate to most retail lending
but a good deal of commercial lending is done on the basis that the security is
held by a trustee or a nominee whilst the funds are provided by a syndicate of
banks, noteholders or other investors. The funds may be collected in by the
proprietor of the registered mortgage and advanced by it to the borrower but
the debtor/creditor relationship is not necessarily between the proprietor of the
registered mortgage and the borrower. This defect existed under s 30(3) of the
LRA 1925 and the draftsman of the LRA 2002 appears not to have been
sympathetic to the concern that was expressed on behalf of commercial lenders
that the defect should be put right.
17.33 The third case where tacking is possible under the LRA 2002 is con-
tained in s 49(4):
‘(4) The proprietor of a registered charge may also make a further advance on the
security of the charge ranking in priority to a subsequent charge if:
(a) the parties to the prior charge have agreed a maximum amount for
which the charge is security, and
(b) at the time of the creation of the subsequent charge the agreement was
entered in the register in accordance with rules.’
The ability to tack given by s 49(4) was completely new. There was no
equivalent for unregistered land nor was there any equivalent for registered
land under the LRA 1925. It was devised in response to representations from
retail lenders received on consultation leading up to the LRA 2002 and follows
the practice in some other jurisdictions.
Section 49(4) is very useful for lenders. It allows them to lend up to a limit with
guaranteed priority but they are not obliged to lend nor do they have to show
that they are lending pursuant to an obligation. It works particularly well for
retail lenders’ flexible mortgages which feature the ability for borrowers to
drawdown and prepay and take payment holidays in a way that does not fit very
well with the concept of further advances. It also frees lenders from a certain
amount of paperwork. They should not need to answer enquiries from other
potential lenders to the borrower about the state of the borrower’s account and
they should not need to enter into priority agreements with later lenders.
There was some apprehension that lenders would find a way to abuse the
provision1. By fixing a very high maximum amount at the outset, the lender
could effectively prevent the borrower having access to other providers of
secured funding whilst itself never intending to lend up to the maximum. The
expectation is that the maximum amount will be a fixed monetary figure which
will include the principal amount of the advance plus interest and costs but this
is not reflected in the Rule2.
Section 49(4), like s 49(3), suffers from the defect of referring to advances made

14
 Further Advances 17.36

only by the proprietor of the registered charge.

1
LRA 2002, s 49(5) specifically allows Rules to be introduced to disapply or qualify s 49(4) in
relation to certain mortgages.
2
SI 2003/1417, rule 109. There is no obvious way of making sure that the maximum amount
changes if the value of the property changes. Where a number of properties are taken as security
for a single loan each property has a maximum amount based on the amount of the loan rather
than the value of the property. The open register allows the curious to find out how much their
neighbours might be able to borrow.

17.34 The fourth case where tacking is possible under the LRA 2002 is
contained in s 49(6):
‘(6) Except as provided by this section, tacking in relation to a charge over
registered land is only possible with the agreement of the subsequent
chargee.’
This is the simple case allowing the original lender to tack with the agreement
of the later lender and again follows previous practice for registered1 and
unregistered2 land. It is important that the agreement is noted on the register to
ensure that the transferee is bound by it in case either of the lenders transfers its
mortgage.
1
LRA 1925, s 29.
2
LPA 1925, s 94(1)(a).

(c) Unregistered land

17.35 In respect of unregistered land1, the position on tacking further advances
is to be found in s 94 of the LPA 1925. Apart from the right created by s 49(4)
of the LRA 2002 to pre-agree a level of priority the concepts are very similar to
those discussed above in relation to registered land.
Section 94(1) of the LPA 1925 provides:
‘After [1st January 1926] a prior mortgagee shall have a right to make further
advances to rank in priority to subsequent mortgages (whether legal or equitable)–
(a) if an arrangement has been made to that effect with the subsequent mort-
gagee; or
(b) if he had no notice of such subsequent mortgages at the time when the further
advance was made by him; or
(c) whether or not he had notice as aforesaid, where the mortgage imposes an
obligation on him to make such further advances.
This subsection applies whether or not the prior mortgage was made expressly for
securing further advances.’
1
LPA 1925, s 94 continues to apply to mortgages of registered land which are not substantially
registered under the LRA 2002, ie, to those which are protected on the land register by means
of a notice or an old notice of deposit.

17.36 No distinction is drawn between legal and equitable mortgages1 nor

between those who are protected by the deposit of deeds and those who are not.
Thus, unless it is under an obligation to make the advance, the right of the
original lender to tack turns simply on the question of notice. This is one of the
principal reasons why a lender secured on unregistered land should always give

15
17.36 Mortgages of Land

actual written notice immediately to any prior secured lenders – to put an end
to this right of prior lenders to advance further funds and to tack them on to the
original advance.
1
Thus the doctrine of tabula in naufragio (’the plank in the shipwreck’) which, as between
competing equitable mortgagees, enabled the mortgagee who acquired a legal estate in the
mortgaged property to prevail over the other was abolished by the LPA 1925. The doctrine
remains important for resolving conflicts between other equitable interests, eg, McCarthy
& Stone Ltd v Julian S Hodge Ltd [1971] 1 WLR 1547.

17.37 But written notice aside, registration on some public registers is deemed
to be notice to the whole world. The effect of ss 197 and 198 of the LPA 1925
is to affix the original lender with deemed actual notice of everything which is
registered as a land charge. This deemed actual notice is just as much notice for
the purpose of s 94(1) as if the later lender had given actual written notice.
Therefore, subject to what is said below in relation to s 94(2), an original lender
proposing to make a further advance on the security of an existing mortgage of
unregistered land should always make a search of the land charges register in
case something has been registered which will stop it tacking the further
advance.
Section 94(1), on its own, would cause problems for banks. It would mean that
a bank could not rely on the security it took for its lending on fluctuating
accounts unless it made a search before it honoured each cheque or made each
advance. Section 94(2) was amended to deal with this situation. It is sometimes
called ‘the Banker’s clause’. As amended by the Law of Property (Amendment)
Act 1926, it provides that:
‘In relation to the making of further advances after 1st January 1926 a mortgagee
shall not be deemed to have notice of a mortgage merely by reason that it was
registered as a land charge . . . if it was not so registered at the time when the
original mortgage was created or when the last search (if any) by or on behalf of the
mortgagee was made, whichever last happened.
This sub-section only applies where the prior mortgage was made expressly for
securing a current account or other further advances.’
Therefore as long as the mortgage provides expressly that it is made to secure a
current account or other further advances and the original lender has done a
search in the land charges register at the outset and has not found any
mortgages registered as land charges, s 94(2) would appear to have it that the
original lender is not going to be prejudiced by later mortgages until it has
actual notice of them or does another search and finds out about them that
way1.
1
Section 94(2) is another key section that has not been seriously tested in the courts and about
which there has long been speculation which the legislature has not taken the trouble to dispel.
See (1958) 22 Con (NS) 44 (Rowley).

8 OVERRIDING INTERESTS

(a) Land Registration Act 1925

17.38 In their commentary on the Bill which became the LRA 2002, the
Law Commission and HM Land Registry said:

16
 Overriding Interests 17.39

‘The fundamental objective of the [LRA 2002] is that, under the system of electronic
dealing with land that it seeks to create, the register should be a complete and
accurate reflection of the state of the title of the land at any given time, so that it is
possible to investigate title to land on line, with the absolute minimum of additional
enquiries and inspections’.1
In doing so they were addressing one of the fundamental issues of land
registration, which is the problem of satisfying the twin objectives of alienabil-
ity and fragmentation. Putting it another way, there is a public interest in having
secure legal titles which can be investigated and transferred simply and straight-
forwardly. However there is a private interest in having interests, rights and
obligations which do not appear on the register upheld both against the
registered proprietor and its transferees. The stance taken by the legislature in
the LRA 2002 was unequivocally in favour of the primacy of the register.
One of the areas where the LRA 1925 was least effective was in its handling of
what are referred to in the LRA 1925 as ‘overriding interests’. These are
interests which, although not appearing on the register, bind third parties such
as purchasers, tenants and lenders. Section 70(1) of the LRA 1925 contained a
list of thirteen kinds of overriding interests. They included local land charges,
leases granted for less than twenty-one years and certain kinds of easements.
They also included some rather more esoteric interests such as the liability to
maintain the chancel of the local church2, fishing and sporting rights and
payments in lieu of tithes. What all these had in common was that in the system
of unregistered land they were all interests which would not necessarily be
apparent from the title deeds. They may well not have been apparent on an
inspection of the property either. The purchaser or the lender could carry out
the most exhaustive enquiries and still find itself bound by an overriding interest
which it had been unable to discover.
As far as lenders were concerned, the overriding interest that caused the most
difficulty was that referred to in s 70(1)(g) of the LRA 1925. This preserved:
‘The rights of every person in actual occupation of the land or in receipt of the rents
and profits thereof, save where enquiry is made of such person and the rights are not
disclosed.’
This was an example of the LRA 1925 reflecting the law as it related to
unregistered land, in this case, the rule in Hunt v Luck3. The rule was that if the
third party visited the property and found someone there other than the legal
owner, the third party was put on notice that something might be wrong and he
ought to start asking questions. If the third party did not visit the property or
did not ask questions he was nevertheless deemed to have constructive notice of
whatever rights the occupier might have had and he took subject to them. The
occupier’s rights would bind the third party even though they were not
registered.
1
Law Com no 271, 1.5.
2
See Aston Cantlow and Wilmcote with Billesley Parochial Church Council v Wallbank [2003]
3 All ER 1213.
3
[1902] 1 Ch 428.

17.39 It was against this background that the Williams & Glyn’s v Boland1
litigation came to court. The bank had agreed to make cash available to Mr
Boland for the purpose of his business and it required him to mortgage the

17
17.39 Mortgages of Land

matrimonial home by way of security. The legal title to the house was registered
at HM Land Registry solely in his name so his wife did not have to sign
anything. Mr Boland defaulted and the day came when the bank wanted to take
possession and enforce its security. At this stage, Mrs Boland claimed that she
had rights in the house. Like most wives, she was able to say that she had
assisted substantially in buying or improving it so although it was registered in
her husband’s name he actually held it on trust for both of them. She said that
her rights were not affected by the mortgage and that her right to stay there
should prevail against the bank’s right to obtain possession. The House of
Lords upheld Mrs Boland and would not give the bank the possession order it
wanted. Mrs Boland was in actual occupation and the bank should have asked
her what her rights were. The fact this would add to the burdens of purchasers
and mortgagees was dismissed. ‘Bankers and solicitors exist to provide the
service which the public needs. They can – as they have successfully done in the
past – adjust their practice, if it be socially required’ – per Lord Scarman in
Boland.
1
[1981] AC 487.

17.40 The rights which could be protected by actual occupation were not
defined in the LRA 1925 and it was left to the courts to develop the concept. The
courts looked at the general law and concluded that the rights which can subsist
as overriding interests are those which ‘have the quality of being capable of
enduring through different ownerships of the land, according to normal con-
ceptions of title to real property’1. The courts have been prepared to recognise
as overriding interests a tenant’s option to purchase the reversion2, the interest
of a beneficiary under a bare trust3, the right to specific performance of an
agreement for purchase4, the right of a tenant to deduct from future instalments
of rent the cost of repairs which he has carried out5 and the right to have a
conveyance rectified on the basis of mistake6. Finally, and probably to most
people’s surprise, their Lordships in Boland also recognised Mrs Boland’s right
which was the right of a beneficiary under a trust for sale to occupy the
property. All of these rights are capable of binding the lender and of severely
limiting the efficacy of the lender’s security.
1
National Provincial Bank Ltd v Hastings Car Mart Ltd [1964] Ch 665. In Paddington Building
Society v Mendelsohn (1985) 50 P & CR 244 reference is made to rights which by their ‘inherent
quality’ are enforceable at the date of the relevant transfer or mortgage.
2
Webb v Pollmount [1966] Ch 584; cf position for unregistered land Hollington Bros Ltd v
Rhodes [1951] 2 TLR 691.
3
Hodgson v Marks [1971] Ch 892.
4
Grace Rymer Investments Ltd v Waite [1958] Ch 831.
5
Lee-Parker v Izzet [1971] 1 WLR 1688.
6
Re Beaney [1978] 1 WLR 770.

17.41 The LRA 1925 did not give any guidance about what was meant by
‘actual occupation’ for the purpose of s 70(1)(g). Boland established that Mrs
Boland’s presence in the property could not simply be explained by saying that
she was Mr Boland’s wife1 but there remained issues about what degree of
physical presence was needed to amount to ‘actual occupation’. It is clear that
it is not necessary for the person claiming the benefit of the overriding interest
to be physically present themselves all, or indeed any, of the time. Occupation
can be established on their behalf by a caretaker, or in the case of a company, by

18
 Overriding Interests 17.44

a representative of the company. On the other hand, removal men or an interior

designer planning decorations and measuring for furnishings would not nor-
mally be occupying for this purpose even though they might be there for hours
at a time2.
1
As was the case pre-Boland at least in respect of unregistered land: Caunce v Caunce [1969] 1
WLR 286.
2
Lloyds Bank Ltd v Rosset [1991] 1 AC 107.

17.42 Whether lenders could ever have hoped to catch some of the transients
that the courts were prepared to recognise as being in ‘actual occupation’ must
be open to doubt. In one case1, the husband invited the lender’s agent to inspect
on a Sunday afternoon. The wife did not sleep in the house when the husband
was there and on the day in question the husband had eliminated all sign of her
occupation. Nevertheless, the agent should have found out about her so the
lender was bound. In another2, ‘actual occupation’ was achieved by a wife who
was flitting in and out of the semi-derelict property at the relevant time
supervising the building works. In a third3, the wife was in hospital having a
baby but she remained in actual occupation because her furniture was still in the
house and it was always her intention to return home.
1
Kingsnorth Finance Co Ltd v Tizard [1986] 1 WLR 783.
2
Lloyds Bank Ltd v Rosset [1991] 1 AC 107.
3
Chhokar v Chhokar [1984] FLR 313.

17.43 There were some areas where the law on overriding interests under the
LRA 1925 was clarified in favour of the lenders. It used to be thought that the
relevant time for ascertaining whether there was anyone in ‘actual occupation’
was when the mortgage transaction was completed. This was extremely incon-
venient because transactions involving registered land are not complete until
the registration process has been dealt with. It led to the unsatisfactory
conclusion that the lender could be bound by the rights of someone moving in
during the period of the registration gap, ie, between the date the property was
bought and the date of the registration. This was dismissed as a conveyancing
absurdity and it was established that the moment to test whether there was
anyone in ‘actual occupation’ was the moment when the purchaser handed over
the purchase price and was given the keys1.
1
Lloyds Bank v Rosset [1991] 1 AC 107.

17.44 The lender who was advancing on a re-mortgage or otherwise taking

security over a property already in the borrower’s ownership also engaged the
sympathy of the courts. The courts looked at the conduct of a person who
stands by knowing the property is being mortgaged by the legal owner and does
nothing to disclose his or her interest1. The courts were prepared to find that
such a person, by his or her conduct in remaining silent, had led the lender to
make the advance. In these circumstances, the rights of such a person lose
priority and the person concerned is estopped from asserting them against the
lender. This loss of rights could occur even though the conduct is not otherwise
reprehensible or calculated to deceive.
1
See Knightly v Sun Life Assurance Society Ltd (1981) Times, 23 July and Bristol and West
Building Society v Henning [1985] 1 WLR 778; Paddington Building Society v Mendelsohn

19
17.44 Mortgages of Land

(1985) 50 P & CR 244; Lloyds Bank v Rossett [1991] 1 AC 107; and Abbey National Building
Society v Cann [1991] 1 AC 56.

17.45 Lastly, the courts took away one of the pieces of legal fiction which had
previously been used to protect the occupier with an interest. In the case of an
acquisition mortgage, the law had been prepared to suppose by way of another
legal fiction that there was a scintilla temporis, an instant of time, between the
moment the borrower acquired the new property and the moment he created
the mortgage over it. For that instant, the borrower had an unencumbered title
to the property and in that instant third parties could acquire rights in respect of
the property ahead of the mortgage created by the borrower. However this
approach is no longer available and the old line of cases has been overruled. The
acquisition of the property and the creation of the mortgage are to be regarded
as not only precisely simultaneous but indissolubly bound together1.
1
Abbey National Building Society v Cann [1991] 1 AC 56.

(b) Land Registration Act 2002

17.46 Like the LRA 1925, the LRA 2002 lists the categories of overriding
interests1. Unlike the LRA 1925, the LRA 2002 draws a distinction between
unregistered interests which override on the first registration of the title and
those which override on a disposition of land which is already registered2. It
therefore contains two lists of overriding interests. The lists are similar to one
another but are not the same. The differences relate to the treatment of certain
kinds of leases, easements and the rights of persons in actual occupation. Both
lists in the LRA 2002 include local land charges, leases originally granted for
less than seven years3 and customary and public rights.
1
The term ‘overriding interest’ continues to be used, as here, although it is not a term used in the
LRA 2002.
2
Eg LRA 2002, s 11(4)(b), Sch 1 and s 29(2)(a)(ii), Sch 3.
3
Whereas leases originally granted for less than 21 years were not registrable under the LRA
1925, this is reduced to leases for less than seven years under the LRA 2002 and is expected to
come down to leases for less than three years.

17.47 The LRA 2002 provided that five of the most obscure categories of
overriding interests would cease to be included in the lists after 13 October
20131. This means that after 13 October 2013 these interests do not bind a
purchaser or a lender unless they have been registered on the register in the
meantime. No compensation will be payable to people whose rights are lost in
this way2.
1
LRA 2002, s 117. The rights to be lost unless they are registered are: a franchise, a manorial
right, a Crown rent, a non-statutory right in respect of an embankment or sea or river wall and
a payment in lieu of tithe. These are already obsolete in that it is no longer possible to create
these rights.
2
According primacy to the register has its costs for the unwary or the unprepared.

17.48 Unlike under s 70(1)(g) of the LRA 1925, both on a first registration and
on a disposal of registered land the rights of persons in receipt of rent from the
land are no longer overriding interests1.

20
 Overriding Interests 17.49

A further change is that the overriding interest is protected only so far as the
land which is actually occupied, not to the rest of the land in the registered title
as well2.
1
See Schedule 3 paragraph 2A of the LRA 2002 for transitional arrangements.
2
By Schedule 3 paragraph 2 of the LRA 2002, and reversing the effect of the decision in
Ferrishurst Ltd v Wellcite Ltd [1999] Ch 355.

17.49 As noted above, the LRA 2002 draws a distinction between unregistered
interests which override on first registration (ie, when unregistered land be-
comes registered land) and those which override on a disposal of registered
land. The most important difference is in relation to the interests of persons in
actual occupation of the land. In the case of a first registration, para 2 of Sch 1
of the LRA 2002 provides that the land will vest in the proprietor subject to:
‘An interest belonging to a person in actual occupation, so far as relating to the land
of which he is in actual occupation ....’
There is no reference here to enquiries being made of the occupier. This is
because no transfer of the land is taking place at this stage, it is simply the
conclusion of the title investigation procedure at HM Land Registry.
In the case of a disposal of land which is already registered, para 2 of Sch 3 of
the LRA 2002 provides that the land will vest in the new proprietor subject to:
‘An interest belonging at the time of the disposition to a person in actual occupation,
so far as relating to land of which he is in actual occupation, except for–
(a) . . .
(b) an interest of a person of whom inquiry was made before the disposition and
who failed to disclose the right when he could reasonably have been expected
to do so;
(c) an interest–
(i) which belongs to a person whose occupation would not have been
obvious on a reasonably careful inspection of the land at the time of
the disposition, and
(ii) of which the person to whom the disposition is made does not have
actual knowledge at that time;
(d) . . . .’
Paragraph 2 of Sch 3 picked up the concepts that formed part of the old law and
expressed them in a simple, coherent manner, making clear that a lender is not
going to be bound by an interest it does not know about if it belongs to an
occupier who is not readily ascertainable. However, the LRA 2002 still did not
attempt to list the kinds of interest which were capable of being protected by the
interested party’s occupation and it still did not define what is meant by ‘actual
occupation’. In these and in other areas where the LRA 2002 overlaps with the
LRA 1925 the cases decided on the LRA 1925 discussed earlier remain relevant.
In Re North East Property Buyers Ltd1, the Supreme Court affirmed that before
a purchaser has obtained legal title to a property, he is not able to grant
equitable rights that are proprietary in nature. Accordingly, the vendor’s rights
in that case were not capable of being overriding interests, because by virtue of
s 29(2) and paragraph 2 of Sch 3 of the LRA 2002, only unregistered propri-
etary, not personal, interests may override registered dispositions. Baroness
Hale expressed her concern about the harsh consequences for vendors arising
from the indivisibility of the acquisition of the legal estate and the grant of the

21
17.49 Mortgages of Land

lender’s charge, which preclude a vendor from having a proprietary right

capable of overriding at the moment of completion. One might expect this issue
to be addressed in the 2018 Law Commission review on the impact of fraud2.
However, it is difficult to envisage how the notion of a ‘middle way’ could
operate without either reverting to the old scintilla temporis debate, or trying to
artificially define the circumstances of ‘fraud’ against which protection is to be
offered.
In Mortgage Express v Lambert3 it was held that right to set aside an uncon-
scionable bargain was ‘a mere equity’, was proprietary, and was therefore an
interest capable of binding successors in title, as provided by LRA 2002 s 1164.
Moreover, such a right is capable of being an overriding interest. Ultimately, the
defendant’s rights in that case were not protected, and the Court held, obiter,
that they would not in any event have been, as she had failed to disclose them in
a questionnaire completed by her, and returned to her solicitor, and she had
signed the title guarantee5. It was predicted that after Boland lenders would be
plagued with fraudulent defences concocted by defaulting borrowers, co-
operative ‘contributors’ and ‘actual occupiers’ which they would be unable to
challenge. In practice, Boland did not open the floodgates and instead lenders,
at least retail lenders, adopted more rigorous procedures. These are equally
applicable under the LRA 2002.
On new purchases, lenders generally insist that all contributors to the purchase
price acquire the legal title jointly so that all of them enter the mortgage6. If
there is a third party who might acquire an interest in the property they insist
that the third party either acknowledges that his interest ranks after the lender’s6
or charges his interest as well. Generally lenders will insist that the third party
takes legal advice independently of the borrower. They also make careful
enquiries as to the source of the balance of finance for the purchase and as to the
intended occupiers. These inquiries are frequently addressed not only to the
borrower but also to the borrower’s solicitors in case they have any information
that might be relevant.
1
[2014] UKSC 52, [2015] AC 385.
2
Chapter 11, concerning overriding interests, did not address the scintilla temporis debate.
3
[2017] Ch 93, first instance decision by HHJ Simpkiss unchallenged.
4
At [18, 24].
5
At [40]–[42].
6
This of course has the further advantage that equitable interests will be overreached. See City of
London Building Society v Flegg [1988] AC 54, [1987] 2 WLR 1442.
6
Any release or consent has to be clear and unambiguous if it is to be effective: Zamet v Hyman
[1961] 1 WLR 1266.

9 LEASEHOLD PROPERTY
17.50 A lender taking a mortgage over leasehold property has to accept that as
well as the borrower/tenant there is a third party/landlord with an interest in the
property. It also has to accept that the borrower/tenant owes obligations to the
third party/landlord and that the breach of those obligations will give the third
party/landlord various remedies which will affect the lender and its mortgage.
In the first place, the tenant may need the landlord’s consent to create the
mortgage. Leases commonly contain covenants which exclude or restrict the
tenant’s ability to deal with the property. These can be in ‘absolute’ or ‘qualified’

22
 Leasehold Property 17.52

form. An absolute covenant prohibits the tenant from dealing with the property
altogether, whereas a qualified covenant permits dealings but only with the
landlord’s consent. By statute1 a qualified covenant against assigning, underlet-
ting, charging or parting with possession will be deemed to be subject to a
proviso that the landlord’s consent is not to be unreasonably withheld2. The
tenant’s position is further strengthened by the Landlord and Tenant Act 1988
which imposes on the landlord a statutory duty to the tenant to give consent
within a reasonable time unless the landlord can show that it is acting reason-
ably in not doing so3. If there is no restriction in the lease, the tenant normally
has the right to deal with the property4 and no consent will be necessary to the
creation of the security.
1
Landlord and Tenant Act 1927, s 19(1)(a). As to leases originally granted for more than 40
years in consideration wholly or partially of the carrying of building works where the landlord
is not a public body – see s 19(1)(b) (no consent required except in the last seven years but notice
must be given). But see Vaux Group v Lilley [1991] 1 EGLR 60 for a restrictive interpretation
of s 19(1)(b) and s 19(4) as to the section’s application to agricultural holdings and mining
leases.
2
See International Drilling Fluids v Louisville Investments (Uxbridge) [1986] Ch 513 for a
modern statement of the law but note the effect of the Landlord and Tenant Act 1988, s 1(6) in
reversing the burden of proof.
3
Footwear Corpn Ltd v Amplight Properties Ltd [1999] 1 WLR 551 and Norwich Union Life
Insurance v Shopmoor [1999] 1 WLR 531 illustrate the consequences of failing to comply with
the requirements.
4
Leith Properties v Byrne [1983] QB 433, where the Court of Appeal found that at common law
a tenant could sublet without his landlord’s consent where the lease was silent as to this.

17.51 A mortgage which is created by a charge expressed to be by way of legal

mortgage, should in theory not breach a prohibition against assignment or
against sub-letting as it does not operate as a transfer of title but simply gives the
same protection power and remedies as if a term had been created1. The point
has come on for consideration by the court but was expressly left open, the
court recognising the view generally held that a lender taking a charge by way
of legal mortgage does not have to obtain the consent of the landlord to a
charge2 except of course where there are specific restrictions in the lease.
Then, the lender may need the landlord’s consent to enable it to enforce the
security. There is a potential breach of a covenant against parting with posses-
sion if the lender goes into possession. If the landlord consented to the grant of
the mortgage then it could be said to have consented to the action that the lender
can take under it. If the landlord’s consent was not required to the creation of
the mortgage then it may be that the landlord can be said to have impliedly
waived the right to object.
1
LPA 1925, s 87(1).
2
Grand Junction Co Ltd v Bates [1954] 2 QB 160.

17.52 On the exercise of the power of sale, there is a further possibility of a

breach of a covenant against assignment. Again there is the argument that if no
consent was required from the landlord to the creation of the mortgage then the
landlord should not be entitled to object to a sale by the lender. The lender may
have some further assistance from statute. Section 89(1) of the LPA 1925
provides that ‘where a licence to assign is required on a sale by a mortgagee,
such licence shall not be unreasonably withheld’. There is no authority as to
whether this is dealing with an absolute covenant that prohibits all assignments

23
17.52 Mortgages of Land

or whether it only relates to the qualified form that allows assignments with the
landlord’s consent. On principle and by analogy with s 19 of the Landlord and
Tenant Act 1927 there is no reason why a landlord should not be allowed to
insist on a complete prohibition against assignment and the better view is that
s 89(1) of the LPA 1925 is not attempting to interfere with this.
17.53 Any event which enables the landlord to put an end to the lease by
re-entry or forfeiture places the lender’s security at risk. The most common
events are of course the tenant’s breach of covenant or the tenant’s insolvency.
In these circumstances, there is an inevitable conflict between the lender who
wishes to keep the lease in existence and the landlord who wants to have the
breaches of covenant remedied (where possible) or otherwise to be rid of an
unsatisfactory tenant. The solution adopted by the legislation is to give the
lender the right to seek relief against the forfeiture through the court1. However
there are certain shortcomings in the arrangements of which the lender ought to
be aware2.
1
Law of Property Act 1925, s 146.
2
Problems can arise for a lender where the landlord seeks a remedy other than forfeiture. For
example, where a sub-tenancy exists the mortgagee of the insolvent tenant would normally
expect to appoint a receiver and continue receiving rent. However under the Law of Distress
Amendment Act 1908, s 6 the superior landlord may require a sub-tenant to pay its rent direct
to the superior landlord in certain circumstances and this has been held by the Court of Appeal
to override the rights of the mortgagee’s receiver to receive them: Rhodes v Allied Dunbar
Services Ltd [1989] 1 All ER 1161.

17.54 Failure to pay rent has to be distinguished from other breaches of

covenant. One of the purposes of the landlord’s right to put an end to the lease
was to secure the payment of rent, so, save in the most exceptional cases, if the
rent was paid with appropriate interest and costs the courts would assume that
no harm had been done and that relief from forfeiture should be given. This
attitude survives so far as tenants are concerned both in the High Court and in
the county court under the current legislation. If a landlord starts proceedings
for forfeiture, the tenant has an absolute right to stay the proceedings if he pays
the arrears of rent and costs before the landlord obtains judgment1. Even after
the landlord has obtained a possession order the tenant has six months2 to apply
for discretionary relief3. The fact that the landlord has re-let the property in the
meantime may of course mean that relief cannot be granted. The landlord may
prefer to re-enter peacefully and not take proceedings for forfeiture, in which
case the tenant can apply to the court to exercise its residual equitable juris-
diction to determine disputes between the parties. Strictly the time limit of six
months will not be relevant4 but in practice the same principles are applied.
Both legal and equitable mortgagees of the lease are able to take advantage of
these provisions5.
1
Common Law Procedure Act 1852, s 212. Some doubt has been expressed whether any one but
the tenant can take advantage of this, but the Court of Appeal has held that others can,
including holders of a charging order: Croydon (Unique) Ltd v Wright [2001] Ch
318. County Courts Act 1984, s 138(2).
2
United Dominions Trust v Shellpoint Trustees [1993] 4 All ER 310 – the Court of Appeal
applied the time limit very strictly against a mortgagee who had proper notice of the proceed-
ings but failed to apply for relief in time.
3
Common Law Procedure Act 1852, s 210; County Courts Act 1984, s 138(9A); Supreme Court
of Judicature Act 1981, s 38.
4
Common Law Procedure Act 1852, s 210. See Lovelock v Margo [1963] 2 QB 786.

24
 Leasehold Property 17.57
5
Ladup Ltd v Williams & Glyn’s Bank plc [1985] 2 All ER 577. See also Bland v In-
gram’s Estates Ltd [2001] Ch 767, [2001] 2 WLR 1638.

17.55 If the landlord is seeking to forfeit the lease for a breach of a covenant
other than the covenant to pay rent, the tenant needs to apply to the court for
relief from forfeiture under s 146(2) of the LPA 1925. The lender is treated for
this purpose as if it were an undertenant and is given a corresponding right to
apply under s 146(4). Where a landlord is taking action through the courts,
the County Court Rules1 and the Civil Procedure Rules2 require the landlord to
give notice to the lender so the lender knows what is going on and has the
opportunity to make the application.
1
The County Court (Amendment No 2) Rules 1986, SI 1986/1189, r 2.
2
CPR, PD 55A 55.4, para 2.4. The lender having been given notice is unlikely to be sympatheti-
cally regarded if it simply files it and does not get round to seeking relief until after the landlord
has signed judgment: Rexhaven Ltd v Nurse [1995] EGCS 125.

17.56 However, s 146(2) of the LPA 1925 has a serious defect as far as lenders
are concerned. Relief can be sought where a landlord is proceeding by action or
otherwise to enforce a right of re-entry or forfeiture through the court but the
landlord can achieve its objectives without having to go to court. A landlord can
instead peaceably re-enter the premises to bring the lease to an end and does not
need to tell the lender what it is doing. If it succeeds in completing the forfeiture,
the right to apply for relief can be lost before the lender even becomes aware of
the situation. In a different age this was described as just one of the ‘risks of the
game’ which the lender secured on leasehold property was expected to appre-
ciate1.
1
Sir Wilfred Greene MR in Egerton v Jones [1939] 2 KB 702.

17.57 The fact that this ‘risk’ still exists has been confirmed by a modern Court
of Appeal roundly declaring that the court has no inherent jurisdiction to grant
relief in circumstances where the landlord was endeavouring to forfeit other-
wise than for arrears of rent1. The court decided that s 146 of the LPA 1925
provides a code that extinguishes altogether any inherent jurisdiction the court
might have had2. Nevertheless the House of Lords has found a way to assist
lenders faced with this situation3. Looking closely at exactly what is meant in
s 146 by the landlord ‘proceeding by action or otherwise to enforce’ its right of
re-entry, their Lordships took the view that when the landlord resorted to
self-help and gained possession by re-entering it had not finished the job. Up
until such time as it obtained an order of the court it must be regarded as still
‘proceeding’. Since, ex hypothesi, this particular landlord had decided not to go
through the courts it would be ‘proceeding’ for quite a long time and during this
period the lender could apply for relief. The wonder of the result, as so often
with decisions on mortgage law, is not that their Lordships were prepared to
find a way through the historical debris but that they made such heavy going of
it.
1
Smith v Metropolitan City Properties [1986] 1 EGLR 52. There had been a conflict of first
instance decisions between Abbey National Building Society v Maybeech Ltd [1985] Ch 190
which supported the inherent jurisdiction and Official Custodian for Charities v Parway Estates
Developments Ltd [1985] Ch 151 which was against it.

25
17.57 Mortgages of Land
2
The modern basis of the jurisdiction was restated in its most general form in Shiloh Spinners v
Harding [1973] AC 691, [1973] 1 All ER 90, and applied in Smith v Metropolitan City
Properties (see fn 1 above).
3
Billson v Residential Apartments Ltd [1992] 1 AC 494. Widely commented on, see for example
PF Smith [1992] Conv 273.

17.58 The tenant who obtains relief under s 146(2) of the LPA 1925 is back
where it started. It is as if the lease had never been forfeited1. Any mortgage it
has given stays in place as do any sub-tenancies. However the lender who
obtains relief under s 146(4) is not in the same position at all. To begin with, the
lender will become the new tenant so it will take on personal liability under the
covenants in the lease. Secondly, it is clear that the lease that is vested in the
lender by the order is an entirely new lease2 and that its effect is not back-dated
to the original forfeiture. This prompts the question of what happens in the
twilight period between the service of the writ for forfeiture of the old lease and
the vesting in the lender of the new one. More particularly, who gets the benefit
of any rents payable by the sub-tenants in the twilight period? In the final
episode of long running litigation in which many of the points affecting the
rights of the landlord, the tenant and the lender in these circumstances were
explored3, the court found that the landlord had no right to recover these rents
from the receiver appointed by the lender secured on the old lease.
1
Cadogan v Dimovic [1984] 1 WLR 609.
2
Cadogan (above) and Official Custodian for Charities v Mackey [1985] Ch 168.
3
Official Custodian for Charities v Mackey (No 2) [1985] 2 All ER 1016.

10 REMEDIES OF A LEGAL MORTGAGEE

17.59 As a legal mortgagee the lender has a number of powerful remedies
which it can bring to bear. For the most part, these are remedies against the
borrower and the mortgaged property. However, the lender may have other
valuable remedies. There may be guarantees from third parties. There may be
rights against the lender’s professional advisers if the formalities in setting up
the mortgage were not properly attended to or if the lender has relied on a
survey or a valuation which was carried out negligently1. The lender may also
have the benefit of mortgage indemnity insurance. The existence of these
alternative remedies will affect how the lender goes about exercising its powers
as mortgagee against the borrower and the mortgaged property2 and it is
important that they are taken into account to maximise the return to the lender.
1
Normally the survey or valuation has to be addressed to the person seeking to rely on it:
Shankie-Williams v Heavey [1986] 2 EGLR 139. But see Yianni v Edwin Evans & Sons
[1982] QB 438. Reliance is essential but this is not necessarily displaced by the lender having
mortgage indemnity insurance: Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd
[1997] AC 191. For the extent of the liability, particularly in the context of a change in the
market between the date of the valuation and the date of realisation, see Banque Bruxelles ante
and Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2)[1997] 1 WLR 1627
and, in the case of multiple valuations, Tiuta International Ltd (In Liquidation) v De Villiers
Surveyors Ltd [2017] UKSC 77, [2017] 1 WLR 4627.
2
Where the lender can look to more than one property of the borrower out of which to satisfy the
debt, the lender may be required to marshal the mortgages if the borrower has mortgaged one
of the properties again in favour of a third party: see Szepietowski v National Crime Agency
[2013] UKSC 65; [2014] 1 All ER 225 at [28]–[38]. The lender may decide to sell off first the

26
 Remedies of a Legal Mortgagee 17.62

property mortgaged to the third party but the third party will be subrogated to the lend-
er’s mortgages on the other properties and entitled to share in any surplus ahead of the borrower
once any remaining part of the debt to the lender is repaid.

17.60 The remedies of a lender secured by way of a registered legal mortgage

are cumulative and with the exception of foreclosure their exercise does not
generally need to be preceded by a judgment of the court. Not surprisingly, the
judiciary and the legislature have, from time to time, tried to control or exclude
the powers.
The lender’s remedies under a registered legal mortgage are as shown below.

(a) An action on the covenant to pay

17.61 A mortgage will normally contain an express covenant on the part of the
borrower to repay the secured sums1. A loan will usually, but not inevitably,
imply an obligation to repay2. The simplest remedy for the lender is to sue on the
covenant in exactly the same way as it would sue to recover any other debt. If
the mortgaged property has been sold and it has not realised enough to
discharge the sums due the lender has little alternative. The right to sue for the
shortfall survives the exercise of the power of sale3.
1
Covenants may be given jointly and severally if there is more than one person named as
mortgagor, see AIB Group (UK) plc v Martin [2002] 1 WLR 94 for the possible consequences.
2
The intention to exclude the implied obligation may be implicit in the charge itself: Fairmile
Portfolio Management Ltd v Davis Arnold Cooper [1998] 42 LS Gaz R 34. In the case of a
registered charge on registered land, s 28(1) of the LRA 1925 implied a covenant on the part of
the borrower with the proprietor for the time being of the mortgage that the borrower would
pay the secured sums. There is no equivalent provision in the LRA 2002. See also the LPA 1925,
s 117(2) for covenants implied in a statutory charge.
3
Rudge v Richens (1873) LR 8 CP 358. In three cases taken together, including Bristol &
West plc v Bartlett Lawtel [2002] 4 All ER 544, the Court of Appeal confirmed that the sale did
not release the borrower and that the mortgagee had twelve years from the accrual of the cause
of action to sue for the principal debt but only six years to sue for interest.

(b) Possession
17.62 By a triumph of legal theory over commercial reality, except insofar as its
rights are limited by contract or statute, a lender secured by a registered legal
mortgage is entitled to possession of the mortgaged property at any time after
the mortgage is executed1. The right arises ‘before the ink is dry on the
mortgage’2 and has nothing to do with whether there has been a default or
whether the debt is due. The courts might be ready to find that the right has been
impliedly excluded but there must be something upon which to hang such a
conclusion3 and they show no readiness to treat the lender’s right to possession
simply as a legal technicality4. Although it may be said that the right to
possession is to be regarded by the lender as a method of ensuring that the debt
is repaid and that it must be exercised in good faith5, the courts generally treat
the lender’s right to possession as absolute6.
1
Four-Maids Ltd v Dudley Marshall (Properties) Ltd [1957] Ch 317; Alliance Permanent
Building Society v Belrum Investments [1957] 1 WLR 720. See also s 95(4) of the LPA 1925
which acknowledges the right but does not confer it.
2
Per Harman J in Four Maids (supra).

27
17.62 Mortgages of Land
3
Esso Petroleum Co Ltd v Alstonbridge Properties Ltd [1975] 1 WLR 1474.
4
Eg, Western Bank Ltd v Schindler [1977] Ch 1 where the Court of Appeal unanimously upheld
the right to possession even though there had been no financial default. See also National
Westminster Bank plc v Skelton [1993] 1 WLR 72, one of a number of cases where possession
is ordered where there is a counter-claim against the lender. The position where there is an
equitable right of set-off is undecided.
5
Quennell v Maltby [1979] 1 WLR 318: the lender was found to be acting as the borrow-
er’s agent in trying to obtain possession against borrower’s tenants whose tenancy was not
binding on the lender. Albany Homes Loans Ltd v Massey [1997] All ER 609: no useful purpose
served in making a possession order against a husband when a similar order could not be made
against his wife.
6
Eg, Ropaigealach v Barclays Bank plc [2000] 1 QB 263.

17.63 As a preliminary to realising the best price for the property, the lender
may need to evict the borrower1. Normally, the borrower is regarded as a tenant
at sufferance and not entitled to notice.
1
Although note that the statutory power of sale discussed below is not dependent on the lender
first taking possession: Horsham Properties v Clark [2009] 1 WLR 1255.

17.64 The right of a lender to possession is restricted where the mortgaged

property consists of or includes a dwelling house1. Where a lender seeks
possession through the court2, s 36 of the Administration of Justice Act 1970 (as
amended by s 8 of the Administration of Justice Act 1973) confers on the court
a wide power to adjourn the possession proceedings or to postpone the date for
the giving of possession if it appears to the court that ‘the borrower is likely to
be able within a reasonable period to pay any sums due under the mortgage’3.
1
The parties will also be expected to comply with the Pre-Action Protocol for Possession Claims
(the current version of which has been in force since 6 April 2015) so as to give the borrower the
best possible chance of remaining in the property. Failure to comply with MCOB does not give
a defence to a possession claim: Thakker and another v Northern Rock plc [2014] EWHC 2107;
nor does failure to comply with the Protocol (paragraph 2.2 thereof).
2
For the argument that s 36 creates a requirement of due process see [1983] Conv 293 (A
Clarke). But to the contrary: Ropaigealach v Barclays Bank plc [2000] 1 QB 263 where
the Court of Appeal found there is no need to obtain a possession order when the borrower is
temporarily absent.
3
The section was introduced after Birmingham Citizens Permanent Building Society v Caunt
[1962] Ch 883 had all but put a stop on the inherent jurisdiction of the court in possession
proceedings being exercised to ensure that ‘in proper cases the wind was tempered to the shorn
lamb, time being given for payment and so forth’ – per Clauson LJ in Redditch Benefit Building
Society v Roberts [1940] Ch 415 and followed the recommendations of the Payne Committee
Report on the Enforcement of Judgment Debts (1969, Cmd 3909).

17.65 The sums concerned, in the case of a mortgage where the borrower is
entitled or is to be permitted to repay the loan by instalments or otherwise to
defer payment of the loan (eg, an instalment or an endowment mortgage1), are
the actual payments which are in arrears, ie, the monthly payments. The court
does not take into account the fact that repayment of the whole of the loan may
have been triggered by the original default2. The ‘reasonable period’ in an
ordinary case will be the remaining term of the loan3 but the court will take into
account the interests of both the lender and the borrower. A borrower has a
duty to present, frankly and fully, up-to-date information about his or her
expenditure and income, such that the Court can place reliance on what is being
said: Jameer v Paratus AMC4. Relevant factors may include the information
presented by the mortgagor to the court being inaccurate, incomplete or
misleading; uncertainties as to the mortgagor’s income, whether its source or

28
 Remedies of a Legal Mortgagee 17.67

amount; obvious omissions in the mortgagor’s declarations of expenditure; a

poor payment history; and the fact that the mortgagor is ‘offering too little, too
late’. If there are other breaches of the mortgage, eg, the borrower has let the
property without consent or there is really no prospect of the borrower being
able to make the required payments, a much shorter period will be specified so
that the sale of the property is not delayed5.
1
Bank of Scotland v Grimes [1985] QB 1179.
2
In Halifax Building Society v Clark [1973] Ch 307 the court took the view that s 36 of the
Administration of Justice Act 1970 as drafted meant that all sums, ie, the accelerated borrow-
ings as well, had to be considered. Clearly a borrower who had defaulted on a few instalments
was hardly likely to have access to sufficient capital to discharge the whole of the original loan
so s 36 was rendered almost useless and s 8 of the Administration of Justice Act 1973 was
required.
3
Cheltenham and Gloucester Building Society v Norgan [1996] 1 WLR 343.
4
[2012] EWCA Civ 1924; [2013] HLR 18.
5
Bristol & West Building Society v Ellis (1996) 73 P & CR 158.

17.66 The Administration of Justice Act 1970, s 36 (as amended) does not fit
comfortably with the kind of arrangement a bank will make with its customer
over the customer’s secured overdraft. Such an arrangement will not normally
entitle the customer to pay by instalments or to defer the repayment of the debit
balance. On the contrary, it will usually be crystal clear that the bank expects to
be repaid in full on demand. The Court of Appeal has held that s 36 has no
application to a mortgage given as security for a bank overdraft under which no
money is due unless and until repayment is demanded by the bank1.
1
Habib Bank Ltd v Tailor [1982] 3 All ER 561; National Westminster Bank v Skelton [1993] 1
WLR 72. Including, for regulated mortgages, under MCOB 13.6.

17.67 The right of the lender secured by a registered legal mortgage to

possession of the mortgaged property carries with it certain responsibilities. If
the lender goes into possession it will incur liabilities. It will owe duties to the
borrower and to anyone else interested in the equity of redemption such as later
secured lenders of whom it has notice1. In the case of a property which is let, so
that the lender is receiving rent, it is obliged to account for what it receives2 or
what it could have received but for its gross default, mismanagement or fraud.
If the lender itself goes into actual possession of the property, otherwise than for
the purposes of a sale within a reasonable time3, it must give credit for a full
occupational rent and if it lets the property it must endeavour to obtain an open
market rent. A lender who lets the property at less than a market value because
it takes some collateral benefit will be required to account on the basis of what
it could have received had it managed the property with due diligence, not on
the basis of its actual receipts4. It must take reasonable care of the property5 and
will also be liable if having obtained a possession order it does not take
reasonable steps to secure the property against vandals. A lender in possession
will also be subject to potential liability for environmental damage under
the Contaminated Land Regime6.
1
Parker v Calcraft (1821) 6 Madd 11.
2
Lord Trimleston v Hammill (1810) 1 Ball & B 377; Downsview Nominees Ltd v First
City Corpn Ltd [1993] AC 295.
3
Norwich General Trust v Grierson [1984] CLY 2306.
4
White v City of London Brewery Co Ltd (1889) 42 Ch D 237.
5
Palk v Mortgage Services Funding plc [1993] Ch 330 at 338A.

29
17.67 Mortgages of Land
6
See Pt IIA of the Environmental Protection Act 1990, which was inserted by s 57 of the
Environment Act 1995.

17.68 Whether or not this obligation to account on the basis of wilful default
is quite so onerous as is sometimes suggested, most lenders will not contemplate
going into possession. The modern practice is for the lender to appoint a
receiver, either under the statutory powers or pursuant to an express power in
the mortgage, in almost all cases where any income is receivable from the
property.

(c) Power of sale

17.69 The lender who had taken a mortgage did not have the right to sell the
mortgaged property free from the borrower’s interest either at common law or
in equity. The lender could always sell the benefit of the interest vested in it, ie,
the mortgage term and the right to receive the mortgage debt, but no-one was
going to buy this if the borrower was in default. To give value to the security the
lender had to be able to sell the mortgaged property itself free from the
borrower’s right to redeem. The right of foreclosure might be available but this
was a cumbersome and unreliable remedy and it could only be exercised
through the courts.
The solution was to give the lender an express power of sale in the mortgage. A
statutory power of sale is conferred by the LPA 1925 where the mortgage is
made by deed. Section 101(1) of the LPA 1925 deals with when the power arises
and provides that:
‘A mortgagee, where the mortgage is made by deed, shall, by virtue of this Act, have
the following powers, to the like extent as if they had been in terms conferred by the
mortgage deed, but not further (namely):
(i) A power, when the mortgage money has become due, to sell, or to concur
with any other person in selling, the mortgaged property, or any part thereof,
either subject to prior charges, or not, and either together or in lots, by public
auction or by private contract, subject to such conditions respecting title, or
evidence of title, or other matter, as the mortgagee thinks fit, with power to
vary any contract for sale, and to buy in at an auction, or to rescind any
contract for sale, and to re-sell, without being answerable for any loss
occasioned thereby ...’ .
Section 103 of the LPA 1925 deals with when the statutory power is exercisable.
The lender is not permitted to exercise the power of sale unless and until1:
(a) notice requiring payment has been served on the mortgagor demanding
payment and the mortgagor has not complied for three months; or
(b) some interest under the mortgage is in arrear and unpaid for two months
after becoming due; or
(c) there has been a breach of some other provision in the mortgage.
1
The pre-conditions to the exercise of the statutory power are frequently excluded by the
mortgage so that power is exercisable without the need to give notice. In the case of registered
land, the lender must be registered as proprietor of the mortgage to exercise the power of sale:
Lever Finance Ltd v Needleman’s Property Trustee [1956] Ch 357.

30
 Remedies of a Legal Mortgagee 17.71

17.70 The distinction between the power arising and its being exercisable is
critical. The LPA 1925 provides that a prospective purchaser of the mortgaged
property from the lender is not concerned to see or enquire whether the power
is being properly or regularly exercised1. It is merely interested in whether it has
arisen and the purchaser can usually ascertain this by inspecting the mortgage.
As long as the mortgage is by deed and there is no contrary intention expressed,
the power arises when the mortgage money has become due, ie, on the legal date
for redemption2. If the lender purports to sell the property before the power of
sale arises it will only succeed in transferring its own limited interest. If it does
so after the power arises but before it becomes exercisable, the purchaser will
obtain a good title to the mortgaged property but the borrower will have a
remedy in damages against the lender based on the abuse of the power3. The
borrower will not be able to get its property back because the relevant provision
expressly provides that the purchaser’s title is unimpeachable4. The only excep-
tion found here is that the courts will not allow the statute to be used for
fraudulent purpose and if the borrower can demonstrate that the purchaser
knew that the power of sale was being improperly exercised they may be
prepared to set the transaction aside5.
1
LPA 1925, s 104(2). The statutory power of sale complies with article 1 of the ECHR: Horsham
Properties v Clark [2009] 1 WLR 1255.
2
For a defective mortgage where there was no proviso for redemption and no power of sale in
case of default, see Twentieth Century Banking Corpn Ltd v Wilkinson [1977] Ch 99. Also
Payne v Cardiff RDC [1932] 1 KB 241.
3
LPA 1925, s 104(2).
4
LPA 1925, s 104(2).
5
Whether the courts would be prepared to do so will depend on how they treat s 104(2) supra in
the light of cases such as Lord Waring v London and Manchester Assurance Co Ltd [1935] Ch
310; and Selwyn v Garfitt (1888) 38 Ch D 273. See also Bailey v Barnes [1894] 1 Ch 25 – the
purchaser must not ‘wilfully shut his eyes and abstain from making inquiries which might have
led to a knowledge of impropriety or irregularity’.

17.71 Where a lender secured by way of a registered legal mortgage of freehold

land1 sells under its statutory or an express power of sale, s 88(1) of the LPA
1925 provides that:
‘(a) the conveyance by him shall operate to vest in the purchaser the fee simple in
the land conveyed subject to any legal mortgage having priority to the
mortgage in right of which the sale is made and to any money thereby
secured, and thereupon;
(b) the mortgage term or the charge by way of legal mortgage and any
subsequent mortgage term or charges shall merge or be extinguished as
respects the land conveyed’.
By this piece of statutory magic, the lender is able to transfer what it has never
had. The purchaser acquires the land even though the lender has never owned
it and the purchaser takes it free of subsequent mortgages and charges. The
purchaser even takes the mortgaged property free from contracts entered into
by the borrower after the borrower created the mortgage notwithstanding that
they have been registered against the borrower in the register of land charges2.
1
As to leasehold land, see LPA 1925, s 89(1) to the same effect.
2
Duke v Robson [1973] 1 WLR 267. The borrower will presumably be liable to the party with
whom it contracted since it will no longer have any estate and is bound to be in breach of
contract. In the case of registered land see Lyus v Prowsa Developments Ltd [1982] 2 All ER
953 where Dillon J was of the view that it is irrelevant that the lender consented to the contract

31
17.71 Mortgages of Land

concerned (approved as to this by the Court of Appeal in Ashburn Anstalt v Arnold [1989] Ch
1 at 24). See also LRA 1925, s 34(4).

17.72 The lender exercising its power of sale has to take a certain care1. This is
not a duty that is imposed by the LPA 19252 but a duty which has been imposed
by the courts faced with complaints by various parties about the way sales have
been conducted. It is clear that it is not a fiduciary duty and that the lender is
perfectly entitled to look to its own interests but at the same time a balance has
to be struck between the lender’s concern to recover the outstanding debt as
soon as possible and the interests of the borrower3 in seeing that a full price is
obtained.
1
The modern authorities have as their starting point Cuckmere Brick Co Ltd v Mutual
Finance Ltd [1971] Ch 949.
2
But as to building societies see Building Societies Act 1986, Sch 4 para 1(1)(a) which requires
reasonable care to ensure that the property realises the best price that can reasonably be
obtained. Local authorities are not subject to an equivalent specific provision but see Housing
Act 1985, Sch 17 for the situation where a local authority seeks to have a property over which
it has taken a charge vested in it.
3
And others interested in the amount realised. The ‘proximity’ of a guarantor was found to be
sufficient for the lender to owe him a duty of care in Standard Chartered Bank Ltd v Walker
[1982] 1 WLR 1410 contrary to previous authorities.

17.73 The courts have chosen to express this duty in a variety of ways. There
have been high points of judicial laissez-faire in favour of the lender and high
points of anxiety for the borrower’s position – more it has to be said of the
former than the latter – and there has been a shift in emphasis in recent years. A
consistent principle has been the obligation for the lender to act in good faith,
and the recovery of the secured debt must be at least some part of the
lender’s motive for taking possession; where the lender and the borrow-
er’s interests conflict, the lender must not act in a manner which unfairly
prejudices or wilfully and recklessly sacrifices the interests of the borrower1.
The requirement of good faith is why restructurings or refinancings in which
existing lenders take an equity stake come under special scrutiny2. While there
is no absolute rule preventing a sale by the lender to a company in which it has
an interest, there does have to be a true sale and the lender may be required to
justify the course of action it adopted3. In certain circumstances a lender may
even be allowed to sell to itself4.
1
Meretz Investments NV v ACP Ltd [2007] Ch 197 at [314].
2
Thus, at one time a careless lender could well escape liability. It was only if the sale price was so
low that it was evidence of fraud that the court would intervene: Warner v Jacob (1882) 20 Ch
D 220.
3
This reversal of the burden of proof is shown in Tse Kwang Lam v Wong Chit Sen [1983] 1
WLR 1349 where it was stated that the lender ‘must show that the sale was in good faith and
that the mortgagee took reasonable precautions to obtain the best price reasonably obtainable
at the time’.
4
Palk v Mortgage Services Funding plc [1993] Ch 330, where in passing Nicholls V-C noted that
the lender could always buy the mortgaged property itself. A purchase with the leave of the
court would be preferable to foreclosure and would help with the issues that frequently arise on
restructuring and on refinancing. The Law Commission recommended allowing a lender to sell
to itself if it can satisfy the court that this is the best option for the borrower and any subsequent
encumbrancers. Even the fraudulent borrower receives considerable protection from the lender:
Halifax Building Society v Thomas [1996] Ch 217, [1995] 4 All ER 673.

32
 Remedies of a Legal Mortgagee 17.75

17.74 There has been a certain amount of discussion about the jurisprudential
basis of the lender’s obligation to the borrower. The courts have treated it both
as an application of the ‘neighbour principle’ found elsewhere in the law1 and as
arising in equity as one aspect of the relationship between the lender and the
borrower. Neither analysis need cause alarm to a lender who seeks to exercise
its powers conscientiously. When and if the mortgagee does exercise the power
of sale, it comes under a duty in equity (and not tort) to the mortgagor (and all
others interested in the equity of redemption) to take reasonable precautions to
obtain ‘the fair’ or ‘the true market’ value of or the ‘proper price’ for the
mortgaged property at the date of the sale2. As long as it takes reasonable steps
to ascertain the value of the property and to expose it to the market and
generally acts in the way a prudent vendor would who was selling his own
property, the lender is not going to suffer3. There has to be some exposure for a
lender in agreeing to a ‘fire sale’4 and the lender may well have to make out a
case for doing so5 but there is certainly no obligation to actually hold back and
wait for a rising market6 or to put the property up for auction. Similarly there
is no obligation to keep the borrower advised of the progress of the sale
although failure to do so may suggest a lack of good faith. Any attempt by the
lender to exclude liability for loss is going to be construed very narrowly7.
1
Salmon LJ in Cuckmere (see 17.72 above). This is useful when the court is trying to demonstrate
that the obligation is owed to third parties as in Standard Chartered v Walker (supra), but ‘both
unnecessary and confusing’ (per Nourse LJ in Parker-Tweedale v Dunbar Bank plc [1991] Ch
12) when it is not. See also: Downsview Nominees Ltd v First City Corpn Ltd [1993] AC 295;
Yorkshire Bank plc v Hall [1999] 1 All ER 879; and Medforth v Blake [2000] Ch 86. The duty
is not contractual so the period of limitation for claims is six years under s 2 of the Limitation
Act 1980 by analogy with s 36: Raja v Lloyds TSB Bank plc (2001) 82 P & CR 191.
2
Silven Properties Ltd v Royal Bank of Scotland plc [2004] 1 WLR 997.
3
But for an example of a case in which the lender was found liable for not properly marketing the
property, see Bishop v Blake [2006] EWHC 831 (Ch) at [107]–[109].
4
A ‘fire sale’ is a sale where the property is sold quickly without ‘proper marketing’. See generally
RRICS Valuation – Professional Standards (9th edn).
5
Predeth v Castle Phillips Finance Co Ltd [1986] 2 EGLR 144 (see [1986] Conv 442 (MP
Thompson)).
6
Bank of Cyprus (London) Ltd v Gill [1980] 2 Lloyd’s Rep 51, or, by the same token, to allow
the borrower time to sell.
7
Bishop v Bonham [1988] 1 WLR 742.

17.75 The borrower has generally had only a passive role in the realisation
process – able to complain, in the last resort, if the lender acts in bad faith but
generally unable to take the initiative. However the Court of Appeal has shown
a willingness, albeit perhaps in exceptional circumstances, to intervene using
the court’s discretion under s 91(2) of the LPA 1925 to order a sale of the
mortgaged property against the wishes of a lender on the application of a
borrower. In one case1, the borrower had negotiated a sale of the property at a
price which would not have been enough to discharge the principal and accrued
interest and applied to the court for an order for sale. The lender wanted to let
the property and wait for prices to rise before it sold. Amidst further attempts
to put into words a general principle that the lender has to be fair to the
borrower, the Court of Appeal accepted that it had an overriding discretion
conferred by s 91(2) to weigh the interests of the parties and to interfere with the
way the lender had decided to proceed. There was no suggestion that the lender
was not acting in good faith but the overwhelming impression given by the
judgment is that the court felt that if the lender wanted to gamble with house

33
17.75 Mortgages of Land

prices it should not be at the borrower’s risk and expense. Subsequent cases
have demonstrated a greater reluctance to order a sale where the proceeds
would not cover the debt2.
1
Palk v Mortgage Services Funding plc [1993] Ch 330. See generally Martin [1993] Conv 59.
2
Cheltenham and Gloucester Building Society v Krausz (1996) 29 HLR 597, but see Polonski v
Lloyds Bank Mortgages Ltd (1997) 31 HLR 721 where there was a shortfall but a sale was
ordered in light of the good social reasons for wishing to move house.

(d) Appointment of a receiver

17.76 In addition to the power of sale, where the mortgage is made by deed,
s 101(1) of the LPA 1925 confers on the lender:
‘(iii) A power, when the mortgage money has become due, to appoint a receiver of
the income of the mortgaged property, or any part thereof; or, if the
mortgaged property consists of an interest in income, or of a rent charge or
an annual or other periodic sum, a receiver of that property or any part
thereof;...’ .
The power becomes exercisable when the lender is entitled to exercise the power
of sale1. It is usually exercised out of court but an application to the court to
appoint a receiver or for directions can be very useful if there is a difficulty with
the lender’s power or some doubt about the extent of the powers of the receiver.
The duty of care which the lender owes in exercising its power to appoint a
receiver is broadly similar to the duty on its exercise of the power of sale and is
based on good faith and fair dealing2.
1
LPA 1925, s 109(1). See also Twentieth Century Banking (para 17.70 above). It does not matter
that the lender has already gone into possession – Refuge Assurance Co Ltd v Pearlberg [1938]
Ch 687. In the case of registered land, the lender must be registered as proprietor of the
mortgage – Lever Finance (supra).
2
In deciding whether to appoint a receiver, the lender owes no duty to the borrower or its
guarantor: Shamji v Johnson Matthey [1991] BCLC 36. As to good faith see Downsview
Nominees Ltd v First City Corpn Ltd [1993] AC 295. It may however be a breach of contract
for the lender to appoint a receiver when he has no right to do so and damages may be payable:
Cryne v Barclays Bank plc [1987] BCLC 548. See also Insolvency Act 1986, s 34.

17.77 A receiver appointed under the statutory power or under an express

power in the mortgage is frequently referred to as an ‘LPA receiver’ to distin-
guish him from the receiver and manager appointed under a debenture or an
administrator or an administrative receiver appointed under the Insolvency Act
1986. The powers of an LPA receiver and the range of assets over which they are
exercisable are likely to be much more restricted than those available to other
kinds of receiver. It is common practice to extend the statutory power of
the LPA receiver to give him wide powers of management and to give him a
power of sale but his role will usually be confined specifically to the land which
is the subject of the mortgage1.
1
See Hadjipanayi v Yeldon [2001] BPIR 487 for the kind of difficulty this can cause.

17.78 Where an LPA receiver is appointed in respect of a property owned by a

company there are certain formalities to be complied with1. The appointment
will be of no effect unless it is accepted by the receiver before the end of the
business day next after the business day he receives the instrument appointing

34
 Remedies of a Legal Mortgagee 17.79

him2. There is no prescribed form for the acceptance and it is usually simply
dealt with in correspondence. The lender making the appointment is respon-
sible for notifying the registrar of companies and must do so in the prescribed
form within seven days of the date of the appointment3. All business letters
written by the receiver or the company in which the company’s name appears
must contain a statement that the receiver has been appointed4. The receiver
will be responsible for delivering accounts of his receipts and payments in the
prescribed form to the registrar and for giving notice to the registrar when he
ceases to act5.
1
As to whether an LPA receiver appointed over land which constitutes the whole (or substan-
tially the whole) of a company’s property by a lender who also holds a floating charge is
necessarily also an administrative receiver for the purpose of the Insolvency Act 1986 and
therefore needs to be licensed see Meadrealm v Transcontinental Golf Construction Ltd
(unreported).
2
Insolvency Act 1986, s 33(1)(a).
3
Companies Act 2006, s 859K(1)–(2).
4
Insolvency Act 1986, s 39(1).
5
Insolvency Act 1986, s 38(1).

17.79 A receiver appointed under the statutory power is deemed to be the agent
of the borrower and the borrower will be responsible for what he does1. An
express power in the mortgage will usually provide for this as well. Thus the
lender secured on income producing property or property which requires active
management will almost always choose to appoint a receiver to collect the rents
and deal with the management because this will preclude the possibility of the
lender being in possession and incurring the strict obligations owed by the
lender in those circumstances2. Accordingly, receipt of rent by the receiver will
not create a tenancy by estoppel which binds the lender3. There is a good deal of
artificiality in this because the receiver will be the lender’s man – chosen by it
and representing its interests4. The receiver owes his duties in equity only5, and
owes them to both lender and borrower (and all other persons interested in the
equity of redemption)6. The receiver will look to the borrower for his remu-
neration and may very well expect to be indemnified by the lender against any
liability incurred in carrying out his receivership. His primary duty, which he
owes to the lender, is to see to the reduction of the mortgage debt7. The
receiver’s agency comes to an end when the corporate borrower is wound up8
but this does not affect the receiver’s power to deal with the mortgaged property
and does not result in his automatically becoming the agent of the lender.
1
LPA 1925, s 109(2). See generally White v Metcalf [1903] 2 Ch 567; Jefferys v Dickson (1866)
Ch App 183; Law v Glenn (1867) Ch App 634; and Gaskell v Gosling [1896] 1 QB 669.
2
The lender will normally refrain from interfering with the receiver’s exercise of his powers in
case this privileged position is eroded: see American Express International Banking Corpn v
Hurley [1985] 3 All ER 564.
3
Lever Finance Ltd v Needleman’s Property Trustee [1956] Ch 357.
4
See Re B Johnson & Co (Builders) Ltd [1955] Ch 634.
5
Raja v Austin Gray (a firm) [2002] EWHC 1607 (QB), [2002] 3 EGLR 61.
6
Gomba Holdings UK Ltd v Homan [1986] 1 WLR 1301; [1986] 3 All ER 94. The remedy is for
an account to all persons interested in the equity of redemption for what the receiver would, but
for his default, have held.
7
This duty to preserve and realise the charged assets was emphasised by the Privy Council in
Downsview Nominees Ltd v First City Corpn Ltd [1993] AC 295. Lord Templeman held that
a receiver owes no general duty of care, but when exercising a power of sale owes the same duty
as a lender. See also Medforth v Blake [2000] Ch 86.

35
17.79 Mortgages of Land
8
Gaskell v Gosling (supra).

(e) Consolidation
17.80 Where a lender holds two or more separate mortgages over different
properties given by the same borrower, the lender may be able to consolidate
them. This means they will be treated together and the borrower will not be able
to redeem one without redeeming the others. The right to consolidate developed
in equity by virtue of the rule that he who seeks equity must do equity. The right
is excluded by the LPA 19251 but is inevitably reinstated in almost all mort-
gages.
1
LPA 1925, s 93(1).

17.81 Where a borrower owes a lender £500,000 secured on a property worth

£1,000,000 and another £500,000 secured on a different property worth
£600,000, the lender is going to be anxious if the borrower wants to sell the first
property. By exercising his right to consolidate, the lender can prevent the
borrower paying off the first loan without at the same time paying off the
second more risky one.
The mortgages must have been made by the same borrower1 but need not have
been given to the same lender as long as they are united in one lender when
consolidation is claimed2. The right of consolidation arises as soon as the
mortgages are united in one lender. That lender can exercise the right even after
the mortgages have devolved from the original borrower and where the
mortgages are subsequently separated the borrower’s successor takes subject to
the existing right3. Whereas equity normally intervenes to force a lender to
allow a borrower to redeem, the right of consolidation favours the lender. It is
‘not one of those doctrines of the Court of Chancery which has met with general
approbation’4 but it is too well settled to be questioned.
1
This is strictly construed and will not include a mortgage by a sole lender and a mortgage by that
lender with another: Jones v Smith (1794) 2 Ves 372.
2
Tweedale v Tweedale (1857) 23 Beav 341.
3
Ireson v Denn (1796) 2 Cox Eq Cas 425. This is regardless of notice. There were doubts about
the way in which LRA 1925 dealt with consolidation. Land Registration Rules 2003, SI
2003/1417, r 110 allows the lender to put entries on the relevant titles.
4
Pledge v White [1896] AC 187.

(f) Foreclosure
17.82 The essence of foreclosure is that it enables the lender to take the
mortgaged property and treat it as its own, free from any right for the borrower
to redeem the mortgage. The right to sue the borrower on the covenant to pay
continues, notwithstanding the foreclosure, as long as the lender retains the
property1. A foreclosure order absolute vests the borrower’s interest in the
property in the lender subject to any legal mortgage having priority to the
lender’s mortgage2. The legal charge merges and the interests of subsequent
lenders who are made party to the proceedings are extinguished. The lender
stands to make a profit from this if the property is worth more than the amount

36
 Equitable Mortgage of the Legal Estate: Remedies 17.83

outstanding so foreclosure is a remedy that can only be exercised through the

court and it is hedged around with procedural protections for the borrower.
Once the borrower’s legal right to redeem has passed, it is open to the court to
grant an order for foreclosure. There are two stages to this. First, the court will
make a nisi order giving the borrower a fixed period, usually six months, to pay
off the outstanding amounts. The lender’s power of sale will be suspended
during this period. If the borrower does not pay off the debt in the prescribed
period, the order will be made absolute. Before the order is made absolute it is
open to the borrower or any other person interested to apply to the court for an
order directing the sale of the property rather than a foreclosure3. After the
order absolute has been made it can in limited circumstances be opened up and
the borrower’s right to redeem will revive4.
The bank might foreclose on the mortgage in every good Victorian melodrama
but given the willingness of modern courts to order a sale and the uncertainties
caused by the ability to open up a foreclosure order absolute it is unlikely to find
it an attractive remedy to pursue today5. The Law Commission proposed
abolishing foreclosure altogether6.
1
Kinnaird v Trollope (1888) 39 Ch D 636. However attempting to sue on the covenant after the
absolute order has been made will give the borrower a new right to redeem and enable it to
reclaim the property if it can pay off the debt – see Perry v Barker (1806) 13 Ves 198. If the
lender has sold it cannot reopen the foreclosure and thus cannot sue on the covenant – see
Palmer v Hendrie (1859) 27 Beav 349. Also Lloyds and Scottish Trust Ltd v Britten (1982) 44
P & CR 249.
2
LPA 1925, ss 88(2) and 89(2). In the case of registered land the proprietor of the charge in
respect of which foreclosure has been obtained is re-registered as the proprietor of the land and
the charge is cancelled.
3
LPA 1925, s 91(2).
4
See Campbell v Holyland (1877) 7 Ch D 166.
5
But see Twentieth Century Banking Corpn Ltd v Wilkinson [1977] Ch 99 where it was
apparently all that was left.
6
Law Com no 204, 7.27.

11 REMEDIES OF AN EQUITABLE MORTGAGEE OF THE

LEGAL ESTATE
17.83 The remedies available to a lender with an equitable mortgage are less
extensive than they would be if it had a legal mortgage that had been properly
registered. By definition, an equitable mortgagee does not have a legal estate in
the property. It is not therefore going to be able to collect rents from the tenants
as of right because it is not the legal reversioner1. Similarly it cannot rely on a
legal estate as entitling it to possession of the mortgaged property. It has been
argued2 that it has an alternative right to immediate possession but in any event
a court will have little hesitation in ordering the borrower to give possession if
there is any difficulty3. What the equitable mortgagee does have is the benefit of
an agreement on the part of the borrower to create a legal mortgage and one of
the remedies it has available is to obtain an order from the court perfecting this
agreement by vesting a legal mortgage in it so that it is in the same position as
a legal mortgagee.
1
Vacuum Oil Co Ltd v Ellis [1914] 1 KB 693.
2
See (1955) 71 LQR 204 (HWR Wade) and Barclays Bank Ltd v Bird [1954] Ch 274.

37
17.83 Mortgages of Land
3
LPA 1925, s 90(1); and Ladup Ltd v Williams & Glyn’s Bank plc [1985] 1 WLR 851.

17.84 Otherwise, in addition to the personal right to take action against the
borrower on the promise to pay, the equitable mortgagee has the remedies
shown in (a) to (c) below.

(a) Power of sale

17.85 There is a statutory power of sale where the mortgage is made by deed1.
This is why an equitable mortgage should always be taken under seal. The
power of sale extends to property which is the subject of the mortgage2 but there
is room for doubt whether the property concerned is anything more than the
equitable interest vested in the lender by the equitable mortgage3 so two
conveyancing devices are commonly employed to enable the equitable mort-
gagee to deal with the legal estate.
1
LPA 1925, s 101(1)(i). This is the case even if the mortgage is not registered: Swift 1st Ltd
v Colin [2011] EWHC 2410 (Ch).
2
LPA 1925, s 104(1).
3
Re Hodson and Howes’ Contract (1887) 35 Ch D 668 but see Lord Denning MR in Re White
Rose Cottage [1965] Ch 940 at 951 who has no difficulty in finding that the power already
extends to the legal estate.

17.86 First, the borrower may give the lender a power of attorney. Such a
power, if given to secure the performance of an obligation owed to the lender
and expressed to be irrevocable, is not revoked by the death, incapacity or
bankruptcy of the borrower1. On enforcing the security the lender sells the legal
estate and conveys it by using the power of attorney2.
Second, the borrower may declare itself trustee of the legal estate for the lender3
and acknowledge that the lender can change the trustee at any time. The
instrument appointing the new trustee will divest the borrower of the legal
estate and vest it in the new trustee who could quite easily be the lender or a
nominee for the lender.
Where the mortgage is not made by deed or does not contain one or both of
these devices the lender will need an order from the court directing a sale4.
1
Section 4(1) of the Powers of Attorney Act 1971.
2
In Re White Rose Cottage (supra) the conveyance purported to be a sale by the borrower so the
purchaser took the property subject to certain interests subsequent to the charge. Had the sale
been by the lender the purchaser would have taken free of them.
3
London and County Banking Co v Goddard [1897] 1 Ch 642.
4
LPA 1925, s 91(2).

(b) Appointment of a receiver

17.87 An equitable mortgage has always had a right to apply to the court for
the appointment of a receiver. Where the mortgage is executed under seal the
lender can take advantage of the statutory power to appoint a receiver without
the need for an application to the court.

38
 Equitable Mortgage of the Legal Estate: Remedies 17.88

(c) Foreclosure
17.88 The court has power to order foreclosure of an equitable mortgage or to
order a sale of the property instead.

39
Chapter 18

GUARANTEES

1 INTRODUCTION 18.1
2 ASPECTS OF THE GENERAL LAW OF GUARANTEES 18.2
(a) Definition 18.2
(b) The secondary nature of the contract 18.3
(c) Letters of comfort 18.4
(d) Formal requirements 18.5
(e) Guarantees by partnerships 18.6
(f) Consideration 18.7
(g) Discharge of the guarantor by conduct of the creditor 18.8
(h) Discharge of the guarantor by alteration of the guarantee 18.11
(i) Rights of the guarantor 18.12
(j) The bank’s duty of disclosure to an intended surety 18.16
3 GUARANTEE FORMS
(a) Principles of construction 18.20
(b) Relevant statutory provisions 18.21
(c) Common provisions in standard form guarantees 18.29

1 INTRODUCTION TO GUARANTEES
18.1 A guarantee is a form of security for lending which is regularly sought by
banks from third parties. The provision of a satisfactory guarantee will be a
condition of lending in any case where the bank wishes to have recourse upon
default to the assets of a party associated with the proposed borrower. Ex-
amples include where a director or shareholder guarantees lending to a
bank’s corporate customer, where one company guarantees lending by a bank
to its parent or subsidiary company, or where a spouse guarantees the borrow-
ing of the other spouse. Guarantees have been a feature of banking practice for
many centuries and have given rise to a substantial, often complex and
technical, body of law.
There is an important point of terminology regarding the expression ‘guaran-
tee’ which should be noted at the outset. This chapter is concerned with
contracts of guarantee, simply described as ‘guarantees’, given in favour of
banks as a form of security for lending. In other contexts, banks enter into
instruments under which they give guarantees in respect of payment obligations
owed by their customer to a third party. While these latter types of instrument
are sometimes also referred to as guarantees, or ‘bank guarantees’ more
specifically, they should not be confused with guarantees of the type with which
this chapter is concerned. In part this is for practical reasons, in that guarantees
and bank guarantees are encountered in different contexts. The former are
found in the context of bank lending, whereas the latter are found in the context
of commercial transactions under which the contracting party of a bank’s cus-
tomer requires a form of security for payment. But the distinction is also
important for legal reasons. Whereas the guarantor’s obligation under a true
guarantee is, as we will see, secondary on the non-performance by the principal

1
18.1 Guarantees

debtor of the guaranteed obligation, the payment obligation under a bank

guarantee is usually autonomous of the obligations arising out of the underlying
commercial transaction and arises simply on the presentation by the third party
of a demand or specified documents. Given these differences, bank guarantees
are considered elsewhere in this work, in Part IX.
In the banking context guarantees are virtually without exception concluded on
standard forms drafted by banks, which are generally in similar terms. To a
significant extent these standard forms modify or eliminate the general law of
guarantees and are drafted intentionally for this purpose.
Given the prevalence of standard forms, the primary focus of this chapter is on
the incidents of the contract of guarantee in its modern context, although a brief
account of the main aspects of the general law of guarantees is provided as
background. Readers seeking a detailed treatment of the general law of guar-
antees are referred to the specialist works1.
1
Particularly Halsbury’s Laws, Volume 49 (2015) 5th edn, Chapter 4, ‘Guarantee and Indem-
nity’; Andrews & Millett Law of Guarantees; and Phillips, O’Donovan and Courtney, The
Modern Contract of Guarantee.

2 ASPECTS OF THE GENERAL LAW OF GUARANTEES

(a) Definition
18.2 A guarantee is a promise to be liable for the debt or other legal obligation
of another1. The person to whom the promise is made is called the ‘creditor’, the
person who makes the promise is called the ‘guarantor’ or the ‘surety’, and the
person whose obligation is guaranteed is the called the ‘principal debtor’ or
simply the ‘principal’. In the bank lending context the bank will be the creditor,
the principal debtor will be the borrower, and the guarantor will be a third party
with some pre-existing relationship with the principal debtor.
Guarantees will usually render the guarantor personally liable for the perfor-
mance of the guaranteed obligation, in which case the security for the
bank’s lending is the personal credit of the guarantor. But this will not always be
the case; a guarantee obligation may alternatively (or in addition) create a
charge on the guarantor’s property. An obligation is a guarantee even where
there is no personal undertaking to be liable but a charge or other security has
been given over a surety’s property for another’s debt or performance of an
obligation2.
1
See the Statute of Frauds 1677, s 4 and Moschi v Lep Air Services Ltd [1973] AC 331,
347H–348A, HL.
2
Smith v Wood [1929] 1 Ch 14, CA; Re Conley (t/a Caplan and Conley), ex p Trustee v Barclays
Bank Ltd [1938] 2 All ER 127; Deutsche Bank AG v Ibrahim [1992] 1 Bank LR 267. The fact
that a third party can give a charge without incurring personal liability is established by China
and South Sea Bank Ltd v Tan Soon Gin (alias George Tan) [1990] 1 AC 536, PC, and Re Bank
of Credit and Commerce International SA (No 8) [1998] AC 214, HL. Hence the considerations
discussed in this chapter also apply to ‘third party charge’ documents used by banks.

2
 Aspects of the General Law of Guarantees 18.3

(b) The secondary nature of the contract

18.3 A guarantee obligation is secondary and accessory to the obligation the

performance of which is guaranteed; the guarantor undertakes that the princi-
pal debtor will perform his (the principal debtor’s) obligation to the creditor
and that he (the guarantor) will be liable to the creditor if the principal debtor
does not perform1. For this reason, the guarantor’s obligation is sometimes
described as being to ‘see to it’ that the principal debtor’s obligation is
performed.
It follows that the guarantor’s liability for the non-performance of the principal
debtor’s obligation is co-extensive with that obligation. If the principal debt-
or’s obligation turns out not to exist, or is void, diminished or discharged, so is
the guarantor’s obligation in respect of it2. Such co-extensiveness between the
principal debtor’s and the guarantor’s obligations is an ‘essential distinguishing
feature of a true contract of guarantee3’. This stands to reason; the guarantor
cannot ‘see to it’ that the principal debtor’s obligation is performed if that
obligation does not exist.
This must be contrasted with the situation where, on the true construction of
the promise, a primary or direct undertaking has been given by the guarantor to
perform the principal debtor’s obligation, regardless of the status of that
obligation as between the creditor and the principal debtor. If that is the case
then the guarantor’s obligation will be to perform his own, primary obligation
in accordance with its own terms, and not to ‘see to it’ that the principal
debtor’s obligation is performed. In such cases, therefore, the guarantor’s prom-
ise: (a) will be enforceable whether or not the principal debtor’s obligation is
enforceable; and (b) will not give rise to a true contract of guarantee, because
the guarantor will have a primary rather than a secondary liability to the
creditor.
Contracts giving rise to primary obligations on the guarantor are often referred
to as ‘indemnities’, in order to distinguish them from true guarantees. The
distinction between the two has been described as an ‘old chestnut’ in this
branch of the law4. This terminology is adopted in this work, but with a note of
caution. The word ‘indemnity’ is a broad term the meaning of which can vary
according to the context in which it is used. In its broadest sense, an obligation
to indemnify is an obligation to hold another person harmless for a loss or
liability which that other person has incurred. Used in this sense, it is possible to
characterise true guarantees as contracts of indemnity5, because the guaran-
tor’s obligation is to render performance to the creditor if the principal debtor
fails to do so.
Ascertaining the nature of the promise in any given case depends upon the true
construction of the actual words in which the promise is expressed. Regard
must be had both to the words of the promise and the context in which it was
given. In each case, the ultimate question is whether the person giving the
promise has given an independent undertaking to perform the principal debt-
or’s obligation, regardless of whether that obligation has ever been or remains
valid and enforceable as between the creditor and the principal debtor. If such
a promise has been given, then the promise will be an indemnity. By contrast, if
the person giving the promise has given merely a secondary undertaking to
ensure that the principal debtor performs his or her obligation, then the promise

3
18.3 Guarantees

will be a guarantee6. This is a question of substance and not form, in that the use
of the words ‘guarantee’ or ‘indemnity’ to describe the promise are relevant but
not determinative. So too are the presence or absence of clauses excluding or
limiting the usual defences available to a guarantor (such as a clause excluding
the rule in Holme v Brunskill, discussed in para 18.8 below), or clauses pro-
viding that certification of the amount due by the creditor is conclusive evidence
of the promisee’s liability7.
The distinction between indemnities giving rise to primary liability and guar-
antees giving rise to secondary liability is technical but is certainly not arid.
The distinction has historically been important to banks in the context of
lending to minors, and borrowing by companies ultra vires their memorandum
of association8, but has been rendered less significant in these situations by
statute9. In the modern context, the question whether an obligation is a
guarantee or a primary or original obligation is still significant in determining
whether the undertaking is within the ambit of the Statute of Frauds 1677, s 4,
and so unenforceable for non-compliance with it (see para 18.5). The distinc-
tion is also significant in circumstances where, if the promise is a true guarantee,
the guarantor would be discharged from liability as a result of the rule in Holme
v Brunskill following an agreement between the creditor and the principal
debtor to vary the principal debt (see para 18.8)10.
The distinction may also be significant where issues arise as to whether the
guarantor’s liability to the creditor sounds in damages or in debt. This may be
the case where, for example, the creditor presents a bankruptcy petition against
the guarantor on the basis that the guarantee gives rise to a debt for a liquidated
sum under section 267(2)(b) of the Insolvency Act 1986, or where a guarantor
seeks to reduce or eliminate his liability by arguing that the creditor has failed
to mitigate its loss. If the promise is construed as a true guarantee then the
guarantor’s liability will often sound in damages, upon the theory that the
creditor’s claim is for the recovery of losses incurred in consequence of the
guarantor failing to perform his obligation to see to it that the principal debtor
performed the guaranteed obligations11. But if the promise is construed as
creating a primary debt obligation owed by the guarantor then the guaran-
tor’s liability will, naturally, sound in that debt. In McGuiness v Norwich and
Peterborough Building Society12, for example, the Court of Appeal construed a
promise that monies owed by the principal debtor to the creditor ‘will be paid
and satisfied when due’ as creating a conditional payment obligation on the
guarantor. Consequently, the guarantor’s liability sounded in debt and was
capable of supporting a petition under the aforementioned section 267(2)(b).
1
Moschi v Lep Air Services Ltd [1973] AC 331, 347H–348A, HL.
2
See Lakeman v Mountstephen (1874) LR 7 HL 17 at 24–5 and generally ‘Guarantees:
The Co-extensiveness Principle’ (1974) 90 LQR 246.
3
Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd [2011] 2 All ER (Comm) 307 at [24].
4
Associated British Ports v Ferryways NV [2009] 1 Lloyd’s Rep 595 (CA) at para 1.
5
Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd [2011] 2 All ER (Comm) 307 at [25].
6
See, for example, IIG Capital LLC v Van Der Merwe [2008] 2 Lloyd’s Rep 187 (CA) (primary
liability); Associated British Ports v Ferryways NV [2009] 1 Lloyd’s Rep 595 (CA) (secondary
liability); ABN Amro Commercial Finance Plc v McGinn [2014] 2 CLC 184 (primary liability);
Golstein v Bishop [2016] EWHC 2187 (secondary liability); MyBarrister Limited v Hewetson
[2017] EWHC 2624 (secondary liability).
7
Autoridad del Canal de Panama v Sacyr SA [2017] 2 Lloyd’s Rep 351 at para 81; MyBarrister
Limited v Hewetson [2017] EWHC 2624 at para 59.
8
A review of the authorities can be found in Paget (9th edn, 1982).

4
 Aspects of the General Law of Guarantees 18.4
9
As to minors, see the Minors’ Contracts Act 1987, s 2 and as to companies, the Companies Act
2006, s 39.
10
Which was the result in Associated British Ports v Ferryways NV [2009] 1 Lloyd’s Rep 595
(CA), where the guarantor under what was held to be a true guarantee was discharged as a result
of the creditor giving the principal debtor time to pay.
11
Moschi v Lep Air Services Ltd [1973] AC 331, HL at 348H (Lord Diplock) and 357E (Lord
Simon).
12
[2012] 2 All ER (Comm) 265 (CA). See also Golstein v Bishop [2016] EWHC 2187, in which
a promise to ‘indemnify’ was construed as giving rise to a unliquidated claim for the purpose of
the provisions in the Insolvency Rules regarding voting at meetings to consider proposals for
individual voluntary arrangements.

(c) Letters of comfort

18.4 In the banking context, a ‘letter of comfort’ is a written assurance given by
a third party to the bank which seeks to reassure the bank that the borrower will
have the financial capacity to repay the loan. Letters of comfort offer consider-
ably less protection to a bank than a guarantee because, as discussed below, they
are usually not legally binding. They are therefore usually given in transactions
where the bank is compelled for commercial reasons to be content with a ‘letter
of comfort’ rather than a guarantee.
Commonly, letters of comfort give an assurance of an intention to maintain
financial support for or retain ownership of the debtor, or that the debt-
or’s financial affairs will be conducted so that it will remain able to satisfy its
commitments to the bank. They are often encountered in transactions where a
bank is making facilities available to a company in a corporate group, and the
bank wishes to obtain comfort from the borrower’s holding company that the
group will maintain ownership of and provide financial support to the bor-
rower.
Letters of comfort may often on their true construction be intended not to be
legally binding but to give rise to a moral responsibility only1. As stated by
the Court of Appeal in Associated British Ports v Ferryways NV2, the general
position is that:
‘a document expressed to be a letter of comfort will usually not give rise to legal
obligations (except, perhaps, as a warranty of present intention) but sometimes a
primary continuing legal obligation may arise as a matter of construction, notwith-
standing the rubric of a letter of comfort. As always, “the court’s task is to ascertain
what common intentions should be ascribed to the parties from the terms of the
documents and the surrounding circumstances”.’
If a letter of comfort is held to be binding3, then a question may arise as to
whether it is to be characterised as a guarantee or some other form of legal
relationship (such as an indemnity). As discussed in para 18.3 above, in every
individual case this will be a question of construing the document in the
circumstances in which it was given.
1
Kleinwort Benson Ltd v Malaysia Mining Corpn Bhd [1989] 1 WLR 379, CA.
2
[2009] 1 Lloyd’s Rep 595 at [27]. The quote in the text is from Kleinwort Benson Ltd v
Malaysia Mining Corpn Bhd [1989] 1 WLR 379 at 560, CA.
3
As it was in Associated British Ports v Ferryways NV [2009] 1 Lloyd’s Rep 595, although
the Court of Appeal deprecated the notion of a ‘binding’ letter of comfort. Other cases where
letters have been held to be binding include Chemco Leasing SpA v Rediffusion Ltd

5
18.4 Guarantees

[1987] 1 FTLR 201, [1986] CA Transcript 1115 and Banque Brussels Lambert SA v Australian
National Industries Ltd (1989) 21 NSWLR 502.

(d) Formal requirements

18.5 Guarantees are one of the few types of contract in relation to which
English law imposes a formal requirement. The effect of s 4 of the Statute of
Frauds 1677 is that a guarantee will be unenforceable if it is not in writing or
evidenced in writing and signed. This is a strict rule which, where it applies,
admits of no exceptions.
The purpose of the statute is to protect people from being held liable as
guarantors on the basis of ill-considered, ambiguous or fictitious oral prom-
ises1. That is plainly a worthy aim, but at the same time it can be questioned
whether the imposition of strict formal requirements on contracts of guarantee
remains the best way of achieving it. By their nature, formal requirements have
the potential to serve as tripwires for the unwary rather than safeguards for the
vulnerable, allowing parties to break contractual promises by reason only of a
defect in the form in which the promises were given or recorded. This has led
some to question whether the mischief the statute is intended to address is
outweighed, at least in some contexts (such as where the parties are of equal
bargaining power), by the mischief to which it can give rise2.
Be that as it may, unless and until the statute is repealed or amended its
requirements remain. In terms, s 4 provides:
‘ . . . no action shall be brought . . . whereby to charge the defendant upon any
special promise to answer for the debt default or miscarriage of another person
. . . unless the agreement upon which such action shall be brought or some
memorandum or note thereof shall be in writing and signed by the party to be charged
therewith or some other person thereunto by him lawfully authorised.’
A promise to ‘answer for the debt default or miscarriage of another person’ is a
promise in the nature of a true guarantee, as discussed in para 18.3 above. The
statute will also apply to a binding agreement to give a guarantee3. Conversely,
and importantly, the statute will not apply if the guarantor’s liability to the
creditor is primary rather than secondary4, including in particular where the
guarantor’s liability is under a contract of indemnity.
The statute imposes two formal requirements on contracts of guarantee. The
first is that the guarantee be embodied or evidenced in writing, and the second
is that the writing be signed by or on behalf of the guarantor. These are
addressed in turn below.
As to the writing requirement, the statute can be complied with in two ways:
either by having a written agreement signed by the guarantor or his agent, or by
having a memorandum of the agreement (which may itself be oral) similarly
signed5. A written agreement for this purpose need not be contained in a single
document6. It follows that, depending on the context and the circumstances, a
written agreement may be comprised of a series of negotiating emails or other
documents7.
All the material terms of the guarantee obligation (save for the consideration)8
must be evidenced by the agreement or memorandum9, and parol evidence will

6
 Aspects of the General Law of Guarantees 18.5

not be admitted to remedy any deficiency in evidencing the promise in writ-

ing10. Conversely, parol evidence may be admitted to show that a memorandum
does not record all the material terms of the contract11. But the material terms
may be proved by documents expressly or impliedly referred to by the signed
memorandum12 and parol evidence is admissible to explain the terms used.
Thus in Perrylease Ltd v Imecar AG13, Scott J admitted objective extrinsic
evidence of the factual background known to the parties at the time that written
guarantees were executed to identify ‘the proposed leasing arrangements’ in
respect of which they had been given14. Further, where the creditor contends
that the guarantee was in writing but cannot locate the document, the creditor
may prove the existence of the written guarantee by other evidence15.
In the modern banking context, the prevalence of standard form guarantees
means that disputes relating to the statute and its requirements arise compara-
tively rarely. However, the use of standard forms can create its own difficulties.
For example, great care is required when special terms are agreed between the
bank and the principal debtor or the guarantor. In such cases, a failure to make
a corresponding adaptation to the form of guarantee employed by the bank
may result in the instrument falling foul of the statute. In Barclays Bank plc v
Caldwell16, a corporate customer had a loan account with the bank in the sum
of £150,000 and an overdraft facility standing at £50,000 which it regularly
exceeded. A guarantee was proposed to be given by the defendant in order that
the overdraft facility be extended by a further £70,000 to £120,000 to provide
the company with further working capital. The bank orally agreed with the
guarantor, in an agreement intended to be reduced to writing, that he would be
liable only for the ‘top £70,000’ of the overdraft and not at all for the loan
account; that all receipts were to go in reduction of the ‘top £70,000’17; and that
if the overdraft fell below £100,000 the guarantee was to be reduced to £50,000
and if the overdraft fell below £50,000 the guarantee would be wholly released.
The guarantee was executed in terms which did not begin to evidence this
agreement18 and was held to be unenforceable.
As to the signature requirement, this only applies to the guarantor. There is no
requirement that the creditor also sign, although he is free to do so if he wishes.
A person can sign a document for the purposes of the statute by using his full
name or his last name prefixed by some or all of his initials or using his initials,
and possibly by using a pseudonym or a combination of letters and numbers,
provided always that whatever is used is inserted into the document in order to
give, and with the intention of giving, authenticity to it. Its inclusion must have
been intended as a signature for these purposes. The presence of an e-mail
address inserted automatically in an e-mail does not constitute a signature.
However, if a party creates and signs an electronic document, he will be treated
as having signed it to the same extent that he would in law be treated as having
signed a hard copy of the same document19. In Golden Ocean Group Ltd v
Salgaocar Mining Industries Pvt Ltd20, it was common ground that an elec-
tronic signature was sufficient for the purposes of the statute, including where
the signature was a first name, initials or, perhaps, a nickname. On the facts of
the case, an e-mail into which the sender had written his first name was held to
be sufficient21.
Non-compliance with the statute renders a promise unenforceable rather than
void22. The statute is not a bar to an action for rectification of a guarantee in
writing23. A party may be estopped from contending that a guarantee is

7
18.5 Guarantees

unenforceable for non-compliance with the statute, although such an estoppel

will not arise simply because the creditor extended credit to the principal debtor
in reliance on the guarantor’s promise. Such a fact pattern is a normal feature of
guarantees and, accordingly, something more is required for an estoppel to
arise24.
A guarantee given at the debtor’s request in respect of an agreement regulated
by the Consumer Credit Act 1974 must generally comply with the additional
formalities laid down in or under that Act, which are dealt with in para 18.28
below.
1
Actionstrength Ltd v International Glass Engineering IN.GL.EN SpA [2003] 2 AC 541 (HL) at
[20].
2
See, for example, Lord Bingham in Actionstrength Ltd v International Glass Engineering
IN.GL.EN SpA [2003] 2 AC 541 (HL) at [7].
3
Mallet v Bateman (1865) LR 1 CP 163, Ex Ch; Compagnie Générale d’Industrie et de
Participation v Myson Group Ltd (1984) 134 NLJ 788.
4
Birkmyr v Darnell (1704) 1 Salk 27.
5
Elpis Maritime Co Ltd v Marti Chartering Co Inc The Maria D, [1992] 1 AC 21, HL at 27 per
Lord Brandon of Oakbrook, where it was established that the intention (as to capacity) with
which the guarantor signed was irrelevant – see especially at p 33.
6
Golden Ocean Group Ltd v Salgaocar Mining Industries Pvt Ltd [2012] 1 WLR 3674 at [29],
CA.
7
See Golden Ocean Group Ltd v Salgaocar Mining Industries Pvt Ltd [2012] 1 WLR 3674 at
[22], CA, where an exchange of emails negotiating a vessel charter was held to comprise a
written agreement for the purposes of the statute. But this conclusion was subject to the
reservation that ‘[w]hether the pattern of contract negotiation and formation habitually
adopted in other areas of commercial life presents difficulty in adoption of the same approach
must await examination when the problem arises’.
8
Mercantile Law Amendment Act 1856, s 3.
9
See Sheers v Thimbleby & Son (1897) 76 LT 709 especially at 711 per Chitty LJ; Beckett v
Nurse [1948] 1 KB 535; Clipper Maritime Ltd v Shirlstar Container Transport Ltd, The
Anemone [1987] 1 Lloyd’s Rep 546, 556.
10
Sheers v Thimbleby & Son (1897) 76 LT 709 explaining Holmes v Mitchell (1859) 7 CBNS 361.
11
Beckett v Nurse [1948] 1 KB 535.
12
Elias v George Sahely & Co (Barbados) Ltd [1983] 1 AC 646, PC. Provided a reference can be
spelt out, parol evidence may be adduced to identify the document referred to.
13
[1988] 1 WLR 463.
14
See [1988] 1 WLR 463 at 469H–470A. And see also Fairstate Ltd v General Enterprise and
Management Ltd [2011] 2 All ER (Comm) 497 at [75] and [82], where Richard Salter QC
(sitting as a Deputy High Court Judge) held that, in accordance with the modern approach to
contractual construction, extrinsic evidence may be relied on to identify the guarantor, the
creditor, the principal debtor or the guaranteed obligation, where these have been inadequately
or ambiguously described in the relevant document; but that, on the facts of that case, the
defects in the relevant document were so great that the court would be impermissibly writing a
new contract for the parties if it applied such an approach.
15
Mitsui Osk Lines Ltd v Salgoacar Mining Industries Private Ltd [2015] 2 Lloyd’s Rep 518 at
[41].
16
(25 July 1986, unreported), Harman J.
17
The judge commented that the intention to guarantee only the £70,000 of ‘new money’ being
provided could only have been effectively implemented by ruling off the company’s account at
its then limit, opening a new account with a limit of £70,000 and the defendant guaranteeing the
liability on the new account: see pp 7H–8A of the transcript.
18
It seems that the guarantee was on the bank’s unadapted standard form: see particularly at pp
1D, 4H–5A, and 14G–15E.
19
Fernandes (Pereira J) SA v Mehta, [2006] 1 WLR 1543 (also reported as Mehta v J Pereira
Fernandes SA [2006] 2 Lloyd’s Rep 244).
20
[2012] 1 WLR 3674, CA.
21
[2012] 1 WLR 3674 at [31] to [34].
22
Maddison v Alderson (1883) 8 App Cas 467.

8
 Aspects of the General Law of Guarantees 18.7
23
GMAC Commercial Credit Development Ltd v Sandhu [2006] 1 All ER (Comm) 268;
Fairstate Ltd v General Enterprise and Management Ltd [2011] 2 All ER (Comm) 497 at [75].
24
Actionstrength Ltd v International Glass Engineering IN.GL.EN SpA [2003] 2 AC 541 (HL) at
[34], [35], [50] and [53].

(e) Guarantees by partnerships

18.6 By the Partnership Act 1890, s 5:
‘Every partner is an agent of the firm and his other partners for the purpose of the
business of the partnership; and the acts of every partner who does any act for
carrying on in the usual way business of the kind carried on by the firm of which he
is a member bind the firm and his partners, unless the partner so acting has in fact no
authority to act for the firm in the particular matter, and the person with whom he is
dealing either knows that he has no authority, or does not know or believe him to be
a partner.’
Although authorities1 from the Victorian era suggest that a partner in a
professional partnership does not have implied or ostensible authority to give a
guarantee binding on the partnership, today this will often not be the position2.
Furthermore, where a contract entered into by a partnership for the purpose of
its business requires a guarantee to be given, then the giving of the guarantee is
itself to be regarded as being done for the purpose of the partnership business,
notwithstanding that in the absence of the contract the giving of the guarantee
would have been outside the usual business of the partnership3.
1
Duncan v Lowndes and Bateman (1813) 3 Camp 478, 170 ER 1452; Sandilands v Marsh
(1819) 2 B & Ald 673, 106 ER 511; Hasleham v Young (1844) 5 QB 833, 114 ER 1463; Brettel
v Williams (1849) 4 Exch 623, 154 ER 1363.
2
See United Bank of Kuwait Ltd v Hammoud, [1988] 1 WLR 1051 per Staughton LJ at 427 and
1063 respectively.
3
Sandilands v Marsh (1819) 2 B & Ald 673; Bank of Scotland v Henry Butcher & Co ,
[2003] 1 BCLC 575, CA at [71]–[72], at [13], [41]–[48], [75], [91]–[93] and [96].

(f) Consideration
18.7 As with any contract, a guarantee must be supported by good consider-
ation if it is not contained in a deed.
In the banking context, standard form guarantees are very often cast as deeds so
as to obviate the need for the creditor (the bank) to give consideration. Where
a deed is not used, the consideration is often found in the bank giving banking
facilities to the principal debtor. It is immaterial whether the giving of such
facilities benefits the guarantor.
Banks’ standard form guarantees will also very often record the consideration
given by the bank, even when cast as a deed. However, the failure to record the
consideration in writing will not of itself make the guarantee unenforceable1.
Wholly past consideration – in particular the existing indebtedness or overdraft
of the principal debtor – is not sufficient2. However, there will be good
consideration if the guarantee is of existing indebtedness but, in return for the
grant of the guarantee the creditor continues or promises to continue to deal
with the principal debtor, including by providing further lending. Further, the

9
18.7 Guarantees

creditor’s agreement to forbear to sue the principal debtor or otherwise enforce

its rights in relation to existing indebtedness will also provide good consider-
ation, as will actual forbearance for a reasonable time at the express or implied
request of the guarantor3. It has been said that where a creditor asks for and
obtains a security for an existing debt, the inference is that but for obtaining the
security he would have taken action which he forbears to take on the strength
of the security4.
Further, where the consideration is expressed in terms that are ambiguous as to
whether it is past or future, extrinsic evidence is admissible to show that it is
good consideration5. Where the consideration is the creditor’s agreement to the
principal debt, and the principal debt pre-dates the guarantee, the court is not
bound to apply a strictly chronological test in determining whether the consid-
eration is past. If the making of the guarantee is part and parcel of a single
transaction also involving the making of the principal debt, then the exact
order in which these events occur is not decisive6.
The consideration given by the creditor may consist of its actual performance of
an act stipulated in the guarantee or his executory promise to do that act. Which
of these is true in any given case will depend on the construction of the
document; in the former case the guarantee will not become binding on the
guarantor unless and until the act is performed, whereas in the latter it will be
immediately binding7. If the creditor intends the guarantee to be immediately
binding, therefore, care should be taken to express the consideration he is
providing in promissory terms.
Each advance under a continuing guarantee of a running account is, in general,
severable consideration. Accordingly, subject to the terms of the guarantee (as
regards, for example, notice), the guarantor is at liberty to revoke his guarantee
in relation to future advances8.
1
Mercantile Law Amendment Act 1856, s 3. It is of course wise to ensure that the guarantee does
deal with this aspect: see below.
2
French v French (1841) 2 Man & G 644; and see Provincial Bank of Ireland Ltd v Donnell
[1934] NI 33. Although in certain specific circumstances, an act done before the guarantee was
made may be good consideration: see Pao On v Lau Yiu Long [1980] AC 614, PC.
3
Oldershaw v King (1857) 2 H & N 517; Miles v New Zealand Alford Estate Co (1886) 32 Ch
D 266, CA; Provincial Bank of Ireland v Donnell [1934] NI 33. Where actual forbearance is
relied on (rather than an agreement to forbear), it is essential that the forbearance was at the
express or implied request of the guarantor.
4
Per Parker J in Glegg v Bromley [1912] 3 KB 474, CA at 491.
5
Goldshede v Swan (1847) 1 Exch 154; Colbourn v Dawson (1851) 10 CB 765; Broom v
Batchelor (1856) 1 H & N 255.
6
Classic Maritime Inc v Lion Diversified Holdings Bhd [2010] 1 Lloyd’s Rep 59 at [43] to [45].
7
Westhead v Sproson (1861) 6 H & N 728; cf Greenham Ready Mixed Concrete Ltd v CAS
(Industrial Developments) Ltd (1965) 109 Sol Jo 209.
8
See Offord v Davies (1862) 12 CBNS 748; Coulthart v Clementson (1879) 5 QBD 42,
46;Lloyd’s v Harper (1880) 16 Ch D 290 at 314, 319–320.

(g) Discharge of the guarantor by conduct of the creditor

18.8 In certain circumstances a guarantor will be discharged from liability as a
consequence of some conduct of the creditor.
The case law on the circumstances in which a guarantor will be discharged on
this basis is substantial and frequently difficult. A detailed analysis is outside the

10
 Aspects of the General Law of Guarantees 18.8

scope of this book1, not least because the principles are in general excluded by
the terms of modern guarantee forms employed by banks2. Nevertheless, a brief
indication of the most important principles is given below.
Unless the guarantee otherwise provides or the guarantor consents3, the guar-
antor will be discharged where the creditor:
(1) Releases the principal debtor, or enters into a binding arrangement with
the principal debtor to give him time4.
(2) Agrees with the principal debtor to vary the terms of the contract
guaranteed, unless it is self-evident that the variation is insubstantial or
one which cannot be prejudicial to the guarantor5. This principle is
known as the ‘rule in Holme v Brunskill’ and is considered further in
paras 18.9 and 18.10 below.
(3) Releases security that he holds for the guaranteed debt6.
(4) Releases any co-guarantor who is jointly or jointly and severally liable
with the guarantor7.
The common principle underlying these grounds of discharge is that the
creditor must not alter the guarantor’s exposure without consulting him8. If the
creditor does so he prejudices the rights of the guarantor9 and thereby justifies
the loss of his own rights.
The guarantor will also be discharged when the creditor commits a repudiatory
breach of his contract with the principal debtor10, provided that (probably) the
principal debtor elects to accept the repudiation and terminate the contract11.
However, a non-repudiatory breach by the creditor will only result in discharge
if it amounts to a ‘substantial’ departure from a term of the principal contract
‘embodied’ in the guarantee, either expressly or by implication12. A general
reference to the principal contract in the guarantee does not embody the former
in the latter for this purpose13.
There is no principle that merely ‘irregular’ conduct by the creditor, even if it
prejudices the guarantor, will discharge the latter. However, the guarantor will
be discharged if the creditor acts in bad faith towards the guarantor or connives
at the default of the principal debtor14.
1
See the specialist works, especially Halsbury’s Laws ‘Financial Instruments and Transactions’
Volume 49 (2015) Chapter 4; Andrews & Millett, Law of Guarantees; Phillips and
O’Donovan, The Modern Contract of Guarantee; Chitty on Contracts.
2
See paras 18.32 and 18.33 below.
3
It may be that any such consent must be communicated to the creditor in order to be effective:
Wittmann (UK) Ltd v Wildav Engineering SA [2007] EWCA Civ 824 at [27].
4
Webb v Hewitt (1857) 3 K & J 438; Samuell v Howarth (1817) 3 Mer 272; Mahant Singh v U
Ba Yi [1939] AC 601, 606.
5
Holme v Brunskill (1877) 3 QBD 495, 505, CA (Cotton LJ). But this rule does not apply where
the creditor and the principal debtor enter into a separate agreement, even if the separate
agreement affects the performance of the guaranteed contract: Hackney Empire Ltd v Aviva
Insurance Ltd [2013] 1 WLR 3400 (CA) at [68], [78] and [79] (although in such a case the
guarantor is not liable in relation to the separate agreement). Nor does the rule apply to an
acceptance by the creditor of a repudiatory breach of contract by the debtor: Moschi v Lep Air
Services Ltd [1973] AC 331 (such acceptance not being a variation of the contract).
6
Pledge v Buss (1860) John 663; Polak v Everett (1876) 1 QBD 669, CA. It appears that if the
creditor by neglect rather than deliberate act fails to make the security he has for the guaranteed
debt properly available to the guarantor, the guarantor’s liability will be discharged pro tanto
but not completely: Wulff v Jay (1872) LR 7 QB 756; Watts v Shuttleworth (1861) 7 H & N
353.

11
18.8 Guarantees
7
Mercantile Bank of Sydney v Taylor [1893] AC 317, PC; Smith v Wood [1929] 1 Ch 14, CA;
Liverpool Corn Trade Association Ltd v Hurst [1936] 2 All ER 309.
8
Hackney Empire Ltd v Aviva Insurance Ltd [2013] 1 WLR 3400 (CA) at [70].
9
Principally those of indemnity against the principal debtor, contribution against any co-
guarantors and in respect of the security for the principal debt to which he might become
subrogated.
10
Watts v Shuttleworth (1861) 7 H & N 353.
11
There appears to be no direct authority on this point. See the discussion in Andrews & Millett,
Law of Guarantees, 7th edn, [9–017].
12
See National Westminster Bank Ltd v Riley [1986] BCLC 268, CA (deriving the proposition
from Vavaseur Trust Co Ltd v Ashmore (2 April 1976, unreported)), CA; Wardens etc of
Mercers v New Hampshire Insurance Co [1992] 2 Lloyd’s Rep 365, CA. However, there does
not seem to be any case where a guarantor has in fact been held to be discharged on this ground
of release. It may therefore be questionable whether this ground is established in English law, or
whether it is an instance of the guarantor being discharged on the basis of a variation of his
obligations in accordance with the rule in Holme v Brunskill. But in Spliethoff’s Bevrachting-
skantoor BV v Bank of China Limited [2015] EWHC 999 Carr J held, in obiter, that this
ground is indeed a principle distinct from the rule in Holme v Brunskill, allowing for discharge
by breach in certain circumstances (at paras [186]–[187]); although she then went on to hold
that the principle did not apply to the case before her (at [196] to [198]).
13
Spliethoff’s Bevrachtingskantoor BV v Bank of China Limited [2015] EWHC 999 at [196]–
[197].
14
Bank of India v Trans Continental Commodity Merchants Ltd and Patel [1983] 2 Lloyd’s Rep
298, CA at 299–300, per Robert Goff LJ affirming Bingham J [1982] 1 Lloyd’s Rep 506 and
approving his statement at 514. See also National Westminster Bank Plc v Bowles [2005]
EWHC 182 at [23], in which Christopher Clarke J held (allowing an application to set aside
default judgment) that a guarantor might well have a claim to be discharged from liability if he
could establish that the bank told untruths to a judge when seeking an injunction freezing assets
of the principal debtor.

18.9 The rule in Holme v Brunskill1 is, as already noted, that the guarantor will
be discharged: (a) if the creditor and the principal debtor agree a substantial
variation to the principal debt; (b) the variation has the potential to prejudice
the guarantor; and (c) the guarantor did not consent to the variation. The
rule reflects the principle that a guarantor is only liable in respect of the
obligation that he guaranteed. It is not for the creditor and the principal debtor
to increase the risk assumed by the guarantor in relation to the principal debt
without involving and obtaining the consent of the guarantor.
So, for example, if a person guarantees a debt to be payable within a specified
time he is not liable in at least two cases: (a) if the creditor advances money or
supplies goods on terms that the money is repayable or the price payable
immediately; or (b) if the creditor and his debtor agree a variation of the
contract whereby the debtor is bound to pay earlier, unless such an agreement
is, on the facts, obviously incapable of prejudicing the surety. In both cases the
transaction between the debtor and creditor which the guarantor is called upon
to underwrite is not the one contemplated by the guarantee: in the first case
because the transaction with the debtor was never of that character; in the
second because the debtor and his creditor have agreed a variation2.
Equally, if the debtor gives a binding obligation to pay the principal debt early
the contract will have been varied and the rule will apply to discharge the
guarantor. The debtor is no longer free to choose whether to pay at the expiry
of the credit period. He is bound to pay before. The contractual obligations into
which he has entered are not the same as those that the guarantor guaranteed3.
But a debtor who is entitled to an agreed period of credit is not bound to wait
until the whole period has elapsed. He can, if he chooses, pay before then. The

12
 Aspects of the General Law of Guarantees 18.10

guarantor is not released because he does so, even if the early payment is made
at the creditor’s request. Such a payment is not inconsistent with the contract
guaranteed and involves no variation of it4.
1
(1877) 3 QBD 495, CA at 505.
2
ST Microelectronics NV v Condor Insurance Ltd, [2006] 2 Lloyd’s Rep 525 at [36].
3
ST Microelectronics NV v Condor Insurance Ltd [2006] 2 Lloyd’s Rep 525 at [38].
4
ST Microelectronics NV v Condor Insurance Ltd [2006] 2 Lloyd’s Rep 525 at [37].

18.10 The rule in Holme v Brunskill presents a particular danger to lending

banks. As part of their everyday business, commercial banks will provide
support to their commercial customers by agreeing variations to the terms of
their lending. In particular, commercial customers will often request and be
granted increases in the amount of their lending or extensions of their repay-
ment obligations, often in return for, say, agreeing to pay more interest or
providing more security. Variations of this nature to debts secured by a
guarantee will almost always attract the rule in Holme v Brunskill and, consent
aside, discharge the guarantor.
For this reason, the guarantee forms used by banks usually contain provisions
which seek to avoid the operation of the rule in Holme v Brunskill as regards
variations to the principal debt. Provisions of this nature come in various forms
(as addressed in section 3 of this chapter below), but all of them share the same
purpose; namely to have the guarantor provide his consent in advance to
variations to the principal debt the bank may in the future agree with the
principal debtor. Such provisions are effective in principle, but will not always
negate the operation of the rule. Two cases serve to illustrate this point.
First, in Burnes v Trade Credits Ltd1, a secured lender agreed an extension of
time for payment coupled with an increased rate of interest. It was common
ground between the parties that this variation of the term of the mortgage was
a material one, and, if not authorised by some provision of the guarantee, of
such a nature as to bring about the legal result of discharging the whole of the
guarantor’s obligations thereunder. The provision of the guarantee on which
the lender principally relied as having authorised the variation provided that
‘any further advance or advances which may be made by the Lender to the
Borrower shall be included in this Guarantee unless the Guarantor shall have
given to the Lender notice in writing . . . clearly stating that no further
advances shall be covered under the terms of this Guarantee . . . ’. It was held
by the Privy Council that this provision did not authorise the variation because,
although it was true to say that the sum remained advanced for a further term,
it was a distortion of language to say that a further advance had been made.
Second, in Triodos Bank NV v Dobbs2, a guarantor of loans made ‘under or
pursuant to’ two loan agreements dated 26 April 1996 claimed to be discharged
on the ground that the lending bank had agreed in November 1998 and again
in September 1999 to increase the loan facility and ‘replace’ the 1996 loan
agreements (and then the 1998 loan agreements) with new loan agreements.
The bank claimed that the guarantor remained liable on the ground that the
guarantee expressly permitted the bank, without reference to the guarantor, to
agree to variations of the loan agreements. The Court of Appeal rejected the
bank’s argument, holding that, as a matter of construction, the later agreements
created new and more onerous obligations which could not properly be
considered as variations of the obligations arising ‘under or pursuant to’ the

13
18.10 Guarantees

original agreements. The Court noted that it is not easy to draw a hard and fast
line between permissible and impermissible variations, but concluded that the
obligations arising from the later agreements were so different from those
arising under the original pair of loan agreements that there was no difficulty in
saying that the line had been crossed. The later agreements were not within the
purview of the original guarantee3.
1
[1981] 1 WLR 805, PC.
2
[2005] 2 Lloyd’s Rep 588, CA.
3
In so holding, the Court of Appeal was applying the ‘purview doctrine’ emerging from cases
including British Motor Trust Co Ltd v Hyams (1934) 50 TLR 230; Trade Indemnity Co Ltd
v Workington Harbour and Dock Board [1937] AC 1, HL; The Nefeli [1986] 1 Lloyd’s Rep
339; Samuels Finance Group Plc v Beechmanor Ltd (1993) P &CR 282; and The Kalma [1999]
2 Lloyd’s Rep 374. In summary, the doctrine is that guarantee clauses intended to avoid the
effect of the rule in Holme v Brunskill, such as the clause considered in Triodos Bank, will be
effective only in relation to variations which are within the purview of the original guarantee. It
has not yet been authoritatively resolved whether the doctrine is a doctrine of law or of pure
construction, or whether effect of the doctrine can be excluded by the terms of the guarantee:
CIMC Raffles Offshore (Singapore) Ltd v Schahin Holding SA [2013] 2 All ER (Comm) 760
(CA) at [51] and [54]–[60].

(h) Discharge of the guarantor by alteration of the guarantee

18.11 It was established as long ago as 1614 that any material alteration of a
document such as a guarantee undertaken after its execution and without the
approval of all the parties to the document renders it void (the rule in
Pigot’s case1).
The precise ambit this doctrine is now to be found in the judgment of Potter LJ
(with whom Thorpe and Henry LJJ agreed) in Raiffeisen Zentralbank Oster-
reich AG v Crossseas Shipping Ltd2. Accepting counsel’s analysis of the large
number of cases to which the court had been referred, Potter LJ identified two
categories of material alterations for the purpose of this rule:
(i) alterations which affect the very nature and character of the instrument3;
and
(ii) alterations which are ’potentially prejudicial’ to the obligor’s legal rights
or obligations4.
An alteration within either of these two categories renders the guarantee void as
against those parties who did not assent to the alteration, but it remains valid as
against any guarantor who did assent to the alteration5.
1
(1614) 11 Co Rep 26b, 77 ER 1177.
2
[2000] 1 WLR 1135, followed in Bank of Scotland v Henry Butcher & Co, [2003] 2 All ER
(Comm) 557 at [71]–[72].
3
[2000] 1 All ER (Comm) 76 at [23]–[24].
4
[2000] 1 All ER (Comm) 76 at [25]–[28]. The test of ‘potential prejudice’ is the same where the
alteration is not to the guarantee, but to the contract between the creditor and the principal
debtor: see the discussion of the rule in Holme v Brunskill above.
5
For an example see Bank of Scotland v Henry Butcher & Co [2003] 2 All ER (Comm) 557 at
[69], where it was accepted that the two guarantors who had assented to the alteration
remained liable.

14
 Aspects of the General Law of Guarantees 18.12

(i) Rights of the guarantor

(i) Right to indemnity from principal debtor

18.12 If the guarantor gives the guarantee at the express or implied request of
the principal debtor, there arises at the time when the guarantee is given an
implied undertaking by the principal debtor to indemnify the guarantor in
respect of any sums the latter pays under the guarantee1.
Further, upon payment of sums due under the guarantee, the guarantor is
normally also entitled to reimbursement from the principal debtor on the
alternative basis that he has been compelled by law to pay or, being so
compellable to pay, has paid money which the principal debtor was primarily
liable to pay2. According to the modern law, the principal debtor’s liability to
the guarantor in these circumstances arises on the basis that he has been
unjustly enriched at the expense of the guarantor. Depending on any special
arrangements between the principal debtor and the guarantor, this liability may
arise even though the terms of the guarantee make the guarantor liable to the
creditor as a primary obligor as well as a guarantor3.
The court will not always find an implied indemnity or hold that the principal
debtor is liable to the guarantor in unjust enrichment. In Owen v Tate4, the
guarantor was in no way concerned with the underlying transaction and
entered into the guarantee initially without the principal debtors’ knowledge
and consent, but in the interests of a third party to secure the release of title
deeds which the creditor bank held as security for the debt. He later made
payment to the bank pursuant to the guarantee but was held not entitled to be
indemnified for his payment, which was pursuant to an obligation voluntarily
assumed. Scarman LJ, with whose judgment Stephenson LJ agreed, considered
that if without antecedent request a person assumes an obligation or makes a
payment for the benefit of another, the law will generally refuse him indemnity
unless he can show that in the particular circumstances of the case there was
some necessity for the obligation to be assumed and it is just and reasonable for
him to be reimbursed5.
Where a guaranteed account is closed and the liability accrued and fixed6 the
guarantor can take proceedings against the principal debtor to exonerate him
by paying the creditor; and may do so even though no demand has been made
on him by the creditor7. The guarantor has a right, after the debt is due, to pay
off the creditor and, on giving him a proper indemnity as to costs, to sue the
principal debtor in the creditor’s name8.
It is also open to the principal debtor to confer an express contractual right of
indemnity on the guarantor. It has been said that, in such cases, any implied
right of indemnity will be excluded unless the contrary intention appears from
the contract9.
1
Re a Debtor [1937] 1 Ch 156 especially at 163, per Greene LJ. In most circumstances, an
implied request by the principal debtor will be readily assumed: see Anson v Anson [1953] 1 QB
636 at 640 per Pearson J. But see Owen v Tate [1976] QB 402, CA at 412H–413A,
per Stephenson LJ, and the discussion of this decision in the text above.
2
Moule v Garrett (1872) LR 7 Exch 101; and see Anson v Anson [1953] 1 QB 636 at 643.
3
Berghoff Trading Ltd v Swinbrook Developments Ltd [2009] 2 Lloyd’s Rep 233 (CA).
4
[1976] QB 402, CA.
5
See [1976] QB 402, CA at 411–412. Ormrod LJ preferred to reserve his opinion about
guarantors who enter into guarantees without the request of the principal debtor for a specific

15
18.12 Guarantees

case: p 414A. It should be noted that Owen v Tate remains good law but has been extensively
criticised for the significance it attaches to an antecedent request by the principal debtor: see, for
example, Burrows, The Law of Restitution, 3rd edn, pages 449–452; Goff & Jones The Law of
Unjust Enrichment, 9th edn, [20–02].
6
As when the guarantor has given notice under the guarantee to determine his prospective
liability and any notice period specified therein has expired.
7
Thomas v Nottingham Incorporated Football Club Ltd [1972] Ch 596 applying Ascherson v
Tredegar Dry Dock and Wharf Co Ltd [1909] 2 Ch 401; see also the other cases considered
therein and the form of relief granted.
8
Mercantile Law Amendment Act 1856, s 5; Swire v Redman (1876) 1 QBD 536 at 541.
9
See Halsbury’s Laws of England, Volume 49 (2015), paragraph 886.

(ii) Right to be subrogated to securities held by creditor

18.13 On full payment of the debt guaranteed, the guarantor is subrogated to
all of the securities held by the creditor for the debt, whether the creditor held
them at the time that the guarantee was given or obtained them afterwards1.
The right to subrogation is by origin an equitable right but it is now considered
to be a remedy in the law of unjust enrichment which operates as follows. The
guarantor’s payment of the principal debt has the effect of discharging the
creditor’s security for that debt. The payment of the principal debt and
discharge of the security enriches the principal debtor at the guarantor’s ex-
pense, because the guarantor made the payment. And the principal debt-
or’s enrichment is unjust because while he was primarily liable for the principal
debt, he failed to pay it and, as a result, the guarantor was legally compelled to
do so. Therefore the remedy of subrogation ‘revives’2 the creditor’s extin-
guished security rights and entitles the guarantor to exercise them3.
If, on construction, the guarantee was of the whole of the debt subject to a
limitation on the guarantor’s liability, then payment of the amount due under
his guarantee will not entitle him to be subrogated to the securities. Where part
only of the debt is guaranteed, on payment of the amount due from the
guarantor, he is entitled to stand pro tanto in the shoes of the creditor in respect
of those securities4.
The guarantors’ rights to and on subrogation are further provided for in s 5 of
the Mercantile Law Amendment Act 1856. The language of the provision is
archaic, but its effect (insofar as relevant to the present discussion) is that the
guarantor’s payment of the principal debt has the effect of assigning to the
guarantor any security held by the creditor in relation to the principal debt.
Notwithstanding the guarantor’s rights as regards the creditor’s securities after
payment, the guarantor has no right to require the creditor to resort to his
securities before calling on the guarantee. Although it has been suggested that
the guarantor has an equity against the creditor to prevent the creditor from
bringing down the whole weight of debt upon him5, the true position is that the
guarantor has no such right to fetter the exercise by the creditor of his rights6.
Similarly, the creditor does not owe a duty of care to the guarantor as to the
timing of the exercise of a power of sale in relation to the creditor’s securities or
in the choice securities to enforce7
1
Re Howe, ex p Brett (1871) 6 Ch App 838 at 841; Forbes v Jackson (1882) 19 Ch D 615.
2
It is convenient to speak of the ‘revival’ of the creditor’s rights in order to illustrate the operation
of the remedy. But it is, strictly, incorrect. The creditor’s security rights are discharged once and

16
 Aspects of the General Law of Guarantees 18.15

for all by the guarantor’s payment. The remedy of subrogation does not revive those rights, or
‘transfer’ them to the guarantor, but grants the guarantor new rights.
3
Banque Financiere de la Cite SA v Parc (Battersea) Ltd [1999] 1 AC 221 (HL); Menelaou v
Bank of Cyprus UK Ltd [2016] AC 176 (SC). And see generally the discussion in Goff & Jones
The Law of Unjust Enrichment, 9th edn, Chapter 39.
4
Re Sass, ex p National Provincial Bank of England Ltd [1896] 2 QB 12. The creditor must
account to the guarantor for the latter’s proportion of the net sums received from realisation of
the securities; cf Goodwin v Gray (1874) 22 WR 312.
5
Lord Watson may have suggested something of this nature in Duncan, Fox & Co v North and
South Wales Bank (1880) 6 App Cas 1 at 22, but see Lord Selborne at p 14 and Lord Blackburn
at p 20.
6
Ewart v Latta (1865) 4 Macq 983, HL. See also Moschi v Lep Air Services Ltd [1973] AC 331,
HL at 356H–357A.
7
China and South Sea Bank Ltd v Tan Soon Gin (alias George Tan) [1990] 1 AC 536, PC, at
545C. Note that in the specific context of possible claims against co-securities, Moore-Bick J in
Mount v Barker Austin [1998] PNLR 493, CA, said (at 500), having referred to China and
South Sea Bank, that the position is no different if the creditor has remedies against two sureties;
he is entitled to choose whether to proceed against one or the other or both or neither.

(iii) Right to contribution from co-guarantors

18.14 Where there is more than one guarantor for an obligation, and one has
paid more than his share of the common liability1, he is entitled to recover the
excess as contribution from his co-guarantors2; since, as between themselves,
the liabilities of the guarantors ought in equity to be equal. Where there are
limits on the liabilities under one or more of the guarantees, the due shares of
the guarantors are proportional to their respective liabilities3. If one of the
guarantors is insolvent, then the shares of the burden that the other guarantors
must bear increases in proportion to their respective liabilities4.
The right of contribution arises against other guarantors of the same obligation
whether they are liable jointly, jointly and severally or severally5, and whether
they are liable under the same or separate instruments6. Where the guarantors’
liability sounds in damages7, claims for contribution are subject to the Civil
Liability (Contribution) Act 1978.
As with the right to indemnity against the principal debtor, a guarantor who
admits his liability and whose liability has accrued and been fixed, may before
he has paid, obtain quia timet relief from co-guarantors requiring that on
payment of his share, they are to indemnify him against further liability8.
1
Payment must have been made by the guarantor claiming contribution pursuant to some legal
obligation: Barry v Moroney (1873) IR 8 Cl 554; Stimpson v Smith [1999] Ch 340, CA.
2
Dering v Earl of Winchelsea [1775–1802] All ER 140, Ex Ch.
3
Ellesmere Brewery Co v Cooper [1896] 1 QB 75.
4
Ellesmere Brewery Co v Cooper [1896] 1 QB 75 at 80; Hole v Harrison (1673) 1 Cas in Ch 246;
Peter v Rich (1629) 1 Rep Ch 34; Hitchman v Stewart (1855) 3 Drew 271.
5
Ward v National Bank of New Zealand (1883) 8 App Cas 755 at 765.
6
Dering v Earl of Winchelsea [1775–1802] All ER 140, Ex Ch; Ellesmere Brewery Co v Cooper
[1896] 1 QB 75.
7
As to which, see para 18.3 above.
8
Wolmershausen v Gullick [1893] 2 Ch 514.

(iv) Right to avail set-offs and other cross-claims of the principal debtor
18.15 Subject to the terms of the guarantee, the guarantor is in general entitled
to avail himself of any defence of set-off available to the principal debtor arising

17
18.15 Guarantees

out of the guaranteed transaction in reduction or discharge of his own liability1.

This is an aspect of the principle of co-extensiveness considered in para 18.3
above.
It has been said that at least where the principal debtor is not insolvent2, an
unliquidated cross-claim (even where capable of being employed by way of
set-off when quantified) can only be utilised by the guarantor where the
principal debtor is party to the proceedings3. But the authorities in support of
this proposition should be treated with caution. The Court of Appeal has
previously endorsed the view that the guarantor may, on being sued by the
creditor, avail himself of any right of set-off or counterclaim which the principal
debtor may have against the creditor4. And it has recently been held that while
joinder of the principal debtor will generally be required when the guarantor is
relying on an unliquidated cross-claim belonging to that party, joinder is
ultimately a discretionary matter for the court, to be exercised according to the
particular facts and circumstances of the case5.
Where the guarantor has granted rights by way of mortgage over his property
to secure the guaranteed debt, a cross-claim or set-off for unliquidated damages
exceeding the amount of the debt will, in general, provide no defence to a claim
for possession of the property. To the layman this may seem a harsh rule, but it
derives from a long-standing principle of English property law, that the rights of
the mortgagee to possession arise from his legal interest in the secured property,
not from the existence of the debt6.
1
Bechervaise v Lewis (1872) LR 7 CP 372; BOC Group plc v Centeon LLC [1999] 1 All ER
(Comm) 53; affd [1999] 1 All ER (Comm) 970, CA (Rix J).
2
The position is arguably different in an insolvency because any set-off between the creditor and
an insolvent principal debtor is automatic and self-executing: see Chapter 14 above.
3
Cellulose Products Ltd v Truda (1970) 92 WN (NSW) 561; and see Sun Alliance Pensions Life
& Investments Services Ltd v RJL and Webster [1991] 2 Lloyd’s Rep 410 at 416.
4
See Hyuandai Shipbuilding & Heavy Industries Co v Pournaras [1978] 2 Lloyd’s Rep 502 and
the discussion in Andrews & Millett, Law of Guarantees, 7th edn, para 11-007.
5
Stemcor UK Ltd v Global Steel Holdings Ltd [2015] 1 Lloyd’s Rep 580 at para 40.
6
Ashley Guarantee plc v Zacaria [1993] 1 All ER 254, CA; National Westminster Bank plc v
Skelton [1993] 1 WLR 72, CA. It has not been decided whether this general rule applies where
the mortgagor has a claim to a liquidated sum by way of equitable set off: Dunbar Assets plc v
Dorcas Holdings Ltd [2013] EWCA Civ 864 at [22], citing Skelton at [78].

(j) The bank’s duty of disclosure to an intended surety

(i) Disclosure in a commercial context
18.16 Contracts of guarantee, unlike contracts of insurance, are not contracts
of the utmost good faith (uberrimae fidei)1. The creditor does not, therefore,
have any general duty to disclose to the intending guarantor, before the contract
is concluded, all material circumstances known to the creditor2. In a commer-
cial context3, the guarantor is generally expected to look after his own interests
and to take it upon himself to make enquiries of the principal debtor as to the
nature and extent of the liability he is assuming.
Yet the creditor does have a limited duty of disclosure. As stated by Lord
Campbell in Hamilton v Watson4, the creditor’s duty is to disclose to the
intending guarantor: ‘anything that might not naturally be expected to take
place between the parties who are concerned in the transaction, that is, whether

18
 Aspects of the General Law of Guarantees 18.16

there be a contract between the debtor and the creditor, to the effect that his
position shall be different from that which the surety might naturally expect;
and if so the surety is to see whether that is disclosed to him.’
In Royal Bank of Scotland v Etridge (No 2)5, Lord Scott cited this passage and
expressed the opinion that the creditor’s duty ‘should extend to unusual
features of the contractual relationship between the creditor and the principal
debtor, or between the creditor and other creditors of the principal debtor, that
would or might affect the rights of the surety6’. In the same case, Lord Nicholls,
while stating that the precise ambit of the duty remains unclear, expressed it in
the following terms7:
‘It is a well-established principle that, stated shortly, a creditor is obliged to disclose
to a guarantor any unusual feature of the contract between the creditor and the
debtor which makes it materially different in a potentially disadvantageous respect
from what the guarantor might naturally expect.’
It follows that the creditor’s duty is concerned specifically with unusual features
of his contractual relationship with the principal debtor or with the principal
debtor’s other creditors. It does not require the disclosure of other facts or
matters, even if such facts or matters might be material for the guarantor to
know8.
Thus in North Shore Ventures Ltd v Anstead Holdings Inc9, the claimant
creditor was owned by a Russian businessman who was under investigation by
the Swiss authorities for alleged financial crimes at the time the guarantee was
entered into. The businessman’s Swiss accounts had been frozen as part of the
investigation, giving rise to the risk that any funds disbursed by the claimant
would also be frozen. That risk eventuated, but in subsequent proceedings to
enforce the guarantee the Court of Appeal held that the claimant was not
obliged to disclose the fact of the investigation to the guarantor because it was
not an unusual feature of the contractual relationship between the claimant and
the principal debtor or between the claimant and other creditors of the principal
debtor10.
However, it is not always straightforward to establish whether a matter is a
feature of the contractual relationship between the creditor and the principal
debtor or an extraneous matter. Thus, in Deutsche Bank AG v Unitech
Global Ltd11, the guarantor defended a claim to enforce its guarantee by
alleging that the claimant creditor had failed to disclose that the guaranteed
transaction (an interest rate swap agreement) was unsuitable for the principal
debtor, that the claimant was involved in the manipulation of LIBOR, or that
the claimant was a party to agreements or practices contravening competition
law. At first instance, Teare J dismissed this defence on the ground that, even if
the matters alleged by the guarantor were true (which he did not decide), they
did not fall within the scope of the claimant’s duty of disclosure because they
were not unusual features of its relationship with the principal debtor12. But
Longmore LJ disapproved of this reasoning on appeal, stating that it was at
least arguable that manipulation by the creditor of a rate by reference to which
interest under the principal debt was to be calculated was indeed a feature of its
contractual relationship with the principal debtor13.
1
Royal Bank of Scotland v Etridge (No 2) [2002] 2 AC 773, at [114] (Lord Hobhouse) and
[185]–[188] (Lord Scott); North Shore Ventures Ltd v Anstead Holdings Inc [2012] Ch 31, CA,
at [29]. For older authorities, see: North British Insurance Co v Lloyd (1854) 10 Exch 523,

19
18.16 Guarantees

relying on Hamilton v Watson (1845) 12 Cl & Fin 109, HL; Davies v London Provincial
Marine Insurance Co (1878) 8 Ch D 469 at 475; Seaton v Heath [1899] 1 QB 782 at 792
(reversed on grounds not affecting this point [1900] AC 135); London General Omni-
bus Co Ltd v Holloway [1912] 2 KB 72, CA at 74, 81, 85–86.
2
See the cases cited in the preceding footnote.
3
By ‘commercial context’, it is meant where the principal debtor or the guarantor or both are
companies. Some of the cases cited below arose in a non-commercial context, and might be
decided differently today in the light of the guidelines given by the House of Lords in Royal
Bank of Scotland v Etridge (No 2) [2002] 2 AC 773 (see Chapter 13 above). Nevertheless, these
cases provide valid illustrations of how the principles apply in a commercial context.
4
(1845) 12 Cl & Fin 109 at 119, HL.
5
[2002] 2 AC 773, HL.
6
[2002] 2 AC 773 at [188].
7
[2002] 2 AC 773 at [81].
8
Previous editions of this work have cited a large number of nineteenth and twentieth century
cases in which the creditor’s duty was considered and developed. Readers interested in the
historical development of the duty are referred to the cases discussed in the main text above, in
which the principal authorities are considered, and to the specialist works.
9
[2012] Ch 31, CA.
10
[2012] Ch 31 at [27]–[32]. The Court also observed, in obiter, that where the creditor is obliged
to disclose a matter, he is not excused from making disclosure simply because he reasonably
believes that the intending guarantor already knows the matter: at [33].
11
[2013] 2 Lloyd’s Rep 629 (first instance); [2016] 1 WLR 3598 (Court of Appeal).
12
[2013] 2 Lloyd’s Rep 629 at [41]–[52]. Teare J also held that the doctrinal basis of the duty is
that the failure to make disclosure amounts to an implied representation that the undisclosed
facts do not exist: at [55]–[56].
13
[2016] 1 WLR 3598 at [19]. This aspect of the Court of Appeal’s decision was obiter. Its actual
decision was that the creditor did not owe a duty of disclosure at all because, properly
construed, the guarantee made the guarantor liable as a primary obligor: at [20].

18.17 It seems that understandings or arrangements between a bank and the

principal debtor do not escape the requirement of disclosure merely because
they do not formally amount to a contract or do not have contractual effect1. In
Pendlebury v Walker2, a guarantor had given a guarantee for a custom-
er’s liabilities to secure an advance by a bank to fund a composition with the
customer’s existing creditors and thereafter to enable the customer to carry on
his business. The bank failed to disclose a secret arrangement between itself and
the customer by which the bank stipulated to be paid the full amount of the
liability it had compounded and took security for the same. The guarantee was
set aside.
The High Court of Australia has held that a bank is also bound to disclose an
arrangement that the existing overdraft limit of the customer is to be reduced
below the existing debit balance (the effect of which is that the customer is to be
given only a temporary respite)3; or that it has been party to the selective
dishonouring of cheques by the insolvent customer in an endeavour to maintain
a facade of prosperity4. Further, where the account to be guaranteed is not really
that of the principal debtor, but in truth that of an undischarged bankrupt for
whom the account holder was a nominee, a bank must disclose that fact if
aware of it5. It is submitted that this is because the bank would otherwise
participate in a fraud upon the surety6.
It seems that the circumstance that a bank has forgotten a fact that should have
been disclosed will not excuse non-performance of the duty7.
1
The point was left open in Levett v Barclays Bank plc [1995] 1 WLR 1260 at 1277D, but in
North Shore Ventures Ltd v Anstead Holdings Inc [2012] Ch 31, the Court of Appeal held (at
[14]) at the creditor’s duty of disclosure extends to any unusual contract ‘or other dealing’ with

20
 Aspects of the General Law of Guarantees 18.18

the principal debtor. See also Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR
447, 457, HC of A; followed by Longmore J in Crédit Lyonnais Bank Nederland v Export
Credits Guarantee Department [1996] 1 Lloyd’s Rep 200 at 226–227; cf Cooper v National
Provincial Bank Ltd [1946] KB 1 at 7.
2
(1841) 4 Y & C Ex 424.
3
Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 457 per Gibbs CJ.
4
Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 457–8.
5
Cooper v National Provincial Bank Ltd [1946] KB 1 at 7.
6
See Goad v Canadian Imperial Bank of Commerce (1968) 67 DLR (2d) 189, where the bank
manager’s knowledge of the falsity of the statements made to the prospective guarantors to
induce them to give the guarantee led on the facts to his being implicated therein and the bank
being held vicariously liable; and see also Crédit Lyonnais Bank Nederland v Export Credits
Guarantee Dept [1996] 1 Lloyd’s Rep 200.
7
Willis v Willis (1850) 17 Sim 218.

18.18 On the other hand, a bank is entitled to assume that a principal debtor
who tenders an intending guarantor has explained the general nature of his
position to the guarantor and has explained it properly1. Similarly, a bank can
assume that an intending guarantor has made himself fully acquainted with the
financial position of the customer whose debt he is about to guarantee2.
Accordingly, in the absence of specific inquiry, a bank is not obliged to disclose
that the customer is indebted or overdrawn on his account3 or that it is not
satisfied with the customer’s credit4. Further, the bank is not obliged to disclose
matters relating to the customer’s conduct of his account; for example, that a
number of cheques had been drawn on the account and then payment of them
countermanded by the drawer5. Neither is a bank bound to disclose the
existence or state of liabilities additional to the customer’s account which will
come within the scope of the guarantee such as another overdrawn account of
the customer6, or the customer’s guarantee to the bank of the liabilities of a third
party7. Applying the test set out in para 18.16 above, such matters are not, in
general, unusual features of the contractual relationship between banker and
customer relationship so as to fall within the bank’s duty of disclosure.
Clearly, information about the customer’s affairs supplied by a bank to the
intending guarantor must be honest, accurate and given with reasonable care;
otherwise, as with any contract8, the guarantor may be entitled to rescind the
guarantee for misrepresentation or claim damages for negligent mis-statement9.
Where the guarantor does ask for information, a bank is best advised to ensure
that, if so required, it has the customer’s express authority to override its duties
of confidentiality10. It is submitted that despite the phraseology in some judicial
statements of a ‘duty’ or ‘obligation’ to answer the guarantor’s questions11, a
bank has the option of declining to answer (just as it may decline to give a
reference for a customer) and leave the guarantor to draw his own conclusions.
A bank is ordinarily under no duty of disclosure after the guarantee has been
given. It is not bound after that point to disclose to the surety mere suspicions
(or the grounds thereof) it may have that the principal debtor is defrauding
him12, or that the principal debtor has been guilty of some other misfeasance
such as forgery13.
1
Lloyd’s Bank Ltd v Harrison (1925) 4 LDAB 12 at 16 per Sargant LJ.
2
Royal Bank of Scotland v Greenshields 1914 SC 259 at 266–267.
3
Wythes v Labouchere (1859) 3 De G & J 593, 609; Royal Bank of Scotland v Greenshields
1914 SC 259; Westminster Bank Ltd v Cond (1940) 46 Com Cas 60; Union Bank of
Australia Ltd v Puddy [1949] VLR 242, 247; and see the cases in the next footnote.

21
18.18 Guarantees
4
London General Omnibus Co Ltd v Holloway [1912] 2 KB 72, 82–83, 87, CA; National
Mortgage & Agency Co of New Zealand Ltd v Stalker [1933] NZLR 1182; Westpac
Banking Corpn v Robinson (1993) 30 NSWLR 668, NSW CA; Commercial Bank of Austra-
lia Ltd v Amadio (1983) 151 CLR 447, 455, HC of A.
5
Cooper v National Provincial Bank Ltd [1946] KB 1 at 7–8.
6
Williams v Rawlinson (1825) 3 Bing 71; Union Bank of Australia Ltd v Puddy [1949] VLR 242
at 247.
7
Goodwin v National Bank of Australasia (1968) 117 CLR 173.
8
MacKenzie v Royal Bank of Canada [1934] AC 468, PC; see also Davies v London and
Provincial Marine Insurance Co (1878) 8 Ch D 469.
9
See Barton v County NatWest Bank Ltd [1999] Lloyd’s Rep Bank 408, CA; Deutsche Bank AG
v Unitech Global Ltd [2013] 2 Lloyd’s Rep 629 at [56]; and also Chapter 3 above.
10
See Lloyds Bank Ltd v Harrison (1925) 4 LDAB 12, 16. In many situations, it would be
expected that the customer had impliedly given such authority.
11
See Royal Bank of Scotland v Greenshields 1914 SC 259 at 271; Westminster Bank v Cond
(1940) 46 Com Cas 60 at 69.
12
National Provincial Bank of England Ltd v Glanusk [1913] 3 KB 335, Horridge J.
13
Bank of Scotland v Morrison 1911 SC 593. Mere suspicion would not be disclosable by the
bank even if harboured before the giving of the guarantee: Crédit Lyonnais Bank Nederland
NV (now known as Generale Bank Nederland NV) v Export Credits Guarantee Department
[1996] 1 Lloyd’s Rep 200 at 227.

(ii) Disclosure in a non-commercial context

18.19 The same principles apply in a non-commercial context, as is illustrated
by one of the appeals determined by the House of Lords in Royal Bank of
Scotland v Etridge (No 2)1, namely Bank of Scotland v Bennett.
However, in a non-commercial context there is the additional disclosure re-
quired by the steps outlined by Lord Nicholls in Etridge as a usually sufficient
response to notice of possible undue influence. These steps are also described in
Chapter 13. Their practical effect is that, in cases where the creditor is put on
inquiry by the nature of the relationship between the principal debtor and the
guarantor (as, for instance, where a wife guarantees her husband’s debts) the
doctrine of undue influence now requires wider disclosure than the law of
guarantees.
1
[2002] 2 AC 773.

3 GUARANTEE FORMS

(a) Principles of construction

18.20 While the authorities are not all consistent, what has been described as
the ‘traditional approach’ to the construction of guarantees involves the appli-
cation of various tenets of construction which are unfavourable to the creditor1.
In particular, it has been said that guarantees must be strictly construed in
favour of the guarantor; that no liability is to be imposed on the guarantor
which is not clearly and distinctly covered by the words of the guarantee; and
that clear and unambiguous language is required to exclude any one or more of
the normal incidents of suretyship2.
However, it is now clear that what is often described as the ‘modern approach’
to construction applies equally to guarantees as it does to other forms of
contracts3 (although there is an open question, noted below, as to whether the

22
 Guarantee Forms 18.20

modern approach has superseded the traditional approach in its entirety). The
consequence is that, in accordance with the principles developed in the House
of Lords decision in Investors Compensation Scheme Ltd v West Bromwich
Building Society4 and subsequent cases, the construction of a guarantee is a
process of inquiry involving ‘the ascertainment of the meaning which the
document would convey to a reasonable person having all the background
knowledge which would reasonably have been available to the parties in the
situation in which they were at the time of the contract5’. When the court
interprets the document, it is not bound to make the unreal assumption that the
parties have expressed themselves with accuracy or precision. The court looks
to the parties’ common aim or intention in reducing an agreement to writing
and the evidence as to the background information may lead to the conclusion
that the parties have failed to express themselves accurately6.
In particular, the court will construe the guarantee as a whole7, and may admit
extrinsic evidence to construe it in accordance with ordinary contractual
principles. Therefore, it may admit evidence of the factual background known
to the parties at or before the date of the contract to ascertain the ‘genesis’ and
objectively the ‘aim’ of the transaction8; or objective extrinsic evidence to see
what was the subject matter which the parties had in their contemplation9.
Further, where there is doubt or ambiguity in its terms, and the guarantee is
drafted by the creditor (as all bank standard forms will be) the document may
be construed contra proferentum and in favour of the guarantor10. This is not a
rigid rule, but in an appropriate case is a matter to which the court may
legitimately have regard when ascertaining the objective meaning of the parties’
language. Thus in Barclays Bank plc v Kingston11, in seeking to ‘interpret the
guarantee as a whole and give it a sensible meaning’ the court took into account
(among other things) the fact that the guarantee was a standard document
prepared by the bank.
Ambiguity may be resolved by reference to the introductory recitals12 or the
statement of consideration13. While the court is bound to apply unambiguous
contractual language, if there are two possible constructions it is entitled to
prefer the construction which is consistent with business common sense14.
It appears to be an open question as to whether the ‘traditional approach’ to the
construction of guarantees continues to apply, or whether it has been super-
seded in its entirety by the ‘modern approach’. The Court of Appeal has given
indications both ways15, and declined to decide the point in its most recent
consideration of it16.
1
Harvey v Dunbar Assets Plc [2013] EWCA Civ 952 at [29] and [32].
2
A concise compilation of the authorities is in Halsbury’s Laws of England, Volume 49 (2015),
[708] to [714]. And see also Chitty on Contract, 32nd edn, [44–062] to [45–082] and Andrews
& Millett, Law of Guarantees, 7th edn, para 4-002.
3
Static Control Components (Europe) Ltd v Egan [2004] 2 Lloyd’s Rep 429 at [13] and [15];
Dumford Trading AG v OAO Atlantrybflot [2005] 1 Lloyd’s Rep 289 at [34]; Cattles Plc v
Welcome Financial Services Ltd [2010] 2 Lloyd’s Rep 514 at [34], [35] and [43]; National
Merchant Buying Society Ltd v Bellamy [2013] 2 All ER (Comm) 674 at [39]; Harvey v Dunbar
Assets Plc [2013] EWCA Civ 952 at [28]. The previous edition of this work was tentative in
expressing the view that the modern approach to construction applies to guarantees. But in light
of the authorities since the point must now be considered settled, at least below the Su-
preme Court (and, potentially, in that court as well; as Gloster LJ pointed out in Harvey v
Dunbar Assets Plc [2013] EWCA Civ 952 at [28], Rainy Sky SA v Kookmin Bank [2011] 1

23
18.20 Guarantees

WLR 2900, SC, cited below, was a case relating to an advance payment bond, which is a form
of refund guarantee).
4
[1998] 1 WLR 896.
5
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at
912. See also, among others: Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101, HL;
Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, SC, Arnold v Britton [2015] AC 1619, SC;
and Wood v Capita Insurance Services Ltd [2017] AC 1173, SC. In the latter case the
Supreme Court held (at [14]) that, contrary to what some had suggested, there was no conflict
between the contextual approach to construction considered in Rainy Sky and the textual
approach considered in Arnold v Britton. The two approaches are complementary rather than
conflicting tools for the ascertainment of the objective meaning of the parties’ contractual
language.
6
Static Control Components (Europe) Ltd v Egan [2004] 2 Lloyd’s Rep 429, CA, at [28]
(Arden LJ).
7
Hyundai Shipbuilding and Heavy Industries Co Ltd v Pournaras [1978] 2 Lloyd’s Rep 502,
506, CA; Bank of India v Trans Continental Commodity Merchants Ltd and Patel [1982] 1
Lloyd’s Rep 506, 512; affd [1983] 2 Lloyd’s Rep 298, CA.
8
Prenn v Simmonds [1971] 1 WLR 1381, 1385, HL applied in Perrylease Ltd v Imecar AG
[1988] 1 WLR 463 at 471B–C; and see also Reardon Smith Line Ltd v Hansen-Tangen [1976]
1 WLR 989, 995H–996A, HL; Hyundai Shipbuilding and Heavy Industries Co Ltd v Pour-
naras [1978] 2 Lloyd’s Rep 502, 506; AIB Group (UK) plc (formerly Allied Irish Banks plc and
AIB Finance Ltd) v Martin [2002] 1 WLR 94.
9
Heffield v Meadows (1869) LR 4 CP 595, 599.
10
Eastern Counties Building Society v Russell [1947] 1 All ER 500, 503D–E, Hilberry J; affd
[1947] 2 All ER 734, CA, see especially at 738H–739A per Tucker LJ.
11
[2006] 2 Lloyd’s Rep 59.
12
See Bank of India v Trans Continental Commodity Merchants Ltd and Patel [1982] 1
Lloyd’s Rep 506; affd [1983] 2 Lloyd’s Rep 298 where, however, there was no such ambiguity
in the guarantee’s terms.
13
National Bank of Nigeria Ltd v Awolesi [1964] 1 WLR 1311, PC.
14
Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, SC, at [21] to [23].
15
See: Liberty Mutual Insurance Company (UK) Ltd v HSBC Bank plc [2002] EWCA Civ 691 at
[56] (holding that the modern approach is not inconsistent with the traditional requirement that
clear words are required to exclude the normal incidents of rights of subrogation) on the one
hand, and Static Control Components (Europe) Ltd v Egan [2004] 2 Lloyd’s Rep 429 at [19]
(expressing the view that, in light of the modern approach, ‘it may be that the concept that a
guarantee should be “strictly construed” now adds nothing’) on the other. The text above from
the previous edition of this work was cited with apparent approval in General Mediterranean
Holding SA.SPF v Qucomhaps Holdings Limited [2017] EWHC 1409 at [36], but that case also
left the point noted in the text undecided.
16
Harvey v Dunbar Assets Plc [2013] EWCA Civ 952 at [29] to [32].

(b) Relevant statutory provisions

(i) Introduction
18.21 Since the 1970s, aspects of the common law of contract have been
affected by statutory provisions designed to protect the interests of consumers
and others occupying structurally vulnerable positions. These provisions are
relevant to the law of guarantees because many guarantees are given by
individuals not acting in a business capacity (such as when a spouse guarantees
the business debts of his or her partner) or, in any event, by individuals
contracting on bank’s standard terms of business. Such persons generally fall
within the ambit of the protection afforded by the statutory provisions.
As at the date of the previous edition of this work (and earlier editions), the
statutory provisions affecting guarantees were contained in the Consumer
Credit Act 1974, the Unfair Contract Terms Act 1977, and the Unfair Terms

24
 Guarantee Forms 18.22

in Consumer Contracts Regulations 1999. The Consumer Credit Act 1974

remains a significant statutory control over the content and form of certain
types of guarantee, and its requirements are addressed in para 18.28 below.
However, since the previous edition of this work very substantial changes have
been made to the Unfair Contract Terms Act 1977 and the Unfair Terms
in Consumer Contracts Regulations 1999. In short, the 1977 Act has been
amended so as to limit its effect to business-to-business transactions, and the
1999 Regulations have been repealed and superseded by a new omnibus piece
of consumer protection legislation entitled the Consumer Rights Act 2015.
These changes have prospective effect only. The 1977 Act, in its pre-Consumer
Rights Act 2015 form, and the 1999 Regulations continue to apply to contracts
made before 1 October 2015. Conversely, the amended 1977 Act1 and the Con-
sumer Rights Act 2015 apply to contracts made on or after 1 October 20152.
Accordingly, for the time being at least, this work will continue to address both
the old law as well as the new law. The former is addressed in paras 18.22 to
18.25 below and the latter in paras 18.26 and 18.27 below. As a general caveat,
however, readers are advised that the new law has added further layers of detail
to what was already a complex and decidedly specialist field. Readers requiring
chapter and verse on this area of the law are therefore referred to specialist
works on consumer protection law3.
1
Consumer Rights Act 2015, Sch 4, paras 2 to 27.
2
SI 2015/1630, reg 3.
3
See, for example, Chitty on Contracts, 32nd edn, Chapter 38.

(ii) The Old Law: The Unfair Contract Terms Act 1977
18.22 As explained in para 18.21 above, the law in this paragraph applies only
to guarantees made before 1 October 2015. See paras 18.26 and 18.27 below
for the law applicable to guarantees made on or after that date.
Bank guarantee forms may be within the ambit of the Unfair Contract Terms
Act 1977, in particular where they involve the guarantor dealing as consumer
or on the bank’s written standard terms of business1. Where that is the case,
guarantee terms which purport to exclude or restrict the bank’s liability for
breach of contract2 may have to be shown by the bank3 to satisfy the require-
ment of reasonableness4.
The Act is directed not only at terms which expressly and directly seek to
exempt or limit a contract breaker’s liability, but those that indirectly have the
same effect, by making the liability or its enforcement subject to restrictive or
onerous conditions; excluding or restricting any right or remedy in respect of it
or subjecting a person to any prejudice in consequence of pursuing the same; or
excluding or restricting rules of evidence or procedure5.
The provisions of the Act do not apply to guarantee terms which preserve the
guarantor’s liability in circumstances where he would otherwise be discharged,
such as on the creditor’s giving time or indulgence to the principal debtor, or of
variation of the principal contract. This is because such terms do not seek to
exclude or restrict the bank’s liability for breach of contract.

25
18.22 Guarantees

However, terms excluding or restricting the guarantor’s rights of set-off are

within the ambit of the Act6. Similarly, a term which excludes or restricts a
remedy in respect of a misrepresentation may also be ineffective except in so far
as it satisfies the requirement of reasonableness7.
1
UCTA 1977, ss 3(1) and 12.
2
UCTA 1977, s 3(2).
3
UCTA 1977, s 11(5).
4
UCTA 1977, s 11; and see also Sch 2.
5
UCTA 1977, s 13.
6
Gill (Stewart) Ltd v Horatio Myer & Co Ltd [1992] QB 600, CA; Esso Petroleum Co Ltd v
Milton, [1997] 1 WLR 938, CA. See also United Trust Bank Ltd v Dohil [2012] 2 All ER
(Comm) 3302 at [52] to [60], in which Simon Picken QC (sitting as a Deputy Judge of the
High Court) held after detailed consideration that a no set-off clause in a guarantee satisfied the
requirement of reasonableness under the Act.
7
Misrepresentation Act 1967, s 3; Skipskredittforeningen v Emperor Navigation [1998] 1
Lloyd’s Rep 66 (Mance J); approved in Regus (UK) Ltd v Epcot Solutions Ltd [2009] 1 All ER
(Comm) 586 at [36], CA.

(iii) The Old Law: The Unfair Terms in Consumer Contracts

Regulations 1999
18.23 As explained in para 18.21 above, the law in this paragraph applies only
to guarantees made before 1 October 2015. See paras 18.26 and 18.27 below
for the law applicable to guarantees made on or after that date.
The Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083)
were made to implement the 1993 Unfair Terms in Consumer Contracts
Directive1. They were repealed by para 34 of Schedule 4 to the Consumer
Rights Act 2015.
By regulation 4(1), the Regulations apply in relation to ‘unfair terms in
contracts concluded between a seller or a supplier and a consumer.’ As defined
in regulation 3(1), a ‘seller or supplier’ is any natural or legal person who, in
contracts covered by the Regulations, is acting for purposes relating to his
trade, business or profession, whether publicly owned or privately owned; and
a ‘consumer’ is any natural person who, in contracts covered by the Regula-
tions, is acting for purposes which are outside his trade, business or profession.
The application of these provisions to contracts of guarantee is not straightfor-
ward. Firstly, guarantees are not, or are at least not obviously, contracts for the
supply of goods or services, although the principal contracts to which they
relate may be. Further, even if the giving of a guarantee is a supply of a service
in the relevant sense, if regulation 4(1) was applied literally the Regulations
would, paradoxically, only apply when the guarantor was acting in the course
of a business and the creditor was acting as a consumer.
Perhaps unsurprisingly, therefore, there is conflicting first-instance authority in
England on whether and to what extent the Regulations apply to the
commonly-encountered situation of guarantees under which the guarantor is a
consumer and the creditor is a business2.
Given this conflicting authority, the previous edition of this work concluded
that the point required appellate determination but expressed the view that the
authorities in favour of the application of the Regulations were likely to
prevail. Consistently with this view, the European Court of Justice has recently

26
 Guarantee Forms 18.24

held that the 1993 Unfair Terms in Consumer Contracts Directive, which the
Regulations implement, applies to any contract between a consumer and a seller
or supplier, and specifically to a guarantee given by a consumer in favour of a
bank. In so holding the Court emphasised that the protections afforded by the
1993 Directive are ‘particularly important in the case of a contract providing
security or a contract of guarantee concluded between a banking institution and
a consumer’3. Accordingly, while this decision has not been considered by any
domestic authority, it is highly likely that, when it is, the Regulations will be
held to apply in any case where a consumer gives a guarantee in favour of a
bank or other business4.
1
Council Directive 93/13 of 5 April 1993 on Unfair Terms in Consumer Contracts, OJ 1993,
L95/29.
2
The authorities holding that the Regulations do not apply are Bank of Scotland v Singh,
unreported, 17 June 2005, Queen’s Bench Division, Mercantile Court, Manchester, [85]–[90];
Manches LLP v Freer [2006] EWHC 991 at [25] and Williamson v Bank of Scotland [2006]
EWHC 1289 at [42]–[46]. The authorities to the contrary hold that the Regulations do apply
where both the guarantor and the principal debtor are natural persons dealing as consumers.
These authorities are Barclays Bank v Kufner [2009] 1 All ER (Comm) 1 at [23]–[30]; Royal
Bank of Scotland v Chandra [2010] 1 Lloyd’s Rep 677 at [102] (affirmed but without reference
to this point at [2011] EWCA Civ 192); and United Trust Bank Ltd v Dohil [2012] 2 All ER
(Comm) 765 at paras [61]–[66].
3
Tarcau v Banca Comerciala Intesa Sanpaolo Romania SA (C-74/15), 19 November 2015 at
para 25. See also the Court’s earlier decisions of Asbeek Brusse v Jahani BV (C-488/11),
30 May 2013 and Siba v Devenas (C-537/13), 15 January 2015.
4
Regardless of whether the principal debtor was also dealing with the creditor as a consumer. In
Tarcau, the principal debtor was a trading company and the principal debt was incurred in the
course of that trade. The guarantors were the parents of the company’s sole director and
shareholder.

18.24 The effect of the Regulations is that a contractual term which has not
been ‘individually negotiated’ will not be binding on the consumer if it is
unfair1. The contract continues to bind the parties if capable of continuing in
existence without the unfair term2.
The Regulations provide3 that a term shall always be regarded as not having
been individually negotiated where it has been drafted in advance4 and the
consumer has not been able to influence the substance of term. The onus is
placed on the supplier who claims a term was individually negotiated to show
that it was5. Notwithstanding that a particular term (or certain aspects of it) has
been individually negotiated, the Regulations apply to the rest of the contract if
an overall assessment of it indicates that it is a pre-formulated standard
contract6.
A term is unfair if7:
‘contrary to the requirement of good faith, it causes a significant imbalance in the
parties’ rights and obligations arising under the contract, to the detriment of the
consumer.’
The unfairness of a contractual term is assessed8:
‘taking into account the nature of the goods or services for which the contract was
concluded and referring, at the time of conclusion of the contract, to all circum-
stances attending the conclusion of the contract and to all the other terms of the
contract or of another contract on which it is dependent.’

27
18.24 Guarantees

Moreover, in determining whether a term may be regarded as unfair, regard is to

be had to the indicative and non-exhaustive list of terms set out in Schedule 2 to
the Regulations9. These include:
(a) terms that make an agreement binding on the consumer whereas provi-
sion of services by the seller or supplier is subject to a condition whose
realisation is dependent on his own will alone (1(c));
(b) terms requiring any consumer who fails to fulfil his obligation to pay a
disproportionately high sum in compensation (1(e));
(c) terms which automatically extend a contract of fixed duration where the
consumer does not indicate otherwise, when the deadline fixed for the
consumer to express his desire not to extend the contract is unreasonably
early (1(h));
(d) terms which irrevocably bind the consumer to terms with which he had
no real opportunity of becoming acquainted before the conclusion of the
contract (1(i)).
These are ‘non-exhaustive’. It seems therefore, that whether a term is within a
category described in the list is not conclusive of whether it is or is not unfair,
but indicates that it may be.
1
Regulation 8(1).
2
Regulation 8(2).
3
Regulation 5(2).
4
Of, presumably, the conclusion of the contract, although this is not said in terms. That is the
time at which the unfairness is to be assessed: regulation 6(1).
5
Regulation 5(4).
6
Regulation 5(3).
7
Regulation 5(1).
8
Regulation 6(1).
9
Regulation 5(5).

18.25 The Regulations exclude from the assessment of fairness any term
which, in so far as it is in plain intelligible language, (a) defines the main subject
matter of the contract or (b) concerns the adequacy of the price or remunera-
tion, as against the services supplied1. Further, the Regulations oblige a supplier
to ‘ensure that any written term of a contract is expressed in plain, intelligible
language2, and if there is doubt about the meaning of the written term, the
interpretation most favourable to the consumer shall prevail3.
The Competition and Markets Authority (or other qualifying body) is entitled
under the Regulations to consider any complaint made to it regarding poten-
tially unfair contract terms4. If on consideration of such a complaint, the CMA
(or a qualifying body) considers that the term is unfair it may, in certain
circumstances, bring proceedings for an injunction under reg 12 (including an
interim injunction)5.
Where a guarantor is a consumer and the Regulations apply, in general each of
the standard terms contained in the guarantee will be subject to the Regulations
and will be unenforceable if unfair except (to the extent they are in plain and
intelligible language) terms which define the consideration or the ‘main subject
matter of the guarantee’. In Office of Fair Trading v Abbey National Plc6, the
Supreme Court held that the identification of the ‘price or remuneration’ for the
purposes of regulation 6(2), and therefore by analogy the ‘main subject matter
of the contract’ in the same regulation, is a matter of objective interpretation for

28
 Guarantee Forms 18.25

the court. In doing so the court should read and interpret the contract in the
usual manner, that is, having regard to the view which a hypothetical reason-
able person would take of its nature or terms7.
It may not always be easy to determine which terms define the main subject
matter of the guarantor’s obligation. It is suggested, however, that the provi-
sions defining what obligations are guaranteed will be of this nature, but that
provisions which limit or negative the scope of the equitable doctrines protect-
ing the guarantor or his rights to indemnity etc, will not (or at least are
significantly less likely to be)8. On this view, a clause (for example) purporting
to preserve the guarantor’s liability in the event the creditor agrees a variation of
the principal debt would be assessable for fairness, but a clause specifying the
principal debt and the extent of the guarantor’s liability in relation to it would
not.
The view expressed above can be supported by an analogy with the position of
insurance contracts under the 1993 Unfair Terms in Consumer Contracts
Directive9. Recital 19 of the Directive states that terms which clearly define or
circumscribe the insured risk and the insurer’s liability are not assessable for
fairness, since restrictions of this nature are taken into account by the insurer
when calculating the premium paid by the consumer. By analogy, when deciding
to give a guarantee the consumer guarantor is likely to take into account the
nature and extent of the principal debt and the main circumstances of his
potential liability. Likewise, the creditor is likely to take into account such
matters when deciding to accept a guarantee as adequate security for the
principal debt10.
A particular consideration that the court will be likely to take into account if
required to judge unfairness is that, by the very nature of the contract, the
guarantor will probably have obtained little personal benefit from the guaran-
tee11. The age, understanding and emotional relationship of the guarantor to the
principal debtor are also likely to be highly relevant, as are the manner in which
the guarantee was taken and the terms of the principal debt.
The Regulations provide incentive for drafting in plain intelligible language in
three ways. First, terms not in plain intelligible language are capable of being
judged unfair even if they define the consideration or the main subject matter of
the contract12. Second, the fact that a term is not expressed in plain intelligible
language would seem to be a factor to be taken into the balance in deciding
whether or not the term is in fact unfair. Third, to the extent there is any doubt
as to the meaning of any written term, the interpretation most favourable to the
consumer will prevail13.
1
Regulation 6(2).
2
Regulation 7(1).
3
Regulation 7(2).
4
Regulation 10(1). For a definition of ‘qualifying body’ see reg 3(1) and Sch 1. This function was
until 1 April 2014 performed by the Office of Fair Trading.
5
Regulation 10(3).
6
[2010] 1 AC 696.
7
[2010] 1 AC 696 at [113].
8
See the second section of this chapter.
9
Council Directive 93/13 of 5 April 1993 on Unfair Terms in Consumer Contracts, OJ 1993,
L95/29.
10
Although in Van Hove v CNP Assurances SA C-96/14 of 23 April 2015, the European Court of
Justice held that it was for the national court to determine whether a term falls within the main

29
18.25 Guarantees

subject matter of the contract, having regard to, among other things, the legal and factual
context of the term. It follows that there is scope for a degree of variation in individual cases.
11
Which underlies many of the equitable principles protecting sureties.
12
Regulation 6(2)(a).
13
Regulation 7(2).

(iv) The Consumer Rights Act 2015 and the amended Unfair Contract
Terms Act 1977
18.26 As explained in para 18.21 above, the law in this paragraph applies only
to guarantees made on or after 1 October 2015. See paras 18.22 to 18.25 above
for the law applicable to guarantees made before that date.
Part 2 of the Consumer Rights Act 2015 re-enacts, with some modifications and
with application to consumer contracts only, the statutory protections previ-
ously provided by sections 2 and 3 of the Unfair Contract Terms Act 1977 and
(in particular) regulations 5 and 6 of the Unfair Terms in Consumer Contracts
Regulations 1999. In guidance published on the 2015 Act, the Competition and
Markets Authority has said that the new law generally carries forward rather
than changes the protections provided to consumers under the old law, and that
changes are mainly to the scope rather than the substance of those protections1.
Thus section 62 of the 2015 Act provides that an unfair term of a consumer
contract (or a consumer notice) is not binding on the consumer. By
section 62(4), a term for this purpose will be unfair if, contrary to the
requirement of good faith, it causes a significant imbalance in the parties’ rights
and obligations under the contract to the detriment of the consumer. However,
section 64 excludes certain terms from fairness assessments under section 62,
namely: (a) terms which specify the main subject matter of the contract; and (b)
terms the assessment of which would involve consideration of the appropriate-
ness of the price payable under the contract by comparison with the goods,
digital content or services supplied under it. These provisions carry forward the
protections previously contained in regulations 5 and 6 of the 1999 Regulations
and, as regards consumer contracts, section 2(2) of the 1977 Act.
A ‘consumer contract’ for the purpose of the above provisions is a contract
between a trader and a consumer, not including a contract of employment or
apprenticeship2. A ‘consumer’ is an individual acting for purposes ‘wholly or
mainly’ outside his or her trade, business, craft or profession. Conversely, a
‘trader’ is a person – natural or corporate – acting for purposes relating to that
person’s trade, business, craft or profession, whether acting personally or
through another person acting in the trader’s name or on the trader’s behalf.
In overall terms, therefore, a guarantee given on or after 1 October 2015 which
is a consumer contract on the above definition will be subject to the 2015 Act.
This would encompass the commonly encountered situation under which an
individual, acting as a consumer, gives a guarantee to a bank. At the same time,
a guarantee given after 1 October 2015 which is not a consumer contract on the
above definition will not be subject to the 2015 Act, but will be subject to the
amended 1977 Act.
1
Competition and Markets Authority, Unfair contract terms guidance: Guidance on the unfair
terms provisions in the Consumer Rights Act 2015, CMA37, 31 July 2015, at [1.46].
2
CRA 2015, s 61.

30
 Guarantee Forms 18.28

18.27 As noted in the previous paragraph, the new law generally – but not
exclusively – carries forward the old law. Four differences between the two
regimes call for comment here.
First, the definition of ‘consumer’ under the new law is broader than under the
old law. The definition in the 2015 Act extends to any individual acting for
purposes wholly ‘or mainly’ outside his or her trade (and the like). The
definition in the 1999 Regulations applies to persons who are acting outside
their trade (and the like) simpliciter, and the definition of ‘dealing as consumer’
in section 12 of the 1977 Act was in similar terms.
Second, the 2015 Act uses the generic term ‘trader’ in substitution for the ‘seller
or supplier’ used in the 1999 Regulations. It is therefore clear that the 2015 Act
will apply to a guarantee given by a consumer to a bank, even though, under the
guarantee, the bank does not supply any goods or services to the consumer. In
this way the 2015 Act avoids the doubt which, until recently, plagued the
question of whether the 1999 Regulations applied to such a guarantee (see para
18.23 above).
Third, section 62 of the 2015 Act applies to any unfair term in a consumer
contract, subject to the exclusions in section 64. This represents an expansion of
the unfairness test in regulation 5 of the 1999 Regulations, which does not
apply to a term, however unfair, which has been ‘individually negotiated.’
Fourth, under the old law terms in consumer contracts falling within
sections 2(2) or 3 of the 1977 Act were unenforceable except in so far as they
satisfied the ‘requirement of reasonableness’ as defined in section 11 of that Act.
That requirement no longer applies to consumer contracts under the new law,
but has been replaced with the unfairness test under section 62 of the 2015 Act1.
1
Although the requirement of reasonableness continues to apply to non-consumer contracts
which fall within the scope of the amended 1977 Act.

(v) The Consumer Credit Act 1974

18.28 A guarantee given at the express or implied request of the debtor to
secure the carrying out of the debtor’s obligations under an agreement regulated
by the Consumer Credit Act 1974 is a ‘security’ for the purpose of that Act1.
Such guarantees are regulated by Part VIII of the Act, meaning that they must be
in writing and in the prescribed form2. They must also be properly executed3 so
that, in addition, they must be signed in the prescribed manner by or on behalf
of the guarantor, embody all the terms of the guarantee other than implied
terms, and, when sent for signature, their terms must be readily legible and be
sent with a copy.
Further, if the guarantee is given by the guarantor after or at the same time as the
regulated agreement, it is not properly executed unless a copy of the regulated
agreement, and any other document referred to in it, is given to the guarantor at
that time. If the guarantee is provided before the regulated agreement is made,
it is not properly executed unless the regulated agreement, and any document
referred to in it, is given to the surety within seven days after it is made4.
If the guarantee is not expressed in writing in accordance with the Act, or is
improperly executed, then so far as it was provided in relation to a regulated
agreement, it is enforceable against the guarantor only on an order of the court5.

31
18.28 Guarantees

Moreover, if an application for such an order is dismissed (except on technical

grounds only) section 106 of the Act6 operates so that, so far as the guarantee
was provided in relation to a regulated agreement, it is to be treated as never
having had effect7.
Section 106 also operates in respect of any security given in relation to a
regulated agreement where such an agreement is cancelled under section 69(1),
or becomes subject to section 69(2), or is terminated under section 91 or where
an application for an order under sections 40(2), 65(1), 124(1) or 149(2) is
dismissed (except on technical grounds only), or a declaration is made by the
court under s 142(1)8.
If a regulated agreement is enforceable on an order of the court only, any
guarantee provided in relation to it is also only enforceable where such an
order has been made in relation to the agreement9.
Where a default notice or a notice under sections 76(1) or 98(1) is served on the
debtor under the regulated agreement, a copy must be served by the creditor on
any guarantor of the regulated agreement or the security will be enforceable
against him on an order of the court only10.
Whether the regulated agreement is, within the definitions employed by the Act,
for fixed sum11 or running account credit12, the creditor must on written request
of the surety give him a copy of the executed agreement, any document referred
to in it and a signed statement of the account13 as between himself and the
debtor14.
1
Consumer Credit Act 1974, s 189.
2
Consumer Credit Act 1974, s 105(1)–(3); the detailed requirements are set out in the Consumer
Credit (Guarantees and Indemnities) Regulations 1983, SI 1983/1556. By regulation 1(2),
‘guarantee’ does not include a mortgage, charge or pledge.
3
Consumer Credit Act 1974, s 105(4)–(5).
4
Consumer Credit Act 1974, s 105(5).
5
Consumer Credit Act 1974, s 105(7).
6
Consumer Credit Act 1974, s 105(8).
7
Where the guarantee consists of rights over the guarantor’s property, ss 106(b)–(d) provide for
return of property lodged with the creditor, for the creditor to remove or cancel relevant entries
in any register and the repayment of amounts received by the creditor on realisation of the
security. In respect of security rights over real property which may have been disposed of by the
creditor, s 177, to which s 106 is subject, gives protection to transferees for value without
notice.
8
Section 113(3). See generally on the Consumer Credit Act 1974, Chapter 9.
9
Section 113(2).
10
Consumer Credit Act 1974, s 111.
11
Consumer Credit Act 1974, s 107, as amended by SI 1998/997, art 3.
12
Consumer Credit Act 1974, s 108, as amended by SI 1998/997, art 3.
13
Complying with the requirements set out in ss 107 and 108.
14
The surety must pay the prescribed fee, currently £1, and the information must be provided
within the prescribed period, currently 12 working days. These sections do not apply to
‘non-commercial’ agreements within the meaning of the Consumer Credit Act 1974: ss 107(5),
108(5). The debtor is also entitled to obtain information relevant to the security in accordance
with s 109.

32
 Guarantee Forms 18.29

(c) Common provisions in standard form guarantees

(i) Consideration

18.29 As discussed in para 18.7 above, any guarantee not contained in a deed
must be supported by consideration. Consideration need not be provided for in
the forms used by banks, but usually it is. The way in which consideration is
expressed is not conclusive, but is relevant in construing the contract itself1,
including for example in relation to the scope of the guaranteed obligations.
The consideration is often stated to be the giving or continuance of banking
facilities or accommodation or further advances to the principal debtor. This is
good consideration for the undertaking to guarantee existing as well as future
indebtedness2 if the bank does give or continues to give banking facilities3 by,
for example, making further advances4.
While the meaning of ‘advance’ may be affected by the context, it normally
means the furnishing of money for some specified purpose5. It is unlikely to
cover a mere increase in an overdraft to finance interest charges accruing on an
existing advance. Each advance under a continuing guarantee is severable
consideration6.
In United Dominions Trust Ltd v Beech, Savan, Tabner and Thompson7, the
claimant sought to recover under a guarantee given in consideration of the
extension of ‘banking facilities . . . by means of advances of cash on
negotiable instruments and for any other form of security or by any other
means’. Geoffrey Lane J held that ‘block plan’ facilities (described at p 548 of
the report) extended to a trader were not banking facilities. In Bank of India v
Trans Continental Commodity Merchants Ltd and Patel8 Bingham J construed
‘banking facilities’ as not excluding foreign exchange facilities offered by and
through the bank, stating that in the modern financial world, it would be
unrealistic to treat foreign exchange facilities as not being banking facilities,
even though they are not facilities offered exclusively by banks.
If a guarantee is subject to the Unfair Terms in Consumer Contracts Regula-
tions 1999 (see paras 18.23–18.25 above) or the Consumer Rights Act 2015
(see paras 18.26 and 18.27 above), the adequacy of a guarantee provision as to
consideration will not usually be subject to any assessment of unfairness. Such
a provision will usually form part of the main subject matter of the contract on
the basis that it defines the quid pro quo making up parties’ bargain. In any case,
however, the provision will be assessable for fairness if it is not in plain,
intelligible language (as regards contracts to which the 1999 Regulations apply)
or not transparent and prominent (as regards contracts to which the 2015 Act
applies)9.
1
National Bank of Nigeria Ltd v Awolesi [1964] 1 WLR 1311, 1315, PC.
2
Johnston v Nicholls (1845) 1 CB 251; Boyd v Moyle (1846) 2 CB 644; White v Woodward
(1848) 5 CB 810.
3
However, it has been said by the Privy Council that continuing to deal with the customer in the
way of its business as a bank must involve some bona fide fresh transaction between the bank
and the customer – not merely holding open its account: Royal Bank of Canada v Salvatori
[1928] 3 WWR 501.
4
Alberta Opportunity Co v Zen (1984) 6 DLR (4th) 620, British Columbia Court of Appeal.
5
Burnes v Trade Credits Ltd [1981] 1 WLR 805, 808, PC per Lord Keith of Kinkel.
6
See Offord v Davies (1862) 12 CBNS 748; Coulthart v Clementson (1879) 5 QBD 42, 46;
Lloyd’s v Harper (1880) 16 Ch D 290, 314, 319–320, CA.

33
18.29 Guarantees
7
[1972] 1 Lloyd’s Rep 546.
8
[1982] 1 Lloyd’s Rep 506 at 512; affirmed [1983] 2 Lloyd’s Rep 298 at 301 (Robert Goff LJ).
The expansion in the activities of banks in the decades since Bingham J’s judgment has added
even greater force to his reasoning.
9
SI 1999/2083, reg 6(2)(b) and CRA 2015, s 64(2).

(ii) ‘All monies’

18.30 It is usual for guarantee forms to provide that all monies owed by the
principal debtor1 to the creditor are secured by the guarantee, howsoever and
whensoever2 that indebtedness is incurred and on whichsoever account; and
whether owed solely or jointly, and whether contingent3 or presently due.
Provisions of this type are known as ‘all monies’ clauses.
From the bank’s perspective, ‘all monies’ clauses are intended both to protect
the bank from the danger of future events operating to discharge the guarantor
(pursuant to the rule in Holme v Brunskill, discussed in paras 18.8–18.10
above) and to bind the guarantor to an enhanced liability without the need to
take a further guarantee4. They are generally effective to achieve this purpose;
an ‘all monies’ guarantee given in respect of all the principal debtor’s present
and future indebtedness to the creditor will not ordinarily be discharged if the
creditor agrees to an increase in the credit limit of a facility available to the
principal debtor5.
It is sometimes suggested that a guarantee should not be drawn to cover a ‘debt’
that is ‘due’, or use any similar combination of words because of Re Moss, ex p
Hallet6. There, a guarantor’s proof in the principal debtor’s bankruptcy on his
claim to be indemnified was rejected, and it was said that on his bankruptcy, the
debt was no longer due from the principal debtor7. Accordingly, the concern is
that the bankruptcy of the principal debtor will discharge any guarantee of a
debt ‘due’ from the principal debtor. However, in Re Rees, ex p National
Provincial Bank of England8 and in Re Sass, ex p National Provincial Bank of
England Ltd9 the creditor bank was able to prove for the entire amount in the
principal debtor’s bankruptcy without deduction for the amount received from
the surety. The better view is that bankruptcy suspends the right of action on the
debt, but does not extinguish the debt, so that the guarantor is not discharged
on the principal debtor’s bankruptcy10. Nevertheless, to minimise the risk of
dispute, it is prudent to add the word ‘unpaid’ as well as ‘due’11.
Most ‘all monies’ clauses are sufficiently widely drawn that liabilities of the
customer to the bank as surety of another’s debts will also be secured by the
guarantee, as soon as they crystallise12. However, it is best to put the matter
beyond argument by expressly providing for the customer’s liabilities to the
bank as surety as well as principal to be guaranteed13.
The guarantee form will generally provide for all of the liabilities of the
principal debtor to be secured up to a monetary limit (which is a blank on the
form to be filled in, as necessary). It is a question of construction as to whether
such a guarantee secures the whole of the principal debt but subject to the limit,
or whether it secures part of the indebtedness in the amount of the limit14. If the
former, upon payment of the sum stipulated the guarantor has not discharged a
pro tanto part of the principal debtor’s liability15 and so is not subrogated, pro
tanto, to the creditor’s rights of security. Further, the bank may sue the principal

34
 Guarantee Forms 18.30

debtor for the whole of the debt, prove for the debt in the principal debt-
or’s insolvency16, or indeed pursue or prove in the insolvency of another surety
for the debt17. Conversely, if the guarantee is for part of the principal debt and
the surety pays to the limit of his liability, then the surety is subrogated pro tanto
to the rights of the creditor and can prove in the principal debtor’s bankruptcy
for the amount he has paid (and the creditor can only prove for the balance)18.
In this regard, where the guarantor’s liability is limited in amount without more
it is likely to be construed as a security for a part of the principal debt, but where
the debt is already ascertained and exceeds the limit it is likely to be construed
as a security for the whole amount19. If the limit provision in the form is not
completed, this will normally be interpreted as indicating an intention that the
guarantee will be unlimited20, not that the guarantee is void for incompleteness
or uncertainty21.
It is considered that an ‘all monies’ clause defines part of the main subject matter
of the contract for the purpose of the Unfair Terms in Consumer Contracts
Regulations 1999 (see paras 18.23 to 18.25 above) and the Consumer Rights
Act 2015 (see paras 18.26 and 18.27 above). This is because such clauses iden-
tify the guaranteed obligations and therefore define the scope of the guaran-
tor’s liability. Accordingly, ‘all monies’ clauses are unlikely to be subject to any
assessment of fairness under those instruments, unless they are not expressed in
plain, intelligible language (as regards contracts to which the 1999 Regulations
apply) or are not transparent and prominent (as regards contracts to which the
2015 Act applies)22.
1
Bank charge documents often secure the liabilities of ‘the mortgagor’, which may include more
than one person or entity. The definition of ‘mortgagor’ will usually ensure that both joint and
sole debts of all the mortgagors are secured: see AIB Group (UK) plc (formerly Allied Irish
Banks plc and AIB Finance Ltd) v Martin [2001] UKHL 63, [2002] 1 All ER 353, [2002] 1
WLR 94.
2
Including, therefore, past indebtedness. This will be effectively covered if the consideration for
the guarantee given by the bank is sufficient.
3
As to which see Re Rudd & Son Ltd (1986) 2 BCC 98955.
4
CIMC Raffles Offshore (Singapore) Ltd v Schahin Holding SA [2013] 2 All ER (Comm) 760
(CA) at [52]–[53].
5
National Merchant Buying Society Ltd v Bellamy [2013] 2 All ER (Comm) 98.
6
[1905] 2 KB 307, DC where the guarantee covered certain interest on a debt ‘so long . . . as
any principal money remains due’.
7
[1905] 2 KB 307 at 310, 314.
8
(1881) 17 Ch D 98, CA, where the guarantee secured ‘moneys then due or which should from
time to time be due’.
9
[1896] 2 QB 12, where the guarantee covered ‘any sum or sums of money which may be now
or may hereafter from time to time become due or owing’.
10
See Bank of Montreal v McFatridge (1959) 17 DLR (2d) 557, 569, where the guarantee covered
present and future debts and liabilities ‘now or at any time and from time to time due or owing’
and the argument that the principal debtor’s bankruptcy operated to discharge the guarantee
was said by the Court to be almost a ‘quibble.’ It is submitted that Re Moss was decided as it was
because allowing the surety’s proof would have on the facts of that case enabled double proof
as the creditor had already lodged a proof in respect of the debt – see especially at pp 312–313,
per Bigham J.
11
See Re Fitzgeorge, ex p Robson [1905] 1 KB 462.
12
See Bank of Scotland v Wright [1991] BCLC 244, where a guarantee of ‘all sums and
obligations due and to become due to you by your customer whether solely or jointly with any
other obligant or by any firm of which your customer may be a partner and/or in any other
manner or way whatever’ was held to cover the customer’s liabilities as surety.
13
See eg Goodwin v National Bank of Australasia (1968) 117 CLR 173.
14
Ulster Bank Ltd v Lambe [1966] NI 161.
15
Ulster Bank Ltd v Lambe [1966] NI 161.

35
18.30 Guarantees
16
Re Rees, ex p National Provincial Bank of England (1881) 17 Ch D 98, CA; Re Sass, ex p
National Provincial Bank of England Ltd [1896] 2 QB 12.
17
Re Houlder [1929] 1 Ch 205.
18
Re Sass, ex p National Provincial Bank of England Ltd [1896] 2 QB 12.
19
Ellis v Emmanuel (1876) 1 Ex D 157, CA, especially at 162, 169.
20
New Zealand Loan and Mercantile Agency Co v Patterson and McLeod (1882) 1 NZLR 325,
NZCA.
21
Caltex Oil (Aust) Pty Ltd v Alderton (1964) 81 WNNSW 297.
22
SI 1999/2083, reg 6(2)(b) and CRA 2015, s 64(2).

(iii) Continuing security

18.31 If the guarantee secures the balance due on a running account or
accounts which is or are expected to fluctuate, and indeed may at some time be
in credit, the guarantee usually provides for the security to be continuing (rather
than specific1) and for the ultimate balance (that is, the final balance due on all
accounts of the customer taken together2). It is also advisable to specify that the
guarantee will not be satisfied by any interim payment or settlement of account.
1
If specific, by operation of the rule in Clayton’s case, the secured liability will be extinguished on
the original balance being first reduced to nil.
2
As to which expression see Mutton v Peat [1900] 2 Ch 79, CA at 85–86

(iv) Non-execution by other intended guarantors

18.32 Where a guarantee is to be given by two or more guarantors, but only
one or some of them sign the document, it is a question of construction as to
whether the signatory guarantor or guarantors will be bound. If the form of the
guarantee on its face shows that it is intended to be a composite guarantee,
contained in a single document, which assumes that it will be signed by all the
guarantors named as such in the document, then the starting point in the
construction exercise will be that the signature of all the guarantors is necessary
for the guarantee to be valid, and that liability will only be imposed on any
individual signatory if all the intended guarantors also sign1. However, the
contrary applies where separate guarantee documents are prepared, each to be
signed separately by a single guarantor2.
It is therefore conventional to include in standard form bank guarantees a
provision to the effect that each guarantor, if more than one, is to be bound by
the guarantee, even if any person who was intended to execute or to be bound
by it does not execute it or is not so bound3. Such provisions must be drafted
with care and clearly provide for the result sought to be achieved.
1
Harvey v Dunbar Assets Plc [2013] EWCA Civ 952 at [22] to [25] (Gloster LJ), interpreting
previous decisions including James Graham and Co (Timber) Ltd v Southgate-Sands [1986] QB
80 and Bank of Scotland v Henry Butcher & Co [2003] 2 All ER (Comm) 557.
2
Capital Bank Cashflow Finance Ltd v Southall [2004] 2 All ER (Comm) 675, CA, at [15]–[18]
(Mance LJ).
3
The efficacy of such a provision was upheld by the Court of Appeal in Bank of Scotland v Henry
Butcher & Co [2003] 2 All ER (Comm) 557 at [52] and [84]. In Harvey v Dunbar Assets Plc
[2013] EWCA Civ 952, it was common ground that it was open to the parties to agree that the
absence of one or more signatures of the intended guarantors should not bring about the result
that those who did sign were not bound (see [26]).

36
 Guarantee Forms 18.33

(v) Notice of determination

18.33 In the absence of contrary stipulation a guarantor can terminate his

liability under a continuing guarantee by giving the creditor notice to that
effect1, although in that event the guarantor will remain liable for liabilities
accrued up until the time of the notice2. To protect the bank, it is usual3 to insert
provision for the guarantor to determine his liability by written notice stipulat-
ing a period at the end of which his liabilities will crystallise4.
Once the guarantor’s liability has crystallised, he is entitled to take proceedings
against the principal debtor for an order that the principal debtor pay whatever
is due to the creditor (thereby relieving the guarantor)5.
In National Westminster Bank plc v Hardman6, where the guarantee provided
that it was ‘to remain in force until determined by three months’ written notice’,
the Court of Appeal held that all liability of the guarantor was determined at the
end of the notice period, unless triggered by the making of a demand before its
expiration. The decision is questionable because it produces a result which
seems unlikely to reflect the true intention of the parties objectively judged. In
Bank of Credit and Commerce International SA v Simjee7, where the guarantee
provided for the liability thereunder to be ‘crystallised (except as regards
unascertained or contingent liabilities and the interest charges costs and ex-
penses . . . ) at the expiration of three months after receipt by you from the
[guarantor] of notice in writing to determine it’, the Court of Appeal distin-
guished Hardman and held that the notice crystallised the guarantor’s liability
but did not terminate it.
In the absence of contrary stipulation, while death of the guarantor does not of
itself terminate the guarantee obligation8, notice of death will discontinue the
guarantee in respect of subsequent advances9. If an express provision for notice
of termination has been included in the guarantee, it will usually be construed
so as to require the personal representatives to give notice to terminate the
guarantee in accordance with its terms and mere notice of the guarantor’s death
will not have such an effect10.
1
Coulthart v Clementson (1879) 5 QBD 42, 46; Lloyd’s v Harper (1880) 16 Ch D 290, 314,
319–320, CA. This is because the consideration for a continuing guarantee is not entire but
severable.
2
National Westminster Bank plc v French (20 October 1977, unreported, Robert Goff J).
3
See Westminster Bank Ltd v Sassoon (1926) 5 LDAB 19.
4
Bank of Credit and Commerce International SA v Simjee [1997] CLC 135, CA.
5
Morrison v Barking Chemicals Co Ltd [1919] 2 Ch 325.
6
[1988] FLR 302, CA.
7
[1997] CLC 135, CA.
8
Bradbury v Morgan (1862) 1 H & C 249; Coulthart v Clementson (1879) 5 QBD 42 at p 46;
and see Harriss v Fawcett (1873) 8 Ch App 866 at 869.
9
Coulthart v Clementson (1879) 5 QBD 42.
10
Re Silvester, Midland Rly Co v Silvester [1895] 1 Ch 573; but cf Harriss v Fawcett (1873) 8 Ch
App 866 where the bank was held unable to recover advances to the principal debtor made after
death, despite the existence in the guarantee of a provision requiring six months notice to
determine it. The case seems to have been decided on the basis that it was ‘inequitable’ to allow
recovery given the mutual conduct of the bank and the executors – see at p 868, and p 869 where
Mellish LJ opined that in law death did not of itself determine the guarantee; see also Coulthart
v Clementson (1879) 5 QBD 42 at 46 per Bowen J.

37
18.34 Guarantees

(vi) Right to continue customer’s account after termination

18.34 On termination of the guarantee, receipts in respect of the outstanding
indebtedness could, on the ordinary operation of the rule in Clayton’s case, be
appropriated in reduction of the guaranteed liability1. Modern guarantee forms
may and usually do negative this by providing that on termination of the
guarantee, the bank may continue the account with the customer and that the
guarantor’s liability shall remain notwithstanding any subsequent payment into
or out of the account by or on behalf of the customer2.
The guarantee may also expressly entitle the bank, on determination of the
guarantee, to open a new ‘suspense’ account and pay into it receipts and
realisations made in respect of the principal liability. Payments into such an
account will not discharge the guaranteed indebtedness until the bank appro-
priates the contents of the account for that purpose3. In the absence of such a
provision, the bank should rule off the guaranteed account and credit receipts
to a new account4.
1
See Re Sherry, London and County Banking Co v Terry (1884) 25 Ch D 692, CA; Deeley v
Lloyds Bank Ltd [1912] AC 756, HL.
2
Westminster Bank v Cond (1940) 46 Com Cas 60.
3
Commercial Bank of Australia v John Wilson & Co’s Estate, Official Assignee [1893] AC 181.
4
See Re Sherry, London and County Banking Co v Terry (1884) 25 Ch D 692, CA at 702; Deeley
v Lloyd’s Bank Ltd [1912] AC 756, HL at 771, 783.

(vii) Preservation of guarantor’s liability

18.35 Banks’ guarantee forms almost invariably provide for preservation of
the guarantor’s liability if circumstances arise where he would otherwise be
discharged in accordance with the rule in Holme v Brunskill (see paras 18.8 to
18.10 above), such as if time is given to the principal debtor. Such provisions are
in principle effective at common law1, provided that, as a matter of construc-
tion, they cover the events which have happened. Therefore they tend to be
all-encompassing. In particular, they preserve the guarantor’s liability in the
event of the bank giving time or any indulgence to the principal debtor;
variation or discharge of the principal transaction or the guaranteed obliga-
tions; composition or settlement with the principal debtor; release, variation,
loss of securities2 or rights against any co-surety; and breach by the bank of any
contract with the principal debtor3.
It has been suggested, obiter, that the existence of the Unfair Contract Terms Act
1977 enables the court to reject these clauses as not fair and reasonable4, but it
is submitted that on the wording of the Act such a proposition is clearly too
wide. As indicated in para 18.22 above, the 1977 Act does not apply to these
clauses because they do not seek to exclude or restrict the bank’s liability for
breach of contract. However, if the Unfair Terms in Consumer Contracts
Regulations 1999 (see paras 18.23–18.25 above) or the Consumer Rights Act
2015 (see paras 18.26 and 18.27 above) apply to a guarantee containing these
clauses, then the clauses will be subject to an assessment of their fairness if the
court concludes that they do not define the main subject matter of the contract
so as to be exempt from assessment. This is a question of objective interpreta-
tion of the guarantee, having regard to the view which a hypothetical reason-
able person would take of its nature or terms5. As indicated in para 18.25
above, however it is suggested that these clauses do not (or at least are not likely

38
 Guarantee Forms 18.36

to) fall within the main subject matter of the contract, and will therefore be
assessable for fairness. In any case, however, these clauses will be assessable for
fairness if they are not in plain, intelligible language (as regards contracts to
which the 1999 Regulations apply) or not transparent and prominent (as
regards contracts to which the 2015 Act applies)6.
If these clauses are assessable for fairness then they may be vulnerable to being
held unfair and so not binding on the guarantor on the ground that they cause
a ‘significant imbalance in the parties’ rights and obligations to the detriment of
the consumer’7.
1
Cowper v Smith (1838) 4 M & W 519; Perry v National Provincial Bank of England [1910] 1
Ch 464, CA; and see Moschi v Lep Air Services Ltd [1973] AC 331, HL at 349C and also at
344G, 349D.
2
Note that the guarantee may not protect the bank if it fails to take the security in the first place:
Bank of Baroda v Patel [1996] 1 Lloyd’s Rep 391 at 396.
3
See the discussion in para 18.10 above regarding the effectiveness of such clauses in displacing
the rule in Holmes v Brunskill that a variation of the principal debt discharges the guarantor.
4
Per Lord Denning MR Standard Chartered Bank Ltd v Walker [1982] 1 WLR 1410, 1416E–F,
CA. As to the Unfair Contract Terms Act 1977, see above, paras 18.22, 18.26 and 18.27 above.
5
Office of Fair Trading v Abbey National Plc [2010] 1 AC 696 at [113].
6
SI 1999/2083, reg 6(2) and CRA 2015, s 64(2).
7
SI 1999/2083, reg 5(1) and CRA 2015, s 64(4) This result would not be automatic – since the
application of the test of unfairness requires careful consideration of the particular case.

(viii) Principal debtor clause

18.36 Generally, modern guarantee forms provide for the guarantor’s liability
to be both as principal debtor or primary obligor (or some such similar
wording) and as surety. The intention of such ‘principal debtor clauses’ is to
preserve the liability of the guarantor in the event that the principal debt-
or’s obligation is for some reason unenforceable or discharged or, as with
clauses of the type discussed in the preceding paragraph, where the guaran-
tor’s liability would be discharged if he was liable only as surety. In principle
such clauses are effective provided that the words, on construction, cover the
events which have happened1. However their inclusion in a guarantee will not
usually have the effect, without more, of converting the guarantee into a
contract of indemnity2.
The inclusion of a principal debtor clause may mean that a demand is not
necessary to constitute the guarantee presently enforceable against the guaran-
tor, even if the guarantee requires the guarantor to pay on demand3.
If the Unfair Terms in Consumer Contracts Regulations 1999 (see paras
18.23–18.25 above) or the Consumer Rights Act 2015 (see paras 18.26 and
18.27 above) apply to a guarantee containing a principal debtor clause, then the
clause will be subject to an assessment of its fairness if the court concludes that
it does not define the main subject matter of the contract so as to be exempt
from assessment. This is a question of objective interpretation of the guarantee,
having regard to the view which a hypothetical reasonable person would take of
its nature or terms4. It is suggested that, in contrast to clauses of the type
considered in the preceding paragraph, principal debtor clauses may well form
part of the main subject matter of a guarantee. While principal debtor
clauses have the same object as the clauses of the type considered in the
preceding paragraph – the preservation of the guarantor’s liability – the means

39
18.36 Guarantees

by which they seek to attain that object are different. Clauses of the type
considered in the preceding paragraph seek to remove what would otherwise be
an ordinary incident of the guarantee relationship, while leaving the remainder
of that relationship in place. By contrast, principal debtor clauses seek to create
an additional, distinct legal relationship between the guarantor and the guar-
antee, namely that of a contract under which the guarantor’s liability is primary
and not merely secondary5. On this view, a principal debtor clause arguably
forms part of the main subject matter of the guarantee as it defines an important
aspect of the legal nature of the relationship between the parties. In any case,
however, a principal debtor clause will be assessable for fairness if it is not in
plain, intelligible language (as regards contracts to which the 1999 Regulations
apply) or not transparent and prominent (as regards contracts to which the
2015 Act applies)6.
1
See eg General Produce Co v United Bank Ltd [1979] 2 Lloyd’s Rep 255; National Westminster
Bank plc v Riley [1986] BCLC 268, CA. Further, in Berghoff Trading Ltd v Swinbrook
Developments Ltd [2009] 2 Lloyd’s Rep 233 at [25] the Court of Appeal assumed that principal
debtor clauses are effective for this purpose: ‘the contract of guaranty with the creditor may
often make the guarantor into a primary obligor, in order to avoid the pitfalls of guaranties,
such as their discharge by waiver and so on.’ For a case in which, on its true construction, a
principal debtor clause was held to be ineffective to prevent a variation of the principal debt
discharging the guarantor, see: Credit Suisse v Allerdale BC [1995] 1 Lloyd’s Rep 315 at 366.
2
Carey Value Added SL v Gruppo Urvasco SA [2011] 2 All ER (Comm) 140 at [22].
3
TS& Global Ltd v Fithian-Franks [2008] 1 BCLC 277 at [26], applying MS Fashions Ltd v
Bank of Credit and Commerce International SA (in liquidation) (No 2) [1993] Ch 425 at
447–448 (Dillon LJ); and see also Hoffman LJ at first instance; and see also Tate v Crewdson
[1938] Ch 869. Note that in Re Bank of Credit and Commerce International SA (No 8)
[1998] AC 214 the House of Lords cast doubt on the correctness of MS Fashions, but on a
different point.
4
Office of Fair Trading v Abbey National Plc [2010] 1 AC 696 at [113].
5
See para 18.3 above on the distinction between contracts of guarantee and contracts of
indemnity.
6
SI 1999/2083, reg 6(2) and CRA 2015, s 64(2).

(ix) Written demand

18.37 Guarantee forms will usually provide that the guarantor’s liability will
arise on the creditor’s written demand. This conventional requirement for a
written demand affects the running of time for the purpose of the limitation
period. In Parr’s Banking Co Ltd v Yates1, where a continuing guarantee
secured all monies that might be owing in account with the customer, but did
not require a written demand, it was held that the cause of action accrued as
soon as each item on the customer’s account was due and not paid, and
accordingly recovery of sums advanced more than six years before the issue of
the writ was statute barred. This case was distinguished in Wright v New
Zealand Farmers’ Co-operative Association of Canterbury Ltd2 where it was
held that on the true construction of a continuing guarantee of the balance from
time to time owing by the principal debtor to the creditor, time ran from the date
such balance was constituted by the excess of total debits over total credits, not
from the date each advance was made to the principal debtor.
Modern bank guarantee forms obviate the need to consider such issues by
providing for the guarantor to discharge his liability to the bank on service of
written demand on him. The service of such a demand will ordinarily then be

40
 Guarantee Forms 18.38

essential before action in order to complete the bank’s cause of action3; and time
for the purposes of the Limitation Act 1980 will run from service of demand.
If the guarantee contains a principal debtor clause (discussed in the preceding
paragraph), demand on one co-principal debtor is a demand on the other. It
appears to follow that this time will run from the date of the demand. What
constitutes a good demand is dealt with elsewhere in this work 4. It is usual and
prudent practice to make demand on the customer in respect of the guaranteed
facilities before making demand on the guarantor.
1
[1898] 2 QB 460, CA.
2
[1939] AC 439, PC.
3
Re Brown’s Estate [1893] 2 Ch 300; Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833, CA;
Esso Petroleum Co Ltd v Alstonbridge Properties Ltd, [1975] 1 WLR 1474. Although see the
discussion in the preceding paragraph regarding the operation of principal debtor clauses in this
respect.
4
Chapter 8.

(x) Right to take further security or release security

18.38 The guarantee should also provide that it is to be in addition and without
prejudice to any other securities then or thereafter held or to be held by the
creditor for past or future advances. Although it has been held that the taking of
additional security does not of itself discharge the guarantor1, it is prudent for
the guarantee to reserve full power to take, vary, exchange, or release such
securities, without prejudice to the guarantee.
If the taking of security is a term of the contract between the creditor and the
principal debtor whose performance the guarantor has guaranteed, the guar-
antor will be wholly discharged if the creditor releases the security without the
consent of the guarantor. This is a straightforward application of the rule in
Holme v Brunskill2.
The creditor is normally under no duty to the principal debtor or to any sureties
to realise any securities. He cannot be compelled to realise a security at any
particular time or at all. But if he does realise a security he must do so prudently,
with reasonable care, so as to seek to obtain a proper price. The duty to take
reasonable care to obtain a proper price is owed to the principal debtor
(assuming it is he whose asset constitutes the security), since his liability to the
creditor ought to be reduced by the full value of the security3. The duty is also
owed to the guarantor because, it has been said, his liability also falls to be
extinguished or reduced by the amount realised by the creditor when he realises
the security4. It has more recently been held that the true basis of the credi-
tor’s duty to the guarantor is that the guarantor is contingently entitled to the
security the value of which has been reduced by the creditor’s negligent
undervalue sale5.
1
Overend, Gurney & Co (Liquidators) v Oriental Financial Corpn Ltd (Liquidators) (1874) LR
7 HL 348 at 361, where it was held that the guarantor would be discharged if the additional
security was part of a contract to give time.
2
(1878) 3 QBD 495. The rule is discussed in paras 18.9 and 18.10 above.
3
See the discussion of this principle in para 20.39 of this work above.
4
Standard Chartered Bank v Walker, [1982] 1 WLR 1410, CA; American Express v Hurley
[1985] 3 All ER 564; Skipton Building Society v Stott [2001] 1 QB 261; Barclays Bank plc v
Kingston [2006] 2 Lloyd’s Rep 59 (not following Burgess v Auger [1998] 2 BCLC 478 and
holding (at [19]) that Barclays Bank v Thienel (1978) 247 EG 385 was wrongly decided);

41
18.38 Guarantees

Alpstream AG v PK Airfinance Sarl [2016] 1 CLC 135, CA at [115]–[117], approving Barclays

Bank v Kingston. See also Andrews & Millett, Law of Guarantees, Seventh edn, [9–043],
submitting (on the basis of a detailed analysis) that the authorities in this area holding that the
creditor owes no duty to the guarantor are either explicable on their facts or wrongly decided.
5
Alpstream AG v PK Airfinance Sarl [2016] 1 CLC 135, CA at [124]. The guarantor is
contingently entitled to the security by reason of the right of subrogation discussed in para
18.13 above.

(xi) Joint and several liability

18.39 Where a guarantor executes a guarantee together with other guarantors,
it is usual to provide that their liability shall be joint and several. The guarantee
will often also provide for the bank to be entitled to release discharge or vary the
liability of one, or of any securities given by him in respect of his liability as
guarantor, without prejudice to the liability of the others.
In the absence of such a provision, where the liability of the guarantors is joint
and several (or simply joint) the release of one guarantor will release the others1,
even if a joint and several judgment has previously been obtained against them2.
The guarantee should also stipulate that it shall remain in force until notice of
termination has been given by each and all of the guarantors.
1
Ward v National Bank of New Zealand (1883) 8 App Cas 755 at 764; Mercantile Bank of
Sydney v Taylor [1893] AC 317; Re EWA (a debtor) [1901] 2 KB 642, CA; Liverpool Corn
Trade Association Ltd v Hurst [1936] 2 All ER 309.
2
Re EWA [1901] 2 KB 642, CA.

(xii) Reinstatement
18.40 A guarantee should provide for the reinstatement of the claims of the
bank against the guarantor in the event that any payment made by the principal
debtor or a co-surety is set aside or reversed; particularly by an order of the
court adjusting prior property transactions of an insolvent guarantor under the
Insolvency Act 19861. Similarly, any release of liabilities should provide for
their reinstatement, in the event of the release being set aside or reversed.
1
See especially ss 127, 238–241, 245–246; 339–344, 343–344 and 423.

(xiii) Set-offs and counterclaims

18.41 A modern guarantee form will usually seek to exclude the guaran-
tor’s right of set-off. This will be of importance where a guarantor alleges that
the bank is liable to him for damages in contract or in tort1.
‘No set-off’ clauses are effective in principle. However, as already observed (in
para 18.22 above), such provisions will need to satisfy the requirement of
reasonableness in the Unfair Contract Terms Act 1977, where that Act applies.
Further, if the Unfair Terms in Consumer Contracts Regulations 1999 (see
paras 18.23–18.25 above) or the Consumer Rights Act 2015 (see paras 18.26
and 18.27 above) apply to a guarantee containing these clauses, then the
clauses will be subject to an assessment of their fairness if the court concludes
that they do not define the main subject matter of the contract so as to be
exempt from assessment. This is a question of objective interpretation of the

42
 Guarantee Forms 18.42

guarantee, having regard to the view which a hypothetical reasonable person

would take of its nature or terms2. It is, however, suggested that ‘no set-off
clauses’ will generally not form part of the main subject matter of the contract,
and will therefore be assessable for fairness. Such clauses are, or are similar to,
exemption clauses which seek to exclude rights arising under the general law
rather than define the scope of the parties’ bargain. In any case, however, these
clauses will be assessable for fairness if they are not in plain, intelligible
language (as regards contracts to which the 1999 Regulations apply) or not
transparent and prominent (as regards contracts to which the 2015 Act
applies)3.
If the 1999 Regulations or the 2015 Act apply to a guarantee, then a no set-off
clause in the guarantee may well, depending on all the circumstances, be unfair.
In this connection, if the guarantor’s claim is for breach of a term of the
guarantee, then paragraph 1(b) of Schedule 2 of the 1999 Regulations or
paragraph 2 of Part 1 of Schedule 2 to the 2015 Act will be relevant. These
includes terms4:
‘inappropriately excluding or limiting the legal rights of the consumer vis-à-vis the
. . . supplier . . . in the event of total or partial non-performance or inadequate
performance by the . . . supplier of any of the contractual obligations, including
the option of offsetting a debt owed to the . . . supplier against any claim which
the consumer may have against him’.
Further, if the guarantee excludes the right to offset counterclaims which are not
claims for breach of contractual terms of the guarantee itself, the term may be
within paragraph 1(q) of Schedule 2 of the 1999 Regulations or paragraph 20
of Part 1 of Schedule 2 of the 2015 Act. These include terms:
‘excluding or hindering the consumer’s right to . . . exercise any . . . legal
remedy’.
Guarantees sometimes exclude defences based on counterclaims available to
the principal debtor. At common law, such a provision should be effective
notwithstanding that the obligations of the principal debtor and the guarantor
are then not co-extensive. But the term would probably be required to satisfy
the test of reasonableness under the 1977 Act and fairness under the 1999
Regulations or the 2015 Act, if applicable.
1
See eg Box v Midland Bank [1979] 2 Lloyd’s Rep 391; revsd [1981] 1 Lloyd’s Rep 434, CA;
Standard Chartered Bank v Walker [1982] 3 All ER 938, [1982] 1 WLR 1410 CA; American
Express International Banking Corpn v Hurley [1985] 3 All ER 564.
2
Office of Fair Trading v Abbey National Plc [2010] 1 AC 696 at [113].
3
SI 1999/2083, reg 6(2) and CRA 2015, s 64(2).
4
The quoted text above is from Schedule 2 of the 1999 Regulations, but the relevant text of
Schedule 2 of the 2015 Act is materially identical.

(xiv) Change in parties

18.42 By statute1 and at common law a change in the identity of the creditor or
the principal debtor (whether partnerships, individuals or corporations) termi-
nates a guarantee as to future advances unless there is agreement to the contrary
express or implied, which may be contained in the guarantee2. Banks today are
almost invariably corporations, and guarantee forms usually provide effectively
for changes in the identity of the bank (in particular by reason of absorption or

43
18.42 Guarantees

amalgamation); they also generally provide that where the guaranteeing entity
or the principal debtor is a partnership, or other unincorporated body, the
guarantee will remain effective notwithstanding a change in its constitution.
Where banking business is transferred from one company to another under a
banking-business transfer scheme or a ring-fencing transfer scheme, sanctioned
by the Court under Part 7 of the Financial Services and Markets Act 2000, the
scheme will invariably contain provisions for the survival of guarantees and
other contracts of security for the benefit of the transferee.
1
Partnership Act 1890, s 18.
2
See First National Finance Corpn Ltd v Goodman [1983] BCLC 203, CA.

(xv) Conclusive evidence

18.43 It is common to provide for a statement or certification by an appropri-
ate officer of the bank of the customer’s indebtedness to be binding on the
guarantor. Detailed consideration of the nature and effect of such clauses is
given elsewhere in this work1.
Where the Unfair Contract Terms Act 1977 applies, conclusive evidence
clauses are likely to be required to satisfy the requirement of reasonableness2.
1
See Chapter 8 above.
2
United Trust Bank Ltd v Dohil [2012] 2 All ER (Comm) 3302 at [18], where the clause was
held to be reasonable on the ground that, by its terms, it did not take effect in cases of ‘manifest
error.’ See also: AXA Sun Life Services plc v Campbell Martin Ltd [2012] 1 All ER (Comm) 268
(CA) at [72]–[74].

(xvi) Costs and expenses of enforcement

18.44 Guarantee forms almost invariably provide that the costs and expenses
of the bank are recoverable from the guarantor on a full indemnity basis. The
general effect of such provisions in bank security forms is examined elsewhere
in this work (see Chapter 8 above).

(xvii) Interest

18.45 A well-drawn guarantee will generally provide for computation of

compound interest on the sums due thereunder from demand until payment or
discharge1. It will also provide for interest to accrue both before and after any
judgment. In respect of the period after demand, it is preferable to rely on the
provisions of the guarantee rather than those of the contract between the bank
and the principal debtor because the wording of most guarantees will require
fresh demands to be made in respect of such interest accruing under the
principal debtor contract.
1
As to such terms generally in bank security documents see Chapter 8.

44
Part V

CUSTOMER INSOLVENCY

1
Chapter 19

INSOLVENCY JURISDICTION

1 INTRODUCTION 19.1
2 EU REGULATION ON INSOLVENCY PROCEEDINGS
(a) Scope 19.2
(b) Jurisdiction 19.3
(c) Applicable law 19.5
(d) Recognition of insolvency proceedings 19.6
(e) Rights of creditors 19.8
(f) Banks, insurance companies and investment undertakings 19.9
3 UNCITRAL MODEL LAW 19.10
4 THE PRIVATE EXAMINATION OF BANKS
(a) Nature of the jurisdiction 19.11
(b) Production of information and documents 19.13
(c) Ancillary orders 19.16
(d) Costs 19.17

1 INTRODUCTION TO INSOLVENCY JURISDICTION

19.1 This chapter (and the following two chapters) contains an overview of the
aspects of insolvency law of concern to banks. It deals solely with the position
in English law – Scotland and Northern Ireland have different regimes1. It is
necessarily not a complete treatment: for that, reference should be made to
specialist works2.
Broadly speaking, the law in relation to insolvency may be divided between
corporate and personal insolvency. Modified regimes, however, apply to LLPs3,
Partnership Act 1890 partnerships4, and the dead5.
The principal forms of insolvency proceeding available under the Insolvency
Act 1986 (‘IA 1986’)6 in relation to companies (as to which, see Chapter 20
below) are administration, liquidation (both compulsory and voluntary), and
company voluntary arrangements. Administrative receivership was formerly
important, but today is rare7. In addition, schemes of arrangement under
the Companies Act 2006 are of considerable practical importance.
The principal forms of insolvency proceeding available under IA 1986 in
relation to individuals (as to which, see Chapter 21 below) are bankruptcy,
individual voluntary arrangements, and debt relief orders. Administration
orders under the County Courts Act 1984 may become of importance if s 106
of the Tribunals, Courts and Enforcement Act 2007 (‘TCEA 2007’) is brought
into force (at the time of writing, it is not clear if or when this section will come
into force). Debt management plans and enforcement restriction orders, both
provided for by TCEA 2007, are also of some importance.
International insolvency proceedings are governed by, amongst other things,
the (recast) European Council Regulation on Insolvency Proceedings and the

3
19.1 Insolvency Jurisdiction

UNCITRAL Model Law on Cross-Border Insolvency.

1
In Scotland, corporate insolvency is largely (although not exclusively) regulated by the Insol-
vency Act 1986, whereas personal insolvency is regulated by the Bankruptcy (Scotland) Act
1985. In Northern Ireland, personal and corporate insolvency are regulated by statutory
instruments that broadly mirror the English position.
2
General: Sealy & Milman, Annotated Guide to the Insolvency Legislation, Butterworths,
Insolvency Law Handbook, Totty and Moss, Insolvency; EC Regulation: Fletcher & Isaacs, EC
Regulation on Insolvency Proceedings; Corporate insolvency: Goode, Principles of Corporate
Insolvency, Lightman and Moss, The Law of Receivers and Administrators of Companies, Kerr
& Hunter, Receivers and Administrators, Fletcher, Higham, Trower, Corporate Administra-
tions and Rescue Procedures; Personal insolvency: Muir Hunter, Personal Insolvency; Cross-
border insolvency: Sheldon, Cross-Border Insolvency.
3
Limited Liability Partnership Regulations 2001 (SI 2001/1090).
4
Insolvent Partnerships Order 1994 (SI 1994/2421).
5
Administration of Insolvent Estates of Deceased Persons Order 1986 (SI 1986/1999).
6
The IA 1986 has been amended by, in particular, the Insolvency Act 2000 which, amongst other
things, introduced a moratorium for a company where the company proposes a voluntary
arrangement; by the Enterprise Act 2002 which reformed the administration procedure and
effectively abolished administrative receivership in relation to floating charges created on or
after 15 September 2003; and by Part 5 of the Tribunals, Courts and Enforcement Act 2007. In
addition to IA 1986, many important provisions are to be found in the Insolvency (England and
Wales) Rules 2016 (SI 2016/1024) (‘IR 2016’), which have replaced the Insolvency Rules 1986.
7
Because it effectively does not apply to floating charges created on or after 15 September 2003.

2 EU REGULATION ON INSOLVENCY PROCEEDINGS

(a) Scope
19.2 Since 2000, insolvency law has been governed, in relation to all member
states of the European Union (except Denmark), by an EC/EU Regulation1. In
respect of proceedings opened on or after 26 June 2017, the relevant regime is
that provided by the recast EU Regulation on Insolvency Proceedings (‘the
Recast Regulation’), designed to cure various perceived deficiencies in the
previous Regulation2. The Recast Regulation provides rules governing the laws
applicable to insolvency proceedings within its scope3. It does not, however,
seek to harmonise substantive national law in the field of insolvency.
The Recast Regulation applies to all ‘public collective proceedings, including
interim proceedings, which are based on laws relating to insolvency and in
which, for the purpose of rescue, adjustment of debt, reorganisation or liqui-
dation’ various specified features are present4 (the Recast Regulation does not,
however, apply to insolvency proceedings in respect of insurance undertakings,
credit institutions, investment firms (etc), or collective investment
undertakings5). This represents a substantial widening of scope beyond that of
the previous Regulation, because it extends the scope of the Regulation to
rescue proceedings and also to interim proceedings, rather than limiting it to
conventional liquidation proceedings.
1
EC Regulation 1346/2000.
2
Regulation (EU) 2015/848.
3
Article 7.
4
Article 1.
5
Article 1(2). These are excluded from the scope of the EC Regulation since they are subject to
special arrangements whereby national supervisory authorities have wide-ranging powers of
intervention: see Recital 19. See further para 20.9 below.

4
 EU Regulation on Insolvency Proceedings 19.3

(b) Jurisdiction

19.3 Under the Recast Regulation, as with the previous Regulation, juris-
diction to open insolvency proceedings is given to the courts of the member
state where the debtor’s centre of main interests (‘COMI’) is situated. The
previous Regulation did not contain a definition of COMI, except to create a
rebuttable presumption in favour of the place of the ‘registered office’ of a
company or other legal person. The Recast Regulation contains a definition
which broadly embodies the case law which had developed as to its meaning1.
The ECJ had made two central points. First, as with many EU law concepts,
COMI has an ‘autonomous meaning and must therefore be interpreted in a
uniform way, independently of national legislation’2. Second,
‘ . . . the centre of a debtor’s main interests must be identified by reference to
criteria that are both objective and ascertainable by third parties, in order to ensure
legal certainty and foreseeability concerning the determination of the court with
jurisdiction to open the main insolvency proceedings. That requirement for objectiv-
ity and that possibility of ascertainment by third parties may be considered to be met
where the material factors taken into account for the purpose of establishing the place
in which the debtor company conducts the administration of its interests on a regular
basis have been made public or, at the very least, made sufficiently accessible to enable
third parties, that is to say in particular the company’s creditors, to be aware of
them.3’
The definition in Article 3(1) of the Recast Regulation provides that:
‘[ . . . ] The centre of main interests shall be the place where the debtor conducts the
administration of its interests on a regular basis and which is ascertainable by third
parties.
In the case of a company or legal person, the place of the registered office shall be
presumed to be the centre of its main interests in the absence of proof to the contrary.
That presumption shall only apply if the registered office has not been moved to
another Member State within the 3-month period prior to the request for the opening
of insolvency proceedings.
In the case of an individual exercising an independent business or professional
activity, the centre of main interests shall be presumed to be that individual’s principal
place of business in the absence of proof to the contrary. That presumption shall only
apply if the individual’s principal place of business has not been moved to another
Member State within the 3-month period prior to the request for the opening of
insolvency proceedings.
In the case of any other individual, the centre of main interests shall be presumed to
be the place of the individual’s habitual residence in the absence of proof to the
contrary. This presumption shall only apply if the habitual residence has not been
moved to another Member State within the 6-month period prior to the request for
the opening of insolvency proceedings.’
Proceedings opened in the COMI state are known as ‘main proceedings’. Where
a debtor’s COMI is located in a member state, the courts of other member states
only have jurisdiction to open insolvency proceedings in relation to the debtor
if he or it has an ‘establishment’ in that member state4. The effects of such
proceedings (known as ‘secondary proceedings’) are restricted to the assets
situated in that member state5.

5
19.3 Insolvency Jurisdiction

A court requested to open insolvency proceedings is required, of its own

motion, to examine whether it has jurisdiction pursuant to the Recast Regula-
tion6. Where main proceedings are opened, the Recast Regulation expressly
permits the debtor or a creditor to challenge that decision (and also allows it to
be challenged by other persons where national law so permits)7.
1
See in particular the ECJ cases referred to in fn 2 below and the UK cases of Shierson v
Vlieland-Boddy [2005] EWCA Civ 974, [2005] 1 WLR 3966, Re Stanford International
Bank Ltd [2010] EWCA Civ 137, [2011] Ch 33, Irish Bank Resolution Corporation Ltd v
Quinn [2012] NICh 1, [2012] BCC 608, and O’ Donnell v Bank of Ireland [2012] EWHC 3749
(Ch).
2
Re Eurofood IFSC Ltd (Case C-341/04), [2006] Ch 508, at [31]. See also Interdil Srl v
Fallimento Interedil Srl (Case C-396/09), [2012] Bus LR 1582, at [42].
3
Interdil Srl v Fallimento Interedil Srl (Case C-396/09), [2012] Bus LR 1582, at [49].
4
Article 3(2). An ‘establishment’ is defined as any place of operations where a debtor carries out
or has carried out in the 3-month period prior to the request to open main insolvency
proceedings a non-transitory economic activity with human means and assets: article 2(10).
5
Recital 23; article 3(2).
6
Article 4(1), subject to an exception in article 4(2).
7
Article 5.

19.4 Secondary proceedings may be commenced prior to or after the com-

mencement of main proceedings1. The opening of such proceedings may be
requested by the liquidator in the main proceedings or any other person or
authority empowered to request the opening of insolvency proceedings under
the law of the member state where the opening of secondary proceedings is
requested2.
Where secondary proceedings are commenced prior to the opening of main
proceedings they are known as ‘territorial insolvency proceedings’ and may be
opened only where: (a) main proceedings cannot be opened because of condi-
tions laid down by the law of the member state where the debtor’s centre of
main interests is situated; or (b) the opening of territorial insolvency proceed-
ings is requested by: (i) a creditor whose claim arises from or is in connection
with the operation of an establishment situated within the territory of the
Member State where the opening of territorial proceedings is requested; or (ii)
a public authority having under national law power to request the opening of
insolvency proceedings3.
Where secondary proceedings are opened, the Recast Regulation contains
detailed provisions to facilitate co-operation and co-ordination between the
main and secondary proceedings (these provisions are considerably more
extensive than those in the previous Regulation)4.
The Recast Regulation requires the insolvency practitioner or debtor to be
notified of any request to open secondary proceedings and permits an insol-
vency practitioner in main proceedings to challenge the opening of secondary
proceedings if those requirements are not complied with5.
Where secondary proceedings are opened, they are governed by the law of the
Member State in which they are opened. The Recast Regulation provides for a
scheme of unilateral undertakings to avoid the opening of secondary proceed-
ings by ensuring that creditors who would benefit from them are put in the same
position they would be were they opened, but without the need for them to be
opened6. The provisions are detailed, but in summary, they allow any insol-
vency practitioner to give a binding unilateral undertaking providing that assets

6
 EU Regulation on Insolvency Proceedings 19.5

in the Member State where the secondary proceedings would otherwise be

opened be distributed, or their proceeds be distributed, so as comply with the
distribution and priority rights of that Member State, as opposed to the
Member State where the main proceedings are opened. It also provides for the
possibility of the opening of secondary proceedings being stayed by the court
for a period not exceeding three months7.
1
Article 3. The limitation in article 3(3) of the previous Regulation that secondary proceedings
must be winding-up regulations has been removed from the Recast Regulation.
2
Article 37.
3
Article 3(4).
4
Articles 41 ff.
5
Articles 38 and 39.
6
Articles 35 (applicable law) and 36 (undertaking). Under the previous Regulation, the English
courts had managed to fashion a remedy to avoid the need for secondary proceedings to be
opened (see Re MG Rover Belux SA/NV [2006] EWHC 1296 (Ch), [2007] BCC 446; Re MG
Rover Espana SA [2006] EWHC 3426 (Ch), [2006] BCC 599, and Re Collins & Aikman
Europe SA [2006] EWHC 1343 (Ch), [2006] BCC 861, [2007] 1 BCLC 182), but these
expedients should no longer be necessary.
7
Article 38.

(c) Applicable law

19.5 As already noted, the Recast Regulation provides rules governing the laws
applicable to insolvency proceedings and to this extent it replaces national
rules of private international law on insolvency in relation to matters which fall
within the scope of the Recast Regulation. The general rule is that the law
applicable to insolvency proceedings and their effects is the law of the member
state in which the proceedings were commenced1.
However, there are a number of exceptions to this general rule set out in the EC
Regulation. These are in respect of: third parties’ rights in rem2, set-off3,
reservation of title4, contracts relating to immoveable property5, payments
systems and financial markets6, contracts of employment7, effects on rights of a
debtor in immoveable property, a ship or an aircraft subject to subject to
registration in a public register8, Community patents and trade marks9, detri-
mental acts10, protection of third party purchasers11 and the effects of insol-
vency proceedings on pending law suits or arbitral proceedings12.
1
Article 7(1); see also article 35 (secondary proceedings).
2
Article 8.
3
Article 9.
4
Article 10.
5
Article 11.
6
Article 12.
7
Article 13.
8
Article 14.
9
Article 15.
10
Article 16.
11
Article 17.
12
Article 18 (the inclusion of arbitral proceedings is new): the effect of the proceedings on the
action or arbitration are for the law of the place where the action is pending or the arbitral
tribunal has its seat. See Mazur Media Ltd v Mazur Media GmbH [2004] EWHC 1566 (Ch),
[2004] 1 WLR 2966, [2005] 1 Lloyd’s Rep 41, [2005] 1 BCLC 305.

7
19.6 Insolvency Jurisdiction

(d) Recognition of insolvency proceedings

19.6 The Recast Regulation provides for the automatic recognition of judg-
ments of the courts of a member state opening insolvency proceedings in all
other member states without the need for any further formality1. In particular,
any judgment opening proceedings will automatically have the same effects in
all member states as it does in the member state where the proceedings were
opened2. In other words, main proceedings have ‘universal effect’3 across the
EU (except Denmark). Moreover, once main proceedings have been opened in
one member state, the courts of other member states are not entitled to review
such opening – and a party interested must challenge the opening of main
proceedings before the courts of the member state in which they are opened4.
However, where secondary proceedings are opened, in the member state in
which they are opened, the law of that state prevails over that of the member
state in which the main proceedings are opened5; the opening of secondary
proceedings is the only way of restricting the ‘universal effect’ of the opening of
main proceedings6. Thus when main proceedings were opened in Poland (the
COMI of the debtor), it was not open to a creditor to attach German assets,
because doing so was in breach of Polish insolvency law7.
1
Article 19; Re MG Probud Gdnyia sp z oo (Case C-444/07) [2010] BCC 453, at [26].
2
Article 20(1).
3
See Re MG Probud Gdnyia sp z oo (Case C-444/07) [2010] BCC 453, at [23].
4
Re Eurofood IFSC Ltd (Case C-341/04), [2006] Ch 508, [2006] BCC 397, at [42]–[43].
5
Articles 3(2), 7(1), and 34.
6
See Re MG Probud Gdnyia sp z oo (Case C-444/07) [2010] BCC 453, at [24].
7
See Re MG Probud Gdnyia sp z oo (Case C-444/07) [2010] BCC 453.

19.7 As well as judgments opening proceedings, all judgments handed down by

a court whose judgment opening proceedings is recognised under the Recast
Regulation and which concern the course and closure of the proceedings
(including compositions approved by the court which would, for example,
include a scheme of arrangement sanctioned by the court) will also be recog-
nised and enforced in other member states1. This principle extends also to
judgments deriving directly from insolvency proceedings and which are closely
linked with them even if they were handed down by another court, and
judgments relating to preservation measures taken after the request for the
opening of insolvency proceedings2.
In addition to the recognition and enforcement of judgments, the Recast
Regulation further provides that an insolvency practitioner appointed in main
proceedings is automatically entitled to exercise in all member states the powers
which are conferred on him under the law of the state in which the main
proceedings were opened3. There is an exception to this where other insolvency
proceedings have been opened, or a preservation measure to the contrary taken
further to a request for the opening of insolvency proceedings, in the state in
which he seeks to exercise his powers4.
As discussed above, the Recast Regulation, unlike its predecessor, extends to
‘rescue’ proceedings (although administration was included in Annex A to the
former Regulation). The relevant proceedings are those set out in Annex A to
the Recast Regulation. However, it does not extend to all ‘rescue’ type proce-
dures: in particular, it does not extend to English schemes of arrangement5. An
order made sanctioning a scheme, therefore, is not entitled to recognition under

8
 EU Regulation on Insolvency Proceedings 19.8

the Recast Regulation. In recent years, there have been a significant number of
cases where the English courts have sanctioned schemes of arrangement (or
directed meetings of creditors) in relation to companies the COMI of which was
elsewhere in the EU6. The view of the English courts7 is that proceedings for a
scheme of arrangement fall within the European Council Regulation on Juris-
diction8.
1
Recital 65, article 32(1) (in the case of enforcement, providing for the regime in the Recast
Brussels Regulation (Regulation (EU) 1215/2012; OJ L 351, 20/12/12, p 1) to apply).
2
Article 32(1).
3
Article 21.
4
Article 21(1).
5
Under sections 895–899 of the Companies Act 2006.
6
See, eg, Re Sovereign Marine & General Insurance Co Ltd [2006] EWHC 1335 (Ch),
[2006] BCC 774, [2007] BCLC 228; Re La Seda de Barcelona SA [2010] EWHC 1364 (Ch),
[2011] BCLC 555; Re Rodenstock GmbH [2011] EWHC 1104 (Ch), [2011] Bus LR 1245,
[2012] BCC 459; Re PrimaCom Holdings GmbH [2012] EWHC 164 (Ch), [2013] BCC 201;
Re NEF Telecom Co BV [2012] EWHC 2944 (Comm); Re Cortefiel SA [2012] EWHC 2998
(Ch); Re Seat Pagine Gialle SpA [2012] EWHC 3686 (Ch); Re Apcoa GmbH [2014] EWHC
3849 (Ch) [2015] Bus LR 374, [2015] BCC 142; Re Van Ganeswinkel GroepBV [2015] EWHC
2152 (Ch), [2015] Bus LR 1046; Re Alegeco Scotsman PIK SA [2017] EWHC 2236 (Ch). As for
the nature of the jurisdictional requirement, see Re Indah Kiat International Finance Co BV
[2016] EWHC 246 (Ch), [2016] BCC 418, at [85].
7
See, Re Rodenstock GmbH [2011] EWHC 1104 (Ch), [2011] Bus LR 1245, [2012] BCC 459.
8
Now the Recast Brussels Regulation (Regulation (EU) 1215/2012; OJ L 351, 20/12/12, p 1).

(e) Rights of creditors

19.8 Insurance undertakings, credit institutions, investment firms and other
firms, institutions or undertakings covered by EU Directive 2001/24/EC and
collective investment undertakings are excluded from the scope of the Recast
Regulation since they are subject to special arrangements whereby national
supervisory authorities have wide-ranging powers of intervention1.
In addition, once insolvency proceedings are opened in a member state, then
either the relevant court or the liquidator appointed must immediately inform
all known ‘foreign creditors’ (that is, those who have their habitual residence,
domicile or registered office in other member states) of the proceedings2.
When lodging a claim, a foreign creditor (in the sense above) may do so in any
of the official languages of the EU3.
1
The former Regulation expressly limited the right to lodge claims to creditors with their
habitual residence, domicile or registered office in a member state (article 39 of the former
Regulation); this has been replaced by a general reference to creditors in article 45, but the
limitation to EU creditors still follows from recital 63 and the definitions of ‘local creditor’ and
‘foreign creditor’ in articles 2(11) and 2(12). Member State tax creditors are included in ‘foreign
creditors’ by recital 63 and article 2(3): so the former rule that tax and social security debts are
not provable (part of the rule that a foreign revenue debt will not be enforced by the English
courts: see Government of India v Taylor [1955] AC 491 and QRS 1 ApS v Fransden [1999] 1
WLR 2169) has been effectively abolished in all cases by this provision of the Recast Regulation
and article 13(3) of Schedule 1 to the Cross-Border Insolvency Regulations 2006 (SI
2006/1030).
2
Article 54(1), and the definition of ‘foreign’ creditors’ in article 2(12).
3
Article 55(5) (a relaxation of the former regime, which allowed a creditor to use the language of
his own member state). The lodging of claims is facilitated by the use of standard forms (see
articles 55(1) and 88): these are available from the European e-justice portal.

9
19.9 Insolvency Jurisdiction

(f) Banks, insurance companies and investment undertakings

19.9 Credit institutions, insurance undertakings, and investment undertakings
were excluded from the scope of the EC Regulation since they are subject to
special arrangements whereby national supervisory authorities have wide-
ranging powers of intervention1.
Insolvency proceedings in relation to banks are governed by European Council
Directive 2001/24 on the reorganisation and winding-up of credit institutions
which was implemented into English law by the Credit Institutions (Reorgan-
isation and Winding Up) Regulations 20042. Insolvency proceedings in relation
to insurance undertakings are governed by European Council Directive
2001/17 on the reorganisation and winding-up of insurance undertakings
which was implemented into English law by the Insurers (Reorganisation and
Winding Up) Regulations 20043.
Under these regulations, a credit institution or insurance undertaking is subject
to a single reorganisation measure or winding-up proceeding in the member
state where the credit institution or insurance undertaking is authorised (the
home member state) which is effective and recognised in all member states4. The
reorganisation measure or winding-up proceeding is governed by the law of the
home member state5.
1
Recital 19 of the Recast Regulation.
2
SI 2004/1045.
3
SI 2004/353 (as amended by the Insurers (Reorganisation and Winding Up) (Amendment)
Regulations 2004 (SI 2004/546)). See also the Insurers (Reorganisation and Winding Up)
(Lloyd’s) Regulations 2005 SI 2005/1998.
4
For a full treatment of the Directives and Regulations see Moss and Wessels, EU Banking and
Insurance Insolvency.
5
Although the Directives and Regulations apply to ‘reorganisation measures’, this does not
include schemes of arrangement pursuant to s 425 of the Companies Act 1985: see Re Sovereign
Marine & General Insurance Co Ltd [2006] EWHC 1335 (Ch), [2006] BCC 774, [2007] BCLC
228.

3 UNCITRAL MODEL LAW

19.10 In addition to the insolvency procedures available under the Insolvency
Act 1986, the United Kingdom has enacted the UNCITRAL Model Law on
Cross-Border Insolvency (‘the Model Law’)1. The Model Law was adopted by
the United Nations Commission on International Trade Law (UNCITRAL) in
1997 and its purpose is to provide model legal provisions for countries to enact
which will address more effectively cases of cross-border insolvency2 (on 2 July
2018, UNCITRAL adopted a new Model Law on the Recognition and Enforce-
ment of Insolvency-Related Judgments: this, which is an attempt to supplement
the 1997 Model Law, has at present no force in the UK). The issues addressed
by the Model Law are the recognition of foreign proceedings, co-ordination of
proceedings involving the same debtor, rights of foreign creditors, the rights and
duties of foreign representatives, and co-operation between authorities in
different states.
Under the provisions of the Model Law, a foreign representative (ie the person
authorised in a foreign proceeding to administer the reorganisation or the
liquidation of the debtor’s assets or affairs or to act as representative of the

10
 UNCITRAL Model Law 19.10

foreign proceeding) may apply directly to the English court to commence

insolvency proceedings under English law3 and may participate in any proceed-
ing commenced4. In addition, a foreign representative may apply for the
recognition of the foreign proceeding in England, which may be recognised as
either a ‘main proceeding’ or a ‘non-main proceeding’5. Upon an application for
recognition, relief may be granted including measures to preserve the value of
the debtor’s assets located in Great Britain6.
Upon recognition of a proceeding as a foreign main proceeding, then there is an
automatic stay and suspension in relation to the debtor’s assets, the analogue of
which applies where an individual is adjudged bankrupt or a winding-up
order made7. The foreign representative may also seek further relief from the
court including orders providing for the examination of witnesses, the taking of
evidence or the delivery of information relating to the debtor8. The court may
also entrust the distribution of all or part of the debtor’s assets located in Great
Britain to the foreign representative or another person designated by the court,
provided that the court is satisfied that the interests of creditors in Great Britain
are adequately protected9. The Model Law also makes provision for co-
operation between English and foreign proceedings and for the co-ordination of
concurrent English and foreign proceedings10.
The Model Law, together with s 426 of the IA 1986, the Recast Regulation and
the powers of the courts under common law11, essentially form a suite of
measures by which the English courts can grant assistance to and co-operate
with foreign insolvency proceedings.
The Model Law, as enacted in the United Kingdom, does not apply to the
insolvencies of banks or EEA insurers12.
1
The Model Law was enacted by the Cross-Border Insolvency Regulations 2006 (SI 2006/1030)
with effect from 4 April 2006: they have been amended on a number of occasions since 2006.
The provisions of the Model Law are contained in Sch 1 to the Regulations.
2
The Model Law has thus far been adopted by 44 countries including the UK (which for these
purposes includes the British Virgin Islands and Gibraltar).
3
SI 2006/1030, Sch 1, Art 9, 11.
4
SI 2006/1030, Sch 1, Art 12.
5
SI 2006/1030, Sch 1, Art 15, 17. A foreign proceeding will be recognised as a foreign main
proceeding if it is taking place in the country where the debtor has the centre of its main interests
and as a foreign non-main proceeding if the debtor has an ‘establishment’ in the foreign country:
Sch 1, Art 17(2).
6
SI 2006/1030, Sch 1, Art 19.
7
SI 2006/1030, Sch 1, Art 20.
8
SI 2006/1030, Sch 1, Art 21(1). But there are limits: in particular, the Model Law cannot be used
to enforce foreign judgments against third parties: Rubin v Eurofinance SA [2012] UKSC 46,
[2013] AC 236, [2013] Bus LR 1, [2013] 1 All ER (Comm) 513, [2012] 2 Lloyd’s Rep 615,
[2012] BPIR 1204, [2013] BCC 1, [2013] 1 All ER 521, [2012] 2 BCLC 682 at [144].
9
SI 2006/1030, Sch 1, Art 21(2).
10
SI 2006/1030, Sch 1, Ch IV (Arts 25–26) and Ch V (Arts 28–32).
11
The scope of the common law power is a vexed area after the disapproval of the 2006 decision
of the Privy Council in Cambridge Gas Transport Corporation v The Official Committee of
Unsecured Creditors of Navigator Holdings plc by the Supreme Court in Rubin v Eurofinance
SA (fn 8 above).
12
SI 2006/1030, Sch 1, Art 2(h)–(l).

11
19.11 Insolvency Jurisdiction

4 THE PRIVATE EXAMINATION OF BANKS

(a) Nature of the jurisdiction

19.11 When its customer goes into administration, administrative receiver-

ship, liquidation or bankruptcy, the bank is often in a position to assist the office
holder1 in his investigations into the customer’s dealings with his property and
assets. Accordingly, banks are frequently made subject to orders under IA
19862, s 236 which enables the court, on the application of the office holder, to
require any person to appear before it whom the court thinks capable of giving
information concerning the promotion, formation, business, dealings, affairs or
property of the company.
The purpose of an examination under the predecessor to IA 1986, s 236 was
considered by Buckley J in Re Rolls Razor Ltd3:
‘The powers conferred by s 268 are powers directed to enabling the court to help a
liquidator to discover the truth of the circumstances connected with the affairs of the
company, information of trading, dealings, and so forth, in order that the liquidator
may be able, as effectively as possible and, I think, with as little expense as possible
and with as much expedition as possible, to complete his function as liquidator, to put
the affairs of the company in order and to carry out the liquidation in all its various
aspects, including, of course, the getting in of any assets of the company available in
the liquidation. It is, therefore, appropriate for the liquidator when he thinks that he
may be under a duty to try to recover something from some officer or employee of a
company, or some other person who is, in some way, concerned with the com-
pany’s affairs, to be able to discover, with as little expense as possible and with as
much ease as possible, the facts surrounding any such possible claim. Normally, it
seems to me, the court should seek to assist the liquidator . . . ’.
The power to require innocent third parties such as banks to attend for
examination has been recognised to be an extraordinary power, and in one case
it was even described as ‘the star chamber clause’4. In Re Rolls Razor Ltd (No
2)5 Megarry J said:
‘ . . . the legislature has provided this extraordinary process so as to enable the
requisite information to be obtained. The examinees are not in any ordinary sense
witnesses, and the ordinary standards of procedure do not apply. There is here an
extraordinary and secret mode of obtaining information necessary for the proper
conduct of the winding up.’
1
He may be the administrator, administrative receiver, liquidator or trustee. An order for an
examination may also be sought by a provisional liquidator.
2
In a personal insolvency, see IA 1986, s 366.
3
[1968] 3 All ER 698 at 700. This was cited with approval by Lord Slynn in British and Com-
monwealth Holdings plc v Spicer and Oppenheim [1993] AC 426 at 438C–F. In Re Pantmae-
nog Timber Co Ltd (in liquidation), Official Receiver v Meade-King (a firm) [2003] UKHL 49,
[2004] 1 AC 158 the House of Lords considered that the powers under s 236 were conferred on
the office-holder for the purpose of enabling him to exercise his statutory functions in relation
to the company. Therefore the powers under s 236 could be used for the sole purpose of
obtaining evidence for use in directors disqualification proceedings.
4
Per Chitty J in Re Grey’s Brewery Co Ltd (1883) 25 Ch D 400 at 403. See also Re North
Australian Territory Co (1890) 45 Ch D 87.
5
[1970] Ch 576 at 591.

19.12 In British and Commonwealth Holdings plc v Spicer and Oppenheim1

the House of Lords rejected an argument that the IA 1986, s 236 was confined

12
 The Private Examination of Banks 19.12

to documents which could be said to be necessary to reconstitute the com-

pany’s knowledge. Accepting the judicial statements of Buckley J and Megarry
J cited above, Lord Slynn described the circumstances in which the jurisdiction
will be exercised in the following terms2:
‘The protection for the person called upon to produce documents lies, thus, not in a
limitation by category of documents . . . but in the fact that the applicant must
satisfy the court that, after balancing all the relevant factors, there is a proper case for
such an order to be made. The proper case is one where the administrator reasonably
requires to see the documents to carry out his functions and the production does not
impose an unnecessary and unreasonable burden on the person required to produce
them in the light of the administrator’s requirements. An application is not necessarily
unreasonable because it is inconvenient for the addressee of the application or causes
him a lot of work or may make him vulnerable to future claims, or is addressed to a
person who is not an officer or employee of or a contractor with the company in
administration, but all these will be relevant factors, together no doubt with many
others.’
In exercising the discretion to make an order for a private examination, the
courts are required to balance the views of the office holder contained in his
confidential report to the court, to which great weight is attached, against the
need to prevent any oppressive, vexatious or unfair use of the power3. In the first
instance the order is usually made ex parte. Whilst the report of the office holder
is not usually served on the examinee, the court has a discretion to require
production of it to him. Prior to the Court of Appeal’s decision in Re British
and Commonwealth Holdings plc (No 2)4 it was generally accepted that in most
cases the examinee would not see the confidential report5. However, the Court
of Appeal held that the principle governing disclosure of the report is that the
examinee should show good reason for requiring disclosure, such as an inten-
tion to challenge the s 236 order, and that disclosure should then be ordered
unless the office holder is able to show some more powerful reason for not
disclosing the statement, or some part or parts of it6. In the light of this
judgment the practice now is to produce a report containing information which
the office holder is content that the examinee should see, and to include all
information in respect of which the office holder seeks to maintain confidenti-
ality in a separate confidential exhibit.
The increasing use of s 426 of the IA 1986 and the UNCITRAL Model Law 7to
assist overseas office-holders, has meant that banks are now more likely to be
ordered by the English court to produce information or documents to overseas
office-holders. In the case of s 426, the overseas office-holder is able to ask the
court of the local jurisdiction8 to request the assistance of the English Court
under s 426. The English Court may then make an order under s 236 of the IA
1986, or under the equivalent provisions in the laws of the overseas territory, to
assist the overseas court9.
1
[1993] AC 426.
2
[1993] AC 426 at 439G–440A.
3
Re Bletchley Boat Co Ltd [1974] 1 All ER 1225, [1974] 1 WLR 630; Re Rolls Razor Ltd (No
2) [1970] Ch 576; Re Spiraflite Ltd [1979] 2 All ER 766, [1979] 1 WLR 1096; Re Castle New
Homes Ltd [1979] 2 All ER 775, [1979] 1 WLR 1075; Re JT Rhodes Ltd [1987] BCLC 77; Re
Embassy Art Products Ltd [1988] BCLC 1; Re Esal (Commodities) Ltd [1989] BCLC 59; Re
Adlards Motor Group Holding Ltd [1990] BCLC 68; Re Cloverbay Ltd [1991] Ch 90. In the
light of British and Commonwealth Holdings plc v Spicer and Oppenheim (fn 1 above) it is
important not to seek to extract rules, as opposed to general guidance, from these decisions.
4
[1992] Ch 342.

13
19.12 Insolvency Jurisdiction
5
See Re Gold Co (1879) 12 Ch D 77; Re Rolls Razor (No 2) [1970] Ch 576; [1969] 3 All ER
1386; Re Aveling Barford Ltd [1989] BCLC 122.
6
[1992] Ch 342 at 367A–B.
7
Foreign office-holders can ‘access’ IA 1986, s 236 via Art 21(1)(g) of the Model Law: see Re
Chesterfield United Inc [2012] EWHC 244 (Ch).
8
Provided that the country in question is a designated relevant country, as to which see para
20.26 below.
9
See Re Focus Insurances Co Ltd [1997] 1 BCLC 219; Re J N Taylor Finance Pty Ltd
[1999] 2 BCLC 256; England v Smith [2001] Ch 419, [2000] 2 WLR 1141; Re Duke Group Ltd
[2001] BCC 144. Whilst s 426 of the IA 1986 provides that the English court ‘shall assist’ the
requesting country, the section does not stipulate how the English Court shall assist that
country, and that enables the English Courts to exercise a measure of discretion, although the
need for comity cannot be overlooked.

(b) Production of information and documents

19.13 An order under IA 1986, s 236 may be made either for an oral
examination, or for the production of documents, or for the production of a
witness statement1. However, an order will not be made under s 236, or an
examinee ordered to answer specific questions, where this would be unduly
oppressive2. Among the factors which will be relevant in considering whether
an order is unduly oppressive are: whether the office-holder has brought, or is
likely to bring in the future, claims against the examinee; the relationship of the
examinee to the company; and the nature of the order sought (oral examination
is more likely to be oppressive than the production of documents).
If an oral examination is sought, there is no general rule that the examination
should be preceded by written questions, but the examinee is entitled to
advance notice, in general terms, of the topics on which he is to be examined3.
If a witness statement is sought, then the application and order should give
particulars of the matters which the deponent is required to deal with4.
Banks are usually asked to produce documents, either relating to the conduct of
the company’s account or, in some cases, the conduct of a third party’s account5.
In that regard, the bank may find that documents are confidential, or that the
use of those documents could prejudice the bank in unconnected transactions or
proceedings. The bank has few arguments which it can deploy to prevent
particular documents being produced to the office holder, and few arguments
which may prevent the documents being passed on by the office holder to third
parties (as to which, see below).
1
The rules governing the application for an examination and the manner in which an examina-
tion should be conducted are contained in IR 2016, rules 12.17–12.22. The courts have said
that orders for a private examination should not be obtained ex parte: Re Maxwell Commu-
nications Corpn plc (No 3) [1995] 1 BCLC 521; Re PFTZM Ltd [1995] 2 BCLC 354.
2
Re Cloverbay Ltd [1991] Ch 90; British and Commonwealth Holdings plc v Spicer and
Oppenheim [1993] AC 426; Re RGB Resources plc, Shierson v Rastogi [2002] EWCA Civ
1624, [2003] 1 WLR 586, [2002] BCC 1005; Daltel Europe Ltd (in liq) v Makki [2004] EWHC
726 (Ch), [2005] 1 BCLC 594.
3
Re Norton Warburg Holdings Ltd [1983] BCLC 235; Hamilton v Naviede [1994] 3 WLR 656
at 668 D–E.
4
IR 2016, rr 12.18(b)(iii) and 12.19(3); Re Aveling Barford Ltd [1989] BCLC 122. In Re Sasea
Finance Ltd [1998] 1 BCLC 559, Sir Richard Scott V-C refused to order interogatories on the
ground that the liquidators already knew what had happened but sought the interrogatories in
order to obtain damaging admissions from the company’s former auditors.
5
See Re Bank of Credit and Commerce International SA (No 12) Morris v Bank of America
National Trust and Savings Association [1997] 1 BCLC 526 in which Robert Walker J ordered

14
 The Private Examination of Banks 19.15

Bank of America to produce documents relating to the affairs of the BCCI Group and the related
ICIC Group; Re Mid East Trading Ltd, Lehman Bros Inc v Phillips [1997] 2 BCLC 230; affd
[1998] 1 BCLC 240, in which the Court of Appeal upheld Evans-Lombe J’s order that Lehman
Bros Inc should produce documents situated in New York which related to the affairs of Mid
East Trading Ltd, a company in liquidation.

(i) Production to the office holder

19.14 In Re Aveling Barford Ltd1 Hoffmann J held that solicitors could not
exercise a lien over documents which the administrative receiver wanted to
inspect. The same would apply to a banker’s right to, for example, retain
documents of title against its customer. Documents produced to an office holder
on a s 236 examination by mistake may be kept by him unless he was aware of
the mistake or acted fraudulently on obtaining the documents in question2.
There was formerly some controversy about whether or not an examinee could
rely upon the privilege against self-incrimination. It is now settled that, whilst
potential incrimination is a factor to be considered when making an IA 1986,
s 236 order, once the order is made, the examinee cannot invoke the privilege
against self-incrimination in order to avoid answering questions3.
One of the few restrictions on production to the officer holder which may be
relied upon by the bank is a claim to legal professional privilege. If documents
are privileged, then the party claiming privilege is obliged to give the liquidator
sufficient information to determine whether the claim to privilege is valid4.
Accordingly, the bank is entitled to refuse to disclose all documents in respect of
which it can claim privilege, for example where those documents contain or
refer to legal advice given to the bank. The court has no power under IA 1986,
s 236 to order the disclosure of those parts of documents which contain
information the disclosure of which is prohibited by Pt XXIII of FSMA 2000,
and redaction of documents will only be ordered with the greatest caution5.
1
[1989] BCLC 122.
2
Re Polly Peck International plc [1992] BCLC 1025.
3
Bishopsgate Investment Management Ltd v Maxwell [1993] Ch 1, approved by the House of
Lords in Hamilton v Naviede [1994] 3 WLR 656 at 662–663; Re Jeffrey S Levitt Ltd
[1992] BCLC 250; Re Arrows Ltd (No 2) [1992] BCLC 1176; Re AE Farr Ltd [1992] BCLC
333; Re London United Investments plc [1992] BCLC 285.
4
Re Aveling Barford Ltd [1989] BCLC 122; see also Re Highgrade Traders Ltd [1984] BCLC
151, CA.
5
Bank of Credit and Commerce International (Overseas) Ltd v Price Waterhouse [1998] Ch 84;
[1997] 4 All ER 781. Re Galileo Group Ltd, Elles v Hambros Bank Ltd (Bank of England
intervening) [1999] Ch 100, [1998] 2 WLR 364, [1998] 1 BCLC 306; Barings plc v Coopers &
Lybrand [2000] 3 All ER 910; see also Real Estate Opportunities Ltd v Aberdeen Asset
Managers Jersey Ltd [2007] EWCA Civ 197, [2007] Bus LR 971, [2007] 2 All ER 791.

(ii) Production by the office holder to third parties

19.15 In Re Esal (Commodities) Ltd1 a large number of documents were
disclosed by the bank some of which were confidential to present or former
clients of the bank2; some of which were commercially sensitive, and could have
been advantageous to the bank’s competitors; and some of which could have
been prejudicial to the bank in other proceedings. The Court of Appeal
overrode all of those interests in favour of the liquidator. The liquidators were

15
19.15 Insolvency Jurisdiction

allowed to pass information obtained on the examination to other companies in

the group to assist them in litigation against the examinee bank.
In Re Barlow Clowes Gilt Managers Ltd3 Millett J held that there is a public
interest immunity which falls to be considered when information obtained
under s 236 is to be disclosed4. In Hamilton v Naviede5 the House of Lords held
that Millett J had expressed the principle too widely and that in the context of
IA 1986, s 236 (but not information produced voluntarily or pursuant to the IA
1986, s 2356) there was no public interest which prevented information or
documents being produced to those persons to whom the statutory provisions
either require or authorise the office holder to make disclosure, such as the
Serious Fraud Office7.
1
[1989] BCLC 59.
2
In Re ACLI Metals (London) Ltd [1989] BCLC 749, Scott J upheld a claim to a common
interest privilege maintained by a connected company.
3
[1992] Ch 208.
4
[1992] Ch 208 at 220H–223H.
5
[1995] 2 AC 75, [1994] 3 WLR 656.
6
Duty of directors, officers and employees to assist the office holder.
7
[1994] 3 WLR 656 at 667–670. In Re Polly Peck International plc [1994] BCC 15 this principle
was applied to the Secretary of State exercising his powers under the Company Directors
Disqualification Act 1986.

(c) Ancillary orders

19.16 The court has taken a broad view of the manner in which it may exercise
its jurisdiction to make ancillary orders. In Re Oriental Credit Ltd1 Harman J
granted an order restraining by injunction a person from leaving the juris-
diction until he had been examined. Harman J made the order under the
Senior Courts Act 1981, s 37. It follows from this approach that in suitable
cases the court may grant injunctions or make disclosure orders (formerly
known as Anton Pillar relief) in aid of a private examination. For example, if
there is a fear that documents may be destroyed, such relief is probably
justifiable.
1
[1988] Ch 204, [1988] 1 All ER 892. See also Daltel Europe Ltd (in liq) v Makki [2004] EWHC
726 (Ch), [2005] 1 BCLC 594 where the passport of a prospective examinee was seized.

(d) Costs
19.17 If a bank is required to comply with an order made under IA 1986, s 236,
then in many cases it will incur substantial costs in complying with the order.
That is particularly so if the bank’s legal advisers have to consider whether
documents are privileged, or should not be disclosed for any reason which the
bank might wish to raise with the court. An examinee does not have a right to
such costs, but the court has a discretion to award them. IR 2016, r 12.22(4)
provides:
‘A person summoned to attend for examination . . . must be tendered a reasonable
sum in respect of travelling expenses incurred in connection with that person’s atten-
dance but any other costs falling on that person are at the court’s discretion.’

16
 The Private Examination of Banks 19.17

In Re Aveling Barford Ltd1 Hoffmann J held that the court’s discretion to make
an order for costs is not limited to witnesses who attend for examination, but
would extend to the costs of producing an affidavit, or disclosing documents2.
However, the courts rarely make orders for costs in favour of witnesses, relying
upon the public duty to assist the liquidator in the performance of his functions.
The court should be astute to ensure that the burden of costs is not such as to
make the examination oppressive or unfair. The difficulty for banks is that, save
in cases where the costs are exceptional, it will be difficult to persuade the court
that this argument applies to them.
1
[1989] BCLC 122 at 128.
2
In Re Cloverbay Ltd (1989) 5 BCC 732, Vinelott J held that the court’s discretion to make an
order for costs under the former IR 1986 extended only to oral examinations. The decision in
Re Aveling Barford Ltd was not cited to the court.

17
Chapter 20

CORPORATE INSOLVENCY

1 COMPANY VOLUNTARY ARRANGEMENTS

(a) Nature of a voluntary arrangement 20.1
(b) Moratorium for small companies 20.2
(c) Meetings (decision procedure) of creditors 20.5
(d) Trust 20.6
(e) Court control 20.7
2 ADMINISTRATION
(a) Nature of administration 20.10
(b) Appointment by the court 20.11
(c) Appointment by holder of floating charge 20.15
(d) Appointment by the company or its directors 20.17
(e) Financial services companies 20.19
(f) The interim moratorium 20.20
(g) The effect of administration 20.21
(h) The bank’s rights as a creditor in the administration 20.23
(i) Distribution and exit from administration 20.25
(j) Administration of foreign companies 20.26
3 ADMINISTRATIVE RECEIVERS AND RECEIVERS
(a) The abolition of administrative receivership 20.27
(b) The meaning of ‘administrative receiver’ and ‘receiver’ 20.28
(c) Appointment 20.29
(d) Powers and duties of a receiver 20.34
4 COMPANY LIQUIDATION
(a) Voluntary winding up 20.43
(b) Compulsory winding up 20.45
(c) Vulnerable transactions 20.49
(d) The liability of banks as a shadow or de facto director 20.61
(e) Distribution of the estate 20.67

1 COMPANY VOLUNTARY ARRANGEMENTS

(a) Nature of a voluntary arrangement

20.1 A voluntary arrangement is a composition in satisfaction of a com-

pany’s debts or a scheme of arrangement of a company’s affairs1.
A proposal for a voluntary arrangement may be made either by the directors of
a company2, or where the company is in administration, by the administrator3,
or where the company is in liquidation, by the liquidator4. A proposal must
identify an insolvency practitioner (who is referred to as the ‘nominee’) to act in
relation to the proposed voluntary arrangement ‘as trustee or otherwise for the
purpose of supervising its implementation’5. It must also deal with a long list of
prescribed matters6. The procedure for consideration of the proposal differs

1
20.1 Corporate Insolvency

somewhat depending on whether or not the nominee is the administrator or

liquidator of the company in question.
Where the nominee is the administrator or liquidator, he summons a meeting of
the company and seeks a decision from its creditors to consider the proposal7.
Where the nominee is not the administrator or liquidator the procedure is more
involved. First, the nominee reports to the Court8. Second, if his opinion is that
the proposal has a reasonable prospect of being approved and implemented and
that it should be considered by a meeting of the company and its creditors, such
a meeting is then called and decision sought9.
1
IA 1986, s 1(1). A composition is an agreement to pay a sum in lieu of a larger debt or other
obligation: Re Bradley-Hole [1995] 1 WLR 1097; IRC v Adam & Partners Ltd [1999] 2 BCLC
730. A scheme of arrangement is an arrangement whereby creditors agree not to have their
claims met in accordance with their contractual terms and conditions: March Estates plc v
Gunmark Ltd [1996] 2 BCLC 1; Re NFU Development Trust Ltd [1972] 1 WLR 1548; IRC v
Adam & Partners Ltd [2001] 1 BCLC 222, CA.
The provisions relating to voluntary arrangements in IA 1986 apply to (a) companies registered
under the Companies Act 2006 in England and Wales or Scotland (but not Northern Ireland),
(b) companies incorporated in an EEA State other than the UK; and (c) companies not
incorporated in an EEA State but having their COMI in a member state other than Denmark:
IA 1986, s 1(4). In addition, the voluntary arrangements provisions in IA 1986 may be applied
to companies not falling within IA 1986, s 1(4) by means of an order under IA 1986, s 426
(co-operation between insolvency courts): see Re Television Trade Rentals Ltd [2002] BCC 807
(the approach of Lawrence Collins J in which was approved by the Court of Appeal in Re
Tambrook Jersey Ltd [2013] EWCA Civ 576, [2013] BCC 472).
2
IA 1986, s 1(1).
3
IA 1986, s 1(3)(a).
4
IA 1986, s 1(3)(b).
5
IA 1986, s 1(2).
6
IR 2016, rr 2.3. A statement of affairs must also be prepared where the nominee is not the
liquidator or administrator: IA 1986, s 2(3).
7
IA 1986, s 3(2). The meetings/decision (the former requirement for a physical meeting of
creditors has been abolished) are considered in para 20.4 below.
8
IA 1986, s 2(2); IR 2016, r 2.9. The Court’s role is essentially administrative unless a dispute
arises.
9
IA 1986, ss 2(2)(a), 2(2)(c), 3(1).

(b) Moratorium for small companies

20.2 IA 1986 (as amended by IA 2000) enables ‘eligible companies’ to take
steps to obtain a moratorium for the company where it is intended to make a
proposal for a voluntary arrangement1. The procedure appears to be little used
this is probably a consequence of the availability of administration.
The definition of eligible company is complex. The starting point is that an
eligible company is a ‘small company’ as defined by the Companies Act 2006
(ie, it meets at least two of the following three requirements: turnover of not
more than £10.2 million; balance sheet total of not more than £5.1 million; not
more than 50 employees)2. However, a raft of companies are then excluded
from being eligible, notwithstanding being small: (a) those that are, or recently
have been, within a list of insolvency/ restructuring exceptions3; (b) those that
carry on insurance or deposit-taking business4; (c) those that are parties to a
market contract or whose property is subject to a market charge5 or system-
charge6; (d) those party to a capital market arrangement under which they have

2
 Company Voluntary Arrangements 20.4

incurred, or are to incur, a debt of over £10 million7; (e) those that are the
project company of certain public-private partnerships8; and (f) those that have
incurred a liability under an agreement of £10 million or more9.
1
IA 1986, s 1A and Sch A1.
2
IA 1986, Sch A1, para 3 (but note the exception in para 3(4)); Companies Act 2006, s 382 (as
amended).
3
IA 1986, Sch A1, para 4(1).
4
IA 1986, Sch A1, para 2(2)(a)–(bb).
5
IA 1986, Sch A1, para 2(2)(c); ‘market contract’ and ‘market charge’ are defined by the Com-
panies Act 1989, ss 155(1) and 173.
6
IA 1986, Sch A1, para 2(2)(c); ‘system charge’ is defined by the Financial Markets and
Insolvency Regulations 1996 (SI 1996/1469), regs 2 and 3(2).
7
IA 1986, Sch A1, paras 4A and 4D–4G.
8
IA 1986, Sch A1, paras 4B and 4H–4J.
9
IA 1986, Sch A1, para 4C.

20.3 To obtain a moratorium, the directors of the company must, having first
submitted specified materials to the nominee1, file with the court five docu-
ments: (i) a document setting out the terms of the voluntary arrangement; (ii) a
statement of the company’s affairs; (iii) a statement that the company is eligible
for a moratorium; (iv) a statement from the nominee that he has given his
consent to act; and (v) a statement from the nominee that in his opinion the
proposed voluntary arrangement has a reasonable prospect of being approved
and implemented, the company is likely to have sufficient funds available to
enable it to carry on its business during the period of the moratorium, and that
meetings of the company and its creditors should be summoned to consider the
proposed voluntary arrangement2. On the filing of those documents the mora-
torium comes into effect. The company is required to do no more than file those
documents, and in particular, there is no hearing before the court. The mora-
torium must be advertised and notified to the registrar of companies and any
petitioning creditor3. The moratorium lasts until the day of the meetings unless
extended at a meeting of creditors for a maximum of two months4.
1
As to which, see IA 1986, Sch A1.
2
IA 1986, Sch A1, para 7.
3
IA 1986, Sch A1, paras 8, 10. When the moratorium ends, that too must be advertised and
notified, IA 1986, Sch A1, para 11. There are also requirements to state on invoices, etc, that a
moratorium is in force: IA 1986, Sch A1, para 16.
4
IA 1986, Sch A1, paras 29 and 32.

20.4 The effect of a moratorium under the voluntary arrangement procedure is

extensive1: no petition can be presented for the winding up of the company nor
a winding-up order made2; no meeting of the company can be called or
requisitioned without the consent of the nominee; no resolution may be passed
to wind up the company; no administration application may be made in respect
of the company; no administrator may be appointed out of court; no adminis-
trative receiver may be appointed; no landlord or other person to whom rent is
payable may exercise any right of forfeiture by peaceable re-entry in relation to
premises let to the company, except with the leave of the court; no steps may be
taken to enforce security over the company’s property or to repossess goods in
the company’s possession under any hire-purchase agreement, except with the
leave of the court; and no other proceedings, no execution, or other legal
process may be commenced or continued against the company or its property,
without the leave of the court. From the perspective or a bank or other lender,

3
20.4 Corporate Insolvency

the complete inability to appoint an administrator out of court or take steps to

enforce a security (except with the court’s leave) are the most notable restric-
tions. Thus, for example, a bank that wishes to appoint a fixed-charge receiver
during the period of a moratorium will need to obtain the court’s leave.
Where a petition for the winding up of the company has been presented and a
moratorium commences subsequently, the provisions against dispositions of
property in IA 1986, s 1273 do not apply. Instead the company may only dispose
of property, otherwise than in the ordinary course of business, or make a
payment in respect of a debt which pre-existed the moratorium, if there are
reasonable grounds for believing that the disposal will benefit the company and
the disposal is approved by a moratorium committee established at the first
meeting of creditors4. Unlike IA 1986, s 127, the provisions do not render
disposals or payments in breach of the prohibition void. The sanctions for
breach appear to be limited to fining the company and its directors.
During the period when a moratorium is in force, a bank holding a debenture is
unable to serve a notice crystallising an uncrystallised charge or restricting the
disposal by the company of any property5. Moreover, any event taking place
during the period of the moratorium which would ordinarily have the effect of
crystallising the charge will not have that effect. Instead, the bank can give
notice at the end of the moratorium that the crystallising event has happened,
the charge will crystallise at the moment the notice is given, but not before6. A
provision in a debenture which provides for obtaining a moratorium or
anything done with a view to obtaining a moratorium to be an event causing a
floating charge to crystallise is void; so too is a provision which would cause
restrictions to apply in such an event, or which would enable the debenture
holder to appoint a receiver7. Thus, from the moment preparatory steps are
taken until after the moratorium has been discharged, the bank’s power to
enforce its rights under its floating charge are effectively suspended.
The company is able to dispose of assets subject to security as if they were not
subject thereto if the security holder consents, or with the leave of the court8. It
is a condition of such consent or leave that the secured creditor is paid the net
proceeds of the disposal and, if that sum is less than the net amount which
would have been realised on a sale of the property in the open market by a
willing vendor, the difference between those two sums9. Where property is
subject to security which was, as created, a floating charge, the secured creditor
has the same priority in respect of property of the company directly or indirectly
representing the property disposed of as he would have had under his security10.
If the company grants security whilst the moratorium is in force, that security is
not enforceable unless at the time the security was granted there were reason-
able grounds for believing that the security would benefit the company11. Banks
lending to companies subject to a moratorium will need to take care to ensure
that any security taken in relation to such lending satisfies this test.
1
IA 1986, Sch A1, para 12(1).
2
This overcomes the problem highlighted by Re Piccadilly Property Management Ltd
[1999] 2 BCLC 145, [2000] BCC 44 in which the court refused to adjourn a winding up petition
to give the company time for a voluntary arrangement to be considered by its creditors in
circumstances where it was likely that a voluntary arrangement would be approved at the
meeting of creditors.
The limitation on petitions and winding-up orders does not apply to an ‘excepted petition’
(defined by IA 1986, Sch A1, para 12(5): ie, a petition under (a) IA 1986, s 124A (the public

4
 Company Voluntary Arrangements 20.5

interest winding-up ground); (b) IA 1986, s 124B (winding-up of companies formed under EC
Regulation 2157/2001 (OJ L294, 10 December 2001 p 1) in breach of article 7 thereof on the
Secretary of State’s petition); and (c) s 367(3)(b) of the Financial Services and Markets Act
2000, as amended by para 14 of Sch 14 to the Financial Services Act 2012 (winding-up on just
and equitable ground on the petition of the Financial Conduct Authority or the Prudential
Regulation Authority).
3
As to which see para 20.46 below.
4
IA 1986, Sch A1, paras 18(1) and 19(1). The ordinary course of business exception is in
paras 18(2) and 19(2). There are restrictions on entering into market contracts contained in
para 23.
5
IA 1986, Sch A1, para 13.
6
IA 1986, Sch A1, para 13(3).
7
IA 1986, Sch A1, para 43.
8
IA 1986, Sch A1, para 20(1) and (2). Similar provisions in relation to goods in the possession of
the company under a hire-purchase agreement are contained in para 20(1) and (3).
9
IA 1986, Sch A1, para 20(6). This is similar to paras 70 and 71 of Sch B1 to IA 1986 which
applies to administration, as to which see below. Where there is more than one security the
proceeds of sale or the additional sum must be applied in the order of the priorities of the
securities: IA 1986, Sch A1, para 20(7).
10
IA 1986, Sch A1, para 20(4).
11
IA 1986, Sch A1, para 14.

(c) Meetings (decision procedure) of creditors

20.5 Decisions are taken whether or not to approve the voluntary arrangement
by the members of the company in a meeting and by the creditors by the
decision procedure (the IR 2016, Chapter 15 decision procedure, which allows
the decision to be taken without a physical meeting)1. The members and
creditors cannot decide to approve a proposal or modification which affects the
rights of a secured creditor, often the bank, to enforce its security, except with
the concurrence of the secured creditor or which affects the rights of preferential
creditors except with the concurrence of those creditors2.
The meeting and decision procedure are conducted in accordance with the
rules3. A decision to approve has effect if passed by (i) the meetings both of the
company and its creditors, or (ii) merely the decision of the creditors (in which
case a member of the company may apply to the court)4. At the creditors’
meeting a resolution to approve any proposal must be passed by a majority in
excess of three-quarters in value of the creditors present and voting on the
resolution5. There is a requirement of complete candour in the information
provided to creditors both before and at the meeting6.
If the arrangement is passed then it takes effect so as to bind every person who
was entitled to vote at the creditors’ meeting whether or not he was present or
represented at it or would have been entitled to vote if he had notice, as if he
were a party to the voluntary arrangement7. Thus, a voluntary arrangement
may be an effective means of re-structuring an insolvent company’s debts or
re-arranging its affairs with the approval of 75% of those creditors who attend
the creditors meeting.
1
IA 1986, s 4(1); as for the decision procedure, see IA 1986, s 246ZE and IR 2016, r 2.25(4).
Under the decision procedure, physical meetings are not required and in practice are likely to be
rare.
2
IA 1986, s 4(3), (4). See IRC v Wimbledon Football Club Ltd [2004] EWCA Civ 655,
[2004] BCC 638, [2005] 1 BCLC 66.

5
20.5 Corporate Insolvency
3
IA 1986, s 4A. Where there is a moratorium, the requirement to conduct the meeting in
accordance with the rules is contained in IA 1986, Sch A1, para 30(1).
4
IA 1986, s 4A(2) and (3).
5
IR 2016, r 15.34(3). Where there is a moratorium the requirement to conduct the meeting in
accordance with the rules is contained in IA 2000, Sch A1, para 30(1).
6
Re A Debtor (No 140 of 1995) [1996] 2 BCLC 429; Cadbury Schweppes plc v Somji [2000] 1
WLR 615, [2001] 1 BCLC 498 (CA).
7
IA 1986, s 5(2)(b). Where there is a moratorium the requirement to conduct the meeting in
accordance with the rules is contained in IA 2000, Sch A1, para 30(1).

(d) Trust
20.6 Where a CVA provides for monies or other assets to be paid to or
transferred or held for the benefit of CVA creditors, this will create a trust of the
monies or assets for those creditors. If a company subsequently goes into
liquidation, those assets may remain in the trust or they may form part of the
estate in the winding up. Which is the case will depend upon the terms of the
trust contained in the CVA1.
1
This follows a line of cases culminating in the Court of Appeal’s decision in Re N T Gallagher
& Son Ltd [2002] EWCA Civ 404, [2002] 1 WLR 2380, [2002] 3 All ER 474, [2002] BCC 867,
[2002] 2 BCLC 133. See also Re Maple Environmental Services Ltd; [2000] BCC 93 and Re
Kudos Glass Ltd [2001] 1 BCLC 390.

(e) Court control

20.7 Where a small company has obtained a moratorium, any creditor, direc-
tor or member, or any other person affected by the moratorium who is
dissatisfied by any act, omission or decision of the nominee during the mora-
torium may apply to the court. The court has jurisdiction to reverse or modify
any act or decision, to give directions or make such other orders as it thinks fit
and the court may bring the moratorium to an end1. The court may also
order the company to pursue a claim against the nominee in relation to acts,
omissions or decisions of the nominee which have caused the company loss2.
The court also has jurisdiction to give relief in relation to the acts or omissions
of the company’s directors during the moratorium where a creditor or member
of the company establishes that the company’s affairs, business or property are
being, or have been, managed in a manner which is unfairly prejudicial to their
interests or that a proposed act or omission would be unfairly prejudicial3.
More generally, applications to the court may be made by those entitled to vote
at the meeting or in the decision procedure, or who would have been entitled to
vote if they had notice of it, or by the nominee or a liquidator or administrator
on the ground that a voluntary arrangement approved at the meetings unfairly
prejudices the interests of a creditor, member, or contributory of the company4
or that there has been a material irregularity at or in relation to either the
meeting or the decision procedure5.
1
IA 1986, Sch A1, para 26.
2
IA 1986, Sch A1, para 27.
3
IA 1986, Sch A1, para 40. In granting relief under this provision, the court is obliged to have
regard to the need to safeguard the interests of persons who have dealt with the company in
good faith and for value (IA 1986, Sch A1, para 40(6)).

6
 Company Voluntary Arrangements 20.9
4
IA 1986, s 6(1)(a) (and see also Sch A1, para 38(1)(a)). The unfair prejudice must be prejudice
caused by the terms of the arrangement itself: Re a Debtor (No 259 of 1990) [1992] 1 WLR
226; Re: a Debtor (No 87 of 1993) (No 2) [1996] 1 BCLC 63; Sea Voyager Maritime Inc v
Bielecki [1999] 1 BCLC 133 (in which the unfair prejudice was caused by the loss to the creditor
of his rights under the Third Party (Rights against Insurers) Act 1930); Re: a Debtor (No 488 of
1996) [1999] 2 BCLC 571; Re: a Debtor (No 101 of 1999) [2001] 1 BCLC 54; Cadbury
Schweppes plc v Somji [2000] 1 WLR 615, [2001] 1 BCLC 498 (CA); Sisu Capital Fund Ltd v
Tucker [2005] EWHC 2170 (Ch), [2006] BCC 463.
5
IA 1986, s 6(1)(b) (and see also Sch A1, para 38(1)(b)).

20.8 To be susceptible to challenge, the conduct complained of must have been

both irregular and material1. In cases where the irregularity is the non-
disclosure or inaccurate disclosure of information, the question is whether the
revelation of the truth would have made a difference to the way in which the
creditors would have considered the terms of the CVA; the test is whether there
is a substantial chance that they would not have approved the CVA in its
presented form; the chance must be substantial, but it does not have to be
proved to beyond the 50% level2. Any CVA which leaves a creditor in a less
advantageous position than before the CVA will be prejudicial to that creditor,
but the real question when the court comes to consider it is whether or not that
disadvantage is unfair3.
1
Re Portsmouth City Football Club Ltd [2010] EWHC 2013, [2011] BCC 149, at [41].
2
Re Trident Fashions plc (in administration) (No 2) [2004] EWHC 293 (Ch), [2004] 2 BCLC 35,
Re Portsmouth City Football Club Ltd [2010] EWHC 2013, [2011] BCC 149, at [41]. See also
Re a Debtor (No 574 of 1995) [1998] 2 BCLC 124, in which it was held that an alleged failure
to investigate disputed debts was not a material omission.
3
Mourant & Co Trustees Ltd v Sixty UK Ltd [2010] EWHC 1890 (Ch), [2010] BCC 882. Thus
it is not necessarily unfair that one creditor or class of creditors should be paid in full when
others are not; though obviously that requires particularly careful scrutiny: Re Portsmouth City
Football Club Ltd [2010] EWHC 2013, [2011] BCC 149, at [41].

20.9 However, such an application can only be made during the 28 days
following the date on which the reports of the meeting and decision procedure
have been made to the court1. On such an application, the court has power to
revoke or suspend approval, or to direct the calling of a further meeting of the
company’s members or seek a decision of the company’s creditors2.
The court also has power to confirm, reverse or modify any act or decision of
the supervisor or the voluntary arrangement or to give him directions if any
creditor, or any other person is dissatisfied by any act, omission or decision of
the supervisor and makes an application to the court3. In King v Anthony4
the Court of Appeal held that the existence of the court’s control over the
voluntary arrangement procedure was inconsistent with individual creditors
being able to bring an action for breach of statutory duty.
1
IA 1986, s 6(3); and see also Sch A1, para 38(3).
2
IA 1986, s 6(4)–(6); and see also Sch A1, para 38(4)–(6).
3
IA 1986, s 7; and see also Sch A1, para 39.
4
[1998] 2 BCLC 517.

7
20.10 Corporate Insolvency

2 ADMINISTRATION

(a) Nature of administration

20.10 A company is in administration where a person (who must be a qualified

insolvency practitioner) has been appointed as its administrator to manage the
company’s affairs, business and property1. Following the reforms effected by
the Enterprise Act 20022, an administrator may be appointed not only by the
court, but also (out of court) by the holder of a floating charge or by the
company or its directors3. Administration has therefore effectively replaced
administrative receivership as the process available to the holder of a floating
charge in relation to floating charges created after the relevant provisions of the
Enterprise Act 2002 came into force on 15 September 2003.
The Enterprise Act 2002 also changed the statutory purposes of administration.
An administrator, however appointed, must perform his functions with the
primary objective of rescuing the company as a going concern4. However, where
the administrator thinks either that this purpose is not practicable or that
performing his function with the objective of achieving a better result for the
company’s creditors as a whole than would be likely if the company were
wound up (without first being in administration) is likely to result in a better
result for the company’s creditors, then he may perform his functions with this
objective5. Importantly, in performing his functions with either of these objec-
tives, the administrator must act in the interests of the company’s creditors as a
whole6.
Where the administrator thinks that it is not reasonably practicable to achieve
either the objective of rescuing the company as a going concern or the objective
of achieving a better result for the company’s creditors as a whole than would
be likely if the company were wound up (without first being in administration),
then he may perform his functions with the objective of realising property in
order to make a distribution to one or more secured or preferential creditors
provided that he does not unnecessarily harm the interests of the creditors of the
company as a whole in so doing7.
It can therefore be seen that, although administration has now effectively
replaced administrative receivership, the nature and purposes of administration
are very different from those applicable in administrative receivership. In
particular, emphasis is now given to the importance of attempting to save the
company as a going concern, and in acting in the interests of all creditors, rather
than the interests of the holder of a floating charge alone.
1
IA 1986, Sch B1, paras 1(1), 1(2), and 6. Note the limited definition of ‘company’ for these
purposes in IA 1986, Sch B1, para 111(1A).
2
But note that the abolition of the old statutory scheme for administration in IA 1986, Part II,
and introduction of the new Sch B1 scheme, does not apply to those classes of company listed
in the Enterprise Act 2002, s 249, all of which are subject to special regimes.
3
IA 1986, Sch B1, para 2. However, an administrator is an officer of the court whether or not he
is appointed by the court: IA 1986, Sch B1, para 5.
4
IA 1986, Sch B1, paras 3(1)(a), 3(3), and 3(4). See also Doltable Ltd v Lexi Holdings plc [2005]
EWHC 1804, [2006] 1 BCLC 384, [2006] BCC 198, at [31] ff and Bank of Scotland plc v
Targetfollow Properties Holdings Ltd [2010] EWHC 3606 (Ch), at [16]–[17].
5
IA 1986, Sch B1, paras 3(1)(b) and 3(3).
6
IA 1986, Sch B1, paras 3(1)(c) and 3(4).
7
IA 1986, Sch B1, para 3(2).

8
 Administration 20.12

(b) Appointment by the court

20.11 An application to the court for an administration order in respect of a
company may be made by the company, the directors of the company, one or
more creditors of the company (including a contingent or prospective creditor)
or any combination of these persons1. Unlike in the case of a winding-up
petition, there is no practice that the court will not make an administration
order where the debt is disputed or there is an arguable cross-claim2. However,
an application may be dismissed when it amounts to an abuse of process3.
Once an application is made to the court for the appointment of an adminis-
trator, the applicant is required as soon as is reasonably practicable to notify
any person who has appointed an administrative receiver of the company and
any person who is or may be entitled to appoint an administrative receiver or
administrator of the company as the holder of a qualifying floating charge4.
1
IA 1986, Sch B1, paras 12(1) and 12(4).
2
Hammonds v Pro-Fit USA Ltd [2007] EWHC 1998 (Ch), [2008] 2 BCLC 159.
3
As to when an application may be an abuse of process, see Re British American Racing
(Holdings) Ltd [2004] EWHC 2947 (Ch), [2005] 2 BCLC 234, [2005] BCC 110, at [41] ff).
4
IA 1986, Sch B1, para 12(2). In addition, once made, an administration application cannot be
withdrawn without the permission of the court: IA 1986, Sch B1, para 12(3).

20.12 On the hearing of an application for an administration order, there are

two conditions which must be satisfied before the court may appoint an
administrator. First the court must be satisfied that the company is or is likely to
become unable to pay its debts; and second the court must be satisfied that the
administration order would be reasonably likely to achieve the purpose of the
administration1. In relation to the second part of this test, under the old law
which required the court to be satisfied that the administration order would be
likely to achieve one or more of the four statutory purposes, it was held, after
some initial divergence of views2, that this meant that the court had to consider
that there was a real prospect that one or more of the statutory purposes might
be achieved3. It is this test that the courts have applied under the new law so that
the court must be satisfied that there is a real prospect that the purpose of the
administration will be achieved4.
In addition to being able to make the administration order sought, on the
hearing of an application for an administration order the court may also
adjourn the hearing (conditionally or unconditionally), make an interim order,
treat the application as a winding-up petition and make an order accordingly, or
make any other order it thinks appropriate5. The practice under the old law for
an administration petition to be supported by a report prepared by an insol-
vency practitioner on the company’s affairs (known as a ‘rule 2.2 report’)
stating, amongst other things, his view on whether or not the order would be
likely to achieve the relevant statutory purpose or purposes has now been
superseded. The application for an administration order must now be accom-
panied by a witness statement from a specified person containing prescribed
information designed to aid the court’s decision-making stating, amongst
things, his opinion that it is reasonably likely that the purpose of the adminis-
tration will be achieved6.
1
IA 1986, Sch B1, para 11. In this context, ‘likely’ means ‘more probable than not’:Re Colt
Telecom Group plc [2002] EWHC 2815, [2003] BPIR 324; and ‘unable to pay its debts’ has the
meaning in IA 1986, s 123 (IA 1986, Sch B1, para 111(1) – thereby importing both cash-flow

9
20.12 Corporate Insolvency

and balance-sheet insolvency (as to which, see BNY Corporate Trustee Services Ltd v Neuber-
ger Berman Europe Ltd [2013] UKSC 28, [2013] 1 WLR 1408, [2013] BCC 397, [2013]
3 All ER 271, [2013] 1 BCLC 613, [2013] Bus LR 715, [2013] 2 All ER (Comm) 531).
2
Re Consumer and Industrial Press Ltd [1988] BCLC 177; Re Manlon Trading Ltd (1988)
4 BCC 455.
3
Re Harris Simons Construction Ltd [1989] 1 WLR 368. See also Re Primlaks (UK) Ltd
[1989] BCLC 734; Re SCL Builders Ltd [1990] BCLC 98; Re Rowbotham Baxter Ltd
[1990] BCLC 397; Re Chelmsford City Football Club (1980) Ltd [1991] BCC 133.
4
Re Redman Construction Ltd [2005] EWHC 1850 (Ch); Hammonds v Pro-Fit USA Ltd [2007]
EWHC 1998 (Ch), [2008] 2 BCLC 159, at [24]. Note that the ‘real prospect’ test does not mean
that the court needs to be satisfied that, on a balance of probabilities, that there would be a
better outcome on administration as compared with winding up: there has to be only a real
prospect (but it is not enough to show a real prospect that administration would achieve no
worse an outcome; the prospect of a better result must be shown: Auto Management Ser-
vices Ltd v Oracle Fleet UK Ltd [2007] EWHC 392 (Ch), [2008] BCC 761, at [3].
5
IA 1986, Sch B1, para 13.
6
IR 2016, r 3.6. The person who is to make the witness statement depends on the identity of the
applicant. The requirement under IR 1986 for a statement from an insolvency practitioner in
Form 2.2B has been abolished.

20.13 In relation to the position of a debenture-holder, as noted above, the IA

1986 provides that notice of an administration application must be given to any
person who has appointed or is or may be entitled to appoint an administrative
receiver of the company or an administrator of the company as the holder of a
qualifying floating charge1. Where the court is satisfied that there is an admin-
istrative receiver of the company, the court must dismiss the petition save in
particular circumstances2; likewise, the court cannot appoint an administrator
where an administrator has already been appointed out of court3. Thus,
provided that he has the power to appoint an administrative receiver or
administrator, a debenture holder has an effective right to veto the making of an
administration order by appointing his own administrative receiver or admin-
istrator4.
In addition, where a debenture holder is entitled to appoint an administrator as
the holder of a qualifying floating charge he may apply to the court on the
hearing of an application for an administration order to have a specified person
appointed as administrator rather than the person specified by the applicant for
the administration order5. The court is required to grant any such application
unless it thinks it right to refuse it because of the particular circumstances of the
case6.
1
IA 1986, Sch B1, para 12(2). In view of the inability (with limited exceptions) to appoint an
administrative receiver in respect of a floating charge created on or after 15 September 2003 (IA
1986, s 72A; Insolvency Act 1986, Section 72A (Appointed Day) Order 2003 (SI 2003/2095),
this limitation will become of decreasing practical relevance.
2
IA 1986, Sch B1, para 39(1). See also Chesterton International Group plc v Deka Immobilien
Inv GmbH [2005] EWHC 656 (Ch), [2005] BPIR 1103.
3
IA 1986, Sch B1, para 7 (see also paras 90-97 and 100-103).
4
The appointment of an administrative receiver or an administrator is not subject to the interim
moratorium which arises on the making of an administration application. See further para
20.20 below.
5
IA 1986, Sch B1, para 36(1).
6
IA 1986, Sch B1, para 36(2).

20.14 A bank which is a creditor of the company, but is not entitled to appoint
an administrative receiver or an administrator as the holder of a qualifying
floating charge, should be able to persuade the court that it is entitled to be

10
 Administration 20.15

heard on the application (as a person having ‘an interest which justifies [its]
appearance’)1, but it will not be served with the application, and, if the
application is heard shortly after it is made, the bank is unlikely to know of or
be represented at the hearing.
The effect of an administration order is such that banks should try to discover
administration applications which have been presented, and the dates and
venues of the hearing of any applications concerning the bank’s customers.
Although under the old law comments were made about the undesirability of
the practice of presenting petitions for hearing ex parte forthwith2, the reality
was that in many cases it was necessary and this became the general practice3
(an alternative to the court making an administration order ex parte may be to
grant interim relief (not, it must be stressed, an interim administration order)
pending the hearing of the administration application4).
However, when an application for an administration order is made ex parte
forthwith, it can be extremely difficult for the company’s creditors, including its
bank, to take steps to be heard on the application. The position is now even
more difficult for banks which are not entitled to appoint an administrative
receiver or an administrator in light of the ability of a company or its directors
to appoint an administrator out of court (as to which, see below).
1
IR 2016, r 3.12(1)(j) (for an example of a case where the court heard a creditor – and took into
account the views of other stakeholders – see DKLL Solicitors v HMRC [2007] EWHC 2067
(Ch), [2007] BCC 908). The bank may wish to be heard on the question of who should be
appointed administrator: see (eg) Re Maxwell Communications Corpn plc (No 1) [1992] BCLC
465, [1992] BCC 372 and Re World Class Homes Ltd [2004] EWHC 2906 (Ch),
[2005] 2 BCLC 1.
2
Re Rowbotham Baxter Ltd [1990] BCLC 397.
3
For the applicability and effect of the rules as to candour on applications for administration
orders made ex parte see: Cornhill Insurance plc v Cornhill Financial Services Ltd [1992] BCC
818 and Re Sharps of Truro Ltd [1990] BCC 94.
4
Re Gallidoro Trawlers Ltd [1991] BCLC 411, [1991] BCC 691; Re Switch Services Ltd [2012]
Bus LR D91.

(c) Appointment by holder of floating charge

20.15 Importantly for banks, an administrator may also be appointed by the
holder of a ‘qualifying floating charge’ in respect of a company’s property1. For
these purposes, a ‘qualifying floating charge’ is a floating charge created by an
instrument which states that para 14 of Sch B1 to IA 1986 applies to the floating
charge, purports to empower the holder of the floating charge to appoint an
administrator of the company, or purports to empower the holder of the
floating charge to make an appointment which would be the appointment of an
administrative receiver (within the meaning of s 29(2) of the IA 1986)2. A
holder of a qualifying floating charge is therefore a person who holds one or
more debentures of the company secured by a qualifying floating charge which
relates to the whole or substantially the whole of the company’s property, by a
number of qualifying floating charges which together relate to the whole or
substantially the whole of the company’s property, or by a charge and other
forms of security which together relate to the whole or substantially the whole
of the company’s property and one of which is a qualifying floating charge3.

11
20.15 Corporate Insolvency

The power to appoint an administrator is subject to restrictions where there is

a holder of a prior qualifying floating charge4, in which case either the consent
in writing of such person to the appointment of an administrator is required, or
he must be given two business days’ notice in writing of the proposed appoint-
ment, and where a provisional liquidator has been appointed in respect of the
company or an administrative receiver is in office5. A failure to give notice to the
prior charge holder is fatal: the purported appointment is invalid ab initio, and
cannot be retrospectively cured6.
1
IA 1986, Sch B1, para 14(1).
2
IA 1986, Sch B1, para 14(2). IA 1986, Sch B1, para 14 goes on to provide that an appointment
may not be made under para 14 ‘while a floating charge on which the appointor relies is not
enforceable’. However, a premature appointment properly to be characterised as a defective
exercise of a power of appointment is not a nullity: Re Care People Ltd [2013] EWHC 1734
(Ch), [2013] BCC 466.
3
IA 1986, Sch B1, para 14(3).
4
Even if his charge is not currently enforceable (as opposed to never enforceable, because the
debt it is security for has been repaid): Re OMP Leisure Ltd [2008] BCC 67.
5
IA 1986, Sch B1, paras 15 and 17. In addition, once there has been an appointment, the holder
of a prior qualifying floating charge may apply to the court for the administrator to be replaced
by his own preferred administrator: IA 1986, Sch B1, para 96.
6
Re Eco Link Resources Ltd [2012] BCC 731.

20.16 Where an administrator is appointed by the holder of a qualifying

floating charge, notice of appointment containing prescribed information must
be filed with the court1. Such notice must include a statutory declaration by or
on behalf of the appointor stating, amongst other things, that each floating
charge relied on in making the appointment is (or was) enforceable on the date
of appointment2. The notice must also be accompanied by a statement from the
administrator stating that he consents to the appointment and that in his
opinion the purpose of the administration is reasonably likely to be achieved3.
The appointment of an administrator by the holder of a floating charge will take
effect once these requirements have been satisfied4. These formalities can take
some time to be completed and this may be thought to be a disadvantage of the
administration procedure compared with the ease with which an administrative
receiver could formerly be appointed. However, where there may be delays in
filing the documentation it is possible to file a notice of intention to appoint
which will itself trigger the interim moratorium5; the notice of appointment and
other documents can then be filed subsequently in order to appoint the
administrator.
The rules make specific provision for the appointment of an administrator by
the holder of a qualifying floating charge to take effect notwithstanding that the
notice of appointment is filed outside of court business hours by fax or email6.
Where the appointment of an administrator by the holder of a floating charge is
discovered to be invalid then the court may order the appointor to indemnify
the person appointed against any liability which arises solely by reason of the
appointment’s invalidity7.
Where a company is in compulsory liquidation, the holder of a qualifying
floating charge may not appoint an administrator, but may make an application
to the court for an administration order8. On such an application the court may
make an order and, if it does, it must discharge the winding-up order9. It should
be stressed that in the case of a company in voluntary winding-up, only the

12
 Administration 20.17

liquidator may apply for an administration order10.

1
IA 1986, Sch B1, para 18(1), (5). The information is prescribed by IR 2016, r 3.17.
2
IA 1986, Sch B1, para 18(2); see further IR 2016, r 3.17(3).
3
IA 1986, Sch B1, para 18(3), (5). For these purposes, the proposed administrator may rely on
information supplied by the directors of the company unless he has reason to doubt its accuracy:
Sch B1, para 18(4). There is no longer a prescribed form which must be used; instead the
information required to be included is specified by IR 2016, r 3.17.
4
IA 1986, Sch B1, para 19.
5
Pursuant to IA 1986, Sch B1, para 44(2). See para 20.20 below.
6
IR 2016, rr 3.20 ff.
7
IA 1986, Sch B1, para 21.
8
IA 1986, Sch B1, paras 8(1)(b) and 37(1)–(2).
9
IA 1986, Sch B1, para 37(3). The liquidator of a company in liquidation may also make an
administration application: IA 1986, Sch B1, para 38.
10
IA 1986, Sch B1, paras 8(1)(a), 8(2), and 38.

(d) Appointment by the company or its directors

20.17 The company itself or its directors may also appoint an administrator1.
Such an administrator may not be appointed if a petition for the winding up of
the company has been presented, an administration order has been made, or an
administrative receiver is in office2. In addition, the power to appoint an
administrator is subject to restrictions where there is a person who is or may be
entitled to appoint an administrative receiver or an administrator as the holder
of a qualifying floating charge. Any such person must be given at least five
business days’ written notice of the proposed appointment in the prescribed
form and identifying the proposed administrator3. A copy of this notice must
also be filed with the court together with a statutory declaration in the
prescribed form stating that the company is or is likely to become unable to pay
its debts, that the company is not in liquidation, and that the appointment is not
prevented4.
An appointment of an administrator cannot be made unless the person making
the appointment has complied with the requirements to give notice of the
proposed appointment and to file such notice together with the statutory
declaration with the court and either the specified period of five business days’
notice has expired or each person to whom notice was required to be given has
consented in writing to the making of the appointment5. It follows that, as with
an application to the court for an administration order, a debenture holder who
is entitled to appoint either an administrative receiver or an administrator as the
holder of a qualifying floating charge has an effective veto on the appointment
of an administrator by the company or its directors provided that he acts within
the specified five business days period.
1
IA 1986, Sch B1, para 22(1)–(2).
2
IA 1986, Sch B1, para 25. In addition, an administrator may not be appointed by the company
or its directors (1) in the period of 12 months following the end of the appointment of an
administrator previously appointed by the company or its directors or (2) in the period of
12 months following the end of a moratorium for a company under IA 1986, Sch A1 at a time
when no voluntary arrangement is in force or following the premature end of a voluntary
arrangement made during a moratorium for the company under IA 1986, Sch A1: IA 1986, Sch
B1, paras 23-24.
3
IA 1986, Sch B1, para 26. See further para 20.13 above.
4
IA 1986, Sch B1, para 27.

13
20.17 Corporate Insolvency
5
IA 1986, Sch B1, para 28(1).

20.18 Where an administrator is appointed by the company or its directors, the

person making the appointment must file with the court a notice of appoint-
ment including a statutory declaration that the person is entitled to make the
appointment under para 22 of Sch B1 of IA 1986, that the appointment is in
accordance with Sch B1 and that, so far as the person making the statement is
able to ascertain, the statements made and information given in the statutory
declaration are accurate1. The notice of appointment must identify the admin-
istrator and must be accompanied by a statement by the administrator that he
consents to the appointment and that in his opinion the purpose of administra-
tion is reasonably likely to be achieved2. The appointment of an administrator
by a company or its directors will take effect once these requirements have been
satisfied3. However, any such administrator may be replaced by a new admin-
istrator by a subsequent meeting of the company’s creditors4.
Where a company enters administration by way of an administration order or
an appointment by the holder of a qualifying floating charge before these
requirements are satisfied, then an appointment by the company or its directors
will not take effect5.
1
IA 1986, Sch B1, para 29(1), (2).
2
IA 1986, Sch B1, para 29(3).
3
IA 1986, Sch B1, para 31.
4
IA 1986, Sch B1, para 97. This only applies if there is no holder of a qualifying floating charge.
5
IA 1986, Sch B1, para 33.

(e) Financial services companies

20.19 An occasionally overlooked limitation on the power of a company or its
directors to appoint an administrator is contained in section 362A of the
Financial Services and Markets Act 2000 (‘FSMA 2000’)1. That applies where
a company (or partnership) (a) is, or has been, an authorised person or
recognised investment exchange, (b) is, or has been, an appointed representa-
tive, or (c) is carrying on, or has carried on, a regulated activity in contravention
of the general prohibition. In the case of such a company (or partnership), no
appointment may be made without the consent of the appropriate regulator
under FSMA 2000 – ie (a) where the company or partnership is a PRA-
regulated person, the PRA, and (b) in any other case, the FCA2. Moreover, the
regulator’s consent must be in writing and filed at court3.
It is important to recognise that many companies the primary business of which
is not financial services either are, have been, or ought to be or have been,
authorised persons under FSMA 2000. The risk is that the FSMA 2000, s 362A
limitation is not appreciated before an appointment is made. After some initial
uncertainty, the courts have held that a failure to obtain the regulator’s consent
prior to an appointment being made is capable of being cured subsequently by
consent being given and filed at court; however, the appointment only takes
effect from the date the regulator’s consent is filed at court4. Thus if the
regulator does not consent, a purported appointment is ineffective. It remains

14
 Administration 20.20

possible, however, for the court to make a retrospective appointment5.

1
In the amended version in effect from 1 April 2013 under the Financial Services Act 2012, Sch
14, para 9(2).
2
FSMA 2000, s 362A(2) and (2B).
3
FSMA 2000, s 362A(3) and (4).
4
See Re Ceart Risk Services Ltd [2012] EWHC 1178 (Ch), [2012] BCC 592, [2012] 2 BCLC
645, [2013] Bus LR 116 and Re Harlequin Management Services Ltd [2013] EWHC 1926 (Ch),
at [12]–[13].
5
Re G-Tech Construction Ltd [2007] BPIR 1275, Re Derfshaw Ltd [2011] EWHC 1565 (Ch),
[2011] BCC 631, [2012] 1 BCLC 814, [2011] BPIR 1289, Re Frontsouth (Witham) Ltd [2011]
EWHC 1668 (Ch), [2011] BCC 635, [2012] 1 BCLC 818, [2011] BPIR 1382, Adjei v Law For
All [2011] EWHC 2672 (Ch), [2011] BCC 963, [2012] 2 BCLC 317, [2011] BPIR 1563.

(f) The interim moratorium

20.20 Where an application for administration has been made but not yet
granted or dismissed, or where a notice of intention to appoint an administrator
has been filed with the court by the holder of a qualifying floating charge or the
company or its directors but such appointment has not yet taken effect, then the
company is subject to an ‘interim moratorium’1. During this period, the
company cannot be put into liquidation, and it is protected from its creditors2.
In particular, no steps may be taken to enforce any security over the com-
pany’s property3, no legal process may be commenced or continued against the
company or its property4, no landlord or other person to whom rent is payable
may exercise any right of forfeiture by peaceable re-entry5 and no steps can be
taken to repossess goods in the company’s possession under a hire-purchase
agreement6 except in each case with the permission of the court.
However, this interim moratorium does not prevent a debenture holder ap-
pointing either an administrative receiver or an administrator where he is able
to do so7. Further, in the case of an application for an administration order, if an
administrative receiver has been appointed before the administration applica-
tion is made, the company is not protected from its creditors by virtue of the
making of that application unless the debenture holder consents to the making
of an administration order. If the debenture holder does consent to the making
of an administration order, the company is protected from its creditors from the
moment when the debenture holder gives that consent8. In addition, the making
of an administration application does not prevent or require the permission of
the court for the carrying out by such receiver of any of his functions9.
1
IA 1986, Sch B1, para 44(1), (2), (4), (5).
2
Petitions may, however, be presented for the winding up of the company on public interest
grounds under IA 1986, s 124A, for the winding up of a Societas Europaea (SE) presented under
IA 1986, s 124B, and by the Financial Conduct Authority or the Prudential Regulation
Authority under FSMA 2000, s 367 and the court may make winding-up orders on the hearing
of such petitions: IA 1986, Sch B1, paras 42(4), 44(7)(a).
3
IA 1986, Sch B1, para 43(2).
4
IA 1986, Sch B1, para 43(3).
5
IA 1986, Sch B1, para 43(4). The provision preventing a landlord from exercising any right of
forfeiture by peaceable re-entry was originally introduced by s 9 of the IA 2000. This over-ruled
the effect of the decisions in Re Olympia & York Canary Wharf Ltd [1993] BCLC 453 and Re
Lomax Leisure Ltd [1999] 2 BCLC 126.
6
IA 1986, Sch B1, para 43(3).
7
IA 1986, Sch B1, para 44(7)(b), (c).
8
IA 1986, Sch B1, para 44(6).

15
20.20 Corporate Insolvency
9
IA 1986, Sch B1, para 44(7)(d).

(g) The effect of administration

20.21 On the making of an administration order, any winding-up petition is
dismissed1 and on the appointment of an administrator by the holder of a
qualifying floating charge, any winding-up petition is suspended while the
company is in administration2. When an administration order takes effect in
relation to a company, any administrative receiver of the company must vacate
office3, and where a company is in administration, a receiver of part of the
company’s property must vacate office on being required to do so by the
administrator4. In either case the remuneration and expenses and any indemnity
to which the administrative receiver or receiver is entitled are charged on the
property of the company which was in his custody or under his control5.
While a company is in administration the company cannot be wound up6, no
administrative receiver can be appointed7, and no other steps can be taken to
enforce any security over the company’s property8 or to repossess goods in the
company’s possession under a hire-purchase agreement9, no landlord or other
person to whom rent is payable may exercise any right of forfeiture by
peaceable re-entry10 and no legal process (including legal proceedings11, execu-
tion, distress or diligence) may be commenced or continued12 except with the
consent of the administrator or the permission of the court and subject to such
terms as the court may impose.
The statutory moratorium does not relieve the company of its contractual
obligations13. Similarly it does not deprive secured creditors of their security14.
The statutory moratorium is subject to the consent of the administrator or the
leave of the court. It is intended that the consent of the administrator should
first be sought and only if it is not forthcoming should an application be made
to the court. The court will then consider all the relevant competing factors and
decide whether or not to grant consent and, if so, upon what terms.
1
IA 1986, Sch B1, para 40(1)(a). This does not apply to petitions presented for the winding up
of the company on public interest grounds under IA 1986, s 124A, for the winding up of a
Societas Europaea (SE) presented under IA 1986, s 124B, or by the Financial Conduct Authority
or Prudential Regulation Authority under FSMA 2000, s 367: IA 1986, Sch B1, para 40(2).
2
IA 1986, Sch B1, para 40(1)(b) (this does not apply to the petitions set out in fn 1 above). As to
the effect of ‘suspension’ of a winding-up petition, see Re J Smiths Haulage Ltd [2007] BCC
135.
3
IA 1986, Sch B1, para 41(1).
4
IA 1986, Sch B1, para 41(2).
5
IA 1986, Sch B1, para 41(3), (4).
6
IA 1986, Sch B1, para 42(2), (3). A winding-up order may be made on the petitions set out in
fn 1 above.
7
IA 1986, Sch B1, para 43(6A).
8
IA 1986, Sch B1, para 43(2) (but this limitation does not apply to a security interest under a
financial collateral arrangement: Financial Collateral Arrangements (No 2) Regulations 2003
(SI 2003/3226), reg 8(1)(a)). Security is defined by IA 1986, s 248(b)(i): ‘any mortgage, charge,
lien or other security’. Under the old law, the courts took a fairly broad approach to the
definition of ‘security’ in the equivalent provisions (see Bristol Airport plc v Powdrill [1990] Ch
744, CA; Exchange Travel Agency Ltd v Triton Property Trust plc [1991] BCLC 396; Re
Olympia and York Canary Wharf Ltd [1993] BCLC 453; Re Sabre International Products Ltd
[1991] BCLC 470); but there were limits to this, and it did not extend to a landlord’s right
peaceably to re-enter (Re Lomax Leisure Ltd [2000] Ch 502, [1999] 3 WLR 652, [2000] BCC
352; a decision now reversed by the express words of IA 1986, Sch B1, para 43(4)).

16
 Administration 20.22
9
IA 1986, Sch B1, para 43(3). The decisions as to the meaning of ‘goods in the com-
pany’s possession’ in the equivalent provision under the old law (Re Atlantic Computer
Systems plc [1992] Ch 505; Re David Meeks Access Ltd [1994] 1 BCLC 680; Re Sabre
International Products Ltd [1991] BCLC 470) appear to remain good law under Sch B1:
Fashoff (UK) Ltd v Linton [2008] EWHC 537 (Ch), [2008] BCC 542, [2008] 2 BCLC 362.
10
IA 1986, Sch B1, para 43(4).
11
The phrase ‘legal process’ covers a wide range: proceedings before an industrial tribunal (Carr
v British International Helicopters Ltd [1994] 2 BCLC 474), criminal proceedings (Re
Rhondda Waste Disposal Co Ltd [2000] Ch 57, [2000] 3 WLR 1304), and certain proceedings
by regulators (Re Railtrack plc [2002] 2 BCLC 308; Re Frankice (Golders Green) Ltd [2010]
EWHC 1229 (Ch), [2010] Bus LR 1608). See also Re Barrow Borough Transport Ltd [1990]
Ch 227, [1989] 3 WLR 858, (1989) 5 BCC 646 (application for an extension of time for the
registration of a charge under the Companies Act 1985 not a ‘proceeding against the company
or its property’). The prohibition is not confined to claims brought by creditors of the company
(Biosource Technologies Inc v Axis Genetics plc [2000] 1 BCLC 286).
12
IA 1986, Sch B1, para 43(6). Under the pre-2002 regime it was established that the making of
an administration order did not stop the limitation period running: Re Maxwell Fleet and
Facilities Management Ltd [2001] 1 WLR, [1999] 2 BCLC 721, [2000] BPIR 294, [2000]
1 All ER 464; Re Cosslett (Contractors) Ltd [2004] EWHC 658 (Ch); Re Leyland Print-
ing Co Ltd [2010] EWHC 2105 (Ch), [2011] BCC 358. The extent to which the same reasoning
applies to the post-2002 regime – given the provision now made for a distribution to unsecured
creditors – remains to be seen.
13
Re Olympia and York Canary Wharf Ltd [1993] BCLC 453; Astor Chemicals v Synthetic
Technology Ltd [1990] BCLC 1; Re P& C and R & T (Stockport) Ltd [1991] BCLC 366.
14
Re Atlantic Computer Systems plc [1992] Ch 505, CA.

20.22 Once appointed, the administrator of a company has extensive powers.

From the moment he is appointed he may do all such things as may be necessary
for the management of the affairs, business, and property of the company, and
he has all of the powers set out in the IA 1986, Sch 11. The manner in which the
administrator may exercise his powers is to a certain extent limited by his duties
to act in accordance with the proposals for the administration approved by the
creditors and in accordance with any directions given by the court. It is also
limited by what may be ultra vires the company2.
IA 1986, Sch B1, paras 70 and 71 give the administrator power to dispose of
property subject to security. If the property is subject to a security which as
created was a floating charge, the administrator may dispose of or otherwise
exercise his powers in relation to that property as if it was not subject to the
charge, and the debenture holder has the same priority in respect of any
property of the company directly or indirectly representing the property dis-
posed of as he would have had in respect of the property subject to the security3.
If the property is subject to any other security, the administrator may apply to
the court, and if the court is satisfied that the disposal of the property subject to
the security (either with or without other assets) would be likely to promote the
purpose of the administration, the court may authorise the administrator to
dispose of the property as if it were not subject to the security4.
A secured creditor must be notified of any application under these provisions5.
The order of the court authorising the administrator to dispose of the property
must specify that certain sums (namely the net proceeds of the disposal) be
applied towards discharging the sums secured, and where those proceeds are
less than such amount as may be determined by the court to be the net amount
which would be realised on a sale of the property or goods in the open market
by a willing vendor, such sums as may be required to make good the deficiency6.

17
20.22 Corporate Insolvency

If there is more than one security interest in respect the property, the sum to be
applied towards discharging the sums secured are applied in order of priorities
of the charges7.
1
IA 1986, Sch B1, para 59(1), 60. Schedule 1 contains the powers of an administrator and of an
administrative receiver.
2
See Re Home Treat Ltd [1991] BCLC 705.
3
IA 1986, Sch B1, para 70(1), (2).
4
IA 1986, Sch B1, para 71(1), (2). There is a similar power in relation to goods in the possession
of the company under a hire-purchase agreement: see IA 1986, Sch B1, para 72.
5
IR 2016, r 3.49(3).
6
IA 1986, Sch B1, para 71(3).
7
IA 1986, Sch B1, para 71(4).

(h) The bank’s rights as a creditor in the administration

20.23 In exercising his powers the administrator is deemed to act as the
company’s agent. As such he owes fiduciary duties to the company to act in
good faith, to perform his functions for the prescribed purpose of the adminis-
tration1, not to make any secret profit from his position and not to place himself
in a position whereby his duties as administrator and his personal interests or
any duties owed by him to third parties conflict. The administrator owes a duty
to the company to take reasonable care in exercising his powers, including a
duty to take reasonable care to obtain the best price for any assets sold that the
circumstances permit. This duty extends to the choice of when to sell the assets2.
The IA 1986 subjects the administrator to general duties3 as well as specific
duties such as sending notices4, laying his proposals before the creditors5,
calling meetings of creditors6 and providing information to a committee of
creditors if one is established7.
The administrator’s general duties are to take into his custody or under his
control all the property to which the company is or appears to be entitled8, and
to manage the affairs, business and property of the company in accordance with
any approved proposals, any revision of the proposals approved by the admin-
istrator which is not substantial and any revision of the proposals approved by
the creditors and, if the court gives directions to the administrator, in accor-
dance with those directions9. These general duties do not affect the administra-
tor if there are no approved proposals and no directions of the court. The court
may give directions to an administration where no proposals have been ap-
proved, the directions are consistent with any approved proposals or any
approved revision, the court thinks that the directions are required to reflect a
change in circumstances since the approval of the proposals or any revision, or
the court thinks the directions are desirable because of a misunderstanding
about the proposals or any revision10.
In many administrations the creditors will have little control over the adminis-
trator’s conduct. In particular, in many administrations the business of the
company has to be sold before it is possible to call a meeting of creditors to
consider the administrator’s proposals under IA 1986, Sch B1, para 51.
1
See IA 1986, Sch B1, para 3.
2
Re Charnley Davies Ltd (No 2) [1990] BCLC 760.
3
IA 1986, Sch B1, paras 67, 68.
4
IA 1986, Sch B1, para 46.

18
 Administration 20.24
5
IA 1986, Sch B1, para 49. Substantial revisions of those proposals are laid before the creditors
pursuant to the IA 1986, Sch B1, para 54.
6
IA 1986, Sch B1, paras 51, 52, 53, 54, 56.
7
IA 1986, Sch B1, para 57.
8
IA 1986, Sch B1, para 67.
9
IA 1986, Sch B1, para 68(1), (2). However, in appropriate circumstances an administrator may
sell the assets of a company in advance of having proposals for the administration approved by
creditors, or even submitted to them: Re Transbus International Ltd [2004] EWHC 932 (Ch),
[2004] 1 WLR 2654, [2004] 2 All ER 911, [2004] 2 BCLC 550, [2004] BCC 401. The position
was the same under the old law: Re T&D Industries Ltd [2000] 1 WLR 646.
10
IA 1986, Sch B1, para 68(3).

20.24 If a bank which is a creditor of a company in administration wishes to

challenge the acts of the administrator, there are a number of courses which it
should consider. First, the court has held that notwithstanding the absence of an
express statutory provision giving creditors the right to apply to the court for
directions to be given to the administrator, the court will entertain such
applications by creditors (because an administrator is an officer of the court)1.
Second, if the bank, either alone or together with other creditors who wish to
adopt the same course, represents more than 10% of the company’s total debts
it can require the administrator to seek a decision from the creditors on a
matter2. However, apart from any proposals approved by the creditors, the
administrator is not bound to follow the wishes of the creditors, and this route
is therefore not entirely satisfactory.
The third remedy available to a creditor is to issue an application pursuant to IA
1986, Sch B1, para 74. While a company is in administration a creditor can
apply to the court on the grounds that the administrator is acting or has acted
so as unfairly to harm the interests of the applicant, or that the administrator
proposes to act in a way which would unfairly harm the interests of the
applicant, or that the administrator is not performing his functions as quickly
or as efficiently as is reasonably practicable3. The nature of the remedy under
Sch B1, para 74 has been described in these terms:
‘Paragraph 74 does not exist to enable individually disgruntled creditors to pursue
administrators for compensation. Its focus is “unfair harm”: and that, I think, will
ordinarily mean unequal or differential treatment to the disadvantage of the appli-
cant (or applicant class) which cannot be justified by reference to the interests of the
creditors as a whole or to achieving the objective of the administration’4.
However, the requisite unfairness need not take the form of unjustifiable
discrimination: a lack of commercial justification for a decision causing harm to
the creditors as a whole may be unfair in the sense that the harm is not one
which they should be expected to suffer and so suffices for the purposes of
para 745.
1
Re Mirror Group (Holdings) Ltd [1993] BCLC 538; Barclays Mercantile Business Finance Ltd
v Sibec Developments Ltd [1992] 1 WLR 1253, [1993] BCC 148. An administrator is an officer
of the court notwithstanding that he is not appointed by the court: IA 1986, Sch B1, para 5.
2
IA 1986, Sch B1, para 56(1).
3
IA 1986, Sch B1, para 74(1), (2).
4
Re Coniston Hotel (Kent) LLP [2013] EWHC 93 (Ch), [2013] 2 BCLC 405, at [36], per Norris
J.
5
See Goel v Grant [2017] EWHC 2688 (Ch), [2018] Bus LR 393, at [33]–[34].

19
20.25 Corporate Insolvency

(i) Distribution and exit from administration

20.25 An administrator may make distributions to creditors of the company or

otherwise make payments which he thinks are likely to assist the purpose of the
administration1. Distributions to unsecured creditors, however, may only be
made with the permission of the court2.
Such distributions may be made to both secured and unsecured creditors.
Accordingly, a bank which is a creditor of a company in administration may be
required to submit its claim to the administrator so that it can be admitted for
proof and so that the bank is able to participate in any distribution. The
Insolvency Rules make provision for the process of proving a debt including
matters such as appeals against decisions on proof, set-off and the notices of
proposed distribution and declaration of dividend which are required to be sent
to creditors by the administrator3.
The appointment of an administrator will automatically cease to have effect
after one year following his appointment4. However, the term of office may be
extended by the consent of the creditors for a specified period not exceeding one
year, and by the court for any specified period5.
Where an administration comes to an end, the Insolvency Act 1986 provides
specific mechanisms to enable the company to move from administration to
creditors’ voluntary liquidation6 or directly into dissolution7. Where the ap-
pointment of an administrator ceases, he is discharged from liability in respect
of any action of his as administrator8.
1
IA 1986, Sch B1, para 65, 66.
2
IA 1986, Sch B1, para 65(3). As to the considerations on an application for permission under
para 65(3), see Re GHE Realisations Ltd (formerly Gatehouse Estates Ltd) [2005] EWHC
2400 (Ch), [2006] 1 WLR 287, [2006] 1 All ER 357 and Re MG Rover Belux SA/NV [2006]
EWHC 1296 (Ch), [2007] BCC 446 (in which HHJ Norris listed factors relevant to the
application before him at [7], although observing that ‘I doubt however that it is possible to
draw up a definitive list of considerations relevant to all cases (given the width of the discretion),
and the considerations will obviously vary from case the case’). In addition, under IA 1986, Sch
1, para 13 administrators may make any payments necessary or incidental to the performance
of their functions (see Re TXU UK Ltd (in administration) [2002] EWHC 2784 (Ch),
[2003] 2 BCLC 341, [2003] BPIR 1062, Re The Designer Room Ltd [2004] EWHC 720 (Ch),
[2005] 1 WLR 1581, [2004] BCC 904, and Re Lune Metal Products Ltd [2006] EWCA Civ
1720, [2007] BCC 217).
3
IR 2016, rr 14.28 ff.
4
IA 1986, Sch B1, para 76(1).
5
IA 1986, Sch B1, para 76(2). For the (detailed) provisions in relation to creditor consent, see Sch
B1, para 78.
6
IA 1986, Sch B1, para 83. An administrator may file a conversion notice even though he will
cease to be an administrator before the notice takes effect: Re E Squared Ltd [2006] EWHC 532
(Ch), [2006] 1 WLR 3414. In Re Globespan Airways Ltd [2012] EWCA Civ 1159, [2013] 1
WLR 1122, [2013] BCC 252, [2013] BCLC 339, [2012] 4 All ER 1124, the Court of Appeal
held that (i) the conversion date is the date of registration of the conversion notice by the
Registrar of Companies; and (ii) an administrator’s term of office is by implication from the
words of para 83(6) extended by filing a conversion notice from the date on which it would
otherwise expire by effluxion of time until para 83(6) comes into effect on registration of the
conversion notice.
7
IA 1986, Sch B1, para 84. It is clear that this route is open even where a distribution has been
made to creditors in the course of the administration: Re GHE Realisations Ltd [2005] EWHC
2400 (Ch), [2006] 1 WLR 287, [2006] 1 All ER 357 (differing from the obiter view expressed
in Re Ballast plc [2005] 1 WLR 1928).
8
IA 1986, Sch B1, para 98(1).

20
 Administrative Receivers and Receivers 20.27

(j) Administration of foreign companies

20.26 In addition to companies registered under the Companies Act, the

administration provisions of IA 1986, Sch B1 extend to (i) a company incorpo-
rated in an EEA state other than the UK; and (ii) a company not incorporated in
an EEA state but having its COMI in an EU member state other than Denmark1.
This is very considerably narrower than the court’s power to wind up foreign
companies as unregistered companies2. It follows that the English court has no
power to make an administration order in respect of a company incorporated
outside the EEA unless it has its COMI in an EU member state (other than
Denmark).
However, that is subject to an important exception. IA 1986, s 426 empowers
the court to assist those courts having insolvency jurisdiction elsewhere in the
UK, and in ‘any relevant country or territory’3. Under that jurisdiction, the
court may make an administration order at the request of a foreign court,
notwithstanding that the company in question does not fall within the defini-
tion of ‘company’ provided for the purposes of IA 1986, Sch B1: see HSBC
Bank plc v Tambrook Jersey Ltd4. That case concerned a Jersey-registered
company with its COMI in Jersey (which has no analogue of administration).
On a letter of request issued by the Jersey court, not made in existing or
intended insolvency proceedings, an administration order was made. This
decision affirms a jurisdiction which the English courts have exercised for some
time5.
1
This follows from the definition of ‘company’ in IA 1986, Sch B1, para 111(1A). See also paras
14.2 and 14.3 above.
2
Under IA 1986, s 220.
3
As defined by IA 1986, s 426(11) and the Co-operation of Insolvency Courts (Designation of
Relevant Countries and Territories) Order 1986 (SI 1986/2123), the Co-operation of Insol-
vency Courts (Designation of Relevant Countries and Territories) Order 1996 (SI 1996/253),
and the Co-operation of Insolvency Courts (Designation of Relevant Countries and Territories)
Order 1998 (SI 1998/2766). The relevant territories are the Channel Islands and the Isle of
Man, Anguilla, Australia, the Bahamas, Bermuda, Botswana, Canada, Cayman Islands, Falk-
land Islands, Gibraltar, Hong Kong, Republic of Ireland, Montserrat, New Zealand, St. Helena,
Turks and Caicos Islands, Tuvalu, Virgin Islands, Malaysia, Republic of South Africa, and
Brunei Darussalam.
4
[2013] EWCA Civ 576, [2014] CH 252, [2014] 2 WLR 71, [2013] 2 BCLC 186, [2013]
3 All ER 850, [2013] BCC 472, [2013] BPIR 484.
5
The first decision was Re Dallhold Estates (UK) Pty Limited [1992] BCLC 621. Five further
decisions involving Jersey companies are referred to in the first instance decision in HSBC
Bank plc v Tambrook Jersey Ltd: see [2013] EWHC 866 (Ch), [2014] Ch 252, at [15].

3 ADMINISTRATIVE RECEIVERS AND RECEIVERS

(a) The abolition of administrative receivership

20.27 Following the coming into force of the Enterprise Act 2002, and subject
to certain exceptions, the holder of a floating charge in respect of a com-
pany’s property created on or after 15 September 2003 may not appoint an
administrative receiver1. For the holder of such a floating charge, the appropri-
ate remedy is to appoint an administrator2.

21
20.27 Corporate Insolvency

The exceptions to this prohibition on the appointment of an administrative

receiver where it remains possible to appoint an administrative receiver not-
withstanding that the floating charge was created on or after 15 September
2003 are set out in IA 1986, ss 72B–72GA and are as follows:
(a) pursuant to an agreement which is or form part of a capital market
arrangement if a party incurs, or when the agreement was entered into
was expected to incur, a debt of at least £50 million under the arrange-
ment and the arrangement involves the issue of a capital market invest-
ment3;
(b) in respect of a project company of a project which is a public-partnership
project and includes ‘step-in’ rights4;
(c) in respect of a project company of a project which is a public utility
project and includes ‘step-in’ rights5;
(d) in respect of a project company of a project which is designed wholly or
mainly to develop land which at the commencement of the project is
wholly or partly in a designated disadvantaged area outside Northern
Ireland and includes ‘step-in’ rights6;
(e) in respect of a project company of a project which is a financed project
and includes ‘step-in’ rights7;
(f) pursuant to a market charge, a system-charge, or a collateral security
charge8;
(g) in respect of a company which is registered as a social landlord9;
(h) in respect of a company holding an appointment under the Water
Industry Act 1991, a protected railway company, or a licence com-
pany10.
1
IA 1986, s 72A(1).
2
See further para 20.15 above.
3
IA 1986, s 72B(1). The expressions capital market arrangement and capital market investment
are defined by IA 1986, Sch 2A, paras 1 ff.
4
IA 1986, s 72C(1). ‘Step-in’ rights arise where a person who provides finance in connection with
the project has a conditional entitlement under an agreement to assume sole or principal
responsibility for carrying out all or part of the project or to make arrangements for doing so:
IA 1986, Sch 2A, para 6(1).
5
IA 1986, s 72D(1).
6
IA 1986, s 72DA(1).
7
IA 1986, s 72E(1). A project is ‘financed’ for these purposes if under an agreement relating to it
a project company incurs or, when the agreement is entered into, is expected to incur, a debt of
at least £50 million for the purposes of carrying out the project: IA 1986, s 72E(2)(a). For the
meaning of this exception, see Cabvision Ltd v Feetum [2005] EWCA Civ 1601, [2006] Ch
585[2006] 3 WLR 427, [2006] BCC 340. See ‘Administrative Receivers: when to step in?’
JIBFL, Sept 2011 p 458.
8
IA 1986, s 72F. For the meaning of ‘market charge’, see the Companies Act 1985, s 173. For the
meaning of ‘system-charge’, see the Financial Markets and Insolvency Regulations 1996 (SI
1996/1469). For the meaning of ‘collateral security charge’, see the Financial Markets and
Insolvency (Settlement Finality) Regulations 1999 (SI 1999/2979).
9
IA 1986, s 72G.
10
IA 1986, s 72GA. For the meaning of ‘protected railway company’ see the Railways Act 1993,
s 59 (and s 19 of the Channel Tunnel Rail Link Act 1996) and for the meaning of ‘licence
company’ see the Transport Act 2000, s 26.

22
 Administrative Receivers and Receivers 20.29

(b) The meaning of ‘administrative receiver’ and ‘receiver’

20.28 It is important to distinguish between ‘administrative receivers’ and
‘receivers’ because, not only may the ability to appoint an administrative
receiver give the bank the power to veto the appointment of an administrator1,
but while there are many provisions which apply both to administrative
receivers and receivers2, there are provisions which apply only to administrative
receivers3 or to receivers4.
An administrative receiver is a receiver or manager of the whole, or substan-
tially the whole of a company’s property appointed by or on behalf of the
holders of any debenture of the company which, as created, was a floating
charge, or by such a charge and one or more other securities, or a person who
would be such a receiver or manager of part only of the company’s property5. It
has been held that a receiver appointed over the whole or substantially the
whole of the property of an unregistered company is an administrative re-
ceiver6.
A receiver or manager includes a receiver or manager of part only of the
company’s property7. A receiver includes a receiver of part only of the com-
pany’s property or only of the income arising from that property or any part of
it8.
1
See 14.23 above.
2
See for example IA 1986, ss 33–36 in relation to the appointment of a receiver and manager;
liability for an invalid appointment; applications to the court for directions; and the courts
power to fix remuneration; the Companies Act 1985, s 405 in relation to the notification of the
appointment; IA 1986, ss 39–41 in relation to notification on stationery that a receiver or
manager has been appointed; payment of debts out of assets subject to a floating charge; and the
enforcement of the duty to make returns.
3
See IA 1986, ss 42–49 in relation to the general powers of an administrative receiver, the power
to dispose of charged property, agency and liability for contracts (in relation to which s 44 was
amended by the IA 1994, but s 37, which is the equivalent provision dealing with receivers, was
not), vacation of office, information to be given to an administrative receiver, the statement of
affairs, report to creditors and the creditors committee.
4
See IA 1986, ss 37 and 38 in relation to the liability for contracts and the receivership accounts
to be delivered to the registrar of companies.
5
IA 1986, s 29(2)(b).
6
Re International Bulk Commodities Ltd [1993] Ch 77. However, doubts have been expressed
as to the correctness of that decision: see Re Devon and Somerset Farmers Ltd [1994] Ch 57 and
Re Dairy Farmers of Britain Ltd [2009] EWHC 1389, [2010] Ch 63, [2010] 2 WLR 311,
[2009] Bus LR 1627, [2009] 4 All ER 241.
7
IA 1986, s 29(1)(a).
8
IA 1986, s 29(1)(a).

(c) Appointment
20.29 A bank considering the appointment of a receiver or manager must first
choose whom it wishes to appoint. A receiver cannot be a body corporate1. An
undischarged bankrupt cannot be a receiver or manager2. Only a licensed
insolvency practitioner can act as an administrative receiver3.
The appointment of a receiver or manager is normally permissible upon the
happening of any of a number of events specified in the charge. One of those
events is usually failure to meet a demand for repayment. Where the bank is

23
20.29 Corporate Insolvency

entitled by the terms of the security to demand repayment of all monies secured,
there is no need to specify the amount of the debt in the demand4. The demand
must precede the appointment5.
Where the debt is repayable on demand, the debtor is allowed a reasonable time
to effect payment before the creditor is entitled to make an appointment (unless
it is clear that the company does not have funds available to satisfy the
demand6). However, that is only a reasonable opportunity of implementing
whatever reasonable mechanics of payment he may need to employ to discharge
the debt; it does not extend to any time to raise the money if it is not there to be
paid7.
In Bank of Baroda v Panessar8 Walton J said:
‘English law, therefore, in my judgment has definitely adopted the mechanics of
payment test. In order to see why this should be so, one has only to consider the case
of a debtor who, perhaps for very legitimate reasons, keeps the money available to
pay off his creditor – both he and the creditor being situate in London – in a bank in
Scotland. It cannot possibly be the law that the debtor would have the right to the
space of time necessary to journey to Scotland and back again before he was in default
in complying with a demand for payment. There is no reason why he should not keep
the money in Scotland but, if he does, he must then arrange for such mechanics of
payment as are, under modern conditions available for the transfer of the money to
his creditor, and, as is well known in these days of telex, facsimile transmission and
other methods of communication and transfer of money, the time required for that is
exceptionally short.’
In the circumstances of that case, Walton J held that the receiver was validly
appointed one hour after the demand was served on the debtor.
1
IA 1986, s 30.
2
IA 1986, s 31.
3
IA 1986, ss 388 and 389.
4
Bank of Baroda v Panessar [1987] Ch 335, [1986] 3 All ER 751; R A Cripps & Son Ltd v
Wickenden [1973] 1 WLR 944, [1973] 2 All ER 606; Bunbury Foods Pty Ltd v National Bank
of Australasia Ltd (1984) 51 ALR 609. An offer to accept payment in instalments will not
invalidate a demand for the full amount: N R G Vision Ltd v Churchfield Leasing [1988] BCLC
624.
5
Windsor Refrigeration Co Ltd v Branch Nominees Ltd [1961] Ch 375, [1961] 1 All ER 277;
RA Cripps & Son Ltd v Wickenden [1973] 1 WLR 944, [1973] 2 All ER 606.
6
RA Cripps & Son Ltd v Wickenden [1973] 1 WLR 944, [1973] 2 All ER 606.
7
There is a long line of English decisions to this effect, culminating in Bank of Baroda v Panessar
[1987] Ch 335, (1986) 2 BCC 99 (see also Sheppard & Cooper Ltd v TSB Bank plc & Ors (No
2) [1996] 2 All ER 654; [1996] BCC 965, and Sucden Financial Ltd v Fluxo-Cane Overseas Ltd
[2010] EWHC 2133 (Comm), [2010] 2 CLC 216, at [33]). This ‘mechanics of payment’ test has
not been uniformly adopted in other common law jurisdictions: see Lloyds Bank plc v Lampert
[1999] BCC 507, [1999] Lloyd’s Rep Bank 138, [1999] 1 All ER (Comm) 161.
8
[1987] Ch 335, at 348F-H.

20.30 In order for the appointment to be valid, any formalities laid down by
the relevant debenture or deed must be followed: for example, if the instrument
requires the appointment to be made in writing or under hand an oral appoint-
ment is not sufficient; if the appointment is required to be under seal, that
formality must be observed1. Usually, the debenture requires the appointment
to be in writing; there is no need (absent an express stipulation to the contrary)
for the appointment to be by deed2. In every case, the formalities required by the

24
 Administrative Receivers and Receivers 20.32

instrument in question should be ascertained and followed.

1
There is a comprehensive review of the authorities in this area in the Irish decision of
Merrow Ltd v Bank of Scotland plc [2013] IEHC 130. Note that in Cryne v Barclays Bank plc
[1987] BCLC 548, Kerr and May LJJ held that in the absence of an express term which entitled
the bank to appoint a receiver where they, on reasonable grounds, considered that their security
was in jeopardy, such a term could not be implied into the debenture.
2
Windsor Refrigeration Co Ltd v Branch Nominees Ltd [1961] Ch 375, [1961] 1 All ER 277,
CA.

20.31 A bank does not owe a duty of care to the company or any guarantors of
the company’s indebtedness to the bank in deciding whether to exercise its right
to appoint a receiver or manager; a mortgagee is entitled to look to his own
interests in deciding to exercise, or not exercise, his powers, and only risks
liability if it acts in bad faith1. It is extremely unlikely that there can be implied
into a debenture a term that the bank shall be under a duty to consider all
relevant matters before exercising that power, and in the absence of such a term,
it has been held that no wider duty exists in tort2. It has also been held that a
bank owes no duty of care to the company’s shareholders in exercising its power
to appoint a receiver3.
The appointment of a person as a receiver or manager is of no effect unless it is
accepted by the proposed receiver before the end of the business day following
that on which the instrument of appointment is received by him or on his
behalf4. If it is accepted, then the appointment is deemed to be made at the time
at which the instrument of appointment is received by the receiver or manager
on his behalf5. The receiver or manager must confirm his acceptance of the
appointment in writing to the bank within five business days, unless his
acceptance was in writing6.
1
See Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295 and Silven
Properties Ltd v Royal Bank of Scotland plc [2003] EWCA Civ 1409, [2004] 4 All ER 484 (and
bad faith in this context is a high test: see Medforth v Blake [2000] Ch 86) (see also China and
South Sea Bank Ltd v Tan Soon Gin [1990] 1 AC 536).
2
Shamji v Johnson Matthey Bankers Ltd [1986] BCLC 278; affd [1986] 1 FTLR 329,
[1991] BCLC 36, CA.
3
Tudor Grange Holdings Ltd v Citibank NA [1992] Ch 53, CA.
4
IA 1986, s 33(1)(a). Further provisions as to acceptance where an appointment is joint are made
by IR 2016, r 4.2.
5
IA 1986, s 33(1)(b).
6
IR 2016, r 4.1(3).

20.32 If the appointment is invalid the receiver or manager has to be with-

drawn by the bank and reappointed1. A second appointment cannot be made
until the bank has restored the company to possession of its assets and renewed
its demand2. The court may order an appointing bank to indemnify a person
purportedly appointed receiver or manager if the appointment is discovered to
be invalid, whether by reason of the invalidity of the instrument containing the
power to appoint or otherwise3 (and it will be noted that in practice banks are
very unwilling to grant contractual indemnities).
The risk of liability resulting from an invalid appointment may be overcome if
the directors request that the bank should appoint a receiver or manager. The
company will be estopped from relying upon an invalid appointment if it did
not object to the defect at the time or, if by its conduct after the appointment, it

25
20.32 Corporate Insolvency

allowed or encouraged the receiver or the bank to assume that the appointment
was valid4.
If the appointment is invalid because of a defect in the debenture, or if an invalid
appointment cannot be cured, the receiver is a trespasser in respect of all of the
company’s assets of which he takes possession5. However, the acts of an
administrative receiver are valid notwithstanding any defect in his appoint-
ment, nomination or qualifications, but that does not apply to an appointment
under an invalid debenture6.
1
R A Cripps & Son Ltd v Wickenden [1973] 1 WLR 944 at 957 A to B.
2
See fn 1 above.
3
IA 1986, s 34.
4
Bank of Baroda v Panessar [1987] Ch 335 at 352. In addition, the courts appear to be reluctant
to investigate the validity of an appointment where belated complaints are made: see Secretary
of State v Jabble [1998] BCLC 598, [1998] BCC 39.
5
Re Goldburg (No 2) [1912] 1 KB 606.
6
IA 1986, s 232.

20.33 If a bank appoints a receiver or manager, it must give notice of the fact to
the Registrar of Companies within seven days, and the Registrar enters that fact
on the register of charges1. After his appointment a receiver or manager must
put a statement that a receiver or manager has been appointed on every invoice,
order for goods or services, business letter, or order form, and on all the
company’s websites2. Where an administrative receiver is appointed he must
send to the company and advertise notice of his appointment, and within 28
days after his appointment he must send notice of his appointment to all the
creditors of the company of whom he is aware3.
1
Companies Act 2006, s 859K(1) and (2).
2
IA 1986, s 39(1).
3
IA 1986, s 46(1) and IR 2016, r 4.5.

(d) Powers and duties of a receiver

(i) The tri-partite relationship between the bank, the receiver and
the company
20.34 Where a bank has a debenture, its appointment of a receiver almost
invariably provides that he shall be the agent of the company. A receiver under
a mortgage of real property is deemed to the agent of the mortgagor; an
administrative receiver is deemed to be the agent of the company unless and
until the company goes into liquidation1. If the receiver ceases to be the agent of
the company he does not thereby become the agent of the bank2, although a
bank may at any time be liable for the acts of the receiver if it interferes with his
conduct of the receivership3.
The relationship between the company and the receiver is not the relationship of
an ordinary principal and agent because the receiver also owes duties to the
debenture holder. The nature of the relationship was described in these terms in
Silven Properties Ltd v Royal Bank of Scotland plc4:
‘The peculiar incidents of the agency are significant. In particular: (1) the agency is
one where the principal, the mortgagor, has no say in the appointment or identity of
the receiver and is not entitled to give any instructions to the receiver or to dismiss the

26
 Administrative Receivers and Receivers 20.35

receiver. In the words of Rigby LJ in Gaskell v Gosling [1896] 1 QB 669 at 692: “For
valuable consideration he has committed the management of his property to an
attorney whose appointment he cannot interfere with”; (2) there is no contractual
relationship or duty owed in tort by the receiver to the mortgagor: the relationship
and duties owed by the receiver are equitable only: see Medforth and Raja; (3) the
equitable duty is owed to the mortgagee as well as the mortgagor. The relationship
created by the mortgage is tripartite involving the mortgagor, the mortgagee and the
receiver; (4) the duty owed by the receiver (like the duty owed by a mortgagee) to the
mortgagor is not owed to him individually but to him as one of the persons interested
in the equity of redemption. The class character of the right is reflected in the class
character of the relief to be granted in case of a breach of this duty. That relief is an
order that the receiver account to the persons interested in the equity of redemption
for what he would have held as receiver but for his default; (5) not merely does the
receiver owe a duty of care to the mortgagee as well as the mortgagor, but his primary
duty in exercising his powers of management is to try and bring about a situation in
which the secured debt is repaid: see Medforth at p86; and (6) the receiver is not
managing the mortgagor’s property for the benefit of the mortgagor, but the security,
the property of the mortgagee, for the benefit of the mortgagee: see Re B Johnson
& Co (Builders) Ltd [1953] Ch 634 per Jenkins LJ at 661 cited with approval by Lord
Templeman in Downsview at 331B and at p 646 per Evershed MR cited with
approval by Scott V-C in Medforth at p 95H to 96A. His powers of management are
really ancillary to that duty: Gomba Holdings v Homan [1986] 1 WLR 1301 at 1305
per Hoffmann J.’
The directors of a company in receivership who are also agents of the company
have no powers over assets of the company which are in the possession or
control of the receiver or manager5.
1
Law of Property Act 1925, s 109(2); IA 1986, s 44(1).
2
Gosling v Gaskell [1897] AC 575.
3
Standard Chartered Bank Ltd v Walker [1982] 3 All ER 938, [1982] 1 WLR 1410.
4
[2003] EWCA Civ 1409, [2004] 1 WLR 997, [2004] 4 All ER 484, at [27]. See also Gomba
Holdings UK Ltd v Minories Finance Ltd [1988] 1 WLR 1231, [1989] 1 All ER 261.
5
Per Hoffmann J in Gomba Holdings UK Ltd v Homan [1986] 1 WLR 1301 at 1307.

(ii) Contracts
20.35 The appointment of a receiver or manager does not determine contracts
entered into by the company before the appointment1, but the receiver need not
cause the company to fulfil the contract2. However, if a contract is specifically
enforceable, the receiver cannot resist a claim for specific performance3. A
receiver or manager is personally liable on any contract entered into by him,
and on any contract of employment adopted by him in the performance of his
functions4. In the 14 days after his appointment the receiver is not taken to have
adopted a contract of employment by reason of any acts or omissions on his
part5. If the receiver is personally liable on any contracts, he is entitled to an
indemnity out of the assets of the company6.
1
Parsons v Sovereign Bank of Canada [1913] AC 160; Griffiths v Secretary of State for Social
Services [1974] QB 468, [1973] 3 All ER 1184; Triffit Nurseries (a firm) v Salads Etcetera Ltd
[2001] BCC 457, [2000] 1 All ER (Comm) 737.
2
Airlines Airspares Ltd v Handley Page [1970] Ch 193; Re Newdigate Colliery Co Ltd [1912] 1
Ch 468, in which the Court of Appeal refused to give a receiver leave to repudiate forward
contracts for coal. It is now settled that a receiver is not liable for inducing a breach of contract:
Welsh Development Agency v Export Finance [1991] BCLC 936. In Lathia v Dronsfield
Bros Ltd [1987] BCLC 321 Sir Neil Lawson struck out a claim against the receivers for inducing
a breach of contract between their principal and the plaintiff. The Court of Appeal in Edwin

27
20.35 Corporate Insolvency

Hill & Partners v First National Finance Corpn plc [1988] 3 All ER 801, [1989] 1 WLR 225
suggested that a receiver will not be liable for inducing a breach of contract. Cf Ash and
Newman Ltd v Creative Devices Research Ltd [1991] BCLC 403.
3
Freevale Ltd v Metrostore (Holdings) Ltd [1984] Ch 199, [1984] 1 All ER 495. The reasoning
adopted in this case was applied in the context of an option granted to a third party in
Telemetrix plc v Modern Engineers of Bristol (Holdings) plc [1985] BCLC 213. See also AMEC
Properties Ltd v Planning Research and Systems plc [1992] BCLC 1149, CA.
4
IA 1986, ss 37(1) and 44(1). Prior to the introduction of these provisions, only a receiver who
had ceased to be the agent of the company was personally liable: Gosling v Gaskill [1897] AC
575.
5
IA 1986, ss 37(2) and 44(2). These provisions were introduced in order to overrule the effect of
the Court of Appeal’s decision in Nicoll v Cutts [1985] BCLC 322. The meaning and effect of
these provisions was considered by the House of Lords in Powdrill v Watson, Talbot v Cadge,
Talbot v Grundy [1995] 2 AC 394, [1995] 2 All ER 65.
6
IA 1986, ss 37(1)(b) and 44(1)(c).

(iii) Powers
20.36 A receiver or manager will have such powers as are contained in the
debenture. The powers conferred upon an administrative receiver are deemed
to include the powers specified in IA 1986, Sch 1 unless those powers are
inconsistent with the provisions of the debenture1. The powers contained in Sch
1 are the same as the powers of an administrator. It is unlikely that a bank
would wish to limit or exclude the operation of the powers set out in Sch 1,
which are likely to be wider than the powers provided in the debenture. A
person dealing with an administrative receiver in good faith and for value is not
concerned to inquire whether the receiver is acting within his powers2.
A receiver or manager, or a bank which has appointed him, has power to apply
to the court for directions in relation to any particular matter arising in
connection with the performance of his functions3. This power has been used in
order to ascertain whether a receiver or manager was an administrative receiver.
The question of whether the receiver or manager has been properly appointed
may also be the subject matter of an application although on a strict construc-
tion of the section a proper appointment is arguably a precondition of making
an application under it. An administrative receiver may apply to the court for an
order that the company’s property be handed over to him; if there is a dispute as
to the ownership of the property in question, it may be resolved in those
proceedings4.
An administrative receiver may apply to the court for an order authorising the
disposal by him of property subject to a security which has priority over the
security pursuant to which he was appointed5. The court may make the order if
it is satisfied that the disposal of the property would be likely to promote a more
advantageous realisation of the company’s assets than would otherwise be
effected6. This provision is similar to the IA 1986, s 15 which applied in the case
of administrators. Its application in the context of an administrative receiver-
ship is curious, because, an administrative receiver is not interested in effecting
a ‘more advantageous realisation’ of assets for the benefit of other secured
creditors, or the unsecured creditors. The advantage should almost certainly be
to the administrative receivership. The question which would then arise is
whether the sale could be less advantageous to the secured creditor and still fall
within this provision. It is arguable that it could, and in circumstances where a
secured creditor, who must be served with the application7, objects to the sale,

28
 Administrative Receivers and Receivers 20.38

the court is likely to favour the administrative receiver. The reason for this is
that in most cases the secured creditor is protected by a proviso to the order,
namely that where the net proceeds of sale are less than such amount as may be
determined by the court to be the net amount which would be realised on a sale
of the property on the open market, the administrative receivers must pay the
amount necessary to make up the deficiency in the net proceeds of sale8.
However, the secured creditor would not be protected if he suffered a loss as a
result of the timing of the sale.
1
IA 1986, s 42.
2
IA 1986, s 42(3).
3
IA 1986, s 35.
4
IA 1986, s 234 (note that the application should be brought in the name of the office-holder, not
in the name of the company: Smith v Bridgend CBC [2001] UKHL 58, [2002] 1 AC 336,
[2001] BCC 740, at [32]); Re London Iron and Steel Co Ltd [1990] BCLC 372, [1990] BCC
159.
5
IA 1986, s 43.
6
IA 1986, s 43(1).
7
IR 2016, r 4.16(3).
8
IA 1986, s 43(3).

20.37 An important issue for administrative receivers is whether, where a

company goes into liquidation, the expenses of the liquidation are payable out
of the assets in the receiver’s hands in priority to the claims of the charge-holder.
In Buchler v Talbot1 the House of Lords held that in this case there are two
distinct funds: (i) the free assets which belonged to the company and were
administered by the liquidator, and (ii) the floating charge assets which be-
longed to the charge-holder to the extent of the security and were administered
by the receiver. Since each fund should bear its own costs of administration,
none of the costs and expenses of winding up the company were payable out of
the assets subject to the floating charge until the whole of the principal and
interest charged thereon had been paid2.
1
[2004] UKHL 9, [2004] 2 AC 298, [2004] 1 All ER 289, [2004] 1 BCLC 281, [2004] BCC 214.
2
The decision of the Court of Appeal in Re Barleycorn Enterprises Ltd [1970] 2 All ER 155 was
overruled.

(iv) Duties
20.38 A receiver owes a primary duty to the debenture holder who appoints
him. In Re B Johnson & Co (Builders) Ltd1 Lord Evershed MR said2:
‘ . . . it is quite plain that a person appointed as receiver and manager is concerned,
not for the benefit of the company but for the benefit of the mortgagee bank to realise
the security; that is the whole purpose of his appointment; and the powers which are
conferred upon him . . . are really ancillary to the main purpose of the appoint-
ment, which is the realisation by the mortgagee of the security . . . by the sale of
the assets.’
Jenkins LJ agreed with Lord Evershed MR in the following terms:
‘The primary duty of the receiver is to the debenture holders and not to the company.
He is receiver and manager of the property of the company for the debenture holders,
not manager of the company.’
This is a fiduciary duty as well as a duty owed under the contract by which the
receiver is appointed. If the receiver fails to fulfil this duty by realising the

29
20.38 Corporate Insolvency

company’s property and taking reasonable steps in doing so, the bank has a
claim against him for breach of that duty. If the appointing bank is held to be
liable by reason of the receiver’s negligence to the company or to a guarantor of
the company’s debt, then the bank will be able to claim an indemnity from the
receiver to recover this sum.
1
[1955] Ch 634, [1955] 2 All ER 775, CA.
2
[1955] Ch 634 at 644.

20.39 Before Cuckmere Brick Co Ltd v Mutual Finance Ltd1 there was some
doubt as to whether, in exercising their powers of sale, receivers owed a duty to
the company in tort. In the Cuckmere Brick case the Court of Appeal held that
a mortgagee, when exercising his powers of sale, owed a duty to the mortgagor
to take reasonable care and to obtain a proper price, and that included a duty to
advertise the property, and to cancel an auction in order to advertise a sale. It
was recognised that this equitable duty of care also applied to the receiver in
Standard Chartered Bank Ltd v Walker2. In that case the Court of Appeal held
that, within reason, the receiver was able to choose the time for the sale and was
not obliged to wait until market conditions resulted in a more substantial
realisation3.
The Privy Council analysed the nature of the duties owed by receivers to the
company and restricted the breadth of those duties in Downsview Nomi-
nees Ltd v First City Corpn Ltd4. In that case the Privy Council held that a
mortgagee and a receiver appointed by him owe no general duty in negligence
to subsequent encumbrancers or the mortgagor to exercise reasonable care in
exercising their powers, but that equity imposes on a mortgagee and a receiver
specific duties, including the duty to exercise their powers in good faith for the
purposes of obtaining repayment. Lord Templeman said5:
‘The general duty of care said to be owed by a mortgagee to subsequent encumbranc-
ers and the mortgagor in negligence is inconsistent with the right of the mortgagee
and the duties which the courts applying equitable principles have imposed on the
mortgagee.’
The Cuckmere Brick decision was held by the Privy Council to be restricted to
a decision that if the mortgagee decides to sell, he must take reasonable care to
obtain a proper price, but no more than that, and that the receiver owes the
same specific duty.
In Yorkshire Bank plc v Hall6 the Court of Appeal’s analysis pointed up the
distinction between the general and specific duties. Robert Walker LJ said7:
‘The mortgagee’s duty is not a duty imposed under the tort of negligence, nor are
contractual duties to be implied. The general duty (owed both to subsequent
encumbrancers and to the mortgagor) is for the mortgagee to use his powers only for
proper purposes and to act in good faith . . . The specific duties arise if the
mortgagee exercises his express or statutory powers . . . If he exercises his power
to take possession, he becomes liable to account on a strict basis . . . If he exercises
his power of sale, he must take reasonable care to obtain a proper price.’

1
[1971] Ch 949, [1971] 2 All ER 633 , CA. See also Tse Kwong Lam v Wong Chit Sen [1983]
3 All ER 54, [1983] 1 WLR 1349, PC.
2
[1982] 3 All ER 938, [1982] 1 WLR 1410, CA. Followed in American Express International
Banking Corpn v Hurley [1985] 3 All ER 564, [1986] BCLC 52; cited with approval in Shamji
v Johnson Matthey Bankers Ltd [1991] BCLC 96, CA. It is to be stressed that the duty owed to

30
 Administrative Receivers and Receivers 20.41

the mortgagor is equitable, not contractual or tortious (Medforth v Blake [2000] Ch 86) and is
owed to the mortgagor as one of the persons interested in the equity of redemption
(Edenwest Ltd v CMS Cameron McKenna [2012] EWHC 1258 (Ch), at [63]).
3
See Parker-Tweedale v Dunbar Bank plc [1991] Ch 12, CA.
4
[1993] AC 295.
5
[1993] AC 295 at 315A–315B.
6
[1999] 1 All ER 879.
7
[1999] 1 All ER 879 at 893.

20.40 In Medforth v Blake1 the Court of Appeal considered the extent to which
a receiver’s duties extend to include duties in respect of his management of a
business. As Sir Richard Scott V-C pointed out, given that the duty in equity
required a receiver to take reasonable care to obtain a reasonable price in selling
the company’s assets, ‘why should the approach be any different if what is
under review is not the conduct of a sale but conduct in carrying on a business?’2
The Court of Appeal held that in exercising his powers of management the
primary duty of the receiver is to try and bring about a situation in which
interest on the secured debt can be paid and the debt itself repaid. Subject to that
primary duty, the receiver owes a duty to manage the property with due
diligence, but that does not oblige the receiver to continue to carry on a business
on the mortgaged premises previously carried on by the mortgagor3.
1
[2000] Ch 86, [1999] 2 BCLC 221.
2
[1999] 2 BCLC 221 at 233d–e.
3
[1999] 2 BCLC 221 at 237b–d.

20.41 It follows from the Downsview Nominees, Cuckmere Brick, Yorkshire

Bank and Medforth1 decisions that the receiver owes duties to the company in
equity to exercise his powers in good faith, and that will include: (a) a duty to
take reasonable care to obtain a proper price in selling the company’s assets and
(b) a duty, subject to his primary duty to attempt to ensure that the secured debt
is repaid, to manage the property with due diligence. What constitutes bad faith
will vary from case to case, but it is a higher threshold to satisfy than
negligence2.
In Standard Chartered Bank Ltd v Walker3 the Court of Appeal held that a
receiver realising assets under a debenture owed the same duty to the guarantor
of the debt as he does to the company to take reasonable care to obtain the best
price that the circumstances permitted. To the extent that this decision suggests
that the receiver owes a general duty of care to guarantors, in the light of the
Privy Council’s decision in Downsview Nominees, it is of doubtful authority.
However, to the extent that the decision in Standard Chartered Bank v Walker
merely deals with the identity of the guarantor as a person to whom the duty is
owed, as opposed to the extent of the duty, it remains good law. It is suggested
that the current law is that a specific duty of care is owed to guarantors on a sale
of the principal debtor’s assets4.
Where a receiver is appointed on behalf of the holder of any debenture secured
by a charge which, as created, was a floating charge, and the company is not in
liquidation, the preferential debts5 must be paid out of the assets coming into
the hands of the receiver in priority to any claims for principal or interest in
respect of the debentures6. The preferential creditors only get priority in respect
of the floating charge assets, and debenture holders do not lose their priority in
respect of fixed charge security7, nor does the company lose its right to a surplus

31
20.41 Corporate Insolvency

arising after the sale of fixed charge securities8.

1
See also Hadjipanayi v Yeldon [2001] BPIR 487; Raja v Austin Gray (a firm) [2003] BPIR 725;
Silven Properties Ltd v Royal Bank of Scotland plc [2003] EWCA Civ 1409, [2004] 1 WLR
997, [2004] 4 All ER 484, [2004] 1 BCLC 359; Edenwest Ltd v CMS Cameron McKenna
[2012] EWHC 1258 (Ch).
2
See Medforth v Blake [2000] Ch 86.
3
[1982] 3 All ER 938, [1982] 1 WLR 1410. Followed in American Express International
Banking Corpn v Hurley [1985] 3 All ER 564, [1986] BCLC 52; cited with approval in Shamji
v Johnson Matthey Bankers Ltd [1991] BCLC 36.
4
This view is consistent with Lightman J’s reasoning in Burgess v Auger [1998] 2 BCLC 478.
5
As defined in IA 1986, s 386 and Sch 6.
6
IA 1986, s 40. This provision stands with s 754 of the Companies Act 2006 (for a discussion of
which, see Re Oval 1742 Ltd [2007] EWCA Civ 1262, [2008] Bus LR 1213, [2008] BCC 135).
As to the receiver’s duty to pay the preferential creditors, see IRC v Goldblatt [1972] Ch 498;
Re H&K (Medway) Ltd [1997] 1 WLR 1422, [1997] BCC 853, [1997] 1 BCLC 545 (in which
the inter-relationship of the IA 1986 and Companies Act provision is discussed).
7
Re Lewis Merthyr Consolidated Collieries Ltd [1929] 1 Ch 498, CA.
8
Re GL Saunders Ltd [1986] 1 WLR 215, [1986] BCLC 40.

(v) Receiver’s documents

20.42 In the course of a receivership, documents will be brought into being,
many of which will be created for or by the bank which appointed the receiver.
In Gomba Holdings UK Ltd v Minories Finance Ltd1 the company sought
orders for delivery up of all the receivers’ documents on the ground that the
receivers were the agents of the company, and that accordingly the documents
created during the course of that agency were the property of the company.
Hoffmann J held that only documents created in pursuance of the receivers’
duty to manage the affairs of the company were the property of the company.
That did not include documents created for the purposes of advising or
informing the debenture holder, nor did it include documents created by the
receivers to enable them to prepare such documents or perform such duties as
they were required to prepare or perform for the purposes of their professional
duties to the debenture holders or the company. During the course of the
receivership the receiver may refuse to divulge information which the company
may be entitled to if he forms the view that disclosure would be against the
interests of the debenture holder2.
1
[1988] 1 WLR 1231, [1989] 1 All ER 261.
2
Gomba Holdings (UK) Ltd v Homan [1986] 1 WLR 1301, [1986] 3 All ER 94.

4 COMPANY LIQUIDATION

(a) Voluntary winding up

20.43 There are two types of voluntary winding up: members’ voluntary
winding up and creditors’ voluntary winding up. The distinction between the
two types of voluntary winding up is that in a members’ voluntary winding up
the directors of the company sign a declaration that the company will be able to
pay its debts in full together with interest within 12 months of the commence-
ment of the winding up, and in a creditors’ voluntary winding up no such
declaration is made1.

32
 Company Liquidation 20.44

A voluntary winding up commences when the members of the company pass a

resolution that the company be wound up2 (that resolution must be advertised
in the Gazette within 14 days3). In a creditors’ voluntary winding up there is no
longer a requirement for a meeting of the creditors of the company. Instead, the
directors must seek the creditors’ nomination of a liquidator by the decision
procedure4. The creditors consider the statement of affairs prepared by the
directors5, vote for the appointment of the liquidator6, and, if they so wish,
appoint a liquidation committee which may exercise control over certain
powers of the liquidator7.
If in a members’ voluntary winding up the liquidator forms the opinion that the
company will not pay all of its debts within the 12 months specified in the
declaration of solvency, he must send a statement of the company’s creditors to
the creditors within seven days after forming that opinion, and the creditors
may then nominate a liquidator8.
1
IA 1986, s 90.
2
IA 1986, ss 84 and 86.
3
IA 1986, s 85.
4
IA 1986, s 100(1B); IR 2016, r 6.14.
5
IA 1986, s 99.
6
Section 100(2) of IA 1986 states that the liquidator is the person nominated by the creditors (if
they nominate – otherwise it is the person nominated by the company). The old law had been
open to abuse, in that the members of the company could call a meeting at short notice and
appoint a liquidator, but, because no meeting of creditors was held, there was no nomination by
the creditors, and the members’ choice of liquidator prevailed for the time being: Re Centre-
bind Ltd [1967] 1 WLR 377, [1966] 3 All ER 889. IA 1986, s 166 limits the powers of the
liquidator nominated by the members pending the meeting of creditors, thereby preventing all
of the company’s assets being disposed of before the creditors’ nominee is appointed liquidator.
The difficulties which formerly arose if the meeting of creditors was inquorate (as to which see
Re Teeside Operating 2 Ltd [2009] EWHC 2544 (Ch)) should not occur now that the new
decision procedure is used.
7
IA 1986, s 101. Up to five persons may act on the committee of creditors. The liquida-
tor’s powers in a voluntary winding up are set out in the IA 1986, s 165 and Sch 4.
8
IA 1986, s 95; IR 2016, r 6.2. Again, the creditors’ choice of liquidator will prevail.

20.44 After the passing of the resolution the company must cease to carry on its
business, except so far as may be required for the beneficial winding up of the
company1. On the appointment of a liquidator the powers of the directors
cease, except where authorised by the company in general meeting or the
liquidator in a members’ voluntary winding up2, or by the liquidation commit-
tee of the creditors in a creditors’ voluntary winding up3. Accordingly, cheques
drawn by directors or other instructions given by them after the liquidator is
appointed are not binding on the company4. It has been argued that the
directors may bind the company after the resolution has been passed but before
the liquidator is appointed. However, this is extremely unlikely, because the
standard form of resolution to wind up a company includes the appointment of
a liquidator. A bank discovering that a meeting has been called to consider a
resolution to wind up the company should freeze all of the company’s bank
accounts, provided that it is entitled to do so on the relevant agreements
between the bank and the company.
1
IA 1986, s 87.
2
IA 1986, s 91(2).
3
IA 1986, s 103.
4
Re London and Mediterranean Bank, Bolognesi’s Case (1870) 5 Ch App 567.

33
20.45 Corporate Insolvency

(b) Compulsory winding up

20.45 The court has power to wind up a company incorporated under

the Companies Acts in any of the circumstances specified in the IA 1986,
s 122(1)1. However, in the case of a company with its centre of main interests
within the EU, the company may only be wound up by the English court if its
centre of main interests is in England and Wales or if it has an establishment in
England and Wales2. It should also be noted that where main proceedings
requiring the debtor to be insolvent have been opened in another Member State
the company’s insolvency is automatically established for the purpose of any
secondary proceedings in England and Wales3.
An unregistered company or partnership may be wound up in any of the
circumstances specified in the IA 1986, s 221(5), and in the case of a partner-
ship, upon certain further grounds set out in the Insolvent Partnerships Order4.
The most usual ground upon which a winding-up petition is presented is that
the company is unable to pay its debts (and that is deemed to be so if the
company fails to comply with a statutory demand5). A company is also deemed
to be unable to pay its debts if it is proved that the value of the company’s assets
is less than the amount of its liabilities, taking into account its contingent and
prospective liabilities6.
1
They are (using the lettering in the section): (a) the company has by special resolution resolved
that the company be wound up by the court; (b) being a public company which was registered
as such on its original incorporation, the company has not been issued with a certificate under
the Companies Act 2006, s 761 (minimum share capital requirements) and more than a year has
expired since it was so registered; (c) it is an old public company, within the meaning of Sch 3
to the Companies Act 2006; (d) the company does not commence its business within a year from
its incorporation or suspends its business for a whole year; (f) the company is unable to pay its
debts; (fa) a moratorium under IA 1986, s 1A comes to an end without a CVA having effect in
relation to the company; and (g) the court is of the opinion that it is just and equitable that the
company should be wound up.
2
See further para 19.3 above.
3
Recast Regulation, art 34.
4
See the IA 1986, s 221 in relation to unregistered companies. The circumstances are: (a) if the
company is dissolved or has ceased to carry on business; (b) if the company is unable to pay its
debts; (c) if the court is of the opinion that it is just and equitable that the company should be
wound up. The circumstances in which an overseas company will be wound up in England were
considered in Banque des Marchands de Moscou (Koupetschesky) v Kindersley [1951] Ch 112;
Re Cia Merabello San Nicholas SA [1973] Ch 75; Re a Company (No 00359 of 1987) [1988]
Ch 210; Re Eloc Electro-Optiek and Communicatie BV [1982] Ch 43; Re a Company (No
007946 of 1993) [1994] Ch 98; Re Latreefers Inc, Stocznia Gdanska SA v Latreefers Inc (No
2) [2001] 2 BCLC 116, CA; Banco Nacional de Cuba v Cosmos Trading Corpn [2000] 1 BCLC
813; Atlantic and General Investment Trust Ltd v Richbell Information Services Inc
[2000] 2 BCLC 778; Banco Nacional de Cuba v Cosmos Trading Corpn [2000] 1 BCLC 813,
CA. See also Re Drax Holdings Ltd [2003] EWHC 2743 (Ch), [2004] 1 All ER 903. In the
context of a public interest petition against an unregistered company which failed because there
was an insufficient connection between the company and the UK see Re Titan International Inc
[1998] 1 BCLC 102. See Insolvent Partnerships Order 1994 (SI 1994/2421) regs 7, 8 and 12 and
Schs 3 and 4 in relation to partnerships.
5
IA 1986, s 123. Note that a statutory demand must be ‘served . . . by leaving it at the
company’s registered office’ (IA 1986, s 123(1)(a) and must be in hard copy: IA 1986,
s 436B(2)(f). A statutory demand must not be served on a solvent company or in order to
recover a disputed debt: Re a Company (No 0012209 of 1991) [1992] 1 WLR 351; Re
Ringfino Ltd [2002] 1 BCLC 210. A cross claim which is genuine, serious or has substance will
be sufficient to establish a disputed debt: Re Bayoil SA [1999] 1 BCLC 62; Orion Marketing Ltd
v Media Brook Ltd [2002] 1 BCLC 184.

34
 Company Liquidation 20.46
6
IA 1986, s 123(2) – as to the meaning of which, see BNY Corporate Trustee Services Ltd v
Eurosail-UK-2007-3BL plc [2013] UKSC 28, [2013] 1 WLR 1408, [2013] 3 All ER 271, [2013]
2 All ER (Comm) 531, [2013] Bus LR 715, [2013] BCC 397, [2013] 1 BCLC 613.

20.46 A compulsory winding up is deemed to begin at the time of the presen-

tation of the petition, or if a voluntary resolution had previously been passed,
from the time when that resolution was passed1. A banker’s position will often
be affected by the presentation of the petition by virtue of IA 1986, s 127 which
provides:
‘In a winding up by the court, any disposition of the company’s property, and any
transfer of shares, or alteration in the status of the company’s members, made after
the commencement of the winding up is, unless the court otherwise orders, void.2’
Until the Court of Appeal’s decision in Hollicourt (Contracts) Ltd v Bank of
Ireland3 it was thought that both payments into and payments out of a bank
account were void4. However, it is now clear that this view was based upon an
over-simplification of the effect of s 127. Payments into a bank account which
is in credit are not dispositions of the company’s property since the funds
remain the company’s and do not go to reduce a debt owed to the bank5. As
regards payments made out of a bank account, whilst such a payment is a
disposition in favour of the creditor, it is not a disposition of the com-
pany’s property in favour of the bank. The bank is merely acting as the
company’s agent and the avoidance of the disposition in favour of the creditor
does not affect the validity of the intermediate or related transactions, such as
the bank honouring the company’s cheque6. Mummery LJ, giving the judgment
of the Court of Appeal, said7:
‘ . . . section 127 only invalidates the dispositions by the company of its property
to the payees of the cheques. It enables the company to recover the amounts disposed
of, but only from the payees. It does not enable the company to recover the amounts
from the bank, which has only acted in accordance with its instructions as the
company’s agent to make payments to the payees out of the company’s bank account.
As to the intermediate steps in the process of payment through the bank, there is no
relevant disposition of the company’s property to which the section applies.’
It is not a disposition for assets which are subject to a charge to be realised and
paid over to the bank8, but it is a disposition for the company to grant a charge
over its assets9. It is not a disposition for a company to complete a contract
which is specifically enforceable, but if the contract is conditional or voidable,
any waiver, confirmation or variation of the contract may be a disposition10. It
is not a disposition if the trustee of property beneficially owned by the company
wrongfully parts with the trust property11.
1
IA 1986, s 129.
2
In Coutts & Co v Stock [2000] 1 WLR 906 at 909, Lightman J said that s 127 is ‘part of the
statutory scheme designed to prevent the directors of the company, when liquidation is
imminent, from disposing of the company’s assets to the prejudice of its creditors and to
preserve those assets for the benefit of the general body of creditors’. This statement was
approved by the Court of Appeal in Hollicourt (Contracts) Ltd v Bank of Ireland [2001] 2 WLR
290, at 296F.
3
[2001] Ch 555, [2001] 2 WLR 290. The Court of Appeal approved the decision of Lightman J
in Coutts & Co v Stock [2000] 1 WLR 906.
4
This was based upon the decision in Re Gray’s Inn Construction Ltd [1980] 1 All ER 814,
[1980] 1 WLR 711. In Hollicourt (Contracts) Ltd v Bank of Ireland [2001] 2 WLR 290 at
299D–H, the Court of Appeal pointed out that the decision in Re Gray’s Inn Construction Ltd

35
20.46 Corporate Insolvency

concerned payments made into an overdrawn account at the bank. They also pointed out that
the wider comments made in the judgment of Buckley LJ in that case were dependent upon
concessions made by Counsel.
5
Re Barn Crown Ltd [1995] 1 WLR 147, [1994] 2 BCLC 186.
6
It makes no difference whether the company’s account was overdrawn or in credit: Hollicourt
(Contracts) Ltd v Bank of Ireland [2001] 2 WLR 290 at 300B–C.
7
[2001] 2 WLR 290 at 299H–300B.
8
Re Margart Pty Ltd, Hamilton v Westpac Banking Corpn [1985] BCLC 314, a decision of the
Supreme Court of New South Wales, approved by Vinelott J in Re French’s (Wine Bar) Ltd
[1987] BCLC 499.
9
See, for example, Re Park Ward & Co Ltd [1926] Ch 828.
10
Re French’s (Wine Bar) Ltd [1987] BCLC 499.
11
Akers v Samba Financial Services [2017] UKSC 6.

20.47 The previous practice was for a bank to freeze the customer’s account on
learning of the presentation of a winding up petition. Given that not every
payment into and out of a bank account will be avoided by s 127, that practice
may not be appropriate. However, prudence dictates that a bank which is
notified of a winding up petition should insist that the company obtains a
validation order under s 127 before permitting it to continue operating the
account. The fact that not all transactions into and out of the account will be
avoided by s 127 will strengthen the company’s case for a validation order.
The court may validate a disposition either prospectively or retrospectively, but
it does not necessarily follow that if the court would have made an or-
der prospectively, it will make a retrospective validation order1. If a company
makes a disposition of its assets which is not approved before it is made, the
recipient will have to repay the money or restore the assets unless the court
exercises its discretion to validate the disposition with retrospective effect.
1
Re Gray’s Inn Construction Ltd [1980] 1 WLR 711, [1980] 1 All ER 814. In Re McGuinness
Bros (UK) Ltd (1987) 3 BCC 571 Harman J relied upon the fact that prospective validation
would have been refused as a reason to refuse retrospective validation.

20.48 On an application for a validation order in the period between the

presentation of the petition and its hearing, the court will need to be satisfied
that it is in the interests of the creditors generally that the transaction should be
allowed to proceed1. The Court of Appeal has recently made clear that
‘ . . . save in exceptional circumstances, a validation order should only be
made in relation to dispositions occurring after presentation of winding up
petition if there is some special circumstance which shows that the disposition
in question will be (in a prospective application case) or has been (in a
retrospective application case) for the benefit of the general body of unsecured
creditors, such that it is appropriate to disapply the usual pari passu principle.’2.
In Re Gray’s Inn Construction Ltd Buckley LJ gave, as examples of dispositions
which might be validated, the advantageous sale of a piece of property of the
company, the completion of a contract, or, in appropriate circumstances,
continuing trade generally3. In Denney v John Hudson & Co Ltd, the Court of
Appeal validated a payment made by a company after presentation of the
petition to a supplier which had insisted upon payment for supplies made prior
to the petition before making further deliveries. The suppliers were acting in
good faith with no notice of the petition and the transactions were both in the
normal course of the company’s business and for the benefit of the creditors

36
 Company Liquidation 20.49

generally, since without further deliveries of the supplies (of diesel fuel) the
company could not have carried on its business as hauliers.
In Re Gray’s Inn Construction Ltd the bank was treated as having notice of the
petition on the day when it was advertised in the Gazette even though the bank
had not seen the advertisement on that day, and the court validated credits paid
into the company’s bank account up to that date but not after. Banks should
ensure that they are aware of the advertisement of a petition against their
customer4.
In Rose v AIB Group (UK) plc5 the situation was that payments had been made
into a company’s overdrawn bank account following the presentation of a
winding-up position. The company subsequently went into liquidation and the
bank then released its security believing that the company’s liabilities to it had
been discharged. The liquidator, however, brought an action seeking to recover
the monies on the basis that the payments were void under s 127. The bank
sought to raise a defence of change of position on the grounds that it had
released the charge in the belief that the payments were valid. The court held
that such a defence was in principle available but that on the facts of the case
would not apply since the bank had been aware when it released the charge of
an exposure to a claim by the liquidator.
1
Re Gray’s Inn Construction Co Ltd [1980] 1 WLR 711, at 717; Express Electrical Distribu-
tors Ltd v Beavis [2016] EWCA Civ 765, [2016] 1 WLR 4783, [2016] BPIR 1386. The Practice
Direction: Insolvency Proceedings contains detailed provisions in para 9.11 and states in
para 9.11.7. that ‘The Court will need to be satisfied by credible evidence either that the
company is solvent and able to pay its debts as they fall due or that a particular transaction or
series of transactions in respect of which the order is sought will be beneficial to or will not
prejudice the interests of all the unsecured creditors as a class’.
2
Express Electrical Distributors Ltd v Beavis [2016] EWCA Civ 765, [2016] 1 WLR 4783, at
[56].
3
See also Re Repertoire Opera Co Ltd (1895) 2 Mans 314; and Re T W Construction Ltd [1954]
1 All ER 744, [1954] 1 WLR 540 in which Wynn-Parry J validated repayment to the bank of
monies lent by the bank after presentation of the petition to enable the company to pay wages
and carry on its business, and Re Clifton Place Garages Ltd [1970] Ch 477, [1969] 3 All ER
892. In Re Webb Electrical Ltd [1988] BCLC 382 Harman J held that the court will only
validate dispositions if the dispositions were made bona fide with a view to the assistance of the
company, but, the authorities do not support such a restricted approach. Further, in appropri-
ate circumstances, the court can validate a transaction for the benefit of a third party. In Re
Dewrun Ltd [2002] BCC 57 the court validated the transfer of a property from the company to
another party to the extent of confirming a charge which a bank had obtained over the property.
4
A winding up petition must be advertised: IR 2016, r 7.10(3).
5
[2003] EWHC 1737 (Ch), [2003] 1 WLR 2791, [2004] BCC 11.

(c) Vulnerable transactions

20.49 IA 1986 prescribes three principal types of transaction which are vul-
nerable in a liquidation: transactions at an undervalue; preferences; and extor-
tionate credit transactions1. The provisions relating to those transactions apply
equally to administrations, and there are similar provisions in relation to
personal insolvency2.
1
See the description of the scheme regarding vulnerable transactions in IA 1986 by Nicholls V-C
in Re Paramount Airways Ltd [1993] Ch 223 at 230 B–G and 233C–235F.
2
IA 1986, ss 339–343.

37
20.50 Corporate Insolvency

(i) Transactions at an undervalue

20.50 A company enters into a transaction at an undervalue if it makes a gift to
another person1 or otherwise enters into a transaction on terms that it will
receive no consideration, or alternatively, if the company enters into a trans-
action for a consideration the value of which, in money or money’s worth, is
significantly less than the value in money or money’s worth of the consideration
provided by the company2.
In Phillips v Brewin Dolphin Bell Lawrie Ltd3 the House of Lords held that
the Court of Appeal had been wrong to decide that only the elements of the
transaction between the company and the person alleged to have received the
benefit of the undervalue could be taken into account. The true issue is to
identify the consideration for the transaction, and this includes the value of the
consideration given under collateral agreements with other parties4.
1
This includes a person resident overseas: Re Paramount Airways Ltd [1993] Ch 223.
2
IA 1986, s 238(4) (and 423(1)). What constitutes consideration which is ‘significantly less’ than
the consideration given by the company was considered in Re Kumar [1993] BCLC 548, and in
the context of the IA 1986, s 423 in National Bank of Kuwait SAK v Menzies [1994] 2 BCLC
306, CA; Pinewood Joinery v Starelm Properties Ltd [1994] 2 BCLC 412; Agricultural
Mortgage Corpn plc v Woodward [1995] 1 BCLC 1; Barclays Bank plc v Eustice
[1995] 2 BCLC 630; Jyske Bank (Gibralter) Ltd v Spjeldnaes [1999] 2 BCLC 101. See also
Chohan v Saggar [1993] BCLC 661; on appeal [1994] 1 BCLC 706, CA; Aiglon Ltd v Gau
Shan Co Ltd [1993] BCLC 1321; Re Brabon, Treharne v Brabon [2001] 1 BCLC 11; National
Westminster Bank plc v Jones [2001] 1 BCLC 98; Lord v Sinai Securities Ltd [2004] EWHC
1764 (Ch), [2005] 1 BCLC 295.
3
[2001] UKHL 2, [2001] 1 WLR 143, [2001] BCC 864.
4
‘Transaction’ is given an extended meaning by IA 1986, s 436(1) (and see further Feakins v
DEFRA [2005] EWCA Civ 1513, [2007] BCC 54, at [76]: transaction includes ‘arrangement’,
which is ‘apt to include an agreement or understanding between parties, whether formal or
informal, oral or in writing’; but see Hunt v Hosking [2013] EWCA Civ 1408, for the need for
some step, or act of participation, to have been taken by the company).

20.51 There are two separate provisions in the Insolvency Act 1986 which deal
with transactions at an undervalue: (i) section 238, which only applies when a
company has entered administration or liquidation, and is subject to time-
limits; and (ii) section 423 which is of general application and not subject to the
same time-limits as section 238, but does require fraudulent intention to be
made out in order for relief to be granted.
20.52 In the case of section 238, a transaction will only be caught if it is entered
into at a relevant time. In the case of companies, the transaction must have been
entered into (i) during the two years preceding the ‘onset of insolvency’1 (which
has nothing to do with the date on which the company actually became
insolvent, but with the commencement of an insolvency process); (ii) between
the making of an administration application and the making of an administra-
tion order on that application; or (iii) between the filing at court of a notice of
intention to appoint an administrator and the making of an appointment2.
In addition, at the date when the transaction is entered into a company must be
unable to pay its debts3 or, must become unable to pay its debts as a conse-
quence of the transaction4. If the transaction was entered into with a connected
person then it is presumed that the company was insolvent at the time5. The
Insolvency Act 1986, s 238(5) prescribes that the court shall not make an
order in the following circumstances6:

38
 Company Liquidation 20.54

‘(a) that the company which entered into the transaction did so in good faith and
for the purpose of carrying on its business, and
(b) that at the time it did so there were reasonable grounds for believing that the
transaction would benefit the company.’

1
The phrase is defined by IA 1986, s 240(3).
2
IA 1986, s 240(1). In the case of individuals it is two years unless the bankrupt was insolvent at
the date of the transaction, or was insolvent as a consequence of the transaction, in which case
it is five years. If the transaction is entered into with an associate, the bankrupt is presumed to
have been insolvent when the transaction was entered into: IA 1986, s 341. The orders which
might be made are set out in s 241 in relation to companies and s 342 in relation to individuals
(see below).
3
Within the meaning given in the IA 1986, s 123.
4
IA 1986, s 240(2), and in relation to individuals, s 341(2).
5
Section 240(2), and in relation to individuals, the IA 1986, s 342(2). Connected persons
include associates of the company. The definition of who is an associate of the company is very
wide, and appears in the IA 1986, s 435.
6
There is no equivalent in the case of individuals. Not surprisingly, s 238(5) was held not to
apply where gratuitous payments had been made to the wife of one director and mother of the
other director in Re Barton Manufacturing Co Ltd [1999] 1 BCLC 740.

20.53 The two types of transaction which will most frequently concern banks
in this context are guarantees and charges. Banks which have taken guarantees
from guarantors who become insolvent within the relevant time risk finding
that the guarantees are set aside as transactions at an undervalue. In the
Northern Irish case of Levy McCallum Ltd v Allen1, Treacy J adopted Prof
Goode’s analysis, holding that in principle a guarantee may be set aside as a
transaction at an undervalue, but that:
‘The particular difficulty in applying [IA 1986, s 238] to guarantees is that “ . . .
the issue of a guarantee by the company merely involves it in a contingent liability
which may never crystallise and the quid pro quo is the making of an advance to a
third party, the principal debtor. So in contrast to the usual case a guarantee does not
at the time of its issue involve any form of transfer either from or to the company and,
indeed, it may never pay anything or receive anything as a result of the transaction.
But these are matters which go merely to the valuation of benefit and burden and they
do not affect the applicability of [s 238]. . . . ”. The “crucial question is whether
there is a broad equality of exchange, that is whether the benefit conferred on the
creditor by the issue of the guarantee is significantly greater than the value to the
surety of the advance to the principal debtor . . . this involves an assessment at the
date of the guarantee of what is likely to happen when payment becomes
due” . . . .’
Where cross-guarantees have been given by several companies in the same
group, s 238(5) may assist the bank, if it can establish that the guarantee was
entered into in good faith and for the purposes of carrying on the com-
pany’s business, and that there were reasonable grounds for believing that the
transaction would benefit the company (it is to be noted that the requirement in
s 238(5) that the transaction should benefit the company is wider than the
requirement in s 238(4) that the company should receive consideration).
1
[2007] NICh 3. The Northern Irish provisions in question are the direct analogue of the IA 1986
provisions.

20.54 In Re MC Bacon Ltd1 Millett J held that the mere creation of a security
could not be characterised as a transaction at an undervalue since it did not

39
20.54 Corporate Insolvency

deplete the company’s assets, and that the company did not provide a consid-
eration which could be measured in money or money’s worth. It has been
suggested2 that the decision may not be good law following the decision of the
House of Lords in Buchler v Talbot3.
However, the grant of a security may be liable to attack on the ground that it
was provided for no consideration4. In any event, if a charge is granted as
security for past consideration, it may be liable to be set aside as a preference (as
to which, see below), or voidable floating charge5. However, it is again likely
that banks will rely upon s 238(5), and the fact that the company received the
benefit of the bank continuing its banking facilities.
1
[1990] BCLC 324 at 340–341; followed by the Court of Appeal in National Bank of Kuwait v
Menzies [1994] 2 BCLC 306.
2
Hill v Spread Trustee Co Ltd (fn 4 below), at [138].
3
[2004] UKHL 9, [2004] 2 AC 298, [2004] BCC 214, [2004] 1 BCLC 281.
4
Hill v Spread Trustee Co Ltd [2006] EWCA Civ 542, [2007] 1 WLR 2404, at [93].
5
IA 1986, s 245.

20.55 IA 1986, s 423 is the successor to provisions with a long history in

relation to transactions defrauding creditors (most recently, section 172 of the
Law of Property Act 1925). It applies both in insolvency proceedings and
generally, and is not subject to the time-limit applicable to IA 1986, s 238. It
applies to a transaction at an undervalue (defined in the same way as in the case
of IA 1986, s 238) but only if it was entered into by a person for the purpose of
(i) putting assets beyond the reach of a person who is making, or may at some
time make, a claim against him; or (ii) of otherwise prejudicing the interests of
such a person in relation to the claim which he is making or may make. It has
been held by the Court of Appeal that in order to demonstrate that the
transferor had the requisite purpose, it is not necessary to establish that such
was his sole or dominant purpose; it is sufficient to establish that such was a
substantial purpose (and, in this respect, two or more purposes may co-exist)1.
However, it appears to remain the law – as it was under the former law – that
intent may be inferred from the mere fact of the making of a conveyance which
would leave creditors unpaid2.
1
Hashmi v Commissioners of Inland Revenue [2002] EWCA Civ 981, [2002] BPIR 974,
[2002] 2 BCLC 489.
2
See Giles v Rhind [2008] EWCA Civ 118, [2009] Ch 191, [2008] BPIR 342, [2008] 2 BCLC 1,
at [14].

(ii) Preference
20.56 IA 1986, 239(4) defines the circumstances in which a preference is given
by a company in the following terms1:
For the purposes of this section and section 241, a company gives a preference to a
person if—
‘(a) that person is one of the company’s creditors or a surety or guarantor for any
of the company’s debts or other liabilities, and
(b) the company does anything or suffers anything to be done which (in either
case) has the effect of putting that person into a position which, in the event
of the company going into insolvent liquidation is better than the position he
would have been in if that thing had not been done.’

40
 Company Liquidation 20.57

Who is a creditor2 or guarantor of a company is unlikely to cause any doubt,

and frequently a bank will be a creditor. Under the Bankruptcy Act 1914 there
was some doubt over who was a surety, and it was held to include a third party
depositor of security even though he undertook no personal liability for the
debts3. Whether or not the relevant act is a preference within sub-s (b) is a
matter of fact, but, in the majority of cases, it will apply to payments made
either to prefer the creditor4 or to release the guarantor of the debt5, or charges
granted by the company to the person preferred6.
1
IA 1986, s 340 makes similar provisions in relation to bankruptcy.
2
In Re Blackpool Motor Car Co Ltd [1901] 1 Ch 77 Buckley J held that the word ‘creditor’
means any person who was entitled to prove in the bankruptcy, and accordingly, included a
surety. In Re Beacon Leisure Ltd [1992] BCLC 565 it was held that the directors of the
company were creditors by virtue of their indemnity against the company for rent payable under
a lease which had been entered into by the directors of premises used by the company. In Re
Thirty-Eight Building Ltd (No 1) [1999] BCC 206, it was held that s 239(4) looks to identify a
‘creditor’ in the legal sense of that word, and it matters not whether that creditor is a creditor in
a trust capacity or in a beneficial capacity.
3
Re Conley, ex p Trustee v Barclays Bank Ltd [1938] 2 All ER 127.
4
See for example Re Cohen [1924] 2 Ch 515. Note that a transfer of funds on trust will not
amount to a preference: Re Branston & Gothard Ltd [1999] BPIR 466, [1999] 1 All ER
(Comm) 289, [1999] Lloyd’s Rep Bank 251.
5
See for example Re FP and CH Matthews Ltd [1982] Ch 257, [1982] 1 All ER 338; Re
Kushler Ltd [1943] Ch 248, [1943] 2 All ER 22.
6
See for example Re Mistral Finance Ltd [2001] BCC 27.

20.57 The preference must have been made at a relevant time, which in the case
of a preference depends upon whether the person preferred is connected to the
company or not1. If the person preferred was a connected person, then the
relevant time can be two years prior to the ‘onset of insolvency’2 (which has
nothing to do with the date on which the company actually became insolvent,
but with the commencement of an insolvency process)3. If not, then it is (i)
6 months prior to the ‘onset of insolvency’4; (ii) between the making of an
administration application and the making of an administration order on that
application; or (iii) between the filing at court of a notice of intention to appoint
an administrator and the making of an appointment5.
The act will not be a preference unless at the time when it was done the
company was insolvent or became insolvent as a consequence of the trans-
action6. However, insolvency is presumed where the person preferred is a
connected person7.
The preference provisions require an element of intention or purpose to be
proved, and it is this part of the test which banks will find most difficult to assess
in relation to any transaction which is challenged. IA 1986, s 239(5) provides:
‘The court shall not make an order under this section in respect of a preference given
to any person unless the company which gave the preference was influenced in
deciding to give it by a desire to produce in relation to that person the effect
mentioned in subsection 4(b).’
IA 1986, s 239(5) requires that there must be a ‘desire’ to prefer the person. It
is the decision to give a preference, rather than the giving of the preference
pursuant to that decision, which must be influenced by the desire to produce the
effect set out in s 239(4)8. There is a rebuttable presumption of intention to
prefer which operates against a connected person (otherwise than only by
reason of being the company’s employee)9. A bank which has become a shadow

41
20.57 Corporate Insolvency

director of a company risks the operation of this presumption against it.

1
The definition of a ‘connected’ person is given by IA 1986, s 249. Where a decision to make a
payment is made and the payment itself made subsequently, the relevant event for the purposes
of determining when the preference was given is the making of the payment, not the date when
the decision was made: Wills v Corfe Joinery Ltd [1998] 2 BCLC 75.
2
The phrase is defined by IA 1986, s 240(3).
3
IA 1986, s 240(1)(a) and (3). In relation to personal insolvency, the relevant time is extended to
two years prior to the presentation of the bankruptcy petition where the person preferred was
an associate of the individual s 341(1)(b).
4
IA 1986, s 240(1)(b). In relation to individual insolvency see IA 1986, s 341(1)(c).
5
IA 1986, s 240(1)(c) and (d).
6
IA 1986, s 240(2).
7
IA 1986, s 240(2). In relation to individual insolvency, the presumption applies to associates: IA
1986, s 341(2).
8
Re Stealth Construction Co Ltd [2011] EWHC 1305 (Ch), [2011] BPIR 1173, at [37], [56].
9
IA 1986, s 239(6). In relation to individual insolvency, the same presumption applies to
associates of the bankrupt: IA 1986, s 340(5). The director in Re Fairway Magazines Ltd
[1993] BCLC 643 was a connected person and successfully rebutted this presumption. The
directors in Wills v Corfe Joinery Ltd [1998] 2 BCLC 75 whose loan accounts were repaid by
the insolvent company, failed to rebut the presumption.

20.58 The difficult question arising out of IA 1986, s 239 is how great an
influence the desire to prefer should be. In Re MC Bacon Ltd1 Millett J held that
the old authorities, which were concerned with the different statutory provi-
sions relating to fraudulent preference, should not be relied upon when consid-
ering this aspect of the new law2. He held that it is no longer necessary to
establish a dominant intention to prefer, but merely that the decision to prefer
was influenced by the requisite desire. There must be a desire to improve the
creditor’s position in the event of an insolvent liquidation3. Millett J held that
the requisite desire may be inferred from the circumstances, but that the desire
must in fact have influenced the debtor’s decision to enter into the transaction4.
It is sufficient if the desire was one of the factors operating on the minds of those
who made the decision.
That decision was followed by Mummery J in Re Fairway Magazines Ltd5.
Mummery J held that a charge granted to a director who lent money to the
company had not been a preference of the director because the requisite desire
had not been present. The company in that case was influenced solely by the
commercial need to raise money. In Re Agriplant Services Ltd6 Jonathan Parker
J followed Millett J’s approach in holding both the creditor and a director who
had guaranteed the creditor’s debt liable to repay a preference. The desire was
both to put the creditor into a better position by paying its debt and to put the
director into a better position as guarantor of that debt. The company’s state of
mind was that of the guarantor director who caused the preference payment to
be made. In Wills v Corfe Joinery Ltd7 Lloyd J also followed Millett J’s ap-
proach in holding the directors liable for preferring themselves in causing the
company to repay their directors’ loan accounts. Lloyd J said that it is sufficient
to show that the decision was influenced by a desire to produce the preferential
effect even if that was not the only factor which led to the decision. He also said
that a preference would not have been given only if it can be shown that the
company was actuated solely by proper commercial considerations8.
Since the dominant intention test no longer applies, many of the defences
previously open to banks and persons preferred may not now be available to
them. For example, the fact that the bank has put considerable pressure on the

42
 Company Liquidation 20.59

company to make a payment does not necessarily mean that the company was
not influenced by a desire to prefer the bank or a guarantor in making the
payment. If a charge was created as part of a wider arrangement, then the
company may have been influenced by a desire to prefer the person to whom the
charge was granted in addition to intending to complete the transaction9. On
the other hand, a company, in granting a mortgage to a bank may not intend to
prefer the bank, but to ensure its survival with the continued assistance of the
bank10. In those circumstances the court should conclude that the company was
not influenced by a desire to prefer the bank11. Whether or not a company which
prefers a creditor pursuant to an earlier contract or obligation will have been
influenced by the necessary desire is unclear, although under the old law such a
transaction would not have amounted to a fraudulent preference.
1
[1990] BCLC 324.
2
[1990] BCLC 324 at 335d.
3
[1990] BCLC 324 at 335h.
4
[1990] BCLC 324 at 336b.
5
[1993] BCLC 643. See in particular Mummery J’s summary of the test at p 649 e–h. See also
Morritt J’s decision in Re Ledingham-Smith (a bankrupt) [1993] BCLC 635 in which he
followed Millett J’s approach.
6
[1997] 2 BCLC 598.
7
[1998] 2 BCLC 75.
8
[1998] 2 BCLC 75 at 77b.
9
See Re Eric Holmes (Property) Ltd [1965] Ch 1052, [1965] 2 All ER 333.
10
This would seem to follow from the decision in Re Fairway Magazines Ltd [1993] BCLC 643.
11
This was the result in Re FLE Holdings Ltd [1967] 3 All ER 553, [1967] 1 WLR 1409.

(iii) Orders which may be made

20.59 If the court finds that a transaction has been entered into at an under-
value or a preference given, it has power to make an order restoring the position
to what it would have been if the company had not entered into the transaction
or given the preference1, including orders:
(a) vesting property transferred in the company;
(b) vesting the proceeds of any property transferred in the company;
(c) releasing or discharging any securities granted by the company;
(d) requiring compensation to be paid for any benefits received;
(e) reviving any obligations of sureties or guarantors released;
(f) requiring security to be given for the performance of any obligations
imposed by the court; and
(g) directing the extent to which any person on whom obligations are
imposed may prove in the liquidation2.
An order under the IA 1986, ss 241, 425 may affect persons who were not
parties to the transaction or who were not preferred. Banks are most often
affected by this provision when a payment is made to the bank which prefers a
guarantor of the company’s indebtedness to the bank. The bank is protected
because the court can order that the guarantee discharged by the preference
should be revived and, usually, guarantees provide that the guarantor remains
liable to the bank in such circumstances.
The position of a person who acts in good faith and for value is protected3. This
may protect banks who may receive a benefit from a transaction or preference

43
20.59 Corporate Insolvency

in good faith and without notice.

1
IA 1986, ss 238(3), 239(3), 241, 423(2), 425(1) and (and s 339(2) in relation to bankruptcy
2
IA 1986, s 241 (and s 342 in relation to individuals). NB – no such relief may be given on an
application under IA 1986, s 423.
3
IA 1986, ss 241(2)–(3C) and 425(2) (and s 342(2) in relation to bankruptcy). The provisions in
ss 241 and 425 were formerly identical, but s 241 now contains far more detailed provisions,
including for rebuttable presumptions (s 241(2A)).

(iv) Extortionate credit transactions

20.60 If a transaction involving the provision of credit to the company is
extortionate and was entered into within three years of the date on which the
company entered administration or went into liquidation, the court has power
to grant relief to the office-holder1. IA 1986, s 244(3) defines the circumstances
in which a transaction is extortionate:
‘For the purposes of this section a transaction is extortionate if, having regard to the
risk accepted by the person providing the credit—
(a) the terms of it are or were such as to require grossly exorbitant payments to
be made (whether unconditionally or in certain contingencies) in respect of
the provision of the credit, or
(b) it otherwise grossly contravened ordinary principles of fair dealing;
and it shall be presumed, unless the contrary is proved, that a transaction with respect
to which an application is made under this section is or, as the case may be, was
extortionate.’
This subsection adapts the (former2) provisions of the Consumer Credit Act
19743 for use in the context of insolvency. It was clear under the Consumer
Credit Act 1974 that the test for an extortionate credit bargain was a high one
(‘so unfair as to be oppressive’)4. In the case of commercial transactions where
the interest rates are spelt out at the outset, it has been held that the test for an
extortionate credit bargain under IA 1986, s 244 is a ‘very stringent one’5.
If the court finds that a transaction is extortionate it may set aside the whole or
any part of any obligation created by the transaction; vary the terms of the
transaction or the terms upon which any security is held; order that any person
who was a party to the transaction should make payments to the liquidator;
require anyone to surrender property held by way of security; or direct accounts
to be taken between anyone6.
1
IA 1986, s 244(2) (the time a company ‘goes into liquidation’ is defined by IA 1986, s 247(2)).
In relation to individual insolvency see the IA 1986, s 343.
2
Following the changes made to the Consumer Credit Act 1974 by the Consumer Credit Act
2006, the provisions in relation to ‘extortionate credit bargains’ have been replaced by a new
‘unfair relationship’ regime, which is discussed at paras 9.10 to 9.17 above.
3
As to which see Chapter 9 above.
4
Paragon Finance plc v Nash [2001] EWCA Civ 1466, [2002] 1 WLR 685, [2002] 2 All ER 248,
[2001] 2 All ER (Comm) 1025, at [67].
5
White v Davenham Trust Ltd [2010] EWHC 2748 (Ch), [2011] Bus LR 615, [2011] BCC 77,
[2011] BPIR 280, at [50].
6
IA 1986, s 244(4).

44
 Company Liquidation 20.62

(d) The liability of banks as a shadow or de facto director

20.61 IA 1986, s 251 defines a ‘shadow director’ as a person in accordance
with whose directions or instructions the directors of the company are accus-
tomed to act. There is no statutory definition of a ‘de facto director’, who is a
person who acts as a director, even though he is not validly appointed as one. A
de facto director owes the company in question director’s duties and is liable to
the remedies against directors and former directors provided for by IA 1986. A
shadow director, on the other hand, probably does not owe director’s duties
except in relation to the directions and instructions he gives the de jure
director(s) (although it should be noted that the law in this area can only be
regarded as unsettled)1.
There was formerly thought to be a bright distinguishing line between the de
facto director (who presumes to act as a director) and a shadow director (who
stands in the shadows): a man could be one or the other, but not both. That view
is very much less in favour following the decision of the Supreme Court in
Holland v HMRC2: ‘a person may act as both, the one in fact shading into the
other’3.
1
See Vivendi SA v Richards [2013] EWHC 3006 (Ch), [2013] BCC 771, at [133] ff.
2
[2010] UKSC 51, [2010] 1 WLR 2783, [2011] Bus LR 111.
3
Secretary of State v Chohan [2013] EWHC 680 (Ch), at [46].

20.62 There have been many first instance decisions considering whether or
not a person was a de facto director – considered at length in Holland v HMRC.
In that case, Lord Collins came to this conclusion as to the nature of the test for
de facto directorship:
‘It seems to me that in the present context of the fiduciary duty of a director not to
dispose wrongfully of the company’s assets, the crucial question is whether the person
assumed the duties of a director. Both Sir Nicolas Browne-Wilkinson V-C in Re
Lo-Line (at p 490) and Millett J in Re Hydrodam (at p 183) referred to the
assumption of office as a mark of a de facto director. In Fayers Legal Services Ltd v
Day, (unreported) 11 April 2001, a case relating to breach of fiduciary duty, Patten J,
rejecting a claim that the defendant was a de facto director of the company and had
been in breach of fiduciary duty, said that in order to make him liable for misfeasance
as a de facto director the person must be part of the corporate governing structure,
and the claimants had to prove that he assumed a role in the company sufficient to
impose on him a fiduciary duty to the company and to make him responsible for the
misuse of its assets. It seems to me that that is the correct formulation in a case of the
present kind.’1
In Re a Company (No 005009 of 1987), ex p Copp2 Knox J refused to strike out
claims for preferences and for wrongful trading against the bank, both of which
depended upon a finding that the bank was a shadow director. The facts which
Knox J held could result in the bank being found to be a shadow director were
that, when the bank discovered that the company was experiencing financial
difficulties, it started to exert pressure on the company; procured a debenture
from the company; and it commissioned a report which made several recom-
mendations which, under pressure from the bank, the directors of the company
followed3. It is to be doubted whether this decision – in light of the adoption of
the ‘part of the corporate governing structure’ test in Holland v HMRC can be

45
20.62 Corporate Insolvency

regarded as remaining good law.

1
[2010] UKSC 51, [2010] 1 WLR 2783, [2011] Bus LR 111, at [93]. See also the list of factors
identified by Hildyard J in Secretary of State v Chohan [2013] EWHC 680 (Ch), at [41].
2
[1989] BCLC 13.
3
See [1989] BCLC 13 at 18 b–f. Knox J declined to state his reasons for finding that the claim
against the bank was not obviously unsustainable to avoid embarrassing the trial judge: see at
21 a–d.

20.63 Companies in difficulty will often discuss their problems with the bank,
which in many cases will have power, by virtue of its securities and importance
to the company, to control the future conduct of the company’s business. It is
suggested that a bank which advises the debtor or indicates the terms upon
which it is prepared to continue its support for the company will not be a
shadow director. There are powerful arguments that the courts should be slow
to find that a bank is a shadow director if the bank leaves the directors with a
real choice whether or not to take a course which accommodates the bank.
However, if the bank assumes effective executive or policy control, there is a
real risk that it will be a shadow director.
20.64 If a bank is a shadow director, then in addition to the presumption which
it will face in any proceedings claiming that a transaction is a preference, it
might find that it is liable for wrongful trading. Although the marginal note to
the IA 1986, s 214 refers to ‘wrongful trading’, the section neither refers to nor
depends upon the company having traded. A declaration that a person who is or
was a director is liable to contribute to the assets of a company under s 214 may
be made if the conditions in the IA 1986, s 214(2) are satisfied:
‘This subsection applies in relation to a person if—
(a) the company has gone into insolvent liquidation,
(b) at some time before the commencement of the winding-up of the company,
that person knew or ought to have concluded that there was no reasonable
prospect that the company would avoid going into insolvent liquidation, and
(c) that person was a director of the company at that time . . . ’
In addition to liability under s 214 for wrongful trading, liability can be
imposed under s 213 of the IA 1986, where any business of the company has
been carried on fraudulently1, on any persons (ie, the section is not limited to
directors and former directors) who were knowingly parties to the carrying on
of the business in this manner2.
1
This is a fairly high test: there must be ‘actual dishonesty involving, according to current notions
of fair trading amongst commercial men, real moral blame: Re Patrick and Lyon Ltd [1933] Ch
786, at 790 – a formulation adopted in many cases since (eg, Re Bank of Credit and Commerce
International SA (No 15), Morris v Bank of India [2005] EWCA Civ 693, [2005] 2 BCLC 328).
2
See Re Bank of Credit and Commerce International SA (No 15), Morris v Bank of India [2005]
EWCA Civ 693, [2005] 2 BCLC 328; Re Bank of Credit and Commerce International SA (No
14), Morris v State Bank of India [2003] EWHC 1868 (Ch), [2004] 2 BCLC 236; Re Bank of
Credit and Commerce International SA, Banque Arabe v Morris [2001] 1 BCLC 263; Morris v
Bank of America National Trust and Savings Association [2001] 1 BCLC 771.

20.65 It will not be difficult to establish that the company has gone into
insolvent liquidation. A company goes into insolvent liquidation if it goes into
liquidation at a time when its assets are insufficient for the payment of its debts
and other liabilities and the expenses of the winding up1. The time referred to in
sub-s (b) is critical, but establishing that time is not free from uncertainties.

46
 Company Liquidation 20.66

Although referred to in the section, the costs and expenses of the liquidation are
unlikely to form part of what the director knew, and it is difficult to see how he
ought to have concluded what they would be, because very few directors would
know, or could be expected to know, what the costs and expenses of a
liquidation are likely to be. Banks could be in a worse position than other
directors because they could be expected to know what the likely expenses of a
liquidation will be and therefore could be expected to realise earlier than other
directors that the company will go into insolvent liquidation. However, in most
cases the question will be whether the director knew that the company was
likely to go into liquidation (other than a members’ voluntary liquidation), or
that he ought to have reached that conclusion.
If there is no evidence that the director knew that the company had no
reasonable prospect of avoiding liquidation, then the liquidator will have to rely
upon what the director ought to have concluded2. IA 1986, s 214(4) sets out the
standard to apply in order to determine both the facts which the director ought
to know and the conclusions which he ought to reach. The director is taken to
be a reasonably diligent person having both the general knowledge, skill and
experience that may reasonably be expected of a person carrying out the same
functions as are carried out by that director in relation to the company, and the
general knowledge, skill and experience that that director has3. It is unclear how
this provision would apply to a bank which was a shadow director because the
bank does not have any formal functions qua director in relation to the
company. The bank should only be found to have the knowledge which was in
fact available to it, and should not be found to have information which it ought
to have acquired by virtue of its office because it has no duty to inquire.
Furthermore, the bank should be taken to have reached such conclusions as it
should have reached based upon the information it had having regard to the
expertise which banks ordinarily possess.
1
IA 1986, s 214(6).
2
See for example Re DKG Contractors Ltd [1990] BCC 903 and Re Continental Assur-
ance Company of London plc [2001] BPIR 733, the latter of which examines the role of
non-executive directors in relation to liability for wrongful trading.
3
IA 1986, s 214(4).

20.66 If the court concludes that the conditions in IA 1986, s 214(2) are
satisfied in relation to a party, it will then have to consider the additional
requirement in sub-s (3) which provides:
‘The court shall not make a declaration under this section with respect to any person
if it is satisfied that after the condition specified in subsection (2)(b) was first satisfied
in relation to him that person took every step with a view to minimising the potential
loss to the company’s creditors as . . . he ought to have taken.’
The director is required to take every step which he ought to have taken
applying the same objective standards which are applied in determining what
the director ought to have concluded1. This does not require the directors to
cause the company to stop trading, but to minimise the loss to creditors. One
example of a situation where it could be wrongful trading to stop trading is
where a company is party to a contract which if completed will yield a large
profit, but which if terminated would result in large damages claims. In such
circumstances the directors should probably complete the contract, although
they might also be liable for wrongful trading unless the contract is completed

47
20.66 Corporate Insolvency

under the control of an administrator. A bank which is a shadow director in

such circumstances could be faced with a situation where the contract cannot be
completed without further funding. However, it is their conduct qua directors
and not their conduct qua bank which should be considered in this context.
Arguably, if the bank refuses to lend money to the company (provided that it
would be appropriately secured) it fails to take every step which it could take,
and arguably which it ought to take. However, the courts should be reluctant to
conclude that the bank is liable for wrongful trading in such circumstances
because in deciding whether or not to lend money to the company the bank is
acting qua bank and not qua director. In the more usual case, where the
company’s continued trading causes a loss to creditors, banks could be found
liable as shadow directors if they fail to ensure that the company stops trading
immediately.
If a person is found liable for wrongful trading, the court may declare that he
should make a contribution to the company’s assets. The quantum of such
contribution is left entirely at large by IA 1986, but it has been held that the
purpose of s 214 is compensatory, and that the prima facie measure of the
award is the amount by which the company’s assets can be discerned to have
been depleted by the director’s conduct which caused the discretion under s 214
to arise2. The court has wide powers to make such directions as it thinks proper
to give effect to its declaration3, but in the case of banks it is suggested that the
most usual order will be an order for payment by the bank to the liquidator
without more.
1
IA 1986, s 214(4).
2
Re Produce Marketing Consortium Ltd (No 2) [1989] BCLC 520. Where the company’s re-
cords are in disarray, one approach is to order the director to pay a sum equal to the aggregate
value of the debts incurred after the date on which they ought to have appreciated that insolvent
liquidation was inevitable: Re Purpoint Ltd [1991] BCLC 491 (see also Re Kudos Business
Solutions Ltd [2011] EWHC 1436 (Ch), [2012] 2 BCLC 65).
3
IA 1986, s 215.

(e) Distribution of the estate

(i) Secured creditors
20.67 A secured creditor is defined as a creditor who holds in respect of his debt
any mortgage, charge, lien or other security1, and in many cases banks fall
within one or more of these categories. Generally the right of a secured creditor
to the security is not affected in a liquidation2. Realisations from fixed charge
securities are retained by the secured creditor, subject only to the costs of
realising the security which might be paid either to a receiver or to the liquidator
in the event that he realises the security with the approval of the secured
creditor. If a secured creditor realises his security and there is a balance due to
him from the company, he may prove as an unsecured creditor for the balance
due to him3.
In the case of a floating charge, a liquidator, administrator, or receiver is
required (subject to exceptions) to make a prescribed part of the company’s net
property available to meet unsecured claims, and not distribute that part to the
proprietor of a floating charge except insofar as it exceeds the amount required
for the satisfaction of unsecured claims4.

48
 Company Liquidation 20.68

If part of the secured creditor’s debt is preferential, then he may appropriate the
sum realised from the security to pay the non-preferential part of his debt, and
maximise his claim to prove as a preferential creditor5. A secured creditor may
surrender his security and prove as an unsecured creditor for the whole debt6. In
many cases the secured creditor will submit a proof of debt for the amount by
which the claim exceeds the value of the security. A proof of debt has to contain
particulars of any security held, the date when it was given and the value which
the creditor puts on it7. The valuation is not final and may be amended with the
agreement of the liquidator or the permission of the court (notice must be given
to creditors if the consent is that of the liquidator in defined circumstances)8. If
a secured creditor omits to disclose a security in his proof of debt he must
surrender the security unless the court grants him relief on the ground that the
omission was inadvertent or the result of honest mistake9.
A liquidator may give 28 days’ notice to a secured creditor who has put in a
proof of debt in which he has valued his security, that he will redeem the security
at that value. The creditor then has 21 days in which to revalue his security if he
wishes to do so. In order to avoid uncertainty, the secured creditor can give
notice to the liquidator requiring him to elect whether to exercise his power to
redeem the security. The liquidator has three months either to redeem the
security or to elect not to10. If the liquidator is not satisfied with the value put on
the security he can require that the property be offered for sale11. If the property
is realised, the net amount realised is substituted for the value given by the
secured creditor in the proof of debt12.
1
IA 1986, s 248. A similar definition applies in relation to individual insolvency: see IA 1986,
s 383.
2
In an administration or administrative receivership property given as security can be realised by
the administrator or administrative receiver: see IA 1986, Sch B1, para 70 and s 43, dealt with
above. A lien on book debts is unenforceable if it would deny the office holder possession of any
books, papers or other records of the company: IA 1986, s 246.
3
IR 2016, r 14.19(1).
4
IA 1986, s 176A. By the Insolvency Act 1986 (Prescribed Part) Order 2003 (SI 2003/2097), the
prescribed part is (i) where the net property does not exceed £10,000, 50% of that property; and
(ii) where the net property does exceed £10,000, 50% of the first £10,000, plus 20% of the
property which exceeds £10,000 up to a maximum prescribed part of £600,000.
5
Re William Hall (Contractors) Ltd [1967] 2 All ER 1150, [1967] 1 WLR 948.
6
IR 2016, r 14.19(2). The provisions as to insolvency set-off do not require a creditor to set-off
what against what the company owes him what he owes the company unless he chooses to
release his security and prove: Re Norman Holding Co Ltd [1991] 1 WLR 10.
7
IR 2016, r 14.4(g).
8
IR 2016, rr 14.14 and 14.15.
9
IR 2016, r 14.16. The rule does not apply to rights in rem protected under the Recast
Regulation: IR 2016, r 14.16(3). This discretion is wider than it was under the old law and,
accordingly, cases which held that amendment would not be allowed without proof that the
liquidator had not changed his position are unlikely to be followed. See, for example, Re Safety
Explosives Ltd [1904] 1 Ch 226.
10
IR 2016, r 14.17.
11
IR 2016, r 14.18.
12
IR 2016, r 14.19.

(ii) Preferential claims

20.68 After payment of the expenses the preferential debts1 are paid in priority
to all other debts2. The preferential debts rank equally amongst themselves and
if the assets are insufficient to meet them, they abate in equal proportions3. By

49
20.68 Corporate Insolvency

virtue of IA 1986, Sch 6, paras 9 and 10 the following debts due to employees
are preferential in relation to both companies and individuals: (a) remuneration
which is owed by the company to an employee in respect of the period of four
months before the relevant date4 and (b) accrued holiday remuneration in
respect of any period of employment before the relevant date. The present limit
of any preferential claim for wages is £8005. By IA 1986, Sch 6, para 11 the
following payments in respect of wages are preferential:
‘So much of any sum owed in respect of money advanced for the purpose as has been
applied for the payment of a debt which, if it had not been paid, would have been a
debt falling within paragraph 9 or 10.’
Thus a bank may claim that part of its debt is preferential if it can establish that
it advanced money which was used to pay wages. In National Provincial
Bank Ltd v Freedman and Rubens6 Clauson J set out the facts as follows:
‘ . . . cheques were not paid in until the company were pretty sure that they would
receive the accommodation they required for meeting wages. Accordingly, every
week a wages cheque was drawn, but the wages cheque was not paid until the
manager (of the bank) was satisfied that there was being contemporaneously paid in,
or there would be in due course of business in a few hours paid in, cheques which
would have the result of reducing the overdraft to such an extent that the wages
cheque would increase the overdraft back again to a figure not exceeding or not
substantially exceeding the figure at which it stood at the beginning of the week.’
The question was whether or not the money which was paid out on the wages
cheques was an advance by the bank for the purpose of paying wages, it having
been alleged that in fact the wages were paid out of the cheques the company
paid in. There was little evidence that this had been done in fact and Clauson J
found for the bank. The rule in Clayton’s Case7 operated in favour of the bank,
so that payments into the account discharged the oldest debts, some of which
would not have been preferential by effluxion of time.
Wynn-Parry J found for the bank in Re Primrose (Builders) Ltd8 on facts similar
to those in National Provincial Bank Ltd v Freedman and Rubens. He pointed
out that there was no obligation on the bank to show that the moneys were
advanced pursuant to any agreement or that its intention in so lending was to
become a preferential creditor. He also found that the rule in Clayton’s Case
applied to the account, there being no evidence to the contrary.
1
They are defined in s 386 of, and Sch 6 to, IA 1986. Crown debts are no longer preferential.
2
IA 1986, s 175 (and in the context of a distribution in an administration, see IA 1986, Sch B1,
para 65(2)). In relation to individual insolvency see IA 1986, s 328.
3
IA 1986, ss 175(1) and 328(2).
4
The relevant date, by reference to which the preferential period is determined is defined in the
IA 1986, s 387. Where a company is in administration the relevant date is the date on which it
entered administration. In a receivership, the relevant date is the date of the appointment of the
receiver. In a compulsory winding up, the relevant date is: (a) where administration immediately
preceded the winding up order, the date on which the company entered administration; (b) the
date of the resolution for voluntary winding up if the compulsory liquidation followed a
voluntary liquidation; (c) the date of an appointment of a provisional liquidator; or (d) the date
of the winding-up order. In a voluntary liquidation the relevant date is the date of the resolution.
In a bankruptcy, the relevant date is the earlier of: (a) the date when an interim receiver was
appointed; or (b) the date of the bankruptcy order.
5
Insolvency Proceedings (Monetary Limits) Order 1986 (SI 1986/1996), art 4.
6
(1934) 4 LDAB 444.
7
Devaynes v Noble (1816) 1 Mer 529.

50
 Company Liquidation 20.70
8
[1950] Ch 561, [1950] 2 All ER 334; see also Re Rampgill Mill Ltd [1967] Ch 1138, [1966] 2
Lloyd’s Rep 527.

20.69 A special wages account is frequently opened, although this is not

essential if the facts are otherwise clear. Nevertheless, the advantage of a special
account is that the possibility of reduction of the preferential claims by
payments in is avoided. Buckley LJ in Re E J Morel (1934) Ltd1 stressed that a
claim under the provision then in force must be supported by evidence that
money was advanced to pay wages; in that case there was a wages account
which was in debit to the extent to which a No 2 account was in credit, and the
interdependence of the two meant that the bank never made advances for
wages.
In Re James R Rutherford & Sons Ltd2, Pennycuick J held that moneys
transferred periodically from an overdrawn account to wipe out indebtedness
on a wages account were moneys advanced for the payment of wages. The judge
agreed with Plowman J in Re Yeovil Glove Co Ltd3 as to the operation of
Clayton’s Case. In Re Rampgill Mill Ltd4 the bank had agreed that the
company’s cheques for wages and for other purposes might be cashed at
another bank. The court gave a benevolent rather than a restrictive construction
to the section and found as a fact that money was advanced for the purpose of
paying wages. The question whether a preferential claim in respect of advances
for wages can be assigned is made even more uncertain by the omission in the IA
1986, Sch 6, para 11 of any reference to the person claiming preference being
‘the person by whom the money was advanced’. Indeed the wording, which
refers to any sum owed in respect of money advanced, gives more support to the
argument in favour of there being a power to assign the preferential claim.
1
[1962] Ch 21, [1961] 1 All ER 796.
2
[1964] 3 All ER 137, [1964] 1 WLR 1211.
3
[1963] Ch 528, [1962] 3 All ER 400.
4
[1967] Ch 1138, [1966] 2 Lloyd’s Rep 527.

(iii) Proof of unsecured claims: the rule against double proof

20.70 Banks which seek to prove1 as unsecured creditors sometimes find that
they are faced with issues arising out of the rule against double proof. The
nature of the rule against double proof was described by Lord Walker in these
terms in Re Kaupthing Singer and Friedlander Ltd2:
‘The function of the rule is not to prevent a double proof of the same debt against two
separate estates (that is what insolvency practitioners call “double dip”). The
rule prevents a double proof of what is in substance the same debt being made against
the same estate, leading to the payment of a double dividend out of one estate. It is for
that reason sometimes called the rule against double dividend.’
Whether or not there is a risk of double proof does not depend upon a strict
contractual analysis of the debts, but an analysis of their substance. In Barclays
Bank Ltd v TOSG Trust Fund Ltd3 Oliver LJ said:
‘ . . . it is, as I think, a fallacy to argue . . . that because overlapping liabilities
result from separate and independent contracts with the debtor, that, by itself, is
determinative of whether the rule can apply. The test is in my judgment a much
broader one which transcends a close jurisprudential analysis of the person by and to
whom the duties are owed. It is simply whether the two competing claims are, in

51
20.70 Corporate Insolvency

substance, claims for payment of the same debt twice over . . . the rule against
double proofs in respect of two liabilities of an insolvent debtor is going to apply
wherever the existence of one liability is dependent upon and referable only to the
liability to the other and where to allow both liabilities to rank independent for
dividend would produce injustice to the other unsecured creditors.’
The context in which the rule against double proof arises is usually (although
not invariably) suretyship. In a simple case, the operation of the rule is fairly
straightforward:
‘ . . . In the simplest case of suretyship (where the surety has neither given nor been
provided with security, and has an unlimited liability) there is a triangle of rights and
liabilities between the principal debtor (PD), the surety (S) and the creditor (C). PD
has the primary obligation to C and a secondary obligation to indemnify S if and so
far as S discharges PD’s liability, but if PD is insolvent S may not enforce that right in
competition with C. S has an obligation to C to answer for PD’s liability, and the
secondary right of obtaining an indemnity from PD. C can (after due notice) proceed
against either or both of PD and S. If both PD and S are in insolvent liquidation, C can
prove against each for 100p in the pound but may not recover more than 100p in the
pound in all.’
[ . . . ]
‘The effect of the rule is that so long as C has not been paid in full, S may not compete
with C either directly by proving against PD for an indemnity, or indirectly by setting
off his right to an indemnity against any separate debt owed by S to PD.’4
In the usual case of a bank with a debt claim against its customer (which is in
liquidation) and a guarantee claim against a guarantor, the effect of the rule is
that until the Bank’s debt has been paid in full, the guarantor cannot prove in
the liquidation of the bank’s customer in competition with the bank. In practice,
most standard forms of bank guarantee provide that the surety shall not prove
in the insolvency of the principal debtor in competition with the bank, with the
result that the bank need not rely on the rule in order to protect its position.
A related problem for the bank is that if it is paid part of the debt by the surety,
that reduces the debt due from the principal debtor pro tanto, and the amount
that it can prove for in the principal debtor’s insolvency. However, if the bank
pays the receipt from the guarantor into a suspense account, until the payment
is appropriated to the debt, it does not operate as a discharge of the principal
indebtedness; the bank can then prove in respect of the whole debt in the
insolvency of the principal debtor5.
If the surety has guaranteed part of the debt, and has paid that sum, then he is
entitled to stand in the creditor’s shoes and ranks for dividend ahead of the
creditor in respect of that part of the debt. If the surety has guaranteed the whole
debt but limits his liability6, then, even if he pays the total amount due under his
limited guarantee, he will not be treated as having discharged his liability and
the creditor retains his right to prove7. However, the surety is entitled to receive
the dividend which the debtor pays in respect of that sum which the surety has
discharged8. This right to prove ahead of the creditor is usually excluded in
bank guarantees by a provision that the security is to be in addition to and
without prejudice to any other securities held from or on account of the debtor,
and that it is to be a continuing security notwithstanding any settlement of the
account9.

52
 Company Liquidation 20.70

The creditor is entitled to prove in the insolvency of a surety for the entire debt
due without giving credit for any sums received from the other co-sureties since
the date of the winding-up order, provided that he does not recover more than
100 pence in the pound10. The creditor’s proof must give credit for any sums
realised before proving, and for any dividends declared in the principal debt-
or’s insolvency11. A surety may prove against the estate of a co-surety whether
he has paid the debt in full or claims to be entitled under his right to
contribution, but he can only recover the just proportion which, as between the
sureties, the co-surety is liable to pay12.
1
The rule can also operate so as to exclude the operation of an insolvency set-off: see Re
Kaupthing Singer and Friedlander Ltd (fn 2 below), at [12].
2
[2011] UKSC 48, [2012] 1 AC 804, [2011] Bus LR 1644, [2012] BCC 1, [2012] 1 All ER 883,
[2011] BPIR 1706 [2012] 1 BCLC 227, at [11].
3
[1984] AC 626, [1984] 1 All ER 1060.
4
Re Kaupthing Singer and Friedlander Ltd (fn 2 above), at [110]-[112].
5
Commercial Bank of Australia Ltd v Official Assignee of the Estate of John Wilson & Co
[1893] AC 181.
6
Modern standard forms of guarantee appear generally to be drafted in an attempt to achieve
this end (see para 18.32).
7
Re Rees, ex p National Provincial Bank of England Ltd (1881) 17 Ch D 98; Re Sass, ex p
National Provincial Bank of England Ltd [1896] 2 QB 12.
8
Ex p Rushforth (1805) 10 Ves 409; Gray v Seckham (1872) 7 Ch App 680.
9
Re Sass, ex p National Provincial Bank of England Ltd [1896] 2 QB 12; Barclays Bank Ltd v
TOSG Trust Fund Ltd [1984] AC 626, at 644; Liberty Mutual Insurance Co (UK) Ltd v HSBC
Bank plc [2002] EWCA Civ 691.
10
Re Houlder [1929] 1 Ch 205.
11
Re Blakeley, ex p Aachener Disconto Gesellschaft (1892) 9 Morr 173; followed in Re
Amalgamated Investment and Property Co Ltd [1985] Ch 349, [1984] 3 All ER 272.
12
Re Clark, ex p Stokes and Goodman (1848) De G 618; Re Parker [1894] 3 Ch 400;
Wolmershausen v Gullick [1893] 2 Ch 514.

53
Chapter 21

PERSONAL INSOLVENCY

1 INTRODUCTION 21.1
2 BANKRUPTCY 21.2
(a) The petition and bankruptcy order 21.2
(b) Dispositions made by the bankrupt 21.6
(c) After-acquired property 21.10
(d) The avoidance of general assignments of book debts 21.11
3 INDIVIDUAL VOLUNTARY ARRANGEMENTS 21.12
4 DEBT RELIEF ORDERS 21.14
5 ADMINISTRATION ORDERS, DEBT REPAYMENT PLANS,
AND ENFORCEMENT RESTRICTION ORDERS 21.17
(a) Administration orders under the County Courts Act 1984 21.18
(b) Debt repayment plans 21.19
(c) Enforcement restriction orders 21.20

1 INTRODUCTION TO PERSONAL INSOLVENCY

21.1 In England and Wales (and Northern Ireland), the main form of insol-
vency procedure traditionally available to individuals was bankruptcy. Legis-
lative developments in recent years have added a series of alternatives, such as
individual voluntary arrangements; they have also removed the option of a
petition by the would-be bankrupt himself, and substituted a regime which
achieves the same result without the need to take up court time hearing a
petition. Legislative provisions which have yet to come into force will, when
they come into force, provide yet further alternatives to bankruptcy.

2 BANKRUPTCY

(a) The petition/application and bankruptcy order

21.2 The law by which an individual may be made bankrupt is similar to the
law by which a company may be put into compulsory liquidation. As a matter
of jurisdiction, a creditor’s bankruptcy petition may be presented1 against a
debtor if2:
(a) the debtor’s centre of main interest (this has the same meaning as in the
Recast Regulation) is in England or Wales; or
(b) his centre of main interest is not in an EU Member State which has
adopted the Recast Regulation, and at any time in the preceding three
years the debtor has either (i) been ordinarily resident or has had a place
of residence or (ii) has carried on business in England and Wales3.
A debtor may have a bankruptcy order made against him on his own applica-
tion to an adjudicator (but only on the ground that he is unable to pay his debts)

1
21.2 Personal Insolvency

and on the same jurisdictional basis as in the case of a creditor’s petition4. This
replaces the former procedure by which he petitioned for his own bankruptcy.
1
The persons who are able to present the petition are set out in s 264 of the IA 1986; the list no
longer includes the debtor himself, but does include various office-holders appointed under the
Recast Regulation.
2
IA 1986, s 265(1).
3
IA 1986, s 265(3) prescribes an extended definition of what constitutes carrying on business.
Under the Bankruptcy Act 1914 it was held that a debtor who had ceased trading, but had left
trading debts unpaid, was carrying on business: Theophile v Solicitor-General [1950] AC 186,
[1950] 1 All ER 405; Re Bird [1962] 2 All ER 406, [1962] 1 WLR 686; Re Brauch (a debtor)
[1978] Ch 316, [1978] 1 All ER 1004, CA. This was applied to the IA 1986 in Re a Debtor (No
784 of 1991) [1992] Ch 554.
4
IA 1986, ss 263H ff.

21.3 A creditor’s petition may be presented to the court if the debt due to the
petitioner exceeds £5,000 (a very substantial increase, implemented in 2015,
from the former level of £750); is liquidated and payable to the petitioning
creditor immediately or at some future time; and is unsecured1. The debt must
be a debt which the debtor appears unable to pay, or to have no reasonable
prospect of being able to pay2. A secured creditor can present a bankruptcy
petition if he states in the petition that he will give up his security for the benefit
of all of the bankrupt’s creditors, or if the security is valued in the petition and
the petition is in respect of the unsecured part of the debt3. In Re A Debtor (No
64 of 1992) it was held that a secured creditor is entitled to serve a statutory
demand in which the total liquidated debt4 was stated and an estimated value of
the creditor’s security deducted. The fact that there may be a dispute as to the
value of the security did not render the debt ‘unliquidated’ and incapable of
forming the basis of a statutory demand.
Usually the debtor’s inability to pay the debt is determined by the service of a
statutory demand, which is no longer required to be in prescribed form, but
must contain prescribed information5. In Re a Debtor (No 1 of 1987)6
the Court of Appeal refused to set aside a statutory demand on the grounds that
it was perplexing (a departure from the law under the Bankruptcy Act 1914)
because the debtor could not show that he had suffered any prejudice as a result.
In the judgment of the court, Nicholls LJ held that IA 1986 contained a new
bankruptcy code that should be construed according to its own terms, unfet-
tered by authorities decided under the previous law7.
The demand in that case was on the wrong form, an affidavit served with the
demand and referred to in the demand was inconsistent with the exhibits to that
affidavit, and counsel for the creditor needed an adjournment in order to
understand the demand. But it referred to a judgment, and the debtor knew how
much was due under the judgment.
The Court of Appeal’s approach to the construction of the IA 1986 was
approved by the House of Lords in Re Smith (a bankrupt), ex p Braintree
District Council8. However, there is a limit to how far the approach goes:
‘ . . . a distinction is to be drawn between, on the one hand, cases where creditors
have served defective statutory demands and, on the other, cases where creditors have
not served (or arguably have not served) statutory demands at all. If a creditor has
served something that can sensibly be regarded as a statutory demand . . . the
court will exercise its discretion on whether or not to set aside the demand having
regard to all the circumstances, and, if the demand is not set aside, it will be open to

2
 Bankruptcy 21.4

the creditor to present a bankruptcy petition. In contrast, a creditor who has not
served anything that can be described as a statutory demand will not be entitled to
petition.’9
The effect of this approach is that creditors such as banks will find that they are
not frustrated by spurious technical arguments advanced by debtors seeking to
avoid the consequences of their insolvency.
1
IA 1986, s 267(1), (2) and (4). A debt which is statute barred is not payable and cannot be the
subject matter of a statutory demand: Re a Debtor (No 50A SD of 1995) [1997] 1 BCLC 280.
As to the difficulties that arise in relation to whether a guarantee or indemnity liability is a
‘debt’, see McGuinness v Norwich & Peterborough BS [2011] EWCA Civ 1286, [2012] BPIR
145.
2
IA 1986, s 267(2)(c).
3
IA 1986, s 269. The trustee may later rely upon the valuation given in the petition and seek to
redeem the security or require that it be sold or in appropriate circumstances, it may be
revalued: see above.
4
[1994] 1 WLR 264.
5
IA 1986, s 268(1)(a); IR 2016, rr 10.1 ff. Inability to pay debts can also be established by
proving an unsatisfied execution (although this is rarely relied on in practice), as to which see Re
A Debtor (No 340 of 1992) [1994] 2 BCLC 171. A statutory demand can also require the
debtor to prove that he will be able to pay a future debt when it falls due: IA 1986, s 268(2). If
there is an application to set aside the statutory demand, then no petition can be presented on
it: IA 1986, s 267(2)(d). However, that does not prevent a petitioner presenting an expedited
petition in the interim period pursuant to IA 1986, s 270: Re A Debtor (No 22 of 1993) [1994]
1 WLR 46.
6
[1989] 1 WLR 271, [1989] 2 All ER 46.
7
[1989] 1 WLR 271, at 276G to 267H.
8
[1990] 2 AC 215.
9
Agilo Ltd v Henry [2010] EWHC 2717 (Ch), [2011] BPIR 297, at [16].

21.4 However, where the debtor (a) claims to have a counterclaim, set-off or
cross demand (whether or not he could have raised it in the action in which the
judgment or order was obtained) which equals or exceeds the amount of the
debt or debts specified in the statutory demand, or (b) disputes the debt (not
being a debt subject to a judgment, order, liability order, costs certificate or tax
assessment) on grounds which appear to be substantial (that is, give rises), or (c)
the creditor has security and has not complied with IR 2016, r 10.1(9) or the
value of the security exceeds or equals the debt, or (d) the court is satisfied on
some other ground that the demand should be set aside, the court will set aside
the statutory demand1.
On the hearing of the petition the court may make a bankruptcy order2. If an
application to set aside a statutory demand has failed, the debtor will not
usually be permitted to raise the same grounds in opposition to the petition3.
The court has a discretion to dismiss the petition if the debtor has made an offer
to secure or compound for the debt which, if accepted, would have required the
dismissal of the petition and the offer has been unreasonably refused4. In
practice, the court has been reluctant to exercise this discretion.
1
IR 2016, r 10.5(5).
2
IA 1986, s 271. The court must be satisfied that the debt has not been paid or secured or
compounded for or, if the debt is a future debt, that the debtor has no reasonable prospect of
being able to pay it when it falls due.
3
Turner v Royal Bank of Scotland plc [2000] BPIR 683.
4
IA 1986, s 271(3). HMRC v Garwood [2012] BPIR 575 contains a summary of applicable
considerations.

3
21.5 Personal Insolvency

21.5 The bankruptcy commences when the bankruptcy order is made1 and is
discharged at the end of one year from the date of commencement2. However,
the court may make an order on the application of the official receiver or trustee
in bankruptcy that the period of the bankruptcy will cease to run for a specific
period or until a specified condition has been fulfilled, but only if the court is
satisfied that the bankrupt has failed or is failing to comply with an obligation
under IA 1986, Part IX3.
1
IA 1986, s 278. As it is a judicial act, the order is deemed to be made at the first moment of the
day on which it is made: Re Warren [1938] Ch 725. This rule was questioned by the Court of
Appeal in Re Palmer (A Debtor) [1994] Ch 316. The bankruptcy order must state the date and
time of the it was made: IR 2016, r 10.31(1)(h).
2
IA 1986, s 279 (1).
3
IA 1986, s 279(3), (4).

(b) Dispositions made by the bankrupt

21.6 In the period between the making of a bankruptcy application or the
presentation of the petition (as applicable) and the date when the bank-
rupt’s property vests in the trustee1, the validity of all dispositions of property
and of any payments is governed by IA 1986, s 284(1)–(2):
‘(1) Where a person is adjudged bankrupt, any disposition of property made by
that person in the period to which this section applies is void except to the
extent that it is or was made with the consent of the court, or was
subsequently ratified by the court.
(2) Subsection (1) applies to a payment (whether in cash or otherwise) as it
applies to a disposition of property and, accordingly, where any payment is
void by virtue of that subsection, the person paid shall hold the sum paid for
the bankrupt as part of his estate.’
As s 284(1) applies until the bankrupt’s property vests in the trustee, it will
apply both to dispositions made before the bankruptcy order and to disposi-
tions made after the bankruptcy order. The bankrupt’s estate does not vest in
the trustee until he is appointed or in the case of the official receiver becomes the
trustee2. Under the current law (which differs substantially from that which
previously applied), the official receiver becomes the trustee on the making of a
bankruptcy order unless there is a supervisor of an approved voluntary arrange-
ment in post, in which case the court may appoint the supervisor as trustee3. The
result is that in the vast majority of cases, the official receiver will become the
trustee without any involvement of the creditors. The creditors may of course
subsequently remove the official receiver and appoint their preferred office-
holder in his place4; and the official receiver may apply to the Secretary of State
to have a trustee appointed in his place5 (a provision likely to be invoked where
the bankruptcy is regarded as complex and/or immediate action is required).
If a payment is made to a bank, which is avoided by s 284(1), the bank holds the
sum paid as part of the bankrupt’s estate6.
The Insolvency Practice Direction, which contains extensive guidance in rela-
tion to an application for a validation order,7 states that in order for a validation
order to be made:
‘The court will need to be satisfied by credible evidence that the debtor is solvent and
able to pay his debts as they fall due or that a particular transaction or series of

4
 Bankruptcy 21.7

transactions in respect of which the order is sought will be beneficial to or will not
prejudice the interests of all the unsecured creditors as a class.’
This aligns with the position in corporate insolvency8.
1
IA 1986, s 284(3).
2
IA 1986, s 306.
3
IA 1986, s 291A.
4
IA 1986, s 298(1), (4A).
5
IA 1986, s 296.
6
IA 1986, s 284(2).
7
See para 12.8, and para 12.8.8 for the passage quoted (and see para 12.8.10 in relation to
applications after a bankruptcy order has been made: ‘Similar considerations to those set out
above are likely to apply . . . ’).
8
As to which, see Express Electrical Distributors Ltd v Beavis [2016] EWCA Civ 765, [2016] 1
WLR 4783, [2016] BPIR 1386, at [56].

21.7 Because IA 1986, s 284(1) affects dispositions made both before and after
the bankruptcy order is made, the section has provided that it applies to all
property belonging to the bankrupt regardless of whether that property would
be comprised in the bankrupt’s estate1. It follows that it applies equally to
dispositions of after-acquired property (ie, property acquired by the bankrupt
after the commencement of the bankruptcy)2. This provision is helpful to banks
in that they do not have to consider whether monies paid into an account are
after-acquired property.
In addition to the discretion vested in the court by the section, s 284(1) is subject
to the proviso in sub-s (4):
‘The preceding provisions of this section do not give a remedy against any person-
(a) in respect of any property or payment which he received before the com-
mencement of the bankruptcy in good faith, for value and without notice that
the petition had been presented, or
(b) in respect of any interest in property which derives from an interest in respect
of which there is, by virtue of this subsection, no remedy.’
This can only protect banks which received property or payments before the
bankruptcy order. Unlike winding-up petitions, bankruptcy applications and
petitions are not advertised (although petitions are delivered to the Chief Land
Registrar for registration in the register of pending actions3). The question of
whether or not the bank had notice that the petition had been presented will not
turn upon questions of constructive notice, but actual notice. Under the old law
the bank was protected provided, inter alia, it did not have notice of an
available act of bankruptcy4. The courts may be guided by cases under the old
law in determining whether the bank had notice of the bankruptcy petition.
Following those authorities the court is likely to conclude that the notice need
not be express or precise, but that if information comes to the attention of the
bank which ought to induce the bank to conclude that a bankruptcy petition
has been presented, that is sufficient notice5. If a bank receives a payment with
notice that the debtor has failed to comply with a statutory demand, it does not
have notice of the petition but it is arguable that the bank does not receive the
payment in good faith6.
1
IA 1986, s 284(6) of the IA 1986.
2
Ordinarily, after-acquired property would not form part of the estate unless the trustee gave
notice under IA 1986, s 307. As to after-acquired property, see para 21.9 below.
3
IR 2016, r 10.13.

5
21.7 Personal Insolvency
4
Under the Bankruptcy Act 1914, s 45.
5
Cf Hope v Meek (1855) 10 Exch 829; Re Dalton [1963] Ch 336, [1962] 2 All ER 499.
6
In Re Dalton [1963] Ch 336, [1962] 2 All ER 499 it was held that knowledge of an available act
of bankruptcy was not necessarily inconsistent with the creditor being bona fide under the
Bankruptcy Act 1914, s 46.

21.8 When the bankruptcy order is made the trustee (now the Official Receiver
in the vast majority of cases) will ordinarily take steps to recover the bank-
rupt’s property, although the court may appoint an interim receiver once the
petition has been presented if that is shown to be necessary1. The bank-
rupt’s estate is defined in IA 1986, s 2832. It excludes tools, books, vehicles and
other items of equipment as are necessary to the bankrupt for use personally by
him in his employment, business or vocation and such clothing, bedding,
furniture, household equipment and provisions as are necessary for satisfying
the basic domestic needs of the bankrupt and his family. It does not include
property held on trust or those classes of tenancy referred to in s 283(3A). A
chose in action which relates entirely to a cause of action personal to the
bankrupt, for example, for personal injuries is not property within the defini-
tion in s 436 of the IA 1986 and therefore does not form part of the estate3.
Under the arrangements now in place, a trustee will be in place immediately that
a bankruptcy order is made, and there will not be a period before one is
appointed during which the Official Receiver acts as receiver and manager, as
was formerly the case; and the person appointed, who in most cases will be the
Official Receiver, is required to give notice of his appointment to the creditors
and have his appointment gazetted4. The Court has power to suspend the
gazetting of a bankruptcy order5. This usually occurs where the bankrupt
makes an application to annul the bankruptcy order6. If that happens, and the
Official Receiver does not tell the bank that the order had been made, then the
bank may continue to honour payment instructions given on the custom-
er’s account.
1
IA 1986, ss 286, 287.
2
In relation to the bankrupt’s home, the Enterprise Act 2002 introduced a new s 283A into IA
1986 pursuant to which, unless a trustee takes action within three years to seek to realise the
interest in the home, then the interest will revest in the bankrupt. This ‘use it or lose it’ provision
was inserted to deal with the perceived unfairness of trustees failing to act and then seeking to
realise an interest in the property many years later. In relation to pensions, the Welfare Reform
and Pensions Act 1999, s 11 now provides that rights in respect of an ‘approved pension
arrangement’ are excluded from a bankrupt’s estate, though the trustee in bankruptcy does
have certain powers to recover excessive pension contributions: IA 1986, s 342A.
3
Ord v Upton [2000] Ch 352, [2000] 2 WLR 755, CA.
4
IA 1986, s 291A; IR 2016, r 10.74.
5
IR 2016, r 10.32(5).
6
The power to annul a bankruptcy order is contained in IA 1986, s 282.

21.9 IA 1986, s 284(5) provides that:

‘Where after the commencement of his bankruptcy the bankrupt has incurred a debt
to a banker or other person by reason of the making of a payment which is void under
this section, that debt is deemed for the purposes of this Group of Parts to have been
incurred before the commencement of the bankruptcy unless—
(a) that banker or person had notice of the bankruptcy before the debt was
incurred, or
(b) it is not reasonably practicable for the amount of the payment to be recovered
from the person to whom it was made.’

6
 Bankruptcy 21.10

The requirement that a debt should be incurred lends weight to the argument
that this subsection only protects banks which have allowed the bankrupt to
operate an overdraft. Payment out of an account in credit does not create a debt
to the banker. The effect of s 284(5) is that the debts created by payments out of
the (overdrawn) account are deemed to have been made prior to the bankruptcy
order, and are therefore provable.
It is important to stress that s 284(5) operates as a general deeming provision
(‘deemed . . . to have been incurred before the commencement of the
bankruptcy’), subject to two exceptions where it does not apply. The first
exception is where the bank ‘had notice of the bankruptcy before the debt was
incurred’. In considering whether the bank had notice of the bankruptcy order,
the court is likely to apply a similar test to the question whether the bank had
notice of the petition under s 284(4). However, the bank will not be able to rely
upon s 284(5) after the bankruptcy order has been gazetted1.
The second exception is where ‘it is not reasonably practicable for the amount
of the payment to be recovered from the person to whom it was made’, in which
case the exception does not apply, and the loss falls on the bank. The circum-
stances in which it is ‘not reasonably practicable’ to recover a payment from the
recipient are unclear. If the recipient is insolvent, then, the test is probably
satisfied. But if the recipient is difficult to sue, or his assets difficult to recover,
possibly because he is abroad, then it is difficult to determine whether sub-
s (5)(b) would apply.
A bank which has notice of either the presentation of a bankruptcy petition, or
the making of a bankruptcy order, should freeze the debtor’s accounts pending
an application to court for a prospective validation order. Banks which suspect
that a petition has been presented or that a bankruptcy order has been made are
in a more difficult position. On the one hand they might be fixed with notice
but, on the other, they should be careful before freezing the customer’s account
and risking liability for breach of mandate.
1
Re Byfield [1982] Ch 267, [1982] 1 All ER 249.

(c) After-acquired property

21.10 The trustee may serve a written notice on the bankrupt claiming any
property for the bankrupt’s estate which has been acquired by, or has devolved
upon the bankrupt since the commencement of his bankruptcy1. The notice
must be served within 42 days after the trustee discovered that the property had
been acquired2, and in that regard a bankrupt is under a duty to inform his
trustee of any property which is acquired3. The effect of such a notice is to vest
the property in the trustee from the date when the property was acquired4.
Banks now enjoy substantial protection in respect of after-acquired property. IA
1986, s 307(4A) now provides that:
‘Where a banker enters into a transaction before service on the banker of a notice
under this section (and whether before or after service on the bankrupt of a notice
under this section) the trustee is not in respect of that transaction entitled by virtue of
this section to any remedy against the banker5.

7
21.10 Personal Insolvency

This subsection applies whether or not the banker has notice of the bankruptcy.

1
IA 1986, s 307(1). Because a bankrupt is entitled to carry on business and to retain the tools of
his trade, there may be difficulties in establishing whether property acquired in the course of
business can be caught by this section.
2
IA 1986, s 309.
3
IA 1986, s 333(2). By IR 2016, r 10.125(1), the bankrupt has 21 days to give notice to his
trustee.
4
IA 1986, s 307(3).
5
This replaces, and is considerably wider than, IA 1986, s 307(4)(b).

(d) The avoidance of general assignments of book debts

21.11 If the bankrupt is engaged in business, a general assignment of book
debts is void against the trustee of a bankrupt’s estate as regards any book debts
which were not paid before the presentation of the petition, unless the assign-
ment has been registered under the Bills of Sale Act 18781. An assignment
includes an assignment by way of security or charge, but it will not be a general
assignment if it is an assignment of specified debts or debts arising under
specified contracts2. Book debts are not defined in the section and, accordingly,
the phrase will bear its common meaning3.
1
IA 1986, s 344. In substance this re-enacts the Bankruptcy Act 1914, s 43.
2
IA 1986, s 344(3).
3
See Chapter 30 below.

3 INDIVIDUAL VOLUNTARY ARRANGEMENTS

21.12 IA 1986, Part VIII provides for scheme for voluntary arrangements,
called Individual Voluntary Arrangements (‘IVAs’), to be entered into by
debtors as an alternative to bankruptcy (including after a person has been
adjudged bankrupt). The essence of an IVA is that the debtor puts forward
proposals to his creditors for a composition or scheme of arrangement, to be
supervised by a person known as the ‘nominee’ (who must be a qualified
insolvency practitioner), which they may accept or reject. If they accept them,
then the composition or scheme comes into effect.
Under the arrangements now in force an IVA may – but need not – be preceded
by an application for an interim order1. Such an application may be made where
the debtor intends to put forward proposals for an IVA2. An interim order may
not be made unless the following requirements are satisfied3: (a) the debtor
intends to make a proposal for an IVA (which, the courts have held, must be a
serious and viable proposal4); (b) on the day of making the application the
debtor was an undischarged bankrupt or was able to apply for his own
bankruptcy; (c) no previous application has been made by the debtor for an
interim order in the period of 12 months ending with that day; and (d) the
nominee under the debtor’s proposal is willing to act in relation to the proposal.
Further, the court may (but is not bound) to make an order if appropriate for the
purpose of facilitating the consideration and implementation of the debt-
or’s proposal5.

8
 Individual Voluntary Arrangements 21.13

If an interim order is made, the effect is that for the period for which it is in
force, (a) no bankruptcy petition relating to the debtor may be presented or
proceeded with, (b) no landlord or other person to whom rent is payable may
exercise any right of forfeiture by peaceable re-entry in relation to premises let
to the debtor in respect of a failure by the debtor to comply with any term or
condition of his tenancy of such premises, except with the leave of the court;
and (c) no other proceedings, and no execution or other legal process, may be
commenced or continued and no distress may be levied against the debtor or his
property except with leave of the court6. Where an interim order is made, the
nominee is required (before the order ceases to have effect) to submit a report to
the court7. The debtor is required to provide to the nominee for the purpose of
preparing his report (a) a document setting out the terms of the proposed IVA,
and (b) a statement of his affairs8 (in practice these documents are prepared by,
or with the assistance of, the nominee). There is a similar procedure for the
preparation of a nominee’s report, and its submission to the debtor’s creditors
(rather than the court), when no interim order is made9.
1
Under IA 1986, s 252.
2
IA 1986, s 253.
3
These are set out in IA 1986, s 255(1).
4
See (eg) Bramston v Haut [2012] EWCA Civ 1637, [2013] 1 WLR 1720, [2013] BPIR 25, at
[59].
5
IA 1986, s 255(2). In Davidson v Stanley [2004] EWHC 2595 (Ch), [2005] BPIR 279, at [22],
Blackburne J pointed out that: ‘Relevant to the exercise of the discretion is whether, in his
proposal, the debtor has made a full and correct disclosure of his affairs – in particular, his assets
and the extent to which they are subject to encumbrances, and of his expected future earnings
if, and insofar as, those earnings are to be relied upon as part of the benefits which are to be
available to creditors under the arrangement’.
6
IA 1986, s 252(2).’Distress’ bears its technical sense – ie, distress for rent by a landlord, which
has now been abolished by s 71 of the Tribunals, Courts and Enforcement Act 2007.
7
IA 1986, s 256(1).
8
IA 1986, s 256(2).
9
IA 1986, s 256A.

21.13 In either event, assuming the nominee’s report is favourable, the debt-
or’s creditors then consider the proposal1. Every proposal for an IVA ‘should be
characterised by complete transparency and good faith by the debtor.’2
The creditors may reject the proposal, approve the proposal, or approve it with
modifications (if the modifications are accepted by the debtor); in order to be
approved, a majority of three-quarters by value of the creditors who respond to
the request to consider the proposal vote in favour (but a decision is not made
to approve if more than half the total value of the creditors not associated with
the debtor vote against it)3. Once approved, the arrangement takes effect and
binds every person who was entitled to vote in the decision procedure or would
have been entitled to vote had he had notice of it4
If approved, an IVA may be challenged by an application to the court on the
ground that (a) it unfairly prejudices the interests of a creditor of the debtor, or
(b) there was some material irregularity at or in relation to the creditors’
decision procedure5.
1
IA 1986, s 257. They consider it by a creditor’s decision procedure (IA 1986, s 257(2A); see
s 379ZA for the definition and IR 2016, Part for the procedure), and not at a meeting, as was
formerly the case.
2
Cadbury Schweppes plc v Somji [2001] 1 WLR 615, [2001] 1 BCLC 498, [2001] BPIR 172, at
[40], per Judge LJ.

9
21.13 Personal Insolvency
3
IA 1986, s 258; IR 2016, r 15.34(6) (‘associates’ are defined by r 15.34(7)).
4
IA 1986, s 260.
5
IA 1986, s 262. There are strict time limits on making an application in IA 1986, s 262(3)
(although time can be extended: Tager v Westpac Banking Corp [1998] BCC 73).

4 DEBT RELIEF ORDERS

21.14 The Tribunals, Courts and Enforcement Act 2007 (‘TCEA 2007’) intro-
duced a new Part 7A into IA 1986, providing for a regime for small-scale
personal insolvency by a device called a Debt Relief Order (‘DRO’). An
individual who is unable to pay his debts may apply for a DRO to be made in
respect of his ‘qualifying debts’ – these are defined so as to exclude secured debts
and any debt which is an ‘excluded debt’1.
In order to be eligible, the debts and means of the debtor must be small2: (a)
unliquidated and excluded debts of less than £20,000; (b) monthly surplus
income (ie, the amount by which his income exceeds the amount necessary for
the reasonably needs domestic needs of the debtor and his family) of less than
£50; and (c) property worth less than £1,000.
1
IA 1986, s 251A. The categories of excluded debt are set out in IR 2016, r 9.2.
2
IA 1986, Sch 4ZA, paras 6–8; Insolvency Proceedings (Monetary Limits) (Amendment) Order
2015 (SI 2015/26); see further IR 2016, rr 9.7 and 9.10 in relation to surplus income and
valuation of the debtor’s property.

21.15 The application is not made to the court, but instead to the Official
Receiver, through an ‘approved intermediary’ in electronic form and by elec-
tronic means – the debtor may not apply directly to the Official Receiver1.
The application is required to provide a substantial quantity of information
about the debtor and his affairs2. The official receiver may stay consideration of
the application until he has received answers to queries raised by him3. Once he
has received answers to any queries, he must determine the application either by
(a) refusing it, or (b) making a DRO in relation to the specified debts of the
debtor that he is satisfied were qualifying debts as at the application date4.
An application may be refused on specified discretionary grounds5. An appli-
cation must be refused if the Official Receiver is not satisfied that (a) the debtor
is an individual who is unable to pay his debts; (b) at least one of the specified
debts was a qualifying debt of the debtor at the application date; or (c) each of
the conditions set out in IA 1986, Sch 4ZA, Part 1 is met6.
1
IA 1986, s 251B(1); IR 2016, r 9.4. As to the identity of approved intermediaries, see IA 1986,
s 251U and the Debt Relief Orders (Designation of Competent Authorities) Regulations 2009
(SI 2009/457).
2
IA 1986, s 251B(2); IR 2016, r 9.3.
3
IA 1986, s 251C(2).
4
IA 1986, s 251C(3).
5
These are set out in IA 1986, ss 251C(4) and 251C(6) and IA 1986, Sch 4ZA, Part 2.
6
IA 1986, s 251C(5). Various presumptions are provided for as to these matters in IA 1986,
s 251D.

21.16 If a DRO is made by the Official Receiver, it must include a list of the
debts of the debtor which he is satisfied were qualifying debts of the debtor at
the application date1. The making of the DRO brings about a one-year

10
 Administration order, debt repayment plans etc 21.18

moratorium during which a creditor in respect of a specified qualifying debt (a)

has no remedy in respect of the debt; and (b) may not commence a credi-
tor’s petition in respect of the debt or otherwise commence any action or other
legal proceedings against the debtor for the debt, except with the permission of
the court and on such terms as the court may impose2.
During the moratorium period, a creditor specified in the DRO may object to
the Official Receiver to the making of the DRO, the inclusion of his debt in the
DRO, or the details of his debt3. The Official Receiver may amend or revoke a
DRO on specified grounds4. A person aggrieved by any act, omission, or
decision of the Official Receiver may apply to the court, which has wide powers,
including to revoke a DRO5.
At the end of the moratorium period (unless it terminates early or the DRO is
revoked by the court under IA 1986, 251M), the debtor is discharged from all
the qualifying debts specified in the DRO6.
1
IA 1986, s 251E(3).
2
IA 1986, s 251G(2).
3
IA 1986, s 251K.
4
IA 1986, s 251L.
5
IA 1986, s 251M.
6
IA 1986, 251I.

5 ADMINISTRATION ORDERS, DEBT REPAYMENT PLANS, AND

ENFORCEMENT RESTRICTION ORDERS
21.17 TCEA 2007 provides for a series of three new insolvency-like and
insolvency-related procedures, in addition to Debt Relief Orders. The relevant
provisions of that Act have not yet been brought into force, nor have the
regulations required for them to operate been published.

(a) Administration orders under the County Courts Act 1984

21.18 In its current form, Part VI of the County Courts Act 1984 (‘CCA 1984’)
provides for a County Court to make an order for the administration of a
debtor’s estate where a debtor (a) is unable to pay forthwith the amount of a
judgment obtained against him; and (b) alleges that his whole indebtedness
amounts to a sum not exceeding the county court limit, inclusive of the debt for
which the judgment was obtained. These provisions are now very little used,
and s 106 of TCEA 2007 will substitute a new Part 6 once it is brought into
force1. In order to work, the new Part 6 will require detailed regulations to be
made. Absent those regulations, it is only possible to summarise the operation
of the new Part 6 in general terms.
In its new form, an administration order will be an order of the County Court
(a) to which certain debts are scheduled; (b) which imposes the requirement
specified in s 112E on the debtor (ie, to repay the scheduled debts in whole or in
part); and (c) which imposes the requirements specified in sections 112F to 112I
on certain creditors (which include not presenting a bankruptcy petition or
pursuing other remedies for the enforcement of the debt owed and not charging
interest)2. An order may only be made on the application of the debtor, but

11
21.18 Personal Insolvency

(unlike the present form of Part VI), judgment need not have been entered
against the him3.
It is envisaged that regulations will prescribe a maximum amount of indebted-
ness and minimum amount of surplus income on the part of the debtor to be
eligible for the making of an administration order4.
The maximum duration of an administration order will be five years5. An
administration order will take priority over any debt management arrange-
ments in force prior to its being made6. Upon repayment of a scheduled debt to
the extent provided by the order (ie, potentially only in part), the County Court
is obliged to ‘order that the debtor is discharged from the debt’7. If the debtor
repays all of the scheduled debts to the extent provided for by the administra-
tion order, the County Court must revoke the order8. The court has power to
revoke or vary an administration order once made9.
1
It remains unclear when (and indeed if) s 106 will be brought into force.
2
CCA 1984, s 112A.
3
CCA 1984, s 112J.
4
CCA 1984, s 112B.
5
CCA 1984, s 112K.
6
CCA 1984, s 112L.
7
CCA 1984, s 112Q(1)(a).
8
CCA 1984, s 112Q(3).
9
CCA 1984, ss 112R, 112U, 112V.

(b) Debt repayment plans

21.19 Sections 109 and following of TCEA 2007 will (if they come into force)
provide a wholly novel device: a debt management scheme open to non-
business debtors, under which upon request by a debtor, a debt repayment plan
may be arranged for him1. Section 110 provides as follows:
(1) A debt repayment plan is a plan that meets the conditions in this section.
(2) The plan must specify all of the debtor’s qualifying debts2.
(3) The plan must require the debtor to make payments in respect of each of
the specified debts.
(4) It does not matter if—
(a) the plan requires payments of different amounts to be made in
respect of a specified debt at different times;
(b) the payments that the plan requires to be made in respect of a
specified debt would, if all made, repay the debt only in part.’
Debt management schemes will be subject to regulatory oversight (although the
detail of this is left to regulations which have not yet been made), including in
particular the approval of schemes by a regulator3. The operator of an approved
scheme will be entitled to recover its costs by ‘charging debtors or affected
creditors (or both)4.’
Once a debt repayment plan has been arranged for a particular debtor under an
approved scheme, he is discharged from the debts specified in the plan once he
has made the payments required by the plan5. When a plan is in place under an
approved scheme, the debtor is protected against the presentation of a bank-
ruptcy petition, other enforcement action, and the charging of interest6.

12
 Administration order, debt repayment plans etc 21.20

If a plan is arranged, an affected creditor may appeal to the County Court

against any of the following: (a) the fact that the plan has been arranged; (b) the
fact that a debt owed to the affected creditor has been specified in the plan; (c)
the terms of the plan7. The County Court is given wide powers on the hearing
of the appeal, including power to modify or revoke the plan8.
1
TCEA 2007, ss 109, 110.
2
These are defined by s 132(1).
3
TCEA 2007, ss 112, 113, 128–130.
4
TCEA 2007, s 124(1).
5
TCEA 2007, s 114.
6
TCEA 2007, ss 115 ff.
7
TCEA 2007, s 122(2).
8
TCEA 2007, s 123.

(c) Enforcement restriction orders

21.20 Section 107 of the TCEA 2007 will (if it comes into force) introduce a
new Part 6A into the CCA 1984, providing for enforcement restriction
orders (‘EROs’). An ERO is an order of the County Court intended to give a
non-business debtor who has suffered an unexpected and sudden financial
set-back a breathing space; it may only be made on the application of the
debtor1.
CCA 1984, s 117B will contain the central provisions in relation to the making
of an ERO:
‘(1) A county court may make an enforcement restriction order if the conditions
in subsections (2) to (8) are met.
(2) The order must be made in respect of an individual who is a debtor under
two or more qualifying debts.
(3) That individual (“the debtor”) must not be a debtor under any business
debts.
(4) The debtor must not be excluded under any of the following—
(a) the ERO exclusion;
(b) the voluntary arrangement exclusion;
(c) the bankruptcy exclusion.
(5) The debtor must be unable to pay one or more of his qualifying debts.
(6) The debtor must be suffering from a sudden and unforeseen deterioration in
his financial circumstances.
(7) There must be a realistic prospect that the debtor’s financial circumstances
will improve within the period of six months beginning when the order is
made.
(8) It must be fair and equitable to make the order.
(9) Before making an enforcement restriction order, the county court must have
regard to any representations made by any person about why the
order should not be made.
(10) Subsection (9) is subject to Civil Procedure Rules.’
Under an ERO, the debtor is protected against the presentation of a bankruptcy
petition and other enforcement action (and, in addition, county court proceed-
ings in respect of a qualifying debt must be stayed)2. An ERO has priority over
any other debt management arrangements3. An ERO may (but not must)
impose a repayment obligation on the debtor4. An ERO may not be made for a

13
21.20 Personal Insolvency

period of longer than 12 months5.

1
CCA 1984, s 117G(1).
2
CCA 1984, ss 117C, 117D, 117L.
3
CCA 1984, s 117I.
4
CCA 1984, s 117F.
5
CCA 1984, s 117H.

14
Part VI

PAYMENTS

1
Chapter 22

THE PAYING BANK: OBLIGATIONS

BETWEEN BANK AND CUSTOMER

1 INTRODUCTION
(a) Structure of Part IV 22.1
2 BASIC CONCEPTS AND MECHANISMS
(a) Payment systems 22.2
(b) Funds transfer and legal tender 22.5
(c) The nature of a funds transfer 22.12
(d) The Payment Services Regulations 2017 (‘PSR’) 22.21
(e) Terminology 22.22
(f) Credit and debit transfers 22.25
(g) Clearing and settlement 22.29
(h) Clearing systems and clearing rules 22.43
3 THE BANK’S PAYMENT OBLIGATIONS
(a) The scope of the obligation to repay 22.50
(b) The bank’s general contractual duty to the customer 22.51
(c) The bank’s duty in negligence to its customer 22.52
(d) The requirement for sufficient and available funds 22.59
(e) The originator bank’s obligations to the beneficiary 22.62
(f) Relationship of the originator’s bank with the correspondent
bank 22.65
(g) Relationship of the originator’s bank with the beneficiary’s bank 22.69
(h) Relationship of beneficiary bank with the beneficiary 22.71
(i) Relationship of beneficiary bank with the originator and the
originator’s bank 22.74
(j) The customer owes a limited duty of care to the paying bank 22.77
(k) Proof of repayment 22.78
(l) The bank’s limitation defence 22.79
4 THE COMPLETION OF PAYMENTS
(a) Introduction 22.80
(b) Intra-branch transfers 22.85
(c) Inter-branch transfers 22.91
(d) Inter-bank transfers 22.93
5 THE PAYMENT OF CHEQUES
(a) Regular and unambiguous in form 22.99
(b) Cheque and Credit Clearing Company Ltd Rules for the Conduct
of Cheque Clearing 22.100
(c) Interest on proceeds of collected cheques 22.101
6 DETERMINATION / SUSPENSION OF AUTHORITY TO PAY 22.102
(a) Countermand instructions 22.103
(b) Mental disorder and contractual incapacity 22.110
(c) Insolvency 22.111
(d) Suspicion of money laundering 22.112
7 WRONGFUL DISHONOUR OF A PAYMENT ORDER
(a) Breach of contract 22.113

3
22.1 Paying Bank Obligations

1 INTRODUCTION TO THE PAYING BANK

(a) Structure of Part VI

22.1 It is one of the defining characteristics of a bank that, subject to the

limitations dealt with in this Chapter, it is obliged to comply with a custom-
er’s payment order. Having made payment (whether to the customer or, usually
through a collecting bank, for the benefit of a third party), the paying bank is
entitled to debit the customer’s account.
This Chapter deals with the obligations and liabilities arising between bank and
customer (and, in some cases, bank and third parties) in relation to the
bank’s function of making payment on behalf of its customers, when it is the
‘paying bank’. The counterpart function of receiving funds and crediting its
customers’ account accordingly (ie acting, in electronic payments, as the
‘beneficiary bank’) is also addressed below. In the case of payments by cheque,
the latter bank is referred to as the ‘collecting bank’ and its duties and liabilities
are separately addressed in Chapters 26 and 27 below.

2 BASIC CONCEPTS AND MECHANISMS

(a) Payment systems

22.2 Payment by the physical delivery of money (ie coins and bank notes) from
payer to payee can be both expensive and risky. This has led to the development
of various payment mechanisms and payment systems, which Geva has defined
in the following terms:
‘Any machinery facilitating the transmission of money which bypasses the transpor-
tation of money and its physical delivery from the payor to the payee is a payment
mechanism. A payment mechanism facilitating a standard method of payment
through a banking system is frequently referred to as a payment system. Payment
over a payment mechanism is initiated by payment instructions, given by the payor or
under the payor’s authority, and is often referred to as a transfer of funds1’.

1
B Geva, The Law of Electronic Funds Transfers (1992, loose-leaf, Matthew Bender, New
York), s 1.03[1]. See also M Brindle and R Cox Law of Bank Payments (5th edn, 2017) at
1-024.

22.3 As Brindle and Cox observe1, the modern industry relating to the provi-
sion of payment services may be divided into three broad segments:
(a) Banks (and similar institutions) which provide payment services to allow
individuals, companies and other entities to make payments to each
other, and to banks. These methods of payment include fund transfers,
internet payments, credit and debit cards and cheques;
(b) Companies which provide the means for banks to make payments to
each other, often as part of the means of settling payments between
customers of the banks. Examples are CHAPS, BACS, the Faster Pay-
ments Scheme and the Cheque & Credit Clearing Company. These are
the engines of the payment industry. They deal with payments between

4
 Basic Concepts and Mechanisms 22.5

banks and involve settlements which are for the most part via accounts
at the Bank of England but may be via accounts at another bank. They
are at the heart of most methods of payment; and
(c) Exchanges which provide payment services to users where payment is
embedded and linked to an obligation to settle sums due under some
transaction, such as the purchase of securities, or the price of options, for
example, CREST.
For more detail on the components of the major electronic and paper based
payment systems, see Brindle and Cox2.
1
M Brindle and R Cox, Law of Bank Payments, (5th edn, 2017) at 1-024.
2
Chapter 3, Section II of Law of Bank Payments (5th edn, 2017).

22.4 The existence and importance of payment systems, particularly, electronic

funds transfer systems, originally derived largely from the use of funds transfers
as a method of payment used in a broad range of domestic and financial market
transactions, eg foreign exchange, short-term money-market instruments, cor-
porate equity and debt securities, derivative products and inter-bank borrowing
and lending1. In recent years, the retail sector has also become a driver of
payment systems, with payments using debit and credit cards taking up 75% of
market share in 2016: £261.6 billion worth of goods2.
The significance of modern payment systems to the economy is such that, in
2013, new powers of regulation were introduced through the Financial Services
(Banking Reform) Act 2013. This Act created a new regulator in the UK, the
Payment Services Regulator, which is authorised to regulate any payment
system designated by the Treasury under section 43 of the Act. To date, the
Treasury has designated eight major payment systems, applying the section 44
criterion that ‘any deficiencies in the design of the system, or any disruption of
its operation, would be likely to have serious consequences for those who use,
or are likely to use, the services provided by the system’. These eight systems
are BACS, CHAPS, Faster Payments Scheme, LINK, Cheque and Credit;
Northern Ireland Cheque Clearing, MasterCard and Visa Europe. See further
Chapter 24 on the Payment Services Regulations.
1
R Bhala, ‘The Inverted Pyramid of Wire Transfer Law’, Ch 7 in J Norton, C Reed and I Walden
(eds), Cross-Border Electronic Banking – Challenges and Opportunities (1st edn, 1995, LLP).
2
See British Retail Consortium, Payment Survey Report 2016, page 8, accessed on 26 July 2018
at https://brc.org.uk/media/179489/payment-survey-2016_final.pdf.

(b) Funds transfer and legal tender

22.5 In modern commercial practice payment is commonly made through the
transfer of funds from the bank account of the debtor to that of the creditor at
the same or with another bank. In such cases the creditor agrees to accept a
claim against his bank in substitution for his claim against his original debtor.
The creditor’s claim against his bank stems from the basic principle that ‘the
relation between banker and customer, as far as the pecuniary dealings are
concerned, [is] that of debtor and creditor’1.
1
Foley v Hill (1848) 2 HL Cas 28 at 45, per Lord Campbell.

5
22.6 Paying Bank Obligations

22.6 However, payment through the use of a funds transfer system is not
payment by legal tender. Legal tender is those coins and bank notes which meet
the statutory requirements for legal tender1. Unless he has expressly or im-
pliedly agreed to accept payment by some other means, a creditor is entitled to
demand and is only obliged to accept payment in legal tender. The credi-
tor’s consent may be express or implied, eg from the fact that he has provided
the debtor with his bank account number on his invoice or stationery. The mere
fact that the creditor has a bank account is not in itself to be construed as
evidencing his tacit consent to accept payment into that account2. Nevertheless,
the courts have shown themselves willing to construe the terms of commercial
agreements to allow for payment through the transfer of funds between bank
accounts3.
1
See the Currency and Bank Notes Act 1954, s 1(2); the Coinage Act 1971, s 2, as amended by
the Currency Act 1983, s 1(3).
2
Customs and Excise Commissioners v National Westminster Bank plc [2002] EWHC 2204
(Ch), [2003] 1 All ER (Comm) 327, applying TSB Bank of Scotland plc v Welwyn Hatfield DC
[1993] 2 Bank LR 267.
3
As in Tenax Steamship Co Ltd v The Brimnes (Owners) [1975] QB 929, CA (payment ‘in cash’
construed in the context to include a bank transfer of immediately available funds to the
creditor’s account).

22.7 The right to demand payment in legal tender is illustrated by Libyan Arab
Foreign Bank v Bankers Trust Co1. In that case the claimants were a Libyan
corporation, wholly owned by the Central Bank of Libya, and the defendants
were a New York bank. The claimants maintained US dollar accounts at the
New York and London branches of the defendants and there was an arrange-
ment whereby funds would be transferred between the two accounts. However,
relations between the US and Libya were not good and in January 1986 the
President of the United States issued an order blocking all property and interests
of the Government of Libya, its agencies, instrumentalities, and controlled
entities and the Central Bank of Libya, which were or would come into the
possession or control of US persons, including overseas branches of US persons.
When the claimants later demanded, inter alia, repayment of the US $131m
standing to the credit of their London account, the defendants refused to make
repayment arguing, first, that payment was illegal under New York law, which
was the proper law of the entire contract between them; and, alternatively, that,
even if English law was the proper law of the London account, payment of so
large a sum could not have been made without using the payment machinery
available in New York, so that performance of the contract would have
required them to perform an illegal act in New York.
1
[1989] QB 728.

22.8 Staughton J rejected both arguments and gave judgment for the claimants.
He held on the first point that whilst there was one single contract between the
claimants and the defendants it was governed by two proper laws, New York
law applying to the New York account and English law applying to the London
account1. On the second point, his Lordship applied the general rule that an
English court would not enforce a contract which was illegal in the place where
it must necessarily be performed2, but he went on to hold that, in this particular
case, it was not necessary for the contract to be performed in the United States
at all. He rejected the defendants’ submission that Eurodollars3 cannot be

6
 Basic Concepts and Mechanisms 22.10

withdrawn in cash, but must be cleared through New York, and held that the
claimants were entitled to payment in cash in US dollars in London, which
could be imported from the United States without any breach of New York law.
1
It is a general rule of English law that the contract between a bank and its customer is governed
by the law of the place where the account is ‘kept’, unless there is agreement to the contrary. See
Libyan Arab Foreign Bank v Bankers Trust Co [1989] QB 728 at 746, per Staughton J, citing
XAG v A Bank [1983] 2 Lloyd’s Rep 535, McKinnon v Donaldson Lufkin and Jenrette
Securities Corpn [1986] Ch 482 at 494; Libyan Arab Foreign Bank v Manufacturers Hanover
Trust Co [1988] 2 Lloyd’s Rep 494; Attock Cement Co Ltd v Romanian Bank for Foreign
Trade [1989] 1 WLR 1147, CA; Libyan Arab Foreign Bank v Manufacturers Hanover Trust Co
(No 2) [1989] 1 Lloyd’s Rep 608. The Contracts (Applicable Law) Act 1990 (as amended),
implementing the Rome Convention on the Law Applicable to Contractual Obligations 1980
(the ‘Rome Convention’), did not appear to alter this general rule. Under Rome 1 Regulation
(593/2008) art. 4(1)(b) the governing law, in the absence of a choices, is that of the habitual
residence of the service provider: the bank; see Sierra Leone Telecommunications Co Ltd v
Barclays Bank plc [1998] 2 All ER 821 at 827 per Cresswell J, and see further Chitty
on Contracts (32nd edn, 2017, Sweet & Maxwell), Vol 1, at para 30-076 for a list of scenarios
in which the courts have identified the characteristic performance of the contract.
2
The classic authority is Ralli Bros v Compania Naviera Sota y Aznar [1920] 2 KB 287, a case
of supervening illegality; but the same (or a closely similar principle) applies to existing
illegality: see Robert Goff J in Toprak Mahsulleri Ofisi v Finagrain [1979] 2 Lloyd’s Rep 98,
107, approved by the Court of Appeal [1979] 2 Lloyd’s Rep 112, 117. See also Ispahani v Bank
Melli Iran [1998] Lloyd’s Rep Bank 133, 136, per Robert Walker LJ. The rule certainly applies
where the contract is governed by English law, although it is doubtful that the same rules applies
to performance of a contract governed by a foreign law: see HG Beale et al (eds), Chitty
on Contracts (32nd edn, 2017, Sweet & Maxwell), Vol 1, para 30-361.
3
A Eurodollar is a credit in US dollars at a bank or financial institution outside the United States,
whether in Europe or elsewhere: see Libyan Arab Foreign Bank v Bankers Trust Co [1989] QB
728 at 735 per Staughton J.

22.9 This last point is somewhat controversial as it is arguable that transport-

ing dollars from New York would probably have breached the relevant freezing
order, but the point never arose in practice as the US issued a licence allowing
the defendants to pay the claimants its funds and there was no appeal1. The
ability of national authorities to issue licences or authorisations has a significant
impact upon the scope of arguments that a payment obligation has been
frustrated by reason of it becoming illegal in the place of payment2.
1
Scott argues that shipping over dollars would have breached the freezing order but goes on to
argue that there would have been no breach if there had been an in-house or correspondent
transfer of dollars abroad without use of the US payment system: HS Scott, ‘Where are the
dollars? – Off-shore funds transfers’ (1988–89) 3 BFLR 243.
2
DVB Bank SE v Shere Shipping Co Ltd & Ors [2013] EWHC 2321 (Ch) and Melli Bank Plc v
Holbud Ltd [2013] EWHC 1506 (Comm).

22.10 Staughton J went on to state that had he not held that payment should
have been made in cash in US dollars, he would have held that payment should
have been made in sterling. His Lordship reasoned that as a foreign currency
debtor has a choice to pay in the foreign currency or in sterling1, he should not
be entitled to choose the route which is blocked and then claim that his
obligation was discharged or suspended2.
1
[1989] QB 728 at 765-766, citing Miliangos v George Frank (Textiles) Ltd [1976] AC 443. This
rule applies where a sum is payable in England under a contract governed by English law, but
is subject to contrary agreement between the parties: Marrache v Ashton [1943] AC 311; Syndic
in the Bankruptcy of Jolian Nasrallah Khoury v Khayat [1943] AC 507, PC.
2
Staughton J left open the question whether the creditor could claim payment in sterling if it was
still possible to pay in the foreign currency: [1989] QB 728 at 766. For a recent decision

7
22.10 Paying Bank Obligations

involving allegations of illegality arising under the Iranian sanctions regime see DVB Bank SE
v Shere Shipping Co Ltd & Ors [2013] EWHC 2321 (Ch).

22.11 Should payment by funds transfer be recognised as payment by legal

tender? The argument in favour of this development points to the frequent use
of such payment and suggests that the law should reflect modern commercial
practice1. Proponents of this line of argument point to the Netherlands, where
payment via a credit transfer is recognised as payment by legal tender. Never-
theless, there are strong arguments against this development. As the credi-
tor’s claim against his bank is subject to a credit risk, and also to the risk of the
possible off-setting of his claim with the bank’s counter-claim, it is submitted
that the creditor should be required to consent to payment in this way if it is to
amount to discharge of the original debt2.
1
For an analogous development, see Esso Petroleum Co Ltd v Milton [1997] 2 All ER 593,
where the Court of Appeal pointed to modern commercial practice when extending the ‘no
set-off’ rule from payment by cheque to payment by direct debit. The case is considered in detail
below, at paras 22.13 to 22.14.
2
R Hooley, ‘Payment in a Cashless Society’, Ch 13 of BAK Rider (ed), The Realm of Company
Law – A Collection of Papers in Honour of Professor Leonard Sealy (1998, Kluwer), pp
256–259.

(c) The nature of a funds transfer

22.12 The order to make a credit transfer or a debit transfer of funds is not a
negotiable instrument and may be revoked any time before it is acted upon1.
However, there is much criticised authority that a direct debit is to be treated as
though the debtor had drawn cheques for the relevant payments in favour of the
payee.
1
Tenax Steamship Co Ltd v Reinate Transcoceania Navegacion SA (The Brimes) [1975] QB
929.

22.13 In Esso Petroleum Co Ltd v Milton1, a majority of the Court of Appeal

considered a claim on a direct debit to be equivalent to that which a creditor
would have on a dishonoured cheque for the purposes of equitable set off. The
case was concerned with a service station operator, the defendant, who was
operating two service stations owned by Esso under licence. The licence
agreements between Esso and the defendant required him to buy all his petrol
from Esso and sell it at no higher than a maximum retail price, and to pay Esso
the same price less a ‘licence margin’. The defendant was obliged to pay for
those supplies on or before delivery by direct debit. The relationship between
the parties began to break down from November 1995, when Esso notified the
defendant (and its other licencees) that it would reduce the licence margin from
1.19p a litre to 1.1p a litre, effective 1 January 1996. On 29 March 1996, Esso
notified its licensees that the profit margin was to be reduced still further, to
0.75p a litre, effective 1 May 1996. In the defendant’s view, this stripped away
the profitability of his business and amounted to a repudiation of the contract.
The defendant, anticipating terminating the contract, procured the delivery of
almost £168,000 worth of fuel over 1–9 April 1996 (which was the Easter Holy
Week), and terminated the direct debit immediately before payment was to be
collected at the end of the bank holiday period. Esso brought a claim against the

8
 Basic Concepts and Mechanisms 22.14

defendant for the outstanding sum. The defendant admitted Esso’s claim, but
brought a counterclaim for damages for repudiation of contract, and sought to
set this off against Esso’s debt claim. Esso sought summary judgment of the
claim, on three alternative grounds:
(1) That, where parties had agreed that payment should be by direct debit,
this ought to be treated as assimilated to payment by cheque, where no
set off was permitted absent fraud, invalidity or failure of consider-
ation2;
(2) That in any event, the defendant’s claim for lost profits was insufficiently
connected with Esso’s claim for unpaid deliveries; and/or
(3) That the license agreement expressly excluded set off.
The first instance judge dismissed the application, but Esso successfully ap-
pealed on the first two grounds. The full Court of Appeal agreed that the
counterclaim was insufficiently connected with the claim to allow for the
defence of set off (this, properly, is the ratio of the decision). As for whether
courts ought to approach payments by direct debit as equivalent to payment by
cheque for the purposes of set off, Thorpe LJ3, considered that this would be ‘a
natural evolution’ of the rule which applies to bills of exchange and cheques.
According to Sir John Balcombe4, this was a question of policy which recog-
nised ‘the modern commercial practice’ of treating ‘a direct debit in the same
way as a payment by cheque and, as such, the equivalent of cash’. By contrast,
Simon Brown LJ, dissenting, held that there were insufficient similarities
between cheques and direct debit arrangements to treat the two as equivalent.
1
[1997] 2 All ER 593.
2
Applying by analogy Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH [1977] 1 WLR 713
at 721: ‘When one person buys goods from another, it is often, one would think generally,
important for the seller to be sure of his price: he may (as indeed the appellants here) have
bought the goods from someone else whom he has to pay. He may demand payment in cash; but
if the buyer cannot provide this at once, he may agree to take bills of exchange payable at future
dates. These are taken as equivalent to deferred instalments of cash. Unless they are to be treated
as unconditionally payable instruments (as in the Act, section 3, says “an unconditional order in
writing”), which the seller can negotiate for cash, the seller might just as well give credit. And
it is for this reason that English law (and German law appears to be no different) does not allow
cross-claims, or defences, except such limited defences as those based on fraud, invalidity, or
failure of consideration, to be made. I fear that the Court of Appeal’s decision, if it had been
allowed to stand, would have made a very substantial inroad upon the commercial principle on
which bills of exchange have always rested.’
3
[1997] 2 All ER 593 at 606f.
4
[1997] 2 All ER 593 at 607j, citing Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH
[1977] 1 WLR 713 at 721.

22.14 It is respectfully submitted that Simon Brown LJ was right, and the
majority were wrong, on this issue.
‘The analogy with a dishonoured cheque is flawed. Where a cheque is dishonoured,
the payee obtains a cause of action through breach of the drawer’s payment
obligation embodied in the cheque itself1. There is no similar promise embodied in a
direct debit mandate, revocation of which does not of itself create a separate cause of
action2. Where a direct debit mandate is revoked, the creditor is left only with his
claim for the debt due on the underlying contract. Why should the debtor lose his
right of set off when sued on the underlying contract? The mere fact that the payment
was to be by direct debit should not of itself be enough to imply an exclusion
clause into the contract. Such a term is neither obvious, nor necessary for business

9
22.14 Paying Bank Obligations

efficacy. If the debtor’s right of set off is to be excluded, this should be done through
an express term of the underlying contract3’.
Indeed, as Simon Brown LJ noted, the claimants in this case did attempt to rely
on an express term of the licence agreements which purported to exclude any
right of set off, albeit this term was held to be insufficiently clear, and in any
event, unreasonable, under the Unfair Contract Terms Act 1977 (citing but
distinguishing Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] QB 600, CA).
1
Bills of Exchange Act 1882, s 55(1)(a).
2
See, by analogy, The Brimnes [1975] QB 929, 949, 964–965, 969, CA.
3
As put by a previous author of this chapter; see R Hooley ‘Direct Debits and Set-Off. The Tiger
Roars!’ [1997] CLJ 500 at 502–503, see also the criticisms of the majority made in A
Tettenborn (1997) 113 LQR 374.

22.15 The policy explanation for applying the no set-off rule to bills of
exchange and cheques is that it facilitates the free negotiation of such instru-
ments for cash. However, direct debits are not transferable and do not require
the same protection1.
1
As noted by R Hooley [1997] CLJ 500, at 503, who added that: ‘It does not answer this point
simply to assert, as Esso did, that as most cheques are now non-transferable, being crossed
“account payee only”, no distinction should be drawn between such cheques and direct debits.
Perhaps it would show greater consistency if non-transferable cheques were also kept outside
the no set-off rule.’ However, it has long been recognised that one of the important features of
making payment by cheque (transferable or not) is that it creates an autonomous obligation that
is not susceptible to defences that might be raised to the underlying liability: Byles on Bills of
Exchange & Cheques (29th edn, 2013) paragraph 26-018.

22.16 Payment by funds transfer involves the adjustment of balances on the

bank accounts of the payer and the payee. From an accounting point of view,
the payer’s account is debited and the payee’s account is credited. The debt
owed to the payer by his bank is extinguished or reduced pro tanto (or, where
his account is overdrawn, his liability to the bank increased) by the amount of
the transfer to the payee, whilst the debt owed to the payee by his own bank is
increased (or, where his account is overdrawn, his liability is reduced) by the
same amount. Thus whilst the payer’s net position with his own bank deterio-
rates, the payee’s net position with his own bank improves by the same amount.
22.17 The legal nature of a funds transfer was considered by the House of
Lords in R v Preddy1. In that case, the defendants were charged with obtaining
or attempting to obtain mortgage advances from lending institutions by decep-
tion contrary to s 15(1) of the Theft Act 1968. In making their applications for
mortgage advances, the defendants had deliberately given false information to
the lending institutions. In cases where the advances were approved, they were
paid, not in cash, but by the CHAPS electronic transfer of funds from the bank
account of the lending institution to the account of the defendant (or his
solicitor)2. The key question for the House of Lords was whether this process
meant that the defendants had ‘obtain[ed] property belonging to another’ as
required by s 15(1) of the Theft Act 1968. Reversing the Court of Appeal3, the
House of Lords held that it did not4.
1
[1996] AC 815 and approved in R v Waya [2013] 1 AC 294, paragraph 51. Preddy involved a
credit transfer, but see also Mercedez-Benz Finance Ltd v Clydesdale Bank plc [1997] CLC 81
(Outer House of the Court of Session), where Lord Penrose held that a direct debit does not
operate to vest in the payee any right of the payer against his own bank.

10
 Basic Concepts and Mechanisms 22.19
2
Some advances were paid by telegraphic transfer, but the House of Lords held (at [1996] AC
815, 833D) that no distinction need be drawn for present purposes between the CHAPS system
and telegraphic transfer. In some cases the sums were paid by cheque, but the House of Lords
were not asked to consider such payments. However, Lord Goff did make some obiter
statements on payment by cheque (at 835-837).
3
[1995] Crim LR 564.
4
But it has since been held that ‘appropriation’ under s 1(1) of the Theft Act 1968 is to be treated
differently from ‘obtaining’ under s 15(1): see R v Williams [2000] All ER (D) 1393 (CA Crim
Div); R v Hinks [2001] 2 AC 241, HL.

22.18 Lord Goff, delivering the main speech, dealt first with the position where
the account of the lending institution was in credit1. In such a case, the credit
balance standing in the account represented property, ie a chose in action, of the
lender. When funds were ‘transferred’ to the account of the defendant (or his
solicitor) that chose in action was reduced or extinguished, and the defen-
dant’s (or his solicitor’s) chose in action against his own bank created or
increased. However, as Lord Goff emphasised, the defendant’s (or his
solicitor’s) chose in action against his own bank had never belonged to the
lender, it was a newly created proprietary right quite distinct from the lend-
er’s chose in action against its own bank. Where the lender’s account was
overdrawn his Lordship recognised that it might have to be argued that it was
the bank’s property, and not the lender’s property, which had been ‘obtained’ by
the defendant, but again he concluded that as a result of the transfer the
defendant (or his solicitor) would be given a new chose in action against his own
bank, a chose in action which had never belonged to the lender’s bank2.
However, where the account of the defendant (or his solicitor) was overdrawn,
he would not acquire a chose in action against his own bank, rather the
bank’s chose in action against him would be reduced.
1
[1996] AC 815, 834.
2
[1996] AC 815 at 834–835.

22.19 The importance of Preddy extends beyond the criminal law1. Preddy
confirms that it is a misnomer to speak of the ‘transfer’ of funds in a funds
transfer operation, as cash is not transferred from one account to another and
the debt owed to the payer by his bank, assuming his account is in credit, is not
assigned to the payee2. Preddy highlights the important distinction between the
transfer of property rights and the extinction and creation of property rights.
The point was emphasised by Lord Jauncey in Preddy itself:
‘In applying these words [“belonging to another”] to circumstances such as the
present there falls to be drawn a crucial distinction between the creation and
extinction of rights on the one hand and the transfer of rights on the other. It is only
in the latter situation that the words apply3’.
1
Preddy made a considerable impact on the criminal law as it exposed an important lacuna. The
Law Commission acted quickly and in its report, Offences of Dishonesty: Money Transfers
(Law Com no 243), published on 10 October 1996, only three months after Preddy was
decided, proposed, inter alia, a new s 15A of the Theft Act 1968 introducing a specific offence
of ‘obtaining a money transfer by deception’. Lord Goff introduced the Law Commis-
sion’s draft Bill into the House of Lords on 24 October 1996, and it was enacted as the Theft
(Amendment) Act 1996 on 18 December 1996.
2
See also Libyan Arab Foreign Bank v Bankers Trust Co [1989] QB 728, 750; Customs and
Excise Comrs v FDR Ltd [2000] STC 672, CA, paras 36-37; Foskett v McKeown [2001] 1 AC
102, 128, HL. See also Dovey v Bank of New Zealand [2000] 3 NZLR 641, 648 (NZCA).
Preddy also undermines R v King [1992] QB 20, CA, where the Court of Appeal (Criminal

11
22.19 Paying Bank Obligations

Division) held that a CHAPS payment order was a ‘valuable security’, for the purposes of the
Theft Act 1968, s 20(2) and (3), on the ground that it created or transferred a right over
property. But note that the assignment explanation has some support in the US case law: see,
especially, Delbrueck & Co v Manufacturers Hanover Trust Co 609 F 2d 1047, 1051 (1979).
3
[1996] AC 815 at 841.

22.20 In summary, it is more accurate to speak in terms of the transfer of value

from payer to payee. Property rights are not transferred between accounts. The
receipt of a payment message from the payer, or from the payee acting under the
payer’s authority, leads to the adjustment of the separate property rights (ie
choses in action) of the payer and payee against their own banks. By this process
value is transferred between them.

(d) The Payment Services Regulations 2017 (‘PSR’)

22.21 The Payment Services Regulations 20171 implement the second EU

Payment Services Directive (PSD2)2. From 13 January 2018, the PSR revoked
and replaced3 the Payment Services Regulations 20094, which had implemented
the first Payment Services Directive5.
PSD2 (transposed into UK law through the PSR) provides the legal framework
for the operation of a single market in payment services, by harmonising the
authorisation and registration requirements for ‘payment service providers’.
Payment services include, among other things, services relating to the operation
of payment accounts, execution of payment transactions, card issuing, mer-
chant acquiring, and money remittance. PSD2 focuses on electronic means of
payments including by credit card, standing order, direct debit, debit card,
mobile phone payments and payments from other digital devices. It also applies
to firms providing holders of online payment accounts with payment initiation
services and account information services. (PSD2 does not apply to cash-only
transactions or paper cheque-based transfers.)
‘Payment service providers’, therefore, captures entities well beyond merely
banks, and the PSR applies to ‘authorised payment institutions’, including
credit institutions and electronic money institutions, as well as the Post Office
Limited, the Bank of England and European Central Bank, money remitters,
card issuers, merchant acquirers, payment initiators, account aggregators and
certain electronic communication network service providers.
The PSR imposes conduct of business requirements on payment service provid-
ers, including obligations to provide information to its customers before, during
and after a transaction, and before entering into any general framework
contract (Part 6). Part 7 of the PSR defines various rights and obligations which
apply to contracts for payment services between payment service providers and
customers subject to geographical limitations6. Unless the payment service user
is a consumer, micro-enterprise or charity, the parties may agree that certain
regulations be disapplied7.
Subject to certain exceptions, parts 6 and 7 of the PSR impose obligations on
payment service providers which can be directly enforced at the suit of a private
person8. The PSR is considered in depth in Chapter 24.
1
SI 2017/752,

12
 Basic Concepts and Mechanisms 22.23
2
Directive 2015/2366/EU.
3
See Explanatory Note to SI 2017/752.
4
SI 2009/209.
5
2007/64/EC.
6
SI 2017/752, regs 40, 63.
7
SI 2017/752, reg 63(5).
8
SI 2017/752, reg 148. A private person is defined as an individual (except where the individual
suffers the loss in the course of providing payment services) and a person who is not an
individual, except where the person suffers the loss in question in the course of carrying on
business of any kind. It is suggested that authority on the question of whether a litigant is a
‘private person’ for the purposes of s 138D of FSMA 2000 (previously s 150) is likely to be
applicable here – see Titan Steel Wheels v RBS [2010] EWHC 211 (Comm); [2010] 2
Lloyd’s Rep 92, followed in Camerata Property Inc v Credit Suisse Securities (Europe) Ltd
[2012] EWHC 7 (Comm), Grant Estates Ltd v Royal Bank of Scotland Plc [2012] CSOH 133
(Court of Session (Outer House) and Bailey v Barclays Bank Plc [2014] EWHC 2882 (QB).

(e) Terminology
22.22 There has been some attempt to standardise the terminology in this area.
This has arisen from the influence of Art 4A of the American Uniform Com-
mercial Code (adopted in 1989) and the UNCITRAL Model Law on Credit
Transfers (1992). The same terminology was adopted in EC Directive 97/5 on
cross-border credit transfers, and has entered English law with the implemen-
tation of that Directive through the Cross-Border Credit Transfer Regulations
19991 and continued to an extent by the PSR.
1
SI 1999/1876 and repealed by the PSR Sc. 6(2) paragraph 2.

22.23 It is summarised in the Prefatory Note to Art 4A of the UCC as follows1:

‘X, a debtor, wants to pay an obligation owed to Y. Instead of delivering to Y a
negotiable instrument such as a check or some other writing such as a credit card slip
that enables Y to obtain payment from a bank, X transmits an instruction to X’s bank
to credit a sum of money to the bank account of Y. In most cases X’s bank and
Y’s bank are different banks. X’s bank may carry out X’s instruction by instructing
Y’s bank to credit Y’s account in the amount that X requested. The instruction that X
issues to its bank is a “payment order”. X is the “sender” of the payment order and
X’s bank is the “receiving bank” with respect to X’s order. Y is the “beneficiary” of
X’s order. When X’s bank issues an instruction to Y’s bank to carry out X’s payment
order, X’s bank “executes” X’s order. The instruction of X’s bank to Y’s bank is also
a payment order. With respect to that order, X’s bank is the sender, Y’s bank is the
receiving bank, and Y is the beneficiary. The entire series of transactions by which X
pays Y is known as the “funds transfer”. With respect to the funds transfer, X is the
“originator”, X’s bank is the “originator’s bank”, Y is the “beneficiary” and Y’s bank
is the “beneficiary’s bank”. In more complex transactions there are one or more
additional banks known as “intermediary banks” between X’s bank and Y’s bank. In
the funds transfer the instruction contained in the payment order of X to its bank is
carried out by a series of payment orders by each bank in the transmission chain to
the next bank in the chain until Y’s bank receives a payment order to make the credit
to Y’s account.’
1
The idea of citing the Prefatory Note for this purpose comes from Goode on Commercial Law
p 505. The emphasis above has been added.

13
22.24 Paying Bank Obligations

22.24 It should be noted, however, that Art 4A restricts the term ‘funds
transfer’ to credit transfers and excludes debit transfers from its scope. In this
chapter, the same terminology is used for both credit and debit transfers.

(f) Credit and debit transfers

22.25 Funds transfers can be classified as either credit or debit transfers

according to the way payment instructions are communicated to the origina-
tor’s bank.
22.26 With a credit transfer the originator instructs his bank to cause the
account of the beneficiary, at the same or another bank, to be credited. The
originator’s instruction may be for an individual credit transfer, eg a CHAPS
payment, or for a recurring transfer of funds under a standing order1. On
receipt of the originator’s payment order, the originator’s bank will debit his
account, unless provided with some other means of reimbursement, and credit
the beneficiary’s account, where it is held at the same bank, or, where the
beneficiary’s account is held at another bank, forward instructions to the
beneficiary’s bank, which will credit the beneficiary’s account.
1
Standing orders are instructions given by a customer to his bank to make regular payments of
a fixed amount to a particular beneficiary. Standard forms for standing orders supplied by
banks to their customers usually contain a provision giving the originator’s bank authority to
debit the originator’s account. However, the originator’s bank is under no duty to make a
standing order payment if there are insufficient funds to the credit of the originator’s account,
or no overdraft facility to cover the payment, and is under no obligation subsequently to
monitor the account to establish whether sufficient funds have been paid into the account to
meet the standing order payment (Whitehead v National Westminster Bank Ltd (1982) Times,
9 June).

22.27 With a debit transfer the beneficiary conveys instructions to his bank to
collect funds from the originator. These instructions may be initiated by the
originator himself and passed on to the beneficiary, eg as happens with the
collection of cheques; alternatively, they may be initiated by the beneficiary
himself pursuant to the originator’s authority, as happens with direct debits. On
receipt of instructions from the beneficiary, the beneficiary’s bank usually
provisionally credits the beneficiary’s account with the amount to be collected
and forwards instructions to the originator’s bank, which will debit the origi-
nator’s account. The credit to the beneficiary’s account becomes final when the
debit to the originator’s account becomes irreversible.
22.28 The movement of both payment orders and funds in credit and debit
transfers is illustrated in Diagram 1.

14
 Basic Concepts and Mechanisms 22.31

Diagram 1 Credit and debit transfers

.

(g) Clearing and settlement

22.29 Payment effected through a funds transfer system is initiated by a

payment order given by the originator, or someone else acting with his author-
ity, to his own bank. In cases where the payment is not ‘in-house’ (ie the
originator and the beneficiary hold accounts at the same bank), the origina-
tor’s payment order will lead to a further payment order passing between the
originator’s bank and the beneficiary’s bank, sometimes through the interme-
diation of other banks. The process of exchanging payment orders between
participating banks is known as clearing. Clearing may take place through a
series of bilateral exchanges of payment orders between banks, but in the
United Kingdom it is more common for clearing to take place multilaterally
through a centralised clearing house.
22.30 Funds transfer systems are classified as either paper-based or electronic
depending on the medium used for inter-bank communication of payment
instructions1. In a paper-based funds transfer system the paper embodying the
payment instruction is physically transferred from one bank to another, eg by
direct courier or at a centralised clearing house. The credit clearing is a
paper-based funds transfer system (as is the cheque clearing). By contrast, with
an electronic funds transfer system the inter-bank communication of payment
instructions is by electronic means, eg by electronic link. The major inter-bank
electronic funds transfer systems in the United Kingdom are the services
operated by BACS Payment Schemes Ltd and Voca Ltd (‘BACS’) and the
payment system run by Clearing House Automated Payments System
(‘CHAPS’) which applies to sterling clearing.
1
B Geva, The Law of Electronic Funds Transfers (1992, loose-leaf, Matthew Bender), s 1.03[4].

22.31 Where the originator and the beneficiary hold accounts at the same
bank, the transfer of funds between the two accounts will usually involve a
simple internal accounting exercise at the bank, known as an ‘in-house’
transfer1. The originator’s account is debited and the beneficiary’s account is

15
22.31 Paying Bank Obligations

credited. The position will be different where the originator’s account and the
beneficiary’s account are held at different banks, known as an ‘inter-bank’
transfer. In such cases an inter-bank payment order will pass from bank to bank,
sometimes from the originator’s bank directly to the beneficiary’s bank, other-
wise via intermediary banks which each issue their own payment order to the
next bank down the chain, until a payment order finally reaches the beneficia-
ry’s bank. Each inter-bank payment order must be paid by the bank sending the
instruction to the bank receiving it. It is this process whereby payment is made
between the banks themselves of their obligations inter se which is known as
settlement.
1
Libyan Arab Foreign Bank v Bankers Trust Co [1989] QB 728, 750-751, Staughton J.
Although, as Cranston points out, payment need not be in-house even where originator and
beneficiary have accounts at separate branches of the same bank, where the accounts are located
in different jurisdictions and the transfer is in the currency of a third country: R Cranston,
Principles of Banking Law (3rd edn, 2017, Oxford University Press), p 339.

22.32 Settlement can occur on either a bilateral or multilateral basis. Bilateral

settlement occurs where the bank sending the payment order and the bank
receiving it are ‘correspondents’, meaning that each holds an account with the
other. Settlement is effected through an adjustment of those accounts. Multi-
lateral settlement involves the settlement of accounts of the sending bank and
the receiving bank held at a third bank. The third bank could be a common
correspondent of the two banks, ie one where they both have accounts;
alternatively, and more typically, the third bank could be a central bank.
22.33 Settlement may be either gross or net. With gross settlement the sending
and receiving banks settle each payment order separately without regard to any
other payment obligations arising between them. This is usually done on a
real-time basis, with settlement across the accounts of participating banks held
at the central bank as each payment order is processed. With net settlement the
mutual payment obligations of the parties are set off against each other and
only the net balance paid. This process occurs periodically with net balances
being settled either at the end of the day (‘same-day’ funds) or on the following
day (‘next-day’ funds)1.
1
This chapter is only concerned with payment (or settlement) netting as opposed to contract (or
novation) netting, as to which see P Wood, English and International Set-Off (1989, Sweet &
Maxwell), paras 5–75 et seq; P Wood, Title Finance, Derivatives, Securitisations, Set-off and
Netting (1995, Sweet & Maxwell), ch 10; P Wood, International Finance Series, Vol 4, Set-Off
and Netting, Derivatives and Clearing Systems (2nd edn, 2007, Sweet & Maxwell), para 1-029
et seq.

22.34 Net settlement may also be either bilateral or multilateral. In a bilateral

net settlement system a participant’s exposure is measured by reference to its net
position with regard to each individual counterparty and not by reference to the
system as a whole. In a multilateral net settlement system a participant’s posi-
tion is measured by reference to its net position with regard to all other
participants in the system as a whole. As a result, each participant will end up
as a net net debtor or a net net creditor in relation to all other participants in the
system. Multilateral netting may arise through direct determination of multi-
lateral net positions or indirectly by netting the net bilateral positions and
thereby obtaining net net positions. In each case settlement follows the multi-
lateral netting process.

16
 Basic Concepts and Mechanisms 22.37

22.35 There are a number of advantages to be gained from net settlement: it

reduces the number and value of inter-bank settlement operations, this leads to
reduced transaction costs, liquidity is maintained, and it reduces insolvency
losses provided netting withstands insolvency. On the other hand, net settle-
ment does result in exposure to several types of risk including receiver risk1. A
bank receiving a payment instruction from another bank participating in a
payment system usually makes funds available to its own customer before it has
itself been placed in funds on completion of the multilateral net settlement at the
end of the day (assuming the receiving bank turns out to be a net net creditor).
Thus, the receiving bank carries the risk that it might never be placed in funds.
Furthermore, acting on its customer’s instruction, the receiving bank might
itself pass on payment instruction down a chain of banks. The failure of one
bank to make payment may mean that the other banks in the chain cannot meet
their own payment commitments. This is known as systemic risk.
1
R Sappideen, ‘Cross-border electronic funds transfers through large value transfer systems, and
the persistence of risk’ [2003] JBL 584 at 589 and 593.

22.36 There are various ways to reduce systemic risk in settlement systems
through the introduction of appropriate prudential safeguards, eg same-day (as
opposed to next-day) settlement; net bilateral receiver limits (credit caps); net
sender limits (debit caps); appropriate membership criterion; real time moni-
toring of net balances; and schemes which guarantee settlement even if one
party defaults1.
1
See B Geva, ‘International Funds Transfers: Mechanisms and Laws’, ch 1 in J Norton, C Reed
and I Walden (eds), Cross-Border Electronic Banking – Challenges and Opportunities (2nd
edn, 2000, Informa Law); R Dale, ‘Controlling Risks in Large-Value Interbank Payment
Systems’ (1997) 11 JIBFL 426.

22.37 Failure of a participant in a net settlement payment system may lead to

further difficulties under insolvency law. Certain States have rules giving
retroactive effect to the pronouncement of insolvency. The zero-hour rule,
which applies, for example, in the Netherlands, Austria and Italy, renders void
all transactions conducted by an insolvent institution after midnight (ie zero
hour, or 00:00) on the date on which it is declared to be insolvent. As a result,
payment instructions introduced after zero hour of the day of the opening of the
insolvency proceedings against a participant in a payment system, but before
the pronouncement of insolvency, could be challenged by the liquidator of an
insolvent participant. In common law jurisdictions, bilateral netting withstands
insolvency of a counterparty due to the effectiveness of the right of set-off in
insolvency. However, effective set-off requires pre-insolvency mutuality; only
debts between the same counterparties can be set-off against each other. Thus,
under English law a multilateral netting arrangement can be challenged by a
liquidator of a participant on the grounds that it allows set off of claims in
relation to which there is no mutuality and that it infringes the pari passu
principle1.
1
Based on the application of what was then section 302 of the Companies Act 1948 (now
section 107 of the Insolvency Act 1996): the leading decision is British Eagle International
Airlines Ltd v Compagnie Nationale Air France [1975] 1 WLR 758, HL applied in Chaucer
Insurance Plc v Folgate London Market Ltd [2011] Bus LR 1327 at paragraph 1338.

17
22.38 Paying Bank Obligations

22.38 In order to reduce systemic risk in payment systems which operate on the
basis of payment netting, and to minimise the disruption caused by insolvency
proceedings against a participant in a payment or securities settlement system,
the European Parliament and Council adopted Directive 98/26 on settlement
finality in payment and securities settlement systems1. The Settlement Finality
Directive, in amended form, provides, inter alia, that:
(i) transfer orders and netting are to be legally enforceable and binding on
third parties, even in the event of insolvency proceedings, provided the
transfer orders were entered into the system before the moment of
opening of the insolvency. Where transfer orders were entered after the
opening of insolvency proceedings the system operator has the burden of
proving that it was not aware of and should not have been aware of the
opening of such proceedings (art 3(1));
(ii) there is to be no unwinding of a netting because of the operation of
national laws or practice which provide for the setting aside of contracts
and transactions concluded before the moment of opening of insolvency
proceedings (art 3(2));
(iii) in the case of interoperable systems each system determines in its own
rules the moment of entry into its system (art 3(4));
(iv) a transfer order is not to be revoked by a participant in a system, nor by
a third party, from the moment defined by the rules of that system (art 5);
and
(v) insolvency proceedings are not to have retrospective effect on the rights
and obligations of a participant arising from, or in connection with, its
participation in a system earlier than the moment of opening of such
proceedings (art 7).
The moment of opening of insolvency proceedings is the moment when the
relevant judicial or administrative authority handed down its decision
(art 6(1)).
1
(OJ 1988 L166/45) as amended on 6 May 2009 by Directive 2009/44/EEC (OJ 2009 L146/37,
on 24 November 2010 by Directive 2010/78/EEC (OJ 2010 L/331/120), on 4 July 2012 by
Regulation 648/2012/EU (OJ 2012 L201/1) and on 23 July 2014 by Regulation 90/2014/EU
(OJ 2014 L257/1).

22.39 The United Kingdom implemented the Directive through the Financial
Markets and Insolvency (Settlement Finality) Regulations 19991. The Regula-
tions apply only to systems which are accorded designation by a ‘designating
authority’2. Part III of the Regulations largely displace the rules of insolvency
law, giving precedence to the proceedings of the relevant designated system.
This reverses the effect of the ruling in British Eagle so far as those designated
systems are concerned3. As the Regulations are domestic legislation, their
displacement of the rules of insolvency law in respect to designated systems will
remain in effect unless and until such a time as they are repealed or amended.
1
SI 1999/2979 as amended on 6 April 2011 by the Financial Markets and Insolvency (Settlement
Finality and Financial Collateral Arrangements) (Amendment) Regulations 2010, SI 2010/2993
and the Financial Markets and Insolvency (Settlement Finality) (Amendment) Regulations
2015, SI 2015/347.
2
See regs 3–12 and the Schedule thereto.
3
As stated in terms by the Explanatory Note to the Financial Markets and Insolvency (Settlement
Finality) Regulations 1999: ‘Regulations 13 to 19 modify the law of insolvency in so far as it
applies to transfer orders effected through a designated system and to collateral security

18
 Basic Concepts and Mechanisms 22.44

provided in connection with participation in designated system.’ An international commentary

is found in Insolvency Arrangements and Contract Enforceability produced by the Contact
Group in December 2000.

22.40 Nevertheless, concern about systemic risk in large-value transfer systems

led the EC central banks to adopt the principle that member states should each
develop their own real-time gross settlement system for large-value payments.
Within the G-10 countries, the first RTGS system was US Fedwire which was
launched in 1970. Subsequently RTGS systems or facilities were introduced in
the Netherlands (1985), Sweden (1986), Switzerland (1987), Germany (1987),
Japan (1988), Italy (1989), the UK (1996), Belgium (1996) and France (1997).
22.41 The various real-time gross settlement systems of member states of the
EU are connected by TARGET2, which is the payment system arrangement
allowing high value payments in euros to be made in real-time across borders
within the European Union1. (At the time of writing, it is unclear whether
United Kingdom participants will continue to have access to TARGET2 after
Brexit.) With real-time gross settlement, receiver risk is significantly reduced as
no intra-day credit is granted to participants in the system. Foreign currency
exchange settlement risk (Herstatt risk) remains, but for those banks that have
joined the continuous linked settlement (CLS) system, which became opera-
tional in September 2002, it has largely been eliminated for certain foreign
exchange transactions2.
1
TARGET2 is the successor to TARGET which was introduced in 1999. See below at paras
25.66 to 25.71.
2
See M Brindle and R Cox (eds), Law of Bank Payments (5th edn, 2017, Sweet & Maxwell),
paras 3-019 and 3-044 et seq.

22.42 However, lack of credit means that participants must have funds avail-
able at the central bank to meet their payment obligation before they can send
payment instructions. This reduces liquidity and can lead to gridlock (ie the
system cannot get going until participants have received sufficient credits from
other participants), although this can be avoided through the central bank
offering secured overdraft facilities to participating banks (‘daylight
overdrafts’) or entering into repurchase arrangements.

(h) Clearing systems and clearing rules

22.43 The term ‘clearing system’ can be used in one of two senses. As Geva
observes:
‘In its narrow sense, “clearing system” is a mechanism for the calculation of mutual
positions within a group of participants (“counterparties”) with a view to facilitate
the settlement of their mutual obligations on a net basis. In its broad sense, the term
further encompasses the settlement of the obligations, that is, the completion of
payment discharging them1’.
1
B Geva, ‘The Clearing House Arrangement’ (1991) 19 Can BLJ 138 at 138.

22.44 A clearing system is operated by a clearing house. The banks which

participate in a clearing system – known in the UK as ‘clearing banks’: some
building societies are also members of clearing systems in the UK – are members

19
22.44 Paying Bank Obligations

of the clearing house. The members are bound by the clearing house
rules through a multilateral contract1. The multilateral contract may arise
where the member contracts with the clearing house to conform to the rules: the
member is then deemed to have contracted with all other members on the terms
of its individual undertaking2. Alternatively, the members of the clearing system
may agree together to abide by the system rules. The rules must be interpreted
against the background of the manner and operation of the particular clearing
system. Any interpretation of the rules must also be in accordance with the
nature of the rules themselves.
1
See R Cranston, Principles of Banking Law (3rd edn, 2017, OUP), pp 241–243.
2
Clark v Earl of Dunraven, The Satanita [1897] AC 59, HL. (Note that the Privy Council in The
Cape Bari [2016] UKPC 20; [2017] 1 All ER held that The Satanita was not a case of general
application on the separate question of when parties would be held to have contracted out of
statutory rights of limitation.)

22.45 It always remains open (although unlikely in practice) for clearing house
rules to be expressly incorporated into a bank’s contract with its customer.
However, to rely on the clearing house rules against a member bank other than
his own bank, the customer would have to bring himself within the ambit of
the Contracts (Rights of Third Parties) Act 1999, which may prove difficult, not
least because the member banks may have ‘contracted out’ of the Act1.
1
As occurs, eg, with the CHAPS Reference Manual (version 25 May 2018, at Chapter 1, page
20). See the Contracts (Rights of Third Parties) Act 1999, s 1(2). Agency arguments are likely
to prove equally problematical.

22.46 A customer of a clearing bank may be bound by, and able to rely on, the
clearing house rules against his own bank through an implied term of the
bank-customer contract. The customer is taken to have contracted with refer-
ence to the reasonable usage of bankers, including those clearing house
rules which represent such reasonable usage1. However, where clearing house
rules derogate from the customer’s existing rights, the usage codified in the
rules will be deemed unreasonable and will not bind the customer without his
full knowledge and consent2.
1
Hare v Henty (1861) 10 CBNS 65; Re Farrow’s Bank Ltd [1923] 1 Ch 41; Parr’s Bank Ltd v
Thomas Ashby & Co (1898) 14 TLR 563; Tayeb v HSBC Bank plc [2004] EWHC 1529
(Comm), [2004] 4 All ER 1024 at [57] and Tidal Energy Ltd v Bank of Scotland Plc [2014]
EWCA Civ 1107.
2
Barclays Bank plc v Bank of England [1985] 1 All ER 385 at 394D, per Bingham J (sitting as
judge-arbitrator); Turner v Royal Bank of Scotland plc [1999] Lloyd’s Rep Bank 231, CA. See
also R Hooley, ‘Bankers’ References and the Bank’s Duty of Confidentiality: When Practice
Does Not Make Perfect’ [2000] CLJ 21.

22.47 There are five major clearing systems in the United Kingdom; each is run
by independent companies operating under the umbrella of the UK Payments
Administration1. The main clearing systems are as follows:
(a) The cheque clearing system (operated by the Cheque and Credit
Clearing Co Ltd), which is used for the physical exchange of cheques and
similar instruments. This system is being replaced by the Image Clearing
System, which is being rolled out on a phased basis and is expected to
replace the physical system by the end of 2018.

20
 The Bank’s Payment Obligations 22.50

(b) The credit clearing system (also run by the Cheque and Credit
Clearing Co Ltd), which is a paper-based credit transfer system used for
the physical exchange of high-volume, low-value, credit collections such
as bank giro credits.
(c) BACS (operated by BACS Payment Schemes Ltd and Vocalink), which
provides a high-volume, low-value, bulk electronic clearing service for
credit and debit transfers, including standing orders, direct debits, wages
and salaries, pensions and other government benefits.
(d) CHAPS which is a paperless real-time gross settlement (RTGS) system
operated by the CHAPS Clearing Co Ltd. There is no physical clearing
with CHAPS. In 2017, the total value transmitted by CHAPS was £84.1
trillion, on average £334 billion a day. 41.7 million transfers were made
in the year, an average of 165,284 a day. The CHAPS Participation
Requirements provide a maximum payment transmission time of 1.5
hours. The CHAPS Rules provide a maximum payment transmission
time of 1.5 hours.
(e) Faster Payment Scheme which is a limited value (£250,000 is the
maximum payment but individual banks impose different limits) elec-
tronic transfer system in which payments are made within hours of the
instruction being given. The Scheme was introduced in 2008 and is
operated by Vocalink2.
1
Previously known as the Association for Payment Clearing Services (APACS). It is the trade
association for the UK payments industry.
2
See www.fasterpayments.org.uk for a description of how the payment system works.

22.48 Save for CHAPS, which is a real-time gross settlement system, and the
Faster Payment Scheme, the other clearing systems are multilateral net settle-
ment systems with settlement of balances across the participants’ accounts held
at the Bank of England at the end of each day.
22.49 The UK Payments Administration also oversees the Currency Clearings,
which clear paper-based payment orders drawn in foreign currencies on UK
banks. A major clearing system available to UK banks, but operating outside
the UK Payments Administration umbrella, is the Euro Banking Associa-
tion’s multilateral cross-border clearing and settlement system providing same-
day settlement for euro payments (EURO 1)1. There are also a number of other
payment networks operating outside UK Payments Administration, such as the
Visa and MasterCard networks, which handle various types of payment cards.
1
For EURO 1, see para 25.72 below.

3 THE BANK’S PAYMENT OBLIGATIONS

(a) The scope of the obligation to repay

22.50 Where a customer pays money into his account, the bank obtains title to
the money and assumes a contractual liability to repay an equivalent amount to
the customer or to his order1. At any given time, the bank is liable to repay its
customer on demand the amount of the credit balance on the account or, where
the bank has a presently exercisable right of set-off, the net balance on one or
more accounts.

21
22.50 Paying Bank Obligations

A bank’s obligation to honour its customer’s payment orders is subject to the

following general qualifications:
(1) the customer must have funds which are sufficient and available (see
paras 22.60–22.61 below);
(2) the bank’s authority to honour payment orders or a particular payment
order must not have been determined or suspended (see paras 22.102–
22.112 below).
Wrongful dishonour of a payment order will usually render the bank liable to
the customer for breach of contract, and it may also constitute the tort of libel
(see para 22.115 below).
It is submitted that the bank’s obligation (absent express terms to the contrary)
is to repay at any domestic branch, or through ATMs or telephone or internet
banking where such facilities are offered, provided always that reasonable
proof of identity is provided. Although there are old cases indicating that the
bank is only obliged to make repayment at the branch of the bank where the
account is kept, it is suggested that their rationale no longer exists, at least so far
as domestic banking transactions are concerned2.
In his formulation of the terms of the banker-customer contract in the Joachim-
son case3, Atkin LJ left open the question whether the demand for repayment
must be in writing. It is submitted that the banker should be entitled to insist
upon a written demand, although it remains to be seen whether a payment
order made by ATM, internet or smartphone banking would constitute a
‘written demand’, given that the customer will have had to identify themselves
before making the payment order and an electronic record would be created
and made of the payment order.
1
Foley v Hill (1848) 2 HL Cas 28.
2
See R v Lovitt [1912] AC 212 at 219; Joachimson v Swiss Bank Corpn [1921] 3 KB 110, 127,
CA. Those judgments reflected banking practice at the time. The banks had in practice localised
their obligations (because, for example, the officials at one branch could not know what the
state of a customer’s account at another branch was - see R v Lovitt p 219). Given the advent
of internal computer systems allowing communication between branches, and the increasing
delocalisation of banking activities (through non-branch based accounts, and the operation of
banking facilities via ATMs, telephone, the internet, and now smartphones), it is submitted that
there is no longer any such limitation in the context of withdrawals within the jurisdiction. See
the discussion of the Singapore High Court in Damayanti Kantilal Doshi v Indian Bank [1999]
4 SLR 1, at page 11. It is suggested that different considerations may still apply in relation to
cross-border banking relationships (for example where a customer of an English bank seeks to
withdraw funds from a branch of that bank in a foreign country). In those circumstances, it
must be doubted whether, absent express terms, English law would require that the bank must
make payment abroad, in circumstances where the bank may incur
exchange/transmission/regulatory costs. Such flexibility could also affect the question of the
proper law which governs the debt: see Arab Bank Ltd v Barclays Bank (DCO) [1954] AC 495.
3
[1921] 3 KB 110 at 127, CA.

(b) The bank’s general contractual duty to the customer

22.51 The bank is under a duty to obey the customer’s mandate1. Where the
bank acts outside the mandate, eg transmitting a payment message to the wrong
bank, to the wrong payee, or in the wrong amount, it cannot debit its
customer’s account2.

22
 The Bank’s Payment Obligations 22.54

The doctrine of strict compliance3, which applies to documentary credit trans-

actions, has been held not to apply to a customer’s instruction to transfer
funds4. Where payment is not made at all, or is made only after a delay, the
originator’s bank does not act outside its mandate. In such cases the origina-
tor’s bank will only be liable for the customer’s consequential loss where this is
caused by its own negligence or that of its employees or agents.
1
The bank is only obliged to honour its customer’s mandate if the account is in credit, or, where
it is in debit, if the customer has been granted an overdraft facility: Bank of New South Wales
v Laing [1954] AC 135 at 154, PC.
2
Orr v Union Bank 1854 1 Macq 513, HL; Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep
147 at 168.
3
See para 37.1 below.
4
Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyd’s Rep 194 at 199. Nevertheless, Geva
rightly submits that strict compliance ought to be regarded as the required standard for the duty
of the originator’s bank to issue onwards a corresponding payment order matching that of the
originator: see B Geva, Bank Collections and Payment Transactions (2001, OUP), p 292, citing
Clansmen Resources Ltd v Toronto Dominion Bank (19 December 1986), 86/00047;
[1987] BCJ No 618 (BCSC), on-line: QL (BCJ), affd on other grounds (1990), 43 BCLR (2d)
273, CA.

(c) The bank’s duty in negligence to its customer

22.52 When executing the customer’s instruction to make a funds transfer the
bank acts as its customer’s agent1. Acting as agent the bank owes the customer
a duty to observe reasonable care and skill in and about executing the custom-
er’s orders. The duty arises both at common law2 and under statute3.
1
Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyd’s Rep 194 at 198. See also Barclays
Bank plc v Quincecare Ltd [1992] 4 All ER 363 at 375J, per Steyn J. But what if the originator
is not a customer of the bank? Contrast E P Ellinger, E Lomnicka and RJA Hooley, El-
linger’s Modern Banking Law (4th edn, 2005, OUP), pp 552–553, with R R Pennington, A H
Hudson and J E Mann, Commercial Banking Law (1978, Macdonald & Evans), p 283.
2
Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyd’s Rep 194 at 198. See also Selangor
United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555; Karak Rubber Co Ltd v
Burden (No 2) [1972] 1 WLR 602; Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363;
Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340; revsd [1991] 2 AC 548, but there was no
appeal on the duties of the originator’s bank.
3
Supply of Goods and Services Act 1982, s 13.

22.53 In certain circumstances the duty to exercise reasonable care and skill
may come into conflict with the bank’s duty to obey the customer’s mandate.
For example, the bank would not be in breach of mandate if it paid in
accordance with instructions given by a duly authorised officer of a corporate
customer, but it would be in breach of its duty of care and skill if the bank knew
or ought have known that the officer was acting dishonestly for his own
purposes1.
1
Barclays Bank Ltd v Quincecare, fn 3 above; Lipkin Gorman v Karpnale Properties Ltd, fn 3
above; Verjee v CIBC Bank and Trust Co (Channel Islands) Ltd [2001] Lloyd’s Rep Bank 279,
282, Ch D; see also the recent case of Singularis Holdings Ltd (in liq) v Daiwa Capital Markets
Europe Ltd [2017] EWHC 257 (Ch); [2017] 2 All ER (Comm) 445, upheld by the Court of
Appeal in [2018] EWCA Civ 84; [2018] 1 Lloyd’s Rep 472.

22.54 There are various aspects of the originator’s bank’s duty to exercise
reasonable care and skill. Where the customer does not specify how the transfer

23
22.54 Paying Bank Obligations

is to be made, the bank is free to choose the method of transfer, so long as it

exercises reasonable care and skill when making its choice1. Where the cus-
tomer specifies a particular method of transfer, the bank is not bound to use that
method, unless the specification is deemed to be of the essence of the instruc-
tion, so long as the alternative method of transfer is at least as secure and as
speedy a method of transfer as that specified2. Where the time of transfer is not
specified by the customer, or it cannot be inferred from the method of transfer
specified by the customer3, the bank must make the payment within a reason-
able time4. Where it is necessary for the originator’s bank to employ the services
of an intermediary (correspondent) bank it must take reasonable care to engage
a reliable intermediary5. In carrying out an instructed payment the origina-
tor’s bank will not be liable if, following established banking practice, it
facilitates the defrauding of the customer. In Tidal Energy Ltd v Bank of
Scotland Plc6 a customer instructed its bank to make a CHAPS payment and
gave the correct name but incorrect account number and sort code to its bank
(the customer had been subject to a fraud). The payment was made to the
fraudulent third party which immediately withdrew the payment. The customer
claimed that the bank had wrongly debited his account. Summary judgment
was granted in favour of the bank and upheld on appeal because the ordinary
practice of the CHAPS scheme since 2007 was not to match names to account
numbers and sort codes but to process on the basis of the sort code (or bank
identifier code) and account number. A customer who instructs a bank to make
a CHAPS transfer is, as a matter of construction, contracting on the basis of the
banking practice which governs CHAPS. A bank has no duty of care to check
that a beneficiary’s name in the instruction accurately matches the name of the
customer indicated by the other identifiers.
1
Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyd’s Rep 194 at 197–198.
2
See Dovey v Bank of New Zealand [2000] 3 NZLR 641, 651–652, where the New Zea-
land Court of Appeal held that the originator’s bank had not breached its contract with the
originator when it ignored his instruction to send funds overseas by tested telex and used the
faster SWIFT system instead: the specified method was held not to be of the essence of the
contract.
3
Eg where the customer instructs his bank to make a CHAPS payment, the inference is that he
expects value to be given the same day.
4
Supply of Goods and Services Act 1982, s 14.
5
Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyd’s Rep 194. Breach of this duty will be
hard to establish.
6
[2014] EWCA Civ 1107 Floyd LJ dissented.

22.55 The bank must install and maintain a reasonably efficient security
system and must exercise reasonable care and skill to ensure that its equipment
is operating properly1. In cases where a bank sells or hires hardware to a
customer, or software provided through tangible means such as a hard drive (eg
when providing corporate or institutional customers with direct access to BACS
or CHAPS), the bank will be under a duty to supply equipment which is of
satisfactory quality and fit for its purpose2. The bank will be strictly liable for
breach of such a duty; liability does not depend on establishing that the bank
was negligent.
There has until recently been a controversy as to whether the supply of software
could constitute ‘goods’ for these purposes, with many courts concluding
(albeit in obiter) that ‘goods’ denotes something tangible, and electronically
provided software does not constitute goods3. The Court of Appeal has settled

24
 The Bank’s Payment Obligations 22.56

that controversy in Computer Associates UK Ltd v The Software Incuba-

tor Ltd4. The Court of Appeal held that the supply of software in the form of an
internet download (as distinct from the programme being supplied through
some tangible medium such as a USB stick) does not constitute a ‘sale of goods’
for the purposes of the Commercial Agents (Council Directive) Regulations
1993. (It is likely that this analysis will be applied in respect to other legislation,
most notably the Sale of Goods Act 1979.) The consequence of this judgment is
that a bank that supplies its customer with software on a hard drive will be
supplying ‘goods’ within the meaning of the Goods and Services Act and subject
to its implied terms, but a bank that supplies the same software via internet
download will not. As the Court of Appeal noted in the judgment, it is for the
legislature, not the courts, to pass legislation to deal with new technologies. It is
submitted that this is an area that is ripe for such legislative intervention.
1
C Reid, Electronic Finance Law (1991, Woodhead-Faulkner), pp 20 and 21; cf A Arora,
Electronic Banking and the Law (2nd edn, 1993, Banking Technology), p 146.
2
Sale of Goods Act 1979, s 14; Supply of Goods and Services Act 1982, s 9. In St Alban’s City
and District Council v International Computers Ltd [1996] 4 All ER 481 at 493–494, Sir Iain
Glidewell stated (obiter) that software did not fall within the statutory definition of ‘goods’ in
the Sale of Goods Act 1979, s 61 and the Supply of Goods and Services Act 1982, s 18, but that
the seller or hirer of a disk incorporating defective software would nevertheless be in breach of
the terms as to satisfactory quality and fitness for purpose implied by the Sale of Goods Act
1979, s 14 and the Supply of Goods and Services Act 1982, s 9. He also stated that where there
is a contract to transfer computer software without the transfer of a disk, or other tangible thing
on which the program is encoded, the common law would imply a term that the software would
be reasonably fit for the intended purpose. See also Watford Electronics Ltd v Sanderson
CFL Ltd [2000] 2 All ER (Comm) 984, 1066, revsd in part on appeal [2001] EWCA Civ 317,
[2001] 1 All ER 696.
3
See, in particular, Beta Computers (Europe) Ltd v Adobe Systems (Europe) Ltd 1996 SLT 604;
St Alban’s City and District Council v International Computers Ltd [1996] 4 All ER 481, CA;
Watford Electronics Ltd v Sanderson CFL Ltd [2000] 2 All ER (Comm) 984, revsd in part on
appeal [2001] EWCA Civ 317, [2001] 1 All ER 696. See, generally, P S Atiyah, J N Adams &
H MacQueen, The Sale of Goods (11th edn, 2005, Longman), pp 77–82.
4
[2018] EWCA Civ 518 (reversing the judgment of HHJ Waksman QC at first instance).

22.56 The originator’s bank will be vicariously liable for the negligence or
fraud of its employees and agents1. A payment made as the result of negligence
or fraud will usually be in breach of mandate. Where the Payment Services
Regulations apply2 if a payer denies authorising the payment the burden falls
upon the paying bank to authenticate the transaction3.
In principle, it will be liable for the negligence of any correspondent bank it
employs4. However, it is common practice for the originator’s bank to disclaim
liability for the negligence and default of the intermediary. Clauses disclaiming
liability are usually set out in standard payment instruction forms supplied by
the payer’s bank for the payer’s use. Such clauses may be subject to review under
the provisions of the Unfair Contract Terms Act 1977 (‘UCTA’)5, and under
the Consumer Rights Act 2015, which replaced the Unfair Terms in Con-
sumer Contracts Regulations 19996. Where the originator, who is dealing on
the bank’s written standard terms of business7, is acting in a business capacity
(ie the originator is a non-consumer) UCTA will apply8, and precedent suggests
that a clause disclaiming liability for negligence of the intermediary is likely to
be upheld as reasonable under UCTA on the grounds that the originator’s bank
has no control over the intermediary and that a business originator might be
expected to insure against the risk9. On the other hand, where the originator is

25
22.56 Paying Bank Obligations

an individual and a consumer, the Consumer Rights Act 2015 will apply. A
clause purporting to exclude or restrict liability for negligence or default by the
intermediary may be found to be ‘unfair’ pursuant to section 62 of the Con-
sumer Rights Act 2015. An unfair term of a consumer contract is not binding on
the consumer: section 62(1)10. Where the Consumer Rights Act 2015 applies,
there would seem to be a greater chance than under UCTA that such a
clause would be held not to be binding11. Where the intermediary is no more
than a branch or office of the originator’s bank, the bank will remain liable for
its own negligence whether dealing with a consumer or a non-consumer. In
these circumstances any purported exclusion of the bank’s liability for its own
negligence is likely to be held both unreasonable and unfair.
1
Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyd’s Rep 194 at 198.
2
For instance ATM withdrawals provided by a bank other than the customer’s are not within the
scope of the PSR nor are cheques, travellers cheques, bills of exchange and promissory notes (see
Sch 1 Pt 1 paras 2(g) and 2(o)).
3
PSR reg 75.
4
Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyd’s Rep 194 at 198. See also Mackersy
v Ramsays, Bonars & Co (1843) 9 Cl & Fin 818 at 846 and 851; Equitable Trust Co of New
York v Dawson Partners Ltd (1926) 27 Ll L Rep 49.
5
See paras 4.12 to 4.15 above.
6
See paras 4.16 to 4.24 above.
7
For one contracting party to deal on the other’s written standard terms of business within the
Unfair Contract Terms Act 1977, s 3(1) it is only necessary for him to enter into the contract on
those terms: the fact there has been negotiations over the standard terms is irrelevant if the terms
remained effectively untouched (St Alban’s City and District Council v International Comput-
ers Ltd [1996] 4 All ER 481, CA).
8
Unfair Contract Terms Act 1977, s 3.
9
Such a clause was upheld in Calico Printer’s Association Ltd v Barclays Bank Ltd (1931) 145
LT 51; affd,(1931) 145 LT 51 at 58 (a pre-Unfair Contract Terms Act 1977 case).
10
See further paras 4.19–4.24 above on the test of fairness under the Consumer Rights Act 2015.
11
See especially, Unfair Terms in Consumer Contracts Regulations 1999, Sch 2, para 2, which
gives as an example of an unfair term: ‘A term which has the object or effect of inappropriately
excluding or limiting the legal rights of the consumer in relation to the trader or another party
in the event of total or partial non-performance or inadequate performance by the trader of any
of the contractual obligations’.

22.57 The originator’s bank will not be vicariously liable for the acts of third
parties who are not its employees or agents, unless the bank has by its own
negligence facilitated those acts, eg where inadequate security procedures
enable a thief to gain access to the bank’s computer system. The origina-
tor’s bank will not be liable for defects in the network or other telecommuni-
cation system provided by a third party, nor for defects in the equipment of the
beneficiary’s bank (or in the equipment of an intermediary bank employed by
the beneficiary’s bank) unless the originator’s bank has given some form of
contractual undertaking to its own customer as to the reliability of this
system/equipment. However, where the bank is aware of any such defects it may
be negligent if it does not do what is reasonably practical in the circum-
stances, eg repeating the message or sending it to the receiving bank’s back-up
centre. The network or other telecommunications system provider may be
contractually liable to the originator’s bank or the beneficiary’s banks1, but it
has no contract with the originator or the beneficiary, and is unlikely to be held
to owe either of them a duty of care in tort on the grounds of lack of assumption
of responsibility and insufficient proximity between them. The liability of the
beneficiary’s bank to its own customer, the beneficiary, and, possibly, the

26
 The Bank’s Payment Obligations 22.60

originator, for malfunction of its equipment, is considered below.

1
The network or telecommunications system provider will usually seek to exclude liability for
breach of their contractual obligations. SWIFT is an important exception to this general rule,
although it does impose limitations on the amount of its liability in respect of different
categories of claim. See para 25.65 below.

22.58 The PSR imposes obligations beyond those at common law upon origi-
nator banks and these are considered in detail in Chapter 24.

(d) The requirement for sufficient and available funds

22.59 The bank’s obligation to pay cheques and honour other payment in-
structions is subject to the condition that there are in its hands funds of the
customer sufficient and available for that purpose.

(i) Sufficiency of funds

22.60 The customer’s funds must be sufficient to enable the bank to effect
payment of the whole sum. If the funds are insufficient, the bank is not bound
to effect partial payment of such funds as there may be. This proposition has
been assumed to be correct in several cases1.
Funds are sufficient if, notwithstanding the insufficiency of the credit balance on
an account, the customer has the right to overdraw or otherwise borrow up to
a given limit not yet reached. Furthermore the drawing of a cheque on an
account the balance of which is not sufficient to meet it may be taken as
authority to the bank to combine the account with another account sufficiently
in credit in order that the cheque may be paid, but the bank is not obliged so to
combine2.
Subject to contrary agreement, the funds must be sufficient at the date on which
the bank is obliged to effect payment. In Whitehead v National Westminster
Bank, the defendant bank had3 accepted a standing order to pay a sum on a
particular day to a payee until further order. On two occasions, there were
insufficient funds on the specified day to meet the payment. The court rejected
the customer’s submission that the bank was under a duty to keep the account
under daily scrutiny so as to be able, whenever there was enough in the account,
to pay the standing order.
Where funds are insufficient, the bank can nevertheless choose to make pay-
ment, taking a cheque or other payment order as a request for an overdraft on
the bank’s relevant standard terms4. These overdraft terms are considered to be
part of the price of the contract between banker and customer for supplying the
package of banking services in general, and so the overdraft terms themselves
will not be assessed for fairness in isolation5.
Where a cheque is returned unpaid with a request to present again, it lies
entirely with the holder whether he will do so or at once treat the cheque as
dishonoured6.
The fact that one cheque has been refused on the ground that it overtops the
available balance would not justify a bank in refusing payment of a cheque
subsequently presented for an amount within the balance. Cheques should as

27
22.60 Paying Bank Obligations

far as possible be paid in the order in which they are presented if there be any
question as to the sufficiency of the balance to cover them all7. When two or
more cheques are presented simultaneously for payment and the balance is
sufficient to satisfy one or some but not all, the bank should pay the one which
the balance will cover. It is suggested that if there are two, each within the limit,
but not enough money to pay both, or if there is enough money to pay two small
ones but not one large one, the bank should pay the small ones, on the ground
that their dishonour would have greater effect on the drawer’s standing. The
dilemma is the fault of the drawer, not the bank.
But a bank is clearly not entitled to dishonour cheques presented because it
knows of others to be presented shortly, unless he has special instructions from
the customer to do so. In Dublin Port and Docks Board v Bank of Ireland8 there
were delays in processing as the result of a backlog due to a bank officers’ strike.
Griffin J held that the bank should have paid in order of presentation ‘subject to
the interest of the customer being taken into account.’
The Office of Fair Trading has accepted that banks are not obliged to process
the transactions upon a customer’s account in a particular order if instructions
are received simultaneously, provided that the account is conducted in accor-
dance with established banking practice. It is not clear that there is such a
practice9.
1
See Whitaker v Bank of England (1835) 1 Cr M & R 744 at 749–750; Marzetti v Williams
(1830) 1 B & Ad 415; Carew v Duckworth (1869) LR 4 Exch 313; Whitehead v National
Westminster Bank Ltd (1982) Times, 9 June (which involved payment by standing order); and
see also the summary of the banker–customer contract given by Atkin LJ in Joachimson v Swiss
Bank Corpn [1921] 3 KB 110 at 127.
2
See Woodland v Fear (1857) 7 E & B 519; Garnett v M’Kewan (1872) LR 8 Exch 10.
3
(1982) Times, 9 June; 10 LDAB 364.
4
Barclays Bank v WJ Simms Son & Cooke (Southern) Ltd [1980] 1 QB 677 at 699; 3 All ER 522
at 539.
5
Office of Fair Trading v Abbey National and others [2010] 1 AC 696. See, however, para 4.22
above for a discussion of subsequent CJEU decisions which may bear upon the position
6
Cf Sednaoui Zariffa Nahas & Co v Anglo-Austrian Bank (1909) 2 LDAB 208.
7
Cf Sednaoui Zariffa Nahas & Co v Anglo-Austrian Bank (1909) 2 LDAB 208.
8
[1976] IR 118. It was held that the Sednaoni decision (above) is not authority that a bank has
a duty to the payee of a cheque to pay in order of presentation.
9
Office of Fair Trading v Abbey National and others [2008] 2 All ER (Comm) 625; [2008]
EWHC 875 (Comm) at [127] and [128].

(ii) Availability of funds

22.61 Funds may be sufficient but not available in at least two circumstances.
The first is where the bank has a right to combine accounts. It was said in
Garnett v M’Kewan1 that the customer must be taken to know the state of each
of his accounts and if the balance on the whole is against him or does not equal
the cheques he draws, he has no right to expect those cheques to be cashed. The
right of combination is, of course, subject to contrary agreement. The right to
combine accounts is considered more fully in Chapter 14 above.
Second, money is not available immediately it is paid in. The position today in
relation to cash and cheques is as follows.
Cash must be available and value dated immediately after the receipt of funds
where the customer is a consumer, micro-enterprise or charity. In any other

28
 The Bank’s Payment Obligations 22.61

case, cash must be made available and value dated no later than the end of the
next business day2.
Cheques paid in at the account-holding branch and drawn on another account
at the same branch should also receive instant credit for interest and available
balance purposes.
As at the date of writing3, all other cheques should clear within three workings
days, counting the day of payment in as day one. However, there is a practice
that, where the need to return a cheque:
(i) because of lack of funds; or
(ii) because payment was stopped no later than close of business on the day
of presentation (day three); or
(iii) because the account was closed; or
(iv) because the customer’s mandate was determined (eg by death or gar-
nishee order)
is not noticed due to inadvertence on the day of presentation, the cheque may be
returned unpaid on the next working day (day four) subject to advice of
non-payment being given by telephone to the collecting bank branch not later
than noon on the day after presentation. This is the so-called ‘inadvertence
procedure’. Its effect is that a cheque paid through clearing and credited as
cleared funds may still be vulnerable to reversal for a short period.
The date from which funds can be withdrawn (‘the cleared date’) is not to be
confused with the date from which funds earn interest (‘the value date’). The
value date may be one or two business days prior to the cleared date and differs
from bank to bank4. The members of the Cheque and Credit Clearing Company
have agreed maximum periods for each stage by an agreement known as
‘2-4-6’, which now represents normal practice.
Paragraph 4.1.1–1.1.4 of the BCOBS provides that banks will tell their custom-
ers how the clearing cycle works, including when the customer can withdraw
money after paying cash or a cheque into their account, and when they will start
to earn interest. Balances appearing on ATMs screens or on the internet will
usually state both the overall balance on the account (assuming that uncleared
effects do in fact clear) and the balance of available funds5.
Subject to contrary agreement, if the crediting is communicated to the customer
as cleared funds, there can be no question that the amount can be drawn
against6.
1
(1872) LR 8 Exch 10.
2
PSR reg 88. Pursuant to the definitions in reg 2(1), a ‘consumer’ is an individual who, in
contracts for payment services to which the PSR apply, is acting for purposes other than a trade,
business or profession. A ‘micro-enterprise’ is defined by reference to Articles 1, 2(1) and (3) of
the Annex to Recommendation 2003/361/EC, ie a person engaged in economic activity,
irrespective of legal form, including partnerships and associations, which employs fewer than
10 persons, and has a turnover or annual balance sheet which does not exceed €2 million. A
‘charity’ is a body whose annual income is less than £1m and is (in England and Wales) a charity
as defined by s 1(1) of the Charities Act 2006.
3
The introduction of the Image Clearing System may reduce these periods.
4
Emerald Meats (London) Ltd v AIB Group (UK) Plc [2002] EWCA Civ 460.
5
These modern practices have rendered obsolete reported decisions in this area such as Jones
& Co v Coventry [1909] 2 KB 1029; Westminster Bank Ltd v Zang [1966] AC 182 at 196 and
215.

29
22.61 Paying Bank Obligations
6
Akrokerri (Atlantic) Mines Ltd v Economic Bank [1904] 2 KB 465, Bevan v National Bank Ltd
(1906) 23 TLR 65; cf Holt v Markham [1923] 1 KB 504.

(e) The originator bank’s obligations to the beneficiary

22.62 The contractual duty of care and skill, generally owed by the origina-
tor’s bank to the originator, does not extend to the beneficiary. There is no
contractual link between them, although where the beneficiary is himself a
customer of the originator’s bank, the bank in its capacity as the beneficia-
ry’s bank will owe him a contractual duty of care.
Bills of exchange, promissory notes and other negotiable instruments are
excluded from the scope of the Contracts (Rights of Third Parties) Act 19991.
Save for cheques, standard credit and debit transfer orders are neither bills of
exchange nor negotiable instruments and so fall outside this exclusion. Could
the beneficiary of a payment order rely on the Contracts (Rights of Third
Parties) Act 1999, s 1(1) and sue the originator’s bank in contract for failing
properly or at all to execute a funds transfer as instructed by the originator? In
effect the beneficiary would be suing the originator’s bank for breach of its
contractual duty to exercise reasonable care and skill in and about the execu-
tion of the payment order. It is unlikely that a court would hold that that term
was intended by the originator and his bank to confer a benefit on the named
payee of a payment order so as to fall within s 1(1)(b) of the Act. There must
also be grave doubt that within the context of the transaction as a whole the
originator and his bank intend to confer an enforceable benefit on the benefi-
ciary2. After all, the dissatisfied beneficiary may well be able to pursue the
originator for breach of their underlying contract which generated the payment
obligation, leaving the originator to seek a remedy against his own bank, the
originator’s bank, for the failed or improperly executed transfer. This contrac-
tual chain of responsibility suggests that the originator and his bank could not
have intended to confer a directly enforceable benefit on the beneficiary3.
1
Section 6(1).
2
See s 1(2). If the payee can establish that the term purports to confer a benefit on him, then the
burden shifts to the originator to show that the parties did not intend the term to be enforceable
by him: see Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2003] EWHC 2602 (Comm), [2004]
1 All ER (Comm) 481.
3
However, it has been held that the mere fact that there is a contractual chain does not necessarily
mean that the third party cannot leap up the chain and sue on another contract: see Laemthong
International Lines Co Ltd v Artis [2005] EWCA Civ 519, [2005] 2 All ER (Comm) 167 and
Great Eastern Shipping Co Ltd v Far East Chartering Ltd [2012] 1 Lloyd’s Rep 637.

22.63 Ordinarily, the originator’s bank will not owe the beneficiary a duty of
care in tort1. In Wells v First National Commercial Bank2 the beneficiary alleged
that the originator gave his bank an irrevocable instruction to make a transfer
of funds to the named beneficiary, but that after accepting the instruction the
originator’s bank failed to make the transfer. The beneficiary started proceed-
ings against the bank claiming breach of a tortious duty of care owed to him by
the bank. The Court of Appeal upheld the bank’s application to strike out the
beneficiary’s claim as disclosing no cause of action. Evans LJ, delivering a
judgment with which Hutchison and Mantell LJJ agreed, rejected the submis-
sion that the case was analogous to White v Jones3, where the House of Lords
had held, by a 3:2 majority, that a solicitor who accepts instructions to draft a

30
 The Bank’s Payment Obligations 22.64

will owes a duty of care to the intended beneficiary and may be liable to the
intended beneficiary in tort if he fails to implement his client’s instructions
within a reasonable time period. Evans LJ held that White v Jones was an
exceptional case which turned on two factors, first, the non-availability of any
effective remedy either for the beneficiary or for the testator’s estate if no duty
of care was imposed4; and secondly, the peculiar status of the solicitor when
preparing a will.
Neither of these factors were held to be present here; in fact the relationships
between the various parties were governed by contracts which gave the benefi-
ciary a claim against the originator for non-payment. So far as Evans LJ was
concerned the case before him was not exceptional; it was a straightforward
commercial situation where a duty of care had never been held to exist and
where there were no grounds for creating an exception to the orthodox Hedley
Byrne5 principle that there must be a special relationship (‘equivalent to
contract’ according to Lord Devlin) between the parties for a duty of care to
exist. As Evans LJ said: ‘the [claimant] contends for a duty of care which, if it
arises here, would arise in the course of an everyday commercial transaction
and would go a long way to revolutionise English banking law’6. However,
Evans LJ did concede (obiter) that:
‘if the [beneficiary] had communicated with the bank then it could be, I say no more,
a situation which was in Lord Devlin’s words “equivalent to contract”. It may be that
in such a situation it would be arguable that a Hedley Byrne duty would arise. It
would arise from the relationship which in fact was established between them.7’

1
In National Westminster Bank Ltd v Barclays Bank International Ltd [1975] QB 654 at 662,
Kerr J held that an drawee bank did not owe a duty of care to the payee when deciding whether
to honour a cheque presented for payment. By analogy, it is submitted that the originator’s bank
would not owe a duty of care to the beneficiary when it receives instructions to effect a funds
transfer. But the drawee’s bank may owe the payee of a cheque a duty to act carefully and
honestly under the Hedley Byrne principle when advising the payee of its reason for dishon-
ouring the cheque: see TE Potterton Ltd v Northern Bank Ltd [1995] 4 Bank LR 179, Irish
High Court.
2
[1998] PNLR 552.
3
[1995] 2 AC 207.
4
This point has subsequently been identified as vital to the majority’s reasoning in White v Jones:
seeCarr-Glynn v Frearsons [1999] Ch 326 at 335, per Chadwick LJ (with whose judgment
Butler-Sloss and Thorpe LJJ agreed); Gorham v British Telecommunications plc [2000] 1 WLR
2129, 2140, 2144, 2146, CA.
5
[1964] AC 465.
6
[1998] PNLR 552 at 562. But see the criticisms of this narrow view of the Hedley Byrne
principle voiced by Stanton in [1998] PN 131.
7
[1998] PNLR 552 at 563. See also Riyad Bank v Ahli United Bank (UK) plc [2006] EWCA Civ
780 at [32], per Longmore LJ.

22.64 The payee has no proprietary claim against the originator’s bank.
However, in R v King1, the Court of Appeal (Criminal Division) held that a
CHAPS payment order was a document of title for the purposes of determining
whether an offence had been committed contrary to s 20(2) of the Theft Act
1968 (procuring the execution of a valuable security by deception). If correct,
this might give the beneficiary a proprietary right of action against the origina-
tor’s bank which failed to send the order after it had been prepared. The better
view is that a CHAPS payment order confers no proprietary rights on the

31
22.64 Paying Bank Obligations

beneficiary as it is merely a mandate from the originator to his bank2. The

reasoning of the House of Lords in R v Preddy that a CHAPS payment does not
transfer property undermines King3.
1
[1992] QB 20.
2
In R v Manjdadria [1993] Crim LR 73 a differently constituted Court of Appeal held that a
telegraphic transfer was not a valuable security within the Theft Act 1968, s 20(3), and King
was described as a case ‘in which perhaps the extreme boundaries of a valuable security were
canvassed’.
3
[1996] AC 815 at 833D.

(f) Relationship of the originator’s bank with the correspondent bank

22.65 Where the originator’s bank does not have a correspondent relationship
with the beneficiary’s bank it must employ a correspondent bank to effect the
transfer. Correspondent banks may be employed in domestic funds transfers,
but they are used more commonly in international funds transfers. Sometimes
both the originator’s bank and the beneficiary’s bank will each have to employ
its own correspondent bank in the same transaction. In each case the corre-
spondent bank acts in a representative capacity. A correspondent bank em-
ployed by the originator’s bank acts as that bank’s agent and the origina-
tor’s sub-agent, and one employed by the beneficiary’s bank acts as that
bank’s agent and the beneficiary’s sub-agent. It is often important to ascertain
on whose behalf a correspondent bank acts as this may determine such matters
as whether the originator can revoke his payment instruction and the time of
completion of payment.
22.66 The originator’s bank will be deemed to have the originator’s authority
to employ the services of a correspondent bank to effect the transfer where it
would be normal banking practice to use a correspondent1. The general rule is
that an agent may not delegate his authority, but there are exceptions to this
rule, including where delegation is part of the usage of the trade2. The corre-
spondent bank will act as the originator’s sub-agent, but there will usually be no
privity of contract between them3. For there to be privity of contract between
principal and sub-agent, the delegating agent must have the principal’s author-
ity to create it, or his act in doing so must be ratified by the principal. Such
authority will not normally be implied4. In Royal Products Ltd v Midland
Bank Ltd, a case involving the telegraphic transfer of funds, Webster J con-
firmed that there was no privity of contract between the originator and the
correspondent bank employed by the originator’s bank5. Thus, the correspon-
dent bank will not be liable to the originator for breach of contract if it performs
defectively, nor is it likely to be held to owe the originator any tortious6 or
fiduciary7 duty8. The originator’s remedy is against the originator’s bank based
on its vicarious responsibility for the negligence and default of the correspon-
dent bank it employs, but the originator’s bank may have validly disclaimed
liability for the acts and omissions of the correspondent bank in the terms of its
contract with the originator9. The originator may also have a claim against the
originator’s bank for failing to exercise reasonable care and skill in choosing the
particular correspondent bank in question.
1
See, eg, Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyd’s Rep 194 at 197–198.
2
De Bussche v Alt (1878) 8 Ch D 286.

32
 The Bank’s Payment Obligations 22.69
3
Cf Bastone & Firminger Ltd v Nasima Enterprises (Nigeria) Ltd [1996] CLC 1902 (a case on
the effect of the Uniform Rules for Collections). See also Grosvenor Casinos Ltd v National
Bank of Abu Dhabi [2006] EWHC 784 (Comm) at [39]–[42] (Colman J), [2006] All ER (D)
106 (Apr).
4
See Calico Printers’ Association Ltd v Barclays Bank Ltd (1931) 145 LT 51; affd (1931) 145 LT
51 at 58. But, cf, J Vroegop ‘The role of correspondent banks in direct funds transfers’ [1990]
LMCLQ 547.
5
[1981] 2 Lloyd’s Rep 194 at 198.
6
Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyd’s Rep 194 at 198; Balsamo v Medici
[1984] 1 WLR 951; cf Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, where, in a ‘most
unusual’ situation (per Lord Goff at 195G), a sub-agent was held to owe a tortious duty of care
to the principal.
7
New Zealand and Australian Land Co v Watson (1881) 7 QBD 374; Royal Products Ltd v
Midland Bank Ltd [1981] 2 Lloyd’s Rep 194 at 198; cf Powell and Thomas v Evan Jones & Co
[1905] 1 KB 11.
8
Cf the position in the US where the intermediary bank has been held liable to the originator for
defective performance: see eg Silverstein v Chartered Bank of Hong Kong 392 NYS 2d 296
(1977); Evra Corpn v Swiss Bank Corpn 522 F Supp 820 (1981); revsd on other grounds 673
F 2d 951 (1982); Securities Fund Services Inc v American National Bank & Trust Co 542 F
Supp 323 (1982). See also UNCITRAL’s Model Law on International Credit Transfers
(Nov 25, 1992), Arts 8 and 17(4).
9
See para 22.56 above.

22.67 A correspondent bank appointed by the originator’s bank owes that

bank an implied contractual duty of care and skill1. A concurrent duty of care
will also arise in tort2. Where a correspondent bank incurs liability as a result of
carrying out the instructions of the originator’s bank, it will usually be entitled
to an indemnity or contribution from the originator’s bank3.
1
The same duty also applies between the beneficiary’s bank and any correspondent bank that it
appoints.
2
In either case an exclusion clause may purport to exclude the duty.
3
Honourable Society of the Middle Temple v Lloyds Bank plc [1999] 1 All ER (Comm) 193;
Linklaters (a firm) v HSBC Bank plc [2003] EWHC 1113 (Comm), [2003] 1 Lloyd’s Rep 545.

22.68 Where the Payment Services Regulations apply and the default of the
correspondent bank causes the originator’s bank to be liable to the customer
then the originator’s bank has a claim against the correspondent bank under
regulation 95 (see Chapter 24 for a detailed analysis).

(g) The relationship of the originator’s bank with the beneficiary’s bank
22.69 The beneficiary’s bank also acts in a representative capacity. It receives
the payment instruction from the originator’s bank (or via its correspondent) as
the agent of the originator’s bank, but once the beneficiary’s bank executes the
instruction, or otherwise accepts it, the bank does so as the beneficiary’s agent,
provided it has the beneficiary’s actual or ostensible authority to do so1.
However, the agency may only be momentary as when the payer’s bank credits
the payee’s account with funds it borrows the money representing the trans-
ferred funds from the payee and the underlying debtor-creditor relationship of
bank and customer is restored.
1
The distinction between receipt and acceptance of payment is considered further at para 22.94
to 22.95. See also UNCITRAL’s Model Law on International Credit Transfers (25 November
1992), Art 10.

33
22.70 Paying Bank Obligations

22.70 In the case of a credit transfer, where the beneficiary has supplied the
originator with details of his bank account, the beneficiary’s bank is deemed to
have the payee’s authority to accept funds into that account1. With direct debits,
the beneficiary and his bank act as the originator’s agents for the purpose of
transmitting the originator’s mandate to his own bank, but the bank nominated
by the payee to accept payment from the originator’s bank does so as the
beneficiary’s agent. In some cases, however, where the originator makes pay-
ment contrary to the terms of his underlying contract with the beneficiary eg
late payment of hire due under a charterparty, the beneficiary’s bank will be
deemed to receive payment purely in a ministerial capacity and not to have
accepted it on the beneficiary’s behalf2. The beneficiary may then accept or
reject the payment, so long as he has not waived his right of rejection, eg by
representing to the originator that the beneficiary’s bank has his authority to
accept a payment out of time.
1
Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyd’s Rep 194 at 198 and Dovey v Bank
of New Zealand [2000] 3 NZLR 641 at 649–650 (which held that by nominating the bank to
which funds were to be transferred, the beneficiary gave that bank authority to accept the funds
on his behalf and thereby constituted it his agent). But contrast Customs & Excise Comrs v
National Westminster Bank plc [2002] EWHC 2204 (Ch), [2003] 1 All ER (Comm) 327, where
it was held that a bank was not authorised to receive a payment on its customer’s behalf simply
because the customer held an account at the bank. See further paras 22.79 and 22.80 below.
2
Mardorf Peach & Co Ltd v Attica Sea Carriers Corpn of Liberia, The Laconia [1977] AC 850
at 871–872, per Lord Wilberforce, and at 884–886, per Lord Fraser. Cf R King ‘The Receiving
Bank’s Role in Credit Transfer Transactions’ (1982) 45 MLR 369.

(h) Relationship of beneficiary bank with the beneficiary

22.71 The beneficiary’s bank owes its customer, the beneficiary, a contractual
duty of care and skill. The duty mirrors that owed by the originator’s bank to
the originator. The duty extends to the way the bank processes a payment
received from the originator’s bank, but it also means that the bank should
exercise reasonable care and skill to maintain its equipment in such a condition
that it can receive the payment in the first place. The bank may also be under a
duty to advise the beneficiary that payment has been effected1. The beneficia-
ry’s bank will be contractually liable to the beneficiary for delay or failure to
effect the transfer which is caused by its own negligence and default or that of
its employees and agents, including that of any correspondent bank acting on its
behalf. However, the beneficiary’s bank will not be liable for the acts of third
parties which cause loss to its customer, unless the bank’s own negligence
facilitates those acts.
1
Eg the duty might arise by implication from the clearing system rules, or the beneficiary may
have instructed his bank to inform him when payment was made.

22.72 A different question arises in respect of the liability of the beneficia-

ry’s bank to its customer when that bank refuses to accept a transfer of funds
into his account. This will turn on the terms of the contract between the
beneficiary and his bank. In Tayeb v HSBC Bank plc1, Colman J held that when
a customer opens an account with his bank, which is capable of receiving
incoming CHAPS transfers, the bank engages that it will accept into his account
all CHAPS transfers which comply with the CHAPS Rules and which are
otherwise in accordance with the terms of the account. In this case, the

34
 The Bank’s Payment Obligations 22.75

beneficiary’s bank became suspicious of the origin of funds that had been
transferred into its customer’s account using CHAPS and, without its custom-
er’s consent, returned those funds to the originator’s (sending) bank. Colman J
held that the bank remained indebted to its customer in the amount of the sum
transferred. The judge took account of the CHAPS Rules and held that a
CHAPS transfer was ordinarily irreversible once the receiving bank had authen-
ticated the transfer, sent an acknowledgement informing the sending bank that
the transfer had been received and credited the funds to its customer’s account.
However, Colman J added that there was an appropriate analogy with the
practice in relation to documentary credits where, at the time of presentation of
documents, a bank with cogent evidence of fraud can decline to make payment
to the beneficiary2. He added that the same exception was likely to apply in
respect of illegal transactions3. But mere suspicion as to the origin of the
transferred funds did not present the bank with a justifiable reason for returning
those funds to the transferor without the customer’s consent4.
1
[2004] EWHC 1529 (Comm), [2004] 4 All ER 1024.
2
Citing United Trading Corp v Allied Arab Bank Ltd [1985] 2 Lloyd’s Rep. 554.
3
At [61], citing Mahonia Ltd v JP Morgan Chase Bank [2003] 2 Lloyd’s Rep. 911.
4
At [84], holding that under the anti-money laundering legislation that applied at the time,
namely the Criminal Justice Act 1988, s 93A (since repealed), an offence would not be
committed merely by accepting a transfer suspecting that it emerged from fraud or other
unlawfulness or that it was part of a money laundering operation, provided the relevant
reporting procedures were implemented by the bank.

22.73 In some types of funds transfer operations, the question of the liability of
the beneficiary’s bank is dealt with in contracts made between the banks
involved in the transaction1. Thus, in SWIFT transfers, the master agreement
between the banks participating in the network makes detailed provisions
concerning the allocation of losses in cases of breakdowns and of improperly
executed instructions. The PSR also contain specific rules as to the time for
making available funds and the allocation of responsibility for failed payments
— see Chapter 24.
1
See, eg, State Bank of New South Wales Ltd v Swiss Bank Corpn [1997] Bank LR 34, CA of
NSW (CHIPS rules).

(i) Relationship of the beneficiary bank with the originator and the
originator’s bank
22.74 There is no privity of contract between the beneficiary’s bank and the
originator. The beneficiary’s bank does not owe the originator a contractual
duty of care1 as set out above.
1
Wells v First National Commercial Bank [1998] PNLR 552.

22.75 The beneficiary’s bank must obey the transfer instructions received from
the originator’s bank if it is to be entitled to reimbursement from the latter.
Some problems may arise where those instructions are ambiguous. It is well
established in the case of ambiguous instructions passing from the originator to
the originator’s bank that the latter will not breach its duty of care and skill if it

35
22.75 Paying Bank Obligations

can show that it adopted a reasonable interpretation of the payment instruc-

tions1. However, where the ambiguity is patent on the face of the instructions
the originator’s bank may be negligent if it does not seek clarification from the
originator before acting upon the instructions2.
1
Ireland v Livingston (1872) LR 5 HL 395; Curtis v London City and Midland Bank Ltd [1908]
1 KB 293.
2
European Asian Bank AG v Punjab and Sind Bank [1983] 1 WLR 642 at 656, per Robert
Goff LJ; Patel v Standard Chartered Bank [2001] Lloyd’s Rep Bank 229 at 234 (Toulson
J); Cooper v National Westminster Bank [2009] EWHC 335 (QB); [2010] 1 Lloyd’s Rep 490 at
[59]–[63] per Judge Seymour QC.

22.76 In Royal Bank of Canada v Stangl1, a Canadian decision, the beneficia-

ry’s bank was held liable to its sender (a correspondent bank) in negligence for
the failure to clarify the contents of a payment order instructing payment into
an account that did not belong to the named beneficiary. However, in Abou-
Rahmah v Abacha2, the English High Court refused to follow Stangl and held
that a payee’s bank does not owe a duty of care to a non-customer originator of
a funds transfer to pay money received only to the beneficiary identified in the
originator’s instructions, or to clarify any discrepancies in those instructions as
to the beneficiary’s identity with the originator. This would appear to leave the
originator without redress against the beneficiary’s bank that mistakenly credits
funds to the wrong account, or against his own bank where it has sent accurate
payment instructions to the payee’s bank. Perhaps the originator’s best option is
to claim that, despite the mistake made by the beneficiary’s bank, the payment
was nevertheless complete as between originator and beneficiary3, leaving the
beneficiary to claim against his own bank.
1
(1992) 32 ACWS (3d) 17 (Ontario Court, General Division) noted by Geva (1994–95) 24 Can
Bus LJ 435. See generally, B Geva, Bank Collections and Payment Transactions – Compara-
tive Study of Legal Aspects (2001, OUP), Pt 4E; B Geva [2004] Journal of South African Law
1 and 235.
2
[2005] EWHC 2662 (QB), [2006] 1 All ER (Comm) 247, affd [2006] EWCA Civ 1492 (but
with no appeal on this issue).
3
Payment may be complete as between originator and beneficiary before funds are credited to the
beneficiary’s account: see Momm v Barclays Bank International Ltd [1977] QB 790;
Tenax Steamship Co Ltd v Reinante Transoceania Navegacion SA [1975] QB 929.

(j) The customer owes a limited duty of care to the paying bank
22.77 The only duties so far recognised as being owed by the customer to his
bank in the operation of his current account are:
(i) the duty to refrain from drawing a cheque in such a manner as may
facilitate fraud or forgery; and
(ii) the duty to inform the bank of any forgery of a cheque purportedly
drawn on the account as soon as he, the customer, becomes aware of it.
The first duty was clearly enunciated by the House of Lords in London
Joint Stock Bank Ltd v Macmillan1, and the second was laid down, also by the
House of Lords, in Greenwood v Martins Bank Ltd2. These duties were
recognised in relation to cheques drawn on current accounts, but in principle
they apply to any other kind of payment order3.

36
 The Bank’s Payment Obligations 22.79

In Tai Hing Ltd v Liu Chong Hing Bank Ltd4, the respondent banks contended
that a customer owes additional duties:
(i) to take reasonable precautions in the management of his business to
prevent forged cheques being presented to the bank; and
(ii) to take such steps to check his periodic bank statements as would a
reasonable customer in his position to enable him to notify the bank of
any debit items in the account which he has not authorised.
The Privy Council rejected both duties.
It follows that the customer’s duties are limited to the Macmillan and Green-
wood duties. These are considered at paras 23.7 to 23.10 below.
1
[1918] AC 777.
2
[1933] AC 51.
3
In Geniki Investments International Ltd v Ellis Stockbrokers Limited [2008] EWHC 549 (QB),
it is accepted, apparently without argument, that the principle in Greenwood could apply where
a customer became aware that its stockbroker was effecting unauthorised trades.
4
[1986] AC 80, [1985] 2 All ER 947, PC.

(k) Proof of repayment

22.78 In the great majority of cases, the question of whether the bank has or
has not repaid a particular sum will be a question of fact1. There is a general
principle that once a debt is proved to have existed, it will be deemed to
continue until it is proved that it has been repaid2. However, repayment may be
inferred from all the circumstances3.
1
Except in the limited circumstances in which the ‘account stated’ rule applies – see Chapter 5.
2
Jackson v Irvin (1809) 2 Camp 48.
3
Douglass v Lloyds Bank Ltd (1929) 34 Com Cas 263. In that case repayment of a sixty year old
debt was assumed based on the surrounding circumstances, including evidence that the
customer (who had long since died) was a careful and businesslike person who would have been
unlikely to forget a significant deposit, particularly in circumstances where he had been in
comparatively straitened financial circumstances towards the end of his life.

(l) The bank’s limitation defence

22.79 In the case of a credit balance on a customer’s current account the period
of limitation is six years from the date when demand for repayment has been
made1. It follows that limitation does not run on dormant accounts2.
In Bank of Baroda v Mahomed3, the question arose whether a customer could
refresh the six year limitation period, by making fresh demands (each of which
would have a six-year limitation period). The Court of Appeal decided that this
would circumvent sections 5 and 6 of the Limitation Act 1980 (‘the Act’), and
so deprive banks (and indeed all debtors) from the protection of the Act.
However, where the banking relationship remains alive, there is no bar on a
customer retracting its extant demand and making a subsequent demand. The
effect of this is that, in order to rely on a limitation defence, a bank must
normally have taken steps to terminate its contract with the customer.
If the banker/customer relationship is terminated before a demand is made, the
moneys become repayable upon such termination4.

37
22.79 Paying Bank Obligations

Where the customer wishes to challenge a debit to his or her account (for
example, because she alleges that she did not authorise a particular payment),
limitation begins to run only when demand is made by the customer of the
amount wrongly debited, and not on the date of the (mistaken) debit5. This is
because the claim is in reality for repayment of a debt said to be owed in full (ie
the amount standing to the customer’s credit, without deduction of the disputed
debit), as opposed to a claim that the wrongful debit is a breach of contract
giving rise to a right to damages. As it was put by Staughton J in Limp-
grange Ltd v Bank of Credit and Commerce International SA6:
‘It was pleaded in the Points of Claim that, in breach of contract and of their duty of
care, (the bank) had wrongly debited the company’s account with the amounts of the
disputed transfers, and that the company had thereby suffered loss and dam-
age. Strictly speaking, it seems to me that those are unnecessary averments. If debits
were made without authority they should be disregarded, and the company can claim
as money owed to it by (the bank) the credit balance remaining when those debits are
left out of account, or if there would still be an overdraft, the company would be
liable to (the bank) only for such amount as the account was overdrawn after deletion
of the disputed debits.’

1
Joachimson v Swiss Bank Corpn [1921] 3 KB 110. In the case of a credit balance on a
customer’s deposit account the period of limitation will begin to run when the prescribed period
of notice of withdrawal has elapsed after demand or, in the case of a time deposit, when the
agreed deposit period expires.
2
Under the Dormant Bank and Building Society Accounts Act 2008, a bank or building society
is entitled to transfer the balance of a dormant account to an authorised reclaim fund, after
which the customer no longer has any right against the bank or building society, but has the
same right against the reclaim fund. An account is ‘dormant’ if (subject to exceptions) there
have been no transactions within the past 15 years by or on behalf of the account holder (see
section 10(1)). Reclaim funds remain theoretically liable for the repayment of dormant
accounts, but can make distributions to good causes.
3
[1999] 1 Lloyd’s Rep Bank 14, 19, CA. The decision concerned a time deposit account that was
repayable on maturity and upon demand. See also Das v Barclays Bank plc [2006] EWHC 817
(QB) at para 37 (Calvert Smith J).
4
Re Russian Commercial Bank [1955] Ch 148.
5
National Bank of Commerce v National Westminster Bank [1990] 2 Lloyd’s Rep 514.
6
[1986] FLR 36.

4 THE COMPLETION OF PAYMENTS

(a) Introduction
22.80 Determining the time of completion of payment as between originator
and beneficiary can be important in certain circumstances, eg where the
originator attempts to revoke a payment instruction; where the death, liquida-
tion or bankruptcy of the originator terminates the bank’s authority to pay;
where the contract between originator and beneficiary requires payment to be
made strictly on the due date; where it is necessary to determine the time of
payment for taxation purposes, or for the calculation of interest; or where there
is a failure of one of the banks involved1.
1
See generally, J Vroegop, ‘The time of payment in paper-based and electronic funds transfer
systems’ [1990] LMCLQ 64; B Geva, ‘Payment into a Bank Account’ [1990] 3 JIBL 108; B
Geva, Bank Collections and Payment Transactions – Comparative Study of Legal Aspects
(2001, OUP), pp 270–289.

38
 The Completion of Payments 22.83

22.81 This section of the chapter will concentrate on completion of payment

by credit transfer. The main difference between credit and debit transfers is that
it is the originator (usually the beneficiary’s debtor) who initiates a credit
transfer by instructing his bank to make payment, whereas it is the beneficiary
(usually the originator’s creditor) who initiates a debit transfer by instructing
his bank to request payment from the originator’s bank1. In a debit transfer,
where the beneficiary requests funds from the originator’s account, the benefi-
ciary’s bank is acting as an agent for the beneficiary in the collecting process.
The position is less certain in the case of a credit transfer. The cases suggest that
the beneficiary’s bank again acts as an agent of the beneficiary2. However, there
is academic argument that the relationship is one of banker/customer3.
1
The language of ‘originator’ and ‘beneficiary’ becomes somewhat strained in the context of a
debit transfer as it is the beneficiary who initiates the transfer. This is not surprising as the
terminology was developed for use in credit transfers and not debit transfers. Nevertheless, for
the sake of consistency, the same terminology is applied to both credit and debit transfers in this
chapter.
2
See especially Mardorf Peach & Co Ltd v Attica Sea Carriers Corp of Liberia, The Laconia
[1976] QB 835, CA, 847 per Lord Denning; [1977] AC 850, HL, 871 per Lord Wilberforce
(with whom Lord Simon agreed), and 880 per Lord Salmon. See also Royal Products Ltd v
Midland Bank Ltd [1981] 2 Lloyd’s Rep 194, 198–199, 201–203, per Webster J. From
overseas, see Delbrueck v Manufacturers Hanover Trust Co 609 F 2d 1047 (1979), 1051–1052
(2nd Cir); Dovey v Bank of New Zealand [2000] 3 NZLR 641, 649 (NZCA).
3
R King, ‘The Receiving Bank’s Role in Credit Transfer Transactions’ (1982) 45 MLR 369.

22.82 There are three good reasons why the beneficiary’s bank should be
deemed to act as the beneficiary’s agent in a credit transfer1. First, if the
beneficiary’s bank is not acting as the beneficiary’s agent then the origina-
tor’s bank transfers funds to someone who is not authorised to receive them.
The transfer of funds to an unauthorised person would not discharge the
originator’s underlying indebtedness to the beneficiary2. Secondly, treating the
beneficiary’s bank as the beneficiary’s agent is consistent with the rule that
payment is complete as between originator and beneficiary on receipt of funds
and before a credit is posted to the beneficiary’s account. Thirdly, failure to
regard the beneficiary’s bank as the beneficiary’s agent draws an unnecessary
distinction between payment by credit transfer and payment by debit transfer so
far as completion of payment is concerned.
1
The first two reasons given in the text are drawn from B Geva, Bank Collections and Payment
Transactions – Comparative Study of Legal Aspects (2001, OUP), p 296.
2
Customs & Excise Comrs v National Westminster Bank plc [2002] EWHC 2204 (Ch), [2003]
1 All ER (Comm) 327.

22.83 Payment usually involves the transfer of money, or the performance of

some other act, tendered and accepted in discharge of a money obligation1. As
already noted, money means cash, ie coins and notes, but the creditor may agree
to accept a funds transfer into his bank account in fulfilment of an obligation to
pay money2. It should not be difficult to imply the creditor’s consent to accept
payment by this method, especially where he furnishes the debtor with details of
his account to enable the transfer to take place. By agreeing to payment by funds
transfer, the creditor (beneficiary) agrees to accept a right of action against his
own bank in lieu of his right of action against his original debtor (originator).
This substitution of one debtor for another is equivalent to payment in cash and

39
22.83 Paying Bank Obligations

discharges the underlying money obligation between the payer and the payee.
Unless the originator and beneficiary have agreed otherwise, completion of
payment between them occurs when this substitution takes place.
1
R M Goode, Payment Obligations in Commercial and Financial Transactions (2016, 3rd edn,
Sweet & Maxwell), p 25 et seq. See generally, C Proctor, Mann on the Legal Aspect of Money
(7th edn, 2012, OUP), Ch 3.
2
See paras 22.6 et seq.

22.84 The precise time of substitution of the beneficiary’s bank for the origi-
nator as the beneficiary’s debtor may be difficult to determine. In The Brimnes1,
Brandon J had to determine the time of payment of hire under a charterparty,
which the owners claimed had been paid late, so as to give them, by the terms
of the charterparty, the right to withdraw their ship. The charterparty called for
‘payment . . . to be made . . . in cash’, but Brandon J held that in ‘modern
commercial practice’ this expression included ‘any commercially recognised
method of transferring funds the result of which is to give the transferee the
unconditional right to the immediate use of the funds transferred’2. The word
‘unconditional’ was later interpreted by the House of Lords in The Chikuma to
mean ‘unfettered or unrestricted’, and not merely ‘that the transferee’s right to
use the funds transferred is neither subject to fulfilment of a condition precedent
nor defeasible on failure to fulfil a condition subsequent’3. It seems, therefore,
that a payment by funds transfer is complete only when the beneficiary is given
an unfettered or unrestricted right against his own bank to the immediate use of
the funds transferred so as to make what is received ‘the equivalent of cash, or
as good as cash’.
1
Tenax Steamship Co Ltd v Reinante Transoceanica Navegacion SA, The Brimnes [1973] 1
WLR 386; affd [1975] 1 QB 929, CA.
2
[1973] 1 WLR 386 at 400B–C.
3
A/S Awilco of Solo v Fulvia SpA di Navigazione of Calgiari, The Chikuma [1981] 1 WLR 314
at 319H, per Lord Bridge.

(b) Intra-branch transfers

22.85 Despite some conflicting dicta in the cases, it is submitted that in the case
of an intra-branch transfer, ie where the originator and beneficiary hold
accounts at the same branch of the bank, payment takes place the moment the
bank decides to make the transfer unconditionally, assuming that the bank has
the beneficiary’s actual or ostensible authority to accept the transfer on its
behalf1.
1
Whether the bank also has to have the beneficiary’s actual or apparent authority to accept the
transfer is only relevant if their relationship is characterised as one of agency (as it is submitted
it is in these circumstances) and not simply one of banker and customer.

22.86 The leading case is Momm v Barclays Bank International Ltd1. There
the defendant bank’s customer, the Herstatt Bank, as part of a currency
exchange transaction with the claimant, ordered the bank to transfer £120,000
from its account to the claimant’s account at the same branch, which the
claimant had designated for the receipt of the funds. Although Herstatt’s ac-
count was overdrawn at the time, the bank decided to make the transfer and set
in motion the appropriate computer processes to carry it out. Later that day it

40
 The Completion of Payments 22.88

was announced that Herstatt Bank had ceased trading and was going into
liquidation. However, no further action was taken by the bank that day and the
processing of the payment from Herstatt to the claimant was completed by the
bank’s central computer that night. The following day the bank reversed the
transfer. When the claimant later discovered what had happened it claimed that
the transfer was irrevocable and the defendant bank had wrongly debited its
account.
1
[1977] QB 790. See also Staughton J in Libyan Arab Foreign Bank v Bankers Trust Co [1988]
1 Lloyd’s Rep 259 at 273.

22.87 Kerr J gave judgment for the claimant on the ground that, as between
Herstatt and the claimant, the payment was complete the moment the bank
decided to credit the claimant’s account and initiated the internal payment
process1. Kerr J also held, following banking practice, that ‘a payment has been
made if the payee’s account is credited with the payment at the close of business
on the value date, at any rate if it was credited intentionally and in good faith
and not by error or fraud.’ It would appear, therefore, that where it is not
possible to identify precisely when a ‘decision’ is made to make payment, it is to
be assumed that payment is made at the end of the day on which the payment
message is processed2. However, where a payment time can be established the
end-of-day practice has no application3. If there is a point in time at which the
funds are available for drawing by the beneficiary, the payment is complete
notwithstanding that the same day the bank may seek to prevent withdrawal4.
1
[1977] QB 790 at 803C.
2
Geva in his article ‘Payment into a Bank Account’ [1990] 3 JIBL 108 at 112–115, and also in
his book Bank Collections and Payment Transactions – Comparative Study of Legal Aspects
(2001, OUP), pp 282–289, notes that, at least where funds are available to the beneficia-
ry’s bank, a ‘hypothetical positive response test’ works better than the end of day upper limit
proposed by Kerr J in Momm as the fallback position. This test is objective: if the beneficiary
had contacted the bank, at what point would he have been informed that the bank had made an
unconditional decision to credit?
3
Tayeb v HSBC [2004] EWHC 1529 (Comm) at [92].
4
Tayeb v HSBC [2004] EWHC 1529 (Comm) at [85–93].

22.88 Three further points can be made about the Momm case. First, Kerr J
emphasised that the transfer was complete when the bank decided to credit the
claimant’s account and initiated the computer process for making the transfer.
However, it is submitted that initiation of the payment process is not essential to
completion of the transfer. Initiation of the mechanical accounting process
merely provides objective evidence that a decision to credit the beneficia-
ry’s account has been made, evidence which may be available from other
sources, eg the bank’s own authorisation slips or other internal memoranda1.
However, the bank must decide to make an unconditional credit to the benefi-
ciary’s account for payment to be complete, as a provisional or conditional
credit would allow for its subsequent reversal2. In Momm, this did not present
a problem as it involved an in-house transfer at a bank holding the origina-
tor’s funds, but in other cases the bank may be unsure of being put in funds and
so decide to make a provisional credit to the beneficiary’s account until funds
arrive.
1
Note that in Libyan Arab Foreign Bank v Bankers Trust Co [1989] QB 728 at 750, Staughton
J’s interpretation of Kerr J’s judgment in Momm concentrates on the bank’s decision to credit
the beneficiary’s account and not the initiation of the computer process.

41
22.88 Paying Bank Obligations
2
See eg Sutherland and Sutherland v Royal Bank of Scotland plc [1997] 6 Bank LR 132, Outer
House of the Court of Session (Scotland). See also Holmes v Governor of Brixton Prison [2004]
EWHC 2020 (Admin), [2005] 1 All ER 490, where it was held that a bank account was not
credited, for the purposes of the Theft Act 1968, s 15A (obtaining a money transfer by
deception), when the bank, with which the account was kept, maintained a reservation that
precluded the account holder from dealing with the funds in question.

22.89 Secondly, Kerr J emphasised that payment was complete even though the
beneficiary had not been informed of it at the time. This approach followed that
established by the Court of Common Pleas in Eyles v Ellis1, but conflicted with
that of Talbot J (at first instance) and Lord Hanworth MR (in the Court of
Appeal) in Rekstin v Severo Sibirsko AO2 who held that payment would not be
complete until the beneficiary had been notified that a transfer had been made
to his account. However, Rekstin is an unusual case. In Rekstin, the originator,
a Russian trading company, instructed its bank to transfer funds from its
account to the account of the beneficiary, a Russian trade delegation with
diplomatic immunity, held at the same branch. This was done to prevent a
judgment creditor levying execution against funds in the originator’s account.
Despite the fact that the bank had begun processing the transfer, it was held by
both Talbot J at first instance and the Court of Appeal3 that the transfer was
incomplete and revocable when the judgment creditor later served a garnishee
order on the bank.
1
(1827) 4 Bing 112.
2
[1933] 1 KB 47 at 57 and 62 respectively.
3
Whilst Lord Hanworth MR’s primary reasoning was based on the absence of notification to the
beneficiary that a transfer had been made to its account (at 62), Slesser and Romer LJJ adopted
different reasoning (at 69 and at 71–72 respectively).

22.90 In Momm, Kerr J distinguished Rekstin as a case turning on its own

special facts. Kerr J stressed that what was important in Rekstin was the fact
that the trade delegation knew nothing of the proposed transfer, that there was
no transaction between Severo and the delegation underlying it, and that the
delegation had accordingly never assented to its account being credited with the
funds that were purportedly transferred to it. This, it is respectfully submitted,
is the correct interpretation of that case, and it is certainly the one which
accords with recognised banking practice. In Rekstin the bank did not have any
authority from the trade delegation to accept the transfer on its behalf. The
bank had no actual authority to accept the transfer because the delegation did
not know of it, nor could they have anticipated that it would be made. The bank
had no ostensible authority to do so either because Severo knew that there was
no reason for it to be made, save to satisfy its own needs1. By contrast, in Momm
the claimant had specifically designated that payment of sums due under the
currency exchange contract should be made into its account held at the
defendant bank. In Momm the bank clearly had the claimant’s authority to
accept the transfer on the claimant’s behalf.
Thirdly, payment was held to be complete in Momm before any credit was made
to the beneficiary’s account. Although this approach is inconsistent with Eyles
v Ellis2, it is in line with the view taken by Brandon J, and affirmed by the Court
of Appeal, in The Brimnes3. In that case the charterers’ bank in London
(‘Hambros’) had an account with the shipowners’ bank in New York (‘MGT’).
On receipt of instructions from the charterers to pay hire due under the charter

42
 The Completion of Payments 22.92

party, Hambros telexed MGT instructing it to transfer the amount of the hire to
the shipowners’ account, ie to make an intra-branch funds transfer. Affirming
the decision of Brandon J, the Court of Appeal held that the payment was
complete when the MGT decided to debit the account of Hambros, the
originator’s agent, and credit the account of the shipowners, the beneficiary4.
This seems to indicate not only that notice to the beneficiary is not necessary,
but also that a decision to transfer need not have been carried out, in whole or
in part, before the payment is deemed complete.
1
See also Taurus Petroleum Limited v State Oil Marketing Co of the Ministry of Oil, Republic
of Iraq [2017] UKSC 64, [2017] 3 WLR 1170, [2018] AC 690, [2018] 2 All ER 675 at [67],
where Lord Sumption characterised Rekstin as a case where ‘the debt sought to be attached
represented moneys deposited by the judgment debtor with a bank which had merely received
a revocable instruction from the judgment debtor to pay it to another bank. The garnishee
order was held to operate as a revocation of that instruction’.
2
(1827) 4 Bing 112.
3
Tenax Steamship Co Ltd v Reinante Transoceania Navegacion SA [1975] QB 929.
4
[1975] QB 929 at 950–951, per Edmund Davies LJ, at 964, per Megaw LJ, and at 969, per
Cairns LJ.

(c) Inter-branch transfers

22.91 An inter-branch transfer involves the transfer of funds between accounts
held at different branches of the same bank. Like an intra-branch transfer, an
inter-branch transfer does not involve the use of a clearing house or any
correspondent relationship and so similar rules apply to both types of transfers.
By analogy with Momm v Barclays Bank International Ltd1, payment is
complete when the bank decides to credit the beneficiary’s account uncondi-
tionally, assuming that the bank has the beneficiary’s actual or apparent
authority to accept the transfer on his behalf. As the branch where the
beneficiary’s account is kept is the most important branch so far as his account
relationship with the bank is concerned2, it is submitted that completion of an
inter-branch transfer turns on the ‘decision’ of the recipient branch as it is this
branch which holds the beneficiary’s account which is to be credited.
1
[1977] QB 790.
2
Unless otherwise agreed, the customer can only demand repayment of funds at the branch
where his account is kept: Woodland v Fear (1857) 7 E & B 519; Joachimson v Swiss
Bank Corpn [1921] 3 KB 110 at 127 per Atkin LJ.

22.92 The issue arose in Libyan Arab Foreign Bank v Manufacturers Hanover
Trust Co (No 2)1, where Hirst J had to decide whether a transfer of US $62m
had been made from the claimant’s (‘LAFB’s’) account at the New York branch
of the defendant bank (‘MHT New York’) to LAFB’s account at the same
bank’s London branch (‘MHT London’) before MHT New York purported to
revoke the transfer. On 7 January MHT New York notified MHT London by
tested telex that it was crediting the London branch with US $62m for the
account of the LAFB. Later the same day, anticipating that a US presidential
order was about to be made blocking the movement of LAFB’s property, MHT
New York instructed its computer in New York to erase the transfer. However,
on the morning of 8 January MHT London acted on the tested telex and
credited LAFB with US $62m on its computerised books. MHT London also
debited MHT New York in the same sum in their nostro account. MHT London

43
22.92 Paying Bank Obligations

then notified LAFB of the credit. On 10 January MHT New York telexed MHT
London to cancel the transfer and this was effected by MHT London on
13 January. Hirst J held that as MHT London had intentionally and bona fide
debited their nostro account with MHT New York (which he described as ‘the
critical fact’) and credited LAFB’s account on 8 January in fulfilment of the
tested telex of 7 January, it was too late to cancel the transfer on 10 January. His
Lordship concluded:
‘By parity of reasoning with Momm’s case, these actions within MHT London in my
judgment constituted a full completion of the payment of the $62 million, and were
in no way effected by the absence of similar entries in MHT New York. The
notification to LAFB confirmed the completion of the payment.2’
1
[1989] 1 Lloyd’s Rep 608.
2
[1989] 1 Lloyd’s Rep 608 at 631.

(d) Inter-bank transfers

22.93 In the case of an inter-bank transfer, where funds are transferred between
accounts held at different banks, payment between the originator and benefi-
ciary is complete when the beneficiary’s bank receives payment instructions
from the originator’s bank and decides to make an unconditional credit to the
beneficiary’s account in the equivalent amount, assuming that the beneficia-
ry’s bank has the beneficiary’s actual or ostensible authority to accept the
transfer on his behalf1. It does not matter that the beneficiary’s bank has yet to
credit the beneficiary’s account or notify him of the transfer2. Further it does not
matter that the beneficiary’s bank places a marker on the beneficiary’s account
to prevent withdrawals because of suspicions of money laundering3. In some
cases the beneficiary bank will require to be put in funds by the origina-
tor’s bank before it will reach a decision to make an unconditional credit to the
beneficiary’s account. However, in other cases the beneficiary’s bank may be
prepared to reach its decision to make an unconditional credit to the beneficia-
ry’s account before it is put in funds, eg where the originator’s bank and the
beneficiary’s bank are correspondents. In either case, once the beneficia-
ry’s bank has made its decision to credit the beneficiary’s account uncondition-
ally the bank accepts the beneficiary as its creditor for the amount in question
and is substituted for the originator as the beneficiary’s debtor. Payment has
then been made between the originator and the beneficiary.
1
A/S Awilco of Oslo v Fulvia Spa di Navigazione of Calgari, The Chikuma [1981] 1 WLR 314;
Mardorf Peach & Co Ltd v Attica Sea Carriers Corpn of Liberia, The Laconia [1977] AC 850.
2
Mardorf Peach & Co Ltd v Attica Sea Carriers Corpn of Liberia, The Laconia [1977] AC 850
at 880 and 889, per Lords Salmon and Lord Russell, but contrast Lord Fraser at 884–885;
Afovos Shipping Co SA v R Pagnan and F Eli, The Afovos [1980] 2 Lloyd’s Rep 469 at 473, per
Lloyd J (although the House of Lords affirmed the Court of Appeal’s decision to reverse Lloyd
J, their Lordships did so without comment on this part of his judgment: see [1982] 1 WLR 848,
CA, and [1983] 1 WLR 195, HL).
3
Tayeb v HSBC [2004] EWHC 1529 (Comm).

22.94 Mere receipt of funds by the beneficiary’s bank is not enough to

constitute payment1. It is the beneficiary’s bank’s decision to accept those funds
for the beneficiary’s account which is vital. The bank may have good reasons for
not making that decision. The payment order may not adequately identify the

44
 The Completion of Payments 22.96

beneficiary, or the bank may wish to check that it has the beneficiary’s authority
to accept the payment, or the bank may be concerned that it will break the law
by crediting the beneficiary’s account, eg where regulations prohibit credits
being made to the accounts of certain foreign nationals2. Until the beneficia-
ry’s bank reaches its decision to accept the funds for the beneficiary’s account,
it holds those funds as agent for the originator and not for the beneficiary. The
funds constitute an unaccepted tender by the originator and not discharge of the
underlying money obligation between the originator and the beneficiary. Of
course, the beneficiary’s bank must be aware that the funds have been trans-
ferred for the account of a particular beneficiary, if it is to accept them on that
beneficiary’s behalf. In Royal Products Ltd v Midland Bank Ltd3, it was held
that a transfer of funds from a customer’s account with one bank to its account
with another was complete only when the funds were available to the other
bank and it was notified for whose credit they were to be held.
1
Contra, J Vroegop, ‘The time of payment in paper-based and electronic funds transfer systems’
[1990] LMCLQ 64. But Vroegop is forced to accept that the decision of the House of Lords in
The Chikuma [1981] 1 WLR 314 is against her on this point.
2
RM Goode, Commercial Law (5th edn, 2016, Penguin), p 512 [17.51].
3
[1981] 2 Lloyd’s Rep 194.

22.95 Payment as between originator and beneficiary will only be complete

where the beneficiary’s bank has the beneficiary’s actual or ostensible authority
to receive and accept a tender of payment on the beneficiary’s behalf. In
Mardorf Peach & Co Ltd v Attica Sea Carriers Corpn of Liberia, The Laconia1,
the charterers of a ship made a late tender of hire to the owners’ bank. The
tender was accepted by the bank without objection, but later rejected by the
owners when they became aware of what had happened. When the owners tried
to invoke a forfeiture clause in the charterparty on the grounds of the late
payment of hire, the charterers argued that their breach had been waived
through acceptance of the late tender by the owners’ agents, ie their bank. The
House of Lords, reversing the Court of Appeal, rejected this contention and
decided the case in favour of the owners. Their Lordships held that the owners’
bank only had limited authority to receive the payment and obtain instructions
from the owners, it did not have authority to accept the late payment on behalf
of the owners and had no authority to waive the owners’ rights to withdraw the
vessel2. Although the bank had taken delivery of the payment order and had
begun to process it, these were held to be purely ministerial acts, ie provisional
and reversible.
1
[1977] AC 850.
2
See, in particular, Lord Wilberforce at 871–872. Cf Central Estates (Belgravia) Ltd v Woolgar
(No 2) [1972] 1 WLR 1048, considered and distinguished by the House of Lords in The
Laconia.

22.96 In most cases where funds are transferred to the beneficiary’s bank in
accordance with the terms of an underlying contract between the originator and
the beneficiary, the beneficiary’s bank will have the beneficiary’s actual author-
ity to receive and accept the payment on the beneficiary’s behalf1. In the more
unusual case of the beneficiary having instructed his bank not to accept such a
payment the originator could still claim that the beneficiary’s bank had osten-
sible authority to receive and accept the payment. To succeed with such an
argument the originator must establish that he relied on the bank’s appearance

45
22.96 Paying Bank Obligations

of authority, something he cannot do where he knew of the limit placed on the

bank’s authority2, or where he ought reasonably to have known that there was
such a limit3. The beneficiary may give the originator actual notice by telling
him not to make further payments, and it is even possible that the originator
may have been put on notice by the very fact that he makes a payment outside
the terms of his underlying contract with the beneficiary, on the ground that he
ought then to be put on enquiry as to the extent of the authority of the
beneficiary’s bank to accept such payment so as to bind the beneficiary. Of
course, when the beneficiary becomes aware that payment has been received
and accepted by his bank without authority he may decide to ratify the
bank’s actions. Ratification of an agent’s unauthorised act may be express, or
implied from the principal’s conduct, so long as he has full knowledge of the
agent’s unauthorised act4. Silence or inactivity by the principal is not usually
enough to amount to ratification5, but it has been held that ratification may be
inferred where the principal knows that the third party believes him to have
accepted the agent’s acts as having been authorised and takes no steps within a
reasonable time to correct that impression6. Where an arbitrator award creditor
instructs the award debtor not to satisfy the award by payment to a specific
account the subsequent payment into that account is ineffective to satisfy the
award7.
1
See Dovey v Bank of New Zealand [2000] 3 NZLR 641, 650, NZCA (held that by nominating
the bank to which the funds were to be transferred, the claimant gave the bank authority to
accept funds on his behalf, even though the bank had yet to open an account for him). See also
Tayeb v HSBC [2004] EWHC 1529 (Comm).
2
As in Customs and Excise Comrs v National Westminster Bank plc [2002] EWHC 2204 (Ch),
[2003] 1 All ER (Comm) 327.
3
Overbrooke Estates Ltd v Glencombe Properties Ltd [1974] 1 WLR 1335; Heinl v Jyske Bank
(Gibraltar) Ltd [1999] Lloyd’s Rep Bank 511, 521, 533, CA.
4
The Bonita; The Charlotte (1861) 1 Lush 252; cf Marsh v Joseph [1897] 1 Ch 213.
5
Crampsey v Deveney (1969) 2 DLR (3d) 161 at 164, per Judson J; 713860 Ontario Ltd v Royal
Trust Corpn of Canada (22 January 1996, unreported), Wilson J, upheld on appeal by the
Ontario Court of Appeal (1 March 1999, unreported).
6
Suncorp Insurance and Finance v Milano Assicurazioni SpA [1993] 2 Lloyd’s Rep 225 at 241,
Waller J. See also Yona International Ltd and Heftsiba Overseas Works Ltd v La Reunion
Francaise Societe Anonyme d’Assurancees et de Reassurances [1996] 2 Lloyd’s Rep 84 at 103
(Moore-Bick J).
7
Razcom CI v Barry Callebaut Sourcing AG [2010] EWHC 2598 (QB).

22.97 In TSB Bank of Scotland plc v Welwyn Hatfield District Council

and Council of the London Borough of Brent1, Hobhouse J held that a
beneficiary would be deemed to have accepted an unauthorised payment made
into his account where he dealt with the transferred funds as his own2. In that
case the issue before the court was whether an inter-bank transfer of funds by
one local authority into the account of another local authority amounted to
payment of an underlying restitutionary liability. Hobhouse J held that, despite
the beneficiary local authority’s initial protestations, its retention of the money
for three weeks, use of the money and eventual return of the money without
interest amounted to acceptance of tender and, therefore, payment.
1
[1993] 2 Bank LR 267.
2
Hobhouse J spoke in terms of ‘acceptance’ where ‘ratification’ would probably have been more
accurate in a case involving a third party, ie the bank.

46
 The Payment of Cheques 22.100

22.98 In TSB Bank of Scotland plc v Welwyn Hatfield District Council the
beneficiary local authority was at all times fully aware that the unauthorised
payment had been made into its account. This may not always be the case. In
HMV Fields Properties Ltd v Bracken Self Selection Fabrics Ltd1, a Scottish
case, a landlord served the Scottish equivalent of a notice of forfeiture on his
tenant for breach of various covenants in a lease. The tenant refused to move
out and arbitration proceedings were commenced. Meanwhile, the tenant
continued to pay rent through the bank giro system, something which the
landlord did not notice for several weeks. When the rent payments eventually
came to the landlord’s attention it returned them to the tenant, again using the
bank giro system. On appeal from the arbitration it was held by the First
Division of the Inner House of the Court of Session that the landlord was not
barred from forfeiture by reason of having accepted rent. It was held that
‘acceptance’ was a question of fact and, despite the landlord’s initial delay of
several weeks before returning the rent, there had been no acceptance here. In
this case the beneficiary had no knowledge of the payment being made into its
account, whereas in the TSB Bank of Scotland case the beneficiary was fully
aware of the payment.
1
1991 SLT 31.

5 THE PAYMENT OF CHEQUES

(a) Regular and unambiguous in form

22.99 The cheque must be regular and unambiguous in form. This is consid-
ered in detail in section 4 of Chapter 26.

(b) Cheque and Credit Clearing Company Ltd Rules for the Conduct of
Cheque Clearing

22.100 Presentation normally means presentation through the cheque clearing

system managed by the Cheque and Credit Clearing Company Ltd, or presen-
tation by electronic means. The current rules for cheque clearing (introduced in
November 2007) provide for a ‘2-4-6’ clearing timescale; see para 26.37 below.
In Australia it has been held that the plaintiff ‘was entitled as between himself
and his agent to have the benefit of the advantage arising from the use of the
machinery of the clearing house’1. Even so, it is still an open question whether
the payee of a cheque may so rely on the rules of a clearing house as to be
entitled to take advantage of any breach of a rule. The banks alone are party to
the agreement containing the rules. Whether there is privity with a paying bank
through the payee’s (collecting) bank is also an unanswered question. It is
submitted that the payee of a cheque collected through a clearing house would
not be justified in assuming that the rules are made for his benefit so that he may
claim against a paying bank which fails to obey the rules.
Where a bank receives from a customer for collection a cheque drawn on
another bank by a person having an account at a branch of the paying bank and
the cheque is dealt with through the inter-bank system for clearing cheques, the
presenting bank’s responsibility to its customer in respect of the collection is

47
22.100 Paying Bank Obligations

discharged only when the cheque is physically delivered to that branch of the
paying bank for decision whether it should be paid or not2. However, it is
expected that the position will be different when the presenting bank and the
paying bank are using the ICS, with responsibility instead discharged at the
point when the digital image of the cheque is transmitted to the paying bank for
decision.
1
Per Mann J in Riedell v Commercial Bank of Australia Ltd [1931] VLR 382 at 384, 389.
2
Barclays Bank plc v Bank of England [1985] 1 All ER 385 (Bingham J sitting as an arbitrator).

(c) Interest on proceeds of collected cheques

22.101 In Emerald Meats (London) Ltd v AIB Group plc1 the question arose
as to what term should be implied into the contract between a bank and its
customer as to interest on funds received by the bank as collecting bank. It arose
because the bank had been following a practice of crediting its customer on day
four (treating the day of payment in as day one), whereas the bank itself had
received the funds through the clearing settlement process on day three.
The Court of Appeal held that the term to be implied was that the bank would
credit interest in accordance with its own standard practice2. The bank was
entitled to make whatever profit it could from its own banking arrangements
without being accountable to its customers. The judgments follow the approach
in Lloyds Bank plc v Voller3, where it was held that a customer who had
requested an overdraft impliedly consented to pay the bank’s usual overdraft
rate of interest.
1
[2002] EWCA Civ 460 (12 April 2002).
2
See Pill LJ at para 16 and Longmore LJ at paras 24 and 25. The judgment of Longmore LJ can
be read as pointing to a distinction between a bank collecting for: (i) a customer whose account
is in credit; and (ii) a customer whose account is overdrawn. It is submitted that any such
distinction is wrong in principle and unworkable in practice.
3
[2000] 2 All ER (Comm) 978, CA.

6 DETERMINATION/SUSPENSION OF AUTHORITY TO PAY

22.102 By s 75 of the Bills of Exchange Act 1882:
‘The duty and authority of a banker to pay a cheque drawn on him by his customer
are determined by (1) countermand of payment, (2) notice of the customer’s death.’
In principle, the above specified events should determine the duty and authority
of a banker to honour any payment instructions.

(a) Countermand instructions

22.103 The originator’s bank is under a duty to obey the originator’s counter-
mand of his payment order. Notice of countermand must be clear and unam-
biguous1, and it must be brought to the actual (not constructive) knowledge of
the bank2. Unless otherwise agreed, where the originator is a customer of the
bank, notice of countermand must be given to the branch where his account is
kept3.
1
Westminster Bank Ltd v Hilton (1926) 136 LT 315.

48
 Determination/Suspension of Authority to Pay 22.106
2
Curtice v London City and Midland Bank Ltd [1908] 1 KB 293.
3
London, Provincial and South-Western Bank Ltd v Buszard (1918) 35 TLR 142. It will be rare
indeed for a bank to agree to make a funds transfer for an originator who is not a customer, eg
where the non-customer pays cash over the counter and asks the bank to transfer equivalent
funds to the account of a named third party. The bank is unlikely to want to take the risk of
falling foul of the relevant money laundering legislation by acting for a complete stranger.
Nevertheless, should the bank agree to make a funds transfer for a non-customer it is submitted
that, for reasons of certainty, the originator’s countermand would have to be given to the same
branch of the bank that had accepted the original payment order. Note that the bank’s perfor-
mance of an ad hoc service for someone without an account does not make that person a
‘customer’ of the bank in the strict sense of the term: see Taxation Comrs v English, Scottish and
Australian Bank Ltd [1920] AC 683 at 687, PC.

22.104 As the originator’s bank acts as the originator’s agent for the purposes
of executing his payment instruction, the general rule is that the originator, as
principal, may revoke that instruction before it has been executed by the
originator’s bank, his agent1. However, a principal may not revoke his
agent’s authority after the agent has commenced performance of his mandate
and incurred liabilities for which the principal must indemnify him2.
1
Campanari v Woodburn (1854) 15 CB 400.
2
Warlow v Harrison (1859) 1 E & E 309 at 317, per Martin B. Read v Anderson (1884) 13 QBD
779 (this was overridden by the Gaming Act 1892, s 1, which was itself repealed by the
Gambling Act 2005 c 19).

22.105 The general principles to be applied, in the absence of express contract,

when determining the availability of countermand of an originator’s payment
instruction in a funds transfer operation, have been summarised by Cranston in
the following terms:
‘Firstly, a customer who instructs its bank to hold funds to the disposal of a third
party can countermand at least until the time when the funds have been transferred or
credit given to the transferee1. Secondly, a customer who instructs its bank to transfer
funds to a third party cannot revoke from the moment the bank incurs a commitment
to the third party2. Thirdly – and this is the typical case – a customer who instructs its
bank to pay another bank to the order of a third party cannot revoke once the payee
bank has acted on the instructions. This may be a point prior to crediting the
payee’s account3. In all cases, it is irrelevant, from the point of view of revocation,
whether the third party has been informed.4’

1
Gibson v Minet (1824) 130 ER 206.
2
Warlow v Harrison (1859) 1 E & E 309.
3
Astro Amo Compania Naviera SA v Elf Union SA, The Zographia [1976] 2 Lloyd’s Rep 382.
4
R Cranston, ‘Law of International Funds Transfers in England’ in W Hadding & UH Schneider
(eds), Legal Issues in International Credit Transfers (1993, Duncker & Humblot), p 233.

22.106 Applying these general principles to the typical case where there is an
originator’s bank and a beneficiary’s bank involved in the funds transfer
operation, the customer’s payment instruction is irrevocable once the benefi-
ciary’s bank accepts the payment order from the originator’s bank either by
returning an acceptance message or by acting on the payment order in some
other way, eg by debiting an account of the originator’s bank held by the
beneficiary’s bank or by making an unconditional decision to credit the benefi-
ciary’s account1.
1
See PR Wood, Comparative Financial Law (1995, Sweet & Maxwell), para 25-18.

49
22.107 Paying Bank Obligations

22.107 To avoid uncertainty as to the customer’s right of countermand, the

originator’s bank may include in its contract with the originator an express
provision stipulating that the originator may not countermand his payment
instruction after a certain point in the payment process. Alternatively, the
originator will be bound by the rules of the payment system used to make the
transfer where those rules represent banking usage. It is well established that a
‘man who employs a banker is bound by the usage of bankers’1. The usage
becomes an implied term of the bank-customer contract. Revocation of pay-
ment instructions will usually be a matter provided for, expressly or by
implication, in the rules of the payment system used to effect the transfer.
1
Hare v Henty (1861) 10 CBNS 65, 142 ER 374 at 379. But the customer must know of, and
consent to, the usage where it deprives him of a right (see Barclays Bank plc v Bank of England
[1985] 1 All ER 385 at 394; Turner v Royal Bank of Scotland plc [1999] Lloyd’s Rep Bank 231,
CA).

22.108 Where the originator’s bank and the beneficiary’s bank employ inter-
mediary banks to act on their behalf, as would be the case where neither bank
is a member of the relevant clearing system, the time when a payment message
becomes irrevocable, as between, for example, the originator’s bank and the
intermediate bank employed as its agent, is determined by the terms of the
respective contracts between the banks1. Where the intermediary bank em-
ployed by the originator’s bank and the intermediary bank employed by the
beneficiary’s bank are members of the same clearing system, as between those
intermediary banks the time when a payment message becomes irrevocable will
be determined by the rules of that system.
1
RM Goode, Commercial Law (5th edn, 2016), p 511 [17.49].

22.109 Although a payment instruction may become irrevocable before pay-

ment is made as between the originator and the beneficiary, in theory at least, it
cannot be revoked after completion of payment as between them1.
1
Momm v Barclays Bank International Ltd [1977] QB 790 at 800B and Tayeb v HSBC [2004]
EWHC 1529 (Comm).

(b) Mental disorder and contractual incapacity

22.110 If the state of the customer’s mind is such that he does not know what
he is doing, he can give no mandate1 and any existing mandate is revoked2; but
if the bank has no knowledge and no reason to suspect, then the mandate is
operative. What is sufficient to entitle a banker to refuse to obey his custom-
er’s mandate, on the ground that he is suffering from a mental disorder
depriving him of mental capacity, is not easy to define. The opinion of the
customer’s medical practitioner would be a guide but not conclusive, though if
he advised positively that his patient was of sound mind, the banker would
normally be justified in paying. Entry into hospital for observation or treatment
is not in itself enough.
Where a customer’s mental health deteriorates to such an extent that the Court
assumes jurisdiction over him pursuant to the legislation in force from time to
time for protecting persons with mental incapacity, the position will be much
clearer3.

50
 Wrongful Dishonour of aPayment Order 22.114

Orders made under the relevant legislation ought not in principle to affect rights
acquired before the making of the order4.
1
Imperial Loan Co Ltd v Stone [1892] 1 QB 599.
2
Drew v Nunn (1879) 4 QBD 661; Daily Telegraph Newspaper Co v McLaughlin [1904] AC
776.
3
See the Mental Capacity Act 2005.
4
See Davies v Thomas [1900] 2 Ch 462.

(c) Insolvency
22.111 The effect of insolvency is considered in Part 5 above.

(d) Suspicion of Money Laundering

22.112 The impact of anti-money laundering obligations upon the bank’s ob-
ligation to make payment is considered in Chapter 2 above1.
1
See also Goode, Goode on Payment Obligations in Commercial and Financial Transactions
(3rd edn) para 5-36.

7 WRONGFUL DISHONOUR OF APAYMENT ORDER

(a) Breach of contract

22.113 Failure to comply with a payment order is a breach of mandate and
gives rise to damages1. The burden of proving that the customer authorised a
payment is upon the originator bank2. As the bank is acting as agent of the
customer in making a payment the usual defences of an agent are applicable
(such as ratification of the principal).
The wrongful dishonour of a cheque gives rise to a claim for breach of contract
for general damages in respect of damage to reputation and to a claim in libel.
1
Barclays Bank v Simms (WJ) Son and Cooke (Southern) Ltd [1980] 1 QB 677,699.
2
Izodia v RBS 2006 JLR 346, paragraph 90.

22.114 In respect of a cheque claim for breach of contract the law presumes
injury without proof of actual damage in the case of trading customers. The
special position of traders was recognised by the House of Lords in Wilson v
United Counties Bank Ltd, where, after reviewing the authorities, Lord Birken-
head LC said1:
‘The ratio decidendi in such cases is that the refusal to meet the cheque, under such
circumstances, is so obviously injurious to the credit of a trader that the latter can
recover, without allegation of special damage, reasonable compensation for the
injury done to his credit.’
There is no formulated definition of ‘trader’ in the authorities but a common
theme is carrying on some form of business. The historic approach to non-
traders was stated by Lawrence J in Gibbons v Westminster Bank Ltd2:

51
22.114 Paying Bank Obligations

‘A person who is not a trader is not entitled to recover substantial damages for the
wrongful dishonour of his cheque, unless the damage which he has suffered is alleged
and proved as special damage.’
This principle was applied by the Court of Appeal in Rae v Yorkshire Bank plc3,
where a non-trader who was unable to prove special damage was awarded only
nominal damages for the wrongful dishonour of his cheques.
However, the distinction between traders and non-traders was not accepted by
the Court of Appeal in Kpohraror v Woolwich Building Society4. Evans L J
observed that in modern social conditions it is not only a tradesman for whom
the dishonour of a cheque might be obviously injurious. The credit rating of
individuals is important for their personal transactions, including mortgages,
hire-purchases and banking facilities, and it is notorious that central registers
are kept containing information relevant to credit rating. There is a presump-
tion of some damage in every case. Accordingly, the Court of Appeal upheld an
award of £5,500 general damages for the wrongful dishonour of a cheque for
£4,500 and the giving of a discreditable reason for doing so.
Kpohraror has been followed in Nicholson v Knox Ukiwa (A Firm)5 and Sealy
v First Caribbean National Bank (Barbados)6.
1
[1920] AC 102 at 112.
2
[1939] 2 KB 882 at 888, [1939] 3 All ER 577 at 579.
3
[1988] FLR 1, [1988] BTLC 35, CA (O’Connor and Parker LJJ).
4
[1996] 4 All ER 119.
5
[2007] EWHC 2430 (QB), [2007] All ER (D) 456 (Jul).
6
[2010] 2 LRC 750 a decision by the Barbados Court of Appeal.

22.115 Libel is the tort of making a defamatory statement in writing or

printing which without justification disparages a person’s reputation to a third
party. The elements of this wrong are now codified in the Defamation Act 2013,
which, in particular, now requires a plaintiff to show that the defamatory
statement has caused or is likely to cause them ‘serious harm’: s 1(1). In
Lachaux v Independent Print Ltd1, Davis LJ (giving the judgment of the Court
of Appeal) declined to elaborate on what the statute meant by ‘serious’, stating:
‘It seems to me that that means what it says and requires no further gloss. It can
be accepted, however, that it conveys something rather more weighty than
“substantial”’. On 21 March 2018, the Supreme Court granted the Defendant
permission to appeal, and so the Supreme Court may provide further guidance
in due course.
When a cheque is dishonoured it is usual for the drawee bank to put a note on
it indicating the reason for the dishonour.
In Sim v Stretch2 Lord Atkin said that if the words used tend to lower the
claimant in the estimation of right thinking people generally, they are defama-
tory. The common answer where a bank decides to dishonour a cheque conveys
in many people’s minds that he has no money in his account to meet it, or that
he did not draw in good faith, or that he drew recklessly or in fraud.
In Ellaw Co Ltd v Lloyds Bank Ltd3 in which the libel claim was not proceeded
with, Mackinnon J said that if he had come to the conclusion that there had
been any breach on the part of the bank, it would have been a question whether
any damages beyond the most nominal sum could have been claimed in view of

52
 Wrongful Dishonour of aPayment Order 22.115

the fact that the whole of the claimant’s banking account was concerned with
kite-flying operations, and that on many other occasions its cheques had been
rightly dishonoured.
In Frost v London Joint Stock Bank Ltd4 the Master of the Rolls said that in
order to found a libellous interpretation of an answer there must be extrinsic
evidence that the answer was calculated to lead reasonable people to attach an
injurious meaning to it. A cheque was returned unpaid with a slip attached
bearing the words ‘reason assigned’ against which was written ‘not stated’. It
appeared that the claimant had failed to prove that the words would naturally
be understood by reasonable persons as conveying the libellous interpretation
alleged. The Court of Appeal held that where words are not obviously and
directly defamatory the test is not what they might convey to a particular class
of persons who, by reason of their calling, might attach a special significance
thereto, but what they would ordinarily suggest to the mind of any person of
average intelligence who read them. It may well be that some of the answers in
daily use may have acquired a special meaning or significance to businessmen,
but such technical construction is not enough to put a forced interpretation on
words not in themselves defamatory.
The answer commonly given, in the absence of circumstances requiring a
different one, is ‘Refer to Drawer’, sometimes abbreviated to ‘R/D’. At one time
this was not regarded as capable of a defamatory meaning, Scrutton J in Flach
v London and South-Western Bank Ltd5 stated that it was not possible to
extract a libellous meaning from what the bank said. This view was adopted by
Du Parcq J in Plunkett v Barclays Bank Ltd6. Today, it is generally accepted that
the term is capable of a defamatory meaning because they connate insufficiency
of funds.
In Jayson v Midland Bank Ltd7 at first instance the jury found that ‘Refer to
Drawer’ was likely to lower the drawer’s reputation in the minds of right
thinking people; but the bank succeeded on the facts and the Court of Appeal
upheld the decision. In relation to a bill of exchange, ‘R/A’ in Millward v Lloyds
Bank Ltd8 was held to be defamatory, the acceptor being a merchant.
In Davidson v Barclays Bank Ltd9 Hilbury J held that the words ‘not sufficient’
on a bookmaker’s cheque were capable of being defamatory. In Baker v
Australia and New Zealand Bank Ltd10 ‘present again’ was held to be defama-
tory.
In Russell v Bank of America National Trust and Savings Association11, the
plaintiff’s cheques were dishonoured with the words ‘account closed’ after the
customer had allegedly arranged that they should be referred to an account in
Jersey. The judge ruled that the words were capable of a defamatory meaning.
Claims in respect of dishonoured cheques are often brought both in contract
and libel. If the claim for breach of contract fails, ie if the refusal to pay is
justified, the claim for libel must also fail as the paying bank was entitled to
dishonour the cheque. The damages awarded are to be reasonable and are
limited to the kind of damage that might reasonably be supposed to have been

53
22.115 Paying Bank Obligations

in the contemplation of both parties at the time of when the contracts were
made. Factors bearing on the award of damages include the size of cheque, the
circumstances of the recipient and the circumstances relating to the dishon-
our12.
1
[2017] EWCA Civ 1334; [2018] QB 584 at 610–611.
2
[1936] 2 All ER 1237, HL.
3
(1934) 4 LDAB 455.
4
(1906) 22 TLR 760, CA.
5
(1915) 31 TLR 334.
6
[1936] 2 KB 107, [1936] 1 All ER 653.
7
[1968] 1 Lloyd’s Rep 409, CA.
8
(1920) unreported.
9
[1940] 1 All ER 316.
10
[1958] NZLR 907.
11
(1977) unreported.
12
John v MGN Ltd [1997] QB 586.

54
Chapter 23

UNAUTHORISED PAYMENTS

1 PAYMENT CONTRARY TO THE MANDATE

(a) Effect of the mandate 23.2
(b) Unauthorised payments which discharge a customer’s debts 23.3
2 PAYMENT AGAINST A FORGED OR UNAUTHORISED
SIGNATURE
(a) The effect of a forged signature 23.4
(b) Meaning of ‘forged’ and ‘forgery’ 23.5
(c) Defences 23.6
3 PAYMENT WHEN BANK ON NOTICE OF FRAUD 23.13
(a) Notice of an agent’s fraud 23.14
(b) Suspicion of money laundering 23.16

23.1 The primary duty of a paying bank is to honour its customer’s instructions
and make payments as instructed in accordance with its mandate. That duty is
a fundamental aspect of the contractual relationship between the bank and its
customer. The bank’s payment obligation only arises if the instructions comply
with the mandate and if there are sufficient funds in the customer’s account (or
if the bank has agreed to provide the customer with sufficient overdraft
facilities) to meet the payment instruction. If so, in the vast majority of cases the
bank must comply with its customer’s instructions. But there are a number of
exceptional circumstances in which the bank’s contractual duty to the customer
conflicts with other duties owed by the bank, and in those cases the law must
strike a balance between the conflicting obligations (see para 23.13 below).
Where the bank makes a payment which is unauthorised by its customer, it has
no right to debit the customer’s account, and it must instead look to the
recipient of the payment for repayment under restitutionary principles: claims
by the paying bank against third parties in those circumstances are considered
in Chapter 28.
This chapter concerns claims against the paying bank by its customers in which
the bank’s authority to make the payment is in dispute. Such claims tend to arise
in three principal situations:
(i) where the payment is contrary to the mandate;
(ii) where the payment is against a forged or unauthorised signature;
(iii) where the paying bank is on notice of a potential fraud in relation to the
payment.

1 PAYMENT CONTRARY TO THE MANDATE

(a) Effect of the mandate

23.2 The mandate embodies an agreement which authorises the bank to pay if
it is given instructions in accordance with its terms. Typically a mandate will list

1
23.2 Unauthorised Payments

the individuals who have authority to sign cheques or other payment orders and
will specify how many individuals (if more than one) must sign any given order.
Some mandates require orders to be signed by A and by any one of B, C and D.
Others require the signature of any one of E, F and G and any one of H, I and
J. There are many other possible combinations.
A bank which acts in accordance with its mandate is duly authorised, and will
be entitled to debit the customer’s account in the amount of the payment. But it
does not follow that a bank which acts contrary to the mandate is bound to be
unauthorised. The bank will not be liable to the customer if the customer did in
fact authorise the payment (not withstanding that the payment instruction did
not comply with the mandate). This is illustrated by London Intercontinental
Trust Ltd v Barclays Bank Ltd1, where the defendant bank had honoured a
cheque bearing a sole signature in breach of a mandate requiring two signa-
tures. However, the sole signatory had actual authority from the claim-
ant’s board of directors to order the transfer of the sum in question. Accord-
ingly, the claim was dismissed. The bank’s failure to observe the discrepancy
between the cheque and the mandate simply had the consequence that the bank
exposed itself to the risk that the signatory had not in fact been authorised2.
Similarly, no claim for breach of mandate will lie against the paying bank if the
payment has been subsequently ratified by the customer3. For ratification to
apply, the customer must have (a) expressly or impliedly manifested an un-
equivocal intention to adopt the unauthorised payment4, and (b) done so in full
knowledge that the payment was without authority. Ratification will only be
implied where one cannot logically analyse the act without imputing the
approval of the customer5.
1
[1980] 1 Lloyd’s Rep 241; followed in Symons (HJ) & Co v Barclays Bank [2003] EWHC 1249
(Comm) at [22]–[24], [65]. See also In re Cleadon Trust Ltd [1939] Ch 286, CA.
2
[1980] 1 Lloyd’s Rep 241 at 249.
3
For a detailed description of the principles of ratification, see Bowstead and Reynolds on
Agency (21st edn, 2017), paras 2-047 to 2-099.
4
Swotbooks.com v Royal Bank of Scotland plc [2011] EWHC 2025 (QB).
5
Harrisons & Crossfield Ltd v London and North-Western Railway Company [1917] 2 KB 755
at 758, per Rowlatt J.

(b) Unauthorised payments which discharge a customer’s debts

23.3 Where the bank makes a payment to a third party which is unauthorised,
the bank usually has no entitlement to debit the customer’s account, and must
instead look to recover the payment from the third party recipient under
restitutionary principles (dealt with in Chapter 28). However, where the third
party is a creditor of the customer, it may be alleged that the effect of the
bank’s payment was to discharge a debt. Plainly, if a payment does have that
effect, the customer would receive a windfall if he were entitled to retain benefit
of the discharged debt but without the paying bank being entitled to make an
equivalent deduction from his account, and that should not be permitted.
Accordingly, the bank has a defence to a claim by a customer arising out of an
unauthorised payment where the effect of the payment was to discharge a debt
owed by the customer: this is often referred to as ‘the Liggett’ defence, after
Liggett (Liverpool) Ltd v Barclays Bank Ltd1.

2
 Payment Contrary to the Mandate 23.3

However, in most circumstances an unauthorised payment by the bank to a

creditor of the customer will not have the effect of discharging the debt. A bank
making a payment which is unauthorised is treated as having made the payment
voluntarily and on its own behalf, rather than on behalf of its customer, and the
general rule is that where a volunteer makes an unrequested payment to a
creditor in respect of a customer’s obligation, that payment will not discharge
the customer’s debt (unless the customer subsequently ratifies the payment)2.
In Liggett, the bank paid against cheques drawn by a single director of the
company (the customer), although the mandate required two directors to sign.
Wright J said that the payments by the bank had discharged the debts of the
customer, and hence the bank was not liable to re-credit the customer’s account.
However, he did not examine how the payments had the effect of discharging
the customer’s debt given the lack of authority.
In Re Cleadon Trust Ltd3, the majority of the Court of Appeal considered that
the result in Liggett could only be upheld on the basis that the director who had
drawn the cheque had in fact been authorised to discharge the debt due to the
third party payee, although he was not authorised to draw the cheque. In other
words, a debt may be discharged, even where the payment is in breach of
mandate, if the person instructing the bank to make the payment was autho-
rised to do so, albeit not by the means chosen4.
Accordingly, even where a paying bank makes a payment to a holder of a
cheque drawn on its customer’s account in purported discharge of a debt owed
by the customer to the holder, this will not in fact discharge the debt if the
cheque is paid otherwise than in accordance with the mandate5.
The question of whether the fact that an unauthorised payment is made to a
customer’s creditor could give rise to a defence to a claim for breach of mandate
was further considered by the Court of Appeal in Crantrave Ltd v Lloyds
Bank plc6. The Court emphasised that the general rule was that an unauthor-
ised payment does not discharge a debt. Pill LJ summarised the position as
follows7:
‘Applying the Cleadon case to the present facts, I regard it as authority for the
proposition that, in the absence of authorisation or ratification by the company of the
bank’s payment to the third party, the “mere fact” that the bank’s payment enured to
the benefit of the company does not establish an equity in favour of the bank against
the company. Moreover, even upon Wright J’s formulation in the Liggett case, in
order to establish the equity, the bank would have to show that the payment
discharged (at least partially) a legal liability of the customer. In the absence of
evidence that the bank’s payment has been made on the customer’s behalf or
subsequently ratified by him, the payment to the creditor will not of itself discharge
the company’s liability to the creditor . . . ’
Pill LJ went on to recognise, however, that there may be other situations going
beyond the ‘mere fact’ of the bank’s payment where relief may be granted to the
paying bank on the grounds that the customer would otherwise be unjustly
enriched8:
‘There will be circumstances in which a court may intervene to prevent unjust
enrichment either by the customer having his money from the bank as well as having
the claim of his creditor met, or by the creditor who has double payment of the debt.
The onus is in my judgment on the bank to establish the unjust enrichment on the
evidence. In this case not only is there no evidence of authorisation or ratification of

3
23.3 Unauthorised Payments

the payment by the third party to the customer but there is no evidence of unjust
enrichment of the customer. In the absence of authorisation or ratification of the
payment, the bank must in my judgment meet this claim and recoup the sum paid, if
they can, from the third party to which it was paid.’
May LJ also recognised that authority or ratification might not always be
necessary9:
‘In another case, it might be possible to establish that the customer ratified the
gratuitous payment either expressly or by taking advantage of it; or there might
conceivably be circumstances not amounting to ratification in which it would
nevertheless be unconscionable to allow the customer to recover from the bank the
balance of his account without deduction of a payment which the bank had made
gratuitously. But I agree with Pill LJ that no such circumstances were established in
the present case.’
An example of a situation where there may be a defence to a breach of mandate
claim on this basis, even though the payment was unauthorised and did not
discharge a debt, is provided by Oyston v Royal Bank of Scotland10, where the
customer’s accountant had dishonestly procured various payments, in breach of
mandate, out of the customer’s accounts. However, a substantial part of the
moneys claimed had merely been transferred into other accounts held by the
customer or his companies. HHJ Hegarty QC held that, since the transfers had
been used for the proper purposes and benefit of the defendant customer and his
group of companies, he would be unjustly enriched if he were to be permitted to
recover them from the bank.
Similarly, in Limpgrange v BCCI11, money had again been paid out to a third
party without authority, but some of that money had subsequently been paid
back by the third party to the corporate customer; Staughton J held that the
company’s claim against the paying bank should be correspondingly reduced,
although he described the process as being one of set-off rather than an
application of the Liggett defence.
1
[1928] 1 KB 48.
2
Re Cleadon Trust Ltd [1939] Ch 286; Crantrave Ltd v Lloyds Bank plc [2000] QB 917;
Swotbooks.com Ltd v Royal Bank of Scotland plc [2011] EWHC 2025 (QB). See also Owen v
Tate [1976] QB 402, [1975] 2 All ER 129, CA.
3
[1939] Ch 286, CA.
4
See para 23.2 above, discussing London Intercontinental Trust Ltd v Barclays Bank Ltd [1980]
1 Lloyd’s Rep 241.
5
Barclays Bank plc v W J Simms Son and Cooke (Southern) Ltd [1980] QB 677.
6
[2000] QB 917.
7
[2000] QB 917, at 923.
8
[2000] QB 917, at 924.
9
[2000] QB 917, at 924.
10
Unreported, 8 December 2003, Manchester District Registry (Mercantile Court), HHJ
Hegarty QC.
11
[1986] FLR 36.

4
 Forged or Unauthorised Signatures 23.5

2 PAYMENT AGAINST A FORGED OR

UNAUTHORISED SIGNATURE

(a) The effect of a forged signature

23.4 Where a bank honours a payment instruction on the basis of a cheque or
other bill of exchange, and even where the instruction appears to be within the
mandate, the payment will nevertheless be unauthorised if in fact the instru-
ment bears a forged signature. By the Bills of Exchange Act 1882 (‘BEA 1882’),
s 24:
‘Subject to the provisions of this Act, where a signature on a bill is forged or placed
thereon without the authority of the person whose signature it purports to be, the
forged or unauthorised signature is wholly inoperative, and no right to retain the bill
or to give a discharge therefor or to enforce payment thereof against any party thereto
can be acquired through or under that signature, unless the party against whom it is
sought to retain or enforce payment of the bill is precluded from setting up the forgery
or want of authority.
Provided that nothing in this section shall affect the ratification of an unauthorised
signature not amounting to a forgery.’

(b) Meaning of ‘forged’ and ‘forgery’

23.5 The terms ‘forged’ and ‘forgery’ are not defined in the BEA 1882. Some
assistance may be gleaned from the definition in the Forgery and Counterfeiting
Act 1981, s 1:
‘A person is guilty of forgery if he makes a false instrument, with the intention that he
or another shall use it to induce somebody to accept it as genuine, and by reason of
so accepting it to do or not to do some act to his own or any other person’s prejudice.’
Section 9 then provides that an instrument is false (for the purposes of this part
of the Act):
‘(a) if it purports to have been made in the form in which it is made by a person
who did not in fact make it in that form; or
(b) if it purports to have been made in the form in which it is made on the
authority of a person who did not in fact authorise its making it that form; or
(c) if it purports to have been made in the terms in which it is made by a person
who did not in fact make it in those terms; or
(d) if it purports to have been made in the terms in which it is made on the
authority of a person who did not in fact authorise its making in those terms;
or
(e) if it purports to have been altered in any respect by a person who did not in
fact alter it in that respect; or
(f) if it purports to have been altered in any respect on the authority of a person
who did not in fact authorise the alteration in that respect; or
(g) if it purports to have been made or altered on a date on which, or at a place
at which, or otherwise in circumstances in which, it was not in fact made or
altered; or
(h) if it purports to have been made or altered by an existing person but he did
not in fact exist.
(2) A person is to be treated for the purpose of this Part of this Act as making a
false instrument if he alters an instrument so as to make it false in any respect
(whether or not it is false in some other respect apart from that alteration).’

5
23.5 Unauthorised Payments

However, care needs to be exercised with this definition, especially insofar as it

extends to situations where the signatory is falsely claiming to be authorised to
sign. The meaning of forgery under the BEA 1882 is narrower than under the
criminal law. In particular, there is an important distinction between an instru-
ment containing a forged signature and an instrument which has been genuinely
signed but by an agent misusing his authority. Morison v London County and
Westminster Bank Ltd1 established that the fraudulent misuse of authority does
not invalidate a negotiable instrument in the hands of an innocent holder, and
that an instrument cannot be valid for one purpose and invalid for another,
genuine in the hands of one person but a forgery in the hands of another. Per
Phillimore LJ:
‘Where there is power to sign “per pro”, a document so signed is not a forgery to the
person to whom it is addressed and who can, or, a fortiori, must, act upon it and
therefore is not a forgery at all. This misuse by an agent of his power of writing his
principal’s name, either as a simple signature or by signing “per pro”, may, however,
be indictable as some sort of fraud.’
In contrast, in Kreditbank Cassel GmbH v Schenkers2, the Court of Appeal
relied on the definition in the predecessor to the Forgery and Counterfeiting Act
1981 (ie the Forgery Act 1913) in concluding that a company was not liable for
bills signed by the local manager of a company purportedly on its behalf, but in
fact without authority. It does not appear that Morison was cited to the Court
of Appeal, and it is submitted that the approach in the Morison decision is to be
preferred3.
The distinction between an instrument containing a forged signature and an
instrument containing a genuine, but unauthorised, signature of an agent is also
important for the purposes of ratification. It is clear from the wording of BEA
1882, s 24 that a merely unauthorised (but not forged) signature may be
ratified, and it is implicit that a forgery is unratifiable. This distinction may be
rationalised on the basis that a person forging a signature is neither acting nor
purporting to act under the authority of the person whose signature he forges,
whereas an unauthorised signature can be ratified because the agent is purport-
ing to act on behalf of a principal. The distinction is to be maintained
irrespective of whether the unauthorised signature would constitute a ‘forgery’
within the wider meaning of the Forgery and Counterfeiting Act 1981.
1
[1914] 3 KB 356, 381–382, CA.
2
[1927] 1 KB 826, CA decided some twelve years after the passing of the Forgery Act 1913. A
similar issue appears to have arisen in Alexander Stewart & Son of Dundee Ltd v Westminster
Bank Ltd [1926] WN 126; revsd [1926] WN 271, but the case is not well reported on this point.
3
The same view is taken in Brindle & Cox, Law of Bank Payments (5th edn, 2017), at
para 6-129, and in Chalmers and Guest on Bills of Exchange (18th edn, 2016), para 3-047 (cf
McKendrick, Goode on Commercial Law (5th edn, 2016), p 559).

(c) Defences
23.6 The principal defences available to a paying bank which made a payment
against a forged cheque or analogous instrument are as follows:
(1) The loss was caused by the customer’s breach of its duty to the bank to
refrain from drawing the cheque in such a manner as to facilitate fraud
or forgery (‘the Macmillan duty’)1;

6
 Forged or Unauthorised Signatures 23.7

(2) The customer is estopped from asserting the forgery by reason of the
breach of its duty to the bank to inform it of any forgery on the account
as soon as the customer becomes aware of it (‘the Greenwood duty’)2;
(3) The customer is estopped from asserting the forgery by reason of an
express representation that the payment order was genuine3;
(4) The bank is entitled to debit the customer’s account since the payment
discharged a debt owed by the customer to the payee (‘the Liggett
defence’)4.
1
London Joint Stock Bank v Macmillan [1918] AC 777, HL.
2
Greenwood v Martins Bank Ltd [1933] AC 51.
3
Brown v Westminster Bank [1964] 2 Lloyd’s Rep 187.
4
See 23.3 above.

(i) The customer’s duty to refrain from facilitating fraud or forgery

23.7 The customer owes its bank a duty to refrain from drawing cheques or
other payment orders in such a manner as to facilitate fraud or forgery. This is
often referred to as the Macmillan duty, following the House of Lords’ decision
in London Joint Stock Bank Ltd v Macmillan1.
The facts in the Macmillan case were that the customers, Macmillan and Arthur,
had a clerk who prepared and presented for signature to one of the partners
cheques for small amounts of petty cash. The clerk, with a view to fraud, wrote
a cheque, inserting a ‘2’ in the space for figures, with available blanks before and
after the numeral, putting nothing where the sum in writing should appear. He
then handed the cheque to a partner who was just leaving the office and who,
being in a hurry, failed to notice anything unusual. Being told it was for petty
cash and that 2 pounds would be sufficient, the partner signed it. The clerk filled
in ‘One hundred and twenty pounds’ in writing, inserted a ‘1’ before the ‘2’ and
a ‘0’ after it, presented it to the bank; he received the £120 and absconded. The
judge at the trial and the Court of Appeal decided against the bank; the House
of Lords reversed this decision and gave judgment for the bank. Lord Finlay
defined and explained the customer’s duty as follows2:
‘If he (the customer) draws a cheque in a manner which facilitates fraud he is guilty
of a breach of duty as between himself and the banker, and he will be responsible to
the banker for any loss sustained by the banker as a natural and direct consequence
of this breach of duty . . . As the customer and the banker are under a contractual
relation in this matter, it is obvious that, in drawing a cheque, the customer is bound
to take usual and reasonable precautions to prevent forgery. Crime is, indeed, a very
serious matter, but everyone knows that crime is not uncommon. If the cheque is
drawn in such a way as to facilitate or almost to invite an increase in the amount by
forgery if the cheque should get into the hands of a dishonest person, forgery is not a
remote but a very natural consequence of negligence of this description.’
It is a question of degree whether neglect of ordinary precautions in issuing a
cheque amounts to breach by the drawer of his contract with his banker. On the
one hand, in Société Générale v Metropolitan Bank Ltd3, where a ‘y’ was
inserted after an ‘eight’ in a bill, Bovill CJ said that ‘it was the usual way of
filling up blanks in a form’, and that ‘no man in the City would take notice of
“eight” not being close to the next word’. At the other extreme is the Macmillan
case itself, where the space for the amount in writing was left entirely blank.

7
23.7 Unauthorised Payments

Where the alteration is obvious or discoverable by the exercise of reasonable

care, or where the state of the cheque raises suspicion of its having been
tampered with and payment is made without inquiry4, the Macmillan case
offers no relief to the bank.
An extension of the duty of the drawer of a cheque, as laid down in Macmillan’s
case, to cover the point of leaving a blank space after the payee’s name, was
refused by the Court of Appeal in Slingsby v District Bank Ltd5. That case
concerned the material alteration of a cheque payable to John Prust & Co by the
fraudulent addition to the payee’s name of ‘per Cumberbirch and Potts’. It was
argued that the drawers of the cheque were negligent in their duty to the paying
banker in not drawing a line in the blank after the payee’s name and had thus
enabled the fraud to be committed. Scrutton LJ6 was satisfied, however, that at
that time it was not a ‘usual precaution’ to draw lines before or after the name
of the payee.
The Macmillan duty is limited to the drawing of individual cheques. It was
established in Tai Hing Cotton Mill v Liu Chong Hing Bank Ltd7 that the
customer does not owe a wider duty to take reasonable precautions in the
management of its business to prevent forged cheques being presented to its
bank (such as checking bank statements to see whether or not debits were
authorised).
Similarly, the holder of a genuine cheque owes no duty of care to the bank to
manage its affairs (such as ensuring that cheques are not lost or stolen) so as to
prevent a material alteration of the cheque8.
1
[1918] AC 777.
2
[1918] AC 777, at 789–790.
3
(1873) 27 LT 849.
4
Scholey v Ramsbottom (1810) 2 Camp 485.
5
[1932] 1 KB 544.
6
[1932] 1 KB 544, at 560.
7
[1986] AC 80, PC; Price Meats Ltd v Barclays Bank plc [2000] 2 All ER (Comm) 346 (Arden
J); Patel v Standard Chartered Bank [2001] Lloyd’s Rep Bank 229 (Toulson J); Financial
Institutions Services Ltd v Negril Holdings Ltd [2004] UKPC 40.
8
Yorkshire Bank plc v Lloyds Bank plc [1999] 2 All ER (Comm) 153, 158, [1999] Lloyd’s Rep
Bank 191, 195 (HHJ Pitchers).

(ii) The customer’s duty to inform the bank of known forgery

A. Nature of scope of the duty

23.8 The customer owes a duty to inform its bank of any forged payment
order as soon as he becomes aware of it. This is often referred to as the
Greenwood duty, after Greenwood v Martins Bank Ltd1. If he does not, and the
bank’s position is thereby prejudiced, the customer adopts the bill or cheque
and is estopped from asserting the forgery2. The same rule would seem to apply
when the signature has been fraudulently obtained3. The facts of Greenwood
were that a wife forged her husband’s signature on cheques which she cashed
and she then spent the proceeds. When the husband discovered the forgeries, he
did not immediately inform the bank. He later decided to tell the bank and the
wife committed suicide. It was held that the husband was estopped from setting

8
 Forged or Unauthorised Signatures 23.9

up the forgeries since, because of his silence, the bank had lost the opportunity
to bring a claim against the wife. Giving the opinion of the House, Lord Tomlin
said4:
‘The sole question is whether in the circumstances of this case the respondents are
entitled to set up an estoppel.
The essential factors giving rise to an estoppel are I think:–
(1) A representation or conduct amounting to a representation intended to
induce a course of conduct on the part of the person to whom the represen-
tation is made.
(2) An act or omission resulting from the representation, whether actual or by
conduct, by the person to whom the representation is made.
(3) Detriment to such person as a consequence of the act or omission.
Mere silence cannot amount to a representation, but when there is a duty to disclose,
deliberate silence may become significant and amount to a representation . . . .
The deliberate abstention from speaking in those circumstances seems to me to
amount to a representation to the respondents that the forged cheques were in fact in
order, and assuming that detriment to the respondents followed there were, it seems
to me, present all the elements essential to estoppel.’
Lord Tomlin rejected the submission that the bank’s initial negligence (in not
detecting the forgery) made a difference5:
‘What difference can it make that the condition of ignorance was primarily induced
by the respondents’ own negligence? . . . For the purposes of the estoppel, which
is a procedural matter, the cause of the ignorance is an irrelevant consideration.’
This doctrine is not confined to customers. In M‘Kenzie v British Linen Co6 and
William Ewing & Co v Dominion Bank7 there was no relationship of banker
and customer.
1
[1933] AC 51.
2
See, in addition to Greenwood v Martins Bank Ltd [1933] AC 51, HL: M‘Kenzie v British
Linen Co (1881) 6 App Cas 82, particularly at 92, 101 and 109; Ogilvie v West Australian
Mortgage and Agency Corpn Ltd [1896] AC 257 at 270; William Ewing & Co v Dominion
Bank [1904] AC 806, PC; Leather Manufacturers’ National Bank v Morgan 117 US 96 (1886)
(Supreme Court of the United States); Morison v London County and Westminster Bank Ltd
[1914] 3 KB 356.
3
Midland Bank v Lord Shrewsbury’s Trustees (1924) Times, 18 March.
4
[1933] AC 51, at 57–59.
5
[1933] AC 51, at 59.
6
(1881) 6 App Cas 82, although M‘Kenzie was referred to as a customer in Ogilvie v West
Australian Mortgage and Agency Corpn Ltd [1896] AC 257.
7
[1904] AC 806.

B. Requirement of knowledge
23.9 The duty requires that a person must not knowingly allow another to be
prejudiced by the fraudulent use of a forged instrument to which he has set, or
appears to have set, his hand, a ‘duty required of him by the rules of fair
dealing’1.
It seems clear that what is required is actual knowledge; constructive knowledge
will not suffice, ie the Greenwood duty does not extend to a fraud of which the
customer is unaware, even if a hypothetical reasonable person having the same
knowledge ought to have discovered the fraud. In Patel v Standard Chartered

9
23.9 Unauthorised Payments

Bank2, the defendant bank relied on the claimant’s failure to report a fraud of
which, the bank alleged, the customer ought to have been put on enquiry.
Toulson J held that to impose a duty to enquire and report based on knowledge
of circumstances which would cause a reasonable hypothetical customer to
discover the existence of fraud would be inconsistent with the ruling and
reasoning both in Tai Hing3 and the subsequent decision in Price Meats Ltd v
Barclays Bank plc4 (in which Arden J had said, obiter, that the authorities did
not support the bank’s proposition that constructive knowledge was sufficient).
1
Ogilvie v West Australian Mortgage and Agency Corpn Ltd [1896] AC 257 at 269; William
Ewing & Co v Dominion Bank (above).
2
[2001] Lloyd’s Rep Bank 229.
3
Tai Hing Cotton Mill v Liu Chong Hing Bank Ltd [1986] AC 80, PC.
4
[2000] 2 All ER (Comm) 346.

C. Requirement of prejudice
23.10 Prejudice to the bank is an essential element of the estoppel1. Prejudice is
not confined to payment; it may arise where the bank is precluded from
protecting itself against subsequent forgeries or loses the chance of taking
proceedings against the forger. It was suggested in earlier editions of Paget that
it is immaterial whether proceedings against the forger would result in getting
the money back or not2. However, the modern tendency is not to permit the
defence of estoppel to lead to recovery greater than the actual damage suffered
by the representee in consequence of having relied on the relevant representa-
tion3. In National Westminster Bank plc v Somer International (UK) Ltd4, a
case involving recovery of a mistaken payment, Potter LJ made the following
observations about the Olgivie and Greenwood cases5:
‘The Court6 also cited Olgivie v West Australian Mortgage and Agency Corporation
Limited [1896] AC 257 and Greenwood v Martins Bank Limited [1932] 1 KB 371
(affirmed in the House of Lords [1933] AC 51) as demonstrating that a claimant who,
as a result of being able to rely on estoppel, succeeds on a cause of action on which,
without being able to rely on it, he would necessarily have failed, may be able to
recover more than the actual damage suffered by him as a result of the representation
which gave rise to it. It is difficult to see how the last two cases support the principle
for which they were cited. In each case a bank customer discovered that cheques
drawn on his account had been forged, but failed to inform the bank until a
substantial period had elapsed. In each case it was held that there was no need to
investigate whether the bank could in fact have recovered the money from the forger
had it acted immediately. The banks had not received benefit, but had suffered loss of
any opportunity for recovery elsewhere, as to which the uncertainty of such recovery
was resolved in favour of the representee.’
In Greenwood itself, the forger was the wife of the bank’s customer, and the
husband would at that time have been liable for his wife’s tort, so that he could
not have succeeded in any event in recovering the money which the bank had
paid away on the forgeries7.
On the facts, the relevant cheques had been forged between 1928 and October
1929; whilst the husband only found out about the forgeries in October 1929,
he was nonetheless estopped from claiming back any of the monies paid out

10
 Forged or Unauthorised Signatures 23.11

under any of the forged cheques, even those forged prior to his knowledge. The
position is the same in the case of an estoppel arising out of an express
representation: see Brown v Westminster Bank Ltd8, discussed in the sec-
tion below.
1
M‘Kenzie v British Linen Co (1881) 6 App Cas 82 at 109, 111, 112; but see, in another
connection and in relation to ratification, Bank Melli Iran v Barclays Bank (Dominion,
Colonial and Overseas) [1951] 2 Lloyd’s Rep 367.
2
See 11th edn, p 248, citing M’Kenzie v British Linen Co (1881) 6 App Cas 82, and Scottish cases
cited there at 110; Ogilvie v West Australian Mortgage and Agency Corpn Ltd [1896] AC 257
at 270; William Ewing & Co v Dominion Bank [1904] AC 806; Leather Manufacturers’ Bank
v Morgan 117 US 96 (1886); cf Knights v Wiffen (1870) LR 5 QB 660; Brown v Westminster
Bank Ltd [1964] 2 Lloyd’s Rep 187. See also a dictum in Imperial Bank of Canada v Bank of
Hamilton [1903] AC 49 at 57, apparently treating as material the likelihood that the forger
could not have paid anything.
3
See para 28.16.
4
[2001] EWCA Civ 970, [2002] 3 WLR 64, [2002] 1 All ER 198, CA.
5
At paras 44–45.
6
Meaning the Court of Appeal in Avon County Council v Howlett [1983] 1 WLR 605.
7
The liability of a husband was removed by the Law Reform (Married Women and Tortfeasors)
Act 1935.
8
[1964] 2 Lloyd’s Rep 187.

(iii) Estoppel by customer’s express representation

23.11 Where the customer has expressly represented that the cheque or pay-
ment order was within the mandate, then the customer will be estopped from
contending that the bank’s payment was in breach of mandate. For example, in
Bank of England v Vagliano Bros1 the drawer’s name, as well as that of the
supposed payee, was the work of the forger, and the instruments were not really
bills at all. The House of Lords held that Vagliano, by writing an acceptance on
such instruments, represented to the bank that they were genuine bills and that,
this representation being untrue, the bank was entitled to be indemnified2.
Moreover, the inclusion of spurious instruments in letters of advice to the bank
of bills coming forward for payment was an act of the customer directly tending
to mislead the bank.
Lord Halsbury stated3:
‘I think that a representation made directly to the banker by the customer upon a
material point, untrue in fact (though believed by the person who made it to be true),
and on which the banker acted by paying money which he would not otherwise have
paid, ought also to be an answer to that prima facie case. If the bank acted upon such
a representation in good faith and according to the ordinary course of business, and
a loss has in consequence occurred which would not have happened if the represen-
tation had been true, I think that is a loss which the customer, and not the bank, ought
to bear4’.
In Brown v Westminster Bank Ltd5 the claimant expressly stated to the bank
manager that certain cheques were genuine. The submission that there could be
no estoppel in respect of the cheques paid before the representation was
rejected, and it was held that the customer was debarred from ‘setting up the
true facts in relation to the cheques which had already been forged’. The
estoppel will therefore apply to the cheques already paid by the paying bank
and to subsequent cheques drawn in the same manner.
1
[1891] AC 107.

11
23.11 Unauthorised Payments
2
See, especially per Lord Macnaghten at 158, 159; per Lord Halsbury at 114.
3
[1891] AC 107 at 114.
4
[1891] AC 107 at 123.
5
[1964] 2 Lloyd’s Rep 187, 203, followed in Tina Motors Pty Ltd v Australia and New Zealand
Banking Group Ltd [1977] VR 205; and see Arrow Transfer Co Ltd v Royal Bank of Canada,
Bank of Montreal and Canadian Imperial Bank of Commerce [1971] 3 WWR 241, 19 DLR
(3d) 420.

(iv) Unauthorised payments which discharge a customer’s debts

23.12 This topic is dealt with in para 23.3 above.

3 PAYMENT WHEN BANK ON NOTICE OF FRAUD

23.13 There are limited situations in which a bank ought not to effect a
payment instruction even where it is within the mandate. Two situations are
considered here.
The first is where the bank is on notice that an agent acting on behalf of a
customer is misusing his authority in order to misappropriate his princi-
pal’s money. The difficulty for the bank in that situation is that its duty of care
comes into potential conflict with its duty to honour payment instructions given
in accordance with the customer’s mandate.
The second is where the bank suspects that the payment it has been instructed
to make constitutes money laundering. There, the bank’s duty to honour its
payment instructions potentially conflicts with the relevant statutory provisions
designed to prevent and detect money laundering.

(a) Notice of an agent’s fraud

23.14 A paying bank owes a duty of care to its customer to refrain from
executing a payment order if and for so long as it is put on inquiry in the sense
that it has reasonable grounds (although not necessarily proof) for believing
that the order is an attempt to misappropriate its customer’s funds: Barclays
Bank plc v Quincecare Ltd1.
On the facts of Quincecare, the bank had transferred funds from a company
account to a solicitor’s account in the USA on the instructions of the com-
pany’s chairman. The instruction was within the mandate, but the chairman
was committing a fraud on the company and he absconded to spend the
proceeds of his fraud. The company alleged that the bank had made the transfer
in breach of its duty of care to its customer. Steyn J stated:
‘ . . . the law should guard against the facilitation of fraud, and exact a reasonable
standard of care in order to combat fraud and to protect bank customers and
innocent third parties. To hold that a bank is only liable when it has displayed a lack
of probity would be much too restrictive an approach. On the other hand, to impose
liability whenever speculation might suggest dishonesty would impose wholly im-
practical standards on bankers. In my judgment the sensible compromise, which
strikes a fair balance between competing considerations, is simply to say that a
banker must refrain from executing an order if and for as long as the banker is “put
on inquiry” in the sense that he has reasonable grounds (although not necessarily

12
 Payment When Bank on Notice of Fraud 23.15

proof) for believing that the order is an attempt to misappropriate the funds of the
company... And, the external standard of the likely perception of an ordinary prudent
banker is the governing one.’
Steyn J emphasised that the standard of care ought not to be confused with the
test for liability as a constructive trustee2. He observed that factors such as the
standing of the corporate customer, the bank’s knowledge of the signatory, the
amount involved, the need for a prompt transfer, the presence of unusual
features, and the scope and means for making reasonable inquiries, may be
relevant. He further observed that trust, not distrust, is the basis of a
bank’s dealings with its customers, and identified the following factor as one
which will often be decisive3.
In the result, the bank was held not to have breached its duty of care. The
chairman had been known to the bank for some time and was thought to be
reliable and dependable, and the payment instructions appeared to be expli-
cable by reference to recent transactions that the company had entered into.
1
[1992] 4 All ER 363, 376G applied in Verjee v CICB Bank and Trust Co (Channel Islands) Ltd
[2001] Lloyd’s Rep (Bank) [2001] Lloyd’s Rep (Bank) 2727 (Hart J), a case involving a personal
bank account.
2
Cf earlier cases in which the common law test had been mistakenly blurred with equitable
concepts of constructive trusteeship: see Selganor United Rubber Estates Ltd v Craddock (No
3) [1968] 1 WLR 1555, and Karak Rubber Co Ltd v Burden (No 2) [1972] 1 All ER 1210,
which are no longer regarded as good law.
3
[1992] 4 All ER 363, at 377b.

23.15 Quincecare was followed by Lipkin Gorman v Karpnale Ltd1 where the
scope of the paying bank’s duty of care was further considered by the Court of
Appeal. The facts were that a partner in a firm of solicitors had been entitled to
draw on the firm’s client account on his sole signature; the partner was a
compulsive gambler and stole monies from the client account in order to fund
his addiction. The Court of Appeal considered the standard of care to be
expected from the bank but found on the facts that the bank had not breached
the duty. May LJ stated2:
‘For my part I would hesitate to try to lay down any detailed rules in this context. In
the simple case of a current account in credit the basic obligation on the banker is to
pay his customer’s cheques in accordance with his mandate. Having in mind the vast
numbers of cheques which are presented for payment every day in this country,
whether over a bank counter or through the clearing, it is in my opinion only when
the circumstances are such that any reasonable cashier would hesitate to pay a cheque
at once and refer it to his or her superior, and when any reasonable superior would
hesitate to authorise payment without enquiry, that a cheque should not be paid
immediately upon presentation and such enquiry made. Further, it would I think be
only in rare circumstances, and only when any reasonable bank manager would do
the same, that a manager should instruct his staff to refer all or some of his
customer’s cheques to him before they are paid.’
The standard of care was then formulated by Parker LJ as follows3:
‘The question must be whether if a reasonable and honest banker knew of the
relevant facts he would have considered that there was a serious or real possibility
albeit not amounting to a probability that his customer might be being de-
frauded . . . . That, at least, the customer must establish. If it is established then in
my view a reasonable banker would be in breach of duty if he continued to pay
cheques without enquiry. He could not simply sit back and ignore the situation.’

13
23.15 Unauthorised Payments

More recently, Quincecare was applied in Singularis Holdings Ltd v Daiwa

Capital Markets Europe Ltd4. This is the first case in which the court has found
a financial institution to have acted in breach of the Quincecare duty. A
stockbroker had paid $204 million from the account of Singularis at the request
of Mr Al Sanea, Singularis’ director and only shareholder. At first instance, Rose
J held that the Quincecare duty ‘require[s] a bank to do something more than
accept at face value whatever strange documents and implausible explanations
are proffered by the officers of a company facing serious financial difficulties’
and found Daiwa liable because there were ‘obvious’ and ‘glaring’ signs that Mr
Al Sanea was perpetrating a fraud on the company; however, the judge reduced
the damages payable by the defendant by 25% on the grounds of contributory
negligence. On appeal, Daiwa argued that the claim was precluded (a) by the
fact that it was being brought on behalf of the creditors and (b) because Mr Al
Sanea’s fraud was attributable to the company, but both of those arguments
were rejected and the appeal was dismissed.
1
[1992] 4 All ER 409, [1989] 1 WLR 1340; overturned, on different grounds, by the House of
Lords [1991] 2 AC 548.
2
[1992] 4 All ER 409 at 421h, [1989] 1 WLR 1340 at 1356E. For a recognition of the scale of
cheque processing by modern banks, see also Honourable Society of the Middle Temple v
Lloyds Bank plc [1999] 1 All ER (Comm) 193.
3
[1992] 4 All ER 409 at 441g, [1989] 1 WLR 1340 at 1378B.
4
[2017] EWHC 257 (Ch).

(b) Suspicion of money laundering

23.16 This topic is covered in detail in Chapter 2 at para 2.5. In brief summary,
section 328 of the Proceeds of Crime Act 2002 creates an offence of becoming
concerned in an arrangement which the defendant ‘knows or suspects’ facili-
tates (by whatever means) the acquisition, retention, use or control of criminal
property by or on behalf of another person. Where a bank suspects that a
money laundering offence may be committed by complying with a payment
instruction, it must, in order to avoid committing an offence itself, make an
authorised disclosure under s 338 and seek consent under s 335 from the
National Crime Agency (formerly the Serious Organised Crime Agency,
‘SOCA’) before complying with the instruction.
Hence a bank in that situation faces conflicting obligations between its contrac-
tual duty to its customer to comply with instructions within the mandate, and
its statutory obligations to report potential money laundering.
Hamblen J’s solution in Shah v HSBC Private Bank (UK) Ltd1, was that there is
an implied term in the contract between a bank and its customer that the bank
is permitted to refuse to execute a payment instruction where it suspected that
the transaction constituted money laundering and it was awaiting the consent
of SOCA to perform the transaction. In that case, the bank took two days to
decide whether to seek consent, and the transfers were only made it received
confirmation from SOCA that it was entitled to proceed with the transaction.
The customers claimed that there was no reasonable basis for the bank
questioning the transaction and seeking consent and claimed damages resulting
from the delay in processing the payment. Hamblen J struck out the claim as
having no real prospect of success. He held that the test was whether the bank

14
 Payment When Bank on Notice of Fraud 23.16

had a genuine suspicion, that the test was subjective, and hence it was unnec-
essary for the suspicion to be supported by objectively reasonable grounds. He
also found that two days from receipt of the payment instruction was a
reasonable period of time, given that the instruction had to be reviewed at
different levels within the bank (operational, compliance, and by the
bank’s money laundering office).
1
[2012] EWHC 1855 (QB); [2013] Bus LR D38.

15
Chapter 24

THE PAYMENT SERVICE

REGULATIONS 2017

1 INTRODUCTION AND ENACTMENT 24.1

2 PAYMENT SERVICES – DEFINITION 24.2
3 KEY REGULATIONS: PARTS 6 AND 7 24.3
4 PART 6 of PSR 2017 24.8
(a) Single payment service contracts: Regulations 43 to 47 24.8
(b) Framework contracts: Regulations 48 to 54 24.10
5 PART 7 OF PSR 2017 24.11
(a) Consent and withdrawal of consent: Regulation 67 24.12
(b) Obligations on the payment service user: Regulation 72 24.13
(c) Obligations on the payment service provider: Regulation 73 24.14
(d) Notification: Regulation 74 24.15
(e) Evidence and the burden of proof: Regulation 75 24.16
(f) Payment service provider’s liability for unauthorised payment
transactions: Regulation 76 24.17
(g) Payer’s liability for unauthorised payment transactions: Regula-
tion 77 24.18
(h) Amounts transferred and amounts received: Regulation 84 24.19
(i) Application of Regulations 86 to 88: Regulation 85 24.20
(j) Payment transactions to a payment account: Regulation 86 24.21
(k) Incorrect Unique identifier: Regulation 90 24.22
(l) Non-execution or defective execution of payment transactions
initiated by the payer: Regulations 91 to 94 24.23
(m) Force Majeure: Regulation 96 24.24

1 INTRODUCTION AND ENACTMENT OF THE PAYMENT

SERVICE REGULATIONS 2017
24.1 On 13 August 2017, most of the Payment Service Regulations 2017 (‘PSR
2017’, SI 2017/752) came into force1. The PSR 2017 implement into English
law EU Directive (2015/2366/EU) on payment services in the internal market,
known as the Payment Service Directive II (PSD II).
The PSR 2017 replaced the former Payment Service Regulations 2009 (PSR
2009) which implemented the precursor to PSD II, namely EU Directive
(2007/64/EC), known as the Payment Service Directive (PSD I) (now replaced
by PSD II).
For litigation specialists, the most important Parts remain largely unchanged,
namely those Parts setting out the rights and obligations as between payment
services users and payment service providers in the execution of payment
instructions.
The changes in PSD II were primarily a response to rapid developments within
the payment services market, in particular:

1
24.1 The Payment Service Regulations 2017

(1) The increasing security risks for electronic payments due to the growing
technical complexity of electronic payments, the continuously growing
volumes of electronic payments worldwide and emerging types of pay-
ment services (Recital (7)).
(2) The need to cover new types of payment services which have emerged
since PSD I, such as payment initiation services. These are online services
which allow a customer to pay companies directly from their bank
account instead of using a debit or credit card via third parties such as
Visa or MasterCard. They access a user’s payment account to initiate a
transfer of funds on their behalf with the user’s consent and authentica-
tion2 (Recital (27)).
(3) The need to cover technological developments and a range of comple-
mentary services, such as account information services. Those services
provide the payment service user with aggregated online information on
one or more payment accounts held with one or more other payment
service providers and accessed via online interfaces of the account
servicing payment service provider. The payment service user is thus able
to have an overall view of its financial situation immediately at any given
moment (Recital 28).
1
The remainder came into force on 13 October 2017.
2
See the FCA’s explanatory note entitled: ‘Account information service (AIS) and payment
initiation service (PIS)’.

2 PAYMENT SERVICES – DEFINITION

24.2 As under PSR 2009, the PSR 2017 apply to ‘payment services’, defined in
Schedule 1 Part 1. The definition of payment services is wide-ranging and
broadly unchanged from PSR 2009. It encompasses the execution of direct
debits, standing orders and ‘payments executed through a payment card or
similar device’. The activities listed must be carried out as a regular occupation
or business activity.
It also covers:
‘(i) services enabling cash to be placed on a payment account and all of the
operation required for operating a payment account (1(a));
(ii) services enabling cash withdrawals from a payment account and all of the
operations required for operating a payment account (1(b));
(iii) money remittance (1(f));
(iv) payment initiation services (1(g)); and
(v) account information services (1(h))’.
As above, payment initiation services are described in Recital 27. In summary
they are, services provided by businesses that contract with online merchants to
enable customers to purchase goods or services through their online banking
facilities, instead of using a payment instrument or other payment method such
as Visa or MasterCard.
Account information services are online services to provide consolidated infor-
mation on one or more payment accounts held by the payment service user with
another payment service provider (PSR 2017, reg 2(1)). These include a suite of
programmes which present information about a user’s bank account in a
user-friendly manner. They are often referred to as account management

2
 Key Regulations: Parts 6 & 7 24.4

services and comprise, for example, an electronic ‘dashboard’ where users can
view information from various payment accounts in a single place and data
displays to provide users with a personalised comparison service for different
accounts and products. It also includes the provision of information to third
party providers such as financial advisors and credit reference agencies with the
user’s permission1.
Schedule 1, Part 2 contains activities that do not count as payment services.
These remained largely unchanged from PSR 2009. For example the following
do not constitute payment services:
‘(i) payment transactions executed wholly in cash and directly between the payer
and the payee, without any intermediary intervention (2)(a);
(ii) cash-to-cash currency exchange operations where the funds are not held on a
payment account (2)(f); and
(iii) cheques (2)(g)(i)).’

1
Description provided by the FCA, ‘Payment Services and Electronic Money – Our Approach
(July 2018) at p 17.

3 KEY REGULATIONS: PARTS 6 AND 7 OF PSR 2017

24.3 The key Parts of PSR 2017 are:
(1) Part 6, formerly Part 5 of the PSR 2009, concerns the information
requirements for payment services. In particular: information required
before and/or after execution of payment orders for single payment
service contracts1, framework contracts2, and individual payment trans-
actions3;
(2) Part 7, formerly Part 6 of the PSR 2009, concerns the ‘Rights and
Obligations in Relation to the Provision of Payment Services’, and is
largely concerned with the respective duties, rights and liability as
between payment service user and provider in relation to unauthorised
payment transactions.
1
SI 2017/752, regs 43–46.
2
SI 2017/752, regs 48–49.
3
SI 2017/752, regs 52–54.

24.4 The application of both Parts 6 and 7 has been expanded in the PSR 2017.
As before they apply to services provided from an establishment maintained by
a payment service provider or its agent in the UK (regs 40(1)(a) and 63(1)(a)).
More extensively than before, the Parts apply to services provided where the
payment services providers of payer and payee are located within the EEA
whether the currency of the transaction to which the service relates is a currency
of an EEA State or another currency (regs 40(1)(b)(i)–(ii) and 63(1)(b)(i)–(ii)).
However, where the currency is other than that of an EEA State, (i) the Parts
apply only in respect of those aspects of a transaction carried out in the EEA and
(ii) certain regulations do not apply, for example those concerning maximum
execution time (regs 40(2) and 63(2)).

3
24.4 The Payment Service Regulations 2017

Parts 6 and 7 also apply where only one payment service provider (either of
payer or payee) is located within the EEA (regs 40(1)(b)(iii) and 63(1)(b)(iii)).
However, in that case (i) those Parts apply only in respect of those aspects of a
transaction carried out in the EEA and (ii) certain regulations do not apply, such
as those concerning maximum execution time (regs 40(3) and 63(3)).
24.5 Unless the payment service user is a consumer, micro-enterprise1, or
charity the parties can contract out of any or all of certain regulations specified
in regulation 40(7) or 63(5)(a).
Under regs 42 and 65, the parties can also agree to disapply identified provi-
sions of the PSR 2017 for low value payment instruments.
1
A ‘micro-enterprise’ is defined in reg 2(1) as ‘an enterprise which, at the time at which the
contract for payment services is entered into, is an enterprise as defined in article 1 and
article 2(1) and (3) of the Annex to Recommendation 2003/361/EC’.

24.6 According to reg 148(1)(c) of the PSR 2017, a requirement imposed by

Parts 6 or 7 is actionable at the suit of a private person who suffers loss as a
result of the contravention, subject to the defences and other incidents applying
to actions for breach of statutory duty. A ‘private person’ is defined as an
individual (except where the individual suffers the loss in the course of provid-
ing payment services) and a person who is not an individual, except where the
person suffers the loss in question in the course of carrying on business of any
kind (reg 148(3)).1.
1
Authority on the question of whether a litigant is a ‘private person’ for the purposes of FSMA
2000, s 150 is likely to be applicable by way of analogy here – see Titan Steel Wheels v RBS
[2010] EWHC 211 (Comm); [2010] 2 Lloyd’s Rep 92 [44]–[76].

4 PART 6 OF PSR 2017

24.7 Part 6 of the PSR 2017 sets out the requirements to be met by payment
service providers in relation to the provision of information to users.
There are separate provisions for single payment service contracts (regs 43 to
47) and framework contracts (regs 48 to 54). There are also common provi-
sions including a prohibition on charging for certain information (regs 55 to
59).

(a) Single payment service contracts: Regulations 43 to 47

24.8 Before (or immediately after the execution of the payment transaction
using distance communication which does not enable the provision of
information) the payment service provider must provide or make the following
information available to the payment service user1:
Regulation 43(2):
(a) the information or unique identifier that has to be provided by the
payment service user in order for a payment order to be properly
initiated or executed;
(b) the maximum time in which the payment service will be executed;

4
 Part 6 of PSR 2017 24.8

(c) the charges payable by the payment service user to the user’s payment
service provider and, where applicable, a breakdown of such charges;
(d) where applicable, the actual or reference exchange rate to be applied to
the payment transaction; and
(e) such of the general information for framework contracts specified in
Schedule 4 as is relevant to the single payment service contract in
question.
Immediately after the receipt of payment order, the payment service provider
must provide or make the following information available to the payer:
Regulation 45(2):
(a) a reference enabling the payer to identify the payment transaction and,
where appropriate, information relating to the payee;
(b) the amount of the payment transaction in the currency used in the
payment order;
(c) the amount of any charges for the payment transaction payable by the
payer and, where applicable, a breakdown of the amounts of such
charges;
(d) where an exchange rate is used in the payment transaction and the actual
rate used in the payment transaction differs from the rate previously
provided in accordance with regulation 43(2)(d), the actual rate used or
a reference to it, and the amount of the payment transaction after that
currency conversion; and
(e) the date on which the payment service provider received the payment
order.
Immediately after the execution of the payment transaction, the payee’s pay-
ment service provider must provide or make the following information avail-
able to the payee:
Regulation 46(2):
(a) a reference enabling the payee to identify the payment transaction and,
where appropriate, the payer and any information transferred with the
payment transaction;
(b) the amount of the payment transaction in the currency in which the
funds are at the payee’s disposal;
(c) the amount of any charges for the payment transaction payable by the
payer and, where applicable, a breakdown of the amounts of such
charges; and
(d) the credit value date.
Regulations 43 and 44 govern the information which must be provided by
payment initiation services. For example under regulation 44(1) immediately
after the initiation of the payment order the payment initiation service provider
must make available to the payer confirmation of the successful initiation of the
payment order (44(1)(a)), a reference enabling the payer and the payee, to
identify the payment transaction (44(1)(b)) and the amount of the payment
transaction (44(1)(c)).
1
A payment service user means a person when making use of a payment service in the capacity
of payer, payee, or both (per PSR 2017, reg 2(1)).

5
24.9 The Payment Service Regulations 2017

24.9 Regulation 47 provides the only exception to the above information

requirements. Where a payment order for a single payment transaction is
transmitted by way of a payment instrument issued under a framework con-
tract, in respect of that single payment transaction the payment service provider
need not provide information which has been or will be provided by another
payment service provider in respect of the framework contract.

(b) Framework contracts: Regulations 48 to 54

24.10 A ‘framework contract’ is defined in reg 2(1) of the PSR 2017 as:
‘a contract for payment services which governs the future execution of individual and
successive payment transactions and which may contain the obligation and condi-
tions for setting up a payment account.’
Schedule 4 to the PSR 2017 sets out the information that must be given to the
payment service user. This must be provided:
(1) ‘in good time’ before the payment service user is bound by the frame-
work contract (or immediately after the execution of the payment
transaction, if using distance communication which does not enable the
provision of information) (reg 48). There is no guidance in the Regula-
tions as to what is meant by ‘in good time’; and
(2) during the contractual relationship upon request of the payment service
user (reg 49).
Regulation 50 covers changes to the framework contract:
(1) A payment service provider must give a minimum of two months’ notice
of any proposed changes to the terms of the framework contract or the
information specified in Schedule 4 (reg 50(1)). A framework contract
can provide for such proposed changes to be made unilaterally by it if the
user does not notify the payment service provider to the contrary prior to
the proposed date of the changes (reg 50(2)), but only if a payment
service provider informs the payment service user that it will be deemed
to have accepted the changes and that it has the right to terminate the
framework contract immediately without charge before the proposed
dated of their entry into force (reg 50(3)).
(2) Changes to the interest or exchange rates can be applied immediately
and without notice if the framework terms so provide (and they were
given to the service user in accordance with this Part of the Regulations)
or if such changes are more favourable to the user (reg 50(4)).
A framework contract can be terminated by the payment service user at any
time (ie without notice) unless the terms of the contract provide for (a maxi-
mum of) one month’s notice (reg 51(1)).
The payment service provider may terminate a framework contract concluded
for an indefinite period by giving at least two months’ notice, if the contract so
provides (reg 51(4)).

6
 Part 7 of PSR 2017 24.14

5 PART 7 OF PSR 2017

24.11 Part 7 of the Regulations provides for the rights and obligations of
parties relating to the provision of payment services. As before, it makes
provision for matters including consent to payment transactions (reg 67),
unauthorised or incorrectly executed payment transactions, liability for unau-
thorised payment transactions (regs 74 to 77), refunds, execution of payment
transactions, execution time and the liability of payment service providers
(regs 79 to 96). It now makes provision for access to payment accounts for
payment initiation services and account information services.

(a) Consent and withdrawal of consent: Regulation 67

24.12 Under the regulations, a payment transaction is ‘authorised by the payer’

if consent has been given for the execution of a single payment or a series of
payments either before or (if agreed) after the transaction(s) in a form and in
accordance with a procedure agreed between the payer and the payment service
provider (reg 67(1) and (2)).
The payer’s consent can be withdrawn at any time before the point at which the
payment order can no longer be revoked (reg 67(3)) subject to regulation 83,
which sets out the general rule (with certain exceptions) that a user may not
revoke an order after it has been received by the payer’s payment service
provider.

(b) Obligations on the payment service user: Regulation 72

24.13 The payment service user must use the payment instrument1 in accor-
dance with the terms and conditions governing its use and notify the payment
service provider in the agreed manner without undue delay if it becomes aware
of any loss, theft, misappropriation or unauthorised use of the payment
instrument (reg 72(1)). It must also on receipt of a payment instrument take all
reasonable steps to keep its personalised security features safe (reg 72(3)).
1
A ‘payment instrument’ means any personalised device, or personalised set of procedures
agreed between the payment service user and the payment service provider, used by the payment
service user in order to initiate a payment order (PSR 2017, reg 2(1)). Examples include
credit/debit cards. However, the same term in the PSR 2009 was also considered to include a
personalised payment procedure such as payment arrangements by way of telephone call with
password or an online instruction depending on the service being provided (see further
the Court of Justice of the European Union decision in T-Mobile Austria GmbH v Verein
für Konsumenteninformation, 2013, C-616/11).

(c) Obligations on the payment service provider: Regulation 73

24.14 Under regulation 58(1), the payment service provider must ensure the
safety features of the payment instrument are not accessible to persons other
than the payment service user; it cannot send an unsolicited payment instru-
ment (unless it is a replacement); it must ensure that appropriate means are
available at all times to enable the payment service user to notify it of any loss
or unauthorised use of a payment instrument; it must provide to the payment
service user at any time for up to 18 months after any such notification with the

7
24.14 The Payment Service Regulations 2017

means to prove that such notification was made; and it must prevent the
payment instrument from being used once it receives such a notification.
Pursuant to regulation 73(2) the payment service provider bears the risk of
sending a payment instrument or any of its personalised security features to the
payment service user.

(d) Notification: Regulation 74

24.15 Under regulation 59(1) a payment service user is entitled to redress (as
set out in regs 76, and 91–94 see further below) if it notifies the payment service
provider without any undue delay and in any event within 13 months after the
debit date on becoming aware of any unauthorised or incorrectly executed
payment transaction.
If the payment service provider has failed in relation to the information
provision requirements in Part 6 of the PSR 2017, the payment service user is
entitled to redress regardless of the fact that it did not notify the payment service
provider either without any undue delay or within 13 months of the debit date
(reg 74(2)).

(e) Evidence and the burden of proof: Regulation 75

24.16 Regulation 75 provides that where the payment service user denies
having authorised an executed payment transaction or claims that a payment
transaction was incorrectly executed, the burden of proof is on the payment
service provider to prove that such transaction was authenticated, accurately
recorded and entered into its accounts and that there was no technical failure or
other deficiency.

(f) Payment service provider’s liability for unauthorised payment

transactions: Regulation 76

24.17 This regulation requires the payment service provider to refund the
amount of an unauthorised payment to the payer and if applicable to restore the
debited payment account to the state it would have been in if the unauthorised
payment not taken place.
It has been expanded since its predecessor, regulation 61 of the PSR 2009, to
stipulate that the payment service provider must provide the refund as soon as
practicable and in any event no later than the end of the business day following
the day on which it becomes aware of the unauthorised transaction (reg 76(2)).
However, reg 76(2) does not apply where the payment service provider has
reasonable grounds to suspect fraudulent behaviour by the payment service
user and notifies one of the following individuals of those grounds in writing
(persons listed in s 333A(2) of the Proceeds of Crime Act 2002):
(a) a police constable,
(b) an officer of the Revenue and Customs,
(c) a person appointed as the ‘nominated officer’ as required by the Money
Laundering Regulations1,

8
 Part 7 of PSR 2017 24.20

(d) a National Crime Agency officer authorised for the purposes of this Part
by the Director General of that Agency.
1
For more on nominated officers see ML 7.1 of the FCA Handbook.

(g) Payer’s liability for unauthorised payment transactions: Regulation 77

24.18 The payer is only liable for all losses incurred in respect of an unautho-
rised payment transaction where the payer (i) has acted fraudulently
(reg 77(3)(a)) or (ii) with intent or gross negligence failed to comply with
regulation 72, namely the payment service user’s obligations regarding payment
instrument and personalised security credentials, as to which see above
(reg 77(3)(b)).
Outside those circumstances, where a payment service provider is liable under
regulation 76(1), it may require that the payer is liable up to a maximum of £35
for any losses incurred in respect of unauthorised payment transactions arising
from the use of a lost or stolen payment instrument, or from the misappropria-
tion of a payment instrument (reg 77(1)). However, the payer is not liable where
the loss, theft or misappropriation was not detectable prior to the payment nor
where the loss was caused by acts or omission of an employee, agent or branch
of a payment service provider (reg 77(2)).
In Winnetka Trading Corporation v Julius Baer International1 Roth J com-
mented (obiter) at paragraph 16 that the term ‘gross negligence’ did not have a
statutory definition in the previous PSR 2009 (as remains the case under the
PSR 2017). He made this observation after noting that gross negligence is not
the same as subjective recklessness, though it may come close to it, referring to
A v Bottrill2.
1
[2011] EWHC 2030 (Ch).
2
[2002] UKPC 44 at 76 and 79.

(h) Amounts transferred and amounts received: Regulation 84

24.19 Pursuant to this provision, the payment service providers of the payer
and the payee must ensure that the full amount of the payment transaction is
transferred without charges being applied.
If charges are applied then the payer’s payment service provider is responsible
for replacing the amount charged when the payment was initiated by the payer
and the payee’s payment service provider is responsible if the payment was
initiated by the payee.
Provided that the full amount of the payment and charges are stated to the
payee, he and his payment service provider may agree for the latter to deduct its
charges before crediting the payment to the payee’s account.

(i) Application of Regulations 86 to 88: Regulation 85

24.20 The provisions of the Regulations dealing with execution time and value
dates of payment transactions (regs 86 to 88) necessarily apply to transactions

9
24.20 The Payment Service Regulations 2017

in euro, sterling (if executed wholly within the UK) and involving only one
currency conversion between euro and sterling if the currency conversion is
carried out in the UK and if cross-border only if the transfer takes place in euro
(reg 85(1)).
For any other payment transactions, the parties can agree that regulations 86 to
88 will not apply (reg 85(2)).

(j) Payment transactions to a payment account: Regulation 86

24.21 This provision deals with the time frame in which the payer’s payment
service provider must ensure payments are made. Subject to the exceptions in
regulations 86(2) and (3), the payment service provider must ensure that the
amount of the payment transaction is credited to the payee’s payment service
provider’s account by the end of the business day following the time of receipt
of the payment order (reg 86(1)). The exceptions:
(1) Paper payment orders: payment must be made by the second business
day following the receipt of the payment order (reg 86(2)).
(2) Where a payment transaction does not fall within paragraphs (a) to (c)
of regulation 85(1) but is to be executed wholly within the EEA, the
payer’s payment service provider must ensure that the amount of the
payment transaction is credited to the payee’s payment service provid-
er’s account by the end of the fourth business day following the time of
receipt of the payment order (reg 86(3)).
(2) To fall outside paragraphs (a) to (c) of regulation 85(1) it must be a
payment transaction (1) not in euro, (2) executed in part outside the UK
(or executed in the UK in a non-sterling currency), and (3) not involving
a currency conversion between the euro and sterling where the currency
conversion is carried out in the UK and in a cross border payment
transaction, the cross-border transfers takes places in euro.

(k) Incorrect unique identifier: Regulation 90

24.22 The unique identifier is the code or number for the other party to a
payment or for that party’s account, as specified by the payment services
provider to the user (reg 2). If a payment is executed in accordance with the
payee’s unique identifier it is deemed correctly executed with respect to him.
Conversely, where the unique identifier provided by the user for a transaction is
incorrect, the payment service provider is not liable under regulations 91 or 92
for non-execution or defective execution.
However, the payment service provider is nevertheless under an obligation to
make reasonable efforts to recover the funds (reg 90(2)(a)) and, if it has been
agreed in the relevant framework contract, may charge the payment service user
for any such recovery (reg 90(2)(b)).
It is important to note that even if the payment service user provides further
information (ie additional to that specified in regulation 43(2)(a) or Schedule 4
paragraph 2(b)) such as the name of the recipient, the payment service provider
is still only liable for the execution of the payment transaction in accordance
with the unique identifier provided (reg 90(3)).

10
 Part 7 of PSR 2017 24.23

(l) Non-execution or defective execution of payment transactions initiated

by the payer: Regulations 91 to 94

24.23 These regulations apply where the payment order is initiated by the
payer and payee respectively. They render the payer’s payment service provider
liable to the payer for the correct execution of the payment transaction unless it
can prove to the payer that the payee’s payment service provider received the
amount of the payment transaction.
As noted in the FCA guidance ‘Payment Services and Electronic Money – Our
Approach’ at 8.299, the effect of this provision is that if, due to the error of the
payer’s payment service provider, the funds have been sent to the wrong place or
the wrong amount has been sent, as far as the payer is concerned the whole
transaction is cancelled. The payment service provider will either have to stand
the loss or seek reimbursement from the other payment service provider1.
The wording of the regulation, requiring the payment service provider to prove
the matter ‘to the payer’, may seem odd, in that the payer judges the question of
the payment service provider’s liability. However the proof in question will be
evidence of receipt and as such the payer will not have any discretion – it will
likely be a binary question of whether any proof has been provided, ie in any
dispute where the payer denies that its payment service provider proved to its
satisfaction that the correct amount was received by the payee’s payment service
provider, the court will likely identify whether proof has been provided to the
payer.
This position is essentially unchanged from the PSR 2009 where the relevant
regulations were regs 75–76. However, a new regulation relates specifically to
payment orders initiated by the payer through a payment initiation service. The
account servicing payment service provider must refund to the payer the
amount of the non-executed or defective payment transaction and, where
applicable, restore the debited payment account to the state in which it would
have been had the defective payment transaction not taken place (reg 93(2)).
However, on request, the payment initiation service provider must immediately
compensate the account servicing payment service provider for the losses
incurred as a result of the refund where the payment initiation service provider
does not prove to the account servicing payment provider that:
(a) the payment order was received by the payer’s account servicing pay-
ment service provider; and
(b) within the payment initiation service provider’s sphere of influence the
payment transaction was authenticated, accurately recorded and not
affected by a technical breakdown or other deficiency linked to the
non-execution, defective or late execution of the transaction.
It should be noted that pursuant to regulation 95, where the liability of a
payment service provider (‘the first provider’) under regs 76, 91, 92 or 93 is
attributable to another payment service provider or an intermediary, the other
payment service provider or intermediary must compensate the first provider
for any losses incurred or sums paid pursuant to those regulations.

11
24.23 The Payment Service Regulations 2017

Regulation 94 makes the payment service provider liable to its user for (a) any
charges for which the payment service user is responsible and (b) any interest
which the payment service user must pay; as a consequence of the non-
execution or defective execution of the payment transaction.
1
See www.fca.org.uk/publication/finalised-guidance/fca-approach-payment-services-electronic-
money-2017.pdf.

(m) Force Majeure: Regulation 96

24.24 There is no liability for a contravention of a requirement imposed on it
under Part 7 of the Regulations where the contravention ‘is due to abnormal
and unforeseeable circumstances beyond the person’s control, the consequences
of which would have been unavoidable despite all efforts to the contrary’. This
is a relatively high test, in particular it is noted that the consequences of the
contravention have to be unavoidable despite all efforts to the contrary – and
not just reasonable efforts.

12
Chapter 25

ELECTRONIC PAYMENT SYSTEMS

1 NON-CONSUMER-ACTIVATED EFT SYSTEMS 25.2

(a) BACS 25.3
(b) CHAPS 25.18
2 CONSUMER-ACTIVATED EFT SYSTEMS 25.30
(a) Credit cards 25.31
(b) Electronic funds transfer at point of sale (EFTPOS) debit cards 25.35
(c) ATM cards 25.37
(d) Electronic money systems 25.40
(e) Internet payment systems 25.46
3 INTERNATIONAL FUNDS TRANSFERS 25.53
(a) Onshore and offshore international transfers 25.55
(b) SWIFT 25.60
(c) TARGET2 25.66
(d) EBA euro clearing system (EURO 1) 25.72

25.1 This chapter considers the two categories of electronic funds transfer
(‘EFT’) systems: non-consumer-activated systems and consumer-activated sys-
tems used in the United Kingdom. A non-consumer-activated EFT system is, as
its name suggests, designed to be used by banks and certain other financial
institutions for inter-bank transfer of funds, rather than by consumers (accoun-
tholders). Consumer-activated EFT systems provide consumers with quick,
easy and direct access to their funds, and examples include the use of cash
dispensers, credit and debit cards and electronic money schemes.
This chapter also examines the international aspects of electronic funds trans-
fers, in particular the operation of TARGET2 and Euro1. The use of SWIFT is
also considered below.

1 NON-CONSUMER-ACTIVATED EFT SYSTEMS

25.2 The two major inter-bank EFT systems in the UK are the services operated
by VocaLink and BACS Payment Schemes Ltd (‘BACS’)1 and the Clearing
House Automated Payments System (‘CHAPS’). CHAPS is particularly signifi-
cant as it is the UK’s large value transfer system operating in both sterling and
euro. CHAPS also gives its member banks access to TARGET, which is the
gross-settlement system designed by the European System of Central Banks
(‘ESCB’) for cross-border euro transfers2. Cross-border inter-bank euro trans-
fers can also be made using a variety of other means, including the euro clearing
and settlement service (‘EURO1’), provided by the Euro Banking Association3.
All these non-consumer activated EFT systems are reviewed in this section of
the chapter.
1
VocaLink (formerly Voca Ltd which was originally BACS Ltd), is responsible for the physical
processing of payments and the maintenance of the payment network. BACS Payment
Schemes Ltd is membership-based and manages the scheme.

1
25.2 Electronic Payment Systems
2
Other banks and financial institutions may use member banks as their agents to gain access to
TARGET2.
3
EURO1 is a same-day value, end-of-day net settlement system. The EBA also operates a
low-value, cross-border payment system called STEP.

(a) BACS
25.3 BACS (Bankers Automated Clearing Service) is an automated clearing
house which provides bulk electronic clearing for credit and debit transfers such
as standing orders, Direct Credit and Direct Debit payments. Typically, BACS
deals with high volume, but low value, transfers of funds. It is commonly used
for the payment of monthly salaries and the collection of regular payments, eg
utility bills, insurance premiums and mortgage repayments. It is the largest
payment system in the UK by volume of transactions. In 2017, 6.34 billion UK
payments were made through BACS with a total combined value of £4.9
trillion. A new record was set on 30 June 2017, with 111.7 million transactions
processed in a single day.
25.4 There are currently 21 BACS participants1. Each participant has direct
access to the BACS system and will supply BACS with credit and debit
instructions as computer data (‘input data’) for processing. Members may also
sponsor their non-personal customers (ie non-member banks and building
societies and corporate customers) to submit their own input data to BACS.
However, sponsored customers remain the responsibility of their sponsor and
any transfer they initiate must still be processed with reference to the sponsoring
member. The rules governing the operation of the system are set out in the
Payment System Rules (current version dated 10 June 2016).
1
A list of member banks and building societies, and also of BACS affiliates, can be found posted
on the BACS website (www.bacs.co.uk).

25.5 Participants in BACS do not settle on a real-time gross basis but periodi-
cally on a net basis, in batches. To reduce the risk of settlement failure that this
involves, in 2015 BACS introduced prefunding1. This requires Banks to hold
funds in a segregated account in the Bank of England in an amount equal to the
maximum of their net obligations in the system.
1
Bank of England, ‘A New RTGS Service for the Untied Kingdom’, 2016, 10 – and see Principles
of Banking Law 3rd edn, 2017 (Cranston, Avgouleas, Zweiten, Hare, van Sante) p 351.

(i) The BACS payment cycle

25.6 The BACS payment cycle takes three working days, although most
payments are now completed using the faster payments service (as to which see
para 25.12 below).
On the three working day cycle, input data submitted by sponsored customers
must be received by BACS at its main processing centre by 10.30pm on day one
of the payment cycle in respect of payments due on day three. Member banks
and building societies can submit input data to BACS up to midnight on day one
of the cycle. However, BACS has a data storage facility so that non-urgent credit

2
 Non-Consumer-Activated EFT Systems 25.12

and debit instructions can be dispatched to BACS by members and their

sponsored customers up to 71 days in advance of the required payment date.
25.7 BACS users submit input data to BACS using an internet-based payment
service known as BACSTEL-IP. BACSTEL-IP provides a secure channel for the
submission of input data to BACS by its members and sponsored customers and
enables them to receive reports electronically as well as maintain their informa-
tion online.
25.8 BACS processes the input data overnight between days one and two.
Input data is validated and recorded by BACS and an input report is sent to the
user. BACS then sorts the data and produces a series of credit and debit
instructions (‘output data’) for each member bank and building society. BACS
is a self-balancing system in that every instruction to credit an account must be
accompanied by an instruction to make a corresponding debit to the account
from which payment is to be made. Individual output files are produced
by BACS for each member bank and building society. These record the output
data relevant to the accounts of the customers of that member. BACS completes
processing by 6am on day two, by which time all the output data has been
dispatched to member banks and building societies.
25.9 On day two the member banks and building societies process the output
data received from BACS and ensure that credits and debits are made to
customers’ accounts by the opening of business at 9.30am on day three. The
inter-bank obligations that arise in BACS are settled at the Bank of England on
a multilateral net basis on day three. This occurs at 9.30 am each day by posting
multilateral net amounts directly to settlement members’ settlement accounts
using the CHAPS real-time gross settlement processor1.
1
Source: www.bacs.co.uk (April 2018).

25.10 BACS is an immediate payment system in the sense that debiting of the
payer’s account and crediting of the payee’s account occur simultaneously at the
start of business on day three of the payment cycle. But BACS is not a true
immediate electronic funds transfer system as the order to pay, or collect, must
be made at least two days before the payment date. In fact the BACS payment
cycle is no quicker than the ordinary cheque clearing process, which also takes
three working days. However payments made utilising the Faster Payments
Service are same day payments.
25.11 A BACS service for euro-denominated credits became operational in
1999. Users are able to input separate files of euro and sterling credit items.
Items remain in their original currency as they pass through the BACS system.
The receiving bank makes the necessary conversion where the receiving account
is held in a different currency.

(ii) Faster payments

25.12 The Faster Payments Service enables electronic payments, typically

initiated via the internet or telephone to be processed within hours. The Faster
Payments system is operated by Faster Payments Scheme Limited which is a
not-for-profit company owned and operated by its ten current banks and
building society members.

3
25.12 Electronic Payment Systems

Faster Payments are generally high volume small value payments. They include
bills, supplier payments and online transfers. They are restricted in size to a
maximum of £250,000 but individual banks may impose a lower transaction
limit. Since the launch of Faster Payments in 2008, more than 5 billion
payments have been made through the scheme.
25.13 The payment cycle in Faster Payments is as follows. When a customer
makes a Faster Payment, he instructs his bank through mobile phone, online or
by telephone to make a same day payment to an account holder (for example)
at another bank, providing the sort code, account number, account name and
any reference. The paying bank carries out its normal checks to verify that he is
the genuine customer, that the instruction is genuine (which may include further
fraud protection checks) and that the payer’s account has sufficient funds. The
paying bank then submits the transaction through the Faster Payments Service.
From this point the transaction cannot be cancelled.
The Faster Payments Service sends the payment instruction to the receiving
bank, after checking that all the relevant details are included and properly
formatted, and then debits the paying/sending bank. Once the receiving bank
has received the transaction data, it checks that the account number is valid (it
should be noted that the receiving bank does not verify that the account name
and number match) and then sends a message back to the Faster Payments
Service indicating whether it has accepted or rejected the payment. If it has
accepted payment, the Faster Payments Service credits the receiving bank with
the funds and sends a message to the paying bank to let them know that the
transaction has been made successfully. Each paying bank decides how this
confirmation will be made available to its own customer. In all cases, once the
payment has been made, a confirmation message will be sent between banks.
The receiving bank will credit the payee’s account.

(iii) The Direct Debit Scheme

25.14 The Direct Debit scheme facilitates the prompt payment of amounts due
under commercial and consumer contracts by enabling the supplier, dealer, or
other creditor to obtain payment of amounts due to him by issuing a direct
demand for payment to the debtor’s bank. In terms of volume of payments, it is
the most popular form of cashless payment in the UK1. The scheme was
launched in 1967. It is currently administered by BACS and is governed by its
own set of rules2.
Conceptually direct debiting can be used for the settlement of any type of
payment. In the majority of cases, however, direct debiting is used to arrange for
the payment of varying amounts falling due at regular or irregular intervals,
such as amounts payable in respect of electricity bills or for the supply of
different quantities of a commodity ordered by a purchaser from a supplier
from time to time as old stock is used up.
1
In 2017 BACS handled over 4.2 billion direct debit transactions, although the sums paid by
direct debit tend to be relatively small when compared to the value of payments that pass
through CHAPS (source: www.bacs.co.uk processing statistics).
2
The Service User’s Guide and Rules to the Direct Debit Scheme (updated at regular intervals).

4
 Non-Consumer-Activated EFT Systems 25.18

25.15 The procedure involves extra paperwork at the initial stages but saves
time thereafter. The creditor asks the debtor to sign a mandate executed on a
standard form1. The form is returned to the creditor, which either sends it to the
debtor’s bank or, where the Automated Direct Debit Instruction Service
(‘AUDDIS’) is used, kept by the creditor and details of the mandate are
transmitted electronically to the debtor’s bank2. The form authorises the
debtor’s bank to pay amounts demanded by the creditor; there is no need to
require on each occasion the confirmation of the indebtedness by the debtor.
Although intimation of the sum payable is in the hands of the creditor, the
mandate remains that of the debtor and the direct debit does not operate so as
to vest in the creditor any rights of the debtor against its own bank3.
1
There is also a Paperless Direct Debit service, which enables direct debits to be set up over the
telephone or via the internet.
2
The creditor’s failure properly to implement a correctly completed direct debit mandate might
constitute a breach of an implied term of the underlying contract between them, or even a
breach of a duty of care in tort owed by the creditor to the debtor: Weldon v GRE Linked Life
Assurance Ltd [2000] 2 All ER (Comm) 914 (Nelson J).
3
Mercedes-Benz Finance Ltd v Clydesdale Bank plc [1997] CLC 81, Ct of Sess (OH).

25.16 All mandate forms used under the scheme must be variable in terms of
amount, date and frequency; as such, neither the amount of the debit, its date
nor its frequency is specified on the form. However, the creditor must give the
debtor at least ten working days’ notice (unless a shorter period of notice has
been agreed) of the amount and date of the first direct debit and of any
subsequent change to the amount and date of the direct debit. The creditor must
then collect the direct debit payment on or within three working days after the
specified due date as advised to the debtor; failure to do so results in the creditor
having to give the debtor further notice of the new collection date.
25.17 It is obvious that direct debiting is open to abuses. There are, however,
control measures in operation which reduce this risk. First, a firm that wants to
collect payment by direct debit must be sponsored by one of the banks and
building societies which operate the scheme. Sponsorship is dependent on the
sponsor being satisfied as to a number of factors, including the financial status
and administrative capability of the firm. Secondly, before being accepted into
the scheme, the firm must provide all banks and building societies operating the
scheme with an indemnity against any loss, including consequential loss, that
may be caused to them, unless the loss was due to the bank or building
society’s own fault. Under the terms of the direct debit scheme, the debtor is
guaranteed a full and immediate refund from his bank should there be an error
in the direct debiting process by the creditor or the debtor’s own bank, eg where
a payment was made after the debtor cancelled his authority, where more than
the notified sum was debited from the account, or the debit was made on the
wrong date. Where the error is due to the fault of the creditor, the debtor’s bank
can claim a refund from the creditor under the terms of its indemnity.

(b) CHAPS
(i) Basic aspects

25.18 The Clearing House Automated Payment System, better known as

CHAPS, started operation as a same-day value electronic sterling credit transfer

5
25.18 Electronic Payment Systems

system in 1984. Unlike BACS, which is a net settlement system, CHAPS is a

real-time gross settlement (RTGS) payment system1. Payments are settled on an
individual basis in real time across the relevant members’ settlement accounts,
in the respective currency, held at the Bank of England2.
1
On 22 April 1996 CHAPS changed from being a same day system subject to end of day
multilateral net settlement to become one of real time gross settlement (‘RTGS’).
2
In January 1999, CHAPS Euro, a same-day value electronic credit transfer system run by the
CHAPS Clearing Co Ltd, which provided a high-value clearing for euro-denominated payments
running over SWIFT came into operation. CHAPS Euro closed on 16 May 2008 just prior to
TARGET2 going live.

25.19 A CHAPS Reference Manual1 provides an Overview (Chapter I),

CHAPS Rules (Chapter II), CHAPS Participation Requirements (Chapter III)
and CHAPS Procedures (Chapter IV). At date of writing the current version of
the CHAPS Reference Manual is 25 May 2018. Participation in CHAPS is
governed by the CHAPS Rules. To be eligible to become and remain a Partici-
pant, an entity must, per CHAPS Rule 2.1:
(i) hold a sterling settlement account at the Bank of England which the
Bank of England has agreed may be used for the purpose of settling
CHAPS payment obligations;
(ii) be a participant which falls within the definition of ‘participant’ in the
Financial Markets and Insolvency (Settlement Finality) Regulations
1999;
(iii) have the ability to comply on a continuous basis with the technical and
operational requirements of the CHAPS System;
(iv) if required to do so by the Bank, pay a single entrance fee based on the
cost of technical implementation; and if required to do so by the Bank,
provide a legal opinion regarding, amongst other things, the enti-
ty’s capacity to execute and be bound by the CHAPS Specifications and
its agreement(s) with the Bank relating to participation in the CHAPS
System.
1
Available at www.bankofengland.co.uk.

25.20 CHAPS is the dominant cashless payment system, in terms of value,

operating in the UK. The total value transmitted in CHAPS in 2017 grew by
11.3% to a record £84.1 trillion, on average £334 billion daily. CHAPS
represents 0.5% of UK total payment volumes but 93% of total sterling
payment values1.
The system is frequently used by banks to move money around the financial
system and for high-value sterling transfers, eg foreign exchange and money
market settlement, business-to-business payments, and solicitors or licensed
conveyancers following house purchases.
1
See https://www.bankofengland.co.uk/payment-and-settlement/chaps as at April 2018.

25.21 There are currently 26 direct participants in CHAPS. They are all banks,
including the Bank of England which is a member as of right pursuant to the
CHAPS Rules1. Unlike BACS, CHAPS does not operate a central clearing
system. CHAPS settlement members utilise their SWIFT interfaces enabling

6
 Non-Consumer-Activated EFT Systems 25.25

each settlement member to communicate directly with other settlement mem-

bers over the SWIFT network. Thus, a settlement member sends credit transfer
messages to, and receives similar messages from, other settlement members via
its SWIFT interface.
1
See Annual Summary of CHAPS Payment statistics 2017.

25.22 Financial institutions which are not direct participants can access the
system indirectly and make their payments via direct participants. This is
known as agency or correspondent banking. The direct participants enter into
separate contractual agreements with the non-direct participant (eg their cor-
porate or institutional customers). These non-direct participants are treated like
branches of the direct participant and may be linked, via a computer system or
an existing SWIFT connection, to the direct participant’s payment processing
system. Once settled, payments are irrevocable.
25.23 Each direct participant has its own internal system which enables its
branches to access its payment processing system. Customers may use a variety
of means to instruct their branch to issue a CHAPS payment message, eg by
telephone, telex or in writing. It may be expected that the remitting branch will
be provided with the account details of the Ordering Customer, the Beneficiary
Customer name, account number and details of the bank and branch where the
funds are to be transferred.
25.24 Incoming payment instructions given by overseas banks to their UK
correspondents will usually be received over SWIFT. Where the UK correspon-
dent is a CHAPS settlement member, it will normally debit the account of the
overseas sender and then use CHAPS in order to make payment to the
beneficiary’s bank or its correspondent.
Each CHAPS payment message is settled across members’ accounts at the Bank
of England before full payment data is sent to the receiving bank1. The SWIFT
Y-Copy service ensures that a settlement request derived from each payment
message received by the CHAPS Closed User Group is sent initially to the Bank
of England. If there are sufficient funds in the sending bank’s account2, the Bank
of England settles the transaction by debiting the sending bank’s account and
crediting the receiving bank’s account in the same amount. Thereafter a form of
confirmation is added to the full message stored by the Y-Copy service. On
receipt of this confirmation, the full payment message is automatically released
to the receiving bank. The receiving bank receives the full payment message and
confirmation and, once authenticated, it immediately transmits a positive user
acknowledgement (or ‘UAK’) back to the sending bank. The UAK confirms safe
receipt and acceptance of the output message.
1
This may be the beneficiary’s bank itself, but where the beneficiary’s bank is not a settlement
member the receiving bank will be a settlement member employed by the beneficiary’s bank to
act as its agent.
2
The sending bank may be the originator’s bank or some other bank acting as a correspondent
of the originator’s bank.

25.25 For each payment message, settlement takes place in real time against
funds in the sending bank’s account. To ensure that this process works smoothly
settlement banks prime their settlement accounts with liquidity prior to the start
of day. The Bank of England facilitates this process by providing the CHAPS

7
25.25 Electronic Payment Systems

banks with intra-day liquidity so that they can maintain an even flow of funds
through the system. This is achieved by purchasing from the settlement banks
certain high-quality assets under sale and repurchase agreements. In the un-
likely event of gridlock1, a circles processing facility has been developed which
allows the simultaneous settlement of payments queued on behalf of different
banks which would largely set off each other.
1
In a gross settlement system gridlock can occur either when one or more direct members defer
the performance of their settlements until such time as they have received sufficient credits from
their bilateral counterparts within the system, or sufficient overall liquidity is not made
available, thereby preventing the system from starting or continuing to work. See M Giovanoli,
‘Legal Issues Regarding Payment and Netting Systems’, in J Norton, C Reed and I Walden (eds),
Cross-Border Electronic Banking – Challenges and Opportunities (2nd edn, 2000, LLP), p 224.
However as this predates the Payment Services Regulations 2009, the content may be somewhat
historic.

25.26 The CHAPS Rules provide that payments made through CHAPS must
be unconditional1. A Payment Message in respect of any payment takes effect as
having entered the CHAPS System at the point at which that Payment Message
has entered the SWIFT network and is acknowledged within that network by
SWIFT. It is not capable of being revoked by the sending participant or any
other party after the moment that settlement with respect to that Payment
Message is ‘final’2. Finality is defined by Section C.7 (Final settlement in the
RTGS System) of the RTGS Reference Manual (available on the Bank of
England website to RTGS account holders only).
1
CHAPS Rules (May 2018), r 4.1.
2
CHAPS Rules (May 2018), r 4.2.

25.27 When a customer opens an account with his bank which is available for
receiving incoming CHAPS transfers, the bank engages that it will accept into
the customer’s account all CHAPS transfers which comply with the CHAPS
Rules and which are otherwise in accordance with the terms of the account1 and
that the bank will comply with standard banking practice for making CHAPS
payments (see para 25.23 above). The receiving bank will ordinarily become
indebted to its customer for the amount of the CHAPS transfer and, in the
absence of error, the transfer may not be reversed by that bank once it has
authenticated the transfer, sent an acknowledgement informing the sending
bank that the transfer has been received and credited the funds to the custom-
er’s account2. However, the bank is entitled to decline to make payment to its
customer where it is faced with cogent evidence of fraud or illegality3.
1
Tayeb v HSBC Bank plc [2004] EWHC 1529 (Comm), [2004] 4 All ER 1024 at [83].
2
[2004] 4 All ER 1024, at [85].
3
[2004] 4 All ER 1024, at [60]–[61].

(ii) Unauthorised/defective payment instructions

25.28 Where the PSR 2017 apply, the position with respect to unauthorised
transactions is set out in Chapter 24. Simply put, the payer’s payment service
provider is prima facie liable to refund the payer and recredit his account unless
the payer has failed to keep the security details of his account safe in which case
he may bear the losses up to £35 (See Chapter 24).

8
 Consumer-Activated EFT Systems 25.31

The allocation of responsibility between payment service providers and their

customers for defective execution of authorised payment instructions is differ-
ent. Under the PSR 2017, if the payer’s payment service provider can prove that
the fund reached the payee’s payment service provider then the latter payment
service provider is liable to the payer. Otherwise the payer’s payment service
provider is prima facie liable to refund the amount of the payment and to
recredit its customer’s account (See Chapter 24 and PSR 2017, reg 90).
Another situation arises where the execution of an authorised payment instruc-
tion is defective because the payer provided incorrect details about the payee or
the payee’s account. In this situation, under the PSR 2017, provided the paying
payment service provider has acted in accordance with the account number and
sort code on the transfer instructions, the paying payment service provider is
not liable to its customer (PSR 2017, reg 90(2) and see Chapter 24).
25.29 However, outside the PSR 2017, the position is governed by Tidal
Energy Ltd v Bank of Scotland1. In Tidal Energy, Tidal attempted to transfer a
sum to its supplier via CHAPS. However, it filled in the CHAPS transfer form
incorrectly. Whilst the beneficiary name was correct, the sort code and account
number was not. Tidal wanted its account recredited. Judge Havelock-Al-
lan QC held on the evidence that due to the volume of transactions it processed,
CHAPS did not operate using a beneficiary’s name as part of the unique
identifier determining the destination of a payment. Accordingly, the claimant
was not able to recover from the remitting bank where there was a mismatch
between the account number specified and the name of the account holder.
The Court of Appeal (Floyd LJ dissenting) upheld that decision on the basis
that, unless there were an express term to the contrary, a customer who used
CHAPS was taken to contract on the basis of the banking practice that
governed CHAPS transactions, and so was bound by the established practice
between banks of ignoring the beneficiary name2. It is respectfully submitted
that the majority of the Court of Appeal reached the right result, as an
obligation to ensure that the remitter’s description of the intended beneficiary
corresponds to the name of the account holder for the payee account (a matter
normally not known to the remitting branch) would be fraught with practical
difficulties and likely to frustrate the requirement that CHAPS payments be
swiftly settled.
1
[2013] EWHC 2780 (QB).
2
[2014] EWCA Civ 1107.

2 CONSUMER-ACTIVATED EFT SYSTEMS

25.30 This section outlines particular features of a number of different types of
consumer activated EFT Systems.

(a) Credit cards

(i) Normal features of credit card transactions

25.31 The normal features of a credit card transaction were stated by Sir
Nicholas Browne-Wilkinson V-C in Re Charge Card Services Ltd1 to include
the following:

9
25.31 Electronic Payment Systems

(A) There is an underlying contractual scheme which predates the individual

contracts of sale. Under such scheme, the suppliers have agreed to accept the
card in payment of the price of goods purchased: the purchasers are entitled
to use the credit card to commit the credit card company to pay the suppliers.
(B) The underlying scheme is established by two separate contracts. The first
is made between the credit company and the seller: the seller agrees to accept
payment by the use of the card from anyone holding the card and the credit
company agrees to pay the supplier the price of goods supplied less a
discount. The second contract is between the credit company and the card
holder: the cardholder is provided with a card which enables him to pay the
price by its use and in return agrees to pay the credit company the full amount
of the price charged by the supplier.
(C) The underlying scheme is designed primarily for use in over-the-counter
sales, ie sales where the only connection between a particular seller and a
particular buyer is one sale.
(D) The actual sale and purchase of the commodity is the subject of the third
bilateral contract made between buyer and seller. In the majority of cases, this
sale contract will be an oral, over-the-counter sale. Tendering and acceptance
of the credit card in payment is made on the tacit assumption that the legal
consequences will be regulated by the separate underlying contractual obli-
gations between the seller and the credit company, and the buyer and the
credit company.
(E) Because the transactions intended to be covered by the scheme will
primarily be over-the-counter sales, the card does not carry the address of the
cardholder and the supplier will have no record of his address. Therefore the
seller has no obvious means of tracing the purchaser save through the credit
company.
1
[1989] Ch 497 at 509, [1988] 3 All ER 702 at 705, CA. This case, and in particular this
description of a credit card transaction, continues to be regularly cited.

25.32 In Office of Fair Trading v Lloyds TSB Bank1, Lord Mance analysed the
underlying contractual relationships by distinguishing between charge cards
such as American Express and credit card networks like Visa and MasterCard.
In the former, there was a tripartite arrangement – (1) between a card issuer and
cardholder, (2) between the card issuer and suppliers authorised by the card
issuer to accept its cards, and (3) between the cardholder and a particular
supplier in relation to a particular supply. In the case of credit cards, the
situation was more complex. Under the rules of those networks:
– Certain card issuers are authorised to act as ‘merchant acquirers’, in
practice only within their home jurisdictions.
– They contract with suppliers or merchants to process all such suppliers’
supply transactions made with cards of the relevant network, by paying to
such suppliers the price involved, less a merchant service charge.
– Suppliers do not become members of the network, but contract with
merchant acquirers to honour the cards of the network (ie to accept them
in payment of supplies).
– Where the merchant acquirer is itself the issuer of the card used in a
particular transaction, the transaction is tripartite and the merchant
acquirer looks direct to its cardholder (debtor) for reimbursement of the
price.

10
 Consumer-Activated EFT Systems 25.34

– In the more common case of use of a card issued by a card issuer other
than the merchant acquirer who acquired the particular supplier, the
network operates as a clearing system, through which the merchant
acquirer is reimbursed by the card issuer, less an ‘interchange fee’.
A credit card is a ‘credit-token’ within the meaning of the Consumer Credit Act
1974, s 14(1). It is also a payment instrument for the purposes of the Payment
Services Regulations 2017 (‘PSR 2017’)2.
1
[2008] 1 AC 316 at [23].
2
SI 2017/752; see Chapter 24 above.

(ii) Effect of payment by credit card or charge card

25.33 The PSR 2017 applies to credit cards and charge cards on the basis that
they are likely to constitute payment instruments by virtue of being a ‘person-
alised device’ or ‘personalised set of procedures’ used to initiate a payment
order (See Chapter 24 and PSR 2017, reg 2).
The PSR 2017 is discussed in Chapter 24 above. Its application can be divided
into the relevant relationships1:
(1) As between cardholder and issuer: the PSR 2017 creates a number of
information and disclosure obligations on the card-issuer because the
payment instrument will usually be issued under a framework contract.
For example, certain information must be supplied to the cardholder
before he is bound by the credit contract (PSR 2017, reg 48(1)), and the
card issuer must give two months’ notice of any contractual variations
(PSR 2017, reg 50). The PSR 2017 entitles the payment service provider
to stipulate in the framework contact that it is entitled to stop the
payment card on reasonable ground relating to the payment instru-
ments’ security (PSR 2017, reg 71).
(2) As between the card-issuing bank and the supplier: a supplier who is
entitled to accept payment cards will provide goods and services upon
presentation of the cards and in return the card issuer will reimburse the
supplier. Therefore, the supplier will be able to claim against the card-
issuing bank under contract2.
1
See pp 399–405 of Principles of Banking Law 3rd edn, 2017 (Cranston, Avgouleas, Zweiten,
Hare, van Sante).
2
In Re Charge Card Services at 510, it was confirmed that the supplier will have a claim against
the card-issuer not the cardholder for payment.

25.34 It should be noted that Re Charge Card Services Ltd, concerned a card
scheme with only a single card-issuer. Whereas in the UK various banks and
other financial institutions have credit cards (eg Visa and Mastercard). Each of
these issuers has a master agreement binding participating banks/financial
institutions. Under these master agreements the participating banks can issue
cards in their own name to their customers and admit suppliers to the scheme so
as to entitle them to accept cards in payment for goods and services supplied to
them.
Depending on the precise terms of the master agreement, a supplier is usually
authorised and obliged to accept all cards issued under the scheme in payment

11
25.34 Electronic Payment Systems

for goods or services, and the ‘merchant acquirer’ agrees to pay to the supplier
the value of the goods or services supplied, less a handling charge, provided the
supplier has complied with certain stipulated conditions. For each transaction
the supplier transmits card and transaction details to the merchant acquirer
over an EFTPOS system. The merchant acquirer pays the supplier and, under
the terms of the master agreement, obtains reimbursement from the participat-
ing financial institution which issued the card used. Some or all of the partici-
pating financial institutions’ services, performed as ‘issuer’ or ‘merchant ac-
quirer’ (or both) can be outsourced to separate companies.
In Lancore Services Ltd v Barclays Bank plc1, the Court of Appeal considered
a merchant services agreement between a supplier and a merchant acquirer and
held that it entitled the merchant acquirer to withhold payments to the supplier
because the supplier had processed transactions on behalf of third parties in
breach of the terms of the agreement. Rimer LJ at [31] held that the terms of the
merchant services agreement did not give rise to any agency or fiduciary
relationship between the merchant acquirer and the supplier and they entitled
the merchant acquirer to refuse to make the claimed payments.
1
[2009] EWCA Civ 752, [2010] 1 All ER 763.

(b) Electronic funds transfer at point of sale (EFTPOS) debit cards

25.35 EFTPOS (also known as Chip and Pin) allows payment to be made for
goods and services by the electronic transfer of funds from the custom-
er’s current account to the supplier’s account. In the case of a retail payment,
instead of a customer paying for goods or services by means of cash or a cheque,
he presents the cashier with a plastic EFTPOS debit card, incorporating an
integrated circuit chip1. The card is inserted into a card reader installed at the
retailer’s point of sale terminal and the cashier enters the amount of the
transaction2. The customer will then be invited to insert his personal identifi-
cation number (PIN) into the machine3. Where the transaction is over a given
amount the retailer’s terminal will seek authorisation from the authorisation
centre of the customer’s bank to accept the card, although the precise circum-
stances where authorisation is required will vary according to the rules of each
EFTPOS system. The PIN acts as the customer’s mandate to his bank to debit
his account and credit the retailer’s account, and a message to this effect is
transmitted, via one of the independent EFTPOS networks, to the custom-
er’s bank and the retailer’s bank. The message may be transmitted either directly
to the EFTPOS network or stored at the retailer’s terminal for transmission in
batch mode at the close of business that day. When the customer’s bank and the
retailer’s bank have received their respective debit and credit instructions over
the network, the customer’s and retailer’s accounts will be adjusted accordingly.
Where an EFTPOS system operates on-line it is technically possible for trans-
mission of the debit/credit message from the retailer’s terminal, and adjustment
of accounts at the customer’s and retailer’s banks, to be virtually instantaneous.
However, off-line EFTPOS payments require that the retailer submit the pay-
ment record and can take longer to process.
1
See generally, B Geva, ‘The EFT Debit Card’ (1989) 15 CBLJ 406.

12
 Consumer-Activated EFT Systems 25.39
2
Although credit card transactions may also be executed using EFTPOS terminals, eg Visa and
MasterCard operate such systems; they differ from EFTPOS debit card transactions as only the
latter, but not the former, effect the electronic transfer of funds from the customer’s account to
the supplier’s account.
3
In an attempt to combat card fraud, from 14 February 2006 cardholders have been required to
know their PIN. The intention was that from this date all card readers which required the
cardholder to sign a paper voucher would be replaced with machines operating under the ‘chip
and PIN’ system. However, more recently ‘contactless cards’ have been introduced, allowing
the card user to make small payments at shops and retailers which have contactless reader both
domestically and abroad.

25.36 The debit card schemes which operate in the UK generate the same types
of contractual relations as arise with credit and charge card transactions. Debit
card transactions involve four separate contractual relationships, namely those
between:
(i) card-holder and supplier1;
(ii) card-issuing bank and card-holder (giving the card-holder authority to
use the card and the card-issuing bank authority to debit the card-
holder’s account with the amount of any card transaction entered into);
(iii) supplier and merchant acquirer (obliging the supplier to accept all cards
issued under the scheme in payment for goods or services and containing
the merchant acquirer’s undertaking to pay the supplier for the value of
good and services supplied); and
(iv) the participating banks and financial institutions themselves (covering
various matters including, most importantly, the means of transfer of
funds from one institution to another)2.
1
In Commissioners for Revenue & Customs v Debenhams Retail plc [2005] EWCA Civ 892,
[2005] STC 1155, the Court of Appeal held that where a customer agreed to purchase goods
from a retailer by credit or debit card knowing, through notices in the store and on till slips, that
2.5% of the total purchase price was to go to another company as a card-handling charge, the
customer did not enter into a separate contract with that card-handling company: the custom-
er’s sole contract was with the retailer who remained liable for VAT on 100% of the total
purchase price of the goods.
2
Visa and MasterCard each have their own master agreement, which is a binding contract
between the participating banks/financial institutions.

(c) ATM cards

25.37 The first cash dispensers in the world were introduced in the UK in 1967.
A cash dispenser is an ATM (an automated teller machine) which only dispenses
cash. ATMs can provide many more services than simply dispensing cash. Some
ATMs allow the customer to initiate the transfer of funds between his own
accounts, or to the account of a third party, and even to receive deposits into his
account.
25.38 An ATM card can only be used in the ATMs of the card-issuing bank and
the ATMs of other banks with whom the issuing bank has reached a reciprocal
agreement. These cards, being single-function, are more unusual today.
25.39 Where an ATM card is used to withdraw cash from a machine operated
by the card-issuing bank there will be only one contractual relationship in-
volved, as the issuer and the supplier of cash is one and the same.

13
25.39 Electronic Payment Systems

The primary impact of PSR 2017 on ATMs is regulation 61 governing the

information that needs to be provided for ATM withdrawal charges.
Where a card-holder uses an ATM card issued by his own bank to withdraw
cash from a machine operated by another bank within the same network, there
is some uncertainty as to whether the card-holder and the bank whose ATM is
used enter into a direct contractual relationship or whether the bank acts merely
as the agent of the card-holder’s own bank1. It is arguable that there is a
unilateral contract between the card-holder and the bank whose ATM is used,
which comes into existence in a similar way to the unilateral contract which
arises when a supplier accepts a cheque card2. Alternatively, depending on the
master agreement between the banks, the bank dispensing cash from its ATM
may do so as the agent of the bank that issues the card to the card-holder. The
issue awaits judicial determination.
1
The relationship between the banks themselves was examined in Royal Bank of Scotland
Group plc v Commissioners of Customs and Excise [2002] STC 575, Second Division, Inner
House, Court of Session, where the bank dispensing cash was held to supply the custom-
er’s bank with a service which was an ‘exempt supply’ for VAT purposes.
2
See M Smith & P Robertson in ch 4 of M Brindle & R Cox (eds), Law of Bank Payments (5th
edn, 2017, Sweet & Maxwell), para 4-049-end.

(d) Electronic money systems

25.40 EC Directive 2009/110 on the taking up, pursuit of and prudential
supervision of the business of electronic money institutions (the Electronic
Money Directive) describes electronic money as ‘an electronic surrogate for
coins and bank notes, which is to be used for making payments’1. In other
words, electronic money (or ‘digital cash’) provides an alternative to payment
by cash.
1
Recital 13 of the Electronic Money Directive, [2009] OJ L267/7. There are some useful Bank for
International Settlements’ publications in this area, including Security of Electronic Money
(1996), Implications for Central Banks of the Development of Electronic Money (1996), Risk
Management for Electronic Banking and Electronic Money Activities (1998), Survey of
developments in electronic money and internet and mobile payments (2004) and Innovations in
retail payments (2012).

25.41 Real cash, ie coins and bank notes, has certain distinguishing character-
istics: cash is easily transferable; payment by cash immediately discharges the
underlying indebtedness; cash allows a purchaser to retain his anonymity. If
electronic money is to provide a true alternative to payment by real cash, it must
replicate these characteristics. This is recognised in Art 2(2) of the Electronic
Money Directive, which defines ‘electronic money’ as meaning:
‘electronically, including magnetically, stored monetary value as represented by a
claim on the issuer which is issued on receipt of funds for the purpose of making
payment transactions as defined in point 5 of Article 4 of Directive 2007/64/EC, and
which is accepted by a natural or legal person other than the electronic issuer.’
25.42 The Electronic Money Directive aims to enable new, innovative and
secure electronic money services to be designed; provide market access to new
companies; and foster real and effective competition between all market par-
ticipants, with a view to benefitting consumers, businesses and the European
economy.

14
 Consumer-Activated EFT Systems 25.44

The Electronic Money Directive focuses on modernising EU rules on electronic

money, especially bringing the prudential regime for electronic money institu-
tions, into line with the requirements for payment institutions in the Payment
Services Directive.
The Electronic Money Directive does not apply to:
• monetary value stored on specific pre-paid instruments that can be used
to acquire good or services only within the premises used by the issuer, or
within a limited network of service providers under direct commercial
agreement with professional issuer, or can be used only to acquire a
limited range of goods or services. Such pre-paid instruments include
store cards, petrol cards, membership cards, public transport cards such
as Oyster cards, or vouchers for services (Recital 5).
• monetary value that is used to purchase digital goods or services, where,
by virtue of the nature of the good or service, the operator adds intrinsic
value to it, eg in the form of access, search or distribution facilities,
provided that the good or service in question can be used only through a
digital device, such as a mobile phone or a computer, and provided that
the telecommunication, digital or IT operator does not act only as an
intermediary between the payment service user and the supplier of the
goods and services. This is the situation where a mobile phone or other
digital network subscriber pays the network operator directly and there
is neither a direct payment relationship nor a direct debtor-creditor
relationship between the network subscriber and any third-party sup-
plier of goods or services delivered as part of the transaction (Recital 6).
25.43 Electronic money systems (or digital cash systems) are either smart card
systems, where electronic value is stored in a microchip on a smart card, or
software based systems where tokens or coins are stored in the memory of a
computer. The ‘value’, ‘tokens’ or ‘coins’ take the form of digital information.
Electronic money allows payment to be made simply by transferring digital
information directly between debtor and creditor so that value is transferred
immediately upon delivery. In some systems the recipient of electronic money
can immediately use it to pay for other goods or services. Other systems require
the token to be deposited in a bank account or with the issuer who will then
issue a token of equivalent value or credit the value to an account.
25.44 Electronic money is not legal tender. Unless he has agreed otherwise, a
merchant is under no obligation to accept electronic money in payment for
goods or services. However, where a merchant is a member of an electronic
money scheme, and displays the scheme’s logo to the public1, he makes a
standing offer to accept electronic money in payment2. Whether payment by
electronic money operates as absolute or conditional discharge of the underly-
ing indebtedness between the merchant and the customer will turn on the
intention of the parties. Payment by credit card or charge card is presumed to be
intended by the parties to constitute absolute payment, as the supplier accepts
the card issuing company’s, or his own bank’s, payment obligation in place of
the customer’s liability3. It seems likely that the same presumption of absolute
payment will apply in the case of payment by electronic money. By accepting a
payment in electronic money the creditor’s right is now ultimately against its
issuer.
1
Which could be via the merchant’s website.

15
25.44 Electronic Payment Systems
2
See, eg, Re Charge Card Services Ltd [1989] Ch 497, where, in a contract for the self-service
supply of petrol, a garage was held to have undertaken to accept a particular charge card in
payment where it displays a notice of willingness to do so.
3
Re Charge Card Services Ltd [1989] Ch 497.

25.45 The Electronic Money Regulations 2011, SI 2011/99, (the ‘Electronic

Money Regulations’) implement the Electronic Money Directive. It should be
noted that the Electronic Money Regulations provide for specific exceptions,
including prepaid store cards and that parts 2 to 4 of these Regulations do not
apply to Banks.
Part 5 of the Electronic Money Regulations applies to the issuance and
redemption of electronic money where such activities are carried on in an
establishment maintained by an electronic money issuer or its agent in the
United Kingdom. Under regulation 39, an electronic money issuer must (1) on
receipt of funds, issue without delay electronic money at par value; and (2) at
the request of the electronic money holder, redeem at any time and at par value
the monetary value of the electronic money held. Contraventions of these
requirements are actionable at the suit of a private person1 who suffers loss as
a result of the contravention2. Other regulations actionable on the suit of a
private person include a requirement to inform an electronic money holder of
the provisions as to redemption prior to contracting (reg 40) and provisions
prohibiting the award of interest (reg 45).
The Financial Conduct Authority is the regulatory body charged with the
responsibility of oversight in relation to the Electronic Money Regulations.
1
Under regulation 72(3) ‘private person’ means ‘any individual, except where the individual
suffers the loss in question in the course of issuing electronic money or providing payment
services’, and ‘any person who is not an individual, except where that person suffers the loss in
question in the course of carrying on business of any kind, but does not include a government,
a local authority (in the United Kingdom or elsewhere) or an international organisation’.
2
See regulation 72(1)(c).

(e) Internet payment systems

25.46 The advent of the internet offered and continues to offer new opportu-
nities in and development of internet payment systems. There are three main
types of internet payment systems:
(1) use of the internet as an alternative means of communicating payment
instructions to the customer’s bank (known as internet banking);
(2) use of an internet payment operator (IPO) either as the customer’s agent
to make funds transfers from the customer’s normal bank account to
payees, or by the IPO assuming the customer’s indebtedness to the payee;
and
(3) payment through the transfer of electronic money (also known as
‘digital cash’) over the internet.

(i) Internet banking

25.47 At its most basic level the internet simply provides a customer with an
alternative means of access to his bank account or as a means of communicating

16
 Consumer-Activated EFT Systems 25.51

his instructions to his bank, using suitable methods of security. Following

instructions received online the bank completes any transfer of funds to payees
as the customer’s agent, using its normal/specified means of electronic funds
transfers.

(ii) Internet payment operators

25.48 Under more sophisticated internet payment systems an organisation

specifically set up to effect payment (called the internet payment operator, or
IPO) acts as the customer’s agent to make funds transfers from the custom-
er’s bank account to payees. On joining the scheme the customer appoints the
IPO as his agent with authority to debit his bank account with payments made
by the IPO on his behalf. The customer then sends payment instructions via the
internet to the IPO. When the IPO receives payment instructions from its
customer it either makes an automated clearing house transfer from its own
bank account, or issues a cheque, to the payee, and debits the customer’s bank
account electronically with the amount of the transfer plus a fee for performing
the service.
25.49 An alternative method by which an IPO can effect payment is where it
uses a combination of credit card and automated clearing house (ACH)
payments to effect the transfer. The customer sends a payment instruction to the
IPO via the internet. On receipt of the payment instruction, the IPO debits the
customer’s credit card in favour of itself and periodically deposits these
amounts (less charges) into the payee’s bank account via an ACH payment.
Provided the payee accepts this means of payment, the customer’s indebtedness
to the payee is discharged through the substitution of the IPO for the customer
as the payee’s debtor1.
1
Similar to a credit card payment: Re Charge Card Services Ltd [1987] Ch 150.

(iii) Electronic cash: Software systems and card schemes

25.50 An electronic money software system usually works by the payment
service user uploading value which is stored remotely in a payment account
managed by the issuer. These systems are mainly designed to facilitate internet
purchases and operate by way of a transfer of value to the merchant’s electronic
device using appropriate security. In the last few years since 2016 there has been
a proliferation in examples of a software-based systems which now include
Paypal and Apple Pay. In the case of PayPal, the payment service user must enter
into a contract with PayPal, under which it will have certain rights and
liabilities, however, where the PayPal payment was funded from a credit or
debit card, the buyer will also have their rights under that credit or debit card
agreement.
25.51 A card-based electronic cash scheme is one in which the user of the card
makes a payment to the issuer, the issuer then updates or stores such monetary
value by means of a microchip embedded in a plastic card, when the card is
presented in payment for goods/services, the card is put in or on a device which
transfers the specified monetary value from the card to the supplier. The Oyster
card system operated by Transport for London is probably one of the best
known examples of a closed card based scheme.

17
25.52 Electronic Payment Systems

25.52 Payments made through an electronic money software or card based

system are governed by the Payment Service Regulations 2017 (as to which see
Chapter 24), and the Electronic Money Regulations 2011.

3 INTERNATIONAL FUNDS TRANSFERS

25.53 An international funds transfer occurs where either the originator’s bank
or the beneficiary’s bank, or both banks, are located in a country other than that
of the currency of the transfer. A cross-border or overseas branch is considered
as a separate bank for these purposes. Most international funds transfers are
credit transfers. They operate in a similar way to domestic credit transfers,
although international credit transfers generally involve greater use of interme-
diary banks. Foreign exchange transactions are more complex as they involve
the exchange of two credit transfers, one in each currency, between two banks1.
1
In theory, each delivery obligation is concurrent but, in practice, there may be a time delay
between the two transfers. This time delay means that a bank which has completed its transfer
of funds runs the risk that its counterparty may fail to complete its side of the bargain. The risk
is known as ‘Herstatt’ risk following the collapse of the German bank Bankhaus ID Herstatt
KGaA in June 1974 (as to which see Momm v Barclays Bank International Ltd [1977] QB 790;
and Delbrueck & Co v Manufacturers Hanover Trust Co 464 F Supp 989 (1979); affd 609 F 2d
1047 (1979)). For those banks that have joined the continuous linked settlement (CLS) system,
which became operational in September 2002, Herstatt risk has largely been eliminated for
certain foreign currency transactions: see M Brindle and R Cox (eds), Law of Bank Payments
(5th edn, 2018, Sweet & Maxwell), paras 3-045 for the CLS System and 3-019 for Herstatt
Risk.

25.54 An international funds transfer may be subject to more than one law.
Each account relationship in the transfer – for example, as between the
originator and the originator’s bank, the originator’s bank and an intermediary
bank, the intermediary bank and the beneficiary’s bank and the beneficia-
ry’s bank and the beneficiary – may be subject to its own applicable law which,
in each case, may be different from the law governing the underlying obligation
between the originator and the beneficiary. It is of paramount importance to
identify the law applicable to the relationship in issue.
Relatively little attention has been paid to the role of private international law
in the context of international funds transfers. In principle, an international
payment transaction can be regarded as either a single global transaction or,
instead, as a set of connected, but independent transactions. Under the tradi-
tional approach, still adhered to by art 4A of the Uniform Commercial Code,
and shared by UNCITRAL’s Model Law on International Credit Transfers, each
part of the overall transaction has tended to be viewed as an individual
transaction. However, this view is probably not followed in some continental
legal systems, eg France, which take a single transaction view. Nevertheless,
even in those jurisdictions that favour the single transaction approach, where
one would expect to find one unitary law applicable to the entire single
transaction, segmentation according to the location of each receiving bank is
the predominant conflict of laws approach. This is probably the most workable
solution1.
1
See Luca G. Radicati Di Brozolo, ‘International Payments and the Conflicts of Laws’ (2000) 48
American Journal of Comparative Law 307.

18
 International Funds Transfers 25.57

(a) Onshore and offshore international transfers

25.55 An international funds transfer may be either onshore or offshore. The
transfer will be onshore where either the originator’s bank or the beneficia-
ry’s bank is located in the country of the currency of the transfer, and offshore
where neither bank is located in the country of the currency of the transfer.

(i) Onshore transfers

25.56 Where the transfer is onshore, the originator’s bank and the beneficia-
ry’s bank may be correspondents, ie each maintains an account with the other,
thereby allowing bilateral settlement between them. Where the beneficia-
ry’s bank and the originator’s bank are not correspondents, it will be necessary
to employ the services of at least one correspondent bank. In Libyan Arab
Foreign Bank v Bankers Trust Co1, Staughton J refers to a transfer involving the
use of an intermediary or correspondent bank as a ‘correspondent bank
transfer’.
1
[1989] QB 728 at 750–751.

25.57 Where funds are transferred from the originator’s bank located overseas
to the beneficiary’s bank located in the country of the currency, eg where the
originator’s bank in London wants to transfer US dollars to the beneficia-
ry’s bank in New York, the originator’s bank will employ a correspondent bank
in the country of the currency to transfer funds to the beneficiary’s bank.
Typically, the transfer between the local correspondent and the beneficia-
ry’s bank will use the Clearing House Interbank Payments System (CHIPS) in
the example given above.
Where funds are transferred from the originator’s bank located in the country
of currency to the beneficiary’s bank located overseas, eg where the origina-
tor’s bank in London wants to transfer sterling to the beneficiary’s bank in New
York, the originator’s bank will transfer funds to the local correspondent of the
beneficiary’s bank, probably using CHAPS sterling in the example given above,
and that correspondent will complete the transfer to the beneficiary’s bank.
Diagrams 1 and 2 illustrate the movement of payment orders and funds in
onshore transfers.

19
25.57 Electronic Payment Systems

Diagram 1 Originator’s bank located outside country of currency

.

Diagram 2 Originator’s bank located inside country of currency

.

(ii) Offshore transfers

25.58 Where the transfer is offshore it will usually pass through the country of
the currency of the transfer. But this will not always be the case. The transfer
will not pass through the country of the currency:
(i) where the originator’s bank has a foreign currency account with the
beneficiary’s bank, and both banks are located outside the country of the
currency of the transfer; or

20
 International Funds Transfers 25.59

(ii) where the originator’s bank and the beneficiary’s bank hold foreign
currency accounts with a common intermediary (correspondent) bank
which is located outside the country of currency1.
1
See HS Scott, ‘Where are the dollars? – Off-shore funds transfers’ (1988–89) 3 BFLR 243.

25.59 However, an offshore transfer will pass through the country of the
currency of the transfer where the originator’s bank employs an intermediary
(correspondent) bank in the country of currency to make the transfer to the
beneficiary’s bank. The transfer from the correspondent bank to the beneficia-
ry’s bank will be either direct or indirect. It will be direct where the correspon-
dent is a mutual correspondent of the originator’s bank and the beneficia-
ry’s bank1. It will be indirect, where there is no mutual correspondent. Where
the transfer is indirect the correspondent of the payer’s bank will transfer funds
to the correspondent of the beneficiary’s bank in the country of currency over
the clearing system of that country2. Diagram 3 uses a Eurodollar transaction to
illustrate an offshore transfer passing through the country of the currency of the
transfer3.

21
25.59 Electronic Payment Systems

Diagram 3 Eurodollar transfer from London to Zurich

.

1
Eg in Zim Israel Navigation Co v Effy Shipping Corp, The Effy [1972] 1 Lloyd’s Rep 18, a
US dollar transfer between the originator’s bank in Israel and the beneficiary’s bank in London
passed through their mutual correspondent in the US.
2
Sometimes referred to as a ‘complex account transfer’: Libyan Arab Foreign Bank v Bankers
Trust Co [1989] QB 728 at 750–751, per Staughton J.
3
A Eurodollar is a credit in US dollars at a bank or financial institution outside the United States,
whether in Europe or elsewhere: see Libyan Arab Foreign Bank v Bankers Trust Co [1989] QB
728 at 735, per Staughton J.

(b) SWIFT
25.60 Most banks communicate with their overseas, or cross-border, counter-
parts using the telecommunication network operated by the Society for World-
wide Interbank Financial Telecommunication (‘SWIFT’)1.
1
See Dovey v Bank of New Zealand [2000] 3 NZLR 641 at 645, where the New Zealand Court
of Appeal endorsed the trial judge’s findings that SWIFT constituted ‘the almost universal

22
 International Funds Transfers 25.64

system for transferring funds across international boundaries’. It should be borne in mind
however that SWIFT is neither a payment nor settlement system.

25.61 SWIFT is a non-profit making co-operative society organised under

Belgian law with its headquarters in Belgium. It is wholly owned by its member
banks, eligible securities broker-dealers and regulated third-party investment
management institutions, whose shareholdings vary annually in proportion to
the use made by them of the SWIFT system. SWIFT operates an international
financial message system which provides secure messaging services to financial
institutions and market infrastructures such as CHAPS, CREST and TARGET,
enabling payment instructions and related messages, including statements,
foreign exchange and money market confirmations, collections, documentary
credits, interbank securities trading, balance reporting, to be sent between
members and other connected users all over the world. Unlike BACS and
CHAPS, the main inter-bank electronic funds transfer systems operating in the
United Kingdom, SWIFT is purely a message transfer system, it does not
incorporate settlement.
25.62 SWIFT has now been operating for over forty years. It was established in
1973 by 239 banks in 15 different countries. Since then it has grown consider-
ably. SWIFT now serves over 10,000 members, sub-members and participants,
collectively known as users1, in 212 countries. Millions of standardised finan-
cial messages are exchanged through SWIFT every day.
1
Source: SWIFT website at www.swift.com.

25.63 SWIFT operates using an internet based messaging infrastructure called

SWIFTNet. This offers a range of messaging services service enabling financial
institutions worldwide to exchange financial messages and files securely and
reliably as well as to browse via online portals. These services include FIN
(accessed via SWIFTNet FIN) which is SWIFT’s core store-and-forward mes-
sage processing service. SWIFT users can use FIN to send financial data to each
other, either domestically or cross-border, in a quick, reliable and secure
fashion1.
1
Source: SWIFT website at www.swift.com.

25.64 Relations between SWIFT and SWIFT users are governed by SWIFT
By-laws, SWIFT Corporate Rules, SWIFT contractual documentation, SWIFT
General Terms and Conditions as well as the SWIFT User Handbook (‘UHB’).
At the time of writing the latest version of the Swift Corporate rules was dated
12 January 2018.
In the event of a dispute relating to the SWIFT Corporate Rules, a claim against
SWIFT must be submitted to the SWIFT in writing within 30 days of the date of
the event giving rise to the claim. SWIFT shall then acknowledge receipt of the
claim within 15 working days of receipt. SWIFT may accept, reject or dispute a
claim within three months after submission of the claim and inform the
claimant accordingly. If SWIFT has not informed the claimant that it accepts the
claim within three months of the date of submission, SWIFT is deemed to have
rejected or disputed the claim.

23
25.64 Electronic Payment Systems

If SWIFT has rejected or disputed the claim, any outstanding dispute is finally
settled under the Rules of Conciliation and Arbitration of the International
Chamber of Commerce (ICC) by three arbitrators and, to the extent permitted
under the Rules of Conciliation, the arbitration will take place in Brussels, in
English1.
1
Swift Corporate Rules (12 January 2018) – clause 7.3 entitled ‘Dispute over the Corporate
Rules’.

25.65 SWIFT’s general policy is to disclaim liability for breach of its duties,
subject to limited exceptions. SWIFT’s Corporate Rules provides that:
‘Except for fraud or gross negligence by SWIFT, and to the extent not otherwise
prohibited by law, SWIFT’s entire liability under or in connection with these
SWIFT Corporate Rules (whether in contract, tort or otherwise) will be limited to
20,000 Euro per event or series of related events.
Even if SWIFT has been advised of their possibility, SWIFT excludes any liability for
(i) any loss or damage the occurrence or extent of which is unforeseeable; (ii) any loss
of business or profit, revenue, anticipated savings, contracts, loss or corruption of
data, loss of use, loss of goodwill, loss of reputation, interruption of business, or other
similar pecuniary loss howsoever arising (whether direct or indirect); and (iii) any
indirect, special, or consequential loss or damage of any kind.’
By way of exception to this general disclaimer, the limitation and exclusions of
SWIFT’s liability do not apply in case of fraud, wilful default or, more generally,
to the extent not permitted under applicable law

(c) TARGET2
25.66 TARGET2 (Trans-European Automated Real-time Gross-settlement
Express Transfer) is the second generation of TARGET, replacing TARGET in
May 2008. TARGET2 connects national real-time gross settlement (RTGS)
payment systems across the European Union and allows high value payments in
euro to be made in real-time across borders within the EU. Member States of the
EU that are outside the Eurozone, are entitled to connect to TARGET2.
For reasons of timing and introduction of the Euro, the first generation
TARGET was created by linking together the different RTGS systems that
existed at a national level of participating member states and defining a
minimum set of harmonised features which enable the sending and receiving of
payments across national borders.
TARGET2 was launched in November 2007. The decentralised structure of
TARGET was progressively replaced by a single technical platform, the ‘Single
Shared Platform’ (SSP). Three Eurosystem central banks (the Banca d’Italia, the
Banque de France and the Deutsche Bundesbank) jointly provided the SSP for
TARGET2, and operate it on behalf of the Eurosystem. The migration to the
new platform took place in three waves between November 2007 and
May 2008. Payment transactions in TARGET2 are settled one by one on a
continuous basis, in central bank money with immediate finality.
There are several different types of transactions, for example customer pay-
ments, interbank payments and liquidity transfers. There is no upper or lower
limit on the value of payments. In terms of the value processed, TARGET2 is

24
 International Funds Transfers 25.69

one of the largest payment systems in the world, it processes a daily average of
around 360,000 payments with a total value of about €2 trillion. Perhaps
unsurprisingly, about half of the payments in terms of volume and one-third in
terms of value are submitted via the Bundesbank.
TARGET2 is intended to eliminate credit and liquidity risks in cross-border
payments and to facilitate the operation of the single market. The system also
allows arbitrage flows between different financial centres which could be
important in linking together national euro money markets.
The Bank of England decided not to participate in TARGET2, accordingly UK
banks have made individual arrangements for cross border euro payments,
using TARGET2 via other member states.
25.67 Only the national central banks (NCBs) of EU member states have direct
access to TARGET21. Each payment made through TARGET2 is made in funds
belonging to the NCB in the jurisdiction of the sending credit institution. The
sending credit institution supplies the NCB with the necessary funds through
the local RTGS. There are arrangements agreed with the ECB Governing Coun-
cil whereby NCBs, including ‘out’ NCBs such as the Bank of England, may
provide intra-day credit to their own RTGS members. TARGET2 settles in NCB
funds through accounts held at the central banks. As the Bank of England is not
a direct participant in TARGET2, it accesses the system via De Nederlandsche
Bank, enabling the Bank of England to make and receive euro payments.
1
NCBs use TARGET to effect monetary policy payments as well as to process ordinary euro
transfers.

25.68 TARGET2 is legally structured as a multiplicity of RTGS systems, ie

each central bank maintains full responsibility for the business and legal
relationship with its participants. Each component system is individually des-
ignated and notified as a payment system under the Settlement Finality Direc-
tive, thus TARGET2 benefits from the protection against systemic risk under
that Directive.
As it is a RTGS system, payments are handled individually. Unconditional
payment orders are automatically processed one at a time on a continuous
basis. Thus, TARGET2 provides immediate and final settlement of all pay-
ments, provided that there are sufficient funds or overdraft facilities available
on the payer’s account with its central bank.
25.69 The legal framework for TARGET2 is based on the TARGET2 Guide-
line and the TARGET2 Agreement1. The Guideline governs the relationship
between the ECB and the ‘in’ NCBs. The provisions of this Guideline, amended
as necessary, are extended to ‘out’ NCBs through a contractual arrangement
called the TARGET2 Agreement.
The Guideline and Agreement give details of the understandings reached on
minimum common features of national RTGS systems, such as: which types of
institution can be granted access; pricing policy; operating days and hours;
security and business continuity; and provisions aiming to ensure clarity about
the timing and nature of finality through the series of payment messages making
up a TARGET2 payment. The documents also cover the procedure which
central banks follow amongst themselves to ensure that the interlinking system
operates reliably and that there is a clear chain of responsibility for processing

25
25.69 Electronic Payment Systems

a payment and dealing with technical or operating difficulties.

1
See Guideline ECB2012/27 .

25.70 The rights and duties arising out of the relationship between participat-
ing credit institutions and their local NCB are governed by national RTGS rules.
This means that the full legal framework governing a TARGET2 payment from
the sending credit institution to the receiving credit institution consists of the
sending country’s RTGS rules, the TARGET2 Guideline (together with the
TARGET2 Agreement as necessary) and the receiving country’s RTGS rules.
25.71 TARGET2, like other netting or clearing house arrangements, may pose
particular problems in an insolvency context.
In British Eagle International Airlines v Compagnie Nationale Air France1, a
clearing house system happened to require money to be paid out in different
orders and proportions from that which would normally occur under the
general insolvency rule of pari passu. Lord Cross held at (at page 780) that the
‘clearing house’ arrangements by establishing that simple contract debts are to
be satisfied in a particular way, effect a ‘contracting out’ of statutory insolvency
principles. It was irrelevant that the parties to the ‘clearing house’ arrangements
did not direct their minds to the question of any insolvency. Such a ‘contracting
out’ was contrary to public policy and the insolvency rules took precedence.
In response to this the EU Council and Parliament adopted Directive 98/262.
This provides that:
• Transfer orders are to be legally enforceable and binding on third parties
even in the event of insolvency proceedings (Art 3.1).
• There is to be no unwinding of a netting because of the operation of
national laws (Art 3.2).
• A transfer is not to be revoked by a participant in a system nor by a third
party, from the moment defined by the rules of that system (Art 5).
• Insolvency proceedings are not to have retrospective effect on the rights
and obligations of a participant arising from participation in a system
earlier than the insolvency proceedings (Art 7).
1
[1975] 1 WLR 758 (HL).
2
This Directive has been amended by Directive 2009/44 and Directive 2010/78.

(d) EBA euro clearing system (EURO1)

25.72 The EBA euro clearing system (EURO1) is intended to provide volume
clearing facilities for EU member states through over 62 major banks operating
in Europe, and initially focusing particularly on cross-border euro payments. It
is run by the Euro Banking Association (EBA). EURO1 offers a cheaper
alternative than using TARGET to make large value cross-border payments in
euro1. Other methods of making cross-border euro payments remain avail-
able, eg through correspondent banking arrangements and through the branch
networks of large international banks2. The system is developed and main-
tained by SWIFT. The EBA also operates a low-value cross-border payment
system called STEP.
EURO1 processes on average over 200,000 payments a day with an average

26
 International Funds Transfers 25.75

total value of about 200 billion euro3.

1
N O’Neill, ‘Cross-Border Payment Arrangements for the Euro’ (1998) 4 JIBFL 123 at 124. The
Payments in Euro (Credit Transfers and Direct Debits) Regulations 2012/3122, made pursuant
to the UK’s obligation under Regulation (EC) No 924/2009, now control the charges that may
be levied by banks on their customers for making cross-border payments in euro.
2
See www.ebaclearing.eu.
3
See www.ebaclearing.eu.

25.73 Payments processed through EURO1 are irrevocable. Following the

cut-off of EURO1 at 16:00 (CET), the final positions of banks participating in
the system are settled via the European Central Bank. This enables the partici-
pants sufficient time to complete the settlement process prior to the closing time
of TARGET2 at 18:00 (CET).
EBA Clearing has created an additional user profile for EURO1: sub-
participation status. Sub-participation status allows EURO1 Banks to connect
their EEA-based branches, subsidiaries and other group members directly to the
system, under the single liquidity position of the banking group. This helps to
facilitate a banking group’s euro payments within Europe (whether cross-
border/domestic/internal). There are over 100 banks holding sub-participation
status.
Banks from non-EU countries can participate in EURO1 through a branch
located in the EU.
25.74 To make a euro payment over the EBA’s system, a member bank sends a
SWIFT payment message which is identified as an EBA payment (using the tag
‘EBA’ in field 103 of the message header) and copied to the EBA processor (also
operated by SWIFT).
Payment messages are processed on an individual basis. On receipt by the EBA
processor the payment is assessed against the relevant sending and receiving
bank limits. Where the payment is within the relevant limits it is processed and
transmitted on, via the SWIFT network, to the receiving bank. The payment
message may be revoked by the sending bank up until the time it is processed by
the EBA processor. Where a message would cause a relevant limit to be
breached the message is queued by the EBA processor until such time that other
processed payments create the necessary headroom under that limit (ie it allows
for adjusting of positions).
The EBA monitors member banks’ net positions and queues in real time. Each
member bank has a multilateral debit and credit limit, which under the EBA
clearing’s legal framework (the Single Obligation Structure) represents the
maximum allowed single obligation of claim of that member towards the group
of all other members. The limits are binding throughout the operating day, and
are each capped at a maximum of €1 billion.
A payment message can be cancelled by the sending participant as long as it is
not processed.
25.75 Unlike TARGET2, which is a real-time gross settlement system, the EBA
euro clearing system operates using a form of net settlement – the ‘Single
Obligation Structure’1. Under this arrangement clearing between member
banks occurs continuously as messages are exchanged between them, with the
eventual single obligation being settled at the end of the day. This is done

27
25.75 Electronic Payment Systems

through multilateral netting by novation on a continuous basis. At any time on

any given settlement day, there will only be one single amount payable by or to
each participant. At no time will gross obligations arise in respect of payment
messages. The end-of-day payment acts as settlement of the final obligation due
between each member and all other members, as calculated at the end of the
clearing day, with the EBA acting as a settlement agent.
In other words, through the cumulative combination of all of a member
bank’s payments and receipts throughout the day, each member bank is
considered to owe to, or to be owed by, all other member banks a single net
amount – only at the end of the day, or upon intra-day default by a member
bank, does the single net obligation crystallise into a debt owed to or by the
other members of the system2.
1
Practical Issues Arising from the Introduction of the Euro (Bank of England, Issue No 6,
10 December 1997), pp 22 and 23. The member banks are bound by a contractual agreement
governed by German law.
2
N O’Neill, ‘Cross-Border Payment Arrangements for the Euro’ (1998) 4 JIBFL 123 at 124.

25.76 Settlement under the EBA euro clearing system takes place centrally at
the European Central Bank (ECB). The ECB holds a central settlement account
for the EBA through which EBA member banks settle their end-of-day balances.
Banks with a net debit position in the system transfer the relevant funds to the
EBA account at the ECB through a cross-border TARGET payment. Banks with
a net credit position receive funds from the EBA through a cross-border
TARGET transfer to the national central bank where their account is main-
tained. The ECB holds a cash pool of €1 billion on behalf of the EBA and its
members, which acts as an emergency source of liquidity in case an EBA
member should fail to make its end-of-day settlement payment into the settle-
ment account.
There was concern over whether or not the single obligation structure involves
a form of multilateral netting which may not be enforceable under the laws of
all EU member states on the insolvency of one of the participants. However, it
appears that the EBA has obtained favourable legal opinions from all EU
jurisdictions (including England) and from all non-EU jurisdictions where
major international banks are incorporated (ie the US, Japan and Switzerland)
to the effect that the single obligation structure is robust and could not be
challenged following the insolvency of a member bank incorporated in those
jurisdictions. Implementation in EU member states of the EC Directive on
settlement finality in payment and securities settlement systems reinforces the
robustness of the EBA euro clearing system in this respect1. The EBA Clearing
website states that the Single Obligation Structure has been ‘validated in all
EU25 jurisdictions’ (with validation in Bulgaria and Romania being finalised).
1
EC Directive 98/26/EC of 19 May 1998, [1998] OJ L 166/45, implemented in the UK through
the Financial Markets and Insolvency (Settlement Finality) Regulations 1999, SI 1999/2979.
This Directive has been amended on various occasions since 2007.

28
Chapter 26

CHEQUES

1 CHEQUES – OVERVIEW 26.1

2 THE DEFINITION OF THE CHEQUE 26.2
(a) ‘Unconditional order’ 26.3
(b) ‘Addressed by one person to another’ 26.4
(c) ‘On demand’ 26.5
(d) ‘To a specified person or to bearer’ 26.7
3 NEGOTIABILITY, TRANSFERABILITY, AND CROSSINGS
(a) Negotiability and transferability 26.8
(b) The ‘Account Payee’ crossing 26.9
(c) Other crossings 26.12
4 THE BANK’S OBLIGATION TO MAKE PAYMENT 26.13
(a) Regular and unambiguous in form 26.14
(b) Cheques out of date 26.15
(c) The paying bank owes no obligations to the holder of a cheque 26.16
(d) Notice of Dishonour 26.17
(e) Intervening conduct of a third party 26.18
(f) Discharge by payment 26.19
(g) Statutory protection 26.28
5 THE COLLECTION OF CHEQUES 26.34
(a) Collection generally 26.35
(b) Collection of cheques 26.36
(c) Notice of dishonour 26.43
(d) Debiting customer’s account upon dishonour 26.46
(e) Statutory rights of the collecting bank 26.47
(f) Duty owed by collecting bank to drawer of cheque 26.48
(g) The collection of bills of exchange 26.49
6 INSTRUMENTS ANALOGOUS TO CHEQUES 26.51
(a) Dividend warrants 26.52
(b) Interest warrants 26.53
(c) Conditional orders for payment 26.54
(d) Bank drafts 26.57
(e) Banker’s payments 26.59
(f) Travellers’ cheques 26.60
(g) Postal orders 26.64

1 CHEQUES – OVERVIEW
26.1 This chapter deals with cheques and other paper-based payment orders.
Although historically the principal method by which payment instructions were
given to banks by their customers, the use of cheques has declined very
significantly as a result of the advent of electronic banking (see Chapter 25
above). Much of the law in relation to cheques deals with their status as a
negotiable and/or transferable instrument, and the complexities arising there-
from. In practice, however, since 1992 UK cheques have almost invariably been

1
26.1 Cheques

marked ‘account payee only’, and as a result are non-negotiable and non-
transferable, but are simply written payment orders from a customer to its
bank, requesting the bank to pay a certain sum of money to a named third party.
Nevertheless, cheques continue to be widely used. A 2009 decision by the UK
Payments Council to set a target of 2018 for the end of universal cheque-
clearing (and so, in effect, the abolition of cheques) was reversed in 20111,
chiefly in response to concern from pensioners’ groups and the charities sector.
At the time of writing the banking industry was in the process of transitioning
to a new method of clearing. Rather than the physical cheque passing from the
payer, to the payee, to the collecting bank, and then to the paying bank as
hitherto, clearing will become image based. The collecting bank will take an
image of the cheque and present the image for payment to the paying bank.
This will have two principal benefits for users. First, clearing times will
substantially reduce, so that funds will be definitely available by the end of the
working day after the cheque is paid in to the collecting bank. Second, this will
enable customers to pay in cheques without visiting a branch, by taking a
picture of the cheque on their phone, which can be uploaded to their collecting
bank via a mobile banking app. This will have the advantage of leaving the
present system in place for users who rely on cheques and would find other
payment methods difficult, whilst providing a convenient service for those who
would prefer not to visit a branch.
The new image based clearing process began in October 2017, with the aim that
all cheques would be cleared using the image based system from a date to be
determined in 2018.
Legislative provision for the new process is made in a new Part 4A to the Bills
of Exchange Act 1882 (‘BEA 1882’). By s 89A(1), ‘Presentment for payment of
an instrument to which this section applies may be effected by provision of an
electronic image of both faces of the instrument, instead of by presenting the
physical instrument, if the person to whom presentment is made accepts the
presentment as effective.’
This chapter deals with the law regarding cheques insofar as relevant to modern
banking practitioners. For detail of the law as regards negotiable or transferable
cheques, the reader is referred to specialist works on cheques and other bills of
exchange2.
1
See http://www.paymentscouncil.org.uk/media_centre/press_releases/-/page/1575/.–.
2
Elliott, Odgers and Phillips: Byles on Bills of Exchange and Cheques (29th edn, 2013); Guest
Chalmers and Guest on Bills of Exchange, Cheques, and Promissory Notes (18th edn, 2017).

2 THE DEFINITION OF THE CHEQUE

26.2 A cheque is a type of bill of exchange. Although in its modern usage it is
in many respects quite unlike a bill of exchange, statute defines the cheque by
reference to bills of exchange.
By BEA 1882, s 3(1), a bill is defined as:
‘an unconditional order in writing addressed by one person to another, signed by the
person giving it, requiring the person to whom it is addressed to pay on demand, or

2
 The Definition of the Cheque 26.4

at a fixed or determinable future time a sum certain in money to or to the order of a

specified person or to bearer.’
BEA 1882, s 73 provides that a cheque is ‘a bill of exchange drawn on a banker
payable on demand’. ‘Banker’ includes a body of persons whether incorporated
or not who carry on the business of banking (BEA 1882, s 2)1.
Taking s 3(1) and s 73 together, the following composite definition of a cheque
can be formulated:
A cheque is an unconditional order in writing addressed by one person to a
banker, signed by the person giving it, requiring the banker to pay on demand
a sum certain in money to or to the order of a specified person or to bearer.
These requirements will now be considered in more detail. A document which
does not meet the requirements of a cheque will not necessarily be a nullity – it
may take effect as a simple payment instruction to the bank – but it will not have
all the features of a cheque.
1
As to the meaning of ‘banker’ at common law, see para 4.1 above.

(a) ‘Unconditional order’

26.3 To be unconditional a cheque must not be made payable out of a
particular fund1 or payable on a contingency2. In Thairlwall v Great Northern
Rly Co3 a dividend warrant bore a note to the effect that it would ‘not be
honoured after three months from the date of issue unless specially indorsed by
the Secretary’. It was held that the bill was unconditional. The words were
merely a definition by the directors acting within their authority as to what was
a reasonable time within which the warrant had to be presented having regard
to the nature of the instrument, the usage of trade and bankers, and the facts of
the particular case. A cheque is none the less an unconditional order notwith-
standing that by s 74 of the Bills of Exchange Act the drawer may be discharged
if the cheque is not presented within a reasonable time4.
Instruments which require as a condition of payment the signing of a receipt are
not cheques5.
1
Bills of Exchange Act 1882, s 3(3).
2
Bills of Exchange Act 1882, s 11.
3
[1910] 2 KB 509, 79 LJKB 924.
4
[1910] 2 KB 509, per Lord Coleridge J at 520.
5
See Bavins Junior and Sims v London and South Western Bank [1900] 1 QB 270; Capital
and Counties Bank Ltd v Gordon [1903] AC 240. Where the condition is not imposed on the
drawee-banker (the party to whom the order is given), but is addressed to and affects only the
payee or holder, this does not make the cheque conditional: Nathan v Ogdens Ltd (1905) 94 LT
126; Thairlwall v Great Northern Rly Co [1910] 2 KB 509; Roberts & Co v Marsh [1915] 1 KB
42. In the last-named case the word ‘drawee’ should read ‘payee’ throughout: see errata at
beginning of the volume.

(b) ‘Addressed by one person to another’

26.4 A cheque, like all bills of exchange, must be addressed by one person to
another. There must be one person as drawer (the person who draws, or makes
out the cheque), and another, a bank, as drawee1. The head office and branches

3
26.4 Cheques

of a bank constitute for general purposes only one concern or legal entity2. For
this reason drafts drawn by one branch of a bank on another branch or the head
office are not cheques or bills. Bankers drafts are dealt with in para 26.57 below.
1
Vagliano Bros v Bank of England (1889) 23 QBD 243 at 248, CA; London City and Midland
Bank Ltd v Gordon [1903] AC 240.
2
Although, as discussed in para 22.50, there are old authorities that cheques need only be paid
by a bank at the branch at which the customer has his account.

(c) ‘On demand’

26.5 A cheque must be payable on demand (ie not after a particular period of
time, or on a particular date). The ordinary modern cheque does not include
such a reference, but this is justified by BEA 1882, s 10, which provides:
‘A bill is payable on demand
(a) which is expressed to be payable on demand or at sight or on presentation, or
(b) in which no time for payment is expressed.’
Sometimes instruments in cheque form bear a note to the effect that they must
be presented within a given period or they will not be paid. In Thairlwall v
Great Northern Rly Co1, Bray J further held that the note on the warrant that
it would not be honoured after three months from the date of issue did not
prevent the instrument from being payable on demand.
The absence of a date has no impact on the validity of a cheque. Further, the
validity of a cheque is not compromised by the insertion of a date, even where
that is in breach of an agreement2.
1
[1910] 2 KB 509.
2
Aspinall’s Club Ltd v Al-Zayat [2007] EWHC 362 (Comm), at 10.

(i) Post-dated cheques

26.6 How does the requirement that a cheque must be payable on demand
square with the use of post-dated cheques?
A post-dated cheque is an instrument which bears a date later than the date of
its issue. Such an instrument is undoubtedly a bill of exchange (whether or not
it is a cheque). This follows from the BEA 1882, s 13(2), which provides:
‘A bill is not invalid by reason only that it is ante-dated or post-dated . . . ’.
The cases establish that a post-dated cheque is valid and can be negotiated
between the date of its issue and its maturity date (ie the date it bears), and for
a reasonable time thereafter1 (although, of course, almost all cheques in the UK
cannot be negotiated, because they bear the ‘account payee crossing’). How-
ever, the drawee bank is not entitled (absent agreement to the contrary):
‘(a) to pay a post-dated cheque and debit its customer’s account before the date
of the instrument; or
(b) to treat the cheque as a bill presented for acceptance and hold the
customer’s funds to meet it2.’
Accordingly, a customer is entitled to recover damages against a bank which
pays a post-dated cheque before its date, and then dishonours another cheque

4
 The Definition of the Cheque 26.6

of the customer (presented before the date of the post-dated cheque) on the
ground that after payment of the post-dated cheque there are insufficient funds
in the account to meet the other cheque3.
The question whether a post-dated cheque is a cheque within the Bills of
Exchange Act is relevant because if such an instrument is not a cheque (on the
ground that it is not payable on demand), the drawer may be discharged if the
holder does not present it within a reasonable time4.
The leading authority is Royal Bank of Scotland v Tottenham5. The status of a
post-dated cheque appears irrelevant to the availability of protection under the
Cheques Act 1957 since ss 1(2)(a) and 4(2)(b) confer protection in respect of
instruments which are not bills of exchange. It would be absurd to construe
these subsections as not giving protection in respect of instruments which are
bills of exchange but not cheques. This can be avoided by reading the words
‘though not a bill of exchange’ as meaning ‘even if not a bill of exchange’, where
the dispute was whether a post-dated cheque which had been stamped as a
cheque rather than a bill of exchange was admissible in evidence. In upholding
its admissibility, the Court of Appeal treated a post-dated cheque as a valid
cheque at the relevant date, ie the date on which the cheque had been tendered
in evidence, which date was after the date of the cheque itself. The Court of
Appeal construed the BEA 1882, s 13(2) (‘A bill is not invalid by reason only
that it is . . . post-dated . . . ’) to include the proposition that a cheque
shall not be invalid by reason only of its being post-dated6.
A more detailed analysis of the problem was carried out by the New South
Wales Court of Appeal in Hodgson & Lee Pty Ltd v Mardonius Pty Ltd7, where
the drawer of a post-dated cheque sought to escape liability on the ground that
the holder had failed to prove that he had presented the cheque. In rejecting this
unmeritorious defence, the Court of Appeal analysed statutory provisions
corresponding with the Bills of Exchange Act 1882, ss 3, 10 and 11, and
concluded convincingly that a post-dated cheque is not payable at a fixed or
determinable future time, and must therefore be payable on demand. On this
view, a post-dated cheque is a valid cheque not simply from the date it bears, but
from the date of its issue8. It was rightly pointed out that in Bank of Baroda Ltd
v Punjab National Bank Ltd9, the Privy Council treated the post-dated cheque
in question as a cheque and not as a bill of exchange payable at some later date.
1
See Hitchcock v Edwards ; (1889) 60 LT 636; Royal Bank of Scotland v Tottenham [1894]
2 QB 715; Carpenter v Street (1890) 6 TLR 410 Robinson v Benkel (1913) 29 TLR 475. This
statement (as it appeared in Paget (8th edn)) was cited with approval by the New South
Wales Court of Appeal in Hodgson & Lee Pty Ltd v Mardonius Pty Ltd (1986) 5 NSWLR 496
at 498–499.
2
Pollock v Bank of New Zealand (1901) 20 NZLR 174; Hodgson & Lee Pty Ltd v Mardonius
Pty Ltd (fn 1 above). See also Morley v Culverwell (1840) 7 M & W 174, 178 (Parke B); Keyes
v Royal Bank of Canada [1946] 3 DLR 179 at 187; Brien v Dwyer (1979) 141 CLR 378, 394,
declining to follow Magill v Bank of North Queensland (1895) 6 QLJ 262.
3
Pollock v Bank of New Zealand (1901) 20 NZLR 174.
4
See BEA 1882, s 40, Elliott, Odgers and Phillips: Byles on Bills of Exchange and Cheques (29th
edn), para 11-005. The status of a post-dated cheque appears irrelevant to the availability of
protection under the Cheques Act 1957 since ss 1(2)(a) and 4(2)(b) confer protection in respect
of instruments which are not bills of exchange. It would be absurd to construe these subsections
as not giving protection in respect of instruments which are bills of exchange but not cheques.
This can be avoided by reading the words ‘though not a bill of exchange’ as meaning ‘even if not
a bill of exchange’.
5
[1894] 2 QB 715, CA. Compare BEA 1882, ss 45(1) and (2), and see Hodgson & Lee Pty Ltd
v Mardonius Pty Ltd (1986) 5 NSWLR 496.

5
26.6 Cheques
6
See [1894] 2 QB 715 at 718 per Lord Esher MR (‘On the other hand, the Bills of Exchange Act
1882, s 13, says that a cheque shall not be invalid by reason only of its being post-dated’), and
at 719 per Kay LJ (‘The Bills of Exchange Act 1882, expressly says that a post-dated cheque is
not for that reason only invalid’).
7
(1986) 5 NSWLR 496. Cf Brien v Dwyer (1979) 141 CLR 378.
8
In Royal Bank of Scotland v Tottenham [1894] 2 QB 715, CA, Lord Esher MR appears to have
considered that during the period up to the date of the cheque, the instrument would not have
been a cheque for the purposes of the Stamp Act 1891, but it is not clear whether he considered
that the status of the instrument would have been the same during that period under the Bills of
Exchange Act 1882.
9
[1944] AC 176, [1944] 2 All ER 83, PC.

(d) ‘To a specified person or to bearer’

26.7 By s 7(1):
‘Where a bill is not payable to bearer, the payee must be named or otherwise indicated
therein with reasonable certainty.’
Instruments are occasionally drawn on a cheque form in favour of ‘Wages’ or
‘Cash’; there is in these cases no payee and the instruments are not bills of
exchange or cheques.
In North and South Insurance Corpn Ltd v National Provincial Bank Ltd1, an
instrument in the form of a cheque drawn ‘pay cash or order’ was delivered by
the drawer to a company in payment for services. The instrument was duly
presented to the drawer’s bank and paid. An action was subsequently brought
by the liquidator of the drawer claiming that the bank had acted without
authority in paying the instrument. It was first contended that the instrument
was a cheque drawn to order and accordingly required endorsement. Branson J
held that the instrument was not a cheque. In his view, the printed words ‘or
order’ were to be disregarded, with the result that the instrument was a
direction to pay cash. Accordingly the document was not drawn to pay any
person at all, and not being payable to a specified person or bearer, failed to
satisfy s 7 of the Act. It was then contended that if the instrument was not a
cheque, it contained no mandate justifying its being acted upon as in fact it was.
In rejecting this contention, Branson J held that the drawer had intended the
bank to pay the person presenting the document and that the bank had properly
interpreted the intention of the drawer, and accordingly the latter could not
then question the transaction.
Such instruments fall within the Cheques Act 1957, ss 1(2)(a) and 4(2)(b) as
being documents issued by a customer which, though not bills of exchange, are
intended to enable a person to obtain payment from the banker of the sum
mentioned in them.
1
[1936] 1 KB 328, approved in Orbit Mining and Trading Co Ltd v Westminster Bank Ltd
[1963] 1 QB 794; and see also Cole v Milsome [1951] 1 All ER 311, in which Lloyd-Jacob J at
313 came to the same conclusion in regard to an instrument which in all material respects was
the same.

6
 Negotiability, Transferability, and Crossings 26.10

3 NEGOTIABILITY, TRANSFERABILITY, AND CROSSINGS

(a) Negotiability and transferability

26.8 Cheques, being bills of exchange, are in theory both transferable and
negotiable instruments. So the payee of a cheque is entitled to transfer it by
indorsement to a third party, who then becomes the holder of the cheque, and
entitled to collect payment from the bank. Since cheques are additionally
negotiable, a transferee can acquire better title to the cheque than the transferor
had.
The effect of the ‘not negotiable’ crossing was to make a cheque so crossed
transferable but not negotiable (in other words, the transferee is unable to
acquire better title than the transferor). In modern practice, however, cheques
are neither transferable nor negotiable, because they are almost invariably
crossed ‘account payee only’ (see below). This is also the case where a cheque is
drawn to a specified person only or where the words ‘not transferable’ are
written prominently across the cheque.

(b) The ‘Account Payee’ crossing

26.9 The Cheques Act 1992 was introduced in response to public concern
about the growth in cheque fraud, especially the theft of cheques sent by post.
Cheques were stolen from the post, then indorsed fraudulently to a third party,
then paid into that third party’s bank account, from which the funds could
easily be withdrawn.
26.10 The Act came into force on 16 June 1992. It gives the account payee
crossing the entirely new effect of making a cheque non-transferable1.
This was achieved by the insertion of a new section in the Bills of Exchange Act
1882: BEA 1882, s 81A(1):
‘Where a cheque is crossed and bears across its face the words “account payee” or‘
“a/c payee”, either with or without the word “only”, the cheque shall not be
transferable, but shall only be valid as between the parties thereto.’
Thus to make a cheque non-transferable by virtue of this provision:
(i) the instrument must be crossed; and
(ii) the instrument must bear across its face the words ‘account payee’ or
a/c ‘payee’.
The word ‘only’ adds nothing. The Act does not preclude making a cheque
non-transferable by other appropriate wording – for example, by writing the
word ‘only’ after the name of the payee and the words ‘not transferable’
between the parallel lines.
It is now the standard practice of the major banks to issue customers with
crossed cheques with a pre-printed account payee crossing between the parallel
lines and without the words ‘or order’ at the end of the first line.
Where the payee requires a negotiable cheque, there is no reason in law why the
drawer should not ‘open the crossing’ by deleting the words account payee,
adding ‘or order’ and initialling the amendments, but this is rare, and may be

7
26.10 Cheques

prohibited by an express or implied term of the bank-customer contract2.

1
The account payee crossing had previously had a more limited effect – it was treated as merely
a direction to the collecting bank as to how the proceeds of the cheque were to be dealt with
after receipt. For a description of the previous law, see Paget (10th edn), pp 377–378.
2
For further details of the circumstances in which the crossing may be ‘opened’, the reader is
referred to previous editions of Paget, and to the specialist works on cheques and bills of
exchange, such as Elliott, Odgers, Phillips Byles on Bills of Exchange and Cheques (29th edn,
2013), Guest Chalmers and Guest on Bills of Exchange, Cheques, and Promissory Notes (17th
edn, 2009).

26.11 The 1992 Act has made cheque fraud more difficult. A thief who steals
a cheque is now very likely to find that it is crossed account payee. Since a
collecting bank should refuse to credit the proceeds of a cheque crossed account
payee for anyone other than the named payee, the thief is unlikely to obtain the
proceeds of such a cheque unless he manages to alter the name of the payee or
open an account in the false name of the payee. This is a far more difficult
deception than a one-off forged indorsement on an instrument which is nego-
tiable.
Where, however, a thief is successful in obtaining payment of a stolen cheque
bearing the account payee crossing, the drawer’s position as against the payee,
the paying bank and the collecting bank is much the same as it was before the
Cheques Act 1992.
(1) As against the payee, the drawer will probably have failed to discharge
his liability because the payee will never have received the cheque.
(2) As against the paying bank, the drawer is unlikely to be able to challenge
the debit to his account under BEA 1882, s 801. Just as before the
1992 Act, the paying bank is likely to establish a statutory defence
because the process of cheque clearing does not inform the paying bank
to whom the collecting bank has paid the proceeds. This is why the
words account payee have always been treated as a direction to the
collecting bank rather than the paying bank.
(3) As against the collecting bank, whether a thief obtains the proceeds by
opening an account in the false name of the payee, by paying the cheque
into an account in a different name, or by fraudulently altering the name
of the payee, any issues about conversion and the availability of the
collecting bank’s statutory defence should be decided in the same way as
they would have been before the 1992 Act2.
1
See para 26.32 below.
2
See Chapter 27.

(c) Other crossings

26.12 There are other forms of crossing available to the drawer of a cheque, as
set out in BEA 1882, ss 76–81 and the Cheques Act 1957, s 4. In summary, their
effect is to require that the paying banker pay only to another banker (ie to
make payment only to a ‘collecting bank’ collecting on behalf of their customer,
rather than to make payment in cash to the person presenting the cheque).
Payment contrary to the crossing would be negligence on the part of the banker,
so that if the customer suffered loss, the banker would be unable to charge the

8
 The Bank’s Obligation to Make Payment 26.14

customer1, or a breach of mandate, so the bank is not entitled to debit its

customer’s account with the amount paid2.
Except in rare cases, these have been superseded by the account only crossing.
The reader is referred to previous editions of this text, or the specialist texts on
cheques and bills of exchange if further detail is required3.
1
Bellamy v Marjoribanks (1852) 7 Exch 389.
2
The crossing constitutes an instruction as to how the cheque should be paid and to that extent
alters the bank’s mandate: Smith v The Union Bank of London [1875] 1 QBD 31, 35.
3
Elliott, Odgers, Phillips Byles on Bills of Exchange and Cheques (29th edn, 2013), Guest
Chalmers and Guest on Bills of Exchange, Cheques, and Promissory Notes (18th edn, 2017).

4 THE BANK’S OBLIGATION TO MAKE PAYMENT

26.13 A bank is obliged to pay its customer’s cheques as it is obliged to comply
with any valid payment orders. See para 22.50 ff above for the general law. This
section deals with the particular requirements which must be complied with for
the bank to be obliged to pay cheques.

(a) Regular and unambiguous in form

26.14 The cheque must be regular and unambiguous in form. The judgments
both in the Macmillan1 and the Joachimson2 cases explicitly declare that it is
part of the contractual relationship that the customer shall issue, and the banker
receive his mandate, embodied in the cheque, in plain, unmistakable terms. In
the Macmillan case Lord Haldane said3:
‘The customer contracts reciprocally that in drawing his cheques on the banker he
will draw them in such a form as will enable the banker to fulfil his obligation, and
therefore in a form that is clear and free from ambiguity.’
and:
‘The banker as a mandatory has a right to insist on having his mandate in a form
which does not leave room for misgiving as to what he is called on to do.’
As regards ambiguity in the mandate, the recognised rule is that an agent who
has adopted a reasonable course in face of ambiguity in the principal’s instruc-
tions cannot be made liable whether such ambiguity arises from the method of
expression or the medium of communication4. The banker is entitled to the
benefit of this rule, but must also bear in mind the limits to its operation,
including (1) that once a person enters into a contract he is bound by its terms,
which, in the event of dispute, will fall to be construed objectively; (2) that a
party relying on his own interpretation of the relevant instrument must have
acted reasonably in all the circumstances in so doing, and, if the ambiguity is
patent on the face of the document, it may well be right, especially with the
facilities of modern communications, for an agent to have his instructions
clarified by his principal, if time permits, before acting on them5.
It was recognised in the Macmillan case that the customer has no right to put
upon the banker, and the banker is not bound to accept, any risk or liability not
contemplated in or essentially arising out of the ordinary routine of business.
The rights of the banker to decline unusual risks, clearly recognised since the
Macmillan case, are not confined to those arising directly from ambiguity of the

9
26.14 Cheques

mandate. It is a fair reading of the contractual obligation that not only shall the
customer not impose, but the banker need not undertake, exceptional risks. In
banking practice contingencies arise where, in the interests of banker and
customer alike, the only reasonable course is to ‘postpone’ payment in appro-
priate and innocuous terms, as for instance where a cheque or draft is negoti-
ated abroad and on which appears a special indorsement in Arabic or Oriental
characters, conveying absolutely nothing to the drawee bank. By issuing such a
cheque the customer must be taken to empower the banker to act reasonably for
his own protection in any contingency such as foreign negotiation which may
arise in connection with the cheque.
The dictum of Maule J in Robarts v Tucker6 that a banker might defer payment
of a bill until he had satisfied himself that the indorsements thereon were
genuine was expressly disapproved by the House of Lords in Vagliano’s case7.
Lord Macnaghten said that a banker must pay off-hand and as a matter of
course bills presented for payment, duly accepted and regular and complete on
the face of them. A bank might seek telephone confirmation from the drawer of
the authenticity of cheques above a certain amount, but the mere unavailability
of the drawer cannot justify a delay in payment.
Ungoed-Thomas J in Selangor United Rubber Estates v Cradock (No 3)8
recognised:
‘the very limited time in which banks have to decide what course to take with regard
to a cheque presented for payment without risking liability for delay, and the extent
to which an operation is unusual or out of the ordinary course of business.’
1
London Joint Stock Bank v MacMillan and Arthur [1918] AC 777, HL, 88 LJKB 55.
2
Joachimson v Swiss Bank Corp [1921] 3 KB 110; [1921] All ER Rep 92, CA.
3
[1918] AC 777 at 814 and 816. See also Arab Bank Ltd v Ross [1952] 2 QB 216, [1952]
1 All ER 709.
4
Ireland v Livingstone (1872) LR 5 HL 395; Curtice v London City and Midland Bank Ltd
[1908] 1 KB 293.
5
European Asian Bank AG v Punjab and Sind Bank (No 2) [1983] 2 All ER 508 at 517, 518,
[1983] 1 WLR 642 at 656, CA, see also Cooper v National Westminster Bank plc [2009]
EWHC 3035 (QB) at paragraphs 55-63, [2010] 1 Lloyd’s Rep 490 at para 55–63.
6
(1851) 16 QB 560.
7
Bank of England v Vagliano Bros [1891] AC 107, 55 JP 676, HL.
8
[1968] 2 All ER 1073 at 1118H, [1968] 1 WLR 1555 at 1608C.

(b) Cheques out of date

26.15 It has long been the practice of banks not to pay a cheque presented after
a certain period has elapsed since its date of issue. Although the drawer is
entitled to stop an outstanding cheque if he does not wish it to remain
outstanding, it is suggested that the reason for this time bar is to protect
customers who may have forgotten that a cheque is outstanding from the
consequences of the cheque later being presented for payment and dishonoured.
As a matter of law, the drawer’s liability holds good for six years, save in one
contingency, that of the cheque not having been presented within reasonable
time, the bank having failed within such reasonable time, and the drawer
having lost money by reason of such failure and failure to present in time. In
such a case he is discharged to the extent of his loss and no further1.

10
 The Bank’s Obligation to Make Payment 26.17

The answer given on such cheques, such as ‘Out of date’, is in no way calculated
to damage the customer’s credit (unlike, for example, the response ‘refer to
drawer’). As a result, the question of the validity of the practice is never likely to
be raised.
Where a cheque bears no date at all, it has been held that the cheque is wanting
in a material particular, and the bank is therefore entitled to refuse to make
payment2. However, in some circumstances, the person in possession of an
undated cheque is entitled to fill in a date – see BEA 1882, s 20, discussed at para
26.26 below.
1
See Bills of Exchange Act 1882, s 74(1).
2
Griffiths v Dalton [1940] 2 KB 264, 109 LJKB 656.

(c) The paying bank owes no obligations to the holder of a cheque

26.16 A cheque is no more than an instruction by the drawer to the bank to pay
the amount stated to the payee. Accordingly, payment by cheque carries the risk
for the payee that the cheque will be dishonoured1.
It is suggested that the drawing of a cheque does not of itself impose any liability
on the paying bank to the payee.
This question has not been finally determined, but in National Westminster
Bank Ltd v Barclays Bank International Ltd Kerr J could see no basis for any
suggestion that a paying bank owes a duty of care to a payee in deciding
whether to honour a customer’s cheque, at any rate where it appears to be
regular on its face2.
This view is supported by the Irish case of Dublin Port and Docks Board v Bank
of Ireland3, where it was held that a paying bank owed no duty to the payee of
a cheque to pay cheques in order of presentation.
1
[1940] 2 KB 264, 265.
2
[1975] QB 654 at 662F-6, [1974] 3 All ER 834 at 841b.
3
[1976] IR 118.

(d) Notice of dishonour

26.17 Where the paying bank decides not to pay a cheque, the drawer is
entitled to receive notice of that fact (ie ‘notice of dishonour’). If it is not given
and not excused by circumstances1, he is discharged from liability both on the
cheque and on the consideration for which it was given2. In most cases,
however, notice need not be given because notice of dishonour to the drawer is
dispensed with where:
(a) the drawee bank is, as between itself and the drawer, under no obligation
to pay (as where the drawer’s account has insufficient funds); or
(b) the drawer has countermanded payment3.
1
BEA 1882, s 48, as amended by SI 2001/1149, art 3(1), Sch 1; Peacock v Pursell
(1863) 14 CBNS 728; May v Chidley [1894] 1 QB 451.
2
BEA 1882, s 50(2)(c).

11
26.17 Cheques
3
BEA 1882, s 50(2)(c). As to notice of dishonour by the collecting banker, see paras 26.43 to
26.45 below.

(e) Intervening conduct of a third party

26.18 On occasions a customer who has given a valid payment order will
dispute his liability to reimburse the paying bank for a payment the bank has
made pursuant to the payment order, on the ground of some event which has
occurred since the order was issued. Examples of such events are:
(i) a thief steals a cheque and obtains the proceeds by opening an account in
the false name of the payee or altering the name of the payee;
(ii) a payee dishonestly alters the amount of a cheque and thereby obtains
payment of more than the amount for which the cheque was drawn.
As between the paying bank and its customer, the intervening dishonest conduct
of a third party raises two issues.
The first is whether the bank’s payment has discharged the instrument. If it has,
the customer in his capacity as drawer has fulfilled his engagement under the
BEA 1882, s 55(1) and, accordingly, he is both discharged from liability on the
instrument and bound to indemnify his paying agent (ie the bank).
The second issue is whether, if the paying bank would not otherwise be entitled
to indemnification by its customer, it is protected by any of various provisions
contained in the Stamp Act 1853, the BEA 1882 and the Cheques Act 1957.

(f) Discharge by payment

26.19 Payment of a bill of exchange, including a cheque, is governed by the
Bills of Exchange Act 1882, s 59, which provides:
‘(1) A bill is discharged by payment in due course by or on behalf of the drawee or
acceptor. “Payment in due course” means payment made at or after the maturity of
the bill to the holder thereof in good faith and without notice that his title to the bill
is defective.’
26.20 ‘Payment’ within the meaning of the Act is widely interpreted1. In Meyer
& Co Ltd v Sze Hai Tong Banking and Insurance Co Ltd2, the Privy Council
held that where a bank paid a crossed cheque across the counter by giving its
own cheque on another bank, this was payment of the cheque. Payment may
take the form of the actual delivery of money to the presenter of the instrument
or of transfer to the account of the payee whether in account with the paying
bank or otherwise or, again, through clearing; it is complete when the payer
obtains a discharge. Where an English bank had the accounts of two German
banks and was instructed by one to transfer £120,000 from its account to the
account of the second, it was held that payment was complete when the English
bank set in motion the computer processes for making the transfer. The dispute
arose because the first bank ceased trading on the day the transfer was to be
made with its account in debit, and the English bank reversed the entries3.
Where a payment by one bank to another on the instruction of charterers in
respect of hire was made by a payment order used between bank and bank, it
was held that, as such an order was regarded by banks as equivalent to cash, the

12
 The Bank’s Obligation to Make Payment 26.23

hire was paid when the order was delivered to the receiving bank4. Where a
cheque drawn on one branch of a bank was paid in at another and appeared as
an item in balancing the accounts between the two branches, the branch on
which it was drawn was held to have paid it within the meaning of s 605.
An intimation by the drawee in response to an inquiry that a cheque will be
paid, known as notifying its fate, is not payment6.
1
See Glasscock v Balls (1889) 24 QBD 13 at 16 per Lord Esher MR.
2
[1913] AC 847, 83 LJPC 103, PC.
3
Momm (t/a Delbrueck & Co) v Barclays Bank International Ltd [1977] QB 790, [1976]
3 All ER 588.
4
Mardorf Peach & Co Ltd v Attica Sea Carriers Corpn of Liberia, The Laconia [1976] QB 835,
[1976] 2 All ER 249.
5
Gordon v London City and Midland Bank Ltd [1902] 1 KB 242 per Collins MR at 274–5; cf
Bissell & Co v Fox Bros & Co (1885) 53 LT 193. See generally Chapter 22.
6
See eg Bissell & Co v Fox Bros & Co (1884) 51 LT 663; varied (1885) 53 LT 193; Ogden v
Benas (1874) LR 9 CP 513 at 516.

(i) Meaning of ‘holder’

26.21 The holder is defined by the BEA 1882, s 2 as the ‘payee or indorsee of
a bill or note who is in possession of it, or the bearer thereof’.
‘Bearer’ is defined as ‘the person in possession of a bill or a note which is payable
to bearer’. By BEA 1882, s 8(3):
‘A bill is payable to bearer which is expressed to be so payable, or on which the only
or last indorsement is an indorsement in blank.’
In practice, since the Cheques Act 1992, the payee is normally the only holder.

(ii) ‘Without notice that his title to the bill is defective’

26.22 In some cases, a cursory examination of a bill which is presented for

payment will reveal a defect in the title of the holder. For example, B may
present for payment a cheque indorsed to him by the payee, A, but which is
crossed account payee.
Leaving aside cases of forged indorsements (see below), BEA 1882, s 59 would
present a major difficulty for paying banks but for the existence of statutory
protection, dealt with in paras 26.28. This is because the process of cheque
clearing does not identify for the paying bank the person on whose behalf a
cheque is being presented by the collecting bank. In the example given above,
the paying bank would not know that the collecting bank was acting as agent
for B, and would not be aware of the holder’s defect in title even though the
defect would be readily apparent if the holder’s identity were known1.
1
BEA 1882, s 59(1) presupposes that the payer knows the identity of the holder. The payer could
not be allowed to escape the operation of the section by saying that he did not know the identity
of the holder.

(iii) Material alterations

26.23 A bank has no mandate to pay a materially altered cheque, and if it does
so, it must reverse any debit to its customer’s account in respect of the cheque1.

13
26.23 Cheques

(i) erasing the name of the original payee and substituting the name of a
different payee;
(ii) altering the date of a post-dated cheque to an earlier one2;
(iii) altering ‘order’ to ‘bearer’ with a false indorsement; and
(iv) altering the amount to be paid under the cheque.
Example (iii) above is a particularly hard one, because if the fraudulent person
had left the ‘order’ but forged the indorsement, the banker would have been
protected by BEA 1882, s 603.
By the Bills of Exchange Act 1882, s 64:
‘(1) Where a bill or acceptance is materially altered without the assent of all
parties liable on the bill, the bill is avoided except as against a party who has
himself made, authorised, or assented to the alteration, and subsequent
indorsers.
‘(1) Provided that,
‘(1) Where a bill has been materially altered, but the alteration is not apparent,
and the bill is in the hands of a holder in due course, such holder may avail
himself of the bill as if it had not been altered, and may enforce payment of it
according to its original tenor.
(2) In particular the following alterations are material, namely, any alteration of
the date, the sum payable, the time of payment, the place of payment, and,
where a bill has been accepted generally, the addition of a place of payment
without the acceptor’s assent.
As to when an alteration is apparent:
‘An alteration in a bill is apparent within s 64 if it is of such a kind that it would be
observed and noticed by an intending holder scrutinising the document, which he
contemplated taking, with reasonable care.4’
However, since a payee is not a ‘holder in due course’, the proviso in s 64(1) is
of limited contemporary relevance5.
This question does not seem affected by the Macmillan case6. If, as there, no
sum was filled in in writing, the whole raised amount can be debited.
1
See Smith v Lloyds TSB Group plc [2001] QB 541 at 557B, [2001] 1 All ER 424 at 434f.
2
Cf Vance v Lowther (1876) 1 Ex D 176.
3
London Joint Stock Bank v MacMillan and Arthur [1918] AC 777, HL, 88 LJKB 55.
4
Per Salter J in Woollatt v Stanley (1928) 138 LT 620.
5
Jones (R E) Ltd v Waring and Gillow Ltd [1926] AC 670, 95 LJKB 913 Abbey National Plc v
JSF Finance & Currency Exchange Co Ltd [2006] EWCA Civ 328, at 13, [2006] All ER (D) 474
(Mar) at 13.
6
[1918] AC 777, HL see also para 23.7 ff.

26.24 However, a paying bank does not bear the risk of a material alteration if
the circumstances are such that the risk has passed to its customer. In Smith v
Lloyds TSB Group plc1, one of the appeals involved a claim in conversion by
the payee of a banker’s draft issued and paid by Woolwich plc. Woolwich had
issued the draft at the request of its customers, who had delivered it to the
claimant in payment for goods. The payee’s claim in conversion failed because
the effect of the material alteration was to render the draft a worthless piece of
paper (see para 27.3 below). As to the position between the issuer of a draft and
its customer, Pill LJ observed that, in the case of a banker’s draft, the custom-
er’s account is debited when the draft is issued to him. He has the benefit of a bill
drawn by the bank itself, and once he has possession of it, he assumes the

14
 The Bank’s Obligation to Make Payment 26.25

relevant risk, just as he would assume the risk if he withdrew bank notes which
were stolen2. On the particular facts, the customers had delivered the draft to
the payee, and the risk must then have passed to the payee.
1
[2001] QB 541, [2001] 1 All ER 424, CA.
2
[2001] QB 541 at 557B, [2001] 1 All ER 424 at 434f.

26.25 Where the genuine can be disentangled from the false, the custom-
er’s mandate still holds good pro tanto; in the same way as Lord Ellenborough
‘with the eyes of the law’ read the erased but still legible £57 instead of the
substituted £66 in Henfree v Bromley1. But this contention would not help in
cases where the cheque was so altered as completely to merge its identity and
directly contravene the customer’s mandate.
As to the amount chargeable, in Colonial Bank of Australasia Ltd v Marshall2,
as in the earlier raised cheque cases, the customer only took objection to being
charged with the excess over the original amount. In the Macmillan case3, the
original sum was negligible and the point was not raised. There are, however,
expressions in other cases which, taken strictly, would seem to suggest a doubt
as to the banker’s right to debit even the original amount:
‘ . . . any alteration in a material part of any instrument or agreement avoids it,
because it thereby ceases to be the same instrument4.
The question is whether the alteration introduced made it a different note; if it be
material it is a different note5.
But it is further to be considered whether the crossing was part of the cheque, so that
the erasure of it would amount to a forgery of another and different cheque from that
which the plaintiff drew; for if it had that effect, the plaintiff never drew the cheque
that was paid, and the banker cannot claim credit for it6.
If unfortunately he (the banker) pays money belonging to the customer upon an
order which is not genuine, he must suffer; and to justify the payment, he must show
that the order is genuine, not in signature only, but in every respect.7’
However, this last case was distinguished in a case of accidental destruction of
numbers on an instrument8.
In Imperial Bank of Canada v Bank of Hamilton9, the Judicial Committee
treated a raised cheque as having been a good cheque for the original amount.
It is suggested that this approach is right as a matter of policy: it is difficult to see
why a customer who has drawn a cheque for £100 should be able to avoid
having his account debited by £100 where the bank mistakenly pays away
£1,000, the cheque having been materially altered. It is not obvious why the
bank should bear the whole risk of a raised cheque.
As regards the material alteration of a promissory note, an unsuccessful attempt
was made in Ireland by the signatory to a promissory note to avoid liability on
the ground that the signature was appended after the completion and issue of
the note and therefore constituted a material alteration10. Gavan Duffy J held
that the alteration was material, but saw ‘no reason either in logic or grammar,
for making an actual signatory less liable because he was not an original party’.
1
(1805) 6 East 309.
2
[1906] AC 559, 75 LJPC 76 in Commonwealth Trading Bank of Australia v Sydney
Wide Stores Pty Ltd (1981) 55 ALJR 574, at 578 148 CLR 304 at 317, the High Court of

15
26.25 Cheques

Australia held that ‘the principle enunciated in Macmillan is to be preferred to that stated in
Marshall’.
3
London Joint Stock Bank v MacMillan and Arthur [1918] AC 777, HL, 88 LJKB 55.
4
Master v Miller (1791) 4 Term Rep 320, although in Habibsons Bank Ltd v Standard Chartered
Bank (Hong Kong) Ltd [2010] EWCA Civ 1335, [2011] QB 943, [2011] Bus LR 692 the Court
of Appeal noted that the effect of avoiding a written instrument would not be to void the
underlying transaction except where it is the instrument itself which had given rise to the
obligation.
5
Knill v Williams (1809) 10 East 431.
6
Simmons v Taylor (1857) 2 CBNS 528 at 539; see also 541; affd (1858) 4 CBNS 463.
7
Hall v Fuller (1826) 5 B & C 750 at 757; see also Suffell v Bank of England (1882) 9 QBD 555.
8
Hong Kong and Shanghai Banking Corpn v Lo Lee Shi [1928] AC 181, PC, 97 LJCP 35
distinguishing Suffell v Bank of England (1882) 9 QBD 555.
9
[1903] AC 49, 72 LJPC 1.
10
Flanagan v National Bank Ltd (1939) 5 LDAB 135, [1939] IR 352.

(iv) Blank cheques

26.26 By the BEA 1882, s 20 (as amended), where a person signs a blank
cheque, or a cheque which is wanting in any material respect, the person in
possession of it has a prima facie authority to fill up the omission in any way he
thinks fit (for any amount). It will then be enforceable against any person who
was a party to the bill before it was completed, provided that it was completed
within a reasonable time and strictly in accordance with the authority given.
Additionally, if an instrument is negotiated to a holder in due course it will be
valid and effectual in his hands (whether or not it was in fact filled up within a
reasonable time or in accordance with the authority given.
It is generally recognised that estoppels with regard to bills and cheques are not
confined to the specific cases of inchoate instruments, but by virtue of BEA
1882, s 97(2) include all estoppels known to the common law1. The Macmillan
case2 greatly expanded both the range and the applicability of this doctrine.
1
This recognition stems from Lloyd’s Bank Ltd v Cooke [1907] 1 KB 794 at 800. Collins MR
thought it unnecessary to treat the rights of the parties to a promissory note in that case as
having to be ascertained by reference to the Bills of Exchange Act because ‘the common law
doctrine of estoppel applies, and the rights of the parties may be decided by reference to that
doctrine’. But it was commonly assumed that even the common law operated in favour of the
person who takes a negotiable instrument as a holder or transferee, not necessarily by
negotiation from a prior party; thus the payee would be included. The limitation in s 20 to the
holder in due course, a source of difficulty, was thus overcome. Cf Talbot v Von Boris [1911]
1 KB 854, CA.
2
London Joint Stock Bank v MacMillan and Arthur [1918] AC 777, HL, 88 LJKB 55. See para
23.7.

26.27 In Garrard v Lewis1 an acceptance2 was delivered to the drawer with the
amount in figures in the margin but the body of the bill blank. The drawer then
filled in the blank in the body of the bill for a higher sum and fraudulently
altered the figure in the margin to that sum. It was held that the defendant
acceptor was liable for the larger amount for which the bill was filled in and
altered, on the ground that he clothed the person to whom he entrusted the bill
with ostensible authority to fill it in as he pleased. It seems to have been taken
for granted that, for the purpose of estoppel, the paying banker was in the same
position as a transferee. The cheque, so far as the signature goes, is a mandate

16
 The Bank’s Obligation to Make Payment 26.28

which the paying banker is bound to obey. The customer must be taken to
contemplate its effect on him as much as on a transferee, and the banker would
seem entitled to the same protection3.
If a blank cheque is not filled up in accordance with the authority given and
within a reasonable time, it will only be valid and effectual in the hands of a
holder in due course (ie neither the payee4 nor, usually, the paying banker.
In Gerald MacDonald & Co v Nash & Co5 Lord Haldane LC held that the BEA
1882, s 20 enabled the drawers of bills to complete them by adding the name of
themselves as payees, in pursuance of an agreement between them, the sellers,
and the buyers.
The estoppel is in no way dependent on the existence of a duty or the breach of
it; it is not a question of negligence, save possibly in the sense of a man’s duty to
the public6. If a man chooses to deliver an inchoate negotiable instrument to an
agent for the purpose of negotiating it or raising money on it, he is responsible
to anybody who is injured by the agent’s misuse of the instrument. It may be
suggested that in the above proposition the factor of deputing the filling-up,
included by Lord Finlay, has been omitted, but there was no evidence or
suggestion in the Macmillan case that Arthur, the partner who actually signed
the cheque, gave any authority to the fraudulent clerk to fill it up; he was in a
hurry and simply did not notice that it was not filled up for £2. The position,
therefore, appears fairly stated as it is; the handing of the inchoate instrument to
another person for the purpose of getting money must be taken to involve
authority to complete it, whether the signatory knows it is incomplete or not.
However, the inchoate instrument has to be delivered to get the money; if, as in
Smith v Prosser7, it is merely handed over for safe keeping, awaiting further
instructions, and the custodian wrongfully fills up and deals with it, neither
transferee nor drawee can avail himself of either the inchoate instrument or the
holding-out.
1
(1882) 10 QBD 30.
2
An acceptance is an undertaking by the drawee to pay a bill of exchange.
3
And see per Lord Greene MR in Wilson and Meeson v Pickering [1946] KB 422, [1946]
1 All ER 394.
4
See para 26.50.
5
[1924] AC 625, 632.
6
See per Pollack CB in Barker v Sterne (1854) 9 Exch 684 at 687.
7
[1907] 2 KB 735.

(g) Statutory protection

26.28 There is a multiplicity of statutory provisions conferring protection on
the paying banker in the situation in which it has made payment under a cheque
but has not discharged the instrument and is therefore not entitled to be
indemnified by his customer.
Unfortunately there is considerable overlap between the protective provisions.
The difficulties to which this situation inevitably gives rise are not lessened by
differences in terminology between the various provisions. For example, BEA
1882, s 60 refers to payment ‘in good faith and in the ordinary course of
business’, whereas BEA 1882, s 80 refers to payment ‘in good faith and without

17
26.28 Cheques

negligence’. Again, the effect of s 60 and the Cheques Act 1957, s 1(1) is that a
payment is deemed to have been made ‘in due course’, but the effect of the BEA
1882, s 80 is that a payment is deemed to have been made ‘to the true owner’,
and the effect of the Cheques Act 1957 s 1(2) is that payment ‘discharges the
instrument’. There is a clear case for the various overlapping provisions to be
consolidated in a single enactment. This was recommended by the Jack Com-
mittee and accepted by the Government, but the recommendation has not been
implemented1.
This section summarises the key provisions. Much of the detailed law has been
removed given the comparative rarity of negotiable/transferable cheques. The
reader is referred to one of the specialist texts of cheques for further details2.
1
See Cm 622 at 157 (Rec 7(6)) and Cm 1026 at para 5.9.
2
Elliott, Odgers, Phillips Byles on Bills of Exchange and Cheques (29th edn, 2013), Guest
Chalmers and Guest on Bills of Exchange, Cheques, and Promissory Notes (18th edn, 2017).

(i) Bank’s protection where it pays on a forged or

unauthorised indorsement
26.29 By BEA 1882, s 60, where a banker pays an indorsed cheque in good
faith and in the ordinary course of business, he is deemed to have paid the
cheque in due course even where the indorsement is forged or made without
authority. The effect is that the cheque is discharged and the banker is entitled
to debit his customer’s account.
This protection only operates where a cheque is capable of indorsement. It is
suggested that payment of a cheque to an apparent indorsee where it is crossed
a/c payee only would not be payment in the ordinary course of business (unless
the crossing has been opened).
26.30 A bank may act in good faith despite being negligent1, but it is an open
point whether a bank may act in the ordinary course of business despite being
negligent2.
The ‘ordinary course of business’ must be the recognised or customary course of
business of the banking community at large, not of any particular bank or
group of banks3. The question whether a payment is made in the ordinary
course of business must depend upon the circumstances.
In many cases, courts will be influenced by the evidence of persons experienced
in banking on such questions4.
1
BEA 1882, s 90; Woods v Martins Bank Ltd [1959] 1 QB 55, [1958] 3 All ER 166.
2
Carpenters’ Co v British Mutual Banking Co Ltd [1938] 1 KB 511, 107 LJKB 11.
3
Cf Rickford v Ridge (1810) 2 Camp 537; Lloyds Bank Ltd v Swiss Bankverein (1913) 18 Com
Cas 79, , 57 Sol Jo 243.
4
See per Denning LJ in Arab Bank Ltd v Ross [1952] 2 QB 216 at 227,[1952] 1 All ER 709 at
716; and United Dominions Trust Ltd v Kirkwood [1966] 1 QB 783, [1965] 2 All ER 992; affd
[1966] 2 QB 431, [1966] 1 Lloyd’s Rep 418; also Jayson v Midland Bank Ltd [1967] 2
Lloyd’s Rep 563, 111 Sol Jo 719.

26.31 The Stamp Act 1853, s 19, gives broadly similar protection to a banker
paying on a draft or order which does not fall within the definition of a bill of
exchange or a cheque. Protection is given in slightly wider circumstances, in

18
 The Collection of Cheques 26.34

that there is no requirement that the banker has acted in good faith or in the
ordinary course of business.
26.32 Further protection is given by the BEA 1882, s 80 where a banker pays
a crossed cheque (including a cheque crossed account payee only under the BEA
1882, s 81A) in good faith and without negligence to a banker in accordance
with the crossing. In those circumstances the banker is entitled to the same
rights and placed in the same position as if payment of the cheque had been
made to the true owner. Additionally, if the cheque has come into the hands of
the payee, the drawer will also be put in the same position as if payment had
been made to the true owner.
This responds to the problem noted above that, in the clearing process, the
paying bank is unable to verify whether the collecting bank is collecting on
behalf of the true owner.

(ii) The Bank’s protection against risks which are apparent on the face of
the cheque – Cheques Act 1957, s 1

26.33 The BEA 1882, s 60 and the Stamp Act 1853, s 19 are concerned
essentially with the problems of forged indorsements, a risk against which the
paying banker is clearly entitled to be protected. Those sections do not,
however, afford protection against risks which are apparent on the face of a
cheque, in particular, the absence of or irregularity in indorsement. Payment in
such circumstances would not be in the ordinary course of business (within BEA
1882, s 60), nor without negligence (within BEA 1882, s 80); and the protection
of the Stamp Act 1853, s 19 does not extend to the payment of cheques.
Accordingly, before the passing of the Cheques Act 1957, prudent banking
practice required the paying banker to dishonour cheques which lacked in-
dorsement or which were irregularly indorsed.
The purpose of the Cheques Act 1957 was to eliminate the need for the
indorsement of cheques and analogous instruments. It achieves this objective by
preventing the paying banker from incurring liability by reason only of the
absence of, or irregularity in, indorsement of the instruments mentioned in
s 1(1) (cheques) and (2) (certain analogous instruments). An indorsement is
regular if it is written on the bill itself and signed by the indorser (BEA 1882,
s 32(1).
Provided the banker pays the cheque (or other instrument) in good faith and in
the ordinary course of business, he does not incur liability as a result only of the
absence of or irregularity in the indorsement, and he is deemed to have paid the
cheque in due course (or discharged the other instrument).
The protection which this section offers is additional to that given by s 19 of
the Stamp Act 1853 and ss 60 and 80 of the Bills of Exchange Act 1882, and the
paying banker is entitled to whatever advantage he can gain from all or any of
them.

5 THE COLLECTION OF CHEQUES

26.34 This section deals with the collection of cheques – ie the bank’s role in
receiving cheques received by its customers, sending them to the paying bank

19
26.34 Cheques

through the process of ‘clearing’, and receiving a credit from the paying bank,
so allowing it to make a corresponding credit entry on its customer’s account.
The section deals first with collection generally, then with the collection of
cheques, and finally with the collection of bills. Given that the use of cheques is
declining and that the great majority of cheques are crossed ‘account payee’ or
‘a/c payee’ and are therefore not transferable (and not negotiable), parts of the
established law relating to collection – for example, the circumstances in which
a bank may become a holder for value – have become far less relevant. These
areas are accordingly not addressed in detail below although merit some
treatment because foreign jurisdictions continue to use transferable cheques
(for example, the USA). A more detailed treatment can be found in the 13th
edition of Paget, Part V Chapters 22 to 24.

(a) Collection generally

(i) General rights and duties

26.35 Just as the paying bank is the agent of the drawer of a bill, so too the
collecting bank is the agent of the customer who pays in the bill for collection.
As agent, the banker collecting bills for a customer is entitled to all the rights of
an agent against his principal. Unless the banker is himself at fault, he can claim
indemnity from his customer and can debit him with a dishonoured bill or with
any amount for which he has been found liable to a true owner. He is not liable
where he acts reasonably, though mistakenly, on ambiguous instructions. The
principal must save him harmless from any loss into which he has led him by
word, deed, or silence. The banker is bound to present bills for acceptance and
payment in accordance with the provisions of the Bills of Exchange Act and
must give notice of dishonour to the customer or the persons liable on the bill1.
If the banker employs a sub-agent for the purpose of collecting bills, he is
responsible to the customer for negligence on the part of such sub-agent2 and
for moneys received by such sub-agent, apart from any question of account
between banker and sub-agent3.
Where physical bills are lost or destroyed while in the hands of a bank purely for
collection, the loss will fall on the customer if the bank is not at fault4.
It has been held in Australia that a bank is not obliged to collect a cheque if it
might expose itself to an action for conversion to which no statutory defence
would be available5.
Note that there is no privity of contract between the customer of the remitting
bank (ie the bank instructed by the payee of the cheque to seek collection) and
the collecting bank (which, in this context, is instructed by the remitting bank)6.
A collecting bank may be liable in conversion to the true owner of a cheque if it
collects the cheque for another person. This cause of action is discussed in
Chapter 27 below.
1
Bills of Exchange Act 1882, s 49(13); 5 Halsbury’s Statutes (4th edn, 1989 Reissue) 362. Bank
of Van Diemen’s Land v Bank of Victoria (1871) LR 3 PC 526; Bank of Scotland v Dominion
Bank (Toronto) [1891] AC 592.
2
Mackersy v Ramsays, Bonars & Co (1843) 9 Cl & Fin 818; Prince v Oriental Bank Corpn
(1878) 3 App Cas 325, PC; see also Calico Printers’ Association Ltd v Barclays Bank (1930)
36 Com Cas 71; on appeal (1931) 145 LT 51, 36 Com Cas 197.

20
 The Collection of Cheques 26.37
3
Mackersy v Ramsays, Bonars & Co, above; and see Morris v Martin & Sons Ltd [1966] 1 QB
716, [1965] 2 All ER 725, CA.
4
Thompson v Giles (1824) 2 B & C 422; Re Wise, ex p Atkins (1842) 3 Mount D & De G 103.
5
Tan ah Sam v Chartered Bank (1971) 45 ALR 770.
6
Calico Printers Association v Barclays Bank Ltd (1931) 36 Com Cas 71; Grosvenor Casi-
nos Ltd v National Bank of Abu Dhabi [2008] EWHC 511 (Comm), [2008] 2 All ER (Comm)
112, [2008] Bus LR D95.

(b) Collection of cheques

(i) Time for presentation
26.36 A cheque is a bill payable on demand. Accordingly, presentation (re-
ferred to as presentment in the Bills of Exchange Act) must be made within a
reasonable time after a cheque’s issue in order to render the drawer liable (BEA
1882, s 45(2)). Sections 45 and 74 of the Bills of Exchange Act import the
custom of trade and the custom of bankers as elements in the determination of
what is reasonable time for the presentation of a cheque.
The drawer is discharged to the extent that the cheque is not presented within
a reasonable time after issue and suffers actual damage through the delay (BEA
1882, s 74(1)). This situation will be rare; late presentation will normally be to
the drawer’s advantage because he has extended use of funds. Late presentation
would cause loss if, for example, the drawer’s bank would have paid on prompt
presentation, but has since become insolvent.

(ii) Means of presentation

A. Presentation through clearing

26.37 Hitherto, presentation (sometimes referred to as ‘presentment’) has

normally meant physical presentation of the paper cheque through the cheque
clearing system managed by the Cheque and Credit Clearing Company Ltd.
Presentation by electronic means (known as truncation) was also permitted.
The current rules for cheque clearing (introduced in November 2007) provide
for a ‘2-4-6’ clearing timescale: at a maximum, a customer can expect to earn
interest within two days of presentation, to withdraw money from his account
within four days (six days for savings accounts), and after six days the customer
is protected from dishonour, unless he is a knowing party to a fraud1.
A cheque may be forwarded to another branch or to an agent of the bank, who
has the same time for presentation after receipt2. A non-clearing bank can thus
use a clearing bank.
As set out in para 26.40 below, from a date to be determined in 2018, it is
intended that paper based clearing will cease and be replaced by image based
clearing.
1
Further information can be found here: www.chequeandcredit.co.uk/files/candc/c&ccc/pdf_an
d_docs/cheque_and_cheque_clearing_the_facts_2012.pdf.
2
Prideaux v Criddle (1869) LR 4 QB 455.

21
26.38 Cheques

B. Presentation by one bank to another

26.38 One bank may also present a cheque directly to another bank1. However
this is usually done for a special purpose. In that case, it would seem that the
paying bank receives the cheque as agent for presentation to itself, and so can
hold it till the day after receipt. If not paid, it must be returned the day after
receipt.
BEA 1882, s 74A permits presentation at an address specified by the drawee
bank by notice published in the London, Edinburgh or Belfast Gazettes.
1
Bailey v Bodenham (1864) 16 CBNS 288 at 296.

C. Presentation by post
26.39 Presentation by post is sufficient only where authorised by agreement or
usage1.
1
BEA 1882, s 45(8).

D. Presentation by electronic means

26.40 With effect from October 2017, image based clearing began to be used
pursuant to Part 4A of the BEA 1882. The intention is for paper based clearing
to cease entirely from a date to be determined later in 2018. This has replaced
the previous process by which truncated presentation took place pursuant to
ss 74B and 74C. Those sections were repealed by the Small Business, Enterprise
and Employment Act 2015, s 13(4).
The effect of this is that the transmission of an electronic image of the cheque
can operate as effective presentation (see s 89A(1)). Pursuant to s 89A(7), the
obligations of the paying bank and collecting bank are unchanged. However,
under the Electronic Presentment of Instruments (Evidence of Payment
and Compensation for Loss) Regulations, SI 2018/832, which came into effect
on 31 July 2018, statutory liability is now imposed on collecting banks to
compensate paying customers where loss results from the operation of elec-
tronic presentation.
The reasoning behind this is that the paying bank will not (as previously) have
the opportunity to examine the physical cheque before paying it. So, (for
example) where the electronic image has been altered electronically, so that it is
no longer a true image of the original cheque, the collecting bank will be strictly
liable to compensate the paying bank or its customer. The circumstances in
which the collecting bank will be liable are somewhat wider than the example
given above, and are set out in detail in regs 5(1) and (2).
First, in each case the claimant must have incurred the loss in connection with
the actual or purported electronic presentment of an instrument (reg 5(1)(a)).
Second, the claimant must be either the customer of the paying bank, or the
paying bank itself (reg 5(1)(b).
Third, the loss must result wholly or in part from a factor other than gross
negligence on the part of the claimant, or fraudulent activity in which the
claimant was knowingly involved (reg 5(1)(c)).

22
 The Collection of Cheques 26.41

Fourth, the claimant must have notified a bank in accordance with reg 6(1) and
made a claim in accordance with regs 6(3) and (4) (reg 5(1)(d)).
Fifth, one of the following criteria must have been met:
(a) that the cheque was collected for or paid to a person other than the true
owner of the instrument,
(b) the underlying instrument could not be presented for payment by
electronic means,
(c) the electronic image had been stolen,
(d) the electronic image was of an instrument with no legal effect, or
(e) the electronic image purports to be but is not an image of a physical
instrument (including one which has been altered electronically),
(reg 5(1)(e), read with s 89E(2)(c)–(e) of the Bills of Exchange Act 1882).
The collecting bank will not be able to rely on the defence of non-negligence
under s 4 of the Cheques Act 1957, although it will be able to avoid liability if
the claimant was grossly negligent or fraudulent (reg 5(1)(c)). It will also be able
to benefit from a contributory negligence defence (reg 8).
There are strict notification requirements and time limits set out in the regula-
tions. The claimant must notify the paying bank, which must in turn notify the
responsible bank (generally the collecting bank1) within five working days from
its notification (reg 6(1) and (2). Following notification, the claim for compen-
sation may only be made if the claimant has not received compensation 56 days
after notification (reg 6(4)). The claim for compensation (distinct from
notification) must be made in writing, and contain all information relating to
the claim necessary for the responsible bank to assess whether the conditions for
liability in reg 5 (summarised above) have been met (reg 6(3)). Once that claim
for compensation has been received, the collecting bank has 15 working days to
(i) accept the claim (and pay it within a further ten working days), (ii) reject it,
giving reasons, or (iii) request further information to assess the claim (reg 6(5)).
But in any event, each claim must be accepted or rejected within 120 days after
the collecting bank received the claim (reg 6(6)). The only exception is where
the collecting bank has reasonable grounds to suspect that the claimant was
knowingly involved in a fraud, the bank has notified the appropriate authority,
and the bank considers that giving a notification would be likely to prejudice
any investigation (reg 6(7)).
The claim for compensation must be made within six years of the loss having
been incurred (reg 6(4)). However, if that claim for compensation is wrongly
rejected, the claimant will have a cause of action for breach of statutory duty
(reg 9). That cause of action will, in principle, have a further six-year limitation
period pursuant to the Limitation Act 1980.
1
See the Bills of Exchange Act 1882, s 89E. A bank which presents the cheque in the capacity of
its holder can also be responsible.

(iii) House cheques

26.41 When a cheque drawn by one customer of a bank is received from
another customer of the same branch, it is a question of fact whether it is
presented for payment or paid in for collection1. If the latter, the bank has the

23
26.41 Cheques

usual time of an agent for returning it and giving notice of dishonour2. In Grace
Chu Chan Po Kee v The Hong Kong Chinese Bank Ltd the claimant, a customer
of the defendant bank, delivered to the bank a cheque for HK $1,200,000
drawn on the bank by another customer for the credit of her loan account.
Three weeks later the bank returned the cheque. It was conceded that this
period exceeded ‘the time established by the custom and practice of banks in
Hong Kong within which paying banks decide the fate of a cheque which has
not been presented to the paying banker through the Clearing House’. Judg-
ment was given for the claimant3.
Where a cheque is paid in for collection, the bank should deal with it as in the
case of any other cheque but, as drawee banker also, must pay such cheque in
preference to a debt due to itself from the drawing customer4. If, for instance,
the drawer’s account was overdrawn when the cheque was paid in, but before
it was returned, the drawer paid in sufficient funds to cover it, not appropriated
to other payments, the bank would have to pay the cheque, irrespective of its
right of set-off.
1
Cf Carpenters’ Co v British Mutual Banking Co Ltd [1938] 1 KB 511.
2
Boyd v Emmerson (1834) 2 Ad & El 184.
3
High Court of Hong Kong (9 January 1979, unreported).
4
Kilsby v Williams (1822) 5 B & Ald 815.

(iv) Liability to customer for delay in presentment

26.42 If the collecting banker fails to present a cheque within the allotted time
after it reaches him, he is liable to his customer for loss arising from the delay1.
The banker is further liable to his customer for damage to his credit if he
dishonours a cheque which there would have been funds to meet if other
cheques paid in by the customer had been presented for payment without
delay2.
1
Lubbock v Tribe (1838) 3 M & W 607; see also Yeoman Credit Ltd v Gregory [1963] 1 All ER
245, [1963] 1 WLR 343.
2
Forman v Bank of England (1902) 18 TLR 339.

(c) Notice of dishonour

(i) Requirement for notice
26.43 If a cheque is dishonoured (eg because the drawer of the cheque holds
insufficient funds on deposit with the paying bank), the collecting bank must
give the drawer notice: BEA 1882, s 48. Note however that in many cases
omission to give notice would be excused under s 50(2)(c) (notice to drawer
dispensed with where the drawer has countermanded payment).
By s 49(13) notice of a dishonoured bill in the hands of an agent (such as a
collecting banker) may be given to his principal, his customer, and, presumably,
by the return of the instrument to him.

24
 The Collection of Cheques 26.45

(ii) Form of notice

26.44 Save in the case of the return of the instrument itself, notice must be
given in writing or by personal communication in terms which sufficiently
identify the cheque (s 49(5)).
A telephone communication may be a mere warning of what is in the post rather
than the substantive notice of dishonour1.
1
Lombard Banking Ltd v Central Garage and Engineering Co Ltd [1963] 1 QB 220 at 232,
[1962] 2 All ER 949 at 955D.

(iii) Time for giving notice

26.45 The time allowances for giving notice, where a bill or cheque is in the
hands of a bank for collection, are fairly liberal. By BEA 1882, s 49(13), the
banker has the same time to give notice to his customer as if he (the banker)
were the holder, and the customer, upon receipt of such notice, has himself the
same time for giving notice to the drawer as if the banker had been an
independent holder. Moreover, where the instrument has been forwarded by
one branch to another, or by a branch to the head office, or vice versa, for
collection, each such constituent of the entire bank is, for the purpose of giving
notice of dishonour, regarded as a separate entity, and the same time allowed as
if it were an independent holder1. However, except in the case of personal
communication, the crucial time is the sending, not the receipt, of the notice
(s 49(12)). Thus, where the parties reside in different places and written notice
is provided, the notice must be sent off on the day after the dishonour of the bill
if there is post at a convenient hour on that day, and if there be no such post on
that day, then by the next post thereafter.
In Fielding & Co v Corry2, notice of dishonour was posted by mistake to the
wrong branch of the presenting bank and a telegram sent the next day to the
right branch. It was held that this was equivalent to a redirection of the latter,
and that the notice was good. In London, Provincial and South-Western
Bank Ltd v Buszard3, an order to stop a cheque, addressed to the wrong branch,
was held ineffective.
In Lombard Banking Ltd v Central Garage and Engineering Bank Ltd4, bills
accepted payable with Barclays Bank Ltd in Porthcawl were handed by the
claimant to Westminster Bank in London for collection. The latter sent them to
Barclays for presentation to themselves. They were dishonoured, upon which
Barclays advised Westminster Bank and returned the bills, which were received
by Westminster Bank on the working day following dishonour. The same day,
Westminster Bank notified the claimants who, however, did not advise the
defendant company until the bills were in their possession, ie that day or the
first working day following receipt. The second and third defendants were
directors of the defendant company. To the defence that notice of dishonour
was not given within s 49(12) and (13), Scarman J held that the claimants had
acted reasonably in waiting to get the bills back before giving notice, and that
even if Barclays were the agents of the holders, notice of dishonour was given in
time, since the oral or telephonic communication of Westminster Bank was a
warning of what was in the post and not the substantive notice of dishonour,

25
26.45 Cheques

which was the receipt by the claimants of the dishonoured bills5.

1
Clode v Bayley (1843) 12 M & W 51; Prince v Oriental Bank Corpn (1878) 3 App Cas 325;
Fielding & Co v Corry [1898] 1 QB 268.
2
[1898] 1 QB 268; and see Eaglehill Ltd v J Needham Builders Ltd [1973] AC 992, [1972]
3 All ER 895, [1972] 3 All ER 895, where the House of Lords held that a notice of dishonour
sent by post and delivered in the ordinary course of post is not ‘given’ until it is received.
3
(1918) 35 TLR 142.
4
[1963] 1 QB 220, [1962] 2 All ER 949.
5
[1963] 1 QB 220, [1962] 2 All ER 949; and see Hamilton Finance Co Ltd v Coverley, Westray,
Walbaum and Tosetti Ltd and Portland Finance Co Ltd [1969] 1 Lloyd’s Rep 53.

(d) Debiting customer’s account upon dishonour

26.46 The right to debit the customer with a returned cheque, notwithstanding
that it has been credited as cash, was recognised by Lord Lindley when he said
in Gordon v Capital and Counties Bank Ltd1:
‘It is no doubt true that if the cheque had been dishonoured, Jones [the customer]
would have become liable to reimburse the bank the amount advanced by it to him
when it placed the amount to his credit. This he would have to do where any cheque,
crossed or not, was placed to his credit, and was afterwards dishonoured.’
Where the account for which the cheque is collected is in debit at the time of
dishonour, the banker has the choice of increasing the overdraft or of debiting
a suspense account with a view to reserving his rights against other parties. The
effect of debiting the customer’s account may be to relinquish the lien, as was
evident in Westminster Bank Ltd v Zang2, and the banker would not acquire a
fresh lien by taking the cheque back, as it would not have come into his hands
qua banker but, presumably, as the claimant in an intended action on the
instrument.
If the customer’s account cannot meet the dishonoured instrument and the
banker wishes to retain his rights against the parties, he can retain possession,
give notice to all parties and debit the amount to a suspense account; but that is
a matter of accounting.
In practice, as noted above at para 26.37, under the present physical clearing
rules a customer’s account will not be debited upon a dishonoured cheque later
than six days after it has been paid in, unless he is a knowing party to a fraud.
This may well be given contractual effect in the terms of the bank-customer
contract.
1
[1903] AC 240 at 248.
2
[1966] AC 182, [1966] 1 Lloyd’s Rep 49, [1964] 3 All ER 683.

(e) Statutory rights of the collecting bank

26.47 Almost all cheques now bear a pre-printed ‘account payee’ or ‘a/c payee’
crossing. By BEA 1882, s 81A(1) (inserted by the Cheques Act 1992, s 1), such
cheques are not transferable.
No-one other than the payee can become the holder of a cheque which is not
transferable. A bank which collects a non-transferable cheque payable to a

26
 The Collection of Cheques 26.48

customer cannot become a holder of the instrument and cannot acquire any
rights under it.
In the rare circumstances when a cheque is transferable, the collecting bank may
have certain rights. These arise under, firstly, s 2 of the Cheques Act 1957
(which provides a bank giving value for or having a lien upon a cheque payable
to order has the same rights as if the holder had indorsed it in blank); secondly,
under the BEA 1882, s 27(3) (which provides that where the bank has a lien on
the cheque arising either from contract or by implication of law, it is deemed to
be a holder for value to the extent of the sum for which he has a lien). Given the
absence of transferable cheques in modern English banking practice these rights
are not addressed further.

(f) Duty owed by collecting bank to drawer of cheque

26.48 It would seem that a collecting bank does not owe a duty of care to a
drawer of a cheque. This is supported by English authority1 and Canadian
authority2:
In the relevant English authority, Abou-Rahmah v Abacha3, the claimants had
made payments to an account in London of the defendant (a Nigerian bank),
with instructions to credit the account of a customer named Trust International.
In the event, the defendant credited the account of an entity named Trusty
International, which was controlled by fraudsters who had devised a scheme to
defraud the claimants. The claimants contended that the defendant as receiving
bank owed them a duty to take care to pay the monies received only to the
named beneficiary identified in the payment instructions. In applying the
threefold test of foreseeability, proximity and reasonableness, Treacy J had
regard to the following factors:
(i) the claimants were not the defendant’s customers;
(ii) no special responsibility had been undertaken by the defendant to the
claimant;
(iii) until the monies were received by the defendant, there had been no
contact from the claimants;
(iv) the defendant received the monies as agent of the customer to whom it
owed duties arising from their contractual relationship;
(v) a bank has a huge number of potential payers who can remit monies
without significant control by the bank;
(vi) the imposition of a duty of care in relation to such persons (in the
absence of special circumstances) would in practice impose very heavy
burdens on banks and significantly hamper their efficiency.
On these factors, it was held that the Nigerian bank did not owe a duty to the
claimants.
1
Abou-Rahmah v Abacha [2005] EWHC 2662 (Ch), [2006] 1 All ER (Comm) 247, [2006] 1
Lloyd’s Rep 484, affd [2006] EWCA Civ 1492, [2006] All ER (D) 80 (Nov).
2
Groves-Raffin Construction Limited & others v Bank of Nova Scotia & others (1975) 64 DLR
(3rd) 78; Toor and Toor v Bank of Montreal (1992) 2 Bank LR 8; but see Royal Bank of Canada
v Stangl (1992) 32 ACNS (3d) 17 Ontario Court, General Division.
3
[2005] EWHC 2662 (Ch).

27
26.49 Cheques

(g) The collection of bills of exchange

(i) General

26.49 Everything said above about the collection of cheques applies to the
collection of other bills of exchange. The following additional points are made.
First, presentation of a bill for acceptance is necessarily a step in collection,
though a banker may be employed for that purpose alone, returning the
accepted bill to the customer. The duties of a banker re-presenting bills for
acceptance are set out in BEA 1882, s 41. Whether there is any responsibility on
the part of the presenting banker to ensure that the signature to the acceptance
is that of the drawee or written by his authority has not been the subject of
decision, but it is not done in practice.
Second, the banker receiving bills for collection from another banker is not
agent for that banker’s customer, but for the remitting banker; and, unless he
has distinct notice that the bills are the property of the customer and are in the
remitting banker’s hands purely for collection, may treat them as that bank-
er’s property1. On this basis they would be subject to the lien of the sub-agent
for any balance due to him from the remitting banker2.
Third, section 49(6)3 enacts that:
‘The return of a dishonoured bill to the drawer or an indorser is, in point of form,
deemed a sufficient notice of dishonour.’
1
Johnson v Robarts (1875) 10 Ch App 505; Re Dilworth, ex p Armistead (1828) 2 Gl & J 371.
2
Re Parker, ex p Froggatt (1843) 3 Mont D & De G 322; Prince v Oriental Bank Corpn (1878)
3 App Cas 325; Re Burrough, ex p Sargeant (1810) 1 Rose 153.
3
See Westminster Bank Ltd v Zang [1966] AC 182 and in the Court of Appeal Lord Den-
ning MR, [1966] AC 182 at 197.

(ii) Collecting bank as holder

26.50 The Bills of Exchange Act recognises three types of holder:
(i) a mere holder, who is defined by s 2 as the payee or indorsee of a bill or
note who is in possession of it, or the bearer thereof;
(ii) a holder for value, ie a holder of a bill for which value has been given
(whether or not by the holder), who is deemed by s 27(2) to be a holder
for value as regards the acceptor and all parties to the bill who became
parties prior to value being given; and
(iii) a holder in due course, who is defined by s 29(1) as a holder who has
taken a bill complete and regular on the face of it under specified
conditions, including that he took the bill in good faith and for value,
and that at the time the bill was negotiated to him he had no notice of
any defect in the title of the persons who negotiated it.
The holder of a bill is entitled to sue on it. The difference between the three types
of holder lies in the defences which can be set up against them. The strongest
position is enjoyed by a holder in due course. By s 38(2) he holds the bill free
from any defect in title of prior parties, as well as from mere personal defences
available to prior parties among themselves; he can obtain a good title to a
bearer bill even from a thief1. The rights of a holder for value are not defined by

28
 Instruments Analogous to Cheques 26.51

the Act, but by implication from his non-inclusion in s 38(2), a holder for value
can be met with the defences which that section renders unavailable against a
holder in due course. A mere holder is in the weakest position and is vulnerable
to the defence of absence or failure of consideration.
It is possible for a bank to sue as a holder for value as to part of the amount of
the bill and as a mere holder for the balance2.
The question whether a collecting bank is a holder and, if so, what type of
holder, is potentially relevant in two very different situations. First, the collect-
ing bank may wish to bring proceedings on a dishonoured bill against the
drawer or an indorser. This tends to be a remedy of last resort. A collecting bank
which has credited its customer with the amount of a bill which is subsequently
dishonoured will usually protect itself by the simple expedient of reversing the
credit. However, the collecting bank may wish to sue on the bill if the account
is overdrawn and there is doubt about the customer’s ability to repay his
indebtedness.
Second, a bank which is a holder in due course is in some circumstances
insulated from liability in conversion. In practice, this defence is rarely invoked
by a collecting bank. One reason is that a collecting bank does not give value (a
prerequisite to becoming a holder in due course) unless it purchases the
instrument outright (which is unusual) or it is deemed a holder for value by
virtue of s 27(3) (see below). Another reason is that in many cases of alleged
conversion there will have been a forged indorsement which breaks the chain of
title (a thief who steals a bill which is not a bearer bill has to forge an
indorsement to pass apparent title on to the innocent purchaser). The forged
indorsement will be wholly inoperative (s 24) and neither the immediate
purchaser from the thief nor subsequent holders will acquire any rights against
the drawer or acceptor even if they took the bill in good faith, for value and
without notice of the theft. The person from whom the instrument was stolen
remains the true owner; a collecting bank which acts for the purchaser from the
thief or for a subsequent holder commits an act of conversion.
1
See Clutton v Attenborough & Son [1897] AC 90, where a fraudulent clerk obtained possession
of cheques which he had persuaded his employers to sign; there was actual theft coupled with
fraud which might well have been classed as larceny by a trick. The House of Lords upheld a
claim by a holder in good faith and for value. See also Dextra Bank & Trust Co Ltd v Bank of
Jamaica [2002] 1 All ER (Comm) 193.
2
See Barclays Bank Ltd v Aschaffenburger Zellstoffwerke AG [1967] 1 Lloyd’s Rep 387, CA.

6 INSTRUMENTS ANALOGOUS TO CHEQUES

26.51 The statutory protection relating to the payment1 and collection2 of
cheques extends by virtue of the Cheques Act 1957, ss 1(2) and 4(2), to certain
instruments which, though not cheques, are analogous to cheques. These
instruments are:
(1) As regards the paying banker—
(a) a document issued by a customer of his which, though not a bill of
exchange, is intended to enable a person to obtain payment from him of
the sum mentioned in the document;

29
26.51 Cheques

(b) a draft payable on demand drawn by him upon himself, whether payable
at the head office or some other office of his bank.
(3) As regards the collecting banker—
(a) any document issued by a customer of a banker which, though not a bill
of exchange, is intended to enable a person to obtain payment from that
banker of the sum mentioned in the document;
(b) any document issued by a public officer which is intended to enable a
person to obtain payment from the Paymaster General or the
Queen’s and Lord Treasurer’s Remembrancer of the sum mentioned in
the document but is not a bill of exchange;
(c) any draft payable on demand drawn by a banker upon himself, whether
payable at the head office or some other office of his bank.
It is convenient to consider at this point certain instruments analogous to
cheques (some of which may in fact be cheques if drawn in the appropriate
form) and whether the payment and collection of such instruments attracts the
protection of the Cheques Act 1957.
1
Paras 26.28 ff.
2
Para 26.47.

(a) Dividend warrants

26.52 Dividend warrants are often cheques in a somewhat unusual form. A
dividend warrant would not, however, be a cheque if made conditional, for
instance, by making the counter-signature of the payee a condition of payment.
BEA 1882, s 95 provides that the crossed cheques provisions of the Act shall
apply to ‘a warrant for the payment of dividends’; and BEA 1882, s 97(3)(d)
provides that nothing in the Act shall effect the validity of any usage relating to
dividend warrants or the indorsement thereof. This latter provision is probably
directed to the payment of dividend warrants drawn in favour of two or more
payees on the indorsement or discharge of one.
A dividend warrant which is not a cheque will ordinarily be a document
intended to enable a person to obtain payment from a banker within the
Cheques Act 1957, s 1(2)(a) or s 4(2)(b).

(b) Interest warrants

26.53 In Slingsby v Westminster Bank Ltd1, Finlay J held that a Bank of

England interest warrant was a dividend warrant within the meaning of the
BEA 1882, s 95 and that accordingly, applying the provisions of the Bills of
Exchange Act as to crossed cheques, BEA 1882, s 82 was available to the
defendant bank. The ground was that the drawer of the warrant, the Chief
Accountant of the Bank of England, was acting as agent of the Government (not
merely Bank) and that the instrument was thus a cheque.
As in the case of dividend warrants, an interest warrant which is not a cheque

30
 Instruments Analogous to Cheques 26.56

will ordinarily fall within the Cheques Act 1957, s 1(2)(a) or s 4(2)(b).
1
[1931] 1 KB 173.

(c) Conditional orders for payment

26.54 Conditional orders for payment are instruments issued by a customer
addressed to his bank imposing a condition of payment, such as the signing by
a payee of a form of receipt placed thereon or annexed thereto. Where this is a
condition of payment, contained in the body of the instrument, addressed to
and affecting the drawee banker, the instrument is not a bill of exchange and
therefore not a cheque1.
1
See Bavins Junior and Sims v London and South Western Bank Ltd [1900] 1 QB 270; London,
City and Midland Bank Ltd v Gordon [1903] AC 240. The Revenue Act 1883 (repealed) treated
conditional orders as non-negotiable instruments. The Cheques Act 1957, s 6(2) provides that
its foregoing provisions do not make negotiable any instrument which, apart from them, is not
negotiable.

(i) Negotiability of conditional orders for payment

26.55 Making a conditional order for payment payable to order or even to
bearer does not make it negotiable1, nor even transferable. If this were not so,
incongruous results would follow. This becomes clear upon considering the
position in the case of a purported transfer. The transferee (B) would only
accept the instrument upon signature of the receipt by the payee (A), for
otherwise B would be unable to tender the document in the appropriate form.
This has the consequence, however, that if the instrument were paid, the bank
would be paying to B money which A had already acknowledged to have been
paid to him in accordance with the order2.
1
See the judgment of the Court of Appeal in Gordon v London, City and Midland Bank Ltd
[1902] 1 KB 242 at 275.
2
This obvious objection to the negotiation or transfer of conditional orders for payment appears
never to have been raised in cases where it might have been, eg Bavins Junior and Sims v London
and South Western Bank [1900] 1 QB 270, or the Gordon case, above.

(ii) Statutory protection

26.56 Payment of conditional orders to pay is protected by the Cheques Act
1957, since a conditional order for payment is a document within the Cheques
Act 1957, s 1(2)(a) or s 4(2)(b).
It is submitted that to collect a conditional order for a transferee from the payee
or an indorsee would not, by itself, amount to negligence1.
1
In Bavins Jnr and Sims v London and South Western Bank [1900] 1 QB 270, CA and in the
Gordon case [1903] AC 240, conditional orders were collected for a transferee, but no
objection seems to have been raised. As to negligence which deprives a collecting banker of the
statutory protection, see paras 27.14–27.22 below.

31
26.57 Cheques

(d) Bank drafts

(i) Inland bank drafts
26.57 A bank draft is a draft drawn by one branch on another branch or on the
head office of the same bank or vice versa. Bank drafts are not cheques or bills,
there being no distinct drawer and drawee1.
A bank draft is equivalent to a promissory note2 and a holder may at his option
treat the instrument either as a bill of exchange or as a promissory note3.
A bank draft payable to bearer on demand would probably be an infringement
of the Bank Charter Act 1844, s 114, which was enacted in the national interest
to prevent the excessive issue of notes by banks and to facilitate the ultimate
transfer of the whole note issue to the central bank.
The payment and collection of bank drafts is protected by the Cheques Act
1957, ss 1(2)(b) and 4(2)(d).
1
London City and Midland Bank Ltd v Gordon [1903] AC 240.
2
Commercial Banking Co of Sydney Ltd v Mann [1961] AC 1, PC, at 7 (‘[Bank drafts] are in
legal significance promissory notes made and issued by the bank’).
3
BEA 1882, s 5(2).
4
The section appears to have been judicially considered only in the case of A-G v Birkbeck (1884)
12 QBD 605, where it was held that the word ‘issue’ means the delivery of notes to persons who
are willing to receive them in exchange for value in gold, in bills or otherwise, the person who
delivers them being prepared to take them up when they are presented for payment: (1884)
12 QBD 605 at 611.

(ii) Foreign bank drafts

26.58 There is some doubt as to whether foreign bank drafts are covered by
the Stamp Act 1853, s 191 or the Cheques Act 1957.
It is suggested that the protection extends to all documents falling within its
terms at the present day. Statutes are not to be confined to conditions existing at
the date of their passing, if their wording is wide enough to include subsequent
developments2.
The Cheques Act 1957 does nothing to include a draft drawn abroad, but the
Act does not exclude it, and the argument that it is included seems valid.
1
London City and Midland Bank v Gordon [1903] AC 240 at 251.
2
A-G v Edison Telephone Co of London (1880) 6 QBD 244, explained and applied in R (on the
application of ZYN) v Walsall Metropolitan Borough Council [2014] EWHC 1918 (Admin),
[2014] All ER (D) 108 (Jun).

(e) Banker’s payments

26.59 A banker’s payment is a non-transferable payment order from one bank
to another. It will identify the drawer, the drawee (who will often be the same
bank), the payee, the party for whose account the payment is made (which will
often be the payee itself) and the party by whose order the instrument was
issued.
The use of banker’s payments has fallen dramatically with the abolition of
Town Clearing and the introduction of CHAPS. Banker’s payments now have

32
 Instruments Analogous to Cheques 26.61

to clear through the ordinary cheque clearing system. Accordingly they are used
only occasionally, mainly for smaller payments where same-day settlement is
not necessary.
Since the instrument is valid only as between the bank drawer and the bank
payee, it is not surprising that there has been no reported litigation concerning
banker’s payments. In principle, such instruments are capable of being con-
verted. As to statutory protection for a collecting bank which commits conver-
sion, a banker’s payment drawn on another bank appears to be a non-
transferable cheque within the Cheques Act 1957, s 4(2)(a) (as amended by the
Cheques Act 1992), and a banker’s payment drawn by the drawer on itself
appears to be a bank draft within s 4(2)(b).

(f) Travellers cheques1

1
See generally Chitty on Contracts (33rd edn, 2018), paras 34-171 to 34-179.

(i) The legal nature of travellers cheques

26.60 The modern travellers cheque is an instrument which contains a direc-
tion along the following lines:
‘When countersigned below with this signature [space for signature], pay this cheque
to the order of [space for name of payee]’.1
The instrument will state the issuer’s name and be signed on its behalf by means
of a pre-printed reproduction signature. The payment order is often directed to
the issuer itself.
The specimen signature is that of the purchaser and is written on the instrument
at the time of purchase. The purchaser is able to obtain payment of the
instrument from any of the thousands of institutions worldwide which accept
travellers cheques by adding his own countersignature. He will usually be
required to provide appropriate proof of identity. The signatory is able to
transfer title to the cheque by countersigning and inserting the name of a
different payee after the words ‘pay this cheque to the order of’.
It is submitted that a travellers cheque in the above form is not a bill of exchange
for two reasons. First, the drawer and the drawee are the same; however, this
alone would not prevent a travellers cheque from being treated as a bill of
exchange or a promissory note at the option of the holder. Second, the payment
order is conditional, because the direction is to pay only after the instrument has
been countersigned. This prevents a travellers cheque from being either a bill of
exchange or a promissory note (see ‘Conditional orders for payment’ above
para 26.54).
1
This wording is taken from an American Express travellers cheque.

(ii) Loss or theft of travellers cheques which have not been countersigned
26.61 In the event of loss or theft of a travellers cheque which has not been
countersigned, the rights of the purchaser against the issuer are usually gov-
erned by written terms and conditions. For example, in Fellus v National
Westminster Bank plc1, the issuer had agreed to make refunds provided that

33
26.61 Cheques

there had been no undue negligence; in Braithwaite v Thomas Cook Travellers

Cheques Ltd2, the issuer had agreed to replace or refund lost or stolen cheques
provided that the purchaser had properly safeguarded them; in El Awadi v
Bank of Credit and Commerce International SA Ltd3, the contract provided
that any claim for a refund of lost or stolen cheques was subject to approval by
the issuer. The construction of such terms and their application to particular
facts has to be determined case by case.
In the absence of an express contractual right to a refund for lost or stolen
cheques, the purchaser is likely to base any claim on an implied contractual
term or on an allegation of conversion.
Differing views have been expressed as to whether the contract between the
issuer and the purchaser contains any such implied term4. It is submitted that
Hutchison J was correct in the El Awadi case in holding that it is a necessary
incident of the contract for the purchase and sale of travellers cheques that the
issuer will refund the value of lost or stolen cheques. This term takes effect
subject to any relevant limitation contained in the other terms of the contract.
However, it is not a necessary incident of the contract that the purchaser should
safeguard his cheques with reasonable care. If the issuer wishes to impose any
such duty on the purchaser, he can do so by an appropriate express term.
As to conversion, Hutchison J regarded the purchaser’s allegation that BCCI
had converted the cheques as distinctly arguable5. In principle it seems correct
that the issuer converts a stolen cheque by paying its face value other than to the
true owner6. However, if the purchaser is in breach of some term requiring him
to take reasonable care to safeguard his cheques, a claim in conversion would
prima facie fail for circuity of action.
Many issuers of travellers cheques are not banks, but companies which spe-
cialise in that line of business. Not being banks, such entities cannot claim the
protection of the Cheques Act 1957, s 1(2). Even where the issuer is a bank, it
may be questioned whether the statutory protection is available. Protection is
not available under s 1(2)(a) because travellers cheques are not issued by the
customer but by the bank itself. However, if it is right to treat a travellers cheque
as a species of bank draft (when issued by a bank), protection is probably
available under s 1(2)(b). The fact that the payment order is conditional should
not prevent the instrument being payable on demand for the purpose of the
subsection.
1
(1983) 133 NLJ 766.
2
[1989] QB 553, [1989] 1 All ER 235.
3
[1990] 1 QB 606, [1989] 1 All ER 242.
4
See Braithwaite v Thomas Cook Travellers Cheques Ltd [1989] QB 553, 557H, [1989]
1 All ER 235, 239c (Schiemann J) and El Awadi v Bank of Credit and Commerce International
SA Ltd [1990] 1 QB 606, 616, [1989] 1 All ER 242, 247–248 (Hutchison J).
5
[1990] 1 QB 606, 627D, [1989] 1 All ER 242, 256e.
6
As to conversion by a paying bank, see para 26.24 above.

(iii) Rights of holder in due course

26.62 Although travellers cheques are not bills of exchange or promissory
notes, they have probably acquired the status of negotiability by mercantile
usage. They have been held negotiable in the USA1. If travellers cheques were

34
 Instruments Analogous to Cheques 26.64

held negotiable under English law, a holder in due course would obtain good
title against the issuer notwithstanding that, unknown to him, the instrument
had been stolen before he became holder.
1
Ashford v Thomas Cook & Son (Bankers) Ltd 471 Pac Rep 2d 531, 533 (1970). See also State
v Katsikaris 1980 (3) SA 580, 592.

(iv) Travellers cheques in decline

26.63 In 2011, the OFT recorded that the use of travellers cheques was
declining, and the decline was expected to continue1. This seems likely to have
been caused by an increased use abroad of UK credit or debit cards, and/or
pre-paid currency cards2.
1
OFT: Travel Money and Card Use Abroad: Response to the Consumer Focus super-complaint
– OFT1400 www.gov.uk/search?q=super+complaints, paragraph 2.9
2
See Chapter 25.

(g) Postal orders

26.64 By the Postal Services Act 2000, s 112(1), ‘the Post Office company’
(defined in s 62(8) as the company nominated for the purposes of s 62) may not
issue postal or money orders otherwise than in accordance with a scheme made
under that section.
By s 113(1), where a money order has been delivered for collection to a banker,
and the Post Office company has paid the order to the banker when it should
not have done, the sum paid may be deducted from sums subsequently falling to
be paid by the Post Office company to the banker by way of payment of money
orders. The bank’s only remedy is to debit the customer for whom it collected
the impugned order.

35
Chapter 27

CHEQUES AND CONVERSION

1 INTRODUCTION 27.1
2 CONVERSION: COLLECTING BANKS
(a) Definition 27.2
(b) Entitlement to immediate possession 27.4
(c) Conversion by agent 27.9
(d) Alternative claim 27.10
3 DEFENCES TO CONVERSION CLAIMS
(a) The Cheques Act 1957, s 4 27.11
(b) Contributory negligence 27.24
(c) The Liggett defence 27.26
(d) Indemnity 27.27
4 CLAIMS AGAINST THE PAYING BANK 27.28
(a) Conversion where bank both paying and collecting bank 27.30

1 INTRODUCTION TO CHEQUES AND CONVERSION

27.1 This section deals with claims for conversion of cheques which may be
brought against the collecting bank or against the paying bank. This chap-
ter addresses conversion claims against collecting banks first (and defences to
such claims), and then claims against paying banks.
It should be noted that a number of other claims relating to the unauthorised or
fraudulent transfer of funds may be brought against paying and/or collecting
banks, including:
(i) unjust enrichment;
(ii) equitable wrongdoing and/or constructive trusteeship; and
(iii) negligence.
These are dealt with in Chapters 22 and 28. However the claim in conversion
raises issues specific to cheques, and for this reason has been given its own
chapter.
It should be noted that the treatment of conversion of cheques in this chapter is
significantly shorter than in the 13th edition (which addressed conversion in
parts of Chapters 21, 23 and all of Chapter 24).
This reflects both the declining volume of cheque use and the fact that (as almost
all cheques are crossed ‘account payee’) the incidence of banks collecting
cheques with forged indorsements, or other similar circumstances which have
historically given rise to conversion claims1, will be few. This is also reflected in
the absence of any very recent case law on the subject of cheque conversion.
One scenario in which conversion by a collecting bank may still occur is when
a cheque crossed ‘account payee’ is collected for someone other than the named
payee. This may be because a thief has dishonestly opened an account in the
name of the payee or where the name of the payee simply differs slightly from

1
27.1 Cheques and Conversion

that of the account holder. The practical difficulties facing collecting banks in
this regard were explained to the court through evidence put in by the defendant
bank in Architects of Wine Ltd2:
‘The payee name as it appears on a cheque is usually very similar to the account name
on Barclays’ system, but it is by no means always exactly the same. For example, a
cheque payable to Joe Smith or J Smith may be presented for payment into an account
with the name of Joanne Smith. In cases where the payee name and the account name
are very similar I would not expect the cashier at the branch . . . to raise a query
over the cheque in question . . . it is simply not practicable to conduct a detailed
investigation for each minor discrepancy between a cheque payee name, and the
account name on Barclays’ IT system. The question of whether the payee name
sufficiently matches the account name is treated as a matter of commonsense.’
Another possibility, in the event of theft, is that the thief will alter the name of
the payee – but in that case, a collecting bank is not exposed to claims in
conversion because a materially altered cheque is a worthless piece of paper for
which any damages in conversion would be nominal (see para 26.23 above and
27.3 below).
As a result of the statutory protections available, it will also, in practice, be very
rare that a paying bank will be exposed to conversion claims (see para 26.28 et
seq above and 27.29 below).
As summarised in Chapter 26 above, UK banks are currently in the process of
moving to an image-based clearing process. Nevertheless, potential liability for
conversion will remain relevant.
First, non-sterling cheques will continue to be cleared using the existing
paper-based method.
Second, paper cheques may be misappropriated before they are paid in to the
collecting bank, such that a collecting bank’s conduct in receiving and imaging
a misappropriated cheque may give rise to liability in conversion.
Additionally, however, since 31 July 2018, collecting banks have been under a
separate and additional statutory liability pursuant to the Electronic Present-
ment of Instruments (Evidence of Payment and Compensation for Loss) Regu-
lations, SI 2018/832. This is discussed further in para 26.40 above. Where the
regulations apply, the liability of the collecting bank is strict, and the collecting
bank will not have the defences which operate to claims in conversion as set out
below.
1
See for example Bissell & Co v Fox Bros & Co (1885) 53 LT 193, CA; Kleinwort, Sons & Co
v Comptoir National d’Escompte de Paris [1894] 2 QB 157; Great Western Rly Co v London
and County Banking Co Ltd [1899] 2 QB 172; revsd [1901] AC 414, HL; Capital and Counties
Bank Ltd v Gordon [1903] AC 240, HL; A L Underwood Ltd v Bank of Liverpool and Martins
[1924] 1 KB 775, CA; Midland Bank Ltd v Reckitt [1933] AC 1, HL; Lloyds Bank Ltd v E B
Savory & Co [1933] AC 201, HL; Motor Traders Guarantee Corpn v Midland Bank Ltd
[1937] 4 All ER 90; Baker v Barclays Bank Ltd [1955] 2 All ER 571, [1955] 1 WLR 822;
Marquess of Bute v Barclays Bank Ltd [1955] 1 QB 202, [1954] 3 All ER 365; Nu-Stilo
Footwear Ltd v Lloyds Bank Ltd (1956) 7 LDAB 121; Great Western Rly Co v London
and County Banking Co Ltd [1901] AC 414, HL; Capital and Counties Bank Ltd v Gordon
[1903] AC 240, HL.
2
[2006] EWHC 1648 (QB), [2007] 1 All ER (Comm) 152.

2
 Conversion: Collecting Banks 27.3

2 CONVERSION: COLLECTING BANKS

(a) Definition
(i) Nature of conversion

27.2 In Kuwait Airways Corpn v Iraqi Airways Co (Nos 4 and 5) Lord

Nicholls defined the tort of conversion at common law in the following terms:
‘First, the defendant’s conduct was inconsistent with the rights of the owner (or other
person entitled to possession). Second, the conduct was deliberate, not accidental.
Third, the conduct was so extensive an encroachment on the rights of the owner as to
exclude him from use and possession of the goods.1’
A conversion is a wrongful interference with goods, as by taking, using or
destroying them, inconsistent with the owner’s right of possession. Conversion
may occur as a result of an honest mistake without blameworthiness (as where
a cheque is inadvertently presented on behalf of the wrong customer). However,
it requires a positive step, and does not arise as a result of passive neglect.
A claim in conversion may also be made under statute. By s 1(a) of the Torts
(Interference with Goods) Act 1977, conversion of goods is included in the
definition of ‘wrongful interference’ and ‘wrongful interference with goods’ for
the purposes of the Act. A bill, note, or cheque, or the paper it is written on, is
‘goods’ within the above definition2. Subject to the requirement that the
instrument must have value (as to which see the next paragraph), the damages
for conversion of a cheque are its face value3.
A person who has obtained money by means of conversion of a cheque is
estopped from alleging that its value is not the amount he has obtained4.
1
[2002] UKHL 19, [2002] 2 AC 883 at [39]. See further para 7.4 above.
2
See Morison v London County and Westminster Bank Ltd [1914] 3 KB 356, CA per Lord
Reading LCJ; Lloyds Bank Ltd v Chartered Bank of India, Australia and China [1929] 1 KB 40,
CA.
3
Morison v London County and Westminster Bank Ltd [1914] 3 KB 356, CA, per Phillimore LJ;
Bobbett v Pinkett (1876) 1 Ex D 368; Fine Art Society Ltd v Union Bank of London Ltd (1886)
17 QBD 705; Bavins Junior and Sims v London and South Western Bank [1900] 1 QB 270, CA;
Macbeth v North and South Wales Bank [1908] 1 KB 13, CA; affd on appeal sub nom North
and South Wales Bank Ltd v Macbeth [1908] AC 137, HL.
4
See Bavins Junior and Sims v London and South Western Bank, supra; Morison v
London County and Westminster Bank Ltd, supra; Fine Art Society Ltd v Union Bank of
London Ltd, above; Lloyds Bank Ltd v Chartered Bank of India, Australia and China [1929]
1 KB 40.

(ii) The instrument must have value

27.3 A cheque is treated as having a value equal to its face amount. This was
explained by Scrutton LJ in Lloyds Bank Ltd Chartered Bank of India,
Australia and China1:
‘ . . . a series of decisions binding on this Court, culminating in Morison’s case and
Underwood’s case, have surmounted the difficulty by treating the conversion as of the
chattel, the piece of paper, the cheque under which the money was collected, and the
value of the chattel converted as the money received under it.’

3
27.3 Cheques and Conversion

It follows however that if the cheque is worthless, for example because the
drawer’s signature is forged2 or because it has been materially altered3, there
will be no conversion (or only nominal damages for the conversion).
In OBG Ltd v Allan4, the House of Lords decided that there could be no
conversion of intangible property. It follows that improper dealing with an
electronic image (as opposed to the underlying tangible instrument which was
imaged) is unlikely to sound in conversion. The ‘gap’ in protection for paying
customers is to some extent covered by the 2018 Regulations, as summarised in
para 26.40 above.
1
[1929] 1 KB 40, CA.
2
Arrow Transfer Co Ltd v Royal Bank of Canada, Bank of Montreal and Canadian Imperial
Bank of Commerce [1971] 3 WWR 241 at 258; affd on appeal sub nom Arrow Transfer Co Ltd
v Royal Bank of Canada, Bank of Montreal, Canadian Imperial Bank of Commerce and Seear
[1972] 4 WWR 70.
3
Smith v Lloyds TSB Group plc [2001] QB 541, [2000] 2 All ER (Comm) 693.
4
[2008] 1 AC 1.

(b) Entitlement to immediate possession

27.4 As a prerequisite to a claim in conversion, a claimant must generally be
entitled to immediate possession of the cheque as at the date of conversion1. The
1882 Act2 uses the term ‘true owner’ to describe such a person, as does the
Cheques Act 19573, ie the person who is entitled to the money represented by
the cheque or obtainable under it4. However neither Act defines these terms,
and the terms are not entirely helpful since they do not reflect the significance of
entitlement to immediate possession as a pre-requisite to a conversion claim.
It follows that if the claimant is not entitled to immediate possession, he will not
have a claim in conversion. For example:
(1) In Robinson v Midland Bank Ltd5, an account was opened by conspira-
tors in the name of Robinson. A cheque in favour of Robinson’s solici-
tors was specially indorsed by one of the conspirators to Robinson, and
paid by the conspirator into the account. Robinson sued for conversion
and money had and received, but failed on the ground that he had
neither possession nor any right of property in the cheque.
(2) In Surrey Asset Finance Ltd v National Westminster Bank plc6, the
claimant drew a cheque crossed ‘Account payee’ payable to SAC Car
and Commercial Sales Ltd. The cheque was delivered to the payee, paid
by its sole director into his personal account, and collected by the
defendant. The claimant sued the defendant in conversion. The claim
was dismissed because, having delivered the cheque to the payee, the
claimant had no right to possession of it.
In other cases, the question of whether the claimant had an immediate right to
possession at the date of conversion is more difficult. The cases can be
considered under the following headings:
(i) instruments delivered under void contracts;
(ii) instruments delivered under voidable contracts;
(iii) after acquired title;

4
 Conversion: Collecting Banks 27.6

(iv) misappropriated cheques.

1
White v Teal (1840) 12 Ad & El 106 at 115, in which Lord Denman said that lien was
inconsistent with the plaintiff’s right of possession; Marquess of Bute v Barclays Bank Ltd
[1955] 1 QB 202.
2
See BEA 1882, ss 79(2) and 80.
3
See CA 1957, s 4.
4
Morison v London County and Westminster Bank Ltd [1914] 3 KB 356 at 357.
5
(1925) 41 TLR 402, 4 LDAB 19.
6
(8 September 2000, unreported) (Anthony Temple QC sitting as a Deputy High Court Judge);
affd on appeal [2001] EWCA Civ 60.

(i) Instruments delivered under void contracts

27.5 Where a drawer issues a cheque pursuant to a void contract, title does not
pass to the payee. So, for example, where a rate-collector cashed a falsely
obtained cheque from the appellant company on the basis of rates he falsely
represented were due, payable to him or order, crossed, and marked ‘non-
negotiable’, title to the cheque did not pass to the rate-collector. The collecting
respondent bank therefore did not take title to the cheque and was liable in
conversion to the appellant: see Great Western Rly Co v London & County
Banking Co Ltd1. However, it is necessary to distinguish between this case,
where the contract was void, and the case where the cheque is delivered
pursuant to a subsisting, but voidable, contract. This is addressed below.
1
[1901] AC 414, HL, esp. per Lord Davey at 419–420.

(ii) Instruments delivered under voidable contracts

27.6 By contrast, a cheque given under a subsisting but voidable contract does
pass title to the payee, at least until the contract is rescinded by the drawer. It
follows that a bank which collects a cheque for a customer who holds it under
voidable title is protected from liability for conversion: see Tate v Wilts and
Dorset Bank Ltd1. In that case, a cheque was drawn pursuant to a contract
which the drawer had entered into as a result of the payee’s fraud. However, the
drawer did not know of the fraud and did not rescind his contract with the
fraudster. As a result, he was not the true owner of the cheque. Collection for
someone with a voidable title is protected if the money is paid away before
notice of revocation is received2.
The drawer may also authorise delivery of the cheque to the payee. Thus, in
Midland Bank v Brown Shipley & Co Ltd3, the claimant was induced by
fraudsters to issue banker’s drafts in favour of the defendant in payment of the
fraudster’s purchase of foreign exchange. The claimant gave the drafts to a
messenger sent by the fraudsters to deliver to the defendant, and they were then
cashed. The claimant sued the defendant in conversion, alleging it had no title
to the drafts. Waller J held that the claimant had given voidable authority to
deliver the drafts to the defendant, in circumstances where the claimant had not
considered it of crucial importance who had delivered the drafts to the defen-
dant. Accordingly, the claimant’s claim failed.
1
(1899) 1 LDAB 286.
2
Bavins Junior and Sims v London and South Western Bank [1900] 1 QB 270 (CA).

5
27.6 Cheques and Conversion
3
[1991] 1 Lloyd’s Rep 576.

(iii) After acquired title

27.7 In Bristol and West of England Bank v Midland Rly Co1, the Court of
Appeal held it was no answer to a claim in conversion that at the date of
wrongful delivery the claimants had not acquired their title to the goods2.
1
[1891] 2 QB 653 (CA).
2
cf London Joint Stock Bank Ltd v British Amsterdam Maritime Agency Ltd (1910) 104 LT 143.

(iv) Misappropriated cheques

27.8 Where a cheque is stolen from the drawer, title remains with the drawer of
the cheque. Generally, once delivered to the payee or his agent (and subject to
the points made above about void and voidable contracts) title then lies with the
payee1. However, a bill no longer in the possession of the drawer is assumed to
have been unconditionally delivered to the payee until the contrary is proved2.
1
See Marfani & Co v Midland Bank Ltd [1968] 1 WLR 956; Byles on Bills of Exchange and
Cheques (2013), 22-015.
2
BEA 1882, s 21(3).

(c) Conversion by agent

27.9 A principal may sue in respect of the conversion of his agent. The agent
must, however, have been acting beyond his authority. In Australia and New
Zealand Bank Ltd v Ateliers de Constructions Electriques de Charleroi1, an
agent paid his principal’s cheques into his personal account, but it was held that
there was no conversion because there was implied authority from the principal
to the agent to use his private account for such purposes although the principal
was in fact defrauded. Thus, although the banker was negligent in dealing with
such cheques without specific authority, and would have lost his statutory
protection, he escaped liability.
This can be contrasted with Marquess of Bute v Barclays Bank Ltd2, where
warrants of the Scottish Department of Agriculture drawn on the King’s and
Lord Treasurer’s Remembrancer in favour of Mr D McGaw were collected for
him personally. However, in a box opposite the name McGaw were the words
‘(for the Marquess of Bute)’. McNair J held that in order to claim in conversion
it is sufficient if the claimant can prove that at the time of the alleged conversion
he was entitled to immediate possession, and stated that the test was the
intention of the drawers as expressed in the instrument. He held that the words
‘for the Marquess of Bute’ were an essential part of the description of the payee.
It had been argued that the claimant was estopped from claiming by reason of
his representation that the warrant could be paid to McGaw; but McNair J held
that the warrant contained no such representation3. This decision was approved
by the Court of Appeal in International Factors Ltd v Rodriguez4, and by Lord
Goff in Lipkin Gorman v Karpnale Ltd5.
A bill or cheque may, of course, be made payable to an agent in his own name
or under his official designation, but without reference to his principal. This

6
 Conversion: Collecting Banks 27.10

occurred in Great Western Rly Co v London and County Banking Co Ltd6,

where a cheque was made payable to Huggins or order, he being a rate collector,
in payment of rates falsely represented by him to be due from the Great Western
Railway. Lord Halsbury LC said7:
‘In this case it cannot be pretended that Huggins had any title to it at all.’
Lord Davey said8:
‘I am of opinion that Huggins never had any property in the cheque, which was
handed to him only as the collector and agent of the overseers in payment of a debt
alleged to be due to them. The appellants never intended to vest any property in him
for his own benefit, but the property in the cheque was intended to be passed to his
employers, the overseers, notwithstanding that it was made payable to Huggins’
order. Huggins therefore had no real title to the cheque.’
If a cheque is wrongfully issued by an agent authorised to draw it for specific
purposes, the principal remains the owner9.
1
[1967] 1 AC 86, PC.
2
[1955] 1 QB 202, [1954] 3 All ER 365.
3
[1955] 1 QB 202 at 213, as to which see Woodhouse AC Israel Cocoa Ltd v Nigerian Produce
Marketing Co Ltd [1971] 2 QB 23, [1970] 2 All ER 124, CA; affd [1972] AC 741, [1972]
2 All ER 271, HL.
4
[1979] QB 351, [1979] 1 All ER 17, CA.
5
[1991] 2 AC 548, 587.
6
[1901] AC 414, HL.
7
[1901] AC 414 at 418.
8
[1901] AC 414 at 419.
9
Morison v London County and Westminster Bank Ltd [1914] 3 KB 356 at 364, 375; Lloyds
Bank Ltd v E B Savory & Co [1933] AC 201, HL.

(d) Alternative claim

27.10 Wherever conversion lies, and money has been received by the bank for
the converted cheque, the claimant may sue in the alternative on the basis that
the collecting bank has been unjustly enriched1. The claims are usually joined in
the alternative, and this is the form in which the action is couched against a
banker who has collected a cheque for someone without title. The claims may
be pleaded in the alternative but (to the extent that the remedies are
inconsistent) the claimant must make his election no later than the entry of a
final and binding judgment2.
1
This was previously known as ‘waiving the tort’ although this is best understood as requiring
the claimant to be held to any genuine election between inconsistent rights or remedies – see for
example Twinsectra Limited v Lloyds Bank Plc [2018] EWHC 672 (Ch) and the cases cited
therein. The election may be made based on the question of whether the bank’s enrichment
exceeds the losses suffered by the claimant. Pleading both may also permit the claimant to
obtain relief even if a a technical defence to conversion should apply.
2
See, for instance, Morison v London County and Westminster Bank Ltd [1914] 3 KB 356, CA,
and see per Lord Atkin in United Australia Ltd, supra, at 19: ‘You may put them in the same
writ; or you may put one in first, and then amend and add or substitute another’.

7
27.11 Cheques and Conversion

3 DEFENCES TO CONVERSION CLAIMS

(a) The Cheques Act 1957, s 4

(i) Introduction

27.11 The main defence of a collecting bank is the statutory protection

contained in s 4 of the Cheques Act 1957.
Section 4 of the Cheques Act 1957 protects a bank which receives payment of
specified instruments for a customer who has no title or a defective title. It
provides as follows:
‘(1) Where a banker, in good faith and without negligence–
(a) receives payment for a customer of an instrument to which this
section applies; or
(b) having credited a customer’s account with the amount of such an
instrument, receives payment thereof for himself;
(b) and the customer has no title, or a defective title, to the instrument,
the banker does not incur any liability to the true owner of the
instrument by reason only of having received payment thereof.
(2) This section applies to the following instruments, namely–
(a) cheques (including cheques which under section 81A(1) of the Bills of
Exchange Act 1882 or otherwise are not transferable);
(b) any document issued by a customer of a banker which, though not a
bill of exchange is intended to enable a person to obtain payment
from that banker of the sum mentioned in the document;
(c) any document issued by a public officer which is intended to enable a
person to obtain payment from the Paymaster General or the
Queen’s and Lord Treasurer’s Remembrancer of the sum mentioned
in the document but is not a bill of exchange;
(d) any draft payable on demand drawn by a banker on himself whether
payable at the head office or some other office of his bank.
(3) A banker is not to be treated for the purposes of this section as having been
negligent by reason only of his failure to concern himself with absence of, or
irregularity in, indorsement of an instrument.’
Unless a bank can satisfy the requirements of this section, it is left with its
common law liability for conversion, or money had and received, in the event
that the person from whom it takes the cheque for collection has no title or a
defective title. The reference to negligence has been held to be identical to a
common law cause of action in negligence, save that the onus is on the banker
to disprove negligence in order to avoid strict liability1.
1
Marfani & Co. Ltd v Midland Bank Ltd [1968] 1 WLR 956, 972, CA per Diplock LJ. See also
Lloyds Bank Ltd v E B Savory & Co [1933] AC 201 at 229 per Lord Wright, addressing
s 4’s statutory predecessor, Bills of Exchange Act 1882, s 82.

27.12 If the statutory protection under s 4 is to be invoked, the whole

transaction from the taking of the cheque to the receipt and disposition of the
money must be in good faith and without negligence1.
If it were only the actual receipt of payment which had to be in good faith and
without negligence, the section, from the true owner’s point of view, would be
of little value. The obligation not to convert and the protection against liability
must be correlative and co-extensive. If the words ‘receives payment’ are to be

8
 Defences to Conversion Claims 27.16

read as involving protection to the banker for all preliminary operations leading
up to the receipt of the money, the condition precedent to that protection, viz,
that the banker shall act in good faith without negligence, must cover the same
ground. It is hard to visualise a situation in which a banker could take a crossed
cheque negligently or in bad faith and yet receive the money for his customer in
good faith and without negligence.
However, this provision does not provide a defence to the statutory strict
liability imposed on collecting banks under the 2018 Regulations, as discussed
at para 26.40 above.
1
See Diplock LJ in Marfani & Co Ltd v Midland Bank Ltd [1968] 1 WLR 956, 971, CA.

(ii) Good faith

27.13 The first requirement of the statutory immunity is that the bank has
acted in good faith. For these purposes, a thing is deemed to be done in good
faith where it is in fact done honestly, whether it is done negligently or not1.
Whether payment has been received in good faith will therefore depend on the
facts of the particular case. In most cases this requirement will be satisfied.
1
See s 90 of the Bills of Exchange Act 1882.

(iii) ‘Without negligence’

27.14 More likely to be in issue is the standard that the bank must meet in
order to satisfy the second condition, namely that it has acted ‘without
negligence’.
The key principles are summarised below. This summary largely follows that
provided by the Court of Appeal in Architects of Wine1.
1
[2007] EWCA Civ 239, [2007] 2 All ER (Comm) 285, [2007] 2 Lloyd’s Rep 471, [3]–[12] per
Rix LJ.

27.15 Where the customer is in possession of the cheque at the time of delivery
for collection, and appears on the face of it to be the payee, the banker is
generally entitled to assume that the customer is the owner of the cheque, unless
there are facts which are, or ought to be, known to the banker which would
cause a reasonable banker to suspect that the customer was not the true owner.
It was said by Diplock LJ in Marfani & Co Ltd v Midland Bank Ltd1 that:
‘What the court has to do is to look at all the circumstances at the time of the acts
complained of, and to ask itself: were those circumstances such as would cause a
reasonable banker, possessed of such information about his customer as a reasonable
banker would possess, to suspect that his customer was not the true owner of the
cheque?’

1
[1968] 2 All ER 573 at 582B, [1968] 1 WLR 956 at 976E, CA.

27.16 One test of what is negligent is whether what has occurred is out of the
ordinary course of business:

9
27.16 Cheques and Conversion

‘ . . . the test of negligence is whether the transaction of paying in any given cheque
[coupled with the circumstances antecedent and present] was so out of the ordinary
course that it ought to have aroused doubts in the bankers’ mind, and caused them to
make enquiry1.’

1
Isaacs J in Commissioners of State Savings Bank v Permewan, Wright & Co (1914) 19 CLR
457, 478, as cited by Rix LJ in Architects of Wine at [6].

27.17 Another key question is whether the bank has taken steps in accordance
with current banking practice.
What facts ought to be known to the bank, what enquiries it should make, and
what facts are sufficient to cause it reasonably to suspect the customer is not the
true owner, are likely to depend in significant part on current banking practice.
Accordingly, whilst current banking practice is highly relevant1, on the other
hand historical cases may not be a reliable guide as to what is now to be
expected from the reasonable bank2.
A bank’s evidence as to its own current practice is (especially if unchallenged)
relevant evidence as to the current practice of banks, and whilst not binding
the Court, is likely to be accepted3. Moreover, as observed by Diplock LJ in
Marfani4, the Court should be:
‘hesitant before condemning as negligent a practice generally adopted by those
engaged in banking business.’
Further, the focus is on the ordinary practice of banks generally, not on that of
particular individuals5.
1
Architects of Wine [12].
2
See Diplock LJ in Marfani, 972.
3
Architects of Wine [12].
4
At 975.
5
Commissioners of Taxation v English, Scottish and Australian Bank Ltd [1920] AC 683, 689
per Lord Dunedin.

27.18 It is also likely that the assessment of the bank’s actions will be looked at
in the round and may take into account events occurring after the conversion
technically took place. One point taken by the claimant in Marfani was that a
reference obtained by the bank was given after the bank had collected the
cheque, when the conversion was in law complete. It was contended that this
sequence of events precluded a defence under s 4, even though the bank had not
permitted its customer to draw on the proceeds until the reference had been
received. Diplock LJ thought this: ‘much too technical an effect to give to a
statute [the Cheques Act 1957] which was intended to apply to business
transactions as they are carried on in real life’. And:
‘At the relevant time, the banker was entitled to take into consideration the interests
of his customer who, be it remembered, would in all probability turn out to be honest,
as most customers are, and his own business interests and to weigh these against the
risk of loss or damage to the true owner of the cheque in the unlikely event that he
should turn out not to be the customer himself.’
He held the relevant time to be the time at which the bank pays out the proceeds
of the cheque to its own customer and so deprives the true owner of his right to
follow the money into the bank’s hands.

10
 Defences to Conversion Claims 27.21

27.19 The question of whether the bank has been negligent should be assessed
having regard to what was known at the time. It has been said that:
‘ . . . the courts should be wary of hindsight or of imposing on a bank the role of an
amateur detective1.’
Notwithstanding that the bank does not need to act as amateur detective, it
should not refrain from acting so as to avoid offending its own customer. It
might be awkward for the bank to manifest suspicion of its own customer; but
if it refrains from acting on suspicion, it might easily render itself liable to the
true owner, as having neglected its duty to him. As Scrutton LJ said in
Underwood’s case2:
‘If banks for fear of offending their customers will not make inquiry into unusual
circumstances, they must take with the benefit of not annoying those customers the
risk of liability because they do not inquire.’
1
Architects of Wine [11]–[12].
2
[1924] 1 KB 775 at 793.

27.20 An issue that is particularly likely to arise in the modern banking context
is whether it is relevant to consider the role of the person at the bank to whom
the cheque has come. Where the cheque has come before a cashier only, the
question is whether a bank cashier of ordinary intelligence and care, on having
the cheque presented, would be informed by the terms of the cheque itself that
it was open to doubt whether the customer had good title1.
However, if the cheque has been singled out for special attention (for example,
being referred by clerical staff to management), or where the cheque is paid in
a context where managerial oversight is relevant (for example, when an account
is opened) it would appear that more would be expected of the bank in order to
discharge its duty2. Presumably, in this case, the question is assessed from the
perspective of whether a manager (rather than a cashier) would have suspected
that it was open to doubt whether the customer had good title.
It is not however the law that all aspects of the bank’s knowledge are to be
assumed to be accumulated in every employee of the bank, such the bank
cannot rely on any division of knowledge between departments. This argument
was advanced by the claimant in Architects of Wine, but rejected by Rix LJ at
[10].
1
Bailhache J in Ross v London County Westminster & Parr’s Bank Ltd [1919] 1 KB 678,
685-686, cited in Architects of Wine at [8].
2
Architects of Wine at [9], referring to Honourable Society of the Middle Temple v Lloyds
Bank plc [1999] 1 All ER (Comm) 193, 228 per Rix J.

27.21 A collecting bank may not be negligent when collecting a cheque crossed
‘account payee’ for anyone other than the named payee in circumstances where
the customer was a foreign bank, and the marking ‘account payee’ or even, as
in the Importers Co case1, ‘account payee only’, referred to the foreign bank-
er’s customer, as to whom it was obviously impossible for the English bank to
know or find out anything.
However, in The Honourable Society of the Middle Temple v Lloyds Bank plc2,
a cheque for £183,189.89 drawn by Middle Temple on Child & Co in favour of
its insurers and crossed ‘Not Negotiable A/C Payee Only’ was stolen and

11
27.21 Cheques and Conversion

presented at the Istanbul branch of a Turkish bank. The Turkish bank agreed to
collect the cheque and sent it to Lloyds Bank plc for collection. The cheque was
paid, and Middle Temple sued Lloyds and the Turkish bank in conversion.
Lloyds had acted as agent for collection of a foreign bank and relied heavily on
the Importers decision as providing a defence. Rix J interpreted the Importers
decision as authority for the following propositions3:
(1) The true owner’s argument that the clearing bank, if it is to acquit itself
of negligence, must satisfy itself that the proceeds are paid to the named
payee, is wrong and too demanding.
(2) The bank’s argument that it is under no duty at all, save to satisfy itself
as to its correspondent bank’s mandate, is also wrong (per Atkin LJ, cf
Bankes LJ): that would be to leave the important interests of the owners
too exposed.
(3) The test is whether there was anything in the circumstances which ‘was
noticed or was such that it ought to be noticed’ (at 308). If so, the bank
is on enquiry, and may not be able to discharge its onus of proving the
absence of negligence.
(4) That test has to be applied against the background that a clearing bank
is handling huge numbers of instruments each day, and on the principle
of practicality, that no test should be applied in such a way as to make
the business of the clearing house impossible.
(5) In considering what is practicable or negligent in this context, regard
must be had to the way in which business is (invariably) done, to the
practice of bankers.
(6) Semble, the duty of the customer’s bank is not delegated to its agent, the
clearing bank, since their knowledge may not be the same.
Rix J heard evidence of the practice of English banks in the collection of cheques
sent for clearing by foreign correspondent banks. The evidence of banking
practice noted that, as to the identity of the foreign bank’s customer in relation
to the payee of an a/c payee cheque, their general practice is to assume that the
foreign bank has carried out the necessary enquires and has adopted the
necessary precautions, and that that acquits them of the need to give any similar
consideration to such matters. That assumption is necessitated by the fact that
they are not in a position to know who the foreign bank’s customer is, but,
equally, it is based on the belief that the foreign bank is aware of what English
law demands. Even though the banks give no consideration in the ordinary way
to the foreign bank’s customer, if anything comes to their notice in a particular
case, they will make enquiries designed to protect the owner of the cheque.
Similarly, if it comes to their notice that a correspondent bank appears not to
have regard for its obligations to the owners of cheques, they will take steps to
put that right4.
In the event, Rix J found that Lloyds had been guilty of negligence in failing to
inform its overseas correspondents of the important change in English law
brought about by the Cheques Act 1992. In this respect, Lloyds failed to adopt
the prudent course taken by other banks.
He also found that Lloyds were on enquiry when, in consequence of the Turkish
bank’s enquiry after fate, the cheque had to be ‘removed for referral from the
anonymous and numberless multitude of cheques’ which Lloyds was handling

12
 Defences to Conversion Claims 27.24

and made the subject of individual attention.

1
Importers Co v Westminster Bank Ltd [1927] 2 KB 297.
2
[1999] 1 All ER (Comm) 193, [1999] Lloyd’s Rep Bank 50.
3
See n 3 at 215 and 64.
4
See n 3 at 222 and 69.

27.22 Similar issues arose in Linklaters v HSBC Bank plc1, where HSBC had
acted as the collection agent of an overseas bank (‘BPE’) in relation to a cheque
crossed ‘a/c payee only’ which was being collected, to the knowledge of HSBC,
for someone other than the named payee.
1
[2003] 2 Lloyd’s Rep 545.

(iii) Causation
27.23 In the Marfani case, Diplock LJ made the following observations on the
question of causation1:
‘There are dicta, which can be found collected in Baker v Barclays Bank Ltd2 at pp
836 to 838, which suggest that, even if it could be proved that a failure to make a
particular inquiry which a prudent banker would have made had no causative effect
upon the loss sustained by the true owner, the banker would nevertheless be
disentitled to the protection of the Cheques Act 1957, s 4. For my part I think that
these dicta are wrong. But it is obviously difficult to prove so speculative a proposi-
tion as what would have happened if inquiries had been made which were not made,
and I do not think that the defendant bank has sustained the onus of proving it here.
I prefer to put it in the alternative way I have already indicated. It does not constitute
any lack of reasonable care to refrain from making inquiries which it is improbable
will lead to detection of the potential customer’s dishonest purpose, if he is dishonest,
and which are calculated to offend him and maybe drive away his custom if he is
honest.’
This passage was cited with approval by Rix J in Honourable Society of the
Middle Temple v Lloyds Bank plc3.
Devlin J in Baker v Barclays Bank Ltd declined to speculate about what would
have happened if the bank manager in that case had asked to see the person
responsible for the frauds. He held that where a bank manager failed to make
the inquiries that he should have made, a very heavy burden rested on him of
showing that such inquiries could not have led to any action which would have
protected the interests of the true owner. The inquiry would have been why a
partner in a confectionery business should be paying partnership cheques into
an account of a third party.
1
[1968] 2 All ER 573 at 582C, [1968] 1 WLR 956 at 976H.
2
[1955] 2 All ER 571, [1955] 1 WLR 822.
3
[1999] 1 All ER (Comm) 193, 226, [1999] Lloyd’s Rep Bank 50, 71.

(b) Contributory negligence

27.24 A defence of contributory negligence may also be available. The point is
covered by s 47 of the Banking Act 1979, which provides:

13
27.24 Cheques and Conversion

‘In any circumstances in which proof of absence of negligence on the part of a banker
would be a defence in proceedings by reason of section 4 of the Cheques Act 1957, a
defence of contributory negligence shall also be available to the banker notwithstand-
ing the provisions of section 11(1) of the Torts (Interference with Goods) Act 1977.’
This section remains in force notwithstanding the repeal of the greater part of
the 1979 Act.
27.25 It has also been said that a defence of the true owner having ‘lulled the
bank to sleep’ is available to a conversion claim. This arose in Morison’s case1,
decided in 1914, prior to the availability of a contributory negligence defence.
In that case, the frauds of an employee extended over a number of years and
some were known to the owner or came to the attention of staff employed by
him. Some of the cheques wrongfully dealt with had been the subject of
previous arrangements between the fraudster and his employer, the claimant,
and debited to the former in the books of the business; the employee had been
re-employed after the earlier frauds had been discovered. However, none of this
was communicated to the defendant bank, the claimant explaining he thought
the employee was going to be honest for the future. The court decided for the
bank, essentially on the grounds that the frauds having gone on for so long, the
bank was misled into thinking there was nothing wrong, and that the claimant
must have adopted the earlier cheques in respect of which arrangements were
made.
However, the notion of ‘lulling to sleep’ has subsequently been impugned2.
Today, conduct of the kind in Morison’s case would more naturally be relied
upon by a collecting bank as establishing contributory negligence at a level
which breaks the chain of causation or, at the very least, justifies a substantial
reduction in damages.
1
[1914] 3 KB 356, CA.
2
Lloyds Bank Ltd v Chartered Bank of India, Australia and China [1929] 1 KB 40 at 60, per
Scrutton LJ; Lloyds Bank Ltd v E B Savory & Co [1933] AC 201 at 236, per Lord Wright.

(c) The Liggett defence

27.26 It should also be noted that the liability of a collecting bank for
conversion may be reduced to the extent that the proceeds of the instrument are
applied to discharge the plaintiff’s liabilities. This principle has already been
considered in para 23.3.

(d) Indemnity
27.27 In some cases, it is possible that a collecting bank liable for conversion
may be entitled to an indemnity either from the customer into whose account it
paid the converted cheque or (when acting as agent for collection) from its
principal bank. However the authorities do not speak entirely with one voice.
In Redmond v Allied Irish Banks Plc1 the claimant paid certain cheques marked
‘not-negotiable – account payee only’ into his account, when he was not the
named payee. The defendant bank was sued by the true owner and debited the
claimant’s account with the value of the cheques. The claimant sued the
defendant bank alleging breach of an alleged duty of care. The claimant

14
 Claims Against the Paying Bank 27.29

conceded that a bank collecting a cheque for a customer who is not the named
payee is entitled to be indemnified by that customer for its liability to the true
owner. However, Saville J expressed doubt as to whether that concession was
correctly made:
‘ . . . the assumption would seem to involve the proposition that the plaintiff
impliedly agreed to indemnify the bank against the consequence of their own
negligence in agreeing to pay an account payee only cheque into the account of
another . . . .’
However in The Honourable Society of the Middle Temple v Lloyds Bank
(discussed above at para 27.21), Rix J held that Lloyds, acting as agent for
collection of another bank, was entitled to be indemnified, in circumstances
where both banks had converted the claimant’s cheque and failed to establish a
s 4 defence. Although the agent bank (Lloyds) had acted in breach of its duty to
the claimant, it had not acted in breach of its duty to its principal (a Turkish
bank), because it had done the very thing it had been instructed to do. He
further observed that on this approach, Saville J’s doubts in Redmond were
misplaced because the defendant bank had not acted in breach of duty to the
claimant (the instructing party). In the alternative, Rix J held that the agent
bank was protected by an implied warranty from its principal. Rix J held that if
Lloyds had not been entitled to rely on an indemnity or implied warranty, he
would have assessed contribution as 75% for the Turkish Bank and 25% for
Lloyds. One consequence of this decision – arguably a curious one – is that the
entire loss was therefore borne by the Turkish bank, despite the fact that Lloyds
failed to make enquiries as to why a cheque payable to Middle Temple was
presented to a bank in Turkey. Arguably a fairer outcome would have been
apportionment by way of contribution.
Finally in Linklaters v HSBC Bank2 HSBC (the agent bank) claimed a complete
indemnity from BPE (the overseas bank), relying on Middle Temple. Gross J did
not accept BPE’s submissions that Middle Temple was per incuriam, or distin-
guishable, and accordingly followed it.
1
[1987] 2 FTLR 264.
2
[2003] 2 Lloyd’s Rep 545.

4 CLAIMS AGAINST THE PAYING BANK

27.28 The payment of a cheque to someone who is not the true owner is
probably an act of conversion1.
Payment of travellers’ cheques which had not been countersigned by the
original purchaser may also be an act of conversion2.
1
Smith v Union Bank of London(1875) 1 QBD 31, CA. On the basis of this decision, it was
conceded in Smith v Lloyds TSB Group plc that a paying bank can be liable in conversion: see
[2001] QB 541, 550E, [2001] 1 All ER 424, 427, CA.
2
El Awadi v Bank of Credit and Commerce International SA Ltd [1990] 1 QB 606, 627D,
[1989] 1 All ER 242, 256e. The court regarded the point as distinctly arguable.

27.29 However, in practice it will be very rare that a paying bank will be liable
in conversion. This follows from s. 80 of the 1882 Act. This provides that:

15
27.29 Cheques and Conversion

‘Where the banker, on whom a crossed cheque (including a cheque which under s 81A
below or otherwise is not transferable) is drawn, in good faith and without negligence
pays it, if crossed generally, to a banker, and if crossed specially, to the banker to
whom it is crossed, or his agent for collection being a banker, the banker paying the
cheque, and, if the cheque has come into the hands of the payee, the drawer, shall
respectively be entitled to the same rights and be placed in the same position as if
payment of the cheque had been made to the true owner thereof.’
Where the requirements of s 80 are met, its effect is, therefore, that the paying
bank acts lawfully towards the true owner and complies with the mandate of
the drawer of the cheque. The reason for the protection thus given to the paying
bank is that it cannot verify that the collecting bank is indeed collecting on
behalf of the true owner. If the cheque is crossed generally, s 80 requires as a
condition of protection that the payment is made to another banker.
There is little guidance on what constitutes negligence within s 80. However, by
s 81A(2), a banker is not to be treated for the purposes of s 80 as having been
negligent by reason only of his failure to concern himself with any purported
indorsement of a cheque which under s 81A(1) or otherwise is not transferable.
The operation of this provision can be illustrated by the example of a cheque
crossed account payee drawn payable to A, which A has purported to indorse
with the words ‘pay B’. The effect of s 81A(2) would seem to be that it is not
negligent to pay such a cheque without inquiry even if the paying notices the
indorsement. In effect, the paying bank is entitled to assume that the collecting
bank will have refused to collect the cheque for anyone other than A. If,
contrary to the paying bank’s legitimate expectation, the collecting bank is
acting for B, it is the collecting bank which is exposed to a claim in respect of
any loss suffered by A or the drawer.

(a) Conversion where bank both paying and collecting bank

27.30 When a crossed cheque drawn by one customer is paid into the account
of another at the same bank, while the bank may be protected as paying banker
as having paid to itself as a banker under s 80 or as collecting bank this would
not enable it to avoid liability if it collected with negligence, as in Carpen-
ters’ Co v British Mutual Banking Co Ltd1. The bank is acting in two capacities
and it cannot escape liability incurred in one capacity by setting up what might
be a complete defence in the other. Hence, where a bank is both the paying bank
and the collecting bank, a claim in conversion is most naturally made against it
in its capacity as collecting bank.
In Linklaters v HSBC Bank plc2 HSBC’s capacity as paying bank was held to be
irrelevant because HSBC’s liability to the claimant did not arise before it
credited BPE’s account with the proceeds of the cheque in its capacity as agent
for collection3. The Court noted that it is very rare for a paying bank to be sued
for conversion of a cheque4. However, on the facts of the case, there seems no
reason why HSBC was not also liable as paying bank.
1
[1938] 1 KB 511.
2
[2003] 2 Lloyd’s Rep 545.
3
See fn 2 at 47.
4
See fn 2 at 46.

16
Chapter 28

RESTITUTION, PROPRIETARY
CLAIMS, AND TRACING

1 RESTITUTION OF MONEY PAID BY MISTAKE

(a) Introduction 28.2
(b) Conditions for recovery of a mistaken payment 28.4
(c) Defences to a claim for recovery of a mistaken payment 28.8
2 PROPRIETARY CLAIMS AND CONSTRUCTIVE TRUSTS
(a) Proprietary claims by banks 28.20
(b) Proprietary claims against banks 28.23
(c) Dishonest assistance 28.32
3 TRACING
(a) Introduction 28.34
(b) ‘Following’ and ‘tracing’ payments 28.35
(c) Distinction between common law and equitable tracing 28.36
(d) Common law tracing rules 28.37
(e) Equitable tracing rules 28.38

28.1 This chapter deals with three related topics.

The first section (para 28.2) deals with personal restitutionary claims brought
by a paying bank against the recipient of a mistaken payment. Such a claim will
arise where the paying bank is not entitled to reimbursement of the payment
from its own customer, and so must look to the recipient for repayment.
Circumstances in which that might be the case include where the payment is not
in accordance with the mandate, or the payment has been made against a forged
signature on a cheque or payment instruction. The paying bank may also have
a restitutionary claim where it mistakenly acts on a payment instruction which
has already been effected (so that the recipient is paid twice), or where it has
paid too much, or paid the wrong person.
The second section (para 28.20) deals with proprietary claims and constructive
trusts, in the context of claims both by and against banks.
The third section (para 28.34) deals with the concepts of ‘following’ and
‘tracing’, which are processes or techniques whereby the party asserting a
proprietary claim may seek to recover his assets or their traceable proceeds.

1 RESTITUTION OF MONEY PAID BY MISTAKE

(a) Introduction
28.2 This section is concerned with the paying bank’s restitutionary claim for
the repayment of money paid by mistake. Such a claim is a claim in ‘unjust
enrichment’. It is a personal, as opposed to proprietary, claim against the
recipient. The elements of an unjust enrichment claim are well established. In

1
28.2 Restitution, Proprietary Claims, and Tracing

general terms, the claimant bank will have to show that the payee has been
enriched, that the enrichment was received at the payer’s expense, and that there
is a restitutionary ground which makes the enrichment ‘unjust’1. The last of
these elements requires the establishment of a recognised ‘unjust factor’, such as
mistake, compulsion/duress, or total failure of consideration2.
The relevant ‘unjust factor’ considered here is mistake. As explained in Chapter
23, where the bank mistakenly pays contrary to its mandate, the consequence is
that the bank has acted without its customer’s authority and hence is not
entitled to debit the customer’s account3. As also noted in Chapter 23, however,
an unauthorised payment will not normally be effective to discharge a debt. So
where, for example, an unauthorised payment is made to a recipient who is a
creditor of the customer, the recipient will be unjustly enriched since it will have
received the proceeds of the payment and yet will still be able to sue the
customer on the debt. Hence, subject to the defences considered below, the bank
will prima facie have a restitutionary claim against the recipient to recover the
unauthorised payment.
1
Sempra Metals Ltd v Inland Revenue Commissioners [2008] 1 AC 561 at paras [23], [25] &
[107], HL.
2
See Burrows, The Law of Restitution (3rd edn 2011), pages 86-87. The claim must fall within
one of the established categories of unjust enrichment or a justified extension: Uren v First
National Homes Finance [2005] EWHC 2529 (Ch) at [16–18] (Mann J); Deutsche Morgan
Grenfell Group plc v Inland Revenue Commissioners [2006] 3 WLR 781, HL.
3
In Agip (Africa) Ltd v Jackson [1991] Ch 547, where a funds transfer was carried out pursuant
to a fraudulently altered payment instruction, the payment was treated as one which had been
made under a mistake.

28.3 There are a number of general principles which need to be emphasised at

the outset.
First, since the bank’s claim is personal in nature, it is not necessary to
demonstrate that the bank has retained any title to or interest in the money paid
over1.
Second, the fact that the bank may have acted negligently in making the mistake
does not defeat the restitutionary claim2.
Third, the quantum of the claim is the enrichment received by the recipient, ie
it is ‘gain-based’ claim rather than a ‘loss-based’ claim3.
Fourth, it is not necessary for the mistake to be one of fact, since a mistake of
law can also give rise to a restitutionary claim4. A paying bank might, for
example, make a payment in the mistaken belief that it was legally obliged to do
so. However, it is not easy to define when a person’s understanding of the law
constitutes a mistaken understanding. In Kleinwort Benson, Lord Goff held
that a payment made by a person who mistakenly believes that the law at the
time obliged him to make it is a payment under a mistake of law which is
recoverable subject to any applicable defences5. Lord Hope added that the
concept of mistake of law includes cases of sheer ignorance as well as a positive
incorrect belief6. However, if the person who pays has assumed the risk that he
was mistaken, because, for example, he made the payment in the knowledge
that there was a ground to contest liability, then there is no actionable mistake
of law7. Lord Hope further observed that a mistake is different from a state of
doubt, and that a person who pays when in a state of doubt takes the risk that
he may be wrong8. Lord Hoffmann emphasised that there was room for a

2
 Restitution of Money Paid by Mistake 28.4

spectrum of states of mind between genuine belief in validity, founding a claim

based on mistake, and a clear acceptance of risk that did not found such a
claim9.
In Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners10,
however, Lord Hoffmann said that the existence of a state of doubt was not
necessarily inconsistent with making a mistake; in his view the essential
question is whether the person who made the payment took the risk that he
might be wrong, and that will depend on the circumstances of the case11. Lord
Brown preferred the view that when a paying party recognises that he has a
worthwhile claim he cannot, or can no longer, be regarded as making a payment
under a mistake of law12.
1
Westdeutche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669,
[1996] 2 All ER 961; Agip (Africa) Ltd v Jackson [1991] Ch 547, 563; Armstrong DLW GmbH
v Winnington [2012] EWHC 10 (Ch).
2
Kelly v Solari (1841) 9 M & W 54, 59, per Parke B; Scottish Equitable plc v Derby [2001]
3 All ER 818, CA; Dextra Bank and Trust Co v Bank of Jamaica [2002] 1 All ER (Comm) 193
at 207, PC; TFL Management Services Ltd v Lloyds Bank plc [2013] EWCA Civ 1415 at
para [88], per Beatson LJ.
3
Sempra Metals Ltd v Inland Revenue Commissioners [2008] 1 AC 561 HL at paras [31],
[116–7], [132] & [231].
4
Kleinwort Benson v Lincoln City Council [1999] 2 AC 349.
5
[1999] 2 AC 349, 379. A person who makes a payment on the assumption that any overpay-
ments would be recoverable in restitution faces a paradox when claiming that very assumption
to be the relevant mistake of law since, if he is allowed recovery, the basis of the claim
evaporates as there was no mistake, whereas if recovery if denied then there was a mistake and
the basis of the claim rematerialises: Nurdin & Peacock v D B Ramsden [1999] 1 WLR 1249 at
1273 (where Neuberger J faced this problem and decided to cut the vicious circle by allowing
the claim).
6
[1999] 2 AC 349, 409–410.
7
[1999] 2 AC 349, 410–412.
8
[1999] 2 AC 349, 411.
9
[1999] 2 AC 349, 401.
10
[2006] UKHL 49, [2006] 3 WLR 781, at paras [64]–[65].
11
[2006] UKHL 49, [2006] 3 WLR 781, at paras [25]–[27].
12
[2006] UKHL 49, [2006] 3 WLR 781, at paras [164]–[165], [176].

(b) Conditions for recovery of a mistaken payment

28.4 The governing principles were summarised as follows by Robert Goff J in
Barclays Bank Ltd v W J Simms Son & Cooke (Southern) Ltd1:
‘(1) If a person pays money to another under a mistake of fact which causes him to
make payment, he is prima facie entitled to recover it as money paid under a mistake
of fact. (2) His claim may however fail if (a) the payer intends that the payee shall
have the money at all events, whether the fact be true or false, or is deemed in law so
to intend; or (b) the payment is made for good consideration, in particular if the
money is paid to discharge, and does discharge, a debt owed to the payee (or a
principal on whose behalf he is authorised to receive the payment) by the payer or by
a third party by whom he is authorised to discharge the debt; or (c) the payee has
changed his position in good faith, or is deemed in law to have done so.’
The text immediately below considers conditions (1), (2)(a) and 2(b) in further
detail. Condition (2)(c) is considered at para 28.9 below, as one of a number of

3
28.4 Restitution, Proprietary Claims, and Tracing

defences potentially available.

1
[1980] QB 677, 695. These principles were formulated with reference to mistakes of fact, but,
following Kleinwort Benson v Lincoln City Council [1999] 2 AC 349, must now be taken to
apply equally to mistakes of law.

(i) Causation
28.5 Condition (1) is that the mistake must have caused the payment. This
means that the claimant would not have made the payment but for the mistake1.
The burden of so proving is on the payer2. It is only necessary that the mistake
is on the part of the payer; it is not necessary that the payee should also be
mistaken3, and it is not material if he was mistaken.
There are several statements in some of the earlier authorities that the mistake
must be about some matter as between the party paying and the party receiv-
ing4. However, in the Simms case5, Robert Goff J subjected the supposed
rule that the mistake must be as between payer and payee to a searching
analysis, and rejected it. There is no requirement that a mistake must relate to
the liability of the payer to the payee to make the payment, and there is no
requirement that the mistake must be shared by both parties.
The mistake must be operative at the time of the payment. A subsequent
mistake is irrelevant. However, a mistake is operative even if the bank making
the payment at one point knew the truth, provided that the bank is mistaken at
the time of making the payment6.
1
Barclays Bank Ltd v W J Simms Son & Cooke (Southern) Ltd [1980] QB 677, 692, 694; Nurdin
& Peacock plc v D B Ramsden and Co Ltd [1999] 1 WLR 1249; Dextra Bank and Trust Co v
Bank of Jamaica [2002] 1 All ER (Comm) 193, 202, PC.
2
Holt v Markham [1923] 1 KB 504, CA; Avon County Council v Howlett [1983] 1 All ER 1073,
[1983] 1 WLR 605, CA.
3
Westminster Bank Ltd v Arlington Overseas Trading Co [1952] 1 Lloyd’s Rep 211.
4
See Rogers v Kelly (1809) 2 Camp 123 per Lord Ellenborough; Skyring v Greenwood (1825) 4
B & C 281; Chambers v Miller (1862) 13 CBNS 125; Deutsche Bank (London Agency) v Beriro
& Co (1895) 73 LT 669, 1 Com Cas 255; Barclay & Co Ltd v Malcolm & Co (1925) 133 LT
512; R E Jones Ltd v Waring and Gillow Ltd [1926] AC 670, especially at 692 (per Lord
Sumner); National Westminster Bank Ltd v Barclays International Bank Ltd [1975] QB 654,
[1974] 3 All ER 834.
5
[1980] QB 677 at 696 C, [1979] 3 All ER 522 at 536e.
6
Kelly v Solari (1841) 9 M & W 54, 58; Barclays Bank v Simms [1980] 1 QB 677, 686.

(ii) No intention for the payee to have the money in any event
28.6 Condition (2)(a) is that the payor must not intend that the payee should
have the money in any event, irrespective of the mistake, or is deemed in law to
have such an intention. This may not be a separate condition at all, since in
those circumstances it is difficult to see how the mistake could be said to have
‘caused’ the payment: if the payor has consciously taken the risk of paying
irrespective of the true facts, it cannot be said that ‘but for’ the mistake the
payment would not have been made.

4
 Restitution of Money Paid by Mistake 28.8

(iii) Payment otherwise than for good consideration

28.7 The restitutionary claim will be defeated where the recipient gave good
consideration for the payment. The recipient will have given consideration if,
for example, the effect of the payment was to discharge a debt owed by the
recipient to the customer. As noted above, an unauthorised payment does not
normally have that effect. However, Robert Goff J in Simms noted an important
distinction between the situations (a) where the bank acts in the mistaken belief
that the customer has sufficient funds to make the transfer, and (b) where the
bank is mistaken as to whether the payment is within the mandate (or has been
countermanded). He explained that1:
‘In each case, there is a mistake by the bank which causes the bank to make the
payment. But in the first case the effect of the bank’s payment is to accept the
customer’s request for overdraft facilities; the payment is therefore within the
bank’s mandate, with the result that not only is the bank entitled to have recourse to
its customer, but the customer’s obligation to the payee is discharged. It follows that
the payee has given consideration for the payment; with the consequence that,
although the payment has been caused by the bank’s mistake, the money is irrecov-
erable from the payee unless the transaction of payment is itself set aside. Although
the bank is unable to recover the money, it has a right of recourse to its customer. In
the second case, however, the bank’s payment is without mandate. The bank has no
recourse to its customer; and the debt of the customer to the payee on the cheque is
not discharged. Prima facie, the bank is entitled to recover the money from the payee,
unless the payee has changed his position in good faith, or is deemed in law to have
done so.’
That distinction was applied by the Court of Appeal in Lloyds Bank plc v
Independent Insurance Co Ltd2, where the claimant bank had made a CHAPS
payment of £162,387 in the mistaken belief that there were sufficient cleared
funds in its customer’s account to fund the payment. The payment was made at
10.26 am, and within a short time thereafter, the paying bank notified the
receiving bank by telephone that the payment had been made in error and
requested repayment. The receiving bank refused repayment. On the facts,
the Court of Appeal (over-ruling the trial judge) held that the payment had been
made with actual authority. The paying bank submitted that it was nevertheless
entitled to recovery because there is no principle of law that actual authority
precludes recovery by a paying agent of a mistaken payment. This submission
was rejected by the Court of Appeal. Waller LJ considered that this rejection
accorded with restitutionary principles because (amongst other reasons) the
payment was made for good consideration (ie the discharge of the debt)3. Peter
Gibson LJ relied additionally on the fact that a payment which does discharge
a debt does not result in the unjust enrichment of the payee4.
1
[1980] QB 677 at 700, [1979] 3 All ER 522 at 535 per Robert Goff J.
2
[2000] QB 110.
3
At 125H–126A. For further discussion of the change of position defence, see 28.9 below.
4
At 132E.

(b) Defences to a claim for recovery of a mistaken payment

28.8 There are a number of defences to a claim for restitution of a mistaken
payment. The defences considered below are:

5
28.8 Restitution, Proprietary Claims, and Tracing

(1) Change of position;

(2) Estoppel;
(3) The rule in Cocks v Masterman;
(4) Ministerial receipt.
The provision of good consideration (para 28.7), and intentional payment
(para 28.6), can also be categorised as defences. Other defences to restitution-
ary claims, including counter-restitution, illegality, legal incapacity and limita-
tion are beyond the scope of this book1.
1
Reference should be had to the various available text books on restitution, eg Goff & Jones, The
Law of Unjust Enrichment (9th edn, 2016); Burrows, The Law of Restitution (3rd edn, 2011).

(i) Change of position

28.9 This defence is available where the recipient of the payment has so
changed his position that it would be inequitable in all the circumstances to
require him to make restitution, or restitution in full.
The defence was firmly established in English jurisprudence by the House of
Lords’ decision in Lipkin Gorman (a firm) v Karpnale Ltd1. There, a dishonest
solicitor, Cass, had drawn cheques on his firm’s client account and used them to
fund his gambling habit at the Playboy Club. The club did not provide good
consideration by way of gambling payments, since these were unlawful2; nor
did it provide good consideration by way of the provision of gambling chips,
since of themselves they had no value3. However, to the extent that the club had
paid over winnings to Cass, the House of Lords held that the club was entitled
to reduce its liability by the defence of change of position.
1
[1991] 2 AC 548.
2
[1991] 2 AC 548 at 575C.
3
[1991] 2 AC 548 at 575G.

A. Detriment
28.10 In general, the defence of change of position will only operate where the
recipient can identify some form of detriment.
As to the manner of detriment that will qualify for the defence, the starting
point is that the mere spending of the money received will not suffice. In Lipkin
Gorman1, Lord Goff stated:
‘I wish to stress however that the mere fact that [he] has spent the money, in whole or
in part, does not of itself render it inequitable that he should be called upon to repay,
because the expenditure might in any event have been incurred by him in the ordinary
course of things.’
Rather, the recipient must have incurred ‘extraordinary expenditure’2. This
does not mean that the money must have been spent on something extraordi-
nary; it simply means that the recipient must have entered into a transaction
which he would not have entered into if he had not received the money. In other
words, there must be a causal link between the receipt and the expenditure3. So
a recipient who increases his standard of living commensurately with his newly
acquired wealth may be entitled to rely on the defence4, although, as was
pointed out in Avon County Council v Howlett5, it may be difficult for a payee

6
 Restitution of Money Paid by Mistake 28.12

to prove that he has altered his mode of living.

1
[1991] 2 AC 548 at 580. The point was also emphasised in Dextra Bank & Trust Co Ltd v Bank
of Jamaica [2001] UKPC 50; [2002] 1 All ER (Comm) 193, and In re the FII Group Litigation
[2008] EWHC 2893 (Ch).
2
Dextra Bank & Trust Co Ltd v Bank of Jamaica [2001] UKPC 50; [2002] 1 All ER (Comm)
193.
3
Papamichael v National Westminster Bank plc [2003] 1 Lloyd’s Law Rep 341 at 366; Jones
v Commerzbank [2003] EWCA Civ 1663 at paras [43], [59]; Credit Suisse (Monaco) SA v Attar
[2004] EWHC 374 (Comm) at para [98]; Abou-Rahmah v Abacha [2006] EWCA Civ 1492 at
para [85].
4
Philip Collins Ltd v Davis [2000] 3 All ER 808, at 827-830; Scottish Equitable v Derby [2001]
3 All ER 818 at para [33]; In re the FII Group Litigation [2008] EWHC 2893 (Ch) at
paras [343–4].
5
[1983] 1 All ER 1073, [1983] 1 WLR 605, CA.

28.11 There are certain expenditures which are not regarded as a sufficient
detriment for the purposes of the defence.
First, in general it is not a detriment to pay off a debt1. The rationale is that the
recipient’s wealth is not reduced by paying a debt since the effect of the payment
is offset by the release of his liability to his creditor. However, there may be
circumstances where some true detriment might be suffered. For example, if the
recipient had paid off borrowing which had been on particularly advantageous
terms, and the effect of restitution would be to require him to re-borrow in
circumstances where such advantageous terms were no longer available to him,
the Court may in those circumstances conclude that restitution (or restitution in
full) would lead to injustice2.
Second, where the recipient uses the money to buy an asset which remains in his
hands at the time of the bank’s claim for repayment, the defence of change of
position is disallowed to the extent that the recipient is still enriched. In Lipkin
Gorman3, Lord Templeman gave the example of a recipient who uses the money
to buy a car: the recipient suffers no greater detriment than the decline in the
value of the car between the date of purchase and the date of the proceedings for
recovery4. Similarly, in Credit Suisse (Monaco) SA v Attar5, the defence of
change of position failed because the defendant had used the money to buy
shares which had then increased in value and were sold at a profit.
1
Scottish Equitable v Derby [2001] 3 All ER 818 at [35]; followed in Credit Suisse (Monaco) SA
v Attar [2004] EWHC 374 (Comm) at [98].
2
Scottish Equitable v Derby [2001] 3 All ER 818 at para [35].
3
[1991] 2 AC 548 at 560.
4
See also Cheese v Thomas [1994] 1 WLR 129, where it was held that the loss in value of a
property to which the claimant and defendant had jointly contributed was to be borne by each
party in proportion to his contribution. Although Sir Donald Nicholls VC based his reasoning
on equitable principles, it has been suggested that this can be seen as an application of the
change of position defence: M Chen-Wishart, Loss sharing, undue influence and manifest
disadvantage (1994) LQR 110, 173-8.
5
[2004] EWHC 374 (Comm) at para [98].

28.12 The defence is not limited to detriments incurred after the mistaken
payment. It was established by the Privy Council in Dextra Bank v Bank of
Jamaica1 that provided the recipient’s enrichment and detriment are causally
linked, the defence is also available where the detriment has been incurred in
anticipation of a subsequent enrichment2.
1
[2001] UKPC 50.

7
28.12 Restitution, Proprietary Claims, and Tracing
2
See also: Jones v Commerzbank [2003] EWCA Civ 1663 at paras [38], [64]; Abou-Rahmah v
Abacha [2006] EWCA Civ 1492 at paras [34], [56].

B. Bad faith and ‘wrongdoing’

28.13 The defence of change of position is not available (a) to a recipient who
has changed his position in bad faith (for example where he has paid away the
money received with knowledge of the facts entitling the bank to restitution),
and (b) to a ‘wrongdoer’1.
As to bad faith, it is not sufficient to defeat the defence that the recipient ought
to have known that the payment was mistaken if the recipient did not have
actual knowledge of the mistake2. Beyond that, whether the recipient acted in
good faith is a question of fact. In Niru Battery Manufacturing Co v Mileston
Trading (No 1)3, Moore-Bick J said4 (in a passage subsequently approved by
the Court of Appeal both in those proceedings5 and also Abou-Rahmah v
Abacha6):
‘I do not think that it is desirable to attempt to define the limits of good faith; it is a
broad concept, the definition of which, insofar as it is capable of definition at all, will
have to be worked out through the cases. In my view it is capable of embracing a
failure to act in a commercially acceptable way and sharp practice of a kind that falls
short of outright dishonesty as well as dishonesty itself. The factors which will
determine whether it is inequitable to allow the claimant to obtain restitution in a
case of mistaken payment will vary from case to case, but where the payee has
voluntarily parted with the money much is likely to depend on the circumstances in
which he did so and the extent of his knowledge about how the payment came to be
made. Where he knows that the payment he has received was made by mistake, the
position is quite straightforward: he must return it. This applies as much to a banker
who receives a payment for the account of his customer as to any other person...
Greater difficulty may arise, however, in cases where the payee has grounds for
believing that the payment may have been made by mistake, but cannot be sure. In
such cases good faith may well dictate that an enquiry be made of the payer. The
nature and extent of the enquiry called for will, of course, depend on the circum-
stances of the case, but I do not think that a person who has, or thinks he has, good
reason to believe that the payment was made by mistake will often be found to have
acted in good faith if he pays the money away without first making enquiries of the
person from whom he received it.’
As to wrongdoing, Lord Goff did not in Lipkin Gorman define the scope of the
term ‘wrongdoer’, but in practice the concept appears to be aligned with that of
illegality. In O’Neil v Gale7, for example, the Court of Appeal considered a
change of defence position raised by the wife of a fraudster who had been
operating a ‘Ponzi’ scheme. The claimant was an investor who had paid money,
in part, into an account held in the name of the wife. Since the wife was held to
have been assisting her husband in the commission of a criminal offence, she
was to be regarded as a wrongdoer, with the result that her change of position
could not be taken into account8.
1
Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548 at 580, per Lord Goff; Papamichael
v National Westminster Bank plc [2003] 1 Lloyd’s Law Rep 341 at 367.
2
Dextra Bank & Trust Co Ltd v Bank of Jamaica [2001] UKPC 50; [2002] 1 All ER (Comm)
193; Papamichael v National Westminster Bank plc [2003] 1 Lloyd’s Law Rep 341 at 367–9.
3
[2002] 2 All ER (Comm) 705.
4
At para [135].
5
[2004] QB 985, at paras [164–5].

8
 Restitution of Money Paid by Mistake 28.14
6
[2006] EWCA 1492; [2007] 1 All ER (Comm) 827 at paras [48–49].
7
[2013] EWCA Civ 1554. See also Barros Mattos Junior v MacDaniels [2005] 1 WLR 247, at
para [43]. These decisions are considered in Campbell, ‘Change of position: retreating from
Barros Mattos’, Restitution Law Review (2014), 22 (paras 105–110).
8
For further discussion of this topic, see Goff & Jones, The Law of Unjust Enrichment (9th edn,
2016), paras 27-49 to 27-53.

(ii) Estoppel
28.14 A claimant who is prima facie entitled to recover money paid under a
mistake will be estopped from doing so if: (a) he made a representation of fact
which led the defendant to believe that he was entitled to treat the money as his
own; and (b) relying on this representation, the defendant acted to his detri-
ment1.
There are two important differences between the defence of change of position
and the defence of estoppel.
First, unlike the defence of change of position, estoppel requires there to have
been a representation by one party to another2.
Second, estoppel is, at least in theory, an ‘all or nothing’ defence (unlike the
change of position defence, which can operate pro tanto). That can lead to
injustice if the claimant is denied recovery to an extent which is greater than the
detriment actually suffered by the recipient3.
Considerations such as these led Lord Goff to observe in Lipkin Gorman that
estoppel is not an appropriate concept to regulate the scope of relief for unjust
enrichment4. Subsequently, in Philip Collins Ltd v Davis5, Jonathan Parker J
said6 that ‘the law has now developed to the point where a defence of estoppel
by representation is no longer apt in restitutionary claims where the most
flexible defence of change of position is in principle available’.
Nevertheless, unless and until the Supreme Court rules that change of position
has completely subsumed and ousted estoppel as an independent defence, it
remains relevant to consider the estoppel defence in further detail, albeit that in
practice courts are reluctant to allow the defence to succeed if it produces an
unconscionable result7.
1
See United Overseas Bank v Jiwani [1977] 1 All ER 733 at 737, [1976] 1 WLR 964 at 968,
MacKenna J.
2
See para 28.15 below.
3
See, however, the relaxation of this requirement in Avon CC v Howlett [1983] 1 WLR 606 CA;
Scottish Equitable plc v Derby [2001] 3 All ER 818; and National Westminster Bank v Somer
International UK Ltd [2002] QB 1286, 1306-1310, considered further in para 28.16 below.
4
[1991] 2 AC 548 at 579, [1992] 4 All ER 512 at 533.
5
[2000] 3 All ER 808, 826.
6
Cited by the Court of Appeal in National Westminster Bank plv v Somer International UK Ltd
[2002] QB 1286 at para [23].
7
See further, Hudson, ‘Estoppel by representation as a defence to unjust Enrichment – the vine
has not withered yet’, Restitution Law Review, (2014), 19.

9
28.15 Restitution, Proprietary Claims, and Tracing

A. Representation

28.15 Unlike the change of position defence, it is an essential element of the

defence of estoppel that the paying bank has made a representation which has
been relied upon by the recipient.
However, the mere tendering of the payment does not carry with it an implicit
representation that the payment is due. In Philip Collins Ltd v Davis1, Jonathan
Parker J said:
‘ . . . the mere tendering of a payment under a contract does not, without more,
amount to a representation that the payment is due. No reasonable person will
assume that mistakes may not be made. The tender may well amount to a represen-
tation that the tenderer believes the sum tendered to be due, but that is a represen-
tation as to the tenderer’s current state of mind and not as to the parties’ rights under
the contract.’
Similarly, the paying bank does not impliedly represent that the drawer’s sig-
nature on a cheque or other bill of exchange is genuine2. Nor is the paying bank
estopped from denying the validity of a duplicate share certificate issued in
favour of a fraudster to anyone who relies on it, since, although it names the
true owner, it does not represent that the person in possession of the certificate
is the true owner3.
The paying bank owes no duty of care to the payee in deciding whether to
honour a customer’s cheque, at any rate when it appears to be regular on its
face. This prevents an estoppel by negligence4.
A defence of estoppel cannot succeed if the representation was induced by
concealment on the part of the representee. As Lord Brampton said in George
Whitechurch Ltd v Cavanagh5:
‘ . . . in my judgment no representations can be relied on as estoppels if they have
been induced by the concealment of any material fact on the part of those who seek
to use them as such; and if the person to whom they are made knows something
which, if revealed, would have been calculated to influence the other to hesitate or
seek for further information before speaking positively, and that something has been
withheld, the representation ought not to be treated as an estoppel.’

1
[2000] 3 All ER 808, 824.
2
National Westminster Bank Ltd v Barclays Bank International Ltd [1975] QB 654 at 672E and
674F, [1974] 3 All ER 834 at 849 and 850h.
3
Royal Bank of Scotland plc v Sandstone Properties Ltd [1998] 2 BCLC 429.
4
National Westminster Bank Ltd v Barclays Bank International Ltd [1975] QB 654 at 662F,
[1974] 3 All ER 834 at 841b. Cf Skyring v Greenwood (1825) 4 B & C 281, and Holt v
Markham [1923] 1 KB 504, CA. See also Weld-Blundell v Synott [1940] 2 KB 107 at 114–115,
Asquith J.
5
[1902] AC 117 at 145, HL. This passage was cited with approval by Kerr J in National
Westminster Bank Ltd v Barclays Bank International Ltd [1975] QB 654 at 676, [1974]
3 All ER 834 at 852 and by Neild J in Secretary of State for Employment v Wellworthy Ltd (No
2) [1976] ICR 13 at 25. In the former case Kerr J held that no estoppel could protect the
defendant as ‘the circumstances in which the cheque came into (his) hands . . . reeked with
suspicion’.

10
 Restitution of Money Paid by Mistake 28.17

B. Estoppel as a partial defence

28.16 The general rule is that an estoppel cannot operate pro tanto, so that if
the claimant is estoppel by his representation from making a claim for repay-
ment, then the claim entirely fails. This is because estoppel is usually seen as a
rule of evidence, and the consequence of the representation is to preclude the
representor from asserting facts contrary to his representation. This was
expressly restated by the Court of Appeal in Avon County Council v Howlett1.
However, the Court of Appeal in Avon recognised that this rule could lead to
injustice, and hence suggested that an estoppel might give rise to a partial
defence, albeit that this would be exceptional. Slade LJ said that this might be
the case ‘where the sums sought to be recovered were so large as to bear no
relation to any detriment which the recipient could possibly have suffered’2
Eveleigh LJ put the position in wider terms, suggesting that ‘there may be
circumstances which would render it unconscionable for the defendant to retain
a balance in his hands’3. This latter test of unconscionability was adopted and
applied by the Court of Appeal in Scottish Equitable v Derby4, and in National
Westminster Bank plc v Somer5. Whilst the Court of Appeal confirmed in these
cases that the general rule remains that the estoppel defence did not operate pro
tanto, it recognised that there was an exception where it would be clearly
inequitable or unconscionable for the defendant to retain a balance of the
mistaken payment in his hands. Clark LJ in Somer noted6 the tension between
the rule and the exception, and recognised that in practice it would very often be
unconscionable for a recipient to retain the whole amount paid over. Hence
Goff & Jones7, conclude that ‘unless the difference between the value of the
benefit received by the defendant and the value of the detriment incurred by the
defendant is vanishingly small, the courts can always be expected to hold that it
would be “unconscionable” for the defendant to keep this windfall’. Indeed, the
exception appears to be potentially so wide as to entirely emasculate the rule8.
1
[1983] 1 WLR 605, at 622.
2
At 624–5.
3
At 612.
4
[2001] 3 All ER 818.
5
[2002] QB 1286.
6
[2002] QB 1286, at 1307–8.
7
The Law of Unjust Enrichment (9th edn, 2016), para 30-15.
8
See also Burrows, The Law of Restitution (3rd edn, 2011), p 557: ‘the Avon exception swallows
up its all or nothing rule. Estoppel will always, by this means, operate in a pro tanto fashion.
The cleaner approach would be to recognise this and to clarify that, in contrast to change of
position, the all or nothing estoppel defence is in this context inapt and should be excised’.

(iii) The rule in Cocks v Masterman

28.17 There is a somewhat anomalous rule, derived principally from Cocks v
Masterman1 and London and River Plate Bank v Bank of Liverpool2, that
where money is paid on a negotiable instrument to a person innocent of any
knowledge of mistake it cannot be recovered if the payee’s position might, not
necessarily would, be affected if he had to refund the payment. This suggests
that while in all other cases, in resisting an action for repayment of money paid
to him under a mistake of fact, the defendant must establish a change of
position or an estoppel on the basis of his having actually acted to his detriment,

11
28.17 Restitution, Proprietary Claims, and Tracing

in relation to negotiable instruments the principle is that the defendant need

only show that his position might be affected if he had to repay.
In Cocks v Masterman itself, Bayley J laid expressed this rule in the following
terms:
‘But we are all of the opinion that the holder of a bill is entitled to know, on the day
when it becomes due whether it is an honoured or dishonoured bill, and that, if he
receives the money and is suffered to retain it during the whole of that day, the parties
who paid it cannot recover it back. The holder, indeed, is not bound by law (if the bill
be dishonoured by the acceptor) to take any steps against the other parties to the bill
till the day after it is dishonoured. But he is entitled so to do, if he thinks fit, and the
parties who pay the bill ought not by their negligence to deprive the holder of any
right or privilege. If we were to hold that the plaintiffs were entitled to recover, it
would be in effect saying that the plaintiffs might deprive the holder of a bill of his
right to take steps against the parties to the bill on the day when it becomes due.’
In London and River Plate Bank v Bank of Liverpool3, Matthew J stated the
law in even broader terms. He held that the ruling principle was not negligence
or the banker’s knowledge or means of knowledge, but the right to an imme-
diate answer as to the fate of a cheque – which is an element essential to the
negotiability of the instrument and imperatively demanded by the exigencies of
business. On the facts, a bill was mistakenly paid against a forged indorsement,
and the claimant subsequently sought to recover the payment on the grounds of
mistake. Matthew J held it was not recoverable, and gave judgment for the
defendants, even though it was agreed that there was no evidence of negligence
on the part of the claimants and that the defendants had acted throughout in
good faith. The validity of the rule was also recognised in the case of Mather v
Lord Maidstone4.
However, no convincing reason is given for the rule and it is not surprising that
subsequent authorities have sought to limit its apparently broad application. In
particular, it is now firmly restricted only to cases where notice of dishonour is
required to be given to a person who would otherwise be discharged from
liability on the bill5. In Leeds and County Bank Ltd v Walker6, the rule was held
to have no application to a forged bank note. Lord Goff in Lipkin Gorman7
referred to the Cocks v Masterman defence as being one which could arguably
be seen as an instance of the operation of the change of position defence. It
seems likely that the defence will eventually be subsumed within change of
position, so that actual detriment will need to be established in all cases.
1
(1829) 9 B & C 902.
2
[1896] 1 QB 7.
3
[1896] 1 QB 7.
4
(1856) 18 CB 273.
5
Imperial Bank of Canada v Bank of Hamilton [1903] AC 49 at 57–58; National Westminster
Bank Ltd v Barclays Bank International Ltd [1975] QB 654, [1974] 3 All ER 834; Barclays
Bank v Simms [1980] 1 QB 677, at 700, 703 (where the cheque was countermanded, so no
notice of dishonour was required). Notice of dishonour is rarely required where a cheque is
concerned: see para 26.17.
6
(1883) 11 QBD 84, especially at 89.
7
Lipkin Gorman v Karpnale [1991] 2 AC 548, 578H.

12
 Restitution of Money Paid by Mistake 28.19

(iv) Ministerial receipt

28.18 Money paid under a mistake to an agent will be recoverable from the
agent until the agent has paid it over to the principal or has legitimately
disposed of it on behalf of the principal, in which event it becomes recoverable
from the principal. This defence is sometimes referred to as ‘ministerial receipt’.
Hence, where the recipient is itself a bank, and the bank receives the money on
behalf of its customer and credits it to the customer’s account (at least where the
account is in credit), the bank itself (as opposed to its customer) should not face
liability for restitution of the sums paid to it. The position is more complicated,
however, where the customer’s account is overdrawn, since the question then is
whether it is the bank or the customer which is enriched by the payment; see
para 28.28 below.
28.19 The defence is derived from a line of cases, starting with Buller v
Harrison1, which decided that money paid to an agent and placed to the
principal’s account in the agent’s books is recoverable as money had and
received. Buller was a case concerning restitution of a mistaken payment where
it was held that the claimant could recover from the agent since the agent had
not paid the monies over to his principal, and hence had in fact been enriched by
it2.
The principle was endorsed in a banking context in British American Conti-
nental Bank v British Bank for Foreign Trade3, where Bankes LJ said:
‘It is, I think, clear law that if money is paid to an agent on behalf of a principal under
a mistake of fact the agent must return it to the person from whom he received it,
unless before the mistake was discovered he had paid over the money he had received
to his principal, or settled such an account with his principal as amounts to payment,
or did something which so prejudiced his position that it would be inequitable to
require him to refund.’
A more modern and arguably preferable interpretation of the ‘ministerial
receipt’ defence is to be found in Jeremy D Stone Consultants Ltd v National
Westminster Bank Plc4. In the usual situation where money is paid to the bank
as agent for its customer, the bank is not ‘enriched’ since it never receives and
retains any money for its own account or in its own right; hence, one of the
essential elements of the cause of action is missing (‘enrichment’ in the case of a
claim in unjust enrichment, and ‘receipt’ in the case of a claim for knowing
receipt). There is no need to classify this situation as giving rise to a ‘defence’ to
a cause of action, since the cause of action is not itself made out5.
The principle is said6, on the basis of Continental Caoutchouc and Gutta
Percha Co v Kleinwort Sons & Co7 and Kleinwort Sons & Co v Dunlop
Rubber Co8, to be subject to certain exceptions, namely that the defence will not
exonerate the defendant if:
(e) he had notice of the claimant’s claim before paying the money to the
principal or otherwise disposing of it on his behalf9;
(f) in the course of the transaction he acted as the principal; or
(g) he received the money in consequence of some wrongdoing to which he
was a party or of which he had knowledge.
However, on the facts of both the Kleinwort cases cited above the merchant
bank was in fact acting as principal, and these apparent ‘exceptions’ ought to be

13
28.19 Restitution, Proprietary Claims, and Tracing

treated with caution in the light of Royal Brunei v Tan10: it may be that
‘exceptions’ (a) and (c) are really situations in which the bank faces potential
liability on the grounds of knowing receipt or dishonest assistance, in which
case the question is whether the evidence establishes the criteria required for
such liability. The Kleinwort cases should not be seen as giving rise to a wider or
different basis of recipient or accessory liability than that established in Tan.
Where the payment to the bank is applied to reduce or discharge an overdraft,
it is arguable that the defence of ministerial receipt should not be available since
it could be said that the bank has been enriched to the extent of the reduction in
the overdraft. The contrary argument is that, even in this situation, it is the
customer that has been enriched, since his overdraft indebtedness has been
discharged, whereas the bank’s position remains neutral, ie the payment has
simply caused one asset (its cause of action in debt against its customer for
repayment of the overdraft) to be replaced with another (the receipt of the
money). Further, unless the overdraft facility is then withdrawn, the customer
would still be able to take the benefit of the payment, since he could simply
withdraw the equivalent amount for himself, causing the account to go back
into overdraft. There is conflicting authority and academic opinion on this
point. Millett J stated (obiter) in Agip (Africa) v Jackson11that:
‘The essential feature of [knowing receipt] is that the recipient must have received the
property for his own use and benefit. This is why neither the paying nor the collecting
bank can normally be brought within it. In paying or collecting money for a customer
the bank acts only as his agent. It is otherwise, however, if the collecting bank uses the
money to reduce or discharge the customer’s overdraft. In doing so it receives the
money for its own benefit.’
However, earlier authorities suggest that no distinction is to be drawn between
receipts into accounts in credit and those in overdraft12. Writing extra-judicially,
Lord Millett has more recently suggested that a bank can only be said to have
received the money beneficially where there has been ‘some conscious appro-
priation of the sum paid into the account in reduction of the overdraft’13. This
suggestion has been criticised in Goff & Jones14 since ‘when a bank receives a
payment from a third party it has no choice but to credit the account designated
by the third party’. It would be difficult to see how the ‘conscious appropria-
tion’ test could operate in practice15.
There may also be other circumstances in which the bank is found to have
received money for its own use or benefit. In Polly Peck International plc v
Nadir (No 2)16, the bank was engaged in certain currency exchanges, and it was
found on the facts that the bank had been exchanging currency in its own right
and not as banker to its customer.
1
(1777) 2 Cowp 565.
2
(1777) 2 Cowp 565 at 568.
3
[1926] 1 KB 328 at 568.
4
[2013] EWHC 208 (Ch), [241–242.]
5
This analysis accords with the view of the editors of Goff & Jones, The Law of Unjust
Enrichment (9th edn, 2016), at paras 28-02 to 28-06 and 28-18, and with the decision in Bellis
v Challinor [2015] EWCA 59.
6
See Chudley v Clydesdale Bank plc [2017] EWHC 2177 (Comm), at [292–298], referring to an
earlier edition of Paget.
7
(1904) 90 LT 474, 9 Com Cas 240, CA.
8
(1907) 97 LT 263, HL.

14
 Proprietary Claims and Constructive Trusts 28.20
9
See also: Gower v Lloyds and National Provincial Foreign Bank Ltd [1938] 1 All ER 766; and
Transvaal and Delagoa Bay Investment Co Ltd v Atkinson [1944] 1 All ER 579.
10
[1995] 2 AC 378, [1995] 3 All ER 97, PC.
11
[1990] 1 Ch 265 at 292.
12
Continental Caoutchouc and Gutta Percha Co v Kleinwort Sons & Co (1904) 90 LT 474 at
476; British North American Elevator Co v Bank of British North America [1919] AC 658.
13
Millett, ‘Tracing the Proceeds of Fraud’ (1991) 107 LQR 70, p 83, fn 46; noted, without
deciding the issue, by the New Zealand Court of Appeal in Westpac Banking Corp v NM
Kembla New Zealand Ltd [2001] 2 NZLR 298, at 316–317.
14
(9th edn, 2016), at para 28-14.
15
See further: Bryan, ‘Recovering Misdirected Money from Banks: Ministerial Receipt at Law and
in Equity’ in Rose (ed.), Restitution and Banking Law, pp 181–187; Smith, ‘Unjust Enrichment,
Property, and the Structure of Trusts’ (2000) 116 LQR 412, p 433. Bryan’s criticism of the
distinction drawn in Agip (between an account in credit and an in overdraft) was endorsed,
obiter, by Moore-Bick LJ in Uzinterimpex JSC v Standard Bank Plc [2008] EWCA Civ 819 at
[40].
16
[1992] 4 All ER 769. See also Uzinterimpex JSC v Standard Bank Plc [2008] EWCA Civ 819.

2 PROPRIETARY CLAIMS AND CONSTRUCTIVE TRUSTS

(a) Proprietary claims by banks

(i) Distinction between personal and proprietary claims
28.20 Proprietary claims arise where the claimant has retained a proprietary
interest in the payment or other property transferred to the defendant. The
proprietary claim is based not on a mistake or other factor making the
defendant’s retention of the property ‘unjust’, but on the fact that the claimant
retains, or is deemed to have retained, ownership of the property in the
defendant’s hands. Proprietary restitution is hence an aspect of property law,
rather than the law of unjust enrichment.
In contrast, the unjust enrichment claims considered in the preceding sec-
tions depend upon establishing a mistake or other ‘unjust factor’. They are
personal restitutionary claims which follow the recipient rather than the
property, and they are concerned with the enrichment received by the defendant
irrespective of whether particular property has been retained. Hence, no
question of following or tracing arises in the context of personal restitutionary
claims. As noted in Armstrong DLW GmbH v Winnington Networks Ltd1:
‘By definition, [the personal claim] claim would suggest that the claimant has lost,
and the defendant has gained, property in a relevant asset. By contrast, a proprietary
restitutionary claim is based on the notion that the claimant has, at all times, retained
legal title to the relevant asset, which asset has been transferred away from the
claimant and it (or its substitute) has found its way into the hands of the defendant.’
Similarly, Lord Millett Foskett v McKeown2 stated:
‘The transmission of a claimant’s property rights from one asset to its traceable
proceeds is part of our law of property, not of the law of unjust enrichment. There is
no “unjust factor” to justify restitution (unless “want of title” be one, which makes
the point). The claimant succeeds if at all by virtue of his own title, not to reverse
unjust enrichment. Property rights are determined by fixed rules and settled prin-
ciples. They are not discretionary. They do not depend upon ideas of what is “fair, just
and reasonable”. Such concepts, which in reality mask decisions of legal policy, have
no place in the law of property.’

15
28.20 Restitution, Proprietary Claims, and Tracing

The distinction is particularly important where the defendant is insolvent, since

a proprietary claim may entitle the claimant to have priority over the defen-
dant’s general creditors. A proprietary claim may also entitle the claimant to
look to subsequent transferees, rather than the immediate recipient, for recov-
ery.
1
[2012] EWHC 10 (Ch), at paras [62–3], per Mr Stephen Morris QC (sitting as a Deputy
High Court Judge).
2
[2001] 1 AC 102, at 127.

(ii) Mistaken payments

28.21 In general, where a paying bank makes a payment by mistake, its claim
against the recipient will be personal in nature. The bank does not retain title to
the money paid over, and its remedy will arise under the personal claim for
unjust enrichment considered in the sections above. There will in those circum-
stances be no question of following or tracing the money paid over.
The personal nature of the paying bank’s claim was established in Westdeutsche
Landesbank Girozentrale v Islington London Borough Council1, where Lord
Browne-Wilkinson considered the decision of Goulding J in Chase Manhattan
Bank NA v Israel-British Bank (London) Ltd2. In Chase Manhattan, the paying
bank mistakenly made the same payment twice as a result of a clerical error;
Goulding J held that the bank could make a proprietary claim to the mistaken
second payment since the bank had retained equitable title to the money and the
conscience of the recipient was subject to a fiduciary duty to respect that
property. Lord Browne-Wilkinson in Westdeutsche did not agree; he held that a
payment made by mistake does not give rise to an equitable relationship and
nor does it give the payer an equitable interest in the funds. He stated3:
‘First, [Goulding J’s reasoning] is based on a concept of retaining an equitable
property in money where, prior to the payment to the recipient bank, there was no
existing equitable interest. Further, I cannot understand how the recipient’s “con-
science” can be affected at a time when he is not aware of any mistake.’
Lord Browne-Wilkinson went on to say, however, that Chase Manhattan may
have been rightly decided on its facts, since there the recipient bank knew of the
mistake made by the paying bank within two days of receipt, and although ‘the
mere receipt of the moneys, in ignorance of the mistake, gives rise to no trust,
the retention of the moneys after the recipient bank learned of the mistake may
well have given rise to a constructive trust’4. In other words, although the
recipient is not immediately rendered a trustee of the asset upon its transfer, a
trust may arise if the recipient’s conscious becomes affected (eg where he knows
the payment was mistaken but nevertheless deliberately retains it). That analy-
sis has, however, been subjected to considerable academic and judicial crticism5.
1
[1996] AC 669.
2
[1981] Ch 105. See also Sinclair v Brougham [1914] AC 398, which the House of Lords
overruled in Westdeutsche.
3
[1996] AC 669, at 714.
4
[1996] AC 669, at 715.
5
Barclays Bank v Box [1998] Lloyds Bank Rep 185, 200-201 per Ferris J; Papamichael v
National Westminster Bank plc (No 2) [2003] EWHC 164 (Comm); [2003] 1 Lloyd’s Rep 341,
at paras [232]–[242] per Judge Chambers QC; Shalson v Russo [2005] Ch 281 at paras [108]-
[127] per Rimer J; London Allied Holdings Ltd v Lee [2007] EWHC 2061 (Ch) at paras [268]–
[272] per Etherton J; Fitzalan-Howard v Hibbert [2009] EWHC 2855 (QB), at [49] per

16
 Proprietary Claims and Constructive Trusts 28.22

Tomlinson J; Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA [2013]
EWCA Civ 1679, at [18]–[19] per Tomlinson LJ. See also Re D&D Wines International Ltd (In
Liquidation) [2016] 1 WLR 3179: although Westdeutsche was not mentioned in that case, the
reasoning of the Supreme Court suggests that it would not accept that knowledge alone would
be enough to give rise to a proprietary restitutionary remedy. For a detailed criticism of the
analysis see also Goff & Jones, The Law of Unjust Enrichment (9th edn, 2016), paras 37-23 to
37-26.

(iii) Payments obtained by theft or fraud

28.22 Where money has been stolen, for example by means of a fraudulent
diversion from its intended recipient1, then the actual recipient of the funds has
no legal entitlement to them. In these circumstances, equity treats the fraudulent
recipient as holding the funds on constructive trust for the payor who retains his
beneficial interest in the funds, and the payor is entitled to trace the money in
equity. In Westdeutsche Landesbank v Islington BC, Lord Browne-Wilkinson
stated2:
‘I agree that . . . stolen moneys are traceable in equity. But the proprietary interest
which equity is enforcing in such circumstances arises under a constructive, not a
resulting, trust. Although it is difficult to find clear authority for the proposition,
when property is obtained by fraud equity imposes a constructive trust on the
fraudulent recipient: the property is recoverable in equity.’
Although Lord Browne-Wilkinson’s statement was obiter, it has been treated as
a correct proposition of law and is supported by numerous authorities both in
this jurisdiction3 and Australia4.
A distinction is, however, to be drawn between transactions in which money has
been stolen or otherwise misappropriated (ie non-consensual transfers), and
those which are consensual transactions but voidable for misrepresentation. In
the former case, there is never a transfer of legal title and the constructive trust
arises immediately upon the transfer. In the latter situation the constructive
trust arises, not at the outset, but if and when the transaction is rescinded, at
which point the proprietary interest in the money revests in the payor entitling
him to trace the money in equity5.
However, there are two Court of Appeal cases which blur the above distinction
and appear to suggest that there may be an immediate trust, without the need
for rescission, if the fraudulent misrepresentation so seriously vitiates a claim-
ant’s intention to transfer property that the transaction should be regarded as a
nullity from the outset. The first case is Collings v Lee6, where the claimants
were induced by a fraud to transfer their house to the defendant who was using
an assumed name. The second case is Halley v The Law Society7, where a
recipient sought to retain an ‘advance fee’ payment made into a solicitor’s client
account pursuant to contracts relating to certain investment schemes: it was
held that the contracts were nothing more than vehicles for obtaining money by
fraud. As the authors of Goff & Jones point out8, these cases should be treated
with caution since they rest on the novel proposition that a contract induced by
fraudulent misrepresentation is sometimes to be treated as void rather than
voidable. On the other hand, it may be possible to rationalise these decisions as
involving not merely consensual transfers induced by misrepresentation, but
non-consensual transactions in the sense that the claimant had no intention to

17
28.22 Restitution, Proprietary Claims, and Tracing

transfer any money or property to the defendant at all.

1
A particularly prevalent modern example is the ‘Authorised Push Payment’: the payment is
authorised in the sense that the bank has made the payment to the recipient account details
provided by the customer, but the customer has been defrauded by a third party into making the
payment to the wrong recipient, and in that sense the transaction is not consensual: see the
FCA Consultation Paper 17/2 (November 2017).
2
[1996] AC 669, at p 715–6.
3
El Ajou v DHL Plc [1993] 3 All ER 717, 734; Papamichael v NatWest Bank plc [2003] Lloyds
Rep 341, at [241]; Commerzbank Aktiengesellschaft v IMB Morgan plc [2005] 2 All ER
(Comm) 564, at [36]; London Allied Holdings Ltd v Lee [2007] EWHC 2771 (Ch), at [275–6];
Bank of Ireland v Pexxnet Ltd [2010] EWHC 1872 (Comm) at [55–57]; Armstrong
DLW GmbH v Winnington Networks Ltd [2013] Ch 156. Cf Shalson v Russo [2005] Ch 281,
at [110–111], where Lord Browne-Wilkinson’s dicta was subject to criticism.
4
Black v S Freedman & Co (1910) 12 CLR 105; Creake v James Moore and Sons Pty Ltd (1912)
15 CLR 426; Australian Postal Corp v Lutak (1991) 21 NSWLR 584; Robb Evans v European
Bank Ltd (2004) 61 NSWLR 75.
5
Shalson v Russo [2005] Ch 281, at [127]; Twinsectra v Yardley [2000] WLR 527, at [98–99]
per Potter LJ; affd on other grounds [2002] AC 164.
6
[2001] 2 All ER 332, at 337 per Nourse LJ.
7
[2003] EWCA Civ 97.
8
The Law of Unjust Enrichment (9th edn, 2016), para 40-30.

(b) Proprietary claims against banks

28.23 When a customer deposits money into a bank account, the title the
money itself vests absolutely in the bank (in law and equity). However, as
previously described1, the customer’s title to the money is replaced by title to the
cause of action (the debt) exercisable against the bank for the repayment of the
money. In the case of an ordinary deposit account, the title to that cause of
action will vest absolutely in the customer. In the case of the trust account, the
customer will hold such title on trust for the beneficiaries.
Ordinarily, the bank itself is not a trustee in either situation; even in the case of
a trust account, the bank is a third party to the trust and simply has a
contractual relationship with its customer (and the beneficiaries are third
parties to that relationship)2.
1
See para 22.50 above.
2
Barnes v Addy (1874) LR 9 Ch App 244, 251–2; Chudley v Clydesdale Bank Plc [2017] EWHC
2177 (Comm), at [259–260].

(i) De facto trustee (‘trustee de son tort’)

28.24 Exceptionally, however, it may be asserted that the bank has taken upon
itself the responsibility to act on behalf of the beneficiary without authority to
do so. By this unauthorised intermeddling, the bank may be held to have
usurped the role of trustee and to have constituted itself a ‘trustee de son tort’, ie
a de facto trustee1. But, (a) the doctrine will only apply where the bank has
consciously taken the office of trustee, and (b) the bank could only be a trustee
of property which it had received in the sense of ‘legal ownership or the right to
obtain legal ownership’2. Hence, the application of this doctrine is highly
unusual, since a court will not readily infer that a bank has voluntarily assumed
the role of trustee3. However, where it has done so, it will be strictly liable as

18
 Proprietary Claims and Constructive Trusts 28.28

trustee; liability does not depend on establishing dishonesty4.

1
Taylor v Davies [1920] AC 636 at 651; Mara v Browne [1896] 1 Ch 199 at 209 (solicitor as
trustee de son tort). For a modern explanation of the basis of liability, see Dubai Aluminium v
Salaam [2003] AC 366 at para [138].
2
Lewin on Trusts (19th edn, 2015), paras [41–103] and [41–121]; Chudley v Clydesdale Bank
Plc [2017] EWHC 2177 (Comm), at [256(4)].
3
See eg Rowlandson v National Westminster Bank Ltd [1978] 3 All ER 370 at 378c, [1978] 1
WLR 798 at 803C.
4
Dubai Aluminimum v Salaam [2003] AC 366 at para [138].

(ii) Distinction between ‘knowing receipt’ and ‘dishonest assistance’

28.25 More commonly, the beneficiary’s proprietary claim will be asserted on
the basis that the bank has knowingly received the proceeds of a breach of trust,
or has dishonestly assisted in a breach of trust, and has hence become a
constructive trustee.
‘Knowing receipt’ refers to situations where the defendant, with knowledge of
a breach of trust or fiduciary duty, can be shown to have received trust property.
A claim in knowing receipt is a claim by the beneficial owner to vindicate his
rights of ownership against the property in the hands of the defendant.
‘Dishonest assistance’, on the other hand, is a form of accessory liability. It does
not depend on the defendant having received trust property, but arises out of the
defendant’s dishonesty in assisting in a breach of trust or fiduciary duty. The law
relating to dishonest assistance was analysed in detail by the Privy Council in
the landmark decision in Royal Brunei Airlines v Tan1, considered below.
1
[1995] 2 AC 378, [1995] 3 All ER 97, PC.

(iii) Knowing receipt

28.26 By definition, a paying bank cannot be held liable on the basis of
knowing receipt. However, a receiving bank, or a bank which is both the paying
and receiving agent, is vulnerable to claims based on knowing receipt.

A. The ingredients of liability

28.27 The essential ingredients for liability for knowing receipt were helpfully
summarised by Hoffmann LJ in El Ajou v Dollar Land Holdings1:
‘For this purpose the plaintiff must show, first, a disposal of his assets in breach of
fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are
traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part
of the defendant that the assets he received are traceable to a breach of fiduciary duty.’
Liability is subject to various defences, considered at para 28.31 below.
1
[1994] 2 All ER 685 at 700.

B. ‘Beneficial receipt’
28.28 As against a bank, beneficial receipt is likely to be established only where
the bank receives money for its own use and benefit. Normally, a collecting

19
28.28 Restitution, Proprietary Claims, and Tracing

bank does not receive money for its own benefit, but rather as agent for the
customer. The bank will not face liability in those circumstances: see further the
discussion of the defence of ‘ministerial receipt’ at paras 28.18–28.19 above.

C. The requisite degree of knowledge

28.29 The question then arises as to what degree of knowledge is required for
the imposition of a constructive trust.
Previous authority suggested that a constructive trust should be imposed where
the recipient bank had either actual or constructive knowledge, ie knowledge
which he would have had if he had made reasonable inquiries1. In other cases,
however, the Courts expressed caution in relation to the application of the
doctrine of constructive knowledge in commercial transactions2.
The Court of Appeal’s solution in BCCI (Overseas) Ltd v Akindele3, per
Nourse LJ, was to introduce a more general and flexible test, namely that ‘the
recipient’s state of knowledge must be such as to make it unconscionable for
him to retain the benefit of the receipt’. This broad test of unconscionability has
been followed in subsequent authorities4. The degree of knowledge which
might make the recipient’s conduct unconscionable depends on the context, but
it must generally be shown that the recipient knows enough about the facts
surrounding the misapplication of trust property to make it unconscionable for
him to retain the payment5.
Constructive trusts are not frequently imposed in a commercial context: in
banking and other commercial transactions, where there is no customary
practice of making routine inquiries into title and where transactions need to be
concluded promptly, it is more likely that the bank will need to be subjectively
aware that it is receiving tainted property before its conduct could be stigma-
tised as being unconscionable6.
1
The main authorities supporting that approach were: Belmont Finance Corpn Ltd v Williams
Furniture (No 2) [1980] 1 All ER 393, CA; International Sales and Agencies Ltd v Marcus
[1982] 3 All ER 551, Lawson J; and El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717
at 739, Millett J (the decision was reversed on appeal [1994] 2 All ER 685, but not on this
point); and Houghton v Fayers [2000] 1 BCLC 511 at para [18].
2
Eagle Trust plc v SBC Securities Ltd [1993] 1 WLR 484; Cowan de Groot Properties Ltd v
Eagle Trust plc [1992] 4 All ER 700; Eagle Trust plc v SBC Securities (No 2) [1996] 1 BCLC
121 at 152c; Dubai Aluminium Co Ltd v Salaam [1999] 1 Lloyds Rep 415; Polly Peck
International plc v Nadir (No 2) [1992] 4 All ER 769 at 782e. For a discussion of the
circumstances in which knowledge will be imputed in the banking context see the decisions in
Lloyds Bank Ltd v E B Savory & Co [1933] AC 201; Barclays Bank plc v Quincecare Ltd
[1992] 4 All ER 363, 377–8; and Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340,
1356E–G, 1358G–1359B, 1378–1380, CA.
3
[2001] CH 437 at 455.
4
Uzinterimpex JSC v Standard Bank Plc [2008] EWCA Civ 819; Richardson v AG of the Turks
& Caicos Islands [2012] UKPC 30; Madoff Securities International Ltd v Raven [2013] EWHC
3147 (Comm); Gray v Smith [2013] EWHC 4136 (Comm); Otkritie International Investment
Management Ltd v Urumov [2014] EWHC 191 (Comm); Group Seven Ltd v Nasir [2018]
PNLR 6; Apollo Ventures Co Ltd v Manchanda [2018] EWHC 58 (Comm).
5
Otkritie International Investment Management Ltd v Urumov [2014] EWHC 191 (Comm), at
para [81].
6
Otkritie International Investment Management Ltd v Urumov [2014] EWHC 191 (Comm), at
para [81].

20
 Proprietary Claims and Constructive Trusts 28.32

D. The bona fide purchase defence

28.30 If a bank, without notice of a breach of trust, gives good value for the
receipt of funds, it becomes a bona fide purchaser and has a good defence to a
claim in knowing receipt. That the defence is total, and not limited to the value
that has been paid out, can be seen from Lipkin Gorman v Karpnale Ltd, where
Lord Goff said1:
‘The defence of change of position is akin to the defence of bona fide purchaser: but
we cannot simply say that bona fide purchase is a species of change of position. This
is because change of position will only avail a defendant to the extent that his position
has been changed; whereas, where bona fide purchase is invoked, no inquiry is made
(in most cases) into the adequacy of the consideration.’
Given this feature of the defence of bona fide purchaser, it is not surprising that
the courts have taken a narrow view of what amounts to ‘consideration’ or
‘value’ for these purposes. It appears that the mere opening of an account, the
giving of credit or the issue of banking cards is insufficient: what is necessary is
some form of payment out prior to being put on notice. That appears from Lord
Templeman’s judgment in Lipkin Gorman v Karpnale Ltd where he said2:
‘If a thief deposits stolen money in a building society, the victim is entitled to recover
the money from the building society without producing the pass book issued to the
thief. As against the victim, the building society cannot pretend that the building
society gave good consideration for the acceptance of the deposit. Of course the
building society has a defence if the building society innocently pays out the deposit
before the building society realises that the deposit was stolen money.’
1
[1991] 2 AC 548 at 580.
2
[1991] 2 AC 548 at 580 at 563B. See also the dictum of Lord Wilberforce in Barclays Bank Ltd
v Quistclose Investments [1970] AC 567 at 582C. Compare, however, the dictum of Bingham
J in Neste Oy v Lloyds Bank plc [1983] 2 Lloyds Rep 658 at 667.

E. Other defences
28.31 In addition to the bona fide purchase defence, the normal restitutionary
defences will apply: these include ministerial receipt, bona fide purchase,
change of position, estoppel, counter-restitution, limitation, illegality, legal
incapacity and limitation. Ministerial receipt is dealt with in paras 28.18–
28.19. Change of position is dealt with in paras 28.9–28.13 above. Estoppel is
dealt with in paras 28.14–28.16 above.
For a detailed exposition of the remaining defences, reference should be made to
the various specialist texts on restitution1.
1
Eg Goff & Jones, The Law of Unjust Enrichment (9th edn, 2016); Burrows, The Law of
Restitution (3rd edn, 2011).

(c) Dishonest assistance

(i) The ingredients of liability
28.32 In Royal Brunei Airlines v Tan1 a director and shareholder in a travel
agent company helped the company to withhold monies from its principal and

21
28.32 Restitution, Proprietary Claims, and Tracing

to apply them for improper purposes. When the travel agent became insolvent,
the principal sought to recover its losses from the director, alleging that he was
guilty of ‘knowing assistance’. The Privy Council, allowing the appeal, upheld
the claimant’s claim. Lord Nicholls set out the necessary ingredients of liability
as follows2.
(1) The first element necessary to establish a claim for dishonest assistance is
the existence of a trust. This need not be a formal trust. It is sufficient for
there to be a fiduciary relationship between the trustee and the property
of another legal person (for example, a company director’s fiduciary
relationship between himself and the company)3.
(2) Liability as an accessory to a breach of trust is not dependent upon
receipt of trust property. It arises even though no trust property has
reached the hands of the accessory. It is a form of secondary liability in
the sense that it only arises where there has been a breach of trust4.
(3) Liability is based on the accessory’s own dishonesty, so it is not necessary
to show a dishonest and fraudulent design on the part of the trustee. The
state of mind of the trustee is entirely irrelevant, and the trustee’s breach
of trust may be entirely innocent5
(4) The necessary state of mind for accessory liability is dishonesty; nothing
short of this will suffice6.
Lord Nicholls also noted that accessory liability is always personal and never
proprietary7. As it was put in an earlier case, a constructive trust based on
dishonest assistance may be described as ‘nothing more than a formula for
equitable relief’8.
1
[1995] 2 AC 378 at 387.
2
See also El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 at 700.
3
Royal Brunei Airlines v Tan [1995] 2 AC 378 at 387.
4
[1995] 2 AC 378 at 382D. See also 386F.
5
[1995] 2 AC 378 at 384E.
6
[1995] 2 AC 378 at 392G. For discussion of the meaning of dishonesty in this context, see para
28.33 below.
7
[1995] 2 AC 378 at 387E, 104d.
8
Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 2 All ER 1073 at 1097H, [1968]
1 WLR 1555 at 1582A per Ungoed-Thomas J.

(ii) Dishonesty
28.33 Most of the recent debate in the context of accessory liability for a
breach of trust has concentrated on the question of what constitutes dishonesty.
It is now settled law, both in the civil and criminal context, that the test for
dishonesty is the objective test set out by Lord Nicholls in Royal Brunei Airlines
v Tan1:
‘ . . . acting dishonestly, or with a lack of probity, which is synonymous, means
simply not acting as an honest person would in the circumstances. This is an objective
standard. At first sight this may seem surprising. Honesty has a connotation of
subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have
a strong subjective element in that it is a description of a type of conduct assessed in
the light of what a person actually knew at the time, as distinct from what a
reasonable person would have known or appreciated. Further, honesty and its

22
 Tracing 28.34

counterpart dishonesty are mostly concerned with advertent conduct, not inadver-
tent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to
be equated with conscious impropriety.
However, these subjective characteristics of honesty do not mean that individuals are
free to set their own standards of honesty in particular circumstances. The standard
of what constitutes honest conduct is not subjective. Honesty is not an optional scale,
with higher or lower values according to the moral standards of each individual. If a
person knowingly appropriates another’s property, he will not escape a finding of
dishonesty simply because he sees nothing wrong in such behaviour.’
In Twinsectra Ltd v Yardley2, the House of Lords sought to add an additional
requirement that the defendant must have been himself aware that, the ordinary
standards of honesty, he was acting dishonestly. That has subsequently been
rejected. The objective test was reaffirmed by the Privy Council in Barlow
Clowes International Ltd v Eurotrust International Ltd3, where Lord Hoff-
mann explained the test in the following terms:
‘Although a dishonest state of mind is a subjective mental state, the standard by
which the law determines whether it is dishonest is objective. If by ordinary standards
a defendant’s mental state would be characterised as dishonest, it is irrelevant that the
defendant judges by different standards.’
This objective test has now been endorsed as a universal test of dishonesty
(applicable both in the civil and criminal law) by the Supreme Court in Ivey v
Genting Casinos UK Ltd4.
The requisite dishonesty may be established on the evidence by a combination
of the defendant’s suspicions and a conscious decision not to make inquiries; so,
for example, if a bank manager, having suspicions, deliberately fails to ask
blatantly obvious questions for fear of what he might learn, then that may be
held to be conscious impropriety amounting to dishonesty, for which the bank
may be vicariously liable5.
The defendant may be liable for dishonest assistance even though he did not
know that the assets in question were held on trust or what a trust meant6.
1
[1995] 2 AC 378, at pp 388–389.
2
[2002] 2 AC 164.
3
[2005] UKPC 37, [2006] 1 All ER 333, [2006] 1 WLR 1476, at [13]–[18]. See also ‘Dishonesty
in the context of assistance – again’ [2006] CLJ 18.
4
[2017] UKSC 67; [2017] 3 WLR 1212.
5
Royal Brunei Airlines v Tan [1995] 2 AC 378 at 389; Abu-Rahmah v Abacha [2006] 1 All ER
(Comm) 247 at [43(iii)]; Glen Diplex Home Appliances v Smith [2012] EWCA Civ 1154, at [6].
6
Barlow Clowes International Ltd v Eurotrust International Ltd [2006] 1 WLR 1476, at [28].

3 TRACING

(a) Introduction
28.34 Since a proprietary claim is a claim to vindicate the claimant’s existing
property rights, he can potentially, and subject to the relevant principles
considered below, follow his property through a chain of transactions into the
hands of subsequent recipients, and/or trace his property into substitute assets.

23
28.35 Restitution, Proprietary Claims, and Tracing

(b) ‘Following’ and ‘tracing’ payments

28.35 Lord Millett in Foskett v McKeown1 described the distinction between

‘following’ and ‘tracing’ in the following terms:
‘The process of ascertaining what happened to the plaintiffs’ money involves both
tracing and following. These are both exercises in locating assets which are or may be
taken to represent an asset belonging to the plaintiffs and to which they assert
ownership. The processes of following and tracing are, however, distinct. Following
is the process of following the same asset as it moves from hand to hand. Tracing is
the process of identifying a new asset as the substitute for the old. Where one asset is
exchanged for another, a claimant can elect whether to follow the original asset into
the hands of the new owner or to trace its value into the new asset in the hands of the
same owner. In practice his choice is often dictated by the circumstances.’
Hence, in order to follow its property, the claimant must establish that it has
(legal or equitable) title to the property in question. Similarly, in order to
establish a tracing claim, the claimant must establish that it had (legal or
equitable) title to the (original) property in the substituting person’s hands
immediately prior to the substitution2.
In terms of bank payments, it is for the most part artificial and inaccurate to
think of ‘following’ the money as a tangible asset. A bank account does not
physically hold money; rather it is merely a statement of the extent of indebt-
edness as between the bank and its customer. Hence, Lord Millett in Foskett v
McKeown3 explained that where money passes from one bank account to
another, what the claimant traces is not a physical asset but the value repre-
sented by the balance on the account.
1
[2001] 1 AC 102, at 127.
2
See Burrows, [above], page 119.
3
[2001] 1 AC 102 at 128.

(c) Distinction between common law and equitable tracing

28.36 The orthodox position is that the rules of tracing differ according to
whether the claimant is seeking to vindicate legal title to the property, or an
equitable interest in the property. In Foskett v McKeown the House of Lords
cast doubt on whether there was any sense in maintaining the difference
between tracing ‘at law’ and ‘in equity’1. Certainly, the current state of the law
gives rise to an unfortunate lacuna: on the one hand, the common law cannot
trace into a mixed fund, whilst on the other hand equitable tracing is only
available where there is a fiduciary relationship or some other basis for the
imposition of a constructive trust. It is for that reason that Lord Millett
questioned whether a fiduciary relationship should remain as a necessary
precondition for applying equitable tracing rules2. For the time being, however,
the distinction appears to remain part of English law3.
1
[2001] AC 102; see especially Lord Millett at 128, Lord Steyn at 113, and Lord Browne-
Wilkinson at 109.
2
[2001] AC 102, at 128.
3
Shalson v Russo [2005] Ch 281, at paras [102–4]; Cie Noga D’Importation et D’Exportation
SA v Australia and New Zealand Banking Group Ltd (No 5) [2005] EWHC 225 (Comm) at
para [16]; London Allied Holdings Ltd v Lee [2007] EWHC 2061 (Ch) at paras [256–7].

24
 Tracing 28.37

(d) Common law tracing rules

28.37 The nature of tracing at common law was summarised by Millett J in

Agip (Africa) Ltd v Jackson1 as follows:
‘The common law has always been able to follow a physical asset from one recipient
to another. Its ability to follow an asset in the same hands into a changed form was
established in Taylor v Plumer (1815) 3 M & S 562. In following the plaintiff’s money
into an asset purchased exclusively with it, no distinction is drawn between a chose in
action such as the debt of a bank to its customer and any other asset: In Re Diplock
[1948] Ch 465, 519. But it can only follow a physical asset, such as a cheque or its
proceeds, from one person to another. It can follow money but not a chose in action.
Money can be followed at common law into and out of a bank account and into the
hands of a subsequent transferee, provided it does not cease to be identifiable by being
mixed with other money in the bank account derived from some other source:
Banque Belge pour l’Etranger v Hambrouck [1921] 1 KB 321.’
On the facts of Agip, a fraudulent employee of the claimant company was able
via forged payment instructions to procure a funds transfer from the claim-
ant’s account to the account of another company, after which there were
various onward bank transfers to various recipients including the defendant
firm of accountants. The claim to recover from the defendant failed on the basis
that the common law tracing rules did not allow funds received by the
defendant firm to be identified with the debiting from the claimant’s account,
because of intermediate mixing in inter-bank clearing and settlement systems.
Millett J also held that there was a distinction between tracing the proceeds of
a cheque at common law and tracing an electronic transfer, suggesting that in
the latter case there was no physical asset being transferred because the
electronic transfer comprised nothing ‘but a stream of electrons’2.
Millett J’s judgment was followed by Tuckey J in Bank Tejarat v Hong Kong &
Shanghai Banking Corp (CI) Ltd3. However, in the Court of Appeal decision in
Agip4, which was not cited to Tuckey J in Bank Tejarat, Fox LJ disagreed with
Millet J’s distinction between cheques and electronic payments5. Following the
introduction in the UK in October 2017 of an electronic imaging based system
of cheque clearance, the distinction referred to in Agip will now arguably
become redundant, since both forms of payment will involve electronic data
transfer. In any event, given that the purpose of the tracing process is to identify
that a debit from the transferor’s account is linked to a credit to the transfer-
ee’s account, as a matter of principle the method of payment should be
irrelevant. The common law should have no difficulty in being able to trace
through a transfer from one bank account to another, irrespective of the transfer
process adopted6.
The Court of Appeal in Agip did agree with Millett J, however, that the mixing
of the funds in bank clearing and settlement systems was fatal to the common
law tracing claim. It is difficult to see, however, why that should defeat a claim
to trace through a bank transfer, given that (as explained in Foskett v
McKeown)7, bank accounts do not hold money as a physical asset but merely
represent a chose in action8.
McKendrick9 contends that the mixing of funds should not in any event be a bar
to tracing, since there is no principled reason why the ability to identify the
money as having come from the claimant should be any less at common law

25
28.37 Restitution, Proprietary Claims, and Tracing

than it is in equity10.
1
[1990] Ch 265, at 285. Millet J’s decision was affirmed by the Court of Appeal at [1991] Ch
547.
2
[1990] Ch 265, at 286.
3
[1995] 1 Lloyd’s Rep 239. See also Bank of America v Arnell [1999] Lloyd’s Rep 399, Aitkens
J.
4
[1991] Ch 547, at 565.
5
There is also academic criticism: McKendrick, Goode on Commercial Law, (5th edn, 2017), at
para 17.19; Andrews and Beatson, Common law tracing: Springboard or Swansong? (1997)
113 LQR 21; L D Smith, The Law of Tracing (1997), pp 123–130 and 168–174.
6
In the decision of the Supreme Court of Canada in BMP Global Distribution Inc v Bank of
Nova Scotia [2009] SCC 15; (2009) 304 DLR (4th) 292 at [83], it was recognised that the ‘the
clearing system amounts to no more than channelling the funds’.
7
[2001] 1 AC 102.
8
See Banque Belge pour l’Etranger v Hambrouck [1921] 1 KB 321 CA, where the Court of
Appeal allowed the claimant to bring a claim at common law which involved following the
proceeds of a cheque through the clearing system.
9
McKendrick, Goode on Commercial Law, (5th edn, 2017), at page 496.
10
See Fennell, ‘Misdirected funds: problems of uncertainty and inconsistency’ (1994) 57 MLR 38,
at pp 43 ff; L D Smith, The Law of Tracing (1997), ch 5.

(e) Equitable tracing rules

28.38 No such difficulties arise in the context of equitable tracing1. Equitable
proprietary interests can undoubtedly be followed and traced into and through
mixed accounts. In Sinclair Investments (UK) Ltd v Versailles Trade Fi-
nance Ltd2, Lord Neuberger MR said:
‘I do not doubt the general principle, reiterated by Lord Millett in Foskett v
McKeown [2001] 1 AC 102, that if a proprietary claim is to be made good by tracing,
there must be a clear link between the claimant’s funds and the asset or money into
which he seeks to trace. However, I do not see why this should mean that a
proprietary claim is lost simply because the defaulting fiduciary, while still holding
much of the money, has acted particularly dishonestly or cunningly by creating a
maelstrom. Where he has mixed the funds held on trust with his own funds, the onus
should be on the fiduciary to establish that part, and what part, of the mixed fund is
his property.’
However, a fundamental condition for property to be traced in equity is the
existence of an equitable relationship3. This usually arises as a result of breach
of a fiduciary duty; for example, fraudulent misappropriation of a com-
pany’s funds by a director or an employee4. Tracing in equity is also available
where the circumstances give rise to a resulting or constructive trust5.
The requirement for a fiduciary relationship is controversial. McKendrick6
argues that there is no policy reason why the right to trace should be restricted
to cases involving a fiduciary relationship, and suggests that it should be
sufficient that the claimant has a stronger right to the money than the defendant
such that he would be entitled to recover under the usual rules of priority in
property law. The need for a fiduciary relationship as a prerequisite to equitable
tracing was also questioned by Lord Millett in Foskett v McKeown7.
Equity does not permit tracing into an overdrawn account, whether overdrawn
at the time the money was paid into the account or subsequently8. The essential
rationale is that moneys paid into an overdrawn account effectively disappear,
so there is nothing on which a proprietary claim can operate9. However, this

26
 Tracing 28.38

does not mean that the fact that money has passed through an overdraft
account should defeat the right to trace if the money is ultimately identifiable
(otherwise fraudsters and others acting in breach of fiduciary duty could readily
obtain ownership of misappropriated assets by the simple device of the inter-
position of an overdraft account). In Federal Republic of Brazil v Durant
International Ltd10 the Privy Council rejected the argument that the court can
never trace the value of an asset whose proceeds are paid through an overdrawn
account, but held that the claimant needs to establish a coordination between
the depletion of the fund and the acquisition of the asset which is the subject of
the tracing claim, looking at the transaction as a whole, such as to warrant the
attribution of the value of the interest acquired to the misuse of the fund. Lord
Toulson said11:
‘The development of increasingly sophisticated and elaborate methods of money
laundering, often involving a web of credits and debits between intermediaries,
makes it particularly important that a court should not allow a camouflage of
interconnected transactions to obscure its vision of their true overall purpose and
effect. If the court is satisfied that the various steps are part of a coordinated scheme,
it should not matter that . . . a debit appears in the bank account of an interme-
diary before a reciprocal credit entry.’
By parity of reasoning, the Privy Council in Durant similarly rejected the
argument that misappropriated money can never be traced into an asset
purchased prior to the money being received by the purchaser (ie so-called
‘backwards tracing’). Lord Toulson said12 that the availability of equitable
remedies should depend on the substance of the transaction in question and not
upon the strict order in which associated events occur. However, the evidential
burden is relatively high: the claimant must establish a coordinated scheme or
equivalent close causal connection and transactional link between the misuse of
the fund and the asset acquired.
1
For a statement of the nature of tracing in equity, see Boscawen v Bajwa [1996] 1 WLR 328,
334C, [1995] 4 All ER 769, at 776e, per Millet LJ.
2
[2012] Ch 453, at 492, CA.
3
Agip (Africa) Ltd v Jackson [1991] Ch 547, 566H–567A, [1992] 4 All ER 451, 466; approved
in Abdul Ghani El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717, 733j; Boscawen v
Bajwa [1995] 4 All ER 769 at 777j, [1996] 1 WLR 328, 335G.
4
Re Untalan, Hong Kong & Shanghai Banking Corpn v United Overseas Bank [1992] 2 SLR
495, 504F.
5
Westdeutsche Landesbank v Islington London Borough Council [1996] AC 669 at 715H-716D
(Lord Browne-Wilkinson); Polly Peck International v Nadir (No 2) [1992] 2 Lloyd’s Rep 238,
242; Bankers Trust Co v Shapira [1980] 1 WLR 1274, 1282C; cf Box v Barclays Bank plc
[1998] Lloyd’s Rep Bank 185.
6
McKendrick, Goode on Commercial Law, (5th edn, 2017), at para 17.21.
7
[2001] 1 AC 102, at 128.
8
In Re Hallett’s Estate (1880) 13 Ch D 696 at 719; In Re Diplock [1948] Ch 645 at 521.
9
Bishopsgate Investment Management v Homan [1995] Ch 211, followed in Style Finance
Services v Bank of Scotland [1995] BCC 785, 790. See also, Box v Barclays Bank plc [1998]
Lloyd’s Rep Bank 185.
10
[2015] UKPC 35; [2015] 3 WLR 599. See also Relfo Ltd (In Liquidation) v Varsani [2014]
EWCA Civ 360, where the Court of Appeal was prepared to look broadly at the series of
transactions as a whole, notwithstanding evidential gaps and possible chronological anomalies,
in order to conclude that the claimant could trace the money in equity.
11
At [38]. A similar sentiment was expressed by the Court of Appeal in Sinclair Investments
(UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347; [2012] Ch 453, at [135]–
[139], where it was held that a defendant wrongdoer cannot defeat the possibility of tracing by
creating an evidential ‘black hole’ designed to frustrate the claimant’s action against him.

27
28.38 Restitution, Proprietary Claims, and Tracing
12
At [34], [38].

28
Part VII

INVESTMENTS AND
FINANCIAL PRODUCTS

1
Chapter 29

ADVISING ON
FINANCIAL PRODUCTS

1 SCOPE 29.1
2 NEGLIGENT ADVICE 29.2
3 ADVICE AS MISREPRESENTATION 29.11
4 FIDUCIARY DUTY OF ADVISER 29.12
5 REGULATION OF ADVICE 29.14
6 MEANING OF ADVICE 29.15
7 ADVICE ON INVESTMENTS: COB & COBS 29.18
(a) COB: Rules applying prior to 1 November 2007 29.19
(b) COBS: Rules applying after 1 November 2007 (MiFID) 29.20
(c) COBS: Rules applying after 3 January 2018 (MiFID II) 29.21
(d) COB & COBS: Case Law 29.22
8 ADVICE ON INSURANCE: ICOB & ICOBS 29.24
9 ADVICE ON MORTGAGES: MCOB 29.28
(a) MCOB: Prior to 26 April 2014 29.30
(b) MCOB: Post 26 April 2014 29.31

1 SCOPE OF ADVISING ON FINANCIAL PRODUCTS

29.1 Advising on financial products can be an important element of a
bank’s business, encompassing the sale of a wide variety of financial products,
ranging from the deposit or lending products offered by the bank itself, to
insurance and investments either provided by the bank or by a third party via
the bank, which then acts purely as an advisor or intermediary rather than
provider.
This chapter deals first with the nature and extent of a bank’s obligations, as
they arise at common law, where a bank provides advice on a financial product.
Such obligations1 remain of considerable importance in what might be seen as
an area of law where regulation increasingly encroaches. This is particularly so
for products outside the scope of regulation (eg large-scale commercial lending,
or spot foreign exchange transactions) or where the counterparty to a trans-
action would not have a right of action or of complaint under the relevant
regulatory legislation (eg ‘non-private persons’ under the Financial Services and
Markets Act 2000 (FSMA) regime).
However, within their scope, regulatory causes of action can be particularly
powerful, either in imposing higher obligations than would exist at common
law or in providing prescriptive requirements or guidance on properly advising
on a particular type of financial product, tailored to that market. The general
scheme of financial regulation of banks under FSMA is dealt with in Chapter 1
to which reference should be made for the key concepts.
This chapter builds on this to consider the specific regulatory obligations which
govern advice given by a regulated person such as a bank on certain key

3
29.1 Advising on Financial Products

financial products, namely, regulated investments, insurance and mortgages.

The sale of these financial products is regulated under FSMA and by the
rules made by the Financial Conduct Authority (FCA) as contained in the FCA
Handbook2. In doing so, this chapter considers the updated regulatory regimes
implemented in recent years by the second Markets in Financial Instruments
Directive (MiFID II), the Insurance Distribution Directive (IDD) and the
Mortgage Credit Directive (MCD), as well as predecessor regimes.
1
There may also be other such obligations giving rise to a basis for a claim, outside the scope of
this chapter, for example in breach of trust, confidentiality or in restitution.
2
The selling of interest rate swaps and other derivatives is dealt with specifically in Chapter 30.
Prior to 1 April 2013, said rules were made by the Financial Services Authority (FSA). No
changes to the regulation of the standards of advice on such financial products were made
purely as a result of this transition from the FSA to the FCA of conduct regulation. The FCA
Handbook can be found online at: www.handbook.fca.org.uk/.

2 NEGLIGENT ADVICE
29.2 If advice is given by an employee or agent of a bank, a preliminary
question may arise whether the bank is responsible for that advice.
The older authorities concerning liability for advice given by a bank are much
occupied with the advertised scope of that bank’s business, as relevant to the
actual or ostensible scope of an agent’s authority to give advice on financial
products on behalf of the bank. Such authority is a precursor to the existence of
the liability of the bank. In Banbury v Bank of Montreal1 the claimant was given
advice as to the credit and standing of the company in which he invested and
lost his money. The case was treated as analogous to that of gratuitous services
rendered by a person professing special knowledge and skill, say, a surgeon.
Lord Finlay LC said:
‘The limits of a banker’s business cannot be laid down as a matter of law2 . . . If he
undertakes to advise, he must exercise reasonable care and skill in giving the advice.
He is under no obligation to advise, but if he takes upon himself to do so, he will incur
liability if he does so negligently.’
The entire claim therefore narrowed down to whether it was part of the
bank’s business in fact to advise on investments and if it was, whether accord-
ingly a local manager had the necessary authority to advise on credit and
standing. The claim failed as it had been admitted that providing such advice
was not within the manager’s authority and accordingly the bank could not be
liable.
By contrast, in Woods v Martins Bank Ltd3 the question was contested. In this
case, the bank had held itself out as willing to advise by advertising that it had
‘six district head offices with boards of directors and general managers, so that
the very best advice is available through our managers’, and that the bank
manager could be consulted on all matters affecting one’s financial welfare.
Accordingly, the bank was held liable for advice given by its managers.
1
[1918] AC 626 at 652, 654, and 659. This passage was cited with approval by Lord Millett in
National Commercial Bank (Jamaica) Ltd v Hew [2003] UKPC 51 at para 13, [2004] 2 LRC
396, [2003] All ER (D) 402 (Jun).
2
This view was adopted by Salmon J in Woods v Martins Bank Ltd [1959] 1 QB 55 at 70, [1958]
3 All ER 166. He continued: ‘What may have been true of the Bank of Montreal in 1918 is not

4
 Negligent Advice 29.4

necessarily true of Martins Bank in 1958.’ At this time Martins Bank were advertising their
readiness to advise.
3
[1959] 1 QB 55, [1958] 3 All ER 166; but see Mutual Life and Citizens’ Assurance Co Ltd v
Evatt [1971] AC 793, [1971] 1 All ER 150, PC in which it was held that giving advice on
investments was not part of the company’s business; and Morgan v Lloyds Bank plc [1998]
Lloyd’s Bank Rep 73 at 80, where it was not part of the bank’s business to advise on a mortgage.

29.3 In more modern cases, the issue of authority has not generally arisen. This
is likely the result of the fact that intense competition for customers has driven
banks to publicly offer the possibility of providing advice to their customers
(albeit usually in carefully circumscribed circumstances). Accordingly, today
most banks would fail on a defence of lack of authority in any case where the
agent’s impugned advice relates to the bank’s business, however it remains a
question of fact in each case.
In addition to express authority, an agent further has implied actual authority to
do what is required for the performance of matters within or incidental to any
express actual authority in the usual way1. For example in the more modern
case of Martin v Britannia Life Ltd2, although express authority given to an
agent was confined to giving ‘investment advice’ it was held this contained
implied authority to advise on a mortgage, even though this was not an
investment, as the advice on the mortgage was necessarily ancillary to the
investment advice given.
Finally, even where the agent is not actually authorised, advising may be
sufficiently within an agent’s ostensible authority by virtue of the agent’s title or
the circumstances in which the agent was allowed to advise the customer, to
entitle a customer to assume authority was present, and to found a claim for
negligence if the agent falls short of the standard the customer would be entitled
to expect3. For example, in Martin it was held a business card made up by the
defendant for the adviser with the title of ‘Financial Adviser’ was sufficient to
give rise to ostensible authority to advise on a range of financial products, such
as the mortgage.
If however, it is only the agent, rather that the principal that provides the
indications of authority, this will be insufficient to establish liability of the
principal in the absence of actual authority4.
1
See Bowstead & Reynolds on Agency (21st edn) at para.3-021 et seq.
2
[2000] Lloyd’s Rep PN 412.
3
See Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480. Bowstead
& Reynolds on Agency (21st edn) at para 3-004 et seq. For a case in which the authority of a
bank employee was considered in a somewhat different context, namely the issue of a bank
guarantee, see Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Ltd
[1985] 2 Lloyd’s Rep 36, CA.
4
See for example in the financial services context, Emmanuel v DBS Management Plc [1999]
Lloyd’s PN 593. It is generally not possible to establish a duty of care on an employer to
safeguard against the fraud of an employee save to the extent the employer knew of or was
reckless as to the fraud Hornsby v Clark Kenneth Leventhal [1998] PNLR 635. In some cases,
where the principal has become insolvent, it may be important to seek to establish a direct duty
of care, usually of an employee. Such a duty will only be owed if it is clear that the advice was
given in a personal capacity; see for an example where this was not the case: Hale v
Guildarch Ltd [1999] PNLR 44.

29.4 Having established authority, the question then arises whether advice has
been given and a duty of care has actually arisen. The duty of care may be

5
29.4 Advising on Financial Products

contractual, extending to all the services provided under that contract. Con-
tracts are likely to often be present in the context of advising on financial
products, and the duty may arise under the contract as an express or implied1
term.
Indeed the entire contract may be implied, as in Rubenstein v HSBC2, where
ostensibly extra-contractual advice given prior to a pure contract to trade was
held to result in a collateral contract to provide that advice, consideration being
engaging the bank to effect the transaction.
The question of how the contract is to be construed is no different from any
other contract, however evidently the context of the relevant financial industry
may affect the meaning of particular express terms. Further it may be the case
that compliance with particular regulatory obligations are expressly imported
as terms of the contract, rendering them actionable3.
In addition to a contractual duty, or absent a contract, the duty of care may arise
in negligence under the Hedley Byrne v Heller4 principle of assumption of
responsibility and the three-part test in Caparo Industries plc v Dickman of
foreseeability, proximity and it being fair, just and reasonable to impose the
duty of care5. A tortious duty may be concurrent and consistent with a
contractual duty6, but may also be wider where there is an extra-contractual
assumption of responsibility and the duty in tort is not limited or excluded in
contract.
This issue was extensively considered in JP Morgan Chase Group v Springwell
Navigation Corporation7 where, at first instance and affirmed on appeal, the
absence of a contractual duty was held not to determine whether a duty is owed
in tort, but to be of weight in all the circumstances. The absence of a contractual
duty is merely one factor pointing against any duty of care in tort rather than
one that determines the question.
In Springwell the investors were sophisticated, agreed to be treated as sophis-
ticated under the relevant regulatory regime, had dealt with the bank for many
years on a non-advised basis, did not seek to rely on any advice, and at all times
took their own decisions whether to invest. This all indicated against a duty of
care, which when added to the absence of any advisory agreement between the
parties, determined against a duty of care being owed in tort.
1
Supply of Goods and Services Act 1982, s 13.
2
[2011] EWHC 2304 (QB), [2012] PNLR 7 at paras 69–70. This decision was overturned in part
on appeal to the Court of Appeal [2012] EWCA Civ 1184, [2013] 1 All ER (Comm) 915 but not
on this point which was not appealed.
3
See Brandeis (Brokers) Ltd v Herbert Black [2001] 2 Lloyd’s Rep. 359 (incorporating the SFA
Rules), and Larussa-Chigi v CS First Boston Ltd [1998] CLC 277 (incorporating foreign
exchange guide of best practice). Cf Clarion Ltd v National Provident Institution [2000] 1
WLR 1888 (SIB Principles not incorporated).
4
[1964] AC 465, HL. See also Customs & Excise Commissioners v Barclays Bank plc [2006]
UKHL 28, [2007] 1 AC 181, holding that assumption of responsibility is a sufficient but not
necessary test for the establishment of the duty of care.
5
[1990] 2 AC 605. The two tests have been described as overlapping and acting as a ‘cross-check’
on each other which should not be considered in isolation for each other: see Property Alliance
Group Ltd v Royal Bank of Scotland plc [2018] EWCA Civ 355 at para 62. See also Chandler
v Cape plc [2012] EWCA Civ 525, [2012] 1 WLR 3111, at para 62; Playboy Club London Ltd
v Banca Nazionale del Lavoro SpA [2016] EWCA Civ 457, [2016] 1 WLR 3169 at para 17;
CGL Group Ltd v Royal Bank of Scotland plc [2017] EWCA Civ 1073, [2017] CTLC 97; cf
Robinson v Chief Constable of West Yorkshire Police [2018] UKSC 4.

6
 Negligent Advice 29.5
6
Henderson v Merrett Syndicates Ltd [1995] 2 AC 145; Midland Bank Trust Co Ltd v Hett,
Stubbs & Kemp [1979] Ch. 384.
7
[2008] EWHC 1186 (Comm) at para 53; [2010] EWCA Civ 1221, [2010] 2 CLC 705.

29.5 Likewise, in IFE Fund SA v Goldman Sachs International1 in the case of

specialist services provided by a bank under contractual terms drafted by
lawyers, the Court held that in such circumstances it is unlikely to find the duty
in tort extends any wider than that arising in the detailed contract provided for
by express agreement of the parties. A contract that specifically provides that no
advice is being given may go further to negate a duty of care in tort.
In Titan Steel Wheels v RBS plc2 express disclaimers of any advice having been
given (going beyond the mere absence of a contractual duty) were held to have
the effect of negating the existence of any duty of care in tort as a matter of
contractual estoppel; and similar effect has been found as a result of non-
reliance or no-representation clauses by preventing any allegation of necessary
reliance or representations.
Attempts to challenge such clauses as unreasonable exclusion clauses under ss 2
and 3 Unfair Contract Terms Act 1977 have generally failed because they are
construed as clauses which define the ‘basis’ of the relationship, rather than as
a clause excluding liability or one that permits performance which is substan-
tially different from that which was reasonably expected. This was a distinction
raised in Springwell supra and applied in various cases since3. As acknowledged
by Andrew Smith J in Camerata Property v Credit Suisse4:
‘Although the distinction is clear in principle, it seems to me that in application the
question whether, as a matter of substance rather than form, a particular provision
should be regarded as defining the terms upon which business was conducted or as
purporting to allow a party by his standard terms to render a performance substan-
tially different from that which was reasonably to be expected of him can be a fine
one, and ultimately, I think, can be a matter of impression rather than analysis.’
On the balance of current authority, it appears that most such contractual
clauses stating that no advice is given, no reliance will take place or no
representations have been made will be viewed as defining the relationship and
accordingly not susceptible of challenge, and only clauses clearly addressed at
excluding liability expressly or which attempt to rewrite history that has
already occurred in order to avoid liability, will be treated as susceptible to
challenge5. Generally, whether a clause is a ‘basis’ clause will depend on its
proper construction in all the circumstances6. Thereafter its enforceability
depends whether it satisfies the requirement of reasonableness7.
In Standard Chartered Bank v Ceylon Petroleum Corporation8 Hamblen J
rejected any suggestion of a reverse estoppel by convention, or acquiescence
arising from a course of conduct, preventing reliance on a relevant non-reliance
clause, as the:
‘ . . . point and effect of [non-reliance] provisions is to require the parties to accept
a particular state of affairs, even if the actual reality was different. One cannot,
merely by referring to what is asserted to be the underlying reality, avoid the effect of
those provisions.’
1
[2006] EWHC 2887 (Comm), [2007] 1 Lloyd’s Rep 264 at para 63, per Toulson J (affirmed
[2007] EWCA Civ 811, [2007] 2 Lloyd’s Rep 449). Cf Sumitomo Bank Ltd v Banque Bruxelles

7
29.5 Advising on Financial Products

Lambert SA [1997] 1 Lloyd’s Rep 487; Weldon v GRE Linked Life Assurance Ltd [2000]
2 All ER (Comm) 914.
2
[2010] EWHC 211 (Comm), [2010] 2 Lloyd’s Rep 92. See also Lowe v Lombank [1960] 1 WLR
196; Springwell supra; Peekay Intermark Ltd v ANZ Banking Group Ltd [2006] EWCA Civ
286, [2006] 2 Lloyd’s Rep 511; Trident Turboprop (Dublin) Ltd v First Flight Couriers Ltd
[2008] EWHC 1686 (Comm). Cf Deutsche Bank AG v Chang Tse Wen [2012] SGHC 238.
3
See Springwell [2010] EWCA Civ 1221 at 119–122, 144–182; Bankers Trust International plc
v PT Dharmala Sakti Sejahtera [1996] CLC 518 at 531; Raiffeisen v RBS [2010] EWHC 1392;
Standard Chartered Bank v Ceylon Petroleum Corporation [2011] EWHC 1785 (Comm);
Cassa di Risparmio della Repubblica di San Marino v Barclays Bank Ltd [2011] EHWC 484
(Comm); Barclays Bank plc v Svizera Holdings BV [2014] EWHC 1020 (Comm); Thorn-
bridge Ltd v Barclays Bank plc [2015] EWHC 3430 (QB); Sears v Minco [2016] EWHC 433
(Ch); First Flower Trustees Ltd v CDS (Superstores International) Ltd [2017] EWHC B6 (Ch)
(affirmed on appeal: [2018] EWCA 1396); Marz Limited v Bank of Scotland plc [2017] EWHC
3618 (Ch).
4
[2011] EWHC 479 (Comm) at para 186.
5
Camerata Property v Credit Suisse supra; Svizera Holdings BV supra at para 58; Marz supra at
para 258. Note that these cases did not consider whether challenge was possible under the
Unfair Terms in Consumer Contracts Regulations 1999 or its successor in the Consumer Rights
Act 2015, which also dis-applies UCTA to business to consumer contracts within its scope.
Under these Acts, unfair terms are not enforceable against the consumer, and the application of
the test of unfairness is much more general and not limited to terms that are strictly ‘exclusion’
clauses as opposed to ‘basis’ clauses. For a detailed consideration of the applicable test, see
Exclusions Clauses and Unfair Contract Terms (12th edn) Chapter 10.
6
See First Tower Trustees v CDS (Superstores International) [2018] EWCA Civ 1396. In Carney
v NM Rothschild [2018] EWHC 958 (Comm) [94] HH Judge Waksman QC held that the
question of whether basis clauses were in fact exclusion clauses for the purposes of UCTA 1977
and s 3 of the Misrepresentation Act 1967 was multi-faceted and that it was necessary to have
regard to several factors, although no single factor would be determinative, including at least:
(a) the natural meaning of the language of the clauses in their contractual context; (b) the
particular factual context in which the agreement was made, including whether history had
been re-written or reality had been departed from; (c) the format and location within the
contract of the clause: if a clause was simply one of a myriad of standard terms, that might point
to it being exclusionary; (d) however, the relative position of the parties in terms of, for
example, bargaining power was not particularly relevant.
7
See Springwell supra; IFE Fund SA v Goldman Sachs International supra; and Raiffeisen
Zentralbank Osterreich Ag v Royal Bank of Scotland plc [2010] EWHC 1392 (Comm); [2011]
1 Lloyd’s Rep 123. Note UCTA no longer applies to consumer contracts concluded from
1 October 2015 as defined in the Consumer Rights Act 2015. Such terms may also be open to
challenge under the Consumer Rights Act 2015, or its predecessor, the Unfair Terms in Con-
sumer Contracts Regulations 1999, if the applicable tests are met.
8
[2011] EWHC 1785 (Comm), at paras 540–544.

29.6 Accordingly, while there may be no obligation to give advice in a banker-

customer relationship or generally, where advice is given by a bank, a duty of
care may be imposed. A bank which assumes responsibility towards a customer
for advising on investments owes a duty of care to use reasonable skill and care,
even if the advice is gratuitous. However, the question of whether such a
responsibility has been assumed depends on the facts of each case, as explained
in Springwell supra. The following are examples of decisions on the question of
whether an assumption of responsibility had occurred across various areas of
banking business.
In Verity and Spindler v Lloyds Bank plc1, the claimants had borrowed
£152,000 to purchase a house which they intended to renovate and then sell on
for profit, and the question was whether there existed a duty of care. Taylor J
found:

8
 Negligent Advice 29.7

(1) that the borrowers had sought advice from the bank manager about the
prudence of the transaction; and
(2) that the bank manager had voluntarily assumed the role of financial
adviser. In this capacity the manager had inspected the property, advised
that the transaction was viable, and encouraged the claimants to pro-
ceed.
On these quite unusual facts, a duty of care was not difficult to find. This can be
contrasted with the decision in Investors Compensation Scheme Ltd v West
Bromwich Building Society (No 2)2. It was argued for the claimants that the
Society had voluntarily assumed a duty of care to the borrowers:
(1) by acknowledging such a duty at a board meeting;
(2) by instructing solicitors acting on the completion of early release mort-
gage transactions to obtain from borrowers an acknowledgement that
they had had explained to them the effect of certain provisions in the
mortgages; and
(3) by joining with an independent financial intermediary in the marketing
of early release mortgages.
However, the Society had not had any relevant direct contact with the borrow-
ers and had not offered them any advice of any kind. Evans-Lombe J held that
in these circumstances, the Society had not assumed a responsibility towards the
borrowers.
Even with more prolonged or extensive contact, a duty of care may not arise.
One of many cases decided in the area of trading advice is the case of Wilson v
MF Global UK Ltd3, where Eady J applied the guidance set out by Gloster J in
Springwell to conclude4: ‘ . . . the fact that [the bank’s employee] expressed
his views from time to time about the market, or particular opportunities,
would not amount to an assumption of responsibility on the part of [the bank]
so as to bring into play the full range of obligations of an investment adviser’.
In Riyad Bank v Ahli United Bank (UK) plc5 a bank which reported regularly to
an investment fund on equipment leases which were available for purchase, the
number of rental payments, the assumed renewals, and the estimated residual
value of the equipment at the end of any renewable period, was held to owe a
duty of care to the fund to ensure that the advice it gave on these matters was
sound. The terms of the contracts were not inconsistent with such a duty, and
the absence of a contractual duty did not determine no such duty existed in
negligence.
1
[1995] CLC 1557.
2
[1999] Lloyd’s Rep PN 496 at pp 525–527.
3
[2011] EWHC 138 (QB). See also Standard Chartered Bank v Ceylon Petroleum Corporation
[2011] EWHC 1785 (Comm); Bank Leumi (UK) Ltd v Wachner [2011] EWHC 656 (Comm);
and City Index Ltd v Balducci [2011] EWHC 2562(Ch); for further applications of this
approach in relation to trading advice, which on each case’s particular facts, led to the
conclusion advice had not been given. Cf Camerata.Property Inc v Credit Suisse Securities
(Europe) Ltd [2011] EWHC 479 (Comm), [2011] 2 BCLC 54.
4
Wilson v MF Global UK Ltd [2011] EWHC 138 (QB), at para 127.
5
[2005] EWHC 279 (Comm), [2005] 2 Lloyd’s Rep 409; affirmed [2006] EWCA Civ 780,
[2006] 2 All ER (Comm) 777.

29.7 It is important to keep in mind the fact that a bank only incurs liability if
it actually undertakes to advise and it does so advise (a failure to advise would

9
29.7 Advising on Financial Products

only potentially be actionable as a breach of a contractual obligation to advise,

or if it was part of a rare duty to advise on an ongoing basis). In Na-
tional Commercial Bank (Jamaica) Ltd v Hew1 the Privy Council held that
neither of the following matters gave rise to a duty of care to advise:
(i) the existence of a condition in a loan facility that the loan proceeds were
to be used exclusively for the purpose of a property development; and
(ii) the fact (if it was the case) that the project was clearly flawed from its
inception.
In relation to the second factor, Lord Millett said:
‘The other difficulty is that, even if the project was unsound and Mr Cobham [the
local branch manager] ought to have realised it, this means only that he would have
been negligent if he had advised Mr Hew to embark upon it. But it does not establish
that he did so. Still less does it establish that he assumed a duty to advise Mr Hew
against it2.’
Where a bank complies with a duty that has previously arisen in respect of any
advice it has given, it does not, absent anything further, assume a continuing
obligation to keep that advice under review and correct it in the light of
supervening events3.
1
[2003] UKPC 51, [2004] 2 LRC 396, [2003] All ER (D) 402 (Jun).
2
National Commercial Bank (Jamaica) Ltd v Hew [2003] UKPC 51, at paras 20, 26.
3
Fennoscandia Ltd v Clarke [1999] 1 All ER (Comm) 365, CA.

29.8 The general type of case considered above is a claim against a direct
adviser, but there are some cases where a claimant would seek to claim against
a third party rather than the direct adviser. This will usually be done for
practical reasons, in particular to increase the chances of recovery, or may be, in
rare cases, of necessity where it is impossible to claim against the adviser.
Usually a bank will not be liable if advice it has given is passed on to third
parties without the bank’s prior knowledge. For the bank to liable in such cases:
(1) the bank must be aware of the identity of the third party; and
(2) the purpose for which the information is provided to the third party; and
(3) that the third party is likely to rely on it for that purpose1.
The leading example of such a claim is the case of Seymour v Ockwell and
Zurich IFA Ltd2 in which Ms Ockwell recommended an investment called ‘the
Alpha Fund’ to the claimants. Those recommendations were based on and
included information about the Alpha Fund provided to her by Zurich IFA Ltd.
A claim was brought against both Ms Ockwell and Zurich. The claim against
the latter was brought notwithstanding there had never been any contact with
Zurich.
It was held there was no duty of care owed by Zurich to the claimants in
providing the information to Ms Ockwell as: ‘the contractual chain and the
framework of statutory duties tell against the imposition of a direct duty of
care . . . It would be a duty which by-passed the regulatory regime and
side-stepped the contractual remedy’. There had not been an assumption of
responsibility, the relationship with the claimants was insufficiently close, and
the applicable FIMBRA rules placed responsibility for advice solely on Ms
Ockwell.

10
 Negligent Advice 29.9

This can be contrasted with the case of Riyad Bank v Ahli United Bank
(UK) plc3 where the defendant bank was contractually engaged to advise a
clamant investment vehicle established by the second claimant bank. Notwith-
standing the defendant’s argument that a contractual duty was designed to be
owed only to the second claimant bank, isolating it from the claimant invest-
ment vehicle, it was held that a duty of care in negligence was also owed to the
claimant investment vehicle as it was known to the defendant that advice was to
be passed on to the claimant investment vehicle without qualification from the
second claimant bank. Thus the investment vehicle was able to recover for
advice provided indirectly by the defendant.
1
Caparo Industries plc v Dickman [1990] 2 AC 605. Applied in Mann v Coutts & Co [2003]
EWHC 2138, [2004] 1 All ER (Comm) 1.
2
[2005] EWHC 1137, [2005] PNLR 39 at para 143.
3
[2005] EWHC 279 (Comm), [2005] 2 Lloyd’s Rep 409; affirmed [2006] EWCA Civ 780,
[2006] 2 All ER (Comm) 777.

29.9 A distinct type of case where liability to third parties arises is where advice
was given to the purchaser of a financial product that is intended to benefit third
parties.
This issue arose for consideration in the context of the advised sale of a pension
and life insurance scheme in Gorham v British Telecommunications Plc1. In this
case Mr Gorham had been misadvised to buy a Standard Life pension scheme
rather than opting into a better and available occupational pension scheme. The
dependents of Mr Gorham, namely his wife and children, were held to be owed
a duty of care, notwithstanding they were not able to claim under the then
applicable regulatory scheme. The Court of Appeal held:
‘Mr Gorham intended to create a benefit for his wife and children in the event of his
predeceasing them . . . It is fundamental to the giving and receiving of advice upon
a scheme for pension provision and life insurance that the interests of the custom-
er’s dependents will arise for consideration . . . practical justice requires that the
disappointed beneficiaries should have a remedy against an insurance company in
circumstances such as the present . . . The duty is not one to ensure that the
dependants are properly provided for. It is, in the present context, a duty to the
dependants not to give negligent advice to the customer which adversely affects their
interests as he intends them to be2.’
This conclusion was subject to a qualification in the judgment of Sir Mur-
ray Stuart-Smith that it depended upon an identity of interest between the
advised party and the beneficiaries3.
Accordingly, in cases where insurance is purchased to cover a third party, it
seems generally likely that the duty of care owed by an adviser will extend to
that third party. However, in cases where a product may incidentally benefit a
third party, but there was at the material time a conflict of interest, say if the
advisee was seeking to maximise his benefits at the expense of other beneficia-
ries, it would not necessarily be possible to impose conflicting duties of care. It
remains a point for further consideration whether consistent duties of care
could be found in more intermediate cases, for example the conflict of interest
was only in respect of one part of the product but not others, and a more limited
duty could be argued to arise.
1
[2000] 1 WLR 2129.

11
29.9 Advising on Financial Products
2
Gorham v British Telecommunications Plc [2000] 1 WLR 2129, at para 2140–2142; see
generally White v Jones [1995] 2 AC 207.
3
Gorham v British Telecommunications Plc [2000] 1 WLR 2129, at para 2147.

29.10 Where a duty of care arises, the standard of care is an objective one of
reasonable skill and care. However, given the many and various types of advice
a bank may provide in a variety of markets, the standard at which such a duty
is set and accordingly whether or not the duty has been met will be decided by
reference to all the circumstances of the case, and in practice often by reference
to expert evidence as to reasonable standards of conduct in the industry1.
Such expert evidence is increasingly common in complex financial services
cases; however, expert evidence should remain concise and limited to the issues
in respect of which an order for expert evidence has been made2. Further,
notwithstanding such expert evidence on practice in a particular industry,
the Court may reject a common practice if it is, in any event, not a standard of
reasonable care. This is uncommon, but may arise for example if there has been
a recent shift in regulatory obligations, as was the case in Loosemore v
Financial Concepts3.
In Green v Royal Bank of Scotland4 it was held that the existence of a regulatory
statutory duty does not give rise to a co-extensive common law duty of care
with regulatory obligations actionable under FSMA, where those obligations
are not actionable. However, where a common law duty arises, it was recog-
nised that the standard of reasonable skill and care will often be informed by
regulatory obligations5. When the regulatory obligations are actionable,
the Court has generally treated the obligations at common law as going no
wider than the regulatory obligations, per Walker v Inter-Alliance Group Plc
(In Liquidation)6.
In recent years, a number of cases have considered the extent of a duty of care
owed by banks in selling interest rate swaps, a topic covered more fully in
Chapter 30, but which may also be of general application.
Most notably, it was held in the decision of Crestsign Ltd v National Westmin-
ster Bank plc7 that a bank could owe a duty of care described as a ‘mezzanine’
(or ‘intermediate’) duty, being less than a full duty of care to advise but more
than a mere duty to not misstate, namely one to take reasonable care to explain
the nature and effect of a proposed transaction. Despite the ostensible creation
of a new class of duty, sitting in between a duty not to misstate and to give
advice, this has been rejected as terminology ‘best avoided’ by the Court of
Appeal in Property Alliance Group Ltd v Royal Bank of Scotland plc8. Rather,
the Court of Appeal held the ordinary Hedley Byrne duty not to misstate
information might in the particular factual context: ‘extend to correcting any
obvious misunderstandings communicated by the customer and answering any
reasonable questions the customer might ask about those products in respect of
which the bank had chosen to volunteer information.’
Such a requirement would be an application of the duty not to misstate, for
example by omission or impliedly in allowing a customer to continue in a false
understanding or in refusing to answer a question that would correct a
mis-understanding created by some earlier statement or omission by the bank.
1
See Selangor United Rubber Estates Ltd v Cradock (a bankrupt) (No 3) [1968] 2 All ER 1073,
[1968] 1 WLR 1555.

12
 Advice as Misrepresentation 29.11
2
See Zeid v Credit Suisse [2011] EWHC 716 (Comm); and JP Morgan Chase Bank v Springwell
Navigation Corp (Application to Strike Out) [2006] EWHC 2755 (Comm).
3
[2001] Lloyd’s Rep. PN 235. See generally Edward Wong Finance Co Ltd v Johnson, Stokes &
Master [1984] AC 296.
4
[2013] EWCA Civ 1197, at [29]. See also Grant Estates Ltd v The Royal Bank of Scotland plc
[2012] CSOH 133, at [79] and O’Hare v Coutts & Co [2016] EWHC 2224 (QB).
5
[2013] EWCA Civ 1197, at [18]. See also Loosemore v Financial Concepts [2001] Lloyd’s Rep
PN 235 at 241, Seymour v Ockwell & Co [2005] PNLR 758; Shore v Sedgwick Financial
Services Ltd [2008] PNLR 244 at para 161; Thomas v Triodos Bank NV [2017] EWHC 314
(QB) at para 64.
6
[2007] EWHC 1858 (Ch), at [40].
7
[2014] EWHC 3043, [2015] 2 All ER 133 at para 136.
8
[2018] EWCA Civ 355 at para 67.

3 ADVICE AS MISREPRESENTATION
29.11 While not strictly pertaining to advice, the Misrepresentation Act 1967
or the common law actions of negligent misstatement or deceit, may be of
potential application in particular cases.
In particular, the provision of information together with or as part of any advice
may involve false statements giving rise to a cause of action in misrepresenta-
tion, negligence or deceit. Detailed consideration of the law in these areas is
outside the scope of this work1, however in general, these causes of action are all
based upon showing a statement was made that was one of fact, not of opinion,
and the statement must be false in a material respect.
As such, pure statements of advice are unlikely to found a claim in misrepre-
sentation, being statements of opinion or belief rather than statements of fact.
However, they may be based on a separate statement of fact which proves to be
false and which is sufficient to found a claim in misrepresentation (however, in
this regard the fact advice was given is essentially irrelevant)2.
Alternatively, the statement amounting to advice may carry with it an implied
statement of fact, in particular it many carry with it an implied statement to the
effect that the representor has reasonable grounds for holding the opinion3. In
the case of Investors Compensation Scheme Ltd v West Bromwich Building
Society (No 2)4, while predictions themselves as to the future performance of
certain investments were not actionable, Evans-Lombe J. held these predictions
amounted to an implied representation that the predictions could be justified on
reasonable grounds. Advice may, on the facts, also include a statement that the
representor is not aware of any facts which make the statement of opinion
untrue5.
This may be contrasted with the affirmation on appeal in JP Morgan Chase
Group v Springwell Navigation Corporation where it was upheld that there
may be certain opinions which, in all the circumstances, are not accompanied
by the implied representation of reasonable grounds. The existence of such a
representation will generally depend on the context of the communication and
the parties’ respective positions, knowledge and experience. The parties may
also agree to a term that no representations were made or relied upon; thereby
barring the claimant from asserting that such a representation was made or
relied upon, by contractual estoppel6.
1
See Chitty on Contracts (32nd edn), Chapter 7.

13
29.11 Advising on Financial Products
2
Peekay Intermark Ltd v ANZ Banking Group Ltd [2006] 2 Lloyd’s Rep. 511. The Court of
Appeal held that notwithstanding oral misrepresentations, these had been corrected in the
contract but overlooked by the claimant, and the claimant was induced not by the misrepre-
sentation but by the assumption that the contract was in the same terms. See also Watersheds v
DaCosta [2009] EWHC 1299 (QB); [2010] Bus. LR 1.
3
Brown v Raphael [1958] Ch. 636.
4
[1999] Lloyd’s Rep. PN 496.
5
See IFE Fund SA v Goldman Sachs International [2007] EWCA Civ 811, [2007] 2 Lloyd’s Rep.
449. The Court of Appeal held that on the facts of the case there was no such implied
representation made in relation to the investment.
6
See para 29.5 above.

4 FIDUCIARY DUTY OF ADVISER

29.12 An adviser will not automatically owe a fiduciary duty to a customer, as
this is not one of the relationships presumed to give rise to such a duty1. Nor will
it generally exist in all the circumstances as the touchstone of the existence of a
fiduciary duty is the existence of a relationship of ‘trust and confidence’, as
described in the leading case of Bristol & West Building Society v Mothew in
terms:
‘A fiduciary is someone who has undertaken to act for or on behalf of another in a
particular matter in circumstances which give rise to a relationship of trust and
confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty.
The principal is entitled to the single-minded loyalty of his fiduciary2.’
Accordingly, the mere existence of an advisory relationship is insufficient on its
own to create a fiduciary relationship, nor would the termination of any
advisory contract necessarily end any fiduciary relationship3.
If a fiduciary duty is present, the fiduciary must not put himself in a position
where his duty and his personal interest may or do conflict (the ‘no conflict’
rule) and must not make an undisclosed profit from his position (the ‘no profit’
rule).
In JP Morgan v Springwell Navigation Corporation4 it was argued that in all the
circumstances there was just such a relationship of trust and confidence in
relation to advice given. This was rejected by Gloster J in short terms that there
was only an ordinary banking relationship between the parties, and while this
involved some ‘trust’ it did not require the bank to put its client’s interests above
its own as would be expected in a fiduciary relationship.
1
See JP Morgan Chase Group v Springwell Navigation Corporation [2008] EWHC 1186
(Comm) at paras 571–576.
2
[1998] Ch 1 at 18.
3
Longstaff v Birtles [2001] EWCA Civ 1219, [2002] 1 WLR 470 at 471.
4
See fn 1 above; see also in the investment context Diamantides v JP Morgan Chase Bank [2005]
EWCA Civ 1612.

29.13 The assertion of a fiduciary relationship has been widely argued in the
context of insurance mis-selling, however has regularly failed to be established.
In Barnes v Black Horse Ltd1 it was argued that the regulatory requirements,
namely those of the General Insurance Standards Council codes and Office of
Fair Trading guidelines, would by their terms create a fiduciary duty. It was held

14
 Regulation of Advice 29.14

that these were insufficient to create a fiduciary duty and in the absence of
evidence of any relationship of trust and confidence, there was no fiduciary
duty. The judgment concluded2:
‘ . . . the mere giving of advice does not of itself import a fiduciary relationship and
that for the most part commercial relationships which may involve the giving of
advice or stating opinions are unrelated to any consideration of loyal service. Only
exceptionally will the line be crossed from that of mere honesty care and skill and the
like to a fiduciary obligation such that the adviser is held to be acting in the other
party’s interest in terms of advice, information and so on.’
This appears a well-established position, and accordingly examples of fiduciary
duties in a purely advisory context are difficult to find. The most common basis
is a fiduciary relationship in fact established out of an agency (one that may
follow on from or co-exist with the giving of advice, in that the adviser may take
on the task of arranging the relevant transaction as agent). Such agency
however needs to be separately established.
Hurstanger v Wilson is the leading case on agent’s duties in respect of arranging
financial products. In this case an appeal was allowed on a claim for a secret
commission. A broker who arranged a loan for the counterclaiming defendants
had received a commission of £240 for which the broker had not obtained
informed consent. As the defendants were vulnerable and unsophisticated,
disclosure of the amount of the commission was required which was not done3.
It is plainly likely that in cases where advice is given by a broker, that broker
may also act as agent for the customers in arranging the financial product on
which advice was given, and accordingly, may owe a fiduciary duty. Accord-
ingly, any commission paid (or any profit obtained or conflict entered into) may
give rise to an action for breach of fiduciary duty. This does however depend on
establishing the fiduciary relationship, and advice alone is insufficient to auto-
matically create such a relationship, which depends on trust and confidence.
1
[2012] EWHC 1950 (QB).
2
Barnes v Black Horse Ltd [2012] EWHC 1950 (QB), para 17.
3
[2007] EWCA Civ 299; [2007] 1 WLR 2351. See also McWilliam v Norton Finance (UK) Ltd
(in liquidation) [2015] EWCA Civ 186; [2015] 1 All ER (Comm) 1026; Nelmes v NRAM plc
[2016] EWCA Civ 491; Medsted Associates Ltd v Canaccord Genuity Wealth
(International) Ltd [2017] EWHC 1815 (Comm), [2018] 1 WLR 314; applying Hurstanger.
Note, again beyond the context of mere advice, it has also been determined that the failure to
inform customers of a commission in relation to regulated consumer credit can give rise to an
unfair relationship under section 140 of the Consumer Credit Act 1974: Plevin v Paragon
Personal Finance Ltd [2014] UKSC 61, [2014] 1 WLR 4222 overruling Harrison v Black
Horse Ltd [2011] EWCA Civ 1128; see also Nelmes supra.

5 REGULATION OF ADVICE
29.14 The regulation of advice, to the extent it is regulated, is governed by first,
the requirement to be authorised and have appropriate permissions from the
regulator1, and second by the rules made by the regulator2. There are broadly
three common bases for action under FSMA linked to these requirements.
First, if a person conducts the regulated activity of advising on specified
investments in the United Kingdom without being authorised, any agreement
entered into as a result will be unenforceable at the election of the person to
whom advice was given, and that person may also obtain return of all sums paid

15
29.14 Advising on Financial Products

under the relevant agreement3. This is subject then to the discretion of

the Court, on application, to allow the relevant counterparty to enforce the
agreement4. Such a remedy is unlikely to be relevant to banks as they should
always be authorised to carry on the regulated activity of deposit taking at a
minimum.
Second, even if authorised for some regulated activities, a bank that provides
advice on specified investments in the United Kingdom in the course of business,
is required to have the specific permission to advise, and if not this would give
rise to a basis for claim. This basis would most likely arise if the bank had
intended its business not to include providing advice, but inadvertently tres-
passed into giving such advice. If an authorised person conducts the regulated
activity of advising in the United Kingdom without a specific permission to do
so, this gives rise to an action for damages for breach of statutory duty, subject
to the usual defences available to such action5.
Third, once authorised and having advised, any such bank is then subject to the
conduct rules made by the FCA contained throughout the FCA Handbook. The
most pertinent parts of the FCA Handbook in relation to advising and presently
applicable are: in respect of investments, the Conduct of Business Sourcebook
(COBS); in respect of non-investment insurance, the Insurance Conduct of
Business Sourcebook (ICOBS); and in respect of regulated mortgages: the
Mortgages and Home Finance Conduct of Business (MCOB) sourcebook.
Any breach of these rules is actionable under section 138D FSMA by a private
person6. It is valuable to note that a regulated person advising on such regulated
products may not exclude or restrict, or seek to rely on any such exclusion or
restriction of, any duty or liability under the regulatory system by any commu-
nication, whether written or oral7. This prohibition is to be interpreted purpo-
sively8, and therefore in light of the FCA’s objective to secure an appropriate
degree of protection for consumers, it seems likely that if advice was given in
fact, any communication effectively avoiding regulatory obligations would be
impermissible, including for example the establishment of a contractual estop-
pel9. In short, the effect is that within this regulated space, it is not possible to
contract out of, or otherwise devise a method of avoiding the regulatory
obligations. These regulatory obligations are considered in further detail below.
1
On 1 April 2013, a system of dual regulation was introduced. The Prudential Regulatory
Authority (PRA) authorises and deals with the permissions of banks, and makes and supervises
prudential rules applicable to a bank. The Financial Conduct Authority (FCA) makes and
supervises conduct rules applicable to a bank.
2
The FCA Handbook can be found online: www.handbook.fca.org.uk/handbook/.
3
FSMA 2000, ss 26 and 26A.
4
FSMA 2000, ss 28 and 28A.
5
FSMA 2000, s 20(3) makes this cause of action in prescribed cases. Regulation 4 of the
Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 has prescribed all
cases as giving rise to a cause of action so long as brought at the suit of a private person and not
pertaining to the imposition of a financial resources requirement on the firm. Any such claim
would require a careful assessment of whether performing the regulated activity has in fact
caused loss: no such loss was found in the case of Re Whiteley Insurance Consultants (A Firm)
[2008] EWHC 1782 (Ch); [2009] Bus LR 418 as the insurance sold had performed as expected.
However, it was held that if the insurance had been inadequate, specifically if the insurer had
been wound up prior to the expiry of the policy, then there would be a claim for the cost of
replacement insurance for the remaining term.
6
Formerly FSMA 2000, s 150. ‘Private person’ includes any individual who is not acting in the
course of a regulated activity, and any person who is not an individual, so long as they did not
suffer the loss in the course of carrying on a business of any kind. For cases on the wide

16
 Meaning of Advice 29.16

interpretation of this business test, see Titan Steel Wheels v RBS [2010] 2 Lloyd’s Rep 92;
Camerata Property v Credit Suisse Securities (Europe) Ltd [2012] EWHC 7 (Comm); Grant
Estates Ltd v RBS [2012] CSOH 133; Bailey v Barclays Bank plc [2014] EWHC 2882 (QB);
Thornbridge Ltd v Barclays Bank plc [2015] EWHC 3430 (QB); note however permission to
appeal the first instance decision in Bailey and the wide interpretation was granted in [2015]
EWCA Civ 667 before settling. At present, it seems only natural persons and charities are able
to claim on first instance case law, rather than companies with any kind of business to which a
financial transaction will almost certainly relate. Whether such a broad effect (as opposed to
capturing merely those companies whose business was in the relevant financial transactions)
was the intended effect of the definition of ‘private person’, is a point which remains to be
considered by the Court of Appeal.
7
Per COBS 2.1.2R; ICOBS 2.5.1R; MCOB 2.6.2R. ‘Regulatory system’ is defined to include the
arrangements for regulating a person under FSMA, including the threshold conditions, the
Principles and other rules, the Statements of Principle, codes and guidance, the Consumer
Credit Act 1974 and including any relevant directly applicable provisions of a Directive or
Regulation.
8
GEN 2.2.1R. However, cf Wilson v MF Global [2011] EWHC 138, where as part of the general
context, contractual clauses stating an execution-only service was provided was viewed as a
‘considerable obstacle’ to a finding that advice had, in fact, been given (at paras 90, 93). See also
Bank Leumi (UK) plc v Wachner [2011] EWHC 656 (Comm), [2011] 1 CLC 454 at
paras 306–307.
9
See para 29.5 above.

6 MEANING OF ADVICE
29.15 It is useful at this stage to consider exactly what is meant by advice, by
contrast in particular to the mere provision of information. This is because the
question can define important questions such as whether a bank has been
advising without permission or whether a personal recommendation has been
made, engaging obligations of suitability in the Handbook rules.
It will be seen that there is a degree of cross-pollination and indeed identity in
the case-law (particularly where common law and regulatory actions are both
pursued) between the approach to identifying an assumption of responsibility
at common law based on advice and the identification of advice for the purposes
of FSMA.
29.16 Focusing first on the regulatory material, guidance from the regulator
(first made by the FSA in 1 July 2005 and continued by the FCA) is contained in
the Handbook in the ‘perimeter guidance’ in PERG. This is extensive, but the
broad effect of the central provisions is that advice requires an element of
opinion on the part of the adviser as to a course of action. This is in distinction
to pure information which will involve mere statements of facts or figures,
without comment or value judgment on their relevance to the decision the
person has to make1.
Walker v Inter-Alliance Group plc, a case under the Financial Services Act
1986, shows this focus on ‘value judgement’ is a continuance of the approach
from that applied by the Court under the previous system of financial regula-
tion. Henderson J stated:
‘ . . . any element of comparison or evaluation or persuasion is likely to cross the
dividing line [into advice]. However, the provision of purely factual information does
not become objectionable merely because it feeds into the client’s own decision-
making process and is taken into account by him. It is obvious that any informed
decision making requires the provision of accurate information and will be based
upon it2.’

17
29.16 Advising on Financial Products

These two sources of guidance on the meaning of advice came to be considered

at first instance in the case of Rubenstein v HSBC3. The decision of HHJ
Havelock-Allan QC focused again on the presence of a ‘value judgment’, in
terms:
‘The key to the giving of advice is that the information is either accompanied by a
comment or value judgment on the relevance of that information to the client’s in-
vestment decision, or is itself the product of a process of selection involving a value
judgment so that the information will tend to influence the decision of the recipient.
In both these scenarios the information acquires the character of a
recommendation4.’
The same test was applied to the question of whether advice had been given in
both the context of an action for breach of regulatory requirements as well as in
the action for negligent advice. As above this appears justified because in each
case, the question of whether advice had been given is not a matter of meeting
a legal definition, but rather a question principally of fact.
Such a value judgment may be implied from the way in which information is
given, as illustrated by the further guidance in PERG 5.8.11G which gives the
following examples:
‘ . . . Examples of situations where information provided by a person (P) might
take the form of advice are given below.
(1) P may provide information on a selected, rather than balanced and neutral,
basis that would tend to influence the decision of a person. This may arise
where P offers to provide information about contracts of insurance that
contain features specified by the person, but then exercises discretion as to
which complying contract of insurance to offer to that person.
(2) P may, as a result of going through the sales process, discuss the merits of one
contract of insurance over another, resulting in advice to enter into a particu-
lar one . . . .’

1
See PERG 5.8, 8.28, 8.29.
2
[2007] EWHC 1858, para 30.
3
[2011] EWHC 2304 (QB); [2012] PNLR 7. This decision was overturned on appeal on other
grounds.
4
[2011] EWHC 2304 (QB) para 81, cited with approval in Thomas v Triodos Bank NV [2017]
EWHC 314 (QB) at para 64. See also Zaki v Credit Suisse (UK) Ltd [2011] EWHC 2422
(Comm), [2011] 2 CLC 523 per Teare J at paras 83–84: Advice on the merits of purchasing a
structured product must, I think, refer to the advantages and disadvantages of purchasing the
product . . . [this] requires an element of opinion on the part of the adviser [and] . . . is to
be distinguished from the mere giving of information.

29.17 However, one important caveat is the assessment must remain one that
takes account of all the circumstances. Accordingly in Wilson v MF Global
UK Ltd, Eady J rejected an approach whereby each individual statement had to
be classified in isolation according to whether it is information or advice.
Rather the conversations between the parties taken altogether showed in that
case that the parties were merely exchanging information and bouncing ideas
off each other:
‘If such conversations were to be subjected regularly to analysis of that kind with a
view to changing the express terms of the parties’ relationship, brokers would not be
able to operate and communications would soon be drastically curtailed . . . 1.’

18
 Advice on Investments: COB & COBS 29.19

Finally, the requirement is that the advice should be given in relation to a

particular investment or investments, which would not be the case in the giving
of mere advice in the form of ‘trading floor opinion’ as to the state of the
market, which quite easily falls into the realm of information, and falls short of
the specific merits and/or suitability of a particular investment2.
1
[2011] EWHC 138 (QB), para 96.
2
Bank Leumi (UK) plc v Wachner [2011] EWHC 656 (Comm), [2011] 1 CLC 454 at paras 196,
305-307.

7 ADVICE ON INVESTMENTS: COB & COBS

29.18 The regulation of advice on investments has a long history stretching
back to the inception of the previous regulatory regime under the Banking Act
19791. However since the introduction of FSMA on 1 December 2001 it has
been governed by the Conduct of Business (COB) sourcebook, and since
1 November 2007 by the Conduct of Business Sourcebook (COBS). COBS was
introduced to implement in part the Markets in Financial Instruments Directive
(MiFID) and has since been further amended from 3 January 2018 to imple-
ment MiFID II2. This part of the chapter sets out the scope of regulation of
investments, the specific requirements in relation advice given in advised sales
under these more recent regimes of COB and COBS, and the key case law
thereon3.
1
See Chapter 1 above.
2
MiFID: Directive 2004/39/EC on markets in financial instruments (OJ L145/01). MiFID II:
Directive 2014/65/EU on markets in financial instruments (OJ L173/349).
3
Reference should be made however to Chapter 30 for a detailed consideration of all the
regulatory requirements (including those not pertaining directly to the standard of advice
required) in relation to the sale of interest rate swaps and other derivatives.

(a) COB: Rules applying prior to 1 November 2007

29.19 COB had many and varying application provisions defining the particu-
lar circumstances in which given rules were engaged, however broadly each
part of COB had an application provision making the relevant rules and
guidance apply only to ‘designated investment business’ or a subset thereof, and
in relation to ‘designated investments’ or a subset thereof.
Designated investment business was defined to include a variety of regulated
activities including dealing in investments (as principal or agent), arranging
deals in, managing of, and advising on investments, amongst others. Designated
investments was also defined, and includes a variety of securities and
contractually-based investments, such as life policies, shares, debentures, op-
tions, futures and contracts for difference, as defined in the Financial Services
and Markets Act 2000 (Regulated Activities) Order 2001 (RAO).
The principal advisory obligation in COB provided1:
‘(1) A firm must take reasonable steps to ensure that, if in the course of designated
investment business:
(a) it makes any personal recommendation to a private customer to:

19
29.19 Advising on Financial Products

(i) buy, sell, subscribe for or underwrite a designated investment (or to

exercise any right conferred by such an investment to do so); or . . .
(c) it makes a personal recommendation to an intermediate customer or a market
counterparty to take out a life policy;
(c) the advice on investments or transaction is suitable for the client.
(3) In making the recommendation or effecting the transaction in (1), the firm must
have regard to:
(a) the facts disclosed by the client; and
(b) other relevant facts about the client of which the firm is, or reasonably should
be, aware.’
As can be seen the obligation was principally confined to recommendations
made to ‘private customers’ which was defined as a client who was not a market
counterparty or an intermediate customer (which are the subject of their own
extensive definitions). Very broadly, a private customer will capture all indi-
viduals who are not regulated persons and all clients who have been classified as
a private customer on a discretionary basis2, in addition to a number of other
minor specific instances where a client will be a private client.
Extensive guidance on matters that should be taken into account when assess-
ing suitability, across a variety of scenarios, was set out in COB 5.3.29G.
Further this suitability obligation is enhanced to require the product to be ‘the
most suitable’ where the advice is on a ‘packaged product’3. Packaged products
included a life policy, a regulated collective investment scheme, an investment
trust savings scheme or a stakeholder pension scheme. Reasonable steps were
also required be taken to ensure that customer understood the risks of the
recommended product4.
1
COB 5.3.5R(1), (3).
2
Per COB 4.1.14R.
3
Per COB 5.3.5R(2).
4
COB 5.4.3R.

(b) COBS: Rules applying after 1 November 2007 (MiFID)

29.20 When COBS was introduced to implement MiFID, the above definitions
of ‘designated investment’ and ‘designated investment business’ were retained
to define the general scope of COBS, however as they were broader than the
scope of MiFID itself, it was in some cases necessary for those drafting COBS to
employ the new term ‘MiFID business’. This was used in cases where a
narrower scope was necessary because it was not considered appropriate to
extend the requirements of MiFID beyond the minimum scope.
Advice however was not one of these areas, and the principal advisory obliga-
tion in COBS in relation to designated investments is contained in 9.2.1R and
provides:
‘(1) A firm must take reasonable steps to ensure that a personal recommendation,
or a decision to trade, is suitable for its client.
(2) When making the personal recommendation or managing his investments,
the firm must obtain the necessary information regarding the client’s:
(a) knowledge and experience in the investment field relevant to the specific
type of designated investment or service;
(b) financial situation; and

20
 Advice on Investments: COB & COBS 29.21

(c) investment objectives;’

so as to enable the firm to make the recommendation, or take the decision, which is
suitable for him.
This obligation applies whenever a bank makes a personal recommendation in
relation to a designated investment, and applies to every client when within the
scope of MiFID business, and when outside this MiFID scope1, only to a retail
client2, properly so classified pursuant to COBS 3. In addition, per COBS
9.2.2R and 9.2.3R, the firm must obtain information from the client sufficient
to have a reasonable basis for believing the product being advised meets the
client’s investment objectives, that the client is able to bear the financial
consequences of investment risk, and that the client understands the risks of the
product in question.
COBS 9.3 provides guidance on assessing suitability, in particular that unsuit-
ability may arise because of the risk of the investment, its nature, or character-
istics of the order or the frequency of trading, along with specific guidance on
the risks of churning, switching and income withdrawals. The previous require-
ment in COB above to advise on the ‘most suitable’ product, in relation to
packaged products, was removed, as it was felt that the suitability, disclosure
and best interests requirements sufficed3.
1
Eg when a bank provides advice on life, pensions and other ‘packaged’ products which are not
financial instruments specified in Annex I, Section C of MiFID.
2
COBS 4.1.9R. A retail client is defined as one which is not a professional client or an eligible
counterparty: see generally COBS 3.2 for the definitions of these entities. See also COBS
4.1 generally for the application of COBS 4.
3
It should be noted that in addition to advice obligations in relation to suitability considered
here, COBS contains extensive other protections, such as the client’s best interest rule (COBS
2.1.1R), the clear fair and not misleading communication rule (COBS 4.2.1R), general
disclosure obligations (see COBS 6), and the requirement that an investment should be
appropriate, even where advice is not given (see COBS 10).

(c) COBS: Rules applying after 3 January 2018 (MiFID II)

29.21 The COBS regime prior to 3 January 2018 effectively continues for any
business outside the scope of MiFID II (such as life insurance policies or
pensions, or designated investments outside the scope of MiFID II), and
continues to be contained in COBS 9 in much the same terms as previously.
However, all MiFID business is now subject to a new regime in COBS 9A as well
as a directly effective Commission regulation known as the ‘MiFID Org
Regulation’1.
The key rule relating to advice is at COBS 9A.2.1R in terms:
‘When providing investment advice . . . a firm must:
(1) (1) obtain the necessary information regarding the client’s:
(a) knowledge and experience in the investment field relevant to the
specific type of financial instrument or service;
(b) financial situation including his ability to bear losses; and
(c) investment objectives including his risk tolerance,
(1) so as to comply with (2);
(2) recommend investment services and financial instruments . . . which is
[sic] suitable for the client and, in particular, in accordance with the cli-
ent’s risk tolerance and ability to bear losses.’

21
29.21 Advising on Financial Products

Substantively the obligation is not much changed from that under MiFID,
however there is a new emphasis on an assessment of the client’s ability to bear
losses and their risk tolerance, when considering suitability. Considerably more
change is to be found in the detailed supplementary regulations in the MiFID
Org Regulation, covering new detailed requirements to assess the need and then
to obtain information concerning a client’s knowledge and experience, financial
situation and investment objectives, mirroring each element of the suitability
test above2. It will most likely follow that if these obligations are not met that it
will not have been possible to properly assess suitability in line with COBS
9A.2.1R above. If the bank fails to obtain sufficient information, it cannot
advise3.
Further, a bank acting as adviser will be required to assess the reliability of the
information, imposing specific obligations to sufficiently question and profile
clients, as well as ensure that no reliance is put on information which is
obviously inaccurate4. This effectively creates an obligation on the bank as
adviser to go beyond merely relying upon what information is provided, but to
appraise the soundness of that information or test it against common sense.
Finally, in a nod to the potential future role for artificial intelligence to be
involved in the process of delivering advice, the MiFID Org Regulation provides
that where advice is provided by automated (or semi-automated) systems,
responsibility for that advice still lies with a bank employing such a system
(rather than say the creator of the system) and shall not be reduced merely by
reason of the use of such an electronic system5.
1
Commission Delegated Regulation (EU) 2017/565, OJ L87/1.
2
See COBS 9A.2.6 to 9A.2.8 setting out Article 55(1), (4)–(5) of the MiFID Org Regulation.
3
See COBS 9A.2.13R setting out Article 54(8) of the MiFID Org Regulation.
4
See COBS 9A.2.9R setting out Article 54(7) of the MiFID Org Regulation.
5
See COBS 9A.2.23R setting out Article 54(1) of the MiFID Org Regulation.

(d) COB & COBS: Case Law

29.22 The most recent COBS regime implementing MiFID II has been in place
for a short period of time only such that it has not been considered in case-law
as yet. This section accordingly focuses on certain case-law that considered
COB and COBS in the MiFID incarnation. In considering the case law in this
area, naturally there is a split between that which considered COB and that
which considered COBS. However, as can be seen above, the basic obligations
remained those of suitability and understanding of risk. Thus the case law,
subject to the exception that any questions arising in a case on the very
particular drafting of the rules in COB or COBS, is likely to be of some general
assistance throughout both periods of regulation.
The importance of proper classification of a client is illustrated by the decision
in Wilson v MF Global UK Ltd1. The suitability obligation will only apply in
COB where the client is a private customer as opposed to an intermediate
customer or market counterparty. Here, the claimants claimed for breach of
COB 5.3.5R on the basis that there had been investments recommended which
were unsuitable, and COB 5.4.3R on the basis a personal recommendation had
been given without ensuring the claimants understood the risks involved.

22
 Advice on Investments: COB & COBS 29.23

However, the claimants were held to have been properly classified as interme-
diate customers, such that these obligations did not arise in the first place. Eady
J expressed the approach the court should take upon an allegation of misclas-
sification of a customer as an intermediate customer, in the following terms2:
‘ . . . the court is not concerned to come to its own separate and objective assess-
ment of the “correct” classification. The test is whether reasonable care has been
taken to determine that the client had sufficient experience and understanding to be
classified as an intermediate customer.’
This has some relevance to COBS, as although the COBS suitability obligation
(both before and after MiFID II) extends to all clients (of any classification)
within the MiFID scope, where the product in respect of which advice is
provided falls outside the MiFID scope (eg a pension) (both before and after
MiFID II), then the suitability obligation only extends to retail clients properly
so classified under COBS, and proper classification is critical.
1
[2011] EWHC 138 (QB).
2
[2011] EWHC 138 (QB), para 24. See also on the importance and process of proper classifi-
cation Spreadex Ltd v Sekhon [2008] EWHC 1136 (Ch), [2009] 1 BCLC 102, Maple Leaf
Macro Volatility Master Fund v Rouvroy [2009] EWHC 257 (Comm), and Bank Leumi (UK)
Plc v Wachner [2011] EWHC 656 (Comm), [2011] 1 CLC 454.

29.23 The COBS suitability obligation at 9.2.1R was considered in detail in

Zaki v Credit Suisse1. The claimant had purchased various different types of
notes, and Teare J had to consider the question of suitability in respect of each.
In doing so, the Court considered the three factors of:
(a) the client’s knowledge and experience;
(b) financial situation; and
(c) investment objectives as set out in COBS 9.2.1R(2).
Ostensibly as part of this, most likely as part of the client’s investments
objectives, Teare J accepted that the Court could have regard to whether the
recommended products were riskier than desired by the client or were insuffi-
ciently diversified; and of further relevance was the suitability of the leverage
used in the recommended investments2. Although the approach of Credit Suisse
to collecting and storing information about the claimant may have been in
technical breach of regulatory requirements in COBS, it was held this did not
affect the question of whether the products recommended were in fact suitable
or not (although it would potentially have relevance to the question of whether
the reasonable care required by COBS 9.2.1R had been exercised, should the
product have been unsuitable).
As to this question of suitability, 7 of the 10 notes were held suitable, based on
the claimant’s understanding of the structure of the notes, the risks associated
with them and because they fitted with the claimant’s desire for higher returns.
The remaining notes were held unsuitable because they were more highly
leveraged, in an already undiversified portfolio and were exposed to banking
shares at a time when they were already falling. However, the claim on these
notes failed in any event for it could not be shown the claimant had relied on the
advice given.
While no longer present in COBS, the obligation in COB to give advice on the
‘most suitable’ product on ‘packaged products’ was considered in Rubenstein v

23
29.23 Advising on Financial Products

HSBC3. In this case, as the product was an investment sold in a life policy
wrapper, it met the definition of packaged product and attracted the higher
obligation under COB 5.3.5R(2)(a).
In these circumstances the test of suitability is more easily established, namely
identifying and examining the products within the bank’s scope. If there is a
more suitable product there is a breach. In this case money was desired to be
held at very low risk as a paramount concern, and as there was a lower risk
product available within the scope, it was held there was a breach of COB
5.3.5(2)(a).
A finding by the judge that the claim failed because the loss was caused by a
rumour during the ‘credit crunch’ that the product provider, AIG, would
collapse, was unforeseeable in September 2005 as unthinkable, was overturned
on appeal4. The loss was not too remote as the claimant made it clear he wanted
a no-risk investment and so any market loss fell within the scope of the
bank’s duty.
For further cases considering the application of the suitability requirement (and
others) specifically in relation to the sale by banks of interest rate swaps, see
Chapter 30.
1
[2011] EWHC 2422 (Comm), [2011] 2 CLC 523. Affirmed [2013] EWCA 14; [2013] 2 All ER
(Comm) 1159.
2
See fn 1, paras 112, 122. The requirement to consider suitability of leverage is strictly separate
from that in COBS 9.2.1R, being based on requirements contained in COBS 7.9. The
requirements of COBS 7.9 were considered in detail on appeal op cit.
3
[2011] EWHC 2304 (QB), [2012] PNLR 7.
4
See [2012] EWCA Civ 1184 at paras 118, 120–125.

8 ADVICE ON INSURANCE: ICOB & ICOBS

29.24 Banks’ role in advising on insurance1 will generally be that of interme-
diary.
While effecting or carrying out insurance has been regulated under FSMA since
its inception, it was not until 14 January 2005, following implementation of the
Insurance Mediation Directive2 (IMD), that the scheme of regulated activities
under FSMA was extended to include insurance mediation of non-investment
insurance3 by way of business in the United Kingdom. This ‘by way of business’
test was modified, reflecting the IMD, in relation to insurance mediation
activities, to require that the intermediation be for ‘remuneration’4.
The regulated activities included in the regulator’s definition of ‘insurance
mediation activities’ include advising on investments5. When considering insur-
ance, strictly these regulated activities apply in relation to ‘rights under a
contract of insurance’6, and therefore extend to an alteration or addition of
rights under an existing contract of insurance. This is subject to a number of
exceptions contained in the RAO7.
In tandem with this extension of regulation, the regulator introduced specific
conduct of business requirements on such insurance intermediaries contained in
the Insurance: Conduct of Business (ICOB) sourcebook. On 5 Janu-
ary 2008 ICOB was replaced with the Insurance: Conduct of Business Source-
book (ICOBS), subject to a set of transitional provisions which allowed

24
 Advice on Insurance: ICOB & ICOBS 29.24

insurance intermediaries to continue to comply with ICOB instead of ICOBS

until 6 July 20088.
This change was made following a review of ICOB which had determined that
in several ways the United Kingdom implementation of the IMD had been too
prescriptive or unnecessarily super-equivalent. As a result ICOBS was drafted in
a more concise manner than ICOB. However in some respects ICOBS became
more stringent, imposing greater obligations in relation to the sale of particular
types of insurance, namely ‘pure protection contracts’ and ‘payment protection
contracts’.
ICOBS has also been recently revised to meet the new European requirements
set out in the Insurance Distribution Directive (IDD).These rules were substan-
tially due to come into force on 1 October 2018. As the focus of this work is on
litigation, which has and is most likely to arise out of the existing ICOBS and
prior ICOB regimes, only these regimes are covered. There remains consider-
able overlap between the ICOB and current ICOBS regimes, reflecting as they
do the common purpose of implementing the IMD. As ICOB may still remain
relevant to some sales that may come to Court or the Financial Ombudsman
Service (FOS), without facing a limitation problem, the requirements of ICOB
and ICOBS are considered together in the next section.
Banks may find themselves liable for a breach of ICOB or ICOBS either directly
by way of suit under FSMA 2000, s 138D by a private person, or alternatively,
because such a breach of those requirements has given rise to an unfair
relationship in the consumer credit relationship existing between them and the
customer (for example in respect of a policy of insurance sold to cover risks
arising under or in connection with that credit relationship), including as a
result of any failures by any agent of the bank9.
1
Insurance, for the purposes of regulation, has no defined meaning, and simply includes all
contracts of insurance as a matter of English case law, subject to certain specific extensions and
restriction in RAO art 3(1). Guidance on the regulators’ likely approach to assessing whether
something is insurance is given in PERG 6 and see also MacGillivray on Insurance Law (13th
edn) Chapter 1. While types of insurance are defined for particular purposes in the Handbook,
this does not affect the general meaning of insurance.
2
Directive 2002/92/EC on insurance mediation (OJ L009/03).
3
ICOB and ICOBS apply only to such non-investment insurance, which include all general
insurance and pure protection contracts which are not a long-term care insurance contract. For
a list of what qualifies as general insurance, see RAO Schedule 1, Part 1. Neither sourcebook
applies in relation to a reinsurance contract.
4
FSMA 2000, s 22. Such remuneration may be direct or indirect. See the guidance at PERG 5.4.
It can include for example enhanced sales of another product or service with the insurance.
5
The regulated activity of advising on investments in RAO art 53, applies to any ‘relevant
investment’, which per RAO art 3(1) includes any contract of insurance as there defined.
6
Per RAO art 75.
7
See PERG 5.8 for a summary of these exceptions.
8
Note on 1 April 2013, the FCA took over conduct regulation of insurance intermediaries, and
therefore took over, and effectively remade, ICOBS to continue going forward. No practical
effect arises from this transition save that any cause of action for breach of a rule that before this
date would be made under s 150 of FSMA 2000, is now under FSMA 2000, s 138D.
9
See Plevin v Paragon Personal Finance [2014] UKSC 61, [2014] 1 WLR 4222, in particulars
paras 24, 26, 29–30, and 33.

25
29.25 Advising on Financial Products

29.25 Under the regime which applies under ICOBS to 1 October 2018, if a
bank has provided advice on relevant non-investment insurance, the obliga-
tions in ICOBS 5.3 on advised sales will apply. The core rule is ICOBS 5.3.1R,
which requires:
‘A firm must take reasonable care to ensure the suitability of its advice for any
customer who is entitled to rely upon its judgment.’
There is a singular lack of reported authority to provide guidance on this
obligation. The first source of guidance is provided by the regulator in ICOBS
5.3.2G, to explain what reasonable care requires in the context of ‘payment
protection’ or ‘pure protection’ contracts.
ICOBS 5.3.2G(1) first requires that the bank must establish the custom-
er’s demands and needs ‘using information readily available and accessible to
the firm and by obtaining further relevant information from the customer,
including details of existing insurance cover’. However it is also made clear in
ICOBS 5.3.2G(1) that the bank need not consider products which are not
insurance, or needs of the customer which are irrelevant to the type of policy
being considered. A bank is also not required to advise comparatively across the
whole market unless that is the scope of service being provided, per ICOBS
5.3.3R.1
Having established the customer’s demands and needs, the bank should com-
pare these with the features of the policy of insurance, in particular its ‘level of
cover and cost’, ‘relevant exclusions, excesses, limitations and conditions’ (per
ICOBS 5.3.2G(2)) and inform the customer of ‘any demands and needs that are
not met’ by the policy being recommended (per ICOBS 5.3.2G(3))2.
While this guidance is qualified to the above noted payment protection or pure
protection insurance (which required specific guidance due to poor practice), it
is guidance on ICOBS 5.3.1R, which should apply, it is submitted, more broadly
unless there is some good reason why it should not, not least as demands and
needs are required to be assessed in every case per ICOBS 5.2.2R(1). It is indeed
hard to conceive of a case where a bank having assessed the customer’s demands
and needs could properly ignore those demands and needs, and assess suitabil-
ity in a vacuum. The sources of information described are also unlikely to be
onerous in most cases and the comparison required between the demands and
needs and the features of the policy are generic.
1
Likewise in ICOB 4.3.1R(2). See Harrison v Black Horse [2010] EWHC 3152 (QB); [2011]
Lloyd’s Rep IR 455, at para 24 (affirmed [2011] EWCA Civ 1128. These decisions were both
overruled by Plevin supra however not on this point); Goodman v Central Capital [2012]
EWHC 8 (QB); [2012] CTLC 158, at para 35. If the bank is tied to advise on one product only,
the bank need only advise on the suitability of that product.
2
These requirements also apply in the case of insurance being sold as part of a packaged bank
account, and the bank is required ‘to explain its recommendation to the customer and the
reasons for the recommendation’ (per ICOBS 5.3.2AR).

29.26 The second source of assistance may be found in the old regime in ICOB.
The principal obligation in relation to advice under ICOB was contained in
ICOB 4.3.1R(1):
‘An insurance intermediary must take reasonable steps to ensure that, if . . . it
makes any personal recommendation to a customer to buy or sell a non-investment

26
 Advice on Insurance: ICOB & ICOBS 29.27

insurance contract, the personal recommendation is suitable for the customer’s de-
mands and needs at the time the personal recommendation is made.’
The obligation here in ICOB 4.3.1R is the same as that in ICOBS 5.3.1R,
namely requiring the product to be suitable for the customer, save that com-
parison with the customer’s demands and needs is part of the rule rather than
covered separately in guidance.
Accordingly, subject only to the unlikely case where the guidance in ICOBS
5.3.2G does not apply or is inappropriate in the circumstances, the principal
obligations are identical in both regimes, and it may be inferred that the
approach prescribed in ICOB would provide some assistance interpreting
ICOBS, where not inconsistent with a specific provision in ICOBS.
The next key rule in ICOB is ICOB 4.3.2R which provides the requirements of
assessing demands and needs. The bank is required to seek such information as
would reasonably be expected to be relevant to the customer’s requirements,
and to take into account the relevant details about the customer available to the
bank (eg age, or employment status). It was held in Black Horse Ltd v Speak1
that it is acceptable to obtain this information from a partner if the partner has
been given authority to answer the questions on their behalf. The bank is also
required under this rule to explain the obligation to make disclosure of all
material facts and the consequences of failure to make such disclosure, and
must take into account any material facts disclosed by the customer. The latter
requirement was considered in the case of Jones v Envirocom Ltd2 where it was
held that this obligation stems from the overall suitability obligation, by reason
of the fact that if the customer ends up with a voidable policy for non-
disclosure, it is inherently unsuitable. In that case the defendant sought to rely
on documentary disclosure of the obligation, but in addition to the terms of that
disclosure being held inadequate, it was held by David Steel J:
‘In any event, I am not persuaded that it is sufficient simply to rely upon written
standard form explanations and warnings annexed to proposals or policy docu-
ments. I understood the experts to be agreed on this. The broker must satisfy himself
that the position is in fact understood by his client and this will usually require a
specific oral or written exchange on the topic, both at the time of the original
placement and at renewal . . . 3.’
1
[2010] EWHC 1866 (QB); [2010] CTLC 211, at paras 59–60.
2
[2010] EWHC 759 (Comm); [2010] Lloyd’s Rep IR 676, at paras 53–62.
3
Jones v Envirocom Ltd [2010] EWHC 759 (Comm); [2010] Lloyd’s Rep IR 676, para 63.

29.27 ICOB 4.3.5R bars any recommendation being made of particular insur-
ance if the bank is aware the customer has insurance that may affect the
suitability of the considered policy until details have been made available; or the
bank may do so if it makes clear that, as a result of the existing insurance that
has not been considered, the policy may not be suitable. Having established the
customer’s demands and needs, ICOB 4.3.6R prescribes the following mini-
mum approach to assessing suitability:
‘In assessing whether a non-investment insurance contract is suitable to meet a
customer’s demands and needs, an insurance intermediary must take into account at
least the following matters:
(1) whether the level of cover is sufficient for the risks that the customer wishes to
insure;

27
29.27 Advising on Financial Products

(2) the cost of the contract, where this is relevant to the customer’s demands and
needs; and
(3) the relevance of any exclusions, excesses, limitations or conditions in the
contract.’
The question of the relevance of cost came to be considered at first instance in
the case of Harrison v Black Horse Ltd1 where it was held that the proviso
‘where this is relevant to the customer’s demands and needs’ must mean that
cost of the insurance will not be relevant in every case. It was held that if the
customer identifies a particular budget then cost might become a relevant factor.
Further it was held that ICOB 4.3.2R did not require an intermediary to ask
whether there was a particular budget; the ‘customer’s requirements’ in respect
of which information is to be sought was held to refer to the ‘particular risks
which the customer needed covering in light of the cover (if any) which he then
had’2.
1
[2010] EWHC 3152 (QB); [2011] Lloyd’s Rep IR 455. The appeal to the Court of Appeal
([2011] EWCA Civ 1128; subsequently overruled in Plevin supra) concerned the separate issue
of an unfair relationship under s 140 of the Consumer Credit Act 1974 only.
2
Harrison v Black Horse Ltd [2010] EWHC 3152 (QB); [2011] Lloyd’s Rep IR 455, para 23.

9 ADVICE ON MORTGAGES: MCOB

29.28 Regulation of the sale of particular mortgages and certain other home
finance transactions began from 31 October 2004. This chapter concentrates
on banks’ principal regulated activity of advising on regulated mortgage
contracts1 by way of business2 in the United Kingdom.
The definition of a ‘regulated mortgage contract’ was originally one under
which, at the time it is entered into:
(1) one person provides credit to an individual or to trustees (note, this does
not include any corporate entity);
(2) the obligation to repay being secured by a first legal mortgage on land
(other than timeshare property) in the United Kingdom; and
(3) at least 40% of that land is used or intended to be used as a dwelling or
in connection with a dwelling by the borrower or beneficiary of the
relevant trust, or related person3. While designed to identify consumer
borrowing, the purpose of the loan is irrelevant.
Second or later charge mortgages were accordingly excluded4. This was how-
ever amended effective from 21 March 2016 to give effect to the expanded
scope of the Mortgage Credit Directive (MCD) to include second and later
charges, as well as to extend it to mortgage over land anywhere in the EEA.
These requirements are unlikely to be difficult to apply in the typical situation
where an individual takes a first legal mortgage to fund the purchase of a
dwelling for that individual or individual’s relations. However, in particular
cases the requirement may be more difficult to apply. To this extent, helpful
guidance is given by the regulator in PERG 4.5 Examples given there include:
(1) where an individual mortgages a property in respect of which it is
intended to lease half and live in the other half, being over 40% occupied
as a dwelling by the individual mortgaging the property, that mortgage
will be regulated;

28
 Advice on Mortgages: MCOB 29.30

(2) if a farmhouse and land is mortgaged, and the farmhouse and non-
farmland garden is less than 40% of the total, the mortgage is unregu-
lated, farmland not being in the regulator’s view, as used ‘in connection
with’ the farmhouse; and,
(3) a buy-to-let property, if it is intended to lease the property to a related
person, or ultimately to be a long term dwelling for the individual
mortgagor following a period of rental, the mortgage will nonetheless be
regulated.
1
RAO art 53A.
2
The ‘by way of business’ test is modified in relation to mortgage mediation activities under the
Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business)
Order 2001, SI 2001/1177 at art 3A to require that the person ‘carry on the business of engaging
in that activity’. This means the activity must be carried on as a business in its own right, rather
than being ancillary.
3
A ‘related person’ (per RAO art 61(4)(c)) includes a spouse, civil partner, any partner in fact,
grandparent, parent, sibling, child or grandchild.
4
RAO art 61(3)(a). ‘Credit’ is defined (per RAO art 61(3)(c)) as a loan of money in any form and
any other form of financial accommodation. Note as a result, all types of financial accommo-
dation may be captured, for example a bank guarantee or performance bond, as if the bank
performs the customer will then become indebted to the bank.
5
In particular at PERG 4.4.6G onwards.

29.29 Since the inception of regulation of mortgages, the various regulated

activities in relation to such mortgages have been governed by the rules and
guidance published in the Mortgages and Home Finance: Conduct of Business
sourcebook (MCOB).
The focus in this chapter is on the sale of a standard regulated mortgage.
Particular adapted regimes in MCOB apply to equity release mortgages, home
purchase plans and sale and rent-back agreements. However, the particular
activity of advising on regulated mortgage contracts1 is covered principally in
MCOB 4, which has been subject to significant amendment on 26 April 2014
and subsequently as a result of the MCD. The regime as it applied before
26 April 2014 is considered first.
1
RAO art 53A.

(a) MCOB: Prior to 26 April 2014

29.30 MCOB 4 applied to a bank acting in the role of mortgage adviser (even
if it is also the mortgage provider) whenever the bank makes or anticipates
making a personal recommendation to enter into a regulated mortgage contract
or to vary the terms of a regulated mortgage contract1.
The general purpose of MCOB 4 in providing rules and guidance that apply to
the giving of advice is to ensure advice given to a customer is suitable2. However
it is acknowledged that the steps required will vary depending on the demands
and needs of the particular customer and the type of mortgage being considered.
MCOB 4.3 contains rules about the description by a bank of its scope of service,
and requires a firm to take reasonable steps to describe accurately the scope of
products on which it will advise, be it whole market, limited or single provider.
This feeds into the requirements on advised sales contained in MCOB 4.7, the
principal obligation of which is in terms3:

29
29.30 Advising on Financial Products

‘A firm must take reasonable steps to ensure that it does not make a personal
recommendation to a customer to enter into a regulated mortgage contract, or to vary
an existing regulated mortgage contract, unless the regulated mortgage contract is, or
after the variation will be, suitable for that customer . . . ’
A mortgage will be suitable if4, by reference to facts disclosed by the customer
or other relevant facts of which the bank should be aware, there are reasonable
grounds to conclude the mortgage
(a) is affordable5;
(b) appropriate to the needs and circumstances of the customer6; and
(c) is the most suitable product of those within the scope of the service
provided to the customer.
There are limited illustrations of this test in case law; confined to the case of
Emptage v Financial Services Compensation Scheme7 where the FSCS conceded
that there had been a breach of these rules in recommending an unsuitable
interest-only re-mortgage, by reason of the fact there were no reasonable
grounds to conclude the mortgage was affordable, as repayment of the principal
was dependent on the success of an uncertain investment in Spanish property.
The Court held that the bad advice related to a failure to properly assess
affordability because the borrower would have no prospect of repayment if the
investment failed, and this exposed the borrower to the risk of losing the
mortgaged property, a foreseeable risk for which the borrower was entitled to
compensation notwithstanding an investment in Spanish property is unregu-
lated. No recommendation may be made if there is no suitable product within
the scope of the service8. Where more than one product is suitable, the bank
must recommend the least expensive product for the customer, focusing on any
pricing elements (eg interest rate, monthly payment, fees) identified by the
customer as important9.
Where dealing with a customer consolidating existing debts, the bank is
required to consider the extra cost of extending the period over which a debt is
to be repaid, whether it is appropriate to secure a previously unsecured debt,
and whether, where there are known payments difficulties, it would be more
appropriate to negotiate arrangements with creditors rather than taking out a
new mortgage10.
1
MCOB 4.1.3R. Such variations may include adding or removing a party, taking out a further
advance, or switching all or part of the mortgage to a different interest rate. Specific guidance in
MCOB 4.1.8G provides that the removal of a deceased party is not a variation.
2
MCOB 4.2.1G(2)(b).
3
MCOB 4.7.2R.
4
MCOB 4.7.4R(1).
5
Having regard to the matters set out in MCOB 4.7.7E.
6
Having regard to the matters set out in MCOB 4.7.11E.
7
[2013] EWCA Civ 729.
8
MCOB 4.7.4R(2).
9
MCOB 4.7.13E.
10
MCOB 4.7.6R.

(b) MCOB: Post 26 April 2014 and MCD

29.31 The above regime applied to 26 April 2014, before being replaced by an
extensively amended set of rules contained in a new MCOB 4.7A and 11, and

30
 Advice on Mortgages: MCOB 29.31

with MCOB 4.3 being removed. Many further alterations have been made to
the MCOB regime as a result of the implementation of the MCD.
However at the centre of the new rules at various stages, the principal obliga-
tion of suitability remains the same1, save that the assessment of affordability
becomes an obligation of the lender contained in MCOB 11.6 under an
overarching ‘responsible lending’ rule2 in terms:
‘ . . . before entering into, or agreeing to vary, a regulated mortgage contract or
home purchase plan, a firm must assess whether the customer (and any guarantor of
the customer’s obligations under the regulated mortgage contract or home purchase
plan) will be able to pay the sums due; and . . . the firm must not enter into the
transaction . . . unless it can demonstrate that the new or varied regulated mort-
gage contract or home purchase plan is affordable for the customer (and any
guarantor).’
However, where the bank is advising on its own products, there is no practical
change as the obligation was and remains on the bank. MCOB 11 now contains
a more prescriptive regime for assessing affordability under the responsible
lending rule. A further change to the MCOB regime is that all spoken or other
‘interactive’ sales of mortgages, and debt consolidation mortgages, must be
advised sales. Such an interactive sale may be spoken face to face or take place
across all sorts of interactive media, such as SMS, email and communications by
social media3.
This is subject to certain limited exceptions4, for example allowing spoken or
other interactive sales on an execution-only basis in the case of a high net worth
mortgage customer, professional customers or where the loan is solely for a
business purpose5, and the customer has made an informed positive election to
proceed with an execution-only sale6. A further exception is where the customer
has rejected advice and wishes to enter into a different mortgage contract on an
execution-only basis7. However these exceptions do not exempt the lender from
carrying out the affordability assessment in MCOB 11.6.
Interest-only mortgages are also subject to new specific considerations. The
question of affordability is specifically modified8 to require the bank to assess
affordability on a capital and interest repayment basis, even when only interest
has to be paid periodically. Accordingly, in order to sell an interest-only
mortgage there must be a ‘clearly understood and credible’ strategy in place for
repayment of the principal sum borrowed.
As above, the Emptage decision suggests that basing that repayment strategy on
a speculative investment would not be sufficient9. However new guidance and
evidential provisions10 suggest strategies based on
(a) regular savings or investments;
(b) repayment from irregular sources of income (eg bonuses); or
(c) the sale of other assets than the property; may be acceptable; whereas
strategies based on;
(d) selling the mortgaged property, particularly if only viable based on
expected growth in value or if there would be insufficient equity upon
sale to buy a smaller property;
(e) an uncertain inheritance; would not be acceptable and demonstrate a

31
29.31 Advising on Financial Products

failure to assess affordability.

1
New MCOB 4.7A.2R is effectively identical to MCOB 4.7.2R above, and this is expanded upon
by MCOB 4.7A.5R in effectively identical terms to MCOB 4.7.4R above.
2
MCOB 11.6.2R.
3
MCOB 4.8A.7R, MCOB 4.8A.3G.
4
MCOB 4.8A.9R.
5
A ‘high net worth mortgage customer’ is one ‘with an annual net income of no less than
£300,000 or net assets of no less than £3,000,000, or whose obligations are guaranteed by a
person with an income or assets of such amount’. A ‘professional customer’ is one ‘who works
or has recently worked in the home finance sector for at least one year in a professional position,
which requires knowledge of the home finance transactions or home finance services envisaged,
and who the firm reasonably believes to be capable of understanding the risks involved in the
transaction or transactions contemplated’.
6
MCOB 4.8A.14R(4), (5).
7
MCOB 4.8A.12R.
8
MCOB 11.6.41R.
9
This is repeated in MCOB 11.6.41R(3).
10
MCOB 11.6.45G, MCOB 11.6.46E.

32
Chapter 30

RETAIL DERIVATIVES

1 INTRODUCTION 30.1
2 PRINCIPLES OF DERIVATIVES LAW
(a) Derivatives and their structures 30.2
(b) Standard Documentation – The ISDA Master Agreement 30.5
(c) Legal issues in relation to Events of Default 30.6
(d) Capacity and authority 30.10
3 INTEREST RATE HEDGING PRODUCTS 30.12
(a) Types of Interest Rate Hedging Product 30.13
(b) Documentation of IHRPs 30.19
(c) Exit fees 30.20
(d) Regulation of IHRPs 30.21
4 STRUCTURED NOTES 30.23
(a) Types of structured notes 30.24
(b) Regulation of structured notes 30.26
5 CLAIMS IN RESPECT OF RETAIL DERIVATIVES 30.30
(a) Regulatory duties 30.31
(b) Common law duties 30.32
(c) Caselaw 30.33

1 INTRODUCTION TO RETAIL DERIVATIVES

30.1 During the first decade of the twenty-first century the sale and use of
derivatives moved from being the exclusive preserve of sophisticated corporate
clients of investment banks to being a common feature of retail banking, with
increasingly complex products being marketed and sold to individuals and
small businesses. This development brought about many challenges as banks
sometimes struggled to explain complex structures to customers who had often
never entered into any transaction more complicated than a mortgage in the
past. After the financial crisis of 2008 left many customers seriously out of the
money on long-term transactions or holding derivatives in the form of specu-
lative investments whose value had plummeted, it was inevitable that much
legal and regulatory scrutiny would be focused on this developing area. This
chapter outlines the basic legal principles underpinning derivatives law before
introducing two of the most common forms of retail derivatives, namely
interest rate hedging products and structured notes, before finally reviewing a
number of issues that have been considered in the case-law on this topic to date.

2 PRINCIPLES OF DERIVATIVES LAW

(a) Derivatives and their structures

30.2 Derivative contracts have existed for centuries – from the ancient Greeks
trading olive oil futures through the sale of tulip futures in seventeenth century
Holland1. At the risk of over-simplification, the term ‘derivative’ connotes a

1
30.2 Retail Derivatives

financial arrangement whose value is derived from another product or measure

of economic value. The name therefore reflects the concept at the heart of the
derivative – a derived value. The derivation of value does not affect the
independent status of a derivative, however; a derivative is a chose in action and
thus transferable as a bundle of contractual rights in itself. This definition
demonstrates the potential breadth of subject matter to which a derivative can
relate, and over time a wide range of derivative constructs have been developed
in the financial markets such as forwards, swaps, swaptions, caps, floors and
collars.
The basic transactional form from which these structures have developed is the
option: a contractual right to compel a counterparty to make or receive a
payment or deliver an asset. The timing and amount of payment or delivery will
be fixed by the terms of the option. It has been said that there are only three
forms of derivative – the swap, the forward and the option, with all other
derivatives being ‘embroidery, based on these building blocks’2. A swap is in
essence a series of mutual payment or delivery flows between its parties, whilst
a forward (or ‘future’) refers to a contract requiring performance by each party
on a single date in the future.
1
Swann, The Regulation of Derivatives (London, Routledge Cavendish 1995) and James, The
Law of Derivatives (London, LLP 1999).
2
Hudson, The Law of Financial Derivatives, 5th edn, para 1-22.

30.3 Before turning to the detail of the legal considerations, it is worth

contemplating the reasons for entering into derivatives. Whilst there are many
such reasons, in the majority of cases derivatives are used to manage risks (often
called hedging), to create investment opportunities tailored to specific risk and
yield requirements, to provide solutions to tax, accounting or regulatory issues,
to obtain exposure to an asset which is not otherwise available or to do so more
efficiently, securely and confidentially than direct investment in the underlying
asset. It has been an important feature of many of the cases concerning
derivatives which have come before the courts to discern the purpose of entering
into the derivative, as will be discussed below.
30.4 It is misleading to speak of derivatives law; derivatives are, after all,
contracts like any other and most of the case law in relation to them follows
ordinary contractual principles. Nonetheless, the nature of these financial
instruments and the standard form contractual documentation used in relation
to them have given rise to a number of novel issues over recent years. In
addition, the fact that many of the transactions in question will involve at least
one regulated entity raises the question of the extent to which regulatory
obligations can impact upon the parties’ contractual obligations1. This overlap
has arisen particularly in relation to the requirement on regulated entities to
ensure that their communications are fair, clear and not misleading.
1
See eg Lomas v JFB Firth Rixson Inc [2011] 2 BCLC 120 at [53]; BNP Paribas v Wockhardt EU
Operations (Swiss) AG [2009] EWHC 3116 (Comm) at [23]. In BNP Paribas SA v Trattamento
Rifiuti Metropolitani SPA [2018] EWHC 1670 (Comm), Knowles J cited (at [44]) the ‘world-
wide use of ISDA documentation’ as signalling the interest of parties to achieve consistency and
certainty in the context of derivative financing, and approved Briggs J’s suggestion in Lomas
and others v JFB Firth Rixson Inc and others (ISDA intervening) [2010] EWHC 3372 (Ch), at
[53], that, in respect of an ISDA master agreement, ‘[i]t is axiomatic that [it] should, so far as

2
 Principles of Derivatives Law 30.5

possible, be interpreted in a way that serves the objectives of clarity, certainty and predictability
so that the very large number of parties to it should know where they stand’.

(b) Standard documentation – the ISDA master agreement

30.5 Whilst not required to be used, in practice the documentation for deriva-
tives produced by the International Swaps and Derivatives Association (ISDA)
in 1987 and then revised in 1992 and 2002 has become the default contractual
framework for financial derivatives transactions1. In general, the ISDA archi-
tecture is composed of three main types of document: the master agreement; the
schedule; and the confirmation2. The master agreement is a standard form
document which is intended to provide the principal legal structure within
which the parties will conduct their transactions. It is not altered by the parties
save to insert their names. There are two versions of the 2002 master agree-
ment: a domestic version for transactions between parties in the same juris-
diction transacting in the same currency, and a multicurrency version. The latter
contains additional terms dealing with matters such as the use of multiple
offices to enter into transactions, taxes, currency of payment and the appoint-
ment of a service agent for the receipt of notices and legal process3. The
standard governing law and jurisdiction clauses provide for the parties to
choose between English Law and the Commercial Court in London, or New
York Law and the New York District Court, though in September 2013 ISDA
issued its Arbitration Guide which includes the text of a range of model
arbitration clauses4. In an attempt to ensure consistency of approach and
interpretation, ISDA produces a number of supporting materials in relation to
the master agreement, perhaps the most important of which are the definitions
for the various types of derivative and the User’s Guide.
There are two main areas of difference between the 1992 and 2002 master
agreements. The first is that section 6 of the 2002 Form contains only one
method for calculating amounts payable following early termination. The 1992
Form required the calculation of the early termination amount by reference to
either ‘Market Quotation’ or ‘Loss’ (as defined). The 2002 Form abandons
those concepts in favour of a calculation of an early termination amount in the
close-out provisions which may, but is not necessarily required to, be based on
quotations for replacement transactions. Whereas the ‘Market Quotation’
measure under the 1992 Form depended upon actual bid market quotations,
the non-defaulting party under the 2002 Form is entitled to adopt a more
subjective approach which can reflect public price source and internal model-
ling to determine a commercially-reasonable price. The underlying rationale for
the drafting change was to bring about greater flexibility5. The second relates to
the payment of interest. Under the 1992 Form, interest is payable from one
party to the other in various situations at three different rates (the ‘default rate’,
the ‘non-default rate’ and the ‘termination rate’), calculated by reference to the
concept of the cost to one party or the other of funding the relevant amount.
The circumstances in which the 1992 Form requires interest to be paid, and the
rates applicable in each case, are set out in sections 2 and 6. By contrast, the
2002 Form introduces a new section 9(h), which consolidates and updates all
provisions regarding interest and compensation. The same concept of costs of
funding to either party is retained, but section 9 introduces a new basis for
calculating interest by reference to the overnight rate offered by major banks6.

3
30.5 Retail Derivatives

The parties can amend, expand or add detail to the content of the master
agreement using the schedule, which therefore also forms part of the overarch-
ing framework within which individual transactions between the parties will
take place. The schedule is the place where the parties can choose between the
various options presented by the master agreement; specify thresholds relating
to events of default, payment methods, and any other additional terms that they
wish to apply to their relationship. Together, the master agreement and the
schedule provide all of the general terms and conditions necessary to allocate
the risks of the transactions between the parties, but do not contain any details
of specific transactions.
The confirmation is the document which records the essential commercial terms
of each individual transaction undertaken under the master agreement. Thus,
while the master agreement provides for matters such as what will constitute an
event of default and the governing law, the confirmation will shortly set out, for
example, what has been bought or sold and at what price. In practice, a great
deal of business under master agreements is transacted over the telephone or by
email and the confirmation permits the terms agreed to be quickly recorded and
evidenced within the context of the master agreement. The contract is formed
between the parties at the time of the oral or electronic agreement, and the
standard confirmation provides a limited period of time following receipt for
the counterparty to object or seek to amend the record of what has been agreed.
One optional additional element of the ISDA architecture of importance in the
context of over-the-counter (OTC) derivative transactions7 is the credit support
annex, which makes provisions for the collateralisation of exposures between
the parties. The annex contains provisions dealing with the types of collateral
which may be used, how it should be posted and returned and its treatment by
the secured party. On 12 May 2014, ISDA also published the ISDA 2014 Col-
lateral Agreement Negative Interest Protocol, which is designed to provide
certainty about how the payment of interest on posted collateral is calculated in
a negative interest rate environment under ISDA collateral documentation. As
at July 2018, there are over 700 organisations which have publicly confirmed
adherence to the Protocol.
The terms of transactions entered into under the ISDA master agreements fall to
be determined and construed in accordance with ordinary principles of contract
law8. As regards construction, the court is concerned to identify the parties’
intentions by reference to what a reasonable person having all the background
knowledge that would have been available to the parties would have under-
stood them to be using the language in the contract to mean9. The relevant
background to the 2002 ISDA master agreement includes its 1992 iteration, the
applicable User’s Guides10, and the fact that the ISDA master agreement is a
standard form document widely used in international financial markets11. It is
‘axiomatic’ that the ISDA master agreements should ‘so far as possible be
interpreted in a way that achieves the objectives of clarity, certainty and
predictability, so that the very large number of parties using it know where they
stand’12. Whilst the relevant background, so far as common to the various
transactions effected on the 1992 and 2002 Forms and reasonably expected to
be common knowledge among users of those Forms, is admissible, a standard
form is not context-specific and therefore factual matrix peculiar to a particular
transaction has limited, if any, part to play in construing the terms of the master
agreement13. The focus is on the words used14, but particular care is necessary

4
 Principles of Derivatives Law 30.5

not to adopt a restrictive or narrow interpretation which might make the form
inflexible and inappropriate for parties who might commonly be expected to
use it15. Matrix may, of course, be more relevant to the construction of
particular terms of a confirmation. Likewise, the orthodox rules on contractual
rectification apply in equal measure to the ISDA architecture16.
1
ISDA estimates that it is used in over 90% of all such transactions. Referred to in Lomas v JFB
Firth Rixson Inc [2010] EWHC 3372 (Ch); [2011] 2 BCLC 120 at [5].
2
For a general description of the basic framework of the ISDA master agreements, see Lomas and
others v Burlington Loan Management Limited [2016] EWHC 2417 (Ch) at [30]–[31].
3
On notices, in particular, see Greenclose Ltd v National Westminster Bank Plc [2014] EWHC
1156 (Ch), 1 CLC 562, which concerned the proper construction of section 12(a) of
the 1992 ISDA master agreement (Multi Currency-Cross Broder Form) (‘Notices –
Effectiveness’). Andrews J held that section 12 was mandatory. Notice had to be given by the
means prescribed by section 12, unless there had been an amendment by a notice given by the
party pursuant to section 12(b). If the schedule did not provide the information necessary for
service by a prescribed method, then service could only be effected by the methods expressly
permitted by the schedule, unless and until the missing information was either notified under
section 12(b) or inserted by way of formal amendment. However, a notice will still be a notice
even where there is a question over a calculation, or the notice is late, or the notice does not
contain details of the account to which any amount payable must be paid: Lehman Brothers
Special Financing Inc v National Power Corporation [2018] EWHC 487 (Comm) at [42], citing
Videocon Global Limited v Goldman Sachs International [2016] EWCA Civ 130; [2017]
2 All ER (Comm) 800.
4
Parties (particularly those in Asia) have agreed their own, non-standard, arbitration clauses for
some time already: see for example the reference to the LCIA arbitration in respect of a parallel
transaction in the Court of Appeal’s judgment in Standard Chartered Bank v Ceylon Petroleum
[2012] EWCA Civ 1049 at [9] et seq.
5
Lomas and others v Burlington Loan Management Limited [2016] EWHC 2417 (Ch) at [32].
6
The main differences between the 1992 and 2002 Forms are described in detail in Lomas (ibid)
at [32]–[45].
7
Ie customised bi-lateral agreements negotiated privately between two parties and booked
directly with each other, in contrast to standardised, exchange-traded derivatives which are
executed over a centralised trading venue and booked with a central counterparty known as a
clearing house.
8
Eg at Bailey v Barclays Bank Plc [2014] EWHC 2882 (QB) at [62]; Lehman Brothers Special
Financing Inc v National Power Corporation [2018] EWHC 487 (Comm) at [37].
9
Arnold v Britton [2015] UKSC 36; [2015] AC 1619 at [15]; Rainy Sky SA v Kookmin Bank
[2011] UKSC 50, [2012] 1 All ER 1137, [2011] 1 WLR 2900; Wood v Capita Insurance
Services Limited [2017] UKSC 24; [2017] 2 WLR 1095.
10
The State of the Netherlands v Deutsche Bank AG [2018] EWHC 1935 (Comm) at [34];
Lehman Brothers International (Europe) v Lehman Brothers Finance SA [2013] EWCA Civ
188; [2014] 2 BCLC 451 at [52]–[53].
11
Lehman Brothers Special Financing Inc v National Power Corporation [2018] EWHC 487
(Comm) at [39]; Lehman Brothers International (Europe) (in administration) v Lehman
Brothers Finance SA [2013] EWCA Civ 188; [2014] 2 BCLC 451 at [52]–[53]; Videocon
Global v Godman Sachs [2016] EWCA Civ 130; [2017] 2 All ER (Comm) 800 at [2].
12
Re Lehman Brothers International (Europe) (in administration) (No 8) [2016] EWHC 2417
(Ch); [2017] 2 All ER 275 at [48]; Lomas v JFB Firth Rixson Inc and Others [2010] EWHC
3372 (Ch); [2011] 2 BCLC 120 at [53].
13
Re Lehman Brothers International (Europe) (in administration) (No 8) [2016] EWHC 2417
(Ch); [2017] 2 All ER 275 at [48], citing AIB Group (UK) Limited v Martin [2001] UKHL 63;
[2002] 1 All ER (Comm) 209.
14
Re Lehman Brothers International (Europe) (in administration) (No 8) [2016] EWHC 2417
(Ch); [2017] 2 All ER 275 at [48], citing Re Lehman Brothers International (Europe) v Lehman
Brothers Finance SA [2013] EWCA Civ 188; [2014] 2 BCLC 451 at [53] and [88].
15
Re Lehman Brothers International (Europe) (in administration) (No 8) [2016] EWHC 2417
(Ch); [2017] 2 All ER 275 at [48], citing Anthracite Rated Investments (Jersey) Limited v
Lehman Brothers Finance SA (In liq) [2011] EWHC 1822 (Ch) at [115].
16
LSREF III Wright Limited v Millvalley Limited [2016] EWHC 466 (Comm), in particular at
[64] ff.

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30.6 Retail Derivatives

(c) Legal issues in relation to events of default

30.6 A crucial feature of the ISDA master agreement from a practical perspec-
tive is that it expressly provides that it is to be read together with the schedule
and all confirmations under it as a single agreement and that the parties have
relied upon that position in entering into their transactions (section 1(c) of the
2002 Form). This reflects the concept at the core of the master agreement –
achieving netting of payment flows on all transactions between the parties in the
event that it is necessary to terminate those transactions. This is of particular
importance in an insolvency context, where the netting results in a single net
sum which is provable in an insolvency, rather than a requirement to address
payment flows on a transaction by transaction basis.
Under the ISDA master agreement, there are two different routes for the
(overall) contractual relationship to come to an end: events of default and
termination events. In broad terms, events of default are events for which one of
the parties is at fault, whereas termination events are not fault-based but events
which nonetheless warrant the termination of the transactions such as a change
in the organisation of one of the parties or a change in the law or regulatory
system impacting on the transactions. Section 6 of the master agreement
provides the procedure for a party to terminate transactions early if an event of
default or termination event occurs. This part of the master agreement was
substantially altered in the 2002 Form and now focuses on the ascertainment of
a close out amount and an unpaid amount which together are referred to as the
Early Termination Amount; this is the net amount payable from one party to the
other in respect of the terminated transactions. In essence, the parties select a
date on which all outstanding transactions will be deemed to be terminated. On
that valuation date, the calculation agent (usually the seller of the financial
instrument) must calculate the amount payable in relation to each outstanding
transaction, both to date (the unpaid amounts) and in the future (the close out
amount). The close out amount is, broadly speaking, the profit or loss which
would be made on entering into an identical transaction on the early termina-
tion date. The amounts so identified are then set off against each other to leave
one net sum which is required to be paid to settle all of the outstanding
transactions. It has been held that there is a clear distinction in the ISDA master
agreement between, on the one hand, the underlying indebtedness obligation
and the date on which the relevant amount becomes due and, on the other hand,
the payment obligation and the date on which the obligation to pay the relevant
amount arises. The debt obligation in respect of an Early Termination Date
‘arises, or accrues due on, or as at’ the Early Termination Date, and the
obligation to pay the relevant amount arises on the day on which notice of the
amount payable, given in a manner described in section 12 to the address or
number provided in the Schedule, will be deemed effective in accordance with
section 121.
1
Videocon Global Ltd v Goldman Sachs International [2016] EWCA Civ 130; [2017] 2 All ER
(Comm) 800 at [53], [56] and [60] (in respect of the 1992 Form, but equally applicable in
respect of the 2002 Form: Lehman Brothers Special Financing Inc v National Power Corpora-
tion [2018] EWHC 487 (Comm) at [41].

6
 Principles of Derivatives Law 30.7

(i) Calculation agents

30.7 A key designation made in ISDA documentation is the role of calculation
agent. The calculation agent’s function is mainly to calculate the amounts to be
paid between the parties, both in the ordinary course of a transaction and as a
part of the termination procedure. In Socimer International Bank Ltd v Stan-
dard Bank London Ltd1, the Court of Appeal considered the obligations
imposed by law on those exercising roles such as calculation agent. It held that
such persons are bound by ‘concepts of honesty, good faith, and genuineness,
and the need for the absence of arbitrariness, capriciousness, perversity and
irrationality’2. Importantly, it does not include negligence. It is therefore not
generally sufficient in litigation to be able to demonstrate that the calculation
agent acted in a negligent manner, or that its calculation was erroneous. To
succeed in overcoming the determination of a calculation agent, a claimant
must show that it was at least arbitrary, if not made in bad faith. If the
calculation agent fails to perform a calculation, or the calculation performed is
struck down by the court as arbitrary or irrational (for example), the question
of the true valuation is once more at large. In such a case, the court must put
itself in the position of the decision maker and find what the decision maker
would have done, if it had acted in accordance with its contractual obligations.
It is important to emphasise, however, that this does not mean that the court
undertakes an objective valuation – that is not the question. It remains the
decision of the decision maker with its contractual discretion3. The principles
articulated in Socimer were endorsed by the Supreme Court in Braganza v BP
Shipping Limited and another4. The upshot is that, where contractual terms
give one contracting party the power to exercise a discretion or to form an
opinion as to relevant facts, it is not for the court to make that decision for
them. However, where the decision would affect the parties’ rights and obliga-
tions, such that the decision-maker’s discretion entails a conflict of interest,
abuse of the discretionary power will be curtailed by an implied term that the
power should be exercised not only in good faith, but also without being
arbitrary, capricious or irrational (in the sense adopted by public law principles
controlling the decision-making functions of public authorities). It follows that,
where such a term is implied, a decision could be impugned where the decision
is one that no reasonable decision-maker could reach and where the decision-
making process fails to exclude extraneous considerations or to take account of
all obviously relevant ones. But no such term will be implied where the terms of
the agreement expressly control the parties’ exercise of a discretionary power.
This appears to be the case in respect of the non-defaulting party’s power to
determine the Close-Out Amount following early termination, given the ex-
press limitations imposed by section 14 of the 2002 ISDA master agreement (see
below)5.
In West LB v Nomura6, the Court of Appeal emphasised the importance of the
fact that one of the purposes of the valuation discretion is to enable the valuing
party to protect itself from risk. Within the parameters of honesty and ratio-
nality, the discretion permits the valuing party to have regard to danger to itself
from valuing too highly. The court noted, however, that the scope of the
discretion may be affected by whether or not the valuing party is itself in breach
of contract.
A different point was advanced at trial in Kaupthing Singer & Friedlander v
UBS AG7. There, KSF claimed against UBS the sum of $65 million plus interest

7
30.7 Retail Derivatives

which was allegedly owed under a failed foreign exchange transaction executed
under the 1992 ISDA master agreement. UBS defended the claim on the basis
that KSF had defaulted on the trade, sections 6(c) and 6(e)(iv) of the master
agreement entailed the termination of all continuing obligations following a
notice of an Event of Default, the amount payable by the parties after early
termination resulting from an event of default was an amount equal to the
non-defaulting party’s loss, and UBS, as the non-defaulting party, had reason-
ably determined in good faith that it owed KSF $5.116 million, which did not
include the $65 million. KSF sought to argue at trial that the loss calculation by
UBS that omitted the claim for $65 million was, on a true construction of the
master agreement, a nullity, alternatively that a determination that omitted a
termination transaction was, as a matter of law, unreasonable and UBS had in
fact acted unreasonably. Those arguments were only fully articulated in closing
submissions. They were not pleaded. The trial judge (upheld on appeal) refused
permission for KSF to introduce them and decided in UBS’s favour. The proper
construction of section 14 of the 1992 master agreement, which defines the
non-defaulting party’s ‘loss’ as being the Termination Currency Equivalent of
an amount which the non-defaulting party ‘reasonably determines in good faith
to be its total losses and costs’ or gain in connection with the Agreement’, was
left undetermined. However, the authorities now ‘clearly establish’ that, in
considering whether the non-defaulting party has reasonably determined its
‘loss’ under the 1992 master agreement, that party is not required to comply
with an objective standard of care as in a claim for negligence. Instead,
(expressed negatively) the non-defaulting party must simply not arrive at a
determination which no reasonable non-defaulting party could come to: ‘it is
essentially a test of rationality’8.
The position is different in respect of the 2002 ISDA master agreement. The
updated wording in section 14 states that ‘[a]ny Close-out Amount will be
determined by the Determining Party (or its agent) which will act in good faith
and use commercially reasonable procedures in order to produce a commer-
cially reasonable result’. The change in wording from the 1992 Form to the
2002 Form was material. It has been held that this provision imposes two
objective standards9. The first is that the procedures used should be commer-
cially reasonable. The second is that the result produced should be commer-
cially reasonable. This is not the same as the ‘rationality’ threshold applied to
the 1992 Form. Rationality is not the same as reasonableness. Reasonableness
is an external, objective standard applied to the outcome of a person’s thoughts
or intentions. The question is whether a notional hypothetically reasonable
person in his position would have engaged in the way suggested; by contrast, a
test of rationality applies a minimum objective standard to the relevant per-
son’s mental processes10. Both rationality and (wholly objective) reasonableness
allow for a result that falls within a range. Thus, under the 2002 Form, the
concept of reasonableness allows for a number of results that may be commer-
cially reasonable. However, the fact that there is a range does not mean that the
Determining Party under the 2002 Form can simply take the result that suits it
best at one end of the range11. In practice, not only does the shift from
rationality to reasonableness mean that the Determining Party is held to a more
exacting standard, but it might be thought more likely that a court will more
readily undertake the determination exercise itself under the 2002 Form than
the equivalent exercise under its 1992 counterpart12.

8
 Principles of Derivatives Law 30.8

There is also the separate question of whether the Determining Party is entitled
to re-submit an adjusted Close-Out Amount. The position seems to be as
follows13. Once the Determining Party gives notice of the Close-Out Amount,
that is generally irreversible (save by agreement, or in some cases an order of a
court or tribunal). It follows that, if there is an error in the determination, then
(absent agreement), the court or tribunal chosen by the parties will be left to
declare that and to state what the Close-out Amount would have been on a
determination that was not erroneous. If a revised calculation statement is given
by the Determining Party, then this will not affect the validity of the
(irreversible) original determination, but the revised statement may still serve as
evidence in court proceedings to inform the question whether there was an
error, and the question what the Close-Out Amount would have been on a
determination without error. It is theoretically possible that an error is so egre-
gious that a putative determination is not a determination at all within the
meaning of the agreement. However, that is likely to be rare: in the case of
Lehman Brothers Special Financing Inc v National Power Corporation, the
court held that manifest numerical or mathematical error would probably not
suffice, and the determination would still be binding absent agreement or court
intervention14.
1
[2008] EWCA Civ 116; [2008] 1 Lloyd’s Rep 558.
2
See fn 1, at [66] per Rix LJ.
3
Ibid.
4
[2015] UKSC 17; [2015] 1 WLR 1661.
5
Lehman Brothers Special Financing Inc v National Power Corporation [2018] EWHC 487
(Comm) at [65].
6
[2012] EWCA Civ 495.
7
[2016] EWCA Civ 319.
8
Fondazione Enarsarco v Lehman Brothers Finance SA [2015] EWHC 1307 (Ch) at [53].
9
Lehman Brothers International (Europe) (In Administration) v Lehman Brothers Finance SA
[2012] EWHC 1072 (Ch); Lehman Brothers Special Financing Inc v National Power Corpo-
ration [2018] EWHC 487 (Comm) at [81].
10
Hayes v Willoughby [2013] UKSC 17; [2013] 1 WLR 935 at [14].
11
Lehman Brothers Special Financing Inc v National Power Corporation [2018] EWHC 487
(Comm) at [79].
12
Lehman Brothers Special Financing Inc v National Power Corporation [2018] EWHC 487
(Comm) at [81].
13
See, in particular, Lehman Brothers Special Financing Inc v National Power Corporation
[2018] EWHC 487 (Comm) at [51].
14
Lehman Brothers Special Financing Inc v National Power Corporation [2018] EWHC 487
(Comm) at [56], citing Lehman Brothers Finance SA v SAL Oppenheim Jr & Cie KGAA [2014]
EWHC 2627 (Comm) and Clark v Nomura International [2000] IRLR 766.

(ii) Close-out mechanism is not penal

30.8 In one case, the defaulting party sought to contend that the close out
mechanism under the master agreement was unenforceable by reason of the
doctrine relating to penalties1. The argument advanced by the defaulting party
was essentially that the full Early Termination Amount (which includes the
Close-out Amount in respect of future transactions) is payable in respect of a
range of breaches of greater and lesser severity and which are not breaches of
condition yet have the same consequences, whether the defaulting party has one
or many open transactions and is an amount which cannot be predicted at the
time of entering into the transactions.

9
30.8 Retail Derivatives

Christopher Clarke J resolved the issue by holding that the terms of the ISDA
master agreement made failure to pay an amount a breach of condition, because
the consequences provided for such an event are those which follow from a
breach of condition. This was important since the Close-out Amount is forward
looking and results from the closing out of all future transactions, as opposed to
existing losses as at the date of breach. The Judge added that what the Close-out
Amount provides for is the non-defaulting party’s loss of bargain and thus seeks
to put it into the position it would have been in absent the other party’s breach.
He also identified the importance of the fact that the net payment could be in
either direction – it is not a given that it will be from the defaulting party to the
non-defaulting party – as relevant to his conclusion that there was no prospect
of the defendant succeeding in its argument that the close out mechanism was
penal in effect.
Christopher Clarke J’s decision was rendered at first-instance. But it might be
thought extremely doubtful that any renewed argument that the provisions
relating to an Early Termination Amount are unenforceable as a result of the
penalties doctrine would succeed. Since the Supreme Court’s decision in
Makdessi v Cavendish Square Holdings BV,2 the test is whether the impugned
provision imposes a detriment on the contract-breaker out of all proportion to
any legitimate interest of the innocent party in the enforcement of the primary
obligation. That is an exacting test. The broad effect of the early termination
provisions is to procure, as far as possible but in an accelerated form, the same
economic outcome for the parties as if there had been neither an event of default
nor an early termination. There are obvious commercial justifications for
requiring accelerated payment in case of contractual default, and it will be
difficult to assert that the acceleration of the defaulting party’s payment
obligations by itself imposes any detriment that is out of all proportion to the
innocent party’s interest in enforcing the defaulting party’s primary obligations
under the transactions.
1
BNP Paribas v Wockhardt EU Operations (Swiss) AG [2009] EWHC 3116 (Comm).
2
[2015] UKSC 67; [2016] AC 1172.

(iii) Performance whilst counter-party is in default

30.9 Another aspect of the protection afforded to the non-defaulting party
which has caused practical issues in the case law arises from section 2(a)(iii) of
the master agreement. That section is a condition precedent which relieves the
non-defaulting party from its obligation to make payments under derivatives
transactions in circumstances where there is an event of default or a potential
event of default involving the other party. Courts in England and the
United States have considered two main aspects of this provisions: first, does it
operate only to suspend obligations whilst the default is continuing, or does it
extinguish those obligations entirely? Second, if it is suspensory in nature, does
the suspension continue indefinitely or is there some period after which it ends?
This can be important, since it can potentially give a non-defaulting party an
opportunity to decide tactically whether or not to close out transactions based
upon whether or not they are currently in the money or out of the money.
In its decision in Lomas v JFB Firth Rixson Inc1, the Court of Appeal held that
section 2(a)(iii) was suspensory in effect and that such suspension can be

10
 Principles of Derivatives Law 30.10

indefinite, regardless of the original termination date of the relevant swap

transaction; ie the suspension of the non-defaulting party’s obligation to make
payments or deliveries continues until the event of default is cured or the
non-defaulting party elects to terminate2. The Court’s decision resulted in ISDA
publishing on 19 June 2014 a set of amendments entitling the defaulting party
to submit a notice to the non-defaulting party, establishing a ‘Condition End
Date’. The Condition End serves as a time limit on how long the non-defaulting
party may suspend payment or delivery upon reliance on section 2(a)(iii).
Whilst the basic time limit is 90-days, the amendment permits negotiation of a
different Condition End Date Term. If a new Event of Default or Potential Event
of Default occurs, then the Condition End Date is void (save in very limited
prescribed circumstances), and the default party must submit a new notice
establishing a new Condition End Date3.
1
[2012] EWCA Civ 419.
2
In this latter regard, the Court of Appeal disagreed with the decision below, which had been that
the suspension continued until the event of default was cured or the expiry of the term of the
transaction. In the case of expiry of the term of the transaction, the High Court had held that the
payment obligation was extinguished and the non-defaulting party was released from its
obligation to pay.
3
This amendment broadly aligns the express terms of the ISDA master agreement with the
position which has been adopted in the US courts in relation to section 2(a)(iii), where it has
been held that the non-defaulting party must decide within a reasonable time whether or not to
terminate the contract: In re Lehman Brothers Holdings Inc, Case No 08-13555 et seq (JMP)
(jointly administered).

(iv) Interest
30.10 The parties’ respective entitlements to, and liabilities in respect of,
interest following early termination after a continuing event of default or a
termination event can be substantial. In those circumstances, the non-
defaulting party is entitled to determine the amount to be paid on early
termination, in accordance with sections 6(d) and (e). Section 6(d)(ii) provides
for interest to be paid on the sum calculated as being due from one party to the
other under section 6(e). It is therefore imperative that the non-defaulting party
understands the basis on which interest is calculated. As described above, the
provisions on interest differ as between the 1992 and the 2002 Forms. But both
Forms make heavy use of the concept of ‘the cost (without proof or evidence of
actual cost) to the non-defaulting party (as certified by it) if it were to fund the
relevant amount’. For instance, following the occurrence of an early termina-
tion date, if an ‘unpaid amount’ is due from the defaulting party, interest is
payable under the 1992 Form at the ‘default rate’ from (amongst other dates)
the early termination date. The ‘default rate’ is ‘a rate per annum equal to the
cost (without proof or evidence of any actual cost) to the relevant payee (as
certified by it) if it were to fund or of funding the relevant amount plus 1% per
annum’.
The meaning of the word ‘cost’ in that phrase was addressed by Hildyard J in
Lomas and others v Burlington Loan Management Limited1, on an application
for directions by the administrators of Lehman Brothers International
(Europe). The question arose as to the interest payable on debts owed by LBIE
following close-out of various derivative transactions entered into under the
1992 and 2002 ISDA master agreements. With reference to the definition of

11
30.10 Retail Derivatives

‘default rate’ in the ISDA master agreements (which is the same in both the 1999
and the 2002 Forms), the administrators sought directions as to whether the
‘cost’ to the non-defaulting party could include: (i) the actual or asserted costs
of funding the relevant amount by borrowing that amount; (ii) the actual or
asserted average cost of raising money to fund all of the payee’s assets by
whatever means, including by raising shareholder funding; (iii) the actual or
asserted cost to the payee of funding or carrying on its balance sheet an asset
and/or of any profits and/or losses incurred in relation to the value of that asset,
including any impact on the cost of its borrowings and/or its equity capital in
light of the nature and riskiness of that asset; and/or (iv) the actual or asserted
cost to the relevant payee of funding a claim against LBIE. The answer turned
on the construction of the master agreements. Hildyard J held that the cost to
the relevant payee if it were to fund or of funding the relevant amount is to be
certified by reference to the cost which the relevant payee is or would be
required to pay in borrowing that amount under a loan transaction, whether at
actual cost (if the payee does in fact enter a loan) or a hypothetical cost (where
it does not do so). ‘Cost’ means the price required to be paid in return for
borrowing the funds over the period they are required. It follows that reward
for investment by way of a specified share in profit is not a relevant ‘cost of
funding’; neither, for that reason, is equity funding, the costs or financial
consequences of carrying defaulted receivables on the balance sheet or the costs
of funding a claim against LBIE2. However, the relevant payee has a broad
discretion to certify its cost of funding, and a certificate cannot be impugned
unless it was made irrationally or in bad faith, or the certificate was founded on
a manifest numerical or mathematical error3.
This definition of ‘cost’ undoubtedly involves a narrow construction, which
may cause some surprise for prominent users of the ISDA master agreements.
However, as Hildyard J himself noted, the meaning he ascribed to the concept
of ‘cost’ was not intended to champion a legalistic or restrictive interpretation
in place of the balance between the commercial expectation of flexibility and the
control of rational and good faith certification reflected in the ISDA master
agreement. It was intended to reflect the fact that the governing objective is the
determination of a rate of interest, which connotes borrowing. Interest is
perhaps an imperfect proxy for opportunity costs, which may fail to reflect all
of the costs incurred by the defaulting party’s failure to pay. But ‘it is a
commercially as well as legally accepted proxy, and its adoption here is
consistent with normal legal and commercial expectation’4.
1
[2016] EWHC 2417 (Ch).
2
Lomas and others v Burlington Loan Management Limited [2016] EWHC 2417 (Ch) at [147].
3
In the Matter of Lehman Brothers International (Europe) (In Administration) [2018] EWHC
1980 (Ch) at [34], citing Re Lehman Brothers International (Europe) (No 6) (Waterfall IIC)
[2017] Bus LR 1475 at [207].
4
At [142].

(d) Capacity and authority

30.11 Another area which has given rise to a considerable body of case law
over a number of years is the authority and capacity of the parties to enter into
the transactions. Whilst the principles for resolving these questions are derived
from general company law and the law of agency, the derivatives context

12
 Principles of Derivatives Law 30.12

sometimes requires a close understanding of the substance of the relevant

derivative itself in order to determine the application of those principles.
Beginning with the landmark decision in Hazell v Hammersmith and Ful-
ham LBC1, where the House of Lords held that interest rate swap agreements
entered into by local authorities were ultra vires and void because they exceeded
the authorities’ borrowing powers under the Local Government Act 1972, the
courts have had occasion to consider many different aspects of such transac-
tions. Most recently, the Court of Appeal in Standard Chartered Bank v Ceylon
Petroleum Corporation2 emphasised that the Hazell decision that speculative
derivative transactions created questions of lack of capacity, was based upon its
own facts and was not a statement of general law. The Court of Appeal rejected
the contention that the categorisation of a transaction as speculative or hedging
is purely an objective exercise, but held that this was not a decisive issue in any
event as the question of capacity was to be judged by reference to the legislation
under which Ceylon Petroleum Corporation had been established. The Court
recognised that if cases were to be decided upon the basis of whether a
transaction was more or less speculative, that would give rise to enormous
practical problems, in particular because the counterparty will not know on
which side of the line a transaction falls; a transaction which appears on its face
to be speculative may well be justified hedging by reference to other consider-
ations facing the company, of which the counterpart may know nothing3.
According to the Court, ‘The question is whether in anticipation, and not in
retrospect, these transactions were ordinarily part of, ancillary or conducive to,
the business of a commercial, if public, corporation’4.
1
[1992] 2 AC 1.
2
[2012] EWCA Civ 1049.
3
At [36].
4
At [40]. See also Credit Suisse International v Stichting Vestia Groep [2014] EWHC 3103
(Comm) at [214] per Andrew Smith J: ‘Mr Howe submitted that the distinction that Vestia
draw between transactions that ‘genuinely constituted hedges’ and speculation is a false one. I
accept that, if not false, it is certainly an elusive one, and to my mind it did not prove to be a
useful one . . . It tended to distract from the important question, which is whether the
contracts comprising the disputed transactions were within Vestia’s objects’.

30.12 It is also worth noting in the retail derivatives context the importance of
the representations made in the ISDA standard documentation from the buyer
to the seller, particularly as regards the status of communications made by the
seller during the sales process. These may give rise to a contractual estoppel that
prevents the parties from arguing to the contrary and/or provide evidence as to
the nature of the relationship1. Declaratory relief is a legitimate way of realising
a contractual estoppel where a defendant may deny the truth of the represen-
tations made in the ISDA master agreement2. But the benefits of contractual
estoppel may be somewhat limited. There are two key points. First, it has been
held that the representations in section 3(a) of the 2002 ISDA master agreement
cannot contractually estop a party from asserting that transactions entered into
pursuant to the master agreement were ultra vires and therefore invalid, even
though section 3 provides that the representations in the master agreement are
deemed repeated on each date that a transaction is executed3. The section 3
representations are repeated (or deemed to be repeated) when a party ‘enter[s]
into’ a new transaction. If the transactions themselves are ultra vires, then the
representations in section 3(a) cannot be repeated (or deemed to be repeated),

13
30.12 Retail Derivatives

because the ultra vires nature of those transactions means that no new transac-
tions are entered into4. Further, the provisions in section 3(a) of the master
agreement concern the position when the master agreement is made: they are
representations that go to the parties’ capacity to enter into and act in relation
to the master agreement, and not their capacity to enter into and act in respect
of future transactions made under it5. It follows that those representations
cannot form the basis of a contractual estoppel as to the capacity of the parties
to execute trades under the master agreement. However, in Credit Suisse
International v Stichting Vestia Groep6, Andrew Smith J held that various
‘Additional Representations’ made in the Schedule to the master agreement
were, on their proper construction, contractual undertakings as to future
performance which could found a contractual estoppel as to the parties’
capacity to execute new transactions7. Even if they did not generate a contrac-
tual estoppel, then a breach of the ‘Additional Representations’ would have
given rise to an actionable claim for damages in any event8. Accordingly, with
careful drafting, it ought to be possible to mitigate the risk of incapacity
concerns by incorporating future-looking contractual undertakings into the
Schedule to the master agreement, as envisaged by section 3.
Second, questions of contractual estoppel must now be considered in light of
the Court of Appeal’s decision in First Tower Trustees Limited v CDS (Super-
stores International) Limited9. That case concerned the extent to which statu-
tory controls on exclusions and limitations of liability (particularly under the
Unfair Contract Terms Act 1977 and section 3 of the Misrepresentation Act
1967) applied to so-called ‘basis clauses’; clauses by which the parties agree the
basis on which they are dealing, including whether they have relied upon any
pre-contractual representations. A line of authority has held that such
clauses may contractually estop parties from denying the state of affairs
expressed in the basis clause10.
But the law had become somewhat confused about whether such clauses are
subject to the reasonableness test under section 11 of the 1977 Act and, if so, in
what circumstances. In First Tower Trustees, Lewison LJ clarified that the
applicability of the 1977 and 1967 Acts is not only a question of construing the
clause in question: whether a clause falls within the purview of those Acts also
depends upon construing the statutory language. It follows that the parties may
agree that, for instance, they have not relied upon any pre-contractual repre-
sentations in entering into a contract, which may give rise to a contractual
estoppel, but this does not mean that the clause is free from statutory interfer-
ence, because, as a matter of construction of the 1977 Act, the clause might
nonetheless constitute an exclusion clause11. The distinction is between those
clauses that define the parties’ primary obligations under the contract, and
those that seek to exclude or restrict the parties’ liability thereunder. Only the
latter will be subject to the reasonableness test under the 1977 Act. The
difficulty is in deciding on which side of the line any particular clause falls.
In that regard, Lewison LJ suggested that the touchstone for deciding whether
a clause defined the parties’ primary obligations or was, instead, an exclusion
clause was to ask what the position would be in the absence of that clause12.
That is a test of deceptive simplicity. However, it is difficult to see how that test
can operate appropriately where the impugned clause delimits the parties’
primary obligations by prescribing carve-outs to the parties’ general obliga-
tions. In Impact Funding Solutions Ltd v Barrington Support Services Ltd13,

14
 Principles of Derivatives Law 30.12

Lord Toulson (at [36]) gives the example of a decorator who agrees to paint the
outside woodwork of a house ‘except the garage doors’ or ‘with a clear proviso
that the contractor was not obliged to paint the garage doors’. It is obvious that
neither of those carve-outs constitutes an exclusion clause. Yet, they would
appear to fail Lewison LJ’s test: if those carve-outs were absent, then the
contractor would very probably have been obliged to paint the garage doors,
and he would have been liable if he had failed to do so. Lewison LJ clearly
recognised this eventuality,14 but offered no clear solution. It has also been
suggested that the First Tower test does not address the field of implied
representations, where the presence of the clause is an important factor in
deciding what, if any, representations have been made15. The upshot appears to
be that the question is ultimately a matter of construction (and, regrettably,
judicial impression). It is important to recall, however, that, even if a particular
‘basis’ clause is subject to regulation under the 1977 and 1967 Acts, that
clause will still be enforceable in a non-consumer context insofar as it satisfies
the test of reasonableness under section 11 of the 1977 Act. Everything depends
upon the facts; although, in derivative transactions between sophisticated
counterparties, there would often be good grounds for arguing that such
clauses should be upheld as reasonable.
Relatedly, as discussed below, those selling retail derivatives must be authorised
persons under FSMA and are, in prescribed circumstances, subject to the
FCA’s Conduct of Business Rules. COBS 2.1.2R prevents any attempt by an
authorised firm ‘in any communication relating to designated investment
business seeking to (1) exclude or restrict; or (2) rely on any exclusion or
restriction of; any duty or liability it may have to a client under the regulatory
system’. It has been held (obiter) that COBS 2.1.2R goes further than the
1977 Act, in that it ‘prevent[s] a party creating an artificial basis for the
relationship, if the reality is different’16. Thus, a ‘basis’ clause might well satisfy
the test of reasonableness, but could nonetheless be invalidated insofar as it
excludes or restricts the firm’s duties under the UK regulatory system.
These uncertainties are unlikely to matter much, however, insofar as the
representations relied upon in the ISDA master agreements relate to capacity or
authority: those are unlikely to be representations that exclude or restrict
liability and, as such, will not invoke the principles established in First Tower
Trustees or the prohibition imposed by COBS 2.1.2R.
1
See paras 29.4 and 29.5 above.
2
At BNP Paribas SA v Trattamento Rifiuti Metropolitani SPA [2018] EWHC 1670 (Comm) at
[41]; Dexia Crediop SPA v Provincia Di Brescia [2016] EWHC 3261 (Comm) at [81]; Regione
Piemonte v Dexia Credit SPA [2014] EWCA Civ 1298 at [109]; Merrill Lynch v Commune di
Verona [2012] EWHC 1407 (Comm).
3
Credit Suisse International v Stichting Vestia Groep [2014] EWHC 3103 (Comm).
4
See fn 3, at [293].
5
See fn 3, at [295]–[297].
6
[2014] EWHC 3103 (Comm).
7
See fn 3, at [301]–[321].
8
See fn 3, at [322] ff.
9
[2018] EWCA Civ 1396.
10
Eg Peekay Intermark Ltd v Australia and New Zealand Banking Group [2006] 1 CLC 582; IFE
Fund SA v Goldman Sachs International [2006] EWHC 2887 (Comm); Springwell Naviga-
tion Corp v JP Morgan Chase Bank [2010] 2 CLC 705; Raiffeisen Zentralbank Osterreich AG
v The Royal Bank of Scotland plc [2010] EWHC 1392 (Comm); Thornbridge v Barclays Bank
Plc [2015] EWHC 3430 (QB); Impact Funding Solutions Ltd v Barrington Support Services Ltd
[2016] UKSC 57.

15
30.12 Retail Derivatives
11
At [49].
12
At [41].
13
[2016] UKSC 57.
14
At [42]–[43].
15
Jonathan Nash QC, 3 Verulam Buildings, ‘3VB’s Finance Column: A Reasonable Basis’,
Practical Law (2018) uk.practicallaw.com/w-015-7440.
16
Parmer & Parmar v Barclays Bank Plc [2018] EWHC 1027 (Ch) at [132]–[134].

(e) Jurisdiction and governing law

30.13 The ISDA master agreements have not escaped scrutiny in the context of
conflicts of laws. In Banco Santander Totto SA v Companhia De Carris De
Ferro De Lisboa SA and others1 (upheld on appeal2), a Portuguese bank sought
(amongst other things) payment from the defendants pursuant to a series of
exotic IRHPs executed under ISDA master agreements and subject to English
law and jurisdiction. The defendants argued that, although English law gov-
erned the master agreements, the agreements were subject to article 3(3) of the
Rome Convention, which provided that, where all elements relevant to the
situation at the time of the choice of law were connected with one country only,
the choice did not prejudice the application of rules of the law of that country
which could not be derogated from by contract, so that Portuguese mandatory
rules applied to the swaps and gave rise to various defences. Blair J rejected that
contention. He held that, in determining whether, choice of law aside, all the
other elements relevant to the situation are connected with one country only,
the inquiry is not limited to elements that are local to another country, but
‘includes elements that point directly from a purely domestic to an international
situation’. The adoption of ISDA or other standard documentation used
internationally may be relevant, as could be the fact that the transactions are
part of a back-to-back chain involving other countries3. The use of the ISDA
master agreement and the fact of routine back-to-back contracts executed
outside of the local jurisdiction have subsequently been held to be ‘enough on
[their] own to demonstrate an international and relevant element in the situa-
tion such that it is impossible to say that ‘all elements (other than the choice of
law) relevant to the situation’ are located in a country other than England’4.
Further, in determining the applicability of Article 3(3) of the Rome Conven-
tion, it is misplaced to undertake a detailed factual comparison of the case-law.
It should be possible for parties to swap contracts to know where they are in
relation to Article 3(3) without recourse to such detailed comparisons and, once
an international element comes into the picture, Article 3(3) with its reference to
mandatory rules should have no application5. Accordingly, it will be extremely
difficult for a party to oust the choice of law provisions in the ISDA master
agreements by appealing to Article 3(3) of the Rome Convention, or Article
3(3) of its successor, the Rome I Regulation6.
As described above, section 13 of the ISDA master agreement provides that,
with respect to any suit, action or proceedings relating to that agreement, each
party irrevocably submits to the jurisdiction of the English courts, if the
agreement is expressed to be governed by English law, or to the non-exclusive
jurisdiction of the New York courts if the agreement is expressed to be governed
by the law of the State of New York. Insofar as English law is prescribed in the
Schedule as the governing law, then section 13 constitutes an exclusive juris-
diction clause in favour of the English Courts within the Convention territories

16
 Interest Rate Hedging Products 30.14

for the purposes of Regulation (EU) No 1215/2012 (the Brussels Recast

Regulation)7. A number of litigants have sought to argue that disputes relating
to transactions effected under ISDA master agreements in fact fall within the
jurisdiction agreements of related contracts. Unsurprisingly, they have been met
with significant judicial resistance. Such arguments are necessarily context-
sensitive and will invariably depend upon the precise wording of the competing
jurisdiction clauses in issue and the surrounding contractual documentation.
However, it has been repeatedly held that declarations tracking the representa-
tions made in the ISDA master agreement involve a ‘suit, action or proceedings
relating to the [ISDA master agreement]’ and accordingly fall within sec-
tion 138. In this context, the court has emphasised that the ‘most powerful point
of context’ is the use of the ISDA documentation and the ISDA jurisdiction
clause within it: where commercial parties use ISDA documentation, they are
unlikely to intend that provisions in that documentation may have one meaning
in one context and another meaning in another context9. The implication seems
to be that parties will be hard-pressed to argue that matters naturally falling
within the plain wording of section 13 should nevertheless be understood to fall
within the purview of a competing jurisdiction agreement, if the effect is to
render the scope of section 13 uncertain and ambulatory. In the context of the
ISDA Master Agreements, the court’s desire for certainty in this area achieves a
laudable aim.
1
[2016] EWHC 465 (Comm).
2
[2017] 1 WLE 1323.
3
At [404], [411], [748]–[749].
4
Dexia Crediop SPA v Comune DI Prato [2017] EWCA Civ 428 at [133].
5
Dexia Crediop SPA v Comune DI Prato [2017] EWCA Civ 428 at [137].
6
No 593/2008 (EC).
7
Dexia Crediop SPA v Privoncia Di Brescia [2016] EWHC 3261 (Comm) at [45].
8
Dexia Crediop SPA v Privoncia Di Brescia [2016] EWHC 3261 (Comm) at [105]–[106]; BNP
Paribas SA v Trattamento Rifiuiti Metropolitani SPA [2018] EWHC 1670 (Comm); Deutsche
Bank AG v Comune Di Savona [2018] EWCA Civ 1740, in particular at [24]–[28].
9
BNP Paribas SA v Trattamento Rifiuiti Metropolitani SPA [2018] EWHC 1670 (Comm) at
[44]–[45].

3 INTEREST RATE HEDGING PRODUCTS

30.14 Interest rate hedging products (‘IRHPs’) are probably the most common
form of retail derivative. Various types of IRHP exist but most are intended to
mitigate the risk associated with borrowing at floating rates based on either the
Bank of England base rate or the London Interbank Offer Rate (LIBOR). The
period 2005 to 2008 saw a boom in both individuals and enterprises entering
into IRHPs. Mindful that the Bank of England base rate had begun to rise
having reached an historic low of 3.5% in 2003, and fearful of a return to the
high base rates of the late 1980 and early 1990s (which peaked at around 15%
in 1990 shortly before the UK joined the Exchange Rate Mechanism), borrow-
ers generally used IRHPs either to fix their interest payments going forward or
at least to limit the extent to which they would suffer from rising rates. As is well
known, however, the global financial crisis prompted the Bank of England to
reduce its base rate to the unprecedented rate of just 0.5%, with LIBOR
following. This left many holders of IRHPs paying interest rates significantly
higher than they would have enjoyed unhedged and, perhaps unsurprisingly,
resulted in a great deal of legal and regulatory scrutiny.

17
30.15 Retail Derivatives

(a) Types of interest rate hedging product

30.15 As OTC derivatives, there is in theory no limit to the parameters that

parties to an IRHP can agree on. The most common forms of IRHPs are swaps,
caps and collars. However, more complicated structures such as callable swaps
and structured collars are not uncommon and (as explained further below) the
latter have attracted particular regulatory focus. In each case the parties must
agree the term of the transaction, the notional amount being hedged and the
observation dates on which the respective rights and liabilities are to be
calculated and any resultant payments made.

(i) Swaps

30.16 An interest rate swap is an exchange of interest payments between

counter-parties on an agreed amount of notional principal for an agreed period
of time. In a typical interest rate swap transaction the customer agrees to make
periodic payments to the bank calculated at a fixed rate on a notional amount
of sterling, in exchange for the bank agreeing to make periodic payments to it
calculated at a floating rate (such as the BoE Base Rate or LIBOR) determined
for each day of the relevant calculation period on the same notional amount. It
should be noted that the swap remains a separate transaction from any lending
that it may be used to hedge – indeed, the bank may well have been uninvolved
in the loan being hedged. Thus, to the extent that the term and notional amount
of the swap do not correspond with the term and amount of the loan, the
customer may find himself either under-hedged or over-hedged. Similarly, the
swap may not provide a perfect hedge if the observation dates on the swap do
not correspond to payment dates of the loan being hedged, or if the floating rate
on the swap is pegged to LIBOR but the underlying lending is pegged to the BoE
Base Rate.

(ii) Caps

30.17 Under a cap, the customer effectively buys protection from the bank
against their exposure to interest rates rising above a specified level. In return
for a promise to pay the customer the difference between the floating rate and
the cap rate, the customer pays a premium at the outset but no further payments
during the lifetime of the cap. Again it is necessary for the parties to agree the
notional amount and the term in advance and the extent to which the cap
hedges relevant lending will depend upon the correlation of the term and
amount of the loan with that of the cap.

(iii) Collars

30.18 A collar is an IRHP that establishes both a maximum rate through a cap
and a minimum rate through a corresponding floor. The customer buys the cap
from the bank and simultaneously sells a floor to the bank. At each observation
date the prevailing floating rate is compared to the cap and the floor rates. If the
floating rate is between the cap and the floor then no payment is made as
between the parties. If the floating rate is above the cap then the customer
receives a payment from the bank corresponding to the difference between the

18
 Interest Rate Hedging Products 30.22

floating rate and the cap. If the floating rate is below the floor level then the
customer makes a payment to the bank corresponding to the difference between
the floating rate and the floor. Depending upon the floor and cap levels chosen
a premium may be payable by one party to the other.

(iv) Callable swaps

30.19 A callable swap operates in a similar manner to a simple swap but the
bank has the right but not the obligation to call or cancel the swap prior to
maturity on a pre-agreed date or dates. The value of this right to the bank
(technically a call option) is normally reflected in a reduced rate of interest
payable by the customer. Typically the bank would exercise its option to call the
swap if on an observation date the prevailing floating rate that the bank was
paying was higher than the fixed rate that it was receiving under the swap.

(v) Structured collars

30.20 Structured collars are transactions which enable a customer to limit

interest rate fluctuations to within a specific range, but which involve arrange-
ments where, if the reference interest rate falls below the bottom of the range,
the interest rate payable by the customer may increase above the bottom of the
range. By way of example, such a structured collar might provide that no
payment would be due from the customer provided that the floating rate
remained between a floor rate of 4% and a cap rate of 7%, but if the floating
rate fell below the floor rate then the customer would be liable to pay the bank
the difference between the floating rate and 5% (sometimes referred to as the
‘reset rate’).

(b) Documentation of IRHPs

30.21 IRHPs are typically documented by means of the ISDA master agree-
ment accompanied by recorded trade calls subsequently documented in Con-
firmations.

(c) Exit fees

30.22 As described above, early termination of a derivative subject to the ISDA
master agreement is likely to involve a termination payment or ‘exit fee’ by one
party to the other. Under an IRHP the method for calculating such exit fee will
be determined by the contractual documentation but, however calculated, the
amount in question will generally represent the cost to the other party of a
transaction entered into with a third party that would have the effect of
preserving for that party the economic benefit of any future payments due under
the transaction. Whether such payment moves from customer to bank or bank
to customer will depend upon the prevailing market sentiment as to the future
movement of interest rates and thus the value of the bank’s position under the
IRHP. It will be readily appreciated that under the simplest of swaps between a
customer paying a fixed rate and the bank paying the floating rate, where the
market view is that the floating rate will remain below the fixed rate for the

19
30.22 Retail Derivatives

remainder of the term of the swap any exit fees will be paid by the customer and
have the potential to be very high. As alluded to at the outset this is the position
that many IRHP holders found themselves in after the BoE Base Rate and
LIBOR fell dramatically in 2008.

(d) Regulation of IRHPs

(i) IRHPs as designated investments

30.23 Whilst, as noted above, there is no conceptual limit on the complexity of

any particular IRHP, such transactions are most likely to be classified for
regulatory purposes as contracts for differences within the meaning of Article
85 of the Financial Services and Markets Act 2000 (Regulated Activities) Order
20011. To the extent that the IRHP also provides for the possibility of its being
called by one side or other, or otherwise involves more complex financial
engineering, it is likely also to incorporate transactional elements that would
fall within the definition of options in Article 83 of the Regulated Activities
Order. As such selling and advising on the sale of IRHPs both constituted
‘designated investment business’ within the meaning of Part II of the Regulated
Activities Order and regulated activities within the meaning of section 22 of the
Financial Services and Markets Act 2000.
1
(a) a contract for differences; or (b) any other contract the purpose or pretended purpose of
which is to secure a profit or avoid a loss by reference to fluctuations in: (i) the value or price of
property of any description; or (ii) an index or other factor designated for that purpose in the
contract.

(ii) Regulatory intervention

30.24 IRHPs have attracted a particularly high level of regulatory scrutiny,
including the imposition of a past business review under which certain banks
were required to review their sales of IRHPs to private/retail customers and
provide any redress due. Particular problems identified by the Regulator
included poor disclosure of exit costs, failure to ascertain the customer’s under-
standing of risk, non-advised sales straying into advice and over-hedging, where
the amount and/or duration did not match the underlying loans. In respect of
the disclosure of exit fees the Regulator has stated that a bank must, ‘in good
time before the sale’, provide its customer with ‘an appropriate, comprehensible
and fair, clear and not misleading disclosure of any potential break costs’.

4 STRUCTURED NOTES
30.25 Structured notes (also known as structured products) are securitised
investment instruments under which, in exchange for a premium, the note
issuer undertakes to make specified payments in the form of coupon and to
return the invested capital on redemption provided, in each case, that specified
conditions are met. The specified conditions are limited only by the imagination
of the structurer and may, for example, relate to the movement of equity indices
or a basket of equities, the correlation between swap rates or the fluctuation of
the oil price. The common feature to all such notes is that they are ‘synthetic’ in
the sense that there is no actual underlying purchase of the reference asset. The
only security that the note purchaser has for the performance of the note

20
 Structured Notes 30.26

issuer’s obligations is the issuer’s creditworthiness and in the event of the

issuer’s insolvency there is no underlying asset upon which the note purchaser
has a direct call. For the same reason the noteholder does not enjoy any of the
rights associated with ownership of the underlying assets such as voting rights,
subscription rights, dividends or interest.
Structured notes are securitised instruments and thus generally tradeable on a
secondary market. This gives them a market value during their term which can
be used to secure borrowing; as a result such notes are commonly used to secure
the borrowing employed to fund their purchase.

(a) Types of structured notes

30.26 The Swiss Structured Products Association identifies four main catego-
ries of structured product.
‘Capital Protection notes’ achieve the economic effect of investing in an
underlying asset whilst providing a degree of protection at maturity on the
capital invested; in return for this protection the growth potential of the
investment is typically limited or capped. So, for example, a capital protection
note linked to the Euro Stoxx 50 index with a term of three years, a participa-
tion rate of 60% and a capital protection level of 100% would permit the
noteholder to enjoy on maturity 60% of any rise in the index without risking
their capital. If during the term of the note the index rose by 10% then the note
holder receives on maturity a redemption amount of 106% of the nominal value
of the note (ie a full return of the capital plus 60% of the 10% rise in the
reference index). If, however, the index fell then on maturity the noteholder
would receive 100% of the nominal value of the note but would not suffer any
downside from the fall in the index.
‘Yield enhancement notes’ permit the holder to enjoy regular coupon in return
for foregoing full participation in the price increases of the underlying index or
asset. The holder also enjoys conditional capital protection on the nominal
value of the note provided that the underlying remains above a certain level
(known as a barrier) of the price at the date of issue (known as the strike price).
So, for example, the holder of a ‘barrier reverse convertible’ note linked to a
single share gives up the potential to participate in the upside movement of the
underlying share price in return for enjoying a high level of coupon. The holder
is not exposed to downward movement of the underlying unless that movement
goes below the barrier level at which point the holder participates (fully, or to a
specified percentage) in the downward movement and thus the risk associated
with the note converts to an equity risk on the underlying. Where such a note is
linked to the performance of several underlying equities, only the underlying
with the weakest performance is taken into account when determining whether
the barrier has been breached, hence the description of such notes as ‘worst of’.
‘Participation notes’ are perhaps simpler in that they allow the holder to
participate in the upward and downward movement of an underlying, both
without protection against downside movement. Any gains will however be
marginally reduced and any losses marginally increased by any fees incorpo-
rated into the product. Such notes allow investors to invest in commodities or
markets that might otherwise be difficult to access. So for example a tracker

21
30.26 Retail Derivatives

certificate for silver would allow the holder to participate at marginal cost in
movements in the price of silver without the inconvenience and larger incidental
costs of making a direct investment.
‘Leverage notes’ permit the holder to invest in a leveraged long position in the
underlying with the potential for leveraged upside along with leveraged expo-
sure to any falls in value. Such products obviously entail greater risk (along with
greater potential upside) than participation notes. Some such notes, for ex-
ample ‘mini-futures’, may include a stop-loss feature under which a decline in
the value of the underlying below a specified level triggers immediate sale of the
notes at the prevailing market price; however, as explained above, sale of the
note is not the same as sale of the underlying so the sale value of the note when
the stop loss level is reached may be substantially below the corresponding
value of the underlying.
30.27 Even at this generic level, it may be seen that structured notes can involve
widely varying degrees of risk and reward, along with technical jargon. In
addition to the risks associated with the underlying, the noteholder is also
exposed to the credit risk of the issuer, liquidity risk (namely the risk associated
with such notes being difficult to sell in the secondary market) and the risk
associated with the fact that the value of such a note on the secondary market
before maturity depends upon market sentiment rather than simply a net asset
value.

(b) Regulation of structured notes

(i) Classification as designated investments

30.28 Depending upon their exact configuration, structured notes are likely to
be classified as combinations of contracts for differences and options. As with
IRHPs, this means that selling and advising on structured notes are regulated
activities under FSMA.

(ii) Classification as transferable securities subject to the Prospectus Rules

30.29 In addition, a structured note is likely to fulfil the definition of ‘transfer-

able security’ in section 102A of FSMA (which itself cross-refers to the defini-
tion thereof in Article 4(1)(18) of the Markets in Financial Instruments Direc-
tive 2004/39/EC), being securities ‘giving rise to a cash settlement determined
by reference to transferable securities, currencies, interest rates or yields,
commodities or other indices or measures’. As such any offer of structured notes
to the public which falls within the definition of ‘offer of transferable securities
to the public’ in section 102B of FSMA and is not an exempt offer within the
meaning of section 86, will attract the requirement in section 85 for the person
making such offer (which is not necessarily just the issuer) to make available
before such offer a prospectus that has been approved by the FCA or the
appropriate authority in another member state of the European Union.

(iii) Regulatory intervention

30.30 The Regulator has produced a considerable amount of regulatory guid-

ance relevant to issuers and structurers of and advisers on structured notes1.

22
 Claims in Respect of Retail Derivatives 30.33

This guidance has particularly emphasised the need for clear explanations of the
mechanics of such products (including issues such as counterparty risk and the
extent to which capital is put at risk), the onus on advisers properly to analyse
customers’ needs and circumstances, and the responsibility on structurers and
issuers to conduct due diligence on credit providers and to provide adequate
information both to distributors and customers.
1
‘Fair, clear and not misleading—review of the quality of financial promotions in the structured
investments products marketplace’; ‘Treating customers fairly—structured investment prod-
ucts’ and ‘Quality of advice on structured investment products—The findings of a review of
advice given to consumers to invest in structured investment products backed by Lehman
Brothers from November 2007 to August 2008’.

5 CLAIMS IN RESPECT OF RETAIL DERIVATIVES

30.31 As outlined above, advising on and selling retail derivatives is an
increasingly tightly regulated area of financial services. Holders of retail deriva-
tives who have suffered a loss arising from such investments are likely to
advance claims based upon breaches of relevant regulatory duties as well as
breach of the common law duty of care and misrepresentation.

(a) Regulatory duties

(i) Duties under COBS

30.32 First and foremost, those advising on and selling retail derivatives
including IRHPs and structured notes must be authorised persons under FSMA
and are subject to the FCA’s Conduct of Business Rules (‘COBS’) whenever
dealing as such with clients. Of particular relevance to claims in relation to
retail derivatives are likely to be COBS 2.2.1R (a duty to provide appropriate
information to the customer in a comprehensible form), COBS 4.2.1R (a duty
to communicate with customers in a way which is clear, fair and not
misleading), COBS 9.2.1R (a duty to take reasonable steps to ensure that any
recommendation is suitable for the customer in that it meets the custom-
er’s investment objectives, the customer is financially able to bear the risks
involved and the customer has the necessary knowledge and experience to
understand the risks involved) and COBS 14.3.2R (a duty to provide a descrip-
tion of the nature and risks of any relevant investment to the customer). Such
investor protection provisions derive from and implement the European Mar-
kets in Financial Instruments Directive1 (MiFID).
1
No 2004/39/EC.

30.33 COBS 9.2.1R requires a firm advising a client in respect of a retail

derivative to consider the suitability of an investment by reference to the
customer’s investment objectives. However, it should be remembered that such
objectives may develop in an iterative process during the course of a relation-
ship and are unlikely to be set in stone simply by the completion of account
opening documents indicating in broad terms the investment objectives for an
investment account. It has been held that the client remains ‘the master of the
account’ and that ‘the investment objectives are his servant and must be adapted
to meet the client’s trading decisions’1. Moreover, it has been held that there is

23
30.33 Retail Derivatives

nothing intrinsically wrong with a private banker using persuasive techniques

to induce a client to take risks the client would not take but for the bank-
er’s powers of persuasion, provided the client can afford to take the risks and
shows himself willing to take them, and provided the risks are not so high as to
be foolhardy2.
1
Valse Holdings SA v Merrill Lynch [2004] EWHC 2471 (Comm) per Morrison J.
2
Kerr J in O’Hare v Coutts [2016] EWHC 2224 (QB).

30.34 COBS 9.2.1R also requires a firm to consider whether a customer has the
necessary experience and knowledge in order to understand the risks involved
in a transaction. The level of understanding required of the customer has been
considered in a number of cases involving structured products where a compre-
hensive understanding of all of the risks involved in the particular structure
would require a level of expertise reserved only to specialist technicians or
‘quants’. It has been held sufficient for the customer to understand ‘the essential
features’ or ‘basic structure’ of such transaction as set out in the termsheet and,
where such note involves the risk of barriers being breached, to have a ‘loose
sense’ of the risk of a barrier breach1.
1
Magdy Zeid v Credit Suisse [2011] EWHC 2422 (Comm) per Teare J at 53 to 56.

30.35 Whilst the suitability requirements in COBS require reasonable steps to

be taken, if an investment is in fact suitable for the customer it does not matter
if there have been failings in the process1. Similarly, it has been held that if the
relevant investment was suitable then it adds nothing to enquire whether the
adviser’s approach to obtaining and recording information and classification
was adequate or not2. Even where unsuitable advice has been given, a claim may
fail where the customer did not in fact rely upon such advice and instead relied
upon their own judgment3.
Where losses do arise from investments purchased as a result of unsuitable
advice, a claim may also fail or be reduced where the customer has failed to take
reasonable steps to mitigate their loss.The reasonableness of steps taken in
mitigation is a question of fact, as demonstrated by two contrasting outcomes
arising from the liquidation of similar leveraged portfolios of structured notes
by the same bank at the same time (October 2008) following the relevant
customers’ refusal to meet margin calls. In Al Sulaiman v Credit Suisse Securi-
ties (Europe) Ltd [2013] EWHC 400 (Comm) Cooke J described the custom-
er’s refusal to meet a margin call as ‘utterly nonsensical’ and held that even if
advice tendered to a customer had been unsuitable, it was not causative of her
loss because that arose from her unreasonable refusal to provide further
margin. By contrast, in Abdullah v Credit Suisse (UK) Ltd [2017] EWHC 3016
(Comm) Andrew Baker J found that the claimants’ decision not to meet a
margin call was ‘a reasonable view to form, even if it would also have been
reasonable to form the view that the margin call should be met and the account
kept alive’ [236].
1
Magdy Zeid v Credit Suisse [2013] EWCA Civ 14 at 79-82 and Al Sulaiman v Credit Suisse
Securities (Europe) Ltd and another [2013] 1 All ER (Comm) 1105 at 19.
2
Magdy Zeid v Credit Suisse [2011] EWHC 2422 (Comm) per Teare J at 99.
3
Magdy Zeid v Credit Suisse [2011] EWHC 2422 (Comm).

24
 Claims in Respect of Retail Derivatives 30.37

30.36 COBS 14.3.2R requires an adviser to provide a description of the nature

and risks of any relevant investment to the customer. It has been held1 that a
duty to explain risks under the COBS Rules is not governed by the Bolam test
– ie by reference to a responsible body of opinion with the profession – because
there is little consensus in the industry as to how the treatment of risk appetite
should be managed by an advisor. Instead, an analogy may be drawn with the
duty of medical advisers as found by the Supreme Court in the Montgomery v
Lanarkshire Health Board [2015] AC 1430, namely: ‘to take reasonable care to
ensure that the patient is aware of any material risks involved in any recom-
mended treatment, and of any reasonable alternative or variant treatments’
[82].
Those risks are, of course, the risks that were reasonably apparent at the time of
sale. In the context of IRHPs, it has been held (obiter) that an adviser would not
have been in breach of the precursor rule to COBS 14.3.2R (COB 5.4.3R) for
failing in 2005 to say more than that there could be a break cost in the event of
early termination and offering to provide further details on request; there was
no need to allude to the risk that such break cost could be very significant if the
base rate fell as low as it did fall in 2008, because as at 2005 ‘that was very much
a theoretical risk and not one which needed to be positively stated’2. Similarly it
has been held that a banker advising a customer on a structured note issued by
Lehman Brothers was not negligent for failing to focus on the counter-party risk
posed by the issuer when he had no reason at the time of advising to consider
that there was any risk of that entity defaulting3. Predictions or views expressed
by a salesman as to the future movement of particular market indicators may
not in themselves constitute advice4.
1
O’Hare v Coutts and Co [2016] EWHC 2224 (QB).
2
Green and Rowley v Royal Bank of Scotland [2012] EWHC 3661 QB per HHJ Waksman QC
at 87.
3
Camerata Property Inc v Credit Suisse Securities (Europe) Ltd [2011] EWHC 479 (Comm) per
Andrew Smith J at 194 to 196.
4
HHJ Moulder in Thornbridge Limited v Barclays Bank plc [2015] EWHC 3430 (QB) at [98(i)].

(ii) The Rights of Action Regulations

30.37 Whether or not such a customer will have a right of action against the
authorised person under section 138D (formerly section 150) of FSMA will
depend upon whether the person falls within the definition of ‘private person’ in
article 3 of the Financial Services and Markets Act 2000 (Rights of Action)
Regulations 2001. Whilst an individual will almost always fall within such
definition, whether a company or partnership will do so depend upon whether
it was acting ‘in the course of carrying on business of any kind’ when it suffered
the loss in question.
In Titan Steel Wheels Limited v Royal Bank of Scotland1, a case concerning the
sale of two foreign exchange swaps, David Steel J indicated that he favoured a
‘wide’ interpretation of ‘carrying on business of any kind’ found in any event
that the corporate claimant did not fall within the definition of ‘private person’
for the purposes of the Rights of Action Regulations because (a) the swaps in
question amounted to more than pure hedging by the claimant and in fact
represented ‘businesslike speculation’ entered into in the hope of making a
profit2, and (b) the disputed swaps were just two of over forty foreign exchange

25
30.37 Retail Derivatives

products purchased by the claimant over eight years whose scale and frequency
indicated that far from being ‘sporadic and intermittent activity fully outside
the course of [its] business’ such transactions were ‘integral’ to its business.
Despite being arguably obiter, Steel J’s ‘wide’ interpretation of ‘carrying on
business of any kind’ has been followed in a number of subsequent first instance
decisions3. The point has not yet been subject to consideration at appellate level.
Permission to appeal on this question was granted in Bailey v Barclays Bank plc
[2014] EWHC 2882 (QB) ([2015] EWCA Civ 667), but the case settled before
the appeal could be heard.
MiFID itself does not distinguish between natural and non-natural persons and
refers instead to the provision of services to ‘clients’ – namely ‘any natural or
legal person to whom an investment firm provides investment or ancillary
services4’. The Rights of Action Regulations were not amended when MiFID
was implemented. The consequence of the ‘wide’ interpretation of ‘private
person’ is that obligations are placed by the COBS rules upon authorised
persons in respect of their dealings with non-natural persons, but those persons
have no direct means of enforcing such obligations or seeking a remedy for their
breach. The Court was not referred to MiFID in Titan Steel.
MiFID II5, whose provisions applied from 3 January 2018, went further by
requiring in Article 69(2) that ‘Member States shall ensure that mechanisms are
in place to ensure that compensation may be paid or other remedial action be
taken in accordance with national law for any financial loss or damage suffered
as a result of an infringement of this Directive or of Regulation (EU) No
600/2014 [MiFIR]’. Again, no amendment to the Right of Action Regulations
was made. This arguably amounts to a failure properly to implement MiFID II,
or at least a breach of the European principle of ‘effectiveness’ pursuant to
which Member States are required to ensure that the conditions which must be
fulfilled in order to bring a civil action for breach of a right conferred by the EU
legal order must not be arranged in such a way as to make the exercise of those
rights practically impossible6.
1
[2010] EWHC 211 (Comm). See also Camerata Property Inc v Credit Suisse Securities
(Europe) Ltd, [2012] EWHC 7 (Comm) [2012] All ER (D) 99 (Jan)per Flaux J at 89-98, Grant
Estates Ltd v Royal Bank of Scotland plc [2012] CSOH 133 , 2012 Scot (D) 10/8, OH per Lord
Hodge at 49-62 and Bailey v Barclays Bank plc [2014] EWHC 2882 (QB), [2014] All ER (D)
151 (Aug) per HHJ Keyser QC at 44.[2010] EWHC 211 (Comm).
2
As to the often unclear distinction between hedging and speculation in the field of hedging
transactions see also Standard Chartered Bank v Ceylon Petroleum Corporation [2012] EWCA
Civ 1049, referred to above. See Camerata Property Inc v Credit Suisse Securities (Europe) Ltd,
[2012] EWHC 7 (Comm) [2012] All ER (D) 99 (Jan)per Flaux J at 89-98, Grant Estates Ltd v
Royal Bank of Scotland plc [2012] CSOH 133 , 2012 Scot (D) 10/8, OH per Lord Hodge at
49–62 and Bailey v Barclays Bank plc [2014] EWHC 2882 (QB), [2014] All ER (D) 151 (Aug)
per HHJ Keyser QC at 44.
3
As to the often unclear distinction between hedging and speculation in the field of hedging
transactions see also Standard Chartered Bank v Ceylon Petroleum Corporation [2012] EWCA
Civ 1049, referred to above.
4
Directive 2004/39, Article 4(1)(10).
5
No 2014/65/EU.
6
See further Busch, Danny, The Private Law Effect of MiFID: The Genil Case and Beyond
(December 31, 2016). See paragraph 27 of the judgment of the CJEU in Littlewoods Retail and
Others, Case 591/10.

26
 Claims in Respect of Retail Derivatives 30.39

(iii) Contractual incorporation of the COBS rules

30.38 Whilst banks’ terms of business will typically state that they are ‘subject
to’ the COBS Rules, this is unlikely as a matter of construction to be effective to
incorporate such rules as contractual obligations1. Similarly, a clause in an
interest rate swap agreement that ‘applicable regulations’ including ‘the FSA
Rules, the rules of any other relevant regulatory authority, and any applicable
laws and regulations in force from time to time’ has been held to be insufficient
to incorporate such regulations into the contract2.
1
See Bailey at 52 to 55.
2
Flex-E-Vouchers Ltd v Royal Bank of Scotland [2016] EWHC 2604 (QB).

(b) Common law duties

30.39 As a result of the decision in Titan Steel, a significant number of cases
have been brought by corporate entities (and others to whom a regulatory
remedy was not available) asserting the existence of parallel or complementary
duties at common law. This has resulted in two important decisions of the Court
of Appeal.
In Green and Rowley v Royal Bank of Scotland the Court of Appeal held that
where a bank has assumed a duty at common law to advise a customer as to a
designated investment, the content of that duty will in part be informed by
corresponding regulatory duties where they apply. However, where such regu-
latory duties do not apply because a customer does not have a right of action
under section 138D, the common law will not automatically impose a concomi-
tant tortious duty1.
The extent of the common law duty that might be imposed on particular facts
was explored in a line of cases culminating in the decision of the Court of
Appeal in Property Alliance Group v The Royal Bank of Scotland [2018]
EWCA Civ 355. This case principally concerned the bank’s failure to disclose
the possible or probable size of future break costs associated with certain
swaps, including a figure prepared by the bank for its internal purposes known
as the ‘credit limit utilisation’ (CLU). The Court held at first instance, and
the Court of Appeal agreed, that no duty to disclose such figures arose on the
facts and that the bank was not in breach of any general duty by failing to
provide them. Whilst expressed to be a decision on the facts, certain of the facts
relied upon were of general relevance to the banking industry, including that (as
had been established in other cases considering the same point) it was not the
normal practice to disclose the CLU or similar predictions and that the CLU
represented only the subjective view of the particular bank about a range of
matters including the likely future movement of interest rates. Future claimants
seeking to assert a similar duty will, therefore, need to distinguish this decision.
Two key points of wider significance emerge.
First, in the absence of an advisory relationship a bank does not owe a common
law duty to explain the nature or effect of a particular investment product to its
customer. The Court of Appeal specifically deprecated the notion of a ‘mezza-
nine’ or intermediate duty to take reasonable care to ensure that any explana-
tion of financial products given to potential customers was full, accurate and fit

27
30.39 Retail Derivatives

for purpose2. The Court found that the expression ‘mezzanine’ wrongly implied
the existence of a ‘continuous spectrum of duty, stretching from not misleading,
at one end, to full advice, at the other end’. As a result, in a non-advised sale a
bank will typically owe no more than a Hedley Byrne duty not to misstate.
However, the exact scope of such duty is ‘elastic’ and ‘fact sensitive’ and may
encompass a duty to provide ‘further elucidation’, to correct ‘misleading
impressions’ or ‘obvious misunderstandings’ on the part of the customer, and to
answer any questions asked by the customer about the products in respect of
which the bank had chosen to proffer information.
Second, where a bank does offer an explanation or tender advice in respect of an
investment then the extent of any duty to ensure that such explanation or advice
is full and accurate will again depend upon the particular factual context and
the particular transaction or relationship in issue. The claimant must satisfy one
of the traditional tests for establishing a duty of care (see Customs and
Excise Commissioners v Barclays Bank plc [2006] UKHL 28).
1
Green v Royal Bank of Scotland [2013] EWCA Civ 1197, [2014] Bus LR 168.
2
Such a duty had been held to exist in Crestsign Ltd v National Westminster Bank plc and Royal
Bank of Scotland plc [2014] EWHC 3043 (Ch).

(c) Misrepresentation
30.40 Given the potential complexity of certain products, it is unsurprising
that customers who have suffered a loss are quick to assert that the risks
involved in their product were misrepresented to them. However, in practice
such claims have proved difficult to establish for the simple reason that
derivative contracts tend to be extensively documented leaving little scope for
loose language. It has been held that to the extent that a ‘rough and ready’ oral
description of a transaction might otherwise form the basis of a claim in
misrepresentation, such claim is unlikely to be open to a customer who has been
provided with the full contractual documentation and given the opportunity to
read it1.
In Property Alliance Group, see above, the Court rejected an argument that a
description of certain interest rate swaps as ‘hedges’ amounted to a misrepre-
sentation because the potentially substantial cost of breaking the swaps if
interest rates dropped and the bank’s right to cancel them meant that they did
not in fact provide protection against adverse movement in interest rates.
The Court of Appeal upheld the decision at first instance, agreeing that the
purpose of the swaps was to ensure that the claimant would be protected
against increases in interest rates which might otherwise undermine its ability to
pay interest due on the loans so hedged. The same case also considered the
highly fact specific issues arising out of the alleged manipulation of LIBOR – the
interest rate by reference to which the swaps were calibrated. The Court of
Appeal held (reversing the decision at first instance) that proffering the swaps to
customers could amount to an implied representation that the bank was not
manipulating and did not intend to manipulate LIBOR. However, the Court at
first instance had found that there was no evidence of any such manipulation by
the bank and the Court of Appeal was not prepared to interfere with that

28
 Claims in Respect of Retail Derivatives 30.42

finding of fact.
1
Peekay Intermark v Australia & New Zealand Banking Group [2006] EWCA Civ 386 per
Moore-Bick LJ at 52.

(d) Characterisation of derivative contracts

30.41 The proper characterisation of derivative contracts can have an impor-
tant impact upon the application of regulatory requirements and accounting
rules or even their enforceability.
In Morgan Grenfell v Welwyn Hatfield District Council [1995] 1 All ER 1,
Hobhouse J rejected an argument that an interest rate swap was a wagering
contract within the meaning of section 18 of the Gambling Act 1845 and thus
legally unenforceable. Numerous attempts have been made to overturn this
decision but all have failed1 and the Court of Appeal confirmed in WW Property
Investments Ltd v National Westminster Bank [2017] 1 CLC 388 that ‘The
basic principle is that a contract entered into for a genuine commercial purpose,
and which is not a disguise for something else, is not to be treated as a wager.’
A number of so-called ‘embedded swap’ cases have considered the situation
where, in the event of early redemption by the borrower, the terms of a loan
agreement entitle the lender to claim an indemnity for its own costs of
unwinding associated hedging arrangements. Whilst a party entering into a
swap agreement with a customer would be under the various regulatory duties
outlined above, it has been held that a lender is not under either a contractual or
tortious duty to advise its customer as to the potentially onerous effect of a
clause entitling the bank to an indemnity for break costs it itself incurs on
associated hedging2. On the other hand, it has also been held that such a
clause does not entitle the bank to recover the costs of unwinding an internal
swap transaction entered into between two departments of the bank itself3.
1
Nextia Properties v Royal Bank of Scotland [2013] EWHC 3167 (QB), [2014] EWCA Civ 740.
2
Finch v Lloyds TSB Bank Plc [2016] EWHC 1236 (QB).
3
Barnett Waddington Trustees (1980) Ltd v Royal Bank of Scotland Plc [2015] EWHC 2435
(Ch).

(e) The role of expert evidence in claims relating to retail derivatives

30.42 Given the complexity of certain types of derivative, it is unsurprising that
parties to derivatives litigation seek to rely upon expert evidence to some
degree. A number of cases have considered the appropriate limits to such
evidence, although many of these decisions are somewhat fact specific.
Most obviously the relevant expert must have sufficient expertise to give useful
evidence1. CPR Rule 35.1 restricts expert evidence to ‘that which is reasonably
required to resolve the proceedings’; the test is, therefore, whether the evidence
is admissible and reasonably required2.
It would appear that expert evidence in relation to the risks inherent in a
particular derivative is more likely to be permitted the more complex the
derivative. Thus expert evidence has been permitted in relation to the risks of
certain relatively complicated structured notes3 but refused in respect of certain

29
30.42 Retail Derivatives

interest rate swap agreements on the basis that such risks were apparent from
the agreements’ terms and could be explained, so far as necessary, by counsel4.
In cases considering whether the risks in a derivative have been properly
disclosed to the customer in accordance with COBS 14.3.2R, it has been held
that the proper purpose of expert evidence is not to attempt to identify the
‘practice of competent respected professional opinion’ in the field but to
consider whether the investments in question carried ‘material risks’ of which
the customer was not made aware – a ‘material’ risk being one to which a
reasonable person in the customer’s position would be likely to attach signifi-
cance5.
Expert evidence has been permitted in relation to the practice of banks selling
interest rate hedging products6. Expert evidence may also be permissible in
relation to issues of causation and the calculation of damages7.
Expert evidence on purely legal topics such as the correct construction of the
COBS rules is likely to be inadmissible8. On the other hand, expert evidence has
been ‘reluctantly’ permitted on the question as to whether an interest fixing
arrangement under a loan agreement in fact constituted a swap9.
1
Zeid v Credit Suisse [2011] EWHC 716 (Comm).
2
RBS (Rights Issue Litigation), Re [2015] EWHC 3433 (Ch).
3
Zeid v Credit Suisse [2011] EWHC 716 (Comm).
4
London Executive Aviation Ltd v Royal Bank of Scotland Plc [2017] EWHC 1037 (Ch).
5
Kerr J in O’Hare v Coutts [2016] EWHC 2224 (QB) at 199 to 214.
6
St Dominic’s Ltd v Royal Bank of Scotland Plc [2015] EWHC 3822 (QB); Dudding v Royal
Bank of Scotland Plc [2017] EWHC 2207 (Ch).
7
Zeid v Credit Suisse [2011] EWHC 716 (Comm).
8
London Executive Aviation Ltd v Royal Bank of Scotland Plc [2017] EWHC 1037 (Ch).
9
Braintree Leisure Ltd v Nationwide Building Society [2013] EWHC 4282 (QB).

30
Part VIII

INTERFERENCE BY
THIRD PARTIES

1
Chapter 31

ATTACHMENT BY THIRD PARTY

DEBT ORDER

1 THE COURT’S JURISDICTION

(a) Introduction 31.1
(b) Application and form of order 31.3
(c) Effect of order. 31.4
(d) Debt ‘due or accruing due’ 31.7
(e) Trust accounts and nominee accounts 31.14
(f) Joint accounts 31.15
(g) Liquidator’s account 31.16
(h) Debts due to foreign sovereign state 31.17
2 FACTORS AFFECTING THE DISCRETION 31.18
(a) Rights of set-off 31.19
(b) Third party claims 31.20
(c) Insolvency of the judgment debtor 31.21
(d) Hardship payment orders 31.22
3 RECEIVER APPOINTED BY WAY OF EQUITABLE
EXECUTION 31.23

1 THE COURT’S JURISDICTION OVER ATTACHMENT

(a) Introduction

31.1 Although the terminology has since changed, a useful summary of the
nature of attachment proceedings under English law was given by Lord Den-
ning MR in Choice Investments Ltd v Jeromnimon1:
‘The word “garnishee” is derived from the Norman French. It denotes one who is
required to “garnish”, that is, to furnish a creditor with the money to pay off a debt.
A simple instance will suffice. A creditor is owed £100 by a debtor. The debtor does
not pay. The creditor gets judgment against him for the £100. Still the debtor does not
pay. The creditor then discovers that the debtor is a customer of a bank and has £150
at his bank. The creditor can get a “garnishee” order against the bank by which the
bank is required to pay into court or direct to the creditor – out of its customer’s £150
– the £100 which he owes to the creditor.’
There are two steps in the process. The first is a garnishee order nisi. Nisi is
Norman-French. It means “unless”. It is an order upon the bank to pay the £100 to
the judgment creditor or into court within a stated time, unless there is some sufficient
reason why the bank should not do so. Such reason may exist if the bank disputes its
indebtedness to the customer for some reason or other. Or if payment to this creditor
might be unfair to prefer him to other creditors: see Pritchard v Westminster
Bank Ltd2 and Rainbow v Moorgate Properties Ltd3. If no sufficient reason appears,
the garnishee order is made absolute – to pay to the judgment creditor – or into court:
whichever is the more appropriate. On making the payment, the bank gets a good

3
31.1 Attachment

discharge from its indebtedness to its own customer – just as if he himself directed the
bank to pay it. If it is a deposit on seven days’ notice, the order nisi operates as the
notice.
As soon as the garnishee order nisi is served on the bank, it operates as an injunction.
It prevents the bank from paying the money to its customer until the garnishee
order is made absolute, or is discharged, as the case may be.
Attachment proceedings are a species of execution4.
For a great many years, attachment proceedings were governed by procedural
rules which used terms such as ‘garnishee’, ‘order nisi’ and ‘order absolute’. In
2002, the old rules contained in RSC Ord 49 were revoked and replaced by
those set out in CPR Pt 72 entitled ‘Third Party Debt Orders’5, which intro-
duced the present terminology, whereby:
(i) ‘garnishee’ was replaced by ‘third party’;
(ii) ‘order nisi’ was replaced by ‘interim third party debt order’;
(iii) ‘order absolute’ was replaced by ‘final order’; and
(iv) all reference to ‘attachment’ was dropped.
1
[1981] QB 149 at 154–155, [1981] 1 All ER 225 at 226–227, CA.
2
[1969] 1 All ER 999, [1969] 1 WLR 547, CA.
3
[1975] 2 All ER 821, [1975] 1 WLR 788, CA.
4
But note that different procedural rules apply to different methods of enforcement. See for
example the distinction drawn between the power to make a third party debt order and the
issuing of writ of execution: Westacre Investments Inc v The State-Owned Company Yugoim-
port SDPR [2008] EWHC 801 (Comm), [2009] 1 All ER (Comm) 780.
5
See SI 2001/2792, r 6(c), Sch 3.

31.2 Nonetheless, the basic purpose of CPR Pt 72 is the same as that of RSC
Ord 491, namely to provide rules for a judgment creditor to obtain an order for
the payment to him of money which a third party who is within the jurisdiction
owes to the judgment debtor2. The jurisdiction has been enhanced by provisions
as to: (i) the obligations of a bank or building society3 served with an interim
order; (ii) hardship payment orders; and (iii) the effect of a final third party debt
order.
In this chapter, the former terminology is retained in relation to cases decided
under RSC Ord 49 and its predecessors because the judgments in such cases
naturally adopt the terminology of the rules then in force.
1
See Lord Millett in Societe Eram Ltd v Cie Internationale [2003] UKHL 30, [2004] 1 AC 260,
[2003] 3 All ER 465, HL, at [112]: ‘RSC Ord 49 has now been replaced by Part 72 of the Civil
Procedure Rules, which is cast in more modern language. It is common ground that, as the
editorial introduction states, the basic purpose of the rule remains unchanged. Unfortunately all
reference to attachment has been dropped, and there is no longer any indication that the
order has proprietary consequences. The words which formerly created an equitable charge at
the interim stage have been replaced by a power to grant an injunction, which is normally a
personal remedy. The straightforward language of Part 72 is deceptive. Its true nature cannot
easily be understood without a knowledge of its history and antecedents. I do not, with respect,
regard this as an altogether satisfactory state of affairs.’
2
See CPR 72.1(1).
3
‘Bank or building society’ is defined by CPR r 72.1(2) to include any person carrying on a
business in the course of which he lawfully accepts deposits in the United Kingdom.

4
 The Court’s Jurisdiction Over Attachment 31.4

(b) Application and form of order

31.3 The application for an interim third party debt order is normally made on
paper, without a hearing, and without giving notice to any other party. How-
ever, it has been cautioned that if the application is made without notice ‘a clear
and ostensibly uncontentious case should normally be expected’ and that if
there is potential contention the applicant is relied upon to draw to the
court’s attention the points which the respondent may be anticipated to take
(together with the response to such points)1.
By CPR r 72.2(1), the court has power to order the third party to pay to the
judgment creditor (a) the amount of any debt due or accruing due to the
judgment debtor from the third party, or (b) so much of that debt as is sufficient
to satisfy the judgment debt and the judgment creditor’s costs of the applica-
tion.
Since the judgment creditor will often be unaware of the exact amount owed by
the third party to the judgment debtor, Form N349 permits the judgment
creditor to apply for an order which caters for both situations, leaving it to the
bank (as the third party) to disclose to the court and the judgment creditor
within seven days of being served with the order, in respect of each account held
by the judgment debtor, whether the account is in credit, and if so, whether the
balance of the account is sufficient to cover the amount specified in the order, or,
if the balance is less than the amount specified in the order, the amount of the
balance at the date the bank was served with the order: see CPR r 72.6(2)(b),
(c). It has always been necessary to stipulate the amount of the judgment debt
because otherwise the order might inadvertently attach the whole of the
judgment debtor’s balance, no matter what the amount of the debt: see Rogers
v Whiteley2.
If the third party debt order attaches a debt up to a stated sum only, a bank is
free to part with any surplus it may hold on the judgment debtor’s account, and
it cannot later be made to refund any monies paid from that surplus.
1
Merchant International v NAK Naftogaz [2014] EWCA 1603 [30] per Davis LJ.
2
[1892] AC 118.

(c) Effect of order.

(i) Effect of interim order
31.4 The effect of a garnishee order nisi made under the old rules was
explained in Galbraith v Grimshaw and Baxter1, where Farwell LJ said:
‘The effect of the service of a garnishee order nisi in England was thus stated by
Jessel MR in In Re Stanhope Silkstone Collieries Co2: “The attachment or garnishee
order is a mode of enforcing by execution the payment of the debt in the original
action; and the order that the debt be attached and that the garnishee, that is, the
debtor of the original judgment debtor, shall appear to show cause why he should not
pay the debt, does not operate to give the plaintiff in the original action any security
until it is served.” It is plain that Jessel MR means that as soon as the order is served
it does give the judgment creditor some security. It does not, it is true, operate as a
transfer of the property in the debt, but it is an equitable charge on it, and the

5
31.4 Attachment

garnishee cannot pay the debt to any one but the garnishor without incurring the risk
of having to pay it over again to the creditor. That was decided in Rogers v Whiteley3.’
The words in RSC Ord 49 which formerly created an equitable charge at the
interim stage have been replaced in CPR Pt 72 by a power to grant an
injunction4, which is normally a personal remedy.
However, the nature of attachment was explained by Lord Bingham in Societe
Eram Ltd v Cie Internationale5:
‘24. To resolve the issues arising between the judgment creditor and the third party in
this appeal it is in my opinion necessary to return to very basic first principles. A
garnishee or third party debt order is a proprietary remedy which operates by way of
attachment against the property of the judgment debtor. The property of the
judgment debtor so attached is the chose in action represented by the debt of the third
party or garnishee to the judgment debtor. On the making of the interim or nisi
order that chose in action is (as it has been variously put) bound, frozen, attached or
charged in the hands of the third party or garnishee. Subject to any monetary limit
which may be specified in the order, the third party is not entitled to deal with that
chose in action by making payment to the judgment debtor or any other party at his
request. When a final or absolute order is made the third party or garnishee is obliged
(subject to any specified monetary limit) to make payment to the judgment creditor
and not to the judgment debtor, but the debt of the third party to the judgment debtor
is discharged pro tanto.’
It has since been held that the effect of an interim third party debt order is to
create a defeasible charge in favour of the judgment creditor in respect of the
attached debt, and which gives priority over other creditors if it is confirmed
and made final at the later stage6.
1
[1910] 1 KB 339 at 343, per Farwell LJ; affd [1910] AC 508.
2
(1879) 11 Ch D 160.
3
[1892] AC 118.
4
CPR r 72.4(2(b)) permits the Court to direct that the third party must not make any payment
which reduces the amount he owes the judgment debtor to less than the amount specified in the
order.
5
[2003] UKHL 30, [2004] 1 AC 260, [2003] 3 All ER 465, HL.
6
See FG Hemisphere Associates LLC v Congo [2005] EWHC 3103 (QB), applying Societe Eram
Shipping Co Ltd v Compagnie Internationale de Navigation.

(ii) Effect of final order

31.5 CPR r 72.9(1) provides that a final third party debt order is enforceable as
an order to pay money. It follows that, when the order is made final, the third
party himself becomes a judgment debtor to the judgment creditor, and the
judgment creditor has available to him all the remedies available to judgment
creditors generally. Accordingly:
(1) a person who had obtained a final order is entitled to petition for the
winding-up of a third party company on its failure to obey the order1;
(2) a judgment creditor will have rank in priority ahead of the holder of a
floating charge over all the property of the judgment debtor2.
1
Compare under the old RSC Ord 49, which did not have the same effect: Re Combined
Weighing and Advertising Machine Co (1889) 43 Ch D 99, CA. See also Re Steel Wing Co
[1921] 1 Ch 349 at 355; Pritchett v English and Colonial Syndicate [1899] 2 QB 428, CA
(action maintainable on garnishee order leading to petition based upon judgment).

6
 The Court’s Jurisdiction Over Attachment 31.7
2
Compare under the old RSC Ord 49: Norton v Yates [1906] 1 KB 112; Cairney v Back [1906]
2 KB 746; cf Vacuum Oil Co Ltd v Ellis [1914] 1 KB 693, CA.

(iii) Duties of a bank on service of order

31.6 By CPR r 72.6(1), a bank served with an interim third party debt
order must carry out a search to identify all accounts held with it by the
judgment debtor.
The bank must then disclose to the court and the creditor within seven days of
being served with the order, in respect of each account held by the judgment
debtor: (a) the number of the account; (b) whether the account is in credit; and
(c) if the account is in credit, (i) whether the balance of the account is sufficient
to cover the amount specified in the order, (ii) if not, the amount of the balance
at the date on which it was served with the order, and (iii) whether the bank
asserts any right to the money in the account, whether pursuant to a right of
set-off or otherwise, and if so giving details of the grounds of that assertion
(CPR r 72.6(2)).
If the judgment debtor does not hold an account with the bank, or the bank is
unable to comply with the order for any other reason, the bank must inform the
court and the judgment creditor of that fact within seven days of being served
with the order (CPR r 72.6(3)).
If the bank gives notice that it does not owe any money to the judgment debtor,
or that the amount it owes is less than the amount specified in the interim order,
and the judgment creditor wishes to dispute this, the judgment creditor must file
and serve written evidence setting out the grounds on which he disputes the
bank’s case (CPR r 72.8(3)).
The Practice Direction to CPR Pt 72 confirms that a bank is not required to
retain money in, or disclose information about, accounts in the joint names of
the judgment debtor and another person or, if the interim order has been made
against a firm, accounts in the names of individual members of that firm (72
PD.3).

(d) Debt ‘due or accruing due’

(i) Is there a debt at all?

31.7 A third party debt order can only attach a ‘debt due or accruing due’ to the
judgment debtor from the third party. Whether ‘due’ or ‘accruing due’, there
must be a debt.
Credits in respect of uncleared cheques do not create debts in view of the
decision in A L Underwood Ltd v Barclays Bank1 that mere crediting as cash
does not constitute the bank as holder for value. That being the position in
relation to negotiable instruments, it is a fortiori the position in relation to a
cheque crossed ‘account payee’.
In Cohen v Hale, Midland Rly Co, Garnishees2, a garnishee order was made
attaching a debt. At that time the garnishees had given the judgment debtor a
cheque for the amount of the debt. Upon service of the order on the garnishees

7
31.7 Attachment

they stopped payment of the cheque, which had not been presented. It was held
that the effect of the countermand was as if the cheque had never been given;
there was therefore an existing debt capable of being attached, and the gar-
nishee order was effectual.
In Rekstin v Severo Sibirsko Gosudarstvennoe Akcionernoe Obschestro Kom-
severputj and Bank for Russian Trade Ltd3, the bank, on instructions from a
judgment debtor, transferred the balance on its account to the account of the
Trade Delegation of the USSR, but did not advise the Delegation of the transfer.
A garnishee order nisi was served after the transfer was effected, but it was held
that there having been no communication to the Delegation, the instruction was
revocable and the balance came under the attachment of the garnishee order, the
latter operating as a revocation of the instruction.
The mere expectation of a debt is insufficient. In O’Driscoll v Manchester
Insurance Committee4, which concerned fees earned by a doctor but not then
paid, Bankes LJ said:
‘It is well established that “debts owing or accruing” include debts debita in praesenti
solvenda in futuro [see below]. But the distinction must be borne in mind between the
case where there is an existing debt, payment whereof is deferred, and the case where
both the debt and its payment rest in the future. In the former case there is an
attachable debt, in the latter case there is not.’
An entitlement to a share in a residuary estate5 has been held not to amount to
a debt which could be the subject of a third party debt order6.
1
[1924] 1 KB 775, CA. Cf Jones & Co v Coventry [1909] 2 KB 1029. The position may be
different if the customer has the right to draw against uncleared effects: see Fern v Bishop Burns
[1980] LS Gaz R 1181.
2
(1878) 3 QBD 371; but see Elwell v Jackson (1884) Cab & El 362, 1 TLR 61 and affd (1885)
1 TLR 454, CA, in which the cheque had not been presented, so that there was no debt actually
due, nor was there a debt solvendum in futuro, as the cheque was ultimately paid: see also para
31.8.
3
[1933] 1 KB 47; distinguished in Momm v Barclays Bank International Ltd [1977] QB 790,
[1976] All ER 588.
4
[1915] 3 KB 499 at 516, CA.
5
Resulting from an order under s 2 of the Inheritance (Provision for Family and Dependants) Act
1975.
6
Lansforsakringar Bank AB v Wood [2007] EWHC 2419 (QB).

(ii) Meaning of ‘due’ and ‘accruing due’

31.8 The test of ‘debt due’ is whether it is one for which the creditor could
immediately and effectually sue1.
The meaning of ‘debt accruing due’ was explained by Lord Blackburn in Tapp
v Jones2:
‘the meaning of accruing debt is debitum in praesenti solvendum in futuro, but it goes
no further, and it does not comprise anything which may be a debt, however
probable, or however soon it may be a debt.’
Due or accruing due therefore means that while orders can only be made in
respect of an existing debt, they can be made even if the debt is payable in the
future3. The debt must be due or accruing due when the interim third party debt
order is made or served on the debtor; it does not suffice that it is due or

8
 The Court’s Jurisdiction Over Attachment 31.9

accruing due when the final third party debt order is made or at the time of the
hearing of any application for such an order4
It follows from this that monies paid into a bank account after the service of an
interim third party debt order nisi are not attached by it. On this point Webb
v Stenton was cited with approval of the Court of Appeal in Heppenstall v
Jackson and Barclays Bank Ltd5. Lindley LJ in Webb v Stenton said:
‘An accruing debt is a debt not yet actually payable, but a debt which is represented
by an existing obligation.’
Monies represented by a bill of exchange are attachable when the bill matures6.
The court can make a final third party debt order in respect of an order for costs
to be assessed if not agreed, since that gives rise to a debt due or accruing due
within CPR r 72.2(1)7.
1
Glegg v Bromley [1912] 3 KB 474; this sentence was cited by Lord Mance (dissenting, but not
on this point) in Taurus Petroleum v State Oil Marketing Co of the Ministry of Oil (Iraq) [2017]
UKSC 64 [88]; also applied in Hardy Exploration and Production (India) v Government of
India [2018] EWHC 1916 (Comm) [119].
2
(1875) LR 10 QB 591. The same meaning was adopted in Webb v Stenton (1883) 11 QBD 518,
CA.
3
Merchant International Co Ltd v Natsionalna Aktsionerna Kompania Naftogaz Ukrainy
[2014] EWHC 391 (Comm).
4
Heppenstall v Jackson [1939] 1 KB 585, 591–592; Hardy Exploration and Production (India)
v Government of India [2018] EWHC 1916 (Comm) [113].
5
[1939] 1 KB 585, [1939] 2 All ER 10.
6
Hyam v Freeman (1890) 35 Sol Jo 87.
7
Travelers Insurance Co Ltd v Advani (Unreported, 10 May 2013, Andrew Smith J).

(iii) Debts subject to a condition or contingency

31.9 Many debts are not payable either presently or in the future until the
satisfaction of a condition or the occurrence of a contingency1.
In the case of a current account the only condition precedent to withdrawal is
demand and it was held in the Joachimson case2 that:
‘service of the garnishee order nisi is, by operation of law, a sufficient demand to
satisfy any right the banker may have as between himself and his customer to a
demand before payment of moneys standing to the credit of a current account can be
enforced.’
The Court of Appeal accorded to it the same effect as if the demand had been
made by the judgment debtor/customer himself prior to the garnishee order nisi
being applied for.
Prior to the Administration of Justice Act 1956, deposit balances were treated
differently from credit balances as regards attachment proceedings because
deposit balances were often subject to conditions precedent to their with-
drawal, which meant that they were not due or accruing due until the condi-
tions had been fulfilled3.
The position today is governed by s 40 of the Senior Courts Act 1981, which
provides:

9
31.9 Attachment

‘(1) Subject to any order for the time being in force under subsection (4), this
section applies to any deposit account, and any withdrawable share account,
with a deposit-taker.
(2) In determining whether, for the purposes of the jurisdiction of the
High Court to attach debts for the purpose of satisfying judgments or
orders for the payment of money, a sum standing to the credit of a person in
an account to which this section applies is a sum due or accruing to that
person and, as such, attachable in accordance with rules of court, any
condition mentioned in subsection (3) which applies to the account shall be
disregarded.
(3) Those conditions are:
(a) any condition that notice is required before any money or share is
withdrawn;
(b) any condition that a personal application must be made before any
money is withdrawn;
(c) any condition that a deposit book or share-account book must be
produced before any money or share is withdrawn; or
(d) any other prescribed condition . . . ’
By CPR r 72.2(3), in deciding whether money standing to the credit of the
judgment debtor in an account to which s 40 of the Senior Courts Act4 relates
may be made the subject of a third party debt order, any condition applying to
the account that a receipt for money deposited in the account must be produced
before any money is withdrawn is to be disregarded.
A deposit-taking institution is entitled to deduct a prescribed sum, presently
£55,5 towards its administrative and clerical expenses in complying with an
interim third party debt order6. But no such deduction may be made in a case
where, by virtue of ss 183 or 346 of the Insolvency Act 1986 the creditor is not
entitled to retain the benefit of the attachment7.
1
See eg Kier Regional Ltd v City & General (Holborn) Ltd [2008] EWHC 2454 (TCC).
2
Joachimson v Swiss Bank Corpn [1921] 3 KB 110 at 121, per Bankes LJ. See also Bank of
Baroda v Mahomed [1999] 1 Lloyd’s Rep Bank 14, CA.
3
See Re Dillon, Duffin v Duffin (1890) 44 Ch D 76, per Cotton LJ; Atkinson v Bradford Third
Equitable Benefit Building Society (1890) 25 QBD 377 Re Tidd, Tidd v Overell [1893] 3 Ch
154; Cowley v Taylor (1908) 124 LT Jo 569 and Bagley v Winsome and National Provincial
Bank Ltd [1952] 2 QB 236, [1952] 1 All ER 637.
4
Or s 108 of the County Courts Act 1984.
5
Attachment of Debts (Expenses) Order, SI 1996/3098.
6
Supreme Court Act 1981, s 40A(1), as amended by SI 2001/3649 and SI 2002/439.
7
Section 40A(2).

(iv) Flawed assets

31.10 The term ‘flawed asset’ refers to a debt the right to repayment of which
is conditional on the occurrence of some event other than demand. For
example, a parent company may place a deposit with its bank to facilitate a loan
by the bank to its subsidiary. The agreement governing the deposit may contain
a term that the bank is under no obligation to repay unless and save to the
extent that the subsidiary has repaid the loan. The parent company’s asset (the
right to repayment of the deposit) would then be flawed.
In the light of the authorities which led to the 1956 Administration of Justice
Act, a flawed asset arrangement appears to prevent a debt from being ‘due or
accruing due’ within CPR r 72.2 until the occurrence of the event which

10
 The Court’s Jurisdiction Over Attachment 31.12

constitutes the flaw. Such events are unlikely to be within any conditions
prescribed under the Senior Courts Act 1981, s 40(3).
However, in Fraser v Oystertec plc1, the Court seems to have taken the
approach that the existence of a flawing provision, or a prior equitable charge,
goes only to discretion. While that may be correct in relation to a prior charge,
it is submitted that a flawing provision, if still operative, does prevent a debt
being due because the bank’s obligation to repay the debt is conditional on the
due performance of the obligation which gives rise to the flaw.
1
[2004] EWHC 1582 (Ch), [2006] 1 BCLC 491.

(v) Margin payments

31.11 Money deposited as margin is prima facie not attachable until after the
closing and settlement of the transactions in respect of which it was paid. In
Hutt v Shaw1, the judgment debtor, Tassie, was a client of the garnishee, Shaw,
who was a stockbroker. Tassie had deposited with Shaw £150 as cover for
certain speculations in stocks and shares. The judgment creditor, Hutt, served a
garnishee order nisi on Shaw in respect of the £150 at a time when several
transactions were open between Tassie and Shaw. If those transactions had been
immediately closed, Shaw would have owed Tassie £70. It was held by
the Court of Appeal that Hutt had no right to intervene and compel Shaw to
close the transactions, and that until the transactions were closed and settled,
there was no debt owing or accruing under a predecessor to CPR Part 72 (RSC
Ord 45)2.
1
(1887) 3 TLR 354, CA.
2
The rule then in force (Ord XLV) used the expression ‘debt owing or accruing’. The wording
was amended to ‘debt due or accruing due’ in 1967. The amendment appears to have been
stylistic rather than substantive.

(vi) Debt situated outside the jurisdiction

31.12 CPR r 72.1(1) uses the expression ‘ . . . money which a third party
who is within the jurisdiction owes to the judgment debtor’. Hence the third
party must be within the jurisdiction1.
It was for a long time understood that the law required not only that the third
party be within the jurisdiction, but also that the debt be situated and payable
within the jurisdiction. This followed from the decision in Richardson v
Richardson2 that the words in the former Ord XLV ‘any other person is
indebted to the judgment debtor and is within the jurisdiction’ meant ‘is
indebted within the jurisdiction and is within the jurisdiction’. However, in SCF
Finance v Masri (No 3)3 the Court of Appeal said, obiter, that there was no
reason to read in words to the effect that the third party be indebted within the
jurisdiction. The fact that the third party is not indebted within the jurisdiction
goes to discretion, not jurisdiction.
The law has been restored to its former position by the decision of the House of
Lords in Societe Eram Ltd v Cie Internationale4, where the opportunity was
taken to re-examine the consequences of attachment. It was held that as a
matter of principle the English court would not make a garnishee order or third

11
31.12 Attachment

party payment order regarding a debt situated abroad, unless it appeared that
the English order would be recognised under the foreign law as discharging the
liability of the third party.
Lord Bingham, with whom Lords Nicholls, Hobhouse and Millett agreed5,
expressed his view as follows:
‘26. It is not in my opinion open to the court to make an order in a case, such as
the present, where it is clear or appears that the making of the order will not
discharge the debt of the third party or garnishee to the judgment debtor
according to the law which governs that debt. In practical terms it does not
matter very much whether the House rules that the court has no jurisdiction
to make an order in such a case or that the court has a discretion which
should always be exercised against the making of an order in such a case. But
the former seems to me the preferable analysis, since I would not accept that
the court has power to make an order which, if made, would lack what has
been legislatively stipulated to be a necessary consequence of such an order. I
find myself in close agreement with the opinion of Hill J in Richardson v
Richardson [1927] P 228, subject only to the qualification (of little or no
practical importance) that an order may be made relating to a chose in action
sited abroad if it appears that by the law applicable in that situs the English
order would be recognised as discharging pro tanto the liability of the third
party to the judgment debtor. If (contrary to my opinion) the English court
had jurisdiction to make an order in a case such as the present, the objections
to its exercising a discretion to do so would be very strong on grounds of
principle, comity and convenience: it is contrary in principle to compel a
bank to pay out money owed by a customer if its liability to its customer is
not reduced to the same extent; it is inconsistent with the comity owed to the
Hong Kong court to purport to interfere with assets subject to its local
jurisdiction; and the judgment creditor has a straightforward and readily
available means of enforcing its judgment against the assets of the judgment
debtors in Hong Kong.’
Lord Hoffmann, with whom Lords Nicholls, Hobhouse and Millett also
agreed6, stressed the importance of sensitivity to foreign sovereignty as demon-
strated by the court’s approach to the grant of freezing orders7, and arrived at
the following conclusion:
‘59. The conclusion I draw from this survey of principle and authority is that
there are strong reasons of principle for not making a third party debt
order in respect of a foreign debt. I agree with my noble and learned friend,
Lord Millett8, that the application of such principles is not at all the same as
the exercise of a discretion. To that extent, the references to a discretion in
cases like SCF Finance Co Ltd v Masri (No 3) [1987] QB 1028 and
Interpool Ltd v Galani [1988] QB 738 are misleading. On the other hand, a
principle is not the same as a statutory rule restricting the jurisdiction. It may
have to give way to some other overriding principle. But I find it hard to
think what such a principle might be. Until this case there was no reported
instance in which the normal principle had not been applied.’
This analysis leaves as little scope for a third party debt order in relation to a
debt situate abroad as the analysis of Lord Bingham.
In another appeal heard immediately after the Eram appeal, the House of Lords
ruled that where the debt is situate in a state which is party to the Brussels or
Lugano Conventions, the English court has no jurisdiction to make a third

12
 The Court’s Jurisdiction Over Attachment 31.13

party debt order because the Conventions allocate jurisdiction to the state
where the judgment is to be enforced.
Given the clear statements of principle in these cases, earlier decisions9 based on
the Court of Appeal’s judgment in the Masri case cannot safely be relied on as
providing any useful guidance.
As to ascertaining the location (‘situs’) of a debt for these purposes, the principle
is that the situs of the debt is the place where it is properly recoverable or
enforceable, in the sense, not of where execution might be levied in respect of it,
but of the place where the governing law will determine whether or not the debt
has been discharged and where the existence and extent of the debt may be
determined. This may lead to different answers depending on whether the third
party debt has or has not been established by judgment or arbitral award10.
1
As to what constitutes presence within the jurisdiction, see SCF Finance Co Ltd v Marsi (No 3)
[1987] QB 1028, [1987] 1 All ER 194, CA.
2
[1927] P 228.
3
[1987] QB 1028 at 1044, [1987] 1 All ER 194 at 205, CA, citing Swiss Bank Corpn v
Boehmische Industrial Bank [1923] 1 KB 673, CA. See also Interpool Ltd v Galani [1988] QB
738 at 741 D, [1987] 2 All ER 981 at 983j, CA; Deutsche Schachtbau-und Tiefbohrgesell-
schaft GmbH v Ras Al Khaimah National Oil Co [1990] 1 AC 295 at 319F, [1987] 2 All ER
769 at 983j, CA; revsd in part on appeal without affecting this point [1990] 1 AC 295, [1988]
2 All ER 833, HL; Société Eram Shipping Co Ltd v Compagnie Internationale de Navigation
[2001] EWCA Civ 1317, [2001] Lloyd’s Rep 627.
4
[2003] UKHL 30, [2004] 1 AC 260, [2003] 3 All ER 465, HL.
5
At [31], [70] and [113] respectively.
6
Ibid.
7
At [55]–[58].
8
See Lord Millett at [77]–[78]. Lord Millett concluded at [111] that the only relevant question is
whether the foreign court would regard the debt as automatically discharged by the order of the
English court. This is a more rigid view than that of the other Lords.
9
Kuwait Oil Tanker Co SAK v Qabazard [2003] UKHL 31, [2004] 1 AC 300.
10
Hardy Exploration and Production (India) v Government of India [2018] EWHC 1916
(Comm) [82] per Peter MacDonald Eggars QC.

(vii) Debts due in a foreign currency

31.13 In a logical development of the principle established in the Miliangos
case1 that an English court can give judgment in a foreign currency, the Court of
Appeal has held that a debt payable in a foreign currency is attachable in
accordance with the following procedure2:
‘(1) So soon as reasonably practicable after the time of service of the order nisi,
the bank must ascertain, at its then normal buying rate of exchange against
sterling, the amount of the foreign currency balance of the judgment debtor
as would, if converted at that rate, produce an amount equal to the sterling
judgment debt and costs, and that amount of foreign currency as ascertained
must be attached;
(2) So soon as reasonably practicable after service of the order absolute, the
bank shall purchase, at its then normal buying rate of exchange against
sterling, the attached amount of foreign currency, or so much thereof as will
by the application of that rate produce the sterling judgment debt and costs,
and pay the same into court or to the judgment creditor;
(3) In order that the garnishee order absolute should express the obligation of
the bank under the above procedure, the bank should inform the court of the
amount of foreign currency attached and the rate of exchange used by the

13
31.13 Attachment

bank; and, when the order is made absolute, it should order the bank to pay
the sterling equivalent of the foreign currency attached or the amount of the
judgment debt and costs, whichever be the lesser.’

1
Miliangos v George Frank (Textiles) Ltd [1976] AC 443, [1975] 3 All ER 801, HL.
2
Choice Investments Ltd v Jeromnimon [1981] QB 149 at 157C-G, [1981] 1 All ER 225 at
228f-j. For the procedure, in particular, evidence required, for enforcement of a judgment
expressed in a foreign currency by Third Party Debt Order proceedings, see para 23.9.8 of the
Queen’s Bench Guide in Volume 2 of the White Book.

(e) Trust accounts and nominee accounts

31.14 The court has jurisdiction to make a third party debt order even where
the debt is payable to the judgment debtor as trustee, but this is a matter which
the court would be bound to take into account in exercising its discretion, and
normally the order will not be made final1.
In Plunkett v Barclays Bank Ltd2 du Parcq J held that a solicitor’s client account
was attachable though known to be a trust account; that the bank was right in
refusing to part with the balance and that it was its duty to inform the court of
the claim of the person beneficially entitled. In this connection he cited Roberts
v Death3 to the effect that the court ought not to make a final order where there
was reasonable ground for thinking that the money due to the execution
creditor was trust money. He did not think that it was ever intended that the
garnishee should be compelled to adjudicate on conflicting equities. As to the
bank’s obligation, the same view was expressed by Mackinnon LJ in Hirschorn
v Evans4.
The courts have the power to go behind the ostensible ownership of an account,
and would probably exercise it on cogent evidence that the account was in
substance not the account of one of the parties, but of a third party5. In
Harrods Ltd v Tester6, for instance, a garnishee order was served attaching an
account of a woman whose husband supplied all the funds and who signed only
with her husband’s consent. The Court of Appeal held that, on the authority of
Marshal v Crutwell7, there was in the circumstances a resulting trust in favour
of the husband and that the creditors of the wife could not attach the hus-
band’s monies by garnishee process, even though the account stood in her
name.
In AIG Capital Partners Inc v Republic of Kazakhstan (National Bank of
Kazakhstan intervening)8, an attempt was made by the claimant to enforce an
arbitration award against the Republic of Kazakhstan by attaching cash ac-
counts maintained by a third party for (and in the name of) the National Bank
of Kazahkstan. Aikens J discharged an interim third party debt order which had
been made against the third party:
‘31. The fact that Kazakhstan holds the ultimate beneficial interest in the national
fund held by [the third party] on behalf of NBK does not, in my view, mean
that there is a debt due or accruing due to Kazakhstan in respect of those
accounts. Kazakhstan has no contractual rights against [the third party]
either under the global custody agreement or otherwise. There is no
relationship of debtor and creditor between them. The fact that Kazakhstan

14
 The Court’s Jurisdiction Over Attachment 31.15

may, ultimately, have a beneficial interest in the money represented in the

cash accounts cannot, in my view, create such a relationship.’

1
Deutsche Schachtbau- und Tiefbohrgesellschaft GmbH v Shell International
Petroleum Co Ltd [1990] 1 AC 295 at 351C, [1988] 2 All ER 833 at 851g, HL, citing Roberts
v Death (below).
2
[1936] 2 KB 107, [1936] 1 All ER 653; applied in Re a Solicitor [1952] Ch 328, [1952]
1 All ER 133.
3
(1881) 8 QBD 319.
4
[1938] 2 KB 801 at 815, [1938] 3 All ER 491 at 498.
5
Cf Pollock v Garle [1898] 1 Ch 1.
6
[1937] 2 All ER 236.
7
(1875) LR 20 Eq 328.
8
[2005] EWHC 2239 (Comm), [2006] 1 All ER 284, [2006] 1 All ER (Comm) 1. See further
Continental Transfert Technique Ltd v Federal Government of Nigeria [2009] EWHC 2898
(Comm).

(f) Joint accounts

31.15 A current account credit balance in joint names is attachable to answer
a joint debt only, irrespective of the mandate. As Pollock B put it in Beasley v
Roney (speaking with reference to Macdonald v Tacquah Gold Mines Co1)2:
‘That case is a distinct authority to show that the debt owing by a garnishee to a
judgment debtor which can be attached to answer the judgment debt must be a debt
due to the judgment debtor alone, and that when it is only due to him jointly with
another it cannot be attached.’
This had previously been held to be the case in Macdonald v Tacquah Gold
Mines Co3, and was approved by the majority of the Court of Appeal (Slesser
and MacKinnon LJJ, Greer LJ dissenting) in Hirschorn v Evans4.
The liability of partners being joint, to attach a partnership debt the judgment
on which a garnishee order is founded must be against the firm or the individual
partners jointly. A judgment against an individual partner may form the basis of
an attachment of his private account only5. But a judgment against a firm may
serve to attach the private accounts of the partners6. A debt owing to a
partnership is not attachable in an action against a partner in his individual
capacity7.
1
(1884) 13 QBD 535.
2
[1891] 1 QB 509 at 512.
3
(1884) 13 QBD 535.
4
[1938] 2 KB 801, [1938] 3 All ER 491.
5
Fox v Mainwaring, Henn Collins LJ in Chambers (13 June 1891, unreported) following
Macdonald v Tacquah Gold Mines Co (1884) 13 QBD 535, CA.
6
Miller v Mynn (1859) 1 E & E 1075. Note the Practice Direction to CPR Pt 72, which at 72PD.3
sub-paragraph 3.2(2) provides that a bank served with an interim third party debt order made
against a firm is not required to retain money in, or disclose information about accounts in the
names of individual members of that firm.
7
Hoon v Maloff (1964) 42 DLR (2d) 770. See also CPR 72PD.3 and 72PD.3A.

15
31.16 Attachment

(g) Liquidator’s account

31.16 A judgment obtained against a company in liquidation cannot form the
basis for an order attaching the account of the liquidator; the liquidator is the
only person who can sue the bank and there is no relationship of banker and
customer between the bank and the company1.
1
Lancaster Motor Co (London) Ltd v Bremith Ltd, Barclays Bank Ltd, Garnishees [1941] 1 KB
675, [1941] 2 All ER 11. The Court of Appeal expressly dissociated themselves in that case from
the decision of the court in Gerard v Worth of Paris Ltd [1936] 2 All ER 905 in so far as it held
that the creditors of a company could attach an account in the name of the liquidator.

(h) Debts due to foreign sovereign state

31.17 The State Immunity Act 1978, s 13(2)(b) grants a general immunity
from the enforcement jurisdiction of the UK courts to the property of a foreign
sovereign state. This immunity is subject to an exception in s 13(4) in respect of
property which is for the time being in use or intended for commercial purposes.
In Alcom Ltd v Republic of Columbia1, an attempt was made to attach the
credit balance on an account kept by a diplomatic mission with the London
branch of a commercial bank for the purpose of meeting the expenditure of the
day-to-day running of the mission. It was held by the House of Lords that the
language of s 13(4) of the State Immunity Act 1978 was not apt to cover the
credit balance on such an account and the debt was therefore not attachable.
The debt owed is one and indivisible and is not susceptible of anticipatory
dissection into the various uses to which moneys drawn on it might be used in
the future. The judgment creditor has to show that the bank account is
earmarked by the foreign state solely (save for de minimis exceptions) for the
settlement of liabilities incurred in commercial transactions, for example reim-
bursement obligations in respect of letters of credit issued in payment of the
price of goods sold to the state2.
In Servaas Inc v Rafidain Bank3 the Supreme Court dismissed a US judgment
creditor’s appeal against a decision that moneys due to the Republic of Iraq
under a scheme of arrangement relating to the respondent bank were immune
from execution by reason of s 13. The distribution under the scheme of
arrangement had been acquired by Iraq which directed that they be made to a
Development Fund for Iraq. The head of Iraq’s diplomatic mission certified that
the claims had neither been used, nor were intended to be used, for commercial
purposes. The judgment creditor argued that the transactions that gave rise to
the relevant debts were commercial and that Iraq had purchased those debts as
a commercial venture in order to make a profit rather than as an exercise of
sovereign authority. The Supreme Court dismissed the appeal on the basis that
the essential distinction for the purposes of s 13 was between the origin of funds
and the use to which they were put. It had to be shown that the relevant funds
were in use or intended to be used for commercial purposes. It is not enough to
demonstrate merely that the funds related to or arose out of genuinely commer-
cial transactions.
In AIG Capital Partners Inc v Republic of Kazakhstan (National Bank of
Kazakhstan intervening)4, it was held that s 14(4) of the State Immunity Act,
which provides that property of a state’s central bank shall not be regarded as
in use for commercial purposes, reflects Parliament’s intention that the position

16
 Factors Affecting the Discretion 31.19

of a central bank should be dealt with distinctly from any other government or
state department, and that when a central bank acts as guardian and regulator
of the state’s monetary system, it is exercising sovereign authority and not
acting for commercial purposes.
1
[1984] AC 580, [1984] 2 All ER 6, HL.
2
[1984] AC 580 at 606, [1984] 2 All ER 6 at 13b, HL. See also Taurus Petroleum v State Oil
Marketing Co of the Ministry of Oil, Iraq [2015] EWCA Civ 835 [45], [47] and [52].
3
[2012] UKSC 40, [2012] 4 All ER 1081.
4
[2005] EWHC 2239 (Comm), [2006] 1 All ER 284, [2006] 1 All ER (Comm) 1.

2 FACTORS AFFECTING THE DISCRETION

31.18 The general principles governing the exercise of discretion to make any
third party debt order or charging order were summarised by the Court of
Appeal in Roberts Petroleum Ltd v Bernard Kenny Ltd (in liquidation)1. The
exercise of discretion will be heavily dependent on the facts of any particular
case2. Reference has already been made to two matters which may affect the
discretion, namely (1) that the debt is payable outside the jurisdiction, and (2)
that the judgment debtor is or claims to be a trustee. Without attempting to
identify all the factors which may be relevant, the additional factors referred to
below are those which appear most likely to affect bankers.
1
[1982] 1 WLR 301.
2
See also Novoship (UK) Ltd v Vladimir Mikhaylyuk [2014] EWCA Civ 252.

(a) Rights of set-off

31.19 By CPR r 72.6(2)(c)(iii), within 7 days of being served with an interim
third party debt order, a bank must disclose to the court and the creditor
whether it asserts any right to the money in the account, whether by pursuant to
a right of set-off or otherwise, and if so it must give details of that assertion.
The principles governing rights of set-off appear to be as follows:
(1) If no debt is due or accruing due from the judgment debtor to the third
party, an interim order will be made final. This applies even if the debt
attached is payable in the future, so that a right of set-off might arise
against the judgment debtor before the attached debt becomes payable.
In Tapp v Jones1 the garnishee owed the judgment debtor a sum of £590
payable by monthly instalments of £10 each. The garnishee objected
that if the order were made absolute, the judgment creditor would be
given a right greater than that enjoyed by the judgment debtor. Black-
burn J rejected this argument2:
(1) ‘It is obviously just that if a cross debt were due to the garnishee at the date
of the attachment there should be a right of set-off in his favour, and I should
strive hard to give effect to it if I could, though there would be difficulties in
the way. But Mr Williams goes further, and maintains the right to set off debts
accruing after the attachment. For this I see no ground. On the attachment
the thing is absolutely fixed – and there is no clause of mutual credit or
set-off. What would have been wise or just I do not say; but the legislature has
certainly said no such thing as that contended for.’

17
31.19 Attachment

(1) The final two sentences refer to s 63 of the Common Law Procedure Act
1854, substantially re-enacted in RSC Ord 49, rr 1(1) and 4(1), but not
in CPR r 72. Although the rules no longer refer to ‘attachment’3, the
basic purpose of the rule remains unchanged. Tapp v Jones is arguably
inconsistent with the substantial body of authority to the effect that the
judgment creditor must not be put in a better position than the judgment
debtor – see, for example, Sampson v Seaton Rly Co4 and O’Driscoll v
Manchester Insurance Committee5.
(2) If a debt owed by the judgment debtor to the third party (a) is presently
payable, or (b) though payable in the future will accrue due before the
debt attached accrues due, then, provided the two claims are capable of
being set off, an interim order will not be made final. Authority for this
proportion can be found in Hale v Victoria Plumbing Co Ltd, where
Danckwerts LJ said6:
(2) ‘It seems to me to be contrary to justice and sense to order that a garnishee
should pay out money which it appears probably will not be due from him at
all – because no proceedings have been taken by the judgment debtor against
the garnishee. It seems to me contrary to justice that an order should be made
for payment of moneys which on the face of it appear not likely to be due and
which might perhaps be paid away irretrievably to a man or company who is
in trouble.’
(3) If a debt owed by the judgment debtor to the third party, whether
presently due or payable in the future, could only form the basis of a
counterclaim not a set-off, the order will be made final – Stumore v
Campbell & Co7. The rule appears to be a harsh one. In proceedings by
the judgment debtor against the third party, the third party who could
show a seriously arguable counterclaim might persuade the court to stay
any judgment on the debt pending trial of the counterclaim. If the
counterclaim were successful, execution could be levied only for the
balance. This case, like Tapp v Jones, appears to worsen the position of
the third party. Stumore v Campbell could possibly be distinguished if
the third party could adduce good evidence that the judgment debtor
would probably be unable to satisfy a judgment on the third par-
ty’s claim.
(4) If a debt owed by the judgment debtor to the third party accrues due
after the debt attached is or will become payable, the order will be made
final because, if the third party were to discharge his obligation
promptly, no set-off could arise.
1
(1875) LR 10 QB 591.
2
(1875) LR 10 QB 591 at 593.
3
This was criticised by Lord Millett in Societe Eram Ltd v Cie Internationale [2003] UKHL 30,
[2004] 1 AC 260, [2003] 3 All ER 465, HL, at [112].
4
(1875) LR 10 QB 28 at 30.
5
[1915] 3 KB 499 at 517. See also Taurus Petroleum v State Oil Marketing Co of the Ministry
of Oil, Iraq [2017] UKSC 64, at [42]–[46].
6
[1966] 2 QB 746 at 751, [1966] 2 All ER 672 at 673, CA.
7
[1892] 1 QB 314, CA.

18
 Factors Affecting the Discretion 31.21

(b) Third party claims

31.20 By CPR r 72.8(1), if the judgment debtor or the third party knows or
believes that a person other than the judgment debtor has any claim to the
money specified in the interim order, he must file and serve evidence stating his
knowledge of that matter. The procedure under CPR r 72.8(1) probably applies
not only where it is alleged that the legal title to the debt is not vested in the
judgment debtor, but also where it is so vested and the judgment debtor is
alleged to be a trustee or a third party is alleged to be otherwise interested in the
debt1.
A garnishee order may be postponed to a prior equitable assignment2. Curran v
Newpark Cinemas Ltd3 was a case in which the question for decision was
whether there had been a valid prior assignment and whether a garnishee
order was rightly made:
‘ . . . we think it clearly wrong, where the garnishee shows that he has notice of a
prior assignment, to make an order against him unless (sic) he is able to prove strictly
and conclusively that the assignment of which he has notice is a valid assignment.’

1
See Deutsche Schachtbau- und Tiefbohrgesellschaft GmbH v Shell International Petro-
leum Co Ltd [1990] 1 AC 295 at 351D, [1988] 2 All ER 833 at 851g, HL; and see ‘Trust
accounts and nominee accounts’ above.
2
Holt v Heatherfield Trust Ltd [1942] 2 KB 1, [1942] 1 All ER 404. But see Taurus Petroleum
(above) [2017] UKSC 64 at [42] to [46].
3
[1951] 1 All ER 295 at 300, CA. It is suggested that the word ‘unless’ should be ‘if’.

(c) Insolvency of the judgment debtor

31.21 An order for the compulsory winding-up of a company or a resolution of
a company in general meeting for voluntary winding-up is, without more, a
sufficient reason for not making final an interim third party debt order1. This
accords with the Insolvency Act 1986, s 183(1), which provides that where a
creditor has (inter alia) attached any debt due to the company, he is not entitled
to retain the benefit of the attachment unless he has completed the attachment
before the commencement of winding-up. ‘Completed’ means, in the case of
attachment, that there must be receipt of the debt2. Similar provisions apply in
bankruptcy3.
An interim third party debt order ought not to be made final if payment would
mean a preference of the judgment creditor, the judgment debtor being insol-
vent4.
In A Co Ltd v The Republic X5 the creditor obtained a garnishee order nisi
against a special bank account holding funds granted to the judgment debtor by
the Commission of the European Communities for particular purposes.
The Commission intervened to argue that the funds in the account were held on
trust for the purposes of the grant. This argument was rejected because the
relations between the Commission and the Republic were governed by an
international treaty and not by any system of municipal law. Accordingly,
the Commission had no legally enforceable rights to or interest in the account.
1
Roberts Petroleum Ltd v Bernard Kenny Ltd [1983] 2 AC 192, [1983] 1 All ER 564, HL.
2
[1983] 2 AC 192 at 213D, [1983] 1 All ER 564 at 576d, HL. See also Re Rainbow Tours Ltd
[1964] Ch 66, [1963] 2 All ER 820.

19
31.21 Attachment
3
Insolvency Act 1986, s 346(1).
4
George Lee & Sons (Builders) Ltd v Olink [1972] 1 All ER 359, [1972] 1 WLR 214, applying
Roberts v Death (1881) 8 QBD 319, CA; and see Pritchard v Westminster Bank Ltd [1969]
1 All ER 999, [1969] 1 WLR 547.
5
[1994] 1 Lloyd’s Rep 111; affd sub nom Philipp Bros v Republic of Sierra Leone [1995] 1
Lloyd’s Rep 289.

(d) Hardship payment orders

31.22 By CPR r 72.7, the court is given a new power to make an order (‘a
hardship payment order’) permitting a bank to make payments out of an
account of the judgment debtor if the judgment debtor is an individual and an
interim third party debt order is preventing him withdrawing money from the
account, thereby causing him or his family hardship in meeting ordinary living
expenses.

3 RECEIVER APPOINTED BY WAY OF EQUITABLE EXECUTION

31.23 A situation analogous to attachment is the appointment of a receiver by
way of equitable execution. The utility of this procedure is illustrated by Soinco
SACI v Novokuznetsk Aluminium Plant1, where the claimant had an unsatis-
fied arbitral award (enforceable as a judgment) against the defendant in excess
of US $10m. The claimant sought the appointment of a receiver by way of
equitable execution to receive payments due and which in future might become
due to the defendant under a supply contract. The application was based on two
fundamental impediments to the claimant’s ability to satisfy the judgment by
garnishee proceedings. First, the claimant had no information as to what sums
were or would in future become due under the supply contract. Second,
garnishee proceedings cannot attach future debts (as distinct from present debts
payable in the future). Colman J reviewed the authorities and concluded that
there is no longer any rule that a receiver cannot be appointed unless the
property is amenable to execution by legal process. On the facts, he concluded
that the appointment of a receiver would be a just and convenient method of
satisfying the outstanding judgment debt.
It has since been held by the Court of Appeal that there is no rule that the court
cannot make a receivership order by way of equitable execution in relation to
foreign debts and that a receiver can be appointed by way of equitable
execution over future debts: Masri v Consolidated Contractors Inter-
national Company SAL2.
Where a receiver is so appointed, a bank at which the judgment debtor has a
deposit account can be brought into the proceedings, either on the application
for a receiver or subsequently, and the order framed or a separate order made so
as to affect the money in the hands of the bank. In Giles v Kruyer3, receivers
were appointed by way of equitable execution on a judgment for £500 costs.
The judgment debtor had a deposit account at a bank with a credit balance of
£2,300. The order appointing receivers was served on the bank on 17 April
1919, but they were not party to the proceedings. The bank, not having heard
anything more of the matter, on 4 December 1919 paid the whole £2,300 to the
judgment debtor. The receivers served the bank with a summons for an
order that the bank should pay the receivers £500. Greer J dismissed the

20
 Receiver Appointed by Way of Equitable Execution 31.23

summons. He held that the order appointing receivers, made in the absence of
the bank, was in personam the judgment creditor only, not in rem, and operated
only as an injunction to restrain the judgment creditor from receiving the
money, not the bank from paying it. He quoted Lord Esher in Re Potts, ex p
Taylor4.
‘If it [the order] had charged the money in the hands of the executors and had ordered
them not to pay it to Potts, but to pay it to the receiver, although it might not create
a common law charge, or a charge within the meaning of any of the statutes which
create charges, it might still perhaps amount to an equitable charge.’

And he said that the claimants had had opportunity from April to December to
apply for an order directly affecting the bank.
1
[1998] QB 406, [1997] 3 All ER 523 (Colman J).
2
[2008] EWCA Civ 303. Approved in Taurus Petroleum v State Oil Marketing Company of the
Ministry of Oil (Iraq) [2017] UKSC 64.
3
[1921] 3 KB 23; and see RSC Ord 51, r 3(5).
4
[1893] 1 QB 648 at 658.

21
Chapter 32

FREEZING INJUNCTIONS

1 THE GRANT OF FREEZING INJUNCTIONS

(a) Nature of a freezing injunction 32.2
(b) Purpose and operation of freezing injunctions 32.3
(c) The court’s jurisdiction to grant freezing injunctions 32.4
(d) Guidelines for the grant of a freezing injunction 32.5
(e) Worldwide freezing injunctions 32.6
2 FREEZING INJUNCTIONS AGAINST BANKS 32.9
3 EFFECT ON A BANK OF A FREEZING INJUNCTION
AGAINST A CUSTOMER
(a) Searching for accounts maintained by the defendant 32.10
(b) Joint accounts and accounts in the name of a third party 32.11
(c) Maximum sum orders 32.12
(d) Particular assets other than cash balances 32.14
(e) Debits to the defendant’s account 32.21
(f) The banker’s rights of set-off and exercising security 32.25
(g) Disclosure of Information 32.26
4 NO DUTY OF CARE TO APPLICANT FOR FREEZING
ORDER 32.27
5 INJUNCTIONS IN AID OF TRACING CLAIMS 32.28

32.1 By s 37(1) of the Senior Courts Act 1981 the High Court has jurisdiction
by order (whether interlocutory or final) to grant an injunction in all cases in
which it appears to the court to be just and convenient to do so. In relation to
the freezing of assets pending trial or execution of judgment, this jurisdiction is
now exercised by the grant of injunctions of two types: freezing injunctions
(formerly Mareva injunctions) and injunctions in aid of proprietary and tracing
claims. These orders are an important aspect of modern banking because the
majority are served on at least one bank. It has been aptly observed that banks
bear by far the greatest burden of policing freezing injunctions1. Yet the
jurisdiction to grant freezing orders is not wholly burdensome, for banks not
infrequently obtain such orders on their own application, in particular in
pursuit of funds of which they have been defrauded.
1
Oceanica Castelana Armadora SA of Panama v Mineralimportexport [1983] 2 All ER 65 at 71,
[1983] 1 WLR 1294 at 1302 per Lloyd J.

1 THE GRANT OF FREEZING INJUNCTIONS

(a) Nature of a freezing injunction

32.2 A freezing injunction1 is an order of the court restraining a party to
proceedings from removing from the jurisdiction of the court or otherwise
dealing with assets located within the jurisdiction and, in more limited circum-
stances, from dealing with assets outside the jurisdiction.

1
32.2 Freezing Injunctions

The first freezing injunction was made on an ex parte application in May 1975
by the Court of Appeal in Nippon Yusen Kaisha v Karageorgis2. The epony-
mous Mareva Cia Naviera SA v International Bulkcarriers SA3, also heard ex
parte by the Court of Appeal, followed four weeks later. The freezing injunction
has received statutory recognition4 in s 37(3) of the Senior Courts Act 1981,
which provides:
‘The power of the High Court under subsection (1) to grant an interlocutory
injunction restraining a party to any proceedings from removing from the jurisdiction
of the High Court, or otherwise dealing with, assets located within that jurisdiction
shall be exercisable in cases where that party is, as well as in cases where he is not,
domiciled, resident or present within that jurisdiction.’
The words ‘or otherwise dealing with’ are not to be construed ejusdem generis
with ‘removing from the jurisdiction’; they are to be given a wide meaning, and
they include dissipation of assets within the jurisdiction5.
The words ‘dealing with’ are wide enough to include disposing of, selling,
pledging or charging6, and although orders are frequently drafted with the
inclusion of such phrases immediately before the words ‘or otherwise dealing
with’, they appear to add nothing.
The word ‘assets’, if used without limitation, includes chattels such as motor
vehicles, jewellery, objets d’art and other valuables, as well as choses in action7.
Freezing injunctions often specify particular assets to which the restraint
applies, and in practice the assets most commonly so specified are bank
accounts and interests in land. The proceeds of loan agreements also constitute
assets within the extended definition of assets now incorporated into the sample
order annexed to the Practice Direction to CPR Pt 25 and to the Commer-
cial Court Guide (‘For the purpose of this order, the Respondent’s assets include
any asset which he has the power, directly or indirectly, to dispose of or deal
with as if it were his own. The Respondent is to be regarded as having such
power if a third party holds or controls the asset in accordance with his direct
or indirect instructions’)8. An instruction to a lender to pay the proceeds of a
loan agreement (being the lender’s money) to a third party amounts to dealing
with the lender’s assets as if they were the defendant’s own assets9. However, it
is important to note that a contractual right to draw down under an unsecured
loan facility is not an asset for the purposes of the old standard form freezing
injunction10, which does not contain the extended definition referred to above.
The jurisdiction is also now recognised in the Civil Procedure Rules. By CPR
r 25.1(1)(f), the court may grant an order (referred to as a ‘freezing injunction’):
(i) restraining a party from removing from the jurisdiction assets located
there; or
(ii) restraining a party from dealing with any assets whether located within
the jurisdiction or not.
Paragraph 6 of the Practice Direction on Interim Injunctions states that there is
annexed an example of a freezing injunction which may be modified as
appropriate in any particular case. Most of the provisions in the sample
injunction have by now become well established, and in practice the court
would require a very convincing reason for modifying such provisions. The
restraining provision in the worldwide order provides that:
‘5. Until the return date or further order of the court, the Respondent must not:

2
 The Grant of Freezing Injunctions 32.3

(1) remove from England and Wales any of his assets which are in
England and Wales up to the value of £. . . . . . . ; or
(2) in any way dispose of, deal with or diminish the value of any of his
assets whether they are in or outside England and Wales up to the
same value.’
6. Paragraph 5 applies to all the Respondent’s assets whether or not they are in
his own name and whether they are solely or jointly owned. For the purpose
of this order the Respondent’s assets include any asset which he has the
power, directly or indirectly, to dispose of or deal with as if it were his own.
The Respondent is to be regarded as having such power if a third party holds
or controls the asset in accordance with his direct or indirect instructions.
7. This prohibition includes the following assets in particular:
(a) the property known as [title/address] or the net sale money after
payment of any mortgages if it has been sold;
(b) the property and assets of the Respondent’s business [known as
[name]] [carried on at [address]] or the sale money if any of them have
been sold; and
(c) any money standing to the credit of any bank account including the
amount of any cheque drawn on such account which has not been
cleared.

1
For a fuller treatment of freezing injunctions generally, see Gee Commercial Injunctions (6th
edn, 2016).
2
[1975] 3 All ER 282, [1975] 1 WLR 1093, CA.
3
[1980] 1 All ER 213, [1975] 2 Lloyd’s Rep 509, CA.
4
In Fourie v Le Roux [2007] UKHL 1, [2007] 1 All ER 1087, [2007] 1 WLR 320 at [25] Lord
Scott of Foscote emphasised that the power of a judge to grant an injunction against a party to
proceedings properly served is confirmed by, but does not derive from, s. 37 of the
Senior Courts Act 1981. ‘It derives from the pre-Supreme Court of Judicature Act 1873 (36 &
37 Vict c 66) powers of the Chancery courts . . . ’.
5
Z Ltd v A-Z and AA-LL [1982] QB 558 at 571, [1982] 1 All ER 556 at 561, CA, per Lord
Denning MR.
6
CBS United Kingdom Ltd v Lambert [1983] Ch 37 at 42, [1982] 3 All ER 237 at 241, CA.
7
[1983] Ch 37 at 42, [1982] 3 All ER 237 at 241, CA.
8
JSC BTA Bank v Mukhtar Ablyazov [2015] WLR 4754 at paragraph 39.
9
JSC BTA Bank v Mukhtar Ablyazov [2015] WLR 4754 at paragraph 40.
10
JSC BTA Bank v Mukhtar Ablyazov [2015] WLR 4754 at paragraph 38.

(b) Purpose and operation of freezing injunctions

32.3 The foundation of the court’s jurisdiction to grant freezing injunctions is
to prevent judgments of the court from being rendered ineffective whether by
the removal of assets from the jurisdiction or by dissipation within the juris-
diction. In cases where a freezing injunction is granted over foreign assets, the
purpose extends to preventing dissipation of assets outside the jurisdiction or
the transfer of assets from one foreign jurisdiction to another. An example of the
latter is Republic of Haiti v Duvalier1, where the defendants’ own evidence was
that assets under their control had, when threatened with legal attachment
proceedings, been removed from the foreign jurisdiction concerned to other
foreign jurisdictions.
It is not the purpose of a freezing injunction in any way to improve the position
of claimants in an insolvency. In particular:

3
32.3 Freezing Injunctions

(1) A freezing injunction is not a proprietary remedy, but is relief in

personam which prohibits certain acts in relation to the assets in
question. The claimant acquires no rights against the assets specified in
the order, his only rights are against the defendant personally.
(2) A freezing injunction is not a form of pre-trial attachment. It is not
granted to give a claimant advance security for his claim (although it
may have something of that effect in practice): it is ‘a supplementary
remedy, granted to protect the efficacy of court proceedings’2.
(3) It is not the purpose of the freezing jurisdiction to freeze a defen-
dant’s assets to ensure that there are funds available from which the
claimant will be able to satisfy a judgment, regardless of the defen-
dant’s need to draw on the funds to meet his debts as they fall due3.
In JSC BTA Bank v Mukhtar Ablyazov4, Beatson LJ identified three principles
relevant to the court’s approach to freezing injunctions:
(1) The enforcement principle: the purpose of a freezing order is to stop the
injuncted defendant dissipating or disposing of property which could be
the subject of enforcement if the claimant goes on to win the case it has
brought, and not to give the claimant security for his claim5.
(2) The principle of flexibility: the jurisdiction to make a freezing or-
der should be exercised in a flexible and adaptable manner so as to be
able to deal with new situations and new means employed by defendants
to make themselves ‘judgment-proof’6.
(3) The principle of strict construction: it is a ‘fundamental requirement of
an injunction directed to an individual that it shall be certain’ because of
the penal consequences of breaching a freezing order, and therefore such
orders should be clear, unequivocal and strictly construed7.
1
[1990] 1 QB 202, [1989] 1 All ER 456, CA.
2
Fourie v Le Roux [2007] UKHL 1, [2007] 1 All ER 1087, [2007] 1 WLR 320 at [2]; Cretanor
Maritime Co Ltd v Irish Marine Management Ltd [1978] 3 All ER 164, at 170b-e, 172d-h,
[1978] 1 WLR 966 at 974A–D, 976F–G, CA; Taylor v Van Dutch Marine Holding Ltd and
others [2017] EWHC 636 (Ch), [2017] 1 WLR 2571 at [10].
3
Iraqi Ministry of Defence v Arcepey Shipping Co SA [1981] QB 65 at 72, [1980] 1 All ER 480
at 486.
4
[2013] EWCA Civ 928 at [34] to [37].
5
Z Ltd v A-Z [1982] QB 558 at 571 and 585; Derby & Co Ltd v Weldon (Nos 3 & 4) [1990]
1 Ch 65 at 76, [1989] 1 All ER 1002 at 1007; Federal Bank of the Middle East Ltd v
Hadkinson[2000] 2 All ER 395 at 409b-d and 416b-g, [2000] 1 WLR 1695 at 1709G-H and
1714E–1715A; JSC BTA Bank v Solodchenko [2010] EWCA Civ 1436, [2011] 4 All ER 1240
at [32], [49], and [52].
6
Derby & Co Ltd v Weldon (Nos 3 & 4) [1990] 1 Ch 65 at 76 and 77, [1989] 1 All ER 1002 at
1007; TSB Private Bank SA v Chabra [1992] 2 All ER 245 at 255d, [1992] 1 WLR 231 at 241D.
7
Z Ltd v A-Z [1982] QB 558 at 582; Haddonstone v Sharp [1996] FSR 767 at 773 and 775;
Federal Bank of the Middle East Ltd v Hadkinson [2000] 2 All ER 395 at 404h-j, [2000] 1 WLR
1695 at 1705C; Anglo Eastern Trust Ltd and another v Kermanshahchi [2002] EWHC 1702
(Ch).

(c) The court’s jurisdiction to grant freezing injunctions

32.4 The court’s jurisdiction can be summarised as follows:

4
 The Grant of Freezing Injunctions 32.4

(1) Where the English court is properly seized of the dispute before it, the
court will grant a freezing injunction over assets outside as well as within
the jurisdiction, and both before and after judgment1. Where a freezing
injunction is granted after judgment (or, in the context of arbitration
proceedings, after publication of the award), the injunctive relief is
granted as an aid to enforcement2.
(2) Where a freezing injunction is the only relief claimed by the claimant, the
court does not have power to grant leave to serve proceedings outside
the jurisdiction (save in relation to arbitration claims – see (5) below)
because the claim does not fall within any of the sub-paragraphs of CPR
PD6B, para 3.13.
(3) However, even where it is not seized of the dispute, the court has power
to grant a freezing injunction in cases falling within s 25 of the Civil
Jurisdiction and Judgments Act 19824 by which the High Court has
power to grant interim relief where:
(a) proceedings have been or are to be commenced in a Brus-
sels Contracting State or a State bound by the Lugano Conven-
tion or a Regulation State or a Maintenance Regulation State
other than the United Kingdom or in a part of the United
Kingdom other than that in which the High Court in question
exercises jurisdiction, and
(b) there are or will be proceedings whose subject-matter is either
within the scope of the Regulation (Council Regulation (EC) No
1215/20125), within the scope of the Maintenance Regulation
(Council Regulation (EC) No 4/2009) or within the scope of the
Lugano Convention (whether or not the Regulation, the Main-
tenance Regulation or the Lugano Convention has effect in
relation to the proceedings).
(3) This power ensures that the court can give effect to Article 35 of the
recast Brussels Regulation6, which provides:
(3) ‘Application may be made to the courts of a Member State for such provi-
sional, including protective, measures as may be available under the law of
that Member State, even if the courts of another Member State have
jurisdiction as to the substance of the matter.’
(3) Prior to the enactment of s 25, it appeared that the decision of the House
of Lords in Siskina (Cargo Owners) v Distos Cia Naviera SA5 (consid-
ered in (4) below) would prevent the court from granting interim relief in
support of foreign proceedings if no claim for substantive relief were
made in the English court.
(3) In Crédit Suisse Fides Trust SA v Cuoghi6 the claimant company com-
menced civil proceedings in Switzerland against the defendant, who was
resident and domiciled in England, alleging his complicity in the misap-
propriation of US $21.66m by one of its employees. CSFT subsequently
applied to the High Court for a worldwide freezing injunction against
the defendant in aid of the Swiss proceedings together with an ancillary
disclosure order relating to his assets worldwide. Since Switzerland was
a party to the Lugano Convention, and the substantive proceedings fell
within the scope of the Convention, the court considered that it had
jurisdiction to grant interim relief pursuant to s 25 of the Act. It held that
on an application under s 25, the focus of the court’s attention is whether

5
32.4 Freezing Injunctions

it would be expedient to make the order, in view of its lack of jurisdiction

apart from s 25 over the subject matter of the substantive proceedings in
question, and not whether the circumstances are exceptional. On the
facts, the Court of Appeal affirmed the judge’s decision to grant a
worldwide freezing injunction.
(3) In Motorola v Uzan & others7 the Court of Appeal identified five
‘particular considerations’ relevant to the question of inexpediency:
(i) whether the making of the order will interfere with the manage-
ment of the case in the primary court eg where the order is
inconsistent with an order in the primary court or overlaps with
it;
(ii) whether it is the policy in the primary jurisdiction not itself to
make worldwide freezing/disclosure orders – for reasons of co-
mity it may be inexpedient for the English court to grant such an
order if it would be inconsistent with the policy of the primary
jurisdiction;
(iii) whether there is a danger that the orders made will give rise to
disharmony or confusion and/or risk of conflicting inconsistent
or overlapping orders in other jurisdictions, in particular the
courts of the state where the person enjoined resides or where the
assets affected are located;
(iv) whether at the time the order is sought there is likely to be a
potential conflict as to jurisdiction rendering it inappropriate and
inexpedient to make a worldwide order;
(v) whether, in a case where jurisdiction is resisted and disobedience
is to be expected, the court will be making an order which it
cannot enforce.
(4) Subject to (3) above, even where jurisdiction can be founded as of right,
the court will probably not entertain an action where a freezing injunc-
tion is the only relief claimed. This follows from the decision of the
House of Lords in Siskina (Cargo Owners) v Distos Cia Naviera SA8,
where it was held–
(a) that a freezing injunction is interlocutory, not final; it is ancillary
to a substantive claim for debt or damages;
(b) that as such, a claim for a freezing injunction is not a cause of
action capable of standing on its own.
(4) It is a form of relief dependent upon there being a pre-existing cause of
action against the defendant arising out of an invasion, actual or
threatened by him, of a legal or equitable right of the claimant for the
enforcement of which the defendant is amenable to the jurisdiction of
the court9. As explained in (3) above, the effect of s 25 of the Civil
Jurisdiction and Judgments Act 1982 is to ensure that the rule estab-
lished in Siskina does not prevent the courts from giving effect to Article
35 of the recast Brussels Regulation.
(4) In Fourie v Le Roux10 the House of Lords held that a claimant must be
able to point to proceedings already brought, or proceedings about to be
brought, and establish that he has a prima facie case on the merits of the
action in connection with which he is seeking the protective remedy.
Although the court has jurisdiction ‘in the strict sense’ to grant an
injunction in circumstances in which it has in personam jurisdiction over

6
 The Grant of Freezing Injunctions 32.4

a person against whom the injunction is sought, that jurisdiction should

not be exercised unless a claim for substantive relief has been formu-
lated, and proceedings for substantive relief have been or will be insti-
tuted.
(4) The Siskina decision does not prevent the court from granting a freezing
injunction against a co-defendant against whom no cause of action lies,
providing that the claim for the injunction is ancillary and incidental to
the claimant’s cause of action against the other co-defendant11. This is,
however, an exceptional course. The court can grant a freezing injunc-
tion against the third party where there is ‘good reason for supposing
that the assets [of the third party] are in truth the assets of the defen-
dant’12. If there is credible evidence that assets apparently the property of
a third party (whether a company or otherwise) may be held by that
third party as nominee or trustee for the defendant those assets may be
the subject of a freezing order in appropriate circumstances13. The court
need not be satisfied that the defendant has equitable or beneficial
ownership of the asset, but it is not enough for the claimant to show that
the defendant has substantial control over the third party’s assets. The
court must be satisfied that the defendant can be compelled to cause the
third party’s assets to be used for the purposes of enforcement or that
there is some other process by which the clamant can enforce against the
third party’s assets14.
(5) The court can grant freezing injunctions in support of arbitration
proceedings, whether or not the seat of the arbitration is in England and
Wales, under s 44 of the Arbitration Act 1996. A court may give
permission to serve a claim form out of the jurisdiction under CPR r 62.5
where the claim is for an order under s 44 of the 1996 Act.
1
See Republic of Haiti v Duvalier [1990] 1 QB 202 at 214G-215H, [1989] 1 All ER 456 at
465c-466b, CA; Babanaft International Co SA v Bassatne, [1990] Ch 13 at 36G-37C, [1989]
1 All ER 433 at 447d-h, CA; Derby & Co Ltd v Weldon [1990] Ch 48 at 54C-G and 58G-H,
[1989] 1 All ER 469 at 473a-d and 476d-e, CA; Derby & Co Ltd v Weldon (Nos 3 and 4)
[1990] Ch 65 at 79E-80C, 93E-G, 96D-G, [1989] 1 All ER 1002 at 1009d-j, 1020b-c, 1022e-h,
CA.
2
Mobile Telesystems Finance SA v Nomihold Securities Inc [2011] EWCA Civ 1040 at
[32]–[33], CA; Great Station Properties SA v UMS Holding Limited [2017] EWHC 3330
(Comm) at paragraphs 61 to 63.
3
Mercedes-Benz AG v Leiduck [1996] AC 284, [1995] 3 All ER 929, PC. The grounds on which
the court may grant permission to serve the claim form out of the jurisdiction were stated in
CPR r 6.20 before 1 October 2008.
4
As amended by the Arbitration Act 1996, s 107(2), Sch 4 para 1; Civil Jurisdiction and
Judgments Act 1991, s 3, Sch 2 para 12; SI 2001/3929, arts 1(b) and 4, and Sch 2; SI 2009/3131,
reg 17; and SI 2011/1484, reg 6, Sch 4 para 6. This jurisdiction is recognised in CPR PD6B
para 3.1(5).
5
This is a reference to the recast Brussels Regulation, which replaced Council Regulation (EC)
No 44/2001.
6
Formerly Article 31 of Council Regulation (EC) No 44/2001.
5
[1979] AC 210, [1977] 3 All ER 803, HL.
6
[1998] QB 818, [1997] 3 All ER 724, CA; (pet dis).
7
[2003] EWCA Civ 752 at [115].
8
[1979] AC 210, [1977] 3 All ER 803, HL.
9
[1979] AC 210 at 256, and [1977] 3 All ER 803 at 824.
10
[2007] UKHL 1, [2007] 1 All ER 1087, [2007] 1 WLR 320 at [3], [7].
11
TSB Private Bank International SA v Chabra [1992] 2 All ER 245 at 255h-256g, [1992] 1 WLR
231 at 241H–242G; Aiglon Ltd v Gau Shan Co Ltd [1993] 1 Lloyd’s Rep 164; Mercantile

7
32.4 Freezing Injunctions

Group (Europe) AG v Aiyela [1994] QB 366 at 375H-376E, 376F-H, 377D-F, [1994] 1 All ER
110 at 116e-j, 117a-d, 117h-j, CA.
12
SCF Finance Ltd v Masri [1985] 2 All ER 747 at 753c-f, [1985] 1 WLR 876 at 884B-D, CA. See
also Yukos v Rosneft [2010] EWHC 784 (Comm); JSC BTA Bank v Solodchenko [2010]
EWCA Civ 1436 and PJSC Vseukrainskyi Aktsionernyi Bank v Maksimov [2013] EWHC 422
(Comm) for more recent examples of cases in which the courts have considered whether assets
in the name of a third party in fact belong to the defendant.
13
Parbulk II AS v PT Humpuss Intermoda Transportasi TBK & Ors [2011] EWHC 3143
(Comm) at [41]; [2012] 2 All ER (Comm) 513 at [41].
14
Linsen International Ltd v Humpuss Sea Transport Pte Ltd [2011] EWHC 2339 (Comm) at
[146]–[151].

(d) Guidelines for the grant of a freezing injunction

32.5 It is beyond the scope of Paget to give detailed consideration to the
guidelines which govern the grant of freezing injunctions, but it may be helpful
to give a summary1:
(1) The claimant should make full and frank disclosure of all material facts
known to him or which would have been known to him had he made all
such inquiries as were reasonable and proper in the circumstances2.
(2) The claimant should give particulars of his claim against the defendant,
stating the ground of his claim and its amount, and fairly stating the
points made by the defendant.
(3) The claimant should give some grounds for believing that the defendant
has assets in the relevant place. The existence of a bank account is
enough, whether it is in overdraft or not.
(4) The claimant should give some grounds for believing that there is a risk
of the defendant’s assets being removed or dissipated before the judg-
ment or award is satisfied. Solid evidence will be required, although
precisely what evidence will be required will depend on the circum-
stances of the case3. In circumstances where the underlying claim is one
of dishonesty concerning the dissipation of sums of money through
international jurisdictions, those facts can be relied upon to establish a
risk of dissipation4.
(5) The claimant will usually be required to give the undertakings contained
in the sample orders annexed to the Practice Direction to CPR Pt 25.
These include an undertaking in damages in case he fails in his claim or
the injunction turns out to be unjustified; and in a suitable case this
should be supported by a bond or security. However, it is the general
practice of the court not to require a public authority bringing proceed-
ings pursuant to a public duty to provide an undertaking in damages in
respect of losses suffered either by defendants or by third parties affected
by the injunction5.
(6) The claimant must establish a good arguable case6, namely a case ‘which
is more than barely capable of serious argument and yet not necessarily
one which the judge believes to have a better than 50 per cent chance of
success7’.

8
 The Grant of Freezing Injunctions 32.5

(7) It is no part of the court’s function when asked to make an interim

order at the pre-trial stage to try to resolve factual disputes on which the
claims of either party may ultimately depend, nor to decide difficult
questions of law which call for detailed argument and mature consider-
ation8.
(8) The defendant should not be prevented from using his assets for a
legitimate purpose which does not conflict with the purpose of a freezing
injunction, eg for the making of payments which the defendant in good
faith considers he should make in the ordinary course of business, or if
an individual, for his ordinary living expenses or for paying legal costs to
defend the proceedings9. The sample orders annexed to the Pt 25
Practice Direction include ‘exceptions’ permitting the respondent to
spend a limited amount on ordinary living expenses, legal advice and
representation, and to deal with and dispose of his assets ‘in the ordinary
and proper course of business’.
(9) In exercising its discretion, the court is not limited in its consideration to
funds to which the defendant has a legal right if there are reasonable
grounds for believing that there are other funds available to him10.
However, the standard wording of a freezing injunction (‘ . . . the
Respondent’s assets whether or not they are in his own name and
whether they are solely or jointly owned’) and the extended definition
now incorporated into the sample order annexed to the Practice Direc-
tion to CPR Pt 25 (‘For the purpose of this order the Respondent’s assets
include any asset which he has the power, directly or indirectly, to
dispose of or deal with as if it were his own. The Respondent is to be
regarded as having such power if a third party holds or controls the asset
in accordance with his direct or indirect instructions’) do not extend to
assets which are beneficially owned by another11.
(10) The order should normally specify a maximum sum, that is to say it
should restrain removal or dissipation of assets save in so far as such
assets exceed a specified sum12. There is an additional exception in the
sample orders covering this.
(11) The order should make reasonable provision for the protection of third
parties and should include notice of their right to seek variation of the
order13.
(12) The terms of the order should be certain so that the party against whom
the injunction is directed knows precisely what he can and cannot do.
(13) A freezing injunction may be granted against persons unknown, as long
as those persons can be clearly identified14.
1
Guidelines (1)–(5) are based upon Third Chandris Shipping Corpn v Unimarine SA [1979] QB
645 at 668–669, [1979] 2 All ER 972 at 984–985, CA per Lord Denning MR, with modifica-
tions to take account of subsequent developments in the freezing injunction. See generally the
notes to CPR Pt 25.
2
See Bank Mellat v Nikpour [1982] Co. LR 158; [1985] FSR 87, CA; Dadourian Group
International Inc. v Simms [2007] EWHC 1673 (Ch) at [29], [2009] EWCA Civ 169 at [172]
and [188], CA. For the consequence of breach of these notices, see Lloyds Bowmaker Ltd v
Britannia Arrow Holdings plc [1988] 3 All ER 178, [1988] 1 WLR 1337, CA; Brink’s-MAT Ltd
v Elcombe [1988] 3 All ER 188, [1988] 1 WLR 1350; Behbehani v Salem [1989] 2 All ER 143,
[1989] 1 WLR 723; CA; The P [1992] 1 Lloyd’s Rep 470 at 473–474.
3
Holyoake v Candy [2017] EWCA Civ 92, [2017] 3 WLR 1131 at paragraph 34.
4
VTB Capital Plc v Nutriteck International Corp & Ors [2012] EWCA Civ 808 at [174] to
[178].
5
Financial Services Authority v Sinaloa Gold Plc [2013] UKSC 11, [2013] 2 WLR 678 SC at [36].

9
32.5 Freezing Injunctions
6
The Niedersachen [1984] 1 All ER 398 at 414–415, [1983] 1 WLR 1412 at 1417, CA; see also
Kazakhstan Kagazy Plc v Zhunus [2014] EWCA Civ 381, [2014] 1 CLC 451 at paragraph 66.
7
The Neidersachen [1983] 2 Lloyd’s Rep 600, at 605 per Mustill J; Kazakhstan Kagazy Plc v
Zhunus [2014] EWCA Civ 381, [2014] 1 CLC 451 at paragraph 23.
8
Derby & Co Ltd v Weldon [1990] Ch 48 at 57D-H, [1989] 1 All ER 469 at 475c-g.
9
Iraqi Ministry of Defence v Arcepey Shipping Co SA [1981] QB 65 at 72, [1980] 1 All ER 480
at 486; PCW (Underwriting Agencies) Ltd v Dixon [1983] 2 All ER 158 at 162d-g (appeal
allowed by consent without affecting this point [1983] 2 All ER 697n); Derby & Co Ltd v
Weldon (Nos 3 & 4) [1990] 1 Ch 65 at 76, [1989] 1 All ER 1002 at 1007; Cala Cristal SA v
Emran Al-Borno (1994) Times, 6 May.
10
Atlas Maritime v Avalon Maritime (No 3) [1991] 4 All ER 783 at 792c, [1991] 1 WLR 917 at
927B, CA.
11
Lakatamia Shipping Co Ltd v Su [2014] EWCA Civ 636, [2015] 1 WLR 291, paragraphs 28 to
31. Note that the optional wider wording in the Commercial Court standard form (which
extends to assets in which the Respondent is interested ‘legally, beneficially or otherwise’)
includes assets held by the defendant as trustee or nominee for a third party.
12
See para 32.12 below.
13
Such a notice is contained in the approved form of order annexed to CPR Pt 25. See Banco
Nacional de Comercio Exterior SNC v Empresa de Telecomunicationes de Cuba SA [2007]
EWCA Civ 662, [2007] 2 All ER (Comm) 1093 at [40]-[41]; Financial Services Authority v
Sinaloa Gold Plc [2011] EWCA Civ 1158 at [17]–[23].
14
CMOC v persons unknown [2017] EWHC 3599 (Comm) at paragraphs 2 to 5.

(e) Worldwide freezing injunctions

32.6 The grant of worldwide freezing injunctions has given rise to difficult
questions as to how third parties, and in particular banks, can best be protected
from committing an unintended contempt of court. The problem was described
by Lord Donaldson MR in Derby & Co Ltd v Weldon (No 4)1:
‘Court orders only bind those to whom they are addressed. However, it is a serious
contempt of court, punishable as such, for anyone to interfere with or impede the
administration of justice. This occurs if someone, knowing of the terms of the court
order, assists in the breach of that order by the person to whom it is addressed. All this
is common sense and works well so long as the “aider and abettor” is wholly within
the jurisdiction of the court or wholly outside it. If he is wholly within the jurisdiction
of the court there is no problem whatsoever. If he is wholly outside the jurisdiction of
the court, he is either not to be regarded as being in contempt or it would involve an
excess of jurisdiction to seek to punish him for that contempt. Unfortunately,
juridical persons, notably banks, operate across frontiers. A foreign bank may have a
branch within the jurisdiction and so be subject to the English courts. An English
bank may have branches abroad and be asked by the defendant to take action at such
a branch which will constitute a breach by the defendant of the court’s order. Is action
by the foreign bank to be regarded as contempt, although it would not be so regarded
but for the probably irrelevant fact that it happens to have an English branch? Is
action by the foreign branch of an English bank to be regarded as contempt, when
other banks in the area are free to comply with the defendant’s instructions?’
The court has attempted to solve this problem by the insertion in freezing
injunctions over foreign assets of a proviso which has come to be known as the
Babanaft proviso2. The proviso proposed in Babanaft itself was reformulated
by the Court of Appeal in Derby & Co Ltd v Weldon (No 4) to read as follows:
‘PROVIDED THAT, in so far as this order purports to have any extra-territorial
effect, no person shall be affected thereby or concerned with the terms thereof until it
shall be declared enforceable or be enforced by a foreign court and then it shall only
affect them to the extent of such declaration or enforcement UNLESS they are (a) a

10
 The Grant of Freezing Injunctions 32.7

person to whom this order is addressed or an officer of or an agent appointed by a

power of attorney of such a person or (b) persons who are subject to the jurisdiction
of this court and (i) have been given written notice of this order at their residence or
place of business within the jurisdiction, and (ii) are able to prevent acts or omissions
outside the jurisdiction of this court which assist in the breach of the terms of this
order.3’
However, this proviso did not fully address the position of a bank which:
(i) has branches in England and in a foreign country; or
(ii) has a branch in England and a subsidiary in a foreign country.
If the branch in England is served with notice of a worldwide Mareva, the bank
is likely to be ‘a person who is able to prevent acts or omissions outside the
jurisdiction of the court which assist in the breach of the terms of the order’. Yet
the bank’s branch in the foreign country may be advised by its local lawyer that
the bank would commit a breach of contract if it were to refuse repayment of
monies held by the defendant at the foreign branch.
1
[1990] Ch 65 at 82F-83A, [1989] 1 All ER 1002 at 1011h-1012a.
2
Although not adopted in that case, the proviso proposed by the Court of Appeal in Babanaft
International Co SA v Bassatne [1990] Ch 13, [1989] 1 All ER 433 was the court’s preferred
solution to the problem of third parties outside the jurisdiction of the court.
3
[1990] Ch 65 at 84D-E, [1989] 1 All ER 1002 at 1013b-c.

32.7 This was the problem which confronted Clarke J in Baltic Shipping Co v
Translink Shipping Ltd1, where a bank with a branch in London and a
subsidiary in New Caledonia was served at its London branch with notice of a
worldwide freezing injunction. Monies of the defendant were held by the bank
in New Caledonia and the bank was concerned that it would be in breach of the
order if its New Caledonian subsidiary were to comply with a demand for
repayment. To protect the bank, Clarke J took up the suggestion of Saville J in
his end of year statement as judge in charge of the commercial list on 30 July
1993 that the Babanaft proviso be extended by the following wording:
‘Nothing in this Order shall, in respect of assets located outside England and Wales
(and in particular [specify if necessary the foreign country concerned]), prevent [the
Bank] or its subsidiaries from complying with:
(1) what it reasonably believes to be its obligations, contractual or otherwise,
under the laws and obligations of the country or state in which those assets
are situated or under the proper law of the account in question;
(2) any orders of the Courts of that country or state.’
Clarke J suggested that this extended proviso should be included in the standard
worldwide freezing injunction to provide reasonable protection for banks. He
rejected the claimant’s application to continue the freezing injunction until
application was made for protective measures in New Caledonia, since it was
unsatisfactory to require the bank to rely on the claimant’s undertaking to
indemnify it against any liability which it might incur under foreign law. The
claimant was protected to the extent that the bank, in deciding whether to obey
the freezing injunction, had to act on a reasonable belief as to its obligations
under local law. He concluded that the key is for the claimant to proceed with
alacrity in the foreign court (although he may need the leave of the English court
to do so: see below)2.

11
32.7 Freezing Injunctions

The sample worldwide freezing injunction appended to the Pt 25 Practice

Direction now includes provisions modelled on the Babanaft and Baltic Ship-
ping provisos:
‘19. Persons outside England and Wales
(1) Except as provided in paragraph (2) below, the terms of this order do
not affect or concern anyone outside the jurisdiction of this court.
(2) The terms of this order will affect the following persons in a country
or state outside the jurisdiction of this court—
(a) the Respondent or his officer or agent appointed by power of
attorney;
(b) any person who – (i) is subject to the jurisdiction of this court;
(ii) has been given written notice of this order at his residence
or place of business within the jurisdiction of this court; and
(iii) is able to prevent acts or omissions outside the jurisdiction
of this court which constitute or assist in a breach of the terms
of this order; and
(c) any other person, only to the extent that this order is declared
enforceable by or is enforced by a court in that country or
state.
20. Assets located outside England and Wales
20. Nothing in this order shall, in respect of assets located outside England and
Wales, prevent any third party from complying with—
(1) what it reasonably believes to be its obligations, contractual or
otherwise, under the laws and obligations of the country or state in
which those assets are situated or under the proper law of any
contract between itself and the Respondent; and
(2) any orders of the courts of that country or state, provided that
reasonable notice of any application for such an order is given to the
Applicant’s solicitors.’
In Bank of China v NBM LLC3, on considering both the Babanaft and the
Baltic Shipping cases, it was held that the need to avoid unwarranted extra-
territorial jurisdiction, the need to provide reasonable protection for third
parties affected by freezing orders, and the need to clarify the Derby v Weldon
proviso, would usually entitle third parties to have the Baltic proviso added to
worldwide freezing orders unless the court considered on the particular facts of
the case that it was inappropriate.
1
[1995] 1 Lloyd’s Rep 673, cited with approval by Lord Hoffmann in Societe Eram Ltd v Cie
Internationale [2003] UKHL 30, [2004] 1 AC 260, [2003] 3 All ER 465, HL, at [58].
2
[1995] 1 Lloyd’s Rep 673 at 677–679.
3
[2001] EWCA Civ 1933, [2002] 1 All ER 717.

32.8 In addition to the inclusion of a Babanaft proviso, a worldwide freezing

injunction will often contain an undertaking by the claimant not, without leave
of the court:
(i) to begin proceedings (or further proceedings) against the defendant in
other jurisdictions1;
(ii) to make improper use of the information obtained through disclosure of
the defendant’s assets2; or
(iii) to apply to a foreign court to enforce the freezing injunction or obtain
similar asset-freezing orders3.

12
 The Grant of Freezing Injunctions 32.8

These are control mechanisms to prevent freezing injunctions being used

oppressively against the defendant either through exposure to a multiplicity of
proceedings or onerous invasions of privacy.
The Court of Appeal has now given the following guidelines (‘the Dadourian
Guidelines’, named after Dadourian Group International Inc v Simms4) as to
the court’s exercise of its discretion to grant permission to enforce a worldwide
freezing order (‘WFO’) abroad:
‘Guideline 1. The principle applying to the grant of permission to enforce a WFO
abroad is that the grant of that permission should be just and convenient for the
purpose of ensuring the effectiveness of the WFO, and in addition that it is not
oppressive to the parties to the English proceedings or to third parties who may be
joined to the foreign proceedings.
Guideline 2. All the relevant circumstances and options need to be considered. In
particular consideration should be given to granting relief on terms, for example
terms as to the extension to third parties of the undertaking to compensate for costs
incurred as a result of the WFO and as to the type of proceedings that may be
commenced abroad. Consideration should also be given to the proportionality of the
steps proposed to be taken abroad, and in addition to the form of any order.
Guideline 3. The interests of the applicant should be balanced against the interests of
the other parties to the proceedings and any new party likely to be joined to the
foreign proceedings.
Guideline 4. Permission should not normally be given in terms that would enable the
applicant to obtain relief in the foreign proceedings which is superior to the relief
given by the WFO.
Guideline 5. The evidence in support of the application for permission should contain
all the information (so far as it can reasonably be obtained in the time available)
necessary to enable the judge to reach an informed decision, including evidence as to
the applicable law and practice in the foreign court, evidence as to the nature of the
proposed proceedings to be commenced and evidence as to the assets believed to be
located in the jurisdiction of the foreign court and the names of the parties by whom
such assets are held.
Guideline 6. The standard of proof as to the existence of assets that are both within
the WFO and within the jurisdiction of the foreign court is a real prospect, that is the
applicant must show that there is a real prospect that such assets are located within
the jurisdiction of the foreign court in question.
Guideline 7. There must be evidence of a risk of dissipation of the assets in question.
Guideline 8. Normally the application should be made on notice to the respondent,
but in cases of urgency, where it is just to do so, the permission may be given without
notice to the party against whom relief will be sought in the foreign proceedings but
that party should have the earliest practicable opportunity of having the matter
reconsidered by the court at a hearing of which he is given notice.’
In relation to states which are parties to the Lugano Convention on jurisdiction
and the recognition and enforcement of judgments in civil and commercial
matters or subject to the recast Brussels Regulation (Council Regulation (EC)
No 1215/2012), the procedure by which an order of the English Court is
declared enforceable or enforced is that contained in arts 32 to 52 of the Con-
vention and arts 36 to 57 of the recast Brussels Regulation. In Derby & Co Ltd
v Weldon (No 4)5 a receivership order was made over a company incorporated
in Luxembourg. The order was then recognised by the Luxembourg court.

13
32.8 Freezing Injunctions

Banks, whether English or foreign, with branches in Luxembourg became

affected by the order upon such recognition. The same proviso is to be inserted
even if the defendant is resident or incorporated in a state which is not a
convention state. Thus in Derby & Co Ltd v Weldon (No 4) a receivership
order was made against a Panamanian company in the same terms (mutatis
mutandis) as those made in relation to the Luxembourg company.
1
The undertaking however does not prevent a claimant from making complaints or laying
information to foreign authorities with a view to criminal proceedings: Re BCCI (No 9) [1994]
1 WLR 708 at 714E-715G.
2
Babanaft International Co SA v Bassatne [1990] Ch 13 at 47B-C; Derby v Weldon [1990] Ch
48 at 57B, 59H-60B.
3
Re BCCI (No 9) [1994] 1 WLR 708 at 713; Derby v Weldon [1990] Ch 48 at 55G, 57B, 59D–F.
4
[2006] EWCA Civ 399, [2006] 3 All ER 48.
5
[1990] Ch 65.

2 FREEZING INJUNCTIONS AGAINST BANKS

32.9 The circumstances in which an application for a freezing injunction can
properly be made against a bank will be very rare.
In Polly Peck International plc v Nadir (No 2)1, a freezing injunction which had
been granted against the Central Bank of the Turkish Republic of Cyprus was
discharged on appeal. The court identified two factors specific to banks which
weigh against the grant of such an order:
(i) a bank’s stock in trade is money borrowed from its depositors; in so far
as the bank is called upon to repay its depositors its assets (although not
its net assets) will thereby be reduced, however, this reduction will be in
the ordinary course of its business; and
(ii) all banking business is fundamentally dependent on the maintenance of
confidence on the part of its customers; any order which could produce
a situation in which there is a run on the bank would be inimical to the
purposes for which the jurisdiction to grant freezing injunctions exists2.
Lord Donaldson MR did not rule out the possibility of a freezing injunction
against a bank, but cautioned that the circumstances would have to be un-
usual3.
At an earlier hearing in the same litigation, the Court of Appeal stated that on
an application for a freezing injunction against a bank, the court should
consider whether to hear the evidence and even give judgment in camera in
order to minimise the risk of irreparable damage caused by public allegations
which later prove to be without foundation4.
In Camdex International Ltd v Bank of Zambia (No 2)5 the central bank of
Zambia was a judgment debtor and subject to a freezing injunction granted to
the claimant judgment creditor. As inflation was very high in Zambia, the bank
had arranged for the printing in the UK of a large quantity of high value bank
notes for issue in Zambia in replacement of lower denomination notes, and
those notes were an asset within the injunction. Accordingly, although it had
not satisfied any part of the judgment debt through lack of funds, the bank
applied to the court for the bank notes to be exempted from the injunction, on
the ground that the issue of the notes was of great importance to the Zambian

14
 Effect on a Bank of a Freezing Injunction 32.10

economy. The judge refused the application, and the bank appealed. The Court
of Appeal allowed the appeal, on two grounds. First, the transfer to Zambia of
the notes (which were of negligible value save to the bank) would not constitute
the dissipation of an asset available to satisfy the judgment debt; and to
maintain the injunction merely because the bank was willing to pay a consid-
erable price to recover the notes would amount to holding it to ransom. Second,
although a judgment debt should, in the ordinary way and in any ordinary
situation, be paid, the facts that the bank was a body to whom the ordinary
procedures of bankruptcy and winding up were not available, that on the
evidence severe national hardship to the people of Zambia would follow if the
state defaulted on its international obligations, and that the concern of the bank
to try to ensure that it repaid its debts to the World Bank and the IMF was
legitimate, constituted extraordinary circumstances affecting the exercise of the
court’s general equitable discretion.
1
[1992] 4 All ER 769.
2
[1992] 4 All ER 769 at 786b-d.
3
[1992] 4 All ER 769 at 786h.
4
Polly Peck International plc v Nadir (1991) Times, 11 November.
5
[1997] 1 All ER 728, [1997] 1 WLR 632, CA.

3 EFFECT ON A BANK OF A FREEZING INJUNCTION AGAINST

A CUSTOMER

(a) Searching for accounts maintained by the defendant

32.10 If the claimant is able to identify bank accounts maintained by the
defendant, he should do so with as much precision as is reasonably practicable1,
and normally any such account will be specified in the order itself.
If the claimant cannot identify a bank account, he has the following options:
(i) He may request the bank to conduct a search of a particular branch or
branches, or of all its branches. If he does so, he will normally be
required to agree in advance to pay the costs of the search2.
(ii) He may simply serve a copy of the freezing injunction on the bank. This
is tantamount to a request to search all branches, for it has been said that
such service obliges a bank, as a matter of self-defence for the purpose of
complying with the order, to carry out a search throughout all its
branches in order to see whether it holds any assets of the particular
defendant3. In practice, the bank will normally first check with the
claimant’s solicitors that the claimant intends a full search to be made.
Whether or not the claimant requests a search, the bank is entitled to
carry one out and to be indemnified in respect of its costs.
(iii) He may apply for a discovery order against the defendant or his agents
requiring him to disclose the identity of all bank accounts maintained by
him within the jurisdiction, whether in his own name, or jointly or in the
name of a third party, or otherwise howsoever, and the credit balance (if
any) on each such account.
1
Searose Ltd v Seatrain (UK) Ltd [1981] 1 All ER 806, [1981] 1 WLR 894; Z Ltd v A-Z and
AA-LL [1982] QB 558 at 575E-F, 588F-G, [1982] 1 All ER 556 at 564e-f, 574f-g, CA.
2
Searose Ltd v Seatrain (UK) Ltd [1981] 1 All ER 806 at 808, [1981] 1 WLR 894 at 897; Z Ltd
v A-Z and AA-LL [1982] QB 558 at 575G-576A, [1982] 1 All ER 556 at 564g-h, CA

15
32.10 Freezing Injunctions
3
Z Ltd v A-Z and AA-LL, [1982] QB 558 at 586G-H, [1982] 1 All ER 556 at 573b-c.

(b) Joint accounts and accounts in the name of a third party

32.11 In Z Ltd v A-Z and AA-LL, the Court of Appeal stated by way of general
guideline that any freezing injunction which it is intended to serve on a bank is
not applicable to a joint account in the name of the defendant and of some other
person or persons unless the order is so drafted as to make it clear that it is
intended to apply to it, but this would only be justifiable in rare cases1. Where
the other holder of a joint account is not a party, the order should include
reference to the joint account, and a copy of the order should be served on the
other holder. In principle these guidelines apply, mutatis mutandis, to accounts
maintained by the defendant in the name of third parties. The guidelines
presuppose that a freezing injunction over a joint account restrains drawings by
either account holder, even where the mandate provides either to sign. Al-
though, strictly speaking, each account holder owns separate choses in action
against the bank2, it is clearly preferable for freezing injunction purposes to
treat the asset as being the fund itself. It is for this reason that the injunction
should be extended to a joint account only if there are good grounds for
suspecting that the account belongs in truth to the defendant alone. However,
the sample order annexed to the Part 25 Practice Direction restrains the
respondent from disposing of assets ‘whether or not they are in his own name
and whether they are solely or jointly owned’.
In SCF Finance Co Ltd v Masri the position in relation to accounts in the name
of a third party was summarised by Lloyd J as follows3:
(1) Where a claimant invites the court to include within the scope of a
freezing injunction assets which appear on their face to belong to a third
party, eg a bank account in the name of a third party, the court should
not accede to the invitation without good reason for supposing that the
assets are in truth the assets of the defendant.
(2) Where the defendant asserts that the assets belong to a third party, the
court is not obliged to accept that assertion without inquiry, but may do
so depending on the circumstances. The same applies where it is the third
party who makes the assertion, on an application to intervene.
(3) In deciding whether to accept the assertion of a defendant or a third
party, without further inquiry, the court will be guided by what is just
and convenient, not only between the claimant and the defendant, but
also between the claimant, the defendant and the third party.
(4) Where the court decides not to accept the assertion without further
inquiry, it may order an issue to be tried between the claimant and the
third party in advance of the main action, or it may order that the issue
await the outcome of the main action, again depending in each case on
what is just and convenient.
This summary was approved by the Court of Appeal in Allied Arab Bank Ltd
v Hajjar4, where the Court rejected a contention that where the third party has
become a party to the action and is thus before the court, it is sufficient for the
claimant to show that there is a serious issue to be tried, and that the

16
 Effect on a Bank of a Freezing Injunction 32.12

court’s approach to the matter should be the same as that laid down by the
House of Lords in American Cyanamid Co v Ethicon Ltd5.
The principles stated in SCF Finance Co Ltd v Masri presumably apply mutatis
mutandis to joint accounts.
1
[1982] QB 558 at 577A, 591C-D, [1982] 1 All ER 556 at 565g, 576e-f.
2
See Chapter 5.
3
[1985] 2 All ER 747 at 753, [1985] 1 WLR 876 at 884, CA. See also para 32.4 above.
4
[1989] Fam Law 68, CA. See also Dadourian Group International v Simms [2006] EWCA Civ
399, [2006] 1 WLR 2499 at [29], where the Court of Appeal referred to the procedure laid
down in Masri with approval; and JSC BTA Bank v Solodchenko [2010] EWCA Civ 1436,
[2011] 1 WLR 888 at [36] in which the Court of Appeal referred to the decision in Masri as
authority for the proposition that the court has power to decide issues of ownership of assets as
part of its jurisdiction to grant freezing order relief.
5
[1975] AC 396, [1975] 1 All ER 504, HL.

(c) Maximum sum orders

32.12 The normal form of freezing injunction restrains the defendant from
removing his assets from the jurisdiction or otherwise dealing with them within
the jurisdiction save insofar as such assets exceed a specified sum1. An or-
der which specifies a sum in this way is often described as a maximum sum
order.
Such an order is preferable to an order which imposes a freeze on the defen-
dant’s assets within the jurisdiction without limitation. Kerr LJ observed in
Z Ltd v A-Z and AA-LL2 that there are two obvious reasons for this preference.
First, it represents no more than what a claimant can justifiably request from the
court. Second, an order which freezes all assets is, in the ordinary case, bound
to lead to an outcry from the defendant and to the need for an adjustment, at
any rate if he is resident within the jurisdiction. A general freezing order cannot
be justified in principle, save in wholly exceptional cases, unless it is clear that
(1) the defendant’s assets within the jurisdiction are insufficient to meet the
claim, and (2) he is neither resident nor carries on business within the juris-
diction.
In Z Ltd v A-Z and AA-LL, the Court of Appeal accepted the submission of the
intervening bank that a maximum sum order is unworkable as far as a bank or
other innocent third party is concerned, because it does not know what other
assets the defendant may have or their value3. As a solution to this difficulty
the Court of Appeal gave a guideline that the first paragraph of a freezing
injunction should restrain the defendant in general terms up to the maximum
sum in question, but the second paragraph should then qualify the first by
providing that, so far as any specified accounts are concerned, the defendant is
not to be entitled to draw upon any of them except to the extent to which any
of them exceed the maximum sum4. The advantage to a bank of an order in this
form is the protection it confers from demands for repayment from an enjoined
customer on the basis of the customer’s assertion that he has other frozen funds
exceeding the maximum sum. The order places the onus firmly on the
defendant/customer to obtain a variation to permit payment by the bank. If the
order has the effect of freezing assets in the hands of third parties exceeding the
maximum sum, the defendant is adequately protected both by his right to apply
for a variation, and by the claimant’s undertaking in damages.

17
32.12 Freezing Injunctions

This guidance did not gain general acceptance. The sample order annexed to the
Pt 25 Practice Direction approaches the problem in a different way. It contains
an express provision (para 8) permitting the disposal of assets if the total value
of unencumbered assets exceeds the maximum sum. It also provides (para 18)
that no bank need enquire as to the application or the proposed application of
any money withdrawn by the respondent if the withdrawal appears to be
permitted by the order. The effect of this appears to be that a bank may permit
cash withdrawals for living expenses, and may transfer funds in payment of
legal fees, so long as the order contains appropriate exceptions. But it is difficult
to see how a bank could honour payment instructions generally unless it has
satisfied itself that its customer has unencumbered assets in excess of the
maximum sum. If the situation is unclear, the bank should seek clarification
from the court as to what is permitted by the order.
1
See the comments of Teare J in JSC BTA Bank v Ablyazov [2009] EWHC 3267 (Comm);[2010]
1 All ER (Comm) 1040 at [28], in which he said that maximum sum orders are ‘correct in
principle’.
2
[1982] QB 558 at 589C-E, [1982] 1 All ER 556 at 575a-c.
3
[1982] QB 558 at 576C-G, 589F, [1982] 1 All ER 556 at 565a-e, 575d.
4
[1982] QB 558 at 590D-F, [1982] 1 All ER 556 at 575j to 576a.

32.13 In Oceanica Castelana Armadora SA of Panama v Mineralimportex-

port1 a point arose as to whether, in calculating the amount not caught by a
freezing order, a bank must make provision for future liabilities of the customer.
The court gave the following example to illustrate the point. A bank holds
assets of the defendant totalling $10m. The defendant’s future liabilities to the
bank amount to $3m. The freezing injunction is limited to a maximum sum of
$2m. Is the bank bound to freeze $2m or $5m? It is, of course, to the
claimant’s considerable advantage for the bank to freeze the higher sum. If the
bank freezes only $2m, any subsequent set-off in respect of the $3m will reduce
and eventually extinguish the $2m. Conversely, if the bank freezes $5m, the
$2m is likely to be preserved intact, subject to any application by the defendant
to vary the order to permit payments out of it.
In the example given, where the order specifies the lower sum, the bank cannot
rely on the order as justification for freezing the higher sum. This, however, does
not answer the question of principle, which is whether the order ought to
specify the higher sum so that, subject to any variation of the order on the
defendant’s application, funds will be available to satisfy the claims of both the
bank and the claimant. It was held that the order should specify only the lower
sum. Two reasons were given2. First, there is no ground on which the bank
could, in the example given, have refused to repay $8m to its customer, in
respect of which, ex hypothesi, it would have no existing right of set-off.
Second, that the extinction of the $2m by the exercise of the bank’s right of
set-off is ‘an inevitable consequence of a defendant who is subject to a
‘maximum sum’ freezing order, and who has no other free assets, being allowed
to pay his debts as they fall due’. However, in the example given, even if the
order were to specify the higher sum, the defendant would have $5m free funds
available for payment of debts owed to persons other than the claimant and the
bank. Conversely, whatever the specified maximum sum, the order is liable to
be varied if the defendant requires the frozen funds to pay his debts. It is
submitted that there are powerful arguments, yet to be fully explored judicially,

18
 Effect on a Bank of a Freezing Injunction 32.16

both for and against the grant of a freezing injunction over assets which are
likely to be extinguished by set-off before the claimant obtains judgment.
Where the order is expressed in one currency, and the bank holds an account in
another currency, the problem is to be resolved in the same way as in relation to
garnishee orders; ie upon being served with the order, the bank should convert
the credit balance into sterling at the then buying rate to the extent necessary to
meet the sum stated in the order, and then put a stop on the account to this
extent3. If the order expresses the maximum sum in a currency other than
sterling, the conversion should presumably be made into that other currency.
1
[1983] 2 All ER 65, [1983] 1 WLR 1294.
2
[1983] 2 All ER 65 at 71, [1983] 1 WLR 1294 at 1301.
3
Z Ltd v A-Z and AA-LL [1982] QB 558 at 593B-D, [1982] 1 All ER 556 at 577j–578a, CA.

(d) Particular assets other than cash balances

32.14 The assets with which banks are primarily concerned are:
(i) letters of credit, performance bonds and bank guarantees of which the
defendant is beneficiary;
(ii) bills of exchange and other negotiable instruments of which the defen-
dant is payee;
(iii) shares, title deeds, and articles held in safe custody.

(i) Letters of credit etc

32.15 Where the defendant is the beneficiary of a letter of credit, performance

bond, or bank guarantee, the following questions arise:
(1) Is the benefit of the issuing or confirming bank’s undertaking an asset to
which the freezing injunction applies?
(2) If so, will an order be made restraining the issuing or confirming bank (in
either case, ‘the paying bank’) from performing its undertaking to the
defendant, or otherwise interfering with the contract between them?
(3) If not, will the order restrain disposal of the proceeds as and when
received by the defendant?
For these purposes there is no material difference between letters of credit,
performance bonds and bank guarantees, and reference is made simply to
letters of credit.

A. Does the Freezing injunction apply?

32.16 On the assumption that an irrevocable credit becomes binding once it is

communicated to the beneficiary, the benefit of the issuing or confirming
bank’s undertaking is prima facie an asset to which a freezing injunction in
standard form will apply.
In Z Ltd v A-Z and AA-LL, it was noted that banks do not maintain a central
register or other means of identifying the defendant as the beneficiary, even if he
is a customer in whose name they hold accounts. This is of no concern if the
credit proceeds are paid into a frozen account, for the bank is on notice that

19
32.16 Freezing Injunctions

those funds are subject to a freezing order. The difficulty arises if, for example,
the defendant instructs the bank’s letter of credit department to remit the
proceeds direct to an overseas account. It was said, obiter, in Z Ltd v A-L and
AA-LL that a freezing injunction drafted in the split form recommended for
maximum sum orders would confine the effect of the order to the defen-
dant’s bank accounts, and not extend it to the defendant’s assets generally
(including letters of credit) insofar as they are under the control of a bank on
which a copy of the order is served1. It is, however, difficult to see how the mere
division of the order into paragraphs in the manner suggested can limit the
ordinary meaning of the word ‘asset’. In any event, many orders do not adopt
the recommended drafting. In practice the instances of defendants attempting
to circumvent freezing orders by issuing remittance instructions in respect of
credit proceeds are so few that it has not yet been necessary for the courts to
consider the problem more fully.
1
[1982] QB 558 at 591E-G, [1982] 1 All ER 556 at 576g-j, CA.

B. Will the court restrain performance?

32.17 The court will not restrain the paying bank from performing its under-
taking to the defendant as beneficiary1. This accords both with the general
principle that a freezing injunction will not be permitted to interfere with
performance of an existing contract between a third party and the defendant2,
and also with the general approach of the court to restraint of payment under
letters of credit and performance guarantees3.
In Lewis & Peat v Almatu Properties Ltd4 the Court of Appeal stated obiter
that it was of the utmost importance that routine banking transactions such as
documentary collections should not be subject to interference by the
court’s power to grant freezing injunctions unless an exceptionally strong case
could be made out that for some reason or another the well-settled principles of
banking law were inapplicable.
The freezing injunction does, of course, restrain any transfer by the defendant
of a portion of the credit or any assignment of the benefit thereof.
1
Intraco Ltd v Notis Shipping Corpn [1981] 2 Lloyd’s Rep 256 at 258, CA; Power Curber
International Ltd v National Bank of Kuwait SAK [1981] 3 All ER 607 at 613, [1981] 1 WLR
1233 at 1241–1242; Z Ltd v A-Z and AA-LL [1982] QB 558 at 574G, 591F, [1982] 1 All ER
556 at 563j, 576h, CA.
2
Galaxia Maritime SA v Mineralimportexport [1982] 1 All ER 796, [1982] 1 WLR 539, CA.
3
See Chapter 35.
4
[1993] 2 Bank LR 45.

C. Does the order apply to the proceeds?

32.18 There is no objection to the order imposing a specific restraint in respect
of the proceeds of a letter of credit as and when received by or for the
defendant1. If the proceeds are paid into a frozen bank account, they are caught
by the order whether or not the proceeds are specifically identified as an asset to

20
 Effect on a Bank of a Freezing Injunction 32.22

which the order applies.

1
Intraco Ltd v Notis Shipping Corpn [1981] 2 Lloyd’s Rep 256 at 258, CA; Z Ltd v A-Z and
AA-LL [1982] QB 558 at 574G, 591F, [1982] 1 All ER 556 at 563j, 576h, CA.

(ii) Bills of exchange and other negotiable instruments

32.19 The principles stated above apply, so far as they are relevant, where the
defendant is the payee of a bill of exchange or other negotiable instrument.

(iii) Shares, title deeds and articles held in safe custody

32.20 In Z Ltd v A-Z and AA-LL Kerr LJ said the following in relation to
shares or title deeds which a bank may hold as security, or articles in a safe
deposit which the bank may hold in the name of the defendant1:
‘Unless these are either (sic) specifically referred to in the order, because they are in
some way connected with the subject matter of the action, the order should not apply
to such assets even if the bank in question is able, through some central register, to
ascertain that they are held in the name of the defendant. The reason is that the bank
may not, and generally will not, know their precise value, and that the bank should
not be expected to try to assess this in some way even at the claimant’s expense, unless
the terms of the order are specifically drafted so as to include them. The same applies
to articles held in safe custody in the name of the defendant, with the additional
complication that the bank may neither know the contents of the safe deposit or of
some other container entrusted to it for safe-keeping, let alone the value of the
contents; nor whether or not the contents in fact belong to the defendant or are held
by him for someone else. Accordingly, the order should be so drawn as to make it
clear that its terms do not apply to such assets, if any.’
In practice it is rare for orders to be so drawn because the claimant will
normally not know whether the defendant has placed such assets with his bank.
In the exceptional case where the claimant has such knowledge, he may well
also be in a position to give a sufficient estimate of value to meet the suggested
difficulty.
1
[1982] QB 558 at 590H–591B, [1982] 1 All ER 556 at 576c-e.

(e) Debits to the defendant’s account

32.21 The bank’s entitlement to debit the defendant’s account has been con-
sidered in relation to:
(i) cheques drawn by the defendant;
(ii) transactions entered into by the defendant involving the use by him of a
cheque card or credit card;
(iii) letters of credit etc, as regards which the defendant is the applicant.

(i) Cheques drawn by the defendant

32.22 As soon as a bank receives notice of a freezing injunction, it must freeze

the defendant’s bank accounts up to the specified maximum amount (if any)
and it must not allow any drawings to be made on the frozen funds, even by

21
32.22 Freezing Injunctions

cheque drawn before the making of the order. The reason is because, if it
allowed any such drawings, the bank ‘would be obstructing the course of justice
– as prescribed by the court which granted the injunction – and it would be
guilty of a contempt of court’1. The sample order appended to the Pt 25 Practice
Direction expressly provides in para 7(c) that the frozen assets include ‘the
amount of any cheque drawn on such account which has not yet cleared’. The
dishonouring of cheques drawn before the making of the order is typical of the
damaging consequences which can result from the grant of a freezing order. The
justification for including uncleared cheques is that otherwise post-
order cheques might be deliberately ante-dated2.
The sample order permits the defendant to pay sums to be determined by the
court towards his ordinary living expenses, and legal advice and representation.
This permits a bank to honour cheques in respect of such expenses and
liabilities, whether drawn before or after the making of the order. This raises a
fresh difficulty, discussed below, whether a bank has to satisfy itself that cheques
purporting to be drawn pursuant to such permission are in fact so drawn.
1
[1982] QB 558 at 574D-E, [1982] 1 All ER 556 at 563g.
2
[1982] QB 558 at 592B, [1982] 1 All ER 556 at 577b.

(ii) Transactions involving the use of a credit card

32.23 If a defendant has used a credit card or other payment system which
gives rise to obligations on the part of a bank to a third party, the bank is entitled
and bound to honour such obligations to the third parties concerned1. This
creates a fundamental distinction from the position relating to cheques, where
the bank’s obligation is solely to the defendant. The Court of Appeal has given
guidelines that, in cases where the defendant might avoid the incidence of the
freezing order by means of credit cards, the order should make it clear that it
does not preclude the debiting of his account in respect of any credit card
transaction effected by the defendant prior to the date when the order is served
on the bank2.
In practice it is rare for an order to contain such a provision, and this reflects the
fact that banks and credit card companies have not found it necessary to insist
upon its inclusion. There are several reasons for this. First, in most cases where
such a provision would otherwise be appropriate, the order will contain a more
general proviso in respect of trading or living expenses and/or pre-existing
liabilities. Second, credit card companies are not generally entitled to debit the
cardholder’s account, and therefore the recommended proviso would not assist
them in any event. Third, a claimant cannot properly use his freezing injunction
to defeat a bank’s contractual right to debit an account in respect of a
pre-order card transaction, and so in practice such debits are made with the
claimant’s consent.
It has been said that once the bank has been served, it will no doubt consider it
prudent to take steps to withdraw the card facility from the defendant insofar as
it is in its power to do so. This implies that failure to do so would be a material
consideration on an application to vary a freezing injunction to permit the
debiting of an account in respect of use of a card which could have been
prevented, and that failure to prevent such use may amount to contempt of
court. It is, however, thought doubtful whether either proposition survives

22
 Effect on a Bank of a Freezing Injunction 32.25

analysis, especially where the order permits a defendant to pay expenses.

1
[1982] QB 558 at 591H-592A, [1982] 1 All ER 556 at 576j-577a per Kerr LJ.
2
[1982] QB 558 at 591H–592D, [1982] 1 All ER 556 at 576j-577d per Kerr LJ.

(iii) Letters of credit, etc

32.24 It has already been noted that where the defendant is the beneficiary of
a credit, a freezing injunction will not be granted to restrain payment by the
issuing or confirming bank. Consistent with this approach, and with the
bank’s position in relation to credit card transactions, where the defendant is
the applicant for the credit, the issuing bank, having paid the beneficiary (or
reimbursed the paying bank), should be permitted to debit the defendant’s ac-
count1.
1
[1982] QB 558 at 574F-G, [1982] 1 All ER 556 at 563j.

(f) The banker’s rights of set-off and exercising security

32.25 All freezing injunctions which are intended to be served on banks should
contain in the original ‘without notice’ or ‘ex parte’ order a suitable proviso to
enable the bank to exercise its right of set-off without the necessity of applying
for a variation to the order. The sample order annexed to the Pt 25 Practice
Direction includes the following provision (para 17):
‘This injunction does not prevent any bank from exercising any right of set-off it may
have in respect of any facility which it gave to the respondent before it was notified of
this order.’
If a bank is served with an order which does not contain a set-off proviso, the
question arises whether it is entitled to exercise its right of set-off without
applying to the court for a variation. In Oceanica Castelana Armadora SA of
Panama v Mineralimportexport1, Lloyd J held that the answer is ‘no’, or at the
very least that there is a doubt. In light of this observation, it would clearly be
imprudent for a bank to effect a set-off without first making the appropriate
application.
The Crown Court may make a ‘restraint order’, which is akin to a freezing
injunction. By s 41(1) of the Proceeds of Crime Act 2002 (‘POCA 2002’), the
effect of a restraint order is to prohibit the person specified by the order (a
defendant to criminal proceedings or a suspected offender) from dealing with
any realisable property held by him. The restrained assets can later be the
subject of a confiscation order under POCA 2002, s 6, corresponding to
enforcement of a civil judgment against frozen assets.
As with freezing injunctions, a restraint order will usually affect the specified
person’s bank. Thus, it should provide for the banker’s right of set-off with text
such as this:
‘This order does not prevent any bank from exercising any right of set-off it may have
in respect of any facility which it gave to the defendant before it was notified of this
order.’

23
32.25 Freezing Injunctions

Again, where such a provision is omitted, a question will arise as to the

bank’s right of set-off. In Re K (Restraint Order)2, Otton J held that a bank
could combine an overdraft account with two deposit accounts, despite a
restraint order3. The reason was that the process was a mere accounting
exercise, which did not involve disposing of or dealing with the assets contrary
to the restraint order4. The bank thus obtained a variation of the restraint
order allowing the set-off.
Thus, as with freezing injunctions, the prudent course will be to seek a variation
to the restraint order to include an express provision for set-off5. The bank can
make the application directly under POCA 2002, s 42(3)(b), or it can prevail on
the prosecutor to make the application.
However, a bank with security over property caught by the freezing injunction
does not need permission to exercise that security, because the exercise of
disposal rights under the security is not an act prohibited by the injunction, and
therefore does not infringe it. In Taylor v Van Dutch Marine Holding Ltd6 a
secured creditor was allowed to enforce a charge without a variation to the
freezing injunction. Mann J observed that:
‘ . . . [the freezing order] operates to prevent each of the defendants from dissipat-
ing or disposing of their respective assets. It does not in terms bar anyone else, who
might have an independent right over the assets, from disposing of them. Third
parties might be caught by the order if, for example, their acts fell to be treated as acts
of the defendants, or if they were otherwise acts done so as to defeat the order in some
improper way, but that is different.
Thus, in my view, a third party with security over property which is frozen by the
freezing order would not need to obtain permission in order to exercise that security
because the exercise of disposal rights under that security would not be an act
prohibited by the order . . . 7’
The judge emphasised the fact that this approach would apply only ‘in a normal
security enforcement situation which does not involve anything which could
properly be classed as a disposal by the defendant, which is not collusive (in an
infringement of the order) and which does not amount to aiding and abetting a
breach of the order . . . ’8.
1
[1983] 2 All ER 65 at 71d-h, [1983] 1 WLR 1294 at 1301-1302.
2
[1990] 2 QB 298.
3
The restraint order was made under the Drug Trafficking Offences Act 1986, using a pre-
decessor provision to the one currently found in POCA 2002.
4
The conclusion in Re K is undoubtedly correct, despite the controversy about the precise nature
of the banker’s right of set-off described in para 14.18 above. The essential reason is that the
right of set-off is a form of security. Hence in Irwin Mitchell v Revenue and Customs
Prosecutions Office [2008] EWCA Crim 1741, [2009] 1 WLR 1079, the court allowed
solicitors to transfer restrained funds from their client account to their office account in
payment of their fees. The solicitors were secured creditors by virtue of their lien and so the
situation was analogous to that in Re K (see [25] and [35] of the judgment). Contrast SFO v
Lexi Holdings Plc [2008] EWCA Crim 1443, [2009] QB 376 where the court held that a
restraint order may not be varied so as to allow a payment of a debt to an unsecured creditor,
unless there is no conflict with the object of satisfying any confiscation order that has been or
might be made.
5
In Re K, Otton J concluded that the bank ‘might’ be able to exercise its rights without resorting
to the court. But he went on to say that ‘all banks no doubt will still consider it prudent to apply
to the court for a variation for the avoidance of doubt and when no assurance has been given by
the Crown Prosecution Service that any point adverse to them will be taken’.
6
[2017] EWHC 636 (Ch), [2017] 1 WLR 2571.
7
[2017] EWHC 636 (Ch), [2017] 1 WLR 2571 at [11]–[12].

24
 Injunctions in Aid of Tracing Claims 32.28
8
[2017] EWHC 636 (Ch), [2017] 1 WLR 2571 at [17].

(g) Disclosure of information

32.26 Unless disclosure is made pursuant to a specific order for disclosure,
disclosure of information about a customer’s assets would amount to a breach
of the bank’s duty of confidentiality1. There is no obligation on a bank served
with a freezing injunction to inform the claimant what assets it holds which are
covered by the injunction. Although the court has jurisdiction to order a bank
to disclose the state of its customer’s account, that jurisdiction is to be used
sparingly:
‘It is a strong thing to order a bank to disclose the state of its customer’s account and
the documents and correspondence relating to it. It should only be done when there
is a good ground for thinking the money in the bank is the plaintiff’s money — as, for
instance, when the customer has got the money by fraud — or other wrongdoing —
and paid it into his account at the bank2’.

1
See Chapter 3.
2
Bankers Trust Co v Shapira [1980] 1 WLR 1274 at 1282.

4 NO DUTY OF CARE TO APPLICANT FOR FREEZING ORDER

32.27 In Customs and Excise Comrs v Barclays Bank plc1, the question arose
whether a bank, notified by a third party of a freezing injunction granted to the
third party against one of the bank’s customers, owes a duty to the third party
to take reasonable care to comply with the terms of the injunction. The facts
were that the defendant bank had permitted substantial withdrawals from the
accounts of two corporate customers after being notified of a freezing injunc-
tion against them.
The House of Lords, allowing the appeal and restoring the order of Colman J,
held that a bank owes no such duty. Although notification of the injunction to
the relevant bank imposes a duty on that bank to respect the order of the court,
it does not generate a duty of care to the applicant. There is no assumption of
responsibility by the bank towards the applicant. The bank’s only duty is to the
court, and a failure to comply with the terms of a freezing order exposes the
bank to the risk of punishment for contempt of court.
The decision is not only a very welcome one for banks in the context of freezing
orders, it is also an important contribution to the vexed question of when one
person comes under a duty of care to protect another person from economic
loss.
1
[2006] 4 All ER 256, [2006] 3 WLR 1, HL.

5 INJUNCTIONS IN AID OF TRACING CLAIMS

32.28 There is a well-established jurisdiction to grant injunctions in aid of
tracing claims. The jurisdiction is acknowledged, at least in relation to identi-
fiable funds, in CPR r 25.1(1)(c), which permits the court to make an order for

25
32.28 Freezing Injunctions

the preservation of relevant property, and r 25.1(1)(g), which permits the

making of an order directing a party to provide information about the location
of relevant property. CPR r 25.1(2) defines relevant property as ‘property
(including land) which is the subject of a claim or as to which any question may
arise on a claim’.
In the exercise of this jurisdiction the court has tended to follow the robust
approach taken in two unreported cases in 1978. In the first, London
and Counties Securities Ltd (in liquidation) v Caplan1 Templeman J granted in
aid of a tracing claim an injunction which restrained the defendant from dealing
not only with assets within the jurisdiction, but also assets outside the juris-
diction, including in particular any credit balances in accounts maintained with
specified overseas subsidiaries of Lloyds Bank. In the second case, Mediterranea
Raffineria Siciliana Petroli SpA v Mabanaft GmbH2, the Court of Appeal
upheld disclosure orders in aid of an injunction freezing certain sale proceeds in
which the claimant claimed a proprietary interest.
The jurisdiction has since been exercised, or its exercise considered, in a number
of reported cases. In A v C3, Robert Goff J granted an injunction in aid of a
tracing claim restraining disposal of monies in bank accounts up to a specified
amount. He also granted a freezing injunction restraining disposal of a much
larger sum in aid of claims in personam.
In Ashtiani v Kashi4, a case involving a worldwide freezing injunction, Dillon LJ
observed that the jurisdiction conferred by s 37(1) of the Senior Courts Act
1981 obviously covers an injunction in respect of foreign assets where the title
to those assets is in question. In Republic of Haiti v Duvalier, Staughton LJ
observed that the powers of the court to restrain dealing with assets outside the
jurisdiction may be wider, and its discretion is certainly more readily exercised,
if the claimant’s claim is a proprietary claim5. In Polly Peck International plc v
Nadir (No 2)6, the Court of Appeal stated that an injunction in aid of a tracing
claim has a wholly different basis from a freezing injunction7. Since the claimant
is asserting title to a particular fund, an injunction in aid of a tracing claim will
not be subject to provisos enabling the use of the money for normal business
purposes or the payment of legal fees or the like8.
In A v C, above, a bank which had received the monies which were the subject
of the tracing claim was joined as a party to the action. It is thought that this is
generally not necessary, save where a disclosure order is sought9. A bank which
is on notice of a tracing claim could not safely pay away any such monies in its
hands, even before the making of a freezing order against its customer. After
notice of a freezing order, such payment would constitute a contempt of court.
In relation to the obtaining of freezing orders, a claimant with a proprietary
claim enjoys certain advantages over a claimant with a claim in personam,
namely:
(1) an injunction over overseas assets will more readily be granted;
(2) it is not necessary to prove a real risk of dissipation – it is sufficient to
establish an arguable title to the monies;
(3) ancillary relief by way of discovery and the appointment of a receiver is
in practice more readily available;
(4) if the defendant has other assets, the court may decline to permit
payments out of the disputed fund to pay legal costs, trade debts etc; and

26
 Injunctions in Aid of Tracing Claims 32.28

(5) if the proprietary claim is established, the claimant’s title prevails in an

insolvency.
1
5 May 1978 (ex parte application); (26 May 1978, unreported) (inter partes hearing between
claimant and Lloyds Bank Ltd).
2
[1978] CA (Civil Division) Transcript 816, CA.
3
[1981] QB 956 (Note), [1980] 2 All ER 347.
4
[1987] QB 888 at 901B, [1986] 2 All ER 970 at 977b-c, CA.
5
[1990] 1 QB 202 at 213H–214A, [1989] 1 All ER 456 at 464f-g.
6
[1992] 4 All ER 769.
7
[1992] 4 All ER 769 at 787a.
8
[1992] 4 All ER 769 at 784f.
9
Under CPR 25.1(1)(g) the court can make a disclosure order ancillary to an interim or-
der against a party, although note that in exceptional cases the court may make an order against
a bank as a third party under CPR Part 31. See Bankers Trust Co v Shapira [1980] 1 WLR 1274
at 1282 and para 32.26 above.

27
Chapter 33

COMPULSORY DISCLOSURE

1 NON-PARTY DISCLOSURE UNDER THE CPR AND THE

SENIOR COURTS ACT 1981 33.2
2 DISCLOSURE IN AID OF TRACING CLAIMS
(a) Jurisdiction to order disclosure by a bank 33.3
(b) Discretion 33.4
(c) Procedure and costs 33.5
3 DISCLOSURE ORDERS UNDER NORWICH PHARMACAL 33.6
4 INSPECTION ORDERS UNDER THE BANKERS’ BOOKS
EVIDENCE ACT 1879 33.8
(a) Proof of contents of bankers’ books 33.9
(b) Inspection orders 33.10
5 ORDERS UNDER EVIDENCE (PROCEEDINGS IN OTHER
JURISDICTIONS) ACT 1975 33.13
6 DISCLOSURE UNDER THE INSOLVENCY ACT 1986, s 235 33.14
7 DISCLOSURE TO INVESTIGATORS 33.15
8 DISCLOSURE TO HMRC 33.16
9 DISCLOSURE PURSUANT TO CRIMINAL LAW STATUTES 33.17
(a) Section 2 of the Criminal Justice Act 1987 33.18
(b) Section 9 of the Police and Criminal Evidence Act 1984 33.19
(c) The Terrorism Act 2000 33.20
(d) The Proceeds of Crime Act 2002 33.21
(e) The Crime (International Co-operation) Act 2003 33.22
(f) The Money Laundering, Terrorist Financing and Transfer of
Funds (Information on the Payer) Regulations 2017, SI 2017/692 33.23

33.1 This chapter reviews the main situations in which a bank can be required
to disclose confidential information about its customers. In the landmark case
of Tournier1, the Court of Appeal held that it was an implied term of the
contract between bank and customer that the banker would not divulge to third
parties the state of the customer’s account, or any of the customer’s transactions
with the bank, or any information relating to the customer acquired through
the keeping of the account, save where one (or more) of four circumstances
applied2:
‘(a) Where disclosure is under compulsion by law; (b) where there is a duty to the
public to disclose; (c) where the interests of the bank require disclosure; (d) where the
disclosure is made by the express or implied consent of the customer.’
When Tournier was decided in 1923, there were very few instances of compul-
sion by law to disclose confidential information (as the Jack Committee Report
noted in 1989). Besides s 7 of the Bankers’ Books Evidence Act 1879, cited by
Atkin LJ, the Committee could identify only one other instance, namely s 5 of

1
33.1 Compulsory Disclosure

the Extradition Act 18733. Today the position is very different. The Jack Com-
mittee identified 19 statutes requiring or permitting banks to disclose confiden-
tial information and yet more control has been introduced since.
1
Tournier v National Provincial and Union Bank of England [1924] 1 KB 461, discussed at para
3.17 to 3.22 above.
2
[1924] 1 KB 461 at 473.
3
Cm 622, para 5.06.

1 NON-PARTY DISCLOSURE UNDER THE CPR AND THE

SENIOR COURTS ACT 1981
33.2 Disclosure against non-parties is addressed in the Civil Procedure Rules
by CPR r 31.17 and CPR r 34.21. By CPR r 31.17 the court may make an
order under this rule only where, per r 31.17(3)(a), the documents of which
disclosure is sought are likely to support the case of the applicant or adversely
affect the case of one of the other parties to the proceedings and, per
r 31.17(3)(b), disclosure is necessary in order to dispose fairly of the claim or to
save costs. This rule co-exists alongside CPR r 34.2 which gives the court the
power to order a witness to produce a document to the court. By CPR r 31.18,
CPR r 31.17 is expressly stated not to limit any other power which the court
may have to order, inter alia, disclosure against a person who is not a party to
proceedings. Accordingly the case law and other statutory bases are retained
subject to irreconcilable inconsistencies.
1
Disclosure against non-parties in cases of personal injury or death is also addressed in section 34
of the Senior Courts Act 1981, which provides that the High Court has the power to
order disclosure from a person who is not a party to the proceedings and who appears to the
court to be likely to have relevant documents in his possession, custody or power.

2 DISCLOSURE IN AID OF TRACING CLAIMS

(a) Jurisdiction to order disclosure by a bank

33.3 The court has inherent power to order disclosure in aid of a tracing claim1.
This includes the power to make a disclosure order against a third party such as
a bank even though no other relief is claimed against it.
1
See generally the notes to CPR, r 25.1(1)(g); and see also AJ Bekhor & Co Ltd v Bilton
[1981] QB 923 at 953–954, [1981] 2 All ER 565 at 586, CA.

(b) Discretion
33.4 The power to make ancillary disclosure orders is discretionary. Issues of
principle relating to the manner in which the discretion should be exercised
were considered in the two unreported cases concerning tracing claims. In the
first, London and Counties Securities (in liquidation) v Caplan1, the court made
a disclosure order requiring Lloyds Bank to procure certain overseas subsidiar-
ies to disclose statements of bank accounts maintained with them outside the

2
 Disclosure in Aid of Tracing Claims 33.5

jurisdiction. Templeman J acknowledged that it was not surprising that injunc-

tions in these forms had caused both Lloyds Bank and its foreign subsidiaries
considerable concern for two reasons:
(1) an injunction of the English court would not be a complete answer to a
civil action brought against them overseas for non-repayment of credit
balances;
(2) the English order might give rise to civil or even criminal liability for
breach of the duty of secrecy.
To meet these concerns, the ex parte order was varied in two respects. First, to
minimise the possibility of civil liability in damages, the freezing order was
varied so as to cease to bite if one of the overseas banks gave notice to the
claimant that the defendant was seeking to withdraw money, but subject to the
claimant having seven days in which to take action itself abroad so as to obtain
a corresponding order from the foreign court. Second, to minimise the pos-
sibility of criminal proceedings, the disclosure order was made subject to a
proviso that the banks would not be guilty of contempt if their failure to comply
with the order would render them liable to criminal process in the jurisdiction
in which it was situate.
Today these problems are best resolved by inserting the Babanaft proviso (see
paras 32.6 to 32.7 above) with the wording suitably amended to cover disclo-
sure rather than disposal of assets. The current version of the Babanaft proviso,
modified a number of times since, is to be found in the CPR, Pt 25, Practice
Direction – Interim Injunctions, Annex, Freezing Injunction, paragraph 19.
In the second unreported case, Mediterranea Raffineria Siciliana Petroli SpA v
Mabanaft GmbH2, the Court of Appeal upheld an order for disclosure and for
an affidavit of documents made for the purpose of ascertaining not only the
whereabouts of certain proceeds of sale to which the claimant asserted a
proprietary title, but also the identity of persons who controlled a Panamanian
company. In a statement which has often been cited, Templeman LJ said:
‘A court of equity has never hesitated to use the strongest powers to protect and
preserve a trust fund in interlocutory proceedings on the basis that, if the trust fund
disappears by the time the action comes to trial, equity will have been invoked in vain.
That is why orders of this sort were made long before the recent orders for discovery,
and they are at the heart of the Chancery Divisions concern, and it is the concern of
any court of equity, to see that the stable door is locked before the horse has gone.’

1
5 May 1978 (ex parte application); (26 May 1978, unreported) (inter partes hearing between
claimant and Lloyds Bank Ltd).
2
[1978] CA (Civil Division) Transcript 816, CA.

(c) Procedure and costs

33.5 Where a disclosure order is sought against a bank, the proper procedure
is to join the bank as a defendant to the action, as in A v C1. This accords with
the established practice that an injunction ought not to be granted against a
non-party2. The order will normally contain an undertaking by the claimant to
pay the bank’s reasonable costs and expenses of compliance on an indemnity
basis.

3
33.5 Compulsory Disclosure

If, however, the bank is not joined as a party, it may nonetheless apply for
permission to make an application to vary or discharge in the existing action. It
is not necessary to institute separate proceedings in order to seek such relief3.
The claimant must expect to pay the costs of an innocent third party who
applies to intervene. In Project Development Co Ltd SA v KMK Securities Ltd4
an order was made that the intervener’s costs were to be taxed in accordance
with RSC Ord 62, r 29 (revoked) on a solicitor and own client basis but with a
direction that, notwithstanding the terms of RSC Ord 62, r 29(1), it was for the
intervener to establish that the costs had been reasonably incurred and were
reasonable in amount. It appears that the equivalent direction under the CPR
would be for assessment in accordance with CPR, r 44.4(3) on an indemnity
basis but with a direction that, notwithstanding the terms of that rule, any
doubts as to whether the costs were reasonably incurred or were reasonable in
amount are to be resolved in favour of the paying party.
1
[1981] QB 956n, [1980] 2 All ER 347.
2
See Elliot v Klinger [1967] 3 All ER 141, [1967] 1 WLR 1165.
3
In London and Counties Securities (in liquidation) v Caplan the bank issued an originating
notice of motion. It was held that the application should have been made in the existing action.
For an example of a third party intervening, see Project Development Co Ltd SA v KMK
Securities [1983] 1 All ER 465, [1982] 1 WLR 1470. See also Bank of China v NBM LLC,
[2002] 1 All ER 713, [2002] 1 WLR 844.
4
[1983] 1 All ER 465,[1982] 1 WLR 1470.

3 DISCLOSURE ORDERS UNDER NORWICH PHARMACAL

33.6 In Norwich Pharmacal Co v Customs and Excise Comrs1 the House of
Lords held that if a person through no fault of his own becomes involved in the
tortious acts of others so as to facilitate their wrongdoing, he may incur no
personal liability but he comes under a duty to assist the person who has been
wronged by giving him full information and disclosing the identity of the
wrongdoers. This jurisdiction overlaps considerably the jurisdiction under
s 37(1) of the Senior Courts Act 1981 to make disclosure orders in aid of tracing
claims.
In Mitsui & Co Ltd v Nexen Petroleum UK Ltd2, Lightman J identified three
respects in which subsequent cases have extended the Norwich Pharmacal
principle3:
(i) the jurisdiction is not confined to circumstances where there has been
tortious wrongdoing and is now available where there has been contrac-
tual wrongdoing4;
(ii) the jurisdiction is not limited to cases where the identity of the wrong-
doer is unknown – relief can be ordered where the identity of the
claimant is known, but where the claimant requires disclosure of crucial
information in order to be able to bring its claim or where the claimant
requires a missing piece of the jigsaw5;
(iii) the third party from whom information is sought need not be an
innocent third party: he may be a wrongdoer himself6.
Lightman J summarised the three conditions which have to be satisfied for the
court to exercise the power to order Norwich Pharmacal relief as being: (i) a
wrong must have been carried out, or arguably carried out, by an ultimate

4
 Disclosure Orders Under Norwich Pharmacal 33.7

wrongdoer; (ii) there must be the need for an order to enable action to be
brought against the ultimate wrongdoer; and (iii) the person against whom the
order is sought must: (a) be mixed up in so as to have facilitated the wrongdo-
ing; and (b) be able or likely to be able to provide the information necessary to
enable the ultimate wrongdoer to be sued7. He regarded it as clear that the
exercise of the jurisdiction of the court under Norwich Pharmacal against third
parties who are mere witnesses innocent of any participation in the wrongdoing
being investigated is a remedy of last resort, suggesting it is not sufficient to
show that disclosure is necessary to enable an action to be brought; it must also
be established that the information concerned cannot be obtained elsewhere8.
1
[1974] AC 133, [1973] 2 All ER 943, HL.
2
[2005] EWHC 625 (Ch), [2005] 3 All ER 511.
3
At [19].
4
Citing P v T Ltd [1997] 4 All ER 200, [1997] 1 WLR 1309; Carlton Film Distributors Ltd v
VCI plc [2003] EWHC 616, [2003] FSR 876.
5
Citing AXA Equity and Law Life Assurance Society plc v National Westminster Bank plc
[1998] CLC 1177, CA (Axa Equity); and Aoot Kalmneft v Denton Wilde Sapte (a firm) [2002]
1 Lloyd’s Rep 417.
6
Citing CHC Software Care Ltd v Hopkins and Wood [1993] FSR 241 and Hollander,
Documentary Evidence (8th edn, 2003) p 78, fn 11.
7
At [21].
8
At [24].

33.7 The Norwich Pharmacal principle was applied in Bankers Trust Co v

Shapira1, where the claimant claimed to have been defrauded by two individu-
als of US $1m, of which US $708,203 had been credited to accounts maintained
with Discount Bank (Overseas) Ltd. Upon discovery of the fraud some months
later, the claimant instituted proceedings against the two individuals and the
bank, and applied ex parte for freezing and disclosure orders. The freezing
orders were granted, but at first instance Mustill J declined to grant a disclosure
order against the bank, principally on the grounds that there was no need to
forestall the disposition of the money since the events in question had happened
eight months earlier, and the individual defendants were not before the court,
not having been served. The Court of Appeal, applying Norwich Pharmacal,
allowed an appeal against the refusal to grant a disclosure order. The Court
recognised that it is a strong thing to order a bank to disclose the state of its
customer’s account, and the documents and correspondence relating to it. It
stated that this should only be done when there is good ground for thinking that
the money in the bank is the claimant’s money.
The categories of documents ordered to be disclosed by the bank were:
(1) all correspondence passing between the bank and the first and second
defendants (the two individuals) relating to any account at the bank in
the names of either the first and/or second defendants;
(2) all cheques drawn on any account at the bank in the names of either the
first and/or second defendants;
(3) all debit vouchers, transfer applications and orders and internal memo-
randa relating to any account at the bank in the names of either the first
and/or second defendants;
in each case from the date of the alleged fraud, onwards.

5
33.7 Compulsory Disclosure

An order of that breadth was held to be justified because, unless the fullest
possible information had been ordered, the difficulties of tracing the funds
would have been ‘well-nigh impossible’.
The international jurisdictional limits of disclosure under Norwich Pharmacal
are the same as those of a witness summons requiring production of documents2
or an order under the Bankers’ Books Evidence Act 18793.
In recent years this jurisdiction has been extended to a ‘flexible remedy’ most
recently endorsed by the Supreme Court in Rugby Football Union v Consoli-
dated Information System (formerly Viagogo) (In Liquidation)4. Lord Kerr
described the jurisdiction to allow a prospective claimant to obtain information
via Norwich Pharmacal relief by citing the familiar passage from Lord
Reid’s speech in that case but went on:
‘15. Later cases have emphasised the need for flexibility and discretion in considering
whether the remedy should be granted: [Ashworth5; Koo6]. It is not necessary that an
applicant intends to bring legal proceedings in respect of the arguable wrong; any
form of redress (for example disciplinary action or the dismissal of an employee) will
suffice to grant an application for the order... . . .
17. The essential purpose of the remedy is to do justice. This involves the exercise of
discretion by a careful and fair weighing of all relevant factors.7’

1
[1980] 3 All ER 353, [1980] 1 WLR 1274, CA. See also CHC Software Care Ltd v Hopkins &
Wood [1993] FSR 241 at 250 (jurisdiction not confined to identifying wrongdoers); Omar v
Omar [1995] 3 All ER 571 at 580f, [1995] 1 WLR 1428 at 1438C (order made where evidence
disclosed strong prima facie case of dishonest design, but no direct evidence of participation by
a company whose name was ordered to be disclosed); and Miles Smith Broking Ltd v Barclays
Bank Plc [2017] EWHC 3338 (Master Clark) (order made where a reinsurance broker had a
good arguable case that it had a proprietary interest in monies in a third party’s bank account,
even if the broker was not the ultimate beneficial owner of the monies and was itself holding
them on trust for another).
2
See CPR r 34.2.
3
MacKinnon v Donaldson, Lufkin and Jenrette Securities Corpn [1986] Ch 482 at 498–499,
[1986] 1 All ER 653 at 661.
4
[2012] 1 WLR 3333.
5
Ashworth Hospital Authority v MGN Ltd [2002] 1 WLR 2033, para 57, per Lord Woolf CJ.
6
Koo Golden East Mongolia v Bank of Nova Scotia [2008] QB 717, paras 37–38, per Sir
Anthony Clarke MR.
7
See further Mann J in Various Claimants v Newsgroup Newspapers [2013] All ER (D) 174 (Jul)
and R (on the application of Omar) v Secretary of State for Foreign and Commonwealth Affairs
[2013] EWCA Civ 118, [2013] 3 All ER 95 where the Court of Appeal decided that where the
regime of the Crime (International Co-operation) Act 2003 (see below) was in play, Norwich
Pharmacal did not apply.

4 INSPECTION ORDERS UNDER THE BANKERS’ BOOKS

EVIDENCE ACT 1879
33.8 The Bankers’ Books Evidence Act 1879 deals with two separate matters.
First, it provides a convenient procedure for the proof of the contents of
bankers’ books without bank officers being compellable witnesses in legal
proceedings to which the bank is not a party. Second, it confers a jurisdiction to
make inspection orders against banks. It is convenient to deal with both matters
in this chapter, even though the first is not strictly within its ambit.

6
 Inspection orders under BBEA 1879 33.9

(a) Proof of contents of bankers’ books

33.9 The main object of the Bankers’ Books Evidence Act 1879 is to avoid the
inconvenience to bankers1 of their being compellable to produce their books in
legal proceedings to which they are not party2. The previous practice was
vexatious, because in theory the books could be utilised only for refreshing the
memory of the clerk or officer who made the entries and was summoned as a
witness, whereas the real object of compelling their production was that they
were in practice invariably but irregularly put forward and treated as substan-
tive evidence in themselves3.
By s 3 of the Act, in all legal proceedings4, a copy of any entry in a banker’s book
shall be received as prima facie evidence of the existence of such entry and of the
matters, transactions and accounts therein recorded. By s 9(2) (as substituted by
the Banking Act 1979, s 51(1) and Sch 6, Pt I), ‘bankers’ books’ include ledgers,
day books, cash books, account books and other records used in the ordinary
business of the bank, whether those records are in written form or are kept on
microfilm, magnetic tape or any other form of mechanical or electronic data
retrieval mechanism. Such evidence is available against anyone; thus copies of
entries in the books of bankers who are defendants can be used as evidence
against the claimant5.
To be used in the ordinary business of a bank, a book does not have to be in use
every day; it is sufficient if it be a book kept by the banker for reference if
necessary6.
Although cheques and paying-in slips constitute part of a bank’s records used in
the ordinary course of its business, the adding of an individual cheque or
paying-in slip to an unsorted bundle does not constitute the making of an entry
in those records. However, in 1988 the Court of Appeal considered that a
microfilm recording the payment of cheques by photographing the name of the
payee probably is an entry in a banker’s book7. By analogy, it is expected that
electronic records of the payment of cheques or other payment instruments
would likewise constitute an entry in a banker’s books. A letter from a banker
to his customer is not a bankers’ book8 nor are notes of interviews or conver-
sations or other internal memoranda.
In Douglass v Lloyds Bank Ltd9 Roche J allowed the bank to produce old
deposit ledgers to show that they carried no trace of a deposit alleged to have
been made in 1866 and not repaid. The bank could produce nothing earlier
than 1873 and the learned judge held that ‘the ignorance of the bank of the
subsistence of this deposit as constituting a debt’ confirmed his view that the
deposit had been repaid. The judge relied on s 3 in permitting such evidence to
be adduced.
Whether the non-existence of any entry in the material books is prima facie
evidence of the non-existence of an account remains undecided as a result of
that case.
A bank can of course be made to produce items held by it for a customer under
CPR r 34.2. It is no answer to such an order that the document is held by the
bank on terms that its delivery up requires the authority of the depositor10. That
said, s 6 of the Act provides that no banker or officer of a bank, in any legal
proceeding to which the bank is not a party, may be compelled to produce the

7
33.9 Compulsory Disclosure

originals of any banker’s book the contents of which can be proved with copies
under the Act11, or to appear as a witness to prove the matters, transactions and
accounts recorded in it, unless by order of a judge made for special cause12.
However, to obtain the benefit of this relief from attendance and production,
the banker or officer must have furnished, or have been willing to furnish,
verified copies of the required entries; and, if he has not done so, the books may
still be obtained by order of the court: Emmott v Star Newspaper Co13.
A bank which is a party to litigation is, of course, under the ordinary duty to
give disclosure of relevant documents and to allow inspection14.
1
For the meaning of ‘bank’ and ‘banker’ in the Act, see Chapter 4 above. For present purposes,
‘bank’ and ‘banker’ includes a deposit taker and the National Savings Bank: s 9(1), 9(1A), (1B)
and (1C) as amended; Financial Services and Markets Act 2000, s 22 and Sch 2.
2
Parnell v Wood [1892] P 137.
3
See per Bowen LJ in Arnott v Hayes (1887) 36 Ch D 731 at 738.
4
Section 10, as amended by SI 2001/3649, art 266, provides: ‘In this Act – The expression “legal
proceeding” means any civil or criminal proceeding or inquiry in which evidence is or may be
given, and includes: (a) an arbitration; (b) an application to, or an inquiry or other proceeding
before, the Solicitors Disciplinary Tribunal or any body exercising functions in relation to
solicitors in Scotland or Northern Ireland corresponding to the functions of that Tribunal; and
(c) an investigation, consideration or determination of a complaint by a member of the panel of
ombudsmen for the purposes of the ombudsman scheme within the meaning of the Financial
Services and Markets Act 2000. The expression “the court” means the court, judge, arbitrator,
persons or person before whom a legal proceeding is held or taken.’ As such, this rule of
evidence also applies to arbitrations governed by English law.
5
Harding v Williams (1880) 14 Ch D 197. In London and Westminster Bank v Button (1907) 51
Sol Jo 466 it was held that evidence produced under the Act was prima facie evidence against the
world.
6
Idiots’ Asylum v Handysides (1906) 22 TLR 573.
7
Williams v Williams [1988] QB 161 at 168, [1987] 3 All ER 257 at 261, CA.
8
R v Dadson (1983) 147 JP 509.
9
(1929) 34 Com Cas 263.
10
R v Daye [1908] 2 KB 333.
11
In re Howglen Ltd [2001] 1 ALL ER 376 Pumfrey J noted that s 6 prevented the court from
making a subpoena duces tecum or like order in relation to bankers’ books. He presumably
took the view that the case did not come within the ‘special cause’ exception to s 6.
12
As to the purpose of the ‘special cause’ exception, see Douglas v Pindling [1996] AC 890,
[1996] 3 WLR 242, PC.
13
(1892) 62 LJQB 77 and see also R v Daye [1908] 2 KB 333.
14
Woods v Martins Bank Ltd [1959] 1 QB 55, [1958] 3 All ER 166, Earles v Barclays Bank
[2009] EWHC 2500.

(b) Inspection orders

(i) In general
33.10 By s 7 of the Act, on the application of any party to a legal proceeding a
court or judge may order that such party be at liberty to inspect and take copies
of any entries in a banker’s book for any of the purposes of such proceedings.
An order may be made either with or without summoning the bank or any other
party, and must be served on the bank three clear days before the same is to be
obeyed, unless the court or judge otherwise directs. Ordinarily such orders are
applied for and made without notice, leaving it to the bank, where an order is
made, to apply to vary or set aside the order. If made without notice, the proper

8
 Inspection orders under BBEA 1879 33.10

course is to challenge the order on notice whether the application to discharge

or vary comes from the account-holder or the bank.
An order may be made under s 7 by ‘the court’ or ‘a judge’, as defined in
section 10(c) of the Act. ‘The court’ (as noted at para 33.9 (fn 4) above) includes
both civil and criminal proceedings, and means ‘the court, judge, arbitrator,
persons or person before whom a legal proceeding is held or taken’; and ‘ “a
judge” means with respect to England a judge of the High Court, and with
respect to Scotland a lord ordinary of the Outer House of the Court of Session,
and with respect to Ireland a judge of the High Court in Northern Ireland’.
However, a judge of the county court ‘may with respect to any action in such
court exercise the powers of a judge under this Act’.
The granting or refusing of an application for inspection is discretionary as are
its terms1 and the power to grant it will be exercised with great caution and only
on clearly established and sufficient grounds2. The Court may dismiss or cut
down an application if not satisfied as to relevance or on the basis that it may be
oppressive3. Fishing exercises are objectionable and there must be evidence of
material entries or documents. Orders under s 7 should be clear and in respect
of a limited and reasonable period of time4.
The power to make an order for inspection will seldom be exercised with regard
to the accounts of third parties unless it be shown that such account is in
substance really the account of one of the parties to the litigation, or kept on his
behalf. Where inspection of the account of a third party is sought, notice of such
application must be given to such third party and to the bank concerned5.
In South Staffordshire Tramways Co v Ebbsmith6 Lord Esher MR said that:
‘if the court were satisfied that in truth the account which purported to be that of a
third person was the account of the party to the action against whom the order was
applied for, or that though not his account, it was one with which he was so much
concerned that items in it would be evidence against him at the trial . . . then they
might order an inspection.’
This test was applied by the Court of Appeal in Ironmonger & Co v Dyne7,
where inspection of a husband’s account was ordered for the purpose of
discovery concerning his wife’s transactions in securities for which the hus-
band’s account was a cloak. It may also be ordered where the public interest in
helping the prosecution outweighs the private interest in keeping a custom-
er’s bank account confidential8.
The Act may not be used to increase facilities for disclosure and s 7 ‘must be
regarded as being subject to the scope of the Act in general’9. In Williams v
Summerfield10 the Divisional Court held that if legal proceedings were begun
with the sole object of investigating a suspect bank account – a fishing operation
– an application under s 7 should be refused. If made at all, the order should be
strictly confined to relevant entries, of which copies would be disclosable and
admissible in evidence at the trial11. In Williams, the s 7 order was confined to
those entries the party had sworn were the only entries relevant to the matters
in issue. It is common for a bank to redact irrelevant entries deposing to the
irrelevance of the redacted matters. Of itself the Act neither compromises
privilege nor extends disclosure12, merely permitting inspection in the hands of
others. So, in Waterhouse v Barker13 where a party swore that entries would
tend to incriminate him, inspection of them was refused.

9
33.10 Compulsory Disclosure

A bank must give all reasonable facilities to a party authorised to inspect and
take copies of entries by an order under s 714; only when a bank has complied
with the requirements of the Act is it entitled to its protection against being
summoned to appear at trial15.
There would seem no objection to a bank supplying the requisite copies, if that
be the more convenient course16.
Applications are not limited in time and may be made after judgment in the
same way17. For post-judgment applications in respect of third party accounts
the applicant must establish:
(a) That the account is in substance the judgment debtor’s account or so
closely connected to him that items concerning the account will provide
material evidence to the whereabouts of his assets;
(b) That there is firm evidence amounting to near certainty that there are
material items;
(c) That the application is not designed to procure material for cross-
examining the debtor; and
(d) That there are no other reasons for refusing inspection18.
Whilst material disclosed pursuant to a s 7 application is subject to the usual
undertaking not to use the same for a collateral purpose:19, exceptionally the
court has permitted its use in other proceedings specified in the order: see
Jonathan Parker LJ in The Russell-Cooke Trust Company v Richard Prentis
& Co20.
1
Emmott v Star Newspaper Co, above; Waterhouse v Barker [1924] 2 KB 759.
2
See Arnott v Hayes (1887) 36 Ch D 731 per Bowen LJ at 738; also South Staffordshire
Tramways Co v Ebbsmith [1895] 2 QB 669 per Lord Esher MR at 674; see also R v Andover
Justices, ex p Rhodes [1980] Crim LR 644, DC; M’Gorman v Kierans (1901) 35 ILT 84; L’Amie
v Wilson [1907] 2 IR 130.
3
R v Bono (1913) 29 TLR 635.
4
R v Marlborough Street Magistrates’ Court Metropolitan Stipendiary Magistrate, ex p Simpson
(1980) 70 Cr App Rep 291, DC; Owen v Sambrook [1981] Crim LR 329, DC; R v Nottingham
Justices, ex p Lynn (1984) 79 Cr App Rep 238, DC.
5
South Staffordshire Tramways Co v Ebbsmith, [1895] 2 QB 669; Howard v Beall, post; Pollock
v Garle [1898] 1 Ch 1; Ironmonger & Co v Dyne (1928) 44 TLR 579, CA. See also Staunton
v Counihan (1957) 92 ILT 32, in which Dixon J refused to accept the view given obiter in
L’Amie v Wilson [1907] 2 IR 130, that it was desirable to serve notice on the bank of an
application to inspect.
6
[1895] 2 QB 669 at 675.
7
(1928) 44 TLR 579; and see Re Marshfield, Marshfield v Hutchings (1886) 32 Ch D 499.
8
R v Grossman (1981) 73 CrAppR.
9
Per Ridley J in R v Bono (1913) 29 TLR 635 at 636. In Waterhouse v Barker [1924] 2 KB 759,
it was held by Bankes and Atkin LJJ (Scrutton LJ dissenting) that on an application under s 7,
the court is guided by the general rules regulating the inspection of documents before trial.
10
[1972] 2 QB 512, [1972] 2 All ER 1334.
11
Arnott v Hayes (1887) 36 Ch D 731; Howard v Beall (1889) 23 QBD 1; Perry v Phosphor
Bronze Co Ltd(1894) 71 LT 854. See also R v Marlborough Street Metropolitan Stipendiary
Magistrate, ex p Simpson (1980) 70 Cr App Rep 291. South Staffordshire Tramways Co v
Ebbsmith [1895] 2 QB 669, CA.
12
Perry v Phosphor Bronze Co (1895) 71 LT 854.
13
[1924] 2 KB 759, CA.
14
Waterhouse v Barker [1924] 2 KB 759; Williams v Summerfield [1972] 2 QB 512, [1972]
2 All ER 1334.
15
Emmott v Star Newspaper Co (1892) 62 LJQB 77.
16
Cf Emmott v Star Newspaper Co (1892) 62 LJQB 77.
17
Ironmonger & Co v Dyne (1928) 44 TLR 579; DB Deniz Nakliyati Tas v Yugopetrol [1992] 1
WLR 437 CA.

10
 Inspection orders under BBEA 1879 33.11
18
DB Deniz Nakliyati TAS v Yugopetrol and others [1992] 1 All ER 205.
19
Bhimji v Chatwani (No 2) [1992] 1 WLR 1158.
20
Unreported, August 24 2000.

(ii) Extra-territorial orders

A. Orders made by the English court

33.11 An order whether under s 7 or by a witness summons, requiring the
production by a non-party of documents held outside the jurisdiction concern-
ing business transacted outside the jurisdiction should not, save in exceptional
circumstances, be imposed upon a foreigner, and, in particular, a foreign bank:
‘The principle is that a state should refrain from demanding obedience to its
sovereign authority by foreigners in respect of their conduct outside the
jurisdiction’1.
In R v Grossman2, an order was made ex parte under s 7 against Barclays Bank
at its head office in London requiring it to allow the Inland Revenue to inspect
and take copies of an account maintained by an Isle of Man company with
Barclays Bank’s branch in the Isle of Man. An application for a similar
order had previously been made to the court in the Isle of Man and had been
refused. The Court of Appeal set aside the inspection order. In the words of
Lord Denning MR3:
‘I think that the branch of Barclays Bank in Douglas, Isle of Man, should be
considered in the same way as a branch of the Bank of Ireland or an American bank,
or any other branch in the Isle of Man which is not subject to our jurisdiction. The
branch of Barclays Bank in Douglas, Isle of Man, should be considered as a different
entity separate from the head office in London. It is subject to the laws and
regulations of the Isle of Man. It is licensed by the Isle of Man government. It has its
customers there who are subject to the Manx laws. It seems to me that the court here
ought not in its discretion to make an order against the head office here in respect of
the books of the branch in the Isle of Man in regard to the customers of that branch
. . . Any order in respect of the production of the books ought to be made by the
courts in the Isle of Man – if they will make such an order. It ought not to be made by
these courts. Otherwise there would be danger of a conflict of jurisdictions between
the High Court here and the courts of the Isle of Man. That is a conflict which we
must always avoid . . . It seems to me that, although this court has jurisdiction to
order the head office here to produce the books, in our discretion it should not be
done.’
R v Grossman was applied in MacKinnon v Donaldson, Lufkin and Jenrette
Securities Corpn4 where the court set aside an ex parte order made against
Citibank NA, which was not a party to the proceedings, requiring it to produce
books and other papers held at its head office in New York relating to
transactions which took place in New York on an account maintained there by
a Bahamian company. Hoffmann J stated that orders concerned with docu-
ments outside the jurisdiction are so unusual that they should ordinarily be
made on notice to the bank concerned so as to give it full opportunity to
investigate the position5.
1
MacKinnon v Donaldson, Lufkin and Jenrette Securities Corpn [1986] Ch 482 at 493G, [1986]
1 All ER 653 at 658b, per Hoffmann J. This statement of principle was referred to with
apparent approval in Interpol Ltd v Galani [1988] QB 738 742F, [1987] 2 All ER 981 at 984h,
CA. See also Societe Eram Ltd v Cie Internationale [2003] UKHL 30, [2004] 1 AC 260, [2003]

11
33.11 Compulsory Disclosure

3 All ER 465, HL, at [67] where Lord Hoffmann applied this principle to a case in which a party
sought a third party debt order against a branch of a bank in England in respect to money
standing to a judgment debtor’s account with that bank in Hong Kong.
2
(1981) 73 Cr App Rep 302.
3
(1981) 73 Cr App Rep 302 at 307–308.
4
[1986] Ch 482,[1986] 1 All ER 653.
5
[1986] Ch 482 at 497E, [1986] 1 All ER 653 at 660h.

B. Orders made by foreign courts

33.12 The same principles apply in the inverse case of a subpoena issued by a
foreign court requiring production of documents by non-parties relating to
business transacted outside the jurisdiction of the foreign court. In X AG v A
Bank1 two corporate customers of the London branch of an American bank
applied for an injunction to restrict the bank from producing documents
relating to their accounts pursuant to a subpoena issued by a grand jury and
upheld by the United States District Court for the Southern District of New
York. The English court granted an interlocutory injunction to restrain disclo-
sure. The issue having arisen on an interlocutory application, it was dealt with
in strict conformity with American Cyanamid principles2.
In determining whether the injunctions should be continued the court deter-
mined the balance of convenience, having regard to:
(a) the breach represented by the New York court order of both the private
contractual interest in confidentiality and the public interest in maintain-
ing the obligation of confidence imposed on banks conducting business
in London;
(b) the fact that the New York court would not hold the bank liable in
contempt, considering the English Court injunction an adequate excuse
for the non-production of the documents; and
(c) the concern that, if the injunction were discharged, the mere fact of
failing to impede the New York subpoena would constitute assistance
and approbation of a subpoena requiring disregard of the confidentiality
which the Court would ordinarily maintain in the public interest.
The balance of convenience was between impeding the New York court in the
exercise of powers considered excessive by English standards and causing very
considerable commercial harm to the plaintiffs by not continuing the injunc-
tions: the injunctions were continued3.
The point of principle arose in more acute form in FDC Co Ltd v Chase
Manhattan Bank NA4, where the parties agreed that the hearing of an applica-
tion for an interlocutory injunction should be treated as the trial of the action.
The case arose out of a subpoena issued by the New York District Court
addressed to the defendant Bank in New York, but aimed at information within
the jurisdiction of the Hong Kong courts. The Hong Kong Court of Appeal
granted a final injunction restraining the bank from complying with the
subpoena. It held that disclosure did not fall within any of the four exceptions
to the duty of confidentiality stated in Tournier’s case. In dealing with the
exception which permits disclosure by compulsion of law, Silke JA observed
that the compulsion had to be that of the law of Hong Kong, ie the law

12
 Orders under Evidence (POJ) Act 1975 33.13

governing the relevant account. Applying R v Grossman, above, the court

treated the Hong Kong branch of the bank as a separate entity from the head
office in New York.
In Pharaon v BCCI5, Rattee J held that the public interest in upholding the duty
of confidentiality between bank and customer was subject to being overridden
by the greater public interest in making confidential documents relating to the
alleged fraud of an international bank available to the parties to private foreign
proceedings for the purpose of uncovering that fraud. However, such disclosure
should be limited to what is reasonably necessary to achieve the purpose of the
public interest in disclosure.
1
[1983] 2 All ER 464, [1983] 2 Lloyd’s Rep 535.
2
American Cyanamid Co v Ethicon Ltd [1975] AC 396, [1975] 1 All ER 504.
3
[1983] 2 All ER 464.
4
(1984) unreported, Hong Kong CA.
5
[1998] 4 All ER 455.

5 ORDERS UNDER THE EVIDENCE (PROCEEDINGS IN OTHER

JURISDICTIONS) ACT 1975
33.13 The Hague Convention was implemented in England and Wales by the
Evidence (Proceedings in Other Jurisdictions) Act 1975 (the ‘Act’). The Act
empowers and requires the English High Court to assist foreign courts in
other Contracting States in civil or commercial proceedings by enabling evi-
dence to be taken from witnesses in England and Wales for the purposes of the
foreign proceedings.
By ss 1 and 2(1) of the Act, where an application is made to the High Court, the
court has power by order to make such provision for obtaining evidence in the
part of the United Kingdom in which it exercises jurisdiction as may appear to
it to be appropriate for the purpose of giving effect to the request in pursuance
of which the application is made.
The court must be satisfied (per section 1(a) and (b)) that: (1) that the
application is made in pursuance of a request issued by or on behalf of a court
or tribunal (‘the requesting court’) exercising jurisdiction in any other part of
the United Kingdom or in a country or territory outside the United Kingdom;
and (2) that the evidence to which the application relates is to be obtained for
the purposes of civil proceedings which either have been instituted before the
requesting court or whose institution before that court is contemplated.
The manner in which the court’s discretion should be exercised in relation to
evidence the production or giving of which would lead to disclosure by a bank
of confidential information relating to a customer was considered by the Court
of Appeal in Re State of Norway’s Application1. The position was summarised
by Kerr LJ as follows2:
‘The court must carry out a balancing exercise. In the scales on one side must be
placed the desirable policy of assisting a foreign court, in this case supported by both
parties to the litigation before it. On the other side there is the opposing principle that
the court will give great weight to the desirability of upholding the duty of confidence
in relationships in which, as here, it is clearly entitled to recognition and respect.
Which way the balance then tilts depends upon the weight which is properly to be
given to all the other circumstances of the case.’

13
33.13 Compulsory Disclosure

On the facts of the case, the request was held to be in the nature of a roving
investigation which might affect the private financial affairs of unknown
persons who were entitled to expect that the highly reputable merchant bank to
which they had entrusted their affairs would never be compelled to disclose
those affairs except in circumstances of allegations of fraud or crime3. Exercis-
ing the discretion afresh, the Court of Appeal, by a majority, refused to accede
to the request. However, in Re State of Norway’s Application (No 2)4, the
House of Lords upheld a redrafted request. Lord Goff, delivering the leading
speech, recorded that both sides accepted that the question of confidentiality
could only be answered by the court undertaking a balancing exercise of the
sort described by Kerr LJ5.
In First American Corp v Sheikh Zayed Al-Nahyan6, it was held that the court
should, where appropriate, accede to a letter of request issued by a foreign court
seeking evidence for use in foreign proceedings, particularly where the litigation
arose out of a fraud practised on an international scale. When deciding how to
respond to a letter of request, the court should bear in mind the need to protect
intended witnesses from an oppressive request. However, no objection can be
made to the request on the basis that it is a ‘fishing’ exercise if there is sufficient
ground for believing that the intended witness might have relevant evidence to
give on topics relevant to the issues in the action. On the particular facts, the
questions were intended to elicit evidence for use at trial and the topics
described were ones in respect of which the intended witnesses could reasonably
be expected to have some relevant evidence to give. Nevertheless, the letters of
request were oppressive, since allegations of complicity in the fraud had been
made against the two intended witnesses and there was a possibility of their
being joined as defendants in a civil action based on that alleged complicity.
Accordingly, the Court of Appeal upheld the judge’s dismissal of the claim-
ant’s application for an order giving effect to the letters of request.
On similar grounds, the High Court in Mudan v Allergan Inc7 found that a very
wide letter of request issued by a US court at the pre-pleading discovery stage
was properly characterised as being for the impermissible purpose of investiga-
tion rather than the legitimate purpose of seeking relevant evidence for the
purpose of proving a case at trial. The consequence was that the Court had no
jurisdiction under the Act to order disclosure. In a helpful piece of guidance for
parties seeking to obtain orders from US Courts which will be enforceable in
England, Mrs Justice Cockerill noted that8:
‘it must be borne in mind that, just like many applicants for letters of request,
US Courts do not necessarily comprehend – unless it is explained to them – the basis
upon which this jurisdiction operates and in particular its limitations. So when a
US Court has heard argument on the issuance of a letter of request, and has had the
English Court’s approach explained to it, and sets that out in the letter of request and
says something along the lines of: “I understand the basis on which the English Court
operates may be rather more restrictive than that with which I am familiar, but even
so I can say that the evidence sought is relevant to issues for trial” [ . . . ] it will be
almost unimaginable for the court to look behind that statement.
However a letter of request not issued on that basis will be more open to scrutiny
where the terms of the letter suggest that the intention behind it is not to obtain
evidence for trial. It is not the same thing at all (as noted in CH (Ireland) Inc v Credit
Suisse Canada [2004] EWHC 626) when a court issues a letter of request without the

14
 Disclosure to Investigators 33.15

defendant being heard, or when the Court itself says nothing about relevance but
simply records the submission of the applicant.’
In cases where jurisdiction is found, the discretion to exercise that jurisdiction
is subject to limitations. Section 2(3) provides that an order shall not require
any particular steps to be taken unless they are steps which can be required to
be taken by way of obtaining evidence for the purposes of civil proceedings in
the High Court making the order. Secondly, an order shall not require a person
to state what documents relevant to the proceedings to which the application
for the order relates are or have been in his possession, custody or power
(s 2(4)(a)). Thirdly, an order shall not require a person to produce any
documents other than particular documents specified in the order as being
documents appearing to the court making the order to be, or to be likely to be,
in his possession, custody or power (s 2(4)(b))9.
CPR Part 34 – Witnesses, Depositions and Evidence for Foreign Courts (to-
gether with the Practice Direction 34A) sets out the procedural basis for such
evidence including those which apply pursuant to Council Regulation (EC) No
1206/2001 of 28 May 2001 on co-operation between the courts of the Euro-
pean Member States in the taking of evidence in civil or commercial matters.
1
[1987] QB 433,[1989] 1 All ER 661, CA.
2
[1987] QB 433 at 486G, [1989] 1 All ER 661 at 688b.
3
[1987] QB 433 at 487D, [1989] 1 All ER 661 at 688f (Kerr LJ). See also Glidewell LJ at 490D,
690j.
4
[1990] 1 AC 723, [1989] 1 All ER 745, HL.
5
[1990] 1 AC 723 at 762h, [1987] QB 433 at 479E (affirming the CA and applying Brit-
ish Steel Corpn v Granada Television Ltd [1981] AC 1096, [1981] 1 All ER 417, HL). On this
point see also Securities and Exchange Commission v Stockholders of Santa Fe Inter-
national Corpn [1985] ECC 187, Drake J.
6
[1998] 4 All ER 439, [1999] 1 WLR 1154, CA.
7
[2018] EWHC 307 (Comm) (Unreported, 21 February 2008, Cockerill J).
8
[2018] EWHC 307 (Comm) at [57]–[58].
9
As to particular documents specified in the order see Re Asbestos Insurance Coverage Cases
[1985] 1 All ER 716, [1985] 1 WLR 331, HL (an order for production of A’s ‘monthly bank
statements for the year 1984 relating to his current account’ with a named bank would satisfy
the requirements of s 2(4) (b), provided that the evidence showed that regular monthly
statements had been sent to A during the year and were likely to be still in his possession. But a
general request for ‘all A’s bank statements in 1984’ would refer to a class of documents and
would not be admissible).

6 DISCLOSURE UNDER THE INSOLVENCY ACT 1986, S 235

33.14 Disclosure under this legislation is considered in Chapter 19, Section 4.

7 DISCLOSURE TO INVESTIGATORS
33.15 The powers of the Financial Conduct Authority under the Financial
Services and Markets Act 2000 to obtain information and require production of
documents have been considered in Chapter 1.
The majority of the provisions of the Companies Act 1985 Pt XIV (ss 431–
453D) have not been repealed and are included in the ‘Companies Acts’ as
defined by the Companies Act 20061. They give rise to numerous duties for
officers and agents of relevant companies to comply with investigatory powers

15
33.15 Compulsory Disclosure

therein contained. ‘Agents’, in relation to a company or other body corporate,

includes its bankers, whether they are or are not officers of the company or
other body corporate: see s 434(4) of the Companies Act 1985.
The following additional statutory powers of investigation and seizure are
subject to limited protection in favour of banks.
First, the power under Pt XIV of the Companies Act 1985 to investigate
companies and their affairs is subject to ss 452(1A) and (1B) of the Act, which
provide that a person is not required to make disclosure where he owes an
obligation of confidence by virtue of carrying on the business of banking unless:
(a) the confidence is owed to the company or other body corporate under
investigation,
(b) that person consents to the disclosure or production, or
(c) the making of the requirement is authorised by the Secretary of State.
This protection is not available, per s 452 (1B), where the person owing the
obligation of confidence is itself the subject of investigation under ss 431 432, or
433.
Second, the power conferred by the Companies Act 1985, ss 447 to 451 to
requisition and seize books and papers of a company is subject to s 452(3), (4),
which prevents the requisition of documents relating to the affairs of a
bank’s customer, or the disclosure by the bank of information relating to those
affairs, unless one of the conditions in sub-s (4) is met, namely
(i) that the Secretary of State thinks it is necessary to do so for the purpose
of investigating the affairs of the person carrying on the business of
banking;
(ii) that the customer is a person on whom a requirement has been imposed
under s 447;
(iii) that the customer is a person on whom a requirement to produce
information or documents has been imposed by an investigator ap-
pointed in pursuance of section 171 or 173 of the Financial Services and
Markets Act 2000 (powers of persons appointed under s 167 or as a
result of s 168(2) to conduct an investigation).
Finally, the power conferred by s 83 of the Companies Act 1989 to require
persons to attend and give evidence, produce documents or otherwise give
assistance for the purposes of aiding an overseas regulatory authority is subject
to the proviso that the same shall not override bank duties of confidentiality
absent relevant consent unless, per s 84(4)(a), the imposing on him of a
requirement with respect to such information or documents has been specifi-
cally authorised by the Secretary of State.
1
Companies Act 2006, s 2(1)(c).

8 DISCLOSURE TO HMRC
33.16 The amended Schedule 36 to the Finance Act 2008 (‘Schedule 36’)
contains powers enabling an officer of Revenue and Customs to call for
information and carry out inspections when checking any person’s position as
it relates to income tax, corporation tax, capital gains tax and value added tax.

16
 Disclosure to HMRC 33.16

This includes (by paragraph 2 of Schedule 36) a power to call for information
from a third party. There have been a number of well-publicised cases against
banks requiring disclosure of accounts with foreign branches: see in particular
in relation to predecessor sections Re an Application by Revenue and Cus-
toms Comrs to Serve section 20 Notice1.
By Income Tax Act 2007, s 748 an officer of Revenue and Customs may by
notice require any person to provide the officer with such information as the
officer may reasonably require for the purposes of the relevant income tax
avoidance provisions. Those particulars may include particulars about—
(a) transactions with respect to which the person is or was acting on behalf
of others,
(b) transactions which in the opinion of the officer should properly be
investigated for the purposes of that Chapter of the Act even though in
the person’s opinion no liability to income tax arises under the Chapter,
and
(c) whether the person has taken or is taking any part and, if so, what part
in transactions of a description specified in the notice.
By s 750, s 748 does not oblige a bank to provide any particulars of any
ordinary banking transactions between the bank and a customer carried out in
the ordinary course of banking business, unless:
(a) per s 750(2), the bank has acted or is acting on behalf of the customer in
connection with—
(i) the creation of any settlement as a result of which income
becomes payable to a person abroad, or
(ii) the execution of the trusts of any such settlement; or
(b) per s 750(3) the bank has acted or is acting on behalf of the customer in
connection with the formation or management of a body corporate to
which s 749(6) applies.
Banks are also required to report certain customer accounts in respect to certain
transactions under the International Tax Compliance Regulations 2015 (as
amended)2. These Regulations consolidate the due diligence and reporting
obligations imposed on financial institutions by the EU Directive on Adminis-
trative Cooperation (‘DAC’)3; the Common Reporting Standard (‘CRS’)4; and
the UK/US Intergovernmental Agreement on FATCA (the Foreign Account
Tax Compliance Act (US)) of 2012 (‘FATCA’). The Regulations require banks
to report specified information on ‘Reportable Accounts’, including personal
details of the account holder and (where applicable) the account balance or
account value at the end of each calendar year. ‘Reportable Accounts’ are as
defined within each of DAC, CRS and FATCA.
1
[2006] STC (SCD) 71.
2
SI 2015/878.
3
Council Directive 2011/16/EU of 16 February 2011.
4
As endorsed by the OECD by declaration of 6 May 2014.

17
33.17 Compulsory Disclosure

9 DISCLOSURE PURSUANT TO CRIMINAL LAW STATUTES

33.17 Obligations potentially arise under s 2 of the Criminal Justice Act 1987
(as amended), s 9 of the Police and Criminal Evidence Act 1984, the Terrorism
Act 2000, the Proceeds of Crime Act 2002, the Crime (International Co-
operation) Act 2003 and the Money Laundering, Terrorist Financing and
Transfer of Funds (Information on the Payer) Regulations 2017.

(a) Section 2 of the Criminal Justice Act 1987

33.18 By s 2(2) the Criminal Justice Act 1987, the Director of the Serious Fraud
Office may by notice in writing require the persons whose affairs are to be
investigated or any other person whom he has reason to believe has relevant
information to answer questions or otherwise furnish information with respect
to any matter relevant to the investigation. By s 2(3), the Director may require
documents to be produced.
In the case of bankers, these wide powers are subject to s 2(10), which provides:
‘(10) A person shall not under this section be required to disclose information or
produce a document in respect of which he owes an obligation of confidence
by virtue of carrying on a banking business unless–
(a) the person to whom the obligation is owed consents to disclosure or
production; or
(b) the Director has authorised the making of the requirement or, if it is
impracticable for him to act personally, a member of the Serious Fraud Office
designated by him for the purposes of this subsection has done so.’
In practice, this subsection provides scant comfort for banks. The SFO has
historically issued many s 2 notices to banking businesses, financial institutions,
accountants and other professionals who may, in the ordinary course of their
business, hold information or documents relevant to a suspected fraud. In the
case of section 2(10) notices issued against banks, the SFO has observed the
following1:
(1) The criterion of ‘necessity’ is likely to be met for bank documents, as the
SFO is unlikely to be able to obtain these elsewhere or by consent;
(2) ‘Reasonableness’ involves weighing up the customer’s private right to
privacy against the public interest in investigating fraud. There should be
reasonable grounds to suppose that the bank has in its custody docu-
ments which relate to matters relevant to the investigation.
(3) ‘Proportionality’ involves considering the scale of the intended exercise
of the section 2 powers against the needs of the investigation, where it
may be disproportionate to issue a notice against a bank which is
thought to hold only a very small part of the proceeds of a fraud.
1
SFO Operational Handbook at page 12.

(b) Section 9 of the Police and Criminal Evidence Act 1984

33.19 Section 9 of the Police and Criminal Evidence Act 1984 (PACE) empow-
ers a constable to obtain access to specified material for the purposes of a
criminal investigation by making an application under and in accordance with
PACE, Sch 1. That said, PACE is not limited to the police. Officers such as those

18
 Disclosure Pursuant to Criminal Law Statutes 33.20

of the SFO, the HMRC, and the Federation Against Copyright Theft are within
the category. Conversely, DTI inspectors have been held not to be1. Otherwise,
PACE expressly states to whom it applies. Generally speaking, constables and
designated civilians under the Police Reform Act 2002 are to exercise the
powers2.
There are various alternative bases for making s 9 applications. Applications
with respect to banks are most likely to seek material categorised as ‘special
procedure’ material, being inter alia material acquired in the course of a trade,
profession or similar and which is held subject to a duty of confidence.
In Barclays Bank v Taylor3, the Court of Appeal ruled that a banker’s duty to
keep its customer’s affairs confidential did not go so far as to require a bank,
when served with a notice under PACE to resist on behalf of the customer the
making of an access order or to inform him that such an order was being
sought.
Two customers made counterclaims against their banks in respect of the banks’
compliance with orders under s 9. It was alleged by the customers that the
orders had been improperly made. The Court of Appeal struck out counter-
claims alleging breach of contract by the banks in complying with the orders, on
the grounds that:
(1) a court order which was valid on its face was fully effective and
demanded compliance unless and until it was set aside by the process of
law, and therefore there had been no breach of the duty of confidential-
ity; and
(2) there was no implied contractual obligation on the part of the bank to
take action in support of the confidentiality of their customers’ affairs by
resisting a s 9 order and by informing a customer on learning that such
an order was being sought.
An application under s 9 of and Sch 1 to the 1984 Act for an order for the
production of material has as parties only the requesting body and the custo-
dian of the documents; notice of the application to any person suspected of or
charged with the offence is not required nor is service of a copy of the
application on him4. The notice of application must specify all material sought
to be produced or disclosed notwithstanding the risk that the evidence might be
destroyed5 and an application may be made at any stage in the investigation of
a criminal offence6.
1
R v Seelig & Ors (1992) 94 Cr. App. R. 17 (CA).
2
Eg s 9 Sch 1 applications must be made by a constable (s 9(1)) or by a civilian designated as an
‘investigating officer’ under s 38 of the Police Reform Act 2002 (Sch 4, Pt 2, para 17(a) and (b)).
3
[1989] 3 All ER 563, [1989] 1 WLR 1066, CA. See also R v Crown Court at Manchester, ex p
Taylor [1988] 2 All ER 769, [1988] 1 WLR 705, DC.
4
R v Crown Court at Leicester, ex p DPP [1987] 3 All ER 654, [1987] 1 WLR 1371, DC.
5
R v Central Criminal Court, ex p Adegbesan [1986] 3 All ER 113, [1986] 1 WLR 1292, DC.
6
As to s 9(1) of PACE see further R v Crown Court at Southwark, ex p Bowles [1998] 2 All ER
193, HL.

(c) The Terrorism Act 2000

33.20 Under this Act a person (which would include a bank) is guilty of an
offence if he fails to disclose to a constable or nominated officer that he knows

19
33.20 Compulsory Disclosure

or suspects or has reasonable grounds for knowing or suspecting that another

person has committed certain offences under the Act (fundraising, use or
possession of money for the purpose of terrorism, funding arrangements and
money laundering) and the knowledge or suspicion came to him in the course of
business in the regulated sector: see ss 15–18, 21A. Section 21B provides that
disclosure which satisfies specified conditions is not to be taken to breach any
restriction on the disclosure of information, however imposed. Sections 21CA
to 21CF provide that a person operating a business in the regulated sector (such
as a bank) can (subject to specified conditions) disclose information to another
person in the regulated sector (such as to another bank) without being taken to
have breached its obligations of confidentiality.

(d) The Proceeds of Crime Act 2002

33.21 POCA has been considered in Chapter 2. This Act puts the onus on
bankers to disclose to the police their suspicions of laundering the proceeds of
any criminal conduct. Section 330 makes it an offence for anyone in the course
of business in the regulated sector (as defined in para 1 of Schedule 9, and which
includes banks), who knows or suspects, or has reasonable grounds for know-
ing or suspecting, that someone has been or is involved in criminal conduct to
receive or retain or control money belonging to that person unless he discloses
his suspicions to the police. The Act relieves the person who discloses such
information from his contractual duties of confidentiality to that person.

(e) The Crime (International Co-operation) Act 2003

33.22 This Act makes provision for furthering co-operation with other coun-
tries in respect of criminal proceedings and investigations1. It implemented
several European Union commitments in the area of police and judicial co-
operation and, of note here, mutual legal assistance to enable provision of a
wider range of banking information including tracing any bank accounts and
monitoring identified accounts held by an individual or company. The mutual
legal assistance provisions in Part 1 apply to all other countries, in line with
existing legislation, except for certain provisions which are specifically re-
stricted to ‘participating countries’. For the purposes of those provisions, all EU
Member States are included in ‘participating countries’.
Section 16 enables the appropriate authorities here to apply for and execute a
search warrant or a production order in response to an overseas request, in the
same circumstances as would be possible in relation to a domestic case, namely
when the conduct in question would be a serious arrestable offence were it
committed here. Section 16(2)(b) provides for a search warrant or production
order without an overseas request if the constable who makes the application is
a member of an international joint investigation team (as defined in subsection
(5)). This is designed to cover investigative measures being undertaken without
such a request by seconded members of a joint investigation team in relation to
the team’s investigations overseas.
Sections 32–46 specifically concern information about banking transactions.
Sections 32 and 33 enable the Court to make customer information orders on
the application of authorised police or customs officers. These applications

20
 Disclosure Pursuant to Criminal Law Statutes 33.23

follow incoming requests to provide information about bank accounts in the

UK relating to a person who is the subject of an investigation in a participating
country. A customer information order requires a financial institution specified
in the application to provide details of any accounts held by the person who is
the subject of an investigation into serious criminal conduct as defined in
s 46(3). Section 33 sets out the conditions which must be satisfied before a judge
may make a customer information order and what an application to the judge
should contain. Subsection (2) provides that the application may be made
without notice to a judge in chambers and subsection (4) provides for the
discharge or variation of an order on the application of the applicant or various
named officers.
Section 34 replicates s 366 of POCA, and provides for various criminal offences
connected with failure to comply with customer information orders. The
financial penalties are directed at non-compliant institutions, rather than at
individuals within those institutions.
Sections 35 and 36 address account information prompted by requests for
specified accounts to be monitored during a specified period of time. Such a
request might be made subsequent to a request for bank details or in cases
where the investigator already has the details of the relevant account. Account
monitoring procedures were introduced in the UK under POCA, but separate
provision was made in this Act to ensure that the UK can respond to requests
having a wider scope than POCA. Where the Secretary of State receives such a
request, s 35 authorises him to direct the appropriate police or customs officer
to apply for an account information order. An account information order re-
quires a financial institution specified in the application to provide account
information specified in the order (for example, details of all transactions
passing through the account) during a specified period. Subsection (5) defines
account information as information relating to accounts held by specified
persons whether solely or jointly with others.
It is important for banks and their employees to note that s 42 creates unlawful
disclosure offences designed to ensure that financial institutions do not disclose
to their customers requests for customer or account information, the existence
of an investigation or that information has been passed on by the financial
institution. A financial institution, or an employee of the institution, is guilty of
an offence if it (or, as the case may be, the employee) discloses the types of
information specified in subsection (3), and subsections (4) and (5) respectively
provide for the penalties which may be imposed on the institution and employee
if such an offence is committed.
1
For an example of the same see R (on the application of Omar and others) v Secretary of State
for Foreign and Commonwealth Affairs [2013] 3 All ER 95.

(f) The Money Laundering, Terrorist Financing and Transfer of Funds

(Information on the Payer) Regulations 2017, SI 2017/692
33.23 The Money Laundering Regulations 2007 were established in order to
prevent the use of the financial system for the purposes of money laundering
and terrorist financing and banks’ obligations thereunder. These were replaced
on 26 June 2017 with the Money Laundering, Terrorist Financing and Transfer

21
33.23 Compulsory Disclosure

of Funds (Information on the Payer) Regulations 2017, which implements the

Fourth Money Laundering Directive ((EU) 2015/849). These regulations have
been considered in Chapter 2. It is worth noting here disclosure obligations
arising in the context of the Information and Investigation provisions of Part 8.
By Regulation 66, a bank’s supervising authority (the FCA – see regs 3, 7 and 8)
may, by notice to a relevant person (an expression which includes credit
institutions: see reg 3) or to a person connected with a relevant person, require
the relevant person or the connected person (1) to provide such information as
may be specified in the notice; (2) to produce such recorded information as may
be so specified; or (3) to attend before an officer at a time and place specified in
the notice and answer questions. The supervising authority may also exercise
the reg 66 power upon request from a foreign authority: reg 67.

22
Chapter 34

ECONOMIC SANCTIONS

1 INTRODUCTION
(a) Background 34.1
(b) The legislation 34.2
(c) The jurisdictional scope of EU and UK sanctions 34.3
(d) The typical financial restrictions imposed by sanctions 34.4
(e) The reporting obligations imposed on financial institutions 34.12
(f) Criminal sanctions 34.12
2 THE EFFECT OF ECONOMIC SANCTIONS ON
CONTRACTS 34.19
(a) The first port of call – statutory defences 34.20
(b) The second port of call – contractual defences and force majeure 34.24
(c) The third port of call – illegality and frustration 34.27
3 BREXIT AND ECONOMIC SANCTIONS 34.29

1 INTRODUCTION TO ECONOMIC SANCTIONS

(a) Background

34.1 Economic sanctions have long co-existed with diplomatic relations.

Thomas Jefferson promulgated an Embargo Act on 22 December 1807 in light
of perceived British and French breaches of American neutrality. Much earlier,
in 1462, the Venetians imposed an embargo on trade with the Ottoman empire,
as a prelude to a decade-long conflict. In recent years, regional conflicts have led
to a significant increase in reliance on economic and trade sanctions, alongside
diplomatic efforts, often where military force is seen as politically unpalatable
or impracticable. Thus, the Iranian Revolution of 1979, the first and second
Iraq wars and, more recently, the Libyan and Syrian civil wars and the
Ukrainian crisis have seen sanctions and embargoes being imposed at a global
(through the United Nations Security Council (‘UNSC’)), a regional (eg the EU),
or a local (eg UK) level.
Economic sanctions come in many shapes and forms. They sometimes prohibit
the export of certain goods and services, impose restrictions on any dealings
with specific individuals or companies, or more simply restrict any dealings
whatsoever with persons or entities in certain jurisdictions. The effect of
sanctions on international trade is direct, and often leads to the suspension
and/or termination of existing contractual relationships, and to disruptions in
the performance of linked contracts. Financial institutions, in particular, have
borne a heavy burden under recent economic sanctions. In part to do with the
increasingly global footprint of financial institutions, this burden also arises out
of a combination of extensive disclosure obligations combined with restrictions
on dealing with funds directly or indirectly held by sanctioned individuals or
companies.

1
34.2 Economic Sanctions

(b) The legislation

34.2 In the United Kingdom, economic sanctions arise from three primary
sources:
(1) UNSC Resolutions. These are not directly applicable, but are imple-
mented pursuant to Orders in Council under section 1(1) of the United
Nations Act 1946.
(2) EU Regulations. These are directly applicable in the UK, but require
implementing regulations to enact criminal sanctions, and at times to
expand and clarify the UK understanding of the EU Regulations. The EU
formally lists 38 sanctions regimes as being in place, although several
have lapsed.
(3) UK statutory instruments or directions. The majority of the UK legis-
lation relating to sanctions is in the form of implementing regulations or
orders broadly tracking the language of UNSC Resolutions or EU
Regulations. In principle, the UK can implement its own stand-alone
sanctions regimes, but has seldom done so1. As explained further below,
this will inevitably change once the UK leaves the EU. As of 1 March
2018, there were 26 sanctions regimes implemented in UK law.
In practice, these three frameworks overlap to a significant extent and often
operate by way of a waterfall. In particular, where a UNSC Resolution is
adopted, it invariably is then transposed in an EU Regulation2, and eventually
in a UK statutory instrument. More often than not in recent years, however,
geopolitical issues mean that UNSC Resolutions are not adopted, and sanctions
are instead imposed unilaterally by the European Union. For example, recent
sanctions regimes relating to Syria, Iran, the Ukraine and Russia have either
been imposed unilaterally by the EU, or involved a significant reinforcement at
EU level, and have been implemented in the UK.
In addition to the EU and UK legislation, an important supplementary source of
support in interpreting and understanding sanctions regimes can be found in
official guidance issued by the Office of Financial Sanctions Implementation
(OFSI) in the UK3, and by the European Union4. In the absence of detailed case
law on the precise meaning of the relevant legislation, these guidelines are
invaluable in assessing compliance with sanctions regimes, and are addressed
where relevant below.
1
The exceptions are usually directions issued under anti-terrorism legislation.
2
The only exception is where the EU does not have the competence to implement the UNSC
Resolutions, for example in relation to domestic terrorism, which is consequently implemented
directly in UK law.
3
The OFSI formal Guidance on Financial Sanctions (the OFSI Guidance) last updated in March
2018 can be found online.
4
The EU Best Practices (the EU Best Practices) for the effective implementation of restrictive
measures, dated 24 June 2015 can be found online. The EU also routinely publishes specific
guidance relating to specific sanctions regimes: see for example the Commission Guidance Note
on the Implementation of Certain Provisions of Regulation (EU) No 833/2014, issued on
25 August 2017.

2
 Introduction 34.5

(c) The jurisdictional scope of EU and UK sanctions

34.3 The jurisdictional scope of EU Sanctions is consistent across EU sanctions

regimes. For example, Council Regulation (EU) No 269/2014 of 17 March
2014, relating to Ukraine (the Ukraine EU Regulation), provides as follows:
‘Article 17:
This Regulation shall apply:
(a) within the territory of the Union, including its airspace;
(b) on board any aircraft or any vessel under the jurisdiction of a Member State;
(c) to any person inside or outside the territory of the Union who is a national of
a Member State;
(d) to any legal person, entity or body, inside or outside the territory of the Union,
which is incorporated or constituted under the law of a Member State;
(e) to any legal person, entity or body in respect of any business done in whole or
in part within the Union.’
This scope is very broad, and in essence will capture any transaction where
there is a nexus within the European Union. To the extent that a transaction or
person will be captured by the EU sanctions, then the prohibitions will apply.
The UK jurisdiction broadly tracks the EU Regulations’ jurisdictional scope,
and statutory instruments implementing sanctions usually provide that an
offence is committed if it is committed in full or in part in the UK, or if it is
committed by a UK national or a body incorporated or constituted under the
law of any part of the United Kingdom1.
1
See eg reg 1 of the Ukraine (European Union Financial Sanctions) (No 2) Regulations 2014 (the
‘Ukraine UK Regulation (No 2)’).

(d) The typical financial restrictions imposed by sanctions

34.4 There is no one size fits all for the restrictions which economic sanctions
impose. They vary depending on the geopolitical issue that is targeted, and the
economy of the targeted state or organisation. Whereas one set of sanctions
may target the nuclear industry (eg Iran or North Korea), another may focus on
certain sectors such as the military or oil & gas (eg Syria). However, there are a
number of building blocks which appear regularly in most sanctions regimes,
and which will be relevant to banks. Three such building blocks are described
below: asset freezes, sectoral sanctions, and finally financial restrictions1.
1
There are other types of restrictions often imposed, such as travel bans, but in the authors’
experience legal issues much less regularly arise in relation to such types of restrictions.

Asset freezes
34.5 The primary building block of most UN, EU and UK sanctions regime is
an asset freeze. In short, this is a requirement for all counterparties to certain
specified individuals (the ‘designated persons’) to freeze their assets, and not to
provide them with any funds or any valuable assets. The Ukraine EU Regula-
tion, again a typical example, provides as follows:
‘Article 2

3
34.5 Economic Sanctions

1. All funds and economic resources belonging to, owned, held or controlled by
any natural persons or natural or legal persons, entities or bodies associated
with them as listed in Annex 1 shall be frozen.
2. No funds or economic resources shall be made available, directly or indi-
rectly, to or for the benefit of natural persons or natural or legal persons,
entities or bodies associated with them listed in Annex I.’
Similar language appears in almost every EU Regulation imposing sanctions. Its
purpose is to identify individuals or legal entities and restrict their access to
‘funds and economic resources’, directly or indirectly. The designated persons
who are subject to the asset freezes are listed at the annexes of the relevant EU
Regulations. However, both HM treasury in the UK1, and the EU2, maintain
online consolidated lists of designated persons, which should be the first port of
call when considering whether to freeze assets or funds.
1
The UK consolidated list of sanctions targets can be found on the OFSI website.
2
The EU consolidated list of sanctions targets can be found on the EU website.

34.6 The terms ‘funds’ and ‘economic resources’ are defined broadly in EU
Regulations. Again taking the example the Ukraine EU Regulation, which is
representative, these terms are defined as follows:
‘Article 1
. . .
(d) “economic resources” means assets of every kind, whether tangible or
intangible, movable or immovable, which are not funds but may be used to
obtain funds, goods or services;
(d) . . .
(g) “funds” means financial assets and benefits of every kind, including, but not
limited to:
(i) cash, cheques, claims on money, drafts, money orders and other
payment instruments;
(ii) deposits with financial institutions or other entities, balances on
accounts, debts and debt obligations;
(iii) publicly- and privately-traded securities and debt instruments, includ-
ing stocks and shares, certificates representing securities, bonds, notes,
warrants, debentures and derivatives contracts;
(iv) interest, dividends or other income on or value accruing from or
generated by assets;
(v) credit, right of set-off, guarantees, performance bonds or other finan-
cial commitments;
(vi) letters of credit, bills of lading, bills of sale; and
(vii) documents showing evidence of an interest in funds or financial
resources;’
Such definitions of economic resources and funds are intended to be broad, and
non-exclusive. Essentially, once a person or legal entity is designated for an asset
freeze, any step that would allow the designated person to derive any benefit of
economic value or to access any asset (including funds), is prohibited. In
practice, an issue that regularly arises is establishing whether assets, or com-
panies, are ‘owned, held or controlled’ by a designated person. Both the EU and
the UK guidance address this, and provide that an asset or legal person is
‘owned’ by a designated person if the person has a majority interest in it or is in
possession of more than 50% of the proprietary rights in that entity1. ‘Control’
is more complex to establish, and the EU and OFSI guidance includes a

4
 Introduction 34.8

non-exclusive list of potential factors that may indicate control, including the
power to appoint members of the management of a company, or having a
dominant influence on the decision-making of a company2.
1
EU Best Practice, at paragraph 62. OFSI Guidance, paragraph 4.1.
2
EU Best Practice, at paragraphs 63 to 65. OFSI Guidance, paragraph 4.2.

34.7 When incorporated into UK Regulations, the restriction on dealing with

funds and economic resources is usually framed by reference to knowledge, or
reasonable cause to suspect. For example, the Ukraine UK Regulation (No 2)
provides at reg 3(1) that a person must not deal with funds or economic
resources belonging to, or owned, held or controlled by, a designated person if
the person ‘knows, or has reasonable cause to suspect, that P is dealing with
such funds or economic resources’ (emphasis added).
The OFSI Guidance explains that a reasonable cause to suspect is based on ‘an
objective test that asks whether there were factual circumstances from which an
honest and reasonable person should have inferred knowledge or formed the
suspicion’1. This is relatively thin guidance. That said, in a somewhat analogous
context, the Joint Money Laundering Steering Group (JMLSG) defines ‘reason-
able grounds to know or suspect’ as follows:
(1) At [6.15] provides that ‘reasonable grounds for suspecting are likely to
depend upon particular circumstances and the member of staff should
take into account such factors as the nature/origin of the transaction,
how the funds, cash or asset(s) were discovered, the amounts or values
involved . . . ’.
(2) At [6.16] that to demonstrate that there were no reasonable grounds to
suspect, staff should be able to show that ‘they took reasonable steps in
the particular circumstances, in the context of a risk-based approach, to
know the customer and the rationale for the transaction activity or
instruction’
It seems reasonable to assume that given the similarities between economic
sanctions and money laundering/terrorism financing, the guidance from the
JMLSG can help understand what is meant by reasonable grounds to suspect in
a sanctions context. In essence, this requires a case-by-case assessment of all the
circumstances surrounding the payment, including its amount, purpose, and
provenance, in order to ascertain whether or not there is a specific reason to
suspect that it belongs to, is owned, held, or controlled by a designated person.
1
At page 12 of the Sanctions Guidance issued by the OFSI.

34.8 The position can be particularly complex for banks where an individual is
concerned, and where funds are held or dealt with by family members. For
example, in Helene Hmicho v Barclay Bank plc1, Barclays froze the funds held
in bank accounts in the UK under the name of Helene Hmicho (HH), the
UK-resident wife of an individual listed under the Syrian sanctions. The
bank’s position was that it had sufficient grounds to suspect that the funds in
HH’s account belonged to her husband, based partly on an unusual pattern of
large cash deposits made around the time of her husband becoming a designated
person. In the event, Picken J agreed, but made clear that the simple existence of
a spousal relationship with a designated person would not be sufficient to freeze
the spouse’s assets. In practice, this requires a financial institution dealing with

5
34.8 Economic Sanctions

an individual related (by family links or otherwise) to a designated person to

make sufficient inquiries to take a view as to whether in the circumstances there
are specific facts that support a suspicion.
1
[2015] EWHC 1757 (QB).

34.9 Although broad in scope, the asset freezes are not absolute, and usually
have derogations. These derogations can be invoked either by seeking a licence
from a competent authority, or in some cases automatically when permitted by
the implementing legislation in EU Member states. In the UK, the relevant
licensing authority is the Office of Financial Sanctions Implementation, and its
licensing regime is described in each relevant implementing regulation for EU
Sanctions.
The usual derogations found in most EU Regulations are as follows.
(1) Licenses can be granted to allow funds to be released to designated
persons, usually so that they may get legal advice, to satisfy their ‘basic
needs’ (such as medical expenses or payments for foodstuffs), to cover
fees or service charges relating to the freezing of the funds, or for a more
catch-all provision relating to ‘extraordinary expenses’.
(2) Frozen funds can be released to a non-designated person in compliance
with an arbitral or court decision, or in performance of contractual
obligations that arose prior to the listing of the designated person.
These derogations are of particular relevance to banks, who may be called upon
to release frozen funds (or credit frozen accounts) pursuant to them. Guidance
has been provided by HM Treasury including examples, to understand the
scope of each derogation1. There is also some limited case law in relation to
some of the derogations. For example, in Libyan Investment Authority v Maud,
Moore-Bick VP, Longmore and Macur LJJ had to consider whether a payment
to a frozen account under a guarantee pre-dating the Libyan sanctions fell
within the exemption for pre-existing contractual obligations, or whether a
guarantee (which under most regulations is defined as a ‘fund’) is to be frozen
thus preventing any payment even under a derogation. In the event, the Court
of Appeal concluded that there was a distinction to be drawn between dealing
with a guarantee as a fund (eg by discounting it, which is prohibited), and a
payment under a guarantee which would fall within the scope of the usual
exemption for pre-existing obligations2.
It is important to consider very carefully the derogations and licenses available
when assessing whether a contract or a transaction is caught by a sanctions
regime. On the one hand, these should be approached cautiously as a restrictive
interpretation is applied to derogations by the Courts3. On the other hand, the
derogations and licenses cannot simply be ignored, as to do so may mean that
a party loses the protections set out in the EU Regulations (described further
below). Thus, there is case law to the effect that in order to rely on the
protection of the EU Regulations or indeed to invoke frustration or illegality in
relation to a contract, a party must show reasonable diligence to obtain a
licence from HM treasury4, and that it was impossible to fall within an
exemption in the relevant EU Regulation or the UK sanctions5.
1
OFSI Guidance, section 6.
2
[2016] EWCA Civ 788.

6
 Introduction 34.11
3
Per Cranston J at [31] of R (on the application of Ezz) v HM Treasury [2016] EWHC 1470
(Admin).
4
Melli Bank v Holbud Limited 2013 [EWHC] 1506 Comm, Per Robin Knowles Q.C. at [21].
Malik Co v Central European Trading Agency and Central European Trading Agency v
Industrie Chimiche Italia Centrale SpA [1974] 2 Lloyd’s Rep 279; Overseas Buyers v Granadex
SA [1980] 2 Lloyd’s Rep 608; Brauer & Co (Great Britain) Ltd v James Clark (Brush
Materials) Ltd [1952] 2 All ER 497); Islamic Republic of Iran Shipping Lines v Steamship
Mutual Underwriting Association (Bermuda) Ltd [2010] EWHC 2661 (Comm).
5
Tradax Export SA v Andre & Cie SA [1976] 1 Lloyd’s Rep 416, Lord Denning at 423. Also see
Overseas Buyers v Granadex SA [1980] 2 Lloyd’s Rep 608 at 612.

Sectorial sanctions
34.10 The second building block often used in sanctions regimes is referred to
as sectorial sanctions, which prohibit either investments or participation in
certain sectors of the target state’s economy. There are three broad sectors
typically targeted (in addition to the financial sector, addressed further below),
as follows:
(1) Oil and gas sector. A very common target for sanctions is the oil & gas
sectors. Some sanctions regimes place absolute restrictions on any
participation in the oil & gas economy of the target country, or any
purchases of oil and gas produced from these countries. The Iranian,
Syrian and Libyan sanctions at times provided for nigh-total restrictions
on any dealings relating to oil & gas in these economies, although some
included derogations. By contrast, other sanctions regimes, notably the
Russian sanctions, only focus on certain specific sub-sets of oil & gas
investments (eg in Crimea, or Arctic drilling).
(2) Military sector. Most sanctions regimes include an absolute or near-
absolute restriction on selling, or providing any assistance, relating to
the military of the target country. The Iranian and North Korean
sanctions, for example, include such restrictions.
(3) Nuclear sector. A few sanctions regimes, relating to nuclear prolifera-
tion, also include absolute prohibitions on any involvement (including
sales of goods or services) relating to the nuclear industry. Iran and
North Korea are the key examples of such nuclear proliferation sanc-
tions regimes.
The terms of the sectorial sanctions vary for each regime, and can often include
quite specific derogation both timing related (eg permitting the performance of
pre-existing contracts) or for the type of goods caught (eg provisions for
‘dual-use’ goods that can be, but are not necessarily, used for the prohibited
sector). Typically, where a sector of the economy of a state is targeted, then to
provide financing to that sector will also be prohibited. Financial institutions
must take particular care, when financing or providing any support in relation
to projects in jurisdictions subject to sanctions regime, that their assistance does
not fall foul of these sectorial sanctions.

Financial restrictions

34.11 The third type of building block involves prohibitions targeted specifi-
cally at the financial sector, sometimes regardless of the underlying sector of the
economy affected. Although in principle a sub-set of sectorial sanctions, it is

7
34.11 Economic Sanctions

treated separately here due to the significant implications for banks. In recent
years, the EU has taken a number of distinct approaches to financial restric-
tions, some examples of which are as follows:
(a) The Iran sanctions, currently suspended, included some detailed require-
ments for notification and/or permission in relation to any transfer of
funds ‘to and from an Iranian person, entity or body’, with thresholds of
EUR 10,000 (for notification), and EUR 40,000 for prior authorisation1.
This involved, amongst others, specific requirements for ‘enhanced
vigilance’ in the monitoring of payments from and to Iran or Iranian
entities, relating to due diligence and the keeping of records2.
(b) The Ukraine/Russian sanctions provide that it is prohibited ‘to directly
or indirectly purchase, sell, provide brokering or assistance in the
issuance of, or otherwise deal with transferable securities and money-
market instruments with a maturity exceeding 90 days, issued after
1 August 2014’3. These prohibitions are targeted to designated persons,
and to certain sectors of the economy, as well as to certain state-owned
financial institutions in Russia.
These are only examples of the type of financial restrictions that have been
imposed by recent sanctions regime. Again, as for sectorial sanctions, it is
essential carefully to review the relevant sanctions regime whenever a financial
institution is to be involved in a transaction having any link to a sanctioned
country.
1
Article 30, Council Regulation (EU) No 267/2012 of 23 March 2012 concerning restrictive
measures against Iran and repealing Regulation (EU) No 961/2010.
2
Article 32, Council Regulation (EU) No 267/2012 of 23 March 2012 concerning restrictive
measures against Iran and repealing Regulation (EU) No 961/2010.
3
Article 5, Council Regulation (EU) No 833/2014 of 31 July 2014 concerning restrictive
measures in view of Russia’s actions destabilising the situation in Ukraine.

(e) The reporting obligations imposed on financial institutions

34.12 The EU Regulations typically provide for a general reporting obligation
on all EU persons and legal entities. For example, the Ukraine EU Regulation
provides at Article 8(1) that all legal persons, entities and bodies shall:
‘supply immediately any information which would facilitate compliance with this
Regulation, such as information on accounts and amounts frozen in accordance with
Article 2, to the competent authority of the Member State where they are resident or
located, and shall transmit such information, directly or through the Member State,
to the Commission.’
34.13 In the UK, the statutory instruments implementing these very wide
reporting obligations provide much needed clarity. Thus, for example, the
Schedule to the Ukraine (European Union Financial Sanctions) (No 2) Regula-
tions 20141, provides detailed guidance on the ‘information provisions’ of the
sanctions regime, which distinguish between the obligations of ‘relevant insti-
tutions or relevant business or profession’, and of other persons in the UK. The
OFSI Guidance also provides further details of the OFSI’s expectations in
relation to reporting2.
1
As amended by the European Union Financial Sanctions (Amendment of Information
Provisions) Regulations 2017.

8
 Introduction 34.17
2
OFSI Guidance, Section 5.

34.14 A ‘relevant institution’ is a UK authorised institution, an EEA pass-

ported credit institution, or any business that operates a currency exchange
office, transmits money (or any representations of monetary values) by any
means, or that cashes cheques1.
A ‘relevant business or profession’, in turn, is one of: (a) an auditor; (b) a casino;
(c) a dealer in precious metals or stones; (d) an estate agent; (e) an external
accountant; (f) an independent legal professional2; (g) a tax adviser; and (h) a
trust or company service provider3.
1
See eg the Ukraine (European Union Financial Sanctions) (No 2) Regulations 2014, reg 2(1).
2
Although legal professionals are caught by the reporting obligation, this does not apply to
information to which legal professional privilege applies. OFSI Guidance, paragraph 5.4. This
is also made clear in each EU Regulation and in the implementing regulations in the UK.
3
Per the European Union Financial Sanctions (Amendment of Information Provisions) Regula-
tions 2017 (SI 2017/754), incorporating a definition of a ‘relevant business or profession’ in all
sanctions statutory instruments.

34.15 Under paragraph 1 of the Schedule to the Ukraine (European Union

Financial Sanctions) (No 2) Regulations 2014, a relevant institution or a
relevant business or profession must inform the Treasury as soon as practicable
if it knows, or has reasonable cause to suspect, that a person is either a
designated person or has committed an offence under the sanctions regime. It
must also provide to the Treasury the information or other matter on which the
knowledge or suspicion is based, and any information it holds about the person
by which the person is identified. In addition, if the relevant institution holds
funds or economic resources for a designated person, it must inform the
Treasury of the nature and amount or quantity of such holdings. The OFSI
Guidance provides specific examples of the type of information that must be
provided, as well as the mechanism for reporting1.
1
OFSI Guidance, Section 5.

34.16 The position is different for individuals and for legal entities which are
not ‘relevant institutions’. For such persons, the UK statutory instruments do
not provide for automatic disclosure. Rather, paragraphs 2 to 4 of the Schedule
empower the Treasury to require information from such persons, and that it is
an offence to fail to provide the information on request. As will be apparent,
there is a tension between the very broad and general obligation ‘immediately’
to supply information under the EU regulation, and the implementation in the
UK, requiring only ‘relevant institutions’ to volunteer the information, whereas
for all other persons the information must be provided upon request. However,
given that there is no criminal or other sanction for a failure by a non-relevant
institution to volunteer information, in practice there appears to be no sanction
for a failure to do so.

(f) Criminal sanctions

34.17 A breach of the prohibitions set out in an EU Regulation, and as
implemented in the UK implementing regulations, is a criminal offence. So is
any action taken intentionally the ‘object or effect’ of which is, directly or

9
34.17 Economic Sanctions

indirectly, to circumvent the prohibitions or to facilitate the contravention of

any such prohibition1. Where the offence is committed by a body corporate, any
director, manager, secretary or other similar officer of the body corporate, or
any person purporting to act in such capacity, will also be guilty of criminal
offence if they consented or connived to the perpetration of the offence, or
where the offence is attributable to neglect on their part2. The same applies for
partners of a partnership, or any member of a governing body of an unincor-
porated body3. A person guilty of an offence is liable on conviction on
indictment to imprisonment for a term not exceeding two years or to a fine or
to both, and on summary conviction to imprisonment for a term not exceeding
three months or to a fine not exceeding the statutory maximum or to both.
However, where the offence is a breach of the information provision require-
ments, the person guilty of an offence is liable on summary conviction to
imprisonment for a term not exceeding three months or to a fine not exceeding
level 5 on the standard scale or to both.
1
See for example the Ukraine (European Union Financial Sanctions) (No 2) Regulations 2014 (SI
2014/693), reg 10.
2
SI 2014/693, reg 11(1).
3
SI 2014/693, reg 11(1).

34.18 The EU Regulations almost invariably provide that no liability will arise
where an individual or legal entity did not know and had no reasonable cause
to suspect that they would breach the regulations. For example, Article 10.2 of
the Ukraine EU Regulation provides that:
‘Actions by natural or legal persons, entities or bodies shall not give rise to any
liability of any kind on their part if they did not know, and had no reasonable cause
to suspect, that their actions would infringe the measures set out in this Regulation.’
As far as banks or financial institutions are concerned, it may be expected that
to show ‘no reasonable cause to suspect’, suitable systems and controls must be
in place. In any case, this defence highlights the need to ensure that a clear audit
trail is kept of all due diligence underlying payments and/or interactions with
counterparties from jurisdictions which are subject to a sanctions regime.

2 THE EFFECT OF ECONOMIC SANCTIONS ON CONTRACTS

34.19 By their nature, economic sanctions prohibit the initiation or continua-
tion of existing contractual relationships with certain specified counterparts, or
that relate to certain sectors of the economy of targeted jurisdictions. Although
it is clear that a person or entity who falls within the jurisdiction of the relevant
economic sanctions must not take actions in breach of the sanctions regime, it
does not necessarily go without saying that existing contractual obligations
disappear. This section addresses the various defences available to a party faced
with a request for performance of a contractual obligation that falls foul of
economic sanctions in force in the UK.

(a) The first port of call – statutory defences

34.20 A party to a contract affected by EU sanctions can rely on defences in
respect of its non-performance of contractual obligations set out in most of the

10
 The Effect of Economic Sanctions on Contracts 34.22

EU regulations imposing sanctions. For example, Ukraine EU Regulation

provides at Article 10(1), that:
‘The freezing of funds and economic resources or the refusal to make funds or
economic resources available, carried out in good faith on the basis that such action
is in accordance with this Regulation, shall not give rise to liability of any kind on the
part of the natural or legal person or entity or body implementing it, or its directors
or employees, unless it is proved that the funds and economic resources were frozen
or withheld as a result of negligence.’
In a similar vein, the same regulation provides at Article 11 that:
‘1. No claims in connection with any contract or transaction the performance of
which has been affected, directly or indirectly, in whole or in part, by the
measures imposed under this Regulation, including claims for indemnity or
any other claim of this type, such as a claim for compensation or a claim
under a guarantee, particularly a claim for extension or payment of a bond,
guarantee or indemnity, particularly a financial guarantee or financial
indemnity, of whatever form, shall be satisfied, if they are made by:
(a) designated natural or legal persons, entities or bodies listed in Annex
I;
(b) any natural or legal person, entity or body acting through or on
behalf of one of the persons, entities or bodies referred to in point (a).
2. In any proceedings for the enforcement of a claim, the onus of proving that
satisfying the claim is not prohibited by paragraph 1 shall be on the natural
or legal person, entity or body seeking the enforcement of that claim.
3. This Article is without prejudice to the right of natural or legal persons,
entities or bodies referred to in paragraph 1 to judicial review of the legality
of the non-performance of contractual obligations in accordance with this
Regulation.
34.21 Prima facie, these articles – replicated in most EU Regulations imposing
sanctions – preclude claims for breach of contract arising out of the purported
compliance by a party with the prohibitions set out in the relevant EU Regula-
tion (and in particular the asset freeze), as long as the person or legal entity
complying can show that it acted in good faith and not negligently1. A similar
provision is included in most other EU Regulations imposing sanctions regimes.
1
See Gloster J at [23] of Soeximex SAS v Agrocorp International PTE Limited [2011] EWHC
2743 (Comm), albeit obiter.

34.22 The effect of a similar EU statutory defence has been considered by the
House of Lords in 2001 in Shanning International Ltd (in liquidation) v Lloyds
TSB Bank plc (formerly Lloyds bank plc) and others1. The background to the
case was the UNSC embargo imposed on Iraq after the Kuwait invasion, which
included in due course a restriction on the performance of existing contractual
obligations with certain Iraqi counterparties. The UNSC embargo required
states to ‘take the necessary measures to ensure that no claim shall lie at the
instance of the Government of Iraq, or of any person or body in Iraq, or of any
person claiming through or for the benefit of any such person or body, in
connection with any contract or other transaction where its performance was
affected by reason of the [UNSC resolution]’2. The UNSC resolution was
implemented in the EU by Regulation (EEC) 3541/92.
The case concerned a contract entered into in 1989 between Shanning and
Al-M, an Iraqi company, whereby Shanning was to supply ten operating

11
34.22 Economic Sanctions

theatres and medical equipment to Al-M. As part of the contract, Al-M put
forward an initial 20% deposit, and secured a series of guarantees, counter-
guarantees and indemnities by an Iraqi bank and by Lloyds TSB Bank. In 1990,
having performed approximately 90% of its contractual obligations, Shanning
was prevented from performing its remaining contractual obligations due to the
EU Regulation. Shortly thereafter, Shanning entered liquidation, and its liqui-
dators sought the release of funds held by Lloyd on behalf of Shanning by way
of counter-guarantees. This was resisted by Lloyds on the basis that it was
uncertain whether the liability being counter-guaranteed could eventually be
‘revived’ in the event of the embargo against Iraq being lifted.
Lord Bingham of Cornhill, giving the lead judgment in the House of Lords,
considered the nature of the contractual defence set out in the EU Regulation.
He concluded that the UNSC and the EU Commission intended for the EU
Regulation permanently to bar claims relating to contracts affected by the EU or
UNSC sanctions regime by Iraqi entities3. The House of Lords took the view
that the permanent bar on claims would not only affect those obligations
affected by the EU embargo, but any claims whatsoever under the contract
insofar as the contract is itself one way or another affected by the sanctions (see
also Lord Steyn at 27 and 28). This appears to go much further than the
authorities relating to frustration, which suggest that a partial or temporary
illegality may not necessarily vitiate an entire contractual relationship.
1
[2001] All ER (D) 321 Jun.
2
Security Council 681 (1991) at paragraph 29.
3
At 18.

34.23 The full consequences of such a broad proposition remain to be tested in

the English courts. In particular, the fact that Shanning became insolvent and
could not perform its contractual obligations may well have played a role in the
House of Lords’ conclusion. The language of the UNSC resolution, and the
legislative history of the relevant EU Regulation (including the Travaux
Preparatoires), featured prominently in the House of Lords’ decision, and may
well not be relevant to more recent EU Regulations. Nevertheless, Shanning, if
applied to current EU Regulations, could have drastic consequences. Consider
for example a long-term project finance agreement where one member of a
lending syndicate, or indeed the borrower, is prevented from complying with a
very limited obligation (say, to advance a small tranche of funds or from the
borrower’s side to repay a small tranche) due to the EU sanctions. Would
Shanning lead to a conclusion that if the sanctions are subsequently lifted, as for
example happened recently in Libya or in Iran, the underlying continuing
obligations under the loan agreement would become unenforceable by the
Libyan and/or Iranian counterpart without the contract being terminated? This
would mean that a lender would be protected ad infinitum against claims from
its borrower, while being able to continue to enforce its own rights and
obligations long after the sanctions are lifted. Indeed the position would be even
more stark where the lender is incorporated in a jurisdiction caught by the
sanctions, whereby Shanning could in theory result in an inability to enforce the
repayment of the loan.

12
 The Effect of Economic Sanctions on Contracts 34.27

(b) The second port of call – contractual defences and force majeure
34.24 The second port of call, where it appears that continued performance of
a contractual obligation may fall foul of a sanctions regime is to consider
whether the parties specifically addressed that eventuality in their contractual
terms. Broadly speaking, contractual terms that may be relevant to sanctions
regimes fall under two categories: force majeure clauses or sanctions-specific
clauses.
34.25 Force majeure clauses may capture the enactment of economic sanc-
tions. The term ‘force majeure’ does not have a statutory or common law
meaning, and the relevant clause must be construed as any other clause.
However, there is precedent for such clauses capturing the enactment of
economic sanctions or an embargo. For example, in Societe Co-Operative
Suisse Des Cereales et Matieres Fourrageres v. La Plata Cereal Company1, Mr.
Justice Morris held that newly enacted Argentinean restrictions requiring all
maize to be exported by a state-owned company triggered the force majeure
clause of a contract between two private companies for the purchase and
shipment of maize from Argentina2.
1
[1947] 80 Lloyd’s Rep 530.
2
See Van Der Zijden Wildhandel (P J), NV v Tucker and Cross Ltd [1975] 2 Lloyd’s Rep 240
where a clause concerning failure to deliver ‘by reason of war, flood’ etc was held mean that
performance was prevented.

34.26 Sanctions-specific clauses have become increasingly prevalent in con-

tracts with counterparts from jurisdictions which are the subject, or are
perceived as potentially being the subject, of economic sanctions. For example,
in Arash Shipping Enterprises v Groupama Transport1, the Court of Appeal
had to consider the proper construction of a clause allowing an insurer to cancel
their participation to an insurance policy if in their opinion a risk arose of a
breach of any UK, US, EU or UN sanctions. Some industry bodies or organisa-
tions, such as Lloyd’s of London, have provided specific guidance to members
as to the use of sanctions clauses.
1
[2011] EWCA Civ 260.

(c) The third port of call – illegality and frustration

34.27 There may be circumstances where a party’s performance of its contrac-
tual obligations will fall foul of a sanctions regime, but yet be unable to rely on
either contractual protections or the protections of the EU Regulations. The
most common example will be where a foreign sanctions regime – say
United States sanctions – prohibit an action that would otherwise be permitted
under English and/or EU law. In such a scenario, a party may consider whether
it can rely on principles of illegality and/or frustration under English law to
avoid the performance of its contractual obligations and liability in relation to
the same. The English law of illegality is notoriously knotty1, but some general
principles have featured repeatedly in the case law:

13
34.27 Economic Sanctions

(a) First, that an English court will enforce a prohibition on performance

arising out of the law governing a contract. This will obviously apply
where an English-law governed contract is affected by EU or UK
sanctions2, but may also apply in scenarios involving foreign sanctions,
as explained further below.
(b) Secondly, that a prohibition on performance arising out of the law of the
place of performance of a contract will also be given effect by the English
courts. The principle was first articulated in Ralli Bros v Cia Naviera
Sota y Aznor3, and remains good law4.
These rules of thumb are a fair guidance on the principles applicable, but must
be approached cautiously. There will be many situations where one may doubt
their general application: take for example steps taken by a government (such as
Argentina during the 2000s) to protect its local industry against foreign lenders.
Would one expect the English Courts automatically to enforce and apply these
new regulations to frustrate, for example, English-law governed loans to
Argentine companies? That is uncertain, and indeed most case law turns on
specific facts of each case, and often present ‘statements of law or principle
[which] are not all consistent or easily reconciled’5.
1
See ParkingEye Ltd v Somerfield Stores Ltd [2013] Q.B. 840 at [28].
2
See Regazzoni v KC Sethia [1957] 3 All ER 286; Foster v Driscoll [1929] 1 KB 470, CA. See also
Denny Mott & Dickson v James B Fraser & Co Ltd [1944] AC 265; Wadha Bank v Arab
Bank plc, The Times, December 23, 1992. This will be the case even where the contract does not
ostensibly contravene a sanctions regime, but indirectly does so. Thus, in Regazzoni v. KC
Sethia a contract governed by English law for the sale of jute bags to be delivered in Genoa, Italy
was held by the English courts to be unenforceable in circumstance where both parties’
intention (not reflected in the contract) was for the jute bags to be supplied from India and
delivered in South Africa, in breach of the Indian embargo against South Africa.
3
[1920] 2 KB 287.
4
See eg Dana Gas PJSC v Dana Gas Sukuk Ltd [2017] EWHC 1896 (Comm).
5
Per Etherton LJ in Les Laboratoires Servier v Aptex Inc [2013] Bus LR 80.

34.28 Considering sanctions more specifically, as noted above the most likely
scenario is one where a foreign sanctions regime (typically United States
sanctions) prohibits the performance of an obligation under an English-law
governed contract. Given the extensive extra-territorial reach of the US sanc-
tions, this is by no means unusual, and financial institutions with a presence in
the United States will typically find themselves prohibited from dealing with
certain counterparts, whether or not the contract is governed by United States
law.
In such scenarios, it is essential to consider very carefully the nature of the
obligations under the contract, and the place of performance of the contract. In
particular, illegality is unlikely to be accepted as a valid defence to a claim
simply by virtue of one party to a contract not otherwise connected to the
US falling under the jurisdiction of US regulator (because it is incorporated in
the US, or has a presence there). Thus, in Libyan Arab Bank v Bankers Trust co,
the sole fact that the United States government had imposed an embargo on the
extensions of credit to Libyan government organisations could not be relied
upon by the London branch of a US bank to refuse payment to a Libyan

14
 Brexit and Economic Sanctions 34.29

government organisation under an English-law governed contract1.

1
[1989] 3 All ER 252. Also see Fox v Henderson Investment Fund Ltd [1999] 2 Lloyd’s Rep 303
at 306; JSC Zestafoni G Nikoladze Ferroalloy Plant v Ronly Holdings Ltd (No 1) [2004]
EWHC 245 (Comm).

3 BREXIT AND ECONOMIC SANCTIONS

34.29 In recent decades, the United Kingdom’s sanctions policy has been
primarily driven by United Nations and European Union instruments. Once the
UK leaves the EU, it will need its own sanctions policy and legislative frame-
work. For that purpose, on 21 April 2017, the UK Government issued a public
consultation on the future legal framework for imposing and implementing
sanctions. In essence, the government proposed to introduce primary legislation
to create a framework for imposing sanctions regime, with secondary legis-
lation to be introduced for each individual sanction regime.
The Government introduced a Sanctions and Anti-Money Laundering Bill on
19 October 2017, which as of the date of writing is making its way through
Parliament. The primary focus of the Bill, as far as sanctions are concerned, is
to create a framework for the imposition of sanctions. Substantively, at present
it seems that the anatomy of the UK sanctions regime will not fundamentally
change for financial institutions. However, given the repatriation of powers
from the EU, there can be expected to be a much more extensive consideration
of the nature and extent of sanctions regime at a political level in the UK.

15
Part IX

LETTERS OF CREDIT AND

PERFORMANCE BONDS

1
Chapter 35

DEMAND GUARANTEES AND

PERFORMANCE BONDS

1 NATURE OF DEMAND GUARANTEES AND

PERFORMANCE BONDS
(a) Definition 35.1
(b) The Uniform Rules on Demand Guarantees 35.2
(c) Characteristics of demand guarantees 35.6
2 CONSTRUCTION 35.7
(a) Contract of suretyship v demand guarantee 35.8
(b) Assertion of breach 35.9
(c) The degree of strictness of compliance 35.10
(d) Overpayment by the bank to the beneficiary 35.11
3 FRAUDULENT DRAWINGS ON A VALID INSTRUMENT 35.12
(a) Fraud by the beneficiary 35.13
(b) Bank’s knowledge of fraud 35.14
(c) Injunction to restrain payment 35.15
(d) Injunction to restrain payment issued by foreign court 35.16
(e) Injunction to restrain drawing 35.17
(f) Freezing orders and remedies against the fraudster 35.18
(g) Sanctions orders 35.19
4 FRAUD AFFECTING VALIDITY OF INSTRUMENT 35.20

1 NATURE OF DEMAND GUARANTEES AND

PERFORMANCE BONDS

(a) Definition

35.1 A demand guarantee1 is an autonomous obligation of the guarantor to

pay against stipulated documents.
It is formally defined in art 2 of the ICC’s Uniform Rules for Demand
Guarantees (‘URDG’)2:
‘ . . . any signed undertaking, however named or described, providing for payment
on presentation of a complying demand.’
There will always be a principal3, a guarantor and a beneficiary. Where the
beneficiary and the principal are resident in different jurisdictions, the guaran-
tor will usually be a bank in the beneficiary’s country and there will be
interposed between the principal and the guarantor a bank in the princi-
pal’s country. This bank will be an instructing party. Relations between the
guarantor and an instructing party are usually governed by a counter-guarantee
under which the instructing party gives an undertaking to the guarantor in the
same terms as the guarantor’s undertaking to the beneficiary4.

3
35.1 Demand Guarantees and Performance Bonds

The above definition embraces instruments known as performance bonds.

These are simply a form of demand guarantee. In practice, performance bonds
tend to be used where the underlying obligation is not the payment of money,
but the performance of other obligations such as those arising under a construc-
tion contract and this is the reason for the use of a different term.
1
The terms ‘performance bond’, ‘demand bond’, ‘performance guarantee’ and ‘demand guaran-
tee’ are often used interchangeably. For example, in Edward Owen Engineering Ltd v Barclays
Bank International Ltd [1978] QB 159 at 164, Lord Denning MR began his judgment ‘This
case concerns a new business transaction called a performance guarantee or a performance
bond.’ The UN Convention on Independent Guarantees and standby Letters of Credit uses the
term ‘independent guarantee’.
2
ICC Publication 758 published on 1 July 2010. See further Professor Roy Goode’s ‘Guide to the
URDG’, ICC Publication 702.
3
The URDG uses the term ‘applicant’ – see para 35.3 ff.
4
See art 2 URDG for the definition of counter-guarantee. The revised URDG applies equally to
guarantees and counter-guarantees.

(b) The Uniform Rules on Demand Guarantees

35.2 In 1991, the International Chamber of Commerce (‘the ICC’) developed
rules governing demand guarantees, resulting in the publication, in October of
that year, of the Uniform Rules for Demand Guarantees (‘URDG’)1. The first
revision of the URDG was launched in 2007 and, on 1 July 2010, the revised
URDG2 were published and came into force.
Although the 1991 version of the URDG was adopted by the World Bank and
endorsed by UNICITRAL and leading associations such as FIDIC, they did not
seem to be widely applied. The 2010 revision of the URDG differs from the
1991 version contained in ICC 458 in that the rules:
‘(i) adopt the drafting style of the UCP 6003 by providing several definitions at
the outset;
(iii) clarify the process by which a presentation will be checked for conformity;
(iv) provide more precise standards, excluding terms such as ‘reasonable care’
and ‘reasonable time’ and replacing them with, for example, particular time
durations;
(v) incorporate and codify important practices on the advice of a guarantee,
amendments, standards for examination of presentations, partial, multiple
and incomplete demands, linkage of documents, and transfer of guarantees;
(vi) build upon the rights and responsibilities of each party to the guarantee, for
example, by strengthening the independent role of the guarantor; and
(vii) are accompanied by a model guarantee and counter-guarantee form for
users.’
It is hoped that the revised URDG are to be incorporated into more demand
guarantee contracts worldwide4.
The URDG apply to any demand guarantee or counter-guarantee where incor-
porated by reference in the text5. Subject to contrary intention, it is the 2010
revision of the URDG that applies, not the former 1991 version6.
1
ICC 458, 1991.
2
ICC 758.
3
See Chapter 36.
4
The 1991 version of the URDG was referred to by Staughton LJ in Wahda Bank v Arab
Bank plc [1996] 1 Lloyd’s Rep 470; by Moore-Bick LJ in Uzinterimpex JSC v Standard

4
 Nature of Demand Guarantees and Performance Bonds 35.4

Bank plc [2008] 2 Lloyd’s Rep 456 at para 23 and by Beatson J in Meritz Fire and Marine
Insurance Co Ltd v Jan de Nul NV [2010] EWHC 3362 (Comm); [2011] 2 Lloyd’s Rep 379 at
para 69. The 2010 revision has been more recently referred to by Teare J in Sea-Cargo Skips AS
v State Bank of India [2013] EWHC 177 (Comm); [2013] 2 Lloyd’s Rep 477 and by Blair J in
SET Select Energy GMBH v F and M Bunkering Ltd [2014] EWHC 192 (Comm) at para 38.
5
See art 1 URDG.
6
Art 1(d) URDG.

(i) The guarantee

35.3 Under the URDG, a guarantee is independent of and in no way concerned
with the underlying contract (art 5) and it is irrevocable once issued by the
guarantor (art 4). Guarantors are concerned with documents, not goods,
services or performance (art 6), therefore the content of a guarantee and the
instructions for the guarantor to follow are prescriptive (art 8). Art 8 URDG
provides that:
‘All instructions for the issue of guarantees and guarantees themselves should be clear
and precise and should avoid excessive detail. It is recommended that all guarantees
specify:
a. The applicant;
b. The beneficiary;
c. The guarantor;
d. A reference number of other information identifying the underlying relation-
ship;
e. A reference number or other information identifying the issued guarantee or,
in the case of a counter-guarantee, the issued counter-guarantee;
f. The amount or maximum amount payable and the currency in which it is
payable;
g. The expiry of the guarantee;
h. Any terms for demanding payment;
i. Whether a demand or other document shall be presented in paper and/or
electronic form;
j. The language of document specified in the guarantee; and
k. The party liable for the payment of any charges.’

(ii) The demand

35.4 A demand under a guarantee (or counter-guarantee) must be supported

by such other documents as the guarantee specifies, and in any event by a
statement, by the beneficiary, indicating in what respect the applicant is in
breach of its obligations under the underlying relationship1. This statement may
be in the demand or in a separate signed document accompanying or identifying
the demand. Neither the demand nor the supporting statement may be dated
before the date when the beneficiary is entitled to present a demand2.
The guarantor must, within five business days following the day of presenta-
tion, examine the demand and determine if it is a complying demand (art 20a)3.
Article 23 URDG permits the extension or payment of demands in specified
circumstances.
Where the demand fails to comply, the guarantor may, in its sole discretion,
reject it or approach the instructing party or counter-guarantor for a waiver of
the discrepancies. Where it is rejected, the guarantor must give a single notice to

5
35.4 Demand Guarantees and Performance Bonds

that effect, not later than the close of the fifth business day following the day of
presentation, stating each discrepancy for which the demand is being rejected4.
1
Documents may be presented together or by way of partial presentation, provided that the
presentation is completed before the guarantee expires, under URDG art 14(b). This means that
the guarantor is responsible for storing and caring for documentation until a demand is
complete.
2
URDG art 15.
3
This specific time period resolves the ambiguity as to what was meant by a ‘reasonable time’
under the 1991 version of the URDG.
4
URDG art 24.

(iii) Jurisdiction and governing law

35.5 Unless otherwise stated, the governing law of the guarantee is that of the
place of the branch or office of the guarantor that issued the guarantee (art 34).
Further, unless otherwise provided, any dispute is to be settled exclusively by
the competent court of the country of the location of the guarantor’s branch or
office that issued the guarantee (art 35). This means that the underlying
contractual relationship could be governed by a different law from that of the
guarantee and any dispute may be subject to a different jurisdiction from that of
the underlying relationship as well1. This reflects the autonomy of the guarantee
from the underlying relationship2.
1
This was recognised by Blair J in SET Select Energy GmbH v F&M Bunkering Limited [2014]
EWHC 192 (Comm) at para 45.
2
See para 35.6 ff.

(c) Characteristics of demand guarantees

35.6 The essential difference between a guarantee in the strict sense (ie a
contract of suretyship) and a demand guarantee is that the liability of a surety
is secondary, whereas the liability of the issuer of a demand guarantee is primary
and triggered by demand1. A surety’s liability is co-extensive with that of the
principal debtor and, if default by the principal debtor is disputed by the surety,
it must be proved by the creditor. Neither proposition applies to a demand
guarantee. The principle which underlies demand guarantees is that each
contract is autonomous. In particular, the obligations of the guarantor are not
affected by disputes under the underlying contract between the beneficiary and
the principal. If the beneficiary makes an honest demand, it matters not whether
as between himself and the principal he is entitled to payment. The guarantor
must honour the demand, the principal must reimburse the guarantor (or
counter-guarantor), and any disputes between the principal and the beneficiary,
including any claim by the principal that the drawing was a breach of the
contract between them, must be resolved in separate proceedings to which the
bank will not be a party. As Potter LJ explained in Comdel Commodities Ltd v
Siporex Trade SA2:
‘Those authorities are to the effect that it is implicit in the nature of a performance
bond that, in the absence of some clear words to a different effect, when the bond is
called, there will at some stage in the future be an “accounting” between the parties
to the contract of sale in the sense that their rights and obligations will finally be
determined at some future date. The bond is a guarantee of due performance; it is not

6
 Construction 35.7

to be treated as representing a pre-estimate of the amount of damages to which the

beneficiary may be entitled in respect of the breach of contract giving rise to the right
to call for payment under the bond. If the amount of the bond is not enough to satisfy
the seller’s claim for damages, the buyer is liable to the seller for the damages in excess
of the amount of the bond. On the other hand, if the amount of the bond is more than
enough to satisfy the seller’s claim for damages, the buyer can recover from the seller
the amount of the bond which exceeds the seller’s damages.’
The autonomy principle is embodied in URDG art 5(a)3:
‘A guarantee is by its nature independent of the underlying relationship and the
application, and the guarantor is in no way concerned with or bound by such
relationship. A reference in the guarantee to the underlying relationship for the
purpose of identifying it does not change the independent nature of the guarantee.
The undertaking of a guarantor to pay under the guarantee is not subject to claims or
defences arising from any relationship other than a relationship between the guaran-
tor and the beneficiary.’
It is this characteristic which led Lord Denning MR in Edward Owen Engi-
neering Ltd v Barclays Bank International Ltd to describe performance bonds
as ‘virtually promissory notes payable on demand’4, a description which has
been cited in numerous authorities in common law jurisdictions worldwide.
Because of this characteristic, a bank’s position under a demand bond is very
similar to the position of a bank which has issued or confirmed an irrevocable
letter of credit in that the bank must pay if the documents are in order and the
terms of the credit satisfied. Commercially, however, a demand guarantee is
fundamentally different from a letter of credit in that the latter is concerned
with performance whereas the former is concerned with non-performance: a
letter of credit is provided to meet the buyer’s obligation to pay, whereas a
demand guarantee is provided in the hope that no demand will be made under
it but in the eventuality of non-performance or breach by the contractor.
The only exception to the autonomy principle is where there is clear and
obvious fraud of which the bank has notice5.
1
See Vossloh Aktiengesellschaft v Alpha Trains (UK) Limited [2010] EWHC 2443 (Ch); [2011]
2 All ER (Comm) 307 at paras 24 to 26 and Autoridad del Canal de Panamá v Sacyr, SA & Ors
[2017] EWHC 2228 (Comm) per Blair J at para 89.
2
[1997] 1 Lloyd’s Rep 424, CA, 431; followed in Cargill International SA v Bangladesh Sugar
and Food Industries Corpn [1998] 2 All ER 406, [1998] 1 WLR 461, CA.
3
And at 5(b) in relation to counter-guarantees.
4
[1978] QB 159 at 170, [1978] 1 All ER 976 at 983, CA. Geoffrey Lane LJ agreed that
performance bonds have much more the characteristics of a promissory note than of a
guarantee: [1978] QB 159 at 175, [1978] 1 All ER 976 at 986.
5
See Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159 (CA);
Howe Richardson Scale Co v Polimex-Cekop [1978] 1 Lloyd’s Rep 161 (CA); RD Harbottle
(Mercantile) Ltd v National Westminster Bank Ltd [1978] QB 146; see para 35.14 ff.

2 CONSTRUCTION
35.7 The construction of a guarantee under which a bank undertakes to pay on
first written demand may raise four somewhat different issues. The first is
whether the contract is a suretyship or a demand guarantee. The second is
whether, if the instrument is a demand guarantee, it requires the beneficiary to
assert a breach of contract by the principal. This is a question of construing the
guarantee. The third is whether the documents presented by the beneficiary

7
35.7 Demand Guarantees and Performance Bonds

comply with the terms and conditions of the guarantee. This raises the issue of
the required degree of strictness of compliance. The fourth concerns the rights,
as between the parties, if an overpayment is made by the bank to the beneficiary.

(a) Contract of suretyship v demand guarantee

35.8 Where an instrument:

(i) relates to an underlying transaction between parties in different jurisdic-
tions;
(ii) is issued by a bank or other financial institution1;
(iii) contains an undertaking to pay ‘on demand’ (with or without the words
‘first’ and/or ‘written’); and
(iv) does not contain clauses excluding or limiting the defences available to a
surety;
it will almost always be2 construed as a demand guarantee.
By contrast, where an instrument is not given by a bank or other financial
institution it has been held that there is a strong presumption against it being
construed as a demand bond3.
The key question in either case is whether on its proper construction the
instrument is in substance payable on demand (with or without some support-
ing documentation) rather than on proof of the underlying liability. The
presence of principal debtor clauses, clauses excluding or limiting the defences
available to a guarantor (so-called ‘protective clauses’) or the use of words such
as ‘on demand’ are relevant to the proper construction of the instrument, but of
limited significance4.
In construing guarantees, it must be remembered that a demand guarantee can
hardly avoid making reference:
(i) to the contractual performance for which the guarantee is security; and
(ii) to the circumstances in which a demand may be made, namely default by
the principal.
A bare promise to pay on demand without any reference to the princi-
pal’s obligations would leave the principal even more exposed in the event of a
fraudulent demand because there would be room for the principal to assert that
the drawing was in respect of obligations which had not been guaranteed5.
The court’s approach to the construction of guarantees is illustrated by the
following decisions:
(1) In Esal (Commodities) Ltd and Reltor Ltd v Oriental Credit Ltd and
Wells Fargo Bank NA6, the words ‘we undertake to pay the said amount
on your written demand in the event that the supplier fails to execute the
contract in perfect performance’ were construed not to require the
beneficiary to prove a failure to perform.
(2) In Siporex Trade SA v Banque Indosuez7, the guarantee provided: ‘We
hereby engage and undertake to pay on your first written demand any
sum or sums not exceeding US $1,071,000 in the event that, by latest
7 December 1984, no bankers irrevocable documentary letter of credit
has been issued in favour of Siporex Trade SA by Comdel. Any claim(s)

8
 Construction 35.8

hereunder must be supported by your declaration to that effect’. The

guarantee was construed to be a demand guarantee. Hirst J made the apt
observation that8:
(2) ‘The whole commercial purpose of a performance bond is to provide a
security which is to be readily, promptly and assuredly realisable when the
prescribed event occurs; a purpose reflected in the provision here that it
should be payable “on first demand”.’
(3) In Gold Coast Ltd v Caja de Ahorros del Mediterraneo9, the defendant
bank had issued first written demand guarantees payable ‘if and when
the instalment becomes refundable from the Builder under and pursuant
to the terms and conditions of the Shipbuilding contract’. The guaran-
tees then contained conditions, one of which (condition 5) was that any
variation, amendment or waiver given in respect of the underlying
agreement was not to limit, reduce or exonerate the bank’s liability.
The Court of Appeal construed the instrument as a first demand guar-
antee. Tuckey LJ noted that the guarantees had all the appearances of
first demand guarantees. The language of suretyship was strikingly
absent. Condition 5 might have been inserted simply to ensure that the
rules applicable to true guarantees did not apply to the instruments in
question and it was necessary to look beyond the terminology to the
substance of the instrument as a whole without any preconception as to
what it is10.
(4) In Marubeni Hong Kong & South China Ltd v The Government of
Mongolia11, the defendant Government had issued an instrument which
read ‘the undersigned Ministry of Finance of Mongolia unconditionally
pledges to pay to you upon your simple demand all amounts payable
under the Agreement if not paid when the same becomes due (whether at
stated maturity, by acceleration or otherwise) and further pledges the full
and timely performance and observance by the Buyer of all the terms and
conditions of the Agreement’. The Court of Appeal distinguished the
above line of cases, and construed the instrument as a contract of
suretyship, notwithstanding the language of ‘simple demand’, for a
number of reasons: (i) the counter-party was not a bank, but the
Government of Mongolia which would not, in the ordinary course of
business, assume irrevocable primary liability for the defaults of third
parties; (ii) other contemporaneous documents passing between the
parties referred to the instrument as a ‘guarantee’; and (iii) the language
of ‘simple demand’ was qualified by the words that followed immedi-
ately thereafter.
(5) In Vossloh Aktiengesellschaft v Alpha Trains (UK) Limited12 Sir William
Blackburne, considering Marubeni (above), concluded that a guarantee
was a true guarantee and not a demand bond because of the scope of the
secured obligations and the language used in the document13.
(6) In Meritz Fire and Marine Insurance Co Ltd v Jan de Nul NV14 the
buyers obtained advance payment guarantees (‘APGs’) from insurers in
respect of shipbuilding contracts for dredgers from a Korean shipyard.
The APGs provided for return of advance payments in the event of
termination of the shipbuilding contracts. The Korean shipyard merged
with another company and the original company was dissolved. The
insurer guarantor argued that it had only guaranteed the obligation of

9
35.8 Demand Guarantees and Performance Bonds

the former entity and that no valid demand could be made. The Court of
Appeal disagreed. The APGs required a literal construction; the under-
lying transactions were between parties in different countries; the APGs
did not exclude or limit the defences available to a surety in a classic
guarantee and the undertaking was to pay on demand. Their provision
by an insurer did not negate the presumption that they were demand
guarantees15. Further, because the APGs provided for payment even
upon dissolution or liquidation of the Korean shipyard builder, its
merger and subsequent dissolution of that entity did not discharge the
insurer’s liability.
(7) In Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece
SA16 Longmore LJ set out several pointers favouring a conclusion that
the document was a traditional guarantee and other pointers, which
suggested that it was an on demand bond.
(8) In Spliethoff’s Bevrachtingskantoor BV v Bank of China Ltd17 the terms
of the guarantee permitted the bank to withhold and defer payment in
the event of a dispute between the buyer and the seller as to the
underlying obligation being submitted to arbitration, until the arbitra-
tion award was published. Carr J held that this proviso did not change
the substance of the bank’s obligation as being one triggered by the
presentation of a document (namely a demand, followed by an arbitra-
tion award) rather than resulting from the merits of the underlying
dispute18.
(9) In Autoridad del Canal de Panamá v Sacyr, SA & Ors, Blair J held that
APGs issued by the parent companies of a construction consortium were
‘see to it’ guarantees rather than demand guarantees19. A particularly
important factor was that the guarantors agreed to perform the obliga-
tions of the contractor of which it was in breach in the same manner as
required by the contract between the employer and the contractor.
1
See Caterpillar Motoren GmbH & Co KG v Mutual Benefits Assurance Co [2015] EWHC
2304 (Comm) at para 20, in which Teare J held that this presumption applied to a bond issued
by an insurance company in the ordinary course of its business.
2
Such words amount to a presumption, justified by the Court of Appeal authorities, Howe
Richardson v Polimex [1978] 1 Lloyd’s Rep 161, Edward Owen v Barclays Bank Inter-
national Ltd [1978] QB 159 at 170 and Esal (Commodities) Ltd v Oriental Credit Ltd [1985]
2 Lloyd’s Rep 546 at 549. See also Gold Coast Ltd v Caja de Ahorros [2002] 1 Lloyd’s Rep 617
at para 16 and Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA [2012]
EWCA Civ 1629; [2014] 1 Lloyd’s Rep 273 at para 27.
3
See Marubeni Hong Kong and South China Ltd v Government of Mongolia [2005] EWCA Civ
395; [2005] 2 All ER (Comm) 289 per Carnwath LJ at para 30, IIG Capital LLC v Van Der
Merwe [2007] EWHC 2631 (Ch) per Lewison J at paras 20 to 26 and on appeal ([2008] EWCA
Civ 542 at paras 9 and 30), and Autoridad del Canal de Panamá v Sacyr, SA & Ors [2017]
EWHC 2228 (Comm) per Blair J at para 81(4). Cogent indications that the instrument was
intended to operate as a demand guarantee will be required to displace this presumption.
4
See Autoridad del Canal de Panamá at para 81.
5
This guidance was cited with approval and applied by Longmore LJ in Wuhan Guoyu Logistics
Group Co Ltd v Emporiki Bank of Greece SA [2012] EWCA Civ 1629; [2014] 1 Lloyd’s Rep
273 at para 26.
6
[1985] 2 Lloyd’s Rep 546, CA.
7
[1986] 2 Lloyd’s Rep 146.
8
At 158.
9
[2001] EWCA Civ 1086, [2002] 1 All ER (Comm) 142. See also Frank Maas (UK) Ltd v Habib
Bank AG Zurich [2001] Lloyd’s Rep Bank 14.
10
See Tuckey LJ at paras 10 and 15.

10
 Construction 35.9
11
[2005] EWCA Civ 395, [2005] 2 All ER (Comm) 289.
12
[2010] EWHC 2443 (Ch); [2011] 2 All ER (Comm) 307.
13
See also Carey Value Added SI v Grupo Urvasco SA [2010] EWHC 1905 (Comm);
[2011] 1 BCLC 352 in which Blair J dismissed a claim for summary judgment because it was
well arguable that the instrument was not a demand bond and there existed a right of set-off
possessed by the primary debtor, which the guarantor could utilise. Contrast with IIG Capital
LLC v van der Merwe [2008] 2 Lloyd’s Rep 187 (CA).
14
[2010] EWHC 3362 (Comm); [2011] 2 Lloyd’s Rep 379.
15
Contrast this with Sir William Blackburne’s suggestion in Vossloh v Alpha Trains (UK) Ltd
(above) that, because Vossloh was not a bank, this raised a strong presumption that its payment
obligations did not constitute a demand bond (at para 36).
16
[2012] EWCA Civ 1629; [2014] 1 Lloyd’s Rep 273.
17
[2015] EWHC 999 at paras 69 to 85.
18
See also WS Tankship II B.V. v Kwangju Bank Ltd [2011] EWHC 3103 (Comm) at para 116.
19
[2017] EWHC 2228 (Comm) at paras 80 to 103.

(b) Assertion of breach

35.9 The URDG expressly states what is required by way of demand under
those rules1.
It is often more difficult to decide whether a guarantee which is not subject to
the URDG requires, on its true construction, a statement from the beneficiary of
the type described in art 15. In Esal (Commodities) Ltd and Reltor Ltd v
Oriental Credit Ltd and Wells Fargo Bank NA (above, para 35.8), one of the
principal’s defences was that the guarantee required the beneficiary to assert in
his demand that the supplier had failed properly to execute the contract.
Ackner LJ held that such an assertion was required, and observed that the
requirement that the beneficiary must, when making his demand for payment,
also commit himself to claiming that the contract has not been complied with
may prevent some of the many abuses of the performance bond procedure that
have undoubtedly occurred2. However, Neill LJ expressly left open this ques-
tion, expressing reluctance to introduce into this field any rule which provides
scope for argument that the qualifying event has not been sufficiently identified
(or, presumably, not stated to have occurred)3.
In I E Contractors Ltd v Lloyds Bank plc and Rafidain Bank4, Staughton LJ
expressed the view that a construction which requires the demand to assert a
breach of contract is a construction which ‘one would wish to adopt, since it
requires the beneficiary to state in plain terms that which he must, if honest, be
prepared to assert – and may place him in peril of a charge of obtaining money
by deception if it is untrue to his knowledge’. The implication is that, if the
beneficiary is to be required to assert a breach by using some particular form of
words, this ought to be clearly specified in the guarantee5.
1
Above, para 35.4.
2
[1985] 2 Lloyd’s Rep 546 at 550.
3
[1985] 2 Lloyd’s Rep 546 at 554.
4
[1990] 2 Lloyd’s Rep 496 at 500.
5
See Sea Cargo Skips AS v State Bank of India [2013] EWHC 177 (Comm), at para 35.10 ff. See
also Lukoil Mid-East Ltd v Barclays Bank plc [2016] EWHC 166 (TCC) at paras 15 to 19.

11
35.10 Demand Guarantees and Performance Bonds

(c) The degree of strictness of compliance

35.10 Where the guarantee is governed by the URDG, art 6 provides that the
guarantor is concerned with documents and not with goods or services or
performance and art 19 requires the guarantor only to examine a presentation
to determine whether on its face it appears to be a complying presentation. The
prescriptive provisions regarding data in a document and the signature of a
document are intended to resolve any questions of ambiguity and to create a
strict degree of compliance.
Where the guarantee does not incorporate the URDG, the degree of strictness of
compliance involves a question of construction of the demand guarantee and
what type of demand the parties intended would trigger the guarantor’s liability
to pay1. Although this appears to differ from the position under the URDG and
the standard of strict compliance required for letters of credit, it seems to be
now well-established by the authorities that this is the Courts’ approach and, in
matters of construction, the certainty brought by the strict compliance principle
has to some extent yielded to the desirability of avoiding unintended conse-
quences2.
For example:
(1) In Esal (Commodities) Ltd and Reltor Ltd v Oriental Credit Ltd and
Wells Fargo Bank NA3, the words ‘we undertake to pay the said amount
on your written demand in the event that the supplier fails to execute the
contract in perfect performance’ were construed not to require the
beneficiary to prove a failure to perform.
(2) In Frans Maas (UK) Ltd v Habib Bank AG Zurich4, a demand guarantee
required presentation of a written statement that ‘the Principals have
failed to pay you under their contractual obligation’. A demand was
made stating ‘we claim the sum of £500,000, [the Principals] having
failed to meet their contractual obligations to us’. It was held that the
demand did not comply with the guarantee because it did not assert
breach of a payment obligation.
(3) In Rainy Sky v Kookmin Bank5, the defendant issued advanced payment
bonds to the buyers in respect of six shipbuilding contracts with a
Korean shipbuilder. That shipbuilder became subject to a debt workout
procedure therefore the assignee of the benefit of the buyers’ bonds
claimed under them for a refund of the advance payments. The bank
refused payment because, it argued, the refunds under the bonds were
limited to rejection of the vessel, termination, rescission or cancellation
of the contract. The Supreme Court held that where, as in the present
case, a term of a contract was open to two possible interpretations, it
should be construed in a way which gives it the meaning which the
document would convey to a reasonable person knowing all the back-
ground knowledge which would have been available to the parties in the
situation they were in at the time of the contract. The Supreme Court
held that it would be commercially absurd that the bank should not be
liable under the bonds upon the insolvency of the builder, which the
parties would expect would be a commercial purpose of the bonds.

12
 Construction 35.11

(4) In Sea-Cargo Skips AS v State Bank of India6, a refund guarantee issued

in respect of an underlying shipbuilding contract required a statement
that the vessel or the construction thereof is delayed with more than 270
days as set out in the contract article IV 1 (E), which entitled the buyer to
cancel the contract and to receive repayment of the advance payments.
The demand provided that the vessel had not been delivered by the
delivery date or within 270 days of the same and that the buyer had
therefore exercised his right to terminate the contract. Teare J held that
this was not a demand that triggered the bank’s liability to pay because
the parties would reasonably expect the bank to be told that the delay
was as set out in article IV 1 (E) and because the 270 days’ delay did not
refer specifically to the vessel or construction thereof and was therefore
ambiguous.
(5) In MUR Joint Ventures BV v Compagnie Monegasque de Banque7,
Cranston J held that a guarantee that required the demand to be
‘authenticate[d] as well as representative’s powers of [the beneficiary] by
a notary and duly apostilled’ did not require the beneficiary to present a
legal opinion that the representative who had signed the demand had the
power to do so on its behalf. The Judge held that clear words would have
been needed to import that requirement. Similarly, a requirement that
the demand be sent to the bank by registered mail was held to be
‘directory, not mandatory’ and therefore the failure to do so did not
render the demand ineffective so long as it was in fact received by the
bank.
1
I E Contractors Ltd v Lloyds Bank plc and Rafidain Bank [1990] 2 Lloyd’s Rep 496 at 501
per Staughton LJ and per Sir Denys Buckley LJ at 503.
2
See Rainy Sky v Kookmin Bank [2011] UKSC 50, [2012] 1 All ER 1137, [2011] 1 WLR 2900
and Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA [2012] EWCA Civ
1629; [2014] 1 Lloyd’s Rep 273, below.
3
[1985] 2 Lloyd’s Rep 546; There is a difference between letters of credit and demand guarantees
when applying the doctrine of strict compliance. See I E Contractors Ltd v Lloyds Bank plc and
Rafidain Bank [1990] 2 Lloyd’s Rep 496. In Siporex Trade v Banque Indosuez [1986] 2
Lloyd’s Rep 146 at 159, Hirst J drew the same distinction.
4
[2001] Lloyd’s Rep Bank 14 (Sir Christopher Bellamy QC) at paras 59, 60.
5
[2011] UKSC 50, [2012] 1 All ER 1137, [2011] 1 WLR 2900.
6
[2013] EWHC 177 (Comm), [2013] 2 Lloyd’s Rep 477.
7
[2016] EWHC 3107 (Comm).

(d) Overpayment by the bank to the beneficiary

35.11 If the beneficiary makes a call on a demand guarantee which results in an
overpayment to the beneficiary, there is an implied term in the contract as
between the beneficiary and the principal that the beneficiary will account to the
principal to the extent of the overpayment1. This is so, whether or not the
principal has already indemnified the bank for the sums that it paid out to the
beneficiary2. The obligation to account arises when the amount of the overpay-
ment is determined, whether by judgment or agreement between the parties.
The beneficiary does not hold the overpayment on trust for the guarantor and
the preferable view is that no trust arises in favour of the principal3.
1
Cargill International SA v Bangladesh Sugar & Food Industries Corpn [1996] 2 Lloyd’s Rep
524; not challenged on appeal (see [1998] 1 WLR 461); Comdel Commodities Ltd v Siporex

13
35.11 Demand Guarantees and Performance Bonds

Trade SA [1997] 1 Lloyd’s Rep 424; and TTI Team Telecom International Ltd v Hutchison 3G
UK Ltd [2003] EWHC 762 (TCC), [2003] 1 All ER (Comm) 914, [2003] All ER (D) 83 (Apr).
2
Tradigrain v State Trading Corpn of India [2005] EWHC 2206 (Comm), [2006] 1 Lloyd’s Rep
216.
3
Wuhan Guoyu v Emporiki [2013] EWCA Civ 1679.

3 FRAUDULENT DRAWINGS ON A VALID INSTRUMENT

35.12 The existence of a fraud exception in English law1 in the case of
fraudulent drawings was first recognised in relation to performance bonds by
the Court of Appeal in Edward Owen Engineering Ltd v Barclays Bank
International Ltd2, and by the House of Lords in relation to both performance
bonds and letters of credit in United City Merchants (Investments) Ltd and
Glass Fibres and Equipments Ltd v Royal Bank of Canada, Vitorefuerzos SA
and Banco Continental SA (incorporated in Canada)3. In the words of Lord
Diplock4:
‘To this general statement of principle as to the contractual obligations of the
confirming bank to the seller, there is one established exception: that is, where the
seller, for the purpose of drawing on the credit, fraudulently presents to the confirm-
ing bank documents that contain, expressly or by implication, material representa-
tions of fact that to his knowledge are untrue. Although there does not appear among
the English authorities any case in which this exception has been applied, it is well
established in the American cases of which the leading or “landmark” case is Sztejn
v J Henry Schroder Banking Corpn 31 NYS 2d 631 (1941). This judgment of the
New York Court of Appeals was referred to with approval by the English Court of
Appeal in Edward Owen Engineering Ltd v Barclays Bank International Ltd
[1978] QB 159, though this was actually a case about a performance bond under
which a bank assumes obligations to a buyer analogous to those assumed by a
confirming bank to the seller under a documentary credit. The exception for fraud on
the part of the beneficiary seeking to avail himself of the credit is a clear application
of the maxim ex turpi causa non oritur actio or, if plain English is to be preferred,
“fraud unravels all”. The courts will not allow their process to be used by a dishonest
person to carry out a fraud.’
The fraud exception is in reality a limitation on the guarantor’s undertaking. A
guarantor does not undertake to pay on a demand which is plainly fraudulent5.
If a bank pays in such circumstances, it acts beyond its authority and is not
entitled to reimbursement from its principal.
This limitation gives rise to two questions. First, what constitutes fraud on the
part of the beneficiary? Second, in what circumstances will a bank be treated as
knowing of that fraud?
1
The URDG does not address fraud, which is left to the applicable national law.
2
[1978] QB 159, [1978] 1 All ER 976, CA.
3
[1983] 1 AC 168,[1982] 2 All ER 720, HL.
4
[1983] 1 AC 168 at 183,[1982] 2 All ER 720 at 725.
5
See Rix J in Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2
Lloyd’s Rep 187 at 203.

14
 Fraudulent Drawings on a Valid Instrument 35.14

(a) Fraud by the beneficiary

35.13 A beneficiary’s demand is fraudulent if: (i) the beneficiary has no right to
payment under the underlying contract; and (ii) the beneficiary has no genuine
belief in such right. ‘Honest belief is enough’: State Trading Corpn of India Ltd
v E D & F Man (Sugar) Ltd (per Lord Denning MR), cited in United
Trading Corpn SA and Murray Clayton Ltd v Allied Arab Bank1. If the
beneficiary has an honest belief, it does not matter whether that belief is justified
or not.
It is necessary to distinguish fraud committed by the beneficiary from fraud
committed by third parties for which, absent knowledge by the beneficiary,
would not deny the latter payment under the guarantee. As regards fraud by the
beneficiary, the law is authoritatively stated by Lord Diplock in United City
Merchants (Investments) Ltd v Royal Bank of Canada2. Having referred to the
principle that the seller and confirming bank deal in documents, not in goods,
he continued3:
‘To this general statement of principle as to the contractual obligations of the
confirming bank to the seller, there is one established exception: that is where the
seller, for the purpose of drawing on the credit, fraudulently presents to the confirm-
ing bank documents that contain, expressly or by implication, material representa-
tions of fact that to his knowledge are untrue . . . The exception for fraud on the
part of the beneficiary seeking to avail himself of the credit is a clear application of the
maxim ex turpi causa non oritur actio or, if plain English is to be preferred, “fraud
unravels all”. The courts will not allow their process to be used by a dishonest person
to carry out a fraud.’
A difficulty arises where the seller’s agent has committed the fraud. Is the
agent’s fraud to be imputed to the principal? The English courts have yet to
address this issue in the context of the fraud exception to documentary credits:
but it should be noted that the law of agency has adopted different tests for
determining when a principal will be liable for his agent’s fraud4; and when the
agent’s knowledge of a fraud will be imputed to the principal5.
1
[1985] 2 Lloyd’s Rep 554n at 559, CA.
2
[1983] 1 AC 168, [1982] 2 All ER 720, HL.
3
[1983] 1 AC 168 at 183, [1982] 2 All ER 720 at 725.
4
See, eg, Lloyds v Grace Smith [1912] AC 716.
5
See, eg, Re Hampshire Land [1896] 2 Ch 743 and Bilta (UK) Ltd v Nazir (No 2) [2015] UKSC
23.

(b) Bank’s knowledge of fraud

35.14 As regards fraudulent drawings on a valid instrument, a bank is not
justified in refusing to pay unless fraud is clearly established. The expressions
used in Edward Owen (Engineering) Ltd v Barclays Bank International Ltd
(above) include: ‘established or obvious fraud to the knowledge of the bank’1;
clear fraud of which the bank has notice2; and fraud that is ‘obvious or clear to
the bank’3. These are general, if emphatic tests, but three specific points can be
made about them. First, it is clear that a mere allegation of fraud is insufficient.
The bank’s customer must produce corroborative evidence, in the form of
contemporary documents, to prove the allegation. Second, even if the benefi-
ciary has on the face of it made a fraudulent demand, he must normally be given

15
35.14 Demand Guarantees and Performance Bonds

the opportunity to answer the allegation4. His answer may disclose a genuine
dispute. Third, the evidence, together with any explanation offered by the
beneficiary, must be such that fraud is the only realistic inference5. If the facts
before the bank are consistent with honesty, then the bank must pay notwith-
standing that they are also consistent with fraud.
In order to resist an application by a beneficiary for summary judgment, the
bank must demonstrate a real prospect that it will establish at trial that the only
realistic inference is that of fraud6. This is a lower threshold than that required
in order to obtain an injunction to restrain payment by the bank (as to which see
para 35.15 below), but when applying the test the Court must be ‘mindful of the
. . . need [for] particularly cogent evidence to establish the fraud exception’7.
A principal also must establish fraud to a similarly high standard, in order to
resist a claim for summary judgment by a bank against a principal on a
counter-guarantee of a performance bond8.
In practice, it is very difficult for the bank’s customer to establish clear and
obvious fraud. A beneficiary who maintains a demand for payment in the face
of an allegation of fraud is almost bound to make allegations of breach of
contract against the customer. The bank then finds itself between two disputing
parties and is in no position to reject the beneficiary’s allegations, still less to
conclude that those allegations are not only wrong, but dishonest.
Where a bank invokes the fraud exception, it must be prepared to allege and
prove fraud. In Society of Lloyd’s v Canadian Imperial Bank of Commerce9, the
defendant had issued a demand guarantee in favour of the Society of Lloyd’s at
the request of a Lloyd’s member to secure his liabilities to the Society. The
member incurred heavy underwriting losses and the Society made demand on
the guarantee. The defendant sought to invoke the fraud exception by the
following pleading:
‘(a) The Defendant has been provided with information which its customers
allege amounts to a sufficient case of fraud as to entitle the Defendant to
decline to honour the drafts that have been presented. Full particulars of the
said information are set out in Schedule 2 hereto and copies of all such
information have been provided to the Plaintiff.
(b) The Defendant contends that the material provided was, to a reasonable
banker in the position of the Defendant, sufficient to amount to notice of
clear fraud by the Plaintiff. Further or alternatively, the material provided
was such as would lead a reasonable banker in the position of the Defendant
to infer fraud by the Plaintiff. Accordingly, the Defendant was entitled to
dishonour the drafts and to decline to make any payment to the Plaintiff
under the letters of credit.
(c) For the avoidance of doubt, the Defendant does not allege fraud against the
Plaintiff.’
Saville J held that this plea did not disclose an arguable defence, for three
reasons:
(i) the defence was not based on the principle that the court will not assist
fraud because the court was not being asked to decide that there was
fraud;
(ii) there was no support for the defence in the authorities;

16
 Fraudulent Drawings on a Valid Instrument 35.15

(iii) the suggested defence would produce absurd or unacceptable results. It

would mean that the bank was not bound to pay even if at the time of
trial the beneficiary were able to establish that there was no fraud.
Alternatively, if proof of no fraud would be an answer to the defence, the
effect of the defence would be to impose on the beneficiary a burden of
disproving fraud.
The relevant date for the bank’s knowledge of fraud is the date of payment10.
Where there are two banks in the chain (guarantor and counter-guarantor), the
relevant date is the date of payment by the guarantor11.
1
Lord Denning MR at 169D.
2
Browne LJ at 173A.
3
Geoffrey Lane LJ at 175H.
4
Bolivinter Oil SA v Chase Manhattan Bank [1984] 1 Lloyd’s Rep 251 at 257, CA; United
Trading Corpn SA and Murray Clayton Ltd v Allied Arab Bank Ltd [1985] 2 Lloyd’s Rep 554n
at 561, CA.
5
United Trading Corpn SA and Murray Clayton Ltd v Allied Arab Bank Ltd [1985] 2
Lloyd’s Rep 554n at 565, CA.
6
See Enka Insaat Ve Sanayi A.S v Banca Popolare Dell’Alto Adige SPA [2009] EWHC 2410
(Comm) at paras 19–25 and National Infrastructure Development Company Limited v Banco
Santander SA [2017] EWCA Civ 27 at paras 20–24.
7
Teare J in Enka at para 25.
8
Banque Saud Fransi v Lear Siegler Services Inc [2006] 1 Lloyd’s Rep 273.
9
[1993] 2 Lloyd’s Rep 579.
10
United Trading Corpn SA and Murray Clayton Ltd v Allied Arab Bank [1985] 2 Lloyd’s Rep
554n at 560; see also Bolivinter Oil SA v Chase Manhattan Bank NA [1984] 1 Lloyd’s Rep 251
at 256.
11
European Asian Bank AG v Punjab and Sind Bank [1983] 2 All ER 508 at 519d; [1983] 1 WLR
642 at 658C, CA.

(c) Injunction to restrain payment

35.15 In Bolivinter Oil SA v Chase Manhattan Bank1, the Court of Appeal
made the following observations on the grant of ex parte injunctions restraining
payment under letters of credit, performance bonds and guarantees:
‘The unique value of such a letter, bond or guarantee is that the beneficiary can be
completely satisfied that whatever disputes may thereafter arise between him and the
bank’s customer in relation to the performance or indeed existence of the underlying
contract, the bank is personally undertaking to pay him provided that the specified
conditions are met. In requesting his bank to issue such a letter, bond or guarantee,
the customer is seeking to take advantage of this unique characteristic. If, save in the
most exceptional cases, he is to be allowed to derogate from the bank’s personal and
irrevocable undertaking, given be it again noted at his request, by obtaining an
injunction restraining the bank from honouring that undertaking, he will undermine
what is the bank’s greatest asset, however large and rich it may be, namely its
reputation for financial and contractual probity. Furthermore, if this happens at all
frequently, the value of all irrevocable letters of credit and performance bonds and
guarantees will be undermined.
Judges who are asked, often at short notice and ex parte, to issue an injunction
restraining payment by a bank under an irrevocable letter of credit or performance
bond or guarantee should ask whether there is any challenge to the validity of the
letter, bond or guarantee itself. If there is not or if the challenge is not substantial,
prima facie no injunction should be granted and the bank should be left free to
honour its contractual obligation, although restrictions may well be imposed upon

17
35.15 Demand Guarantees and Performance Bonds

the freedom of the beneficiary to deal with the money after he has received it. The
wholly exceptional case where an injunction may be granted is where it is proved that
the bank knows that any demand for payment already made or which may thereafter
be made will clearly be fraudulent. But the evidence must be clear, both as to the fact
of fraud and as to the bank’s knowledge. It would certainly not normally be sufficient
that this rests upon the uncorroborated statement of the customer, for irreparable
damage can be done to a bank’s credit in the relatively brief time which must elapse
between the granting of such an injunction and an application by the bank to have it
discharged.’
Although these observations were directed to ex parte injunctions, they apply
with equal force where the application is inter partes. There are two major
hurdles to be cleared by the applicant for an injunction restraining payment:
(1) to establish a seriously arguable case that the fraud exception applies;
and
(2) to establish that the balance of convenience is in favour of the grant of an
injunction.
The circumstances in which both propositions can be established will be
exceedingly rare2.
As to establishing the first limb, on an interlocutory application for relief based
on the fraud exception, what has to be established is a seriously arguable case
that the only realistic inference is fraud and that the bank was aware of the
fraud3. Furthermore, an underlying cause of action must be established. Where
the injunction seeks to restrain the issuing bank, the applicant will be able to
rely on the implied term in the contract between the applicant and the issuing
bank that a bank will not pay out where the beneficiary’s fraud is patent4. But
where the applicant seeks to restrain a confirming or negotiating bank, it is not
clear on what juridical basis the applicant can do so5.
As to the balance of convenience, the applicant will almost invariably be faced
with the submission that the balance of convenience is against the grant of an
injunction because:
(i) if the injunction is granted in circumstances where the fraud exception is
not subsequently made out at trial, the bank will have suffered damage
to its reputation which will be both irreparable and incapable of precise
quantification; whereas
(ii) if the injunction is refused, but the applicant does establish the fraud
exception at trial, he will have suffered no loss because the bank’s claim
against him for reimbursement will fail.
Other factors will, of course, be thrown up by the facts of particular cases, but
in practice it is very difficult to tip the balance in favour of granting an
injunction6.
The authorities were extensively reviewed by Rix J in Czarnikow-Rionda Sugar
Trading Inc v Standard Bank London Ltd7. He derived eleven propositions
from them, of which the most important are the following.
(1) The interest in the integrity of the banking contracts under which banks
make themselves liable on their letters of credit or their guarantees is so
great that not even fraud can be allowed to intervene unless the fraud
comes to the notice of the bank–

18
 Fraudulent Drawings on a Valid Instrument 35.15

(a) in time, ie in any event before the beneficiary is paid, and

(b) in such a way that it can be said that the bank had knowledge of
the fraud.
(2) The fact that the claimant gets the benefit of a lower standard of proof
for the purposes of a pre-trial hearing places on the court an additional
requirement to be careful in its discretion not to upset what is in effect a
strong presumption in favour of the fulfilment of independent banking
commitments.
(3) It is in this context that balance of convenience presents ‘an insuperable
difficulty’ (per Kerr J in the Harbottle case). This difficulty exists
whether the basis of the application for an injunction is that payment
would be a breach of contract by the paying bank, or that the court
should intervene to prevent the beneficiary from benefiting from his own
fraud.
(4) Although it cannot be said that a court would never grant an injunction
to restrain payment under a letter of credit or demand guarantee, it
would take extraordinary facts to surmount the difficulty arising from
balance of convenience.
1
[1984] 1 All ER 351n, [1984] 1 WLR 392, CA, reported in full at [1984] 1 Lloyd’s Rep 251. See
also Malas (Hamzeh) & Sons Ltd v British Imex Industries Ltd [1958] 2 QB 127, [1958]
1 All ER 262, CA.
2
This was recognised by the Privy Council in Alternative Power Solution Ltd v. Central
Electricity Board [2014] UKPC 31 at para 79. There are numerous reported cases where an
application for an injunction has failed or been set aside on the return date. See, eg Harbottle
(RD) (Mercantile) Ltd v National Westminster Bank Ltd [1978] QB 146, [1977] 2 All ER 862;
Howe Richardson Scale Co Ltd v Polimex-Cekop and National Westminster Bank Ltd [1978]
1 Lloyd’s Rep 161, CA; Edward Owen (Engineering) Ltd v Barclays Bank Ltd International
[1978] QB 159, [1978] 1 All ER 976, CA; Bolivinter Oil SA v Chase Manhattan Bank [1984]
1 Lloyd’s Rep 251; United Trading Corpn SA and Murray Clayton Ltd v Allied Arab Bank Ltd
[1985] 2 Lloyd’s Rep 554n, CA; Tukan Timber Ltd v Barclays Bank plc [1987] 1 Lloyd’s Rep
171; Group Jose Re (formerly known as Group Josi Reassurance SA) v Walbrook Insur-
ance Co Ltd [1996] 1 Lloyd’s Rep 345, CA; Alternative Power Solution Ltd v. Central
Electricity Board [2014] UKPC 31; Tetronics (International) Ltd v HSBC Bank plc [2018]
EWHC 201 (TCC). By contrast, injunctions have only been granted in a handful of cases,
including Kvaerner John Brown Ltd v Midland Bank plc [1998] CLC 446 (where the fraud was
manifest); and Themehelp Ltd v West [1996] QB 84 (considered further below at para 35.17).
3
United Trading Corpn SA and Murray Clayton Ltd v Allied Arab Bank Ltd [1985] 2
Lloyd’s Rep 554n at 561 and 565, CA and Alternative Power Solution Ltd v. Central Electricity
Board [2014] UKPC 31 at para 59. In Alternative Power, the Board held that the expression
‘seriously arguable’ imports a significantly more stringent test than good arguable case or a
serious issue to be tried.
4
See Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2 Lloyd’s Rep
187 at 203.
5
The position of confirming and negotiating banks is considered further in Chapter 36. There is
no contract between the applicant and the confirming bank or negotiating bank. Although in
United Trading Corp SA and Murray Clayton Ltd v Allied Arab Bank [1985] 2 Lloyd’s Rep
554n, CA it was suggested that the confirming bank might owe the applicant a duty of care, this
was doubted in GKN Contractors v Lloyds Bank plc [1985] 30 BLR 48 at 62; and the decision
of the House of Lords in Henderson v Merrett [1995] 2 AC 145 at 195ff strongly suggests that
English Courts will not impose a duty of care to prevent economic loss on parties at opposite
ends of a carefully constructed contractual chain, save in the most unusual circumstances.
6
See the cases cited in fn 2.
7
[1999] 2 Lloyd’s Rep 187.

19
35.16 Demand Guarantees and Performance Bonds

(d) Injunction to restrain payment issued by foreign court

35.16 The court will generally decline to recognise the order of a foreign court
restraining payment under a letter of credit on the application of the buyer
where the foreign court, applying a law which is not the proper law of the credit,
has made a restraining order contrary to the above principles. This is illustrated
by Power Curber International Ltd v National Bank of Kuwait SAK1, where
the Court of Appeal refused to recognise a ‘provisional attachment’ of sums
payable to the claimant by the defendant bank granted by a Kuwaiti court (and
upheld by the Kuwaiti Court of Appeal). The Court of Appeal (in England)
instead granted the claimant summary judgment. The Court will also usually
refuse to stay its judgment pending the lifting of the order of the foreign court.
In NIDCO Ltd v Banco Santander SA, Christopher Clarke LJ observed2:
‘In general terms it is inappropriate for a court to stay its judgment in a letter of credit
case. Letters of credit are part of the lifeblood of commerce and must be honoured in
the absence of fraud on the part of the beneficiary. The whole point of them is that
beneficiaries should be paid without regard to the merits of any underlying dispute
between the beneficiary and its contractor.’
However, where the foreign court was the proper place of performance and the
governing law of the guarantee, the English court will grant judgment in the
sum of the amount payable, but will not compel a guarantor to pay. It is then for
the foreign court to decide whether to lift the injunction3.
1
[1981] 3 All ER 607, [1981] 1 WLR 1233 (overturned on other grounds by Taurus Petro-
leum Ltd v State Oil Marketing Company of the Ministry of Oil [2017] UKSC 64). Applied in
National Infrastructure Development Co Ltd v BNP Paribas [2016] EWHC 2508 (Comm) and
National Infrastructure Development Co Ltd v Banco Santander SA [2017] EWCA Civ 27.
2
[2017] EWCA Civ 27 at para 45.
3
AES-3C Maritza East 1 EOOD v Crédit Agricole Corporate and Investment Bank [2011]
EWHC 123 (TCC); [2011] Bus LR 249 at paras 67 to 69.

(e) Injunction to restrain drawing

35.17 The autonomy principle cannot be relied upon by a beneficiary to defeat
an application by the principal to restrain it (rather than the bank) from
drawing on the instrument where the right to draw down is clearly precluded by
the terms of the underlying contract1. Thus if the principal and beneficiary have
agreed that the right to draw on the bond will be subject to a condition
precedent, the beneficiary may be restrained if it has not complied with that
condition. In MW High Tech Projects UK Ltd, Stuart-Smith J saw no reason in
principle that such a term must be express rather than implied2, but the Court
will not imply such terms lightly3.
A beneficiary will not, however, be so restrained merely because there is a
dispute as to whether the underlying contract has been breached; it must be
clearly established that the beneficiary is not entitled to draw down pursuant to
the terms of the agreement between the principal and beneficiary4. Because
banks are not concerned with the underlying contract between the principal and
beneficiary, the bank will be justified (absent knowledge of fraud) in paying out
upon demand if the terms of the guarantee itself are met, notwithstanding that
the beneficiary has not satisfied a condition agreed with the principal. The

20
 Fraudulent Drawings on a Valid Instrument 35.17

ability of a principal to enjoin the beneficiary from drawing on the guarantee

where such clear conditions have not been satisfied is therefore an important
protection.
In the much criticised5 decision of Themehelp Ltd v West6 the Court of Appeal
upheld by a majority the grant of an injunction on the application of the
principal to restrain beneficiaries from drawing on a demand guarantee issued
to secure an instalment of the price payable under a share sale agreement which
was alleged to have been procured by fraud. They did so on the grounds that:
(i) the grant of an injunction did not threaten the autonomy of the perfor-
mance guarantee;
(ii) the judge had been entitled on the evidence to find a prima facie case that
the purchaser had been induced to enter the agreement by fraud;
(iii) a freezing injunction over the proceeds of the guarantee would not have
been a sufficient remedy because the sellers were out of the jurisdiction
and there was no evidence that they had any assets within it; and
(iv) the beneficiaries were fully protected because the purchasers were sol-
vent and the bank had agreed to extend the expiry date of the guarantee.
In a strong dissenting judgment, Evans LJ concluded that the grant of the
injunction was contrary to legal principle. In particular (i) the purchasers had
not attempted to rescind the share sale agreement and, accordingly, they
remained bound to pay the price; and (ii) there was no finding or evidence that
the fraud exception defence would be available to the guarantor if payment had
been demanded under the guarantee; but if the guarantor was in fact willing and
able to run the defence, the injunction was not necessary. In addition: (iii) the
grant of the injunction was harmful to the integrity of the banking system; and
(iv) by taking into account the extension of time of the guarantee, the court had
imposed on the beneficiaries a variation of the terms of the sale agreement and
had permanently deprived them of the right to enforce the guarantees in
accordance with their original terms. The appropriate relief in the view of
Evans LJ was the grant of a freezing injunction over the proceeds of any
drawing.
It is submitted that the key to this issue lies in the point made by Evans LJ about
the attitude of the guarantor. Either there is clear fraud, or there is not. In the
former case, the principal does not need the protection of the injunction against
the beneficiary because the guarantor has no mandate to pay, and if he does pay,
the principal is not obliged to reimburse him. In the latter case (no clear fraud),
the grant of an injunction is wrong in principle. The injunction in Theme-
help Ltd v West seems to have been granted in circumstances where the
guarantor itself would have felt bound to pay7.
1
See Sirius International Insurance Corp (Publ) v FAI General Insurance Co Ltd [2003] EWCA
Civ 470 at paras 24 to 28; Simon Carves Limited v Ensus UK Limited [2011] EWHC 657
(TCC); MW High Tech Projects UK Ltd v Biffa Waste Services Ltd [2015] EWHC 949 (TCC)
at paras 33 to 35
2
[2015] EWHC 949 (TCC) at para 34.
3
The State Trading Corporation of India Ltd v ED & F Man (Sugar) Limited [1981] Com LR
235 per Shaw LJ, cited with approval by the Court of Appeal in Costain International Ltd v
Davey McKee (London) Ltd (1990, unreported).
4
Stuart-Smith J in MW High Tech Projects UK Ltd at para 34.
5
May LJ described the decision of the majority as ‘questionable’ in Sirius International [2003]
EWCA Civ 470 at para 31.

21
35.17 Demand Guarantees and Performance Bonds
6
[1996] QB 84, [1995] 4 All ER 215, CA. See further the consideration of Themehelp in
Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2 Lloyd’s Rep 187,
Rix J.
7
The analysis of Rix J in Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd
(see above, para 35.15) is implicitly strongly supportive of Evans LJ.

(f) Freezing orders and remedies against the fraudster

35.18 Given these difficulties, a principal or applicant who suspects that the
beneficiary or his agents may be guilty of fraud may be better advised to make
an urgent ex parte application against the beneficiary to freeze the proceeds of
the performance bond or letter of credit in his hands, rather than seeking to
persuade a court to restrain a banker from paying out on the instrument.
In practice, when seeking to persuade a court to grant a freezing order, the
hurdles that have to be surmounted are considerably lower (namely to establish
a good arguable cause of fraud against the beneficiary; and a real risk of
dissipation if the injunction were not granted). The court should have no
inhibition about granting such an order, since it will not interfere with banks’
commercial reputations or run counter to the autonomy principle. However,
the freezing order will not give the applicant priority or security in the event that
the beneficiary is insolvent1.
An applicant or bank which has paid out on a performance bond or letter of
credit against documents which are subsequently shown to be false may also
(depending on the facts) be entitled to claim damages from the fraudster or his
associates in deceit2, conspiracy to injure or use of unlawful means, or dishonest
assistance. The applicant or the bank may also seek to recover the monies paid
from the fraudster or other recipients by bringing claims for monies had and
received, knowing receipt or alternatively an equitable proprietary claim.
1
See Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2 Lloyd’s Rep
187.
2
See for example Komercni Banka AS v Stone and Rolls Ltd [2002] EWHC 2263 (Comm),
[2003] 1 Lloyd’s Rep 383, [2002] All ER (D) 239 (Nov); and Standard Chartered Bank v
Pakistan National Shipping Corp (No 2) [2002] UKHL 43, [2003] 1 AC 959, [2002] 2 All ER
(Comm) 931, [2003] 1 All ER 173, [2002] 3 WLR 1547, [2003] 1 Lloyd’s Rep 227,
[2003] 1 BCLC 244, [2003] 01 LS Gaz R 26, (2002) Times, 7 November, 146 Sol Jo LB 258,
[2002] All ER (D) 67 (Nov).

(g) Sanctions orders

35.19 A sanctions order, whether by way of an EC Regulation or domestic
legislation, may impose a permanent prohibition on payment under a demand
guarantee. This occurred in Shanning International Ltd v Lloyds TSB
Bank plc1, where the prohibition resulted from art 2 of Council Regulation
(EEC) No 3541/92:
‘prohibiting the satisfying of Iraqi claims with regards to contracts and transactions
the performance of which was affected by the United Nations Security Council
Resolution 661 (1990) and related resolutions.’

1
[2001] UKHL 31, [2001] 1 WLR 1462.

22
 Fraud Affecting Validity of Instrument 35.20

4 FRAUD AFFECTING VALIDITY OF INSTRUMENT

35.20 Different considerations apply if the fraud of the beneficiary is not
limited to fraudulently seeking to draw down on an indisputably valid perfor-
mance bond or letter of credit: but if instead, the fraud of the beneficiary goes to
the validity of the instrument itself. To take an example: if the underlying
transaction is in fact a mere ‘sham’, concocted between the applicant and the
beneficiary in order to persuade an innocent bank to open a performance bond
or letter of credit and then pay out against bogus documents, then the bank may
be able to challenge the validity of the instrument itself by asserting that it was
procured as a result of a fraudulent misrepresentation.
These were said to be the relevant facts in Solo Industries UK Ltd v Canara
Bank1. In such a case, it is now clear that the bank is entitled to refuse payment
on the grounds that the instrument is invalid due to fraudulent misrepresenta-
tion. Moreover: (i) the beneficiary is not entitled to summary judgment on the
basis of either the autonomy or ‘equivalent to cash’ principles, given that the
validity of the instrument is itself challenged; and (ii) for these purposes, the
bank does not need to establish fraud to the high standard required when
resisting payment on the basis of a fraudulent drawing by a beneficiary against
a valid instrument. It can refuse payment and resist summary judgment merely
by satisfying the court that there is a reasonable prospect of establishing at trial
that the instrument itself was procured by fraud.
1
[2001] EWCA Civ 1059, [2001] 2 All ER (Comm) 217, [2001] 1 WLR 1800, [2001] 2
Lloyd’s Rep 578, [2001] 29 LS Gaz R 37, (2001) Times, 31 July, 145 Sol Jo LB 168,
[2001] All ER (D) 34 (Jul).

23
Chapter 36

DOCUMENTARY CREDITS: GENERAL

1 THE DOCUMENTARY CREDIT 36.1

2 THE ICC UNIFORM CUSTOMS AND PRACTICE 36.2
3 THE STRUCTURE OF DOCUMENTARY CREDITS
(a) Terminology 36.3
(b) Categories of Bank 36.4
(c) The inter-connected contracts 36.9
4 AUTONOMY 36.10
5 TYPES OF CREDIT
(a) Revocable versus irrevocable credits 36.11
(b) Credits available by sight payment/deferred payment/
acceptance/negotiation 36.12
(c) Revolving credits 36.17
(d) Confirmed and unconfirmed credits 36.18
6 THE OPENING, ISSUE AND AMENDMENT OF CREDITS
(a) Obligation to open a credit 36.19
(b) Instructions to issue or amend a credit 36.20
(b) The operative instrument 36.22
(c) Pre-advice of credits 36.23
(d) Amendment 36.24
7 RIGHTS OF PARTIES WHERE DOCUMENTS ARE
DISCREPANT 36.25
(a) Discrepancy detected by confirming bank 36.26
(b) Discrepancy detected by issuing bank but not by confirming bank 36.27
(c) Discrepancy detected by applicant but not by issuing bank 36.28
8 BANK-TO-BANK REIMBURSEMENT OBLIGATIONS 36.29
9 CREDIT TRANSFER 36.30
10 CREDIT ASSIGNMENT 36.31

1 THE DOCUMENTARY CREDIT

36.1 A documentary credit1 is a document issued by a financial institution,
usually a bank, which undertakes to pay the seller upon presentation of certain
stipulated documents. Documentary credits were introduced by merchants to
facilitate and provide proof of performance of obligations in a commercial
transaction. In such transactions, a seller may be unwilling to despatch goods
without prior payment whereas a buyer may be unwilling to expose itself to the
risk of default by first making that payment. The interposition of a third party
bank as ‘reliable and solvent paymaster’2 between buyer and seller means that
the buyer is afforded the protection and certainty of payment and the seller is
protected against the risk of default by its seller.
A second function of the documentary credit is to provide financing of the sale
for both buyer and seller. The introduction of the third party bank enables a
buyer to receive the goods without being required to reimburse the bank which
has issued the credit until a date in the future. The seller may still take

1
36.1 Documentary Credits: General

immediate payment, if the credit permits it, by selling the documents to a bank
which will pay him immediately and collect payment under the credit at
maturity; this is referred to as negotiation of the credit3.
Although documentary credits are traditionally used for the financing of
international sales contracts, they are also now used in a wide range of other
transactions, including project financing and contracts for the supply of tech-
nology. Where the documents to be presented for payment do not include
commercial documents relating to goods, the credit is referred to as a ‘standby
credit’.
1
The terms ‘documentary credit’, ‘documentary letter of credit’, ‘letter of credit’ and ‘commercial
letter of credit’ have the same meaning. The Uniform Customs and Practice for Document
Credits (‘UCP’) and the International Standard Banking Practice for the Examination of
Documents under UCP 600 (‘ISBP 2013’) use the terms ‘documentary credit’ or simply ‘credit’
and they are employed in these chapters.
2
Soprama SpA v Marine and Animal By-Product Corporation [1966] 1 Lloyd’s Rep 367 at 385
and Maran Road Saw Mill v Austin Taylor & Co Ltd [1975] 1 Lloyd’s Rep 156 at 159.
3
See para 36.16 ff.

2 THE ICC UNIFORM CUSTOMS AND PRACTICE

36.2 The Uniform Customs and Practice for Documentary Credits (‘UCP’) are
a set of rules issued by the International Chamber of Commerce (‘the ICC’)
which have resulted in an unparalleled measure of harmonisation of treatment
of documentary credits across the globe.
The UCP are revised approximately every decade. The first version to be
accepted by British banks was issued in 1962. There were revisions in 1974
(UCP 290), 1983 (UCP 400) and 1993 (UCP 500). The current version,
approved by the ICC Banking Commission1 on 24 and 25 October 2006, and
issued on 1 July 2007, is UCP 6002. One important difference between UCP 500
and UCP 600 is that the latter provides new articles on ‘Definitions’ and
‘Interpretations’, offering greater clarity and precision in the rules.
The ICC issues publications designed to promote fuller understanding and use
of the UCP. The Commission meets biannually to consider matters of banking
technique and practice including UCP interpretation. From time to time
the Commission publishes its decisions or opinions on questions concerning the
UCP, most recently, ICC Banking Commission Opinions 2012–20163. Sec-
ondly, in 1997, the ICC approved the Rules for Documentary Credit Dispute
Resolution Expertise (the ‘ICC DOCDEX Rules’), which govern a dispute
resolution procedure involving expert determination of disputes under credits
incorporating the UCP or the Uniform Rules for Bank-to-Bank Reimburse-
ments4.
Relevant publications on UCP 600 include:
(i) the International Standard Banking Practice for the Examination of
Documents under UCP 600) (‘ISBP 2013’) (ICC 745, 2013);
(ii) commentary on UCP 600 (ICC 680E);
(iii) collected DOCDEX decisions 2004–2008 (ICC 696E, 2008);
(iv) collected DOCDEX decisions 2009–2012 (ICC 739E, 2012);
(v) collected DOCDEX decisions 2013–2016 (ICC 786E, 2017);

2
 The ICC Uniform Customs and Practice 36.2

(vi) Users’ Handbook for Documentary Credits under UCP 600 (ICC 694E);
and
(vii) ICC Uniform Rules for Bank-to-Bank Reimbursements under Docu-
mentary Credits (ICC 725E, 2008).
The ICC has also published an electronic supplement to UCP 500 called ‘eUCP’
to be used as an optional supplement to the UCP for part-electronic or
all-electronic presentations of documents. That version has now been updated
to ‘Version 1.1’ for UCP 600.
UCP 600 does not have the force of law in the United Kingdom5. Instead, it is a
set of standard contractual terms, which apply where the text of the credit
expressly indicates that it is subject to those rules6. It is doubtful that a
statement issued by a bank stating that all credits issued were subject to the UCP
would be effective because it would be straightforward to include such wording
in the document itself. However, where the UCP has been expressly incorpo-
rated into a series of credits but a further credit in the same series fails to refer
to the UCP, it may be inferred that the latter was nevertheless intended to
incorporate the UCP. When the terms of the credit are communicated between
banks by SWIFT messages, the SWIFT rules expressly incorporate the UCP
600.
The UCP 600 falls to be construed in accordance with normal contractual and
commercial legal principles. However, in Fortis Bank SA/NA v Indian Overseas
Bank (Nos 1 & 2)7, Thomas LJ considered that a court must recognise the
international nature of the UCP and approach its construction in that spirit.
Accordingly, it should be interpreted in accordance with its underlying aims and
purposes, given that it is intended to be a self-contained code to reflect good
practice and achieve global consistency, and with the expectations of inter-
national bankers. A literalistic and national approach must be avoided8. This
means that the ICC publications are important evidence of international
banking practice and the international approach that ought to be taken.
Although the English courts have on occasion, implied additional terms into the
UCP9, the approach to interpretation indicated by Thomas LJ is desirable to
achieve harmonisation of these global rules.
It is also a question of interpretation whether the UCP 600, having been
incorporated into a credit, has then been effectively modified or overridden by
an express term in the bespoke documentary credit. In Forestal Mimosa Ltd v
Oriental Credit Ltd10, the Court of Appeal had to consider the effect of a
marginal insertion in a credit which incorporated UCP 400 ‘except so far as
otherwise expressly stated’. If the relevant provision of the UCP (art 10(b)(iii))
had not been incorporated, the defendant confirming bank had an arguable
defence to the summary judgment application on the ground that the applicant
had refused to accept 90-day drafts which were stipulated in the credit and duly
presented by the beneficiary. The Court of Appeal held that it was wrong to
approach the question of construction by looking at the credit first without
reference to the UCP. The credit contained no express provision excluding the
UCP, and the words in the credit which would have founded an arguable
defence without reference to the UCP were in fact explicable by reference to,
and consistent with, arts 10(b)(iii) and 11 of the 1983 Revision. Accordingly,

3
36.2 Documentary Credits: General

adopting the correct approach to the question of construction, the defendant

bank was held to have no arguable defence. The Court of Appeal concluded
that the UCP would be overridden only in the event of an ‘irreconcilable
inconsistency’11.
1
The Commission’s full name is the ICC Commission on Banking Technique and Practice.
2
The ICC Banking Commission announced in June 2017 that it did not consider a revision of
UCP 600 to be required at this time (ICC Document 470/1272).
3
See para 36.2 ff for a list of relevant Collected Opinions.
4
See para 36.29 ff.
5
M Golodetz & Co Inc v Czarnikow-Rionda Co Inc [1980] 1 WLR 495 at 509.
6
See art 1 UCP 600.
7
[2011] EWCA Civ 58, [2011] 2 All ER (Comm) 288, [2012] Bus LR 141.
8
At para 29.
9
See Seaconsar Far East Ltd v Bank Markazi Jomhouri Islaimi Iran [1999] 1 Lloyd’s Rep 36 at
39. Cf Bankers Trust Co v State Bank of India [1991] 1 Lloyd’s Rep 587 at 599 (reversed on
other grounds).
10
[1986] 2 All ER 400, [1986] 1 WLR 631, CA.
11
At 639 per Sir John Megaw.

3 THE STRUCTURE OF DOCUMENTARY CREDITS

(a) Terminology
36.3 The terminology used in relation to documentary credits and adopted in
UCP 600, art 2, is as follows:
(i) ‘applicant’ means the party on whose request the credit is issued;
(ii) ‘beneficiary’ means the party in whose favour a credit is issued;
(iii) ‘issuing bank’ means the bank that issues a credit at the request of an
applicant or on its own behalf. The issuing bank is usually the appli-
cant’s own bank and it takes the risk of reimbursement by the applicant
if it pays under the credit.
(iv) although it is possible that a credit will only involve an issuing bank, it is
more usual that the issuing bank instructs another bank - the ‘advising
bank’, which is likely to be in the country of the beneficiary, to advise the
terms of the credit, accept presentation of documents and accept pay-
ment, at the request of the issuing bank;
(v) the advising bank may also be the ‘confirming bank’ in that it adds its
confirmation to a credit upon the issuing bank’s authorisation or request
- such ‘confirmation’ is a definite undertaking to honour or negotiate a
complying presentation;
(vi) a confirming bank will always also be the ‘nominated bank’. An issuing
bank may also be a nominated bank. A ‘nominated bank’ is the bank
with which the credit is available or any bank in the case of a credit
available with any bank;
(vii) ‘presentation’ means either the delivery of documents under a credit to
the issuing bank or nominated bank or the documents so delivered1;
(viii) a ‘complying presentation’ is one that is in accordance with the terms
and conditions of the credit, the applicable provisions of the UCP 600
and international standard banking practice;

4
 The Structure of Documentary Credits 36.5

(ix) upon a complying presentation of documents, the issuing or confirming

or nominated bank as appropriate must ‘honour’ the credit2. ‘Honour’
means (a) to pay at sight if the credit is available by sight payment; (b) to
incur a deferred payment undertaking and pay at maturity if the credit is
available by deferred payment; (c) to accept a bill of exchange (‘draft’)
drawn by the beneficiary and pay at maturity if the credit is available by
acceptance.
1
Art 2 UCP 600.
2
Arts 7 and 8 UCP 600 and see 36.5 ff.

(b) Categories of Bank

36.4 The UCP recognise four categories of bank:
(i) issuing banks;
(ii) advising banks;
(iii) confirming banks; and
(iv) nominated banks.
These categories overlap in that an advising bank can also act as a confirming
bank, and a confirming bank is always a nominated bank. Of the four
categories, an issuing bank and a confirming bank assume a payment under-
taking; a nominated bank has authority to pay, but does not undertake to do so;
and an advising bank does not engage to pay and, in that capacity, has no
authority to do so.

(i) Issuing banks

36.5 An issuing bank is defined in UCP 600 art 2 (see para 35.3). By art 7(a),
an issuing bank gives a definite undertaking, provided that the stipulated
documents are presented to the nominated bank or to itself and that they
constitute a complying presentation, to perform in one of four ways, depending
on whether the credit is available by sight payment, by deferred payment, by
acceptance or by negotiation.
As provided for in art 7, and by the definition of ‘honour’ in art 2, that under
every credit the issuing bank gives a payment undertaking, but under a credit
which provides for drafts drawn on another drawee bank, that undertaking is
contingent on the drawee dishonouring the draft by non-acceptance or non-
payment. In that way, the issuing bank also undertakes a default obligation in
the event that the nominated bank does not perform its payment obligation.
Thirdly, by art 7(c), where the issuing bank authorises another bank to honour
or negotiate a complying presentation, the issuing bank is bound to reimburse
the nominated bank and to take up the documents provided, of course, that the
nominated bank acts within its mandate1.
1
In Deutsche Bank AG v CIMB Bank Berhad [2017] EWHC 1264 (Comm), Blair J held that the
issuing bank was entitled before reimbursement to require the confirming bank to prove that it
had made payment under the credit. The Judge declined to interpret Art 7(c) as requiring no
more than a statement from the confirming bank that it had honoured the presentation.

5
36.6 Documentary Credits: General

(ii) Advising banks

36.6 By art 9(a) UCP 600, a credit may be advised to the beneficiary through
another bank (‘the advising bank’), which may utilise the services of a further
bank (the ‘second advising bank’) without undertaking to honour or negotiate
on the part of that bank, but that bank, if it elects to advise the credit, it is
signifying that it has satisfied itself as to the apparent authenticity of the credit
or amendment and that the advice accurately reflects the terms and conditions
received and it must take reasonable care1 to check the authenticity of the credit
which it advises. If the bank elects not to advise the credit, it must so inform the
issuing bank without delay (art 9(e)).
If the advising bank cannot establish such apparent authenticity it must so
inform the bank from which the instructions appear to have been received
without delay, and if it elects nonetheless to advise the credit it must inform the
beneficiary that it has not been able to establish the authenticity of the credit
(art 9(f)).
1
Art 14(a) UCP 600, see para 36.6.

(iii) Confirming banks

36.7 A confirming bank is one which upon the authorisation or request of the
issuing bank adds its confirmation to a credit1. Note that if the beneficiary
requests an advising bank to add its confirmation, the advising bank is not a
confirming bank because such request was not made by the issuing bank (this is
sometimes called a ‘silent confirmation’). By art 8, a confirming bank assumes
like obligations to the beneficiary as those of the issuing bank.
1
See para 36.3.

(iv) Nominated banks

36.8 A nominated bank is a bank authorised by the issuing bank to honour or
to negotiate. A confirming bank is a nominated bank. There may be both a
confirming bank and one or more other nominated banks, as where a credit is
confirmed but is also negotiable by any bank in a named territory.
By art 12(c) UCP 600, unless the nominated bank is the confirming bank,
nomination by the issuing bank does not constitute a payment undertaking.
Except where expressly agreed to by the nominated bank and so communicated
to the beneficiary, the nominated bank’s receipt of and/or examination and/or
forwarding of the documents does not make that bank liable to pay, to honour
or to negotiate. This raises questions which the UCP do not answer. For
example, if the beneficiary presents documents to a nominated bank on the day
on which the credit expires, and the following day the nominated bank informs
the beneficiary that it has examined the documents and found them to be
conforming, but nevertheless refuses to pay, what are the rights of the benefi-
ciary? The effect of art 12(c) is that he has no claim against the nominated bank.
He cannot re-present the documents to the issuing bank because the credit has
expired. Is the issuing bank entitled to refuse payment on the ground that the
documents were not presented to it in time? It is submitted that the answer is
negative. The nominated bank’s authority to pay includes the authority to

6
 Autonomy 36.10

receive documents and examine them. If the nominated bank acts on this
authority, its conduct should be binding on the issuing bank. The difficult
question of whether the issuing bank is entitled to raise discrepancies not raised
by the nominated bank after its examination of the documents is considered in
Chapter 37.

(c) The inter-connected contracts

36.9 In United City Merchants (Investments) Ltd v Royal Bank of Canada1,
Lord Diplock observed that an international sale of goods transaction to be
financed by means of a confirmed irrevocable documentary credit involves four
autonomous though interconnected contractual relations2. The first contract is
the underlying agreement for sale between buyer and seller (beneficiary and
applicant), which will require the credit to be opened and which will specify the
terms and type of credit that should be opened. That underlying contract is,
however, entirely independent of the credit itself3. Upon agreeing that sales
contract, the applicant will approach his bank, the issuing bank, and a second
contract is created between these parties pursuant to which the latter (itself or
via a confirming bank) agrees to issue the credit and to honour the credit in
accordance with its terms. If the issuing bank uses a correspondent bank to
confirm or advise the credit, a third contract is created. Fourthly, there is a
contractual relationship between the confirming bank and the beneficiary under
which the confirming bank undertakes to pay to the beneficiary (or to accept or
negotiate without recourse to drawer bills of exchange drawn by him) up to the
amount of the credit against a complying presentation of the stipulated docu-
ments. There is additionally a fifth contract between the issuing bank and the
beneficiary, which embodies the issuing bank’s undertaking to pay upon a
complying presentation4.
1
[1983] 1 AC 168 at 182, [1982] 2 All ER 720 at 725, HL.
2
See 36.10 ff.
3
See 36.10 ff.
4
Lord Diplock omitted the fifth contract from his observations in that particular case.

4 AUTONOMY
36.10 The autonomy principle is central to the structure and operation of
documentary credits. It is embodied in UCP art 4, which provides as follows:
‘Article 4– Credits v Contracts
(a) A credit by its nature is a separate transaction from the sales or other
contract on which it may be based. Banks are in no way concerned with or
bound by such contract, even if any reference whatsoever to it is included in
the credit. Consequently, the undertaking of a bank to honour, to negotiate
or to fulfil any other obligation under the credit is not subject to claims or
defences by the applicant resulting from its relationships with the issuing
bank or the beneficiary.
(a) A beneficiary can in no case avail itself of the contractual relationships
existing between banks or between the applicant and the issuing bank.
(b) An issuing bank should discourage any attempt by the applicant to include,
as an integral part of the credit, copies of the underlying contract, pro forma
invoice and the like.’

7
36.10 Documentary Credits: General

Autonomy is fundamental to the proper operation of the credit. Because the

issuing or confirming bank must honour a complying presentation, the buyer
has the financial reassurance that payment is insulated from disputes arising on
the underlying contract. Although banks may refuse a non-compliant presen-
tation of documents when it knows that goods have been despatched and
received by the seller, it cannot refuse payment upon compliant presentation
even if it knows that the buyer has committed a repudiatory breach of the
underlying contract. Further, an applicant cannot oblige the issuing bank to
cancel the credit, nor can it (subject to limited exceptions considered below)
block the credit indirectly by seeking an injunction preventing the beneficiary
from making a presentation and claiming on the credit1, whether in the English
courts or in a foreign court2.
Another facet of the autonomy principle is that, as provided by UCP art 5,
banks deal with documents, and not with goods, services or the performances
to which the documents may relate. However, if the underlying contract
provides that the documentary credit may not be drawn down unless certain
conditions are met, the court can give effect to that express agreement in a clear
case by restraining the beneficiary from drawing on the credit3. This does not
undermine the autonomy of the independent contracts because the action lies in
the failure to comply with the underlying contract and does not concern the
banks4. If the applicant has a genuine complaint in respect of performance of
the underlying contract, the beneficiary remains entitled to seek payment under
the credit and redress must be sought by the applicant outside the credit by way
of refund.
There are very limited exceptions under English law to the autonomy principle:
namely fraud5 and (in exceptional circumstances) set-off6. It is unclear to what
extent illegality provides a further exception to the autonomy principle, over
and beyond those cases where the illegality taints the documentary credit itself7.
1
See Hamzeh Malas & Sons v British Imex Industries Ltd [1958] 2 QB 127.
2
In Power Curber International Ltd v National Bank of Kuwait [1981] 2 Lloyd’s Rep 39
(overturned on other grounds by Taurus Petroleum Ltd v State Oil Marketing Company of the
Ministry of Oil [2017] UKSC 64) the English court ordered a bank to pay despite the existence
of an injunction precluding payment of the documentary credit issued by the defendant bank in
Kuwait. See to the same effect: National Infrastructure Development Co Ltd v BNP Paribas
[2016] EWHC 2508 (Comm) and National Infrastructure Development Co Ltd v Banco
Santander SA [2017] EWCA Civ 27.
3
See Chapter 35, para 35.17.
4
Sirius International Insurance Co (PUBL) v FAI General Insurance Ltd [2003] EWCA Civ 470;
[2003] 1 WLR 2214; Simon Carves Ltd v Ensus UK Ltd [2011] EWHC 675 (TCC); [2011] Bus
LR 340 (on demand bond).
5
See United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168; and
Chapter 37 Part 10, para 37.20.
6
See Hong Kong and Shanghai Banking Corporation v Kloeckner & Co AG [1990] 2 QB 514.
7
See the decision of Colman J in Mahonia v JP Morgan Chase Bank [2003] 2 Lloyd’s Rep 911
and his discussion of Group Josi Re v Walbrook Insurance [1996] 1 WLR 1152.

5 TYPES OF CREDIT

(a) Revocable versus irrevocable credits

36.11 A revocable credit is one which may be cancelled or amended by the
issuing bank at any moment and without prior notice to the beneficiary1. An

8
 Types of Credit 36.13

irrevocable credit is one by which the issuing bank is irrevocably bound to

honour as of the time it issues the credit2. From that moment, the credit may
only be amended or cancelled with the consent of the issuing bank, the
confirming bank, if any, and the beneficiary3.
Before UCP 500, a credit was deemed revocable unless otherwise stated. UCP
500 provided that in the absence of a clear indication to the contrary, a credit is
deemed to be irrevocable4. Now, UCP 600 defines a credit as ‘any arrangement,
however named or described, that is irrevocable and thereby constitutes a
definite undertaking of the issuing bank to honour a complying presentation’5.
Art 3 UCP 600 on interpretation provides that a credit is irrevocable even if
there is no indication to that effect. The current UCP therefore excludes
revocable credits from the scheme.
In practice, revocable credits are very rare. However, should parties still wish to
create a revocable credit, they may do so either by an express and unequivocal
designation of the credit as revocable, or by incorporating the relevant provi-
sions of UCP 500. The revocable credit provides only a very limited protection
to the beneficiary in that a bank cannot reject its payment obligation after
acceptance of documents. But even if the correct documentation is presented,
the bank may refuse their acceptance and payment. In Cape Asbestos Co Ltd v
Lloyd’s Bank Ltd6 the court held that there was no legal obligation for the bank
to give notice that the credit was withdrawn and would be (and was) refused.
1
UCP 500 – Art 8(a).
2
UCP 600 – Art 7(b).
3
UCP 600 – Art 10(a).
4
UCP 500 – Art 6(c).
5
UCP 600 – Art 2 – Definitions.
6
[1921] WN 274.

(b) Credits available by sight payment/deferred payment/

acceptance/negotiation
36.12 Art 6(a) UCP 600 requires a credit to state the bank with which it is
available or whether it is available with any bank. A credit available with a
nominated bank is also available with the issuing bank. By art 6(b) UCP 600, a
credit must also state whether it is available by sight payment, deferred
payment, acceptance or by negotiation.

(i) Sight payment

36.13 A sight credit is one under which the beneficiary is entitled to payment
immediately on acceptance of the documents and the issuing or confirming
bank will make an immediate transfer of funds1. Sight credits often stipulate
presentation of a sight draft drawn on the confirming or issuing bank, although
this document’s function is little more than an invoice to the paying bank.
1
In Standard Chartered Bank v Dorchester LNG (2) Ltd [2014] EWCA Civ 1382, the Court of
Appeal held that a beneficiary’s claim against an issuing or confirming bank for failure to make
payment sounds in debt rather than damages, provided that the beneficiary is willing and able
to transfer the documents to the bank. Moore-Bick LJ observed (at para 41) that there is
surprisingly little authority on the nature of a claim for dishonour of a letter of credit.

9
36.14 Documentary Credits: General

(ii) Acceptance

36.14 An acceptance credit is one under which the issuing and confirming bank
undertake to accept and pay, or that a nominated bank will accept and pay, a
bill of exchange payable at a future date. Although not stated in the UCP, the
beneficiary under an acceptance credit is entitled to have the accepted draft
delivered up to him. He can then discount it in the market by presenting it
before maturity to another bank or finance house. In practice, a confirming or
other nominated bank will often discount its own acceptance and, in the case of
a deferred payment undertaking, its own future payment obligation. But this
does not accelerate the issuing bank’s reimbursement obligation towards the
paying bank.

(iii) Deferred payment

36.15 A deferred payment credit is one under which the beneficiary is entitled
to payment at a specified number of days after some other date (often the date
of the bill of lading) and the bank incurs a deferred payment obligation to
transfer funds on that later date at maturity. Deferred payment credits were
developed on the continent to avoid payment of stamp duty on accepted bills of
exchange.
Like an acceptance credit, a deferred payment credit may be discounted.
However, the discounting bank is not afforded the protection of the law of
negotiable instruments, as was demonstrated in Banco Santander SA v Bay-
fern Ltd1.
In the Banco Santander case, the claimant was the confirming bank under a
deferred payment credit issued by Banque Paribas in favour of the defendant.
Documents presented by the defendant were accepted by the claimant, at which
point the claimant became bound to pay the defendant at the maturity date
some six months later. At the defendant’s request, the claimant discounted its
own deferred payment obligation and remitted the documents to the issuing
bank. The issuing bank claimed that the documents were fraudulent and
informed the claimant that payment would not be made at the maturity date.
This raised an issue as to the effect of the alleged fraud. The claimant contended
that the relevant date for notice of fraud was the date on which it accepted
documents which appeared on their face to be in conformity with the terms and
conditions of the credit. The issuing bank contended that the relevant date was
the maturity date. Both the trial judge (Langley J) and the Court of Appeal held
that the relevant date was the maturity date. Their reason for so holding was
that the mandate from the issuing bank to the confirming bank under a deferred
payment credit is to pay at the deferred payment date. It does not follow that,
because the confirming bank is not in breach of its duty to the issuing bank in
discounting its deferred payment undertaking, the confirming bank is entitled
to be indemnified for doing so.
It was common ground in the Banco Santander case that the relevant date for
notice of fraud under an acceptance credit is the date of the acceptance, and not
the maturity date. This is because notice of fraud received by the acceptor after
his acceptance cannot defeat the claim of a holder in due course of the accepted

10
 Types of Credit 36.17

bill. If the acceptor becomes holder, the bill is automatically discharged at

maturity (Bills of Exchange Act 1882, s 61) and there is no room for fraud to
provide a defence.
The UCP 600 alters the ability to plead fraud as a defence to non-payment.
Under art 12(b) UCP 600, a nominated bank is expressly authorised by the
issuing bank to make prepayment under a deferred payment credit. Under
arts 7(c) and 8(c) UCP 600, the issuing bank or confirming bank (as applicable)
undertakes to reimburse a nominated bank that has honoured or negotiated a
complying presentation and forwarded the documents to the issuing or con-
firming bank. Such undertaking is independent to that owed to the beneficiary.
So the position is now the same in respect of both acceptance and deferred
payment credits and the outcome in the Banco Santander case is reversed, since
the mandate of a nominated bank is expressly stated to extend to discounting a
deferred payment obligation.
1
[2000] 1 All ER (Comm) 776, [2000] Lloyd’s Rep Bank 165, CA.

(iv) Negotiation credit

36.16 ‘Negotiation’ is defined in art 2 as the purchase by the nominated bank
of drafts (drawn on a bank other than the nominated bank) and/or documents
under a complying presentation, by advancing or agreeing to advance funds to
the beneficiary on or before the banking day on which reimbursement is due to
the nominated bank.
The following points can be drawn from this definition:
(i) Only a nominated bank (not an issuing bank) can negotiate and, in
reality, only a non-confirming nominated bank can be said to negotiate.
(ii) Negotiation is a purchase of documents. The negotiating bank therefore
becomes principal and becomes responsible for the risk of failure to
recover from the confirming or issuing bank.
(iii) Negotiation requires the negotiating bank either to advance, or agree to
advance, funds, and such undertaking must be unconditional1.
1
The purpose of making a credit available by negotiation is that is enables the beneficiary
immediate access to the funds and any agreement by a negotiating bank to advance funds
subject to receipt from the issuing bank would defeat that purpose.

(c) Revolving credits

36.17 A ‘revolving’ credit is one suitable for making payment for regular
deliveries made over a period of time. It is issued by the issuing bank at the
request of the applicant and contains a ‘revolving’ clause, which allows the
seller to present documents to the bank after certain periods of time for
payment. Under the revolving credit, sums drawn may be added to the balance
so as to keep the amount available always up to the total of a permitted credit
limit1. The original amount is often not restored until advice is received of
reimbursement of the previous drawing.
1
See Nordskog & Co v National Bank (1922) 10 Ll L Rep 652; J W Mitchell Ltd v Ivan
Pedersen Ltd (1929) 34 Ll L Rep 310.

11
36.18 Documentary Credits: General

(d) Confirmed and Unconfirmed credits

36.18 If an advising bank has been instructed at the request of the issuing bank,
then a confirmed credit is given by the advising bank by adding its own
undertaking to that of the issuing bank to honour or negotiate that credit1. An
unconfirmed credit is one whereby the sole undertaking is that of the issuing
bank.
A confirmed credit provides the advantage to the beneficiary of having a
paymaster in his own country. The credit will also be irrevocable2, which
protects the beneficiary. Art 8 UCP 600 stipulates the confirming bank’s under-
takings, which are in very similar terms to those of the issuing bank.
1
More than one bank can be authorised to add its confirmation. Any bank that acts on such
authorisation will be a confirming bank: Collected Docdex Decisions 2009-2012, Decision No
298.
2
See para 36.11.

6 THE OPENING, ISSUE AND AMENDMENT OF CREDITS

(a) Obligation to open a credit

36.19 Pursuant to the underlying contract between buyer and seller (benefi-
ciary and applicant), there will be an obligation to open the credit. Determining
whether the parties comply with that obligation is a matter of contractual
construction. Where the terms of the credit to be opened are not express, the
courts will consider its implied terms by reference to customs of the trade,
previous dealings and reasonableness1. However, the credit opened must be the
correct type of credit2 and must be particular as to the documents required to
satisfy the payment obligation and such terms are unlikely to be implied.
As ISBP 2013 notes, many of the problems that arise at the document exami-
nation stage could be avoided or resolved by the respective parties through
careful attention to detail in the credit or amendment application and issuance
of the credit or any amendment thereto. The applicant and beneficiary should
carefully consider the documents required for presentation, by whom they are
to be issued, their data content and the time frame in which they are to be
presented.
If the parties fail to agree the terms of the credit, there is no duty owed by the
seller to negotiate and finalise the terms of the credit3 and it is possible that the
parties are simply not ad idem such that there is no enforceable contract
between them. If the terms are agreed, but no credit is opened, the seller has the
right to cancel the contract and sue the buyer for damages.
1
See Soproma SpA v Marine and Animal By-Products Corpn [1966] 1 Lloyd’s Rep 367 at 386.
2
See paras 36.11–36.18.
3
Siporex Trade SA v Bank Indosuez [1986] 2 Lloyd’s Rep 146.

12
 The Opening, Issue and Amendment of Credits 36.20

(b) Instructions to issue or amend a credit

(i) Applicant and issuing bank

36.20 When an issuing bank accepts instructions from an applicant to open a

credit, the contract that comes into being governs their relationship. The
applicant bears the risk of any ambiguity in its instructions to issue or amend a
credit1. If instructions are ambiguous, the issuing bank should seek clarification
before issuing the credit. Further, an issuing bank may, unless the applicant
expressly instructs to the contrary, supplement or develop those instructions in
a manner necessary or desirable to permit the use of the credit or any amend-
ment thereto2.
If, however, a bank acts upon instructions that are ambiguous, having failed to
detect the ambiguity, then difficulties may arise. It is an established principle
that if the instructions given by the customer to the issuing bank as to the
documents to be tendered are ambiguous or capable of covering more than one
kind of document, the banker is not in default if he acts upon a reasonable
meaning of the ambiguous instructions, or if he accepts any kind of document
which fairly falls within the description used3. Similarly a paying bank which
acts upon an ambiguous mandate is protected4. However, a party such as an
agent acting upon his own interpretation of a document must act reasonably in
all the circumstances in so doing. Accordingly, if the ambiguity is patent on the
face of the document, it may well be right, especially with the facilities of
modern communications, to have the instructions clarified if time permits5.
Banks are required to discourage any attempt to include excessive detail in the
credit or any amendment. Excessive detail is the plague of modern documentary
credits. The tendency is to stipulate numerous documents additional to a
transport document, an insurance document and a commercial invoice. Worse
still, a practice has developed of including ‘special conditions’ which impose
additional requirements to those in the description of the documents. Such
special conditions often stipulate a state of fact without specifying a corre-
sponding document. Art 14(g) UCP 600 provides that any document presented
but not required by the credit will be disregarded and returned to the presenter6.
The difficulties created by poorly drafted credits are illustrated by Credit
Agricole Indosuez v Muslim Commercial Bank Ltd7, where the claimant was
the confirming bank of a credit issued by the defendant. The credit first
stipulated the documents to be presented by the insertion of crosses in boxes
beside a pre-printed list of documents. It then set out ‘Other conditions’ and
below that a hotchpotch of eighteen terms headed ‘Special Conditions’. Some of
the special conditions appeared to stipulate additional documents. The defen-
dant rejected the documents on the ground that some of the documents
mentioned in the special conditions had not been presented. The Court of
Appeal found in favour of the claimant, for two reasons.
First, the credit having been issued on 5 September 1997 specifying a latest date
for shipment of 10 September 1997, there was insufficient time for the claimant
to obtain clarification – a process which would have involved asking ten to
fifteen questions. Staughton LJ added that the claimant was not obliged to give
up the chance of participating in business merely because the ambiguous
language of the other party might lead to a dispute.

13
36.20 Documentary Credits: General

Second, the relationship between an issuing bank and a confirming bank,

although not strictly one of agency, attracts the rule that an agent is to be
excused from acting on a reasonable, even if ultimately wrong, interpretation of
his principal’s instructions.
Credits may be issued either in hard form or by teletransmission8. A common
form of teletransmission is by SWIFT message MT 700 or 701.
1
ISBP 2013 page 13.
2
ISBP 2013 page 13.
3
Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147; Commercial Banking Co of
Sydney Ltd v Jalsard Pty Ltd [1973] AC 279, [1972] 2 Lloyd’s Rep 529, PC; Credit Agricole
Indosuez v Muslim Commercial Bank Ltd [2000] 1 All ER (Comm) 172, CA.
4
Equitable Trust Co of New York v Dawson Partners Ltd (1927) 27 Ll L Rep 49, HL; Samuel
Montagu & Co v Banco de Portugal (1924) 19 Ll L Rep 99, HL; Ireland v Livingston (1872)
LR 5 HL 395; Miles v Haslehurst & Co (1906) 23 TLR 142, 12 Com Cas 83; M A Sassoon &
Sons Ltd v International Banking Corpn [1927] AC 711, PC.
5
European Asian Bank AG v Punjab and Sind Bank (No 2)[1983] 2 All ER 508 at 517, 518,
[1983] 1 WLR 642 at 656 per Robert Goff LJ; Credit Agricole Indosuez v Banque Nationale de
Paris [2001] 2 SLR 1 at 41–42.
6
See paras 36.7– 36.8.
7
[2000] 1 All ER (Comm) 172, [2000] 1 Lloyd’s Rep 275, CA.
8
See art 11 UCP 600.

(ii) Advising and confirming banks

36.21 Where a credit is confirmed by a second bank, a second and separate
contract is created between the confirming bank and the beneficiary. The
confirming bank is then bound to honour or to negotiate the credit under art 8
UCP 600.
However, the position of the advising bank is that it acts as agent of the issuing
bank in being asked to advise the seller/beneficiary of the opening of the credit
and of its terms1. Accordingly, the issuing bank is bound by the acts and
statements of the advising bank and the issuing bank is obliged to honour the
credit as so advised (and to sue under its contract with the advising bank to the
extent it was at fault).
1
See Bank Melli Iran v Barclays Bank plc [1951] 2 Lloyd’s Rep 367 at 376.

(c) The operative instrument

36.22 By art 11(a), when a bank instructs an advising bank by an authenticated
teletransmission to advise or amend a credit, the teletransmission is deemed to
be the operative instrument and no mail confirmation should be sent. Any mail
confirmation has no effect and need not be checked. However, if the teletrans-
mission states ‘full details to follow’ or words to similar effect, or states that the
mail confirmation is to be the operative instrument, the teletransmission will
not be deemed operative (art 11(a)). The issuing bank must then issue the
operative credit or amendment without delay.

14
 Rights of Parties Where Documents Are Discrepant 36.25

(d) Pre-advice of credits

36.23 Some banks will issue a pre-advice of a credit at the request of the
applicant. The applicant’s purpose will usually be to provide comfort to the
beneficiary that the applicant will be able to pay the price. The practice of
pre-advising credits is open to abuse by unscrupulous buyers who know that the
seller is about to manufacture or procure the goods to be exported. Accordingly,
art 11(b) provides that a preliminary advice of the issuance or amendment of an
irrevocable credit may only be given by an issuing bank if it is prepared to issue
the operative instrument. The preliminary advice commits the issuing bank
irrevocably to issue or amend the credit in terms not inconsistent with that
advice without delay.

(e) Amendment
36.24 Subject to art 38 on transfer (see para 36.30), an irrevocable credit
cannot be amended or cancelled without the agreement of the issuing bank, the
confirming bank (if any) and the beneficiary (art 10(a)).
Unfortunately, this straightforward principle is then immediately undermined
by art 10(b), which provides that an issuing bank is bound by an amendment
from the time of its issue, but the confirming bank may choose to advise the
amendment without extending its confirmation. If the beneficiary accepts the
amendment, the confirming bank becomes merely an advising bank because it
is no longer willing to confirm the credit as amended.
The terms of the original credit remain in force for the beneficiary until he
communicates his acceptance of the amendment. The beneficiary should give
notification of acceptance or rejection, but if he fails to do so, tender of
documents which conform to the credit and to not yet accepted amendments is
deemed notification of acceptance (art 10(c)).
Partial acceptance of amendments contained in one and the same advice is not
allowed and will not be given effect (art 10(e)). This prevents the beneficiary
from accepting those amendments which are favourable to him while rejecting
those which favour the applicant.
If a bank uses the services of an advising bank to have the credit advised to the
beneficiary, it must use the services of the same bank for advising an amendment
(art 9(d)).
A provision in an amendment to the effect that the amendment shall enter into
force unless rejected by the beneficiary within a certain time period is to be
disregarded (art 10(f)). This expressly states the approach that has been
adopted by the ICC since 19941.
1
See the Position Paper No 1 published on 1 September 1994, the ICC’s Commission on Banking
Technique and Practice.

7 RIGHTS OF PARTIES WHERE DOCUMENTS ARE DISCREPANT

36.25 In a majority of cases, documents presented by a beneficiary do not
comply with the terms and conditions of the credit (see Chapter 37). Research

15
36.25 Documentary Credits: General

undertaken by the ICC during the preparation of the UCP 600 suggested that
nearly 70% of documents are rejected on first presentation. This creates a
variety of problems, depending on whether the discrepancies are or are not
detected by the confirming and/or issuing bank.

(a) Discrepancy detected by confirming bank

36.26 If the confirming bank detects a discrepancy and rejects the documents,
the question arises as to the beneficiary’s rights against the applicant. Is the
beneficiary entitled to be paid if he tenders the documents to the applicant
direct, having failed to obtain payment under the credit?
The matter appears to have first come before the courts in New Zealand in
Hindley & Co v Tothill, Watson & Co1, when the view that the credit
constituted absolute payment was rejected. In Newman Industries Ltd v
Indo-British Industries Ltd2, Sellers J said:
‘The action is against the buyer, not against the bank, and the question of importance
is whether the seller must look only to the bank who issued the letter of credit; that is,
whether the method of payment agreed releases the buyer from direct liability for
payment under the contract of sale. There does not seem to be any direct authority on
the matter. Where it has been agreed that payment is to be by bill of exchange, the
payment would normally be a conditional payment and it would require very clear
terms to make it an absolute payment. Here payment was to be by a draft drawn on
the bank issuing the credit and it was, therefore, to be made by a negotiable
instrument. Originally the payment of the price was to be guaranteed by a bank and
the letter of credit was only taken subsequently in substitution at the request of the
defendants and with the agreement of the plaintiffs. I do not think there is any
evidence to establish, or any inference to be drawn, that the draft under the letter of
credit was to be taken in absolute payment. I see no reason why the plaintiffs . . .
should not look to the defendants, as buyers, for payment.’
However, to speak of a letter of credit as conditional payment of the price does
not make clear what the condition is or how it works. In Shamsher Jute
Mills Ltd v Sethia (London) Ltd3 Bingham J summarised the position in the
following propositions4:
(1) If the buyer establishes a credit which conforms or is to be treated as
conforming with the sale contract, he has performed his part of the
bargain so far.
(2) If the credit is honoured according to its terms, the buyer is discharged
even though the credit terms differ from the contract terms5.
(3) If the credit is not honoured according to its terms because the bank fails
to pay, the buyer is not discharged because the condition has not been
fulfilled6.
(4) If the seller fails to obtain payment because he does not and cannot
present the documents which the terms of the credit, supplementing the
terms of the contract, require, the buyer is discharged7.
(5) In the ordinary case, therefore, the due establishment of the letter of
credit fulfils the buyer’s payment obligation unless the bank which opens
the credit fails for any reason to make payment in accordance with the
credit terms against documents duly presented.
1
(1894) 13 NZLR 13.

16
 Rights of Parties Where Documents Are Discrepant 36.27
2
[1956] 2 Lloyd’s Rep 219 at 236 (reversed by the Court of Appeal on other grounds); and see
Sinason-Teicher Inter-American Grain Corpn v Oilcakes and Oilseeds Trading Co Ltd [1954]
2 All ER 497, [1954] 1 Lloyd’s Rep 376; affd [1954] 3 All ER 468, [1954] 2 Lloyd’s Rep 327,
CA; Saffron v Société Minière Cafrika (1958) 100 CLR 231, HC of A; Soproma SpA v Marine
and Animal By-Products Corpn [1966] 1 Lloyd’s Rep 367 at 385–386; Alan (W J) & Co Ltd v
El Nasr Export and Import Co [1972] 2 QB 189, [1972] 2 All ER 127, CA; Man (ED & F) Ltd
v Nigerian Sweets and Confectionery Co Ltd [1977] 2 Lloyd’s Rep 50; Ficom SA v Sociedad
Cadex Ltda [1980] 2 Lloyd’s Rep 118.
3
[1987] 1 Lloyd’s Rep 388.
4
[1987] 1 Lloyd’s Rep 388 at 392.
5
Alan (W J) & Co Ltd v El Nasr Export and Import Co [1972] 2 QB 189, [1972] 2 All ER 127,
CA.
6
Man (ED & F) Ltd v Nigerian Sweets & Confectionery Ltd (above). This makes good sense:
‘For the buyers promised to pay by letter of credit, not to provide by a letter of credit a source
of payment which did not pay’, as Stephenson LJ put it in the Alan case at p 220G.
7
Ficom SA v Sociedad Cadex Ltda [1980] 2 Lloyd’s Rep 118.

(b) Discrepancy detected by issuing bank but not by confirming bank

36.27 If, without the issuing bank’s authority, the confirming bank pays
against documents containing a discrepancy which is apparent on the face of
the documents when examined with reasonable care, it is not entitled to
reimbursement from the issuing bank. The confirming bank’s authority is to pay
against a complying presentation (see art 8(a)) and it acts beyond its mandate if
it pays against discrepant documents.
It is submitted that the confirming bank could not in such a case recover its
payment from the beneficiary as monies paid under a mistake1. The provisions
of the UCP as to drafts being purchased without recourse (see below) indicate
that the risk of negligently failing to detect a discrepancy lies with the bank
which is guilty of the failure. The confirming bank should be deemed to intend
that the beneficiary be entitled to retain the payment in the event that the
documents are accepted after examination. Furthermore, if the documentary
credit period has expired and the beneficiary is therefore no longer able to
re-present conforming documents, any claim for recovery of monies paid under
a mistake would be met by a defence based either on change of position or
estoppel.
The position is different where the confirming bank has not made a mistaken
payment against discrepant documents, but has been persuaded to make
payment due to documents that appear to conform with the letter of credit,
pursuant to a misrepresentation by a third party or the beneficiary. In such a
case, the confirming bank may be able to recover damages from the third party
or the beneficiary in tort, provided all the necessary elements of deceit or
negligent misstatement are satisfied2.
The ‘without recourse’ provisions of the UCP (art 8(a)(ii)) do not apply to a
negotiating bank which is not an issuing bank or a non-confirming nominated
bank. Whether such a bank has a right of recourse will depend on the terms of
the negotiation and on whether the documents include a draft3.
1
Contrast the position reached by the US Court of Appeals of New York in Mennen v JP Morgan
& Co [1998] Lloyd’s Rep Banking 330.
2
See Standard Chartered Bank v Pakistan National Shipping Corp (No 2) [2002] UKHL 43,
[2003] 1 AC 959; and Niru Battery Manufacturing Co v Milestone Trading [2003] EWCA Civ
1446, [2004] QB 985.

17
36.27 Documentary Credits: General
3
See Maran Road Saw Mill v Austin Taylor & Co Ltd [1975] 1 Lloyd’s Rep 156.

(c) Discrepancy detected by applicant but not by issuing bank

36.28 The issuing bank’s authority is to pay against conforming documents. If
the issuing bank pays against discrepant documents, the applicant cannot be
made to take them up1.
If it is right (as suggested above) that payments under documentary credits are
made without recourse to the payee in the event that a payer fails to detect a
discrepancy, the issuing bank has no recourse against the confirming bank in
such a case.
1
See Credit Agricole Indosuez v Generale Bank [2000] 1 Lloyd’s Rep 123, at 128.

8 BANK-TO-BANK REIMBURSEMENT OBLIGATIONS

36.29 The credit may provide for a nominated bank to claim reimbursement
from an intermediary bank outside the credit. The issuing bank will reimburse
the intermediary bank and will authorise it to pay the nominated bank. This is
referred to as ‘bank-to-bank reimbursement’ the arrangements for which are set
out in art 13 and, where expressly incorporated in the terms of a reimbursement
authorisation, by the ICC Uniform Rules for Bank-to-Bank Reimbursements
under Documentary Credits (ICC 725E), which came into force on 1 October
2008 (‘URBBR’).
The key difference between art 13 and the URBBR is that the latter provide for
the issue by the nominated reimbursing bank of an irrevocable reimbursement
undertaking in favour of the claiming bank to honour that bank’s reimburse-
ment claim provided that the terms and conditions of the reimbursement
undertaking are complied with.
A claiming bank shall not be required to supply a reimbursing bank with a
certificate of compliance with the terms and conditions of the credit
(art 13(b)(ii)) and the issuing bank is responsible for any loss of interest,
expenses and bank charges (arts 13(b)(iii) and (iv)) as well as for reimbursement
itself, should reimbursement not be made by the reimbursing bank on first
demand (art 13(c)).

9 CREDIT TRANSFER
36.30 In order to discharge his obligations to the applicant/buyer under the
underlying contract, the beneficiary/seller will sometimes employ the services of
a third party supplier. Where this occurs, the seller may wish to make a fraction
of the credit available to the supplier to draw on before the seller draws on it for
the balance. This provides the supplier with a reliable source of payment and
relieves the seller from having to finance a payment to the supplier before the
seller has himself been paid under the credit.

18
 Credit Transfer 36.30

These important commercial objectives are facilitated by art 38, which permits
the transfer of all or parts of a credit. The main rules governing transfer are as
follows:
(1) The provisions give a beneficiary (the first beneficiary) the right to
request either the issuing bank or the nominated bank (referred to
together as the ‘transferring bank’ under art 38) to make the credit
available in whole or in part to one or more1 third parties (the second
beneficiary).
(2) However, in order for a credit to be transferable, it must specifically state
that it is so (art 38(b)).
(3) The transferring bank is under no obligation to transfer a credit except
to the extent and in the manner expressly consented to by that bank
(art 38(a))2.
(4) If the transferring bank does accede to a transfer request, then all charges
incurred must be paid for by the first beneficiary (art 38(c)).
(5) The transferred credit must indicate if and under what conditions
amendments may be advised to the second beneficiary (art 38(e)).
(6) The credit can be transferred only on its terms, with the exception of the
amount, unit price, expiry date, date for presentation of documents and
the period of shipment, any of which may be reduced or curtailed
(art 38(g)). This enables the first beneficiary to reserve part of the credit
amount for him to draw on after the second beneficiary’s drawing and to
give himself a sensible period of time for doing so.
(7) The second beneficiary can substitute the name of the first beneficiary for
that of the applicant, but if the name of the applicant is specifically
required by the original credit to appear in any document other than the
invoice, such requirement must be fulfilled (art 38(g). Therefore the
second beneficiary must carefully consider the terms of the credit before
addressing any document other than the invoice to the first beneficiary.
(8) The first beneficiary has the right to substitute his own invoice for that of
the second beneficiary and to draw on the credit according to its
pre-transfer terms for the difference between the two invoices
(art 38(h)). This is an important feature of the transfer regime because it
enables the first beneficiary to keep confidential from the applicant both
the identity of his supplier (the second beneficiary) and the amount of his
profit of the transaction.
(9) Failure by the first beneficiary to present substitute documents ‘on first
demand’3 — gives the transferring bank the right to present the docu-
ments as received from the second beneficiary to the issuing bank,
without further responsibility to the first beneficiary (art 38(i)).
In Jackson v Royal Bank of Scotland4 the defendant transferring bank inadver-
tently sent a copy of the second beneficiary’s invoice to the applicant instead of
the first beneficiary. On discovering the substantial profit being made by the first
beneficiary (ie, the difference between the amount paid by the first beneficiary to
the second beneficiary, and the amount paid by the applicant to the first
beneficiary), the applicant terminated his business relationship with the first
beneficiary. The first beneficiary claimed damages for breach of the transferring
bank’s duty of secrecy. The damages claimed represented ten years’ loss of
profit. The House of Lords held:

19
36.30 Documentary Credits: General

(i) that the bank owed a duty of confidentiality not only in respect of the
identity of the second beneficiary, but also in respect of the size of the first
beneficiary’s mark-up (para 24);
(ii) that on the particular facts, the loss of repeat orders was not too remote
(para 34); and
(iii) that, in the absence of any exclusion or limitation clause in the
bank’s contract, the only cut-off was the point in time at which the
applicant’s claim for damages became too speculative, which on the facts
represented a period of about four years (para 37).
1
Art 38(d) – this is permitted provided that partial drawings or shipments are allowed. Transfers
cannot be made by a second beneficiary to a further third party, save for the first beneficiary.
2
See Bank Negara Indonesia 1946 v Lariza (Singapore) Pte Ltd [1988] AC 583 (PC).
3
‘On first demand’ is not defined, but it is submitted that it requires a prompt response and will
depend upon the date expressed for the receipt of such documents (see ‘Transferable Credits and
the UCP 500’ ICC Publication No. 470/977 Rev 3 (Oct 2002)).
4
[2005] UKHL 3, [2005] 1 WLR 377.

10 CREDIT ASSIGNMENT
36.31 The right to draw on a credit is personal to the beneficiary and cannot be
assigned1. In some jurisdictions, it is common for a bank which is not a
nominated bank to negotiate the documents from the beneficiary and present
them itself under the credit. This is strictly outside the UCP, but in practice
documents are rarely rejected on this ground.
Article 39 expressly preserves the right to assign the proceeds of a credit, so far
as in accordance with the provisions of applicable law. Such an assignment (of
future debts) is permissible under English law: but if the formal requirements of
the Law of Property Act 1925, s 136 are not complied with, the assignment will
only take effect in equity and will confer a mere equitable title on the assignee.
Furthermore, whether legal or equitable, an assignment will take effect ‘subject
to equities’: so an assignee would take subject to any set-off arising between the
bank and the assignor/beneficiary2; further, if the beneficiary has been fraudu-
lent, the assignee will not be able to claim the right to any proceeds under the
credit3.
1
It is not clear whether the proper legal analysis or a transferable credit under art 38 is that it is
an assignment or a novation or a contractual variation and it is submitted that the legal analysis
will depend upon whether the transferring bank is the issuing, confirming or nominated bank’.
2
Marathon Electrical Manufacturing Corp v Mashreqbank PSC [1997] 2 BCLC 460 at 465 per
Mance J (as he then was).
3
See Banco Santander v Bayfern Ltd [2000] 1 All ER (Comm) 776, [2000] Lloyd’s Rep Bank 165
CA; Sofa v Banque de Cairo [2000] 2 Lloyds Rep 600, CA; Standard Bank London Ltd v
Canara Bank [2002] EWHC 1574 (Comm) per Moore-Bick J at [73] to [81].

20
Chapter 37

DOCUMENTARY CREDITS: THE

PRESENTATION, EXAMINATION
AND REJECTION OF DOCUMENTS

1 AVAILABILITY, EXPIRY DATE AND PLACE FOR

PRESENTATION OF DOCUMENTS 37.1
(a) Availability 37.2
(b) Expiry date and place for presentment of documents 37.3
(c) Extension of expiry date 37.4
(d) Hours of presentation 37.5
2 THE DUTY IN THE EXAMINATION OF DOCUMENTS
(a) The duty 37.6
(b) No reference to reasonable care 37.7
(c) Documents which are not required 37.8
(d) Credit specifying state of fact but no document 37.9
3 TIME FOR EXAMINATION 37.10
4 APPROACHING THE APPLICANT FOR A WAIVER OF
DISCREPANCIES 37.11
5 NOTICE OF REJECTION
(a) General requirements 37.12
(b) Fate of the presented documents 37.13
(c) Obligation to comply with terms of rejection notice 37.14
6 PRECLUSION FROM CLAIMING THAT THE DOCUMENTS
ARE DISCREPANT
(a) The preclusion 37.15
(b) Failures by nominated banks 37.16
7 REFUND OF REIMBURSEMENT 37.17
8 PAYMENT UNDER RESERVE 37.18
9 RE-PRESENTATION OF DOCUMENTS BEFORE THE
EXPIRY OF THE CREDIT 37.19
10 THE FRAUD EXCEPTION 37.20
11 THE DOCUMENTS AS SECURITY 37.21
12 DAMAGES FOR BREACH OF CONTRACT 37.22

1 AVAILABILITY, EXPIRY DATE AND PLACE FOR

PRESENTATION OF DOCUMENTS
37.1 UCP 600 art 6 concerns the availability and expiry date for presentation
of documents under a credit.

(a) Availability

37.2 UCP 600 art 6(a)–(c) sets out various requirements concerning the avail-
ability of credits as follows.

1
37.2 Documentary Credits: Presentation, Examination etc

By UCP 600 art 6(a), a credit must state the bank with which it is available or
whether it is available with any bank. A credit available with a nominated bank
is also available with the issuing bank.
By UCP 600 art 6(b), a credit must state whether it is available by sight
payment, deferred payment, acceptance or negotiation.
By UCP 600 art (c), a credit must not be issued available by a draft drawn on the
applicant.

(b) Expiry date and place for presentment of documents

37.3 By art 6(d)(i), all credits must stipulate an expiry date for presentation. An
expiry date stipulated for honour or negotiation will be deemed to be an expiry
date for presentation.
By art 6(d)(ii), the place of the bank with which the credit is available is the
place for presentation. The place for presentation under a credit available with
any bank is that of any bank. A place for presentation other than that of the
issuing bank is in addition to the place of the issuing bank.
It is accordingly clear that what has to occur on or before the expiry date is the
presentation of documents and not (as some banks had contended prior to UCP
500) examination of the documents and/or payment, acceptance or negotia-
tion.
Except where the expiry date is extended (see para 37.4 below), documents
must be presented (at the stipulated place of presentation) on or before the
expiry date (art 6(e)).

(c) Extension of expiry date

37.4 If the expiry date of the credit falls on a day on which the bank to which
presentation has to be made is closed for reasons other than force majeure, the
expiry date is extended to the first following day on which the bank is open for
business (UCP 600 art 29(a)). But this does not extend the latest date for
shipment (UCP 600 art 29(c)). The extension of time provided by UCP 600
art 29(a) is automatic: but the bank to which presentation is made, must
provide a statement that the documents were presented within the time limit
extended in accordance with that article (see art 29(b)). Such a statement is not
a pre-condition to reimbursement; but may give rise to a claim for damages, if
any loss is suffered as a result of the failure by the bank to provide such a
statement1.
1
See Bayerische Vereinsbank Aktiengesellschaft v National Bank of Pakistan [1997] 1
Lloyd’s Rep 59, at 65.

(d) Hours of presentation

37.5 Banks are under no obligation to accept presentation of documents
outside their business hours (UCP 600 art 33).

2
 The Duty in the Examination of Documents 37.8

2 THE DUTY IN THE EXAMINATION OF DOCUMENTS

(a) The duty

37.6 The bank’s duty in the examination of documents is set out in UCP 600
art 14(a), which provides:
‘Article 14 Standard for Examination of Documents
(a) A nominated bank acting on its nomination, a confirming bank, if any, and
the issuing bank must examine a presentation to determine, on the basis of
the documents alone, whether or not the documents appear on their face to
constitute a complying presentation.’
This is to be understood in conjunction with two further provisions. The first is
UCP 600 art 2, which defines a ‘complying presentation’ as:
‘ . . . a presentation that is in accordance with the terms and conditions of the
credit, the applicable provisions of these rules and international standard banking
practice.’
The second is UCP 600 art 14(d), which sets out the principle of consistency
(described in Chapter 36) as follows:
(d) ‘Data in a document, when read in context with the credit, the document
itself and international standard banking practice, need not be identical to,
but must not conflict with, data in that document, any other stipulated
document or the credit.’

(b) No reference to reasonable care

37.7 Unlike its predecessor (UCP 500 art 13(a)), the statement of the
bank’s duty in UCP 600 does not contain any reference to the concept of
‘reasonable care’. This is a welcome clarification. The principle that the sole
question for the bank is whether the documents appear on their face to comply
is incompatible with the suggestion that a bank could accept non-compliant
documents so long as it exercised reasonable care when examining them. Con-
sequently, the only question under UCP 600 is whether a presentation complies
with the requirements of the UCP and the credit, understood in light of ISBP
2013. As stated by Lord Sumner in Equitable Trust Co of New York v Dawson
Partners Ltd1.
‘There is really no question here of . . . diligence or of negligence or of breach of
a contract of employment to use reasonable care and skill. The case rests entirely on
performance of the conditions precedent to the right of indemnity, which is provided
for in the letter of credit.’

1
(1927) 27 Ll L R 49 at 52.

(c) Documents which are not required

37.8 Article 14(g) further provides that documents which are not required by
the credit will not be examined by banks. If banks receive such documents, they
must return them to the presenter.

3
37.9 Documentary Credits: Presentation, Examination etc

(d) Credit specifying state of fact but no document

37.9 Article 14(h) provides that if a credit contains conditions without stating
the document(s) to be presented in compliance with them, banks must deem
such conditions as not stated and will disregard them. This is a more satisfac-
tory solution than to require banks to call for reasonable documentary proof (as
the English court had done under earlier versions of the UCP which were silent
on this point1).
In Position Paper No 3 published on 1 September 1994, the ICC’s Commission
on Banking Technique and Practice expressed its strong disapproval that certain
banks were continuing to issue credits containing a non-documentary condi-
tion. The Commission also noted that:
‘Sometimes, however, a condition appears in a documentary credit which can be
clearly linked to a document stipulated in that documentary credit. Such a condition
is not then deemed to be a non-documentary condition. For example, if a condition
in the documentary credit states that the goods are to be of German origin and no
Certificate of Origin is called for, the reference to “German origin” would be deemed
to be a non-documentary condition and disregarded in accordance with UCP 500
sub-Art 13(c). If, however, the same documentary credit stipulated a Certificate of
Origin, then there would not be a non-documentary condition as the Certificate of
Origin would have to evidence the German origin.’
However, although Article 14(h) is mandatory in form, it nevertheless creates a
problem of legal analysis (as did its predecessor, UCP 500 art 13(c)): if the buyer
instructs his bank, and the bank agrees, to issue a credit containing a non-
documentary condition, why should not the parties’ apparent specific inten-
tions override the UCP? This would be the usual consequence of an inconsis-
tency between a specifically negotiated term in a contract and standard terms
and conditions incorporated by reference. It should nonetheless be noted that
other provisions of the UCP (such as art 20(c)(ii) and art 20(d)) can similarly
override other specifically negotiated terms of the credit, and that to this extent,
the terms of UCP 600 are unusual standard terms and conditions incorporated
by reference.
Two cases suggest that effect might be given to non-documentary conditions,
notwithstanding the prohibition in the UCP. In Korea Exchange Bank v Stan-
dard Chartered Bank2, the Singapore High Court considered the effect of a
credit which provided that price payable fluctuated according to the market
price of gasoil. Relying on UCP 500 art 13(c), an issuing bank argued that it had
no obligation to reimburse Standard Chartered, which had negotiated the
credit. This argument was rejected by Andrew Ang J, who observed that the
purpose of the prohibition on non-documentary conditions was to protect a
negotiating bank (or, presumably, a beneficiary) against the issuing bank and
that the issuing bank was ‘turning Article 13(c) on its head’ by attempting to use
it to renege on its obligations under the credit. He also said that since the credit
would be unworkable without the express fluctuation provision, effect should
be given to the provision in priority to UCP 500 art 13(c) – so the non-
documentary condition was effective. In Oliver v Dubai Bank Kenya Ltd3, it
was the beneficiary who was seeking to rely on UCP 500 Article 13.c to escape
from the express terms of the credit. In that case, a standby credit had been used
to secure payment under a share sale agreement. It was payable against
presentation of, amongst other documents, an authenticated Swift message and

4
 The Duty in the Examination of Documents 37.9

tested telex issued by the issuing bank confirming the beneficiary’s fulfilment of
their commitments under the share sale agreement. By agreeing those terms, the
beneficiary fell into the trap of making payment conditional on presentation of
a document which it had no power itself to obtain. The beneficiary sought to
extricate himself from this trap by arguing that the relevant condition should be
disregarded because it required the bank to concern itself with the underlying
agreement in deciding whether to issue the telex. Andrew Smith J considered
that the condition was not, in fact, non-documentary, but said that if the credit
had made the obligation to pay conditional upon anything other than a
documentary condition then the court might have to consider whether the
general words that incorporate the UCP into the credit should prevail over the
parties’ express stipulation.
A further consequence of the prohibition on non-documentary conditions in
UCP 600 art 14(h) is that it will generally not be possible to imply into a
documentary credit a term which is non-documentary in nature. In Uz-
interimpex JSC v Standard Bank plc 4, the defendant, Standard Bank, had
financed advance payments on behalf of its customer, who was purchasing
consignments of cotton from the claimant, Uzinterimpex. Standard Bank was
the beneficiary of a demand guarantee from the National Bank of Uzbekistan in
the amount of the advance payments, with the intention that Standard Bank
could recover the payments if the goods were not delivered. The advance
payment guarantee was subsequently called by Standard Bank even though
some of the goods had in fact been received by its customer, and the proceeds
banked with Standard Bank. Uzinterimpex (which had taken an assignment of
NBU’s position, having presumably had to reimburse NBU) argued that Stan-
dard Bank had made a double recovery and that it had an implied obligation to
account to the NBU ‘in circumstances where the bank had received both the
proceeds of the guarantee and the proceeds of the cotton to which it related’.
The Court of Appeal rejected the argument. Moore-Bick LJ emphasised that
banks have the obligation to consider whether documents conform on their face
and that they could not be expected to be aware of or to implement terms that
do not appear on the face of the documents.
As can be seen from these cases, the consequences of including non-
documentary conditions are uncertain and ought therefore to be avoided
wherever possible. With careful drafting, it ought to be possible in most cases to
anticipate and avoid these uncertainties without compromising the commerci-
ality of the transaction. This can usually be done simply by stipulating for the
presentation of a document evidencing satisfaction of the condition. For
example, rather than providing that the price of the goods should be equal to
the prevailing market price, the credit could provide for the presentation of a
certificate from the beneficiary setting out that price or confirming that the
amount demanded has been calculated by reference to the market. If the buyer
is concerned that this places too much trust in the buyer, then the credit could
provide for a certificate from a trusted third party, such as an inspection agency
or industry body. But ultimately the burden lies on all parties to documentary
credits to make sure that they comply with the clear principles of the UCP and
avoid non-documentary conditions; otherwise buyers and sellers will face
uncertainty about the effectiveness of the payment security and banks will find
themselves in the unfortunate position of having to decide whether to refuse a
presentation, and litigate with the seller, or to pay, and litigate with their

5
37.9 Documentary Credits: Presentation, Examination etc

customer.
1
Banque De L’Indochine et de Suez SA v J H Rayner (Mincing Lane) Ltd [1983] QB 711 at 719
(Parker J) and 728 (Sir John Donaldson MR); Astro Exito Navegacion SA v Chase Manhattan
Bank NA [1986] 1 Lloyd’s Rep 455 at 462, and on appeal [1988] 2 Lloyd’s Rep 217 at 220.
2
[2006] 1 SLR 565.
3
[2007] EWHC 2165 (Comm).
4
[2008] EWHC Civ 819.

3 TIME FOR EXAMINATION

37.10 By UCP 600 art 14(b):
‘A nominated bank acting on its nomination, a confirming bank, if any, and the
issuing bank shall each have a maximum of five banking days following the day of
presentation to determine if a presentation is complying. This period is not curtailed
or otherwise affected by the occurrence on or after the date of presentation of any
expiry date or last day for presentation.’
This represents a departure from the corresponding article in UCP 500
(art 13(b)), under which banks had ‘a reasonable time, not to exceed seven
banking days following the day of receipt of the documents’ to examine the
documents and reach a decision. Under UCP 600, banks have a straightfor-
ward, clear-cut timeframe that does not turn on the concept of reasonableness
and that commences on the banking day after presentation.
The time limit set by UCP 600 art 14(b) is mirrored in the terms of UCP 600
art 16(d), which provides that a bank’s decision to refuse a presentation ‘must
be given by telecommunication, or if that is not possible, by other expeditious
means no later than the close of the fifth banking day following the day of
presentation.’

4 APPROACHING THE APPLICANT FOR A WAIVER

OF DISCREPANCIES
37.11 In a significant percentage of cases1, the documents tendered by the
beneficiary contain or are alleged to contain discrepancies, but in only a small
percentage of cases are the documents in fact rejected. This important result is
normally achieved by the applicant’s waiver of discrepancies. Typically the
issuing bank will contact the applicant before sending a rejection notice. If the
applicant gives an immediate waiver, the issuing bank will usually take up the
documents – it has no interest in the matter beyond acting within its mandate,
unless the applicant’s ability to discharge its reimbursement obligation is in
doubt. If an immediate waiver is not forthcoming, the practice is to give notice
of rejection. This does not preclude further contact between the issuing bank
and the applicant or between the beneficiary and the applicant. Indeed, the
sending of a rejection notice is often the trigger for communications between the
beneficiary and the applicant.
The UCP now address this important aspect of documentary credit practice in
UCP 600 art 16(b):
‘When an issuing bank determines that a presentation does not comply, it may in its
sole judgement approach the applicant for a waiver of the discrepancies. This does
not, however, extend the period mentioned in sub-article 14(b).’

6
 Notice of Rejection 37.12

Three points should be noted:

(1) The decision whether to approach the applicant is in the issuing
bank’s sole discretion. Accordingly, neither the applicant nor the benefi-
ciary has a legal remedy against the issuing bank if it rejects the
documents without having made such an approach.
(2) The only purpose for which art 16(b) permits an approach to the
applicant is for a waiver of discrepancies, ie a waiver of the discrepancies
identified by the issuing bank. Article 16(b) does not permit a re-
examination of the documents by the applicant with a view to his finding
additional discrepancies. On this question, art 16(b) reflects the Court of
Appeal’s decision in Bankers Trust Co v State Bank of India2.
(3) The operation of art 16(b) does not extend the time period for determin-
ing compliance, as defined in art 14(b) and art 16(d).
1
In both Banque de l’Indochine et de Suez SA v J H Rayner (Mincing Lane) Ltd [1983] QB 711,
[1983] 1 All ER 1137 and the Rabobank case [1987] 1 Lloyd’s Rep 345; on appeal [1988] 2
Lloyd’s Rep 250, CA, expert evidence was adduced that a majority of tenders contain
discrepant documents. A study of 1,215 sets of documents presented over a random three-week
period in 1983 revealed that the total failure rate of first presentations was 49% – see Professor
Clive Schmitthoff ‘Discrepancy of Documents in Letter of Credit Transactions’ [1987] JBL 94.
As recorded in the introduction to UCP 600, the ICC Working Group noted that a number of
recent global surveys had established that approximately 70% of documents presented under
letters of credit were being rejected on first presentation.
2
[1991] 2 Lloyd’s Rep 443, [1991] 1 Lloyd’s Rep 58. This is probably no coincidence since Mr
Bernard Wheble, one of the expert witnesses who gave evidence in Bankers Trust Co v State
Bank of India, was a member of the UCP 400 Revision Working Group.

5 NOTICE OF REJECTION

(a) General requirements

37.12 Articles 16(c), (d) and (e) lay down the procedure for an issuing,
confirming or nominated bank which decides to refuse documents. It is essential
that this procedure is followed because if not, the issuing or confirming bank
will be precluded from claiming that the documents are discrepant. These
provisions state:
‘(c) When a nominating bank acting on its nomination, a confirming bank, if
any, or the issuing bank decides to refuse to honour or negotiate, it must give
a single notice to that effect to the presenter.
‘(c) The notice must state:
(i) that the bank is refusing to honour or negotiate; and
(ii) each discrepancy in respect of which the bank refuses to honour or negotiate;
and
(a) that the bank is holding the documents pending further instruction
from the presenter; or
(b) that the issuing bank is holding the documents until it receives a
waiver from the applicant and agrees to accept it, or receives further
instructions from the presenter prior to agreeing to accept a waiver;
or
(c) that the bank is returning the documents; or
(d) that the bank is acting in accordance with instructions previously
received from the presenter.
(d) The notice required to be given in sub-article 16(c) must be given by

7
37.12 Documentary Credits: Presentation, Examination etc

telecommunication or, if that is not possible, by other expeditious

means no later than the close of the fifth banking day following the
day of presentation.
(e) A nominated bank acting on its nomination, a confirming bank, if
any, or the issuing bank may, after providing notice required by sub-
article 16(c)(iii)(a) or (b), return the documents to the presenter at any
time.’
The rejection notice must be in the form of a single notice, but need not adopt
any particular form of words, and can be oral1. However, it must contain all of
the information required by art 16(c). The rejection notice must be sent without
delay to the beneficiary under the credit (and not any other person); and this is
so whether or not telecommunications or other expeditious means are used to
convey the rejection2.
1
See Seaconsar v Bank Markazi [1997] 2 Lloyd’s Rep 69.
2
See Seaconsar v Bank Markazi [1999] 1 Lloyd’s Rep 36.

(b) Fate of the presented documents

37.13 By UCP 600 art 16(c)(iii), a rejection notice must state which of a
number of permitted courses of conduct is being adopted in relation to the
documents. These are the courses set out in art 16(c)(iii)(a)-(d). Importantly, the
course of conduct set out in art 16(c)(iii)(b) – namely, for the bank to hold the
documents until it receives a waiver from the applicant and agrees to accept it,
or receives further instructions from the presenter prior to agreeing to accept
such a waiver – was not permitted prior to UCP 600. A rejection notice that
does not identify one of the four permissible options is invalid.
By UCP 600 art 16(e), after a bank has provided a confirming rejection notice,
it may return the documents to the presenter at any time.
The question of whether a rejection notice is compliant can give rise to some
difficulty. A statement:
‘Please consider these documents at your disposal until we receive our Princi-
pal’s instructions concerning the discrepancies mentioned in your schedules . . . .’
was held in the Rabobank case1 to be a valid notice of rejection within the
predecessor to art 16(c). The words ‘until we receive our Principal’s instruc-
tions’ were viewed as a mere expression of hope that the buyers and sellers
might come to some agreement2.
In Bankers Trust Co v State Bank of India3, the issuing bank’s rejection telex
stated:
‘Documents at your risk and will be at your disposal after payment to us.’
This was held to be not in accordance with what is now art 16(c). Comparing
the two cases, Lloyd LJ (who gave judgment in both) stated4:
‘The difference between a telex saying that documents are being held at the disposal
of the sellers until something happens, and a telex saying that the documents will be
at the disposal of the sellers when something happens may seem narrow. But the
difference is crucial. In the one case the documents are held unconditionally at the
disposal of the sellers. In the other case, not.’

8
 Notice of Rejection 37.14

An example of a case decided under UCP 500 that would be decided differently
under UCP 600 is Crédit Industriel et Commercial v China Merchants Bank5,
where the issuing bank’s notice of rejection ended with the statement:
‘Should the disc, being accepted by the applicant, we shall release the docs to them
without further notice to you unless yr instructions to the contrary received prior to
our payment.’
Steel J held (para 68) that the notice of rejection did not comply with the
predecessor to art 16:
‘It follows that the documents were not to be returned to CIC or held to their order.
They were to be released to the applicant, within some indefinite period, in the event
of the applicant accepting the discrepancies, without any notice to CIC. The condi-
tional nature of this rejection is not saved by the potential for acceptance of contrary
instructions prior to payment, particularly where no notice is to be given. In short, the
message constitutes a continuing threat of conversion of CIC’s documents.’
This, however, would now fall within UCP 600 art 16(c)(iii)(b).
1
[1988] 2 Lloyd’s Rep 250, CA.
2
[1988] 2 Lloyd’s Rep 250 at 254.
3
[1991] 2 Lloyd’s Rep 443, [1991] 1 Lloyd’s Rep 58.
4
[1991] 2 Lloyd’s Rep 443 at 452.
5
[2002] EWHC 973, [2002] 2 All ER (Comm) 427.

(c) Obligation to comply with terms of rejection notice

37.14 Once a bank has issued a rejection notice stating what it has elected to do
with the documents, it comes under an obligation to act in accordance with the
notice and with the option it had elected under that notice (subject to the liberty
to return the documents at any time under UCP 600 art 16(e)). This was
confirmed by the Court of Appeal in Fortis Bank SA/NV v Indian Overseas
Bank1 A bank had indicated that it was holding the documents pending further
instructions from the presenter (under UCP 600 art 16(c)(iii)(a)). Some weeks
later, the presenter (a confirming bank) requested that the rejecting bank
endorse the bills of lading and return the documents urgently. The rejecting
bank took nearly one month to respond, stating that the bills of lading could not
be endorsed. It was held at first instance and confirmed on appeal that UCP 600
and international standard banking practice required an issuing bank to act in
accordance with a rejection notice; and that an issuing bank which had elected
to return documents was expected to do so with reasonable promptness and
without delay.
In some cases where documents are rejected by an issuing bank, the documents
will be released to the applicant on the terms of an instrument, sometimes called
a letter of trust, by which the applicant agrees to return the documents to the
issuing bank on demand. In such a case, the documents, although in the
possession of the applicant, remain theoretically in the power of the issuing
bank and (through the issuing bank) in turn at the disposal of the remitter to
whom a rejection notice has been sent2. However, if the applicant were to fail to
return the documents when required to do so, causing the issuing bank to fail to
comply with disposal instructions, it would be difficult to say that the issuing
bank was any longer holding the documents at the disposal of the presenter.

9
37.14 Documentary Credits: Presentation, Examination etc

Since the applicant’s waiver of a discrepancy does not bind the issuing bank
(which retains a discretion not to waive the discrepancy itself), the appli-
cant’s waiver does not automatically bring to an end the trust created by a trust
receipt3.
When a confirming or other nominated bank rejects documents, it may be
instructed by the applicant to forward the documents to the issuing bank on a
collection basis. In doing so, the bank would not be failing to hold the
documents at the disposal of the beneficiary, but acting on the beneficia-
ry’s disposal instructions.
1
[2011] EWCA Civ 58, [2012] Bus LR 141.
2
See Rafsanjan Pistachio Producers Co-operative v Bank Leumi (UK) plc [1992] 1 Lloyd’s Rep
513.
3
At 532. The issuing bank’s discretion not to accept a waiver from the applicant is now found at
UCP 600 art 16(c)(iii)(b).

6 PRECLUSION FROM CLAIMING THAT THE DOCUMENTS

ARE DISCREPANT

(a) The preclusion

37.15 By art 16(f):
‘If an issuing bank or a confirming bank fails to act in accordance with the provisions
of this article, it shall be precluded from claiming that the documents do not
constitute a complying presentation.’
The consequence of art 16(f) is that defective rejection amounts to deemed
acceptance, which has the same legal effect as waiver. It has been said, rightly it
is submitted, that the position is then just the same as if there had been no
discrepancies in the first place1.
1
Per Gatehouse J in the Rabobank case [1987] 1 Lloyd’s Rep 345 at 353. On appeal [1988] 2
Lloyd’s Rep 250, the point did not arise because the Court of Appeal overturned the finding of
waiver. The UCP refer to the issuing bank’s election as being to ‘take up’ or ‘refuse’ the
documents, ie accept or reject them. It is submitted that the word ‘waiver’ is consistent with this
terminology. Before the UCP became so widely adopted, the term used was not waiver, but
ratification. An example is Westminster Bank Ltd v Banca Nazionale di Credito (1928) 31 Ll L
Rep 306 at 312, where Roche J stated that if parties keep documents for an unreasonable time,
that may amount to a ratification of what has been done as being within the mandate.

(b) Failures by nominated banks

37.16 In marked contrast with arts 14(b), 16(b) and 16(c), art 16(f) does not
mention nominated banks. What, then, is the consequence of a nominated bank
failing to comply with its obligations under art 16? In particular, does the failure
of a nominated bank to comply with arts 16(b) and (c) amount to a breach by
the issuing or confirming bank so as to give rise to a preclusion against those
banks under art 16(f)? These questions assume obvious importance where a
credit is not confirmed and is intended to be drawn on at the counters of a
nominated bank.
If the default of the nominated bank is not so imputed to the issuing bank, the
beneficiary is admittedly deprived of the benefit of the preclusion. However, the

10
 Payment under Reserve 37.18

UCP does not impose any obligation on a (non-confirming) nominated bank to

honour or negotiate; and, as necessarily follows from the deliberate omission of
any reference to ‘a nominated bank acting on its nomination’ in art 16(f), no
preclusion (or any other adverse consequence) arises under the UCP from a
failure of a nominating bank to comply with its obligations under the UCP. This
should be borne in mind when considering an unconfirmed credit intended to be
drawn on through a nominated bank; the only consequences of a nominated
bank failing to comply with its obligations under the UCP will be those imposed
by the applicable national law (as informed by any agreement between the
beneficiary and the nominated bank).

7 REFUND OF REIMBURSEMENT
37.17 An issuing bank will sometimes authorise a confirming or other nomi-
nated bank to reimburse itself forthwith on payment to the beneficiary. If the
issuing bank subsequently rejects the documents, it will claim a refund of any
such reimbursement. Similarly, although much less common in practice, a
confirming bank may claim refund of reimbursement from a nominated bank
which has paid on its behalf. The right to claim refund of reimbursement is
provided by UCP 600 art 16(g):
‘When an issuing bank refuses to honour or a confirming bank refuses to honour or
negotiate and has given notice to that effect in accordance with this article, it shall
then be entitled to claim a refund, with interest, of any reimbursement made.’
It is essential for the issuing bank to comply with the requirements of the rest of
UCP 600 art 16. If it fails to do so, it is not entitled to reimbursement. This
occurred in Bankers Trust Co v State Bank of India where the claimant was held
not to be entitled to a refund of reimbursement because it had issued a
conditional disposal notice (see para 37.13 above).

8 PAYMENT UNDER RESERVE

37.18 Often, a disagreement arises as to whether documents that have been
presented comply with the credit. Where the party presenting documents
considers that the documents do comply, but the bank to which they are
presented (most commonly a confirming bank) considers that they do not, one
solution may be for the bank to make payment ‘under reserve’. This practice,
although not uncommon, is not specifically addressed in UCP 600.
‘Payment under reserve’ can take two main forms. Under the first, payment is
effected by the confirming bank in the ordinary way, save that the payment is
simply designated as being made ‘under reserve’. This procedure is commonly
followed where the confirming bank is dealing with a valued customer whose
integrity is established. Under the second, the confirming bank does not effect
payment until it has received from the beneficiary a written indemnity or
guarantee in respect of the consequences of paying against discrepant docu-
ments. Under both procedures the confirming bank remits the documents to the
issuing bank and will normally draw its attention to the discrepancies in
reliance on which unconditional payment was refused. In both cases, the typical
understanding of the arrangement is that if the buyer is not ultimately prepared

11
37.18 Documentary Credits: Presentation, Examination etc

to accept that documents that have been presented (and so refuses to reimburse
the bank), the party presenting the documents will reimburse the bank at once.
The following propositions are put forward in relation to these important
procedures1:
(1) There is in general no material difference between payment under
reserve and payment against an indemnity2. Hereafter, reference is made
simply to ‘payment under reserve’.
(2) Payment under reserve brings into existence a contract whereby, in
consideration for the payment, the beneficiary agrees to repay the money
on demand in the event that the receiving bank rejects the documents in
reliance upon some or all of the identified discrepancies. It was so held in
the leading case of Banque de l’Indochine et de Suez SA v J H Rayner
(Mincing Lane) Ltd3.
(3) After the expiry of a reasonable time to examine the documents, the
receiving bank must decide whether to accept or reject them. If it decides
to reject, but fails to give notice in accordance with art 16(c), it is in
breach of its obligations to the remitting bank. The receiving bank is
then precluded by art 16(f) from claiming that the documents are not in
compliance with the terms and conditions of the credit.
(4) It remains an open point whether the confirming bank may demand
repayment in the event that the issuing bank rejects the documents in
reliance upon discrepancies not specified by the confirming bank itself4.
1
Certain of these propositions derive support from the judgment at first instance of Gatehouse J
in the Rabobank case [1987] 1 Lloyd’s Rep 345. On appeal [1988] 2 Lloyd’s Rep 250, the points
of principle determined by Gatehouse J largely fell away in the light of the Court of Ap-
peal’s finding that the issuing bank had accepted a re-tender of a discrepant sanitary certificate,
and had not (as Gatehouse J held) waived the discrepancy in the document originally tendered.
2
However, in the Rabobank case [1988] 2 Lloyd’s Rep 250, the Court of Appeal appears to have
considered that there was a material difference (notwithstanding the evidence of expert
witnesses for both parties that there was not), but this is not fully explained in the judgments.
3
[1983] QB 711,[1983] 1 All ER 1137, CA.
4
In Rayner’s case, Kerr J inclined to the view (without deciding the point) that the issuing
bank’s grounds of rejection would have to include at least one ground relied upon by the
confirming bank – [1983] QB 711 at 734. It is submitted that this view is correct.

9 RE-PRESENTATION OF DOCUMENTS BEFORE THE EXPIRY

OF THE CREDIT
37.19 If documents are rejected on first presentation, the beneficiary is entitled
to correct the discrepancies and re-present the documents before the expiry of
the credit. On a re-presentation, the bank must examine the documents as it
would any new presentation, considering the replacement documents on their
face. It is not appropriate for a bank to engage in a consideration of changes
between versions of documents, or speculate on the reasons for those changes1.
A separate question that arises if the documents are rejected on re-tender is
whether the rejecting bank is permitted to rely on a discrepancy which existed
in the original presentation, but was not listed in the rejection notice issued in
respect of that presentation.
It is submitted that the answer is affirmative. A notice need only identify the
discrepancies in respect of which the documents are rejected on that particular

12
 The Documents as Security 37.21

occasion. Accordingly the statement of a particular reason or reasons for

rejecting documents is not alone enough to found a representation, waiver or
promissory estoppel in respect of other discrepancies2, although special circum-
stances may give rise to an estoppel. The position was succinctly stated by
Parker J in Kydon Compania Naviera v National Westminster Bank Ltd3:
‘It cannot, as a matter of general principle, be right that a bank can never be estopped
any more than it can that a bank by stating one reason impliedly represents that the
documents are otherwise in order or impliedly promises that if the stated defect is
rectified it will pay.’
Special circumstances founding an agreement or estoppel were held to exist in
Floating Dock Ltd v HongKong and Shanghai Banking Corpn4, where employ-
ees of the issuing bank reached an agreement with the beneficiary regarding
amendment of two credits in circumstances such that the beneficiary could
reasonably assume that the bank would not rely upon a particular ground of
rejection.
1
Swotbooks.com Limited v Royal Bank of Scotland plc [2011] EWHC 2025 (QB).
2
Skandinaviska Akt v Barclays Bank (1925) 22 Ll L Rep 523; Kydon Compania Naviera v
National Westminster Bank Ltd [1981] 1 Lloyd’s Rep 68.
3
[1981] 1 Lloyd’s Rep 68 at 79.
4
[1986] 1 Lloyd’s Rep 65.

10 THE FRAUD EXCEPTION

37.20 The fraud exception has already been considered fully in Chapter 35.
The position where a third party fraudulently brings into existence a document
which is a complete nullity was expressly left open in United City Merchants1.
However, in Montrod Ltd v Grundkötter Fleischvertriebs-GmbH2, Judge Ray-
mond Jack QC held that this ‘nullity exception’ should and does form no part
of English law. It is unsupported by authority and it provides a further
complication where simplicity and clarity are needed. This part of his judgment
was upheld on appeal, with the Court of Appeal stating that it would be
undesirable to create further and imprecise inroads into the principles of
autonomy and negotiability which underpin documentary credits, by recognis-
ing the existence of a further ‘nullity exception’3. However, the Court of Appeal
left open a further possible exception, where the beneficiary had behaved
recklessly (albeit not fraudulently) in presenting documents that had been
concocted by a third party4.
1
[1983] 1 AC 168 at 188A, [1982] 2 All ER 720 at 728h.
2
[2001] 1 All ER (Comm) 368, 379–380.
3
[2002] 1 WLR 1975, CA, especially at paras 58 and 59.
4
At paras 59–60.

11 THE DOCUMENTS AS SECURITY

37.21 Throughout the working out of a credit the bank in possession of the
documents of title has a security interest over them by way of pledge1. If the
buyer is indebted to the issuing bank, the bank has a lien on the documents as

13
37.21 Documentary Credits: Presentation, Examination etc

soon as they came into its hands.

1
Re Barned’s Banking Co, Banner v Johnston (1871) LR 5 HL 157; Rosenberg v International
Banking Corpn and Far East Gerhard and Hey Co (1923) 14 Ll L Rep 344 at 347 per
Scrutton LJ; Ross T Smyth & Co Ltd v T D Bailey Son & Co [1940] 3 All ER 60 at 68, HL.

12 REMEDIES FOR NON-PAYMENT

37.22 If a bank wrongfully refuses to pay under a credit, it will (ordinarily)1 be
liable to the beneficiary. Despite suggestions in the earlier authorities that the
bank’s liability sounds in damages2, it is now clear that if a bank fails to pay
against presentation of conforming documents, the beneficiary may sue in debt
to recover the value of the credit (provided he is willing and able to transfer the
documents to the bank against payment)3. The beneficiary may further pursue
the recovery of any consequential losses as damages4, and in accordance with
normal contractual principles, the bank will be liable for all damages which, at
the time of contracting, it could reasonably have foreseen5 would flow from the
breach6. Beyond that, the bank will not be liable for any special damages that
the beneficiary has suffered, unless it actually knew or ought to have known of
the relevant circumstances at the time of contracting7. In Trans Trust SPRL v
Danubian Trading Co Ltd8, the buyers knew that the sellers could not get the
goods unless the credit was opened; and in those circumstances it was held that
damages for failure to open an irrevocable credit would include loss of profit.
The damages are not simply the damages for non-payment of money9, but for
breach of contract.
Following the decision of the House of Lords in Lagden v O’Connor10, a
defendant may now also be liable for the economic loss suffered by a claimant
as a result of his own impecuniosity (reversing the rule in The Liesbosch
Dredger11).
1
The use of non-standard terms or wording may create ambiguity even in relation to this basic
proposition. For example, in Taurus Petroleum Limited v State Oil Marketing Company of the
Ministry of Oil [2017] UKSC 4, [2017] 3 WLR 1170, the beneficiary under the credit (the State
Oil Marketing Company) was not the party to whom payment was to be made (the Central
Bank of Iraq). In these circumstances, the Supreme Court (in considering whether a third party
debt order should be made in respect of the debt) was split on the question of whether there was
any debt due to the beneficiary under the credit: while Lord Clarke, Lord Sumption, and Lord
Hodge considered that the credit did create a debt in favour of the beneficiary (accompanied by
a collateral obligation on the beneficiary to pay the proceeds to the Central Bank of Iraq), Lord
Neuberger and Lord Mance considered that the only debt was due to the Central Bank of Iraq.
2
See Urquhart, Lindsay & Co Ltd v Eastern Bank Ltd [1922] 1 KB 318 at 323.
3
Standard Chartered Bank v Dorchester LNG (2) Ltd [2014] EWCA Civ 1382, [2016] QB 1 at
[51].
4
Standard Chartered Bank v Dorchester LNG (2) Ltd [2014] EWCA Civ 1382, [2016] QB 1 at
[52].
5
On the basis of the decision in Hadley v Baxendale (1854) 9 Exch 341; see Victoria Laundry
(Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528, [1949] 1 All ER 997, CA, applied
in Aruna Mills Ltd v Dhanrajmal Gobindram [1968] 1 QB 655.
6
Prehn v Royal Bank of Liverpool (1870) LR 5 Exch 92.
7
Hammond & Co v Bussey (1887) 20 QBD 79, CA; British Columbia and Vancouver’s Island
Spar, Lumber and Sawmill Co Ltd v Nettleship (1868) LR 3 CP 499; Hydraulic Engineer-
ing Co Ltd v McHaffie, Goslett & Co (1878) 4 QBD 670, CA; Re R H Hall Ltd and W H Pim
Junior & Co’s Arbitration (1928) 139 LT 50, 33 Com Cas 324, HL.
8
[1952] 2 QB 297, [1952] 1 Lloyd’s Rep 348, CA; Prehn v Royal Bank of Liverpool (1870) LR
5 Exch 92; Urquhart, Lindsay & Co Ltd v Eastern Bank Ltd [1922] 1 KB 318; Ozalid Group
(Export) Ltd v African Continental Bank Ltd [1979] 2 Lloyd’s Rep 231.

14
 Remedies for Non-Payment 37.22
9
Urquhart, Lindsay & Co Ltd v Eastern Bank Ltd [1922] 1 KB 318 at 323; but see the judgment
of Rowlatt J in Stein v Hambro’s Bank of Northern Commerce (1921) 9 Ll L Rep 433, 507;
revsd (1922) 10 Ll L Rep 529, CA, but not affecting this point.
10
[2004] 1 AC 1067.
11
[1933] AC 449.

15
Chapter 38

DOCUMENTARY
CREDITS: COMPLIANCE
OF DOCUMENTS

1 INTRODUCTION
(a) The principle of strict compliance 38.1
(b) UCP 600 38.3
2 TRANSPORT DOCUMENTS 38.5
(a) General provisions relating to transport documents 38.6
(b) Transport documents covering at least two different modes of
transport (art 19) 38.11
(c) Bills of lading (art 20) 38.12
(d) Non-negotiable sea waybills (art 21) 38.17
(e) Charter party bills of lading (art 22) 38.18
(f) Air Transport Documents (art 23) 38.19
3 INSURANCE DOCUMENTS 38.20
(a) Existence of cover 38.21
(b) Inception date 38.22
(c) Currency of cover 38.23
(d) Amount of cover 38.24
(e) Insured risks 38.25
4 COMMERCIAL INVOICES
(a) Form 38.26
(b) Amount 38.27
(c) Description of the goods 38.28
5 OTHER DOCUMENTS NOT COVERED BY UCP 600 38.29
6 CONSISTENCY 38.30
7 LINKAGE 38.31
8 ORIGINAL DOCUMENTS AND COPIES
(a) Introduction 38.32
(b) Original documents 38.33
(c) Copy documents 38.34
9 MISCELLANEOUS RULES
(a) Issuers 38.35
(b) Authentication 38.36
(c) Issuance date of documents v credit date 38.37
(d) Allowances 38.38
(e) Partial shipment and instalments 38.41
(f) Stale transport documents 38.42
(g) Shipping expressions and terminology 38.43

1
38.1 Documentary Credits: Compliance

1 INTRODUCTION TO DOCUMENTARY
CREDITS: COMPLIANCE OF DOCUMENTS

(a) The principle of strict compliance

38.1 The basic principle is that the documents must comply strictly with the
terms and conditions of the credit. This principle is expressed in the classic
statement of Lord Sumner in Equitable Trust Co of New York v Dawson
Partners Ltd1:
‘It is both common ground and common sense that in such a transaction the accepting
bank can only claim indemnity if the conditions on which it is authorised to accept are
in the matter of the accompanying documents strictly observed. There is no room for
documents which are almost the same or which will do just as well. Business could
not proceed securely on any other lines. The bank’s branch abroad, which knows
nothing officially of the details of the transaction thus financed, cannot take upon
itself to decide what will do well enough and what will not. If it does as it is told, it is
safe; if it declines to do anything else, it is safe; if it departs from the conditions laid
down, it acts at its own risk.’
That is to look at the issue from the perspective of the bank’s right to
reimbursement. But the principle also applies to the beneficiary: he will be
entitled to payment if, but only if, the documents presented are in strict
compliance. The principle is derived from the common law but has been
consistently applied to credits subject to the UCP.
1
(1927) 27 Ll L Rep 49 at 52. See also Greer J in Skandinaviska Akt v Barclays Bank (1925) 22
Ll L Rep 523; Kydon Compania Naviera SA v National Westminster Bank Ltd [1981] 1
Lloyd’s Rep 68; Seconsar Far East Ltd v Bank Markazi Iran [1993] 1 Lloyd’s Rep 236 at 239
(overruled without affecting this point at [1994] 1 AC 438, [1993] 4 All ER 456); Glencore
International AG v Bank of China [1996] 1 Lloyd’s Rep 135 at 150, CA.

38.2 From time to time this general principle has been supplemented and
elaborated by more specific statements relating to particular aspects of compli-
ance. The following propositions are supported by authority:
(1) Where the documents are those for which the credit stipulates, the
banker is under no duty to consider their legal effect1, nor is he con-
cerned as to whether the documents serve any useful commercial pur-
pose or as to why the customer called for tender of a document of a
particular description2.
(2) Strict compliance does not uncompromisingly demand exact literal
compliance. An obvious typographical error is not a valid ground for
rejection3, and a degree of judgment must be exercised in determining
compliance4.
(3) Where a credit stipulates for shipping documents, it is essential that they
should ‘so conform to the accustomed shipping documents as to be
reasonably and readily fit to pass current into commerce’5.
(4) The buyer is entitled to documents which substantially confer protective
rights throughout the period during which the goods are at his risk6.
(5) The buyer is not buying litigation, and furthermore the documents have
to be taken up or rejected promptly and without any opportunity for
prolonged inquiry7, so that a tender of documents which, properly read
and understood, invites litigation or calls for further inquiry is a bad
tender8.

2
 Introduction 38.3

(6) The fact that a document contains something unusual is not a ground of
rejection if, when properly read and understood, the document does not
call for further enquiry9.
(7) Where an alleged discrepancy is not covered by any of the above
propositions or by the UCP, the test is whether there is any ground upon
which the alleged discrepancy can reasonably be regarded as material10.
1
National Bank of Egypt v Hannevig’s Bank(1919) 1 Ll L Rep 69, CA; and see Devlin J in
Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147 at 154; and Salmon J in British Imex
Industries Ltd v Midland Bank Ltd [1957] 2 Lloyd’s Rep 591 at 597.
2
Commercial Banking Co of Sydney Ltd v Jalsard [1973] AC 279 at 286, per Lord Diplock.
3
See, for example, Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 2 All ER 400 at 407–408,
where a date on a declaration of shipment which appeared to be ‘2 July’ was held to be a plain
mistyping of ‘22 July’, the two figures ‘2’ having been superimposed. See also: The Messiniaki
Tolmi [1986] 1 Lloyd’s Rep 455 at 461; Seaconsar Far East Ltd v Bank Markazi Jomhouri
Islami Iran [1993] 1 Lloyd’s Rep 236 at 239–240; Credit Industriel et Commercial v China
Merchants Bank [2002] EWHC 973 (Comm), [2002] 2 All ER (Comm) 427 at 434,
[2002] All ER (D) 247 (May).
4
For example, in Kredietbank Antwerp v Midland Bank plc [1999] 1 All ER (Comm) 801, the
credit specified ‘Draft survey report issued by Griffith Inspectorate at port of loading’. The
claimant accepted a draft survey report signed on behalf of ‘Daniel C Griffith (Holland) BV,
which was described as a ‘member of the worldwide inspectorate group’. The Court of Appeal
held that the document was conforming.
5
Per Lord Sumner in Hansson v Hamel and Horley Ltd [1922] 2 AC 36 at 46. A banker cannot,
for instance, be compelled to accept a bill of lading which does not contain the name of the
shipper and which is indorsed in an illegible manner – Skandinaviska Akt v Barclays Bank
(1925) 22 Ll L Rep 523.
6
Hansson v Hamel and Horley Ltd (above) at 46. The words ‘the period during which the goods
are at his risk’ have been added.
7
Hansson v Hamel and Horley Ltd (above) at 46. See also Commercial Banking Co of
Sydney Ltd v Jalsard [1973] AC 279 at 286.
8
Per Donaldson J in M Golodetz & Co Inc v Czarnikow-Rionda Co Inc [1980] 1 WLR 495 at
510.
9
[1980] 1 WLR 495 at 510.
10
An illustration is Netherlands Trading Society v Wayne and Haylitt Co (1952) 6 LDAB 320. A
credit called for presentation of a draft accompanied by (inter alia) an ‘original weight
certificate’ and an ‘original jute mills certificate’. The beneficiary in fact tendered seven
certificates covering the required total number of bags, each being a combined ‘weight and jute
mill certificate’. The claimant bank accepted these certificates, but the applicant refused
reimbursement on the ground (inter alia) that the bank should not have accepted combined
certificates. The court held in favour of the bank on the ground that it had not been and could
not have been alleged that the certificates did not contain everything that jute mill certificates
and weight certificates ought to contain. In other words, the court construed the credit as
requiring the certification of certain matters, but it was impossible to point to any reason why
the mere combining of the certificates could be material. See also Gian Singh & Co Ltd v
Banque de l’Indochine [1974] 1 WLR 1234 at 1240 where Lord Diplock stated with reference
to minor differences between the description in the credit of the certificate required and the
wording of the certificate actually presented: ‘The relevance of minor variations such as these
depends upon whether they are sufficiently material to disentitle the issuing bank from saying
that in accepting the certificate it did as it was told.’

38.3 The principle of strict compliance is a hallmark of the law of documentary

credits, and may not necessarily apply in other contexts. Particular uncertainty
exists in relation to performance bonds and demand guarantees. As Staugh-
ton LJ noted in IE Contractors Ltd v Lloyds Bank plc1, ‘there is less need for a
doctrine of strict compliance in the case of performance bonds... [in each case]
It is a question of construction of the bond’. More recently, Cranston J observed
in MUR Joint Ventures v Compagnie Monegasque de Banque2 that ‘The
principle of strict compliance does not necessarily apply to demand guarantees’.

3
38.3 Documentary Credits: Compliance

In the event of any doubt, a party claiming under a performance bond or

demand guarantee should err on the side of caution, in the knowledge that a
stricter approach may be held to apply.
1
[1990] 2 Lloyd’s Rep 496 at 500–501.
2
[2016] EWHC 3107 (Comm), [2017] 1 Lloyd’s Rep 186 at [25]; and see generally [25]–[28],
and the further authorities cited there.

(b) UCP 600

38.4 By UCP 600 art 2, a complying presentation ‘means a presentation that is
in accordance with the terms and conditions of the credit, the application
provisions of these rules and international standard banking practice.’ The
concept of ‘international standard banking practice’ is to be understood in light
of a companion publication to the UCP, International Standard Banking
Practice for the Examination of Documents under UCP 6001, or ‘ISBP’. The
ISBP is, according to the ICC, ‘a checklist of best practices worldwide for
checking documents under the UCP’; it is revised and reissued rather more often
than the UCP. The introduction to UCP 600 notes that the ISBP ‘has evolved
into a necessary companion to the UCP for determining compliance of docu-
ments with the terms of letters of credit.’ In turn, the ISBP states at para (i) that
‘This publication is to be read in conjunction with UCP 600 and not in
isolation.’
Together, UCP 600 and ISBP aim to provide an international and autonomous
code for determining questions of compliance, and, so far as possible, should be
understood and interpreted consistently with this goal. As stated by Kurkela in
Letters of Credit and Bank Guarantees under International Trade Law2 at para
V.I.4, ‘The interpretation of such rules should be global and universal and
should avoid parochial concepts and meanings.’ Thomas LJ said in Fortis Bank
SA/NV v Indian Overseas Bank (Nos 1 & 2)3:
‘In my view, a court must recognise the international nature of the UCP and approach
its construction in that spirit. It was drafted in English in a manner that it could easily
be translated into about 20 different languages and applied by bankers and traders
throughout the world. It is intended to be a self-contained code for those areas of
practice which it covers and to reflect good practice and achieve consistency across
the world. Courts must therefore interpret it in accordance with its underlying aims
and purposes reflecting international practice and the expectations of international
bankers and international traders so that it underpins the operation of letters of credit
in international trade. A literalistic and national approach must be avoided.’
Further guidance on the interpretation of the UCP can be found in the collected
Opinions published by the ICC Commission on Banking Technique and Prac-
tice4, in published decisions from non-binding arbitrations carried out under
the ICC DOCDEX Rules5, and in the Commentary on UCP 600 by the Drafting
Group behind UCP 6006.
The provisions of UCP 600 address the presentation of documents in general
(such as art 17, addressing the presentation of original documents and copies),
as well as provisions specifying the form and data content of specific kinds of
documents (namely, transport documents, insurance documents and commer-
cial invoices). Transport documents, insurance documents and commercial

4
 Transport Documents 38.6

invoices are subject to stricter and more detailed requirements than other
documents7.
The provisions of the ISBP set out practices stipulating how the articles of UCP
600 are to be interpreted and applied. The ISBP also provides coverage of
documents which are not specifically mentioned in UCP 600, and provides
definitions of expressions which are not defined in UCP 600 in the event that
they are used in a credit which does not define their meaning (and so need to
derive meaning from international standard banking practice).
1
2013 edition: ICC Publication No. 745 (2013).
2
ICC Publication No. 966 (2006).
3
[2011] EWCA Civ 58, [2012] Bus LR 141 at para 29.
4
See ICC Banking Commission, Collected Opinions 1995-2001 (ICC Publication No. 632,
2002), ICC Banking Commission, Unpublished Opinions 1994-2004 (ICC Publication No.
660, 2005), ICC Banking Commission, Opinions 2005-2008 (ICC Publication No. 697, 2009),
ICC Banking Commission Opinions 2009–2011 (ICC Publication No.732E, 2012), ICC
Banking Commission Opinions 2012–2016 (ICC Publication No.785E, 2016).
5
See Collected Docdex Decisions 1997-2003 (ICC Publication No. 665, 2004), Collected
Docdex Decisions 2004–2008 (ICC Publication No. 696, 2008), Collected Docdex Decisions
2009–2012 (ICC Publication No. 739E, 2012), and Collected Docdex Decisions 2013–2016
(ICC Publication No.736E, 2017).
6
By its own terms, the Commentary on UCP 600 only reflects the personal views of the UCP
Drafting Group. Different views have been taken in relation to its status as a guide to the
interpretation of the UCP: compare Fortis Bank S/NV v Indian Overseas Bank [2010] EWHC
84 (Comm), [2010] Bus LR 835 at [44] and [2011] EWCA Civ 58, [2012] Bus LR 141 at
[50]–[51] with Societe General SA v Saad Trading [2011] EWHC 2424 (Comm), [2014] Bus LR
D29 at [47].
7
This is illustrated by Kydon Compania Naviera v National Westminster Bank Ltd [1981] 1
Lloyd’s Rep 68, where Parker J held: (a) that the commercial invoice had to follow the strict
working of the credit, with the result that even if the words used in the invoice have, as between
buyers and sellers, exactly the same meaning as the words in the credit, the invoice does not
conform unless it follows the exact wording of the credit; but (b) that in relation to other
documents there is not the same need to follow the strict wording of the credit, with the result
that a bill of sale which certified a vessel to be free of encumbrances was held to conform to a
credit stipulating for a bill certifying the vessel to be free of all encumbrances.

2 TRANSPORT DOCUMENTS
38.5 UCP 600 adopts the following scheme for transport documents:
(i) transport documents covering at least two different modes of transport
(art 19);
(ii) bills of lading (art 20);
(iii) non-negotiable sea waybills (art 21);
(iv) charterparty bills of lading (art 22);
(v) air transport documents (art 23);
(vi) road, rail or inland waterway transport documents (art 24); and
(vii) courier receipts, post receipts or certificates of posting (art 25).

(a) General provisions relating to transport documents

38.6 The following principles apply to all transport documents under UCP
600.

5
38.7 Documentary Credits: Compliance

(i) Clean transport documents

38.7 By UCP 600 art 27, banks will only accept a clean transport document.
This is defined as one which bears no clause or notation expressly declaring a
defective condition of the goods or their packaging. It follows that banks must
not accept a transport document bearing such clauses or notations unless the
credit expressly stipulates the clauses or notations which may be accepted. This
accords with the position at common law: see National Bank of Egypt v
Hannevig’s Bank1 and British Imex Industries Ltd v Midland Bank Ltd2.
Some cases are clear beyond question. Bills of lading which bore clauses that:
‘so dealt with the condition of the meat or with what the ship said as to the condition
of the meat for shipment as to seriously affect its price and its acceptability.’
were held not to be clean3. As Donaldson J pointed out in the Golodetz case4,
the UCP definition of a clean bill does not specify the time with respect to which
the notation speaks. He further said that if the notation refers to the state of
affairs upon completion of shipment the bill is clean, as it shows that the goods
were in apparent good order and condition on shipment.
The distinction between ‘clean’ and ‘unclean’ bills of lading is one that is
notoriously difficult to draw. Arguably it extends beyond the condition of the
goods or their packaging, so that a bill of lading which is not in the usual form
appropriate to the particular trade would be regarded as ‘unclean’ if the goods
are rendered less saleable as a result5. However, a bill is not necessarily unclean
merely because it contains an unusual clause which purports, in certain circum-
stances, to exclude or limit the carrier’s liability regarding the condition of the
goods6.
1
(1919) 1 Ll L Rep 69.
2
[1958] 1 QB 542 at 551.
3
Westminster Bank Ltd v Banca Nazionale di Credito (1928) 31 Ll L Rep 306 at 311 per Roche
J.
4
In M Golodetz & Co Inc v Czarnikow-Rionda Co Inc [1979] 2 All ER 726, [1979] 2
Lloyd’s Rep 450 there was a fire in the ship after loading; the bill of lading covering the sugar
damaged by fire contained a notation to that effect. It was held that the notation did not affect
the acknowledgment in the bill that the goods were shipped in apparent good order and
condition, did not make the bill of lading unclean and that it was a good tender. Donaldson
J’s decision was affirmed by the Court of Appeal: [1980] 1 All ER 501, [1980] 1 WLR 495.
5
See Megaw LJs dictum to this effect in M Golodetz & Co Inc v Czarnikow-Rionda Co Inc
[1980] 1 WLR at 519.
6
See British Imex Industries Ltd v Midland Bank Ltd [1958] 1 QB 542.

(ii) Carriage on deck

38.8 By UCP 600 art 26(a), a transport document must not indicate that goods
are or will be loaded on deck. However, a transport document stating that the
goods may be loaded on deck is acceptable.

(iii) ‘Shipper’s load and count’

38.9 By UCP 600 art 26(b), a transport document bearing a clause on its face
such as ‘shipper’s load and count’ or ‘said by shipper to contain’ is accept-
able. Consequently, a disclaimer of responsibility in relation to the quantity of

6
 Transport Documents 38.12

goods or the content of containers or packages does not render a transport

document discrepant.

(iv) Freight charges

38.10 In the absence of express stipulation to the contrary in the credit, a bank
will not concern itself with the payment or non-payment of freight. Accord-
ingly, by UCP 600 art 26(c), a transport document may bear a reference, by
stamp or otherwise, to charges additional to the freight, without such reference
rendering it discrepant.

(b) Transport documents covering at least two different modes of transport

(art 19)

38.11 Owing to their increasing prominence in international trade, the first

transport documents addressed by UCP 600 are transport documents covering
at least two different modes of transport. Such transport documents are known
as ‘combined’ or ‘multimodal’ transport documents (the latter being the term
used under UCP 500).
The requirements of UCP 600 art 19 largely reflect the position under UCP 600
art 20, relating to bills of lading, modified as necessary to reflect the fact that a
multimodal transport document covers carriage before and after shipment from
port to port.
A multimodal transport document implies that there will be ‘transhipment’ of
the goods. Accordingly, even if the credit prohibits transhipment, banks must
accept a multimodal transport document which indicates that transhipment
will or may take place, provided that the entire carriage is covered by one and
the same transport document (see art 19(b)-(c)).
In Position Paper No 41, the ICC’s Commission on Banking Technique and
Practice noted that many multimodal transport operators use a multi-format
document titled, for example, ‘Bill of Lading for Combined Transport Shipment
or Port-to-Port Shipment’ or ‘Non-Negotiable Sea Waybill for Combined
Transport Shipment or Port-to-Port Shipment’. A document so titled is accept-
able under art 19 provided that the data content on the front of the document
satisfies the requirement in the documentary credit for multimodal transport
and for a negotiable document or for a non-negotiable document as the case
may be. The Commission also stated that it is acceptable for a multimodal
transport document to show the words ‘carrier’ and not the words ‘multimodal
transport operator’.
1
ICC Commission, 1 September 1994.

(c) Bills of lading (art 20)

38.12 UCP 600 art 20 applies to all bills of lading, including negotiable and
straight bills of lading, with the exception of charterparty bills of lading (which
are the subject of separate provision in art 22).

7
38.12 Documentary Credits: Compliance

By art 20(a), a bill of lading, however named, must satisfy the six requirements
set out in art 23(a)(i)–(vi). These are that the document must appear to:
(i) indicate the name of the carrier and be signed by or on behalf of the
carrier or the master;
(ii) indicate that the goods have been shipped on board a named vessel at the
port of loading stated in the credit;
(iii) indicate shipment from the port of loading to the port of discharge stated
in the credit;
(iv) be the sole original bill of lading or, if issued in more than one original,
be the full set as indicated on the bill of lading;
(v) contain terms and conditions of carriage, or make reference to another
source containing such terms and conditions; and
(vi) contain no indication that it is subject to a charter party.

(i) Signature and authentication

38.13 Under art 20(a)(i), a bill of lading must appear on its face to indicate the
name of the carrier and to have been signed by:
(a) the carrier identified as the carrier; or
(b) the carrier’s named agent indicating the carrier’s name and capacity (ie,
that the named agent acts on behalf of the carrier); or
(c) the master identified as the master; or
(d) the master’s named agent indicating the master’s name and capacity.
By art 3, a document may be signed by handwriting, facsimile signature,
perforated signature, stamp, symbol or any other mechanical or electronic
method of authentication.

(ii) Shipped on board

38.14 The following points should be noted about art 20(a)(ii):

(1) A bill of lading must indicate that the goods have been shipped on board
a named vessel. A statement that the goods have been received for
shipment, stopping short of assurance that the goods have actually been
taken on board, does not suffice1.
(1) Shipment of goods on a named vessel may be indicated by pre-printed
wording on the bill of lading, in which case the date of issuance of the bill
of lading will be deemed to be the date of loading on board and the date
of shipment.
(2) In all other cases, shipment of goods on board a named vessel must be
evidenced by an on board notation indicating the date on which the
goods have been shipped on board, in which case the date of the on
board notation will be deemed to be the date of shipment. A notation is
an addition to the bill as distinct from the words constituting part of the
original documents presented to a ship’s agents for signature and signing
by them2. It was held by the Privy Council in Westpac Banking Corpn v
South Carolina National Bank3 that the equivalent provision in the 1974
UCP was a deeming provision; it does not follow that goods have in fact
been received for shipment or shipped on the deemed date.

8
 Transport Documents 38.16

(3) There is no requirement of a signature or an initial for the on board

notation. This is due to (a) the difficulties of interpretation concerning
whether such notations are properly signed or initialled and (b) the fact
that other notations on bills of lading are not signed or initialled, for
example, a freight-prepaid notation.
(4) If the bill of lading contains the indication ‘intended vessel’, loading on
board a named vessel must be evidenced by an on board notation on the
bill of lading which indicates the date of shipment and the name of the
actual vessel.
1
This mirrors the position at common law, under which received-for-shipment bills were held
not to be a good tender under a CIF contract: Diamond Alkali Export Corpn v Bourgeois
[1921] 3 KB 443 and Yelo v SM Machado & Co Ltd [1952] 1 Lloyd’s Rep 183.
2
Westpac Banking Corpn v South Carolina National Bank [1986] 1 Lloyd’s Rep 311 at
314–315.
3
[1986] 1 Lloyd’s Rep 311 at 316.

(iii) Port of loading and port of discharge

38.15 By art 20(a)(iii), a bill of lading must indicate shipment from the port of
loading to the port of discharge stated in the credit. If the bill of lading does not
indicate the port of loading stated in the credit as the port of loading, or if it
contains the indication ‘intended’ or similar qualification in relation to the port
of loading, an on-board notation indicating the port of loading as stated in the
credit, the date of shipment and the name of the vessel is required. This applies
even when loading on board or shipment on a named vessel is indicated by
pre-printed wording on the bill of lading.

(iv) Transhipment

38.16 The provisions relating to transhipment in art 20(b)-(d) are designed to

reflect the reality of container shipping and overcome problems caused by the
inclusion of unrealistic prohibitions on transhipment in a credit.
By art 20(b), ‘transhipment’ is defined as ‘unloading from one vessel and
reloading to another vessel during the carriage from the port of loading to the
port of discharge stated in the credit’.
By art 20(c)(i), unless transhipment is prohibited by the credit, banks must
accept a bill of lading which indicates that the goods will or may be transhipped,
provided that the entire ocean carriage is covered by one and the same bill of
lading.
By art 20(c)(ii), even if the credit prohibits transhipment, banks must accept a
bill of lading which indicates that transhipment will or may take place, as long
as the relevant cargo is shipped in container(s), trailer(s) and/or LASH (lighter
aboard ship) barge(s) as evidenced by the bill of lading. This is in recognition of
the fact that cargo shipped by these means sometimes has to be transhipped
because the carrying vessel is too large to berth in the port of final destination.
By art 20(d), clauses in a bill of lading stating that the carrier reserves the right
to tranship will be disregarded (thus rendering a bill of lading containing such
a clause acceptable).

9
38.16 Documentary Credits: Compliance

At common law, a delivery order is not a good tender under a credit calling for
a bill of lading1, nor is a ship’s release2; nor is a bill of lading where the credit
calls for a delivery order3. The bill of lading must cover the transit from the port
of origin to the port of destination4.
1
Forbes, Forbes, Campbell & Co v Pelling, Stanley & Co (1921) 9 Ll L Rep 202.
2
Heilbert, Symons & Co Ltd v Harvey, Christie-Miller & Co (1922) 12 Ll L Rep 455.
3
National Bank of South Africa v Banca Italiana di Sconto and Arnhold Bros & Co (Oleifici
Nationale of Genoa, Third Parties)(1922) 10 Ll L Rep 531, CA.
4
E Clemens Horst Co v Biddell Bros [1912] AC 18, HL; Landauer & Co v Craven and Speeding
Bros [1912] 2 KB 94; Brazilian and Portuguese Bank Ltd v British and American Exchange
Banking Corpn Ltd(1868) 18 LT 823; Hansson v Hamel and Horley Ltd [1922] 2 AC 36, HL;
and Holland Colombo Trading Society Ltd v Alawdeen [1954] 2 Lloyd’s Rep 45, 53.

(d) Non-negotiable sea waybills (art 21)

38.17 The main difference between a sea waybill and a bill of lading is that a
sea waybill is not a negotiable document of title. It is primarily a document
which evidences the shippers’ receipt of goods and the contract of carriage to a
named consignee. It need not be produced to obtain delivery of the goods.
The requirements for non-negotiable sea waybills in art 21 do not differ
materially from those for bills of lading under art 20.

(e) Charter party bills of lading (art 22)

38.18 Separate provision is made under art 25 for charterparty bills of lading,
which, for the purposes of art 22, are defined by art 22(a) as ‘A bill of lading,
however named, containing an indication that it is subject to a charter party’.
By art 20(a)(vi), a charterparty bill of lading is not acceptable unless the credit
expressly so provides.
The requirements for non-negotiable sea waybills in art 21 do not differ
materially from those for bills of lading under art 20.
The provisions of art 22 are similar to those of art 20. The main differences are
that:
(i) the signature/authentication requirements under art 22 refer to the
owner rather than the carrier (art 22(a)(ii));
(ii) there is no need to indicate the carrier’s name (art 22(a)(iii));
(iii) the range of acceptable signatories also includes the charterer or a named
agent signing for or on behalf of the charterer (art 22(a)(i));
(iv) a bank will not examine the terms of the charterparty, even if they are
required to be presented by the terms of the credit (art 22(b)); and
(v) a charterparty bill of lading may indicate the port of discharge stated in
the credit, or alternatively a range of ports or a geographical area, as
stated in the credit (art 22(a)(iii)); and
(vi) transhipment, being a rare occurrence in relation to charterparty bills of
lading, is not specifically addressed.

10
 Insurance Documents 38.21

(f) Air Transport Documents (art 23)

38.19 UCP 600 art 23 provides for air transport documents, however named.
The most common air transport documents encountered in practice are air
waybills. An air waybill is a document issued in three originals for:
(i) the issuing carrier, signed by the consignor;
(ii) the consignee, signed by the consignor and the carrier; and
(iii) the consignor, signed by the carrier and handed to the consignor after
acceptance of the cargo.
The provisions of art 23 impose analogous requirements to those of art 20 in
relation to bills of lading, with necessary modifications. For example,
art 23(a)(v) provides that a requirement for an air waybill is to be interpreted as
a requirement for the third original document referred to above, since this is (by
definition) the only original that would be available to a consignor to present.
This expressly overrides any requirement in a credit for a full set of originals;
such a requirement is self-evidently inappropriate (since, as explained above, air
waybills are not issued in sets to a consignor).
As with art 20 in relation to bills of lading, art 23 provides that even if a credit
prohibits transhipment, banks must accept an air transport document which
indicates that transhipment will or may take place, provided that the entire
carriage is covered by one and the same air transport document (art 323(c)).
‘Transhipment’ for this purpose means unloading and reloading from one
aircraft to another during the course of carriage from the airport of departure to
the airport of destination stipulated in the credit (art 323(b)). This reflects the
reality of air transport (and the potential absence of direct flights between many
airports).

3 INSURANCE DOCUMENTS
38.20 Insurance documents are covered by UCP 600 art 28. In broad terms,
art 34(a)-(f) concern the existence of cover and its inception date, currency and
amount; and art 34(g)–(j) concern the scope of the insured risks.

(a) Existence of cover

38.21 The main rules are as follows:

(1) Insurance documents must appear on their face to have been issued and
signed by insurance companies or underwriters or their agents
(art 28(a)).
(2) Cover notes issued by brokers are unacceptable (unless otherwise stipu-
lated in the credit) (art 28(c)).
(3) If a credit calls specifically for an insurance certificate or a declaration
under an open cover, banks will accept, in lieu thereof, an insurance
policy (art 34(d)).

11
38.22 Documentary Credits: Compliance

(b) Inception date

38.22 By art 28(e), banks must not accept an insurance document which bears
a date of issuance later than the date of shipment, unless it appears from the
insurance document that the cover is effective from a date not later than the date
of shipment.

(c) Currency of cover

38.23 By art 28(f)(i), the insurance documents must be expressed in the same
currency as the credit.

(d) Amount of cover

38.24 By art 28(f), a requirement in the credit for insurance coverage to be for
a percentage of the value of the goods, of the invoice value or similar is deemed
to be the minimum amount of coverage required. If there is no indication in the
credit of the insurance coverage required, the minimum amount of coverage is
110% of the CIF or CIP value of the goods. When the CIF or CIP value cannot
be determined from the documents, the amount of insurance coverage must be
calculated on the basis of the amount for which honour or negotiation is
requested or the gross value of the goods as shown on the invoice, whichever is
greater.

(e) Insured risks

38.25 Credits should stipulate the type of insurance required and the addi-
tional risks (if any) to be covered. Imprecise terms such as ‘usual risks’ or
‘customary risks’ should not be used; if:
(i) they are used; or
(ii) the credit makes no specific stipulation as to the required cover;
banks must accept the insurance document as presented and they do not bear
responsibility for any risks not being covered (art 28(g)-(h)).
Banks must accept an insurance document even though it indicates that cover is
subject to a deductible (art 28(j)).
Where a credit stipulates for ‘insurance against all risks’, banks must accept an
insurance document which contains any ‘all risks’ notation or clause, whether
or not bearing the heading ‘all risks’, even if the document indicates that certain
risks are excluded (art 28(h)).

4 COMMERCIAL INVOICES
Commercial invoices are covered by UCP 600 art 18.

12
 Commercial Invoices 38.28

(a) Form

38.26 By art 18(a), a commercial invoice must appear to have been issued by
the beneficiary (except in the case of an invoice presented by the second
beneficiary after a transfer within art 38), be made out in the name of the
applicant (except in the case of an invoice addressed by a second beneficiary to
the first beneficiary), be made out in the same currency as the credit1, and need
not be signed.
1
See Swotbooks.com Ltd v Royal Bank of Scotland plc [2011] EWHC 2025 (QB) at [35]–[36].

(b) Amount
38.27 Banks are entitled but not bound to refuse invoices for amounts in excess
of the amount permitted by the credit. If a nominated bank accepts such an
invoice, its decision will be binding on all parties (ie on the issuing bank and the
applicant), provided that such bank has not paid an amount in excess of that
permitted under the credit (art 18(b)).

(c) Description of the goods

38.28 Article 18(c) provides simply that the description of the goods, services
or performance in a commercial invoice must correspond with that appearing in
the credit. The wording of the description in the invoice must accordingly
follow the words of the credit, and this is so even where the beneficiary uses an
expression which, although different from the words of the credit, has, as
between buyer and seller, the same meaning as such words1.
Two pre-UCP cases illustrate the problems which can arise with the description
of the goods. In J H Rayner & Co Ltd v Hambro’s Bank Ltd a bank refused to
pay against bills of lading covering ‘machine-shelled groundnut kernels’ under
a credit calling for ‘Coromandel ground nuts’, and its refusal was upheld2,
though in the trade the two expressions seemed to be synonymous. In Bank
Melli Iran v Barclays Bank (Dominion, Colonial and Overseas) the credit called
for ‘new’ trucks, but the documents presented described the trucks as ‘in new
condition’ and ‘new, good’. It was held that these documents did not comply
with the credit; and the confirming bank (which had paid out) was saved only
by the fact that the issuing bank was held to have ratified the irregular
payments3.
In Credit Agricole Indosuez v Chailease Finance Corpn4, the date of delivery of
a vessel stated in the bill of sale and the signed acceptance of sale was 21 August
1998, whereas the credit stated that the vessel ‘was for delivery . . . August
17 to 20 1998’. The Court of Appeal held that each of the individual documents
presented was, on its face, compliant. The letter of credit did not state that the
documents had to show that the vessel was delivered within any range of dates.
Accordingly the argument that the description of the vessel in the documents
was inconsistent with the description of the vessel in the credit was rejected.
Given that the wording of the invoice is entirely within the control of the
beneficiary, it is curious how often the commercial invoice is discrepant. All that

13
38.28 Documentary Credits: Compliance

the beneficiary has to do is to follow the wording in the credit.

1
Kydon Compania Naviera SA v National Westminster Bank Ltd [1981] 1 Lloyd’s Rep 68 at 76.
2
[1943] KB 37,[1942] 2 All ER 694 CA,; see also Netherlands Trading Society v Wayne and
Haylitt Co (1952) 6 LDAB 320, in which it was held by the Hong Kong Supreme Court that a
bill of lading for ‘375 bales, gunny bags’ should have been rejected under a credit calling for
documents covering ‘375 bales, each containing 400 pieces New Indian Heavycee Bags . . . ’
3
[1951] 2 Lloyd’s Rep 367; and see, further, Netherlands Trading Society v Wayne and
Haylitt Co, above.
4
[2000] 1 All ER (Comm) 399, CA.

5 OTHER DOCUMENTS NOT COVERED BY UCP 600

38.29 No further provision is made in UCP 600 for other categories of
documents. However, ISBP 2013 contains guidance on the requirements to be
applied (under international standard banking practice) in relation to other
categories of documents, such as packing lists, weight lists, beneficiary certifi-
cates, and analysis, inspection, health, phytosanitary, quantity, quality and
other certificates.

6 CONSISTENCY
38.30 Two documents may individually appear on their face to be in accor-
dance with the terms and conditions of the credit, but yet be inconsistent with
one another. Such inconsistency can easily occur in relation to permitted
tolerances (see below at para 38.39). For example, the commercial invoice may
refer to a quantity of goods greater than that stipulated in the credit but within
the permitted tolerance, whereas an inspection certificate may in error refer to
the same quantity as the credit.
By UCP 600 art 14(d), data in a document (when read in context with the credit,
the document itself and international standard banking practice) need not be
identical to, but must not conflict with, data in that document, any other
stipulated document or the credit.
This represents a deliberate departure from the previous position under UCP
500, art 13(a) of which provided that documents which appear on their face to
be inconsistent with one another will be considered as not appearing on their
face to be in compliance with the terms and conditions of the credit. It has been
suggested that the best interpretation of art 14(d) is that ‘it applies only to
situations where there is a true as opposed to an apparent conflict and only to
situations where the “conflict” is substantive in its impact on the document and
not superficial and irrelevant to the role of the document and the data (if any) in
the letter of credit1’.
This rule has an important bearing on the checking of documents. It is not
enough for the checker simply to check each document individually against the
wording of the credit. He must also compare each document with every other
document in order to identify any inconsistency between them. For example, in
Swotbooks.com Ltd v Royal Bank of Scotland plc2, the commercial invoice that
had been presented referred to a large number of individually numbered and
identified transport documents, but only one single document was presented as
a transport document; this presentation was held (under UCP 500) to be

14
 Original Documents and Copies 38.32

non-compliant.
1
Byrne, The Comparison of UCP 600 & UCP 500 (2007) at p 136.
2
[2011] EWHC 2025 (QB).

7 LINKAGE
38.31 The concept of ‘linkage’ is that each document must directly or indirectly
refer to the actual goods shipped. Although not mentioned expressly in UCP
600. the concept requires a bank ‘to see some form of ‘linkage’ between the
documents presented and/or the letter of credit terms’1. For example, UCP 600
art 14(f) provides:
‘If a credit requires presentation of a document other than a transport document,
insurance document or commercial invoice, without stipulating by whom the docu-
ment is to be issued or its data content, banks will accept the document as presented
if its content appears to fulfil the function of the required document and otherwise
complies with sub-article 14(d).’
The requirement for the document ‘to fulfil the function of the required
document’ may be thought to require an element of linkage. Furthermore, ISBP
2013 provides that a certificate of origin must ‘relate to the invoiced goods’.
This appears consistent with the previous common law approach under Banque
de L’Indochine et de Suez SA v J H Rayner (Mincing Lane Ltd)2, which required
documents sufficiently to identify the goods to which they relate. It is also
consistent with the views expressed by the Court of Appeal in Glencore
International AG v Bank of China in relation to UCP 5003.
1
Collected Opinions 1995-2001, R 251 (Ref 11).
2
[1983] QB 711.
3
[1996] 1 Lloyd’s Rep 135, 154–155.

8 ORIGINAL DOCUMENTS AND COPIES

(a) Introduction
38.32 The basic principle is that the beneficiary must present original docu-
ments unless otherwise stipulated in the credit. The UCP now recognises this
expressly for the first time in UCP 600 art 17(a), which provides:
‘At least one original of each document stipulated in the credit must be presented.’
UCP 600 art 17 represents a significant departure from its predecessor, UCP
500 art 20(b). The latter provision gave rise to considerable uncertainty,
stemming particularly from modern methods of document production. This
culminated in two decisions of the Court of Appeal1 that ultimately led the ICC
Banking Commission to issue a Policy Statement dated 12 July 1999 on ‘The

15
38.32 Documentary Credits: Compliance

Determination of an ‘Original’ Document in the Context of UCP 500 sub-

Article 20(b)’, indicating the correct interpretation of UCP 500 art 20(b). The
substance of this Policy Statement is now reflected in UCP 600 art 17, signifi-
cantly clarifying many sources of uncertainty under UCP 500.
1
Glencore International AG v Bank of China [1996] 1 Lloyd’s Rep 135 and Kredietbank
Antwerp v Midland Bank plc [1999] 1 Lloyd’s Rep Bank 219.

(b) Original documents

38.33 UCP 600 art 17 provides as follows:
‘Article 17 Original documents and copies
(a) At least one original of each document stipulated in the credit must be
presented.
(b) A bank shall treat as an original any document bearing an apparently original
signature, mark, stamp, or label of the issuer of the document, unless the
document itself indicates that it is not an original.
(c) Unless a document indicates otherwise, a bank will also accept a document as
original if it:
(i) appears to be written, typed, perforated or stamped by the document
issuer’s hand; or
(ii) appears to be on the document issuer’s original stationery; or
(iii) states that it is original, unless the statement appears not to apply to
the document presented.
(d) If a credit requires presentation of copies of documents, presentation of either
originals or copies is permitted.
(e) If a credit requires presentation of multiple documents by using terms such as
“in duplicate”, “in two fold”, or “in two copies”, this will be satisfied by the
presentation of at least one original and the remaining number in copies,
except when the document itself indicates otherwise.’
Further guidance is provided by ISBP 2013 paras A27–A31.
The effect of art 17(b)–(c) is to broaden the concept of an original document.
For example, it is now clear that where an electronic document is printed, the
printed document is photocopied, and the photocopied document is signed, the
resulting document will be acceptable as an original document under UCP 600
art 17(b). (Such a document was previously held by the Court of Appeal in
Glencore International AG v Bank of China1 not to satisfy the requirements of
UCP 500 art 20(b).) This represents a significant improvement over the former
position, and correctly recognises that (as when considering other aspects of
compliance) banks ought to be concerned only with a document’s appearance
and form, without attempting to ascertain how precisely a document has been
produced.
For a fuller discussion of the position under UCP 500, the reader should refer to
the thirteenth edition of this book.
1
[1996] 1 Lloyd’s Rep 135.

16
 Miscellaneous Rules 38.38

(c) Copy documents

38.34 A Credit may require presentation of copies, usually in addition to the

original(s). UCP art 17(e) addresses the position where a credit requires
multiple document(s) by using expressions such as ‘duplicate’, ‘twofold’, ‘two
copies’ and the like. Such a requirement ‘will be satisfied’ by the presentation of
one original and the remaining number in copies ‘except where the document
itself indicates otherwise’. These last words cover a case where a document
states that it has been issued in a certain number of originals. In this event, each
original must be presented.
UCP 600 art 17(d) provides that where a credit calls for a copy, an original will
always suffice on the principle that it is a better document than a copy.

9 MISCELLANEOUS RULES REGARDING

DOCUMENTARY CREDITS

(a) Issuers

38.35 By UCP 600 art 3, terms such as ‘first class’, ‘well known’, ‘qualified’,
‘independent’, ‘official’, ‘competent’, ‘local’ and the like are taken to allow any
issuer except the beneficiary to issue that document. They are therefore to be
effectively disregarded, in accordance with the policy that they are unsuitable
for describing the issuers of documents to be presented under a credit.

(b) Authentication

38.36 By UCP 600 art 3, a condition of a credit calling for a document to be

legalised, visaed, certified or similar will be satisfied by any signature, mark,
stamp or label on such document that appears on its face to satisfy the
condition.

(c) Issuance date of documents v credit date

38.37 By UCP 600 art 14, banks must accept a document dated prior to the
issuance of the credit (subject to such document being presented within the time
limits set out in the credit); however, such a document must not be dated later
than its date of presentation.

(d) Allowances
(i) Quantitative expressions

38.38 Some credits use imprecise words of quantification such as ‘about’ or

‘approximately’ in connection with the amount of the credit or the quantity or
the unit price of the goods. These expressions must be construed as allowing a
difference not to exceed 10 per cent more or less (art 30(a)).

17
38.39 Documentary Credits: Compliance

(ii) Tolerance in the quantity of goods

38.39 Where art 30(a) does not apply, a tolerance of five per cent more or less
is permissible, always provided that the amount of the drawing does not exceed
the amount of the credit. This tolerance does not apply where the credit
stipulates quantity in terms of a stated number of packing units or individual
items (art 30(b)).
In this event, the doctrine of strict compliance rigidly applies. The de minimis
principle does not apply in such a situation1, unless, perhaps, a discrepancy is so
minuscule that no reasonable banker would regard it as material2.
1
See Moralice (London) Ltd v ED and F Man [1954] 2 Lloyd’s Rep 526.
2
See Astro Exito Navegacion SA v Chase Manhattan Bank NA [1986] 1 Lloyd’s Rep 455 at
460–461; affd on appeal without affecting this point [1988] 2 Lloyd’s Rep 217, CA.

(iii) Tolerance in the amount of the drawing

38.40 UCP 600 art 30(c) allows ‘a tolerance not to exceed 5% less than the
amount of the credit’, even when partial shipments are not allowed, provided
that:
(i) the quantity of goods, if stated in the credit, is shipped in full;
(ii) a unit price, if stated in the credit, is not reduced;
(iii) art 30(b) does not apply (because art 39(b) concerns tolerances in
quantity rather than the amount of the drawing);
(iv) the credit does not stipulate a specified tolerance; and
(v) the credit does not use the expressed referred to in art 30(a).
The purpose of this article is obscure. A credit which does not come within
arts 30(a) or (b) will almost always stipulate a precise quantity of goods. Since,
in such a case, the seller has to ship that quantity for art 30(c) to apply, it seems
unlikely that he will draw for less than the amount of the credit.

(e) Partial shipment and instalments

38.41 Partial shipments are allowed unless the credit otherwise stipulates
(art 31(a)). It is therefore for the applicant to instruct the issuing bank to
disallow partial shipments if he wants the goods in a single shipment.
Goods may be loaded on the same vessel at different dates and/or at different
ports and under different bills of lading. To cover this and related situations,
art 31(b) provides that a presentation consisting of more than one set of
transport documents evidencing shipment commencing on the same means of
conveyance and for the same journey, provided they indicate the same destina-
tion, will not be regarded as covering a partial shipment, even if they indicate
different dates of shipment or different ports of loading, places of taking in
charge or dispatch. In such a case, the latest date of shipment as evidenced on
any of the sets or transport documents will be regarded as the date of shipment.

18
 Miscellaneous Rules 38.43

(f) Stale transport documents

38.42 Every credit which calls for a transport document should stipulate a
specified period of time after the date of shipment during which presentation
must be made. Absent such a stipulation, banks must reject transport docu-
ments presented to them later than 21 days after the date of shipment
(art 14(c)).

(g) Shipping expressions and terminology

38.43 Various definitions of words and expressions found in credits relating to
the date and period of shipment are given in UCP 600 art 3, including ‘on or
about’, ‘to’, ‘until’, ‘till’, ‘from’, ‘between’, ‘after’, ‘first half’, ‘beginning’,
‘middle’, ‘end’ and related expressions.

19