Recent news and developments: The House of Lords has finally settled a long-running controversy over the nature of fixed charges on deposits

United Kingdom
The House of Lords has finally settled a long-running controversy over the nature of fixed charges on deposits. In Morris v. Agrichemicals Limited the House of Lords had to decide on various issues arising from the liquidation of BCCI. In this case BCCI had taken deposits from third parties to secure the borrowings of its customers. The House of Lords had to look at various arguments on set-off and how the deposits were to be applied. Of particular interest was Lord Hoffman's decision to overrule certain comments made by Mr Justice Millett in the case of Re. Charge Card Services Limited (1987) Ch 150. In that case the judge found that it was not possible for a bank to take a charge over a deposit which was lodged with that bank. Because a deposit is in effect a debt owed by the bank to the depositor, the judge found that it was conceptually impossible for that obligation owed by the Bank to be assigned back to itself by way of charge.

In the House of Lords, Lord Hoffman analysed the matter and found that it was not necessary for an assignment of the debt to occur for an effective charge. Accordingly he found no conceptual impossibility in the idea of charging the deposit back to the Bank.

The Charge Card decision led to the need for banks to use various flawed asset arrangements and set-off provisions in their deposits. It became common practice to draft security over a deposit by what is known as the "triple cocktail" of set-off provisions, a flawed asset and a charge. The effect of the case is to mean that charge on deposits now work. This should give increased protection against third party interests in deposits. However, it seems likely that well advised banks will continue to use the triple cocktail for maximum protection.

The question as to whether a charge on a deposit needs to be registered under section 395 Companies Act 1985 was left open by the House of Lords. Whilst there seem to be fairly strong arguments for suggesting that a deposit is not a book debt and therefore should not be registered, banks would be advised to take the precaution of submitting such charges for registration until such time as we have a definitive answer from the courts on the matter.