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