Deposit Protection Board v Dalia and Another

For the reasons set out in the speech to be delivered by my noble and learned friend Lord Browne-Wilkinson, which I have read in draft and with which I agree, I would allow this appeal and make the declaration which he proposes.

I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Browne-Wilkinson. For the reasons he gives I too would allow the appeal.

The Deposit Protection Fund, established under Part II of the Banking Act, 1987, is designed to provide compensation to depositors on the insolvency of an institution authorised to accept deposits under that Act. On the insolvency of the institution, a depositor is entitled to be paid three-quarters of the amount of his deposit, but limited to a maximum deposit it of £20,000. Thus a depositor owed £20,000 can obtain compensation of £15,000. A depositor owed £100,000 is also entitled to compensation, but his claim too is limited to the same maximum of £15,000.

On 5 July 1991 the Bank of England presented a petition for the winding up of the Bank of Credit and Commerce International S.A. (B.C.C.I.). Provisional liquidators were appointed and depositors ceased to be able to withdraw their money. It was therefore clear that there was a substantial risk that depositors with B.C.C.I. would not recover the amount of their deposits and would have to look to the Deposit Protection Fund. A firm of accountants devised a scheme whereby a depositor would assign a part of his deposit to "family members or close friends who can be trusted". For example, in the case of a deposit of £100,000 the depositor would assign £20,000 out of it to each of four friends. In consequence, if the scheme is effective, instead of the compensation payable in respect of the deposit of £100,000 being limited to £15,000, the original depositor and each of the four assignees could claim compensation of £15,000 in respect of the £20,000 part of the deposit which belonged or had been assigned to him. In consequence, instead of £15,000 being the maximum compensation payable in respect of the original deposit of £100,000, the compensation payable would be increased to £75,000.

The accountants wrote to depositors in B.C.C.I. suggesting this scheme. A substantial number of depositors adopted the scheme. Before 30 July 1991, each depositor executed a deed of assignment which was in the standard form prepared by, or for, the accountants. It described the original depositor as "the vendor" and the assignee as "the purchaser". After reciting the vendor's deposit with B.C.C.I. (which was identified by its number) the deed provided:

"In consideration of the sum of £1 … the vendor by this deed sells, assigns and transfers the sum of £—— of the deposit to the purchaser."

At the same time, the original depositor gave notice of the assignment to B.C.C.I. and instructed B.C.C.I. as follows:

"That the above-mentioned sum is now held by the purchaser and that the purchaser should now be identified by you as a depositor. If, for administrative reasons, you are unable to arrange for the completion of formalities to designate a separate deposit account in the name of the purchaser, I/we confirm that I/we hold the above-mentioned sum on trust for the purchaser."

It is common ground that such assignments were not statutory assignments of the debts owed by B.C.C.I. to the original depositors within the meaning of section 136 of the Law of Property Act, 1925, since only part of the debt was assigned. However it is also agreed that they took effect as equitable assignments under which in equity, but not at law, B.C.C.I. became liable to pay each assignee the part of the debt assigned to him.

Whilst it is accepted by all parties that the scheme devised by the accountants was a device designed solely to increase the amount of compensation recoverable, it is for the purposes of these proceedings accepted that the assignments were genuine and that there was no arrangement that the assignee would hold any compensation received by him for the benefit of the assignor. However, the Deposit Protection Board has reserved the right in future proceedings to challenge the validity of the assignments if necessary.

These proceedings are designed to establish whether or not the scheme devised by the accountants is effective. Any future resort to such a scheme has now been counteracted by the Banking Act 1987 (Meaning of Deposit) Order 1991 (S.I. 1991 No. 1776) in such a way that any assignment of deposits made after 30 July 1991 and after a winding up petition has been presented will not qualify for compensation. But the Order does not affect this scheme which, if effective, will give rise to an additional £3.7 million of compensation being payable out of the Fund in respect of deposits with B.C.C.I. The first defendant is an assignee of part of the debt owed to a Mr. Dalia prior to the assignment: she is joined to represent all such assignees. The second defendant is Barclays Bank Plc. which is joined to represent all the authorised institutions which, under the 1987 Act, are responsible for providing the funds necessary to meet the compensation payments.

The question in this case is one of pure statutory construction. Under section 58(1), upon an authorised institution becoming insolvent compensation is payable "to each depositor who has a protected deposit with that institution". The question is whether an assignee of part of the deposit is a "depositor". No argument was advanced before the House based on the final words of the notice to B.C.C.I. referring to a declaration of trust.

The Act contains no relevant definition of the word "depositor". Broadly stated three possible constructions of "depositor" have been put forward, viz:

Sir Donald Nicholls, Vice-Chancellor, rejected the deposit maker construction as did, unanimously, the Court of Appeal. The entitled-at-law construction was not fully advanced before the Vice-Chancellor and was rejected by the majority of the Court of Appeal ( Russell L.J. and Sir Michael Fox, Simon Brown L.J. dissenting). Accordingly, the Vice-Chancellor and the majority of the Court of Appeal held in favour of the claimants. Barclays Bank appeal that decision to your Lordships' House.

Although the question raised is a simple one, the answer is far from simple and involves the very complicated interaction of a number of sections in the Act, not all of which were brought to the attention of the courts below.

Although the Act contains no definition of "depositor" it does contain a definition of "deposit" to which I attach considerable importance:

"5(1) Subject to the provisions of this section, in this Act 'deposit' means a sum of money paid on terms-

• ( a) under which it will be repaid, with or without interest or a premium, and either on demand or at a time or in circumstances agreed by or on behalf of the person making the payment and the person receiving it; and

• ( b) which are not referable to the provision of property or services or for giving of security;

and references in this Act to money deposited and to the making of a deposit shall be construed accordingly.

(2) …

(3) Except so far as any provision of this Act otherwise provides, in this Act 'deposit' does not include-

• ( a) a sum paid by the Bank or an authorised institution;

• ( b) a sum paid by a person for the time being specified in Schedule 2 to this Act;

• ( c) a sum paid by a person, other than a person within paragraph ( a) or ( b) above, in the course of carrying on a business consisting wholly or mainly of lending money;

• ( d) a sum which is paid by one company to another at the time when one is a subsidiary of the other or both are subsidiaries of another company or the same individual is a majority or principal shareholder controller of both of them; or

• ( e) a sum which is paid by a person who, at the time when it is paid, is a close relative of the person receiving it or who is, or is a close relative of, a director, controller or manager of that person."

That definition applies for all the purposes of the Act but, for the purposes of Part II, certain amendments are made by section 60(9).

Part II of the Act provides for the payment of compensation on the insolvency of an authorised institution. Such payment is made out of a Fund constituted under Part II. Section 58(1) provides for compensation to be payable in the event of an authorised institution becoming insolvent which, by section 59(1) is defined as the date of the winding up order. Section 58(2) provides for the payment of compensation in the event of an administration order being made...