Re Bank of Credit and Commerce International SA ((in Liquidation)) (No. 8)
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE ROSE |
| Judgment Date | 20 December 1995 |
| Judgment citation (vLex) | [1995] EWCA Civ J1220-10 |
| Docket Number | CHANI 94/0778/B |
| Court | Court of Appeal (Civil Division) |
| Date | 20 December 1995 |
[1995] EWCA Civ J1220-10
(Mr Justice Rattee)
Before: Lord Justice Rose Lord Justice Saville Lord Justice Millett
CHANI 94/0778/B
CHANF 94/0790/B
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
MR J McDONNELL QC (Instructed by Messrs Haring Ross Gagrant Gardi & Co, London WC1N 3BZ) appeared on behalf of the First Defendant/Appellant
MR C CARR QC and MR M TODD (Instructed by Messrs Charles Russell, London WC2A 3UL) appeared on behalf of the Second Defendant/Appellant
MR R DICKER (Instructed by Messrs Lovell White Durrant, London EC1A 2DY) appeared on behalf of the Respondent
Wednesday, 20 December 1995
This is the judgment of the Court.
These appeals arise in two test cases in which the liquidators of Bank of Credit and Commerce International SA ("the bank") seek the directions of the Court in the following circumstances. In a large number of cases the bank lent money to a customer ("the principal debtor"). A third party ("the depositor") deposited money with the bank and purported to charge the deposit to the bank with repayment of the loan. The charge was by way of non-recourse collateral security; the bank did not obtain a personal covenant or guarantee of repayment from the depositor. Before the loan was repaid the bank went into liquidation. The liquidators seek directions whether they should attempt to recover the whole of the outstanding loan from the principal debtor and leave the depositor to prove in the liquidation of the bank for the amount of the deposit after the loan has been fully repaid; or whether they should set off the amount of the outstanding loan against the deposit and claim from the principal debtor only so much if any of the loan as exceeds the amount of the deposit. Rattee J held that the liquidators are not required to give credit for the amount of the deposit before claiming to recover the amount of the indebtedness of the principal debtor; and the principal debtors, who were the respondents to the liquidators' applications, now appeal from his decision.
The appellants, who were the respondents to the liquidators' applications, fall into two groups. In the first group the principal debtor is a Panamanian company Rayners Enterprises Inc. ("Rayners") and the depositor is a Mr. Jessa. Mr. Jessa, who is understood to be the beneficial owner of Rayners and who is not resident or domiciled in the United Kingdom, began to deposit money with the Luxembourg branch of the bank in the 1970's. From 1987 onwards Rayners invested in property in England with money borrowed from the London branch of the bank against the security of letters of charge/lien over Mr. Jessa's sterling deposits in Luxembourg. Each of the letters contained a limit of the sum for which the deposit in question was security. The total balance in the deposit accounts on the date of the bank's liquidation was £3,430,953; the total sum secured by the deposits was £1,381,011. The amount of Rayner's indebtedness to the bank on 30th. September 1993 (which is after the date of liquidation) converted into dollars is said to be $3,513,258, that is to say substantially in excess of the face value of the bank's security. The debt is presently due and payable. The bank holds charges over land belonging to Rayners as other security for the debt.
In the second group the principal debtors are a group of companies called the Solai Group and the depositor is Societe Generale de Gestion et Services SA ("SGGS"). The Solai Group were customers of the Wembley branch of the bank. In 1990 they obtained new facilities from the bank. These were contained in a facility letter in which the bank set out the terms on which it was prepared to grant facilities to companies within the Solai Group. These facilities included a loan facility not exceeding £6 million and sterling and dollar overdraft facilities not exceeding £3 million and $8 million respectively. The facility letter required security both real and personal, including security in the form of cash deposits to be placed with the bank. In order to provide this security SGSS, a Panamanian company which is said to be owned and controlled by the same family as the Solai Group, placed two deposits with the Luxembourg branch of the bank. One was a deposit of £3,037,741; the other of $8,018,000. SGGS executed a letter of lien/charge by which it constituted the deposits security for all the outstanding debts of the Solai Group up to a limit of $20 million. The deposits were thus security for both the overdraft facilities and the term loan. The term loan has, however, since been repaid, and the face value of the deposits now broadly corresponds with the amount owing from the Solai Group to the bank. The overdrafts were repayable on demand, and demand was made by the provisional liquidators of the bank following their appointment.
The facility letter also required security in the form of a guarantee from a first class bank. In fact the bank accepted two letters of guarantee, one in respect of the dollar deposit and one in respect of the sterling deposit, given by its Luxembourg branch to its Wembley branch. Both branches were part of the same corporate entity. Following their appointment and the default of the Solai Group in making repayment of the principal debt the provisional liquidators demanded payment of the amounts due from the Luxembourg branch under its guarantees. No payment was received. The legal consequences, if any, of these curious transactions have been the subject of argument before us.
The letters of lien/charge in the two cases are in similar terms. Neither contains any express guarantee on the part of the depositor or any personal covenant, whether as surety or principal debtor, to repay the indebtedness of the principal debtor. In this respect the present case is to be distinguished from the three cases which were considered by Hoffmann LJ sitting at first instance in M.S.Fashions Ltd. v Bank of Credit and Commerce International SA, [1993] Ch. 425. Those proceedings concerned loans made by the bank to three different companies, viz: M.S.Fashions Ltd., High Street Services Ltd. and Impexbond Ltd., secured by a letter of lien/charge over money deposited with the bank by a depositor and by the personal guarantee of the depositor. Hoffmann LJ held that the effect of the automatic operation of set-off in bankruptcy was to extinguish the liability of the depositor under his guarantee; that this amounted to payment of the guaranteed debt; and that accordingly it extinguished the liability of the principal debtor to the bank. There was no appeal in relation to the loans made to M.S.Fashions, where the liquidators had demanded repayment from the depositor under his guarantee. The liquidators appealed in relation to the other two companies, where no demand had been made, but the Court of Appeal upheld the decision of Hoffmann LJ that the effect of the security documentation, which constituted the depositor a principal debtor, was to dispense with the need for a prior demand.
The question in the present case is whether the absence of any personal obligation on the part of the depositor to pay the principal debt is a material distinction which compels a different result. If it is then, it is submitted, the result is a paradox; an insolvent creditor is in a better position if he has not obtained a personal guarantee than if he has.
The arguments on these appeals have been elaborate and far-ranging, but in the end we believe that the problem is susceptible of a simple solution. Before dealing with the appellants' arguments it is necessary to summarise the terms of the letters of lien/charge; to set out the terms of Rule 4.90 of the Insolvency Rules 1986 which provides for mutual dealings and set-off in companies liquidation; and to say something about the legislative history and effect of the Rule.
The letters of lien/charge.
The terms of the letters of lien/charge are set out in full in the judgment below and it is not necessary to reproduce them here. They purported (i) to create in favour of the bank a lien or charge on the balances maintained by the depositor with the bank for all the outstanding liabilities of the principal debtor to the bank; (ii) to give the bank power to withdraw any of the sums standing to the credit of the depositor with the bank and utilise them in the reduction or discharge of the liabilities of the principal debtor without prior reference to the depositor; (iii) to prohibit the depositor from "encumbering, assigning or dealing with" the deposits in any way; and (iv) to allow the bank to refuse to release the deposit to the depositor unless or until the entire outstanding liabilities of the principal debtor whether actual or contingent have been repaid in full and the bank is under no obligation to provide or make available banking facilities to the principal debtor. Two observations may be made. First, the letters purport to operate by way of charge. A power for the grantee to apply property of the grantor in or towards the discharge of the liabilities whether of the grantor or a third party, which power the grantee may or may not choose to exercise, is the standard language of a charge. Secondly, each of the charges is expressed to operate to secure the outstanding liabilities of the principal debtor, not of the depositor. Each of them is a classic example of a collateral security.
Although the deposits were made with the Luxembourg branch of the bank the parties have agreed that the issues...
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