The Court of Appeal by a majority dismissed an appeal by the second defendant, Barclays Bank Ltd, and a cross-appeal by the plaintiff, the Deposit Protection Board, and upheld the decision of Sir Donald Nicholls, Vice-Chancellor (Independent, 12 August 1992; (1992) 3 WLR 945) granting a declaration in favour of the first defendant, Mrs Varsha Dalia.
Under section 58(1) of the 1987 Act, where a recognised banking institution became insolvent, the board paid out of a depositors' protection fund to each 'depositor' compensation equalling three-quarters of his 'protected deposit'. Under section 60(1) the protected deposit was limited to a maximum of pounds 20,000.
On 5 July 1991, the Bank of England petitioned the court to wind up the Bank of Credit and Commerce International SA (BCCI). Depositors ceased to be able to draw their money.
Some large depositors sought to maximise compensation from the fund by assigning pounds 20,000 portions of their deposit to family or friends, so that instead of their whole deposit only attracting pounds 15,000 compensation, each assigned portion would attract pounds 15,000.
The scheme was quickly stopped in its tracks by the Banking Act 1987 (Meaning of Deposit) Order 1991 (SI 1776). From 31 July 1991, 'deposit' under the Act excluded a sum to which a person became entitled, otherwise than by operation of law, after presentation of a winding-up petition.
The question then arose whether assignments made before the apparent loophole was closed had the desired effect in law. Sir Donald Nicholls V-C held that they did, notwithstanding that the assignment of part of a debt could only take effect as an equitable assignment, with the result that both the assignor and the assignee were persons to whom the bank might properly be said to be liable in respect of the assigned part of the debt.
Michael Brindle QC and Bankim Thanki (Lovell White Durrant) for Barclays; Lord Irvine of Lairg QC and Philip Sales (Ashurst Morris Crisp) for Mrs Dalia; John Jarvis QC and Jonathan Nash (Clifford Chance) for the board.
LORD JUSTICE RUSSELL said that while the differences between legal and equitable assignees were real, they did not, in the context of this case, justify a fundamental distinction being drawn so the board was liable to one and not to the other.
Had there been no insolvency, each and every equitable assignee could have sued BCCI to judgment if BCCI, on demand, had declined to pay out whatever sum had been assigned to the individual assignee.
The scheme of the Act was that the board, as compensating authority, should stand in the shoes of the defaulting bank, and there was no reason why, subject to the financial limit, it should be in any better position, vis-a-vis equitable assignees, than it would have been but for the insolvency.
If the bank would have been liable to the equitable assignee by due process of law, and, absent any good cause demonstrated by the assignor, then the board must acknowledge the claim of the equitable assignee.
SIR MICHAEL FOX concurred. The Vice-Chancellor's declaration was correct and these appeals should be
LORD JUSTICE SIMON BROWN, dissenting, said only those to whom the bank was legally liable were depositors within the scheme and it was the sum of a depositor's legal, rather than equitable, claims against the bank which delimited the size of his protected deposit under section 60(1).
Paul Magrath, Barrister