End for banking 'triple cocktail'

A banking law "triple cocktail" concocted some 10 years ago as a means of meeting a 1987 signpost ruling in respect of charges over bank deposits is likely to be served less regularly in future. Banking law experts say that a new House of Lords decision has just swept away "10 years of uncertainty" created by the ruling in 1987 by Mr Justice Millett, as he was then, in Re Charge Card Services Ltd.

The issue was whether or not customers of a bank could give the bank a charge over their deposits with it as security for borrowing of either a third party or themselves.

The latest judgment came in the double case of Morris & ors v Rayners Enterprises Incorporated & anor and Morris & ors v Agrichemicals Ltd & anor. According to Joe Bannister, a business restructuring partner with Lovell White Durrant, the judgment is "one of the banking decisions of the decade".

Bannister acted for the English liquidators of Bank of Credit and Commerce International (BCCI), partners in the international accounting firm Deloitte & Touche.

"This is something banking lawyers have long been waiting and hoping for. From our point of view it is very good news to have this particular question resolved," says Bannister.

In Charge Card, Mr Justice Millett stunned the banking community by saying that it was "conceptually impossible" for a person to execute a charge in favour of a bank over money deposited with that bank. He took the view that because money deposited with a bank was a debt owed by the bank to its customer, there was nothing in which the bank could take a proprietory interest and thus a charge.

In the financial world the ruling was significant, seen as limiting the options open to a bank when taking security. Lord Hoffmann said in BCCI No 8 that Charge Card "had excited a good deal of heat and controversy in banking circles", since documents purporting to create charges over customer deposits had been used for many years before Charge Card.

It was Charge Card that resulted in the so-called "triple cocktail" agreement, whereby, according to Bannister, if one of the three alternative clauses contained in it did not have the desired effect, either or both of the others would.

The three ingredients of a "triple cocktail" are: (a) a third party deposit may be set off against the relevant borrowing; (b) a party who has money in a bank is prohibited from using the deposit until the amounts borrowed by the relevant borrower have been paid off; (c) it purports to give banks a charge over the deposit.

Bannister, who instructed Michael Crystal QC and Robin Dicker of 3/4 South Square, Grays Inn, in the action, says the ruling of Lords Goff, Nicholls, Hope, Hutton and Hoffmann, in which Lord Hoffmann gave the only judgment, is to be regarded as a "landmark" because of the way in which it sweeps away the ruling in Charge Card.

"By doing so, it should greatly assist the structuring of secured financings under English law," he says.

The basis of the Law Lords' ruling, Bannister says, is that a bank can take charges over the deposits its customers make with it.

This is because those deposits are debts owed by the bank to the relevant customer. As such, a deposit with a bank is an asset in the hands of the relevant customer which he could charge to anybody.