Bank Of Credit And Commerce International SA (No. 8), Re

This appeal concerned whether a bank, which held deposits from third parties charged to secure loans to other companies, could sue the borrowers for repayment without first applying or giving credit for the charged deposits. The House considered the effect of rule 4.90 of the Insolvency Rules 1986 (mutual credit and set-off), the construction and effect of letters of lien/charge, the doctrine that a charge over a debt owed by the chargee may be conceptually impossible, and related equitable doctrines such as marshalling and the right of indemnity.

The court held that the letters of lien/charge created a proprietary security interest (an equitable charge) over the depositor's chose in action against the bank rather than a personal obligation by the depositor to pay the borrower's debt. As no personal liability of the depositor existed, mutuality for the automatic set-off under rule 4.90 did not arise and the bank was entitled to sue the borrowers without first resorting to the deposits. The House rejected arguments based on implied indemnity, retrospective set-off, appropriation by the surety and marshalling.

The joint liquidators of Bank of Credit and Commerce International S.A. sought directions about whether the bank could bring claims against primary borrowers for repayment of loans secured by charges over deposits made with the bank by third-party depositors. Two representative fact patterns were chosen: (1) deposits already held and thereafter charged to secure a borrower's debt and (2) deposits made expressly as security and charged contemporaneously.

The issues framed by the court were:

• whether the letter of lien/charge created a personal liability on the depositor such that automatic insolvency set-off (Insolvency Rules 1986, rule 4.90) extinguished the borrower's obligation pro tanto;
• whether a bank can have a proprietary interest (charge) over a debt which it itself owes (the doctrine of conceptual impossibility);
• whether the depositor's ability to have the deposit applied to discharge the borrower's debt produces a right "due" for the purposes of rule 4.90;
• whether equitable doctrines (indemnity, duty to restore security, marshalling) or retrospective treatment could require the bank to resort to the charged deposits before suing the borrower.

The House analysed the construction of the lien/charge letters and precedent. It concluded the documents created a charge over the depositor's chose in action against the bank (not a personal obligation to pay the borrower's debt). The court rejected the conceptual impossibility argument and held that an equitable charge over a chose in action owed by the chargee is coherent and effective. The court interpreted rule 4.90 as requiring a right to make a pecuniary demand (a provable debt) and not being satisfied by a mere right to appropriate property under one’s control. Consequently, automatic set-off did not occur and the bank retained the right to sue the primary borrowers in full.

The House also dismissed alternative submissions based on implied indemnity, appropriation by the surety, the duty to restore security, and marshalling, explaining why none gave rise to a preclusive claim against the bank that could be set off under rule 4.90.

Appeals dismissed. The House held that the letters of lien/charge created a proprietary interest (an equitable charge) in the depositor's chose in action against the bank and did not impose a personal liability on the depositor; therefore there was no mutual provable debt between depositor and bank such as to trigger automatic set-off under rule 4.90. Alternative equitable arguments (implied indemnity, appropriation, duty to restore security, marshalling) did not require the bank to resort to the charged deposits before suing the borrowers.

Application for directions by the joint liquidators in the B.C.C.I. liquidation; matters were considered in earlier Chancery proceedings and reached the Court of Appeal (reported at [1996] Ch. 245). The appeals from the Court of Appeal were heard by the House of Lords, resulting in this judgment ([1997] UKHL 44).