Royal Bank Of Scotland Plc v Wallace International Ltd

A bank cannot combine a customer’s credit balance with debit balances where it knows that the credit balance is held beneficially for a third party. A trust may arise from the parties’ objective arrangements even though they did not use the word “trust” or analyse the transaction in legal terms. The beneficiary’s priority is determined by the timing of the trust and the bank’s notice. Knowledge held by a trustee acting under a conflict of interest is not ordinarily attributed to the beneficiary for estoppel by silence. Where a fiduciary misuses trust money, compound interest may be awarded to strip the fiduciary of presumed profits; the award is compensatory rather than punitive.

Wallace International Ltd had a credit balance with Midland Bank. During the transfer of banking facilities to RBS, the balance was placed in a specially designated account opened in the name of Doctus plc, Wallace’s holding company, because Wallace’s directors had not authorised an RBS account.

RBS knew that the account represented Wallace’s funds but later combined its credit balance with Doctus’s debit balances. Lloyd J declared that Doctus held the balance on trust for Wallace, that RBS had notice, and that Wallace was entitled to repayment with compound interest. RBS appealed on trust, priority, notice, acquiescence or estoppel, and interest.

1. Appeal dismissed. The findings of fact made by Lloyd J, particularly his acceptance of Mr Hughes’s evidence and rejection of Mr Kirkland’s reconstruction, could not properly be disturbed.
2. A trust arose when the Doctus WI account was opened and credited. Doctus regarded the money as Wallace’s property and the account as a mirror of Wallace’s former Midland account. The special designation and separate account recognised that the money was to be kept separate from funds beneficially owned by Doctus. The absence of the word “trust”, a precise legal analysis, or fully defined access arrangements was immaterial.
3. RBS’s rights of combination did not prevail. If a bank knows before an account is opened that the credit balance is held for a beneficiary, there was no earlier period in which the customer was beneficially entitled to confer the asserted rights on the bank. The authorities establish that a bank cannot set off a customer’s debit balance against a credit balance known to belong beneficially to a third party.
4. RBS had actual notice. The trial judge was entitled to find that Mr Kirkland understood from the conversation and the account designation that the funds remained Wallace’s funds, although held in a Doctus account.
5. Wallace was not estopped by silence. Any duty to speak required Wallace to know that RBS was acting under a mistaken belief that it could combine the accounts. Knowledge of the trustee or its officers could not be attributed to Wallace where the trustee’s interests conflicted with its duty to the beneficiary. The alleged representations were also unpleaded and could not be relied upon.
6. Compound interest at 1 per cent above base rate with quarterly rests was within the trial judge’s discretion. The purpose was to deprive RBS, acting in a fiduciary capacity, of presumed profits from using Wallace’s money, not to punish want of probity.

• Court of Appeal (Civil Division): The appeal from Lloyd J’s judgment in the Chancery Division was dismissed with costs.