Crédit Agricole Corporation and Investment Bank v Papadimitriou

For constructive notice in a proprietary claim, a bank need not investigate every mere possibility of a third-party right, and it need not first conclude that the right probably exists. It must make inquiries where the known facts give a reasonable banker in its position serious cause to question the transaction’s propriety, or disclose a serious possibility of such a right. The inquiry may extend to the transaction’s commercial purpose, not only the source or beneficial ownership of funds. If reasonable inquiries or advice would have revealed the probable right, the bank has constructive notice. The bank bears the burden of establishing that it is a bona fide purchaser for value without notice.

The respondent claimed the proceeds of an art collection allegedly misappropriated and sold by Robin Symes. The proceeds were deposited with the appellant bank in Gibraltar and used to support a back-to-back facility for a Symes company. The Chief Justice dismissed the proprietary claim, although the respondent did not appeal the separate findings on dishonest assistance and knowing receipt.

The Court of Appeal of Gibraltar allowed the appeal and entered judgment for US$9.8m, staying execution pending appeal. The central issue before the Board was whether the bank had constructive notice of the impropriety and whether the Court of Appeal applied the correct test, particularly as to the scope of reasonable inquiries.

1. Disposition. The Board dismissed the appeal and advised Her Majesty accordingly. The proprietary claim therefore succeeded against the bank. The unappealed claims for dishonest assistance and knowing receipt were outside the appeal.
2. Constructive notice. The Board accepted the approach stated in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347 and [2012] Ch 453. A bank has constructive notice where a reasonable person with the bank’s attributes should have appreciated from known facts that a proprietary right probably existed, or should have made inquiries or sought advice which would have revealed that probable right.
3. The threshold for inquiry lies between mere possibility and probability. A mere possibility of a third-party right is insufficient. Equally, the bank need not first conclude that the right probably exists. Inquiry is required where there is a serious possibility of such a right, or where the known facts give a reasonable banker serious cause to question the propriety of the transaction. The Board regarded the higher threshold suggested by Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1995] 1 WLR 978 as too high.
4. Notice of a claim is not notice of a proprietary right. In the context of Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd, the reference to a proprietary claim meant the probable existence of the proprietary right itself. The Board relied on the reasoning in Carl Zeiss Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch 276.
5. The inquiry was not properly confined to the source or beneficial ownership of the funds. The commercial purpose of the arrangement was also relevant. The complex use of several entities, the back-to-back guarantee and the cost of the arrangement should have caused a reasonable bank to inquire. Adequate inquiry would have shown that the arrangement was probably improper. The bank therefore failed to establish that it lacked constructive notice and could not rely on the bona fide purchaser defence. The burden was on the bank, consistently with In re Nisbet and Potts’ Contract [1906] 1 Ch 386.
6. Lord Sumption agreed with Lord Clarke’s reasons and added that unexplained features indicative of wrongdoing require an explanation before the bank can assume that there is an innocent explanation.

• Privy Council: Appeal dismissed; the Board advised Her Majesty accordingly.
• Court of Appeal of Gibraltar: On 5 December 2013, the respondent’s appeal was allowed. Judgment was entered for US$9.8m, with execution stayed pending appeal to the Privy Council.
• Chief Justice of Gibraltar: On 27 February 2013, the respondent’s claim was dismissed, including the proprietary claim.