Banks' rights: the right of set-off and nominee accounts

Palitha de Silva, The New Zealand Law Journal, December 2005

This article discusses banks' rights at common law to apply the proceeds of a customer's account to set off the debt in another account, or to honour a demand for payment on an account that is in debit. This right is often referred to as the " Bhogal principle1".

The author discusses the effect of a recent decision of the English Court of Appeal2, where a case was brought by a customer that held an account with the London branch of Dresdner and instructed the bank to transfer all money in the account to an account with Deutsche Bank in Frankfurt.

Dresdner transferred all but $49 million, which it claimed to be entitled to on the basis that it was owed the sum by two Saudi Arabian ministers. The bank's argument was that, because the customer held the money on trust for the Saudi Government, it was entitled to set off the debt owed to it. The customer argued that Dresdner's action was unlawful and that it held the money in the account on trust for another party.

The Court had to consider whether the Bhogal principle applies where the account holder is not the beneficial owner, but there are two competing claims as to who the beneficial owner is.

The Court of Appeal reiterated the lower Court's view that the general principle applied and that the bank had no right of set off in such circumstances. The Court emphasised the contractual nature of the relationship between banker and customer, where the banker has an obligation to repay a customer that has made deposits with it.

Observing that setting the threshold at an arguable case would have the effect of paralysing the customer's funds until the matter was resolved, the Court considered such an outcome undesirable and contrary to the entire basis of the banker-customer relationship.

We consider that the outcome of this case is based on application of similar principles to those set out in the leading New Zealand case on the issue3, in which it was emphasised that, for the efficient conduct of business affairs, third parties' claims should not be allowed to interfere too readily in the banker-customer relationship.

 

1 Bhogal v Punjab National Bank [1988] 2 All ER 296

2 Saudi Arabian Monetary Agency v Dresdner Bank AG [2005] 1 Ll R 12

3 US Marketing Ltd v National Bank of New Zealand Ltd [2004] 1 NZLR 589

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