Loan of Central Bank of Ruritania - Essay Example

Banking part 3 I. Introduction The case at bar involves the prospect of extending an unsecured loan by Bank A to the Central Bank of Ruritania. The Central Bank of Ruritania has an existing deposit in Bank A and in another bank, plus investments in England. There are a number of hypothetical scenarios upon which legal issues may arise in this arrangement. These legal issues would most likely arise when and if the Central Bank of Ruritania fails to pay the loan. In pursuing our hypothetical scenario, let us tackle the possible situations that many arise and what are the remedies available to each party if any. a. In case of failure on the part of the Central Bank of Ruritania to its loan to Bank A, can Bank A freeze the deposit account of Rurutania? The answer to this question would depend largely on the provisions of the contract, which will be signed between Bank A and the Central Bank of Ruritania. As a basic rule, the provisions of the contract shall be considered as the primary authority governing both parties, provided that such contract is entered into according to the laws of the country from whence the party came from or of the country, which was, chose by the parties as the place of jurisdiction of the contract.1 Where the intent of the parties can be clearly gleaned from the tenor of the contract, such intent shall be held a binding upon the parties. However, in the banking system, there are certain established rules, which must be followed. “It is well established that the normal relation between a banker and his customer is that of debtor and creditor…” 2 . When the client deposits money in the bank, the banker debits on its books the amount deposited by the client, thereby, recognizing an account payable. Why is this so? The rationale behind this is that one the money is deposited to the bank, “money which a customer deposits with a bank becomes the bank’s money.” 3 This means that the bank can now use the amount deposited for purposes of loan releases and financing. However, “the bank is prima facie bound to meet its debt when called upon to do so by the customer.”4 In other words, although technically there was a transfer of ownership of the money deposited from the depositor to the depositary bank, the amount can be withdrawn upon demand of the client. The question now is that whether or not the bank can hold on to the deposit account of the client in the event that the client will fail to pay its loan to the bank. What is the right of the bank on the deposit account of the debtor/client? In the case of Halesowen Presswork and Assemblies Ltd v Westmister Bank Ltd (1971) 1 QB 1, 46 the Court said that “the relationship is one where, if the account is in credit, the banker is indebted to his customer,” thus, it has no right to retain such funds without the consent of the client. 5 However, in cases where the client is declared insolvent, the bank may apply in Court for garnishment subject to the provisions of the Insolvency Law. Can Bank A run after the investments of Ruritania in England and its deposits in another bank in case of non-payment of loans? As a rule, the banker has a lien over the properties of the debtor if and only if such properties are used a collateral or security of the loan. We must therefore clearly establish the difference between a specific security and a ‘floating security” in order to clearly establish rights of the creditor in case of failure on the part of the debtor to pay the e to pay the debt. In the case of Evans v Rival Granite Quarries Ltd (1910)6, Buckley LJ defined a floating security as a case where “the holder cannot affirm that the assets are specifically mortgage to him”. If we take this definition under the context of our hypothetical scenario were the bank wants to freeze the deposit of the client in case the client defaults in the payment of its loans, we can clearly say that where the client did not specifically stipulates that the deposit account shall serve as collateral, such deposit account can only be considered at most a “floating security”. According to Buckley “ A floating security is not a specific mortgage of assets, plus a license to the mortgagor to dispose of them in the course of his business, but is a floating mortgage applying to every item comprised in the security, but not specifically affecting any item until some event occurs or some act on the part of the mortgagee is done which causes it to crystallize into a fixed security”.7 b. Provision for compulsory deposit of proceeds One of the popular trades off often used by banks in granting loans to its clients without collateral is the condition that the client company will deposit the proceeds of the business to the bank where the loan was obtained. This practice often leads to many complications and eventual legal battle. To illustrate this, let us again take our hypothetical scenario where bank A requested Ruritania to deposit proceeds of its investments to the bank in exchange for an unsecured loan. The question in this situation would be whether the bank can effectively block the deposit account of the client on the grounds that it is intended as payment of the debt is question. My position on this is that the bank cannot effectively block the account in the absence of a clear consent from the client, which would ratify the implied agreement that such deposit shall be for the payment of the loan. Sound banking principles would tell us that a loan is different from a savings account and one should not be confused for the other. A deposit creates and obligation on the part of the bank to release the money deposited on demand. In the words of Hoffmann J in In Re Birhgtlife Ltd (1987)8 and cited in the case of Agnew v Commissioners of Inland Revenue (2001)9 by Lord Millett, “Once in the account” the money “would be outside the charge over debts and at the free disposal of the company.” Thus, it would be incorrect to say that where the money deposited in the account is intended as payment for the debt, the bank can automatically apply the same to loan without consent of the depositor/debtor. Consent is still very essential as, technically, the deposit is actually the liability of the bank where the depositor is the creditor. Bibliography Laws and Articles 1. EC Convention on the Law Applicable to Contractual Obligations (Rome 1980) 2. Green Paper on the Conversion of the Rome Convention of 1980 (Rome I – law applicable to contractual obligations) into a Community Instrument and its Modernisation online available at http://europa.eu.int/comm/justice_home/news/consulting_public/rome_i/doc/bar_council_england_wales_en.pdf Cases 1. Agnew v Commissioners of Inland Revenue (2001) 2 AC 710, 723 2. Evans v Rival Granite Quarries Ltd (1910) 2 KB 979,999 3. In Re Brightlife Ltd (1987) CH 200, 209 4. In re Bank of Credit and Commerce International SA (No. 8) [1998] AC 214,226 5. Lipkin Gorman v Karpnale Ltd (1989) 1 WLR 1340, 1353 6. National Westminster Bank plc v Spectrum Plus Limited and others and others (2005) UKHL 41 7. Westminster Bank ltd. v Hilton (1926) 43 TLR 124,126 Read More