Bank and Banking Activities under UK Laws - Park Street Securities Ltd v Albert William Roe - Essay Example

Definiton of bank and banking business in the background of case law Park Street Securities Ltd v Albert William Roe. Word Count -2294- excluding title page, foot notes , bibliography , list of cases ,etc. Introduction The banking business can be classified into various sectors, which include retail banking, merchant banking, financial advisory services, provision of insurance services and dealing in derivatives. As the banking activities cover wide sectors, there is no overall definition of banking is available that differentiates the banks from other guises of financial institutions. According to common law, a bank has been defined as an establishment involved in the banking business. Thus, courts, in general parlance, in deciding whether an establishment is a bank or not will give utmost significance to its business and contrast it with that of the business carried over by other banks. In this research essay, we will be analysing the definitions of bank , banking business in the background of case law Park Street Securities Ltd v Albert William Roe. Definition of Bank and Banking Activities under UK Laws When defining a bank, the courts have followed three chief principles – first, the definition of ‘banking business’ may transform over the period, despite customarily, it has been viewed to involve accepting deposits from its customers with a sole aim of earning revenue by relending or reinvesting it, and carrying other banking related activities like facilitating the customers to open current accounts with cheque facilities and collecting the amounts deposited by the customers. Further, a banking business in one place may not be regarded as a bank in another jurisdiction. Third, if a bank is regarded by its customers and society as a bank, then court will also consider the same as a bank. Thus, English courts have defined the banking business as involving the following three main characteristics. Collection of cash and cheques from the customers and crediting the same into their personal accounts Meeting the cheques drawn by its customers on the bank by making a debit to the customer account To offer current account facilities to its customers. Thus, the above three kinds of business structure the core element of banking business under common law in UK. In deciding whether a business is a bank or not, the courts will look into the list of authorised banks, which is issued by the Bank of England (UK’s central bank), the rules framed under Kirkwood’s case and the Banking Act 1987.1 In Azam v. Iqbal2, it was held that despite the fact that money transmission had been considered as a significant feature of banking practice, the offering of such service alone will not transform a financial institution as a banking institution3. Until 1966, there were no clear definition was available for banking or there were no clear rules regarding banking. Both the case laws and statute laws are employed to define the word’ banking.’ The term banking has been defined by an explanation in the Bills of Exchange Act 1882, the Income Tax Acts and the Building Societies Act 1962.4 In United Kingdom, a banking institution does not need a licence so as to carryover a banking business and however, there is a requirement that all participants in the payment system should have a class licence. Further, the Banking Act 1987 has been modified or drafted to mirror the dawn of the Financial Services and Markets Act 2000. (FSMA 2000). As per FSMA 2000, any banking institution that operates in UK should have permission under the Act before it starts to receive deposits from the general public5. In the Bank of Chettinad Limited of Colombo v. Commissioners of Income Tax, Colombo6, it was acknowledged by the Privy Council that a banking company is “a company which main business is accepting deposits on current account or otherwise, which is subject to withdrawal by draft, cheque or order7. As per s2 of the Bills of Exchange Act 1882 (BEA 1982), the term banker has been defined as a body of individuals, whether incorporated or not who conducts the business of banking. In developing the common law definition for banking, the courts in UK have found three fundamental standards as the definition and meaning of the term banking which can vary from time to time.8 In Banbury v. Bank of Montreal9, it was observed by the Privy Council that the offering of financial advice on the customer’s investment did not amount to ‘banking businesses.10 Later, Salmon J in Woods v. Martins Bank Ltd11 viewed that offering advice on financial subjects resulted in banking business since inter alia, the bank in that scenario has conducted itself as an advisor to its customers on their investments.12 In Argo Fund Ltd v. Essar Steel Ltd13 , it was held that the salient feature that can be used to establish whether a specific financial institution can be called as a ‘bank’ can vary as per the specific context.14 It is to be noted that the Building Societies Act 1986 authorised building societies to engage in banking business or to compete with the existing banks for dealing in financial products like current accounts, and some building societies have even demutualised and have got authorisation to engage in banking activities under the FSMA 2000.15 Nowadays, banks have expanded their operations not only in banking but also in derivatives and securities trading, insurance, investment management and pensions normally through various subsidiary companies, which fall within the same banking group instead of carrying these activities in the name of principal banking entity. Presently, a financial institution that is considered as involved in ‘banking business ‘in one country may not be regarded as a bank in another jurisdiction. For instance, both in Australia and Ireland, a financial institution that receives deposits from the public with an aim of relending the same will be regarded as a bank even if it does not extend current account with cheque facilities. In opposite, offering current account facilities to the customers is the essential requisite for a bank under UK laws. For example, in Hafton Properties Ltd v McHugh (Inspector of Taxes) 16, it was held that a financial institution which also carried over banking activity in Isle of Man did not meet the definition of “ bank” under English law as it was not carrying any banking activity within the UK.17 In Commercial Banking Co Ltd v. Hartigan18, it was held that an institution which is well-known and regarded as a bank by the public will be considered by the courts as involved in banking business.19 The same view was also held in United Dominions Trust v Kirkwood also. Despite the fact that the connotation of “banking business” is always changing nowadays, it is significant to evaluate the kinds of transactions that symbolises such banking activity. Customarily, the main characteristic of ‘banking business ‘engrossed the receipt of deposits from the public or from its customers and reinvesting or relending the same with a view to make profits as FitzGibbon LJ held in Re Shields’ Estate that from the bankers point of perspective, the business of banking is to traffic with the funds of others with an aim of making considerable profit. In United Dominions Trust v Kirkwood20, the Court of Appeal had to find out whether the appellant was a bank or a money lender. The appellant sued the defendant for the repayment of the money advanced by it. However, the defendant contended that the appellant was a money lender, and the Moneylenders Act 1900 demanded that before suing for any debts, the registration under the Act is mandatory. Since the appellant had not registered as money lender, defendant claimed that they had no right to sue them. In this case, the Court of Appeal held that the appellant was a bank as it had various customer accounts, which were regularly credited and debited, it used to credit money received from customers in the guise of cash and cheques, it debited its clients’ accounts with standing orders and cheques, and it was considered by the financial community as a bank. It is to be noted that the four litmus tests propounded in the United Dominions Trust case is even now regarded as the test for a banking definition21. After the Kirkwood case, a business in UK cannot term it as a “bank” under common law unless it offers current accounts with cheque facilities and facilitates their customers to pay by cheques and engaged in the collection of the same.22 The Banking Act 1979 offered an exhaustive and a precise definition of the term banking which has been transformed by the Banking Act 1987. According to Banking Act 1987, a bank is one, which should act as a deposit taking institution which is permissible under the Act, and it should have net assets, which are a combination of free reserves and paid-up capital of Euros 5m. In case , if the net assets of an institution fall below Euros 5m ,then , the institution will be considered as an approved deposit-taking business house and such business is not authorised to use the phrase “ bank’ in its name. In Joachimson v Swiss Bank Corp23 [1921] 3 KB 110, the definition of banking has been summarised as follows: a) On behalf of the customer, to collect bills of exchange and to receive money. b) As a debtor of its customer, the bank has to hold such proceeds and moneys; c) On demand, it should have the ability to repay the money either on demand or against the customer’s standing instructions, to issue payments at the branch during the banking hours where such customer account is being operated.24 25Park Street Securities Ltd v Albert William Roe26 In this case, the appellant Park Street Securities Ltd advanced £11,000 to the defendant Roe for the purchase of a leasehold property on 30 September 1974, and the above loan was secured by a legal charge in favour of appellant. Though, defendant made considerable payments to the appellant over the period of 6 years, but as the years passed by, the principal amount remained the same, mainly due to ever inflating interest rates. In the meanwhile, the defendant defaulted the payments, and an action was brought by the appellant against the defendant on 17 December 1980. The defendant contended that balance amount was not payable by him by claiming that the appellant was an unregistered money lender under the Money-lenders Act, 1900. However, the appellant refuted this claim and asserted that under s.6 of the Moneylenders Act 1900, they were carrying out a bona fide banking business. The lower court viewed that from the corroboration submitted, it was evident that appellants were genuinely carrying out banking business. The defendants appealed against the lower -court verdict. In the appeal, it was held by the Court of Appeal that the plaintiff was engaged in offering current accounts to their customers, meeting the cheques drawn on themselves, and engaged in the collection of cheques and these definitely resembled the characteristics of a banking business. Rejecting the claim made by the defendant that the banking activity of the plaintiff was insignificant when contrasted with the rest of their business, the Court opined that it had not made any comparison between the number of clearances made by the plaintiff with the number of clearances made by other banks in the industry. After considering the submission made by both the defendant and by the plaintiff, the Court came to a conclusion that the plaintiff was carrying a bona fide banking business and hence, the court dismissed the appeal by the defendant. The defendant claimed that when the loan was advanced i.e. on 30 September, 1974, by virtue of the Money-lenders Acts, 1900 to 1927, the plaintiff was an unlicensed moneylender, and the loan was illegitimate and hence not recoverable. However, it is to be noted that only in appeal, this point was raised by the defendant. Nonetheless, the plaintiff asserted that it was indulged in banking business by virtue of s.6 of the Money-lenders Act, 1900 which provides as follows: The phrase “money-lender” shall connote every person who carryon the business of money-lending --- but shall not comprise d) Any person who is conducting bona fide banking business. The court of appeal was of the view that the salient feature of a banking business is that a banker should receive money from his clients and should credit the same to his client account now and then, and it should also allow the customer to withdraw such sums as desired by him from time to time either by way of draft, cheque or order. The court further viewed that a bank can carry on multiple business activities like investment advisory, insurance, underwriting, dealing in securities and derivatives and accepting deposits from the customers may be of smaller value. But, because of that, one cannot come to a conclusion that it is not carrying on banking business. The court will see that whether a bank is carrying on a bona fide banking business or not. For determining this , the court will look into whether the banking transactions which the appellant is carrying on is not of insignificant in number and size as contrasted to rest of his business. Further, the transactions footed upon as amounting to acceptance of deposits of money must be authentic of this lawful character and not just camouflaging the transactions of a varied legal character. The court would look into the true colour of the transactions, and not just to their structure or form. In arriving at their verdict that whether the appellant was carrying on bona fide banking business and to derive at the meaning of ‘banking business’ and ‘banking’, the court of appeal relied on the case laws of United Dominions Trust v Kirkwood, Bank of Chettinad Limited of Colombo v. Commissioners of Income Tax ,Colombo, and Joachimson v Swiss Bank Corp. Bibliography Books Asser T M C, Legal Aspects of Regulatory Treatment of Banks in Distress. (1st edition, International Monetary Fund 2001) Beale H, Bridge M, Gulliver L & Lomnicka E, The Law of Security and Title –Based Financing (1st edition, Oxford University Press 2012) Bradgate R & White F, Commercial Law 2012: LPC Guide (1st edition, Oxford University Press 2012) Cowen D V & Emmett E & Gering L, Cowen on the Law of Negotiable Instruments in South Africa (1st edition, Juta1966) Edwards J A & Henley H P, Lloyd’s List Law Reports –volume 2 (2nd edition, Lloyds 1965) Eggers P M, Deceit, the Lie of the Law (1st edition, CRC Press 2013) Ellinger E.P, Hare L C, Ellinger’s Modern Banking Law (5th edition, Oxford University Press 2011) McCormick R, Legal Risk in the Financial Markets (2nd edition, Oxford University Press 2010) Pond K, Retail Banking (1st edition, Global Professional Publishing 2007) Singh D, Banking Regulation of UK and US Financial Markets (1st edition, Ashgate Publishing Ltd 2012) Smith D, Lawson R D, & Painter A A, Business Law (2nd edition, Routledge 2012) Staples R, Taxation Volume 128(multiple editions, Taxation Publishing Company 1991) Wonglimpiyarat J, Strategies of Competition in the Bank Card Business (1st edition, Sussex Academic Press 2005) Journal Articles Chaikin D, ‘Adapting the qualifications to the bankers common law duty of confidentiality to fight transnational crime’. [2011]. Sydney L. Rev 33 265 Lloyds Law Reports, ‘Re Roe’s Legal Charge - Park Street Securities Ltd v Albert William Roe’ [1982] Lloyd’s Law Reports vol 2 4 370 Acts Banking Act 1979 Banking Act 1987 Bills of Exchange Act 1882 Bills of Exchange Act 1882 Building Societies Act 1962 Financial Services and Markets Act 2000. Income Tax Acts Case Laws Argo Fund Ltd v. Essar Steel Ltd Azam v. Iqbal [2007] EWHC 2025 (Admin) [29] Bank of Chettinad Limited of Colombo v. Commissioners of Income Tax, Colombo, [1948] Commercial Banking Co Ltd v. Hartigan (1952) 86 Ir.LTR 109 Hafton Properties Ltd v McHugh (Inspector of Taxes) Joachimson v Swiss Bank Corp [1921] 3 KB 110 Park Street Securities Ltd v Albert William Roe [1982] Vol. 2 Lloyds Rep. 370 Re Shields’ Estate United Dominions Trust v Kirkwood (1966) Woods v. Martins Bank Ltd [1959] 1 QB 55 Read More