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Part F Cross-Border Issues, 45 Execution Proceedings and Foreign Deposits

From: The Law and Practice of International Banking (2nd Edition)

Charles Proctor

Content type:
Book content
Product:
Financial Law [FBL]
Published in print:
01 March 2015
ISBN:
9780199685585

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 07 June 2023

Subject(s):
Regulation of banks — Bank of England

(p. 793) 45  Execution Proceedings and Foreign Deposits

Introduction

45.01  It has been shown that, in general terms, the banker–customer relationship is governed by the law of the country in which the account-holding branch is located. As a necessary consequence, it will follow that action taken by a foreign court or government cannot have an impact upon either the ownership of, or the contractual terms applicable to, a deposit placed with a bank branch situate in England.1

45.02  For completeness, it remains to examine the extent to which the English courts have attempted to make orders which may have extra-territorial effect, in the sense that they seek to affect the rights and obligations of banks with respect to deposits placed with branches outside the jurisdiction.2

45.03  It is proposed to consider the subject matter as follows:

  1. (a)  third-party debt orders;

  2. (b)  the attitude of the English courts in extra-territorial cases;

  3. (c)  the case law;

  4. (d)  special cases; and

  5. (e)  conclusions.

Third-party Debt Orders

45.04  At the outset, it is necessary briefly to describe the context of the present chapter.

(p. 794) As in other cases,3 this chapter is concerned with disputes to which the bank itself is not a party. The bank happens to hold funds belonging to a judgment debtor, and the judgment creditor is seeking access to those funds as a means of satisfying some or all of the judgment.4 There is a certain amount of case law which explains the nature of a third-party debt order,5 and when it should properly be made.6 It is also necessary carefully to distinguish between interim and final orders.

45.05  An interim third-party debt order7 operates as an injunction8 against the account-holding bank and requires it to ensure that the minimum amount stated in the order remains credited to the account for the time being.9 Unless the interim order identifies the relevant account, the bank must undertake a search to identify any accounts held for the debtor, and must give details of the accounts and their balances to the creditor within seven days of service of the order.10

45.06  If the order is made final,11 then the bank must make payment12 of the requisite amount to the judgment creditor; in doing so, it will obtain a corresponding discharge of its obligations to its own customer, the judgment debtor.13 The order can only apply to amounts (p. 795) owing to the judgment debtor. Consequently, if the bank has pre-existing set-off or security rights over the account, these will take priority over the claimant and the order which he has obtained.14

45.07  Although the bank will normally be concerned only with the strict compliance with the terms of the order, it will nevertheless wish to look to its own interests in certain respects. In principle, the bank is only required to give to the judgment creditor that which it is obliged to give to the customer.15 For example, the bank is only obliged to pay that which is actually due. Consequently, a third-party debt order does not accelerate the due date for a time deposit.16 Likewise, it appears that there will be no debt due to the customer if the account is subject to a prior security interest.17

45.08  All of these rules operate satisfactorily in a purely domestic context, where all of the relevant relationships are governed by English law and it is thus plain that the bank will obtain a good discharge when it makes payment to a judgment creditor pursuant to a final third-party debt order. But complexities will inevitably arise when the circumstances of the case introduce a multi-jurisdictional aspect.

Attitude of the English Courts in Extra-territorial Cases

45.09  The jurisdictional difficulties which may arise in this sphere are to some extent acknowledged by the introduction to Part 72 of the CPR, which states that ‘[t]his Part contains rules which provide for a judgment creditor to obtain an order for the payment to him of money which a third party who is within the jurisdiction owes to the judgment creditor.’18 As has been seen, the court has a discretion to make a third-party debt order and, in a domestic case, the bank will usually not be concerned with the exercise of that discretion. However, it may need to challenge an order which may result in a conflict between (i) its obligations under the English court order and (ii) any duties owed to customers and others under foreign systems of law.

45.10  In England, various attempts have been made over the years to enforce judgment or other debts against deposits held abroad. In general terms, actions of this kind have failed, in large measure because:

  1. (a)  the obligation to repay the deposit will be governed by the law of the place where the relevant bank branch is situate;

  2. (b)  questions touching the ownership of the deposit are likewise governed by the same system of law;

  3. (p. 796) (c)  English law can therefore neither (i) dictate that the obligation shall be treated as discharged by payment to a person other than the account holder or (ii) demand that the deposit be treated as the property of the judgment creditor in the proceedings; and

  4. (d)  it would therefore be wrong for an English court to make such an order, because the account-holding bank would not, by complying with it, obtain a good discharge as against its own customer.19

Against this background, a brief survey of the relevant case law is appropriate.

The Case Law

45.11  An excellent illustration of these principles is afforded by the decision of the Court of Appeal in Martin v Nadel (Dresdner Bank, Garnishee).20 In that case, Martin had obtained a monetary judgment against Nadel. Martin knew that Nadel held funds with the Berlin branch of Dresdner Bank; Martin therefore instituted garnishee proceedings against the London branch of Dresdner Bank with a view to securing payment from that source.

45.12  Martin failed to obtain the requested order on two, related grounds:

  1. (a)  third-party debt orders are made to enforce judgment debts and thus form a part of English procedural law. Of course, the German courts would apply their own procedural law in any case before them, and would disregard matters of English procedure;21 and

  2. (b)  a garnishee order is a form of execution which deprives the debtor of ownership of his own property by requiring the bank to pay the judgment creditor, rather than the judgment debtor.22 Where the debt is governed by English law or is situate in England, this amounts to a good discharge of the bank to the extent of the payment.23 In the present case, however, the bank would not enjoy that protection because the deposit was located in Germany. The German courts would therefore disregard any English court order which purported to vest ownership of those sums in the judgment creditor.

45.13  As a result, and regardless of any order which the English court might make, Nadel would be able to recover his deposit from the Berlin branch by proceedings in Germany. An (p. 797) English court order could not protect Dresdner from this ‘double liability’, and it was thus inappropriate for the court to make an order of this kind.24

45.14  Likewise, in Richardson v Richardson (National Bank of India Ltd, Garnishee),25 a divorcee sought to recover costs from her former husband by applying for garnishee orders against the London branch of his bank, even though his accounts were held at branches of that bank in Kenya and Tanganyika. The court found that it had no jurisdiction to make such an order because the debts represented by the deposits were not recoverable by action in England.26

45.15  In spite of doubts which had been expressed in the intervening decades, these two decisions were held to be correct in Société Eram Shipping Co Ltd v Compagnie Internationale de Navigation.27 In that case, a Romanian shipping company had obtained a judgment for demurrage in France. It subsequently registered the judgment in England for enforcement purposes, and attempted to obtain a third-party debt order form the court against a member of the HSBC Group. Whilst that company had a branch in London, the accounts of the judgment debtors were held at the bank’s head office in Hong Kong. The House of Lords applied the decision in Martin v Nadel and held that the court had no jurisdiction to make a third-party debt order in respect of debts situate abroad where the order of the English court would not constitute a discharge of the obligations of the third-party debtor vis-à-vis the judgment debtor himself. It may be emphasized that, whilst the court has discretion to make a third-party debt order in respect of a debt situate in England,28 it has no jurisdiction at all to make such an order in respect of debts located elsewhere.29 As a matter of principle, it is submitted that this should be correct; the third-party debtor was not a party to the original litigation and has only been drawn into it because he happens to owe money to the judgment debtor. An English court should have no jurisdiction to expose such a person to the possibility of double jeopardy (or double payment). To express matters in a different way, the English courts should not seek to regulate the conduct of foreigners outside the jurisdiction. These principles have found approval with other Commonwealth courts.30

45.16  An essentially identical point is made by the contemporaneous decision of the House of Lords in Kuwait Oil Tanker Co SAK v Qabazard.31 Since that case involved debts situate in Switzerland, it was merely necessary for the House of Lords to add that the Lugano (p. 798) Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters did not confer upon the English court the right to make third-party debt orders against debtors resident in Switzerland. Once that point had been disposed of, the case was governed by principles identical to those discussed in the Société Eram decision.32

45.17  A broadly similar issue has arisen before the New York Court of Appeals in Koehler v The Bank of Bermuda.33 In that case, the Bank of Bermuda had submitted to the personal jurisdiction of the New York courts. It was not itself a judgment debtor, but held assets belonging to a debtor under a New York judgment. Relying on an earlier New York decision,34 the Court of Appeals held that it had power to require a garnishee to turn over assets held abroad (ie because that power depends on personal jurisdiction over the garnishee, rather than jurisdiction over the asset which forms the subject matter of the order). It appears that the court has no discretion in the matter, since the relevant statutory provisions (as reproduced in Koehler) state that ‘…where it is shown that the judgment debtor is entitled to the possession of such property, the court shall require such person to pay the money, or so much of it as is sufficient to satisfy the judgment, to the judgment creditor…’. Where the asset is situate outside the United States, the account holding bank may thus be placed in a situation in which it has to pay twice (ie the very situation which the House of Lords sought to avoid in Société Eram). The court in Koehler observed that it was not necessary that it should have jurisdiction over the judgment debtor; it was enough that it had personal jurisdiction over the garnishee.35 It might be argued that this decision would essentially subvert the doctrine by which separate branches of banks are effectively treated as separate entities36 although a number of subsequent decisions hold that Koehler was not dependent on that rule, and did not seek to abrogate it. In particular, it has legitimately been noted that, ‘[i]n light of the significant policy principles underlying the separate entity rule and its lengthy history in New York courts, it is not unreasonable to expect that, if the New York Court of Appeals had chosen to eliminate it, it would have said so’37 and, in practice, the doctrine continues to be applied. In Ayyash v Koleilat,38 the court held that the ‘separate entity’ doctrine precluded an information subpoena order against the US branch of a foreign bank with respect to information held outside the United States. Further, the continuing validity and application of the ‘separate entity’ doctrine was upheld in Motorola Credit Corporation v Standard Chartered Bank,39 although it is understood that this decision is currently under appeal. In view of the importance of the ‘separate entity’ issue for international banks generally, the point was specifically certified for decision by the New York Court of Appeals in Tire Engineering & Distribution LLC v Bank of China,40 (p. 799) although at the time of writing, it is not clear that this issue will be pursued but the decision in Koehler will clearly require further scrutiny.41

45.18  It should be noted that, given that the policy objective is to avoid a situation in which a bank has a double liability to repay a deposit, the US District Court in CE International Resources Holdings LLC v SA Minerals LP42 held that the ‘separate entity’ doctrine applies only to garnishee orders, and not to a subpoena that is merely designed to extract information about the defendant’s account. In this sense, the court specifically departed from the decision in Ayyash v Koleilat (above), on the basis that it was an unwarranted extension of the doctrine. One can certainly see the logic of the approach in the SA Minerals case. The position of the English courts in relation to information requests is discussed separately in the field of bank confidentiality.43

Special Cases

45.19  It has been emphasized on a number of occasions that the bank’s primary concern is to secure compliance with the order served on it. Nevertheless, it should be alert to a few special considerations:

  1. (a)  Accounts held for foreign governments or their departments, or for foreign central banks, may be immune from execution proceedings.44 The bank will usually have no means of knowing whether this is the case, since it is not party to the underlying dispute and, in any event, the extent of immunity can be varied by contracts which the bank may not have seen.45 The bank may therefore wish to proceed with caution when it receives a third-party debt order in relation to such an account, although in principle it should still receive a good discharge if it makes payment out of an English account in compliance with a final order.46

  2. (b)  The bank must also proceed with care if it believes that the monies held within the account are subject to a trust and thus beneficially owned by third parties, for the bank should not facilitate the mis-application of trust funds.47 However, it seems that the trust arrangement must be one which would be recognized and enforced in England. In one case, it was argued that development aid paid by the European Community to Sierra Leone should not be subject to third-party debt proceedings because the funds had been paid on trust for particular purposes. However, the payment had been made under a treaty which did not create rights capable of enforcement before the English (p. 800) courts. The trust therefore had to be disregarded and the third-party debt order was made in the ordinary way.48

Conclusions

45.20  This chapter has again demonstrated the importance of the situs of bank accounts and deposit obligations, and has highlighted some of the attempts which have been made to attach foreign deposits by serving a third-party debt order on the London branch of the account-holding branch.

45.21  From the perspective of the banking industry, the House of Lords’ decision in Société Eram (above) reaches the entirely satisfactory conclusion that such applications should no longer be entertained. Judgment creditors must thus have recourse to enforcement proceedings in the country in which the relevant account-holding branch is situate.

Footnotes:

1  See the discussion in Chapter 41 above. Certain aspects of foreign governmental action and the obligations of an English bank and its customer are also considered in Chapter 48 below.

2  For another discussion of this subject, see Paget, ch 31.

3  See, for example, Chapter 44 above.

4  This should be contrasted with the position discussed in Chapter 44 above. A freezing injunction is granted in anticipation of a judgment, whilst a third-party debt order is granted post-judgment and in aid of its execution.

5  It may be noted that the expression ‘third party debt order’ is derived from CPR, Pt 72. The order was formerly known as a ‘garnishee order’. It seems that Pt 72 was not intended to make any substantive changes to the procedure (although see nn 8 and 9 below). As a result, reference to the older case law still remains pertinent.

6  As is the case with many remedies by way of execution, the court has a discretion (and not an obligation) to grant a third-party debt order: CPR, r 72.8.3.

7  Formerly known as a ‘garnishee order nisi’. An interim order will be made without a hearing. It is designed to prevent dissipation of the deposit until a full hearing can take place.

8  A garnishee order operated by way of attachment and thus had proprietary consequences, whilst an interim third-party debt order operates as an injunction and, hence, in personam. The replacement of the former equitable charge with a personal remedy has not escaped criticism: see the judgment of Lord Millett in Société Eram Shipping Co Ltd v Compagnie Internationale de Navigation [2003] 3 All ER 465 (HL).

9  See Choice Investments Ltd v Jeromnimon [1981] QB 149 and CPR, r 72.4. A bank which pays the customer under such circumstances runs the risk of having to pay the judgment creditor as well: Crantrave Ltd v Lloyds Bank plc [2000] QB 917, where the bank mistakenly released funds to the judgment creditor against receipt of an interim third-party debt order, when it should merely have blocked the account and awaited the final order. However, given that a third-party debt order now operates as an injunction and does not create an equitable charge, it may be that this decision should be reconsidered in the light of the House of Lords decision in Customs & Excise Commissioners v Barclays Bank plc [2006] 4 All ER 256. That decision is considered at para 44.35 above.

10  CPR, r 72.6. This may be contrasted with the bank’s position in relation to a freezing injunction (see para 44.17 above), where the bank must search for accounts but, in the absence of any further order, its duty of confidentiality continues to apply in relation to the state of the account.

11  The order may not be made final if, for example, the judgment creditor would thereby obtain an unfair advantage over other creditors: Rainbow v Moorgate Properties Ltd [1975] 2 All ER 821; Pritchard v Westminster Bank [1969] 1 All ER 999. The bank will not, however, be concerned with such matters since it will not usually be a party to the proceedings. It will merely be concerned to comply with the terms of the order served upon it.

12  Note that a final third-party debt order creates a payment obligation which is enforceable against the bank itself. This was not always the case: see the discussion in Paget, para 31.4.

13  CPR, r 72.9. In deciding whether the debt is capable of attachment, conditions requiring a period of notice of withdrawal or a personal request by the account holder are to be disregarded: s 40 of the Senior Courts Act 1983.

14  This appears to be the effect of Hutt v Shaw (1887) 3 TLR 354, noted by Paget, para 31.11. Note, however, that (i) the right of set-off will not apply to customer liabilities incurred after the date on which the bank is served with the order (Tapp v Jones (1875) LR 10 QB 591) and (ii) any right of set-off which the bank proposes to assert must be notified to the court within seven days after the receipt of the order: CPR, r 72.6.2. See also Paget, para 31.19.

15  See Re General Horticultural Co ex p Whitehouse (1886) 32 Ch D 512.

16  See, for example, Webb v Stanton (1883) 11 QBD 518; Re Greenwood [1901] 1 Ch 887.

17  Holt v Heatherfield Trust Ltd [1942] 2 KB 1; Rekstin v Severo Sibirsko Gosudarstvennoe Akcionare Obschestro [1933] 1 KB 47; ED&F Man (Coffee) Ltd v Miyazaki SA [1991] 1 Lloyd’s Rep 154.

18  CPR, r 72.1 (emphasis added).

19  These general principles of private international law have already been considered in Chapter 41 above. In the light of these principles, the creditor may have to commence proceedings for the recognition or registration of his judgment in the foreign country in which the account is held.

20  [1906] 2 KB 26 (CA). For other examples, see SCF Finance Co Ltd v Masri (No 3) [1987] QB 1028; Interpool Ltd v Galani [1988] QB 738; Deutsche Schachtbau- und Tiefbohr GmbH R’As al-Khaimah National Oil Co [1990] 1 AC 295.

21  This remains the position under the terms of Rome I: see Art 1(3).

22  This is a rather brief explanation which is perhaps sufficient for present purposes, but a full explanation of the history, nature, and effect of such orders is given in the judgment of Lord Bingham in the Société Eram case, n 8 above. It is, however, clear that a third-party debt order is intended to constitute a form of enforcement against the debt itself in the place in which it is situate (ie in rem), rather than against the third-party debtor personally in the country in which he may happen to be found (in personam), with the result that one is concerned with the situs of the third-party debt, rather than the law applicable to it: see the Kuwait Oil Tanker decision (below).

23  This point has already been noted above.

24  The decision was in part motivated by consistency and reciprocity, for the Court of Appeal noted that: ‘If we consider the converse case it is clear, to my mind, that we should take that view of a similar transaction occurring abroad…’ (per Vaughan Williams LJ at 29).

25  [1927] P 228.

26  A third-party debt order can only apply to a debt and, clearly, this point will not usually be disputed in relation to a bank account. It has often been said that the debt must be recoverable by English proceedings, but it seems that this should not be regarded as an ‘infallible test’, see CPR, r 72.2.1.

27  [2003] 3 All ER 465 (HL). On the point just made in the text, see paras 104–106 of the judgment.

28  As noted above, nearly all remedies by way of execution are at the discretion of the court.

29  Earlier cases suggested that the discretion did exist in relation to foreign debts, but that it would hardly ever be exercised; it would be inequitable to do so because of the obvious prejudice to the third-party debtor. It was, nevertheless, held to be incumbent on the bank to demonstrate that it was likely to be obliged to pay under the relevant foreign law and was thus exposed to ‘double jeopardy’: Swiss Bank Corporation v Boehmische Industrial Bank [1923] 1 KB 673. In the light of the decision in Société Eram (n 8 above), it is doubtful whether the bank should now be put to proof on such matters.

30  See, for example, the decisions of the Federal Court of Australia in Suzlan Energy Ltd v Bongad [2011] FCA 1152 and Hua Wang Bank Bhd v Commissioner of Taxation [2013] FCAFC 28.

31  [2003] 3 All ER 501 (HL).

32  In addition, however, the House of Lords held that the Swiss courts had exclusive jurisdiction under Art 16(5) of the Lugano Convention.

33  12 NY 3d 533. The dissenting judgment in that case includes a useful discussion on jurisdictional and policy issues. For an analysis, see David D Siegel, ‘Koehler: Creating Mecca for Creditors or anti-Mecca for Garnishees?’ (2009) 242 NYLJ 4.

34  Morgenthau v Avion Resources Ltd 49 AD 3d 50, modified on other grounds, 11 NY 3d 382 (2008).

35  See also McCarthy v Wachovia Bank NA 759 F Supp 2d 265 (EDNY, 2011).

36  See the discussion at para 43.32 above.

37  Shaheen Sports Inc v Asia Insurance Co Ltd 2012 WL 919664 (SDNY, 2012).

38  New York Appellate Division, First Department (11 March 2014), affirming 957 NYS 2d 574.

39  Nos 13-1519-CV.

40  2nd Cir, March 2014. Tire Engineering concerns an attempt to garnishee a foreign bank account (as opposed to an information subpoena).

41  The ‘separate entity’ doctrine may have received some recent reinforcement as a result of the decisions of the Second Circuit Court of Appeals in the Tiffany and Gucci cases discussed at para 43.33 above.

42  12-CV-08087 (SDNY, 11 June 2013).

43  See the discussion at paras 43.26–43.33 above.

44  On the whole subject, see Fox, The Law of State Immunity (Oxford University Press, 2004) ch 9. For a case dealing with the immunity of foreign embassy accounts, see Alcom Ltd v Republic of Colombia [1984] AC 580 (HL). In the absence of written agreement to the contrary, accounts held by central banks will be immune from execution proceedings irrespective of the intended use of the funds: AIC Ltd v Federal Republic of Nigeria [2003] EWHC 1357; AIG Capital Partners Inc v Republic of Kazakhstan [2006] 1 All ER (Comm) 1; Thai-Lao Lignite (Thailand) Co Ltd v Government of Lao People’s Democratic Republic [2013] 2 All ER (Comm) 883; [2013] EWHC 2466 (Comm), discussed at para 44.54 above.

45  See ss 13 and 14 of the State Immunity Act 1976.

46  It is for the defendant, rather than the bank, to raise questions of sovereign immunity.

47  An application to court on the part of the bank would usually be necessary in such a case.

48  Philipp Bros v Republic of Sierra Leone [1995] 1 Lloyd’s Rep 289 (CA).