Court Of Appeal Confirms That Correspondent Banking Obligations Are Personal, Not Proprietary

First City Monument Bank plc v. Zumax Nigeria Limited [2019] EWCA Civ 294

The England and Wales Court of Appeal has handed down a judgment which clarifies the circumstances in which a Quistclose trust, or any trust, may (or may not) arise, in the context of a series of correspondent banking transactions. In short, correspondent banking transactions will not generally give rise to any trust, and the correspondent bank's obligation to effect the onward payment to the beneficiary bank is personal rather than proprietary in nature. The decision will be welcomed by banks, as it clears up some confusion following the decision at first instance.

Quistclose trusts

Where A lends B money for the sole purpose of discharging B's debt owed to C, a Quistclose trust (so named after the House of Lords decision in Barclays bank Ltd v. Quistclose Investments Ltd [1970] AC 567) may be deemed to arise in the event that B applies the money for a different purpose. In such circumstances, B may not use the funds save for the stated purpose, and at no point "owns" that money but holds them on trust for A if B misapplies the funds for another purpose. The conventional trusts analysis is that a Quistclose trust is a resulting trust in favour of A, coupled with a power granted to B to apply the funds for a stated purpose; if the funds are used for another purpose, the resulting trust is no longer subject to the power and so the funds result back to A. Quistclose trusts are asserted most commonly in insolvency-type contexts, as they enable A as the beneficiary to assert a proprietary (and not merely personal) right over the sums previously advanced to B, which would effectively ringfence those sums to be returned to A in priority over B's unsecured creditors.

Correspondent banking

Correspondent banking involves a financial institution (the correspondent bank) facilitating transactions as an intermediary on behalf of another financial institution (the originating bank), usually because the originating bank does not have an established relationship with the financial institution where the transaction is destined (the beneficiary bank), or does not have a presence in that jurisdiction.

(Simplified) Background

Zumax Nigeria Limited ("Zumax"), a provider of engineering services to oil companies, held accounts with IMB International Bank plc ("IMB"), which later became First City Monument Bank plc (" FCMB ").

Zumax's invoices to its customers were in US dollars and included...