The Nature Of Credits And Debits That Apply When Operating A Bank Account

Executive Summary

On 3 August 2015, the Privy Council has helpfully explained the nature of the credits and debits that apply when operating a bank account.

The Privy Council has also confirmed that backward tracing is possible where there are sufficient links between payments that give rise to a constructive trust and the receipt of such funds, even where the payments out of a bank account were made before the bank account had received the funds to which the claimant is entitled.

This is an exception to or an extension of the general rule that the claimant to a tracing claim must be able to identify the money of the purchasers at every stage of the process.

The reason is that "a court should not allow a camouflage of inter-connected transactions to obscure its true vision of the overall purpose and effect. ... ... ... It should not matter if the steps are part of a co-ordinated scheme if a debt appears in a bank account of an intermediary before a reciprocal credit entry". In re Diplock [1948] Ch 465 at 521.

Comment:

This judgment is about substance and not form or technical arguments. It is rather an extension of the general rule of tracing rather than an exception to it. Where the facts permit, the reality of the position is that the actual date order of credits and debits is not material. In such a case, they are part of the same overall transaction. In that sense, is it really backward tracing at all or perhaps merely a convenient label to apply to the principle.

It is considered that substance should, in this area, properly trump technical formality.

The judgment also provides an analytical statement on the nature of a deposit and the consequences of credits and debits.

The Detail

On 3 August 2015 the Privy Council on appeal from the Court of Appeal of Jersey gave judgment confirming that backward tracing is possible in certain circumstances, including in the circumstances of this case.

The facts of the case were that the Plaintiff had successfully claimed that two BVI companies were liable as constructive trustees of US$10,500,055 representing bribes that had been received by a former mayor of Sao Paulo.

It was countered that the liability only amounted to US$7.5m on two alternative grounds:

Firstly, that three payments had come in after other payments out and so could not be the subject of tracing and in any case that there was no basis for backwards tracing.

Secondly, that as the account was a mixed account with other money and...