Equitable set-off - extension of the Bhogal principle


Saudi Arabian Monetary Agency v Dresdner Bank AG [2004] EWCA Civ 1074



In Bhogal v Punjab National Bank [1988] 2 ALL ER 296, the Court of Appeal held that a bank could exercise a right of equitable set-off against a customer account that was in credit when the bank had clear and indisputable evidence that the sums in the account were held beneficially on behalf of a third-party bank debtor.



This rule, which became known as the Bhogal principle, was derived from facts where a customer account holder sought to maintain a claim to beneficial ownership of the sums standing in credit in the account. The issue for the court in this case was whether the Bhogal principle extended to the case where the issue between the bank and the customer was not whether the account holder was the beneficial owner but which of two third parties was the beneficial owner.



The facts of this case are relatively straightforward. The Saudi Arabian Monetary Agency (SAMA) held an account at the Dresdner Bank that was substantially in credit. SAMA instructed the bank to transfer €291,234,041 (£201 million) to its account at Deutsche Bank, Frankfurt. The bank blocked the sum of €49,147,576 (£34 million) and transferred the remaining balance in the account to Deutsche Bank.


The bank claimed the amount that it blocked was equivalent to sums said to be owed to its affiliate, Dresdner Bank Luxembourg (DBL) by the Ministry of Defence and Aviation and the Ministry of Finance and National Economy of the Kingdom of Saudi Arabia (MoDA and MoF respectively). The bank claimed an interest in these sums as a consequence of DBL having assigned the sums owed to it by MoDA and MoF to the bank.


The bank asserted at the time that it blocked the sums in question that SAMA was an arm of MoF and had been used to remit payments due from MoDA and MoF. SAMA claimed that it was legally and functionally independent of and separate from MoDA and MoF. SAMA also claimed that the monies in the account in question were in fact attributable to the General Organisation of Social Insurance (GOSI) and that GOSI was legally and functionally independent of and separate from MoDA and MoF. For the purpose of argument, in the hearing SAMA accepted that MoDA and MoF were emanations of the Saudi Arabian government. However, SAMA denied that the sums in the account, which it managed for the benefit of GOSI, were sums to which the Saudi government were beneficially entitled.


SAMA issued proceedings for summary judgment. The relief claimed included a declaration that the bank was not entitled to block its account and an order that the sum of €49,147,576 be transferred to Deutsche Bank in accordance with SAMA's instructions. The bank defended the application. It argued that it had an entitlement to an equitable set-off. This was based on its assertion that the bank could set off the sums owed to it by the government of Saudi Arabia against the sums that the bank owed to SAMA and that were said to be owned beneficially by the Saudi government. SAMA succeeded at first instance and the bank appealed.


The court held that the critical element in cases where a banker seeks to rely on the equitable right of set-off against its customer is that the relationship is governed by the underlying banking contract to which they and they alone are parties. Therefore, it was plain that the contract could either expressly preclude or identify the circumstances in which a bank could exercise an equitable right of set-off. In the absence of express contractual provision, the common law would determine the ambit of the equitable right of set-off.



Lord Justice Chadwick reviewed the Bhogal case and subsequent cases in which it had been cited and approved. He then stated that the ratio to be derived from the Bhogal case was that a bank was not entitled to refuse payment of money deposited with it on the basis merely of an arguable case that some other debtor of the bank has an equitable interest in the money. Clear and indisputable evidence was required before the right of set-off could be exercised. Furthermore, the Bhogal principle applied 'even in a case (such as the present) where the customer accepted that it was not the beneficial owner of the balance standing to its credit on the account. The relevant question, as between the customer and the bank, is not whether the customer holds the account in its name for its own benefit or as nominee or trustee for another: the relevant question is whether the customer holds the account as nominee or trustee for the bank's debtor'.



Having held that the judge at first instance correctly approached the application for summary judgment by applying the Bhogal principle, the remaining issue for the Court of Appeal was whether there was clear and indisputable evidence that SAMA held the money in its account as trustee or nominee for the Saudi government. If such evidence existed, the equitable right of set-off would be allowed. On the facts of the case, the court held that there was no clear and indisputable evidence to this effect and the appeal was dismissed.



The decision in this case held that the Bhogal principle applies to any dispute as to whether a bank customer holds an account as nominee or trustee of a bank debtor. That decision is clearly one that gives less protection for banks and weakens the efficacy of the equitable right of set-off.



In the usual course of events, it is probable that a bank will not have clear and indisputable evidence of the identity of the beneficial owner of sums standing in credit on an account. Therefore, banks will be left to take less summary forms of action to recover debts. As a consequence it may be that banks will further consider the incorporation of express terms in their banking contracts. Those terms will give them the right to exercise set-off in circumstances where the evidential burden is not so high, such as where a banker has reasonable grounds for a belief that monies held in an account were held beneficially by a bank debtor.



By Simon Sugar, barrister, 36 Bedford Row, London