The doctrine of conceptual impossibility doctrine was first propounded by Millett J. in In re Charge Card Services Ltd. [1987] Ch. 150 and affirmed, after more extensive discussion, by the Court of Appeal in this case. It has excited a good deal of heat and controversy in banking circles; the Legal Risk Review Committee, set up in 1991 by the Bank of England to identify areas of obscurity and uncertainty in the law affecting financial markets and propose solutions, said that a very large number of submissions from interested parties expressed disquiet about this ruling. It seems clear that documents purporting to create such charges have been used by banks for many years. The point does not previously appear to have been expressly addressed by any court in this country. Supporters of the doctrine rely on the judgments of Buckley L.J. (in the Court of Appeal) and Viscount Dilhorne and Lord Cross (in the House of Lords) in Halesowen Presswork & Assemblies Ltd. v. National Westminster Ltd. [1971] 1 Q.B. 1; [1972] A.C. 785. The passages in question certainly say that it is a misuse of language to speak of a bank having a lien over its own indebtedness to a customer. But I think that these observations were directed to the use of the word "lien", which is a right to retain possession, rather than to the question of whether the bank could have any kind of proprietary interest. Opponents of the doctrine rely upon some nineteenth-century cases, of which it can at least be said that the possibility of a charge over a debt owed by the chargee caused no judicial surprise.

    The reason given by the Court of Appeal [1996] Ch. 245, 258 was that "a man cannot have a proprietary interest in a debt or other obligation which he owes another." In order to test this proposition, I think one needs to identify the normal characteristics of an equitable charge and then ask to what extent they would be inconsistent with a situation in which the property charged consisted of a debt owed by the beneficiary of the charge. There are several well-known descriptions of an equitable charge (see, for example, that of Atkin L.J. in National Provincial and Union Bank of England v. Charnley [1924] 1 K.B. 431, 449-450) but none of them purports to be exhaustive. Nor do I intend to provide one. An equitable charge is a species of charge, which is a proprietary interest granted by way of security. Proprietary interests confer rights in rem which, subject to questions of registration and the equitable doctrine of purchaser for value without notice, will be binding upon third parties and unaffected by the insolvency of the owner of the property charged. A proprietary interest provided by way of security entitles the holder to resort to the property only for the purpose of satisfying some liability due to him (whether from the person providing the security or a third party) and, whatever the form of the transaction, the owner of the property retains an equity of redemption to have the property restored to him when the liability has been discharged. The method by which the holder of the security will resort to the property will ordinarily involve its sale or, more rarely, the extinction of the equity of redemption by foreclosure. A charge is a security interest created without any transfer of title or possession to the beneficiary. An equitable charge can be created by an informal transaction for value (legal charges may require a deed or registration or both) and over any kind of property (equitable as well as legal) but is subject to the doctrine of purchaser for value without notice applicable to all equitable interests.

    The depositor's right to claim payment of his deposit is a chose in action which the law has always recognised as property. There is no dispute that a charge over such a chose in action can validly be granted to a third party. In which respects would the fact that the beneficiary of the charge was the debtor himself be inconsistent with the transaction having some or all of the various features which I have enumerated? The method by which the property would be realised would differ slightly: instead of the beneficiary of the charge having to claim payment from the debtor, the realisation would take the form of a book entry. In no other respect, as it seems to me, would the transaction have any consequences different from those which would attach to a charge given to a third party. It would be a proprietary interest in the sense that, subject to questions of registration and purchaser for value without notice, it would be binding upon assignees and a liquidator or trustee in bankruptcy. The depositor would retain an equity of redemption and all the rights which that implies. There would be no merger of interests because the depositor would retain title to the deposit subject only to the bank's charge. The creation of the charge would be consensual and not require any formal assignment or vesting of title in the bank. If all these features can exist despite the fact that the beneficiary of the charge is the debtor, I cannot see why it cannot properly be said that the debtor has a proprietary interest by way of charge over the debt.

    The Court of Appeal said that the bank could obtain effective security in other ways. If the deposit was made by the principal debtor, it could rely upon contractual rights of set-off or combining accounts or rules of bankruptcy set-off under provisions such as rule 4.90. If the deposit was made by a third party, it could enter into contractual arrangements such as the limitation on the right to withdraw the deposit in this case, thereby making the deposit a "flawed asset." All this is true. It may well be that the security provided in these ways will in most cases be just as good as that provided by a proprietary interest. But that seems to me no reason for preventing banks and their customers from creating charges over deposits if, for reasons of their own, they want to do so. The submissions to the Legal Risk Review Committee made it clear that they do.

    If such charges are granted by companies over their "book debts" they will be registrable under section 395 and 396(1)(e) of the Companies Act 1985. There is a suggestion in the judgment of the Court of Appeal that the banking community has been insufficiently grateful for being spared the necessity of registering such charges. In my view, this is a matter on which banks are entitled to make up their own minds and take their own advice on whether the deposit charged is a "book debt" or not. I express no view on the point, but the judgment of my noble and learned friend Lord Hutton in Northern Bank Ltd. v. Ross [1990] BCC 883 suggests that, in the case of deposits with banks, an obligation to register is unlikely to arise.

    Since the decision in In re Charge Card Services Ltd. [1987] Ch. 150 statutes have been passed in several offshore banking jurisdictions to reverse its effect. A typical example is section 15A of the Hong Kong Law Amendment and Reform (Consolidation) Ordinance Cap. 23, which I have already mentioned. It reads:

 "For the avoidance of doubt, it is hereby declared that a person ("the first person") is able to create, and always has been able to create, in favour of another person ("the second person") a legal or equitable charge or mortgage over all or any of the first person's interest in a chose in action enforceable by the first person against the second person, and any charge or mortgage so created shall operate neither to merge the interest thereby created with, nor to extinguish or release, that chose in action."

    There is similar legislation in Singapore (section 9A of the Civil Law Act, Cap. 43); Bermuda (the Charge and Security (Special Provisions) Act 1990 and the Cayman Islands (the Property (Miscellaneous Provisions) Law 1994. The striking feature about all these provisions is that none of them amend or repeal any rule of common law which would be inconsistent with the existence of a charge over a debt owed by the chargee. They simply say that such a charge can be granted. If the trick can be done as easily as this, it is hard to see where the conceptual impossibility is to be found.

    In a case in which there is no threat to the consistency of the law or objection of public policy, I think that the courts should be very slow to declare a practice of the commercial community to be conceptually impossible. Rules of law must obviously be consistent and not self-contradictory; thus in Rye v. Rye [1962] A.C. 496, 505, Viscount Simonds demonstrated that the notion of a person granting a lease to himself was inconsistent with every feature of a lease, both as a contract and as an estate in land. But the law is fashioned to suit the practicalities of life and legal concepts like "proprietary interest" and "charge" are no more than labels given to clusters of related and self-consistent rules of law. Such concepts do not have a life of their own from which the rules are inexorably derived. It follows that in my view the letter was effective to do what it purported to do, namely to create a charge over the deposit in favour of B.C.C.I. This means that the foundation for Mr. McDonnell's argument for implying a personal obligation disappears.

7. "Due . . . in respect of . . . mutual dealings"

    In the alternative, Mr. McDonnell submitted that even if the depositor was under no personal obligation to pay, being liable to have the deposit applied in discharge of the principal's debt was for the purpose of rule 4.90 just as good. Indeed, from B.C.C.I.'s point of view, it was even better, since the bank was relieved from having to enforce the obligation and could repay itself by entries in its own books. Therefore the amount of the deposit should be treated as "due" to B.C.C.I. for the purposes of rule 4.90 (2). It is clear that for the purposes of the rule, the claim by the creditor against the insolvent company must be a provable debt. It speaks of a "creditor of the company proving or claiming to prove for a debt in the liquidation." It has long been held that this does not mean that the creditor must actually have lodged a proof (Mersey Steel and Iron Co. v. Naylor, Benzon & Co. (1882) 9 Q.B.D. 648) but the debt must be one which would have been provable if he had. The Court of Appeal held that the same was true of the claim by the company against the creditor: the debt must be one which would have been provable against Mr. Jessa if he had been bankrupt. I am not sure that this is right and, as Mr. McDonnell pointed out, the contrary was decided by the High Court of Australia in Gye v. McIntyre (1991) 171 C.L.R. 609, a case which does not appear to have been cited to the Court of Appeal. In England, the extension of the definition of a provable debt by the Insolvency Rules 1986 probably means that the point is unlikely to arise in practice. It is not however necessary to decide it because in my view rule 4.90 requires at least the existence of a right to make a pecuniary demand: see The Eberle's Hotels and Restaurant Co. Ltd. v. E. Jonas & Brothers (1887) 18 Q.B.D. 459 and Dixon J. in Hiley v. Peoples Prudential Assurance Co. Ltd. (1938) 60 C.L.R. 468, 497. A right to appropriate property under one's control or to be discharged from a liability is not the same thing as a right to make a pecuniary demand upon the other party to mutual dealings. If there is any anomaly, it is that which I have discussed in connection with M.S. Fashions and consists in the fact that there is a set-off when the depositor has undertaken personal liability. There is no anomaly in there being no set-off when he has not.

8. Payment by the surety

    Next the appellants say that the depositor, as surety, is entitled to pay off the debt himself and then claim indemnity from the principal debtor. This proposition is not disputed. But then the appellants say that the mode of payment they propose to employ is to appropriate their deposits for the purpose. In my view this cannot be done. For the reasons which I have already stated, there was no set-off between depositor and B.C.C.I. at the bankruptcy date. Accordingly, all that the depositor can do is to prove in the liquidation. It cannot manufacture a set-off by directing that the deposit be applied to discharge someone else's debt, even though it may, as between itself and the debtor, have a right to do so. This is the very type of arrangement which the House declared ineffective in British Eagle International Airlines Ltd. v. Compagnie Nationale Air France [1975] 1 W.L.R. 758.

9.  Right of indemnity 

    Mr. McDonnell next advanced an elaborate argument which he said produced a debt owing from B.C.C.I. to Rayners which could be set off against its liability under rule 4.90. It proceeded as follows. First, Rayners' request to Mr. Jessa to charge his deposits to secure its liability to B.C.C.I. gave rise to an implied promise to indemnify him against any loss which he might suffer thereby: see Ex parte Ford; In re Chappell (1885) 16 Q.B.D. 305 and In re A Debtor (No. 627 of 1936) [1937] Ch. 156. Secondly, the bankruptcy of B.C.C.I. resulted in Mr. Jessa suffering loss as a result of making the deposit for which he had a claim against Rayners. Thirdly, Rayners has a claim against B.C.C.I. to be idemnified against Mr. Jessa's claim because its obligation to pay Mr. Jessa was a result of the breach by B.C.C.I. of its obligation as a mortgagee to take proper care of the security and restore it unimpaired. B.C.C.I.'s bankruptcy converted the security from a claim to the deposit to a mere right to prove in the liquidation, with a fraction of the value of the original deposit. Fourthly, because Mr. Jessa's claim arises out of the implied promise given when the deposit was made, Rayners' claim against B.C.C.I. derives from a right which existed before the bankruptcy date and can be set off under rule 4.90.

    The first stage in the argument is indisputable. I make no comment on the second; Mr Crystal, for the liquidators, said that a principal debtor who requested a surety to charge a deposit as security for his debt did not warrant the solvency of the institution with which the deposit was made. I will, however, assume in favour of the appellants that Mr. Jessa would have been entitled, as against Rayners, to be indemnified for his loss. It is at the third stage that the argument breaks down. B.C.C.I.'s charge was not over the money which Mr Jessa deposited. That became the property of B.C.C.I.: see Foley v. Hill (1848) 2 H.L.Cas. 28. The charge was over Mr. Jessa's chose in action, the debt owed to him by B.C.C.I.. The insolvency involved no breach of duty by B.C.C.I. in its capacity as chargee and did not change the nature of the debt which it owed. The reason why Mr. Jessa lost his money was because the debt became subject to the statutory scheme of payment by pari passu distribution of the assets of B.C.C.I. But this had no connection with the fact that he had given a charge. Rayners therefore had no claim against B.C.C.I. which it could set off against its indebtedness.

    The appellants said that to regard the giving of security as merely the creation of a charge over an existing debt was too narrow a view. The depositing of the money was an integral part of the creation of the security. Mr. Carr, for the Solai Group, pointed out that S.G.G.S. had made the deposit purely for the purpose of providing security; as I mentioned in part 2, above, the letter of lien/charge was actually executed before the money was deposited. The deposit was not an asset already in existence; it was new money provided as security. Mr. McDonnell said that he was in a similar position because although Mr. Jessa had made the deposits earlier, he had been advised by B.C.C.I. to use them as security when he would otherwise have withdrawn them. But however one describes what was done to create the security, the fact is that the charge was over the debt and not over the money. The choses in action belonged to Mr. Jessa and S.G.G.S.; the money belonged to the bank. The appellants may have been badly advised to create an asset for the purpose of giving a charge by depositing money with B.C.C.I., but they are not making a claim on the grounds of bad advice. There would be no point in doing so because it would not put them in a better position in the liquidation.

10. Duty to restore the security

    The appellants' next argument suffers from much the same defect as the last one. They say that B.C.C.I. is not entitled to judgment against the debtor companies unless it is able to restore the security which has been provided. The principle is undisputed, having been affirmed by this House in Ellis & Co's Trustee v. Dixon-Johnson [1925] A.C. 489, although Mr. Crystal for B.C.C.I. said that it was limited to restoration of security given by the debtor and did not apply to third parties. There seems to be no authority on this point but I am content to assume in favour of the appellants that it applies equally to security provided by a third party. Nevertheless, B.C.C.I. is in a position to restore the security simply by releasing the charge over the deposit. The fact that it cannot restore the money in full is not relevant; the charge was not over the money and the winding up affects only B.C.C.I.'s role as a debtor, not its role as a chargee. In fact, in the case of an equitable charge, there is no formal act of release required. The charge simply ceases to exist when the debt it secured has been repaid.

11. Marshalling

    Finally the appellants rely upon the equitable doctrine of marshalling. This is a principle for doing equity between two or more creditors, each of whom are owed debts by the same debtor, but one of whom can enforce his claim against more than one security or fund and the other can resort to only one. It gives the latter an equity to require that the first creditor satisfy himself (or be treated as having satisfied himself) so far as possible out of the security or fund to which the latter has no claim. I am at a loss to understand how this principle can have any application in the present case. There is only one debt and that is owed to B.C.C.I. by the principal borrower. B.C.C.I. has security to which it can resort as it chooses: see the citation from China and South Sea Bank Ltd. v. Tan Soon Gin [1990] 1 A.C. 536 in part 4, above. There is no basis upon which the depositors can assert an equity to require B.C.C.I. to proceed against their deposits before claiming against the principal debtors.

    For these reasons I would dismiss both appeals.

LORD HOPE OF CRAIGHEAD

My Lords,

    I have had the benefit of reading in draft the speech which has been prepared by my noble and learned friend, Lord Hoffmann. I agree with it, and for the reasons which he has given I also would dismiss these appeals.

LORD HUTTON

My Lords,

    I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Hoffmann. For the reasons he gives I, too, would dismiss these appeals.