A bank had to make inquiries if there were a serious possibility of a third party having a proprietary right to funds deposited with it if it was to establish that, when it had received the funds, it was a bona fide purchaser for value without notice.

The Privy Council so held in dismissing an appeal by the defendant, Crédit Agricole Corporation and Investment Bank, against the decision of the Court of Appeal of Gibraltar (Sir Paul Kennedy P, Aldous and Potter JJA) on 31 October 2013 to overturn the dismissal by Dudley CJ in the Supreme Court of Gibraltar on 22 February 2013 of a claim by Despina Papadimitriou, in her capacity as heir to the estate of Irene Michailidis, for payment of $US10.3m on the ground that the bank had constructive knowledge that that amount was held by it on trust for her predecessors.

LORD CLARKE OF STONE-CUM-EBONY JSC , giving the judgment of the Board, said that the claim was based upon a proprietary right to the proceeds of sale of a collection of art deco furniture, belonging to Irene Michailidis. It was common ground that the bank was in possession of the proceeds of sale which the claimant could trace into the hands of the bank, and that her claim would succeed unless the bank could show that it was a bona fide purchaser without notice of the proceeds of sale which had been deposited with its branch in Gibraltar. The collection had been was sold by Mr Robin Symes for US$15m. Sums of US$4m and US$10.4m had been paid to two Panamanian companies. Of the US$10.4m, the sum of US$10.3m had been paid into an account at the bank through a Liechstenstein foundation. The moneys had been deposited in the Gibraltar branch of the bank and credited to the account of a British Virgin Islands company which had been incorporated at the request of Mr Symes. With the deposit in Gibraltar serving as a guarantee, the bank’s London branch had given another Symes company a facility for US$10.3m, which had been drawn down and thereafter repaid in full from the guarantee deposit held in Gibraltar. The balance had been disbursed elsewhere for Mr Symes’s purposes. All those transactions had been part of a fraudulent scheme devised by Mr Symes.

The issue was whether the bank had established that when it received the relevant moneys it was a bona fide purchaser for value without notice. The parties accepted that the relevant test was that stated by Lord Neuberger of Abbotsbury MR in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2012] Ch 453 (in which he quoted Lord Browne-Wilkinson in Barclays Bank plc v O’Brien [1994] 1 AC 180, 195–196 and Millett J in Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1995] 1 WLR 978, 1014. The approaches of Lord Browne-Wilkinson and Millett J did not seem to the Board to be entirely consistent. It was important to distinguish between three different circumstances. The first was where the bank in fact appreciated that a proprietary right in the property probably existed, so that the bank had actual notice of the right. That was not the present case. The second was where a reasonable person with the attributes of the bank should have appreciated based on facts already available to it that the right probably existed, in which case the bank had constructive notice of the existence of the right. The third was where the bank should have made inquiries or sought advice which would have revealed the probable existence of such a right. Here too, the bank would have constructive notice of the right. The question was in what circumstances and to what extent it could properly be said that the bank should have made inquiries or sought advice. The cases suggested various possible approaches. In the Board’s view, on the one hand, the bank’s knowledge of facts indicating the mere possibility of a third party having a proprietary right would not be enough to put the bank on inquiry but, on the other hand, it was not necessary for the bank to conclude that it probably had such a right. The test was somewhere in between. It could be formulated thus: the bank had to make inquiries if there were a serious possibility of a third party having such a right or, put in another way, if the facts known to the bank would give a reasonable banker in the position of the particular banker serious cause to question the propriety of the transaction. In the present case, the Court of Appeal had said that: “The judge should have concluded that the bank should have inquired as to the commercial purpose of the arrangement. If it had done so, it would have realised that such arrangement was improper. That being so, the bank did not establish that it lacked constructive notice of the impropriety of the arrangement and the absence of any right or entitlement on Mr Symes’s part to deal with the fund in question.” The Board agreed with those conclusions. It followed that the appeal had to be dismissed.

LORD SUMPTION JSC gave a concurring judgment.