The High Court held that since the security agreements did not impose personal liability on the third parties for the loans, the companies had no right to set-off under rule 4.90.
In the Court of Appeal[2] Millet LJ gave the leading judgment and said ‘a man cannot have a proprietary interest in a debt or other obligation which he owes another.’ The charges were conceptually impossible.
Yet they were nevertheless good security by reason of the contractual provision limiting the right to repayment and that there were no grounds for holding that they were ineffective unless construed as imposing personal liability.
[3] The doctrine of conceptual impossibility was first propounded by Millett J. in In re Charge Card Services Ltd [1987] Ch 150, 175-176 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.
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.
There are several well-known descriptions of an equitable charge (see, for example, that of Atkin LJ in National Provincial and Union Bank of England v Charnley [1924] 1 KB 431, 449-450) but none of them purports to be exhaustive.
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.
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.
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.
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.
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.
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.