Swiss Bank Corporation v Lloyds Bank Ltd

[HOUSE OF LORDS]

AND

Contract - Implied term - Loan agreement - Foreign currency borrowed to purchase foreign securities - Covenant by borrower to observe conditions of Bank of England permission - Condition requiring repayment of loan out of purchased securities - Whether implied obligation on borrower to do so Whether lender having equitable charge over securities

Exchange Control - Foreign securities - Transfer - Scrip deposited with authorised depository pursuant to Bank of England permission - Removal to second authorised depositary without permission - Equitable charge over securities granted to second depositary - Whether "change of beneficial ownership" - Whether securities in "custody" of second depositary at time of charge - Whether charge valid - Bank of England Exchange Control Notice E.C. 7, paras. 87, 88 - Exchange Control Act 1947 (10 & 11 Geo. 6, c. 14), s. 17 (2)

The plaintiff bank agreed to lend a sum in Swiss francs to I.F.T., the third defendants, to enable them to acquire shares and loan stock of F.I.B.I., a new Israeli bank. Under the loan agreement I.F.T. covenanted to observe all the conditions attached to the Bank of England consent which had been obtained for the loan under the Exchange Control Act 1947. The conditions were, inter alia, that on acquisition the F.I.B.I. securities should be held in a separate account; that repayment of the loan was to be made from the sale proceeds of the F.I.B.I. securities; and that the scrip of the F.I.B.I. securities was to be held by an authorised depositary. Swiss francs advanced pursuant to the loan agreement were invested by I.F.T. in F.I.B.I. securities which were then deposited with the fourth defendants, Triumph, an authorised depositary, of which I.F.T. was a sub-subsidiary. The following year I.F.T. granted an equitable charge over the F.I.B.I. securities to the first defendants, Lloyds, the scrip having already been transferred by Triumph to Lloyds, also an authorised depositary, without specific Bank of England permission. The plaintiff bank brought an action claiming, inter alia, declarations that it was entitled to be considered an equitable chargee of the F.I.B.I. securities or the proceeds thereof for the purpose of securing repayment of the loan in accordance with the loan agreement and the Bank of England conditions and that the charge in favour of Lloyds was void. Browne-Wilkinson J. held that the loan agreement constituted an equitable charge over the F.I.B.I. securities in favour of the plaintiff bank; and that the

charge to Lloyds was illegal and void for failure to comply with section 17 (2) of the Exchange Control Act 1947, ¹ no express Bank of England consent to the charge having been obtained and the general consent given by paragraph 87 of Bank of England Exchange Control Notice E.C. 7 ² being inapplicable by virtue of paragraph 88 thereof. On appeals by Lloyds and I.F.T., the Court of Appeal allowed the appeals.

On appeal by the plaintiff bank:-

Held, dismissing the appeal, (1) that there was nothing in the documents to suggest that there was any agreement with the plaintiff bank on the part of I.F.T. to repay the loan out of the F.I.B.I. securities and that accordingly, the plaintiff bank's claim to any charge over or proprietary interest in the F.I.B.I. securities or the proceeds of their sale failed (post, pp. 613E, 614C, 616A-B, C-F).

(2) That the granting of an equitable charge over a foreign currency security, though a "transfer" within the meaning of paragraph 87 of Bank of England Exchange Control Notice E.C. 7, did not involve "a change of beneficial ownership" within the meaning of paragraph 88 (a) of the notice (post, pp. 615C-D, G, 616C-F); that "the custody" of a foreign currency security in paragraphs (b) and (c) of the notice related to physical possession or control of the scrip and, as at the date of the charge in favour of Lloyds the F.I.B.I. scrip was in the physical possession of Lloyds, the charge was a transfer to an authorised depositary in whose custody the securities then were (post, p. 616A-B, C-F); and, therefore, that the charge over the F.I.B.I. securities in favour of Lloyds was not excluded by paragraph 88 from the permission for transfers of foreign currency securities given by paragraph 87 of the notice and was, accordingly, valid (post, p. 616C, C-F).

Decision of the Court of Appeal (post, p. 590F); [1980] 3 W.L.R 457 affirmed.

The following case is referred to in the opinion of Lord Wilberforce:

Palmer v. Carey [1926] A.C. 703, P.C.

The following additional cases were cited in argument in the House of Lords:

Bond Worth Ltd., In re [1980] Ch. 228; [1979] 3 W.L.R. 629; [1979] 3 All E.R. 919.

Bowmakers Ltd. v. Barnet Instruments Ltd. [1945] K.B. 65; [1944] 2 All E.R. 579, C.A.

English Sewing Cotton Co. Ltd. v. Inland Revenue Commissioners [1947] 1 All E.R. 679, C.A.

Gillott's Settlement, In re [1934] Ch. 97.

1 Exchange Control Act 1947, s. 17 (2): "Except with the permission of the Treasury, no person shall, in the United Kingdom, and no person resident in the United Kingdom, shall, outside the United Kingdom, transfer, or do anything which affects his rights or powers in relation to, any security to which this section applies."

2 Bank of England Exchange Control Notice E.C. 7: "87. Permission is hereby given (subject to the exceptions contained in paragraph 88) for transfers of foreign currency securities by persons other than authorised depositaries to authorised depositaries and to the nominees of authorised depositaries.

"88. The following transfers are excluded from the permission given in paragraph 87:- (a) any transfer which involves a change of beneficial ownership; and (b) any transfer of a security which is in the custody of an authorised depositary other than a transfer to that authorised depositary of his nominee; ..."

Nanwa Gold Mines Ltd., In re [1955] 1 W.L.R. 1080; [1955] 3 All E.R. 219.

Pearce v. Bastable's Trustee in Bankruptcy [1901] 2 Ch. 122.

The following cases are referred to in the judgment of the Court of Appeal:

De Mattos v. Gibson (1859) 4 De G. & J. 276.

English Sewing Cotton Co. Ltd. v. Inland Revenue Commissioners [1947] 1 All E.R. 679, C.A.

Moseley v. Cressey's Co. (1865) L.R. 1 Eq. 405.

Nanwa Gold Mines Ltd., In re [1955] 1 W.L.R. 1080; [1955] 3 All E.R. 219.

National Provincial and Union Bank of England v. Charnley [1924] 1 K.B. 431, C.A.

Palmer v. Carey [1926] A.C. 703, P.C.

Rodick v. Gandell (1852) 1 De G.M. & G. 763.

The following additional cases were cited in argument in the Court of Appeal:

Aksionairnoye Obschestvo Dlia Mechanicheskoyi Obrabotky Diereva A.M. Luther v. James Sagor & Co. [1921] 3 K.B. 532, C.A.

Attorney-General v. Birmingham, Tame and Rea District Drainage Board [1912] A.C. 788, H.L.(E.).

Bond Worth Ltd., In re [1980] Ch. 228; [1979] 3 W.L.R. 629; [1979] 3 All E.R. 919.

British Industrial Plastics Ltd. v. Ferguson [1940] 1 All E.R. 479, H.L.(E.).

Carey v. Palmer (1924) 34 C.L.R. 380.

Emerald Construction Co. Ltd. v. Lowthian [1966] 1 W.L.R. 691; [1966] 1 All E.R. 1013, C.A.

Gillott's Settlement, In re [1934] Ch. 97.

Haile Selassie v. Cable and Wireless Ltd. (No. 2) [1939] Ch. 182; [1938] 3 All E.R. 384, C.A.

Hughes v. Stubbs (1842) 1 Hare 476.

Manchester Ship Canal Co. v. Manchester Racecourse Co. [1901] 2 Ch. 37, C.A.

Manchester Trust v. Furness [1895] 2 Q.B. 539, C.A.

Mulholland v. Mitchell [1971] A.C. 666; [1971] 2 W.L.R. 93; [1971] 1 All E.R. 307, H.L.(E.).

Murphy v. Stone-Wallwork (Charlton) Ltd. [1969] 1 W.L.R. 1023; [1969] 2 All E.R. 949, H.L.(E.).

Myrto, The [1977] 2 Lloyd's Rep. 243.

New Brunswick Railway Co. v. British and French Trust Corpn. Ltd. [1939] A.C. 1; [1938] 4 All E.R. 747, H.L.(E.).

Paul v. Speirway Ltd. [1976] Ch. 220; [1976] 2 W.L.R. 715; [1976] 2 All E.R. 587.

Port Line Ltd. v. Ben Line Steamers Ltd. [1958] 2 Q.B. 146; [1958] 2 W.L.R. 551; [1958] 1 All E.R. 787.

Quistclose Investments Ltd. v. Rolls Razor Ltd. [1968] Ch. 540; [1968] 2 W.L.R. 478; [1968] 1 All E.R. 613, C.A.; [1970] A.C. 567; [1968] 3 W.L.R. 1097; [1968] 3 All E.R. 651, H.L.(E.).

Rogers, In re; Ex parte Holland and Hannen (1891) 8 Morr. 243, C.A.

Stratford (J. T.) & Son Ltd. v. Lindley [1965] A.C. 269; [1964] 3 W.L.R. 541; [1964] 3 All E.R. 102, H.L.(E.).

Strathcona (Lord) Steamship Co. Ltd. v. Dominion Coal Co. Ltd. [1926] A.C 108, P.C.

Thomson (D. C.) & Co. Ltd. v. Deakin [1952] Ch. 646; [1952] 2 All E.R. 361, C.A.

Torquay Hotel Co. Ltd. v. Cousins [1969] 2 Ch. 106; [1969] 2 W.L.R. 289; [1969] 1 All E.R. 522, C.A.

Wilson v. Dagnall [1972] 1 Q.B. 509; [1972] 2 W.L.R. 823; [1972] 2 All E.R. 44, C.A.

APPEALS from Browne-Wilkinson J.

By an agreement dated January 11, 1973, the plaintiff, Swiss Bank Corporation, agreed to lend up to 10.5 million Swiss francs to the third defendants, Israel Financial Trust Ltd. ("I.F.T."), an indirect subsidiary of the fourth defendants, Triumph Investment Trust Ltd. ("Triumph"), in order that I.F.T. could acquire shares in First International Bank of Israel ("F.I.B.I."). By clause 3 (b) of the agreement I.F.T. warranted and covenanted that "all necessary consents and authorisations for the service maintenance and repayment of the loan have been obtained ... and all conditions thereof will be observed ... during the continuance of this agreement." The exchange control consent for the loan obtained from the Bank of England contained conditions requiring, inter alia, that the loan should be used to acquire the F.I.B.I. securities; that such securities should be held in a separate account by an authorised depositary, initially Triumph; that interest on the loan and its eventual repayment was to be provided for out of the securities or their proceeds of sale; and that cover for the loan would be maintained throughout the period of the loan at not less than 115 per cent. of the amount outstanding, such cover consisting of the F.I.B.I. securities and additional securities. By another agreement of the same date, January 11, 1973, Triumph guaranteed that sterling cash deposits would be deposited up to the prescribed amount.

In pursuance of those agreements the plaintiff advanced to I.F.T. sums totalling 9,352,833 Swiss francs, equivalent, at that date, to about �2,672,238. The F.I.B.I. securities, when allotted, were placed in the custody of Triumph, and further foreign currency securities were purchased in the name of I.F.T. to make up the prescribed cover of 115 per cent., such additional securities being deposited with the second defendants, Barclays Bank Ltd. ("Barclays"). On February 26, 1974, without any specific consent from the Bank of England, Triumph sent the certificates relating to the F.I.B.I. securities to the first defendants, Lloyds Bank Ltd. ("Lloyds"), and on September 24, 1974, I.F.T. executed a charge in favour of Lloyds in terms which covered the F.I.B.I.securities.

On December 24, 1974, the plaintiff demanded repayment of the principal of the loan. In order to avoid a further call on the F.I.B.I. securities, they were sold by I.F.T. with the co-operation of Lloyds but without the knowledge or consent of the plaintiff, for U.S. $1,936,500, which were later sold for �820,837.13 and credited to an account at Lloyds in the name of I.F.T.

On February 26, 1975, the plaintiff issued a writ against the defendants, claiming in its amended statement of claim, (1) a declaration that

the F.I.B.I. securities, acquired with the moneys lent (or any investment currency or other foreign currency securities representing the proceeds of sale of the F.I.B.I. securities), were subject to the conditions in respect thereof imposed by the Bank of England pursuant to the Exchange Control Act 1947, as set out in the Bank of England's letter of October 22, 1971, and the memorandum attached thereto; (2) a declaration that the F.I.B.I. securities or the proceeds thereof were held by I.F.T. or alternatively Lloyds upon trust in accordance with the agreement of January 11, 1973, and the Bank of England conditions to provide for the repayment of the loan of 9,352,833 Swiss francs; alternatively a declaration that the plaintiff was entitled to be considered as equitable chargee of the F.I.B.I. securities or the proceeds thereof, for the purpose of securing repayment of the loan in accordance with the agreement and conditions; (3) a declaration that the creation or grant by I.F.T. of a charge or other security over the F.I.B.I. securities in favour of Lloyds was in breach of the Bank of England's conditions and a contravention of the Exchange Control Act 1947, and that any such charge or security was void; (4) a declaration that the F.I.B.I. securities and certain other securities set out in a schedule to the writ, or the proceeds of sale thereof were held by Triumph upon trust in accordance with the agreement and conditions to provide for repayment of the loan; alternatively, that the plaintiff was entitled to be considered as equitable chargee of the F.I.B.I. securities or the proceeds thereof to secure repayment of the loan in accordance with the agreement and conditions; (5) an order restraining the defendants and each of them from dealing with the securities or the proceeds thereof, in any manner in breach of the conditions or otherwise than for the purpose of providing for repayment of the loan in accordance with the agreement and conditions; (6) an inquiry as to the dealings by Lloyds and I.F.T. with the securities or the proceeds thereof; (7) a declaration that Lloyds was liable as constructive trustee for any damage caused to the plaintiff by any such dealings in breach of the conditions; (8) as against Lloyds (i) payment of �820,837.13, being the sterling proceeds resulting from the sale of the F.I.B.I. securities and interest thereon and (ii) damages. In the event neither Lloyds nor Barclays laid claim to the additional securities, in respect of which Triumph gave instructions to Barclays that they should be held to the order of the plaintiff. As the result of interpleader proceedings, the issue as to the additional securities became one between the plaintiff on one side and I.F.T. and Triumph on the other.

By order dated July 13, 1978, Browne-Wilkinson J. declared that (1) the plaintiff was entitled to require the sum credited to the account at Lloyds in the name of I.F.T. to be applied towards repayment of the loan to I.F.T.; (2) the purported charge over the F.I.B.I. securities granted by I.F.T. to Lloyds was contrary to the provision of the Exchange Control Act 1947 and was void; and (3) the plaintiff had no interest right or claim in or over any of the additional securities save as an unsecured creditor of I.F.T., and ordered, inter alia, (1) certain inquiries to be made; (2) that Lloyds be restrained from dealing with the sum in the I.F.T. account; (3) that such sum less

certain costs be paid to the plaintiff; and (4) Lloyds to pay damages to the plaintiff.

Lloyds appealed, by notice dated November 30, 1978, as amended, on the grounds that (1) the judge erred in law in holding, inter alia, that the plaintiff was entitled to any order for specific performance such as gave it an equitable interest in the F.I.B.I. securities; (2) the judge erred in holding, notwithstanding the terms of the loan agreement and the Bank of England permission and his finding that it was not the conscious intention of the parties that the F.I.B.I. securities should be a security for the repayment of the loan, that the loan agreement created in favour of the plaintiff an equitable interest by way of charge or trust; (2A) with effect from October 24, 1979, the terms of the Bank of England permission ceased to be applicable by virtue of Bank of England Notice E.C. 84 and accordingly the plaintiff was not in any event from that date entitled to require any part of the sum in the I.F.T. account to be applied towards repayment of the loan; (3) if, contrary to Lloyds' contention, the plaintiff did obtain an equitable interest in the F.I.B.I. securities, the same was a floating charge within section 95 of the Companies Act 1948 and, not having been registered, was void against the liquidator of I.F.T. and its creditors and in any event ranked after the specific charge created in favour of Lloyds; (4) the delivery by Triumph of the certificates for the F.I.B.I. securities did not involve any breach of the Exchange Control Act 1947; (5) the judge erred in law and in his construction of paragraph 88 of Bank of England Notice E.C. 7 in holding that the creation by I.F.T. in favour of Lloyds of a charge on the F.I.B.I. securities by means of the execution of a memorandum of deposit involved a "change in beneficial ownership" within the meaning of paragraph 88; (6) the judge erred in law and in his construction of paragraph 88 in holding that the F.I.B.I. certificates were not "in the custody of an authorised depositary" (namely Lloyds) immediately prior to the execution of the memorandum of deposit; and (6A) the charge in favour of Lloyds was validated on and from October 24, 1979, by virtue of Bank of England Notice E.C. 84.

I.F.T. appealed by notice dated December 21, 1978, as amended, on the grounds that (1) the judge erred in law in holding that the plaintiff was entitled to an order for the specific performance of the loan agreement in that (i) the judge failed to consider that the plaintiff could be compensated adequately in damages in respect of any breach of the agreement, and (ii) the judge erred in law in holding that the hardship that would ensue to the unsecured creditors of I.F.T. from an order for the specific performance of the loan agreement was not material to the grant of an order for the specific performance thereof; (2) in the foregoing circumstances the judge erred in law in refusing leave to I.F.T. to amend their defence to plead the fact and particulars of I.F.T.'s insolvency; (3) if, contrary to that contention, the plaintiff was entitled to an order for the specific performance of the agreement the judge erred in law in holding that the plaintiff was entitled to an equitable interest in the F.I.B.I. securities by way of charge or by way of trust; (4) if, contrary to the above contentions, the plaintiff

was entitled to an equitable interest in the F.I.B.I. securities that interest was a floating charge not registered under section 95 of the Companies Act 1948 and was void against the liquidator and creditors of I.F.T.; and (5) with effect from October 24, 1979, the terms of the Bank of England permission ceased to be applicable and accordingly the plaintiff was not in any event from that date entitled to require any part of the sum in the I.F.T. account at Lloyds to be applied towards repayment of the loan.

The plaintiff gave notice on February 2, 1979, amended on December 3, 1979, of its desire to contend on the hearing of the appeals (1) that the part of the judge's order whereby Lloyds were restrained from dealing with the sum in the I.F.T. account be affirmed on the alternative ground that Lloyds, having (at the date when the charge was taken) constructive notice of the contractual rights of the plaintiff against I.F.T., ought to be restrained from dealing with that sum so as to cause an infringement of such rights; (2) by way of appeal that the order ought to be varied by, inter alia, the inclusion therein of (i) a declaration that the plaintiff was entitled to require I.F.T. to apply the additional securities (save for certain shares) towards repayment of the loan, (ii) an order restraining I.F.T. from dealing with the additional securities otherwise than applying them as above, (iii) a declaration that the plaintiff was entitled to require Triumph to apply the shares excepted in (i) towards repayment of the loan; and (iv) an order restraining Triumph from dealing with such shares otherwise than by applying them as above; and (3), if the Court of Appeal discharged the part of the order set out in (1) above, by way of appeal that the part of the order relating to damages ought to be varied.

The facts are stated in the judgment of Buckley L.J.

Peter Millett Q.C. and Richard Sykes for Lloyds.

Richard Yorke Q.C. and Gavin Lightman for I.F.T.

Jonathan Parker Q.C. and Timothy Lloyd for the plaintiff.

February 1, 1980. BUCKLEY L.J. read the following judgment. There are before this court two appeals, by the first defendants, Lloyds Bank Ltd. ("Lloyds"), and the third defendants, Israel Finance Trust Ltd. ("I.F.T."), respectively, against a judgment of Browne-Wilkinson J. [1979] Ch. 548 delivered on May 8, 1978, in each of which the plaintiff, Swiss Bank Corporation, has served a respondent's notice and also a cross-appeal. The facts are set out carefully and fully in the judgment of the judge, to which reference should be made. I do not propose to restate them in more detail than is necessary to make my judgment intelligible.

I.F.T. is a sub-subsidiary of the fourth defendants, Triumph Investment Trust Ltd. ("Triumph"). I.F.T. sought Bank of England permission under the Exchange Control Act 1947 to borrow from the plaintiff a sum of Swiss francs of a value of �2.1m for investment in shares and loan stock of an Israeli bank called first International Bank

of Israel Ltd. ("F.I.B.I."). On October 22, 1971, the Bank of England gave the necessary permission subject to certain conditions numbered (i) to (viii) referred to at [1979] Ch. 548, 557. Particular reference should be made to condition (v) relating to maintenance of a specified margin of cover for the borrowing, condition (vi) relating to the payment of interest and charges in respect of the loan out of the income arising from the securities acquired and condition (vii), which I shall read:

"Repayment of the borrowing is made from the sale proceeds of foreign currency securities held by the above-named borrower in the relative 'loan portfolio' or, in the event of a shortfall and subject to the Bank of England's prior permission being obtained, with investment currency."

The conditions ended with the following requirement:

"In view of the terms of sub-paragraphs (iv) and (vi) above, it will be appreciated that the securities acquired with the foreign currency borrowing will need to be kept on a separate account to distinguish them from any other foreign currency securities owned by the borrower."

As a term of the loan the plaintiff required I.F.T. to deposit with the plaintiff the sterling equivalent of the advance or advances actually made and to deposit further sums from time to time (to be guaranteed by Triumph) to cover any exchange differences which might arise.

On January 11, 1973, the plaintiff and I.F.T. entered into the relevant written loan agreement for a sum limited to 10.5m Swiss francs. The obligation of the plaintiff to make any advance under the agreement was expressly made conditional on all necessary consents being granted by the Bank of England and the appropriate sterling cash deposits being made. By clause 3 (b) I.F.T. warranted and covenanted with the plaintiff:

"All necessary consents and authorisations for the service maintenance and repayment of the loan have been obtained by or on behalf of [I.F.T.] and all conditions thereof will be observed by [I.F.T.] during the continuance of this agreement."

Clause 8 contained a charge by I.F.T. on the sterling cash deposits as security for the principal moneys, interest and all other sums payable under the agreement. Clause 8 (e) stipulated that the sterling cash deposits should be maintained at not less than 95 per cent. of the sterling equivalent of the advances at middle market prices on the London Foreign Exchange Market. Clause 9 provided that the loan should be repayable on demand and that the plaintiff should be entitled to realise its security (which Mr. Parker concedes to be a reference to the charge upon the sterling deposits) on a number of specified contingencies. Triumph, by a separate instrument, guaranteed the maintenance of the cash deposits at the specified level.

Pursuant to the loan agreement the plaintiff made advances to I.F.T. of an aggregate amount of 9,352,833 Swiss francs, which were invested

by I.F.T. in shares and loan stock of F.I.B.I. ("the F.I.B.I. securities"). These were deposited with Triumph as an authorised depositary under the Act.

Additional foreign currency securities were earmarked to make up the "cover" for the loan to 115 per cent. of its amount in accordance with Bank of England condition (v) referred to earlier. These securities ("the additional securities") were at all material times deposited with the second defendants, Barclays Bank Ltd., as an authorised depositary.

In 1973 the Triumph group were in financial straits and applied to Lloyds for assistance. In February 1974 Lloyds offered the group a credit line of �27.5m with further stand-by facilities on terms including unlimited guarantees by, amongst other companies of the group, I.F.T. and charges over all unencumbered securities held by companies of the group. The securities to be charged included the F.I.B.I. securities. In due course I.F.T., through another company of the group, guaranteed all Triumph's liabilities to Lloyds and on September 24, 1974, I.F.T. by a written memorandum under hand charged or purported to charge by way of fixed charge in favour of Lloyds ("the Lloyds' charge"), inter alia, the F.I.B.I. securities to secure all moneys at any time due from I.F.T. to Lloyds. Before that memorandum was signed (a) Triumph had, without Bank of England consent, lodged the scrip for the F.I.B.I. securities with Lloyds, both Triumph and Lloyds being authorised depositaries under the Exchange Control Act 1947; and (b) Lloyds had full knowledge of the loan agreement and its terms but were not aware in any detail of the conditions attached to the Bank of England permission.

On December 24, 1974, the plaintiff, being then entitled to do so, demanded repayment of the loan. In its statement of claim the plaintiff asserts that in the circumstances the F.I.B.I. securities became subject to a trust for repayment of the loan thereout or alternatively the F.I.B.I. securities became subject to an equitable charge securing repayment of the loan thereout. The plaintiff also asserts similar claims in respect of the additional securities. In argument no distinction was drawn between a trust and an equitable charge. The argument was presented on the footing that any equitable interest which the plaintiff acquired on the securities constituted an equitable charge.

In January 1973 the plaintiff registered the loan agreement under section 95 of the Companies Act 1948, and no point has been taken below or in this court about any inadequacy of that registration to cover such equitable charge, if any, as the plaintiff has over the F.I.B.I. securities or the additional securities, although Mr. Millett for Lloyds reserves the point for argument elsewhere if necessary.

Browne-Wilkinson J. held first that on the true construction of the loan agreement clause 3 (b) related to the conditions from time to time attached to the Bank of England permission for the borrowing and not only to the original conditions. The plaintiff no longer disputes this and it has accordingly been common ground in this court.

It has also been common ground in this court that any equitable charge created by the loan agreement on the investments and capital

moneys representing the borrowed money is a floating charge upon that fund in whatever state it may be from time to time.

The judge further held that the plaintiff was at all material times entitled to specific performance of clause 3 (b) of the loan agreement requiring (a) the F.I.B.I. securities, or their proceeds, to be kept separate; (b) the interest and loan charges to be paid out of the income and (c) the debt, when repayable, to be paid out of the proceeds of sale, and that the equitable right so arising ought to prevail over the Lloyds' charge. He accepted that it was not the conscious intention of the parties to the loan agreement that the F.I.B.I. securities should be a security for the loan, but he held that, if the loan agreement bound I.F.T. by a specifically enforceable obligation to repay the loan out of the F.I.B.I. securities or their proceeds, this would create an equitable charge on, or interest in, the securities and their proceeds, whether or not the parties knew and intended that legal consequence to follow. He accordingly held that the loan agreement constituted an equitable charge in favour of the plaintiff.

As a secondary line of attack the plaintiff contended below and in this court that if the loan agreement conferred on it no proprietary equitable interest in the F.I.B.I. securities, Lloyds nevertheless took their charge with notice of a subsisting contract between the plaintiff and I.F.T. requiring the F.I.B.I. securities to be used for servicing and repayment of the loan, and that consequently Lloyds could be restrained from acting so as to occasion a breach of that contract: see De Mattos v. Gibson (1859) 4 De G. & J. 276. Browne-Wilkinson J. held that this principle would be applicable if, but only if, Lloyds had actual knowledge of the plaintiff's rights under the loan agreement when they took their charge. He held that Lloyds did not have such actual knowledge and accordingly that no injunction would lie against them on this ground.

Finally, the judge held that the Lloyds' charge was illegal and void for failure to comply with certain exchange control requirements and that the plaintiff's equitable charge did not extend to the additional securities.

In the event the judge (a) declared the plaintiff to be entitled to require a sum of �828,066, the sterling proceeds of sale of the F.I.B.I. securities, with interest thereon less the costs of realisation to be applied towards repayment of the loan; (b) declared the Lloyds' charge to be void; (c) declared the plaintiff to have no interest, right or claim in or over the additional securities save as an unsecured creditor of I.F.T. He ordered some complicated inquiries directed to ascertaining a sum of damages payable by Lloyds to the plaintiff for loss consequent upon the conversion into sterling by Lloyds of the dollar proceeds of sale of the F.I.B.I. securities into the details of which I need not enter, because in the events which have happened that claim to damages is no longer pursued.

Lloyds appeal against (a) and (b) and against the order for inquiries and as to costs. I.F.T. (now in liquidation) appeal against (a) and as to costs. The plaintiff has served a respondent's notice in both appeals in reliance on the De Mattos v. Gibson, 4 De G. & J. 276 argument. The plaintiff cross-appeals, claiming in effect that the relief

granted to it should extend not only to the F.I.B.I. securities and their proceeds of sale but also to the additional securities and their proceeds of sale, and as to costs.

The first question for consideration is whether the judge was right in holding that the loan agreement gave rise to an equitable charge in favour of the plaintiff. The way in which the plaintiff puts its claim to be entitled to such charge is this. By clause 3 (b) of the loan agreement I.F.T. covenanted that all conditions of all necessary consents and authorisations for the service, maintenance and repayment of the loan would be observed by I.F.T. during the continuance of the agreement. The final paragraph of the conditions required that, in view of the terms of sub-paragraphs (iv) and (vi) of the conditions, the securities acquired with the foreign currency borrowing would be kept on a separate account to distinguish them from any other foreign currency securities owned by the borrower. Condition (vi) required interest and other charges in respect of the borrowing and management expenses to be paid out of the income arising from the foreign currency securities acquired, and condition (vii), which I have already read, required the loan to be repaid out of the proceeds of the foreign currency securities in question or, in the event of a shortfall and subject to Bank of England permission, with "investment currency." So, the plaintiff contends, the loan agreement contractually bound I.F.T. to keep the F.I.B.I. securities and any capital moneys arising from them and any investments of such capital moneys (which I shall call comprehensively "the fruits of the borrowing") segregated as a separate fund, to service the loan out of the income and capital of that fund and to repay the loan primarily out of it. Mr. Parker, for the plaintiff, accepts that as between I.F.T. and the Bank of England the Bank of England conditions imposed no positive obligations on I.F.T. They imposed restrictions on I.F.T. in their use of the fruits of the loan if in the event I.F.T. took up the loan. Condition (vii) was a prohibition against repaying the loan in any manner not thereby authorised. But Mr. Parker contends that, as between I.F.T. and the plaintiff, condition (vii) in conjunction with clause 3 (b) gave rise to a positive contractual obligation on the part of I.F.T. to repay the loan primarily out of the fruits of the loan. Relying mainly on In re Nanwa Gold Mines Ltd. [1955] 1 W.L.R. 1080, Mr. Parker says that the consequence of this is that that contractual obligation was specifically enforceable by the court and consequently gave rise to an equitable interest in the plaintiff of a proprietary nature in the fruits of the loan, which, since it was created by way of security only, is properly described as an equitable charge.

We are not concerned here with a charge on an equitable interest in property but with an equitable charge upon property in the legal ownership of the party creating the charge.

An equitable charge may, it is said, take the form either of an equitable mortgage or of an equitable charge not by way of mortgage. An equitable mortgage is created when the legal owner of the property constituting the security enters into some instrument or does some act which, though insufficient to confer a legal estate or title in the subject matter upon the mortgagee, nevertheless demonstrates a binding

intention to create a security in favour of the mortgagee, or in other words evidences a contract to do so: see Fisher and Lightwood's Law of Mortgage, 9th ed. (1977), p. 13. An equitable charge which is not an equitable mortgage is said to be created when property is expressly or constructively made liable, or specially appropriated, to the discharge of a debt or some other obligation, and confers on the chargee a right of realisation by judicial process, that is to say, by the appointment of a receiver or an order for sale: see Fisher and Lightwood, p. 14. It is not, I think, necessary to determine in the present case in what circumstances there is a true distinction between these two types of charge or precisely where it lies. From the way in which the judge dealt with the matter in his judgment it is, I think, clear that he was applying his mind to the question whether the circumstances of the case gave rise to an equitable charge by way of mortgage. The argument in this court has also proceeded upon the same lines, but I must not overlook the possibility of the existence of an equitable charge which is not of the nature of a mortgage.

The essence of any transaction by way of mortgage is that a debtor confers upon his creditor a proprietary interest in property of the debtor, or undertakes in a binding manner to do so, by the realisation or appropriation of which the creditor can procure the discharge of the debtor's liability to him, and that the proprietary interest is redeemable, or the obligation to create it is defeasible, in the event of the debtor discharging his liability. If there has been no legal transfer of a proprietary interest but merely a binding undertaking to confer such an interest, that obligation, if specifically enforceable, will confer a proprietary interest in the subject matter in equity. The obligation will be specifically enforceable if it is an obligation for the breach of which damages would be an inadequate remedy. A contract to mortgage property, real or personal, will, normally at least, be specifically enforceable, for a mere claim to damages or repayment is obviously less valuable than a security in the event of the debtor's insolvency. If it is specifically enforceable, the obligation to confer the proprietary interest will give rise to an equitable charge upon the subject matter by way of mortgage.

It follows that whether a particular transaction gives rise to an equitable charge of this nature must depend upon the intention of the parties ascertained from what they have done in the then existing circumstances. The intention may be expressed or it may be inferred. If the debtor undertakes to segregate a particular fund or asset and to pay the debt out of that fund or asset, the inference may be drawn, in the absence of any contra indication, that the parties' intention is that the creditor should have such a proprietary interest in the segregated fund or asset as will enable him to realise out of it the amount owed to him by the debtor: compare In re Nanwa Gold Mines Ltd. [1955] 1 W.L.R. 1080 and contrast Moseley v. Cressey's Co. (1865) L.R. 1 Eq. 405 where there was no obligation to segregate the deposits. But notwithstanding that the matter depends upon the intention of the parties, if upon the true construction of the relevant documents in the light of any admissible evidence as to surrounding circumstances

the parties have entered into a transaction the legal effect of which is to give rise to an equitable charge in favour of one of them over property of the other, the fact that they may not have realised this consequence will not mean that there is no charge. They must be presumed to intend the consequence of their acts.

In the present case the loan agreement contained no express requirement that I.F.T. should charge the F.I.B.I. securities or the fruits of the borrowing by way of mortgage to secure repayment of the loan. Such intention must be found, if at all, by implication.

A binding obligation that a particular fund shall be applied in a particular manner may found no more than an injunction to restrain its application in another way, but if the obligation be to pay out of the fund a debt due by one party to the transaction to the other, the fund belonging to or being due to the debtor, this amounts to an equitable assignment pro tanto of the fund: see Rodick v. Gandell a (1852) 1 De G.M. & G. 763, 777 and Palmer v. Carey [1926] A.C. 703, 706-707:

"This is but an instance of a familiar doctrine of equity that a contract for valuable consideration to transfer or charge a subject matter passes a beneficial interest by way of property in that subject matter if the contract is one of which a court of equity will decree specific performance."

With this in mind I address myself to the construction and effect of clause 3 (b) of the loan agreement. It is said that by that sub-clause I.F.T. covenanted with the plaintiff that all the requirements of the Bank of England from time to time would be observed by I.F.T. during the continuance of the agreement. Accordingly, it is said that I.F.T. covenanted that the loan should be repaid out of the sale proceeds of the securities in the "relative loan portfolio" (see condition (vii)) and out of no other source save in so far as those sale proceeds should fall short of being sufficient. So, it is said, the relevant loan portfolio, which by the terms of the Bank of England permission was required to be kept as a separate fund distinct from any other foreign currency securities owned by I.F.T., should be the primary source for repayment of the loan. Therefore, it is contended, the parties have manifested an intention that the plaintiff should have such a proprietary interest in the F.I.B.I. securities or any other fruits of the borrowing into which they might be converted from time to time as would enable the plaintiff to realise out of that property, so far as it should suffice, any amount required to repay the loan.

Mr. Parker has conceded that I.F.T. was only obliged by clause 3 (b) of the loan agreement to observe such requirements of the Bank of England as might be in force from time to time. The Bank of England could have waived or rescinded condition (vii) at any time. He accepts that the equitable charge which the plaintiff claims was consequently a precarious one. The fact that an equitable charge may be precarious, however, is not in my view necessarily a sufficient ground for holding that there is no such charge. A mortgage of a terminable lease would be a precarious security, vulnerable to determination of

the lease by the landlord, but I can see no reason why such a lease should not be capable of being the subject matter of a mortgage, if a mortgagee of it could be found. In the present case, however, it is not the continued existence of the subject matter which is precarious; it is those very terms of the contract which are alleged to give rise to the equitable charge, that is to say, the Bank of England conditions requiring segregation of the fruits of the borrowing and repayment of the loan thereout, which might have been terminated or waived by the Bank of England at any time during the continuance of the agreement. The Bank of England might at any time have permitted repayment of the loan out of some other fund, and in that event the plaintiff could have had no ground of complaint about the loan being so discharged. A security of this kind, if capable of constituting a security at all, would, it seems to me, be so precarious that one would need very clear indications that the parties intended, or must be taken to have intended, to enter into such an arrangement by way of security, particularly where the relevant agreement contains an express charge on another subject matter. In my judgment, however, clause 3 (b) of the agreement was incapable, upon its true construction, of constituting any security or creating any equitable charge. So far as it consisted of a covenant, it required I.F.T. to observe the requirements of the Bank of England during the continuance of the agreement. It was directed to ensuring that the loan should not become tainted with any illegality by reason of any failure to comply with those requirements, such as they might be from time to time. In this respect it is, I think, significant that the covenant is linked with the warranty contained in the same sub-clause, which is obviously directed to the legality of the transaction at the date of the agreement. The covenant is, in my opinion, in substance a negative one, viz. not to do anything which might invalidate the bargain between the parties; but, although some argument was addressed to us based upon this negative quality, it is not that which weighs with me. What is to my mind important is that there is here no obligation to repay the loan out of the fruits of the borrowing in any event; the covenant merely requires I.F.T. to repay the loan in a manner approved by the Bank of England. No doubt the plaintiff could have objected to repayment in any manner not so approved and could have obtained an injunction restraining such repayment, if this would have served any useful purpose; but the covenant does not, in my judgment, confer upon the plaintiff any specifically enforceable right to have the loan repaid out of the F.I.B.T. securities or out of any other fruits of the borrowing. It consequently did not, in my judgment, give rise to an equitable charge by way of mortgage.

Nor, in my opinion, can it have given rise to a charge of a kind to which the remedies of a mortgagee would not have attached but which would have been enforceable by the appointment of a receiver or an order for sale. In National Provincial and Union Bank of England v. Charnley [1924] 1 K.B. 431 it seems that Atkin L.J. may have had a charge of this nature in mind. He said, at pp. 449-450:

"... I think there can be no doubt that where in a transaction for value both parties evince an intention that property, existing or future, shall be made available as security for the payment of a debt, and that the creditor shall have a present right to have it made available, there is a charge, even though the present legal right which is contemplated can only be enforced at some future date, and though the creditor gets no legal right of property, either absolute or special, or any legal right to possession, but only gets a right to have the security made available by an order of the court."

In the present case I do not consider that it can properly be said that the parties evinced an intention that the F.I.B.I. securities or any other fruits of the borrowing should be made available as security for repayment of the loan. The only intention which they evinced was that the loan should be repaid in a manner approved by the Bank of England.

Accordingly, in my judgment, the loan agreement did not give rise to any equitable charge in favour of the plaintiff.

Having reached this conclusion, it is strictly unnecessary for me to decide the question raised by the cross-appeal, viz. whether any charge there might have been would have extended to the additional securities; but, in case the matter were to go further, I should perhaps say that I agree with the conclusion reached by Browne-Wilkinson J. on this point, that the additional securities do not form part of the "loan portfolio," and that accordingly the plaintiff would have had no right against I.F.T. to have them applied in repayment of the loan for the reasons set out at [1979] Ch. 548, 581-582.

In this court it emerged in the course of the argument that there is really no substance in the De Mattos v. Gibson, 4 De G. & J. 276 point. Mr. Parker agrees that it is of no value to the plaintiff unless the obligation to repay the loan out of the fruits of the borrowing is specifically enforceable; but, if that obligation were specifically enforceable, the plaintiff would have an equitable charge and would not need to rely on a claim for damages against Lloyds for the tort of knowingly interfering with the contract between I.F.T. and the plaintiff. Accordingly, I say no more about this point.

As regards the legality of the Lloyds' charge under the Exchange Control Act 1947, it was conceded below that the handing over of the scrip of the F.I.B.I. securities by Triumph to Lloyds was in breach of section 16 (2) of the Act. This, as I understand it, was in consequence of a failure by Triumph to comply with Exchange Control Notice E.C. 7, paragraphs 15 (a) (ii), 18 and 25. Counsel in the lower court reserved a right to present an argument to the contrary in this court, but no such argument has been presented to us and so the concession stands.

The judge, [1979] Ch. 548, 576 held that, notwithstanding the irregularity of the transfer of the scrip from Triumph to Lloyds, Lloyds were entitled to claim that at the date of their charge the F.I.B.I. securities were "lodged with or held by" them within the meaning of those words in the Lloyds' charge; that is to say that the F.I.B.I.

securities were included in that charge. The contrary has not been suggested in this court. The argument has centred upon the question whether I.F.T. could legitimately charge those securities in favour of Lloyds without any Bank of England permission specifically relating to that transaction.

Although this question is of much less significance, if there is no competition between the plaintiff as a secured creditor of I.F.T. and Lloyds, than would have been the case if the plaintiff had been a secured creditor, it is nevertheless still an issue between the plaintiff and Lloyds because, if the Lloyds charge is invalid so far as the F.I.B.I. securities are concerned, those securities will be available to the unsecured creditors of I.F.T. of whom, in my view, the plaintiff is one. This question arises on section 17 (2) and its resolution depends upon whether on its true construction Exchange Control Notice E.C. 7, which I mentioned earlier, contains an appropriate permission.

Paragraph 9 of E.C. 7 defines "transfer" as meaning:

"the doing of anything by the legal or beneficial owner or any nominee which affects his rights or powers in relation to any foreign currency security and includes the execution of any instrument of transfer thereof, whether effective or not. [This definition covers, inter alia - (a) any transfer within the books of an authorised depositary, and (b) any declaration of trust involving foreign currency securities whether or not a change of legal ownership is entailed.]."

The Lloyds' charge, if valid, accordingly constituted a transfer by I.F.T. for the purposes of E.C. 7. Paragraph 87 of E.C. 7 provides:

"Permission is hereby given (subject to the exceptions contained in paragraph 88) for transfers of foreign currency securities by persons other than authorised depositaries to authorised depositaries and to the nominees of authorised depositaries."

I.F.T. was not an authorised depositary; Lloyds was. So the Lloyds' charge falls within this permission unless it comes within any of the exceptions in paragraph 88. Paragraph 88 provides:

"The following transfers are excluded from the permission given in paragraph 87:- (a) any transfer which involves a change of beneficial ownership; and (b) any transfer of a security which is in the custody of an authorised depositary other than a transfer to that authorised depositary or his nominee; and (c) any transfer of a security which is not in the custody of an authorised depositary other than a transfer to the authorised depositary who is to have custody of the security or to the nominee of that authorised depositary."

Did the Lloyds' charge involve a change of beneficial ownership? The expression "beneficial ownership" is used constantly throughout E.C. 7, and, as the judge pointed out [1979] Ch. 548, 577, the concept of "beneficial ownership" is of critical importance in it. It is not,

however, particularly easy to define the concept to which the expression is there attached. It has been suggested in argument that in E.C. 7 the expression is used to designate a single person or a group of persons who for the time being answers to the description of the "beneficial owner" of particular foreign currency securities. I think there is much force in this argument. It does not, however, seem to me to be possible to treat the expression "beneficial owner" in E.C. 7 as extending to a number of persons having successive beneficial interests or a variety of beneficial interests in the subject matter under consideration even if, collectively, they have between them every possible beneficial interest in that subject matter. The judge reached the conclusion, at p. 578, that the expression indicates the person to whose order the authorised depositary holds scrip, and I am disposed to agree with him. It appears to me that support for this view can be obtained by comparing E.C. 7 with related provisions of the Act. Thus, for example, section 15 requires securities to which the section applies to be kept in the custody of authorised depositaries. Section 15 (3) forbids an authorised depositary, except with the permission of the Treasury, to part with any such security so deposited with him subject to a proviso:

"... this subsection shall not prohibit an authorised depositary - (a) from parting with a certificate of title or coupon to or to the order of another authorised depositary, where the person from whom the other authorised depositary is to receive instructions in relation thereto is to be the same as the person from whom he receives instructions; ..."

Paragraph 15 of E.C. 7 provides:

"... authorised depositaries may part with securities for delivery into the custody of other authorised depositaries where no change of beneficial ownership is involved ..."

Here the author of E.C. 7 is, in my view, clearly using the expression "no change of beneficial ownership" to express the same idea as is expressed at greater length in the subsection.

The judge went on to express the view, at p. 578, that cases in which there is a change in the person to whose order the authorised depositary holds the scrip include the granting of a charge. Here, with diffidence, I part company from him. Lloyds, if their charge on the F.I.B.I. securities is valid, is an equitable chargee by virtue of the deposit of the certificates of title to the securities and the written memorandum. Accepting that such a transaction would confer on Lloyds a proprietary equitable interest in the securities, it would clearly not, in my opinion, constitute Lloyds an "owner" of the securities: see in this connection English Sewing Cotton Co. Ltd. v. Inland Revenue Commissioners [1947] 1 All E.R. 679. An equitable beneficial interest in property, if it be less than an absolute interest, is less than equitable (i.e. beneficial) ownership. Nor, in my judgment, would an equitable chargee of foreign currency securities, as such, be competent

to give instructions relating to those securities to an authorised depositary in whose custody they were. If A, being the legal and beneficial owner of foreign currency securities, were to deposit the relative certificates in the custody of B as an authorised depositary, and were then to create an equitable charge upon them in favour of C, a creditor of A, B would be bailee of the certificates for A and (subject to any constraint under the Exchange Control Act 1947) would be bound to deal with them in accordance with A's instructions, notwithstanding notice of C's equitable charge. If A were to require B to hand over the securities to D, another authorised depositary, B would have to comply with that instruction and C could not object. It could not be said in these circumstances that B held the securities in any sense to the order of C. A would, in my opinion, remain the "beneficial owner" of the securities for the purposes of E.C. 7. I.F.T. cannot be any less the "beneficial owner" in the present case where the roles of B and C are combined in Lloyds. It follows that, in my judgment, the Lloyds' charge, although it amounted to a transfer within the definition in paragraph 9 of E.C. 7, did not involve a change of beneficial ownership, and so was not excluded by paragraph 88 (a) from the permission contained in paragraph 87.

Browne-Wilkinson J., in the course of his reasoning on this part of the case [1979] Ch. 548, 577-578, placed some reliance on a comparison of paragraph 86 on the one hand and paragraphs 87 and 88 on the other. He took a fictitious case of an authorised depositary having custody of foreign currency securities for an owner who is himself an authorised depositary. The judge said that in this case the owner could not charge the securities in favour of the first authorised depositary because the transfer so occasioned would not be incidental to a parting with the scrip from one party to the other, which is a requisite of paragraph 86. I only refer to this for the purpose of saying that, in my opinion, this argument is insubstantial. The owning authorised depositary could call upon the other authorised depositary to deliver the securities into its own custody, which would be authorised by paragraph 15 of E.C. 7, and could thereupon redeposit them with the other authorised depositary by way of charge, thereby effecting a "transfer" to the latter which would, as it seems to me, be authorised by paragraph 86. In this way the transaction which the judge thought to be forbidden by paragraph 86 could, in my view, be legitimately achieved.

Did the Lloyds' charge come within paragraph 88 (b) of E.C. 7? The charge constituted a "transfer" to Lloyds of the F.I.B.I. securities, which were de facto in the custody of Lloyds. Accordingly, if de facto custody suffices for the purposes of paragraph 88 (b), the Lloyds' charge did not fall within the exception from paragraph 87 contained in paragraph 88 (b). The judge, at p. 578, considered that Lloyds could not be heard to say that they had "custody" of the F.I.B.I. scrip, having obtained physical control of it in an unlawful manner. In this connection it is, in my view, important to keep in mind that the question is not whether the Lloyds' charge is valid. It is valid if it does not come within the terms of paragraph 88 (b). It does not come within that sub-paragraph if at the date of the charge the F.I.B.I.

securities were in the custody of Lloyds. So the question is whether before I.F.T. created that charge, the F.I.B.I. securities had come into Lloyds' custody. This is a question to which, as it seems to me, the doctrine that a man cannot be permitted to rely on his own wrongful act has no bearing. In asserting that the F.I.B.I. securities came into Lloyds' custody for the purposes of paragraph 88 (b) when Triumph handed them over to Lloyds, Lloyds is not setting up any claim to the securities or to any interest in them; it is merely stating a physical fact.

Section 16 (2) of the Exchange Control Act 1947 prohibits an authorised depositary's parting with a certificate relating to a foreign currency security, which is in his custody pursuant to section 15, without Treasury permission otherwise than for certain purposes which are irrelevant to this point. The relevant paragraph of E.C. 7 is paragraph 15, which permits an authorised depositary to deliver such a certificate into the custody of another authorised depositary provided that certain conditions are satisfied. In the present case one of those conditions - viz. that contained in paragraph 15 (a) (ii) - appears not to have been complied with. The non-compliance seems to have been of a quite innocuous kind but the Bank of England, we must assume for sufficient reasons, declined to validate the transfer of custody. It must consequently be treated as having been made in contravention of section 16 (2), which, as I have already mentioned, is conceded; but an act done in contravention of a statute is not necessarily a nullity. Whether it is so or not must depend upon the terms and effect of the statute, and may depend upon the policy of the statute and the nature of the act itself. By section 34 of the Act effect is given to the provisions of Schedule 5 to the Act for the purposes of the enforcement of the Act. Paragraph 1 (1) of Part II of that Schedule provides that any person in or resident in the United Kingdom who contravenes any restriction or requirement imposed by or under the Act shall be guilty of an offence punishable under that part of that Schedule. The subsequent provisions of that part of the Schedule impose maximum penalties by way of imprisonment or fine for such offences.

In my judgment, offences under the Act are clearly mala prohibita, not mala in se; they are not acts the validity of which the law refuses to countenance for any purpose. As such they are not devoid of any effect; they merely expose the culprits to the penalties prescribed by the Act none of which, so far as I am aware, has been exacted or sought to be exacted in this case. Support for this view is, in my opinion, to be found in section 20 (6) of the Act, which is echoed in paragraph 11 (a) of E.C. 7, each of which provides that a security which is required to be kept in the custody of an authorised depositary shall not be treated as being in such custody in either of two contingencies which have no application to the present case. If the legislature had intended that such a security, if transferred from the custody of one authorised depositary to the custody of another without compliance with all the conditions of any relevant permission, should not be treated as being in the custody of the latter depositary, one would, I think, expect to find an express provision to that effect, for otherwise the consequence of an irregular transfer of custody is left in doubt. If the

document is not to be treated as in the custody of the recipient depositary, should it be regarded as still in the custody of the original depositary, contrary to the fact, or as in the custody of no depositary?

In my judgment, the language of paragraph 88 (b) must be construed in accordance with the ordinary rules of construction. The language must be given its normal meaning if this is clearly expressed, unless this would lead to so surprising a result in the context and having regard to the subject matter as to lead convincingly to the conclusion that the author cannot have intended that meaning, and even so the language cannot be construed in any other sense unless it is capable of bearing it.

The language of paragraph 88 (b) is, in my view, straightforward and its meaning is clear. It poses the question whether at the date of a transfer the security transferred was in the custody of an authorised depositary. "Custody" here clearly relates to the possession or control of the certificates as physical objects. The question is a factual question. In the circumstances of the present case there seems to me to be no doubt about the answer. At the date of the Lloyds' charge the F.I.B.I. securities were in the possession and physically under the control of Lloyds. The judge founded his decision on this point upon a construction of paragraph 88 (b) which gave to the word "custody" the meaning of "custody regularly obtained" [1979] Ch. 548, 578. In my judgment, this is to put a gloss upon the language which the language itself does not justify and nothing in the context or the surrounding circumstances requires. Lloyds was subject in relation to the F.I.B.I. securities to all the obligations and constraints of the Act applicable to an authorised depositary having foreign currency securities in his custody as an authorised depositary, whether those securities had come into Lloyds' custody regularly or irregularly. Sterling was not put at risk by the change in custody of the securities, nor was the country's stock of foreign currency securities. The change of custody did not increase the risk of the securities escaping from the exchange control net. For these reasons I differ from the judge on this point. In my judgment, the Lloyds charge was a transfer of the F.I.B.I. securities to the authorised depositary in whose custody those securities then were and so did not come within the exception from paragraph 87 contained in paragraph 88 (b).

In the outcome, in my judgment, the plaintiff has not at any time had a charge upon the F.I.B.I. securities or their proceeds, but those securities were, and their proceeds are, comprised in the Lloyds' charge. I would consequently allow the appeals both of Lloyds and of I.F.T. I would dismiss the plaintiff's cross-appeal.

Since the date of the judge's judgment and before the hearing of these appeals, all exchange control has been abolished and all conditions upon dealing with foreign currency securities previously imposed under the Exchange Control Act 1947 have been removed. In these circumstances the plaintiff applied in this court for leave to amend its pleadings to introduce a claim to damages for an allegedly wrongful refusal by Lloyds to hand over the F.I.B.I. securities to the plaintiff

in December 1974; and the plaintiff contended that if, while the Bank of England conditions connected with the loan remained in force, the plaintiff was entitled to an equitable charge, that charge ceased so soon as the exchange control regulations and the Bank of England conditions ceased to operate so that the loss resulting from the wrongful refusal became irretrievable, and that the rights of the parties should be determined in the circumstances obtaining at the time of the hearing of the appeals. The amendments which the plaintiff sought leave to make could only be of significance if the plaintiff was entitled to an equitable charge on the F.I.B.I. securities. In consequence of my conclusion that the plaintiff was not entitled to such a charge (a) I would refuse leave to make the amendments; and (b) it is unnecessary for me to decide what the effect of the abolition of exchange control would have been upon the plaintiff's equitable charge had it existed.

BRANDON L.J. I have had the advantage of reading in advance the draft of the judgment which Buckley L.J. has just delivered; I am in entire agreement with it.

BUCKLEY L.J. I have the authority of Brightman L.J., who is not able to be with us this afternoon, to say that he also agrees.

Solicitors: Linklaters & Paines; Nabarro Nathanson; Simmons & Simmons.

C. N.

APPEAL from the Court of Appeal.

This was an appeal by the appellants (plaintiffs in the action), Swiss Bank Corporation, from an order dated February 1, 1980, of the Court of Appeal (Buckley, Brandon and Brightman L.JJ.) whereby appeals by the first respondents (first defendants) Lloyds Bank Ltd. and the third respondents (third defendants), Israel Financial Trust Ltd., against an order dated July 13, 1978, of Browne-Wilkinson J., were allowed and a cross-appeal by the appellants against that order was dismissed. The action was commenced by writ on February 26, 1975, against the first three defendants and the fourth defendants, Triumph Investment Trust Ltd., were later added as defendants by amendment. The proceedings against the second defendants, Barclays Bank Ltd., were discontinued in April 1973, it having sought interpleader relief in other proceedings. The third and fourth defendants were now in liquidation and insolvent.

The action concerned the competing claims of the appellants and the first respondents to a fund of some �828,066 which since early 1975 had stood to the credit of a deposit account with the first respondents and represented the proceeds of sale of certain securities issued by a company incorporated in Israel, F.I.B.I. Holding Co. Ltd. to the third respondents.

The issues raised by the appeal were: (i) Were the appellants at the date of the judgment of Browne-Wilkinson J. entitled to a proprietary interest in the proceeds of the F.I.B.I. securities so that they were entitled to be paid those proceeds in or towards repayment of the third respondents' indebtedness to the appellants? (ii) Were the first respondents, at that date entitled to a valid security over those proceeds by virtue of a memorandum of deposit dated September 24, 1974? (iii) If the answer to both those questions was in the affirmative, which of the two competing claims had priority? (iv) If the answer to the first question was in the affirmative, was the appellants' entitlement affected by release of all exchange control restrictions after the date of the judge's order?

The facts are set out in the opinion of Lord Wilberforce.

Richard Scott Q.C. and Timothy Lloyd for the appellants. The following issues arise in this appeal: (1) Were the appellants at the date of Browne-Wilkinson J.'s judgment, dated July 13, 1978, entitled to a proprietary interest in the proceeds of the F.I.B.I. securities so that they were entitled to be paid those proceeds in or towards repayment of I.F.T.'s indebtedness to the appellants? (2) Were Lloyds Bank at that date entitled to a valid security over those proceeds by virtue of a memorandum of deposit dated September 24, 1974? (3) If the answer to both those questions is yes, which of the two competing claims has priority? (4) If the answer to the first question is yes, is the appellants' entitlement affected by release of all exchange control restrictions after the date of the judge's order?

(1) It is not disputed that the appellants were entitled to a proprietary interest if they had a contractual right to have the loan repaid out of the proceeds of the F.I.B.I. securities and if the right was specifically enforceable. Condition (vii) of the memorandum accompanying the letter of consent granted by the Bank of England by its terms required that the loan should be so repaid. I.F.T. was contractually bound to the appellants to repay the loan (clause 9 of the loan agreement) and to do so in compliance with condition (vii). The only way in which the loan could be repaid in such compliance was by using the proceeds of the F.I.B.I. securities and, accordingly, I.F.T. was at all material times under a contractual obligation to repay the loan out of the proceeds of the F.I.B.I. securities. No reason has been suggested why, if that is the correct analysis, that contractual obligation should not be regarded as specifically enforceable. If the contractual obligation were specifically enforceable, it would have given the appellants a proprietary interest in the fund out of which payment would be ordered on ordinary equitable principles: see Palmer v. Carey [1926] A.C. 703; In re Gillott's Settlement [1934] Ch. 97 and In re Nanwa Gold Mines Ltd. [1955] 1 W.L.R. 1080. In re Gillott's Settlement [1934] Ch. 97 is authority for the proposition that the fact that the parties did not intend to effect an equitable charge in the fund is no answer if in fact the agreement in question objectively considered has that effect. As a matter of construction, the agreement means what it says. It is not necessary to go behind it. Reference to repayment in clause 3 (b) of the loan agreement of January 11, 1973, is relevant and important.

The Court of Appeal held that the covenant in clause 3 (b) of the loan agreement was in substance negative, namely, not to do anything which might invalidate the bargain between the parties. Their Lordships held further that the obligation was not to repay the loan out of the proceeds of the F.I.B.I. securities in any event, but rather to repay in a manner approved by the Bank of England. This is not a correct construction of the conditions, in particular condition (vii). However, even if it is correct to view the obligation to comply wth condition (vii) as negative in substance, albeit positive in form, in the actual events, the only way in which that condition could have been complied with was by repayment from the proceeds of the F.I.B.I. securities. That circumstance, taken with I.F.T.'s positive obligation to repay the loan, results in there having been a positive contractual obligation to repay the loan out of the proceeds of the F.I.B.I. securities, that obligation being specifically enforceable for the reason stated above.

(2) On illegality, the following exchange control provisions are relevant: the Exchange Control Act 1947, ss. 1 (1), (2), 15 (1)-(6), 16 (1), (2), 17 (1), (2), 18 (2), 34 (1), Schedule 5, Part II, paragraph 1 (1) and the Bank of Exchange Control Notice E.C. 7, paragraphs 1, 2 (b), 7 (c), 9, 10, 15 (a) (i), (ii), 20 (b), 21, 22, 23 (a), (b), (c), 25, 37, 39 (g), 40, 41 (b), 85, 86, 87, 88 (a), (b), (c).

It is common ground that section 16 of the Act of 1947 applies to this case and also that it was an offence for Triumph to part with the certificates to Lloyds. Section 17 prohibits any charge over foreign securities without permission of the Bank of England and, therefore, unless the respondents' can show a relevant permission, it is illegal and void. This also is common ground. Lloyds did not obtain validation under section 18 (2). A charge to Lloyds cannot be inferred from the permissions contained in the letter from the Bank of England, dated October 22, 1971, to G.T. Whyte & Co. Ltd. (on behalf of I.F.T.). The respondents to succeed on this issue have to bring themselves within the general consent given in paragraph 87 of E.C. 7 as authorising the creation of the charge. More specifically, the question is whether the case is taken out of paragraph 88 (a) or (b). Unless the case is so excluded, paragraph 87 does cover the creation of the charge, being a transfer (as defined by paragraph 9 of E.C. 7) by a person who was not an authorised depositary (I.F.T.) to an authorised depositary (Lloyds).

The appellants rely on paragraph 88 (a) which applies if the creation of the charge involved "a change of beneficial ownership." The concept of beneficial ownership is central to the scheme contained in E.C. 7 and it was accepted by both courts below that the beneficial owner for this purpose is the person to whose order the authorised depositary holds the relevant scrip. The reason why the Court of Appeal reversed the determination of Browne-Wilkinson J. on this point was that it was considered that, notwithstanding the granting of the charge to Lloyds on September 24, 1974, Lloyds as authorised depositary still held the scrip to the order of I.F.T., so that, for example, Lloyds could not have objected if I.F.T. directed that the scrip be transferred into the custody of another authorised depositary.

Even if this approach were correct, as a matter of general principle as regards equitable mortgages, it is unrealistic and wrong on the facts of this case and fails to take account of the extent of the rights granted to Lloyds under the charge. For this reason English Sewing Cotton Co. Ltd. v. Inland Revenue Commissioners [1947] 1 All E.R. 679 is distinguishable. In the circumstances, after the creation of the charge (had it been valid) the scrip was held by Lloyds to its own order as mortgagee and, accordingly, there would have been a change in the beneficial ownership of the securities within the meaning of paragraph 88 (a) of E.C. 7. Accordingly, a specific consent was required to the creation of the charge and, no such consent having been obtained, the charge was illegal and void.

Further, the transfer consisting of the creation of the charge was within paragraph 88 (b), as Browne-Wilkinson J. held, because Lloyds, having obtained the physical custody of the scrip in circumstances which involved a breach of the Act of 1947, could not assert for the purposes of paragraph 88 (b) that the scrip was in its custody regularly obtained under the exchange control scheme. "Custody" in that context means not de facto custody as the Court of Appeal held, but custody illegally obtained under the provisions of the Exchange Control Act 1947. Any other conclusion would detract seriously from the system of notification and controlled custody of scrip on which the Bank of England relied for the supervision and enforcement of exchange control restrictions. For this purpose, where physical custody has been irregularly obtained by an authorised depositary, the scrip should be regarded as not in the custody of any authorised depositary, with the result that, under section 15 (6) Of the Act of 1947, and paragraph 12 of E.C. 7, no transfer of the securities would be permissible at all until the position as regards custody had been regularised or validated. Accordingly, the F.I.B.I. securities were not, for the purposes of paragraph 88 (b), in the custody of Lloyds or any other authorised depositary on September 24, 1974 and the charge to Lloyds was illegal and void for that reason also.

There are two additional reasons why Lloyds charge was void for illegality. First, the effect of Lloyds charge (if it had been valid) would have been to bring about a breach by I.F.T. of Bank of England conditions (vi) and (vii). I.F.T. would no longer have been able to make interest payments or capital repayments to the appellants out of the loan portfolio. For I.F.T. to grant and for Lloyds to accept a charge over the loan portfolio fund in breach of conditions (vi) and (vii) was an illegal act: see section 34 and Schedule 5, Part II, paragraph 1 of the Exchange Control Act 1947. Further, Lloyds were, prior to taking their charge over the F.I.B.I. securities, aware that they were subject to Bank of England conditions. Secondly, it is common ground that Lloyds committed an illegal act under the Exchange Control Act 1947 in accepting custody of the F.I.B.I. securities from Triumph without any Bank of England consent. Under the terms of the subsequent memorandum of charge, executed by I.F.T., the charge was expressed to cover the securities, the certificates of which were then lodged with Lloyds. It is not open to Lloyds for the purposes of bringing the F.I.B.I. securities

within the memorandum of charge to rely on Lloyds own illegal acquisition of custody of the securities. Bowmakers Ltd. v. Barnet Instruments Ltd. [1945] K.B. 65 is distinguishable because in that case no illegal act had to be relied on.

Peter Millett Q.C. and Richard Sykes Q.C. for the respondents on the first and second issues. The whole of the appellants' argument rests on a fundamental misconception of the requirements of condition (vii) of the Bank of England conditions. On their true construction, conditions (vi) and (vii) of the Bank of England's conditions, although positive in form, were negative in substance and merely restricted I.F.T. in the sources from which it might, without the further consent of the Bank of England, lawfully pay sums due to S.B.C. In particular, (i) they did not impose a positive obligation on I.F.T. to pay interest and other charges out of the income of the foreign currency securities or at all; (ii) they did not impose a positive obligation on I.F.T. to repay principal out of the sale proceeds of the foreign currency securities or at all; (iii) they did not impose a positive obligation on I.F.T. to apply the income or sale proceeds of the foreign currency securities in or towards payment of sums due to S.B.C.; but (iv) they merely prohibited I.F.T. from paying sums due to S.B.C. otherwise than out of such income or sale proceeds.

As to the true construction of the Bank of England conditions, condition (vii) has to be construed in the light of the fact that it was imposed solely for exchange control purposes: (a) it must have been imposed in order to protect sterling; (b) it was not imposed to protect a foreign holder; (c) it was to prevent securities bought with sterling at the official exchange rate from being sold without payment of the premium. In construing the conditions, it is to be borne in mind that breach of them constitutes an offence. Condition (vi) can be made wholly intelligible if the word "only" is inserted between "paid" and "out" in the third line of the clause. This condition is directed to the methods available for payment of interest and other charges. It is impossible to construe condition (vii) as a positive obligation to pay interest out of foreign dividends. Similarly condition (vii) amounts to a negative restriction preventing repayment of the loan otherwise than out of the sale proceeds of the F.I.B.I. securities, or other investment currency which had Bank of England approval. If the respondents are correct in relation to condition (vii), then the whole of the appellants' claim disintegrates.

On its true construction, the covenant imposed on I.F.T. by clause 3 (b) of the loan agreement, dated January 11, 1973, was likewise a negative one. Accordingly, so long as the conditions imposed by the Bank of England remained in force: (i) I.F.T. (which, like every debtor, whether the debt be secured or unsecured, was under a contractual obligation to repay) was subject to the restriction that repayment must be made (if at all) from the sale proceeds of the foreign currency securities and not from any other source; but (ii) this was not the same as, and did not constitute, a positive obligation on I.F.T. to apply such proceeds in or towards repayment of the debt due to S.B.C. and not for any other purpose.

The interest claimed, however described, is a security on a debt since (a) it is plain that if the debt to the appellants had been discharged

in whole or in part, the appellants' interest would be determined pro tanto; (b) the appellants claim no interest in any surplus in the I.F.T. securities; (c) I.F.T. were entitled at any time to redeem the debt in any way approved by the Bank of England. The claim is plainly an equitable proprietary interest in the security: see per Buckley L.J. ante, p. 594G. This is no other than an equitable charge. Every security for a debt necessarily takes the form of a proprietary interest: Pearce v. Bastable's Trustee in Bankruptcy [1901] 2 Ch. 122.

A security may be created in law or in equity and may be created by way of mortgage, charge, or lien. In the Present case, the claim plainly relates to a charge. This is often created by way of declaration of trust: see In re Bond Worth Ltd. [1980] Ch. 228, 250B - 251D, for a description of the difference between a mortgage and a charge. An equitable charge can be created by implication: see per Buckley L.J. ante, p. 595F-G. In the present case, there is no express charge nor any language which necessarily creates a charge. Buckley L.J. at p. 596A-C is correct not only in his conclusion but also in his approach to this question. The only intention evinced was to comply with the Bank of England requirements, not to create a security. [Reference was made to Fisher and Lightwood's Law of Mortgage, 9th ed. (1977), pp. 13, 14.]

Browne-Wilkinson J. held that the combination of clause 3 (b) of the loan agreement with condition (vii) of the Bank of England conditions created a charge. It is emphasised that the parties evinced no outward intention to create a charge. The reason the judge found that there was a charge was because he misconstrued condition (vii). There was no appropriation of the F.I.B.I. securities to answer the debt. Even if there was, the parties evinced no intention to create a charge. If there is no positive obligation to appropriate, there cannot be a charge: Palmer v. Carey [1926] A.C. 703. If the creditor cannot control the disposition of the fund, there cannot possibly be a charge. Condition (vii) permitted repayment out of the F.I.B.I. securities; it did not require it. I.F.T. was always free with the consent of the Bank of England to do what they liked with the fund and, therefore, there was no room for a proprietary interest in the appellants. The charge envisaged by the appellants is of a wholly unique nature and is untenable in law.

This whole branch of the law is one where equity gives effect to the intentions of the parties objectively ascertained. Even if I.F.T. undertook positively to pay out of the fund, it does not follow that this can be enforced by specific performance because equity will not interfere if damages at law are an adequate remedy. The judgment of Buckley L.J., ante, pp. 595c to 596B is adopted in its entirety.

It is said that the acquisition of scrip was contrary to section 17 (2) of the Exchange Control Act 1947. This is a most technical breach in the circumstances, but accepting that there was a breach, the judgment of Browne-Wilkinson J., [1979] Ch. 548, 576B-D, is adopted. The respondents do not rely on a mortgage by way of deposit but on the memorandum. Further, they do not have to show how they obtained custody. Doubtless, there was a breach of section 17 (2) of the Act unless permission was granted. The only permission upon which the respondents can rely is paragraph 87 of E.C.7. A charge is a transfer under E.C.7.

Accordingly, paragraph 87 gives permission, unless paragraph 88 takes it away.

Legal ownership remained throughout in I.F.T. A charge does not affect a change of beneficial owner and, therefore, on redemption, there was no change of beneficial interest. Once. however, the bank forecloses, there will be a change of beneficial ownership. Permission would be required the moment that the bank sought to foreclose. To the question, who was the beneficial owner after the creation of the charge, the answer is that it was I.F.T. There can only be one holder of the scrip at any one time: see paragraphs 16, 19, 37 and 42 of E.C.7. As to whether there was a change of beneficial ownership here: see the judgment of Buckley L.J., ante, pp. 600F - 601C, which is adopted. The appellants contended to the contrary but their argument confuses the distinction between the position of a bailee and that of a trustee.

It was said that if paragraph 87 was intended to charge securities, it should have been in part III rather than part IV of E.C.7. But this is to beg the question. As to paragraph 15, this is dealing with parting with physical possession of securities and, therefore, goes with section 15 of the Act. It is emphasised that breaches of the Act are criminal offences and, therefore, any obscurities should be resolved in favour of the subject. As to paragraph 88 (b), the reference to "custody" must be treated as a reference to de facto custody and not to legal custody, otherwise one cannot make sense of the regulations as a whole: see, for example, paragraphs 11, 12, 22, 24, 25. The expression "actual custody" is used in paragraph 7 (c) to contrast such custody with constructive custody.

In conclusion, the appellants contend that the charge contravened condition (vii). If Lloyds Bank were only#a second chargee, it could not contravene condition (vii).

Scott Q.C. in reply on issues (1) and (2). (1) If the appellants be right on construction, then there was an obligation on I.F.T. to repay out of the fund. If that is so, then there is no reason why this was not specifically enforceable and an equitable interest follows. But the respondents contend, nevertheless, even if the appellants are right on construction, they have no equitable interest in the fund. Plainly, this is a case where damages would not be an adequate remedy. It is implicit that if the appellants are correct that they have a contractual right to be paid out of the fund.

(2) Reliance is placed on the language of paragraph 86 of E.C.7 to show that the construction contended for by the respondents of paragraph 87 and 88 leads to various anomalies between different classes of chargors. As to paragraph 88 (b), "custody" means "lawful custody."

Their Lordships took time for consideration.

May 14. LORD WILBERFORCE. My Lords, this appeal is concerned with competing claims to a fund of �828,066 held on deposit by Lloyds Bank Ltd. (Lloyds). It represents proceeds of sale of securities issued by a company incorporated in Israel, F.I.B.I. Holdings Co. Ltd., to

the respondent Israel Financial Trust Ltd. ("I.F.T."). These securities are referred to as "the F.I.B.I. securities." There are three issues: (1) whether the appellants, Swiss Bank Corporation ("S.B.C."), had a charge over or a proprietary interest in the F.I.B.I. securities and, if so, what is the nature of that charge or interest; (2) whether a charge created by I.F.T. over the F.I.B.I. securities in favour of Lloyds is valid; (3) (depending on the answers to questions (1) and (2)) whether the interest of S.B.C. has priority over the charge to Lloyds.

The only effective parties to the appeal are S.B.C. and Lloyds, the fourth and fifth respondents being insolvent.

The answer to the first question depends upon two documents. The first is a letter of consent under the Exchange Control Act 1947 given by the Bank of England to G. T. Whyte & Co. Ltd. (on behalf of I.F.T.) on October 22, 1971 for a loan to I.F.T. of up to 10.5 million Swiss francs. The Bank of England granted consent for this loan subject to various conditions set out in the letter and an accompanying memorandum. It was contemplated that the loan was to be used in order to take up what became the F.I.B.I. securities: under the terms of the consent these securities had to be deposited with an authorised depositary, and held on a separate account distinguished from any other foreign securities belonging to I.F.T. The memorandum set out eight conditions, evidently designed to protect sterling. Those most relevant are the following:

"(iv) No security acquired is sold for sterling and no foreign currency sale/redemption etc., proceeds thereof are sold for sterling in the investment currency market.

"(vi) Interest and other charges in respect of the borrowing and management expenses are paid out of the income arising from the foreign currency securities acquired, any shortfall being met from the sale proceeds of such securities, or from any part of the borrowing then held in liquid form or, subject to the Bank of England's prior permission being obtained, with investment currency or by an increase in the borrowing.

"(vii) Repayment of the borrowing is made from the sale proceeds Of foreign currency securities held by the above-named borrower in the relative 'loan portfolio' or, in the event of a shortfall and subject to the Bank of England's prior permission being obtained, with investment currency. ....

"In view of the terms of sub-paragraphs (iv) and (vi) above, it will be appreciated that the securities acquired with the foreign currency borrowing will need to be kept on a separate account to distinguish them from any other foreign currency securities owned by the borrower."

The agreement for the loan by S.B.C. was made on January 11, 1973, between S.B.C. and I.F.T. It provided for a loan of up to 10.5 million Swiss francs to be taken up by I.F.T. not later than March 31, 1974. It contained a number of provisions designed to ensure that the loan should be in conformity with Exchange Control Regulations and that all necessary consents would be obtained by I.F.T. The critical clause is clause 3 which reads:

The company hereby warrants to and covenants with the bank as follows:- (a) This agreement will when executed constitute a valid and enforceable obligation of the company which has the necessary authority to enter into it. Nothing hereby contained contravenes any statutory requirement or contractual obligation binding upon the company or any provision of its memorandum and articles of association. (b) All necessary consents and authorisations for the service maintenance and repayment of the loan have been obtained by or on behalf of the company and all conditions thereof will be observed by the company during the continuance of this agreement."

The agreement provided for a sterling cash deposit to be made by I.F.T. with S.B.C. of an amount which I.F.T. agreed to maintain at 95 per cent. of the sterling equivalent of the amounts advanced, and with regard to this deposit it was agreed as follows:

"8. (a) As a continuing security for the principal moneys and interest and all other sums payable by the company under this agreement and the performance and observance of all the terms and conditions set out herein the company hereby charges with effect from each of the relevant advance dates the sterling cash deposits on the terms set out below and undertakes to execute on demand any further documents which may reasonably be required by the bank to give effect to this clause 8."

The loan was repayable on demand and also in a number of specified events including breaches by I.F.T. of any condition of the loan.

In due course, S.B.C. advanced to I.F.T. a total of Swiss francs 9,352,833, which I.F.T. used in acquiring the F.B.I. securities. These securities were deposited with Triumph Investment Trust Ltd. ("Triumph") as authorised depositary: Triumph was a parent company of I.F.T.

In 1974 the Triumph group of companies ran into financial difficulties, to meet which Lloyds agreed to lend Triumph some �27.5 million, on terms that I.F.T. and other subsidiaries should guarantee this loan, and grant charges over various assets. I.F.T. accordingly executed a memorandum of deposit in favour of Lloyds on September 24, 1974; I explain the transaction in greater detail below. Later in 1974 the F.I.B.I. securities were sold by agreement with Lloyds, and the dollar proceeds of the sale converted into sterling, realising the above-mentioned sum of �828,066.

On the first question, it is contended by S.B.C. that the effect of clause 3 (b) of the loan agreement, taken together with the conditions on which permission for the loan was granted, in particular condition (vii), was to confer upon S.B.C. an equitable charge, or some other equitable interest of a proprietary nature. The learned trial judge accepted this contention and he held that S.B.C. was contractually entitled to have the loan repaid out of the proceeds of sale of the F.I.B.I. securities; that the agreement to this effect was specifically enforceable by S.B.C.; and that consequently S.B.C. acquired an equitable interest of a proprietary character in those proceeds. The Court of Appeal took the opposite view that S.B.C. was

not entitled to any charge or other proprietary interest. In my opinion they were right.

I do not doubt the correctness of the principles of law upon which these appellants, S.B.C., rely and which were stated by the learned judge. These are best summed up in the well-known passage from the judgment of the Privy Council in Palmer v. Carey [1926] A.C. 703, 706-707, delivered by Lord Wrenbury:

"The law as to equitable assignment, as stated by Lord Truro in Rodick v. Gandell (1852) 1 De G.M. & G. 763, 777, 778, is this: 'The extent of the principle to be deduced is that an agreement between a debtor and a creditor that the debt owing shall be paid out of a specific fund coming to the debtor, or an order given by a debtor to his creditor upon a person owing money or holding funds belonging to the giver of the order, directing such person to pay such funds to the creditor, will create a valid equitable charge upon such fund, in other words, will operate as an equitable assignment of the debts or fund to which the order refers.' An agreement for valuable consideration that a fund shall be applied in a particular way may found an injunction to restrain its application in another way. But if there be nothing more, such a stipulation will not amount to an equitable assignment. It is necessary to find, further, that an obligation has been imposed in favour of the creditor to pay the debt out of the fund. This is but an instance of a familiar doctrine of equity that a contract for valuable consideration to transfer or charge a subject matter passes a beneficial interest by way of property in that subject matter if the contract is one of which a court of equity will decree specific performance."

But I find it impossible to extract from the documents any agreement with S.B.C. on the part of I.F.T. to repay the loan out of the F.B.I. securities.

In my opinion:

1. Condition (vii) is perhaps capable of two meanings. It might create an obligation to apply the loan portfolio to repayment of the loan and for no other purpose. Or it might create an obligation to repay the loan only out of the loan portfolio and not from any other fund unless authorised. Which of these it is to bear must depend upon the nature of the document in which the condition appears. In a commercial contract, between lender and borrower, the first meaning would be appropriate, possibly the more appropriate of the two. But in a document emanating from the Bank of England, in a context of exchange control, the second is the only one possible. The Bank of England would have no interest whatever in protecting a foreign lender: its concern would be, and certainly was, to prevent foreign currency (Swiss francs) acquired at the official rate from being sold with the investment currency premium. In my opinion condition (vii) imposes nothing more than a negative restriction preventing I.F.T. from repaying the loan otherwise than out of the sale proceeds of the F.I.B.I. securities or other investment currency if approved by the Bank of England.

2. As a matter of contract between S.B.C. and I.F.T., clause 3 (b) of the loan agreement is nothing more than a clause, usual in such agreements

designed to ensure that the lender complies with all necessary exchange and control regulations. It cannot convert condition (vii) from an exchange control negative stipulation into one of a different character. There is in fact no agreement with S.B.C. as to the manner of repayment of the loan except that it will be repaid in conformity with Bank of England consent and exchange control regulations.

3. The condition, stated after the numbered conditions, that the F.I.B.I. securities had to be kept on a separate account, was imposed solely for exchange control purposes and to prevent securities acquired at the official exchange rate from being used without permission.

4. The fact that the loan agreement (clause 8) contains an express charge upon the sterling deposits argues strongly against any intention to create a charge on the F.I.B.I. securities through the very different language used in clause 3 (b). As pointed out by Buckley L.J., under the terms of clause 3 (b) read together with condition (vii), any charge which these provisions might be thought to create would be so precarious that no such intention ought to be imputed to the contracting parties in the context of the elaborate agreement they thought fit to make.

I therefore conclude that the appellants' claim to any charge over or proprietary interest in the F.I.B.I. proceeds of sale fails.

The second question, however, still requires decision: for it is in the interest of S.B.C. to contend that Lloyds too have no effective charge over the F.I.B.I. securities, so as to rank, together with S.B.C., as unsecured creditors of I.F.T. I deal now with that question. The relevant facts are the following. In 1974 Lloyds agreed to lend Triumph, then in financial difficulty, a sum of about �27.5 million, repayment to be guaranteed by the subsidiaries of Triumph, including I.F.T. These guarantees in turn were to be secured by charges over certain assets. On February 26, 1974, Triumph, which, as authorised depositary, was holding the F.I.B.I. securities for I.F.T., forwarded them to Lloyds. This transfer, it is said and apparently accepted by Lloyds, though I should have thought it doubtful, was in breach of the Exchange Control Act 1947, section 16. On March 4, 1974, I.F.T. guaranteed repayment of Lloyds' loan to Triumph and on September 24, 1974, executed in favour of Lloyds a memorandum of deposit by way of charge. This extended to all securities "lodged with or held by you (sc. Lloyds) ... (whether lodged held transferred or registered for safe custody collection security or for any specific purpose or generally ...)." No specific consent was obtained by the Bank of England for the creation of a charge in favour of Lloyds.

The first question is whether the memorandum of deposit can be taken to extend to the F.I.B.I. securities. The appellants contend that it cannot because the transfer of those securities to Lloyds by Triumph was unlawful, and consequently Lloyds cannot be allowed to say that it "held" these securities. I have no difficulty in rejecting this contention. Lloyds in fact "held" the securities: in order to establish this factual situation they did not have to rely on any illegal act: the F.I.B.I. securities were simply and uncontestably "held" by them and so within the scope of the memorandum of deposit.

The second question is whether the charge itself was illegal. This

depends upon the construction to be placed upon provisions of the Exchange Control Act 1947 and of a document issued by the Bank of England under the Act known as E.C.7. This, as appears on its face, is in part an administrative document designed to draw attention to the law relating to exchange and control, and in part a legislative document designed to grant certain exemptions, permissions and consents. "It is to be construed accordingly," so the draftsman blandly says, but that is easier said than done.

It first has to be considered whether charges, or at least charges by deposit which do not involve any change in legal ownership, require permission under the Act at all. Neither the Act nor E.C.7 deals specifically with charges, and it does not seem to me at all inconceivable that, unless charges do involve a change in legal ownership, they should be left outside the Act so that they can be created without permission. However, the language of E.C.7, paragraph 9, is extremely wide. It defines a "transfer" (and any "transfer" requires permission under section 17 (2) of the Act) as the doing of anything by the legal or beneficial owner which affects his rights or powers in relation to any foreign currency security. I am unable to say that this language does not extend to a charge, including one by deposit, so that it becomes necessary to inquire whether any permission was given. There was no specific permission, but Lloyds invokes E.C.7, paragraph 87, as conferring a general permission.

"87. Permission is hereby given (subject to the exceptions contained in paragraph 88) for transfers of foreign currency securities by persons other than authorised depositaries to authorised depositaries and to the nominees of authorised depositaries."

This, and the contrary was not seriously argued, is capable of covering the case since I.F.T. was not an authorised depositary but Lloyds was. However, the appellants contend that the case is taken out of paragraph 87 by paragraph 88, which creates three exceptions:

"88. The following transfers are excluded from the permission given in paragraph 87:- (a) any transfer which involves a change of beneficial ownership; and (b) any transfer of a security which is in the custody of an authorised depositary other than a transfer to that authorised depositary or his nominee; and (c) any transfer of a security which is not in the custody of an authorised depositary other than a transfer to the authorised depositary who is to have custody of the security or to the nominee of that authorised depositary."

These provisions are not easy to interpret. However, I have reached the conclusions, and in this I have been much assisted by the full and clear argument in the judgment of Buckley L.J.:

(i) that (a) does not apply because the charge did not create a change in the beneficial ownership. I think it is clear that in relation to a given security there can, for the purposes of the Act, only be one beneficial owner: that is the person for whom the authorised depositary holds the securities and from whom he takes instructions (cf. section 15 (3) of the Act). In my opinion a chargee as such becomes neither the beneficial owner nor a beneficial owner.

(ii) that (b) does not apply because the securities were in the custody of Lloyds and the charge was a "transfer" to Lloyds. That the charge was a transfer results from the definition of transfer which I have already quoted, so it only remains to consider whether the securities were in the custody of Lloyds. In my opinion they were, even if in accepting them Lloyds may have committed a breach of the Act. "Custody," to my mind, connotes a physical situation and nothing else: the alternative to holding that Lloyds had "custody" is to suppose either that Triumph had custody or that nobody had custody and I cannot believe that the Act claims at producing either of these results.

(iii) that (c) does not apply because the securities were in custody of an authorised depositary, viz. Lloyds, for the same reason as stated under (ii).

In my opinion, therefore, none of the exclusions of E.C.7, paragraph 88, apply, the charge was authorised, if authorisation was needed, by paragraph 87, and the contention of illegality fails.

In view of these conclusions, other points as to priorities as between S.B.C. and Lloyds do not arise. I would dismiss the appeal.

LORD RUSSELL OF KILLOWEN. My Lords, I have had the advantage of reading in draft the speech delivered by my noble and learned friend, Lord Wilberforce. I agree with it and would dismiss this appeal.

LORD KEITH OF KINKEL. My Lords, I agree with the speech of my noble and learned friend, Lord Wilberforce, which I have had the benefit of reading in draft, and to which I cannot usefully add. I too would dismiss the appeal.

LORD SCARMAN. My Lords, I have had the advantage of reading in draft the speech delivered by my noble and learned friend, Lord Wilberforce. I agree with it, and would dismiss the appeal.

LORD BRIDGE OF HARWICH. My Lords, I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Wilberforce. I agree with it and would dismiss this appeal.

Solicitors: Simmons & Simmons; Linklaters & Paines.

J. A. G.