UK: Bank Catches Cold from Freezing Orders

Where a bank has been notified that a customer's account is the subject of a freezing order and yet allows money to be withdrawn from that account in breach of the order, the bank can be held liable in negligence to the party that has obtained the order.

Earlier this year the Court of Appeal ruled that Barclays Bank (the Bank) owed a duty of care to the Commissioners of Customs and Excise (the Claimant) after the Claimant served freezing orders on the Bank in relation to two of its customers' accounts (Commissioners of Customs and Excise v Barclays Bank PLC [2004] EWCA (Civ) 1555; [2004] All ER (D) 343 Nov). The Bank's duty was to take care that the funds in such accounts were not dissipated in breach of the freezing orders.

The Claimant obtained the freezing orders (in respect of unpaid VAT) over the accounts of two companies, Brightstar and Doveblue, which were held at the Bank. The Claimant served the orders on the Bank by fax but, within a few hours of receiving each fax the Bank had allowed the two companies to withdraw around £1 million each from their respective accounts. The evidence indicated that operator error was responsible for one of the withdrawals and that the other was completed by means of bypassing the Bank's control facility, through the use of its 'Faxpay' system.

A few months later the Claimant obtained judgments against Brightstar and Doveblue that totalled over £6 million. The companies failed to pay anything and the Claimant sued the Bank for the substantial shortfall between the amounts left in the accounts and the judgment debt.

In the leading judgment, Longmore LJ stated that in determining whether the Bank owed a duty of care three approaches should be utilised:

1. The threefold test of foreseeability, proximity and fairness;
2. The incremental approach; and
3. The assumption of responsibility test.

The Court said that in trying to decide whether there was such a duty, all three tests should provide the same answer to this question.

It was agreed by the parties and confirmed by the Court, that it was foreseeable that if the Bank did not have in place an effective mechanism for preventing withdrawals from customer's accounts then, in this scenario, the Claimant might not be able to collect the money it was owed.

The Court decided that the Claimant and the Bank were not in a position analogous to that of adverse parties in litigation, and that the relationship between them was proximate rather than remote.

The purpose of serving the order on the Bank was to secure its help in preserving the debtor companies' assets. Without the Bank's co-operation the order would be liable to be futile. The Court accepted that the Bank would incur some burden in complying with the order, but that was why it could charge the Claimant a reasonable sum for its co-operation. With this in mind, the Court decided that it was fair that once the Bank had been served with the order it should be legally required to take care not to allow monies to be removed from the relevant accounts in breach of the order.

In summary, under the threefold test the Court held that there was a duty of care owed by the Bank to the Claimant.

It had been considered in a previous case that banks should exercise reasonable care to preserve a defendant's assets in this situation. Longmore LJ said that it was a "short step" from that decision to find that the bank should be liable to an entity that suffers loss if such care is not taken. Accordingly, using the incremental approach the Court found that there was a duty of care owed by the Bank to the Claimant.

Longmore LJ held that although "an assumption of responsibility may, on occasion, be sufficient for the imposition of a duty of care … it is not always a necessary ingredient". He decided that even though the Bank had not expressly assumed responsibility to the Claimant, such responsibility should be imposed by the law and so in respect of this test as well there was a duty of care owed to the Claimant.

1. Banks must have systems in place to identify the accounts in question and prevent dissipation of funds once they have received notice of a Freezing Order.
2. Banks must ensure that their employees are properly trained to recognise and deal rapidly and appropriately with Freezing Orders.
3. Banks must test their systems and procedures on a regular basis to ensure they work in practice and not just in theory.