Paying away frozen funds: a bank's liability

By Jeremy Sharman


When can a bank be liable for paying away frozen funds?

Banks are used to being served with injunctions which freeze the accounts of customers and generally have procedures in place to deal with such an eventuality. However, until very recently the courts had not considered under what circumstances a bank would be liable in negligence to a claimant should it inadvertently pay away the monies in the frozen account. This issue was considered for the first time by Colman J in Commissioners of Customs & Excise v Barclays Bank plc [2004] EWHC 122 (Comm).

The facts of the case can be stated briefly. The Commissioners were owed large amounts of VAT by a company which had a current account at Barclays. A freezing injunction was granted in favour of the Commissioners prohibiting the disposal of the company's assets, including monies in the account at Barclays. After the order was made, the Commissioners' solicitors faxed a copy of the order to Barclays. Some two hours later Barclays failed to stop a substantial transfer from the account. The Commissioners were not able subsequently to recover the money from the company and they therefore looked to Barclays for compensation.

As is standard practice with most banks served with an injunction, Barclays had written to the Commissioners confirming that it would comply with the order. The letter was sent by Barclays before the payment was made but was not received by the Commissioners until after the payment had been made.

Colman J held that the mere service of the injunction had not imposed a duty of care on Barclays. Unless there was an assumption of responsibility by Barclays to the Commissioners, the Commissioners' sole remedy was to bring proceedings for contempt. Such proceedings may have resulted in Barclays being punished, for example, by way of a fine but would not have resulted in the Commissioners being compensated. However, by sending a letter saying it would comply with the order, Barclays had assumed a responsibility to the Commissioners such that a duty of care arose. Fortunately for Barclays, however, because its letter was not received by the Commissioners until after the funds had been transferred, the court decided that it was not liable. Had the letter been received before the transfer was made then Barclays would have been liable.

The case is of great significance to all banks which may be served with injunctions and is being appealed by the Commissioners. Pending the outcome of the appeal, banks will need to consider very carefully the timing and wording of the letters they send out after receiving a freezing injunction and, indeed, whether a written response should be sent at all.

To read the updated article on this topic, please click here.