A hidden danger in Bank transfers

A case has just been decided in the courts which usefully highlights a hidden danger for all businesses (or indeed individuals) which use CHAPS transfers for payments. If you instruct a bank to make a same day transfer it will ordinarily be made by CHAPS payment.

CHAPS is one of those acronyms we take for granted but it stands for Clearing House Automated Payment System and is run by a company with a similar name, with its members being the banks which are using the system.

There is a set of rules which apply to payments made by CHAPS and these rules were a crucial element in this case which concerned a company called Tidal Energy Limited.

Tidal wanted to pay a sum of about £217,000 to one of its suppliers, D Ltd. It completed a CHAPS instruction form to its bank (Bank 1) with the details of the receiving bank (I call it Bank 2), the account number and sort code, an invoice reference and the date for payment. It identified the beneficiary of the payment as “D Ltd”. The payment was made early on 31 December 2012.

Shortly afterwards Tidal discovered that the information it had been given was false. The account of which it had provided details belonged to C Ltd. Tidal immediately asked Bank 1 to revoke the payment on the basis that it had been induced by fraud to make the payment to the account instructed. Bank 1 phoned Bank 2 to ask it to return the payment..Bank 2 said it was a payment made in accordance with the CHAPS rules and it could not do so without a court order. On 6 February C Ltd withdrew the £217,000 odd from its account and the money was gone. Tidal sued Bank 1 (its bank) on the grounds broadly that it had given instructions to pay D Ltd and Bank 1 had not.

Tidal lost the case. The CHAPS rules provide that the required details for a payment are basically account number and sort code-not account or customer name. Bank 1 had no duty to check that the account was D Ltd’s. The court said that level of checking was not part of the CHAPS system.

These electronic payments therefore are quite different from old-fashioned cheques.

Just like sending a confidential e mail, it is vital to take steps to verify very carefully all the relevant details of the business or person to whom you are making a payment. The case highlights the fact that bank systems are not there as a secondary check. If the payment details are wrong, the error is likely to be that of the payer rather than the bank with potentially very painful consequences.

Roger Sands01752 292316rsands@wolferstans.com