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[CHANCERY DIVISION] |
SELANGOR UNITED RUBBER ESTATES LTD. v. |
CRADOCK AND OTHERS (No. 3) |
[1964 S. No. 1648] |
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Company - Director - Fiduciary dufy to company - Use of moneys in company's bank account to finance purchase of stock - Misapplication - Payments by cheques - Whether directors liable as trustees of company's moneys - Whether strangers concerned with purchase liable as constructive trustees - Whether company could sustain claim founded on illegal transactions to which a party - Companies Act, 1948 (11 & 12 Geo. 6, c. 38), s. 54 (1). |
Banking - Company's account - Moneys in credit - Misapplication by directors - Within banks' knowledge - Whether banks liable as trustees or constructive trustees of company's moneys. |
Banking - Negligence towards customer - Duty of care - Misapplication of company's credit in bank account by directors - Banks knew or ought to have known - Whether, when in doubt, banks should have made inquiries. |
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In 1957 a company, with an issued capital of £90,000, which carried on business as a rubber company in the Malay States was without a business, having sold its rubber estates, but had liquid assets of about £235,800. B. & T. Ltd., acting for an undisclosed principal, C., made an offer for the company's stock. The offer was accepted by 79 per cent. of the stockholders. The total amount payable for the stock and expenses was £195,000. |
The first transaction. It was arranged by C. that the company's account with a credit of £232,500 at N. Bank should be transferred to a new account at a branch of D. Bank where C. had an account with a very small credit. At a meeting on April 25, 1958, two drafts for a total of £232,764 were received by D. Bank for the company's new account. The company's board resolved to lend 232,500 to W.T. Ltd. at 8 per cent. interest and a cheque for £232,500 was drawn on the company's new account in favour of W.T. Ltd.; W.T. Ltd. lent that amount at 9 per cent. interest to C. and the cheque was indorsed by W.T. Ltd. in favour of C. and was paid into his account with D. Bank, thus covering the payment of £195,000 to B. & T. Ltd. The bank made no inquiries before paying that cheque. The 79 per cent. of the company's stock was in due course registered in one of D. Bank's nominee companies as nominee for C. Both B. & T. Ltd. and W.T. Ltd. knew that C.'s purpose was to misapply the company's moneys to finance the purchasing of its stock. By April 25, 1958, the company's board of directors had been reshuffled and L. and J. had been appointed. Later in 1958 L. resigned. Both L. and J. acted exactly as told by C. and exercised no discretion or volition of their own. On August 26, 1958, the company's account was transferred to N.S. Bank where it was opened with a credit of about £700. The usual documents authorising directors to sign for the company's cheques drawn were sent. |
The second transaction. On January 26, 1960, it was resolved at a meeting that the indebtedness of W.T. Ltd. to the company and the indebtedness of two nominee companies of C. should be taken over, as to £207,500 by C. and as to £42,000 by H.B. Ltd.; that a cheque for £207,500 in settlement of C.'s liability be paid into the company's account; and that bills for a total of £42,000 payable on future specified dates be drawn on H.B. Ltd. in settlement of its liability. There was a further reshuffle of the board of directors. J. and one A. J. resigned, and B. and S. were appointed directors. At another meeting held on either January 26 or on January 27, 1960, S. was appointed chairman and B. secretary. It was resolved that the company should open an account with N.S. Bank, although it already had opened an account with that bank. The usual banking resolution was passed and a mandate valid for the opening of the account was signed by B. and S. authorising, inter alia, cheques drawn on the account to be signed by the chairman and secretary or any two directors. A cheque for £207,500 was drawn for B. from the company's account in accordance with the mandate by S. and B. and B. drew a cheque for the same amount on his own account in favour of C. At an interview with an official of the N.S. Bank in charge of the branch in the manager's absence it was explained that the cheques were being exchanged for "internal accounting reasons" or "internal book-keeping reasons" and all three cheques were debited and credited as directed. On February 19, 1960, C. sent the company a cheque for £42,000 in place of the bills drawn on H.B. Ltd. which had been refused. That cheque was part of another series of three cheques and on February 25, 1960, they |
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were debited and credited to the three accounts in the same way as the three cheques for £207,500. The purpose of the second transaction was to finance the purchase by B. from C. of the stock in the company. S., though he knew the purpose, handed over the company's cheque, without security, to B., but it was not intended that the money paid to the company by the cheques should belong to it, the company serving a conduit pipe for the passage of that money. |
On August 12, 1964, following investigations by its inspectors, the Board of Trade issued a writ in the name of the company pursuant to section 169 (4) of the Companies Act, 1948, claiming, inter alia, a declaration that the defendants C., L., J., B. and S., being directors, B. & T. Ltd. and W.T. Ltd., being other parties concerned with the transactions, and D. Bank and N.S. Bank, being the company's bankers, were jointly and severally liable to replace moneys of the company which had been misapplied contrary to section 54 (1) of the Act of 19481:- |
Held, (1) (a) that a credit in a company's bank account was moneys of the company under the control of its directors held on trust for the company's purposes and to apply it otherwise was a breach of trust (post, p. 1577G). |
(b) That a director acting on the direction of a stranger was fixed with that stranger's knowledge (post, p. 1578H); and that L. and J. were fixed with C.'s mind (post, pp. 1613H - 1614A). |
Observation of Mellish L.J. in Gray v. Lewis (1873) L.R. 8 Ch.App. 1035, 1056; 29 L.T. 12 applied. |
Land Credit Co. of Ireland v. Lord Fermoy (1870) L.R. 5 Ch.App. 763 distinguished. |
(c) That the company having no moneys at the time of the second transaction which could be misapplied and there being no damage, B. and S. escaped liability in that respect (post, p. 1651 B-H). |
(2) (a) That although a bank was not a trustee for its customers account liability as a constructive trustee might be imposed where the bank knowingly assisted a trustee in a fraudulent and dishonest disposition of the trust property. |
Foley v. Hill (1848) 2 H.L.Cas. 28, H.L.; Burdick v. Garrick (1870) L.R. 5 Ch.App. 233, C.A.; Barnes v. Addy (1874) L.R. 9 Ch.App. 244; and Soar v. Ashwell [1893] 2 Q.B. 390, C.A. followed. |
(b) That the knowledge in such a case was knowledge of circumstances which would indicate to an honest, reasonable man that a dishonest and fraudulent design, i.e., conduct which was morally reprehensible, was being committed or would put him on inquiry (post, p. 1590E-F); and that the transfer of the company's account to D. Bank, followed by payment by indorsement of a cheque to C. of almost the total amount, was a circumstance which put a reasonable banker on inquiry (post, pp. 1634H - 1635B). |
1 Companies Act, 1948, s. 54: "(1) Subject as provided in this section, it shall not be lawful for a company to give ... any financial assistance for the purpose of or in connection with a purchase ... by any person of or for any shares in the company ..." |
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Keane v. Robarts (1819) 4 Mad. 332; and Gray v. Johnston (1868) L.R. 3 H.L. 1, H.L. considered. |
Shields v. Bank of Ireland [1901] 1 I.R. 222; Thomson v. Clydesdale Bank Ltd. [1893] A.C. 282, H.L. (Sc.); and Backhouse v. Charlton (1878) 8 Ch.D. 444, distinguished. |
(3) (a) That the relationship between customer and banker was contractual and founded on one contract which normally included the relationship of creditor and debtor with regard to the balance of the customer's bank account and principal and agent in respect of the payment of the customer's cheques drawn on his account; that under the contract the bank's duty, extending over the whole range of banking business within that contract was to exercise reasonable care and skill in interpreting, ascertaining and acting in accordance with the really intended instructions of the customer as contrasted with the instructions to act to defeat the customer's real intentions (post, pp. 1594B, 1609C). |
Bellamy v. Marjoribanks (1852) 7 Exch. 389; Carpenters' Co. v. British Mutual Banking Co. Ltd. [1938] 1 K.B. 511; [1937] 3 All E.R. 811, C.A., considered. |
(b) That in deciding whether paying banks were in breach of the required standard of care, and whether inquiry ought to have been made, all the circumstances, including the extent to which the transaction appeared out of the ordinary course had to be considered. |
(c) That, on inquiry, the inquirer was entitled to act on an answer received which he might reasonably believe to be true; but if inquiry ought to have been made and was not, it was to be assumed that a true answer would have been given, and if no inquiry was made negligence was established (post, p. 1607C). |
Macbryde v. Eykyn (1871) 24 L.T. 461; and observations of Romilly M.R. in Jones v. Williams (1857) 24 Beav. 47 followed. |
(d) That having regard to all the relevant considerations and the surrounding circumstances the explanation regarding the three cheques given to the N.S. Bank official was justifiably assumed to be honest and did not put the bank on further inquiry. Therefore N.S. Bank was not liable (post, pp. 1645H, 1646G). |
Per curiam: The mandate did not excuse either the signatories or the bank from any obligation existing independently of it, such as obligations under their respective contractual relations with the company, and as between the company and the bank the mandate operated within the normal contractual relationship of customer and banker. Those relationships included the normal duty of care which was owed to the customer, and not to the authorised signatories (post, pp. 1608G - 1609B). |
(4) That although an illegal transaction in a contract or consensual arrangement, itself being forbidden, could not give rise to civil rights a claim could be based on an illegal breach of a right; that, therefore, as against the directors and constructive |
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trustees, the company was not precluded from relying on breach of trust by an illegal transaction to which the company was itself a party when the breach included the making of the company a party to that very transaction; and that, accordingly, the fact that both the transactions in the present case were unlawful and avoided by section 54 of the Act of 1948 did not defeat the company's claims (post, pp. 1654A-B, 1656D-F). |
Steen v. Law [1964] A.C. 287; [1963] 3 W.L.R. 802; [1963] 3 All E.R. 770, P.C., considered. |
Victor Battery Co. Ltd. v. Curry's Ltd. [1946] Ch. 242; [1946] 1 All E.R. 519 explained. |
ACTION. |
This was an action by the Board of Trade brought on April 21, 1964, pursuant to section 169 (4) of the Companies Act, 1948 in the name of the plaintiff company, the Selangor United Rubber Estates Ltd. (in liquidation by an order of the court dated June 5, 1961) against Francis Richard Cradock ("Cradock"); Contanglo Banking and Trading Co. Ltd. ("Contanglo"); District Bank Ltd. ("District"); Woodstock Trust Ltd. ("Woodstock"); Francis Evelyn Barlow-Lawson ("Barlow-Lawson"); Francis Arthur Jacob ("Jacob"), the Bank of Nova Scotia; John Leonard Burden ("Burden"); and William Vernon Squire Sinclair ("Sinclair"); and the trustees of the property of Cradock. |
The writ claimed (1) a declaration that the first nine defendants were jointly and severally liable to replace moneys of the plaintiff which had been misapplied; (a) as to Cradock, the Bank of Nova Scotia, Burden and Sinclair, £249,500; (b) as to Contanglo, £195,322, odd; and (c) as to the remaining defendants, £232,500, the £195,000 and £232,500 being included in £249,500. (2) An order that the first nine defendants should pay to the official receiver as liquidator of the plaintiff such sums as they were found liable to replace with interest thereon at the rate of five per cent. per annum. |
The writ, among other things, also claimed damages for breach of duty amongst the first nine defendants and further or alternatively, against District and the Bank of Nova Scotia, damages for negligence in their capacities as bankers to the plaintiff. |
The facts are fully stated in the judgment. |
W. A. Bagnall Q.C., J. P. F. E. Warner, J. R. Sykes and R. A. Morritt for the Board of Trade. |
Cradock did not appear and was not represented. |
A. J. Balcombe for Contanglo. |
Robin Dunn Q.C., and K. B. Suenson-Taylor for District. |
G. B. H. Dillon Q.C., and D. Nicholls for Woodstock. |
Barlow-Lawson appeared in person. |
Jacob appeared in person. |
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John Arnold Q.C., and R. B. S. Instone for the Bank of Nova Scotia. |
Burden appeared in person. |
Sinclair appeared in person. |
The trustee of the property of Cradock did not appear and was not represented. |
The following cases, in addition to the cases referred to in the judgment, were cited in argument: De Begnis v. Armistead2; Wilson v. Moore3; In re Disderi & Co.4; Ex parte Kingston, In re Gross5; British and American Telegraph Co. v. Albion Bank6; Overend & Gurney Co. v. Gibb7; Lewis v. Great Western Railway Co.8; In re Barrow-in-Furness & Northern Counties Land and Investment Co.9; Yorkshire Railway Wagon Co. v. Maclure10; In re New Mashonaland Exploration Co.11; In re National Bank of Wales Ltd.12; Moxham v. Grant13; Dovey v. Cory14; In re David Payne & Co. Ltd., Young v. David Payne & Co. Ltd.15; Forder v. Great Western Railway Co.16; Victorian Daylesford Syndicate Ltd. v. Dott17; In re Brazilian Rubber Plantations & Estates Ltd.18; Gascoigne v. Gascoigne19; Toronto Electric Comrs. v. Snider20; In re Matthew Ellis Ltd.21; In re Patrick & Lyon Ltd.22; Motor Traders Guarantee Corporation Ltd. v. Midland Bank Ltd.23; Montreal Trust Co. v. Canadian National Railway Co.24; United Australia Ltd. v. Barclays Bank Ltd.25; In re V. G. M. Holdings Ltd.26; Fibrosa Spolka Akcyjna v. Fairbairn, Lawson Combe Barbour Ltd.27; Bowmakers Ltd. v. Barnet Instruments Ltd.28; Gray v. Southouse29; Reading v. Attorney-General30; H. L. Bolton (Engineering) Co. Ltd. v. T. J. Graham & Sons Ltd.31; In re P (G. E.) (An Infant)32; Curtis's Furnishing Stores Ltd. v. Freedman33; In re Gale, decd.34; Snook v. London and West Riding Investments Ltd.35; Marfani & Co Ltd. |
2 (1833) 10 Bing. 107. |
3 (1834) 1 My & K. 337. |
4 (1870) L.R. 11 Eq. 242. |
5 (1871) 6 Ch.App. 632. |
6 (1872) L.R. 7 Exch. 119. |
7 (1872) L.R. 5 H.L. 480, H.L. |
8 (1877) 3 Q.B.D. 195, C.A. |
9 (1880) 14 Ch.D. 400, C.A. |
10 (1882) 21 Ch.D. 309, C.A. |
11 [1892] 3 Ch. 577. |
12 [1899] 2 Ch. 629, C.A. |
13 [1900] 1 Q.B. 88, C.A. |
14 [1901] A.C. 477, H.L. |
15 [1904] 2 Ch. 608, C.A. |
16 [1905] 2 K.B. 532, D.C. |
17 [1905] 2 Ch. 624. |
18 [1911] 1 Ch. 425, C.A. |
19 [1918] 1 K.B. 223, D.C. |
20 [1925] A.C. 396, P.C. |
21 [1933] Ch. 458, C.A. |
22 [1933] Ch. 786. |
23 (1937) 54 T.L.R. 10; [1937] 4 All E.R. 90. |
24 [1939] A.C. 613; [1939] 3 All E.R. 930, P.C. |
25 [1941] A.C. 1; [1940] 4 All E.R. 20, H.L. |
26 [1942] Ch. 235; [1942] 1 All E.R. 224, C.A. |
27 [1943] A.C. 32; [1942] 2 All E.R. 122, H.L. |
28 [1945] K.B. 65; [1944] 2 All E.R. 579, C.A. |
29 [1949] 2 All E.R. 1019. |
30 [1951] A.C. 507; [1951] 1 All E.R. 617, H.L. |
31 [1957] 1 Q.B. 159; [1956] 3 W.L.R. 804; [1956] 3 All E.R. 624, C.A. |
32 [1965] Ch. 568; [1965] 2 W.L.R. 1; [1964] 3 All E.R. 977, C.A. |
33 [1966] 1 W.L.R. 1219; [1966] 2 All E.R. 955. |
34 [1966] Ch. 236; [1966] 2 W.L.R. 571; [1966] 1 All E.R. 945, C.A. |
35 [1967] 2 Q.B. 786; [1967] 2 W.L.R. 1020; [1967] 1 All E.R. 518, C.A. |
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v. Midland Bank Ltd.36; Vine v. National Dock Labour Board37; Amar Singh v. Kulubya38; Alexander v. Rayson.39 |
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May 29, 30. UNGOED-THOMAS J. read the following judgment: I have divided this judgment up into headings so as to make it more easily indentifiable. |
36 [1968] 1 W.L.R. 956; [1967] 3 All E.R. 967, C.A. |
37 [1956] 1 Q.B. 658; [1956] 2 W.L.R. 311; [1956] 1 All E.R. 1. |
38 [1964] A.C. 142; [1963] 3 W.L.R. 513; [1963] 3 All E.R. 499, P.C. |
39 [1936] 1 K.B. 169, C.A. |
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INTRODUCTION |
The plaintiff |
This action arises from the collapse of a group of companies, including the plaintiff company, and the investigation of the plaintiff's affairs by inspectors of the Board of Trade. |
The Board of Trade has brought the action in the name of the plaintiff under its statutory power conferred by section 169 (4) of the Companies Act, 1948, now replaced by section 37 of the Companies Act, 1967. In addition, the action is brought with the authority of the liquidator of the company, who would be the proper person to bring these proceedings apart from the statutory authority. |
The claim and the defendants |
The claims are in respect of substantial funds of the plaintiff used for purchasing stock in the plaintiff company and in respect of a lesser amount used otherwise than for the purposes of the plaintiff. All these sums have been lost to the plaintiff company. The claims are in respect of two separate transactions: the first transaction in 1958 and the second transaction in 1960. The first transaction is the basis of a claim in respect of £232,500 transferred from the plaintiff to the first defendant Cradock, for the purchase of the stock in the plaintiff company. The second transaction is the basis of a claim in respect of first, £207,500 transferred to the eighth defendant Burden for the purchase of the stock in the plaintiff company and, secondly, a claim in respect of £42,000 transferred to Burden otherwise than for the purposes of the plaintiff. The claim in respect of these three sums is not cumulative but is in respect of an overall amount of £249,500 (namely, the £207,500 plus the £42,000) including (that is, in the £249,500) the £232,500. |
The defendant Cradock is at the centre of both transactions and the claim against him is in respect of both the £232,500 and the £249,500. The claims against the rest of the first nine defendants are in respect of the £232,500 or the £249,500 but not both, except that the claim against Contanglo is limited to £195,000 which is that part of the £232,500 which came into its hands. The claims in respect of the £232,500, based on the first transaction, are made against the third to sixth defendants, District, Woodstock, Barlow-Lawson and Jacob and, as I have said, in respect of £195,000, part of the £232,500, against the second defendant Contanglo. The claims in respect of the £249,500 are made against the seventh to ninth defendants, the Bank of Nova Scotia, Burden and Sinclair. |
Cradock was a dealer in some kinds of surplus war stores and in properties and he operated through companies, private and public, which he controlled. In the first transaction he purchased approximately 79 per cent. of stock in the plaintiff company and in the second transaction he disposed of it to Burden. He was adjudicated bankrupt on January 16, 1967, and the Official |
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Receiver is his trustee in bankruptcy. Cradock is out of the country; he entered appearance but there is before me a motion for judgment against him in default of defence. Cradock's trustee in bankruptcy was added by amendment as tenth defendant with a view to his being bound by any order that may be made. |
Of the rest of the first nine defendants the personal defendants have appeared in person and the others have been represented by counsel. |
Contanglo carried on business as a banker and was concerned in take-over bids and acted for Cradock in the first transaction. District were bankers to the plaintiff for a time during the first transaction and the Bank of Nova Scotia were bankers to the plaintiff for a time during the second transaction. |
Woodstock was a private investment company which received a cheque for the £232,500 from the plaintiff, which it claims was as loan at interest; and it indorsed the cheque over to Cradock which it claims was as a loan at 1 per cent. higher rate of interest. |
The individual defendants Barlow-Lawson, Jacob, Burden and Sinclair were directors of the plaintiff: Barlow-Lawson as chairman from April 24, 1958, to October 7, 1959, (a date in respect of which there was some doubt but to which all parties agreed); Jacob from April 25, 1958, to January 26, 1960; Burden and Sinclair from January 26, 1960, to June 1, 1960, at the earliest. Sinclair being also chairman. Barlow-Lawson had a small engineering business and was introduced by Scott, a director of Contanglo, into these affairs. Jacob was an employee of Cradock, Burden was developing and expanding a group of engineering businesses and in the second transaction, as I have said, acquired Cradock's holding of 79 per cent. of stock in the plaintiff company. Sinclair was in concert with Burden. |
The legal formulation of the claim against the defendants is against the directors to account as trustees, and against the rest of the first nine defendants to account as constructive trustees, in respect of the misapplication of the plaintiff's moneys; and, in addition, against the banks for negligence. The claim is against the directors, Barlow-Lawson and Jacob (in respect of the £232,500), Burden and Sinclair (in respect of the £249,500), that they are liable to account as trustees for misapplying the plaintiff's moneys as I have already indicated; against Cradock (in respect of the £232,500 and £249,500), Contanglo (in respect of the £195,000), District and Woodstock (in respect of £232,500) and the Bank of Nova Scotia (in respect of the £249,500) that they are liable to account as constructive trustees; against Cradock and Contanglo and Woodstock on the ground that they knowingly participated in misapplication of the plaintiff's moneys in breach of trust and received, in the case of Cradock and Woodstock, £232,500, and, in the case of Contanglo, £195,000 of such moneys; against District on the ground that it likewise knowingly participated in misapplication of £232,500 of the plaintiff's moneys in breach of trust, |
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or alternatively that it paid away £232,500 of such moneys, knowing them to be trust moneys and when it knew or ought to have known that such payment was a misapplication; and against the Bank of Nova Scotia on the ground that it paid away £249,500 of the plaintiff's moneys knowing them to be trust moneys when it ought to have known (though not when it knew) that such. payment was a misapplication; and in addition against the banks in negligence in breach of their duty to the plaintiff as their customer in making such payments out of the plaintiff's account with them. |
It was submitted that the only misapplication relied on in the statement of claim was the use of the plaintiff's money to buy its own shares. The statement of claim, however, alleges misapplication of the plaintiff's money not for the purposes or benefit of the plaintiff but for the purposes and benefit of named recipients and alternatively, in providing financial assistance for the purchase of shares in the plaintiff by reason of which the plaintiff lost £249,500. The pleadings thus are not, in my view, so limited. The plaintiff in opening limited the misapplication relied on in respect of the £232,500 and £207,500 to financial assistance for the purchase of shares in the plaintiff; but this left standing the allegations that such misapplication was not for the purposes or benefit of the plaintiff but of the recipients by reason of which the plaintiff lost the money. |
These claims are disputed on facts and on law and the questions that thus arise on law are of considerable general importance, particularly for banks. |
The scheme of the judgment |
It would be convenient first to describe the first and second transactions so far as they are not substantially in dispute or there is no difficulty in deciding that the facts are as described. I will then specify the various legal issues which arise and deal with those of them which it will be convenient to deal with at that stage. I will then consider the claim against and the defence of each defendant separately; and in doing so examine the disputes of fact and state the results from my findings of fact, taken in conjunction with my conclusions on the points of law already considered but subject to consideration of outstanding questions of law, which will be more conveniently dealt with afterwards. I will then deal with those outstanding questions of law. Finally, I will state the overall result but leave for consideration later the form of order, costs and a claim for expenses of the investigation by the Board of Trade. |
THE FIRST TRANSACTION |
I will first indicate the gist of the first transaction and then trace it in some detail. |
The gist of the first transaction |
The plaintiff in 1957-58 was a company without a business but with substantial liquid assets of about £235,800. Contanglo, |
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acting for an undisclosed principal, who was Cradock, made an offer for the stock in the plaintiff and the offer was accepted by about 79 per cent. of the stockholders. The total amount payable for the stock and expenses was about £195,000. Cradock had a bank account at District's Oxford Street branch in negligible credit and it was arranged that the plaintiff's £232,500 credit in its bank account at the National Bank should be transferred to a new account in the plaintiff's name at the same branch of the District Bank. At a meeting on April 25, 1958, a banker's draft for the £195,000 on District in favour of Contanglo was transferred to Contanglo. In accordance with an arrangement between Cradock and District, it was to be debited to his account with District, such payment to be covered by a National Bank draft for £232,500 to be paid into Cradock's account. But what happened at the meeting was that, instead of a draft for £232,500 by National for payment into Cradock's account, National transferred to District's representative two drafts for a total of £232,764 drawn by it in favour of District to by paid into the plaintiff's new account with District. In accordance with a resolution of the plaintiff's board to lend £232,500 to Woodstock at 8 per cent. interest, a cheque for £232,500 was drawn on the plaintiff's new account with District in favour of Woodstock; and in accordance with an arrangement that Woodstock should lend that amount at 9 per cent. interest to Cradock, the cheque was indorsed by Woodstock in favour of Cradock, handed to District's representative and paid into Cradock's account with District. The £232,500 thus covered the payment of the £195,000 to Contanglo, and the 79 per cent. of the stock in the plaintiff, bought by Contanglo for Cradock, was in due course registered in one of District Bank's nominee companies as nominee for Cradock. Thus, Cradock obtained the stock, Contanglo the £195,000 paid for the stock and expenses and its own fee, Woodstock a liability for £232,500 from Cradock at 1 per cent. higher rate of interest than its liability for that amount to the plaintiff; and the plaintiff, instead of £232,500 cash, obtained an unsecured liability on the part of Woodstock for that amount at 8 per cent. interest. |
First transaction in detail |
The plaintiff was incorporated as long ago as 1911 and carried on business as a rubber company in the Malay States. In 1957, like other rubber companies there, it sold its rubber estates with the result that it had over £¼ million in cash and investments. There was demand for such companies at this time, companies known as shell companies which had lost all their assets, or preferably which had assets which were all liquid, and also had a quotation on the Stock Exchange. Such a company provides a cheap method of obtaining a public company, without need for a prospectus, or for the consent of the Capital Issues Committee under the Control of Borrowing Order as required for the issue of |
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new shares. Though its Stock Exchange quotation would be suspended on a take-over, it would be regranted when the company acquired business assets and provided the Stock Exchange with particulars of them. Control of such a company had the advantage, for a property dealer, of enabling him to obtain free of tax a profit on a property deal, by selling his properties at substantially less than their market value to the company and then ensuring their resale by the company at market value and taking profits on the re-sale in the form of appreciation in the shares which he then sold. Owing to these advantages, the price for the shares in a shell company exceeded the net asset value of the company's assets and this was represented, in the purchase by Cradock of stock in the plaintiff, by a premium of £9,250 in excess of the net asset value. In order to keep the Stock Exchange quotation, however, it was necessary for there to be a substantial minority holding in the company, as happened in the acquisition of the majority share-holding by Cradock in the plaintiff company. Shareholders who did not accept the take-over offer also shared the advantage of any appreciation in the value of the shares as the result of any re-sale of properties thus sold to (or, to use the jargon, "injected into") the company. Thus the property dealer and shareholders, whether they accepted or rejected the take-over offer, would obtain advantages; and the revenue would not obtain any tax which, apart from the operation, the property dealer would, in the ordinary course, like others, have to pay on the profits of his business. |
Although, in order to obtain the tax advantage, it was of the very essence and purpose of such an operation that the price for the injected properties on sale to the company should be substantially less than the price obtainable on the market, this was apparently treated generally as free from objection. I am not concerned in this case with any objection on such a ground. |
If, however, the shell company's liquid assets were used not to pay for properties sold to the company, but to pay for the controlling share-holding, which the taker-over bought, this would clearly be a blatant and fraudulent misapplication of the moneys of such a company as the plaintiff. That is what the plaintiff says the first transaction was. The danger, in general, of such a misapplication was clearly recognised by those who were versed in such operations. I shall deal with this in detail, together with the suggested refinements of the shaded area between clear honesty and black dishonesty, when I consider the first case which calls for such a detailed consideration, namely, the case against Contanglo. |
Mr. Scott of Contanglo proposed to Cradock that he should acquire the stock in the plaintiff company. On October 16, 1957, acting on behalf of Cradock as principal whose identity was not disclosed, Contanglo approached the plaintiff, with the result that on March 31, 1958, Contanglo wrote to the plaintiff's directors offering, on behalf of unidentified clients (in fact Cradock), |
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to purchase the whole of the issued stock of the plaintiff, namely, £90,000 of stock at 5s. 1½d. per 2s. unit of stock, conditional upon acceptance in respect of not less than 75 per cent. of the issued capital, the offer to remain open for acceptance by stockholders until April 21 or such extended period as Contanglo might approve, being not later than April 28. There was provision for payment of a total of £550 to the directors of the plaintiff, Roberts and Fenton, as compensation for loss of office, and for the replacement of such directors by Contanglo's nominees on the offer becoming unconditional. The offer of 5s. 1½d. per 2s. stock unit represented the premium of £9,250 in addition to the value of the plaintiff's assets; and the £235,000 was to cover the purchase of possibly the whole of the stock. Contanglo gave, as references for their readiness and ability to implement the offer, their solicitors, Messrs. D. B. Levinson & Co., and the National Bank. |
On the same date as Contanglo thus wrote to the plaintiff, namely, March 31, Cradock wrote to Contanglo confirming that their offer to the plaintiff was made for him as undisclosed principal; that if the offer became effective Contanglo would pay for all acceptances; that the shares would be transferred into the names of Contanglo or their nominees; that all such payments, together with expenses, would be provided as loan from Contanglo to Cradock at 8 per cent. interest; that Cradock would repay the loan at the expiration of seven days after the closing date of the offer: that Cradock would pay Contanglo £7,500 if the offer became effective and £500 if not effective; that Cradock charged, by way of first charge, as security for such payments to Contanglo, the shares of all assenting shareholders; and that he would confer with Contanglo as to the constitution of the new board of the plaintiff but, in the event, from the resignation of the old board until Cradock had paid all moneys payable to Contanglo under their agreement, the plaintiff's board was constituted of Contanglo's nominees. |
The consensus of opinion about Levinson, of Contanglo's solicitors D. B. Levinson & Co., is that he was a man of very considerable ability and force of character. He, with Scott and one Essex, had acquired a 50 per cent. share-holding in Contanglo, though both Scott and Levinson preferred not to be on the board. Scott said that he was in control of the operation and in charge of policy matters for Contanglo in the first transaction and that Levinson was responsible for implementing that policy. |
Contanglo arranged with the Whitehall branch of the National Bank to grant it an overdraft for the £235,000 on Levinson's guarantee, supported by securities which he had deposited with the bank. However, Contanglo also had a first charge on the stock units in the plaintiff, purchased for Cradock, for moneys payable by Cradock under his agreement with Contanglo and these were to be in the name of National Bank nominees. Mr. Snell, the branch |
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manager of the National Bank, wrote, also on March 31, to Guthrie & Co. Ltd., the plaintiff's secretaries, that Contanglo was in a position to provide £235,000 for the purchase of the holdings in the plaintiff and added that it had been agreed that the "shares" so purchased should be transferred into a National Bank nominee company and indicated that the transfers should be worded accordingly. Again, however, the event differed from the arrangement, for, as we shall see, Contanglo was paid District's draft for the £195,000 covering payments to accepting shareholders (as well as Contanglo's fee and expenses) before any cheques sent to accepting shareholders were or, indeed, could be presented for payment. |
On April 1, the plaintiff's board resolved to recommend acceptance of Contanglo's offer and by a circular of April 3, it did so. On April 17, Contanglo declared the offer unconditional, and on April 18, requested the plaintiff's board to transfer the whole of the plaintiff's cash and funds to the Whitehall branch of the National Bank. On April 21, the plaintiff's board passed a resolution for such transfer from Barclays Bank to the National Bank branch. On April 22, Contanglo, on Cradock's instructions, requested the plaintiff to sell its gilt-edged securities and tax reserve certificates and pay the proceeds to the plaintiff's account at the National Bank, Whitehall branch. On April 23, Contanglo wrote to Cradock that it had arranged to complete the purchase of the shares at the plaintiff board meeting on April 24, and that Meaden and Barlow-Lawson would then be appointed directors and would resign as soon as Cradock made the payments for which he was liable to Contanglo; and that Cradock intended to make such payments at a board meeting of the plaintiff summoned for April 25. |
Also on April 23, Sarsfield, one of three directors of Woodstock, wrote to Cradock as follows: |
"Dear Mr. Cradock", and the heading is "The Selangor United Rubber Estates Ltd.," "Further to our telephone conversation this afternoon, I confirm the arrangements whereby you will complete the transaction to purchase 719,579 2/-ordinary shares in the above company on Friday April 25. It is understood that Contanglo ... will produce a bankers draft in favour of Woodstock ... for £235,799 representing the balance in the account of Selangor United. We shall then make a loan to you of a similar amount and you in your turn will produce a bankers draft for £195,322 5s. 2d. in favour of Contanglo representing the purchase consideration for the shares. It is further agreed that Woodstock ... will pay interest at the rate of 8 per cent. per annum on the loan from Selangor United and that we shall charge you a rate of 10 per cent. per annum on the same amount, making a net fee to us of 2 per cent. for the period in which the money is outstanding. I also confirm that I shall be present at 11 o'clock on Friday at the National Bank Ltd., 15, Whitehall." |
The fee of 2 per cent. was in fact reduced to 1 per cent. and the figure of £235,799 was erroneous, being more than the balance in the plaintiff's account. |
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On April 23, Cradock telephoned Mr. McMinn, the manager of the Oxford Street branch of the District Bank, and said that he might influence the transfer of the plaintiff's bank account to District. He requested McMinn to prepare a banker's draft in favour of Contanglo for £195,322 and asked for District's representative to attend at the National Whitehall branch to collect a banker's draft in favour of Cradock for £235,000 odd. This was confirmed by a letter of April 24, from Cradock to McMinn. McMinn, reporting on May 20 to his general manager, said: "I understood that the second draft would cover the issue of the first and the arrangement was agreed on this basis." I am completely satisfied that it was on this basis that the arrangement was in fact agreed. This £235,000 odd corresponded with the erroneous figure of £235,799 appearing in Sarsfield's letter of April 23, to Cradock (which I have already referred to) as representing the balance of the plaintiff's account. |
On April 24, the manager of the National Bank, Whitehall branch, wrote to the plaintiff's secretaries that cheques for the accepting shareholders were being sent on that day. On the same day, at a meeting of the plaintiff's board which Levinson attended, the bank's letter was tabled and then Barlow-Lawson and Meaden were appointed as additional directors, the secretaries were instructed to leave the plaintiff's fund on current account and Roberts and Fenton resigned from the board. On the same day, a letter from the plaintiff signed at any rate by Barlow-Lawson, if not also by Meaden, asked Snell to arrange for a banker's draft for £236,964 to be made out to the order of the District Bank. This sum represented the balance of the plaintiff's account at the National Bank, which did not include the proceeds of sale of the plaintiff's stock reserve certificate for which payment had not then been received. |
On the morning of April 25, a board meeting of the plaintiff was held in Snell's office at the Whitehall branch of the National Bank. There were present Barlow-Lawson, Meaden, Jacob and, in attendance, Ringshall for the secretaries, Levinson and Scott for Contanglo, Reynolds for District, Cradock, and for Woodstock Sarsfield. Snell welcomed those who came to the meeting and then left. |
The room was a small room some 15 ft. by 16 ft., but in this room two groups formed, one at the desk in the room and consisting of Levinson, Barlow-Lawson, Meaden, Jacob and Ringshall, and another outer group of Scott, Cradock, Sarsfield and Reynolds, probably nearer the door and probably to some extent standing and to some extent sitting. |
The meeting fell into three stages, first preliminary chat, then the board phase dealing with resolutions, and then documentation to carry out what had been arranged. |
In the first phase (1) Cradock told Reynolds in particular that a board meeting of the plaintiff was to take place and that the |
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plaintiff's account would be transferred from National to the District Oxford Street branch; (2) Sarsfield told Reynolds in particular that the plaintiff would draw a cheque on its new account with District in favour of Woodstock, which would indorse it in favour of Cradock and he asked if this re-arrangement would be all right and Reynolds agreed to it; (3) Reynolds thereupon handed over the draft which he had brought with him, drawn by and on District for £195,000 in favour of Contanglo. He either handed it to Cradock who handed it to Levinson or he handed it direct to Levinson, but the difference is immaterial. |
In the board-meeting stage, although Barlow-Lawson was in the chair formally or, more accurately, nominally in the minutes, Levinson was in complete and exclusive control of the meeting. At this stage, resolutions were passed appointing Jacob as additional director and that Meaden's resignation as director be accepted, that a bank account be opened at the District Bank Oxford Street branch; that £232,764 odd (which included the proceeds of sale of the tax reserve certificates) on current account with National be transferred to that District branch; and that £232,500 be deposited with Woodstock at 8 per cent. per annum interest subject to withdrawal on demand. It was also recorded that Meaden, Scott and Levinson withdrew from the meeting. I mention these resolutions and the withdrawal of the Contanglo representatives without regard to the order in which they occurred. There was considerable dispute about the order and, in particular, whether the Contanglo representatives withdrew before or after the resolution to deposit the plaintiff's moneys with Woodstock, since it became a crucial part of Contanglo's case that they had no knowledge whatsoever about any loan to Woodstock. But the plaintiff was content not to rely on this withdrawal having taken place at any particular point. |
In the course of the third phase of the meeting, documentation, though without regard to the precise order in which the events occurred, Reynolds received (1), for payment into the plaintiff's new account with District, two drafts totalling £232,764 6s. 9d. from National to District, one draft for £226,964 6s. 9d. representing the balance of the plaintiff's credit at National apart from the proceeds of sale of tax reserve certificates, and the other draft for £5,800 representing those proceeds of sale; (2) a mandate form made out by Barlow-Lawson and signed by Barlow-Lawson, Jacob and Ringshall for purpose of operating the plaintiff's account with District; (3) a cheque for £232,500 signed by Barlow-Lawson and Jacob in favour of Woodstock and indorsed specially to Cradock by Sarsfield for Woodstock; (4) probably paying-in slips in respect of the drafts from National to District and a paying-in slip in respect of the cheque indorsed to Cradock; and (5) an undertaking signed by Snell, addressed to the manager of the District Oxford Street branch, to deliver to him 713,579 2/- stock units in the plaintiff with a complete transfer deed in favour of District Bank (London) |
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Nominees Ltd. as soon as formalities of stamping the registration had been completed. This undertaking was handed to Reynolds when he was on the point of leaving and he assumed it was handed by a representative of the National Bank. |
Reynolds returned with these documents and reported to McMinn, the manager of the District Oxford Street branch. McMinn was "horrified." Reynolds had parted with the draft for £195,322 and although he had drafts for £232,764, payable into the plaintiff's new account, what he had for transfer into Cradock's account to cover the £195,322 draft was not a draft but a cheque drawn on the plaintiff's account. In view of the draft payable into the plaintiff's account, the plaintiff's cheque would have been as effectual as a draft if it were properly payable to Cradock. The horrifying difficulty was that it was only payable to Cradock by reason of an indorsement for a limited company. McMinn was therefore concerned to make certain that the indorsement was valid. So he set about getting the indorsement confirmed by Woodstock and eventually he obtained the necessary confirmation from the other two directors of Woodstock on May 30, and ultimately in 1959 of a board meeting of Woodstock. But on April 25, he paid the £232,764 6s. 9d. drafts into the plaintiff's account, debited the amount of the cheque for £232,500 to the plaintiff's account, and credited it to Cradock's account. Thus he covered the payment of £195,000 draft. It would appear from Cradock's account with District, and is stated in a letter of June 16, 1958, from McMinn to his general manager, that the difference between the £195,000 and the £232,500 was used by Cradock for his own purposes and the purposes of his companies. |
On April 25, Contanglo paid into its own account with National the £195,322 5s. 2d. and paid out of that account into an account with National opened for itself with itself £188,809 18s. 1d. Out of that account with National the accepting stockholders were paid, together with certain fees, leaving nil in the account. |
Eventually, as I have said, and in accordance with the undertaking handed to Reynolds at the meeting of April 25, the stock was transferred to and registered in the District nominee company as nominee for Cradock. |
THE SECOND TRANSACTION |
In between the first and second transactions a Mr. Adrian Jacobs was appointed chairman of the plaintiff. Barlow-Lawson resigned from the board, as I have said, and Cradock's stock in the plaintiff was transferred first on September 25, 1958, to Cradock and on January 5, 1959, to G & C Finance Ltd. as nominee for Cradock. On February 24, 1959, G & C was registered as holder of the stock and was issued the stock certificate. On August 26, 1958, the plaintiff's account at District was transferred to the Bank of Nova Scotia where it opened with a credit of some £700 and the usual documents authorising directors to sign for the plaintiff's |
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cheques drawn on the account were sent to the Bank of Nova Scotia, Waterloo Place branch. |
Some little time before January 26, 1960, the plaintiff agreed to buy from Cradock his stockholding in the plaintiff and two persons Stekel and Kraft acted as intermediaries between them and as agents for both of them. There were, I find, two meetings of the plaintiff board on January 26, although it is just possible that the second meeting took place on January 27; the difference is, however, immaterial. At the first meeting, held at Cradock's head office, there were present Jacobs and Jacob and in attendance a Mr. Mitchell, and a Mr. Sterling representing the secretaries, Weavers and a Mr. Curtis and a Mr. Short representing Henry Briggs, Son & Co. (Trust) Ltd., a Cradock company. Cradock, Stekel and Kraft were on the premises and there was a good deal of going to and fro between the room where the meeting was held and other parts of Cradock's premises. Burden and Sinclair were not on the premises at all. It was resolved that the indebtedness of Woodstock to the plaintiff, consequent on the first transaction, and the indebtedness of the two Cradock companies F.R.C. Properties and General Investment Ltd. and M.D.R. Motors Ltd. (for a total of £6,400) should be taken over, as to £207,500 by Cradock, and as to £42,000 or the balance of the indebtedness by Henry Briggs, Son & Co. (Trust) Ltd. that a cheque for £207,500 in settlement of Cradock's liability be handed to Burden's representative for payment into the plaintiff's account; and that bills for a total of £42,000 payable on future specified dates be drawn on Briggs in settlement of Briggs' liability. Jacob and A. Jacobs resigned as directors and Burden and Sinclair were appointed directors. |
No representative of Woodstock was present when the resolution about taking over Woodstock's liability was passed. On January 27, there was an exchange of cheques for £245,761 12s. 0d. each between Cradock and Woodstock and they passed through Martins Bank where Woodstock and apparently Cradock had accounts. This sum, it is said, represented the £232,500, plus outstanding interest, and Woodstock wrote to Cradock on January 27, 1960, that they had that day "repaid you £242,671 12s. 0d. being a principal and part interest on a sum of £232,500." The position about this is by no means clear but it looks as though Woodstock and Cradock were intending to eliminate Cradock's liability to Woodstock and that he should be liable, in Woodstock's place, to the plaintiff. In due course Burden obtained a blank transfer of Cradock's stock in the plaintiff, duly executed by G. & C. |
At the second meeting Sinclair was appointed chairman and Burden secretary and it was resolved that the plaintiff should open an account with the Bank of Nova Scotia, although in fact, as I have said, the plaintiff already had an account with that bank. The usual banking resolution was passed. A mandate appropriate for the opening of such an account was signed by Burden and |
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Sinclair, authorising, inter alia, cheques drawn on the account to be signed by the chairman and secretary or any two directors. It is not disputed that it was a valid mandate. This is the authority relied on by the Bank of Nova Scotia for making the payment in respect of which the claim is made against it on the around of constructive trusteeship and negligence. Stekel or Kraft, or both, came with Cradock's cheque for £207,500 in favour of the plaintiff and handed it to Burden. A cheque for the same amount was drawn in accordance with the mandate by Sinclair and Burden for the plaintiff; and Burden drew a cheque for the same amount on his own account in favour of Cradock. All three cheques for £207,500 each were handed to a solicitor, a Mr. Bieber, "as a stakeholder." |
On February 10, 1960, Bieber took the three cheques to the Bank of Nova Scotia, Waterloo Place branch, where he had an interview with a Mr. Evans who, in the manager's absence, was in charge of the branch. He explained that the cheques were being exchanged for "internal accounting reasons" or "internal bookkeeping reasons." On that day all three cheques were debited and credited as they directed. |
The Westminster Bank refused to discount the bills for £42,000 and on February 19, 1960, Cradock sent the plaintiff a cheque for £42,000 in place of the bills, which were later handed to Cradock. This cheque, however. was part of a further series of three cheques, drawn like the three cheques for £207,500 but for an amount of £42,000 each. On February 25, 1960, they were likewise debited and credited to the three accounts at the Bank of Nova Scotia. The evidence about these three cheques is thin. On February 9, 1960, the date which the three cheques bore, Burden entered into an agreement with Cradock to purchase all the shares in H. C. Hopper (Norwich) Ltd. for £78,000, payable as to £42,000 in cash and the balance of £36,000 in bills drawn by Cradock and accepted by Burden. Burden was expressed to make the agreement "as agent for and on behalf of" without indicating the principal in any way; Burden said he intended the plaintiff to have Hopper. There are unsigned minutes of a board meeting of the plaintiff on March 30, 1960, purporting to record a resolution for investment of the plaintiff's money in short-term loans "pending the result of an investigation into an engineering business which it was suggested the company should purchase." Sinclair said that nothing mentioned in this unsigned minute of a resolution was ever considered. In a memorandum of April 5, 1960, to Burden, Sinclair said "particulars as to paying in of requisite assets are awaited." But whatever any particular person may have intended with regard to Hopper, on May 31, 1960, Burden and Cradock cancelled their agreement for its sale to Burden on Cradock accepting bills drawn by Burden or his nominee for a total of £10,000. No "Hopper" asset and no part of the £10,000 ever reached the plaintiff. |
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QUESTIONS OF LAW |
The following questions of law arise:- |
(1) How far are directors trustees of their companies' funds? |
(2) How far is a director who acts on the direction of a third party to be ascribed the relevant knowledge or state of mind of the third party? |
(3) How far can a stranger to a trust be liable as constructive trustee in respect of a breach of the trust? |
(4) What is the liability to its customer in negligence of a bank which pays out of its customers' account? |
As each of these questions affect more than one defendant and as they are conveniently considered apart from the facts, I will deal with them before considering the cases against the individual defendants. Five further questions involving considerations of law, however, arise. They are:- |
(5) How far did any novation replace the liability of Woodstock to the plaintiff by liability of Cradock and Briggs to the plaintiff and preclude the plaintiff from succeeding in its claim against Woodstock? |
(6) How far was the payment to the plaintiff of the £249,000 satisfaction of its claim in respect of the first transaction? |
(7) Was there any loss to the plaintiff by reason of the second transaction? |
(8) Whether the payments by the plaintiff of the £232,500 and £207,500, in respect of which it claims, are irrecoverable because made illegal by section 54 of the Companies Act, 1948? |
(9) Should the individual defendants Barlow-Lawson, Jacob, Burden and Sinclair be relieved under section 448 of the Companies Act, 1948? |
These questions involve considerations of law and fact together. Questions 6-9 affect more than one defendant. Questions 5-8 involve the inter-relationship of the first and second transactions. It will in the circumstances be convenient to deal with them after I have considered (subject to these questions) the cases against each of the defendants separately; and in the order which I have numbered the questions. |
(1) Directors as trustees of their companies' funds |
The first question of law that arises is how far directors are trustees of their companies' funds? It is clear and not disputed that they owe a fiduciary duty to the company to apply its assets only for the purposes of the company and are therefore liable for breach of that duty. But the question how far they are trustees bears upon the question how other defendants can be made liable as constructive trustees as claimed. |
On occasion directors have been said to be trustees and on occasion not to be trustees. Like so many interminable arguments in philosophy, economics and everyday life, its resolution depends |
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largely upon definition of terms, in this case of "trustees" and then on the ambit of its proper application to directors. |
Directors are clearly not trustees identically with trustees of a will or marriage settlement. In particular, so far as at present relevant, they have business to conduct and business functions to perform in a business manner, which are not normally at any rate associated with trustees of a will or marriage settlement. All their duties, powers and functions qua directors are fiduciary for and on behalf of the company. So property in their hands or under their control is theirs for the company, i.e., for the company's purposes in accordance with their duties, powers and functions. However much the company's purposes and the directors' duties, powers and functions may differ from the purposes of a strict settlement and the duties, powers and functions of its trustees, the directors and such trustees have this indisputably in common - that the property in their hands or under their control must be applied for the specified purposes of the company or the settlement; and to apply it otherwise is to mis-apply it in breach of the obligation to apply it to those purposes for the company or the settlement beneficiaries. So, even though the scope and operation of such obligation differs in the case of directors and strict settlement trustees, the nature of the obligation with regard to property in their hands or under their control is identical, namely, to apply it to specified purposes for others beneficially. This is to hold it on trust for the company or the settlement beneficiaries as the case may be. That is what holding it on trust means. That is why a misapplication of it is equally in each case a breach of trust. This is just not treating as a breach of trust something which is not a breach of trust. No ground has been suggested for treating it as a breach of trust except that it is a breach of trust. It would be topsy turvy, as seems sometimes to have been suggested, to make the misapplication of property that is held a breach of trust (and not just treat it as a breach of trust though not a breach of trust) without the property having been held on trust and thus convert into a trust what was not a trust before the misapplication. |
It has been said that the director is not in all respects in the position of a trustee in respect of an unpaid debt and that a bank account credit, like that of the plaintiff with its banks in this case, is an unpaid debt from the bank to the customer. Normally a trustee of a strict settlement has to get in unpaid debts, whereas a director has to treat unpaid debts with due regard to the commercial purposes which he is serving and perhaps therefore not press for their payment. But a bank credit differs from such unpaid debts which a trustee has to get in - to get in, be it observed, perhaps by having it paid into the trust bank account - and it differs from the ordinary commercial debts owing to a company. In general, the bank's debt to its customer for the credit in his account, though legally a debt, is, in substance and every day experience and conduct of our affairs, moneys within the control of |
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the customer - the customer's moneys at the bank, cash at the bank. In the present case there is no dispute about the fact of payments of the plaintiff's moneys out of the plaintiff's bank accounts but only of their nature and significance and whether they amounted to a misapplication. The very application of the plaintiff's moneys of which complaint is made by the plaintiff would have been impossible if the defendant directors did not have and exercise effective control of these moneys. Those directors were the only directors of the company and the directors who were authorised to operate the company's bank account. Indeed, a crucial part of the defence (namely that which relies on the conclusiveness of the mandate) is that they had that control. |
I will now refer to passages in the authorities. |
In In re City Equitable Fire Insurance Co. Ltd.1 Romer J. said: |
"It has sometimes been said that directors are trustees. If this means no more than that directors in the performance of their duties stand in a fiduciary relationship to the company, the statement is true enough. But if the statement is meant to be an indication by way of analogy of what those duties are, it appears to me to be wholly misleading. I can see but little resemblance between the duties of a director and the duties of a trustee of a will or of a marriage settlement. It is indeed impossible to describe the duty of directors in general terms, whether by way of analogy or otherwise. The position of a director of a company carrying on a small retail business is very different from that of a director of a railway company ... The manner in which the work of the company is to be distributed between the board of directors and the staff is in truth a business matter to be decided on business lines ... It has been laid down that so long as a director acts honestly he cannot be made responsible in damages unless guilty of gross or culpable negligence in a business sense." |
In Russell v. Wakefield Waterworks Co.2 Sir George Jessel M.R., in a passage explaining that the appropriate person to apply to the court for repayment of misapplied funds of a company was, not the shareholders, but the company, said: |
"The answer was, that where the owner of the trust fund is an incorporated company, the corporation is the only party to sue; the stranger has nothing whatever to do with the individual corporators; and although in a sense it is their property, because individual corporators make up the corporation, yet in law it is not their property, but the property of the corporation, and therefore the right person to sue is the corporation, who is the cestui que trust or equitable owner of the fund. That I take to be the general rule of this court. In this court the money of the company is a trust fund, because it is applicable only to the special purposes of the company in the hands of the agents of the company, and it is in that sense a trust fund applicable by them to those special purposes; and a person taking it from them with notice that it is being applied to other purposes cannot in this court say that he is not a constructive trustee." |
1 [1925] 1 Ch. 407, 426; 40 T.L.R. 853, C.A. |
2 (1875) L.R. 20 Eq. 474, 479; 32 L.T. 685; 23 W.R. 887. |
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In In re Lands Allotment Co.3 Lindley L.J. said: |
"Although directors are not properly speaking trustees, yet they have always been considered and treated as trustees of money which comes to their hands or which is actually under their control; and ever since joint stock companies were invented directors have been held liable to make good moneys which they have misapplied upon the same footing as if they were trustees ..." |
Kay L.J. said4: |
"I conceive that the directors of every company being the managing agents of a trading concern have considerable authority and power in dealing with outstanding debts due to the concern ... but if they deal with the funds of a company, although those funds are not absolutely vested in them, but funds which are under their control, and deal with those funds in a manner which is beyond their powers, then as to that dealing they are treated as having committed a breach of trust ... directors are not always trustees. As directors they are not trustees at all. They are only trustees qua the particular property which is put into their hands or under their control, and which they have applied in a manner which. is beyond the powers of the company, I conceive that qua such fund they are constructive trustees, or trustees by implication of law. ..." |
In In re Forest of Dean Coal Mining Co.5 Sir George Jessel M.R., in dealing with the responsibility of directors in respect of debts due to a company, said: |
"Traders have a discretion as to whether they shall sue their customers, a discretion which is not vested in the trustees of a debt under a settlement. ... Again, directors are called trustees. They are no doubt trustees of assets which have come into their hands, or which are under their control, but they are not trustees of a debt due to the company. ... A director is the managing partner of the concern, and although a debt is due to the concern I do not think it is right to call him a trustee of that debt which remains unpaid, though his liability in respect of it may in certain cases and in some respects be analogous to the liability of a trustee. So much for the question of unpaid debts." |
So, in my view, in general as in this case, a credit in a company's bank account which the directors are authorised to operate are moneys of the company under the control of those directors and are held by them on trust for the company in accordance with its purposes. |
(2) How far is a director who acts on the direction of a third partybound by the state of mind of that third party? |
How far, as put in argument, the director who acts, without exercising any discretion, at the direction of a stranger to the company is, in respect of his liability for funds under his control (for which he is, as I have concluded, a trustee) to have ascribed |
3 [1894] 1 Ch. 616, 631; 10 T.L.R. 234, C.A. |
4 [1894] 1 Ch. 616, 637-639. |
5 (1878) 10 Ch.D. 450; 452-453; 40 L.T. 287. |
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to him the purpose of that stranger, or, as I prefer to put it and which comes to much the same thing in our case and is sufficient for present purposes, how far is he bound by the stranger's knowledge of the nature of the transaction? |
In Gray v. Lewis Mellish L.J. said6: |
"If a person allows himself to be the mere nominee of, and acts for another person, he must be bound by the notice which that other person for whom he acts has of the nature of the transaction." |
And that was said with reference to a fraudulent and illegal transaction. The nominees in that case were not directors but purchasers of shares. |
In Land Credit Co. of Ireland v. Lord Fermoy7 a company's funds were used by a duly appointed directors' sub-committee to buy the company's shares in order to raise the price and keep up a fictitious appearance of credit. This operation was carried out and cloaked by the sub-committee in the guise of loans, which were then used to buy the shares. The sub-committee disclosed the loans to the full board but not their purpose and use. The loans were not of unusual amount and there was nothing about them to put the board on inquiry. So a director who was not involved in the transaction, otherwise than as a member of the board, and presumed to have just the knowledge disclosed to the board, was held not liable to repay to the company the amount of the loan. The sub-committee was duly appointed and acted within the ambit of its authority in making the loans, its only report was of the loans and the loans qua loans were unexceptionable. The director therefore acted perfectly properly within the ambit of his responsibility, having regard to the proper delegation of responsibility to the sub-committee in accordance with the company's constitution. The objectionable part was concealed by the sub-committee, namely that the loans were but means of purchasing the company's shares with the company's money. In these circumstances it was said "a director cannot be held liable for being defrauded." |
But that does not touch upon the case of a nominee director putting himself blindly at the disposal of a stranger without status in the company, except the irrelevant status for present purposes of shareholder. The Land Credit Co. case8 decision does not impinge in any way upon the observations of Mellish L.J. which I have quoted. |
In my view, a director acting in a transaction on the direction of a stranger is fixed with that stranger's knowledge of the nature of that transaction. |
(3) Stranger's liability as constructive trustee |
I come now to the question how far a stranger to the trust |
6 (1873) 8 Ch.App. 1035, 1056; 29 L.T. 12. |
7 (1870) 5 Ch.App. 763. |
8 Ibid. |
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can become liable as constructive trustee in respect of a breach of the trust. |
It is essential at the outset to distinguish two very different kinds of so-called constructive trustees: (1) Those who, though not appointed trustees, take upon themselves to act as such and to possess and administer trust property for the beneficiaries, such as trustees de son tort. Distinguishing features for present purposes are (a) they do not claim to act in their own right but for the beneficiaries, and (b) their assumption to act is not of itself a ground of liability (save in the sense of course of liability to account and for any failure in the duty so assumed), and so their status as trustees precedes the occurrence which may be the subject of claim against them. (2) Those whom a court of equity will treat as trustees by reason of their action, of which complaint is made. Distinguishing features are (a) that such trustees claim to act in their own right and not for beneficiaries, and (b) no trusteeship arises before, but only by reason of, the action complained of. |
Until the limitation provisions of the Trustee Act, 1925, the first category of constructive trustees could not rely, in defence of claims against them, on statutory limitation or the analogous rules enforced by courts of equity. This was because they acted as trustees for others, and therefore held in right of those others and therefore time was held not to run in their favour against those others. But as the second category of trustees claimed in their own right, time ran in their favour from their obtaining possession. It is largely by reason of this distinction that the first category of constructive trustee is sometimes referred to or included in the authorities under the term "express trustee": (see Taylor v. Davies9; Soar v. Ashwell,10 especially the judgments of Lord Esher M.R. and Bowen L.J.). |
It has long been well established that a bank is not a trustee for its customer of the amount to his credit in his bank account: (see, for example, Foley v. Hill11; Burdick v. Garrick,12 perLord Hatherley L.C.). In view of this, and the circumstances in which the constructive trusteeship relied on by the plaintiff against the defendants is said to arise, the plaintiff does not rely at all in this case upon the establishment of the first category of constructive trusteeship, but exclusively on the second category. The first category is irrelevant to the plaintiff's case. Soar v. Ashwell13; Burdick v. Garrick14; In re Barney. Barney v. Barney15; Mara v. Browne16; and Williams-Ashman v. Price and Williams17 to which I was referred, fall within that first category. |
Barnes v. Addy18 contains a formulation of the second category of constructive trusteeship, upon which the plaintiff relies. |
9 [1920] A.C. 636, 650-653; 123 L.T. 121, P.C. |
10 [1893] 2 Q.B. 390, 392-399, C.A. |
11 (1848) 2 H.L.Cas. 28, H.L. |
12 (1870) 5 Ch.App. 233, C.A. |
13 [1893] 2 Q.B. 390. |
14 5 Ch.App. 233. |
15 [1892] 2 Ch. 265; 67 L.T. 23. |
16 [1896] 1 Ch. 199; 12 T.L.R. 111, C.A. |
17 [1942] Ch. 219; [1942] 1 All E.R. 310; 166 L.T. 359. |
18 (1874) 9 Ch.App. 244. |
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In that case Barnes was husband of the life tenant of the trust, was appointed sole trustee by Addy, the sole surviving trustee, and subsequently he misappropriated the trust fund. The question before the Court of Appeal was whether the solicitors engaged in respect of the appointment were liable to make good the amount misappropriated. Lord Selborne L.C. referred to both categories of constructive trustees. He said19: |
"That responsibility" - that is the responsibility of express trustees - "may no doubt be extented in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees." |
In that passage he refers to the first category as "trustees de son tort" and as persons who "receive and become chargeable with some part of the trust property" and he refers to the second category as "actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust" and as those who "assist with knowledge in a dishonest and fraudulent design on the part of the trustees." This is virtually repeated by Lord Esher in Soar v. Ashwell20 where he refers to Barnes v. Addy21: |
"There is another recognised state of circumstances in which a person not nominated a trustee may be bound to liability as if he were a nominated trustee, namely, where he has knowingly assisted a nominated trustee in a fraudulent and dishonest disposition of the trust property."22 |
It is this formulation in Barnes v. Addy23 "assist with knowledge in a dishonest and fraudulent design on the part of the trustee" that is the basis of the plaintiff's claim that the defendants are liable as constructive trustees. There are thus three elements: (1) assistance by the stranger, (2) with knowledge, (3) in a dishonest and fraudulent design on the part of the trustees. |
As appears from the passage quoted, an agent acting for a trustee is a stranger within its meaning in that passage, so that he is not liable as a constructive trustee within the second category, unless he too assists "with knowledge in a dishonest and fraudulent design on the part of the trustees." |
What knowledge is required to satisfy the second element? |
Lord Selborne in Barnes v. Addy24 refers to one of the solicitors, a potential constructive trustee, as having no "knowledge or suspicion ... of an improper or dishonest design," that "there |
19 9 Ch.App. 251. |
20 [1893] 2 Q.B. 390. |
21 9 Ch.App. 244. |
22 [1893] 2 Q.B. 390, 394-395. |
23 9 Ch.App. 244. |
24 Ibid. 252. |
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was nothing to lead him to suppose" that there was an intention to misappropriate; and he says of the other solicitor that "he never knew nor suspected any dishonest purpose." These references leave wide open the question what knowledge is required. |
Kindersley V.-C. in Bodenham v. Hoskins25 quoted in Shields v. Bank of Ireland26 indicated that the knowledge required was of circumstances which made it a dishonest and fraudulent breach of trust, though without dishonest intention on the part of the person with that knowledge. The quotation from Kindersley V.-C. in Shields v. Bank of Ireland reads26: |
"I am constrained to arrive at the conclusion that the bankers, although I must exonerate them from any dishonest intention to commit a robbery or commit a fraud, still were not only parties to the simple fact of the transfer, but were parties to the fraud in question in this sense, that they were aware of the circumstances which made it a fraud in Parkes, to make the transfer to his private account, and being cognisant of that, and having been cognisant of it before the time when the account was opened under the name of 'The Rotherwas Account,' and being cognisant of it throughout, they concur in a transaction, the effect of which is, that for their own pecuniary benefit an act is done by Parkes which is a fraud upon the plaintiff. Now, according to the plain principles of a court of equity such an act can never be sustained." |
The plaintiff accepts and relies on this view. |
Porter M.R., referring to the quotation which I have just read from Kindersley V.-C., said27: |
"... he very charitably refrains from arriving at the inference, which he might well have drawn, that the bankers deliberately intended themselves to commit a robbery or a fraud." |
In these circumstances he may well, and very understandably so it seems to me, have had little use for the distinction between knowledge of the circumstances which constitute a fraud and knowledge of fraudulent intent. At any rate, whilst not dissenting from what Kindersley V.-C. said, he added28: |
"You must ... show that the bankers knew of and concurred in the intention to misapply, a knowledge which will easily be presumed if the banker derives a personal benefit from the transaction designed or stipulated for." |
He preferred a more vigorous approach and to rely on a finding of fact rather than a refinement of law. In that case both courses led to the same result. But there may well be cases, of which the present case may be one, in which a finding of fact cannot properly dispense with Kindersley V.-C.'s formulation. |
In the last sentence of the passage quoted from Kindersley V.-C. it is made plain that the act in respect of which relief is given is an act to be judged according to "the plain principles |
25 (1852) 21 L.J.Ch. 864, 873. |
26 [1901] 1 I.R. 222, 228. |
27 Ibid. 229. |
28 Ibid. 232. |
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of a court of equity." It seems to me imperative to grasp and keep constantly in mind that the second category of constructive trusteeship (which is the only category with which we are concerned) is nothing more than a formula for equitable relief. The court of equity says that the defendant shall be liable in equity, as though he were a trustee. He is made liable in equity as trustee by the imposition or construction of the court of equity. This is done because in accordance with equitable principles applied by the court of equity it is equitable that he should be held liable as though he were a trustee. Trusteeship and constructive trusteeship are equitable conceptions. |
The court of equity is not administering criminal law but equity. It is equity and not criminal law or even tort or contract that governs whether a person shall be liable in equity as constructive trustee. So, whether a misapplication of a company's funds for the purchase of its shares occasions the imposition of liability as constructive trustees, depends not upon the statutory provision making it a criminal offence, or upon statute or criminal law, or common law conceptions, but upon equity and its principles. As mentioned in argument, there are criminal offences nowadays which are not morally reprehensible and are not even blameworthy. Indeed, it appears that nowadays, by Act of Parliament, a person is made criminal although he can unquestionably and conclusively prove that he did not even know the facts that establish the crime. If, indeed, this is so, this is crime without guilt. It is to brand such proven innocents as convicted criminals. It may be convenient policing. It is not justice, and it certainly is not equity. On the other hand, there may be actions, dishonest and fraudulent in the eyes of equity, yet not punishable under the criminal law. Equity is not crime and this court is not the Old Bailey. And it is according to "the plain principles of a court of equity" which this court is, in its administration of equitable relief, that what is "dishonest and fraudulent" has to be judged. And the language used by the courts of equity, in the authorities referred to, must be similarly understood in accordance with their equitable principles and conceptions. This may all seem over emphatic emphasis of the obvious; but it is an emphasis that I have found essential if confusion is to be avoided. |
Equity is concerned to give effect to equitable interests, though bereft of legal ownership. Thus it will trace trust property into the hands of a volunteer, where it is not inequitable to do so, and will hold a purchaser for value liable as constructive trustee if he had actual or constructive notice that the transfer to him was of trust property in breach of trust: (see the statement in Snell's Principles of Equity, 26th ed. (1966) p. 202-203, which was relied on by the plaintiff and the defendants). And, in conveyancing (apart from the intrusion of statute) actual or constructive notice of equitable right is enough to fasten a grantee with knowledge of those rights. The governing consideration is to give effect to |
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equitable rights, where it is not inequitable to do so, and when knowledge of the existence of those rights is material to granting equitable relief. In general, at any rate, it is equitable that a person with actual notice or constructive notice of those rights should be fixed with knowledge of them. This is in a context of producing equitable results in a civil action and not in the context of criminal liability. The sort of question to which it is directed is which of two persons should in equity bear the loss, and not whether one of them should be sent to prison. So this seems to me to be the very understandable, and indeed equitable, approach of equity. |
In Lloyd v. Banks29 Lord Cairns L.C. brings out clearly that equity is concerned with knowledge of equitable interests, because it is concerned with fastening upon the conscience of the person with that knowledge. In that case a trustee of a fund saw, in a newspaper, notice of a petition to the Insolvent Debtors' Court presented by his cestui que trust and acted on it. The question was whether a subsequent assignee of the cestui que trust, who gave the trustee formal notice of the assignment, acquired priority over the assignee in insolvency. The case thus did not turn on constructive notice but on the source of actual knowledge which the trustee had. |
Lord Cairns said30: |
"... but I am quite prepared to say that I think the court would expect to find that those who alleged that the trustee had knowledge of the incumbrance had made it out, not by any evidence of casual conversations, much less by any proof of what would only be constructive notice - but by proof that the mind of the trustee has in some way been brought to an intelligent apprehension of the nature of the incumbrance which has come upon the property, so that a reasonable man, or an ordinary man of business, would act upon the information and would regulate his conduct by it in the execution of the trust. If it can be shown that in any way the trustee has got knowledge of that kind - knowledge which would operate upon the mind of any rational man, or man of business, and make him act with reference to the knowledge he has so acquired - then I think the end is attained, and that there has been fixed upon the conscience of the trustee, and through that upon the trust fund, a security against its being parted with in any way that would be inconsistent with the incumbrance which has been created." |
It was unsuccessfully submitted that casual notice obtained by a trustee (who had no concern with the notice except to receive it and observe it) was not enough to decide priorities as between equally innocent holders of equitable interests. In that case the trustee had subjective knowledge, which passed the objective test of "knowledge which would operate upon the mind of any rational men or man of business." Would that objective test be sufficient without the subjective knowledge? |
29 (1868) 3 Ch.App. 488. |
30 Ibid. 490. |
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In Berwick-upon-Tweed Corpn. v. Murray31 William Murray, bound as a surety to the extent of £2,000 to the plaintiff for the due accounting of the office of treasurer by David Murray, received notice that David Murray was a defaulter. He then took from David Murray a deposit note of a bank for £2,300, placed in the bank by David Murray one month previously in the name of his daughter aged 23. It was held that, in the circumstances in which William Murray received the £2,300, William Murray should have made inquiries and, not having done so, that he was bound to restore the £2,300 with 5% interest. Lord Cranworth L.C. said32: |
"But were not the circumstances such as must have forced an honest man to make inquiry. He had just received formal notice that David Murray, for whom he had become surety, had refused to account, or to pay the balance due from him. Nothing could be more reasonable than that he should immediately apply to David Murray for indemnity. But when, by way of indemnity, he was offered a deposit note made a month previously by David Murray, in the name of his daughter, a young woman of 23 years of age, it is impossible that suspicion should not have been excited" - and I observe that this was in 1856 not in 1960 - "He was bound to ask why such a deposit was made not in David Murray's own name, but in that of his daughter. It is not alleged, that he was ever led to suppose the daughter had any beneficial interest in the money; for what purpose then was her name used? In fact, her name was evidently used as a means of disguising the truth. Perhaps inquiry might not have brought out the truth; but it does not lie in the mouth of William Murray to say this. He made no inquiry, although the circumstances were such as ought to have induced him to do so. ... It is impossible to permit a man who received, by way of security from a defaulting agent, a deposit of money which had been withdrawn from the funds of his principal, to insist in circumstances like these on his ignorance of the truth. I am clearly of opinion, that William Murray must be treated as a person who had notice of the truth." |
In a separate short judgment,33 dealing with interest chargeable on the £2,300, Lord Cranworth referred to that sum as "received from David by William under circumstances which have satisfied me that the latter knew it was the money of the corporation." Clearly what he meant by "knew" in that passage was treated by equity as "having notice of the truth," or knowing because of his failure to make inquiry in circumstances in which "an honest man" would have done so. "An honest man" is obviously the ordinary reasonable or honest person. There the test is an objective test. |
In Keane v. Robarts34 beneficiaries under a will claimed that a defendant bank should account for estate moneys alleged to have been applied by them to liquidate the executors' private |
31 (1857) 7 De G.M. & G. 497. |
32 Ibid. 512. |
33 Ibid. 520. |
34 (1819) 4 Mad. 332, 355. |
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account with the bank. It was stated that there was no evidence to that effect.34 The executors were overdrawn on their private account about £8,000. They authorised the bank to sell assets of the testator and credit the proceeds to their account. There were delays in realising the assets and, in the meantime, they drew bills on the bank by which moneys were remitted to them in Ireland, and when assets were realised and paid into the account the overdraft was slightly more than before. As was said35: "In this particular case, however, the remittance of the assets to Ireland was not necessarily a breach of trust in the executors." |
The case is thus summarised36: |
"The present case is not one of purchase or pledge from executors: it is the case of agents of the executors receiving monies by the authority of the executors, and remitting it to them in the course of their duty as agents, and in the proper forms of business, leaving the application of it to the purposes of the will wholly in the power of the executors." |
In the course of his judgment Leach V.-C. said37: |
"With a view of this cause, I have carefully examined every authority upon this subject, and I think the result may be thus stated:- Every person who acquires personal assets by a breach of trust, or devastavit in the executor, is responsible to those who are entitled under the will, if he is a party to the breach of trust. Generally speaking, he does not become a party to the breach of trust, by buying or receiving as a pledge for money advanced to the executor at the time any part of the personal assets, whether specifically given by the will or otherwise, because this sale or pledge is held to be prima facie consistent with the duty of an executor. Generally speaking, he does become a party to the breach of trust, by buying or receiving in pledge any part of the personal assets, not for money advanced at the time, but in satisfaction of his private debt, because this sale or pledge is prima facie inconsistent with the duty of an executor. I preface both these propositions with the term 'generally speaking,' because they both seem to admit of exceptions." |
It is with these observations in mind that a passage relied on by the defendants has to be understood. It reads38: |
"If Robarts and De Lord had reason to believe that Thomas and Fennell were so misapplying the assets, it would be difficult to find a ground which would make them responsible for paying to their principals the monies which had been placed in their hands for the purpose of being remitted to them: that would be to make every trustee accountable for his conduct in the trust to every agent whom he happened to employ, and would carry the principle of constructive trust to an inconvenient, and, indeed, to an impracticable length." |
This is a guarded obiter statement. It indicates that it might |
35 (1819) 4 Mad. 332, 357. |
36 Ibid. 359. |
37 Ibid. 357. |
38 Ibid. 356. |
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not be enough to make an agent liable for breach of trust that he pays trust moneys to the trustee his principal, the legal owner to whom they are payable, when he has reason to believe that he was misapplying the trust assets, when - and this is vital, as appears from the judgment itself in the passage quoted39 - the payment itself did not constitute a breach of trust. That is far removed from our case, where the payments were to strangers and the payments themselves are alleged to constitute, or be part of, the breach of the trust complained of. And "reason to believe" here may have been intended to mean no more than that circumstances were consistent with misapplication or proper application of the trust fund. |
In Gray v. Johnston40 a bank paid a cheque for about £800 drawn by an executrix on the estate bank account in favour of a partnership, which she entered into in place of her husband on her husband, the testator's, death. The cheque was paid into the partnership account in the same bank and it went against the partnership overdraft. No balance was struck and the account continued to be operated as before. It was held that the will beneficiaries were not entitled to have the money replaced by the bank. The relevant nub of the decision for present purposes appears to me to be that, in the circumstances, the payment of the cheque was perfectly consistent with there being no breach of trust, with the result that the bank had no knowledge or notice of breach at all. |
Lord Cairns L.C. summarises the authorities41: |
"I say that the result of those authorities is clearly this: in order to hold a banker justified in refusing to pay a demand of his customer, the customer being an executor, and drawing a cheque as an executor, there must, in the first place, be some misapplication, some breach of trust, intended by the executor, and there must in the second place, as was said by Sir John Leach, in the well-known case of Keane v. Robarts,42 be proof that the bankers are privy to the intent to make this misapplication of the trust funds. And to that I think I may safely add, that if it be shown that any personal benefit to the bankers themselves is designed or stipulated for, that circumstance, above all others, will most readily establish the fact that the bankers are in privity with the breach of trust which is about to be committed." |
This passage again leaves open the question what is to be taken as "proof" of the misapplication and what establishes privity to the intent to make the misapplication. A benefit designed or stipulated for "most readily" establishes it - apparently as evidence of it. How far does shutting one's eyes to circumstances which indicate misapplication to be taken as establishing or constituting such privity? Nor does Lord Westbury deal with this problem.43 |
39 (1819) 4 Mad. 332, 359. |
40 (1868) L.R. 3 H.L. 1, H.L. |
41 Ibid. 11. |
42 4 Mad. 332, 357. |
43 L.R. 3 H.L. 1, 14. |
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In In re Blundell,44 a case of a solicitor's liability as constructive trustee, Stirling J., in considering what was required to make a stranger to a trust liable as constructive trustee, said: |
"... a stranger to the trust receiving money from the trustee which he knows to be part of the trust estate is not liable as a constructive trustee unless there are facts brought home to him which show that to his knowledge the money is being applied in a manner which is inconsistent with the trust ..."; |
and that a solicitor having then "no notice" of any breach of of trust is not liable.45 He also said46: |
"The real difficulty in each case is to determine what is sufficient to fix the solicitors with the liability of constructive trustees. As I have said, they must have been parties to either a breach of trust, or a fraud, on the part of the trustee, or they must have brought home to them facts which show that the fund was being applied in a manner inconsistent with the trust ... a mere suspicion or intimation that something is wrong in the administration of the trust will not, to my mind, be sufficient to deprive the solicitor of his right to accept payment out of the trust estate of costs, charges, and expenses properly incurred." |
So in the same judgment we have as the test "knowledge the money is being misapplied," "notice" and having "brought home to them facts which show" misapplication. Such use of terms in the same judgment shows how dangerous it is to pick on "knowledge" in a passage and treat it per se as necessarily meaning actual knowledge. The last of these passages quoted appears to be in line with a passage quoted earlier from Shields v. Bank of Ireland47 suggesting that the requisite knowledge is of the circumstances which make it a fraudulent breach of trust. |
Gray v. Lewis,48 a decision of Malins V.-C., appears to have been based, as an alternative, on the ratio decidendi that circumstances sufficiently unusual will put a bank on inquiry and may thus fix it with notice of a fraudulent breach of trust. The first two paragraphs of the headnote read: |
"The Laffitte Company was formed to purchase the business of the Paris Bank of Laffitte. The Paris Bank objected to complete the contract until 40,000 shares should have been subscribed for. To effect this object, the International Contract Company guaranteed a subscription of the requisite number of shares. The latter company then applied to the National Bank to discount their bills for £230,000, which they agreed to do upon the guarantee of the Laffitte Company that they would leave in their hands whatever money should be paid in for shares to the amount of the advance. The money was thereupon transferred to the credit of the Contract Company, who provided shareholders, and paid the deposits out of the advances by the bank. In order to procure a settling-day on the Stock |
44 (1888) 40 Ch.D. 370, 381; 4 T.L.R. 506. |
45 40 Ch.D. 370, 383. |
46 Ibid. 382. |
47 [1901] 1 I.R. 222, 228. |
48 (1869) L.R. 8 Eq. 526. |
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Exchange the bank certified that the £230,000 had been deposited with them in payment of shares. |
"The Laffitte Company, by their articles of association, were prohibited from purchasing their own shares." |
The Vice-Chancellor said49: |
"Upon the whole case I must pronounce these proceedings to have been false, fictitious, and fraudulent; and I am bound, I conceive, by the principles of this court to declare that the National Bank could derive no right under the letters or guarantees of December 8, 1865, and February 6, 1866, which were wholly beyond the powers of the company, and were acted upon for a fraudulent and illegal purpose. ..." |
He referred to the transaction as "illegal and fraudulent."50 He dealt with knowledge and notice and said50: |
"This company was expressly prohibited, by the 90th clause of its articles of association, from purchasing its own shares, a provision strictly proper in itself, and introduced for the protection of the public, and also to satisfy the committee of the Stock Exchange, which never grants a settling-day to a company unless it is prohibited from such a course of dealing. ... But it is contended by the learned counsel for the National Bank that they did not know of the rule. But I am of opinion that the circumstances show, and there cannot be a doubt, that it was perfectly known to Sir Joseph McKenna and the other officers of the bank, as it undoubtedly was to the directors, Mr. Harvey Lewis and Mr. Henshaw, who were parties to the transaction, and it was impossible that they could be ignorant of it, for it would be a scandal upon them, as bankers, to suppose that they were ignorant of such a primary rule in commercial transactions; and, even if they did not know of the rule, I am of opinion that the transaction was one of so unusual and extraordinary a character that it became their duty to inquire and investigate as to the rights of this company to enter into such a transaction in the very first hour of its existence, and I must therefore treat the bank as having had express notice that what was being done was a gross breach of trust, in which they consequently became participators. The rules of this court are perfectly well settled, and are the rules of honesty and fair dealing, that no party to an illegal or fraudulent contract can derive any benefit from it, and that all persons who obtain possession of trust funds with a knowledge that their title is derived from a breach of trust will be compelled to restore such trust funds." |
In Thomson v. Clydesdale Bank Ltd.,51 a broker paid a cheque representing proceeds of sale of a client's shares into his own account at the defendant bank, where he was overdrawn. The broker absconded and was found insolvent and the owners of the shares claimed the proceeds of the cheque from the bank. As Lord Shand said,51 a broker, according to ordinary practice, pays the proceeds of shares which he sells into the credit of his own bank account. Such payment, therefore, does |
49 L.R. 8 Eq. 526, 544. |
50 Ibid. 542-543. |
51 [1893] A.C. 282, 291, H.L.(Sc.). |
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not even suggest misapplication or put the bank on inquiry. Lord Herschell L.-C.,52 Lord Watson53 and Lord Shand54 said that to recover against the bank, knowledge by the bank of misapplication by payment into the broker's account would have to be established. But Lord Shand,54 refers to such knowledge as capable of being established by "inference from" or "reasonable inference from" "the facts proved"; and he refers54 to there being "no evidence whatever here of facts which put the bankers on inquiry, or which can be founded on as showing that they must have believed or known that this was a misapplication of funds." Lord Herschell L.-C.,55 refers to the bank as being disentitled to retain money which it receives when it "has reason to believe that the payment is being made in fraud of a third person, and that the person making the payment is handing over in discharge of his debt money which he has no right to hand over." So here again "knowledge," apparently, is not treated as being exclusive of "reason to believe" or being put on inquiry. |
As in Thomson v. Clydesdale Bank Ltd.56 so in Shields v. Bank of Ireland,57 the payment of estate money into an executor's private account did not suggest misapplication. So they "were not bound to inquire." |
In Coleman v. Bucks and Oxon Union Bank58 payment by the bank of trust moneys into a trustee's personal account was not a breach of trust It was without any knowledge that a breach of trust by the trustee was intended and without any intention to benefit themselves. So it does not help on the question of notice of breach. |
In Backhouse v. Charlton59 there was nothing to put the bank on inquiry or suggest constructive notice. It was in those circumstances that Malins, V.-C.59 said that the bank was justified in honouring a cheque signed by a surviving partner out of a partnership account for payment into his own account (as had in fact happened before the death of the other partner) "unless they had express notice that some breach of duty was taking place." I do not read his observation as meaning that the only notice that could in law affect the bank would be express notice. Such an interpretation would be inconsistent with the passages referred to in Malins V.-C.'s judgment in Gray v. Lewis.60 |
In Bank of New South Wales v. Goulburn Valley Butter Co. Proprietary Ltd.61 the bank was held not liable to repay to the company moneys which had been standing to the credit of its account with the bank and transferred by cheques of its managing director to his own overdrawn private account. The private account was, like the company's account, operated in connection |
52 [1893] A.C. 282, 289. |
53 Ibid. 290. |
54 Ibid. 291, 292, 293. |
55 Ibid. 287. |
56 Ibid. |
57 [1901] 1 I.R. 222, 238. |
58 [1897] 2 Ch. 243; 76 L.T. 684. |
59 (1878) 8 Ch.D. 444, 449. |
60 L.R. 8 Eq. 526. |
61 [1902] A.C. 543; 18 T.L.R. 735; 87 L.T. 88, P.C. |
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with the company's business, with cross-payments for adjustment between them being made by cheque, in the ordinary course of business. |
Counsel for the company submitted that the bank knew, or ought to have known, that the managing director was acting wrongfully in transferring funds from the company's account to his account. But it was admitted in argument that, if the company was indebted to the managing director when the cheques were paid, then there could be no objection to their payment; and, as there was no evidence that the bank knew that the company was not indebted to the managing director, the case turned on whether there was a duty on the bank to inquire into the state of account between the bank and the managing director. It was held that in the circumstances it was not obliged to do so. |
It was a strong committee, but they did not state that absence of actual knowledge was conclusive. It seems to me that the decision went on the basis that the absence of actual knowledge was not conclusive and that circumstances might give rise to a duty to inquire; but that, in fact, the circumstances did not impose such a duty in that case. The judgment also seems to me to indicate that what occurs in the normal course of properly conducted business consistent with its unobjectionable operation does not put on inquiry. It is not enough that such normal occurrence is compatible with improper operation too. |
The knowledge required to hold a stranger liable as constructive trustee in a dishonest and fraudulent design, is knowledge of circumstances which would indicate to an honest, reasonable man that such a design was being committed or would put him on inquiry, which the stranger failed to make, whether it was being committed. Acts in the circumstances normal in the honest conduct of affairs do not indicate such a misapplication, though compatible with it. And answers to inquiries are prima facie to be presumed to be honest, an aspect of the law which I shall deal with more fully later when considering negligence. |
I come to the third element, "dishonest and fraudulent design on the part of the trustees." I have already indicated my view, for reasons already given, that this must be understood in accordance with equitable principles for equitable relief. |
I therefore cannot accept the suggestion that, because an action is not of such a dishonest and fraudulent nature as to amount to some crime, that it is not fraudulent and dishonest in the eyes of equity - or that an intention eventually to restore or give value for property - which it was suggested might provide a good defence to a criminal charge - would of itself make its appropriation and use in the meantime, with its attendant risks and deprivation of the true owner, unobjectionable in equity, and thus make what would otherwise be dishonest and fraudulent free from such objection. |
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It was suggested for the plaintiff that "fraudulent" imports the element of loss into what is dishonest, so that the phrase means dishonest resulting in loss to the claimant. It seems to me unnecessary and, indeed, undesirable to attempt to define "dishonest and fraudulent design," since a definition in vacuo, without the advantage of all the circumstances that might occur in cases that might come before the court, might be to restrict their scope by definition without regard to, and in ignorance of, circumstances which should patently come within them. The words themselves are not terms of art and are not taken from a statute or other document demanding construction. They are used in a judgment as the expression and indication of an equitable principle and not in a document as constituting or demanding verbal application and, therefore, definition. They are to be understood "according to the plain principles of a court of equity" to which Kindersley V.-C. referred in Bodenham v. Hoskins,62 and these principles, in this context at any rate, are just plain, ordinary commonsense. I accept that "dishonest and fraudulent," so understood, is certainly conduct which is morally reprehensible. But what is morally reprehensible is best left open to identification and not to be confined by definition. |
(4) Paying bank's liability to its customer in negligence |
A further and alternative claim is made against the defendant banks for negligence. This is a claim for damages at common law, as contrasted with a claim for equitable relief against the banks, as well as against other defendants, to replace moneys misapplied as trustees or constructive trustees. Both these equitable and common law claims, as against both defendant banks, involve the allegations that they ought to have made inquiry. Such allegations, though differing in the case of each bank, are identical under both the equitable and the common law claim, and it is common ground that any standard of care which puts on inquiry or notice is the same under both claims. Whereas the claim in equity against the banks is made against them as constructive trustees, the claim against them in common law is based, as stated in paragraph 27 of the statement of claim, on "the duty which as bankers they respectively owed to the plaintiff as their customer." |
The relationship of banker to customer with regard to the customer's current account in credit at the bank is not that of trustee or fiduciary to a beneficiary but sounds in contract (see Foley v. Hill63 and Joachimson v. Swiss Bank Corporation,64 per Atkin L.J.). |
In Jarvis, v. Moy, Davies, Smith, Vandervell & Co.65 Greer L.J. stated: |
62 21 L.J.Ch. 864, 873. |
63 (1848) 2 H.L.Cas. 28. |
64 [1921] 3 K.B. 110, 126-127; 37 T.L.R. 534, C.A. |
65 [1936] 1 K.B. 399, 405; 154 L.T. 365, C.A. |
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"... where the breach of duty alleged arises out of a liability independently of the personal obligation undertaken by contract, it is tort, and it may be tort even though there may happen to be a contract between the parties, if the duty in fact arises independently of that contract. Breach of contract occurs where that which is complained of is a breach of duty arising out of the obligations undertaken by the contract." |
Although it was suggested that, in this case, paragraph 27 of the statement of claim alleging negligence is wide enough to cover negligence both in tort and contract, the negligence with which we are concerned, being negligence in the duty owed to the plaintiff as the bank's customer, is negligence "arising out of the obligations undertaken by the contract" between the bank and its customer and is, in my view, clearly negligence in contract. The claim by the plaintiff in equity is as a beneficiary in a fund of which it is alleged the director defendants are trustees, and against other defendants treated in equity as constructive trustees. But the claim in common law against the banks is as itself a customer of the banks. It contrasts with any claim which a beneficiary under a settlement trust might make, where the customer is the trustee and not the beneficiary and the account is not in the name of the beneficiary at all but of the trustee. |
The allegations against the defendant banks are exclusively as paying banks and not as collecting banks - for negligence in paying out the plaintiff's money from its bank account. The question, therefore, is: is there any and, if so what, liability of a bank in negligence in contract between a paying bank and its customer? But as the authorities referred to deal with both paying and collecting banks, I will deal first with a bank's obligations in general, both with regard to paying and collecting, so far as they are relevant to this case and the authorities. |
It might be convenient to indicate first certain matters which are elementary. A cheque (as a bill of exchange drawn on the banker payable on demand) is transferred by delivery or indorsement and delivery. Delivery means transfer of possession. When a cheque is delivered to the payee he becomes the holder of it and may negotiate it by presenting it for payment or indorsing it over to a third party, who may similarly indorse it, and so on. If the indorsee gives value for the cheque, he becomes holder for value and if, in addition, he takes it bona fide without notice of any defect of title, he becomes holder in due course and his title is unassailable despite prior defect. The person for the time being entitled to the property in and possession of a cheque, as against all other claimants, is its true owner. Anyone entitled to immediate possession of a cheque may sue for conversion and the measure of damages is the face value of the cheque. Alternatively, a plaintiff may waive the tort and claim the proceeds of the cheque as money had and received to |
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his use: (see Byles on Bills of Exchange, 22nd ed., (1965) pp. 267, 295, 296). |
Section 60 of the Bills of Exchange Act, 1882, provides protection for a paying bank and section 82 for a collecting bank. The protection given by section 60 is to a paying banker who pays "in good faith and in the ordinary course of business," though negligent. The protection to a collecting banker is to a banker who collects not just "in the ordinary course of business" but "in good faith and without negligence." |
Section 60 reads as follows: |
"When a bill payable to order on demand is drawn on a banker, and the banker on whom it is drawn pays the bill in good faith and in the ordinary course of business, it is not incumbent on the banker to show that the indorsement of the payee or any subsequent indorsement was made by or under the authority of the person whose indorsement it purports to be, and the banker is deemed to have paid the bill in due course, although such indorsement has been forged or made without authority." |
On this the text book (Byles on Bills of Exchange, 22nd ed.) comments at pages 268 and 269: |
"This provision protects only the banker on whom the bill or cheque is drawn: it does not protect a collecting banker. Its object is to protect the paying banker against forged or unauthorised indorsements. Hence it applies to an indorsement by an agent in fraud of his principal. Where, however, the paying banker fails to exact a proper indorsement and pays upon an indorsement which is irregular, he is not protected by this section: nor is he protected where the bill or cheque is materially altered, since the instrument has been avoided by the alteration and he is under no duty to pay it. ... Negligence is clearly not incompatible with good faith; and an act which is done negligently may yet be done in the ordinary course of business." |
Section 82 reads as follows: |
"Where a banker in good faith and without negligence receives payment for a customer of a cheque crossed generally or specially to himself, and the customer has no title or a defective title thereto, the banker shall not incur any liability to the true owner of the cheque by reason only of having received such payment." |
Section 80 provides further protection to a paying bank on whom a crossed cheque is drawn and who pays to a banker. This is not limited to protection in respect of indorsements like section 60, but it does require a more stringent standard from the banker than section 60, namely, payment "in good faith and without negligence" and not just "in good faith and in the ordinary course of business." |
Section 80 reads: |
"Where the banker, on whom a crossed cheque is drawn, in good faith and without negligence pays it, if crossed generally, to a banker, and if crossed specially, to |
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the banker to whom it is crossed or his agent for collection being a banker, the banker paying the cheque, and, if the cheque has come into the hands of the payee, the drawer, shall respectively be entitled to the same rights and be placed in the same position as if payment of the cheque had been made to the true owner thereof." |
The relationship between customer and banker is contractual and founded on one contract, which normally includes the relationship of creditor and debtor with regard to the balance in the customer's bank account and the relationship of principal and agent in respect of the payment of the customer's cheques drawn on the customer's bank account. This appears clearly from Lord Atkinson's speech in Westminster Bank Ltd. v. Hilton66 and Atkin L.J.'s famous judgment in Joachimson v. Swiss Bank Corporation.67 |
Lord Atkinson said, in Westminster Bank Ltd. v. Hilton68: |
"It is well established that the normal relation between a banker and his customer is that of debtor and creditor, but it is equally well established that quoad the drawing and payment of the customer's cheques as against money of the customer's in the banker's hands the relation is that of principal and agent. The cheque is an order of the principal's addressed to the agent to pay out of the principal's money in the agent's hands the amount of the cheque to the payee thereof." |
Atkin L.J., in Joachimson's case, said69: |
"The question seems to turn upon the terms of the contract made between banker and customer in ordinary course of business when a current account is opened by the bank. It is said on the one hand that it is a simple contract of loan; it is admitted that there is added, or superadded, an obligation of the bank to honour the customer's drafts to any amount not exceeding the credit balance at any material time; but it is contended that this added obligation does not affect the main contract. The bank has borrowed the money and is under the ordinary obligation of a borrower to repay. The lender can sue for his debt whenever he pleases. I am unable to accept this contention. I think that there is only one contract made between the bank and its customer. The terms of that contract involve obligations on both sides and require careful statement. They appear upon consideration to include the following provisions. The bank undertakes to receive money and to collect bills for its customer's account. The proceeds so received are not to be held in trust for the customer, but the bank borrows the proceeds and undertakes to repay them. The promise to repay is to repay at the branch of the bank where the account is kept, and during banking hours. It includes a promise to repay any part of the amount due against the written order of the customer addressed to the bank at the branch, and as such written orders may be outstanding in the ordinary course of business for two or three days, it is a term of the contract that the bank will not cease to do business with the customer except |
66 (1926) 43 T.L.R. 124, 126; 136 L.T. 315, H.L. |
67 [1921] 3 K.B. 110, 126-127. |
68 43 T.L.R. 124, 126. |
69 [1921] 3 K.B. 110, 126-127. |
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upon reasonable notice. The customer on his part undertakes to exercise reasonable care in executing his written orders so as not to mislead the bank or to facilitate forgery. I think it is necessarily a term of such contract that the bank is not liable to pay the customer the full amount of his balance until he demands payment from the bank at the branch at which the current account is kept. Whether he must demand it in writing it is not necessary now to determine." |
The Joachimson case70 turned, in the special circumstances of that case, on whether the customers had a cause of action against the bank on August 1, 1914. As no demand was made by the customers for payment by the bank of the amount standing to the credit of their account with the bank, that depended on whether demand by a customer was necessary to a cause of action by a customer against a bank for money lent. |
Although the case was concerned with this limited point, it was suggested that the passage quoted from Atkin L.J.70 was intended as a comprehensive statement of the law on the contract between customer and banker and that, therefore, as it did not mention a duty of care by banker to customer there is no such duty of care, the more so as it mentions a duty of care by customer to banker. It would, indeed, seems to me rash, in the absence of compelling considerations, to ascribe particularly to such a judge as Atkin L.J., such a very risky and cramping intention. Bankes L.J.71 in the judgment preceding Atkin L.J., had rejected a somewhat similar submission that Foley v. Hill72 should be treated as making an exhaustive definition of the obligations arising out of the relations of banker and customer. True, Atkin L.J. in his judgment said,73 "The terms of that contract involve obligations on both sides and require careful statement." It was therefore suggested that he was making a careful statement of all the terms. But he did not say "comprehensive" statement, and his "careful statement" was that "They appear upon consideration to include the following provisions."73 But the defendants say that, in the careful statement, the word "includes" means "consist of." But this would rob the statement of the carefulness relied on to make it comprehensive. It seems to me that Atkin L.J. is dealing with the mutual obligations of banker and customer, from receipt of moneys into the customer's account until payment out of the account, so far as they throw light on the question to be decided, namely, whether demand was required before payment. That is why he concludes the relevant passage by saying74: "I think it is necessarily a term of such contract that the bank is not liable to pay the customer ... until he demands payment. ..." What is "such contract" is shown by what he had mentioned earlier, including the obligation of the bank not to cease to do business with the |
70 [1921] 3 K.B. 110. |
71 Ibid. 118-119. |
72 2 H.L.Cas. 28. |
73 [1921] 3 K.B. 110, 127. |
74 Ibid. |
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customer, except upon reasonable notice; and the obligation of the customer to take reasonable care in executing his written orders. That is why he mentioned what he did mention earlier. |
Five years later, the same court was dealing with the duty of care of a paying bank in Hilton v. Westminster Bank Ltd.75 Atkin L.J. said with reference to the plaintiff's instructions to the defendant: |
"I think it is the duty of the bank, arising out of the contract to exercise reasonable care and skill in dealing with the communications which the customer sends to them in relation to his banking business." |
Bankes L.J., in referring to the relationship between banker and customer, said76 that it is |
"to a large extent regulated by statute, but ... in essence it is a contractual relationship which involves, I think, the duty on the bank to take reasonable care in the carrying out for its customer of its customer's business." |
In the House of Lords, the Court of Appeal was reversed, but on inference of fact and not on these statements of law.77 On the contrary, the speeches of the House of Lords were on the footing that there was a duty to take care. To avoid a possible source of confusion which threatened before me, it may be convenient to mention here that Atkin L.J.78 makes it perfectly clear that this is not contrary to, but in addition to, the rule in Ireland v. Livingston79 that an agent, acting honestly on a possible interpretation of ambiguous instructions, cannot be held responsible for so acting. |
The Hilton case80 turned on the stopping of a cheque. The drawing of a cheque and the stopping of a cheque are both instructions to a banker. The banker's obligations with regard to his customer's instructions are the same whether they be to pay or to stop (though subject, of course, to the difference in the substance of the instructions given). There seems no ground for saying that the duty of care applies to instructions to stop but not to instructions to pay, or vice versa. Certainly no such ground has been suggested. Thus Lord Shaw in Westminster Bank Ltd. v. Hilton81 refers to the duty of a bank to honour a cheque drawn on a customer's account up to the amount of the customer's credit, and says: "This duty is ended, and on the contrary when the cheque is stopped another duty arises - namely, to refuse payment." Lord Dunedin says82: "It must always be remembered that a bank can be sued just as much for failing to honour a cheque as for cashing a cheque that had been stopped," and, of course, vice versa. |
The facts in that case, so far as we need be concerned with |
75 (1926) 135 L.T. 358, 362, C.A. |
76 Ibid. 358. |
77 43 T.L.R. 124. |
78 135 L.T. 358, 362, C.A. |
79 (1872) L.R. 5 H.L. 395, H.L. |
80 135 L.T. 358. |
81 43 T.L.R. 124, 129. |
82 Ibid. 126. |
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them, were as follows.83 On August 1, the bank received a telegram purporting to be signed by a customer directing "Stop payment of cheque 117283 amount of £8 1s. 6d. to Poate." On August 2, the customer telephoned the bank branch cashier and the conversation included the following: "Did you get my wire to stop cheque to Poate for £8 1s. 6&D?". "Yes, it has not been presented yet, Mr. Hilton," to which Hilton, the customer, replied: "It is not due to be presented till today," or perhaps, "It is not presentable until today." This telephone conversation authenticated the telegram and so disposed of any question that might have arisen whether the telegram came from the plaintiff. The telegram, taken on its own and thus authenticated, provided perfectly clear instructions. |
But the telephone conversation went beyond authentication and referred to the cheques being presented or presentable "until today," August 2. The Court of Appeal concluded84 that the inference from the reference to August 2 was that the cheque was post-dated August 2. From this conclusion it followed that, when on August 6 a cheque arrived at the bank, drawn by the same customer for the same amount to the same payee and also dated August 2, but numbered 117285, instead of 117283, reasonable care on the part of the bank would have required that the bank should check whether number 117283 had been paid. If they had exercised that care they would have found that it was the number of another cheque that had already been paid on July 29; and that therefore the telegram could not have been intended to refer to 117283 but must have been intended to refer to 117285, with the result that the bank should not have paid cheque 117285. In fact, the bank did pay it, and the Court of Appeal held that, in accordance with their inference about August 2, the bank was liable to the customer for damages for negligence. |
The House of Lords, however, on the other hand, concluded85 that the telephone conversation did not indicate that the cheque was post-dated, and that therefore the cheque 117285, being later in numerical order of the cheque than 117283 and being dated August 2, after the cancellation on August 1 of a cheque already drawn (and which on the House of Lords' view, the bank was not told was post-dated), the supposition was that it was a later duplicate cheque. So, in the view of the House of Lords, there was no breach of the bank's duty to take care, not because there was no such duty to take care but because there had not been a breach of it. On the existence of the duty, the House of Lords did not gainsay what was said by the Court of Appeal. They proceeded on the Court of Appeal view of the law, even though Horridge J. at first instance had, as Lord Dunedin said86: "exonerated the bank on the simple ground that 117283 was |
83 43 T.L.R. 124, 125. |
84 135 L.T. 358, C.A. |
85 43 T.L.R. 124. |
86 Ibid. 126. |
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stopped and 117285 was cashed." If the instructions were conclusive and there were no duty of care, then it seems to me that Horridge J. was necessarily right. |
Further, Lord Dunedin indicated that the duty of care that arose was not limited to checking the accuracy of instructions, when a doubt arose about their expression or meaning, but went beyond that to exercising care that the apparent instructions were in reality the instructions of the customer. Lord Dunedin said86: |
"I was at one time inclined to think that, inasmuch as both the cashier and the manager knew that there was a stop on a cheque they ought, on August 6, to have made certain investigations, but I find that they did do so. They followed the ordinary practice. They looked at the ledger, and the ledger showed that no cheque in favour of Poate had come in. I think, therefore, that the view of the officials was correct that the cheque presented being subsequent to the date of the stop instructions might be a duplicate cheque, and that they were bound to cash it." |
Here it was the mere existence of a stop on a cheque, without regard to any ambiguity in expression, that imposed the obligation to take care by investigation that there was no duplication of payment. This was in keeping with the bank's duty of care, as stated by Bankes L.J. and Atkin L.J. in the passages quoted from Joachimson v. Swiss Bank Corporation,87 and Hilton v. Westminster Bank Ltd.88 |
Curtice v. London City and Midland Bank Ltd.,89 referred to in judgments of Bankes L.J. and Warrington L.J. in the Hilton case,90 was also a case of stopping a cheque. The issues in the Curtice case91 were, whether a cheque could be countermanded by telegram and whether it had in fact been so countermanded. The telegram was placed in the bank's letter-box which, by oversight, was not cleared until after the cheque had been paid. It was held that the cheque was not countermanded within the meaning of section 75 of the Act of 1882 which provides that "The duty and authority of a banker to pay a cheque drawn on him by his customer are determined by (1) countermand of payment. ..." The placing of the telegram in the letter-box did not, by constructive notice, constitute a countermand, when in fact there was none. Cozens-Hardy M.R. said92: "There is no such thing as a constructive countermand in a commercial transaction of this kind," and Fletcher Moulton L.J. and Farwell L.J. agreed.93 But all the members of the court made it perfectly clear that these observations, so far from being related to a claim in negligence, were supplemented by statements that the appropriate course was to claim in damages for negligence, |
87 [1921] 3 K.B. 110, 118-119, 126-127, C.A. |
88 135 L.T. 358, C.A. |
89 [1908] 1 K.B. 293; 24 T.L.R. 176, C.A. |
90 (1926) 135 L.T. 358, 360, 361, C.A. |
91 [1908] 1 K.B. 293. |
92 Ibid. 298. |
93 Ibid. 299, 301. |
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instead of for money had and received, on the ground that the cheque was constructively countermanded. Farwell L.J. said94: "On the evidence here it is clear that the banker is simply put on inquiry by the receipt of a telegram, and his duty is not to pay at once, but to make inquiries." |
Fletcher Moulton L.J. said95: "It must be a question in each case as to whether the agent has behaved reasonably in acting or not acting upon that telegram." |
And Cozens-Hardy M.R. said96: |
"A telegram may, reasonably and in the ordinary course of business, be acted upon by the bank, at least to the extent of postponing the honouring of the cheque until further inquiry can be made. But I am not satisfied that the bank is bound as a matter of law to accept an unauthenticated telegram as sufficient authority for the serious step of refusing to pay a cheque." |
So this case likewise, in my view, goes to indicate that the bank has a duty of care to its customer in respect of the conduct of its customer's business as Bankes L.J. said and not merely in interpreting its customer's instructions; that that duty may in the circumstances require that the bank should make inquiries before acting and for that purpose to postpone honouring the customer's cheque; and that the test of care required in the performance of the bank's duty is an objective test of reasonableness. |
Bellamy v. Marjoribanks,97 a case before the Bills of Exchange Act, 1882, gave the banks statutory protection, also dealt with the duty of care of a paying bank. The plaintiff drew a cheque on Coutts & Co., payable to one Geary or bearer, and crossed it "Bank of England for the account of the Accountant General." Geary crossed out the crossing to the Bank of England and wrote instead the name of his own bankers "Gosling & Co." The amount of the cheque was paid by Coutts & Co. to Gosling & Co. and Geary was thus enabled to misapply the cheque. The plaintiff sued his bankers in negligence for paying the cheque to Gosling and not to the Bank of England. It was decided that the crossing was not part of the drawer's instructions so as to make the cheque payable to the Bank of England only, but that it was, by bankers' usage, a protection for the plaintiff, a design to secure payment through a bank so that98 "in the event of a banker paying a crossed cheque otherwise than to a banker the circumstance of his so paying would be strong evidence of negligence in an action against him." This case was not decided on the ground that the customer's instructions were the bank's only concern and, once ascertained, were conclusive, or on the ground that the care required of the bank was limited to care in interpreting the customer's instructions. Payment, despite |
94 [1908] 1 K.B. 293, 301. |
95 Ibid. 300. |
96 Ibid. 298-299. |
97 (1852) 7 Exch. 389. |
98 Ibid. 403-404. |
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the crossing and the usage, was "strong evidence," but not more than evidence, of negligence. It was not treated as disobedience of instructions. The relevance of the decision is its ratio decidendi; and the decision was based upon a duty of care on the part of the paying bank to protect the plaintiff, its customer. There was, it seems to me, a clear recognition of such a duty of care, even though it may be arguable that the decision might have been founded, as it was not, and perhaps even better founded, upon observance by the bank of an instruction of the customer by crossing, which, truly interpreted, required payment through any bank. |
In Carpenter's Co. v. British Mutual Banking Co. Ltd.99 MacKinnon L.J. (who dissented, but only because he, unlike his brethren, considered that the court was bound by previous decision) said: "the banker does owe a duty of care to his customer; they are in a contractual relation." Then he comments that section 60 of the Act of 1882, in relief of a paying bank, merely requires that the bank should have paid "in the ordinary course of business," and not, as in section 82 in relief of a collecting bank, "without negligence." He adds that, if in section 60 "without negligence" had been intended,99 "seeing that the paying banker already owes a duty of carefulness to his customer, it would have been the more obvious to express it." For the banks it was suggested that this merely referred to a duty to take care not to pay otherwise than in accordance with the instructions. I do not read MacKinnon L.J.'s observations in the limited way for which the banks contend. Slessor L.J.100 treated circumstances which put on inquiry, coupled with the absence of inquiry, as establishing negligence within section 82. |
B. Liggett (Liverpool) Ltd. v. Barclays Bank Ltd.101 was referred to. As the law turned on Royal British Bank v. Turquand,102 with which we are not concerned. and the circumstances of negligence were far removed from the circumstances in our transactions, it does not seem to be of material assistance. |
The cases on the duty of care of paying banks are very few. For the defendant banks, it was suggested that this indicated that there was no duty of care on paying banks. Not only is such a negative indication dangerous, but it seems to me that, to conclude that there is no duty of care on paying banks, is contrary to the quotations which I have made from paying bank cases. For the plaintiff, it was suggested with considerable force that there were good practical reasons why customers should not choose to sue the paying banks, including in particular that it was less onerous to sue the collecting bank. The customer could sue the collecting bank in conversion, in which the burden in a defence under section 82 of the Act of 1882 of establishing absence of negligence would |
99 [1938] 1 K.B. 511, 537; 53 T.L.R. 1040; [1937] 3 All E.R. 811, C.A. |
100 [1938] 1 K.B. 511, 535. |
101 [1928] 1 K.B. 48; 43 T.L.R. 449. |
102 (1856) 6 E. & B. 327. |
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lie on the bank; whereas if the customer sued the paying bank in negligence, the burden of establishing negligence would lie on the customer. The paying bank might be able to rely on section 60 of the Act of 1882, which exonerates a bank acting in good faith and in the ordinary course of business, although negligent. |
The collecting bank cases referred to were relied on by the plaintiff, as I have mentioned, merely as providing an indication of circumstances constituting carelessness and of the standard of care required. |
In Midland Bank Ltd. v. Reckitt103 Lord Terrington was authorised by power of attorney to draw cheques on the account of a client at Barclays Bank for his client's purposes, signed such cheques as his client's attorney, and paid them into his own account at the Midland Bank in reduction of his overdraft. The headnote states the decision: |
"Held, as to all the cheques except two, which depended on special circumstances, affirming the decision of the Court of Appeal, that the defendants, in presenting and receiving payment for the cheques, had converted them, and that, as the defendants had from the form of the cheques notice as to the money not being T.'s money, they were negligent in making no inquiry as to T.'s authority to make these payments into his own account, and therefore failed to bring themselves within section 82 of the Bills of Exchange Act, 1882." |
Lord Atkin104 quotes Lord Carson in a similar case involving Lord Terrington, which is Reckitt v. Barnett, Pembroke & Slater Ltd.,105 and Lord Atkin says: |
"Lord Carson shortly states the conclusion of all the members of the House when he says" - and he quotes from Lord Carson - "'It is clear (1) that the cheque was used to liquidate the private debt of Lord Terrington, (2) that the defendants knew it was so used, and (3) that the form of the cheque gave them notice that the money was not the money of Lord Terrington. In that state of circumstances there is no evidence or any possible inference which can be drawn that the agent was applying his principal's money in discharge of any possible liability of his principal'." Then Lord Atkin adds: "Precisely the same state of things exists here ... It seems to me clear that in an omission of an ordinary business precaution, in breach of a plain duty imposed upon a creditor to take reasonable care to see that a known agent paying his own debt to his creditor out of his principal's money is acting within his authority, the bank were negligent in making no inquiry as to their customer's authority to make these payments"; and later he says106: "the notice found to exist defeats reliance on ostensible equally with actual authority. Neither in the one case nor in the other can the agent be assumed to have authority to pay his own debts with his principal's money." |
103 [1933] A.C. 1, 2; 48 T.L.R. 271, H.L.(E.). |
104 [1933] A.C. 1, 15. |
105 [1929] A.C. 176, 191, H.L. |
106 [1933] A.C. 1, 17. |
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In Penmount Estates Ltd. v. National Provincial Bank Ltd.107 the first paragraph of the headnote reads: |
"The plaintiffs were the payees of a cheque, crossed 'and Co. Not negotiable,' received by a firm of surveyors on their behalf from the War Damage Commission. An employee of that firm, having forged the plaintiffs' endorsement, asked B. to cash the cheque. B. took the cheque to A., a solicitor, who had a clients' account with the defendant bank. A. paid the cheque into the clients' account, having met the bank's objections by stating that he had arranged for cheques from the War Damage Commission to be paid into his clients' account, whereupon he sent his clients his cheque for the amount less his fees. Having discovered the employee's fraudulent conduct, a partner of the firm sent the plaintiffs his cheque for the amount of the commission's cheque. ..." |
The action against the bank was in conversion by it as collecting bank and the bank relied on section 82 of the Act of 1882. The only question was, whether the bank had established that it had acted without negligence within that section, that is, without carelessness towards the plaintiff, the payee, who was the true owner of the cheque. With regard to the plaintiff, the bank owed no contractual duty, but to succeed under section 82 it had to establish that it acted "without negligence" with regard to the plaintiff. MacKinnon L.J., sitting in the King's Bench Division, said108: |
"It is difficult to enunciate any principle which is applicable to the infinite variety of circumstances in which such a question might arise. There are obviously various considerations: the name of the payee; the form of the endorsement; the circumstances of the customer himself. In this case the customer was a solicitor. True, there is reason to believe that he was not a very reputable solicitor; but he was a solicitor, and he was keeping, under statutory conditions, a client's account, and it would be natural that he should be paying into such an account the money of people other than himself. He himself presented the cheque, so that there was no question, as there has been in other cases, of negotiating a cheque for a person known to be a servant of the true owner of the cheque. It is true that, in the light of after events, the explanations given by Addis may sound improbable to anyone in a suspicious frame of mind; but in my opinion the officials of the bank, doing their duty under section 82, have not to be abnormally suspicious. Moneys must be paid out, among a multiplicity of other transactions, with reasonable despatch. As it turns out, there were a good many questions on which a lawyer, who is trained very differently from a bank clerk, would probably have had it in mind to cross-examine Addis." |
So there are an "infinite variety of circumstances" that may be relevant to negligence. "Reasonable despatch" in this passage must, of course, mean reasonable in all the circumstances. It is accepted that, in the ordinary course of business, the decision what course to take with regard to a cheque presented for |
107 (1945) 173 L.T. 344. |
108 Ibid. 346. |
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payment must be taken on the day of its receipt by the bank branch responsible for the decision. But it seems to me that a banker is not compelled at his risk to honour or dishonour his customer's cheque, in the ordinary course, by the end of the day of its receipt, if there are circumstances requiring investigation. The need for despatch and the knowledge of the banker are alike elements which enter into a decision what despatch and what investigation are reasonable in the circumstances. |
In A. L. Underwood Ltd. v. Bank of Liverpool and Martins,109 so far as material, cheques were drawn in favour of a company, indorsed by a sole director duly authorised to indorse the company's cheques, and paid by him wrongly into his private account in the defendant bank. The company sued the defendant as collecting bank for conversion, and the bank relied on section 82 of the Act of 1882. The issue was whether the bank had established under that section that it acted "without negligence," that is, without carelessness in relation to the company, the true owner of the cheque. It was decided that the bank had not so acted without negligence and was therefore liable in conversion to the plaintiff. Bankes L.J. said110: |
"They" - that is, the cheques - "were indorsed by Underwood as sole director, a fact which, instead of absolving the cashiers from inquiry, appears to me to demand the exercise of greater caution on their part, having regard to the fact that the cheques were being paid in to Underwood's private account." |
So, although as stated111 Underwood clearly had authority, as sole director, to indorse cheques, this certainly did not conclude the matter in the bank's favour. |
Atkin L.J. quoted the cross-examination of the bank manager. He said112: |
"At page 125 of the shorthand notes he" - that is, the bank manager - "was asked this: 'It would be negligence on the part of the bank to collect for a customer's private account cheques made payable to his principal. Do you agree with that? (A.) Yes - without asking the principal first - without refering to the principal.'" |
Scrutton L.J.'s judgment contains observations to the same effect.113 Later the cross-examination continued114: |
"'(Q.) I put it that there is a risk that he is, or may be doing wrong?'" - that is, the payer-in. "'(A.) Yes. (Q.) I think you will agree with me that at all events such a transaction, that is to say, the payment to the private account of the official of the company of a cheque which, on the face of it, is made payable to the company, is out of the ordinary course of business? (A.) Yes.'" |
Then Atkin L.J. continues his own observations: |
109 [1924] 1 K.B. 775; 40 T.L.R. 302, C.A. |
110 [1924] 1 K.B. 775, 788. |
111 Ibid. 778. |
112 Ibid. 797. |
113 Ibid. 793. |
114 Ibid. 797. |
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"These admissions, fortified by the whole facts of the case, appear to demonstrate that in disposing of the cheques as he did Underwood was not acting within the ordinary scope of his authority, but was doing something unusual which ought to have attracted the attention of the bank's servants." |
This passage suggests that where a transaction is "out of the ordinary course of business," "doing something unusual which ought to have attracted the attention of the bank's servants," and where there is "a risk" that wrong is being done (to someone with regard to whom the bank seeks to maintain that it is acting without negligence), then the bank is negligent unless it makes inquiry. |
It is irrelevant to the passages which I have quoted, that the negligence of the bank to the true owner of the cheque was imposed by statute and did not arise out of contract, or that such negligence is not a ground of claim but a defence in which, under section 82 of the Act of 1882, the burden of proof lay on the bank, instead of on the plaintiff as in contract. Nor is it relevant that the negligence being considered is that of a collecting and not of a paying bank. The passages are not directed to or affected by the considerations which are irrelevant to them. They are directed to what constitutes carelessness within the legal context of negligence, what kind of behaviour amounts to negligence. They show, to my mind, that the standard of care being considered is not some mystery peculiar to banking law, still less that it is limited to collecting banks. That case does not appear to me to be a pronouncement for banks, and still less for collecting banks, of some peculiar standard of care; but the application to a bank of the approach, tests, and standard of care prevailing generally in the law of contract. |
Morison v. London County and Westminster Bank Ltd.115 was relied on by the defendants. In that case, one Abbott had authority to draw on the plaintiff's account at the National Provincial Bank and sign cheques "per pro," for the purposes of the plaintiff's business. Over the years, he paid in cheques, so signed, into his own account with the defendant bank. The plaintiff sued the defendant, as collecting bank, for damages for conversion, or alternatively for money had and received. It appears (particularly from the observations of Phillimore L.J.115 that, in reply to the claim in conversion, the defendant relied on section 82 of the Act of 1882 (including its collection being without negligence) and, in reply to the claim for money had and received, on the cheques being forgeries and therefore nullities. |
The forgery relied on was what was called "statutory forgery" under section 25 of the Act of 1882. That section provides: |
"A signature by procuration operates as notice that the agent has but a limited authority to sign, and the principal is only bound by such signature if the agent in so signing was acting within the actual limits of his authority." |
115 [1914] 3 K.B. 356, 362, 382; 30 T.L.R. 481, C.A. |
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It was held that the misuse of his authority by a person authorised to sign "per pro" and who so signed, was not a forgery: that with regard to cheques collected in later years, there was no negligence because the bank had collected similar cheques in earlier years without protest from the plaintiff; and that, with regard to cheques in the earlier years, the plaintiff had in the circumstances ratified Abbott's acts. |
Two series of observations in the course of the case, it was suggested, bear on our problem, one series on the position of the paying bank, and the other on negligence. As no claim was made against the paying bank, the observations with regard to it were, at the highest, obiter. Even so, it seems to me that they were not made with any reference to the paying bank's liability in negligence at all, since no suggestion of negligence was made against the paying bank. Lord Reading C.J., said with reference to the forgery issue116: |
"If, as is admitted, the National Provincial Bank were entitled and indeed bound to honour cheques so signed" - and117 - "The plaintiff makes no complaint against the National Provincial Bank. It is clear that they were bound in pursuance of the directions and authority given in 1888 to honour the said cheques on his account." |
Buckley L.J. spoke to the same effect.118 These statements must be read in the context of that case, where there was no claim in negligence or otherwise against the paying bank, or any such ground suggested for impugning the bank's relying on the mandate to it. They were not general pronouncements of law, which would exclude such claims in negligence or otherwise, and so to read them would import into them a significance to which the court's mind was not directed at all and which they were never intended to bear. |
On negligence Lord Reading, C.J., said119: |
"For a firm to pay salary or commission or any debt to a manager by cheques made payable to the firm or order, and for a manager to pay cheques so drawn to his own private banking account after himself indorsing them as agent for the payees, appear to me transactions so out of the ordinary course that they ought to have aroused doubts in the defendants' mind and caused them to make inquiry." |
Phillimore L.J. said119a: |
"Abbott was a customer of the collecting bank, well recommended, no doubt, but known to be an employee and a manager; and, being a manager and having the power of signing per pro. for his employer, he was placing cheques which he drew for his employer to his private account. If this happened often enough, and with regard to sufficiently large sums, I think it ought to give rise to some suspicion in the breast of the bank manager or the cashier. If it were material, I do not think that I should be prepared to dissent from the |
116 [1914] 3 K.B. 356, 366. |
117 Ibid. 363. |
118 Ibid. 374. |
119 Ibid. 368-369. |
119a Ibid. 383. |
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conclusion at which, I think, the learned judge intended to arrive - that there was negligence in cashing some of the earlier cheques, cashing them and paying them to Abbott's account without, at least, some inquiry. But as regards all the middle and later cheques, a suspicion which might have been reasonably entertained would with at least equal reason be lulled to sleep." |
In Orbit Mining and Trading Co. Ltd. v. Westminster Bank Ltd.120 Harman L.J. said: "It is never possible to lay down a rule as to what constitutes negligence and what avoids it. Each case depends on its own facts." He then quotes Lord Dunedin, quoting Isaacs J. in the High Court of Australia referring to the Morison case121 as laying down that "the test of negligence is whether the transaction of paying in any given cheque was so out of the ordinary course that it ought to have aroused doubts in the bankers' mind, and caused them to make inquiry," with Lord Dunedin's comment: |
"If there be inserted after the words 'given cheque' the words 'coupled with the circumstances antecedent and present,' their Lordships think this is an accurate statement of the law. The question is necessarily a question of fact." |
Harman L.J. continues, quoting Lord Dunedin122: |
"'It follows that, being a question of fact, it is really impossible to lay down rules or statements which will determine what is negligence and what is not. Each case must be determined on its own circumstances. In view, however, of what was said in the decision of the High Court of Australia above-mentioned, their Lordships feel bound to say that they cannot agree with the view of the learned Chief Justice in that case where he says that the care to be taken is not less than a man invited to purchase or cash such a cheque for himself might reasonably be expected to take. This seems to their Lordships to apply an inapposite standard, for the simple reason that it is no part of the business or ordinary practice of individuals to cash cheques which are offered to them, whereas it is part of the ordinary business or practice of a bank to collect cheques for their customers. If, therefore, a standard is sought, it must be the standard to be derived from the ordinary practice of bankers, not individuals.'" |
So it seems to me that the standard of care is that which bankers might reasonably be expected to take according to the ordinary practice of bankers. The test thus seems clearly to be an objective test of reasonableness. |
These quotations are in line with other cases, already considered, indicating that, in deciding whether there is carelessness in breach of the required standard of care, and whether inquiry ought to be made, and there is negligence, all the circumstances have to be considered, including the extent to which the transaction appears "out of the ordinary course." |
120 [1963] 1 Q.B. 794, 822; [1962] 3 W.L.R. 1256; [1962] 3 All E.R. 565, C.A. |
121 [1914] 3 K.B. 356. |
122 [1963] 1 Q.B. 794, 823-824. |
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One of the relevant circumstances in assessing the degree of the care required is stated in by Sellers L.J. in Orbit Mining and Trading Co. Ltd. v. Westminster Bank Ltd.123 He said: "It is not our way of life cither in trade or banking or in private relationships to be always on the alert against dishonesty." This is in line with part of a passage, already quoted from the Penmount Estates case,124 that under section 82 of the Act of 1882 the bank officials "have not to be abnormally suspicious." |
Macbryde v. Eykyn,125 in line with Romilly M.R.'s observations in Jones v. Williams,126 states that when, on inquiry, an answer is received which the enquirer may reasonably believe to be true, he is entitled to act on it. |
If inquiry ought to be made, and no inquiry is made, then the weight of authority establishes, in my view, that it is to be assumed that a true answer would be given; and, if no inquiry is made, that negligence is established. Devlin J. in Baker v. Barclays Bank Ltd.127 stated, obiter, in the case of a defence under section 82 of the Act of 1882 where the burden of proving collection without negligence lay on the defendant bank, that "there is at the very least a heavy burden upon him to show that such inquiries could not have led to any action which could have protected the interests of the true owner." But, earlier, he refers to statements of Lord Wright and Greer L.J. in Lloyds Bank v. E.B. Savory and Co.128 to the effect that it is no answer to negligence to say that an inquiry would have been fruitless; and to the statement of Romilly M.R. in Jones v. Williams,129 quoted by Bankes L.J. in A.L. Underwood Ltd. v. Bank of Liverpool,130 that it is no answer to say that a false answer would have been given. Romilly M.R.'s statement, at any rate, was not limited to section 82, but was clearly based on general principle, which Bankes L.J. adopted and applied to section 82. The weight of authority does not seem to me to be in accord with the limited qualifications to which Devlin J. guardedly referred. |
Banking law is not a separate body of law, though, like innumerable other activities, it has statutory provisions dealing exclusively with it, and, being a distinctive and important activity, text books dealing separately with it. Those aspects of law with which we are at present concerned are aspects of the general law of contract applicable to banking. The principles of that law of contract applicable to banking are the principles of the general law of contract. It seems to me that it is in keeping with this that Atkin L.J. in Hilton v. Westminster Bank Ltd.131 said, in a passage already quoted, that it is the duty of the bank to exercise "reasonable care and skill," that being a duty which he describes as "arising out of the contract" between banker and customer. |
123 [1963] 1 Q.B. 794, 815. |
124 173 L.T. 344, 346. |
125 (1871) 24 L.T. 461. |
126 (1857) 24 Beav. 47. |
127 [1955] 1 W.L.R. 822, 838; [1955] 2 All E.R. 571. |
128 [1933] A.C. 201, 231, 233; 49 T.L.R. 116, H.L.(E.). [1932] 2 K.B. 122, 148, C.A. |
129 24 Beav. 47. |
130 [1924] 1 K.B. 775, 789. |
131 (1926) 135 L.T. 358, 362. |
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It seems to me that the passages quoted, in particular from Atkin L.J. and Bankes L.J. in Hilton v. Westminster Bank Ltd.,132 are in keeping with this appreciation. To my mind, in accordance with those quotations, a bank has a duty under its contract with its customer to exercise "reasonable care and skill" in carrying out its part with regard to operations within its contract with its customer. The standard of that reasonable care and skill is an objective standard applicable to bankers. Whether or not it has been attained in any particular case has to be decided in the light of all the relevant facts, which can vary almost infinitely. The relevant considerations include the prima facie assumption that men are honest, the practice of bankers, the very limited time in which banks have to decide what course to take with regard to a cheque presented for payment without risking liability for delay, and the extent to which an operation is unusual or out of the ordinary course of business. An operation which is reasonably consonant with the normal conduct of business (such as payment by a stockbroker into his account of proceeds of sale of his client's shares) of necessity does not suggest that it is out of the ordinary course of business. If "reasonable care and skill" is brought to the consideration of such an operation, it clearly does not call for any intervention by the bank. What intervention is appropriate in that exercise of reasonable care and skill again depends on circumstances. Where it is to inquire, then failure to make inquiry is not excused by the conviction that the inquiry would be futile, or that the answer would be false. |
It was submitted for the defendants that where, as here, in the ordinary way, a company by a board resolution authorises persons to sign cheques on its behalf and provides that cheques so signed "shall be valid and binding on the company" and that the resolution shall be communicated to the bank and continue in force between the company and the bank until terminated as specified, then the bank is only concerned that the cheques should be signed by the authorised persons. If this were so then it seems to follow that, even if the bank actually knew that the authorised signatories were misapplying the company's funds, it could nevertheless rely on the signatures. This could be so outrageous as to lie outside the intention and true construction of the mandate. The mandate does not give the authorised persons' signatures any more conclusive effect than, in the case of an individual's account, a mandate gives the signature of that individual's duly authorised attorney as, for example, in Midland Bank Ltd. v. Reckitt.133 The mandate is to enable the signatories to sign "on behalf of the company" and bind it vis-ˆ-vis the bank. Clearly the signatories, because they were authorised to sign "on behalf of the company," could not rely on the mandate to pay for their own purposes. In reality, they would be signing on their own behalf. Nor could the bank rely on the mandate as conclusive to make |
132 135 L.T. 358, 362. |
133 [1933] A.C. 1. |
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such payment for the signatories' purposes out of the company's account. Neither the signatories nor the bank would, in my view, be excused by the mandate from any obligation which existed independent of the mandate, such as obligations under their respective contractual relations with the company. As between the company and the bank, the mandate, in my view, operates within the normal contractual relationships of customer and banker and does not exclude them. These relationships include the normal obligation of using reasonable skill and care. And that duty, on the part of the bank, of using reasonable skill and care, is a duty owed to the other party to the contract, the customer, who in this case is the plaintiff, and not to the authorised signatories. And it extends over the whole range of banking business within that contract. So the duty of skill and care applies to interpreting, ascertaining, and acting in accordance with the instructions of a customer; and that must mean his really intended instructions as contrasted with the instructions to act on signatures misused to defeat the customer's real intentions. Of course, omnia praesumuntur rite esse acta, and a bank should normally act in accordance with the mandate - but not if reasonable skill and care indicate a different course. |
These conclusions are inconsistent with the acceptance of the submissions for the defendants that (1) a paying bank is concerned exclusively with the mandate from its customer and has no duty of care, or alternatively (2) the bank is only liable otherwise (a) if it actually knew that a cheque is drawn by a mandated agent in breach of his authority, or alternatively (b) if from facts in the actual knowledge of the bank, the irresistible inference is that the cheque is so drawn. I mention the second alternative specifically because it is wished to keep it open. |
CASES AGAINST THE DEFENDANTS SEPARATELY |
I now come to the cases against the defendants separately, dealing first with the cases against them in respect of the first transaction and afterwards with the cases against them in respect of the second transaction. It was emphasised for the defendants that there must be defects in recollection by reason of the long time that had passed since these transactions took place. But the investigations by the Board of Trade inspectors and the collapse of the Cradock and Burden companies took place shortly after the second transaction. It would be surprising if, in all the circumstances, the events of the first and second transactions were not deeply impressed upon the minds of those taking principal parts in them. Allowance certainly has to be made for forgetfulness, particularly of the less salient events, but not to an extent that makes it a significantly exceptional feature of this case, compared with other cases in these courts. |
The first transaction defendants |
With regard to the first transaction it will be convenient to deal |
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first with the defendant Cradock; then with the defendants Barlow-Lawson and Jacob, directors of the plaintiff under Cradock's control; then with Contanglo, agent for Cradock in the first transaction; then with the District Bank; and finally with Woodstock. |
The defendant Cradock |
As I have said, Cradock is in default of defence, and there is a motion for judgment against him. So all I am concerned with, as against Cradock, is whether treating the statement of claim as admitted against him, the claim which it makes against him is established in law. That I will deal with after this judgment and in conjunction with the form of any order against other defendants. |
That the alleged purpose of using the plaintiff's funds was to finance the purchase of stock in the plaintiff by Cradock has to be established as against the other defendants. Not by default of Cradock's defence but positively. |
The plaintiff, Woodstock and District agree that if any payment was made out of the plaintiff's account for the purpose of purchasing the plaintiff's shares, it was £232,500 and not merely the £195,000 paid to Contanglo. As the claim against Contanglo is limited to the £195,000, Contanglo is not concerned with this discrepancy in amount. It is likewise agreed between the plaintiff. Woodstock and District that there should be an inquiry whether any part of the £232,500 so paid was in fact applied for the plaintiff's purposes, and, if so, that the amount so applied be deducted from the amount of any liability in respect of such payment of the £232,500. Barlow-Lawson and Jacob did not dissent from this course, though an opportunity was given to them to consider their attitude. The course suggested seems to me correct and convenient. |
As against Woodstock, Cradock's purpose of using the plaintiff's moneys indirectly to finance his purchase of stock in the plaintiff is established by Sarsfield's letter of April 23, 1958, which I have already quoted in full. It was to achieve that purpose that the £232,500 was paid by cheque from the plaintiff to Woodstock and indorsed over to Cradock. Cradock was already bound by his agreement with Contanglo, whose main provisions I have already stated, to pay the completion price for the stock, which turned out to be £195,000. The transfer of the plaintiff's funds from National to District and a cheque for £232,500 paid into Cradock's account to cover the debiting of the District draft for £195,000 to Contanglo, as appears from Cradock's telephone conversation on April 23, with McMinn and his and Sarsfield's conversations with Reynolds at the beginning of the meeting of April 25, as I have mentioned, and the passage of the amounts through the District with the documentation which I have mentioned, clearly establish Cradock's purpose and, together with Sarsfield's letter of April 23, his arrangement with Woodstock to misapply the £232,500 of the plaintiff's money to finance the purchase by Cradock of the stock in the plaintiff. Contanglo |
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accepts that Cradock's purpose in obtaining the £232,500 was to purchase stock in the plaintiff and that, unless Cradock intended to transfer assets of corresponding value to the plaintiff at the time of or immediately after his acquisition of the stock, it was a dishonest purpose. Although Cradock wanted a shell company with liquid assets, with which it could acquire some of his properties, no specific property was mentioned at the time of the first transaction. We know that Cradock did not intend at the time of his receipt of the £232,500 to transfer such assets in return for such use by him of the plaintiff's moneys, because he did not do so. Nor did he later do so or attempt to do so. It is a question of law whether any intention or contemplation that Cradock may have had to use the plaintiff at some future time to be recipient of assets of his could be regarded as making honest what would otherwise be dishonest in any relevant sense, and with that I have already dealt and I have concluded that it cannot. |
The defendants Barlow-Lawson and Jacob |
The allegation against Barlow-Lawson and Jacob is that they procured that the £232,500 of the plaintiff's money should be misapplied for the purpose of financing stock in the plaintiff by Cradock, in bad faith and in breach of their duties as directors and as part of an arrangement between them, Cradock, Contanglo, District and Woodstock or some of such defendants to which the others were privy. They both deny that they were aware that the plaintiff's money was to be used for such a purpose. |
Barlow-Lawson had a small engineering business and had before the war been an estate agent in partnership with Scott of Contanglo. He gave the impression of being somewhat flamboyant and happy-go-lucky. He repeatedly stressed that he was chairman of a successful company that had been a shell company. He was very easy in manner but not a person of any weight and not comparable in ability or force of personality with such controllers of operations as Burden or Scott, whom I saw, or, by all accounts, of Cradock or Levinson, whom, of course, I did not see. In this case there is a very distinct division both of function and calibre between the controllers and the controlled. Barlow-Lawson was in both respects unmistakably one of the controlled. In his evidence he tried to be truthful and, though he had a marked inclination to create a high opinion of himself, he was apt to come out with the truth when pressed. |
He said that he regarded going on the board of the plaintiff as a "splendid opportunity" to be a director of a public company. But, when pressed, he agreed that Scott had asked him to take the same sort of part as he had done on Levinson's invitation in another take-over, when his directorship lasted three days; and that there was no "splendid opportunity" without the possibility of his remaining on the board. This arose only when Cradock asked him on April 25, just before the board meeting of that day, to be a director. He later said that he went on the board as nominee |
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of Contanglo and as a "friendly gesture" to Scott. He later said what he got out of it was "personal," that he owed money to Contanglo and so was "under obligation to do this sort of thing." It was Scott who introduced Barlow-Lawson to Cradock. |
Barlow-Lawson agreed that he was on the board as nominee, first of Contanglo and then of Cradock, and that he was going to do what Scott or Cradock told him to do and not to do what they did not tell him to do. He knew that Cradock was taking over the plaintiff. |
He authorised the transfer of the plaintiff's moneys on deposit to Woodstock at 8 per cent. without security and without any inquiry about Woodstock. He said: |
"I was quite happy to do what I was told to do by the virtual owner of the company," and added, "because I obviously would have thought that he would not have invested the company's money in something where it would be lost." |
Later, he added: "He said it was all right, yes, and I naturally took his word, not only was he a respectable sort of bloke, in my opinion, quite wealthy but also the owner of the company." He recognised that, after he became Cradock's nominee, he gave no service to any in the company except Cradock. He said Cradock probably thought he would sign a cheque for any amount in favour of anybody if he asked him to do so, and that he was right to think so. He admitted that he was "simply ... the hands and eyes of Mr. Cradock." With regard to the meeting of April 25 he said: "I did not really know what was happening and what was the intention of any of the parties ... I trusted everybody there." |
Jacob was an employee of Cradock and his companies. He was engaged in managing properties and was paid by those companies £2,500 a year less P.A.Y.E., plus the use of a car and expenses. He was a quieter and abler man than Barlow-Lawson and, doubtless, was an able administrator. He did not give the impression of being an adventurer and he was not of the calibre of the controllers. His evidence, doubtless largely due to failure of recollection, was not such that much confidence can be placed in it. |
He knew that Cradock: was purchasing a controlling interest in the plaintiff, that he wanted a shell company with liquid assets with which he could acquire some of his properties. But no specific properties were mentioned for such acquisition at the time of the first transaction. |
He knew on April 25, or on the day before, that he was going to be a director of the plaintiff, and he was told before the meeting on that day, that the plaintiff's money would be deposited with Woodstock to earn a higher rate of interest. |
He denied that Cradock talked to him about Sarsfield's letter of April 23. He said he did not talk to him about that kind of personal matter, though he did mostly show him letters dealing with property matters. This is consistent with the picture which has emerged of Cradock in the course of the evidence. It seems |
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to me that Cradock was not a person to confide more than necessary in those whom he used as his instruments. Barlow-Lawson and Jacob were not expert advisers or controllers of the operation. There was no reason why Cradock should tell Barlow-Lawson and Jacob that he was going to use the company's moneys to pay for the stock. He was astute enough, and there were obviously good reasons for his not informing them of his conduct when he need not do so. |
It was suggested that Jacob must have gathered at the meeting of April 25, that Cradock was going to use the £232,500 cheque to pay for the stock. Of course Jacob, like Barlow-Lawson, knew that Cradock was assuming control of the plaintiff on April 25, through acquiring controlling interest in its stock; and they both knew that the plaintiff's funds were going to Woodstock under the cheque which they signed. At the documentation phase of the meeting, when Jacob signed the cheque, he said Sarsfield stood behind him, Barlow-Lawson described the room as "very, very small." It is clear undisputed evidence that no effort at secrecy was apparent in the indorsement of the cheque by Sarsfield to Cradock and the handing of it to Reynolds and the preparation of the accompanying papers for Reynolds for payment through District. I am invited to conclude that it was inconceivable that Jacob did not appreciate that the plaintiff's money was in effect being transferred to Cradock, and if so that it was for use for payment for Cradock's acquisition of the stock. I think there is very great force in the submission and it has troubled me; but on balance I am not satisfied that it is established. |
Jacob said he was told by Cradock that he was going to be a director of the plaintiff and that his moneys and that of the plaintiff were to be transferred to Woodstock and that he realised that that would involve a resolution of the directors, including himself. He said he voted for the resolution and the removal of the plaintiff's account from National to District because Cradock wanted that. He made no inquiries about the resolutions and never considered the interests of other shareholders than Cradock, but did what Cradock, the majority shareholder, asked him to do. He said that, if Cradock acted honestly, the arrangement was honest, if dishonest it was dishonest, but that there seemed nothing wrong with it, within his knowledge at the time, and that he relied on Sarsfield, to whose company the cheque was being paid, whom he had met casually once and knew to be a stockbroker. And Jacob did later buy a small holding of stock in the plaintiff for himself. |
It seems to me, however, that both Barlow-Lawson and Jacob were nominated as directors of the plaintiff to do exactly as they were told by Cradock, and that that is in fact what they did. They exercised no discretion or volition of their own and they behaved in utter disregard of their duties as directors to the general body of stockholders or creditors or anyone but Cradock. They put themselves in his hands, not as their agent or adviser, |
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but as their controller. They were puppets which had no movement apart from the strings and those strings manipulated by Cradock. They were voices without any mind but that of Cradock; and with that mind they are fixed in accordance with the view which I have already expressed on the law. They doubtless hoped for the best but risked the worst; and that worst has befallen them. |
The defendants Contanglo |
The claim against Contanglo is in equity as constructive trustee to replace with interest at 5 per cent. per annum a sum of £195,322 5s. 2d. of the plaintiff's moneys applied in furtherance of an arrangement between Contanglo, Cradock, the directors, Woodstock and District (or some of them to which the others were privy) in giving financial assistance in connection with the purchase by Cradock of stock in the plaintiff and for Cradock's benefit, in discharging Cradock's liability to Contanglo in respect of such purchase, and which amount, being or representing the plaintiff's moneys, was received by Contanglo knowing that it was so misapplied. The liability to replace the £195,322 5s. 2d. is not disputed, provided that it is established that Contanglo is liable as constructive trustee as claimed. But this liability is disputed on the ground, inter alia, that Contanglo is not within the requirements to make it a constructive trustee of those moneys. |
The first question that arose was whether the £195,000 received by Contanglo was moneys of the plaintiff, or sufficiently represented those moneys as to be the proper subject for such a claim in equity to replace them, as is made by the plaintiff. This is a question of mixed fact and law. |
The draft for £195,000 to Contanglo was drawn by District Oxford Street branch on the District London Office on April 24. That draft was handed over to Contanglo at the beginning of the meeting of April 25. As McMinn acknowledged, District was committed to meeting it, since it would not contemplate dis-honouring its draft. Nevertheless, it had not in fact then been honoured and paid. It was debited to Cradock's account with District on the same day, April 25. |
But as we have seen, McMinn, as manager of the Oxford Street branch, had the draft so drawn only on the assurance that there would be a draft from the National Bank to Cradock for about £235,000 to cover it. Reynolds only parted with the draft to Contanglo on the assurance of Cradock that National would transfer the plaintiff's credit in its National Bank account to its account with District and the assurance of Sarsfield, in line with his arrangement with Cradock, that a cheque drawn on the plaintiff's account with District, in Woodstock's favour, would be indorsed to Cradock. This scheme was carried out by the necessary resolutions of the plaintiff's board and by payment of £232,764 from the plaintiff's account at National to the plaintiff's |
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account with District and £232,500, out of it, by indorsement into Cradock's account, as I have described. It is completely clear that it was only by this use of the plaintiff's £232,500 that the £195,000 payment was effected. |
Of course, the credit in a bank account is not a total of specific or even floating coins, which are the property of the person whose account it is, but the amount of a debt payable by the bank to the customer in accordance with their agreement. Money paid into a bank account becomes the property of the bank. So the £195,000, even if debited to Cradock's account and credited to Contanglo's account after the £232,500 were credited to Cradock's account, would not be moneys of the plaintiff, in the strict sense which I have indicated. But it was or represented moneys of the plaintiff in the sense that it was the plaintiff's moneys paid into its account and out of its account into Cradock's account that alone covered and enabled the £195,000 to be paid out of Cradock's account to Contanglo. No plaintiff's moneys, no payment to Contanglo. It was the credit to Cradock's account of the £232,500, debited to the plaintiff's account, that enabled the £195,000 to be debited to Cradock's account and paid to Contanglo. It is not, in my view, tenable that misapplication by cheque, debiting and crediting to bank accounts, instead of by coin, would prevent there being a misapplication of what would otherwise be a misapplication with liability to replace the amount misapplied. |
It has never been suggested that Woodstock's part in this conversion of a plaintiff £235,000 debit into a Cradock £235,000 credit contributed any cover, backing, or substance to what Cradock received and which he, through the District draft, paid to Contanglo. It seems to me that any relationship of creditor and debtor that arose between Woodstock and Cradock is no more significant than such relationship between the plaintiff and District and between District and Cradock. |
Where there is one operation to pass, and which does pass, all the benefit of A's fund to B, then if that one operation is a misapplication of that fund, it seems to me that A's claim to have that fund replaced is not to be defeated by the incidental legal relationships that arise in the course of that passage. The claim is a claim of substance, founded in equity, which fastens upon the conscience of the recipient. The substance is that A's fund passes to B, in circumstances in which equity says B is liable to replace it. Neither substance nor conscience is affected by the incidental legal relationships that arise in the course of that passage, nor has that been suggested. Different considerations would arise where the fund passes from A to B by a series of disconnected incidents. But where the passage of A's fund to B is designed and takes effect as one operation, equity is not to be defeated by the twists and turns and devious course which |
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that one designed operation pursues. Any indebtedness of Woodstock to the plaintiff, or of Cradock to Woodstock, that might arise in the course of that operation does not, indeed ex hypothesi does not, make the operation less a single operation for the passage of the fund from A to B. Such indebtedness would be subsidiary to that operation. It would be a method of achieving, though obscuring it. To say that such indebtedness should in equity prevail over such operation would be to make what is subsidiary paramount. And nonetheless if A's fund passing to B is read as the benefit of the bank's indebtedness to A passing so as to be transformed, to the accompaniment of legal incidents, into the bank's indebtedness to B. Such wizardry is not to defeat equity. |
So I conclude that £195,000 received by Contanglo were moneys of the plaintiff or, at any rate, sufficiently represented those moneys as to be the proper subject for such a claim in equity to replace them as is made by the plaintiff. |
It was suggested that the payment of the £195,000 to Contanglo was not for its benefit. Contanglo itself took every conceivable precaution to secure its payment. That is what the elaborate security arrangements which it had exacted from Cradock were for. It appeared that the loss to Contanglo on a winding-up of the plaintiff would be several thousand pounds, although Contanglo might well have been able to obtain a better price for the stock than Cradock paid for it. But the payment to Contanglo secured for it, without further doubt or risk, money to pay the accepting stockholders to whom it was immediately liable and its £7,500 profit. I have no difficulty in concluding that the payment was to Contanglo's benefit. |
The question then arises whether Contanglo participated in the operation of misapplying such moneys of the plaintiff for the purpose of paying for the stock in the plaintiff bought by Cradock or knew that the payment to them for the stock was of such moneys and in breach of trust. |
Scott, who, as he said, was in control of the first transaction for Contanglo with the assistance of Levinson, denied such participation or knowledge, and there is no direct evidence, though there is circumstantial evidence relied on, to the contrary. The credibility and reliability of witnesses and the true assessment of their evidence, and particularly of Scott, thus becomes crucial. Scott, with Levinson and a Mr. Essex, had acquired a 50 per cent. shareholding in Contanglo. Scott and Levinson were active in carrying on Contanglo's business, which included the conduct of take-overs. Neither Scott nor Levinson appeared as directors of Contanglo. Scott just preferred not to do so, except for a short period when he could not get anyone else as director instead of him. Meaden, who with Barlow-Lawson became Contanglo nominee in the plaintiff for a day, was a director of Contanglo. Scott was well versed in take-overs, including the |
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take-overs of shell companies. This was not a man, perhaps like some others whom I have seen in this case, paddling or drowning in unfamiliar waters. He was extremely astute, most quick and agile minded, generally, though by no means invariably, aware of the implications of the questions put to him, and on occasion, in difficulty, apt to fence and adjust his answers. His evidence has to be approached with the utmost caution. |
It was Scott who introduced Cradock to Contanglo and who suggested to Cradock the purchase of the controlling interest in the plaintiff to him. Scott was thus both the originator of the purchase and the person who, with Levinson's assistance, conducted it far Cradock. It appears from his evidence that the shell was required for injecting properties of Cradock into it; and there is no suggestion of any other legitimate purpose why Cradock should require it. There is thus, the origin of the purchase at Contanglo's suggestion, the Contanglo control of the purchase for Cradock, the Contanglo knowledge of its purpose. and Contanglo's business as bankers or financial experts and their expert knowledge of conducting take-overs. But Scott denies any participation or knowledge of how Cradock was to provide the money to pay for the stock. |
The normal method of providing such money was by bridging finance, the temporary loan from a banker to pay for the shares pending the sale of the taker-over's properties to the company for payment, which would enable him to repay the bank loan. For a taker-over to provide the payment for the shares out of his own moneys would be extremely unlikely. Scott himself said he could not "ever recollect" such a case. Such a taker-over, though a reputed millionaire like Cradock, would hardly be expected to keep the amounts required for such payment unemployed, particularly when he was to be paid for properties to be sold to the company and the profits on which were to be realised by the sale of the shares which he had acquired. The realisation of those profits, free of tax by sale of the shares, was, as explained, the object of the operation. So the payment by the company to the taker-over for the properties would be of a substantial amount, of the order of the price paid for the shares. So if the taker-over had properties to inject into the company, they would be available as securities for bridging finance. Such a method of financing the purchase of the shares would be free from objection. |
It might even be, at any rate theoretically, conceivable to arrange for the payment for the shares, and the sale of the taker-over's properties to the company, to take place on the same occasion, in such circumstances as to dispense with the need for bridging finance. But the evidence of Mr. Coombes, a stockbroker called as a take-over expert by Contanglo, was that "the idea that you could have everything sewn up and pop in everything in that same afternoon I think is quite impracticable." It |
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might be convenient, if such purchasers of shares and of properties could take place on the same occasion, to have the accounts of the company and of the taker-over at the same branch of the same bank. The crucial factor is whether the payment of the company's moneys is in consideration for the sale of the properties. |
If the taker-over has no properties to inject, on the occasion of his payment for the shares, and cannot provide bridging finance, then a way in which he can pay for the shares is by getting the company's money into an account at his own bank, and getting it transferred to himself to cover payment by him for the shares. Mr. Coombes said: "The acquisition of companies with their own assets is a commonplace," and he added later that if there were a lapse of time between the purchase of shares and the injection of the assets, "in one way or another how it would work" would be for "the company's moneys in the meantime to be used to provide the purchase price of the shares"; and that the difference between later injecting and never injecting the properties into the company was the difference between an honest man and a crook. Such, at any rate, was the differentiation in the view of an expert in these take-over practices. The danger of using the company's moneys to pay for the shares, without a prior or concurrent injection of properties, was a familiar danger present to the mind of take-over practitioners. So was the danger of an assurance, without security, that properties would be injected later, with the well-recognised risk that they never might be. |
In our case there is no question of any security or assurance that properties would be injected. What Contanglo say is that they had no knowledge of and were not concerned about the source for payment of the stock at all. As I have said, the only legitimate purpose suggested for the acquisition of the stock was injection of properties with a view to realisation of the profits on them tax free. But Contanglo does not suggest that it inquired whether Cradock was going to inject properties into the plaintiff on the occasion of his paying Contanglo and taking over the company on April 25. The plaintiff's board would have had to provide for payment of its moneys in return for the properties. That board, until after the £195,000 draft was handed over and, according to Scott himself, taken away from the meeting, consisted of the Contanglo nominees. They had passed no resolution to purchase Cradock properties, nor was there any suggestion that such properties had been identified or valued, or that in any way any preparation had been made or even considered for payment of the plaintiff's moneys for such properties. Contanglo also knew that the new Cradocknominated board could not have given any such consideration. or made any such preparation, because one of its members was Barlow-Lawson who had been one of their nominees, until he |
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became a Cradock nominee on Cradock's invitation that same morning when Cradock took over from Contanglo. |
This analysis, particularly in the light of Coombe's evidence, indicates strongly to my mind that Contanglo, with Scott in control with Levinson's assistance, realised perfectly well that there was not to be any injection of properties into the plaintiff immediately on the Cradock take-over. But what would make this much more patently obvious would be knowledge of Contanglo that plaintiff's moneys were on that very occasion being lent to Woodstock. Contanglo had ample opportunity to acquire that knowledge, but in its defence and by its representatives in the box it has denied having that knowledge. For reasons which appear later, this is a difficulty which I do not find it necessary to resolve. |
I now come to circumstances which, it is suggested, indicate positively that Contanglo completed the sale to Cradock, knowing that the plaintiff's moneys were being used to pay for Cradock's acquisition of the stock. |
It was put to Scott in cross-examination that the one way to make certain that the purchase of the shares was proper, without use of the plaintiff's money, would be "to make certain that the company's money was never touched until it came to be used as the purchase price of some property." Scott replied: "I agree." This part of the questioning was introduced by a suggestion that if one were taking over a company one could arrange for the company "to put the company's money into your bank" and thus find that, on telling the bank you were going to borrow it, the bank would arrange for the payment of the accepting shareholders. The only present significance of the question is that it unmistakably clearly referred to a movement of the company's money from its own bank into the taker-over's bank. And the question and answer to which I first referred was followed almost immediately by the question: |
"But if one is worried about the propriety of a shell operation and one finds that the company's money is moved as the very first step in the operation, then at any rate one would be suspicious'?" And the answer was: "Yes." "(Q.) And rightly suspicious? (A.) Yes." |
When hearing this cross-examination I had no doubt at all that counsel and Scott were in the first question and answer which I quoted referring to the movement of the plaintiff's money from one bank to another, that "never touched" was anything but a more emphatic way of saying "never moved" and certainly had no connotation of being "touched" in any sense of "touching" for a loan or as a transfer from the company. That that was the true view seems to me to be confirmed by a passage considerably later, towards the end of the cross-examination. Immediately after referring to the resolution to pay the plaintiff's money from National to District, counsel |
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referred to his earlier cross-examination, which I have mentioned, and said: |
"I was asking you and you agreed with me that the one way to make certain that the company's moneys were not improperly applied in financing the purchase of its shares was to make certain that the company's moneys were not moved, were not touched until the moment came to pay for the property being put into the company. (A.) Absolutely, and that had always been made very clear to us by Mr. Levinson." |
In re-examination, in referring to the first question of plaintiff's counsel which I quoted, Scott was asked: |
"What did you understand him to mean when he talked about the company's money not being touched? (A.) The company's money remains intact in the company's banking account." |
This is consistent with the meaning of the cross-examination and reply which it seemed to me they plainly bore. Then came, however, the crucial and significant question and answer: |
"Do you consider it in that sense of the word touching the company's money if you move it from an account, shall we say with Lloyd's Bank, to an account in the National Provincial Bank?" and the answer came: "That is exactly the same thing, as long as it was in a bank account." |
No objection was taken to that question, and perhaps wisely as it could not be taken until after it had been put. Despite the answer, I must make it unmistakably clear that I had no doubt that in cross-examination Scott was referring to a movement of the plaintiff's account from one bank to another. |
This conviction is in line with the answer of another take-over expert in cross-examination, namely, Mr. Coombes. |
"(Q.) Supposing you were acting on behalf of the purchaser of a shell company and you asked him how he was going to finance the purchase and he says, 'I am going to borrow the money from my bankers on completion day but it is essential that I have the company's moneys transferred to my bankers on the day of completion,' what would be your view of that method of financing? (A.) I would never do such a thing." |
It is important to distinguish this from a transfer of the company's account after completion of a purchase, when it is clear that no question of use of the company's moneys to pay for the purchase arises. Such a transfer was what was effected by the original directors of the plaintiff, when they transferred the plaintiff's account from Barclays to National, after the bank had long since confirmed that Contanglo was in a position to pay accepting stockholders and after receipt of a letter from the bank that cheques were being sent to them. |
I have referred to this evidence in detail because to my mind it establishes first the danger of the transfer of the plaintiff's account from one bank to another, as from National to District |
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in this case; secondly, Contanglo's knowledge of that danger; and thirdly, an example of Scott's qualities as a witness which I have mentioned, so far as they might be seen without the vivid impression which he conveyed in the box, and the advantage of the tones of the interchanges between counsel and witness. |
There are two other matters to which I must refer. The first is a document headed with the plaintiff's name and underneath "Financial position April 22, 1958." It shows a calculation of the cost to Cradock of acquiring the stock, £195,322 5s. 2d. Underneath it shows the plaintiff's assets, namely, Cash at bank, £191,292; Tax reserves £5,803, Government securities £38,704, amounting to a total of £235,799, and Assets in East, with which we have not been concerned, amounting only to just over £6,500, making the plaintiff's total net assets £222,652 after deducting £19,688 liabilities. The total purchase price is then shown deducted from the plaintiff's total assets, leaving roughly £27,330. This document was prepared at Scott's instigation. Meaden was concerned in its preparation for Contanglo and said, what is obvious on the face of it, that it showed the plaintiff's net assets and the amount Cradock had to pay for the stock. It equally obviously showed (1) the amount of the purchase price deducted from the amount of the plaintiff's net assets, and (2) that the plaintiff's cash at the bank was less than the purchase price. After some cross-examination of Scott on this document, there came the question with regard to the £27,000, balance of the plaintiff's assets after deducting the purchase price of the stock in the plaintiff: |
"It is the difference between the net assets of the company and the cost of buying the shares? (A.) Yes. (Q.) So that it is what will be left in the net assets of the company after taking out of them the cost of buying the shares? (A.) Yes." |
In examination-in-chief, Scott had said that the purpose of the document was |
"To show Mr. Cradock that after he had injected properties to the extent of the net assets of the company which were about £222,000, he would then own £719,579 shares in Selangor and would be possessed of cash to the extent of approximately £27,000." |
On the same day, Meaden wrote to the plaintiff's secretaries, confirming a telephone conversation on that day, requesting a sale of the tax reserve certificates and of Government securities and payment of the proceeds into the plaintiff's National Bank account. The plaintiff's money at the bank thus came to exceed the amount Cradock had to find to pay Contanglo for the acquisition of the stock. |
It seems to me almost inescapable that this document was to show the extent to which the plaintiff's assets exceeded the price of the shares and that arrangements were made in the light of it to sell readily realisable assets so that the plaintiff's cash at the |
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bank would exceed the amount payable for the stock. Scott's explanation that it was not left to Cradock to sell the securities after he had obtained control of the plaintiff because "he was employing us as agents to do certain things and this was part of our service." And his only explanation that the document was not to show what would be left of the plaintiff's moneys after deduction of the purchase price of the stock was to show that he would have the stock and £27,000 cash after injecting properties to the value of the net assets of the plaintiff. There is no reference in the document to any properties being injected at all, and still less to their value; and the document, on its face, does not go beyond deducting the cost of acquisition of the stock from the net assets. I am satisfied, as I have explained, that the immediate injection of assets was not contemplated, and that Contanglo knew this perfectly well. But the immediate sale of the plaintiff's securities was carried out by Contanglo, with the result that the plaintiff had cash at the bank before payment by Cradock to Contanglo of an amount exceeding the amount of that payment, and that the plaintiff's cash was moved by Contanglo from National to Cradock's District branch. These observations are unaffected by the consideration relied on by counsel, though not in fact by Scott in his evidence, that in the event Cradock scooped £235,000 of the plaintiff's moneys which were virtually all its assets, and not its assets less liabilities shown on Contanglo's document. It seems to me that, taken in conjunction with Scott's explanation of it and the other evidence, the document weighs against Contanglo. |
There was a great deal of evidence and argument directed to the question whether the Contanglo representatives, Scott, Levinson and Meaden left the meeting of April 25, before the resolution of the plaintiff's board to make a loan of £232,500 to Woodstock was passed. For the plaintiff, however, it was stated that it was no part of its final submission to me that the Contanglo representatives left at any particular stage, or did not leave before the resolution on the Woodstock loan. So I will deal with this question briefly. The original draft minutes, drawn up by the secretaries' representative, Ringshall, had shown them as leaving at the end of the meeting; but Ringshall was very confused by the proceedings. In his draft he arranged the items by subject matter and not chronologically, and he altered them, most probably at Levinson's indirect instigation, to show that the representatives left before the Woodstock resolution. Nobody else apparently made that complaint of the draft. But Ringshall says he would not have made the alteration if he thought it incorrect. The only direct evidence was that the Contanglo representatives left before the Woodstock resolution. This was the evidence of Scott, Meaden, Barlow-Lawson and Jacob. but it was too unsatisfactory to be reliable. Such evidence would, however, be in line with Coombes' evidence, on |
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take-over board meetings, that it would be normal for the Contanglo representatives to leave at that stage. And the Woodstock resolution did not appear on the agenda which Levinson prepared for the meeting. Indeed, if Contanglo knew otherwise of the Woodstock resolution, my impression is that its representatives would be sufficiently well advised to leave before it was reached. So the view which I favour is that the Contanglo representatives left before the Woodstock resolution. |
The transfer to District could well have been made by Cradock's nominees later than April 25, or even at the meeting of the 25th, after the Contanglo representatives left. No innocent reason for its being made before they left has been sustained. But McMinn and Reynolds, although they hoped and were prepared for it, yet seem hardly to have expected it then. But the resolution to transfer would enable what otherwise would not be feasible, namely the plaintiff's moneys to be used to cover the payment of the draft to Contanglo. Without cover for that draft Contanglo representatives could not expect to depart with it. Contanglo took every precaution to provide against Cradock failing to complete. As Scott said, |
"There is many a slip between the cup and the lip. We completed our transaction on the 24th. For some reason or other, unforeseen reason it may be, Mr. Cradock may not have been able to complete with us. (Q.) You think the whole thing on the 25th might have gone off? (A.) It could have done quite well." |
And Scott said that it was Cradock wanting the plaintiff's money moved to District on the 25th and on the agenda for that day's meeting, that set his mind at rest and he knew that Cradock would be able to complete. Contanglo secured, through their nominees on the plaintiff board, that the resolution for that movement was passed. |
Contanglo knew the amount of money Cradock had to find to pay for his acquisition of the stock; that the plaintiff's assets were liquid; that without the realisation of securities the plaintiff's balance at the bank was less than the money it required to pay Contanglo for the stock; that the securities were substantially all realised and credited to the plaintiff's account at National as Contanglo itself had provided, thus bringing the balance at the bank above the amount of the Contanglo draft for the stock; that Cradock had wanted the plaintiff's moneys at National transferred to Martin's Bank and that he changed this and on April 24 required it transferred to District, Oxford Street branch, on the morning of April 25; that it then knew that Cradock would be able to complete, that it knew the danger of such a transfer resulting in the plaintiff's moneys being used to finance the purchase of the shares in the plaintiff; that it received a banker's draft on the morning of April 25 for £195,000 for Cradock's acquisition of the stock, that the banker's draft was drawn on the District; that, on the same occasion, and when Contanglo was still in control of |
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the plaintiff board and knew that its draft was drawn on the District, and before Contanglo representatives departed from the board with the draft, the plaintiff board in the presence of a District representative passed a resolution to transfer about £232,700 to the District, Oxford Street branch; and after that Contanglo representatives departed with the £195,000 draft. All this in circumstances in which Contanglo knew, as I have concluded, that there was no contemporaneous or immediate injection of assets by Cradock into the plaintiff. |
From the evidence about take-over bids, in general, and their dangers, the analysis of the evidence on this first transaction; and my impression of the evidence, particularly of Scott, I am left at the end of the day convinced, without reasonable doubt, that Contanglo knew perfectly well that the plaintiff's moneys were being used and misapplied to pay them the £195,000 for the acquisition by Cradock of stock in the plaintiff company, and participated in the operation of misapplying that money of the plaintiff, knowing that such misapplication constituted a breach of trust. |
District Bank |
The claim against District is first, in equity as constructive trustee, to replace with interest at 5 per cent. £232,500 of the plaintiff's money applied in furtherance of an arrangement between District, Cradock, Contanglo, the directors of the plaintiff and Woodstock (or some of them to which the others were privy), not for the purposes or the benefit of the plaintiff but for the purpose of giving financial assistance in connection with the purchase by Cradock of stock in the plaintiff, or alternatively with the knowledge which District had, by reason of particularised documents, or ought to have had as a reasonable banker by reason of the specified documents and knowledge of matters alleged in the statement of claim, of such application for the said purposes, and which sum District nevertheless paid and debited to the plaintiff's account. The claim against District is further or alternatively for damages for negligence in performance of the duty which, as bankers, they owed to the plaintiff as their customer, in honouring a cheque for £232,500 drawn on the plaintiff and debiting it to the plaintiff's account, without making any or sufficient inquiry of Barlow-Lawson, Jacob, Cradock and Sarsfield, or any of them, of the purpose for which the £232,500 was being paid to Cradock, by a cheque in favour of Woodstock, indorsed to Cradock. |
In the claim in equity against District, the allegation that District ought to have known the said purposes does not include any allegation that District ought to have made inquiries, because particulars given of the allegation that District ought to have known did not include any reference to inquiries. This contrasts with the claim of negligence against District, which includes the allegation that District ought to have made inquiries of Barlow-Lawson and others as I have already mentioned. (It also, incidentally, contrasts |
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with the claims against the Bank of Nova Scotia in equity and negligence, to which we shall come later, which both include allegations that inquiries ought to have been made). |
Therefore the allegation in equity against District, that District knew or ought to have known the said purposes, must be established by direct proof of actual knowledge, by actual knowledge found by inference or, in accordance with particulars pleaded and the objective test which, in considering the law on constructive trustees, I have concluded applies, by proof of facts which would have brought home the knowledge to the mind of a reasonable banker. |
So if District knew, or the facts were such that a reasonable banker would have known, the said purposes, the plaintiff (on proof of other essential allegations) is entitled to succeed in equity and in negligence. But if the facts were such as only to put a reasonable banker on inquiry, then the plaintiff would succeed (on proof of other essential allegations) in negligence but not in equity, simply because with regard to the plaintiff's claim in equity reference to inquiry is not pleaded as part of the particulars provided by the plaintiff. |
The knowledge of District, with which we are concerned, admittedly includes the knowledge of McMinn, the manager of the District, Oxford Street branch. It also, in my view, clearly includes the knowledge of Reynolds, though it would appear that he did not have any substantial relevant knowledge which McMinn did not also have. It is true that the Oxford Street branch was a small branch consisting of only eight persons, and that it was completely inexperienced in take-overs. But it was a branch which, under the District organisation, was empowered to deal with take-overs, even of the substantial and somewhat complex kind with which we are concerned in this case. Ignorance and inexperience of take-overs applied to McMinn equally with Reynolds and no more excludes Reynolds' knowledge than McMinn's knowledge from being the knowledge of District. Reynolds was not a page-boy. He was second to McMinn, acting in McMinn's place in McMinn's absence, went to the meeting of April 25, as the District's representative to handle the interchange of drafts and the opening of an account for the plaintiff and obviously considered himself, without dispute by District, to have authority to accept the indorsed cheque in place of the banker's draft. Reynolds was a responsible official of District, whose knowledge, in my view, is clearly knowledge of District. |
It is not disputed by District that at the crucial moment of debiting the plaintiff's account and crediting Cradock's account with the £232,500, District knew that the £232,500 came indirectly from the plaintiff to Craddock. Nor do I understand it to be disputed, what is in any case clearly indisputable, that the £232,500 from the plaintiff was cover for the £195,000 payment to Contanglo. As stated for District, "The only defence, therefore, is that they (that is, District) did not know that it was cover for the purchase |
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of the shares by Cradock." Subject to this defence, District clearly assisted in the alleged misapplication of the plaintiff's money. So, in the claim in equity, the question is: Has it been established by direct evidence or inference from the evidence that District knew, or are facts established which would have brought it home to the mind of a reasonable banker, that the plaintiff's £232,500 paid indirectly to Cradock was cover for the purchase of shares in the plaintiff by Cradock? |
In approaching the evidence, I bear in mind the passages already quoted from MacKinnon L.J. in Penmount Estates Ltd. v. National Provincial Bank Ltd.134 and Sellers L.J. in Orbit Mining and Trading Co. Ltd. v. Westminster Bank Ltd.,135 to the effect that the banker does not have to be abnormally suspicious or always on the alert against dishonesty, and Pearce L.J.'s observation in Archbolds (Freightage) Ltd. v. Spanglett Ltd.136: |
"In so many cases of deception it is hard even for the persons deceived to imagine in retrospect how they could have made such a mistake, yet the fact remains that people are misled into foolish errors." |
Perhaps this last quotation cuts both ways in this case, but at any rate it seems to me a reflection on human behaviour which weighs in favour of foolishness rather than wickedness. I also bear in mind that McMinn, in the ordinary course of banking business, should decide on April 25 whether to honour the plaintiff's cheque to Woodstock, indorsed to Cradock, although he would be entitled to suspend payment, pending justifiable investigation. |
McMinn and Reynolds are gentlemen very much, if I may be permitted a colloquialism, out of the same stable. They were both completely honest, conscientious, solid, reliable, slow without ability comparable to those whom I have referred to as controllers in these transactions, completely inexperienced in company takeovers or such transactions as we are concerned with in this case, both with admirable qualities for conducting the ordinary everyday banking business of the ordinary small bank branch office. Some of McMinn's answers were defensive, changeable and contradictory, but I am completely satisfied that this was not because he was in the least being unhelpful or trying to mislead, but because he was concerned not to commit himself or his bank by an answer which he had not adequately considered, and because in some parts of his evidence he was just thinking aloud to and around the answer as he went along. On occasion, however, he found he had become involved in a defensive attitude from which he was too slow and tenacious to withdraw. |
District first comes into the operations, with which we are concerned, on April 23, 1958, when Cradock telephoned McMinn that he could "influence" the transfer to him of the account of the plaintiff "in which he had been interested for some time." McMinn |
134 173 L.T. 344, 346. |
135 [1963] 1 Q.B. 794, 815, C.A. |
136 [1961] 1 Q.B. 374, 383; [1961] 2 W.L.R. 170; [1961] 1 All E.R. 417, C.A. |
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replied that he would be interested in having the account. Cradock then asked McMinn to arrange a banker's draft for £195,322 5s. 2d. to Contanglo and for a District representative to take it to the National Bank on April 25, where he would collect in exchange a banker's draft for about £235,000 in favour of Cradock. This arrangement about the drafts was confirmed by a letter to McMinn, signed by Cradock as "Governing director," without specifying of what company, but on notepaper headed with the Cradock Group Headquarters address. So, at that stage, McMinn knew that Cradock could influence the transfer of the plaintiff's account from National Bank to District and that the draft from District to Contanglo was to be covered by a draft to District, to be collected from National Bank. McMinn denied that any other relevant information passed between him and Cradock and this, I have no doubt at all, was true. In particular there was no mention of the plaintiff's moneys being used to cover the Contanglo draft or to pay for stock in the plaintiff. |
McMinn then instructed Reynolds to attend the meeting on the 25th to exchange the drafts, and to be prepared for the possibility of a new company account being opened with their branch. Reynolds accordingly attended the meeting prepared to carry out this business. Reynolds said that amongst other documents he took a cheque or a cheque book with him. If it were a single cheque, he could not suggest any explanation for his doing so, when it was put to him that to take a single cheque would be explicable if it were to make a payment out of the plaintiff's new account of virtually all the moneys paid into it, as by the cheque to Woodstock. The evidence was that no cheque book was debited to the plaintiff's account until June 11, although there might well have been, by slip, a delay until this date in debiting a cheque book issued on April 25. However, a cheque book was debited to Cradock's account on April 25, and there is nothing to show whether or not the Woodstock cheque came from the book. All this goes to whether District knew before the meeting, at its lowest that one payment was to be made out of the plaintiff's account immediately. I am satisfied that District did not know this. Certainly the Woodstock cheque, which is what the single cheque form would presumably be used for, took District completely by surprise. |
When Cradock and Sarsfield had explained to Reynolds, at the meeting, that the plaintiff's account would be transferred to District and that the plaintiff would draw a cheque on District for £232,500 in favour of Woodstock as a loan, and that it would be indorsed by Woodstock as a loan by Woodstock to Cradock, and Reynolds had thereupon parted with the £195,000 draft in favour of Contanglo, the position was that (subject to the signatures on the cheque, including the indorsement, being in order) the cheque would be as good as a draft, because the plaintiff's balance at National would be transferred by a banker's draft from National to District. But it introduced two new features to District: (1) The |
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plaintiff's moneys were now the cover for the District draft, which Reynolds had parted with, and which was debited to Cradock's account; and (2) whilst, in Reynold's view, the making of a loan by A to B and B to C was normal, to do so by indorsement was "most unusual"; and the indorsement would make the second loan of precisely the same amount as the first loan, unless it was part of a larger loan, which it was not suggested to Reynolds by Sarsfield or Cradock. |
During the board meeting which followed, Reynolds was in the group apart from the board meeting group and had very little idea of what was going on. After that, he took part in the documentation with regard to the opening of the plaintiff's account, including the receipt of the National drafts and the payment of the Woodstock cheque to Cradock's account. After the single cheque reference the next matter relied, with regard to the claim against District, was the undertaking to District from National given to Reynolds. This was the undertaking dated April 25, 1958, signed by Snell and addressed to the District, Oxford Street branch manager, to deliver to him 713,579 stock units in the plaintiff together with a completed transfer deed in favour of District Bank (London) Nominees Ltd., "as soon as certain formalities of stamping and registration had been complied with." Reynolds' evidence was that it was given to him by a person whom he thought to be a National Bank representative, as he was about to leave the meeting. Reynolds agreed that the undertaking was given to him as being there on behalf of District's customer Cradock. Reynolds said that he may have read it but not carefully, that it came as a surprise to him, that it was a letter from one bank to another which called for no immediate action and so he asked no question about it. He denied that the explanation for his not asking was that he knew that the shares in the plaintiff, referred to in the letter, were Cradock's shares, or that he knew before the undertaking that they were to be transferred to the District Bank (London) Nominees Ltd. I do not find this behaviour of Reynolds odd. He was slow and deliberate and engaged in take-over business which was strange to him. When he saw that the undertaking called for no immediate action and was from another bank it seems to me that the natural thing for such a person so placed was to do nothing but take it back with him for his bank manager to deal with. I accept this evidence of Reynolds. But this evidence means that District was informed, immediately after the transfer of the plaintiff's account by Cradock's influence to District and payment out of the plaintiff's account of a large sum indirectly to Cradock, that this large holding in the plaintiff was to be transferred to District Nominees without the beneficial owner being named, when the only person for whom District was acting with regard to the plaintiff was Cradock; that National gave District an undertaking, without District ever having asked for it, to make the transfer; and that it was given to Reynolds as being present on behalf of District's |
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customer Cradock. And this information to District, obtained in the setting of the operations described on April 25, followed upon the information which District already had of those operations. |
When Reynolds reported back to McMinn, McMinn said that his account was confused, which accords with Reynolds' own evidence of his recollection of the board meeting part of the proceedings at the National Bank. But McMinn was "horrified" because Reynolds brought back, instead of the banker's draft in favour of Cradock, a cheque in favour of Woodstock indorsed by Sarsfield to Cradock, when he had already parted with the District draft to Contanglo which District was bound to honour. McMinn was concerned, because if the indorsement was not in order, District might be held liable for conversion. So, as I have explained, he set about and eventually obtained proper confirmation of the indorsement. As Reynolds said, there was what he described as "the fixation on the indorsement." The branch had bank instructions about conversion of cheques and the dangers of indorsements. They had no such instructions about the dangers of payments, if in accordance with a mandate to the bank; and Reynolds had been told that the indorsed cheque represented a loan by the plaintiff to Woodstock and by Woodstock to Cradock and that loan, McMinn said, was "in his mind." So I have no difficulty in believing that these two conscientious bank officials went, if I may so describe it, flat out in blinkers for indorsement with hardly a glance for anything else. McMinn said that when he saw the undertaking he did not connect it with the draft in favour of Contanglo and that he was mystified by the undertaking and decided to wait to hear further on completion of the formalities of stamping and registration mentioned in the undertaking. This is very much a repetition of Reynolds' behaviour when he received the undertaking, and to my mind it is equally in character, but McMinn, despite his slowness and inexperience, agreed in cross-examination that he knew that the undertaking must have something to do with the events of the meeting. |
Various documents were relied on by District as indicating that McMinn did not realise on April 25 that Cradock was purchaser of the stock in the plaintiff. I have found those documents of very little assistance. I will, however, refer, though briefly in the circumstances, to the principal of these documents. On May 13, McMinn wrote to Snell recording that Snell said that he was unable to give information who the beneficial owner of the stock was, and that he had "been in touch with our customer." meaning Cradock, to arrange for National Bank to give the information. On the same day Contanglo wrote to National Bank that the shares were held to the order of Cradock; and on May 14 National Bank wrote to McMinn that they were instructed by their principal Contanglo that the shares were to be so held. It seems to me that, as the stock was delivered to District by National Bank, it was from National Bank that the information should come who was the beneficial owner |
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and only on the instructions of the principal for whom National Bank held the stock, namely Contanglo, and that, accordingly, any oral information from Cradock direct with regard to this would not be satisfactory. However, Cradock would naturally, as District's customer - who introduced the plaintiff to District - be the person to whom District would turn when information was not forthcoming in the first place from National Bank. Thus these letters throw no light one way or the other on McMinn's state of knowledge, on the 25th, of the beneficial ownership of the stock. |
The other of these documents to which I will refer is McMinn's report of May 25, to his head office. McMinn said, with regard to the undertaking, |
"I had no knowledge that this was part of the day's transactions. Mr. Cradock had made no reference to a transfer of stock and I decided to await developments so far as this was concerned." |
But, as I have already said, he agreed in cross-examination that he knew, when he saw the undertaking on the 25th, that it must have something to do with the events of that day's meeting. He explained that the report meant that "it was not part of the day's transactions that Mr. Cradock had told me previously." So this document likewise does not establish that he did not have the knowledge after the meeting upon seeing the undertaking. |
I pass now from the documents, which I said District relied upon, to a most important document, which is an extract from a minute of McMinn's dated April 25, though, in view of the contents of the minute, it was clearly composed not earlier than April 28, and not later than May 3. For the plaintiff the date most favourable to District is accepted, namely May 3. |
The document is headed "Extract from manager's minute book at 413 Oxford Street, London, W.1" and then underneath "Selangor United Rubber Estates Ltd." and the date is April 25, 1958. Then the body of the minute commences: |
"Our customer, Mr. Francis R. Cradock, has been negotiating the purchase of this public company for some time, and completion took place today. The account has been transferred to us from the National Bank, Whitehall. Form No. 36 has been completed; any two directors may sign on the account. After the resignation of the old board, Mr. Francis Arthur Jacob and Mr. Francis Evelyn Barlow-Lawson were appointed directors. Mr. Jacob is known to us as Mr. Cradock's estate manager, and he has a private account at this office. The [plaintiff's] account was opened with two drafts for a total of £232,764 which, we assume, represented the balance transferred from the National Bank. A cheque for £232,500 was immediately drawn on the account in favour of Woodstock Trust Ltd., and this cheque was indorsed in favour of Mr. Cradock, who paid it to his credit. There was a contra entry in his account of £195,322, a draft drawn in favour of Contanglo Banking and Trading Co. Ltd., which was delivered to the National Bank at the time of the completion. We have since obtained a letter from Woodstock Trust dated April 25, confirming that |
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it was in order for the cheque, which they had received from the Selangor United Estates Ltd., in the sum of £232,500, to be endorsed by the company in favour of Mr. F. R. Cradock. The letter explained that the item represented a loan to him of the same amount, bearing interest at the rate of 8 per cent. p.a." |
Form No. 36 was a form of mandate to the bank. |
McMinn could not recollect nor make any reasonably acceptable suggestion for any source of information in that minute except (1) his telephone conversation with Cradock on April 23, (2) Reynolds' report on the meeting of April 25, together with the documents which he brought from the meeting, (3) a conversation with Sarsfield on the afternoon of the 25th, followed by a letter signed by Sarsfield of the same date, purporting to confirm for the Woodstock board that the Woodstock cheque indorsement was in order, and (4) a certified copy of the minute of the meeting of April 25 received by McMinn with a letter dated May 2. |
McMinn's reference in the words "completion took place today" is clearly to the completion of the purchase of the plaintiff company, which he had just mentioned earlier in the same sentence. He agreed in cross-examination that such completion involves payment for shares in the company and the handing over of some document of title and possibly a change in the directors of the company. In the next sentence of the minute he refers to the transfer of the account to District, and I find it irresistible in the context that McMinn realised when he wrote the minute that the transfer by Cradock's "influence" was as the result of the completion of the purchase. He then almost immediately refers to the resignation of the old board and afterwards to the appointment of Jacob and Barlow-Lawson as directors, though Barlow-Lawson had already been appointed and, as appeared from the minutes which McMinn received on May 3, Barlow-Lawson was not appointed after the resignation of the old board at all, he was a member of the old board. So McMinn did not see the substitution of a new for an old board mentioned in the minutes, but could only have inferred it from concluding that on completion there was a change in control of the plaintiff. As he agreed when cross-examined on the minute, "I had had time to think of what had happened on April 25 and obviously the control of the company had changed hands, which would imply that the majority shareholding had changed hands" and "that the purchase had been completed" or, perhaps more accurately, the implication was the other way round. Reynolds said that on the buying of control of a company and its completion he would expect payment of the purchase price, transfer of the shares and the appointment of the purchaser's nominees as directors. McMinn says that he assumed that the advance from National Bank "represented the balance (that is, of the plaintiff's account in National) transferred from the National Bank." He then says that the Woodstock cheque was "immediately" drawn on the plaintiff's new District account and indorsed to Cradock and |
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paid to the credit of his District account, where there was, he says, a contra entry of the £195,322 draft drawn in favour of Contanglo "delivered to the National Bank at the time of completion." So he connected the Contanglo draft with the completion. |
He did not mention the undertaking in the minute, though, as I have said, he agreed that he connected it with the events of the meeting of April 25. Reference to the undertaking may well have been omitted, because he was awaiting events about it, as he said, or perhaps because it was directed to the transfer rather than to the purely banking aspect of the operation. |
McMinn said that the opening words, referring to Cradock "negotiating the purchase" rather than "purchasing" indicated that Cradock was purchasing for another. The letter of April 24, which I mentioned, he signed as "Governing director," which might indicate that he was concerned in the first transaction for his group of companies. But it seems to me immaterial whether he was acting for himself or another. If his actions were for another, then indications that the plaintiff's money was being used to purchase the plaintiff's shares by Cradock would mean purchase by Cradock for another, which, as we know, was in fact himself. McMinn's explanation that "negotiating the purchase" indicated that Cradock was purchasing for another was based on McMinn's construction of his own language, influenced, I think, by his defensive approach. I do not accept that McMinn, when he wrote the minute, looked beyond Cradock or considered that Cradock was acting as an agent. |
The payment of the £232,500 into Cradock's account was clearly to the benefit of District. When it was paid out of the plaintiff's account, McMinn realised this perfectly well, as appears from his evidence. In his memorandum of May 20 to his head office he said "I took the view that as we had released our draft we were committed at this stage," which he explained as meaning that, on April 25, after releasing the District draft for £195,000 to Contanglo, District would either have to rely on getting the £195,000 from Cradock or pay the Woodstock cheque into his account. He could have relied on the shares mentioned in the undertaking as security for payment by Cradock, but that did not occur to him and, indeed, could not have occurred to him if, as he said, he did not realise that the shares mentioned in the undertaking had been purchased by Cradock. It is clear that, at the time that the Woodstock cheque was honoured by McMinn, he was fully aware that it was designed to make good Cradock's debt for the Contanglo draft, and in that sense its payment was a benefit designed for District. Its relevance for present purposes is insofar as it bears upon the knowledge which the plaintiff alleges. This relevance is, to my mind, as evidence of District's and of McMinn's personal and official interest in the honouring of the cheque, and thus on the course which they took and the evidence which they |
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give. It is not relied on as an independent ground for establishing liability, apart from the alleged knowledge. |
So it was, as District well knew, upon the change of control of the plaintiff with a differently constituted board, by completion of the purchase of its majority shareholding, involving payments of its price and handing over of documents of title, that the following events occurred immediately and virtually simultaneously, to District's knowledge: The plaintiff's account was transferred from National Bank to District by banker's drafts; the documents for drawing upon the new District account were signed; the new account was drawn upon by cheque for an amount not far short of its total credit, which cheque, by indorsement, transferred the plaintiff's moneys to Cradock. And Cradock, as District knew, was the person whose "influence" had secured the transfer of the plaintiff's account to District and who had "been negotiating the purchase," and who had obtained the banker's draft for £195,000, already delivered by District to Contanglo and debited to Cradock's account, on promise of cover which the Woodstock cheque drawn on the plaintiff's account would alone now provide. |
These facts appear clearly to convey that the plaintiff's money was being used to finance the purchase of shares in the plaintiff by Cradock. McMinn agreed that he may have drawn the conclusion in May that the plaintiff's money was being used to finance the purchase of the shares. And he agreed that he had all the material to draw that conclusion on April 25. Reynolds agreed that the most likely explanation of the material was that the shares were being purchased by Cradock out of District's moneys replaced by the plaintiff's moneys. Having regard to the evidence, in particular of Coombes and Scott, on the indications of the use of a company's money to buy its shares, then it seems to me a fortiori that a reasonable banker would have no hesitation, on the facts available to District and McMinn in particular on April 25, in concluding, before debiting the plaintiff's account with the Woodstock cheque payment, that the plaintiff's moneys were being used for the purchase of the stock in the plaintiff by Cradock. McMinn and Reynolds did not do so, because they were completely without any experience in such take-over transactions, because they were not of a calibre to deal with such matters, and being the kind of persons that they were, they had what Reynolds not inaptly called a "fixation" about getting the indorsement confirmed. |
For reasons already given in considering the law, District, in my view, is liable as claimed in equity because it paid the Woodstock cheque out of the plaintiff's moneys in circumstances known to District before the payment and in which a reasonable banker would have concluded that the payment was to finance the purchase by Cradock of the stock in the plaintiff, even though McMinn and Reynolds did not then realise that the payment was being so used. This does not seem to me exacting for a bank, or to require from it |
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any unreasonable standard of care, or cause any substantial inconvenience to the conduct of its affairs, as was suggested - although without substantiation by evidence. The evidence showed that the banks put severe limits, as is common knowledge, on powers of bank managers to grant overdrafts and thus risk the bank's money - limits which bear no comparison at all with the amounts at risk of the plaintiff on the Woodstock cheque. The evidence also showed that District gave explicit instructions to avoid their being liable for conversion of cheques, when acting as collecting banks. For my part, I can see no substantial difficulty in banks providing against such exceptional transactions, involving substantial amounts, as in this case, being carried through by officials completely inexperienced in such transactions and unqualified to deal with them. If a bank allows such officials to conduct such business it is asking for the kind of trouble which it has got in this case. It does not seem to me hard on a bank to say that it cannot rely on escaping liabilities by entrusting its business to officials completely unqualified to deal with it when if it ensured - as it readily could - that such business would be handled by qualified officials it would, in the event of loss be liable. |
I can deal briefly with the claim in negligence in the performance of the duty which as bankers District owed to the plaintiff as their customer by honouring the £232,500 cheque drawn on the plaintiff's account, without any or sufficient inquiry as to the purpose for which it was being applied. It is, of course, common ground that the plaintiff was District's customer at the relevant time, when the Woodstock cheque was paid, and that District made no inquiry. |
All the matters already considered as relevant to the question whether a reasonable banker would have known the purpose for which the £232,500 was to be applied are also relevant (if, as I have concluded, there was a duty of care from District to the plaintiff as its customer) to the question whether the circumstances establish that (in accordance with that duty) District should have inquired as to the purpose for which the money was being applied. If a reasonable banker should have known the purpose as I have concluded, then a fortiori District should, in the performance of its duty of care, have made inquiry. The plaintiff's directors were obviously persons of whom inquiry should be made. |
McMinn said that if there were a cheque for a large amount, signed by two directors and made payable to one of them, he would, before paying the cheque, inquire of the other of them whether the payment was for a proper consideration. He said he would make the inquiry whether he was paying banker only, or both paying and collecting banker. He agreed also that he knew that Cradock was in a position to control the share holding or the board and thus influence the transfer of the plaintiff's account to District. |
So it was submitted that, even apart from other factors, the transfer of the plaintiff's account to District by Cradock's influence, |
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followed immediately by payment by indorsement of a cheque to Cradock of almost the total amount of over £200,000 paid into the account to meet the £195,000 indebtedness to District for the Contanglo draft, was such circumstance as to put a reasonable banker on inquiry. I agree. And when there are added the other matters already considered as relevant to the question whether a reasonable banker would have had knowledge of the purposes for which payment of the plaintiff's moneys indirectly to Cradock was made, the establishment of the plaintiff's case in negligence is correspondingly strengthened. So I conclude that, on negligence too, the plaintiff's case against District is established. |
The defendant Woodstock |
The claim against Woodstock is that it is liable to account as constructive trustee for, and repay with interest, £232,500 of the plaintiff's moneys, applied to enable Woodstock to lend £232,500 to Cradock to purchase stock in the plaintiff in the furtherance of an arrangement made by the defendants to the first transaction claim, including Woodstock (or some of them to which the others were privy), or, alternatively, received of Woodstock knowing that it was or represented money of the plaintiff which had been so misapplied. |
It is perfectly clear from Sarsfield's letter of April 23, 1958, to Cradock, which I have already quoted fully, that the plaintiff's £232,500 paid to Woodstock was for the purpose of paying it over to Cradock to finance the purchase by him of stock in the plaintiff. That Sarsfield, a director of Woodstock, by his part in the meeting of April 25, which I have already described, including his indorsement to Cradock of the £232,500 cheque to Woodstock (later confirmed by the Woodstock board) took part in carrying out the arrangements mentioned in the letter of April 23, 1958, as varied in some immaterial respects over which we need not pause. |
For Woodstock it was submitted that there was no reason for supposing that Sarsfield had any idea on April 25, that Cradock would not inject assets into the plaintiff. This is doubtless so if the injection referred to was not injection contemporaneously with or immediately upon the purchase of the stock, but at some wholly undetermined time in the nebulous future. There was no reference at all to injection of assets, still less in return for Woodstock's indorsement or payment to Cradock. The letter makes it clear, in express terms, that the money was to be used for the purchase by Cradock of the stock in the plaintiff - not for purchase by the plaintiff of properties transferred to it from Cradock or anyone else. So it is clear that Woodstock knowingly participated in applying £232,500 of the plaintiff's moneys in giving financial assistance for the purchase by Cradock of stock in the plaintiff and knowingly received that sum accordingly. |
Woodstock is, in my view, liable as constructive trustee as claimed, subject to three questions of law which I shall deal with |
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later, namely, novation, satisfaction and illegality. Indeed, Woodstock did not dispute its liability as constructive trustee as claimed, subject to those three questions of law which in substance constituted its defence. |
THE SECOND TRANSACTION DEFENDANTS |
The liability, with which I will now deal, of the second transaction defendants separately is subject to the decisions on the questions of law, which I have indicated will be dealt with after considering the cases against these defendants. In particular, the present consideration of liability is upon the footing that Cradock's payments of £207,500 and £42,000 were payments to the plaintiff so as to become the plaintiff's own moneys at the plaintiff's disposal. How far they were such payments, however, will be considered when I come to deal with them under the heading of satisfaction. |
Defendants Cradock and Burden |
The first two defendants with whom I am concerned in the second transaction are Cradock and Burden, and it will be convenient to deal with them together. |
Of course, the motion for judgment against Cradock, in default of defence, applies to the claims against him in the second transaction. The claims against Cradock are based on the allegations that he was a party to an arrangement with Burden and Sinclair to misapply the plaintiff's money by the second transaction - in the case of the £207,500 to finance the purchase of the stock in the plaintiff by Burden from Cradock - and that he received the plaintiff's moneys knowing them to be so misapplied. But, as in the first transaction, Cradock's part in the second transaction, so far as it bears upon the cases with regard to the other defendants, has to be established positively. |
The claims against Burden are based on the allegations that he misapplied the £207,500 and the £42,000 of the plaintiff's moneys, in bad faith and in breach of his duty as director and in furtherance of an arrangement with Cradock and Sinclair to misapply them, in the case of the £207,500 to finance the purchase by him of shares in the plaintiff from Cradock, and that he knowingly received those sums knowing that they had been so misapplied. |
The claim against Cradock and Burden is in equity to replace those sums with 5 per cent. interest. |
Burden, whatever his faults, was a likeable person with attractive boyish qualities, though on occasion he gave the impression of ruthlessness. He was an accountant, knowledgeable about companies and business. He was quick and had very considerable ability. In general he appreciated the significance of the questions put to him. He was insistent throughout on declining to say in evidence anything which he said was not within his direct personal |
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knowledge; but I was left with the firm impression that such professed ignorance was on occasion a relief to him. His evidence has to be approached with considerable caution. But, subject to these reservations, particularly with regard to evidence that directly affected himself, he was generally helpful and co-operative. |
Burden's evidence was that Stekel and Kraft introduced the acquisition of the plaintiff to Burden, that Stekel and Kraft acted for Cradock, that they told Burden that they would organise the transaction in such a way as to use the plaintiff's liquid resources to buy the controlling block of shares in the plaintiff, without infringing section 54 of the Companies Act, 1948, and without Burden having to find cash of his own for the purpose. Burden did not find any cash and made no application to any bank to finance the purchase. He said that he left it to Stekel and Kraft to organise the transaction. Stekel and Kraft acted as agents for both Cradock and Burden in agreeing and carrying through the transaction. I accept this evidence of Burden. |
Burden did not in any material respect dispute the facts as prima facie established by the documents and already stated by me. He agreed that none of the circle of three cheques for £207,500 each could have been met apart from the others in the circle; and he agreed that he obtained the stock. So that, if the Cradock £207,500 payment to the plaintiff was a real payment of that sum for the plaintiff's own purposes, then the payment to Burden for payment to Cradock for the shares which Cradock sold to Burden was a misapplication of the plaintiff's funds to finance the purchase by Burden from Cradock of the stock in the plaintiff which Burden obtained. Burden also agreed that, assuming Cradock's £42,000 cheque to the plaintiff was a real payment of that sum to the plaintiff for the plaintiff's purposes in return for the Briggs bills, then the payment by the plaintiff to Burden of £42,000 was a payment for which the plaintiff got nothing. The facts with regard to the Hopper agreement I have already sufficiently stated; and there is no evidence that comes anywhere near establishing that the plaintiff had any interest in the Hopper agreement. Nor is there any reasonable foundation for concluding that Hopper's assets or any other assets were to be injected into the plaintiff as part of the completion of the purchase of the shares in the plaintiff by Burden, or in return for the £42,000 payment to Burden. |
So, in accordance with my conclusions already stated on the relevant law, but subject to the questions of law that I shall deal with later, I conclude that Burden is liable to replace the £207,500 and the £42,000 with interest as claimed. |
The defendant Sinclair |
The claim against Sinclair is in equity to replace with 5 per cent. interest the sums of £207,500 and £42,000 of the plaintiff's moneys, misapplied in bad faith and in breach of duty as director of the plaintiff and pursuant to an arrangement between Cradock, |
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Burden and himself, as to the £207,500, to finance the purchase by Burden from Cradock of stock in the plaintiff, and as to the £42,000 otherwise than for the purposes of the plaintiff. Sinclair's case as presented in his final speech, was principally that he was party to the payments because he was led to assume that they were for the injection of assets into the plaintiff. |
Sinclair is now well on in years and their inevitable toll is hardened by his slowness and misfortunes. He was, as he said, "from a family of proud military traditions." He was called to the Bar and he was a permanent civil servant for over 25 years, and apparently achieved a position of responsibility and of considerable status. But he said that he had always hoped to have an opportunity to build up an industrial group. He seemed rather to fancy himself as a business man. About 1958 he met Burden and helped him with his legal knowledge. Burden suggested that his own rapidity and Sinclair's deliberation would "make a good team." So began Sinclair's industrial ventures. Throughout his evidence this dichotomy appeared: proud, reputable and honourable tradition impelling him to truth, and, on the other hand, less straight-forward experiences and misfortunes which impelled him to escape the truth. So it is, perhaps, not surprising that he was prevaricating, evasive, self-contradictory and loquacious. His evidence was quite unreliable. But nobody could have seen and heard him without sorrow. |
The evidence consists mainly of documents, Sinclair's own evidence, and Burden's evidence. Sinclair and Burden are involved with each other in these events and are now hostile to each other. The evidence of each of them about the other has to be treated with the greatest caution. |
The first question that arises is when Sinclair first became aware of what happened at the first meeting of January 26, namely, (1) the taking over of the liabilities of Woodstock, F.R.C., and M.V.R., to the plaintiff, by Cradock as to £207,500 and by Briggs as to £42,000; (2) the cheque in settlement of Cradock's liability being handed to Burden's representative for payment into the plaintiff's account and that the bills be drawn on Briggs in settlement of Briggs' liability, and (3) the appointment of Burden and Sinclair as directors in place of Jacobs and Jacob. |
At the second meeting of that day Sinclair and Burden were present. Sinclair was appointed chairman and Burden secretary, and it was resolved to open a bank account with the Bank of Nova Scotia. The minutes of that meeting record that the minutes of the first meeting of that day were "read approved and signed by the chairman" and manuscript minutes of that meeting are signed by Sinclair over the date January 26, 1960. |
Weavers, who were the secretaries of the plaintiff until their resignation at the first board meeting, sent typewritten minutes of that meeting to Adrian Jacobs on January 27. A typewritten copy |
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of the minutes was produced from Weavers' file and signed by Adrian Jacobs. |
Sinclair maintained at first that he had not signed the manuscript minutes of the first meeting on January 26, because they were in the writing of Atter, who, he said, had no connection with the plaintiff. But it emerged that he was at the time working for Burden or his organisation at Burden's headquarters and in Sinclair's flat. Sinclair then suggested that Atter copied the minutes subsequently, because the original minutes were typewritten and Sinclair liked to have minutes in writing; and that he, Sinclair, signed the written minutes with the date of his original signature. |
Sinclair eventually accepted that he signed the minutes of the first meeting at the second meeting. He also accepted at one stage that he signed the first meeting minutes which "as recorded in the minutes which you signed on March 30 (that is, minutes of the second meeting of January 26) you read, approved and signed." But later he said what happened must have been that he signed them at the second meeting when Stekel and Kraft "pushed" them in front of him. |
I am satisfied that Sinclair knew perfectly well when the second meeting took place on the 26th, or possibly January 27, what had happened at the first meeting. |
On August 29, 1960, the Board of Trade inspector wrote to Sinclair a letter which included the following paragraphs. |
"4. Two cheques were charged to the company's account at the Bank of Nova Scotia; one was for £207,500 on February 10, 1960, and one was for £42,000 on February 25, 1960. Both cheques were payable to Mr. J. L. Burden and both cheques were signed by Mr. Burden and yourself as directors. Kindly give me full details as to what these payments were for. 5. On the same days as those referred to in paragraph 4 above amounts of £207,500 and £42,000 respectively were credited to the company's account at the Bank of Nova Scotia. I should like to have full details of what those receipts were and of how they were connected with the payments of these identical sums on the same days." |
To these paragraphs Sinclair replied on September 2, 1960, as follows: He introduced his letter by saying "Your letter of August 29 has been forwarded to me here, and replying first to your questions categorically," and then underneath that in due course comes the reference to paragraphs 4 and 5, and about this he said: "To my understanding the combined transactions were no more than bridging operations." |
He was asked why he coupled the cheques mentioned in paragraph 4, charged to the plaintiff' account and payable to Burden, with the cheques mentioned in paragraph 5 credited to the plaintiff, and said that they were no mole than bridging operations. He said (1) that what he was doing was trying to answer the letter, "which I regarded as an infernal nuisance," as quickly as possible. (2) that he was trying to give an idea of what he thought Burden |
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was doing, though he did not mean to convey that he knew anything about it. (3) that "combined transactions" in his letter referred to combining questions 3 and 4 together to dispose of them and not to the transactions being combined. (4) That the reference to bridging was made from "hindsight," though, after cross-examination on what he knew on this in September which he did not know in February, he later withdrew his suggestion. |
In another part of his cross-examination, when his mind was not directed to these letters but to the payment by the plaintiff of the £207,500 cheque in favour of Burden, he said |
"eventually the money would be paid out of Selangor by way of the cheque that Mr. Burden had received in respect of selling assets to the company. That was the general practice at the time and a well-known method of how these companies were acquired." |
I have no doubt that Sinclair said that these cheques were bridging operations because he knew perfectly well throughout that they were bridging operations, that is part of a scheme to finance Burden's purchase of Cradock's shares in the plaintiff. |
First, with regard to the £207,500, Sinclair said he signed the cheque for this sum on the plaintiff's account in favour of Burden and that it was handed to Burden or his agent. It thus passed out of the control of the plaintiff. He said it was handed over on the understanding and the assurance from Burden, Stekel and Kraft that it would not be cleared until matters in "the melting pot" were "finalised" or "completed." Sinclair referred to finalisation and completion differently; sometimes as completion of the purchase of the stock in the plaintiff by Burden from Cradock, and sometimes as the injection of assets into the plaintiff by Burden. But clearly there would be no such injection without the prior transfer of the stock to Burden, since Burden would not inject assets into the plaintiff without having control of the plaintiff. Sinclair said at one stage that he always anticipated that there would "as a concomitant" to the completion of the purchase by Burden of the stock in the plaintiff "be at the same time the putting in of assets by himself" - meaning by Burden; and this, perhaps, is the interpretation most favourable to Sinclair. |
When the plaintiff's cheque to Burden was handed to Bieber, the position then was: Sinclair knew that Burden's purchase from Cradock of the stock in the plaintiff was not completed; Sinclair signed the cheque and put it in Burden's control, at any rate sufficiently for it to be used to pay for the purchase of the stock; and Sinclair so signed and handed over the cheque drawn on the plaintiff, on the assurance that it would not be presented until "completion." |
But if the "completion" for which the cheque was to be presented was the completion of the injection of assets by Burden into the plaintiff, Sinclair completely failed, although he had ample opportunity over a period, to explain why the cheque should be |
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handed over at that time or, indeed, before the assets were injected. This is hardly surprising, since there was no suggestion that any assets for injection had been approved by the plaintiff or valued or even identified. At its highest, there were only the vague and remote conceptions about Hoppers with which I have already dealt. |
Sinclair said that he was told by Burden, at the end of March, that the arrangements for the change of control between him and Cradock had been completed. All the cheques had by that time long since been paid. On April 5, Sinclair wrote Burden "Particulars as to the paying in of requisite assets are awaited" and the evidence showed that that meant payment in to the plaintiff was awaited by Sinclair. And Sinclair said he wanted assets paid in, because he was concerned about paying creditors of the plaintiff, who were pressing for payment. But if the cheque was for assets to be injected by Burden and there had been no injection and, therefore, no payment of the cheque, there would hardly have been difficulty about having part of the cheque available to pay the creditors. But it was not suggested that this was ever considered. I am satisfied that Sinclair knew perfectly well that the £207,500 cheque drawn on the plaintiff had been paid as the plaintiff's bank account showed, and that it had been paid without any injection of assets. And in the repetitions over the same ground in his evidence he only once suggested the possibility that Burden might be raising funds from a bank to finance the purchase of the shares. |
It is clear that Sinclair handed over the plaintiff's cheque, without security, into the control of Burden, who was buying control of the plaintiff and, according to Sinclair's evidence, on an assurance of the injection of assets into the plaintiff "as a concomitant," but without any security for such injection or any step being taken to identify or value such assets and without being able to give any explanation why the cheque for assets should be so handed over beforehand. This was, at its lowest, a misapplication of the plaintiff's funds. But I am completely satisfied that Sinclair knew that they were to be used to pay for the purchase by Burden from Cradock of the stock in the plaintiff and that he handed them over for that purpose. Doubtless he hoped and expected that there would be, at some stage, an injection of some assets. But neither his hopes nor his expectations nor the assets materialised, and they do not prevent his being liable with respect to the £207,500 as claimed. |
With regard to the £42,000 payment from the plaintiff's funds. Sinclair accepted that he signed a cheque for it, although he said he had no recollection of doing so. In his letter of September 2, 1960, to the Board of Trade inspector to which I have referred, he included this £42,000 in the "bridging operation." It did not, like the £207,500, go to Cradock in payment of the stock in the plaintiff; and it is not clear what part, if any, the £42,000 as distinct from the £207,500 played in any bridging operations. Sinclair said Burden had mentioned the acquisition of Hopper, but not in |
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connection with the plaintiff; and the acquisition of Hopper was not consideration for payment of the £42,000. Sinclair said in evidence that the £42,000 cheque was something presented to him as "preliminary to completion." |
Although the evidence lacks the precision that could be wished. I am satisfied that Sinclair concurred in the payment of the £42,000 to Burden without consideration for it and without considering whether it was in the plaintiff's interests to do so. It seems to me that Sinclair knew what he was doing and what risks he was running and making the plaintiff run, though doubtless with regard to the £42,000, as with regard to the £207,500, in the hope and expectation that assets would at some future time be injected by Burden into the plaintiff. If Sinclair did not perfectly well know this, then the conclusion seems irresistible that he was just a Burden man, doing exactly what Burden told him to do, regardless of his responsibilities, and, for reasons already given in considering the law, the abnegation in favour of Burden does not, in my view, enable him to escape liability. |
So, subject to the outstanding questions of law, I conclude that Sinclair is liable as claimed with regard to the £42,000 as with regard to the £207,500 paid out of the plaintiff's funds to Burden. |
The defendant Bank of Nova Scotia |
The claim against the Bank of Nova Scotia can be dealt with comparatively briefly, despite its importance. The relevant law has already been dealt with and after a very thorough and powerful analysis of the case against it by its counsel, plaintiff's counsel, at the end of the day, presented his case within a comparatively small ambit and, in my view, very rightly and helpfully so. |
The case is against the Bank of Nova Scotia in equity as constructive trustee to replace the £249,500 with 5 per cent. interest and for damages for common law negligence in performing the duty owed by it as banker to the plaintiff as its customer by paying the £249,500 out of the plaintiff's account. The case in equity is based, not on actual knowledge, but on knowledge which it is said the Bank of Nova Scotia would have had if it had made inquiries which it was under a duty to make. The case in negligence is also based on failure to make inquiry which it ought to have made. In equity, the Bank of Nova Scotia would be liable to the same extent as it would have been if it had known what it would have known if it had made proper inquiries and assuming that honest answers would have been thus obtained. In negligence, if one's failure of duty to make inquiries is established, then negligence is established and what follows is damages in the usual way. No distinction has been drawn between facts putting on inquiry under the equitable claim on the one hand, or under the negligence claim on the other hand, and, in my view, for reasons already given in considering the law, the standard in each case is that of a reasonable banker. The first material question in each case is whether the facts would have put a reasonable banker on |
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inquiry. If so, the question would arise whether it should have made inquiries which it did not make and, in the case of the equitable claim, what answers it would have received to such inquiries. |
The plaintiff alleges that the Bank of Nova Scotia ought to have had knowledge of the purposes for which the moneys were to be applied from the facts alleged in the statement of claim and through their officials who honoured the cheques. Further particulars, given in the course of the hearing, consisting of documents in a bundle called Bundle E, were not relied on. There seems to be no advantage in making further reference to particulars, since the matters on which the plaintiff eventually rested its case were limited to three only, to which I shall soon come. |
The only Nova Scotia representative we need be concerned with is Mr. Evans, who was the second ranking official of the Nova Scotia branch dealing with this matter. Mr. Evans gave evidence and he was rightly accepted for the plaintiff as a completely honest. reliable and helpful witness. |
The mandate for the drawing of cheques on the plaintiff's account at the Bank of Nova Scotia, signed by Sinclair and Burden, as the plaintiff's cheques for £207,500 and £42,000 were signed, is accepted by the plaintiff as being in order. |
I now come to the three matters relied on by the plaintiff to establish that the Bank of Nova Scotia is, in accordance with the law which I have already considered, to be treated as having knowledge because it was put on inquiry and indisputably made none. |
(1) On February 10, almost immediately after the banking resolutions of January 26, and after the mandate was given, the plaintiff's cheque for £207,500 was paid out of its account at the Bank of Nova Scotia. What is relied on is that this payment was, in itself, and in relation to other entries in the plaintiff's bank account, for a very large sum and that it was paid immediately after the resolutions and mandate. It was suggested that these facts were enough in themselves to put the Bank of Nova Scotia on inquiry. But this payment of £207,500 was not an isolated payment out of the account, but a payment counter-balanced by a payment into the account. It was in fact pant of the three cheques circular movement and it was as such that it was presented to and seen by the Bank of Nova Scotia. It therefore seems to me unrealistic and unhelpful to consider what the effect of such payment in isolation would have been, had it occurred - which it did not. |
(2) The payment was to Burden's account with the Bank of Nova Scotia and that account was opened with that payment and was closed after three credit items were counter-balanced by corresponding debit items (the credit items being the £207,500 and £42,000 and a sum of £44,600, with which we are not concerned, debited and credited on April 28, 1960). Again the £207,500 was part of the circular cheque operation, as the Bank |
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of Nova Scotia knew, and it was the first of the items in Burden's account with the Bank of Nova Scotia. The account remained open after this. The £42,000 debit and credit was the second item in the account; and the account again remained open and in fact was operated for the third item. The Bank of Nova Scotia has to be judged in the light of the facts before it when it honoured the cheque, and not in the light of the subsequent events. The £207,500 cheque was paid by the Bank of Nova Scotia in the light of what was then known to it, and the £42,000 in the light of what was known when that sum was paid, including, doubtless, its knowledge of what had occurred when the £207,500 was paid. Each of these two cheques from the plaintiff into Burden's account was part of similar circular movements of cheques between the same parties, and, again, they must be judged, not in isolation, but as part of these circular movements. So the opening and closing of Burden's account taken in isolation does not appear to me to be realistic or helpful, when it can only be truly assessed as part of the operation of which it formed part. |
(3) So I come to the third matter relied on by the plaintiff, which is the nub of the plaintiff's case against the Bank of Nova Scotia. It is the circular movement of the £207,500 cheque and the explanation given to Evans about it. Evans said that he had no recollection of any event involving the £42,000 cheques. The bank's liability for that later operation seems to me to stand or fall with its liability for the £207,500 cheque operation - nor do I understand that, in this respect, any party has sought to draw any distinction between them. |
On February 10 during the luncheon hour, when the manager and probably a counter official were out, Evans was in charge and at his desk behind the counter. Bieber called and Evans attended to him. He asked for the manager and Evans took him into the manager's room. Evans agreed that Bieber could have asked for the manager because it was a very unusual transaction; and that he gave his explanation as a serious explanation to have some effect on Evan's mind and, it could be, to set it at rest. Bieber produced the three cheques which he wanted debited and credited to the accounts of the plaintiff and Cradock and an account to be opened for Burden. He explained, either voluntarily or in answer to Evans, that they were for "internal accounting reasons" or "internal book-keeping reasons." Evans filled in three paying-in slips, with copies for the parties, for the payment of the three cheques through their accounts. He had no knowledge of Burden or Bieber, but Bieber had the cheques and Evans considered the position and accepted what Bieber said. Was the result of his consideration wrong and ought a reasonable banker to have made inquiry, which the Bank of Nova Scotia did not make? |
There is no suggestion that Evans or the Bank of Nova Scotia was in fact suspicious and Evans denied that he was suspicious. Evans knew that Cradock had had a large holding of stock |
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in the plaintiff in November, 1958, but he did not know that he had a holding in the plaintiff in February, 1960. He did not know that Burden had any intention of purchasing any of those shares or that any deal with regard to the stock in the plaintiff was being transacted or contemplated. He believed what Bieber said, and he had no knowledge with regard to Bieber, Cradock, Burden or the plaintiff that would cause him to doubt Bieber's explanation. He saw that, at the end of the three cheque operation, the balance in the accounts would be exactly the same as before. |
Evans was cross-examined on Bieber's explanation - not, however, on "accounting reasons" or "book-keeping reasons," but upon their being "internal." Evans suggested that, though he agreed that the debiting and crediting of the cheques would be payment, they would also be evidence of payment; and this, of course, was not challenged. The cross-examination then went on the footing that "internal" applied only to internal to the plaintiff. In this cross-examination Evans agreed that it was an inappropriate description and, therefore, an unsatisfactory explanation. But Bieber had not said of "internal" that it was internal to the plaintiff, and counsel for the Bank of Nova Scotia rightly observed that it could refer to internal to the parties. The plaintiff's counsel himself very fairly suggested in cross-examination that "internal" might well have been used to describe moneys passing between a company and its subsidiaries; and, similarly I should have thought, between a company and some individuals, even though subsidiaries and individuals could be regarded as external to the company. As my conclusion on the law is that the standard to be applied is the objective standard of a reasonable banker, what I am concerned with is not Evans' subjective reaction and statement on cross-examination that "internal" made Bieber's explanation unsatisfactory, but whether it should, in the circumstances at the time, have put a reasonable banker on inquiry. |
In my view, it is quite immaterial whether Bieber's explanation was in answer to an inquiry or not. If it was in answer to an inquiry, which did not put on further inquiry, cadit quaestio; and if it would have been an answer to an inquiry that was not put and did not put on further inquiry, then similarly cadit quaestio. The only purpose of the inquiry is to get an answer, not to perform some ritualistic mumbo-jumbo, and if the purpose of the inquiry is served without the inquiry it is so much the better for the saving of words - though not, unfortunately, in this judgment. |
The explanation stands subject to the criticisms that were made, and rightly made, of it in cross-examination. It is right that the explanation should be dissected verbally, as it was, so that all the implications are brought out clearly for the assistance of the court. But when it comes to judgment, I have to regard it, not as technical terms in conveyancing, or words used with precision in some leisurely legal document, but as more rough and ready language used in a business context and to be accepted or rejected or |
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questioned with expedition. In the Penmount Estates case137 the bank was held not negligent, though, as McKinnon L.J. said, |
"there were a good many questions on which a lawyer, who is trained very differently from a bank clerk, would probably have had it in mind to cross-examine." |
So regarding the explanation, in the light of all the relevant considerations which I have referred to in considering the law, and of the surrounding circumstances which I have mentioned, it seems to me that the explanation, justifiably assumed to be honest, did not put the Bank of Nova Scotia on further inquiry. What in the final analysis is said to put a reasonable banker on further inquiry is the one word "internal." Despite it being subject to the criticisms which I have described, that is not to my mind enough. |
If, contrary to my view, the Bank of Nova Scotia were under a duty to make inquiry, then as they did not do so the claim in negligence would succeed. Success in the claim in equity would depend upon the answer which the Bank of Nova Scotia would receive to their inquiries, on the footing that the answers were truthful. The obvious persons of whom the inquiry should be made were the plaintiff's directors, the signatories Sinclair and Burden. If Sinclair had been asked to explain what the payment by the plaintiff was for, he would have said, in accordance with my finding in considering Sinclair's liability, that it was for payment by Burden for Cradock's stock in the plaintiff. Alternatively, he would have said, as he maintained in his evidence, that the cheque was drawn pending completion of such purchase and, perhaps, "as a concomitant" to injection of assets into the plaintiff by Burden; or that he wholly relied on Burden. Sinclair said no payment would have taken place if the Bank of Nova Scotia had inquired of him about the payment. Burden would have said, if he answered truthfully to the inquiry, that he was using the £207,500 to pay for the purchase of Cradock's stock in the plaintiff, and the £42,000 for his own purposes or for purchasing the Hopper company, with the addition, perhaps, that he had it in mind, though without telling anybody, that he might make it over to the plaintiff. Payment in the face of any of these answers would, in my view, make the Bank of Nova Scotia liable in equity as claimed. But, as I have said, no occasion for inquiry, in my view, arose and, therefore, Nova Scotia is not liable. |
THE REMAINING QUESTIONS OF LAW (5) TO (9) |
Namely, (5) Novation, (6) Satisfaction, (7) Loss from the second transaction, (8) Illegality. (9) Section 448 of the Companies Act, 1948. |
(5) Novation |
I come now to two inter-related but separate defences to liability on the first transaction, first novation and, secondly, satisfaction. |
137 173 L.T. 344, 346. |
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With regard to each of these defences it will be convenient to consider law and fact together. Novation is relied on by Woodstock to exonerate it from its alleged liability which is as constructive trustee on the first transaction. Satisfaction is relied on to exonerate from liability all those who might be held liable as claimed on the first transaction, whether as trustees, constructive trustees or in negligence. |
First, then, novation. |
It is claimed by Woodstock and not disputed by the plaintiff that there was a contractual liability, a debt, from Woodstock to the plaintiff with regard to the £232,500 paid under the plaintiff's cheque to Woodstock in the first transaction. The plaintiff, of course, in this action claims not on that debt but against Woodstock, inter alios, as constructive trustee to account for and replace that sum. It is not disputed that there was a novation. The issue is whether it was limited to Woodstock's separate debit to the plaintiff or extended to the liability alleged in the action against Woodstock as constructive trustee, jointly and severally with others. |
In the course of the argument the question arose whether the second transaction was a sham cloaking what did not appear on its surface. The defendants brought forward convincing considerations to the contrary, and as the plaintiff was not concerned to press opposition to this, I will not pause over it. |
The novation relied on is that which, it is not disputed, occurred by reason of the resolution at the first meeting of the plaintiff's board on January 26, 1960, and the exchange of cheques between Cradock and Woodstock, acting on the footing of that resolution, to all of which I have already alluded. The resolution was that |
"the amount due to the company from Woodstock Trust Ltd., F.R.C. Properties and General Investment Ltd. and M.V.R. Motors Ltd. be taken as to £207,500 ... by ... Cradock ... and as to £42,000 ... or such balancing figure as may be due by Henry Briggs Son & Co. (Trust) Ltd." |
The resolution itself points to a debt and not to a liability in equity. The "amount due" and the "balancing figure" indicate specific liquidated amounts into whose calculation the interest rate (8 per cent. on the debt) would enter, and there was no basis for an equitable claim against F.R.C. and M.V.R. which, in the resolution, were bracketed and treated on the same footing as Woodstock. It is clear from Cradock's letters in evidence that his mind was directed to the contractual debt; and Jacobs' evidence was to the effect that no thought was given to the equitable claim. Indeed, the case of the relevant defendants has throughout been that the payment of the £232,500 by the plaintiff to Woodstock was a loan, and that there was no question of any basis for an equitable claim against Woodstock any more than against M.V.R. and F.R.C. I am satisfied that none of the relevant parties had in mind any other basis of liability of Woodstock to the plaintiff than in debt |
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with regard to the plaintiff's loan to Woodstock. In my view, what this novation, on its true construction, was purporting to effect was the substitution of Cradock and Briggs in place of Woodstock as debtor with regard to the amount due under the £232,500 loan to Woodstock at 8 per cent. interest. Is it, nevertheless, a novation which disposes of Woodstock's liability in equity as constructive trustee? |
For Woodstock it was conceded that it was precluded before me, by the ratio decidendi in Quistclose Investments Ltd. v. Rolls Razor Ltd.,138 from succeeding in the submission |
"that the relationship of debtor and creditor for money lent ipso facto excludes any conception of constructive or other trust arising out of what establishes the relationship of debtor and creditor." |
But the submission was kept open for a higher court. |
It seems to me at least questionable whether novation, as contrasted with release, is applicable to wrongdoing at all as contrasted with contract. But I will not pursue this, as it was not canvassed before me and it does not affect my conclusion. It is sufficient that it was not suggested, nor in my view could it reasonably be suggested, that Cradock and Briggs by novation took over the liability of Woodstock in equity as constructive trustees. So what the submission for Woodstock comes to is that, though it was novation, it was novation with regard to debt only. It could only be elimination with regard to the separate claim in equity. There was no conscious act of such elimination, for example by express release or agreement. Nor, in my view, is it necessarily implied in the novation. |
It is said, however, that, so far as the same facts establish rights and remedies at common law and equity, then an agreement, where appropriate by release, assignment or novation, affecting the rights and remedies at common law would equally affect those in equity. It is not disputed that this may occur where liabilities and remedies are provided in common law and equity to secure payment of the same sum for the same reason on the same facts, for example for a principal to recover an agent's secret profit; where the common law implies a contract for payment of the money as money had and received to the principal's use, and equity imposes a constructive trusteeship of the money for the principal; the common law use and the equity trusteeship being applied because in the eyes of common law and equity alike it is inequitable for the agent to retain the money. In our case, however, the basis of the claim which is made in equity against Woodstock as constructive trustee is separate from any claim which might have been made against it as debtor but which, in fact, has not been made. The claim in equity is based upon the application of the money by the plaintiff's directors with the participation of Woodstock, through the loan, to the purchase of the plaintiff's stock. The |
138 [1968] 2 W.L.R. 478; [1968] 1 All E.R. 613, C.A. |
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claim in debt is made upon the loan, the claim in equity upon surrounding circumstances that make the loan an instrument of misapplication of the plaintiff's funds by the directors, with the participation of Woodstock. The claim in debt existed without relying on the facts establishing the constructive trusteeship; and the claim with regard to the constructive trusteeship would exist even though the money paid by the plaintiff to Woodstock did not constitute a loan. The claim in debt arises ex contractu, and in equity from wrongdoing, in debt for the amount lent plus 8 per cent. interest, and in equity to replace the amount misapplied at an equitable rate of interest. The claim at common law is against Woodstock only, the claim in equity against Woodstock jointly and severally with others. |
In my view, the novation which occurred, neither in intention, nor on construction of the contract which constituted novation, nor in its effect, comprised any obligations as constructive trustee upon which the plaintiff's claim is founded in these proceedings. What it did was to place Cradock and Briggs in the place of Woodstock with regard to Woodstock's outstanding debt to the plaintiff. |
(6) Satisfaction |
So I pass to the defence of satisfaction, which, as I have said, is relied on against all claims based on the first transaction. The plaintiff and those who are defendants with regard to the second transaction contest this defence of the defendants to the first transaction. The satisfaction relied on is satisfaction of Woodstock's debt to the plaintiff for £232,500 plus outstanding interest at 8 per cent. taken over as to £207,500 by Cradock and as to £42,000 (or the balance of the debt) by Briggs. |
Any such satisfaction was of the whole of the Woodstock debt, and as that debt was in respect of £232,500 plus interest at 8 per cent., it exceeded the principal amount of £232,500 claimed by the plaintiff and any conceivable rate of interest which the court might allow on it up to the date of such satisfaction. Consequently, if there were satisfaction, as the defendants submit, the plaintiff's loss on the first transaction in respect of which it now claims would have been made good, and there would be no loss in respect of which the defendants could be held liable on the first transaction. |
The satisfaction of Woodstock's debt is said to be effected in accordance with the plaintiff's resolution of January 26, 1960, which I have mentioned, by a cheque for £207,500 in settlement of Cradock's liability and bills payable on future specified dates for a total of £42,000 in settlement of Briggs' liability; such cheque for £207,500 being delivered on January 26, 1960, and paid on February 10, 1960, as part of the circular movement of three cheques for the same amount which I have described; and such bills being later handed to Cradock for a cheque dated February 19, 1960, for £42,000 from Cradock to the plaintiff and paid on February 25, 1960, as part of another circular movement or three |
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cheques for the same amount, which I have also described. The giving of a cheque with regard to a pre-existing debt is a conditional payment, whose condition is satisfied upon the cheque being honoured, whereupon it becomes actual payment as from the giving of the cheque: (Marreco v. Richardson).139 Both the Cradock cheques were honoured in this case, in the context of the three cheque circular movement. The question is whether, having regard to what is involved in this movement as part of the second transaction, there was satisfaction. |
As I have indicated, the second transaction with its circular movement of cheques was not a sham. In particular, the plaintiff and the Bank of Nova Scotia expressly accepted, with regard to the £207,500 cheques, that Cradock intended to pay off his debt to the plaintiff by his cheque; that Burden intended to pay for the stock by his cheque; that Cradock intended to transfer the stock to Burden; that Sinclair and Burden intended to pay £207,500 of the plaintiff's moneys to Burden, and, with regard to the £42,000 cheque, that Cradock intended by his cheque to redeem the Briggs' bills and to satisfy Briggs' indebtedness to the plaintiff; that Burden intended to pay £42,000 to Cradock with regard to Hopper; and that Sinclair and Burden intended £42,000 of the plaintiff's money to be paid to Burden. |
As the second transaction was not a sham, there was payment to the plaintiff of £207,500 plus £42,000. But was the payment satisfaction? |
It was submitted that if the payment by the plaintiff for £232,500 in the first transaction (and likewise of £207,500 in the second transaction) was to give assistance as alleged by the plaintiff for the purchase of stock in the plaintiff, then it was for a purpose made illegal under section 54 of the Companies Act, 1948, and the payments were unlawful and the plaintiff's claim therefore fails; or, alternatively, that the payment was valid, in which case the payment of £207,500 - it was not only admitted but was submitted - was likewise valid and the payment of the £207,500, together with a payment of £42,000, was in satisfaction of the debt with regard to the £232,500 and interest. It is immaterial whether the validity of such payments arose because section 54 did not apply at all or because it did not operate, on its wording, to invalidate the payments in accordance with the first ground of decision in the Victor Battery case140 which I will consider later when dealing with illegality under section 54. |
Insofar as the plaintiff's claim fails, on the ground of illegality, then there is no need to rely on satisfaction. The defence of satisfaction only becomes material on the footing that illegality does not make the debt to the plaintiff irrecoverable. And it seems to me that, as the payments of £207,500 and £42,000 were in fact made, it is immaterial to the defence of satisfaction whether they |
139 [1908] 2 K.B. 584; 24 T.L.R. 624, C.A. |
140 [1946] Ch. 242; [1946] 1 All E.R. 519. |
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were tainted with illegality or not. If not, they would stand, and, if tainted, the court would lend no assistance with regard to them and they would likewise stand. But it does not follow that because the payments are effective as payments, therefore they operate in satisfaction of the debt. So I return to the question asked earlier: were these payments of £207,500 and £42,000 satisfaction? |
Such payments, if treated in isolation, would constitute satisfaction. But do they constitute satisfaction in the circumstances in which they were made? If these payments, amounting to £249,500, were only made as part of the three cheque circular movements, by which the payments to the plaintiff were dependent upon corresponding payments out by the plaintiff's directors from the plaintiff's account to the payer, by a scheme in which the payer participates and without advantage to the plaintiff, then the payer is giving with one hand what he at the same time takes away with the other. The plaintiff has the satisfaction of a conduit pipe. Even if one whistles half time when the money is in the plaintiff's hands, yet it must be the final result that matters in this as in other little games, the more so if the game is fraudulent and dishonest and fixed from the start. Satisfaction must be true and real satisfaction and not part of what makes satisfaction a mockery. I do not find it surprising that there is no authority for such a conclusion: and it is my conclusion. |
(7) Loss from the second transaction |
Did the plaintiff suffer any loss by reason of the second transaction? |
I have concluded that no satisfaction was established by the second transaction, because the payment to the plaintiff under its three cheque circular movement was not, in reality, a payment for the plaintiff to have at all. But as the payment to the plaintiff did not provide any money for the plaintiff, the plaintiff received no money under the second transaction capable of being misapplied; and as the three cheque operation thus, so far as it affected the plaintiff, merely substituted Burden's liability to the plaintiff in place of Cradock's liability to the plaintiff, and the plaintiff conceded that neither was good for the money, there was no damage within the claim for negligence. These considerations are fatal to the plaintiff's claim based on the second transaction. In the case of the Bank of Nova Scotia they are additional to the reasons which have already been given for the failure of the claims against it. In the cases of Burden and Sinclair the absence of receipt by the plaintiff of money capable of being misapplied reverses the decision against them which, as I have indicated, I would otherwise have made. |
If however, there was satisfaction, so that the plaintiff obtained the £249,500, for itself and its own purposes, the question then arises whether there was misapplication of those moneys under the second transaction, and who was liable for such misapplication, |
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and whether there was negligence on the part of the Bank of Nova Scotia with regard to those moneys? |
With regard to the claim in negligence, it was submitted for the Bank of Nova Scotia that any damage thereby suffered was too remote to be recoverable. Overseas Tankship (U.K.) Ltd. v. Morts Dock & Engineering Co. Ltd. (The Wagon Mound)141 laid down that in tort "the essential factor in determining liability is whether the damage is of such a kind as the reasonable man should have foreseen" and whether the defendant "foresaw or could reasonably foresee intervening events which led to its (i.e., the damage) being done." It was submitted for District that in a claim based on negligence of an agent under contract (as distinct from direct breach of contract), such as the claims in negligence against the banks in this case, the first passage quoted provided the test. This was not disputed and the case proceeded on that footing. |
It seems to me that, if a bank pays a cheque out of its customer's account as the Bank of Nova Scotia did, and does so negligently, then the loss to the customer is that loss which a reasonable man should have foreseen and is, in the absence of special circumstances, the amount paid on the cheque. It was suggested, however, that there was a special circumstance, namely, that when Cradock was the debtor of the plaintiff he was not good for the amount of the cheque, as the plaintiff conceded, and, therefore, so the argument went, the substitution of Burden as debtor in place of Cradock resulted in no loss. But this submission which we are considering only becomes material if there has been, by the Cradock cheque, a real genuine payment to the plaintiff for itself constituting satisfaction; and if Cradock was not good for the amount there was no satisfaction. The special circumstance that Cradock was not good for the money, i.e., was unable to meet the cheque to the plaintiff, seems to me contrary to the very hypothesis on which the submission is made, namely, that the money was the plaintiff's own real money as the result of the payment of the cheque by Cradock. This seems to me the answer to the Bank of Nova Scotia's submission that there was no damage because Cradock was not good for the amount of his cheque. To pursue the submission on the footing that Cradock effectively paid to the plaintiff for itself the amount of the cheque, which he was unable to pay, seems to me to lead to mental contortions that appear, happily, to be unnecessary. |
(8) Illegality |
It was submitted that, in so far as the plaintiff's claim is founded on payment of its moneys as means of giving financial assistance for the purchase of stock in the plaintiff, the payment was unlawful and the plaintiff's claim fails. This submission does not affect the plaintiff's claim with regard to the £42,000 but it does affect claims made by the plaintiff with regard to the £232,500 (including the |
141 [1961] A.C. 388; [1961] 2 W.L.R. 126; [1961] 1 All E.R. 404, P.C. |
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£195,000 claimed against Contanglo) and the £207,500, in so far as these claims are based on breach of trust and on constructive trusteeship. |
Of course, if the plaintiff does not establish the breach of trust or requisite constructive trusteeship, there is no need to rely on the defence of illegality against a claim founded on them. So this defence goes on the assumption that, in the case of the directors, breach of trust or fiduciary duty and, in the case of the other defendants, constructive trusteeship, is established. |
Section 54 of the Companies Act, 1948, provides that "(1) ... it shall not be lawful for a company to give ... any financial assistance for the purpose of ... a purchase ... made or to be made by any person of or for any shares in the company." |
It is not disputed by the plaintiff that if a contract or "consensual arrangement" is illegal ex facie, or made for an illegal purpose, then the court will not assist in enforcing the contract or "consensual arrangement" (whether, e.g., by specific performance, money judgment, or damages) or to recover property (including money) passed in pursuance of it. But the plaintiff contends that such refusal of the court to assist is limited to cases of contract or "consensual arrangement" and does not extend in particular to claims based on breach of trust. |
The ambit, within which such consequences of the illegality operate, has by no means been clearly defined. This amply appeared from the arguments before me. The usual field of its operation is certainly contract; but then contract is the field which gives most scope for its operation. |
The principle governing such consequences of illegality is not, however, just a twig of any particular branch of the law, but is rooted deeply in public policy - that the courts are not to be instruments for aiding illegality. The policy is not that the courts are not to be instruments for aiding illegality in contract, but may be instruments for aiding illegality in other branches of the law. It is in accordance with this substantial public policy nature of the courts' refusal of aid to illegality that such illegality is not treated as a matter of pleading, of a matter merely as between the parties, but as a matter of which the court will, of its own initiative, take cognisance irrespective of pleadings or wishes of the parties. |
The objection to aiding illegality is thus not limited in its origin in public policy to any particular form of action. |
The principle has, of course, been stated in various terms in the authorities. It has been stated in terms, primarily at any rate, directed to contract, in particular in an accumulation of passages in Taylor v. Chester142 upon which the plaintiff heavily relied. That, however, was the case of a claim based on contract, namely a contract of bailment. (The relevant illegality was the illegal purpose of that contract. There was a second count in court, namely detinue, but it was irrelevant to consider the illegal purpose with |
142 (1869) L.R. 4 Q.B. 309. |
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regard to tort, since the claim in detinue was defeated by proof of the contract of bailment.) |
The principle has also been stated in general terms: The courts "will not assist an illegal transaction in any respect" (perLord Ellenborough in Edgar v. Fowler143. "No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act" (per Lord Mansfield in Holman v. Johnson144. "The act itself being forbidden I do not think it can be a source of civil rights in the courts of this country" (per Lord Radcliffe in Boissevain v. Weil145. |
The first two of these cases were contract cases; and it has been rightly urged for the plaintiff that the words used should be understood in the contractual context in which they occurred. This would still leave open the question whether the words should be confined to contract by the contractual context, or whether they should be read as words of more general significance, of which contract was a particular application. |
In Boissevain v. Weil146 the claim was founded primarily in debt for repayment of the sum borrowed in foreign currency. contrary to war-time Defence (Finance) Regulations, 1939. But there was an alternative claim for money had and received, on the principle of unjust enrichment. And the view was expressed, without decision in view of the relevant pleading being inadequate, that whether such a claim for money had and received was based upon an imputed promise to pay or upon the principle of unjust enrichment, the court would not assist (see in particular Lord Radcliffe and Lord Simonds147 expressing his concurrence with the Court of Appeal which had so decided). The relevance of this reference is that it goes to show that a claim, though it be not based on promise or contract, but on the equitable principle of unjust enrichment. yet is affected, like contract, by illegality. And it sustains the view that Lord Radcliffe,148 in stating that he did not consider that an illegal act "can be a source of civil rights in the courts of this country," deliberately intended the wide meaning which his words prima facie bear. |
The plaintiff contended that this case did not establish more than that the law will not impose an obligation to do that which, if it had been agreed between the parties to it, would have been illegal. But the imposing of an obligation by law is the counterpart of a recognition of a right by law; and all the rights, and the only rights, in which we are concerned in this court are rights recognised by law. So the contention may be amended to read that the case does not establish more than that the law will not assist (or thus recognise) a right to do an illegal act which if it had been agreed between the parties to that act would have been illegal. This goes well beyond saying that the consequences of illegality which have |
143 (1803) 3 East 222. |
144 (1775) 1 Cowp. 341, 343. |
145 [1950] A.C. 327, 341; 66 T.L.R. (Pt. 1) 771; [1950] 1 All E.R. 728, H.L.(E.). |
146 [1950] A.C. 327. |
147 Ibid. 341, 335. |
148 Ibid. 341. |
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been mentioned are limited to contract or to "consensual arrangements." And having got so far, there seems no justification for importing any limitation that the illegal act must be such that was capable of being agreed between parties to it. |
It seems to me, with the greatest respect to the able argument advanced for the plaintiff, that the statement quoted from Lord Radcliffe,148 understood in its ordinary prima facie meaning, is to be preferred to confining this principle of illegality to contract and consensual arrangements." But does the principle prevent an action succeeding for breach of trust in doing what is illegal? |
In Steen v. Law149 directors of a company, incorporated in New South Wales, lent the company's funds which the directors had to give financial assistance to purchase the company's shares. The liquidator of the company claimed that there had thus been a breach of a New South Wales section, which, so far as material, was in the terms of section 54 of the Act of 1948; and that the directors had thereby committed a breach of their fiduciary duty to the company and should reimburse the company the sums so illegally applied. It was not contended that the directors were absolved from accounting by reason of the illegality of the loan by the company. Such illegality was clearly before the Privy Council and, if available against such a claim, provided a complete answer to it. Yet the point was neither taken by the defendants nor by the Privy Council; and it seems to me for the very good reason that the company was not relying for its claim on the unlawful loan and the relationship of creditor and debtor thereby created, but upon the misapplication by the directors of the company's moneys by way of the unlawful loan. That is the position with regard to the plaintiff's claim in our case. It was founding its claim, as in our case, not on a wrong done by it as a party to the unlawful loan, but as a wrong done to it by parties owing a fiduciary duty to it. The courts were being invited, as in our case, not to aid illegality but to condemn it. If this were not so, the courts would give redress to companies against directors for misapplication and breach of fiduciary duty which did not involve the company in illegality, but no redress if they were so serious as to involve the company in illegality. |
I appreciate that, in the ordinary case of a claim by a beneficiary against a trustee for an illegal breach of trust, the beneficiary is not a party to the illegality; but that, when directors act for a company in an illegal transaction with a stranger, the company is itself a party to that transaction and therefore to the illegality. The company, therefore, could not rely on that transaction as "the source of civil rights" and, therefore, for example, it could not successfully sue the stranger with regard to rights which it was claimed that the transaction conferred. If, however, property had passed under the illegal transaction, it is common ground that the |
148 [1950] A.C. 341. |
149 [1964] A.C. 287; [1963] 3 W.L.R. 802; [1963] 3 All E.R. 770, P.C. |
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right which the holding of that property conferred would be good against all the world, since the court would not assist the only party which had a better title, namely the party from whom it passed under the illegal transaction, to recover it. The right of the holder would be assisted by the courts, because it would be a right established by the holding, without having to rely on any right claimed to be conferred by the illegal transaction - and nonetheless because it was in pursuance of the illegal transaction, to which the holder was a party, that the holding in fact arose: (see particularly Singh v. Ali,150 and Chettiar v. Chettiar151. In a claim based on an illegal breach of trust the claimant does not rely on a right conferred or created by that breach. On the very contrary, he relies on a right breached by the breach, as the very words "breach of trust" indicate. It is only on the footing that there is a breach of trust that the defence of illegality becomes relevant. So it is assumed, for present purposes, that there is a breach of trust against the plaintiff by those who are directors and by those who are claimed to be constructive trustees. The constructive trustees are, it is true, parties with the plaintiff company itself to the transaction which is illegal. The plaintiff's claim, however, for breach of trust is not made by it as a party to that transaction, or in reliance on any right which that transaction is alleged to confer, but against the directors and constructive trustees for perpetrating that transaction and making the plaintiff company party to it in breach of trust owing to the plaintiff company. The breach of trust includes the making of the plaintiff a party to the illegal transaction. So it seems to me clear on analysis that the plaintiff is not precluded from relying on breach of trust by a party to an illegal transaction. to which the plaintiff itself is a party, when the breach includes the making of the plaintiff a party to that very transaction. Those who proved to be constructive trustees, sharing the responsibility with the directors for the breach of trust, share the liability too. |
The result is that the plaintiff in this case would not, by reason of illegality, be prevented from being reimbursed money paid by it unlawfully under a transaction to which it is a party. But this does not mean that this would nullify the ordinary operation of illegality with regard to companies and parties outside the company, and not being or treated as being a trustee to it. But it would prevent such operation shielding those whose position or conduct makes them responsible as owing a fiduciary duty or as constructive trustee. |
In the course of the argument Victor Battery Co. Ltd. v. Curry's Ltd.152 was considered at length, with its implications for this case. It does not seem to me, on the views which I have taken on the different questions of law which have arisen, that the Victor Battery case152 affects my conclusions. But as that case has been relied on |
150 [1960] A.C. 167, 176-177; [1960] 2 W.L.R. 180; [1960] 1 All E.R. 269, P.C. |
151 [1962] A.C. 294; [1962] 2 W.L.R. 548; [1962] 1 All E.R. 494, P.C. |
152 [1946] Ch. 242. |
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in various ways in the course of the hearing, and as it may conceivably be material to matters which will have to be considered at the close of this judgment, it may assist the parties, as well as showing a proper and grateful appreciation of the very able argument addressed to me, if I deal with it. |
In that case the plaintiff company issued a debenture to secure a loan by another company to another person for the purchase of shares in the plaintiff company. The plaintiff company asked for a declaration that the debenture was invalid. It was decided: (1) that where a company gave by means of a security, which was a debenture, financial assistance for or in connection with the purchase of shares in the company, the debenture was a valid debenture, and (2) that even assuming that the debenture was an illegal contract, the plaintiff company was not a person for whose protection the illegality had been created, so that it was not relieved from the operation of the rule that a party to a transaction void for illegality cannot recover property transferred under it, which is in accordance with the maxim in pari delicto potior est conditio defendentis. |
The Court of Appeal in Essex Aero Ltd. v. Cross153 has since confirmed that a company within section 54 of the Act of 1948 is not a person for whose protection the illegality has been created. As a debenture creates a floating security, which confers a property interest in the property for the time being subject to the security, then it would be in accordance with well established law already referred to that the property interest should remain in the debenture holder despite the illegality. I am not concerned in this case with any question of the second ground of decision. But considerable criticism has been made of the first ground of decision (see Dressy Frocks Pty. Ltd. v. Bock154; E. H. Dey Pty. Ltd. v. Dey155: and see Palmer on Company Law, 20th ed. (1959) p. 443). It is with this first ground of decision that I am concerned. |
What was suggested in argument was that if the debenture in the Victor Battery case,156 being "security" within section 54, was valid, then the loans to Woodstock and to Burden were valid, since "loan" and "security" are treated together on the same footing in section 54, i.e., in the provision that it shall not be lawful for a company to give "whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance ..." |
Roxburgh J. said157: |
"The section provides, not that it shall not be lawful for a company to provide a security in order to give financial assistance, but that it shall not be lawful for a company by means of the provision of security to give any financial assistance. In my judgment, 'security' prima facie means 'valid security,' although I do not say that it must mean that. Moreover, the |
153 (1958) Unreported. |
154 (1951) 51 S.R.(N.S.W.) 390. |
155 (1966) V.L.R. 464. |
156 [1946] Ch. 242. |
157 Ibid. 248. |
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words of the section are not 'purport to give financial assistance' but 'give financial assistance' and I cannot see how an invalid debenture could give any financial assistance." |
Thus it was insisted that the security must itself be the means of giving financial assistance and that an invalid security could not give financial assistance because, as I understand it, of its invalidity. It has been doubted (for example, in the Australian cases158 whether an invalid security cannot give financial assistance. In a narrow strict sense, the security itself gives no financial assistance, in the narrow sense of payment, at all, but is security for the repayment of the financial assistance or payment that is given. But that is so however valid the security. The financial assistance for which the security is given is, therefore, what must be referred to in the section as giving "by means of ... the provision of security ... financial assistance." It is in that looser sense that the security is the means of giving financial assistance within the meaning of the section. And this is so even if "security" is interpreted as the document by which this security is given and under which the payment is made. And, in that looser sense, its being the means of giving financial assistance does not depend upon its being valid, at any rate when the financial assistance is in fact given. Indeed, the greater the invalidity the greater the assistance, because the less the liability to repay. |
I would very readily believe, as Roxburgh J.159 has arrived at an opposite conclusion, that this reasoning is erroneous. But, assuming that it is erroneous, it nevertheless does not seem to me necessary to follow from Roxburgh J.'s observations which I have quoted160 that a loan by a company of money as a part of a transaction by which that money is to purchase, and does purchase, shares in a company is a valid loan. Such a loan, unlike the debenture in the Victor Battery case,161 is a transfer of the purchase money of the shares, and the transfer is nonetheless effective because the loan is invalid. If such a loan is valid, then it seems to me that it can only he on the ground that the section itself establishes that, despite its declaring it unlawful for a company to give by means of a loan financial assistance for the purchase of shares in the company, yet the ordinary consequences of such illegality are not to follow. Statute, of course, could so provide expressly or by implication. |
References in the Victor Battery judgment162 might be called in aid of such a conclusion. (1) That section 45 of the Companies Act, 1929 (the predecessor of section 54 of the Act of 1948), unlike section 79 of the Act of 1929, does not indicate an intention to avoid the security. But section 79 (now replaced by section 95 of the Act of 1948) was not dealing with illegality, whose consequences are well established under the general law, but with registration of charges, where the consequences of non-registration were |
158 (1951) 51 S.R.(N.S.W.) 390; (1966) V.L.R. 464. |
159 [1946] Ch. 242. |
160 Ibid. 248. |
161 Ibid. |
162 Ibid. 447. |
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not provided by the general law and, therefore, had to be provided in the statute. (2) That the section does not indicate an intention to punish the lender. This is unless, be it added (as in our case) the lender is the company: so the lender in our case does not come within this observation. (3) That to destroy the security, which may be for very large amounts, is out of all proportion to the £100 fine imposed by section 54 of the Act of 1948. This is a common well-recognised consequence accepted by the courts in cases of transactions being made unlawful and participants being subjected to relatively light criminal punishment. That such provisions might prove a positive boon to the principal offenders has been similarly accepted on the well-accepted ground of public policy that the courts will not aid unlawful transactions but let the consequences fall where they lie. (4) That a person with "knowledge of what the principal offender is doing" may suffer far more than the principal offender. This is subject to the same observation as in (3); and the lender would have the "knowledge." (5) The section was designed against the use of cash in shell companies to purchase the shares of those companies. That would, if the plaintiff establishes its allegations, place the defendants within the design of the section. If the section can be interpreted so as to exclude what is within this design and to exclude what is outside it, then effect can be given to the distinction, but no-one has suggested such an interpretation; and in its absence there appears no good reason for relying on it in some way to exclude the Victor Battery case162 any more than to include what, ex hypothesi, on interpretation is indistinguishable from it, namely the present case. |
It is with hesitation and misgiving that I come to a conclusion different from that of Roxburgh J.163 but I must state what I see, however faulty my sight. |
For my part, I conclude that the loan by the plaintiff to Woodstock and the payment of the £207,500 by the plaintiff to Burden were made unlawful and avoided by section 54 of the Act of 1948. But for reasons already given, this conclusion does not, in my view, defeat the plaintiff's claims in this case. |
(9) Section 448 of the Companies Act, 1948 |
Those defendants who were directors of the plaintiff (i.e., Barlow-Lawson, Jacob, Burden and Sinclair) rely in their defence on section 448 of the Act of 1948. That section provides: |
"(1) If in any proceeding for negligence, default, breach of duty or breach of trust against an officer of a company or a person employed by a company as auditor (whether he is or is not an officer of the company) it appears to the court hearing the case that that officer or person is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably, and that, having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be |
162 [1946] Ch. 447. |
163 Ibid. |
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excused for the negligence, default, breach of duty or breach of trust, that court may relieve him, either wholly or partly, from his liability on such terms as the court may think fit." |
There are, therefore, three requirements for relief, namely that the defendant (1) acted honestly, (2) acted reasonably, and (3) that he ought fairly to be excused. |
The breach of trust relied on is a dishonest breach of trust. Burden I have held liable for such a breach and, therefore, he is outside the requirements of section 448. Similarly, in my view, Sinclair is also outside its requirements. But for Barlow-Lawson and Jacob it may be said that their responsibility for the dishonest breach was because they put themselves at Cradock's disposal as I have described; and, as I have indicated, it is the alternative view in the case of Sinclair that he similarly put himself at the disposal of Burden. Even assuming that this participation in the breach was not dishonest within the section, yet for them, as directors of a public company, to dispose of large sums, constituting virtually the whole of the plaintiff's assets, without any regard whatsoever for minority shareholders, and without consideration, but blindly at the behest of the majority shareholder who nominated them to the board, is not to act reasonably. Nor should they fairly be excused. |
I have no hesitation in concluding that none of them comes within the requirements of section 448 and that they should not be relieved under its provisions. |
THE OVERALL RESULT |
The overall result, therefore, is that the plaintiff succeeds in its claims based on the first transaction and fails in its claims on the second transaction So it succeeds: (1) against Contanglo as constructive trustee to repay £195,000 with interest; (2) against District as constructive trustee to repay £232,500 with interest and for damages for negligence; (3) against Woodstock as constructive trustee to repay £232,500 with interest; (4) against Barlow-Lawson and Jacob as directors and trustees to pay £232,500 with interest. |
This is no more than an indication of the result. The form of order which will work out the result with precision I will, as I have indicated, deal with after the parties have had an opportunity of considering the judgment. I will then also deal with the plaintiff's claim for expenses and with costs. |
Before I part with this case I should now like to repeat what I said at the end of the hearing. It is a pleasure to acknowledge the competence and thoroughness with which all the solicitors concerned have prepared this case. It was most helpful to its proceeding smoothly and properly. |
This was an intricate and difficult case for the parties and I would like to thank all the counsel whom it was my great pleasure to hear for the presentation of their cases, which, indeed, at times reached heights of brilliance. |
Lastly I want to thank the parties who appeared in person. I |
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have had to say hard things of some of them and I find that a distasteful part of a judge's duty, but it has to be done to explain, without reservation, the reasons for the conclusions reached. Nevertheless, I wish to add here, publicly, how much I appreciated the way in which they conducted their cases, despite the strain of their being personally involved, and the unblemished personal relationships throughout a very trying case. |
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Solicitors: Solicitor, Board of Trade; Gouldens; Bower, Cotton & Bower, for Slater, Heelis & Co., Manchester; Beer & Co.; Simmons & Simmons. |
A. R. |