[CHANCERY DIVISION]

KARAK RUBBER CO. LTD. v. BURDEN AND OTHERS (No. 2)

[1965 K No. 112]

Banking - Negligence towards customer - Duty of care - Misapplication of company's credit in bank account by directors - Authorised signatories fraudulent - Knowledge to be imputed to "reasonable banker" - Duty to make inquiries

Banking - Company's account - Moneys in credit - Misapplication by directors - Whether within bank's knowledge - Whether bank liable as constructive trustee

Between January 13 and February 17, 1959, a series of transactions took place whereby the Contanglo Banking and Trading Co. Ltd. acting ultimately as undisclosed agent for and Y or possibly B alone took over the Karak Rubber Co. Ltd., an inactive public company with assets of some £120,000,

by acquiring a majority shareholding in Karak from those shareholders who assented to the take-over. Moneys forming part of Karak's assets were used to pay off the assenting shareholders by the following means. The Cannon Street branch of Barclays Bank issued a banker's draft (the Barclays draft) for £98,954 drawn in favour of Contanglo's bankers, the National Bank. The National Bank, on Contanglo's instructions, used the proceeds of the Barclays draft to pay off the assenting shareholders. Barclays were reimbursed in the following manner: the Chartered Bank who were Karak's bankers prior to the take-over drew a banker's cheque on the Midland Bank in favour of Karak in the sum of £115,890 which was substantially the whole of Karak's cash balance; that cheque (the Chartered cheque) was indorsed over to Barclays by B, who, as a result of the take-over, became chairman of Karak; Karak opened a new account with the Barclays branch and paid into it the Chartered cheque; Karak then drew on that account a cheque for £99,504 (the Karak cheque) in favour of Barclays, being repayment for the Barclays draft plus sundry expenses. C, the assistant manager, and H, the manager, of the Barclays branch acted throughout with complete bona fides and were at all times unaware that Karak's own moneys were being used to pay off the Karak shareholders. The facts in so far as they involved and were known to C and H were as follows.

S was a valued and longstanding customer of the branch. He controlled two small merchant banking companies, one called Minories, both of which enjoyed modest overdraft facilities with the branch. In December 1958, S asked C if the bank would provide facilities for the exchange of banker's drafts in connection with the take-over of public companies. Neither H nor C had any experience of company take-overs and the branch had never taken part in any such transaction. On February 11, 1959, S, acting on behalf of Minories, gave instructions in a matter unconnected with Contanglo land Karak. The instructions were to issue a banker's draft for some £74,000 take it to a certain office where a meeting was to be held and exchange it for "a bank draft acceptable to you for £75,100." The bank's fee was to be five guineas. H was cognisant of such instructions and C accepted them. No similar transaction had ever been carried out by the bank for Minories, whose account was overdrawn by about £3,000 on that date. C duly carried out the exchange of drafts at the meeting at which one X, until then unknown to him, was present. learned that the meeting was connected with a take-over transaction. No explanation was sought by C or volunteered by S.

On February 17, C received a letter from S, as director of Minories, asking him to arrange ,for a draft to be drawn in favour of the National Bank, and delivered to a particular office at noon on that day in exchange "for a draft acceptable to you of not less than £99,504." The bank's fee was to be seven guineas. Prior to receipt of the letter, S had told C on the telephone that the bank might be asked to open a public company account, and that X would be at the meeting to give him instructions. He also told C that his, S's, client was B, the chairman of a public company and a man of importance and integrity. H and C proceeded to sign on behalf of Barclays a draft for £98,954 in favour of the National Bank, i.e., the Barclays draft. C handed it to X just before the meeting began or conceivably to the National Bank representative during the meeting, on receiving assurances from X that there was a banker's cheque in favour of Karak (the first time C had ever heard of that company) for £115,890 (the Chartered

cheque); that B was about to be appointed a director of Karak; that the banker's cheque would then come into the possession of B who would draw a cheque on a new account to be opened by Karak with Barclays which could then be paid into Minories' account instead of the draft envisaged by Minories' letter. As security for that, B would specially indorse the banker's cheque over to Barclays. An extraordinary general meeting of Karak then took place at which according to the minutes and so far as material, (1) the shares of the assenting shareholders were transferred; (2) a letter was submitted from the National Bank stating that cheques were being dispatched to the assenting shareholders that day; (3) B and Y were appointed directors of Karak; (4) the resignations of the former directors of Karak were accepted; and (9) the assets of Karak consisting of a £5,000 tax reserve certificate and a "banker's draft" for £115,890 were handed over to the newly appointed company secretaries; and finally (10) it was resolved to close the company's account with the Chartered Bank and to appoint the Cannon Street branch of Barclays as Karak's bankers. The banker's draft referred to in the minutes was, in fact, the Chartered cheque. C was present throughout the meeting but was not given a copy of the agenda. It was inferred from the evidence that he only heard and understood items 3, 4, 9 and 10. He was at no time aware that the purpose of the Barclays draft was to finance the payment of the assenting shareholders by the National Bank. At the conclusion of item 9 the Chartered cheque was handed to B who indorsed it in favour of Barclays and handed it to C. Thus Barclays Bank through C received the Chartered cheque as Karak's prospective banker. C then left and together with B and Y went to the bank where a form appointing Barclays as Karak's banker was made out by C and signed by B as chairman. C made out a cheque drawn on the new Karak account in favour of Barclays Bank for £99,504 (the Karak cheque) and that was signed by B and Y on behalf of Karak and handed to either C or H. Lastly, C filled in a paying-in slip in respect of the Chartered cheque. Shortly afterwards, the four men parted company. In due course Barclays credited the Chartered cheque, indorsed by H on behalf of Barclays, to Karak's account, debited to that account the Karak cheque and credited the Karak cheque to Minories' account. No suspicion had been aroused in the minds of or C. In the event, Karak, which started February 17 with a cash balance of over £115,000, had at the end of that day one of just over £16,000. Four months later its cash balance was £3 odd.

As a result of Board of Trade inquiries the present action was brought by Karak with the authority of the Official Receiver as liquidator, and by the Board of Trade under section 169 (4) of the Companies Act 1948. B, the first defendant, was adjudicated bankrupt. He died during the hearing. Y, the second defendant, entered an informal defence stating that he had done only what B had told him to do, and took no part in the action. The trustee in bankruptcy of B had no funds enabling him to take part in the action. The only effective defendant was Barclays Bank, against whom was claimed replacement of the amount of the Karak cheque or a like sum by way of damages for negligence.

On the question whether, although neither H nor C knew that the Karak cheque represented moneys being misapplied by B and Y for the purchase of the assented shares, nevertheless, Barclays ought to have known that, or made inquiries whether, such moneys were being misapplied because a reasonable banker would have derived such knowledge from, or have been put on inquiry as a result of, the facts of which H and were actually aware:-

Held, (1) that a paying bank, i.e., the bank on which a cheque was drawn, owed a duty to exercise reasonable care and skill in transacting its customer's banking business, including the making of such inquiries as might, in given circumstances, be appropriate and practical if the banker had, or a reasonable banker would have had, grounds for believing that the authorised signatories were misusing their authority for the purpose of defrauding their principal or otherwise defeating his intentions (post, p. 629F-H).

Selangor United Rubber Estates Ltd. v. Cradock (No. 3) [1968] 1 W.L.R. 1555 applied.

(2) That having regard to the extraordinary nature of the transaction, the magnitude of the sum involved, the degree of suspicion which the facts would have provoked in a reasonable banker and the time there was in which to make inquiries, Barclays, in the performance of its contractual duty as a paying bank, should, through H and C, have made inquiries as to the propriety of the Karak cheque before honouring it. Barclays Bank was, therefore, in breach of its duty and was liable in damages in negligence, the quantum being the loss suffered by Karak (post, pp. 630H-631B).

(3) That B, in deliberate and conscious fraud, had procured the misapplication of Karak's moneys and that Y knowingly or recklessly was implicated in that fraudulent design; that as directors of Karak they were to be treated as trustees of the money comprised in the Chartered cheque and paid into Karak's account with Barclays Bank (post, pp. 632F, G, 633C,D).

(4) That H and C and through them, Barclays Bank, had "assisted with knowledge in a dishonest and fraudulent design on the part of the trustee(s)," knowledge in that context meaning knowledge, actual or constructive, of circumstances indicative to an honest and reasonable banker that such a design was being committed, and were to be considered and treated as agents of such trustees and were, therefore, liable as constructive trustees of the moneys represented by the Karak cheque (post, pp. 633E, 634A-C, 636H-637A).

Dictum of Lord Selborne L.C. in Barnes v. Addy (1874) L.R. 9 Ch. 244, as explained in Selangor United Rubber Estates Ltd. v. Cradock (No. 3) [1968] 1 W.L.R. 1555, applied.

Williams v. Williams (1881) 17 Ch.D. 437 and Carl Zeiss Stiftung v. Herbert Smith & Co. (No. 2) [1969] 2 Ch. 276 distinguished.

The following cases are referred to in the judgment:

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Bank of England v. Vagliano Brothers [1891] A.C. 107, H.L.(E.).

Bank of New South Wales v. Goulburn Valley Butter Co. Proprietary Ltd. [1902] A.C. 543, P.C.

Barnes v. Addy (1874) 9 Ch.App. 244.

Bellamy v. Marjoribanks (1852) 7 Exch. 389.

Carl Zeiss Stiftung v. Herbert Smith & Co. (No. 2) [1969] 2 Ch. 276; [1969] 2 W.L.R. 427; [1969] 2 All E.R. 367, C.A.

Curtice v. London City and Midland Bank Ltd. [1908] 1 K.B. 293, C.A.

Hill v. Simpson (1802) 7 Ves.Jun. 152.

Keane v. Robarts (1819) 4 Madd. 332.

M'Leod v. Drummond (1805) 14 Ves.Jun. 353; (1810) 17 Ves.Jun. 152.

McWilliams v. Sir William Arrol & Co. Ltd. [1962] 1 W.L.R. 295; [1962] 1 All E.R. 623, H.L.(Sc.).

Martin v. Rocke, Eyton & Co. (1886) 34 W.R. 253.

Marzetti v. Williams (1830) 1 B. & Ad. 415.

Mead v. Lord Orrery (1745) 3 Atk. 235.

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Nelson v. Larholt [1948] 1 K.B. 339; [1947] 2 All E.R. 751.

Nugent v. Gifford (1738) 1 Atk. 463.

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Reigate v. Union Manufacturing Co. (Ramsbottom) Ltd. [1918] 1 K.B. 592, C.A.

Scott v. Tyler (1788) 2 Dick. 712.

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Soar v. Ashwell [1893] 2 Q.B. 390, C.A.

Westminster Bank Ltd. v. Hilton (1927) 43 T.L.R. 124.

Williams v. Williams (1881) 17 Ch.D. 437.

The following additional cases were cited in argument:

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Armory v. Delamirie (1722) 1 Stra. 505.

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Gray v. Lewis (1869) L.R. 8 Eq. 526.

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Hadley v. Baxendale (1854) 9 Exch. 347.

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ACTION

On January 29, 1965, the Board of Trade, pursuant to section 169 (4) of the Companies Act 1948, and the Karak Rubber Co. Ltd. with the authority of the Official Receiver as liquidator commenced an action against John Leonard Burden (who was adjudged bankrupt in 1968), Douglas Alfred Cross, Minories Trading & Securities Ltd., Barclays Bank Ltd., Stanley Stewart Ltd. (a company alleged to have received £1,780 as a result of a misapplication of Karak's moneys) and the trustee in bankruptcy of Mr. Burden.

The writ claimed (1) a declaration that the first five defendants were jointly and severally liable to replace moneys of Karak which had been misapplied, (a) as to Mr. Burden and Mr. Cross to the extent of £101,254 10s. 6d.; (b) as to Minories and Barclays Bank to the extent of £99,504 10s. 6d., (c) as to Stanley Stewart Ltd. to the extent of £1,750, which said sums of £99,504 10s. 6d. and £1,750 were included in the sum of £101,254 10s. 6d.; (2) an order on the first five defendants and each of them to pay to the Official Receiver as liquidator of Karak such sum or sums as the defendants or any one or more of them would be declared liable to replace as aforesaid with interest thereon at the rate of 5 per cent. from February 17, 1959; (3) as against Mr. Burden and Mr. Cross damages for breach of duty; (4) further or alternatively, as against Barclays Bank damages for breach of duty; (5) an order on the first five defendants jointly and severally to pay to the Board of Trade or alternatively to the Official Receiver as aforesaid the amount of the expenses of and incidental to the investigation into the affairs of Karak by the inspectors appointed by the Board; (6) costs.

By an order made on June 15, 1971, Mr. Burden ceased to be a defendant. Proceedings against Minories were stayed by an order dated October 10, 1969. Stanley Stewart Ltd. was struck off the register Of companies on October 30, 1970, and no relief was sought against it at the trial. The trustee in bankruptcy of Mr. Burden was joined as the defendant but had no funds to take part in trial of the action.

The facts are fully stated in the judgment.

Ian Edwards-Jones Q.C., J. P. Warner and Andrew Morritt for the plaintiff.

Leonard Caplan Q.C., Andrew Leggatt and Michael Kennedy for the fourth defendant, Barclays Bank.

The remaining defendants were neither present nor represented.

Mr. Burden's trustee in bankruptcy appeared merely to say that he had no funds to enable him to take part in the proceedings.

November 10. BRIGHTMAN J. read the following judgment. This action relates to the misfortunes of the Karak Rubber Co. Ltd., which I will call "Karak," and concerns the liability of its directors and of its bank to make good most of its lost assets. Karak was once a wealthy concern and became insolvent. It was, so it is said, the victim of a species of takeover fraud, whereby those seeking to buy a controlling interest in a company put their fingers in the company's till and steal the money in order to pay for their purchase. The bank was the unconscious tool which aided this process. The principal question in this action is whether it must bear the consequences. The fact that the theft involves a breach of section 54 of the Companies Act 1948 is purely incidental and of no fundamental importance, in my view.

Karak was incorporated in 1907 under the Companies Act 1862 for the purpose of cultivating rubber plantations in Asia. Its issued capital, at the relevant time, was £52,650 divided into £1 shares, which were quoted on the London Stock Exchange. In October 1958, Karak sold its estates and ceased to carry on active business. Thereafter, for practical purposes, its assets consisted only of a sum of the order of £120,000 with its bankers, the Chartered Bank, and £5,000 in tax reserve certificates.

In 1958 the secretaries of Karak were a firm of chartered accountants, George Williamson & Co. (whom I will call "Williamsons"), with an office at 21, Mincing Lane, in the City of London. This was also Karak's registered office. The directors of Karak were Mr. Roy (a partner in Williamsons), Mr. Cheshire and Mr. Clayton, all of whom have acted with complete propriety throughout. The board of Karak decided that the shareholding ought to be realised for the benefit of the members of the company. This could, of course, have been achieved by liquidation. There was, however, a more profitable alternative, which was to offer the shares for sale as a whole, since persons were willing to pay above asset value for shares conferring a controlling interest in a company in this situation. Accordingly, at the end of 1958 the Karak board invited offers for the issued capital. Six offers were received. That which the board resolved to recommend to the shareholders came from Contanglo Banking & Trading Co. Ltd. (which I shall call "Contanglo"). Contanglo's offer was 44 shillings per share, compared with an asset value of 41 shillings per share.

Contanglo was a company in a small way of business by comparison with better known banking concerns. It had an office in Mayfair. It was controlled by Mr. Levinson, a solicitor (now deceased), with the assistance of Mr. Scott. Mr. Levinson was interested in property development and Mr. Scott was said to be an expert in that field. The directors of Contanglo, behind whom Mr. Levinson and Mr. Scott operated, were Mr. Essex and Mr. Meaden. The activities of Contanglo included the purchase, either on its own behalf or for clients, of the control of inactive companies possessed of large cash balances. Contanglo's bankers were the National

Bank Ltd. of Whitehall, London. Contanglo's formal offer was submitted to the Karak directors by a letter dated January 13, 1959. The offer related to the whole of the issued share capital of Karak and was in the following terms: (1) the purchase price was, as I have stated, 44 shillings per share; (2) the offer was to remain open for acceptance for 14 days unless extended; (3) the offer was conditional on 75 per cent. acceptance; (4) the offer was to be dispatched by the board to the shareholders as soon as practicable; (5) after completion of the purchase, the existing board was to hold a board meeting at which Contanglo nominees were to be appointed additional directors, and the existing directors would immediately resign; (6) completion was to take place within seven days after the closing of the offer; (7) £3,500 was to be paid to the existing directors as compensation for loss of office,

Contanglo gave the name of its bankers, the National Bank, and of its solicitors, Mr. Levinson's firm, as references to prove Contanglo's ability to implement the offer. The maximum purchase price that could be payable was £115,830. Williamsons, on behalf of Karak, took up Contanglo's references with the National Bank, the manager of which wrote to "confirm that my customers would be in a position to implement the terms of the offer that is now being made."

Williamsons, on behalf of Karak, submitted Contanglo's offer to the Karak shareholders in a circular letter dated January 23. There was sent with the circular a combined form of acceptance and transfer, which was to be lodged by each assenting shareholder with Williamsons by February 6. The circular stated that

"Members accepting the offer will remain members of the company until February 17, 1959, when the extraordinary general meeting, of which notice is sent herewith, will be held. On conclusion of that meeting, and provided that there has been the requisite percentage of acceptances, payment of the purchase price will be made forthwith to the acceptors."

The extraordinary general meeting was for the purpose of ratifying the payment of the proposed compensation to the directors.

On the same day, January 23, Contanglo wrote a letter to Karak intimating that it would be a matter of convenience to Contanglo if Karak would transfer its deposit account, then in fact £118,500, from the Chartered Bank to the National Bank in advance of the take-over. Mr. Meaden, who wrote this letter on behalf of Contanglo, stated that he had consulted Mr. Cheshire, who was agreeable. The board rejected this proposal

Correspondence ensued between Williamsons and the National Bank, as bankers to Contanglo, in regard to the payment to Karak shareholders of their purchase-money. On February 5 the manager of the National Bank wrote to Williamsons as follows:

"As arranged on the telephone today, I am enclosing a draft letter confirming that cheques are being dispatched to the shareholders who have accepted the offer made by the Contanglo Banking and Trading Co. Ltd. This would be handed to the company at the meeting at the conclusion of the take-over."

The draft was in the form of a letter from the manager of the National Bank to Williamsons on behalf of Karak, and (in its finally agreed form) read as follows:

"I hereby confirm that cheques to the total value of £89,768 16&S are today being dispatched by this bank, to shareholders who have accepted the offer set out in your communication to them under date of January 23, 1959."

On February 6, Contanglo declared the offer unconditional. The total acceptances on the final count amounted to 40,804, involving the payment to assenting shareholders of the sum of £89,768 16s. which I have already mentioned. On February 10 Mr. Meaden, on behalf of Contanglo, wrote to Williamsons a letter covering three matters. First, a suggested agenda was enclosed for the board meeting which, it was said, would be held at noon on Tuesday, February 17. Williamsons were asked to have the agenda, if approved, prepared for that meeting. Secondly, Williamsons were asked to prepare forms showing the change in directors, secretary, registered office, etc. Thirdly, Williamsons were asked to arrange for a banker's draft to be issued in favour of the National Bank, for the credit of Karak's account, comprising the balance of Karak's cash, so that this could be handed to a representative of the National Bank at the meeting. The suggested agenda named the three new Karak directors as Mr. Freeman (a Contanglo director), Mr. Cacutt (the Contanglo book-keeper) and Mr. Mitchell The agenda also provided for the transfer of the Karak banking account to the National Bank.

In accordance with these proposals Williamsons wrote on February 11 to the Chartered Bank requesting the preparation of a banker's draft in the form required by the suggested agenda. Williamsons said that they would collect the draft at 10.30 a.m. on February 17.

It is clear that as between itself and the Karak shareholders, Contanglo was contracting as principal and not as agent. It would seem likely that, down to the stage in the story which I have reached, Contanglo was buying on its own account beneficially. However, on or shortly before February 16, Contanglo parted with the benefit of its contract in consideration of a sum of £7,000 and it thereafter completed the contract as undisclosed agent. Its principals were Mr. John Leonard Burden and Mr. Douglas Alfred Cross, or possibly Mr. Burden alone. It is unnecessary to resolve that obscurity, and for convenience I will refer to Mr. Burden as if he were the only buyer and the sole principal of Contanglo. To explain how this change occurred, it will be necessary to go back in time.

Barclays Bank Ltd. maintained a branch at 103, Cannon Street, in the City of London, known as the Cannon Street Station branch. The customers of that branch included two concerns, described in the evidence in this action as merchant banks, Collingwoods Securities Ltd. [hereinafter referred to as "Collingwoods Securities"] and Minories Trading & Securities Ltd., which I will call "Minories." They had been customers of Barclays Bank for a long time. Their principal business was the provision of finance by way of discounting bills and arranging credit for importers and exporters. The two companies were run by Mr. I. H. Solomons and were owned by him or members of his family. Each of these companies had overdraft facilities with Barclays Bank of relatively modest proportions, about £6,000 in the case of Minories. Mr. Solomons is dead and I have not, therefore, had the advantage of his evidence.

The assistant manager of the branch was Mr. Cooper. He had held that position since 1954. He was about 47 years of age at the time of the relevant events. His banking career had started in 1929 and his experience was considerable and varied; but he had no knowledge or experience of

company take-over transactions. The manager of the branch was Mr. Hockley. He had been manager throughout the whole of Mr. Cooper's appointment. He also had no experience of take-overs. Mr. Solomons was a customer of Barclays Bank of long standing. He was highly regarded by both Mr. Cooper and Mr. Hockley. They found him meticulous in everything he did and said he would do, cautious and particularly well versed in banking and other financial matters. He was said to be the main power in a firm of chartered accountants known as Sinclair De Mesquita & Co.

In December 1958, Mr. Solomons asked Mr. Cooper whether Barclays Bank would be willing to provide a certain service, in the form of a facility for exchanging drafts in connection with the take-over or acquisition of public companies intended to be developed as property companies. Mr. Solomons stated that previously he had had the assistance of a well-known merchant bank, which he named, for this type of work, but had found the bank expensive, and in any event he would prefer to make use of the services of a clearing bank. Mr. Solomons mentioned that Barclays might acquire some valuable accounts in the process. This was an era in which there existed a number of dormant rubber companies with substantial cash balances, and apparently profits were to be made by financiers who possessed the expertise to purchase control and turn the companies to account in other directions. Nothing further was heard by Mr. Cooper of this line of business until on or shortly before February 11, 1959, Mr. Solomons, acting on behalf of Minories, telephoned Mr. Cooper. He asked Mr. Cooper if he would be willing to arrange for Barclays Bank to issue a banker's draft for £74,645 2s., take it to the office of certain stockbrokers in Throgmorton Street at 11.30 a.m. on February 11, and exchange such draft for what Mr. Solomons described as "a bank draft acceptable to you for £75,100." The charge for this service was to be a modest five guineas. The intention of Mr. Solomons, as well understood by Mr. Cooper and by Mr. Hockley (who was cognisant of the proposal), was that the counter-value for the Barclays Bank draft should be a banker's draft which Mr. Cooper could regard as good as money, so that there would not in any real sense be any question of Barclays Bank having to grant a loan or extend credit to Minories. Hence the very small charge. Mr. Cooper thinks that Mr. Solomons mentioned, during the telephone conversation, that a gentleman called Mr. Stekel would be present and would instruct Mr. Cooper in the procedure. The proposal was agreed by Mr. Cooper and was confirmed by a letter from Minories dated February 11.

It was not disputed during the trial that the transaction proposed and agreed was unusual in character and, in relation to Mr. Solomons and his companies, unusual in size. No similar transaction had been done for Collingwoods Securities or Minories before, or indeed for any other customer of the branch. Be that as it may, when Mr. Hockley saw Mr. Solomons' letter, as he did, it did not cause him any concern or qualms or hesitation. I may mention that at this time, and during the relevant ensuing days, Minories' account was overdrawn to the extent of £2,000 to £3,000. There was no question of Barclays Bank regarding Minories as good for £75,000 or any sum approaching that figure.

On February 11, Mr. Cooper set out for Throgmorton Street with his banker's draft. His impression is that when he arrived at the stockbrokers' office, he was taken into the meeting by Mr. Stekel, where he duly exchanged his bank draft for the draft of another bank drawn in favour of

Barclays Bank. Mr. Cooper may have been at the meeting for some 10 or 20 minutes and he then left on his own. He had not been able to gather much of what was happening. He did, however, learn that the meeting was concerned with a take-over transaction and that the name of the company concerned was Kota Tinggi (Johore) Rubber Co. Ltd. The matter to be noted, because it was repeated, was that Mr. Cooper did not request and Mr. Solomons did not volunteer any explanation why the bank should be asked to issue and hand over its own draft in exchange for another draft for a slightly greater amount; nor did Mr. Cooper ask any questions as to the capacity of Mr. Stekel or the extent of his authority. That was the end of the bank's brief acquaintance with Kota Tinggi.

On Monday, February 16, Mr. Solomons again telephoned Mr. Cooper to arrange for an exchange of drafts. The telephone conversation is reflected in a letter dated February 17, and probably sent round to the bank by hand on that day. It is signed by Mr. Solomons as a director and by the secretary of Minories. It is addressed to the manager of the Cannon Street Station branch of Barclays Bank, i.e., in effect to Mr. Hockley, and is in the following terms:

"Confirming telephone conversation of yesterday, we shall be glad if you will arrange for your draft, in favour of the National Bank Ltd., in the sum of £98,954 10s. 6d. to be delivered to the offices of Messrs. George Williamson & Co., 21, Mincing Lane, London, E.C.3, today at 12.15 p.m. in exchange for a bank draft acceptable to you of not less than £99,504 10s. 6d." (i.e. £550 more). "We are pleased to agree your fee of seven guineas for this service."

Mr. Cooper's impression is that Mr. Solomons told him during the course Of the prior telephone conversation that the bank might be required, or might have the opportunity, to open a public company account out of the transaction, by which he meant the account of a company with a stock exchange quotation, that Mr. Stekel would be there as previously and would give Mr. Cooper his instructions; that Mr. Solomons' client was a Mr. Burden, who was chairman of A.B.C. Coupler & Engineering Co. Ltd., a publicly quoted company, and that Mr. Burden was a chartered accountant and a man of importance and integrity.

I must now interpose certain events which happened between February 11 and noon on February 17, but bearing in mind that they were quite unknown to Barclays Bank at any relevant time.

On February 16, or possibly a day or two earlier but it matters not, Contanglo agreed, as I have mentioned, to sell the benefit of the take-over to Mr. Burden for £7,000. On February 16, Contanglo wrote to Mr. Burden enclosing what was called a completion statement, showing that the sum payable by Mr. Burden to Contanglo on completion would be £98,954 10s. 6d., made up of the sum of £89,768 16s. 0d. due to the assenting shareholders, the purchase price of £7,000 to Contanglo, and sundry costs and expenses. Contanglo also told Mr. Burden that a board meeting of Karak had been arranged for 12.15 p.m. on the following day at 21, Mincing Lane, enclosed a copy of the draft agenda and requested Mr. Burden's instructions. Contanglo stated that it would require from Mr. Burden a banker's draft made payable to the National Bank for £98,954 10s. 6d. in accordance with the completion statement. Other action taken by Contanglo on this day was to write to its bankers, the National Bank, to confirm the place and time of the board meeting, stating that -

"At this meeting we shall hand to you a banker's draft amounting to £98,954 10s. 6d. which will adequately cover the cost of the shares. . . . We look forward to meeting your representative who will be handing to the company [Karak] a letter from your bank stating that cheques have been despatched to the assenting shareholders."

Contanglo also wrote to Williamsons confirming the place and time of the board meeting, but amending the agenda in two relevant respects; first, the new directors were to be Mr. Burden, Mr. Cross and Mr. Stapley instead of the hitherto named Contanglo nominees; secondly, the new Karak hankers were "to be resolved at the meeting." The letter concluded:

"We confirm in the meantime that the hanker's draft" (i.e. for Karak's available cash balance with the Chartered Bank) "should be made payable to the company [Karak]. We shall not know until tomorrow the name of the bankers to be appointed to the company."

Mr. Burden, for his part, wrote to Minories:

"We shall be glad if you will arrange for a bank draft for £98,954 10s. 6d. . . . to be issued in favour of the National Bank Ltd. and handed to Contanglo Banking and Trading Co., Ltd. tomorrow Tuesday February 17 at 12.15 p.m. in exchange for a bank draft for £99,504 10s. 6d. . . ."

The reason why Mr. Burden instructed Minories that the draft to be received in exchange should be £550 in excess of that to be handed to Contanglo's bankers, was that there was a side arrangement (to put it shortly) between Minories, Mr. Stekel and Mr. Burden, that Minories should receive £150 for commission and bank charges, and that Mr. Stekel or his nominees should receive £400 for (I infer) services rendered or to be rendered in connection with the take-over.

It was against that backcloth, invisible to Mr. Cooper, that he came on to the stage to play his part. All that he knew was what was stated in Mr. Solomons' letter on February 16 to Mr. Hockley, and what had been mentioned by Mr. Solomons in the preceding telephone conversation. He did not even know the name "Karak Rubber Co., Ltd."

Some time in the morning of February 17, Mr. Hockley and Mr. Cooper signed, on behalf of Barclays Bank, a banker's draft for £98,954 10s. 6d., in favour of the National Bank. I will refer to this as "the Barclays draft." The procedure in the case of a banker's draft issued by a branch on behalf of a customer (at least in the case of Barclays Bank's own procedure) is that the banker's draft, when issued, is debited to the account of the customer and credited to an internal suspense account known as "branch drafts." When the draft is returned to the bank for payment, which will normally be through the town or general clearing house, it is debited to the suspense account. Thus, as a matter of book-keeping, the draft is debited to the customer at the time when it is issued and not subsequently when the bank is called upon to part with the money represented by the draft. The bank statement of Minories accordingly contains a debit on February 17 of £98,954 10s. 6d. against the entry "Draft in favour of National Bank Ltd." When the draft itself was returned through the clearing house a day or two later, it was, no doubt, debited to the suspense account which I have mentioned.

So far as Karak was concerned, Tuesday, February 17, opened with a first board meeting, attended by Mr. Cheshire (in the chair) Mr. Clayton

and Karak's solicitor, Mr. Brandt. The meeting was held in the boardroom at Williamsons' office in Mincing Lane. It dealt with formal matters and calls for no comment. It was followed at 12 noon, in the same room, by an extraordinary general meeting for the purpose only of considering a resolution approving the payment to the outgoing directors of £3,500 compensation for loss of office. Mr. Cheshire (in the chair) and Mr. Clayton were again present, together with three other shareholders and Mr. Brandt. The resolution was not opposed. The completion of the business of that meeting cannot have occupied many minutes.

The events of February 17 are now over 12 years stale, and not surprisingly the witnesses had some difficulty in recalling all the details. Mr. Cooper gave his evidence over a period of three days, and his recollection was tested and retested intensively. Mr. Cooper impressed me, and I am certain impressed all concerned in the case who heard him, as a witness of the utmost candour and honesty and of complete intellectual integrity. His professional reputation was on trial, but he never shirked a question or answered evasively. His sole and manifest purpose was to assist the court to the utmost of his ability, withholding nothing. Inevitably many of his answers were the result of impression and reconstruction, rather than direct recollection.

The boardroom at Williamsons was about eight paces by six in size, with an oblong table capable of accommodating about eight people in comfort, and occupying about half the space; some chairs were at the table, others against a wall. The persons present just before, or during the whole or some part of, the second board meeting, apart from Mr. Cooper, can be identified with reasonable certainty as follows: (1) Mr. Cheshire (in the chair at the commencement of the meeting) and Mr. Clayton. Both gave evidence. (2) A representative of the National Bank, whose role was to receive a banker's draft for £98,954 10s. 6d. in accordance with Contanglo's letter of February 16, and to hand over a letter in the agreed form to Williamsons confirming the dispatch that day of cheques to the assenting shareholders in accordance with the prior arrangement between the National Bank and Williamsons. The National Bank representative could not be traced. So no evidence was forthcoming from that quarter. Probably he did not stay until the end of the meeting. (3) Mr. Cacutt, Contanglo's representative, whose job was to see that a banker's draft for £98,954 10s. 6d., in favour of National Bank, duly reached the hands of that bank, serving the dual purpose of relieving Contanglo of its liability to the assenting shareholders and securing the £7,000 consideration due to Contanglo for the sale of the take-over to Mr. Burden. Mr. Cacutt gave evidence. He left the meeting at an early stage. (1) Mr. Keen, not a partner in, but a highly responsible employee of, Williamsons, who had been concerned throughout with the take-over arrangements. I had no evidence from him, owing to his death before the trial. He had a number of documents in his custody before the commencement of the meeting, including the acceptances and transfers by the assenting shareholders, a cheque for £115,890 18s. 0d. drawn by the Chartered Bank on the Midland Bank Ltd. in favour of Karak (which I will call "the Chartered cheque"), the indicia of title to the only other assets of Karak, namely, a £5,000 tax reserve certificate and a certificate for a few shares in a company irrelevant to this action, and the resignation of the three existing directors signed in anticipation of an item on the agenda to which I will come later. He placed these documents on the boardroom

table, either in front of himself or in front of Mr. Cheshire, as the chairman of the meeting. (5) Mr. Brandt, Karak's solicitor. He gave evidence. He was present, as he says, merely in case any legal difficulties happened to arise. (6) Mr. Simpson, an employee of Williamsons, who kept the list of Karak's shareholders. He was concerned to prepare the boardroom for the three meetings, to lay out the papers and to usher into the room those arriving at 21, Mincing Lane who did not know their way. He gave evidence. (7) Mr. Burden and Mr. Cross. Neither gave evidence during the trial. Mr. Stapley was not present. He is recorded as resigning the next day. (8) Mr. Stekel. He made a fleeting appearance on the stage during the trial, pursuant to a subpoena duces tecum. Neither side called him, although he must have known a lot. I am not going to speculate on the reason for his absence as a witness or to comment on the matter. He was available to both sides, and presumably each side took the view that he would not assist its case. I shall leave it at that. (9) Mr. Curtis, who was to be the new secretary. He was identified by Mr. Cheshire, who happened to know him personally. He was not mentioned by any other witness. He did not give evidence. The total count, including Mr. Cooper, was accordingly 12 persons.

I must say a word about the Chartered cheque. This, as I have mentioned, was in the custody of Mr. Keen of Williamsons, having been fetched earlier that morning from the Chartered Bank by a representative of Williamsons in accordance with their letter to the bank of February 11. It was dated February 16 and was drawn by the Chartered Bank on the Midland Bank in favour of Karak for £115,890 18s. 0d. representing the total cash balance of Karak with the Chartered Bank less the £3,500 compensation for directors, which I have mentioned. For some reason the Chartered Bank did not issue its own cheque in favour of Karak, but drew on an account which it maintained with the Midland Bank, so that, in strict banking terms, this instrument was not a banker's draft but a banker's cheque. It would for practical purposes have the same financial standing as a banker's draft. It was a cheque which qualified for the town clearing, of which the Cannon Street station branch of Barclays Bank was also a member, so that Barclays Bank, if collecting it, would be able to obtain cash the same day without any difficulty. The cheque, as it now exists, contains two indorsements; first a special indorsement and beneath it a general indorsement. The special indorsement is in the handwriting of Mr. Burden and reads: "For and on behalf of Karak Rubber Co. Ltd., J. Leonard Burden, director, pay Barclays Bank Ltd." The general indorsement I will deal with later in its chronological place. I am satisfied that the special indorsement was not on the Chartered cheque at the commencement of the meeting.

Mr. Cooper had been asked to attend at Williamsons' office at 12.15 p.m. He probably turned up about ten minutes earlier. He had the Barclays draft with him. If he had carried out what the bank had agreed to do, he would have retained the Barclays draft firmly in his grip until someone at Williamsons' office handed to him in exchange a banker's draft equivalent in standing to hard cash, for £99,504 10s. 6d. He would then have left Mincing Lane, returned to his branch and paid the exchanged draft into the account of Minories. And that would probably have been the end of the matter so far as Barclays Bank was concerned. Alternatively, if no one had produced a banker's draft for the purposes of the exchange, Mr. Cooper would have returned to his branch with the Barclays draft,

cancelled the draft and reversed the entries in the bank's books in accordance with what I am told is normal banking procedure where a draft is issued but not used.

Mr. Cooper did not part with the Barclays draft in exchange for another banker's draft. He parted with it in exchange for the Chartered cheque. One of the matters probed in evidence and debated in argument was the moment of time when Mr. Cooper handed over the Barclays draft, and whether he received the Chartered cheque into his possession simultaneously or later during the course of the meeting. At the end of the day, doubt whether this matters very much. Mr. Cooper has no positive recollection of how and when he parted with the Barclays draft. I am, however, myself reasonably satisfied that Mr. Cooper was importuned by a persuasive Mr. Stekel into handing over the Barclays draft just before the meeting commenced, without receiving anything in exchange except assurances. I reach this conclusion not only from the general tenor of the evidence of Mr. Cooper as he ultimately reconstructed the situation in his own mind, but also because it is, in my view, unlikely that the National Bank would have engaged itself to pay £89,768 16s. 0d. to the assenting shareholders, as it did at an early stage of the meeting, without first being put in funds by the receipt of the Barclays draft- and it is unlikely for a number of reasons, including what I have heard from Mr. Cheshire, that Mr. Cheshire or Mr. Keen would have allowed the Chartered cheque out of his possession until the new board had taken over responsibility for the company.

The evidence indicates that Mr. Cooper parted with the Barclays draft, probably to Mr. Stekel, but conceivably direct to the National Bank representative, in the brief interval of time which elapsed between his arrival at Mincing Lane and the commencement of the second board meeting (which followed immediately after the extraordinary general meeting and not at 12.15 p.m.) on assurances by Mr. Stekel (i) that there existed a banker's cheque in favour of Karak for £115,890 18s. 0d., and Mr. Stekel may well have taken an opportunity to point to the Chartered cheque lying on the boardroom table; (ii) that Mr. Burden and Mr. Cross were about to be appointed directors of Karak in the place of the existing board; (iii) that the Chartered cheque would then come into the possession of Mr. Burden and Mr. Cross; (iv) that the new directors would then open an account for Karak with the Cannon Street station branch so that the Chartered cheque could be paid into that account; and (v) that Mr. Burden and Mr. Cross would then draw a cheque on the new Karak account in favour of Barclays Bank, which could be paid into the Minories account in place of the banker's draft envisaged by Minories' letter to the bank of February 17. As security for the due performance of these assurances, Mr. Stekel or Mr. Burden probably told Mr. Cooper that Mr. Burden would specially indorse the Chartered cheque in favour of Barclays Bank as soon as he got it. Thus, Mr. Cooper would implement his instructions from Minories in general effect though not in precise detail. Mr. Cooper was not aware of the transaction underlying the intended exchange of drafts. He did not appreciate that the function of the Barclays draft was to pay for Karak shares. Mr. Cooper was concerned to carry out the instructions of Minories and to ensure that he received acceptable counter-value for the Barclays draft. I am completely satisfied that he entertained no suspicion whatever of any impropriety at any relevant time. I also think,

on considering the evidence as a whole, that there was a certain amount of hubbub and chatter at the meeting, owing to the number of people attending who had different interests and functions. This left a marked impression on the mind of, at least, Mr. Cheshire as chairman of the meeting. The only significance of this is that it would tend to make it difficult for an unversed stranger to pick up the threads of what was occurring.

The course of the proceedings of the second board meeting followed the agenda, and are recounted in the minute book of Karak over the signature of Mr. Burden, appended on April 15. Having heard the evidence, I have no reason to doubt that the minute is correct. I will read the minute and comment later:

"1. Transfers. Submit 123 forms of acceptance and transfer for a total of 40,804 shares for a consideration of 44 shillings per share in accordance with circular to shareholders dated January 23, 1959. Submitted. 2. National Bank Ltd. Submit letter from National Bank Ltd. stating that cheques were being despatched this day to assenting shareholders. Submitted. 3 Directorate. Resolve to appoint Messrs. J. L. Burden, D. A. Cross and R. G. Stapley, directors of the company. Carried unanimously. 4. Submit letters of resignation from the board of directors from Messrs. O. J. Roy, A. E. Cheshire and R. A. Clayton in which they also state that they waive remuneration under article 82 of the memorandum and articles of association, as from February 17, 1959. Submitted and accepted. Resolved to appoint Mr. J. L. Burden chairman of the company. 5. Compensation to directors. Confirm the payments to the directors Messrs. O. J. Roy, A. E. Cheshire and R. G. Clayton for the loss of office amounting to a total of £3,500. Confirmed. 6. Secretaries. Submit letter of resignation from the secretaries, Geo. Williamson & Co., in which they also state that they waive remuneration under article 82 of the memorandum and articles of association, as from February 17, 1959. Resolve to appoint Mr. C. R. Curtis, Secretary to the company. 7. Registrars. Resolve to appoint Messrs. C. R. Curtis & Co. registrars to the company. 8. Situation of the registered office.Resolve to change the registered office of the company to 26, Caxton Street, Westminster, London, S.W.1. Resolved accordingly. 9. Assets of the company. Resolve that Geo. Williamson & Co. hand over to the newly appointed secretaries the following: (1) Tax reserve certificate for £5,000 dated March 29, 1957; (2) Certificate for 24 shares of £1 each in Malgro House Ltd.; (3) Banker's draft for £115,890 18s. 0d. 10. Bankers. Resolve to close the company's accounts with the Chartered Bank and to appoint Barclays Bank Ltd. of 103, Cannon Street, E.C.4. 11. Resolutions . . ."

I think I need not read these. They deal with the honouring of cheques by the bank.

Mr. Cooper does not recall being present when items 1 and 2 were taken, but I think he must have been there. However, it is not proved that he heard and absorbed these items, and I see no reason, on the evidence before me, for so inferring. In particular, as I have mentioned, he was not aware of the purpose of the Barclays draft and that it was being used for financing the consideration paid by the National Bank to the assenting shareholders. He was not provided with a copy of the agenda. It is likely

that he heard and understood items 3, 4, 9 and 10, because he would have been on the look-out for them in view of the assurances which had been given to him by Mr. Stekel. I infer that, at the conclusion of item 9, the Chartered cheque was handed to Mr. Burden, and that he then and there indorsed it in favour of Barclays Bank and handed it to Mr. Cooper. Certainly, it was in Mr. Cooper's hands when he left the meeting. Barclays Bank (through Mr. Cooper) received the Chartered cheque in its capacity as Karak's prospective banker.

Mr. Cooper then departed in company with Mr. Burden and Mr. Cross. They made their way to the Cannon Street station branch of the bank, where they arrived shortly before one o'clock. At the bank, Mr. Cooper filled in a copy of the bank's standard form of appointment of Barclays Bank as banker to a company. This form, when completed, recited that at a meeting of the Karak board, held on that day, it was resolved that Barclays Bank be appointed the banker of the company and that the bank was authorised, shortly stated, to honour all cheques signed by Mr. Burden and Mr. Cross as directors. The completed form was signed by Mr. Burden as chairman of Karak. The plaintiff takes no point that the resolution actually passed at Williamsons' office, provided that a cheque should be countersigned by the secretary of Karak. At the same time Mr. Cooper issued a cheque book for Karak, and wrote out in his own hand a cheque drawn on the Karak account, in favour of Barclays Bank, for the promised £99,504 10s. 6d. This cheque was then signed by Mr. Burden and Mr. Cross on behalf of Karak and handed to Mr. Cooper, or to Mr. Hockley, who at some time had joined them. Mr. Cross filled in a paying-in slip in respect of the Chartered cheque. The four of them then took some refreshment at a nearby place and parted company. In due course the bank credited the Chartered cheque (indorsed by Mr. Hockley on behalf of Barclays Bank) to Karak's new banking account, debited to that account the cheque for £99,504 10s. 6d., which I will call "the Karak cheque," and credited the Karak cheque to the Minories account, thus covering the debit for the Barclays draft made on the same day. No suspicion of any sort had been aroused in the mind either of Mr. Hockley or Mr. Cooper.

There are no other events which are directly material to the possible liability of Barclays Bank and I can therefore cover the ground quite briefly. Karak started February 17, with a cash balance, after allowing for the directors' compensation, of over £115,000. It ended the day with just over £16,000. Four months later, having cashed its tax reserve certificates but conducted no real business, its cash balance was down to £3 8s. 8d. It lingered on, with never more than £850 in its coffers, and usually much less, until in June 1961 it was wound up compulsorily on the petition of the Commissioners of Inland Revenue based on an indebtedness of some £10,000. The shares of the assenting shareholders were registered first in the name of the National Bank Branch Offices Nominees) Ltd., but were later transferred (less a few sold off) to Mr. Burden and Mr. Cross. Mr. Cross ceased to be a director in August 1960. On November 14, 1960, the Board of Trade appointed inspectors to investigate the affairs of the company. The inspectors reported on July 31, 1961. On January 29, 1965, the writ in this action was issued.

The action is brought by Karak with the authority of the Official Receiver, as liquidator. The action is also brought by the Board of Trade (now the Department of Trade and Industry) in the name of Karak, pursuant to section 169 (4) of the Companies Act 1948.

The first defendant to the action is Mr. Burden. He was adjudged bankrupt in 1968. He ceased to be a defendant by an order made on June 15, 1971. I have been told that in fact he has died. The second defendant is Mr. Cross. He has served what is called a defence. It is couched in informal language and says that he did what Mr. Burden told him to do. He has taken no part during the trial. The third defendant is Minories, against whom proceedings have been stayed as a result, I believe, of some sort of compromise. The fourth defendant is Barclays Bank which alone has fought the action. The fifth defendant is a company called Stanley Stewart Ltd. It is said to have received some of the pickings in the form of a cheque for £1,750 on the Karak account paid on February 18, 1959, and alleged to have been a misapplication of Karak's moneys. This company has however been struck off the register and no relief is sought against it. The sixth defendant is Mr. Burden's trustee in bankruptcy. He has the benefit of the defence served by Mr. Burden. He appeared before me to say that he had no funds to enable him to take any part in the trial.

For practical purposes the relief claimed is as follows: (1) Against Mr. Cross and Mr. Burden's trustee in bankruptcy, replacement of the amount of the Karak cheque and of the £1,750 paid to Stanley Stewart Ltd., totalling £101,254 10s. 6d. with interest at five per cent. from February 17, 1959. (2) Against Barclays Bank Ltd., replacement of the amount of the Karak cheque, or a like sum by way of damages for negligence, with interest as aforesaid. (3) Against all three defendants, the cost of the Board of Trade investigation.

I will deal first with the claim against Barclays Bank. It is pleaded that a sum equal to the amount of the Barclays draft was, by the process of honouring the Karak cheque, applied not for the purposes or benefit of Karak but for the benefit of Mr. Burden, Mr. Cross, Minories and Barclays Bank. So far as the bank was concerned, (a) it discharged at Karak's expense the indebtedness of Minories to Barclays Bank for the amount of the Barclays draft, or (b) it prevented such indebtedness arising, or (c) it recouped to Barclays Bank the amount for which Barclays Bank was liable on the Barclays draft, or (d) it enabled Barclays Bank, in substance, (though not in form) to comply with the arrangement which it had made with Minories as recorded in the letter of February 17 from the latter to the former. The plaintiff also pleads that the amount of the Karak cheque was misapplied in giving financial assistance for the purpose of, or in connection with, the purchase of the assented shares and was ultra vires Karak.

It is not now claimed against Barclays Bank that either Mr. Hockley or Mr. Cooper was consciously aware that the amount of the Karak cheque represented money being misapplied by Mr. Burden and Mr Cross, either by giving financial assistance for the purpose of, or in connection with, the purchase of the assented shares, or in any other context. It is pleaded nevertheless that Barclays Bank ought to have known that such money was being misapplied because a reasonable banker and a reasonable businessman would have derived such knowledge from the facts of which Mr. Hockley and Mr. Cooper were actually aware. Alternatively, it is said, the bank would have derived such knowledge if certain inquiries had been made which ought to have been made. The inquiries which ought to have been made, it is said, were (1) inquiries from persons present at the second

board meeting, as to the nature of the transaction being carried out, the source of the Chartered cheque and the destination of the Barclays draft; the persons so identified as those of whom inquiries ought to have been made were the outgoing Karak directors, the representatives of Williamsons, Contanglo and the National Bank, and Messrs. Burden, Cross and Stekel; and (2) inquiries from Mr. Burden and Mr. Cross as to the consideration for the Karak cheque. It is further pleaded that Barclays Bank was negligent in the performance of the duty which, as banker, it owed to Karak as its customer in honouring the Karak cheque without (a) making any inquiry as to the purpose for which the money was being applied, or (b) taking steps to ensure that the money would be applied only for the purposes and benefit of Karak, or (c) making the above-mentioned inquiries at the board meeting or of Mr. Burden and Mr. Cross.

The claim against Barclays Bank is based on the interpretation of the law laid down by Ungoed-Thomas J. in Selangor United Rubber Estates Ltd. v. Cradock (No. 3) [1968] 1 W.L.R. 1555. That is to say, it is founded on the principles of constructive trusteeship as elucidated in that case, and also on the principles of contract which that case decided were applicable as between banker and customer where the banker is acting as paying banker. In the Selangor case Ungoed-Thomas J. considered constructive trusteeship before breach of contract, as also did Mr. Edward-Jones in opening this case. However, in reply, Mr. Edward-Jones put breach of contract in the forefront of his case, at least chronologically, and propose, likewise, to deal with the two topics in that sequence.

The facts of the Selangor case, so far as material for present purposes, can be outlined as follows. Selangor was a dormant company with about £235,000 in liquid assets, including some £232,500 to its credit with Barclays Bank. On March 31, 1958, Contanglo, as agent for an unidentified principal, one Cradock, offered to buy the whole of the issued stock of Selangor for cash, conditional upon a minimum percentage acceptance. on April 17, Contanglo declared the offer unconditional. Completion was due to take place on April 25. The purchase price and certain expenses totalled about £188,000. On April 21, the outgoing Selangor board, at the request of Contanglo, transferred the company's cash from Barclays Bank to the National Bank. The National Bank was Contanglo's banker. Cradock had a personal banking account with the Oxford Street branch of the District Bank, where he had an insignificant credit. On April 23, Cradock asked the District Bank branch manager to prepare a banker's draft in favour of Contanglo for £195,322 and to attend at the National Bank on April 25, in order to exchange it for a banker's draft in favour of Cradock for £235,000. The branch manager agreed to do this. On April 25, a board meeting of Selangor was held at the National Bank premises. Reynolds attended as the representative of District Bank. He had with him the banker's draft which had been requested. At the meeting Reynolds was told by Cradock that Selangor's banking account, with available cash totalling £232,764, was about to be transferred to the Oxford Street branch of the District Bank, that Selangor would then draw a cheque for £232,500 on its new banking account in favour of a company called Woodstock Trust Ltd., that Woodstock Trust would indorse such cheque in favour of Cradock, who would pay it into his account with the District Bank. Reynolds was asked, and agreed, to exchange his banker's draft, not for another banker's draft as previously arranged, but for an alleged equivalent, named, Selangor's cheque for £232,500 drawn in favour

of Woodstock Trust and indorsed to Cradock. Contanglo, having thus obtained the banker's draft for £195,322, paid it into its account with the National Bank and thus covered on behalf of Cradock the £188,000 due on completion of the take-over offer. On these facts, which I have only briefly summarised, Selangor claimed, inter alia, against District Bank damages for negligence in performance of the duty which, it was claimed District Bank owed to Selangor as its customer. The negligent act alleged was debiting the £232,500 cheque against Selangor's account without making any, or any sufficient, inquiry as to the purpose for which the £232,500 was being paid to Woodstock Trust for Cradock.

It is convenient to refer to the bank upon which a cheque is drawn by its customer as "the paying bank," and to refer to the bank which receives the cheque for the purpose of collecting payment on behalf of its customer as "the collecting bank." The claim in contract against the District Bank in the Selangor case was, and the claim against Barclays Bank in the case before me is, a claim against such bank in its capacity as paying bank.

The question accordingly arose in the Selangor case [1968] 1 W.L.R. 1555 as to the nature and extent of the contractual duty of care owed by a paying bank to its customer when called upon to honour a cheque drawn by the customer; and in particular, in the case of a corporate customer which has given the usual mandate to its bank, to what extent the bank is entitled to place exclusive reliance on the fact that the cheque is signed by the corporation's duly authorised signatories.

The conclusion reached by Ungoed-Thomas J. was as follows, at p. 1608:

". . . 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."

He continued, at p. 1609:

"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."

In the result, Ungoed-Thomas J. concluded that the circumstances were such as to put a reasonable banker on inquiry in accordance with its contractual duty of care.

This conclusion was reached after considering certain cases dealing with the contract existing between a paying bank and its customer, including Bellamy v. Marjoribanks (1852) 7 Ex.Ch. 389; Curtice v. London City and Midland Bank Ltd. [1908] 1 K.B. 293, decided by the Court of Appeal, and Westminster Bank Ltd. v. Hilton (1927) 43 T.L.R. 124, decided by the House of Lords. It was also reached after considering a number of cases against collecting banks. Where a collecting bank is sued by the true owner of a cheque for wrongful payment thereof, the claim is for conversion or for money had and received, and not in contract. There is no contractual relationship between the person who draws the cheque and the bank to which the cheque is handed for collection (unless the collecting bank is also the paying bank). Negligence (though not an ingredient of a claim in conversion or for money had and received) is, however, a relevant topic because section 82 of the Bills of Exchange Act 1882, and its modern counterpart afford a statutory defence to a claim by the true owner where a banker has collected a crossed cheque in good faith and without negligence on behalf of a customer who has no title or a defective title. The collecting bank cases were cited to Ungoed-Thomas J. and relied on by him for the purpose of providing illustrations of circumstances constituting carelessness in a banking context and as indications of the standard of care demanded of bankers.

I would be guilty of causing a quite unjustified waste of time and paper if I sought to re-state and re-analyse the numerous cases on the duties of bankers which were so recently subjected to critical examination in the Selangor case [1968] 1 W.L.R. 1555. I shall therefore turn at once to the nature of the attack which has been levied in this case upon the correctness of the Selangor decision in contract. The proposition advanced by Mr. Caplan on behalf of Barclays Bank is short and simple, and, in one sense, commercially attractive because readily workable by junior banking staff. It is this. The primary obligation of a paying bank, in relation to a cheque which is presented for payment, and is clear and unambiguous on its face, and is authenticated by the proper signature or signatures, and is covered by available funds, is to pay the cheque on demand. Subject to two apparent exceptions so far as a corporate customer is concerned, the paying bank has no right or duty to exercise any care, skill or judgment in deciding whether it will or will not comply with the unambiguous, properly authenticated instructions of its customer. By virtue of issuing a cheque book to the customer, the bank has engaged itself to pay any such cheque on demand if funds be available. That is the intention of both bank and customer when the account is opened. The paying bank has a duty of care to its customer but that duty is a limited one. It does not embrace the

question whether the bank ought or ought not to do that which the customer has, in the agreed manner, told it to do. It only embraces (1) reasonable care in interpreting the instructions of its Customer (for example, in interpreting a communication countermanding payment), and (2) reasonable care in making itself available to receive the instructions of the customer (for example, by opening its doors at reasonable hours and attending with reasonable expedition to its customer's postal communications). The two exceptions admitted in the case of a corporate customer to the basic and fundamental rule that the paying bank is to dispense cash automatically against an unambiguous and properly authenticated cheque are, (a) if the payment is, to the actual, conscious knowledge of the bank, a wrongful application of the company's money, or (b) if the payment is for a purpose known to the bank, but such purpose (unknown to the bank) is precluded by the memorandum or articles of association. The first exception depends on the fact that it is an implied term of the contract between banker and customer that the banker shall act honestly and in good faith towards its customer. If a bank knowingly pays a cheque which is a wrongful application of its customer's money, it is acting dishonestly and therefore in breach of contract. The second exception depends on the fiction that persons have notice of the contents of a company's memorandum and articles of association.

Mr. Caplan attacked from four directions the wider duty of care which the Selangor case decided is owed by the paying banker to its customer. (1) Neither the Bellamy case (1852) 7 Ex.Ch. 389 nor the Curtice case [1908] 1 K.B. 293 nor the Hilton case (1927) 43 T.L.R. 124 was a proper foundation for the conclusion reached by Ungoed-Thomas J. The Bellamy case was concerned with the crossing of a cheque; such crossing was a device, he submitted, to protect the true owner by securing payment only through a banker; the case was not concerned with any duty of care owed by the paying bank to its own customer. The Curtice case was concerned with a paying bank's obligation when the customer seeks to communicate the countermanding of a cheque; it therefore lies within the area where admittedly the bank has a duty of care. So also the Hilton case, which was concerned with the interpretation of an ambiguous countermand.

(2) Ungoed-Thomas J. could not properly rely on the collecting bank cases or on any analogy with the position or duties of a collecting bank. A collecting bank has no instant duty of action comparable with that which is incumbent on a paying bank. As between itself and its customer, a collecting bank merely has a duty to collect a cheque with reasonable expedition. The cases where, in a suit between a collecting bank and a third party, the collecting bank has sought to disprove negligence in order to secure the protection of section 82 of the Bills of Exchange Act 1882, are irrelevant to the existence, or non-existence, of a general duty of care on the part of a paying bank. The cases under section 82 relate to a duty of care which is different in origin, in character and in scope from the kind of duty with which the court was concerned in the Selangor case; different in origin, because the duty arises by virtue of a statute and not by virtue of a contractual implication; different in character, because it is not a duty which the collecting banker owes to anyone save himself; the true owner of the cheque cannot sue the collecting banker for breach of a duty of care; the collecting banker exercises care solely in order to avoid liability to the true owner in conversion or for money had and received; different in scope, because no standard of care is laid down by section 82.

(3) As a cheque is by statutory definition and by its own inherent nature, a bill of exchange payable on demand, the banker is by the essential nature of the contract between him and his customer prima facie required to pay his customer's cheque on demand. Apart from all else, to dishonour a cheque may defame the drawer or impair his credit. Any gloss on that contract which requires the banker to pay his customer's clear, unambiguous and properly authenticated cheque not on demand but (in certain circumstances) only after critical thought and the conduct of an inquisitorial exercise, can only arise by implication. A term which finds no expression in a contract is not to be implied unless necessary in a business sense to give efficacy to the contract; that is to say, if it is a term of which it can confidently be predicted that it is so obvious that it goes without saying: Reigate v. Union Manufacturing Co. (Ramsbottom) Ltd. [1918] 1 K.B. 592. The Reigate test was not applied in the Selangor case, nor was it mentioned in argument. The terms supposed, in any event, could not have been implied in the absence of evidence of banking practice and procedure, of which there was none. In the absence of such evidence the court would not know what was obvious to a banker in the context of a bill of exchange payable on demand. The Reigate test could only properly be posed within the framework of evidence of the time available to a paying bank when called upon to pay over the counter, or under the town clearing rules or under the general clearing rules.

(4) It was said that important cases exemplifying the right of a customer of a bank to have his cheque paid on demand were not cited to Ungoed-Thomas J. in Selangor [1968] 1 W.L.R. 1555. One of these cases was Marzetti v. Williams (1830) 1 B. & Ad. 415, which was decided in the Court of King's Bench. In that case the plaintiff had a credit of approximately £70 with his bankers at the beginning of December 17. At 11 o'clock in the morning a further sum of £40 was paid into the account in cash. At 3 O'Clock on that day a cheque, drawn by the plaintiff in favour of certain payees for £87, was presented for payment. The bank clerk, to whom the cheque was presented, said that there were insufficient funds in the account for payment. It was found as a fact that enough time had elapsed, between the payment in of the £40 and the presentation of the cheque, for the £40 to have been credited to the account. An action was brought by the customer against the bankers for damages. The action was in substance founded on a contract by the banker to pay the cheques of his customer when the latter had funds sufficient in his hands for that purpose: see P. 423. The plaintiff succeeded in his claim because "he had a right to have his check [sic] paid at the time when it was presented, and the defendants were guilty of a wrong by refusing to pay it": see pp. 425 and 426. Another case, absent from the Selangor citations, on which Mr. Caplan relied, was Martin v. Rocke, Eyton & Co. (1886) 34 W.R. 253, decided by North J. Morris was an auctioneer of cattle. He had a single banking account into which it was his custom to pay the gross proceeds of sale of livestock and out of which he would pay the sellers after deducting his commission. His current account was overdrawn by about £2,250 in December 1884, when he paid in the sum of £2,229 representing most of the proceeds of the last auction sales. The defendant bank withdrew Morris's credit facilities and applied this amount in part discharge of the overdraft. Morris became bankrupt, and the plaintiff, Martin, and other sellers, were not paid. Martin claimed that the bank held the money, less commission, as trustee for the benefit of himself and other unpaid vendors.

The action failed. Mr. Caplan relied upon the following statement of North J. as emphasising the basic obligation of a bank to honour a cheque save where the bank is privy to a wrong:

"The defendants could not have refused to honour Morris's cheque against the funds paid in (assuming the account to have been in credit), unless the bankers were actually privy to an intended breach of trust by Morris. . . ."

A third case upon which Mr. Caplan relied was Bank of England v. Vagliano Brothers [1891] A.C 107. The plaintiff, Vagliano, carried on business as a merchant and a banker, originally in partnership but from May 1887 alone, under the trade name of Vagliano Brothers. The Bank of England was his banker. The plaintiff employed a clerk called Glyka. Glyka had responsible duties and enjoyed the plaintiff's complete confidence. Between February and August 1887, Glyka, by a series of frauds, obtained the plaintiff's genuine acceptance to 43 forged bills of exchange and thereby secured for himself £71,500 which he utilised to cover losses incurred on the stock exchange. Glyka's procedure was to forge the name of a well-known customer of Vagliano Brothers as if such customer were the drawer of a bill of exchange on Vagliano Brothers, the bill being expressed to be payable to Petridi, who was well known to the plaintiff. Glyka then, by a deception, secured the genuine signature of the plaintiff as acceptor of the bill, the bill being marked as payable at the Bank of England. Glyka's next step was to forge the indorsement of Petridi in favour of a fictitious name. Glyka, or his agent, then presented the bill in due time at the Bank of England for payment in cash across the counter, an unusual but not improper course. The plaintiff claimed that the Bank of England had wrongly debited his account with the £71,500, on the basis that a bank which agrees to pay its customer's acceptances has a duty as between itself and its customer to identify the person to whom it makes payment as the person properly entitled to that payment. It was held by a majority in the House of Lords that the bank was not liable because (i) it had been misled by the plaintiff who, by his signatures, had given apparent authenticity to the forgeries and (ii) that the bank was entitled to treat the forgeries as bills payable to bearer because Petridi was a fictitious or non-existent person within the meaning of section 7 of the Bills of Exchange Act 1882. Mr Caplan relied on a number of passages in the speeches to support his proposition that there is an obligation on a bank to pay without inquiry a cheque or other bill of exchange which is clear on its face and properly authenticated. The principal passages are these. Lord Halsbury L.C. [1891] A.C. 107, 116:

"Suppose they had been genuine signatures of Petridi and the bills had been dishonoured while the bankers were making inquiries, would not Mr. Vagliano have had grave grounds for complaint against the bankers who had allowed his credit to be thus disturbed? I think each of the parties to the transaction must be taken to have known the ordinary course of mercantile affairs, and it is manifest that no banker could hesitate to pay such bills as came to him, so accredited as they were by Mr. Vagliano's acceptance, without throwing the whole mercantile world into confusion."

Lord Bramwell, in a dissenting speech, at p. 141:

"I do not agree with the notion that a banker is entitled to make inquiries as to whether he should pay, as there suggested"-That was

a reference to Robarts v. Tucker (1851) 16 Q.B. 560.-"He must honour or dishonour the bill on presentment."

Lord Macnaghten, at p. 157:

"Bankers who undertake the duty of paying their customer's acceptances cannot do otherwise than pay off-hand, and, as a matter of course, bills presented for payment which are duly accepted and regular and complete on the face of them. It would be out of the question for a banker to adopt the suggestion made by one of the learned judges in Robarts v. Tucker (1851) 16 Q.B. 560, and defer payment until satisfied by inquiry and investigation that all the endorsements on the bill are genuine. That is hardly a practical suggestion. A banker so very careful to avoid risk would soon have no risk to avoid."

In Bank of Baroda Ltd. v. Punjab National Bank Ltd. [1944] A.C. 176, the Punjab bank sued the Baroda bank on a cheque. The Punjab bank claimed as holders for value of a cheque drawn by a customer of the Baroda bank on that bank and indorsed generally by the payees. The customer had no funds, but the cheque, which was post-dated, had been marked on its face by an officer of the Baroda bank with a statement indicating that the account was good for the money. A question which arose was whether a cheque, being a bill drawn on a bank payable on demand, was capable of acceptance in the same way as other bills of exchange were accepted. In delivering the opinion of the Board, Lord Wright, after contrasting the acceptance of a cheque with the acceptance of a bill of exchange, said, at p. 184:

"Other things being equal, in particular if the customer has sufficient funds or credit available with the bank, the bank is bound either to pay the cheque or dishonour it at once."

Barclays Bank has led evidence of banking practice. This was given by a Mr. Avis. He had been in the employment of the Midland Bank for 35 years and was now the manager of the High Holborn branch of that bank. Mr. Caplan referred to the strait-jacket of time within which a paying bank operated, and which in his submission precluded the sort of inquiry which the Selangor case [1968] 1 W.L.R. 1555, held to be incumbent upon a paying bank in certain circumstances. There are three situations to be considered. (1) A case where an open cheque is presented to the paying bank over the counter for payment in cash. In such a case the payee obviously expects payment at once and there are practical difficulties in the way of any appreciable delay. (2) A crossed cheque where both the drawer and the payee of the cheque are customers of the same branch of the bank. In that case the bank is acting both as collecting bank and as paying bank and the debit to the account of the drawer of the cheque and the credit to the account of the payee of the cheque are internal matters of the branch concerned. In this case the bank has the whole of the day in which to make the decision whether to debit the cheque to the one account and credit it to the other account. Mr. Avis believed that he was right in saying that as a matter of practice the bank had the power to hold the cheque over until the following day if necessary. (3) Cheques which fall to be paid through the clearing arrangements. A large part of the evidence of Mr. Avis was directed to banking practice in regard to clearing arrangements.

The principal clearing arrangement is the general clearing house. About 2¾ million cheques pass through the general clearing each day. The system works in this way. Assume that a customer of a country branch of the bank (the collecting bank) is the payee of a cheque drawn on a country branch of the P bank (the paying bank). I use the expression "country branch" merely to exclude a branch which is a member of the town clearing to which I will refer later. Assume that the payee hands the cheque to the branch of the C bank on Monday for collection. The branch posts the cheque on that day to its own head office in London, where it will arrive in due course of post on Tuesday. On Tuesday the head office of the C bank bundles together, according to banks, all cheques which are to be collected. All cheques drawn on the P bank will therefore comprise one bundle. A representative of the C bank takes these bundles to the general clearing house, and receives in exchange from a representative of the P bank a corresponding bundle of cheques drawn on the C bank. The total of one bundle of cheques is set off against the total of the other bundle of cheques and a balance struck, but I need not deal with that aspect. On Tuesday, the head office of the P bank posts to the relevant branches of the P bank all cheques drawn on such branches which the head office has received through the general clearing house. The cheque with which I am dealing accordingly arrives back in the normal course of post at the country branch of the P bank on Wednesday. This will be the first that this branch knows of this cheque. The branch must then decide whether to pay the cheque or not to pay. If the branch decides not to pay the cheque, it must send the cheque back to the relevant branch of the C bank by the last post on Wednesday, so that in due course of post it will arrive at such collecting bank on Thursday morning. If the collecting bank has not received the cheque back by that time, it is entitled in all normal circumstances to treat the cheque as having been duly paid by the paying bank and to treat the amount of the cheque as a cleared amount in the account maintained with its customer. In the result, the paying bank has a period of time extending from the incoming post in the morning until the outgoing post in the evening to decide whether or not to pay the cheque. So much for the general clearing. The town clearing gives the paying banker much less time. The town clearing applies only to certain branches of the clearing banks within a limited area of London, and it applies only to cheques of £5,000 and upwards. A cheque is cleared through the town clearing when both the paying branch and the collecting branch are members of the town clearing. Cheques for the town clearing are taken to the town clearing house at intervals during the day, the last delivery being by 3.45 p.m. If the paying banker, having collected cheques drawn on him from the town clearing house, decides not to pay a cheque, he must return that cheque to the town clearing house not later than 4.30 p.m. on the same day. Otherwise the collecting branch is entitled to treat the cheque as cleared. Allowing for the time which would be taken by the messenger in bringing the last batch of cheques back from the town clearing house to the branch in question, it is plain that the paying bank may not have many minutes in which to make up its mind whether to honour the cheque. The minimum sum of money and the clock times which I have mentioned are those now applicable, and different sums and times have applied in other eras. The changes are however of no significance in this case. There are also local clearances. Mr. Avis had no experience of them and they play no part in this case.

In my view the Achilles heel of the bank's argument, both in the

Selangor case [1968] 1 W.L.R. 1555, and in the case before me, is that it is not, and never reasonably could be, asserted that a paying bank with certain knowledge that the authorised signatories are misapplying the company's funds may nonetheless rely on their signatures. If that is axiomatic, and it was conceded so to be in the case before me, it seems utterly irrational to suppose that a bank has an absolute unqualified duty to pay and no duty to inquire despite a deep suspicion, approaching but falling short of a certainty, that the funds are being misapplied. Once a bank disclaims the untenable position of being in all cases an automatic cash dispenser, whatever the circumstances, there is no rational stopping-place short of a contractual duty to exercise such care and skill as would be exercised by a reasonable banker in similar circumstances. And that care and skill must rationally include, in appropriate circumstances, a duty to inquire before paying. I appreciate the simplicity and convenience of Mr. Caplan's able submission, particularly in an age when banking transactions are reckoned in their daily millions and a rapid turnover of staff may present practical difficulties. But on the broader view, expediency is not a persuasive argument for excusing a banker from inquiring in all circumstances short of certainty, when, of course, inquiry would be needless. Without, therefore, reference to authority I would myself be disposed in principle to adopt, without any qualification, that contractual duty of care which has been propounded by Ungoed-Thomas J. in the Selangor case [1968] 1 W.L.R. 1555, because it seems to me rational. I discern nothing in the cases which have been read to me which is inconsistent with that conclusion. None of the cases relied upon by the bank, in support of its defence, was directed towards the type of problem which I have to decide; that is to say, whether, despite a primary obligation to pay a cheque on demand, a bank owes to its customer a duty of care which may, in an extreme case, oblige it to question the authority of an authorised signatory. Nor do I think it is right to assume that Ungoed-Thomas J. in the Selangor case suffered from an absence of evidence of the practice of bankers. He was not dealing, any more than I am dealing, with a case where a cheque is presented over the counter or is subject to the exigencies of the town or general clearing timetables, nor with anything remotely approaching a normal cheque transaction. I 4ave not overlooked the Reigate test (see [1918] 1 K.B. 592), which was much pressed upon me with persuasive illustrations of hypothetical question and answer. In my judgment the implied duty of care formulated in the Selangor case passes that test without trouble. The proper question, in my view, which should supposedly be put to paying banker and customer, in a case such as the present, is whether the banker is to exercise reasonable care and skill in transacting the customer's banking business, including the making of such inquiries as may, in given circumstances, be appropriate and practical if the banker has, or a reasonable banker would have, grounds for believing that the authorised signatories are misusing their authority for the purpose of defrauding their principal or otherwise defeating his true intentions. The answer to that question is so obvious that I forbear to give it.

A shorter course for me to have taken would have been to adopt the decision in the Selangor case without expressing my own opinion. Counsel on both sides accepted that that decision must have high persuasive authority so far as I am concerned, and that it would be correct for me to follow it unless I were convinced that it was wrong: Metropolitan Police District Receiver v. Croydon Corporation [1956] 1 W.L.R. 1113. I did

not take that easy line out of deference to the elaborate and partially new submissions developed before me.

The question accordingly arises whether Barclays Bank, in the performance of its contractual duty of care as a paying bank, should have made inquiry as to the propriety of the Karak cheque before honouring it. Matters to be considered include (1) first and foremost whether the operation was unusual and out of the ordinary course of banking business, (2) the magnitude of the transaction, (3) the time and opportunity available to the bank for making an inquiry, and (4) the degree of suspicion which the known facts would have provoked in the mind of a reasonable banker. In my opinion the operation proposed to the bank in Minories' letter of February 17 was without question unusual and remote from the ordinary course of banking business. It involved the exchange of one banker's draft for another banker's draft of slightly greater amount in unrevealed circumstances. Not the least astonishing feature, to my mind, is that no explanation was sought by Mr. Hockley or Mr. Cooper. It was not the type of transaction customarily carried out by Barclays Bank or, so far as the evidence went, by any other bank. It became no less unusual or out of the ordinary course of banking business in the altered form it assumed at the second board meeting. The Karak cheque, as I have already indicated, by no stretch of imagination represented an ordinary cheque transaction. As to the magnitude of the transaction, it was large in relation to the normal business of Minories, in relation to the credit-worthiness of Minories and in relation to the known assets of Karak. There was ample time and opportunity for the bank to make inquiries. The effective incoming directors of Karak were in the company of Mr. Cooper for at least an hour after the end of the second board meeting. As to the degree of suspicion which would have been aroused in the mind of a reasonable banker, the bank, through Mr. Hockley and/or Mr. Cooper, knew by the end of the board meeting, (a) that the meeting had been concerned with the take-over of a company called Karak, (b) that the effective control of that company had passed to Mr. Burden and Mr. Cross at that meeting, (c) that the delivery of the Barclays draft was a step taken in the course of that take-over, (d) that the Karak cheque was intended to cover the Barclays draft, and (e) that the Karak cheque represented money which was the property of Karak. A reasonable banker who was neither obtuse, as Mr. Cooper was not, nor distracted by other cares, as Mr. Cooper was, would have reasoned that the Barclays draft probably represented the price of the take-over and that Karak money was probably being used to pay that price. Mr. Hockley and Mr. Cooper were both honest and reasonable bankers. Mr. Cooper, however, was completely thrown off his guard by his well-founded anxiety to secure the promised funds to off-set the Barclays draft. He thought, rightly, that in the absence of such funds the bank might not be entitled to debit Minories with the cost of a draft, or recover such cost even if rightly debited. Mr. Hockley was less versed in the facts and no doubt was content to rely on Mr. Cooper.

[His Lordship considered Mr. Cooper's evidence illustrative of his state of mind and continued:] In my judgment the circumstances were so unusual and out of the ordinary course of banking business, the sum involved so large, and the ground so solid for suspecting that someone was using Karak money to finance the take-over transaction, that a reasonable banker would in the interests of his customer have made further inquiries before inviting or allowing the customer's signatories to pay over

£99,504 of the customer's money to the account of Minories. I do not take the view that a reasonable banker would necessarily have made such inquiries at the board meeting itself. At that stage Barclays Bank had not become Karak's banker, Karak had no assets with Barclays Bank, and the Karak cheque, though envisaged, had not been drawn. A reasonable banker, possessed of the knowledge of Mr. Cooper but, unlike Mr. Cooper, approaching the situation in a detached and uncommitted frame of mind, would have put his questions to the signatories when the Karak cheque was actually tendered.

There remains the question what damage, if any, was suffered by Karak in consequence of the bank's failure to perform its duty to inquire. This must depend on what one supposes would have been the answers to questions never in fact put. In the Selangor case [1968] 1 W.L.R. 1555, Ungoed-Thomas J. said, at p. 1607:

"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."

I do not think that this is to be read as meaning that there is an irrebuttable presumption that truthful answers would have been given to the questions put, and Mr. Edwards-Jones, for the plaintiff, expressly disclaimed such a proposition. I have seen a copy of the transcript of part of the argument in the Selangor case and it is clear that counsel for the District Bank and the Bank of Nova Scotia conceded, without argument, that it was to be assumed for the purposes of that case that if an inquiry had been made, an honest answer would have been given. In my view it is clearly open to Barclays Bank to prove if it can that, on a balance of probabilities, inquiries would have produced answers acceptable to a reasonable banker, so that the failure to inquire led to no loss to Karak: see McWilliams v. Sir William Arrol & Co., Ltd. [1962] 1 W.L.R. 295. That was an appeal from the Court of Session in an action by the widow of an employee killed in circumstances in which it was claimed that there was a breach of a statutory duty on the employer to provide safety equipment for the employee's use. It was held that the onus was on the pursuer to establish not only the breach of duty but also the causal connection between the breach and the injury. It is sufficient for me to read a short passage from the speech of Lord Reid, at p. 305:

"If I prove that my breach of duty in no way caused or contributed to the accident I cannot be liable in damages. And if the accident would have happened in just the same way whether or not I fulfilled my duty, it is obvious that my failure to fulfil my duty cannot have caused or contributed to it. No reason has ever been suggested why a defender should be barred from proving that his fault, whether common law negligence or breach of statutory duty, had nothing to do with the accident."

It seems to me that this principle must equally apply to the law of contract. The onus of proving the causal connection lies on Karak. The emphasis is put the other way in the passage I have quoted because, if a statute requires a safety device, one would start with the assumption that it is of some use, that a reasonable employee would use it and that the employee in question was a reasonable man. So the onus of proof will soon shift in a case such as that.

In my judgment the answers which would probably have been given by Mr. Burden and Mr. Cross, had they been questioned, are unlikely to have satisfied a reasonable banker that the Karak cheque represented money about to be applied for the purposes of the company. A few simple questions would merely have served to confirm the reasonable banker's suspicion that the money was not being so applied. On a balance of probabilities I am of the opinion that a reasonable banker of reasonable intelligence, undistracted by any anxiety for his own personal position, would have soon learned that the function of the Barclays draft was to cover payment for shares, and that the function of the Karak cheque was to cover payment for the Barclays draft. And so the fraud would have been exposed. The inevitable result would have been that a reasonable banker performing his contractual duty of care towards Karak, would have declined to write out the Karak cheque in favour of Barclays Bank and to tender it for the signatures of Mr. Burden and Mr. Cross, or to debit such a cheque to the account of Karak.

In my judgment the case against Barclays Bank in negligence is proved. The quantum of damages is the loss suffered by Karak. This may not be the full amount of the Karak cheque in so far as those who have suffered are confined to creditors and non-assenting shareholders. This may have to be the subject matter of further argument.

My decision on the claim in contract is sufficient to dispose of the case so far as this court is concerned. I have, however, heard a full argument on the question of constructive trusteeship, and I must deal with that topic as well.

I must first touch on the plaintiff's claim against the trustee in bankruptcy of Mr. Burden and Mr. Cross. These claims have not been actively fought. I deal with them at this stage because the quality of the conduct of Mr. Burden and Mr. Cross is decisive of the question whether the claim against Barclays Bank in constructive trusteeship is capable of succeeding; that claim is based on the existence of their fraud and dishonesty. The plaintiff pleads that Mr. Burden and Mr. Cross procured that the amount of the Karak cheque should be misapplied in bad faith in providing out of Karak's money the purchase price of 40,804 shares and the expenses incidental to that purchase. In my judgment, on the evidence I have heard, and quite apart from admissions by Mr. Burden and Mr. Cross to which will refer later, it is plain beyond the possibility of argument to the contrary that Mr. Burden, in deliberate and conscious fraud, procured that £99,504 10s. 6d. of Karak's money, that is to say, the amount of the Karak cheque, should be misapplied in financing the purchase of the Karak shares so as to be lost to Karak, and that Mr. Cross, either knowingly or recklessly, was implicated in that fraudulent and dishonest design. I did not understand Mr. Caplan, on behalf of Barclays Bank, to seek to argue otherwise.

It is convenient to make an initial distinction between (i) a person who is a constructive trustee because (though not nominated as a trustee) he has received trust property with actual or constructive notice that it is trust property transferred in breach of trust, or because (not being a bona fide purchaser for value without notice) he acquires notice subsequent to such receipt and then deals with the property in a manner inconsistent with the trust, and (ii) a person who has not received and become chargeable with trust property in that manner but whom equity nevertheless fixes with liability as a constructive trustee on account of assistance which he has

rendered to a breach of trust. This is not intended to be an exhaustive definition of constructive trusteeship, but to distinguish two categories thereof. There is included in the second category of constructive trusteeship the duly appointed agent of the trustees who is in receipt of trust property solely by virtue of the existence of such agency but who, by assisting in a breach of trust at the direction of trustees, is fixed with liability as a constructive trustee. The two categories are conveniently labelled in Snell's Principles of Equity, 26th ed. (1966), pp. 202 and 203, with the catchphrases "knowing receipt or dealing" and "knowing assistance," which seem to me an admirable shorthand description of their different natures.

The question of law which arises is, in what circumstances will a Court of Equity treat the second category of person as a trustee in order to provide an equitable remedy against that person on account of conduct which a Court of Equity considers unconscionable'?

It is common ground that directors of a company, though not trustees in the strictest sense of that expression, are to be considered and treated as trustees of money which comes to their hands or is under their control. The fact that they are to be considered and treated as trustees bears upon the question whether the imposition of the equitable remedy of constructive trusteeship is available against those who have dealings with them. It is also common ground that a bank is not a trustee for its customer of the amount to his credit in his account. In the result, Mr. Burden and Mr. Cross are to be considered and treated as trustees in relation to the sum of money comprised in the Chartered cheque and paid into Karak's account with Barclays Bank, and Barclays Bank is to be considered and treated as the agent of such trustees.

The conclusion of law reached by Ungoed-Thomas J. in the Selangor case [1968] 1 W.L.R. 1555, in relation to the second category of constructive trustees. was as follows: (1) Strangers who act as the agents of trustees are liable as constructive trustees if they "assist with knowledge in a dishonest and fraudulent design on the part of the trustees": see p. 1580 referring to Barnes v. Addy (1874) 9 Ch.App. 244, 252.

(2) "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": [1968] 1 W.L.R. 1555, 1590.

(3) What is "a dishonest and fraudulent design" is to be judged "according to the plain principles of a Court of Equity": see p. 1582.

"The governing consideration is to give effect to equitable rights, where is it 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": see pp. 1582 and 1583.

These conclusions were reached after consideration of a large number of authorities, ranging in time from the decision of Leach V.-C. in Keane v. Robarts (1819) 4 Madd. 332 down to the decision of the Privy Council in Bank of New South Wales v. Goulburn Valley Butter Co. Proprietary Ltd. [1902] A.C. 543.

The formulation in the Selangor case of the law applicable to the second category of constructive trusteeship is based on the judgment of Lord Selborne L.C. in Barnes v. Addy (1874) 9 Ch.App. 244, with which James and Mellish L.JJ. concurred. This was a case in which beneficiaries unsuccessfully sued solicitors who had been associated with the fraud! of the trustee; it was found that the solicitors had no knowledge or suspicion of the fraud and that there was nothing to lead them to suppose that a fraud was intended. The test of liability - which it may be convenient to call the Barnes v. Addy formula - in the words of Lord Selborne L.C., was: "they assist with knowledge in a dishonest and fraudulent design on the part of the trustees" at p. 252. This was paraphrased with approval by Lord Esher M.R. in Soar v. Ashwell [1893] 2 Q.B. 390, 395 (a first category case) as "he has knowingly assisted a nominated trustee in a fraudulent and dishonest disposition of the trust property." The point on which the authorities were obscure, until the Selangor case, was what degree of "knowledge" was required to satisfy that test. A person may have knowledge of an existing fact because in a subjective sense he is actually aware of that fact. In an appropriate context a court of law may attribute knowledge of an existing fact to that person because in a subjective sense he has knowledge of circumstances which would lead a postulated man to the conclusion that the fact exists or which would put a postulated man upon inquiry as to whether the fact exists. The claim against the District Bank was that it knew, or as a reasonable banker ought to have known, that Selangor's money was being applied for the purpose of giving financial assistance in connection with the purchase by Cradock of Selangor stock. It was not pleaded that the District Bank ought to have made inquiries. The decision, which went against the District Bank on constructive trusteeship as it did in negligence, was based on proof of facts which would have brought home the knowledge of such misapplication to the mind of a reasonable banker.

Mr. Caplan attacked the statement of law in the Selangor case [1968] 1 W.L.R. 1555, principally on two grounds, (1) that it was inconsistent with the ratio decidendi of, and was impliedly overruled by the decision of, the Court of Appeal in Carl Zeiss Stiftung v. Herbert Smith & Co. (No. 2) [1969] 2 Ch. 276 and (2) because important and decisive cases were not brought to the attention of Ungoed-Thomas J. It will be observed that, according to the Selangor case, an objective test is to be applied both in assessing the defendant's "knowledge" and in assessing the character of the "design." Mr. Caplan, in an argument of great penetration, accepted the objective test in relation to the "design" but not in relation to "knowledge." There is no such thing, he submitted, as constructive trusteeship of the category with which this case is concerned, based on the defendant's constructive knowledge of facts as distinct from his actual knowledge of facts or knowledge which has to be imputed to him because he has closed his eyes with the deliberate intention of avoiding actual knowledge; Mr. Caplan bracketed actual knowledge with imputed knowledge in that special sense. He said that a defendant is not to be fixed with liability as a constructive trustee of the second category unless he has been guilty of a lack of probity, which he likened to moral obliquity or dishonesty or bad faith or fraud. The test is subjective to this extent, that the court must first assess the acts, the knowledge and the intention of the defendant, and by knowledge is meant actual or imputed knowledge but not constructive knowledge. These

subjective matters are then to be submitted to the objective test of the accepted moral standard of the community and adjudged accordingly. In other words, the defendant is not liable as a constructive trustee if he had no actual or imputed knowledge of the design and did not intend to participate in it; on the other hand, he cannot successfully defend a claim by saying that he knew of the design but did not regard it as dishonest. Unless, it is submitted, a subjective test is applied to the acts, knowledge and intention of the defendant, it is not possible to charge him with that lack of probity which is the foundation of a stranger's liability as a constructive trustee. It is important to an understanding of this argument to appreciate the special sense given to the expression "imputed knowledge," which in Mr. Caplan's formulation is brought about by the deliberate shutting of eyes so as to avoid actual knowledge.

The Carl Zeiss case [1969] 2 Ch. 276, was a dispute between the Carl Zeiss company of Jena ("the East German foundation") and the Carl Zeiss company of Wurttemberg ("the West German foundation"). In the main action the East German foundation claimed (inter alia) that the assets of the West German foundation, including its property in England, were held by that foundation in trust for the East German foundation. The East German foundation later issued a writ against the current and former solicitors of the West German foundation claiming that when they were put in funds by their client, they had notice, via the East German foundation's pleadings in the main action and from other material, that such money belonged to the East German foundation, and it was said that the solicitors were accountable accordingly. The matter came on for trial as a preliminary issue.

The East German foundation based its claim on a submission that a man who receives trust property which he knows or ought to know is trust property and applies that property in a manner which he knows or ought to know is inconsistent with the terms of the trust, is accountable at the suit of the beneficiaries under that trust. The submission failed, on the ground that the solicitors only had knowledge of a disputed claim that the assets of the West German foundation were trust property, they did not have knowledge that such assets were in fact trust property. Danckwerts L.J. expressed his conclusion as follows, at p. 293:

". . . claims are not the same thing as facts. . .. What we have to deal with is the state of the defendant solicitors' knowledge (actual or imputed) at the date when they received payments of their costs and disbursements. At that date they cannot have had more than knowledge of the claims above mentioned. It was not possible for them to know whether they were well-founded or not. . .. Consequently, it seems to me that the plaintiffs' claim against the defendant solicitors must fail on the requisite condition of knowledge or notice.

Sachs L.J. said, at p. 296:

"Firstly, and to my mind decisively, whatever be the nature of the knowledge or notice required, cognisance of what has been termed 'a doubtful equity' is not enough."

Later, after discussing the relevance of constructive notice in the sense of section 199 of the Law of Property Act 1925, he added, at p. 298:

"As at present advised, I am inclined to the view that a further element has to be proved, at any rate in such a case as the present

one. That element is one of dishonesty or of consciously acting improperly, as opposed to an innocent failure to make what a court may later decide to have been proper inquiry. That would entail both actual knowledge of the trust's existence and actual knowledge that what is being done is improperly in breach of that trust - though, of course, in both cases a person wilfully shutting his eyes to the obvious is in no different position than if he had kept them open."

Then, after refering to the Selangor case and certain other authorities, he added, at p. 299:

"Out of deference to the conclusions reached by Ungoed-Thomas J. and to the fact that the Selangor case [1968] 1 W.L.R. 1555 is under appeal, it now seems best, however, for me not to state a final view in this matter, especially when the instant case concerns agents who may thus be in a different position to other strangers."

It is plain that he was not expressing any decided opinion on this point. Lastly, I quote from the judgment of Edmund Davies L.J., at p. 301:

"The concept of 'want of probity' appears to provide a useful touchstone in considering circumstances said to give rise to constructive trusts, and I have not found it misleading when applying it to the many authorities cited to this court. It is because of such a concept that evidence as to 'good faith,' 'knowledge' and 'notice' plays so important a part in the reported decisions. It is true that not every situation where probity is lacking gives rise to a constructive trust. Nevertheless, the authorities appear to show that nothing short of it will do."

Then, at p. 302, after having cited two cases, he said that they were

"but two illustrations among many to be found in the reports of that want of probity which, to my way of thinking, is the hall-mark of constructive trusts, however created."

The Selangor case was certainly not expressly overruled by the Carl Zeiss case [1969] 2 Ch. 276. It was not even referred to in the judgments of Danckwerts and Edmund Davies L.JJ. Nor do I think that it was overruled by necessary implication. Mr. Caplan submitted that Danckwerts L.J. used the expression "imputed knowledge" in his own sense of wilful shutting of eyes as distinct from knowledge which is to be attributed to the defendant because a reasonable person would have drawn the inference or would have been put upon inquiry. I do not read his words in that sense, nor does it seem consistent with his later reference, at p. 293, to "the requisite condition of knowledge or notice." I agree with Mr. Caplan that the judgment of Edmund Davies L.J. might be read as supporting his proposition. But in the end the ratio decidendi of that judgment appears to be the same as that of the other judgments, at p. 304:

" . . . mere notice of a claim asserted by a third party is insufficient to render the agent guilty of a wrongful act in dealing with property derived from his principal in accordance with the latter's instructions unless the agent knows that the third party's claim is well-founded and that the principal accordingly had no authority to give such instructions."

Accordingly I reject the submission that the Selangor judgment [1968]

1 W.L.R. 1555 on constructive trusteeship is inconsistent with the ratio decidendi of the Carl Zeiss case.

In support of his proposition that lack of probity is an essential ingredient of the second category of constructive trusteeship, Mr. Caplan also referred me to five pre-Keane v. Robarts (1819) 4 Madd. 332 cases. These were Nugent v. Gifford (1738) 1 Atk. 463, Mead v. Lord Orrery (1745) 3 Atk. 235, Scott v. Tyler (1788) 2 Dick. 712, Hill v. Simpson (1802) 7 Ves 152 and M'Leod v. Drummond (1805) 14 Ves. 353; (1810) 17 Ves. 152. It may well be that these cases are consistent with the proposition that fraud or what is tantamount to fraud must be found before an agent who has not intermeddled is rendered accountable as a constructive trustee. They are not, in my view, decisive against the relevance of an objective test, that is to say, whether the circumstances would have indicated a dishonest and fraudulent design to a reasonable man or have put him upon inquiry. It must, I think, be remembered that equitable doctrines have developed over the passage of time and it would not be right to assume that principles expressed two centuries ago were being fully and exhaustively enunciated for all ages to come.

Mr. Caplan took me with great care and patience through most of the authorities cited by Ungoed Thomas J. in the Selangor case [1968] 1 W.L.R. 1555 on constructive trusteeship, in order to convince me that they were consistent with his proposition of law. I do not think that any useful purpose would be served by my subjecting these authorities to a critical analysis of my own. That, in my view, is an exercise to be performed elsewhere if it is to be performed at all. I shall, however, refer to one of Mr. Caplan's new authorities in detail, Williams v. Williams (1881) 17 Ch.D. 437. This was a case which was referred to by all the lords justices in the Carl Zeiss case, but was not read to Ungoed-Thomas J. in the Selangor case. It is described on p. 298 of the report of the Carl Zeiss case as "a case cited in the Selangor judgment "but this is clearly a misprint for" a case not cited in the Selangor judgment." It was much stressed in argument on behalf of Barclays Bank. The facts in Williams v. Williams, 17 Ch.D. 437 were these. Edward Williams married in 1863 in India. He made a marriage settlement, which was executed by him and his wife. By the settlement he conveyed his undivided share in certain land to trustees in trust for himself for life, with remainder to his wife for life, with remainder to the children of the marriage. The settlement was handed over to the wife. The parties returned to England. The husband had occasion to consult a solicitor, Mr. Cheese, about his will. Mr. Cheese asked the husband if there were a marriage settlement, and the husband assured him there was none. Something, the husband said, had been prepared but it arrived too late for execution. In 1868 the land was partitioned, and some 700 acres were conveyed to the husband. In 1869 the husband sold part of the land. Mr. Cheese acted as his solicitor. The purchase-money was about £8,000 and was used to pay the husband's debts. Six years later the husband asked his wife for the settlement. He gave her some excuse and she handed it to him. The settlement was never seen again. In 1877 the husband made another will. He appointed the wife his sole executrix and gave her a life interest, with remainder to the children. In 1879 he died. The wife, as his executrix, sold the remainder of the land in lots, Mr. Cheese acting as her solicitor. The land realised about £3,500. In 1880, in the course of dealing with a requisition which had been raised by a purchaser, Mr. Wood, a clerk in Mr. Cheese's office, wrote to the wife and inquired if there was a settlement. The wife replied that there was, and enclosed a note made by the solicitors

who had prepared it. Mr. Wood reported this to Mr. Cheese, but did not show him the wife's letter or the note enclosed with it. Mr. Cheese answered that (see p. 439) "it was all nonsense, that she was referring to a promise only, and that there had been no settlement." Later, a copy or draft of the settlement was found. Mr. Cheese had used half the proceeds of sale to pay the husband's debts, including some money due to himself. The remainder of the money remained intact. The children of the marriage sued the wife, the trustees of the marriage settlement and Mr. Cheese. The claim against Mr. Cheese was (see p. 440) that he

"might be declared liable to account for and make good the purchase-money arising from the sale of the hereditaments comprised in the indenture of settlement received and disposed of by him with notice of the trusts of the said indenture."

Two matters were conceded. First, it was admitted that Mr. Cheese had no wrong motive in anything which he did. Secondly, it was admitted that notice to Mr. Wood of the wife's claim that a settlement existed would not of itself be notice to Mr. Cheese. It was held that Mr. Cheese did not have such notice of the settlement as to be treated constructively as a trustee, so as to be liable for money which had passed through his hands.

Mr. Caplan argued that this case was an authority, not cited to Ungoed-Thomas J. in the Selangor case [1968] 1 W.L.R. 1555, that an agent or other stranger to the trust is not liable as constructive trustee unless he has actual knowledge of the facts or has shut his eyes against acquiring knowledge of the truth. He relied particularly upon a passage in Williams v. Williams, 17 Ch.D. 437, 445:

"I am not now dealing with the question whether Mr. Cheese was negligent in his duty as solicitor. That I take to be a perfectly separate and distinct question. Whether he did his duty as solicitor to Mrs. Williams, or was negligent in that duty, is, I think, a very different question from the question whether he had such notice as to make his concurring as her solicitor in the sales of the property and allowing the money to pass through his hands sufficient to affect him personally so as to make him liable to repay the money. The case, again, would have been different if I had been satisfied that Mr. Cheese had wilfully shut his eyes - if there had been any motive whatever fairly suggested for supposing that Mr. Cheese was desirous of thinking that there was no settlement. If it were proved to me upon the evidence that he had wilfully shut his eyes, and was determined not to inquire, then the case would have been very different."

In my opinion, Williams v. Williams, 17 Ch.D. 437 has no relevance at all to the case before me. In the case with which I am dealing, the plaintiff is relying exclusively on the Barnes v. Addy (1874) 9 Ch.App. 244 formula as interpreted in the Selangor case. It is fundamental to that species of constructive trusteeship that the stranger who is sued has knowingly assisted a trustee in a fraudulent and dishonest disposition of the trust property. The wife in Williams v. Williams was not a trustee of the settlement, and even if she were to be treated as such by virtue of some extension of the Barnes v. Addy principle, she certainly was not engaged in a dishonest and fraudulent design or in a dishonest and fraudulent disposition of the trust property. Furthermore, it is to my mind reasonably clear that the type of notice, the existence of which Kay J. was concerned to decide about, was not confined to actual notice, but extended to constructive notice to be

ascertained by reference to an objective test. After considering the husband's assertion of no settlement, and the long course of dealing with the property on the basis of no settlement. Kay J. said. at p. 445:

"Mr. Cheese, therefore, had a right, I think, under these circumstances, to be very strongly of the opinion that there was no settlement at all. . . . If he had, as I believe he had, a bona fide conviction that there was no settlement whatever, . . . - if that was the impression on his mind - I think it was reasonable under the circumstances that that impression should continue, and that he should give to Mr. Wood the answer he gave, and I cannot hold that he is affected with such notice as to make him personally liable for the purchase-moneys which passed through his hands as solicitor."

Whatever Williams v. Williams may be authority for, it is certainly not authority that, in the context of a claim based on the Barnes v. Addy formula, knowledge means actual knowledge as distinct from constructive knowledge.

In my view, Williams v. Williams (1881) 17 Ch.D. 437, on a proper analysis, was a case concerned with the first rather than the second category of constructive trusteeship. The claim against Mr. Cheese was that trust money was wrongfully in his hands by the direction of one who had no title thereto and that he proceeded to dispose of it in defiance of the beneficiaries' title of which he had been given due notice. That is not the type of case with which the second category of constructive trusteeship is concerned. The same observation applies to the Carl Zeiss case [1969] 2 Ch. 276.

I take this opportunity to record that I asked Mr. Edwards-Jones whether he based his claim to any extent on the first category of constructive trusteeship, having regard to the fact that the Karak cheque was made payable to Barclays Bank and was indorsed by Barclays Bank and credited to Minories, so that in that sense the trust money passed through the hands of Barclays Bank. Mr. Edwards-Jones told me that the claim against Barclays Bank in the context of constructive trusteeship was based exclusively on the second category of constructive trusteeship, that is to say, on the Barnes v. Addy formula, where it is fundamental to find the existence of a dishonest and fraudulent design on the part of the trustees.

I respectfully agree with the explanation of the Barnes v. Addy (1874) 9 Ch.App. 244 formula which I find in the Selangor [1968] 1 W.L.R. 1555 judgment. If, as seems to be established by the cases, an objective test of "knowledge" is rightly applied in the context of the first category of constructive trusteeship (see, for example, Reckitt v. Barnett, Pembroke and Slater Ltd. [1929] A.C. 176 and Nelson v. Larholt [1948] 1 K.B. 339) I do not myself see any particular logic in denying it a similar role in the context of the second category of constructive trusteeship. To borrow the words of Lord Cranworth L.C., spoken admittedly in a different context, "Constructive notice is as good as any notice, if it does amount to notice" (Cookson v. Lee (1853) 23 L.J. Ch. 473, 478).

Applying the Barnes v. Addy formula, as explained in the Selangor case, I reach the conclusion, for reasons already indicated in dealing with the claim in negligence, that a reasonable banker would have been put upon inquiry as to the propriety of the Karak cheque and that such inquiry would in all probability have revealed the impropriety. So I find the claim against Barclays Bank made good in equity as in contract. I do not

consider, because it is unnecessary, whether the circumstances known to Mr. Cooper or Mr. Hockley would have brought the dishonest and fraudulent design home to the mind of a reasonable man, as distinct from putting him on inquiry.

I turn to the relief sought against the trustee in bankruptcy of Mr. Burden and against Mr. Cross. Replacement is sought not only of the amount of the Karak cheque but also of the sum of £1,750 paid to Stanley Stewart Ltd. by cheque dated February 17, 1959, and cleared on February 19. Mr. Burden admitted in a statement made before an examiner on July 5, 1961, that the £99,504 10s. 6d. was transferred to Minories, as he put it, to enable the assenting shareholders to be paid, and that the £1,750 represented a fee paid by Karak for the introduction to Contanglo. No other explanation has been forthcoming from Mr. Cross, nor is there any evidence that those moneys were used for Karak's benefit. In these circumstances, Karak has a claim against both parties for the replacement of such sums with interest. I will hear the plaintiff's counsel on the exact terms of the order which ought to be made against the trustee in bankruptcy and against Mr. Cross.

[Consideration of the terms of the order to be drawn up was adjourned until a later date]

Solicitors: Solicitor to the Department of Trade and Industry; Durrant Cooper & Hambling.

T. C. C. B.