K & S CORPORATION LTD & ANOR v SPORTINGBET AUSTRALIA PTY LTD No. SCCIV-02-614 [2003] SASC 96

K & S CORPORATION LTD & ANOR v SPORTINGBET AUSTRALIA PTY LTD No. SCCIV-02-614 [2003] SASC 96 - SASC 2003 case summary — Zoe

[44]

31 Sportingbet relied on the decision of the House of Lords in Thomson v Clydesdale Bank Ltd [1893] UKLawRpAC 30; [1893] AC 282. In that case, the appellants were trustees who had instructed a broker to sell shares which they held on trust. The broker was instructed to deposit the proceeds in certain colonial banks in the names of the appellants. The broker sold the shares but deposited the proceeds of sale in an overdrawn account in his name with the respondent. The appellants sought to recover the proceeds from the respondent. They were unsuccessful. Sportingbet relied in particular on certain observations of Lord Watson (at 289). It seems to me that the case is distinguishable on the facts from the present case. An important matter in Thomson v Clydesdale Bank Ltd was the fact that there was nothing to put the Bank on notice that the broker might be misappropriating the monies placed in his account. Even if the Bank knew that the monies were the proceeds of the sale of shares owned by the broker's clients, that did not put the Bank on notice that the broker was misapplying the monies. It was not uncommon for a broker to pay his client in advance, and then to recoup his outgoing upon the sale of the shares. Nor was it uncommon for a broker to deposit the proceeds of the sale of shares in his own account and retain the proceeds in that account for an interval of more or less time for the purpose of reinvestment or otherwise. In other words, there were facts which put the Bank on notice that the monies paid into the broker's account were monies resulting from the sale of shares owned by the broker's clients, but there was nothing to put the Bank on notice that by paying the monies into his account, the broker was misapplying the funds. The position in this case is different. If there were facts putting Sportingbet on notice that the monies were not Telford's monies, then on the facts in this case it must follow that there were facts putting Sportingbet on notice that the monies had been or were being misappropriated.

[123]

94 What did NOBS know about Telford after the inquiries it made in June 2001? It may already have had information as to Telford's telephone numbers and a post office box number in Mount Gambier, and the details of a bank account Telford had with the ANZ Bank but if not, it ascertained that information in June 2001. Mr Crowe fixed a credit limit of $250,000, and Telford was immediately classified as a very important client. I find that NOBS ascertained that Telford had been laying large bets with Mr Seal, and that he was settling his debts with Mr Seal. I find that through Mr Humphries, NOBS ascertained that Telford was from the Mount Gambier area and that he was a "high flyer". I find that NOBS ascertained that Telford had previously laid bets with NOBS in July 1999. I find that in June 2001 NOBS had very few requirements in terms of the information a new client had to provide to it. I find that inquiries were made about Telford by Mr Crowe, Mr Tripp and, possibly, Mr Cummins. As none of these men were called as witnesses there is no direct evidence of the full extent of the inquiries which they made. I think that I can infer that Mr Crowe made some inquiries about Telford in terms of who he was and where he came from. I am prepared to infer that Mr Crowe would have discovered that Telford lived and worked in the Mount Gambier area and that he worked for a large business in the area. I am prepared to infer that Mr Crowe ascertained the name of Telford's employer as "K & S". Mr Waller admitted in cross-examination that it was his expectation that Mr Crowe would have ascertained this fact. I think that that is the proper inference to draw bearing in mind that Mr Crowe set out to make inquiries, that it is a natural inquiry to make in the circumstances of NOBS seeking to recruit a very large client and that representatives from NOBS were able to speak to a bookmaker in South Australia (Mr Humphries) who obviously knew something about Telford. I can more confidently draw the inference in view of Mr Crowe's absence from the witness box. For similar reasons, I am prepared to infer that Mr Crowe ascertained that Telford was employed as a financial controller.

[125]

96 It seems that Mrs Burkett identified the payment of $1.4 million on 24 August 2001 as relating to Telford and that Ms Hicks identified the later payments (or most of them) including the payment of $3 million on 15 April 2002. Neither had a clear recollection as to how they identified the payments as payments to be credited to Telford's account. One method generally used was a diary in which they recorded that the payment of a certain sum was expected from a particular client. That diary was tendered in evidence. There are no notes in the diary relevant to the payments on 24 August 2001, 18 December 2001 and 15 April 2002. There are notes about the time of the payments on 25 September 2001 and 4 October 2001 but they refer to different amounts than the amounts Telford ultimately arranged to be paid in. There is a note relevant to the amount paid in on 17 January 2002. On the evidence, I think the most likely source of information for Mrs Burkett and Ms Hicks is Mr Crowe. It is likely that Mr Crowe was advised by Telford that a payment was about to be made or had been made and that he in turn passed this information on to Mrs Burkett or Ms Hicks either by electronic mail message or telephone. The electronic mail messages to which I will refer in more detail later were probably the source of information in relation to the payments on 24 August 2001, 25 September 2001, 18 December 2001 and 17 January 2002. For the other payments Mrs Burkett or Ms Hicks were probably advised by Mr Crowe over the telephone that a payment of a particular amount was due from Telford. In other words, I think that Mrs Burkett and Ms Hicks identified the payments from Telford by reference to an understanding that Telford was to pay in a certain amount at a particular time rather than by reference to the fact that the bank statements read "K & S Group Creditor Payment". I think Mrs Burkett and Ms Hicks noticed the reference to the description of the transaction, but it is clear from their evidence that they paid no particular attention to it.

[200]

167 The second answer to Sportingbet's two submissions is that they fail on the facts. I do not think the plaintiffs acted imprudently. Sportingbet submits that viewed together the following acts constitute imprudence. First, there was no limit on the amount Telford could arrange to be transferred electronically and there was no requirement that he obtain approval from any person in the plaintiffs' organization superior to him or that he report to such a person. It is true that the sums of money are large, but Telford held a senior position in the organization and to all intents and purposes the money was being paid into an investment account at another bank. Secondly, Sportingbet submits that there is no evidence of the person keying in the transaction or from the second signatory to the effect that they asked any questions or carried out any inquiries. It does seem to be a fault in the system that the only person in the company who could have "got away" with the misappropriation was Telford as the chief financial controller. Nevertheless, I accept Mr Allen's evidence as to what he was told by the accounting staff and I do not think the plaintiffs' conduct rises to the level of imprudence. Thirdly, Sportingbet submits that there was no check carried out by the plaintiffs either by their own officers or by external officers. No one took the obvious step of calling for bank statements. Such a request would have disclosed the fraud because of course bank statements did not exist. Even putting hindsight to one side, criticisms can be made of the plaintiffs' system. Presumably a proper annual audit would have revealed the misappropriations and there is force in the submission that there should have been a review or check by reference to bank statements within a shorter period than 12 months. Perhaps that was not done because Telford was the person responsible for implementing this type of review or check. Whatever criticisms can be levelled at the plaintiffs' system it does not to my mind amount to imprudence. Fourthly, Sportingbet submits that the plaintiffs acted in breach of their own policy in that Telford both requested the transfer and was one of the persons who authorised it. I do not think there is anything in this point. It does not indicate imprudence and in any event the strong inference is that a different first signatory would have followed Telford's instructions in the same way as the second signatory in fact did. Fifthly, Sportingbet submits that in fact it was another employee (Mr Richards) who authorised the transfer of the $3,000,000. It is not clear to me what point Sportingbet is making. It seems that there was a problem with the transfer of $3,000,000 because the plaintiffs had exceeded their credit limit and that a Mr Richards telephoned the ANZ Bank and authorised the transaction. Mr Richards was the chief accountant in the group. Telford was his superior. I do not think the point goes anywhere because I accept that Telford was directing the staff below him and in fact had lied to them.

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Judgment (212 paragraphs)

K & S CORPORATION LTD & ANOR v SPORTINGBET AUSTRALIA PTY LTD No. SCCIV-02-614 [2003] SASC 96 (28 March 2003)

Parties

Cases Cited (15)