National Australia Bank Ltd v KDS Construction Services Pty Ltd

The respondent company maintained three current accounts with the appellant bank at its Mt Gravatt branch. In August 1980 Mr. Appleton, who was a director of the respondent, and his wife guaranteed the respondent's accounts with the appellant up to a limit of $30,000. At the same time Mr. Horne, who was also a director of the respondent, and his wife guaranteed the accounts up to a limit of $20,000. On the basis of these guarantees the appellant agreed to an overdraft limit of $50,000 on the accounts.

On 15 September 1981 a creditor presented a petition seeking the winding up of the respondent. On 7 October 1981 the Supreme Court of Queensland made a winding up order, appointing Mr. R. A. Duus as official liquidator.

By a summons dated 17 February 1984 Mr. Duus sought a declaration that a sum of $102,030.33 paid by the respondent to the appellant on 3 September 1981 had the effect of giving the appellant a preference and that the payment was void against the liquidator. By way of amendment the liquidator sought a declaration to the effect that the payment of a sum of $40,000 by the respondent to the Manager's Suspense Account on or about 4 September 1981 had the effect of giving the appellant a preference and that it was void; or, alternatively, a declaration that a sum of $40,000 transferred from the funds of the respondent to the Manager's Suspense Account on or about 4 September 1981 remained the property of the respondent and that any disposition of that sum or any part of that sum subsequent to the filing of the petition on 15 September 1981 was void against the liquidator.

Section 122(1) of the Bankruptcy Act 1966 Cth ("the Act"), which at that time was made applicable to the winding up of companies by s. 293(1) of the Companies Act 1961 Q., provides that a payment made by a person who is unable to pay his debts as they become due from his own money in favour of a creditor having the effect of giving that creditor a preference, priority or advantage over other creditors, being a payment made within six months before the presentation of a petition on which the debtor becomes a bankrupt or after the presentation of a petition in which the debtor becomes a bankrupt and before he becomes a bankrupt is void against the trustee in bankruptcy. A payment which falls within s. 122(1) is void as against the liquidator, unless the creditor can show that it was a payee in good faith for valuable consideration in the ordinary course of business: s. 122(2)(a).

The relief claimed by the liquidator related to certain transactions on the respondent's account no. 148-2362 (the no. 1 account). On 3 September 1981 a deposit was made to that account in the amount of $102,030.33. This deposit consisted of a cheque for $101,810.33 drawn by the Redcliffe City Council and a cheque for $220 drawn by Telecom Australia. At the time of the deposit the account was overdrawn to the extent of $61,998.30. Following further debits on the same day the account was then in credit in the sum of $32,703.19. On 4 September a cheque for $40,000 was drawn on the account in favour of Mr. and Mrs. Appleton and the proceeds were then placed in the Manager's Suspense Account. On 16 October 1981 that sum was withdrawn from that account and credited to the account of Mr. and Mrs. Appleton with the appellant. On the same day the sum of $39,804.25 was withdrawn from that account and applied by crediting the sum of $8,443.26 to the respondent's no. 1 account, the sum of $13,128.18 to the respondent's no. 2 account and the sum of $18,232.81 to the respondent's no. 3 account.

The primary judge (Kelly A.C.J.) accepted the evidence of Mr. Calder, the manager of the appellant's Mt Gravatt branch at the time, that the cheques deposited on 3 September were received in the normal course of business over the counter and cleared in the normal manner. After those cheques would have passed through the clearing house in accordance with the appellant's practice, Mr. Calder spoke to someone at the Commonwealth Bank, the paying bank, about the cheque for $101,810.33 drawn by the Redcliffe City Council and was informed that it had been honoured. In effect that meant that the provisional inter-bank credit, which would already have been raised in the appellant's favour at the clearing house, would not be reversed. Mr. Calder considered that this conversation took place on 4 September, though he conceded that it could have been on 7 September. According to him, the normal practice was that the credit entry for the cheque in the customer's account was treated as provisional until the time for dishonour passed. However, the appellant treated the proceeds of the cheque as being available, and accordingly as having discharged the amount of the then overdraft, on 4 September. In answer to an interrogatory the appellant stated that the proceeds of the cheque for $101,810.33 were available to the respondent on 4 September.

It seems that after this cheque had been deposited on 3 September, Mr. Appleton had a conversation with Mr. Calder at about 1 p.m. and told Mr. Calder that he was concerned either about the respondent's account or about his funds in the respondent and was thinking about having a receiver appointed. Mr. Appleton asked Mr. Calder to refer to him before paying any cheques. The next day Mr. Appleton again went to the bank and told Mr. Calder that he wanted to withdraw $40,000 from the respondent's account "so the other fellow [presumably Mr. Horne] couldn't draw money until some time as he got some more money into the account". Forty thousand dollars was approximately the credit balance of the no. 1 account after the deposit of $102,030.33 without having regard to other debts totalling some $7,300 which had been posted to the account after the deposit had been credited. Mr. Calder said Mr. Appleton chose $40,000 as the amount he would withdraw, each of them knowing that this would overdraw the account. Mr. Appleton said he would be responsible if the account was then overdrawn. Kelly A.C.J. concluded that the decision to place the $40,000 in the Manager's Suspense Account was made by Mr. Calder and Mr. Appleton jointly.

The primary judge held that payment of $102,030.33 was made to the appellant upon deposit of the cheques with it on 3 September 1981. His Honour also held that at this time the respondent was unable to pay its debts as they became due from its own moneys and that the effect of the payment was to give the appellant a preference, the payment having been made within six months of the presentation of the petition. However, his Honour concluded that the payment was made for valuable consideration and in the ordinary course of business. His Honour also held that the appellant was a payee in good faith: see s. 122(2)(a) of the Act. The primary judge accordingly held that the payment of $102,030.33 was not void as against the liquidator. He also held that the sum of $40,000 was, at the time it was paid into the Manager's Suspense Account, the property of Mr. and Mrs. Appleton. As it was not a payment by the respondent to the appellant, it did not fall within s. 122(1). The summons was dismissed with costs, the liquidator to be recouped out of the assets of the respondent.

The Full Court of the Supreme Court of Queensland (Andrews C.J., Thomas and Ryan JJ.) allowed the appeal by the respondent, set aside the order of the primary judge and declared that the sum of $61,998.30 paid by the respondent to the appellant and appropriated to its own use on or about 4 September 1981 had the effect of giving the appellant a preference. Their Honours declared that the payment was void as against the liquidator and ordered the appellant to pay the amount of $61,988.30 to the respondent. The appellant was ordered to pay the respondent's costs of the appeal and of the proceedings at first instance.

The Full Court did not agree with the primary judge's view that payment was made to the appellant when the cheques totalling $102,030.33 were deposited to the credit of the no. 1 account. The Full Court held that, because the appellant was merely the respondent's agent for collection of the cheques, payment was made to the appellant when the proceeds of the cheque for $101,810.33 were made available to the respondent on 4 September. Their Honours accepted that the act of depositing the cheque on 3 September was done in the ordinary course of business but concluded that, in the light of the arrangement made between Mr. Calder and Mr. Appleton in relation to the proceeds of the cheque, the appellant had not discharged the onus of showing that the payment was made in the ordinary course of business. That arrangement was specific and not adopted as part of the ordinary course of business between the respondent and the appellant but to meet the particular wishes of Mr. Appleton. Their Honours' reasons for holding that the payment was made otherwise than in the ordinary course of the respondent's business were expressed by Ryan J. (with whom Andrews C.J. and Thomas J. agreed) in these terms:

The bank received payment from the company in circumstances where it was aware that there was a serious difference between the directors of the company, who were also guarantors of the company's account, and it was at least put upon notice that Mr. Appleton had a problem with the company or his funds in it. It was a party to a transaction by which a sum collected was paid partly to it in liquidation of the company's overdraft, and partly was paid to Mr. and Mrs. Appleton personally it [was] impossible to say that the transaction was part of the undistinguished common flow of business done.

The Full Court concluded that the payment of $102,030.33 resulted in a benefit to the appellant of only the amount of the respondent's indebtedness on the no. 1 account, namely $61,998.30. The balance of the deposit, $40,032.03, resulted in a credit in favour of the respondent. The amount of the preference was accordingly limited to $61,998.30. Although it was unnecessary for the Court to deal with the respondent's alternative claim, their Honours concluded it must fail on the ground that the payment of $40,000 to the Manager's Suspense Account was a payment by the Appletons to the appellant and that it was followed by a repayment by the appellant to the Appletons.

The appellant submits, first, that the respondent paid to the appellant the amount of the two cheques deposited on 3 September at the time of the deposit, subject to a condition subsequent that the cheques be honoured, that the appellant thereupon became a holder for value of the cheques, though it was entitled to debit the respondent's account if the cheques were dishonoured. In this situation, according to the argument, the appellant became the respondent's agent for collection from the paying bank to receive the proceeds so as to discharge the condition subsequent upon which the cheques had been received earlier as conditional payment. On this view of the matter the appellant was not an agent for collection to receive part of the proceeds by way of a loan by the respondent to the appellant.

Generally speaking, when a cheque is given in payment of a debt, it operates as a conditional payment. The payment is subject to a condition that the cheque be paid on presentation. If it is dishonoured the debt revives. Although it is sometimes said that the remedy for the primary debt is suspended, the suspension is no more than a consequence of the conditional nature of the payment: Tilley v. Official Receiver in Bankruptcy [1] . The condition is a condition subsequent so that, if the cheque is met, it ranks as an actual payment from the time it was given. Subject to non-fulfilment of the condition subsequent, the payment is complete at the time when the cheque is accepted by the creditor: Thomson v. Moyse [2] .

1. (1960) 103 C.L.R. 529, at pp. 532-533, 535-536, 537. 2. [1961] A.C. 967, at p. 1004.

The effect of the receipt by a bank of a cheque deposited by a customer to the credit of his current account turns upon the terms of the contract between the bank and its customer. In the ordinary course of business when a customer deposits a cheque to the credit of his account, the bank becomes his agent for collection of the cheque from the paying bank and, if the customer's account is in credit, the collecting bank borrows the proceeds from the customer when collected: Joachimson v. Swiss Bank Corporation [3] ; A. L. Underwood Ltd. v. Bank of Liverpool [4] . If the customer's account is in debit, the proceeds are applied in reduction of the overdraft. In either situation the collecting bank does not become a holder for value of the cheque at any time before it is cleared: A. L. Underwood Ltd. v. Barclays Bank [5] ; National Commercial Banking Corporation of Australia Ltd. v. Batty [6] . In collecting the proceeds the collecting bank exhausts the operation of the cheque (A. L. Underwood Ltd. v. Bank of Liverpool [7] ), notwithstanding that the paying bank holds it thereafter as a voucher on account of its customer the drawer: Midland Bank Ltd. v. Reckitt [8] .

1. [1921] 3 K.B. 110, at p. 127. 2. [1924] 1 K.B. 775, at p. 791. 3. [1924] 1 K.B. 799, at pp. 804, 805. 4. (1986) 160 C.L.R. 251, at p. 273. 5. [1924] 1 K.B., at p. 791. 6. [1933] A.C. 1, at p. 14.

If, however, in the absence of any other arrangement, the bank credits the proceeds of the cheque to the customer's account upon receiving it, before it has been cleared, the bank then becomes the borrower of the proceeds of the cheque and the customer is entitled to draw against them, the bank being a holder for value of the cheque and not a mere agent for collection:Capital and Counties Bank v. Gordon [9] . If, on the other hand, the bank makes it clear, as, e.g., by notation on the deposit slip and in the bank statements, that the crediting of a cheque to the customer's account is subject to clearance of the cheque, the bank remains an agent for collection: Bank of New South Wales v. Barlex Investments Pty. Ltd. [10] ; A. L. Underwood Ltd. v. Barclays Bank [11] .

1. [1903] A.C. 240, at pp. 245, 248-249. 2. [1964-5] N.S.W.R. 546, at pp. 549-550. 3. [1924] 1 K.B., at p. 806.

The appellant contends that when a customer deposits a cheque to the credit of an overdrawn account, the bank receives the cheque as a holder for value, not as an agent for collection. This, so the argument runs, is because the effect of the deposit of the cheque is to extinguish or reduce the indebtedness of the customer, thereby attracting the principle, which was applied in Tilley, that the delivery of the cheque is conditional payment of the debt. The appellant is unable to support its proposition with any authority. This is not surprising. The special characteristics of the relationship between banker and customer make it inappropriate that the general principle governing the payment of a debt by cheque should apply to transactions in the ordinary course of business on an overdraft account. It makes little sense to apply that principle to the deposit of a cheque when both the customer and the bank contemplate that the customer will continue to draw cheques on the account up to the overdraft limit. In such a case it could scarcely be supposed that the customer is entitled to draw against the proceeds before the cheque is cleared. There can be no question of the bank borrowing the proceeds, unless the amount of the cheque is such as to place the account in credit and then it is not to be supposed that the bank becomes a borrower of the surplus until it receives the proceeds of the cheque.

On the other hand there may be specific situations in which, as a result of some arrangement between the parties or some particular circumstances, it would be right to conclude that the bank received the cheque as a holder for value rather than as an agent for collection. So, in M'Lean v. Clydesdale Banking Co. [12] , it was held that the bank took the cheque for £250 as a holder for value when the customer deposited it to the credit of his account, the account then being in debit, for the purpose of reducing his debt. The circumstances were such that the bank received the cheque, "precisely as if it had been a £250 Bank of England note", in the words of Lord Blackburn [13] . His Lordship went on to say [13] that the Court of Exchequer Chamber was correct in Currie v. Misa [14] , in holding that the payment of a cheque, or a bill payable on demand, on account of a debt to a bank, "a payment by which it was intended to be handed to them as property, and not merely handed to them as a servant or agent, but handed to them as cash with the object of reducing a balance" was a payment for valuable consideration. Likewise, in Barclays Bank Ltd. v. Astley Industrial Trust Ltd. [15] , Milmo J. held that where the plaintiff bank had agreed to accept five cheques in conditional reduction of the customer's overdraft, the condition being that the cheques would not be dishonoured on presentation, the plaintiff thereby agreeing to treat the cheques as cash, the plaintiff was a holder for value: see also Midland Bank Ltd. v. Reckitt [16] ; Sidney Raper Pty. Ltd. v. Commonwealth Trading Bank of Australia [17] .

1. (1883) L.R. 9 App. Cas. 95. 2. (1883) L.R. 9 App. Cas., at p. 111. 3. (1883) L.R. 9 App. Cas., at p. 111. 4. (1876) L.R. 10 Ex. 153; L.R. 1 App. Cas. 554. 5. [1970] 2 Q.B. 527, at p. 539. 6. [1933] A.C., at pp. 18-19. 7. [1975] 2 N.S.W.L.R. 227, at pp. 244-245, 250-251.

The appellant relies on a finding made by the primary judge that it was arranged between the branch manager of the appellant and Mr. Horne that the cheque from the Redcliffe City Council would be deposited in reduction of the overdraft. The primary judge said:

Towards the end of August Mr. Calder had made enquiries of Mr. Horne, the director who mainly ran the business, as to why money had not come into the account and he was informed on 31st August that a payment would be received from the Redcliffe City Council in the following week in connection with construction work being carried out by the company. Mr. Calder said that on previous occasions when he had been told that funds were coming, those funds had arrived. I accept the evidence of Mr. Calder on these matters. This finding does not support an inference that the appellant treated the cheque as cash or that the respondent became entitled to draw against the proceeds before the cheque was cleared or that the appellant became a holder for value of the cheque as distinct from a mere agent for collection.

It follows that the Full Court was correct in concluding that the deposit of the two cheques on 3 September did not amount to a payment on that day.

The appellant's second submission is that it had a lien over the cheques deposited on 3 September to secure the respondent's indebtedness. It is well settled that a bank has a lien on all bills and cheques coming into its possession as a banker for the general balance of moneys due from the customer: Brandao v. Barnett [18] . The lien is over the chose in action and, in the case of an overdraft account, is for the extent of the overdraft: Sutters v. Briggs [19] ; In re Keever [20] . The existence of the lien is not affected by the fact that the bank receives the cheque as an agent for collection, so long as the bank is not a mere agent for collection: Barclays Bank v. Astley Industrial Trust Ltd. [21] . In re Keever [22] , decides, correctly in our opinion, that so long as the cheque is received in good faith and in the ordinary course of business, a payment made to the collecting bank by the paying bank in discharge of that lien cannot amount to a preference, priority or advantage.

1. (1846) 12 Cl. & F. 787, at p. 809 [8 E.R. 1622, at p. 1631]. 2. [1922] 1 A.C. 1, at p. 20. 3. [1967] Ch. 182, at pp. 189-190. 4. [1970] 2 Q.B., at p. 538. 5. [1967] Ch., at p. 190.

As there are concurrent findings that the appellant received the cheques in good faith and in the ordinary course of business on 3 September, the cheques were subject to a lien to secure the extent of the respondent's indebtedness to the appellant. It is not to the point that the appellant did not receive the proceeds of the cheques until a later date because a payment received in discharge of a valid security cannot amount to a preference, priority or advantage within the meaning of s. 122(1).

The respondent submits that the appellant's claim for relief, to the extent to which it is based on the existence of a lien, was not raised in the courts below and that accordingly it is not open to the appellant to rely upon it in this Court. The respondent contends that the existence of a lien is a question of fact and that, if the issue had been squarely raised at first instance, evidence might have been led to show that there was in fact no lien, either by reason of express agreement between the parties or circumstances inconsistent with the existence of such a lien.

Although the appellant's claim to a lien was not litigated as such in the courts below, there is nothing in the evidence or in the relationship of the parties that points to the possible existence of an agreement or of circumstances which would negate the existence of a lien. What we do know, from the finding of the primary judge, is that the appellant's branch manager, Mr. Calder, had been inquiring about the reason why money had not come into the account. In response he was informed that the Redcliffe City Council cheque would be paid in.

And we also know that the branch manager inquired from the paying bank as to the clearance of the cheque, probably on 4 September. The conversation between Mr. Calder and Mr. Appleton on 3 September with reference to Mr. Appleton's withdrawal of $40,000 from the no. 1 account is not at all inconsistent with the appellant having a lien, because it proceeds on the footing that the appellant will recoup its indebtedness. There is simply no basis for conceiving that there could be any agreement, express or implied, between the parties or any circumstances negating the existence of a lien. The evidence, which was generally directed to the circumstances in which the cheques came to be deposited and cleared and to the appellant's defence that it took in good faith for valuable consideration in the ordinary course of business, traversed the discussions and transactions between the parties which might have been expected to throw up the basis, if one existed at all, for holding that there was no lien in fact.

Accordingly, the Court should not decline to give effect to the appellant's submission that it had a lien. But in the circumstances it is proper to deny the appellant its costs of the appeal.

In the result we would allow the appeal, set aside the orders of the Full Court, order that the appeal to that Court be dismissed with costs and restore the orders made by the primary judge.