Oris Funds Management Ltd v National Australia Bank Limited [2003] VSC 315

Supreme Court of Victoria|2003-09-01|Before: OSBORN J

CONVERSION - Cheques - Whether bank converted cheques - Whether cheques collected "in good faith and without negligence" - Cheques Act 1986 ss 3, 49, 50, 52, 95 - Corporations Law ss 128 and 129.

1 The plaintiff in this proceeding was incorporated in October 1999 for the purpose of servicing a superannuation business formerly conducted by a subsidiary of a public company OAMPS Ltd ("OAMPS"). The principal business of OAMPS was that of an insurance broker.

2 During the relevant period the superannuation business was conducted under the name OAMPS Financial Services by a company named OFS Pty Ltd ("OFS"), incorporated in June 1998 and wholly owned by Paul Stanley ("Stanley") and Anthony Ponting ("Ponting"). Following its incorporation OFS acquired from a subsidiary of OAMPS the rights to provide superannuation services to the OAMPS broking client base. It also obtained a sub-lease over premises within the building occupied by OAMPS. An outward appearance of association with OAMPS was thus maintained. The superannuation business (which was not insubstantial) was initially conducted utilising National Mutual Ltd as trustee of the fund. The fundamental concept underlying the commercial transactions giving rise to this proceeding was that the plaintiff ("OFM" or "Oris")[1] would be established and funded to operate a new master trust fund for the superannuation business. In order to establish and operate such a fund it was necessary for OFM to obtain access to increased working capital. To do this it was proposed to sell an interest in OFM to a major financial institution.

3 This proceeding concerns the manner in which the defendant bank ("the bank") dealt with three cheques made payable to OFM in respect of initial payments pursuant to Heads of Agreement relating to the acquisition by Tower Life Australia Ltd ("Tower") of a 40% interest in OFM.

(a) collected a Tower cheque dated 6 March 2000 for $100,000 ("the March cheque") made payable to OFM and credited the proceeds to Tasvinum Management Pty Ltd ("Tasvinum");

(b) collected a Tower cheque dated 10 May 2000 for $150,000 made payable to OFM and credited the proceeds to OFS on 11 May 2000 ("the May cheque");

(c) collected a Tower cheque dated 7 June 2000 for $150,000 made payable to OFM and credited the proceeds to OFS on 8 June 2000 ("the June cheque").

5 The March cheque was endorsed by Stanley and Ponting under the OFM company seal purportedly authorising payment to Tasvinum. The May and June cheques were endorsed by Stanley purportedly authorising payment to OFS. OFM's case is that neither Stanley nor Ponting had authority to endorse such cheques. Indeed it was contended for the plaintiff that at the relevant times no officer of OFM had authority to endorse cheques on its behalf. It was further contended that at the relevant dates OFM was the true owner of the cheques and the collection of the cheques by the bank constituted conversion. Alternatively it was contended that such collection gave rise to claims for money had and received, unjust enrichment and/or a claim in negligence. The defendant conversely denies that Stanley and Ponting acted without the authority of OFM, and further denies that the collection of the cheques constituted conversion or can give rise to a successful claim on the alternative bases pleaded.

6 It was common ground between the parties that the tort of conversion is applicable to cheques and other negotiable instruments. As was stated in Lloyds Bank v The Chartered Bank of India, Australia and China[2]:

"Conversion primarily is conversion of chattels, and the relation of bank to customers that of debtor and creditor. As no specific coins in a bank are the property of any specific customer there might appear to be some difficulty in holding that a bank, which paid part of what it owed customers to some person not authorised to receive it, had converted its customer's chattels; but a series of decisions binding on this court, .. have surmounted the difficulty by treating the conversion as of the chattel, the piece of paper, the cheque under which the money was collected, and the value of the chattel converted as the money received under it ..."[3]

7 The essence of the tort is intentional unauthorised interference with the property of another. As Dixon J said in Penfolds Wines Pty Ltd v Elliott[4]:

'The essence of conversion is a dealing with a chattel in a manner repugnant to the immediate right of possession of the person who has the property or special property in the chattel ... an intent to do that which would deprive 'the true owner' of his immediate right to possession or impair it may be said to form the essential ground of the tort."[5]

8 Paget's Law of Banking[6] elaborates the concept of true owner as follows:

'The true owner of a cheque must be the party with an unassailable title to it whether in possession of it or not, for the reason that a cheque is a negotiable instrument. That party may not be the holder or the transferee; where forgery enters into the matter the true owner must be someone prior to the forgery, but if it is only a question of defective title, even though the transfer may have been affected by fraud the transferee or holder may yet be the true owner. At the time the cheque is issued either the drawer or the payee is the true owner, the payee if he has not come by the cheque fraudulently and the drawer if the payee has been fraudulent ..."

9 Each of the cheques issued in these proceedings was delivered to Stanley on behalf of OFM by representatives of Tower. There is no dispute that OFM became the true owner of each of the cheques. The primary dispute is as I have said whether Stanley and Ponting had authority to endorse the cheques in the manner which they did. It is further contended on behalf of the plaintiff that the cheques were not obtained by Tasvinum and OFS without fraud, duress or other unlawful means and that the title of Tasvinum and OFS respectively to the cheques was therefore defective by reason of s.3(3) of the Cheques Act 1986.

10 As against this, it was not contended on behalf of the bank that the plaintiff was estopped from denying the authority of Stanley and Ponting to endorse the cheques. But in addition to denying the plaintiff's contentions it was contended on behalf of the defendant that the cheques were received in good faith and without negligence and that if the plaintiff otherwise established its claim the defendant was entitled to rely on s.95(1) of the Cheques Act:

"(1) Where: (a) a financial institution (the collecting institution), in good faith and without negligence: (i) receives payment of a cheque for a customer; or (ii) receives payment of a cheque and, before or after receiving payment, credits a customer's account with the sum ordered to be paid by the cheque; and (b) the customer has no title, or has a defective title to the cheque; the collecting institution does not incur any liability to the true owner by reason only of having received payment of the cheque."

11 OFM was initially incorporated with Stanley, Ponting and a Dr Jack Cygler ("Cygler") as its members and directors. The shares allotted to Stanley and Ponting were then transferred to family trust companies under their respective control named PCCS Pty Ltd ("PCCS") and Shadsoo Pty Ltd ("Shadsoo").

12 Cygler did not pay for the shares allotted to him but remained a director though the course of the events in issue.

13 Stanley and Ponting had interests in other companies which together with OFM were loosely referred to as the "OFS Group". In particular Stanley had a controlling interest in Tasvinum which was incorporated in August 1998 and carried on business as the operator of a vineyard which Stanley sought to develop in Tasmania and which was owned and developed through other related companies.

14 The defendant bank handled the banking for the "OFS group". It is apparent from the evidence given in this case, particularly by Mr Lawrence Cooper ("Cooper") who was the account manager at the bank for the OFS group of companies, that throughout the relevant period these companies were experiencing some financial difficulties.

15 The evidence makes clear that Stanley and Ponting provided the bank with information regarding the business and proposed business of their companies, and that over the relevant period there was increasing pressure on them from the bank to reduce their indebtedness. This increasing pressure reflected increasing concern within the bank about the various companies' positions.

16 In November 1999 Stanley and Cygler approached Tower Life Australia Ltd with a proposal to sell equity in OFM to Tower. It was intended that this would provide capital to enable OFM to set up and operate the proposed master trust fund. The proposal was of interest to Tower for a number of reasons including the prospect that by obtaining equity Tower could obtain "leverage" in respect of the placement of master trust funds with Tower.

17 On 3 November 1999 a "board" meeting of OFM was attended by interested parties. These included Stanley, Ponting and Cygler, together with Mark Belnick ("Belnick"), Professor Neville Norman ("Norman"), and Richard Udovenya. At that time the ASIC records indicate the directors of OFM were Stanley, Ponting and Cygler. It would appear that the others present attended because it was intended that Norman would become chairman of the board of directors, Belnick would have management responsibilities, and Udovenya would act as company solicitor. In any event the minutes record the fundamental business concept then under discussion which was:

"1. Tower, Tyndall or NAB to buy up 40% of OFM equity as of today."

18 On 18 November 1999 an offer was made to Tower by Stanley (as Managing Director of OFS) of 40% of the capital in OFM for a price of $960,000, accompanied by an information memorandum dated 15 November 1999 (SL1-7). This latter document stated, inter alia:

* OFM was a "public offer Master Fund" and "the fund complies with Superannuation Industry Supervision Law which is regulated by the Insurance and Superannuation Commission."

* OFM's target markets were well established state and national industry associations and corporate funds whose superannuation funds under management were or would be economically viable to OFM.

* The OFM "administration and investment management committee" included, Norman, Stanley, Belnick, Cygler and a solicitor Mr John Dick ("Dick").

* An "investment methodology" and a description of OFM's range of funds devoted to gross, balanced and capital stable markets.

* The proposed arrangements for fund management administration.

* A description of directors' interests and remuneration as follows:

"The directors of OFM are Professor N.R. Norman, John Dick, Mark Belnick, Paul Ronan Stanley, Anthony John Frederick Ponting, and Dr Jack Cygler. The last three directors (from left to right) each own 45%, 45% and 10% of OFM respectively. The last three directors' annual remuneration is $100,000; $40,000 and $75,000 respectively. Mark Belnick's annual remuneration is $75,000."

19 By letter dated 21 December 1999 OFS provided to Tower further details of directors' fees (reduced from those quoted above but totalling $207,500 per annum), an allocation of wages for sales staff up to $130,000 per annum, an allocation of $37,500 per annum to cover reception and support staff and reference to the fact that the "vast majority of administrative functions relating to the superannuation fund management are performed under the administrative services agreement with the sub-contractor TASG". The basis on which fees for these services were met on a fee per week per member basis was set out. By letter of 22 December 1999 OFS also provided to Tower further details of its relationship with OAMPS and a further shorter "Information Memorandum" (CB 188).

20 By fax of 22 December 1999 to Stanley as Managing Director of OFS, Mr Les Mace ("Mace") of Tower advised:

"I am delighted to advise that Tower wishes to proceed with your proposal to take 40% equity participation in OFS Funds Management Ltd."

21 Thereafter, relatively protracted negotiations and due diligence inquiries were conducted. These made clear, inter alia, that Norman, Dick and Belnick were in fact "in the process of being appointed as directors of OFM" (CB 194).

22 Mr Peter McNeil ("McNeil") of Tower says in his witness statement:

"During the due diligence period Stanley came to me and said that the delay in settlement was taking too long and as Oris had incurred expenses in preparing the Trust Deed, printing, staff costs etc, he was contemplating approaching another party. He said that Oris needed money for its cash flow. On 1st March 2000 it was agreed that the parties, Tower Life, Oris, PCCS Pty Ltd, Shadsoo Pty Ltd and Cygler, would execute a heads of agreement and Tower Life would lend to Oris $100,000 to be held on account of the purchase price, pending the completion of due diligence and the preparation and execution of a share sale and purchase agreement ..."

23 On 2 March 2000 Mace sent to Stanley as Managing Director of OFS a fax stating:

"This letter confirms the course of action agreed to at our meeting in Sydney yesterday. * By Tuesday 7 March 2000 Tower will deliver to OFM a Heads of Agreement for signature by both parties. Once the Heads of Agreement is executed we will hand OFM a cheque for $100,000 being a deposit against the full amount contained in our agreement. * By Friday 11 March 2000 Tower will advise OFM of all our due diligence requirements that remain outstanding from OFM. * If all of the outstanding requirements are received within a reasonable time we will use our best endeavours to finalise our agreement by 28 April 2000. * OFM is to provide Tower with a list of key staff/personnel and their jobs. * Paul Stanley is to advise whether Tower would take subscription of new shares from OFM, rather than buy the shares of OFM. This is critical to the documentation and may cause delays if there is a change to the structure of the deal. * Clayton Utz are to draft the OFM Senior Management agreement and the Service/Partnership agreement between OFM and OFS. This will be at OFM's expense. Please call if you wish to discuss any of the above points."

24 On 7 March 2000 Heads of Agreement were executed as foreshadowed in the Tower fax of 2 March 2000. The Heads of Agreement were executed by:

* McNeil on behalf of Tower; * Stanley on behalf of OFM; * Shadsoo (signed by Ponting as director and company seal affixed); * Stanley on behalf of PCCS; * Cygler (presumably as the sole shareholder other than Stanley and Ponting); * OFS (signed by Ponting and Stanley with company seal affixed).

25 The Heads of Agreement recorded by way of background:

"A. The Company through its association with OFS provides superannuation fund and financial management services to a range of industries and intends to establish a public offer master fund to promote those services to a number of organisations within those industries ('Business'). B. For the purposes of expanding the Business, the Company and the Shareholders have prepared an 'Information Memorandum' (attached as Annexure A) seeking an additional equity participant in the Company. C. In response to that Information Memorandum, Tower has indicated its desire to acquire a 40% equity interest in the Company, and to negotiate with the Company and the Shareholders: (a) a Shareholders' Agreement; and (b) one of the following: (i) a share purchase agreement under which the Sellers will sell to Tower equally so much of their respective equity interests in the Company as will provide Tower with a 40% interest in the Company on payment of the Purchase Price by Tower ('Share Purchase Agreement'); or (ii) a share subscription agreement by the Company, under which Tower will pay the Subscription Amount for so many Shares as will provide Tower with a 40% interest in the Company ('Share Subscription Agreement'); or (iii) both a share purchase and a share subscription agreement which together will provide Tower with a 40% equity interest in the Company on payment by Tower of the Tower Payment to the Company and the Sellers ('Share Purchase & Subscription Agreement'). D. The Company and the Shareholders have requested Tower, and Tower has agreed, to pay to the Company the Initial Payment on the terms of, and subject to, these Heads of Agreement to demonstrate Tower's good faith in seeking to acquire an equity interest in the Company in the manner contemplated in C above."

26 The initial payment referred to was further stated to be $100,000. Clause 4 of the Heads of Agreement provided:

"4. INITIAL PAYMENT Subject to clause 6, Tower will pay to the Company the Initial Payment on execution by the parties of these Heads of Agreement which the Company agrees will be used for the purposes of conducting the Business and: (a) if Tower, PCCS and Shadsoo enter into the Share Purchase Agreement in accordance with clause 5(a), those parties and the Company agree that the Initial Payment will be deemed to be part payment for the Sale Shares; (b) if the Company issues Shares to Tower under the Share Subscription Agreement in accordance with clause 5(b), Tower and the Company agree that the Initial Payment will be capitalised and constitute part payment for the Shares so allotted to Tower; and (c) if the Share Purchase & Subscription Agreement is entered into in accordance with clause 5(c), Tower, the Company and the Sellers agree that the Initial Payment will be capitalised and will constitute payment for so many Shares issued by the Company under that agreement as is agreed between Tower and the company at the same price per share as that agreed in accordance with clause 5(c)(ii)."

"8. GUARANTEE (a) Tower has entered into these Heads of Agreement at the request of the Company and OFS and on condition that OFS guarantees to Tower repayment to Tower of the Initial Payment if clause 7 applies. (b) By executing these Heads of Agreement, OFS guarantees to Tower, in consideration for the payment of $1.00 by Tower to OFS if and when demanded, the due and punctual repayment to Tower of the Initial Payment if these Heads of Agreement are terminated in accordance with clause 7."

28 Upon the execution of the Heads of Agreement Tower provided the March cheque for $100,000 to OFM. It was made payable to "OFS Management Ltd or order", crossed and endorsed "Not Negotiable Bank Account Payee Only". Stanley and Ponting subsequently endorsed the cheque in the following terms "Please pay to Tasvinum Management Pty Ltd" and affixed the company seal of OFM together with their signatures. The cheque was presented to the bank and the bank accepted it and collected the cheque crediting the proceeds to Tasvinum.

29 The plaintiff alleges by its statement of claim:

"21. Ponting and Stanley did not at any material time have authority from Oris or Tower to: (a) use the cheques for their own purposes; (b) endorse the cheques as aforesaid; (c) negotiate the cheques; (d) deposit the cheques with the defendant; (e) obtain a credit for the March cheque to the account of Tasvinum Management Pty Ltd; (f) obtain a credit for the May and June cheques to the account of OFS."

30 The first issue which arises in this proceeding is whether the endorsement to Tasvinum was made with the authority of OFM.

31 The minutes of OFM record no resolution of the board of directors authorising either the making of the Heads of Agreement or any subsequent dealing with the initial payment contemplated by these Heads.

* Norman and Dick had consented to act as directors of OFM (4 February 2000);

* One Geoff Donnelly ("Donnelly") had consented to so act (29 February 2000); and

* McNeil had consented to act as a director (1 March 2000).

Nevertheless at the date of the March cheque and up until at least 19 May 2000 the ASIC records showed only Stanley, Ponting and Cygler as directors.

33 Furthermore, both the Tower letter of 2 March 2000 and clause 10 of the Heads of Agreement expressly contemplated further due diligence inquiries. The Court Book contains a response to due diligence questions raised by the solicitors for Tower and given by OFM. It is annotated by a bank officer "from P. Stanley 18/4". It seems clear that it was delivered to the bank after the date of the Heads of Agreement and the March cheque. Answer 1(a)(v) states:

"Consents to act as directors have been received from Professor Neville Norman, John Dick and Geoffrey Donnelly. Copies of these consents are enclosed."

The plain inference to be drawn from this answer is that these persons had consented to act but had not at that time commenced to act as directors. It is also relevant to note that this document expressly stated at answer 4(a)(i):

"Paul Stanley and Anthony Ponting are executive directors of OFS; they will also serve as executive directors of the company."

34 Answer 7(c) listed personnel other than non-executive directors. Stanley was said to be employed pursuant to a directors' agreement as CEO for two years with a salary of $40,000 per annum. Cygler was said to be employed pursuant to a directors' agreement as Managing Director with a salary of $75,000 per annum. Ponting was said to be employed pursuant to a directors' agreement with responsibility for sales and marketing with a salary of $15,000 per annum. Norman was said to be employed pursuant to a directors' agreement as chairman with a salary of $75,000 per annum. Belnick was said to be a full time employee in the position of Investment Manager at a salary of $94,000 per annum. A variety of staff were then listed. Note 4 to answer 7(c) stated:

"Where the nature of employment is a directors' agreement, a separate agreement is, or will be, in place between director and the Company i.e. no sharing between OFS and the Company."

35 The minutes of the board of directors dated 2 May 2000 (CB 96) record that Norman, Cygler, Stanley, Ponting, Donnelly, McNeil and Dick were "formally appointed" as directors on that date. McNeil said in the witness statement adopted by him in evidence that:

"I attended a board meeting of Oris on 2 May 2000. John Dick was also present at that meeting. The meeting resolved to formally appoint myself (with Les Mace as my alternate) and John Dick and others as directors of Oris."

"4. Revised organisational structure and remuneration schedule for executives and employees presented by JC The Board accepted the general structure and agreed that administrative functions in the company be reworded as operational to be more accurate and avoid confusion with the administrative role within the superannuation fund. PS is currently the Company Secretary. The board resolved that JC should also act as company secretary and act as public officer. 5. Draft contract for terms and conditions for directors distributed All directors were asked to review s.15 re: confidentiality by Wednesday May 10. PM suggested that no fee be payable to PM or his alternate. GD asked if the contracts could be between OFM and director personally rather than OFM and consultant. The board agreed that a director may contract personally with the company. GD drew attention to s.12 re: material delivery returns. PS acknowledged that an addition could be inserted in the contract referring to the ability for this to be waived by a company authority to enable a director to maintain certain items for personal records. Draft contract approved in principle by board. Amended copy to be forwarded to directors week starting May 8, 2000. Directors to have terms and conditions reviewed on an individual basis with the Company Secretary (S) shortly thereafter."

37 The remuneration structure for executives and employees which the minutes record was presented by Cygler is not directly evidenced before me. But I find on the balance of probabilities (in the absence of other documentation) that it was that set out on behalf of OFM in the due diligence response of April 2000 referred to above. I further note that item 17 of the minutes records the presentation of financial accounts and forecasts to the board by Cygler. This documentation has not been put in evidence by the plaintiff before me.

38 Mr Dick gave evidence that he "acted as a director" and attended board meetings from February 2000 onwards. Despite this evidence the evidence as a whole strongly supports the conclusion that Mr Dick may have attended board meetings in anticipation of appointment as a director but was not so appointed until 2 May 2000. He was one of a number of directors it was intended to appoint once the company became operational. It was not until 2 May 2000 that he, together with the other independent directors and the Tower representative, became directors of OFM. The only minutes of a board meeting in evidence prior to 2 May 2000 are those of a meeting on 30 April at which only Stanley, Ponting and Cygler were present (and at which the apologies of no other director are recorded) and the minutes of the meeting of 30 November 1999 referred to previously. The minutes of 30 April were accepted by the enlarged board on 2 May 2000 as the minutes of the last meeting of the board. (Although I note the minutes of 2 May 2000 are themselves unsigned.)

39 Somewhat oddly, given the terms of the minutes of 2 May 2000, but again tending to directly confirm that prior to the March cheque there were only three directors, the unsigned board minutes of 19 May record not only that Cygler, Dick, Donnelly, McNeil, Norman, Ponting and Stanley were present but that it was (again) resolved that, having consented to act as directors of the company Dick, Donnelly, McNeil and Norman be appointed as directors. It was further resolved that Cygler be appointed as secretary. The secretary was requested to complete the documents required to reflect the change in the officers of the company.

40 Mr Best has submitted on behalf of the plaintiff that a person who acts in the position of director, whether formally appointed as a director or not, is a director. In the present case, however, I do not accept that it has been satisfactorily established that Mr Dick did act as a director prior to 2 May 2000:

(a) There was an alternative reason for Mr Dick to have some preliminary involvement in the company's affairs, in that as he said he was from time to time asked to advise it as a solicitor and did so;

(b) The documentation and evidence as a whole demonstrates that there was a fundamental difference contemplated between the position of OFM before Tower acquired an interest in it when the company was controlled by Stanley, Ponting and Cygler, and the position that would be put in place when it became the vehicle for broader interests.

(c) Mr Dick's evidence discloses no part in the formulation of or approval of the Heads of Agreement which was surely the fundamental subject of concern for any director during the relevant period.

(d) The ASIC records are consistent with the terms of the company's minutes.

41 If, as I accept, the directors of OFM at the date of the March cheque were Stanley, Ponting and Cygler, the situation confronting the Court is that:

(a) none of these directors was called to give evidence;

(b) there is no minute or other record of deliberation by the directors either with respect to the Heads of Agreement themselves or the initial payment made thereunder;

(c) there is no evidence that the minutes before the Court fully record the deliberations of the directors or indeed constitute the full records of directors' deliberations kept by OFM;

(d) the cheque is in fact endorsed by two directors and affixed with the company seal;

(e) the constitution of the company which was signed by Ponting, Stanley and Cygler on 21 October 1999 provides:

"17.1 Any two directors may sign, draw, accept, endorse or otherwise execute a negotiable instrument. 17.2 The directors may determine that a negotiable instrument may be signed, drawn, accepted, endorsed or otherwise executed in a different way."

(f) OFM did not itself have a bank account into which the March cheque could have been paid. At the relevant date OFM's business operations (such as they were) were being conducted through OFS.

42 The endorsement upon the cheque on its face complies with the provisions of the constitution of the company.

43 The absence of any evidence as to recorded authority for the directors to deal with the initial payment to OFM is susceptible of at least two obvious explanations:

(a) the company's records in evidence do not fully record the formal deliberations and decisions of its directors at the time; or

(b) there was a consensus between Stanley, Ponting and Cygler being the sole shareholders and directors of the company as to the decision that firstly the company would execute the Heads of Agreement and secondly the funds would be applied at the direction of Stanley and Ponting.

44 It is inherently likely that one or both of the two alternatives identified is correct:

(a) Ponting and Stanley were the "sellers" of the shares identified in the Heads of Agreement.

(b) It was Tower's position (as reflected in the letter of 2 March 2000) that the choice was that of Stanley as to whether the Tower acquisition proceeded either by way of a straight purchase of shares from Stanley and Ponting, or by an allotment of new shares, or by a mixture of these mechanisms (as in fact ensued).

(c) All the relevant dealings by Tower with OFM were effected principally through Stanley and Cygler, and on occasions through Ponting. McNeil considered that Stanley was authorised to act on behalf of OFM in relation to the agreement as a whole and the execution of the Heads of Agreement in particular[7]. McNeil had the benefit of advice from Tower's legal department which was conducting due diligence inquiries through external solicitors Clayton Utz[8]. Mace, McNeil and Dick all agreed (to varying degrees) that Cygler was a person who was responsible for the day to day management of OFM[9]. Some correspondence from Tower to Stanley continued to be addressed to him in his capacity as Managing Director of OFS[10].

(d) Stanley, Ponting and Cygler were at the relevant date the sole shareholders in OFM.[11]

(e) The evidence does not make clear whether an information memorandum was in fact annexed to the Heads of Agreement as contemplated by it. But the original information memorandum supplied by OFM to Tower and the answers to due diligence questions delivered in April 2000 (which I have quoted above) contemplated that Stanley, Cygler and Ponting were entitled to the payment of annual directors' fees by OFM exceeding a total of $100,000. It certainly cannot be said the plaintiff has established Stanley, Cygler and Ponting were not entitled to direct payment of such a sum to entities associated with them.

(f) The evidence supports Cygler's concurrence in the actions of Ponting and Stanley with respect to the March cheque. Cygler wrote to Cooper the bank officer responsible for the OFS and associated accounts on 21 March 2000 (CB 263) in terms which assured the bank of the payment by Cygler to OFM of the moneys due for the shares held by him. In an email dated 5 May 2000 he further requested from Tower the advance represented by the May cheque (CB 284):

"Following initial advance of $100,000 received from Tower Life, OFS Funds Management Ltd request a further advance of $150,000 due to the final settlement for shareholding being deferred and the requirement of further capital to continue development and operation of the company and the Oris Superannuation Master Fund."

The terms of this request confirm that Cygler regarded the March payment as having been received by OFM.

(g) No query was raised as to either the propriety of the Heads of Agreement or the dealing with the March cheque at any meeting of OFM's board in the year 2000. The minutes of the meetings of 19 September 2000 (CB 107); 10 October 2000 (CB 454ff); and 15 November 2000 (CB 111) reveal that none of the directors who knew of the March, May and June cheques (that is, Ponting, Stanley, Cygler, McNeil or Mace) ever alleged that Stanley and Ponting were not authorised to deal with them as they did. The understanding of the directors (including McNeil who represented Tower) at the completion of the transaction was that:

"Tower had paid $960,000 for 40% equity in OFM and understood that $500,000 would be made available for use as working capital by PCCS Pty Ltd and Shadsoo Pty Ltd (the trusts of Paul Stanley and Anthony Ponting respectively)."[12]

(h) It was not until 30 March 2001 that the minutes of the board record that:

"GD (Donnelly) asked why the capital paid by Tower for share subscription in OFM was not received by OFM. LM (Mace) reported that Tower paid the money under direction of OFM Directors and that he would follow up where the subscription moneys, including loan payments (made prior to 30 June 2000) that were capitalised as part of the subscription price, paid by Tower Life were deposited."

45 Having regard to all the above matters I am not satisfied the plaintiff has established the cheque was endorsed to Tasvinum without OFM's authority. No evidence has been called from any of the directors at the time and the absence of evidence of an express record of authority by the board is not sufficient to persuade me on the balance of probabilities that there was no such authority having regard to the circumstances I have set out above.

"88. Further or in the alternative to the submissions concerning lack of authority, it is submitted that fraud or breach of faith or some other unlawful act in appropriating the cheques and endorsing them to Tasvinum Management and OFS Pty Ltd will vitiate any good title being passed to those companies by the endorsement and delivery of the cheques."

Specific reference was then made to the provisions of s.3(3) of the Cheques Act. The statement of claim contains no allegation of fraud, duress or other unlawful means. By its reply, however, the plaintiff alleges that Ponting and Stanley had no authority to endorse cheques and acted fraudulently or in breach of faith to OFM or unlawfully. It is further specifically alleged that Tasvinum and OFS knew at the time of the endorsement of the cheques to them that Ponting and Stanley did not have the authority to endorse the cheques to them and that Ponting and Stanley were acting fraudulently or in breach of faith to OFM in so endorsing the cheques. It is further alleged that Tasvinum and OFS were not holders in due course of the cheques.

47 Tasvinum and OFS could not be holders in due course of any of the three cheques because of the form in which they were crossed. Section 50(1)(a) of the Cheques Act provides:

"1. The holder of a cheque is a holder in due course if: (a) the cheque was transferred by negotiation to the holder and, at the time when the holder took the cheque, the cheque: ... (c) did not bear a crossing of the kind referred to in paragraph 53(1)(b);".

Section 53(1)(b) refers to a crossed cheque which bears across the front of the cheque the addition of two parallel transfer lines with the words not negotiable between, or substantially between, the lines.

48 It follows that neither Tasvinum, OFS or indeed the bank can call in aid the provisions of s.49(3) of the Cheques Act.

49 Nevertheless Tasvinum and OFS might be holders deriving title through a holder in due course. Section 52 provides:

"A holder of a cheque (whether or not the holder took the cheque for value) who: (a) derives title to the cheque through a holder in due course; and (b) is not a party to any fraud, duress or illegality affecting the cheque; has, in regards to the drawer and the endorsers prior to the holder in due course, all the rights of the holder in due course."

50 Once it is accepted that the plaintiff has not established that the endorsement occurred without the authority, of the then directors and shareholders, of OFM, it cannot be concluded that the endorsement of the March cheque amounted to a fraud upon OFM or breach of fiduciary duty to OFM in the terms pleaded. The pleading in the reply proceeds by way of express allegation of want of authority. In addition, I note the following matters:

(a) Fraud is a very serious allegation and although it must only be proved on the balance of probabilities, the gravity of the allegation is relevant to the weight of the evidence necessary to satisfy the Court.

(b) As Ms Schoff has submitted the endorsement is explicable as a payment made to Tasvinum at the request of OFS in the belief that OFS was entitled to the benefit of the funds. It was contemplated by the Heads of Agreement that the initial payment would be applied to the business conducted by OFM "through its association with OFS". It is clear that OFS was the vehicle through which all the initial support for OFM was provided including legal fees, wages, rentals and the like. The evidence as to actual expenses of OFM paid by OFS is somewhat unsatisfactory. But there is evidence of costs being incurred and the balance sheet attached to the share sale and subscription agreement ultimately entered into between the parties on 25 July 2000 (CB 393ff) attached a balance sheet which refers to an OFS working capital loan of $171,478 and profit and loss statements showing expenses of $171,678.

(c) In addition to the entitlement of OFS to receive and direct payment of funds received by it on account of expenses incurred and/or expected to be incurred with respect to the business of OFM, there is also a strong prima facie case that the parties including Tower understood and anticipated that Stanley, Ponting and Cygler were themselves entitled to directors' fees payable by OFM in excess of $100,000 per annum. The failure of the plaintiff to produce the Information Schedule attached to the Heads of Agreement, the remuneration schedule referred to in the Board minutes of 2 May 2000 and the draft contacts which were approved in principle, and are also referred to in such minutes, does not assist the plaintiff in this regard. No evidence was called from Stanley, Ponting or Cygler to clarify the situation.

(d) It is clear in hindsight that the companies associated with Ponting and Stanley were heading for financial collapse. At the relevant point in time, however, it cannot be satisfactorily established that Stanley and Pointing did not believe that the "group" with which they were concerned was viable. There is a substantial difference between judging with hindsight that the transactions undertaken by them were financially improvident on the one hand, and inferring on the other that they were fraudulent[13].

(e) Mr Best openly acknowledged to the Court that the conduct of the present proceeding by OFM was funded by Tower. He placed particular emphasis upon the history of financial difficulties which companies in the group controlled by Stanley and Ponting had with the bank from at least mid 1999 onwards. This history, in my view, does not preclude any of the above conclusions. It is apparent Stanley and Ponting were in effect "juggling" potential revenue sources, but the March payment was made when:

(i) it might properly be regarded as a down payment on $960,000 the benefit of which would accrue to them in the relatively near future; and (ii) the final fate of other ventures was not yet decided.

51 No basis for the allegations of fraud, breach of fiduciary duty or illegality with respect to the March cheque has been proven.

52 Each of the alternative formulations of the claim with respect to the March cheque also fail if the plaintiff is unable to establish that the endorsement was made without the plaintiff's authority.

53 Following the March cheque Stanley continued to provide the bank with details of the progress of the Tower transaction.

54 On 3 April 2000 Cooper reported to Ray Kelly, the Credit Controller of the bank's State Credit Bureau on the position of the "OAMPS Financial Services Group". He concluded:

"In terms of previous advices a Heads of Agreement has been signed for $960k with $100k already paid. Completion date on agreement is 8.4.2000. Directors advise that all requisitions to Tower's solicitors have been answered and they expect settlement by completion date. ... The directors remain confident that this week will see the resolution of the unacceptable excesses of the various group entities. There are confirmed amounts of $370k (OAMPS $200k, Cygler $140k & Consultancy $30k) which will clear 3 excesses, and the remaining large excess in Tasvinum Management can be cleared from anticipated settlement of the Tower deal for $860k which has a completion date of 8.4.2000. While position is unsatisfactory, and timing has been slow, it is noted that directors have taken appropriate action to rectify matter. In terms of our earlier comments we support some further latitude in allowing directors to draw against the consultancy payment of $30k (subject to receipt) to meet immediate cash flow requirements."

55 Following this report the bank placed the accounts of "watch" status. On 15 April 2000 Cooper further reported:

"I refer to your call re new watch status for group and provide update to our memo of 3/4 to Ray Kelly, Credit Controller. A) $200k Agency Sale. Funds received Friday 7/4 & credited to OFS P/L trading as OAMPS Financial Services. Account now in order & in terms of arrangements with director $25k will be transferred to Tasvinum M'ment P/L today. Balance of credit funds left in account will need to provide for wages due Wednesday for both OFS & Tasvinum M'ment! B) $140k Sale of part Super to Cygler. Paul Stanley advises that loan via Westpac is approved and additionally Cygler is cashed up via a sale of some share portfolio. Accordingly there is no reason why these payments should not be received early this week. We will continue to pressure for payment daily. (We are assured that Cygler is not waiting for Tower to settle first.) C) $860k sale of 40% Super to Tower Life. Completion date on Heads of Agreement was 8/4. Director advises all issues have been responded to solicitors & expects settlement this week. We urgently press for some evidence of this issue to confirm a settlement date asap! D) $415k (unpaid investment). Director advises that signed release provides for payment to them on 30 days therefore 18/5. We are yet to see the and will continue to request same! On 'reference report' today a/c 45-961-8998 Tasvinum M'ment P/L increased excess by $2,061 to $509,967 Dr (259 days !!). This will be covered today from transfer from OFS (ie now in credit.) I'll keep you informed. Hopefully this week is promising."

56 On 18 April 2000 the bank was supplied with a copy of the response to due diligence questions delivered pursuant to the Heads of Agreement (to which I have already referred). These confirmed, inter alia, that the shares of OFM were in effect held by Stanley, Ponting and Cygler and that they were executive directors of the company. The original attached a copy of OFM's constitution but it does not appear such document (or other attachments) was provided to the bank.

57 Mr Cooper reported the provision of this information to head office on 18 April and stated:

"OFS P/L trading as OAMPS Financial Services Update from previous email 10/4. A) $860k sale of 40% Super to Tower. We have been provided with a copy of Group's response to Due Diligence questions raised by Clayton Utz (Tower's Solicitors). Our customer is now seeking urgent response of any other issues and a definite settlement date. Having been shown the various agreements and new draft of the Superannuation Master fund, we remain optimistic that this will settle in the short term. B) $140k sale of 10% of Super to Dr Cygler. Settlement still outstanding. Despite assurances that Cygler is only awaiting completion of Wpac loan documentation to pay funds across, it would appear he is holding out until Tower settles?? We continue to press for this payment. C) $415k (unpaid investment). Meeting of both parties held last Friday. Director expects payment by Thursday 20/4. (Note we still have not been provided with a copy of investment claim.) D) $200k Agency Sale received last Friday. $19k deposited into account today."

58 The minutes of the board meeting on 2 May 2000 (unsigned) deal with a series of matters of internal management but do not deal with or refer to the receipt of moneys pursuant to the Heads of Agreement.

59 As already noted, on 5 May 2000, Cygler as Company Secretary of OFM[14], requested a further advance of $150,000 from Tower, by way of an email directed to McNeil.

60 McNeil gave evidence that at the time Cygler requested the further advance McNeil was in Alaska with Tower's Managing Director and other executives of Tower. The request for a further advance of $150,000 was relayed to him by Mace and was approved by the Managing Director.

61 A cheque dated 10 May 2000 in the sum of $150,000 was drawn by Tower payable to "OFS Funds Management". The cheque was crossed and imprinted with the annotation "not negotiable account payee only".

62 On 11 May 2000 an amendment to the Heads of Agreement was executed. This recited that:

"The shareholders of OFS Funds Management Ltd have requested an additional payment of $150,000 be made to the company by Tower Life Australia Ltd. In consideration for the additional payment being made, the parties to the Heads of Agreement agree to amend the agreement in accordance with this letter."

The amendment altered the definition of "initial payment" as it appeared in the Heads of Agreement to mean $250,000. Just as the Heads of Agreement themselves were signed by Stanley on behalf of the plaintiff, so was the amendment and the company seal was affixed. Stanley also executed the document on behalf of OFS and his trust company. Ponting executed the document on behalf of his trust company and Cygler executed the document in his own right. A copy of this document was supplied to the bank.

63 On the same day Stanley endorsed the May cheque with the notation "please pay OFS P/L" and signed the endorsement as "Director".

64 It was not suggested that anything turned on the misdescription of the plaintiff company (by the omission of "Ltd") on the face of the cheque.

65 The May cheque stands in a different position from the March cheque:

(b) despite the fact that relevant minutes of the board are unsigned it seems clear that by the date of the May cheque the directors were Stanley, Ponting, Cygler, Norman, Donnelly, McNeil and Dick;

(d) there is direct evidence from Dick and McNeil that no such authority was given to the best of their knowledge.[15]

66 I am satisfied on the balance of probabilities that Stanley was not authorised by the plaintiff's directors to endorse the May cheque in accordance with cl.17.2 of the plaintiff's constitution which provides:

"The directors may determine that a negotiable instrument may be signed, drawn, accepted, endorsed or otherwise executed in a different way" (i.e. other than by any two directors).

67 Having regard to the evidence as a whole I am satisfied that Stanley was so authorised by the plaintiff's three shareholders who were also the executive directors of the company and who had executed the amendment to the Heads of Agreement. Indeed Cygler who had requested the additional advance supplied a copy of the request for payment to the bank and clearly contemplated the moneys would be paid in reduction of the group's existing liabilities to the bank. There is no evidence that after executing the amendment to the Heads of Agreement Cygler or Ponting ever dissented from the application made by Stanley of the proceeds. To the contrary they in due course executed a further variation in like terms. Despite the above matters, however, it is equally clear that Stanley was not authorised to endorse the cheque by the board as a whole.

68 It follows that the bank collected the cheque without the authority of the plaintiff and credited the proceeds to OFS without the authority of the plaintiff. In these circumstances the bank converted the cheque and is liable to the plaintiff unless it can satisfy the Court either that ss.128 and 129 Corporations Law (as it then was) entitled it to make certain assumptions when collecting the cheque which cannot now be denied by the plaintiff or that it collected the cheque "in good faith and without negligence". I shall deal first with the latter matter.

69 There is no allegation the bank acted without good faith.

70 Weaver and Craigie state in The Law Relating to Banker and Customer in Australia:

"Negligence in the sense used here is not the independent tort of negligence, but is a descriptive epithet which, up to the present time, has been used to describe the overall impression formed in relation to the acts and omissions of the collecting bank in a particular factual situation. In short, 'negligence' is equivalent to 'carelessness':"[16]

71 In London Bank of Australia Ltd v Kendall[17] the High Court accepted the test resulting from the refinement by the Privy Council in Commissioners of Taxation v English, Scottish and Australian Bank Ltd[18] of the test first stated by Isaacs J in Commissioners of the State Savings Bank of Victoria v Permewan Wright & Co Ltd[19]:

"The test of negligence is whether the transaction of paying in any given cheque (coupled with the circumstances antecedent and present) was so out of the ordinary course that it ought to have aroused doubts in the bankers' mind, and caused them to make inquiries."

72 In London Bank of Australia v Kendall[20] Isaacs and Rich JJ elaborated the fundamental test by reference to the question of what inquiry should have been made in order to test negligence, as follows:

"The only guiding principle is that, where doubt is once aroused as to the nature and true ownership of the cheque, the nature and extent of the inquiry proper to allay it must be measured by what, in the circumstances, a fair minded banker, paying due regard to the reasonable exigencies of banking business in relation to the person depositing the cheque, would consider it prudent to do in order to protect the interests of the true owner whoever he might be."

73 As I have indicated there is no dispute that the true owner in the present case was the plaintiff. Nor is there any dispute as to whether the bank was put on inquiry. The question is whether it acted without negligence having regard to all the information with which it was supplied and all relevant circumstances of the matter.

74 In the present case the bank has satisfied me that it was not negligent in collecting the May cheque and crediting the cheque to OFS. I have come to this conclusion having regard to the following circumstances:

(1) OFM had since prior to the inception of the Tower transaction and up until the relevant date operated through OFS.

(2) OFM had no bank account and the cheque could not be banked in strict accordance with the terms appearing on its face. Cooper knew this.[21]

(3) Both the Heads of Agreement themselves and the amendment pursuant to which the May cheque was paid were executed by Stanley alone on behalf of OFM. Such execution was apparently acceptable both to Tower and OFM.

(4) The May cheque was paid pursuant to the terms of the amended Heads of Agreement. The original Heads of Agreement supplied to the bank expressly contemplated and required that the proceeds be applied to the joint business of OFM and OFS. The first recital of the Heads of Agreement stated that OFM carried on its business "through its association with OFS".

(5) Although the agreement was conditional OFS was the guarantor and as such was collaterally responsible for the performance of OFM's obligations.

(6) There were very strong grounds for believing that the transaction was authorised by the plaintiff's three shareholders and executive directors. The history of antecedent communications to the bank and joint actions by Stanley, Ponting and Cygler must necessarily have produced such a belief.

(7) Prior to the deposit of the cheque Stanley had told the bank that OFS was expending money on OFM and that OFS had requested an advance from Tower because due diligence was taking too long. Cooper understood (as was the fact) that OFS had paid wages and other costs associated with marketing and development of the superannuation company.[22]

(8) Mr Cooper was a very experienced business banking and account manager. He had been employed by the bank for 34 years. His evidence that he acted in accordance with prudent banking practice is strong prima facie evidence to that effect.

75 If further inquiry had been made of the plaintiff it could only have been made through OFS which was the vehicle for OFM's operations, and could only have been made to the executive directors of OFM. If such inquiry had been made I am satisfied that the executive directors, on behalf of the company, would have confirmed the instruction contained in the endorsement on the cheque.

76 The combination of circumstances which arises in this case is most unusual. It will seldom be that a company which has no bank account receives a substantial cheque made payable to "account payee only". It will be even rarer that the bank has had provided to it the basic contractual documentation pursuant to which the cheque was paid, stating the purpose for which the moneys were to be applied. (In this regard it is clear the bank had the initial Heads of Agreement but it may not have had a copy of the amendment. Cooper's recollection was that it did not.[23]) In my opinion these two circumstances, namely the absence of a bank account and the provision of the underlying contractual documentation, which contemplated OFM would carry on its business through OFS, taken in combination with the other factors mentioned above and the history of communications made through OFS and Stanley on behalf of OFM, lead to the conclusion that the bank was not negligent.

77 In Savings Bank of South Australia v Wallman[24] circumstances arose whereby a Mrs Jenkins was fortuitously able to obtain payment of a cheque which was not intended for her but was expressed to be payable to "E.M. Jenkins or order". In the particular circumstances of the case Rich, Dixon, Evatt and McTiernan JJ stated:

"It was only by a strange coincidence and a curious combination of mistakes that she was able to present the convincing appearance of ownership. We think it would be setting an extraordinarily high standard of diligence to hold that in these circumstances a prudent banker ought to have made still further inquiry. Indeed, it is difficult to see what course of inquiry could have been pursued fruitfully. If Mrs E.M. Jenkins had been further questioned as to the manner in which she acquired the cheque, it would have been enough for her to produce the respondent's letter. If the branch manager had communicated with the respondent by telephone or letter, it is most unlikely that he would have chanced on any statement or question which would have disclosed to the respondent the fact that the proposing customer was not the beneficiary for whom the cheque was intended. The stringent rules which banks adopt for the guidance of their officers afford evidence of the kind of precaution which may be taken; but it is unsafe and perhaps unfair to rely upon their rigour as a measure of the standard of prudence required by the law. In the circumstances of the present case, however, it is quite improbable that any other precaution would have availed."[25] (citation omitted)

"But it is said that a prudent banker ought to have made further inquiries into the transaction, and, in particular, from the drawer of the cheque. It is unlikely, in the curious circumstances of this case, that anything would have resulted from such inquiries. But that fact cannot, in my opinion, excuse the bank if a reasonable and prudent banker ought to have made such inquiries. This is the crux of the case. If a banker exercised 'the same care and forethought in the interests of the true owner with regard to cheques paid in by the customer as a reasonable business man would bring to bear on similar affairs of his own', then the banker has discharged his duty, and is protected by s.88 of the Bills of Exchange Act. It may be that some bankers, in an excess of caution, would have made further inquiries in the present case, but in my opinion any prudent banker or business man would have acted on the information before the bank, and might reasonably have concluded, without any further inquiry, that Mrs E.M. Jenkins was the payee named in the cheque."[26] (citation omitted)

79 It can be seen that the joint judgment regards the question whether any further course of inquiry could had been pursued fruitfully as relevant and potentially determinative. In the present case, as I have indicated, I am satisfied that any further inquiry directed to the true owner would not have altered the instructions to the bank or raised any doubt about them. Even if this question is not necessarily determinative as Starke J indicates may be the case, I remain of the view that in all the circumstances of the case a reasonable and prudent banker need not have made further inquiries of the true owner of the cheque. The degree of inquiry appropriate will of course depend upon the circumstances of each case. In National Commercial Banking Co v Bushby[27] Priestley JA (with whom Glass and Mahoney JJA agreed) referred firstly to the prima facie need for inquiry when a cheque crossed "not negotiable - account payee", is deposited to the credit of a party other than the account payee. He then referred to the particular circumstances of the deposit of the cheque there in issue in conjunction with another cheque. He then referred to the proper practice evidenced by the bank's manual with respect to "third party cheques" and lastly considered what might have been achieved by further inquiry and concluded that only a speculative answer could be given to such question.[28] It is appropriate to refer to each of these considerations.

(a) There was an obvious reason why the money could not be paid to the payee's account in the present case;

(b) The circumstances of the transaction including the relevant contractual documentation confirmed the apparent propriety of a payment to the credit of OFS;

"Third party cheques must be subject to careful inquiry to establish that the customer has a good title to each cheque."

"Authorising officer is to authorise negotiation/encashment at initial register (if applicable) if satisfied: - as to the validity of customer's right to cheque; and - the customer is good for recourse."

Cooper was the authorising officer for the account[29] and was aware of these obligations. I accept the banks' submission that the relevant obligation stated by the manual was that the authorising officer satisfy him or herself as to the validity of the customer's right to the cheque. For the reasons I have stated I am satisfied that the authorising officer was not negligent in this regard.

(d) I am satisfied no purpose would have been achieved by further inquires of OFM as to whether payment to OFS was authorised.

80 It was also submitted on behalf of the plaintiff that negotiation of a third party cheque by a director who had an interest in the third party was a circumstance which called for special inquiry. The primary difficulty with this submission is that the purpose of the Heads of Agreement was to provide the basis for an agreement to convey an interest in OFM to Tower in consideration of payment for the benefit of Stanley and Ponting. Further, pending finalisation of such agreement, the moneys paid by way of initial payment were expressly authorised to be used in the business conducted through OFS. The fact that Stanley might be thought to benefit from the transaction was not sinister but entirely consistent with the Heads of Agreement with which the bank was supplied.[30]

81 The same circumstances lead to the conclusion that the bank cannot be said to have been negligent simply because by May it must have been apparent to Cooper that there were doubts as to the ultimate credit worthiness of Stanley. This is so despite the fact that Cooper conceded having had doubts and misgivings concerning Stanley since 1999.[31]

82 Cooper's understanding of the transaction was that the moneys were proceeds of a sale agreement.

"Again this represented a further part of the sale of Ponting and Stanley's sale of assets, sale of shares, to Tower. There is no account in the name of OFS Funds Management, it was Ponting, I believe, and Stanley's funds and Ponting and Stanley were again Directors of the other company and therefore ... Q. When you say 'the other company' ---?---OFS Funds Management and therefore they had the right to direct the funds into their other group company."[32]

83 It may be objected that Cooper's understanding involved an oversimplification of the effect of the Heads of Agreement. It cannot, however, be said that read carefully the Heads of Agreement provide any basis for doubting Stanley's right to effect payment to OFS. Indeed they expressly envisaged the moneys would be applied through OFS to the business of OFM.

84 It was specifically submitted on behalf of OFM that the bank should have approached Cygler in relation to all cheques and if the inquiry was unsatisfactory, then should have approached the board formally and directly. As I have already indicated I am satisfied that if the bank had approached Cygler or Ponting each of them would have confirmed Stanley's authority to endorse the May cheque. In this regard it is to be noted firstly that Cygler had requested the payment of such cheque and that both Cygler and Ponting executed the amendment to the Heads of Agreement. Neither of them have been called as witnesses. There is no evidence whatsoever that they at any stage queried or dissented from the endorsement of the cheque to OFS. The endorsement was entirely consistent with the course of dealings with which they had previously been involved.

85 It was further specifically submitted that the bank should have made further inquiry of Tower. Tower was not the true owner of the cheque nor was it the bank's customer. Its agreement with OFM was provided to the bank. The payment of the cheque to the credit of OFS might reasonably be regarded as required by such Heads of Agreement. There was no obligation on the bank to make further inquiry of Tower.

86 It was also submitted that Cooper should have sought legal advice as to the effect of the Heads of Agreement. For the reasons I have stated such advice would not in my view have led to the conclusion it was improper to credit OFS with the proceeds of the cheque if authorised to do so by Stanley.

87 It follows that I am satisfied the bank collected the May cheque in good faith and without negligence. It is accordingly entitled to rely on s.95(1) of the Cheques Act. It is so entitled whether the claim is formulated in conversion or on one of the alternative bases set out in the Statement of Claim. For the sake of completeness I will comment further upon the application of ss.128 and 129 of the Corporations Law after considering the June cheque although it is not strictly necessary to do so.

"Group sale of 40% interest in superannuation company to Tower Life Deal was struck late last year for Tower to purchase the 40% interest for $960k of which a $100k deposited has been paid. The final settlement is now only awaiting a final share transfer agreement which solicitors for Tower, Clayton Utz, require. Our customer received a copy of agreement 16/5 and states he can turn around through his solicitors within say four days. Given that superannuation is operational and there have been two board meetings including Tower, Tower paid direct to OFS Pty Ltd $150k last to assist with costs given delay in settlement. Director Paul Stanley advises that the arrangements are in place for Tower to pay another $200k to OFS Pty Ltd by this Friday if full settlement is not ready. Note the $150k corrected the excess on OAMPS Financial Services. Note we have confirmed sale direct with Tower."

89 This memo confirms Cooper's understanding that the May cheque was paid to OFS to cover operational costs. This accords entirely with the Heads of Agreement and with the evidence of McNeil[33] and Mace.[34]

90 The memo also shows Cooper understood by 17 May 2000 that Tower was represented on OFM's board.

91 The reference to confirmation of the sale direct with Tower was a reference to telephone inquiry made by Cooper of Phillip Gellie of Tower. Cooper gave evidence that Stanley gave him the name of Gellie at Tower "to give the bank further comfort". Cooper rang Gellie as "business banking manager for the group of Stanley and Ponting and just sought confirmation that the settlement was proceeding and there was a cheque to issue for $150,000" which Gellie confirmed. There was no inquiry as to whom the payee of the cheque would be.[35] He agreed in cross-examination that he was told the cheque was in the process of being drawn and would be ready in a few days. He agreed he may have been told that it would be payable to OFM.[36] Cooper's report of 17 May 2000 concluded:

"Again we remain confident that the 'Tower' settlement will proceed in the short term however term of excesses is a concern. Clearance remains active but timing has been slow. Financials for the total group are stated to be signed off this week with their board meeting and will then be provided to us. Cheques continue to be returned on the accounts."

92 At some time subsequent Gellie spoke with Cooper again and told him that the cheque was in the process of being drawn.[37]

93 On 19 May 2000 application was made on behalf of OFM to open a bank account with the bank. This application was stopped because of inadequate credit points.

94 On the same day Cooper obtained a company extract from ASIC with respect to OFM. This still recorded Cygler, Ponting and Stanley as the sole directors and shareholders of OFM. It recorded Stanley as the company secretary.

95 On 25 May Cooper again reported to his superiors:

"$100k said to be coming from Tower tomorrow to OFS Pty Ltd as another part payment pending full settlement $700k plus. Also fax letters said to be coming from P. McNeil, Tower director, concerning date of full settlement. Payment from Dr Cygler was stated yesterday to be two days away, therefore due tomorrow."

96 On 30 May 2000 Mace advised Stanley by facsimile letter with respect to the progress of due diligence and advised that "the final documentation is only one week to 10 days away maximum". A copy of the letter was supplied to the bank.

97 On 31 May 2000 Stanley advised Cooper that a further $150,000 advance was expected from Tower that day.

98 On 1 June Cooper sent a facsimile message to Stanley and Ponting concerning the position of the accounts of OFS, OFS Australia Pty Ltd, Tasvinum Management Pty Ltd and Tasvinum Pty Ltd. The facsimile requested immediate provision of information concerning five separate matters. The first of these was:

"Written confirmation from Tower confirming net amount now to be paid for their purchase of the 40 percent share of Superannuation company, advising what matters remain outstanding which are delaying settlement, and an indication of date of settlement."

99 On receipt of the facsimile Stanley rang and promised the information requested by the following morning.

100 The documents do not reflect what happened in the following week as between OFM and Tower (nor is there any direct evidence as to this), but on 6 June 2000 a further amendment to the Heads of Agreement was prepared recording a request by the shareholders of OFM for a further payment of $150,000 to be made to the company by Tower and the amendment of the agreement in consideration of such payment being made. The definition of "initial payment" in the Heads of Agreement was amended to $400,000. No executed copy of this amendment has been produced to the Court. On 7 June 2000, however, Mace wrote to Stanley as "Managing Director OFS Pty Ltd" concerning OFM. He stated:

"I wish to confirm that a cheque for $150,000 will be delivered to you on 8 June 2000 made payable to OFS Funds Management Pty Ltd."

A copy of this letter was provided to the bank as an email of Cooper to his superiors of the same date confirms. It is to be noted that this letter reflected and corroborated the fact that OFM's business was still being carried on through OFS. Thus although the cheque was made payable to OFM advice of such cheque was given to Stanley as Managing Director of OFS.

101 It can be inferred that the amendment to Heads of Agreement dated 6 June 2000 was in fact executed on 7 June 2000. On that day the June cheque was issued made payable to "OFS Funds Management Ltd" in the sum of $150,000 and bearing a printed crossing which stated "not negotiable - account payee only". This cheque was in turn endorsed "pls pay OFS Pty Ltd" and signed by Stanley. It was collected and credited to OFS by the bank on 8 June 2000.

102 I am satisfied the cheque was not endorsed in accordance with the requirements of OFM's constitution for the same reasons I have set out in respect of the May cheque. I am also satisfied that once again it was endorsed with the agreement and authority of the executive directors and shareholders but not of the board as a whole. It follows that Stanley did not have authority to endorse it as he purported to on behalf of the plaintiff. The consequential questions which arise once again concern the effect of ss.128 and 129 Corporations Law, and whether the bank can be said to have acted "in good faith and without negligence" in dealing with the cheque as it did. Once again I shall deal with the latter question first. In my opinion the same underlying circumstances which support the conclusion that the bank acted without negligence with respect to the May cheque, support that conclusion with respect to the June cheque. The following additional circumstances are also relevant:

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Judgment (258 paragraphs)

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Cases Cited (6)