Oris Funds Management Ltd v National Australia Bank Ltd [2005] VSCA 148

Court of Appeal (Vic)|2005-06-10|Before: CHERNOV, VINCENT and EAMES, JJ.A.

Banking Law - Cheques - Endorsement by directors of non-negotiable company cheques to their entities - Whether directors lacked authority - Cheques collected by the bank on behalf of endorsees - Proceeds applied to reduce endorsees' indebtedness to the bank - Whether bank collected cheques "without negligence" - Duties of collecting bank to true owner of cheque -Whether bank liable in conversion - Endorsement to related entity not prima facie evidence of fraud or breach of director's duty - Cheques Act 1986 (Cth), s.95(1).

(a) OFS Pty. Ltd. ("OFS") was incorporated in June 1998. At all relevant times all of its shares were held by Paul Stanley ("Stanley") and Anthony Ponting ("Ponting"). Stanley was its managing director. The principal business of OFS, which it carried on under the trade name "OAMPS Financial Services", was the provision of superannuation services to the client base of a public company, OAMPS Ltd.

(b) The appellant ("OFM") was incorporated in October 1999, initially under the name of OFS Fund Management Ltd. Stanley, Ponting and one Jack Cygler ("Cygler") were, at all relevant times, its shareholders and directors. Each of Stanley and Ponting held 45 per cent of its issued shares through their respective family trust companies and Cygler held the balance of 10 per cent. Throughout the relevant period, OFM did not have a bank account and its business was conducted through OFS. Thus, for example, OFS paid the wages and other costs that were incurred on behalf of OFM.

(c) Tasvinum Management Pty. Ltd. and Tasvinum Pty. Ltd., in which Stanley and Ponting held interests, operated, respectively, a vineyard and a vineyard business.

(d) NAB was the banker to OFS and the Tasvinum companies ("the OFS Group"). Throughout the relevant period, these companies were experiencing financial difficulties and Stanley and Ponting were under increasing pressure from NAB to reduce their indebtedness to it.

(e) Lawrence Cooper ("Cooper") was, during the relevant period, NAB's accounts manager in respect of the OFS Group.

(f) Tower Life Australia Ltd. ("Tower") is, and was at all relevant times, a public company that provides life insurance. As will be described later, in March 2000, it entered into Heads of Agreement with OFM, OFS and others to acquire 40 per cent of the issued capital in OFM.

(g) Peter McNeil ("McNeil") was the Sales Director of Tower.

(h) Mark Belnick ("Belnick"), Neville Norman ("Norman"), Richard Udovenya ("Udovenya"), John Dick ("Dick") and McNeil ("the other OFM Directors") were, according to his Honour, appointed directors of OFM some time after March 2000, although they had consented to act as directors of OFM on various dates before 1 March 2000.

Circumstances of dispute

3 I now turn to consider the circumstances leading to the disputed transactions and I do so in chronological order. As the learned trial judge explained in his reasons for judgment, OFM was established for the purpose of servicing the superannuation business conducted by OFS through the creation and funding of a new master trust fund. It was proposed that the necessary capital would be raised through the sale of OFM shares to a financial institution.[1] To that end, in November 1999, Stanley and Cygler approached Tower with a proposal to sell it 40 per cent of the capital in OFM for the price of $960,000. The offer was made by Stanley (as managing director of OFS) and was accompanied by an information memorandum dated 15 November 1999, which, inter alia, described the business of OFM as being the operation of a "public offer master fund". It was said that its target markets were well established State and national industry associations and corporate funds that had superannuation funds under management. The memorandum also described the types of OFM superannuation funds that were to be offered to members, the proposed arrangements for funding management administration and an overview of OFM's marketing strategy and joint venture projects. The document set out the directors' interests and remuneration in the following terms:

"The directors of OFM are Professor 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."

As his Honour noted, by letter dated 21 December 1999, OFS provided to Tower further details of, inter alia, the fees that were payable to its directors, which totalled $207,500 per annum. On the following day, 22 December 1999, OFS gave Tower details of its relationship with OAMPS Ltd. and a further, shorter "Information Memorandum" concerning aspects of its business.

4 On 22 December 1999, Tower advised Stanley that it "wishe[d] to proceed with [the] proposal to take 40 per cent equity participation in [OFM]". Thereafter, protracted negotiations and due diligence enquiries were conducted which, his Honour said, made clear that as of March 2000 Norman, Dick and Belnick were only "in the process of being appointed directors of OFM". By this time, however, Stanley had become frustrated at the lack of progress in finalising the transaction and told Tower representatives that, because no funds were forthcoming from Tower, OFM was contemplating approaching another party to replace it. It seems that, in the result, an "in principle" agreement was reached on 1 March 2000, between Tower and the OFS Group, whereby it was agreed that the parties would execute Heads of Agreement relating to Tower's purchase of 40 per cent of OFM, and Tower would lend OFM $100,000 (by way of an "Initial Payment"). This amount was to be held on account of the purchase price pending completion of the due diligence investigations.

5 In the event, Heads of Agreement were signed on 7 March 2000 by, amongst others, Tower, OFM, OFS and Cygler. Importantly, the "Business" of OFM was described in the "background" recitals as one which, through its association with OFS, provided "superannuation fund and financial management services to a range of industries and [that it] intended to establish public offer master funds to promote those services to a number of organisations within those industries". The document also recorded Tower's interest in acquiring 40 per cent equity in OFM by the purchase of such equity from the Stanley, Ponting and Cygler interests, or through a share subscription, or both. Recital D dealt with the provision of funds by Tower to OFM before the completion of the transaction and was in the following terms:

"D. [OFM] and the Shareholders have requested Tower and Tower has agreed, to pay to [OFM] the Initial Payment[2] 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 OFM..."

The Heads of Agreement went on to provide that if the transaction proceeded to completion, the "Initial Payment" would be treated as part payment of the purchase price. It is also relevant to note that OFS guaranteed the repayment of the Initial Payment should the contemplated transaction be not finalised.[3]

6 As will be explained later, the Heads of Agreement, including the definition of "Initial Payment" in that agreement, was amended subsequently on two occasions, essentially to provide that Tower would make a total of three such payments to OFM - one of $100,000 (as was envisaged in the original document), and two further payments, each of $150,000. It is the manner in which these three payments were dealt with by NAB that constituted the subject of the dispute between the parties. It is convenient to summarise the impugned transactions.

(a) On 6 March 2000, Tower delivered to OFM a cheque ("the March cheque") in the sum of $100,000 payable to OFM and crossed "Not negotiable - bank account payee only". Stanley and Ponting endorsed this cheque to one of the Tasvinum companies ("Tasvinum"), purportedly on behalf of OFM. Under the words of the endorsement they affixed OFM's seal and their signatures and caused the endorsed cheque to be paid into Tasvinum's account with NAB. The bank collected the proceeds of the cheque and credited them to Tasvinum.

(b) On 10 May 2000, Tower delivered to OFM a second cheque ("the May cheque") in the sum of $150,000 payable to OFM and crossed "Not negotiable - bank account payee only". Stanley endorsed the cheque, purportedly as director of OFM, to OFS, and caused it to be deposited in its account with NAB, which collected the proceeds on its behalf.

(c) On 7 June 2000, Tower drew and delivered to OFM a further cheque in the sum of $150,000 ("the June cheque") payable to OFM and crossed "Not negotiable - bank account payee only". This cheque was dealt with in the same way as the May cheque.

7 It was OFM's principal case below that neither Stanley nor Ponting was authorised to endorse the three cheques. Thus, it was claimed that, at the relevant dates, OFM was the true owner of the cheques and, by collecting their proceeds and dealing with them as described, NAB wrongfully converted them. Alternatively, it was argued that such collection gave rise to claims based on money had and received, unjust enrichment and/or negligence. NAB denied that Stanley and Ponting acted without relevant authority or that the collection of the cheques otherwise constituted conversion or gave rise to a successful claim on the alternative bases pleaded. It maintained also that, in any event, it collected the proceeds of the cheques in good faith and without negligence and thus, gained the protection afforded by s.95 of the Cheques Act 1986 (Cth).

March cheque findings

8 In his comprehensive reasons for judgment, the learned trial judge dealt separately in the the claims made by OFM in respect of each cheque. In relation to the March cheque, his Honour rejected the appellant's claim that it was endorsed to Tasvinum without OFM's authority. In reaching that conclusion his Honour made the following findings. First, the transaction was approved by the only directors (and shareholders) of OFM, namely, Stanley, Ponting and Cygler[4] - the other directors were not appointed as such until after 2 May 2000**.** Secondly, the endorsement of the March cheque, on its face, complied with clause 17.1 of OFM's constitution, which relevantly provided that "Any 2 directors may ... endorse ... a negotiable instrument". Thirdly, the learned trial judge considered that the absence of any evidence of recorded authority for the directors to deal with the Initial Payment to OFM - which, the appellant said, showed that Stanley and Ponting did not have relevant authority - was susceptible to one or both of the following "obvious" explanations:

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

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

Moreover, his Honour was also persuaded that the endorsement was explicable as constituting either a payment to Tasvinum on behalf of OFS, at the direction of Stanley and Ponting, in circumstances where OFM was indebted to OFS and OFS owed Stanley and Ponting directors' fees, or as a payment that was made by OFM at the direction of Stanley and Ponting to whom it owed directors' fees. As I explain more fully later, the learned judge went on to reject the appellant's claim that the impugned endorsement was made fraudulently or in breach of the directors' fiduciary duty to OFM. In the circumstances, his Honour concluded, the appellant failed to establish that the March cheque was endorsed without authority.

May cheque findings

9 By May 2000 the OFS Group was under considerable pressure from NAB to reduce its indebtedness to it. Given OFM's lack of cash flow and continuing run of expenses through OFS, on 5 May 2000, Cygler, as Company Secretary of OFM, requested Tower to advance OFM a further amount of $150,000 by way of an "Initial Payment". In the event, on 11 May 2000, the parties to the Heads of Agreement altered the definition of "Initial Payment" so as to make it read $250,000. It was in those circumstances that the May cheque was delivered to OFM. His Honour noted that, at the time of the endorsement of the May cheque, the other directors had been appointed as directors of OFM, that there was no record of authority having been given by the board to Stanley to endorse the cheque and that there was direct evidence from two of the other directors that, so far as they knew, no such authority had been given. In the circumstances, his Honour was satisfied that Stanley was not authorised to endorse the May cheque.

10 Consequently, his Honour concluded, NAB had collected the proceeds of the cheque and credited them to OFS without OFM's authority. In those circumstances, said his Honour, NAB would be treated as having converted the cheque and as being liable to the appellant unless it satisfied the requirements of either ss.128 or 129 of the Corporations Act 2001 or was entitled to the protection provided by s.95(1) of the Cheques Act because it collected the cheques "in good faith and without negligence". His Honour noted that it was not alleged by the appellant that NAB had not acted in good faith and, as I explain more fully later, he concluded that the bank had acted without negligence in collecting the May cheque, notwithstanding that it had been put on enquiry by the crossing of the cheque in the manner described earlier**.** NAB was, therefore, his Honour found, entitled to the protection of s.95(1) of the Cheques Act.

June cheque findings

11 The circumstances in which the June cheque was processed were these. After the delivery of the May cheque, the liquidity problems of OFS and OFM continued to mount, with NAB continuing to press for reduction of their debts. On 7 June 2000, probably as a result of this pressure, a further amendment was made to the Heads of Agreement whereby the definition of "Initial Payment" was changed to $400,000 and, as a consequence, the June cheque was delivered to OFM on 8 June 2000. For much the same reason that led his Honour to find that NAB was not negligent in respect of the May cheque, the learned judge concluded that, although the bank had not established Stanley's authority to endorse the June cheque, it had not acted negligently in collecting its proceeds.

12 Consequently, NAB was held to be entitled to the protection of s.95(1) of the Cheques Act in respect of the collection of both the May and June cheques with the result that the appellant failed in its claims regarding all three cheques.

Sections 128 and 129 of the Corporations Act

13 Notwithstanding these conclusions, and only for the purposes of completeness, his Honour went on to analyse ss.128 and 129 of the Corporations Act and concluded that they afforded NAB a good defence in relation to the three cheques. His Honour rejected the appellant's claim that s.128(4)[5] applied, stating that he was satisfied that NAB, through its servants and agents, and in particular, Cooper, did not know or suspect that Stanley was not authorised to endorse the May and June cheques. The learned trial judge also rejected the appellant's claim that s.128(4) was concerned with constructive knowledge or constructive suspicion. But even if it were otherwise, said his Honour, he was satisfied that no grounds were established for concluding that NAB ought reasonably to have known or suspected that Stanley was not authorised to endorse the May and June cheques.

14 The appellant claimed below that NAB should not be entitled to rely upon the provisions of ss.128 and 129 of the Corporations Act because such a claim was not pleaded and that, in all the circumstances, it was too late to raise it. In rejecting this claim, his Honour noted that the complaint was not made by the appellant at the earliest reasonable opportunity, namely, in its initial written submissions, but was first raised only in its further written submissions, which were permitted to be made only after his Honour heard the parties on that question. In the circumstances, his Honour concluded, that the appellant would suffer no prejudice from the bank's late reliance on those provisions.

Grounds of appeal pressed

15 I now turn to the appellant's grounds of appeal that were argued before us. Although its notice of appeal contains eight grounds, most of which were of considerable length - for example, ground 1 takes up a whole page and ground 4 contains 14 sub-paragraphs - Mr. Nash, who appeared before us for the appellant, properly and responsibly, I think, argued only a number of them and, in the process, reformulated the basis on which he sought to challenge the decision below.

Fraud or breach of fiduciary duty

16 First, it was claimed, on the basis that Stanley and Ponting had the necessary authority to endorse the March cheque, that his Honour nevertheless erred in not finding that such endorsement constituted a fraud on the company or a breach of fiduciary duty and that, therefore, the cheque was misappropriated. In support of this contention, Mr. Nash argued, in reliance on the minority decision of Brooking, J. in R. v. Roffel[6], which, counsel said, was approved by the High Court in MacLeod v. The Queen[7], that a director who has authority to negotiate a cheque on behalf of a company may nevertheless act unlawfully so that, where the director negotiates in favour of his own business an "account payee" cheque made out in favour of the company, this constitutes prima facie evidence of his breach of duty to it. Thus, it was said, failure by NAB to establish the contrary, meant that his Honour should have found that the March cheque was misappropriated by Stanley and Ponting and that, consequently, NAB was liable to its true owner - OFM - in conversion.

17 It may be accepted, for present purposes, that a director with authority to negotiate a company's cheque may nevertheless do so fraudulently or otherwise in breach of fiduciary duty to the company. But in my view, neither MacLeod nor Roffel, nor, as far as I know, any other authority, supports the appellant's contention that a mere endorsement by the director of a cheque belonging to the company in favour of himself amounts to prima facie evidence of breach, such that the director bears the burden of establishing that the endorsement was not made in breach of duty. It seems clear enough that a cheque crossed in the manner described puts the bank on enquiry[8], but I consider that to go as far as the appellant does in its submission would be to reverse, impermissibly, the onus of proof.

18 For completeness, I note that MacLeod and Roffel dealt with circumstances that were materially different from those that were present in this case. In MacLeod, the court was concerned with the actions of a sole director and shareholder of a company who applied money deposited by the public with the company for investment in a film production scheme towards paying for a number of his personal expenses, including the purchase of his home. The director was charged under the New South Wales Crimes Act for fraudulently taking or applying, for his own use or benefit, the property of the company and was convicted. The joint judgment of Gleeson, C.J., Gummow and Hayne, JJ., and the respective judgments of McHugh and Callinan, JJ. do not contain any suggestion to the effect that mere endorsement of the cheques by the director constituted prima facie evidence of his breach of duty to the company. The same may be said about the dissenting judgment of Brooking, J. in Roffel. In that case, the applicant and his wife were the sole shareholders and directors of a small propriety company. Its premises were destroyed by fire and the insurance proceeds were paid into the company's bank account but they were not sufficient to meet all claims of the company's creditors. The applicant drew five cheques upon the company's account and it can be assumed for present purposes that the proceeds were used for his own purposes. At all relevant times, the applicant had authority to draw cheques on the company's account. He was charged and convicted on five counts of theft under s.72 of the Crimes Act 1958. On appeal, the critical question was whether it could be said that, in the circumstances of the case, there was a wrongful appropriation of the cheques and their proceeds. The majority[9] overturned the conviction on the basis that the company, through its directing mind, had consented to the applicant's drawing of the cheques on its account and, therefore, their Honours said, the element of appropriation was missing since it could not be said that the applicant had interfered with or usurped any of its rights of ownership. Brooking, J., however, considered that even if the cheques (and money) were taken with the authority of the company, there was "still a series of appropriations". His Honour said that Roffel had plainly appropriated the cheques fraudulently because he applied the funds for his own purposes. In that respect, his Honour's view was endorsed by MacLeod.[10] But, as I have noted, the decisions do not support counsel's contention that a mere endorsement of a non-negotiable cheque by a company director in favour of his business amounts to evidence of fraud or breach of fiduciary duty in the sense to which I have referred.

19 Mr. Nash next argued that, in any event, his Honour failed to consider whether there was a wrongful appropriation of the March cheque by Stanley and Ponting notwithstanding that they may have had authority to negotiate it. Counsel said that his Honour wrongly concluded that, once it was established that the appellant had failed to make out lack of authority in Stanley and Ponting to endorse the cheque, it followed that it could not be said that the two had acted fraudulently or in breach of duty to OFM. It was claimed that his Honour said as much when he said in his reasons for judgment:

"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."

In my view, however, these submissions disclose no relevant error by his Honour.

20 First, his Honour's impugned statement should be read in context. The case below on misappropriation was conducted by the appellant on the basis that the unlawful conduct was constituted by the endorsement of the cheque to Tasvinum without authority. Thus, the question whether Stanley and Ponting had authority to endorse that cheque was essentially the sole issue before the court and a great deal of evidence was led by the appellant in an attempt to show, inter alia, that the directors of OFM at the relevant time were not only Stanley and Ponting but included the other directors, or at least some of them, and that, in any event, no relevant authority was given to Stanley and Ponting to endorse the cheque. As I have said, his Honour rejected this claim, and it seems to me that, implicit in that conclusion, was the recognition by his Honour that mere endorsement of the cheque to Tasvinum did not constitute its misappropriation. Given the way in which the appellant conducted the case below, it is understandable that his Honour concluded that, once the appellant failed to establish lack of authority, it must fail in its claim that the endorsement amounted to fraud on OFM or a breach of fiduciary duty to it.

21 Secondly, as I have noted, his Honour also concluded that, in any event, there was no wrongful appropriation of the March cheque because the endorsement to Tasvinum was explicable as a proper commercial transaction.[11] I think that this finding also implies that his Honour had given consideration to whether the directors had acted fraudulently in endorsing the cheque and rejected it. Thirdly, even if the learned judge did not consider this matter, nothing turns on it because the appellant adduced no evidence in support of the claim that Stanley and Ponting acted fraudulently and thus, the finding for which the appellant now contends would not have been made below.

22 It follows that the appellant must fail in its argument based on the alleged misappropriation of the March cheque by Stanley and Ponting.

Negligence

23 The appellant next argued that his Honour erred in finding that the bank had established that it was not negligent (for the purpose of s.95(1) of the Cheques Act) in collecting the proceeds of the May and June cheques.[12] It was common ground below, as his Honour acknowledged, that NAB acted in good faith in collecting the two cheques. Hence, a primary issue before this Court was whether it had acted without negligence, a matter on which NAB bore the onus of proof.[13] Mr. Nash accepted that his Honour correctly stated the law on the elements of negligence in the context of s.95(1) of the Cheques Act, but argued that he misapplied the principles. Counsel submitted that the bank exercised no care whatsoever in ensuring that the interests of OFM in the two cheques were protected. It was said that NAB was only interested in clearing the excess debt in the OFS account and it relied impermissibly on Stanley's assertions that the endorsements were in order in the sense that it took no steps to have that claim independently confirmed. It was said that the evidence of Cooper in relation to the May cheque, for example, showed that he regarded the money coming in from Tower as being a "bucket of money" that could be used as Stanley directed and that, so long as the funds were applied to reduce the excess drawings by OFS, the bank did not care whether such action might be contrary to the interests of OFM. In that context, counsel referred to a number of documents that were in evidence, such as Cooper's notes of his conversations with Stanley and internal memoranda, which, he claimed, made it apparent that NAB was pressing Stanley to have members of the OFS Group bring their accounts into line and that in doing so, Cooper paid no regard to OFM's interest in the cheques. Furthermore, in support of his claim that Cooper displayed no interest in the rights of OFM, Mr. Nash pointed to the circumstances in which the May cheque was deposited with NAB. As counsel pointed out, it was deposited in a branch of the bank other than the one where Cooper was located and Cooper's evidence made it plain that he could not remember very much as to the circumstances of the transaction other than probably satisfying himself by enquiring from the branch bank officer over the telephone that Stanley's signature was on the cheque as endorser. Counsel said that the fact that the March cheque was endorsed by two directors should have alerted the bank to the possibility that OFM's constitution required the signature of two directors for a valid endorsement, yet Cooper made no such enquiry in relation to the May cheque. Mr. Nash submitted that the evidence showed that there was even less care taken by NAB in relation to the June cheque.

24 It is convenient to digress from the examination of this aspect of the appellant's case on negligence and deal briefly with its challenge to his Honour's implicit finding that funds from Tower essentially went to pay expenses incurred by OFS on OFM's behalf. Mr. Nash contended that OFS had spent only in the order of $50,000 on OFM's behalf, which was substantially less than the Tower moneys that were paid into the OFS account. In this respect, counsel relied on what was said in evidence by witnesses called by Tower and the questions put to them by NAB's counsel in cross-examination, the latter being treated by Mr. Nash as admissions against interest.[14] Thus, for example, he referred to the fact that Dick said in cross

examination that the OFM expenses paid by OFS were "very minimal"[15] and that the bank's own counsel had put to McNeil[16] in cross-examination, that (only) $54,000 odd had been spent by OFS in this regard. Mr. Nash argued that these matters demonstrated that the total amount spent by OFS on behalf of OFM was considerably smaller than the $300,000 that was paid into the OFS account by way of the May and June cheques. Counsel emphasised that the amount was immediately "eaten up" by NAB in reducing the overdrawings by OFS. Thus, it was said, the cheques were not used for the purpose of conducting the "Business" as provided for in clause 4 of the Heads of Agreement and NAB made no enquiries to satisfy itself that the money had been properly applied in the interests of OFM.

25 But there was other evidence before his Honour which pointed to OFS having spent amounts on behalf of OFM that were not insubstantial. For example, Dick's evidence confirmed that, in addition to providing office facilities for OFM, OFS paid the salaries of Cygler and Belnick, the latter being a consultant to OFM, as well as the salary of Norman, the chairman of OFM. Furthermore, McNeil's memorandum to the Tower board showed that OFM had been incurring the expenses associated with OFM's negotiations with companies in the industry for the purpose of securing contracts in relation to its undertaking and that such costs were not insignificant. As Ms Schoff for NAB submitted, it was common ground below that OFM conducted its business through OFS. The respondent's counsel also pointed out that, although there was no evidence as to the total amount that was spent by OFS on behalf of OFM, a considerable amount of material was before his Honour that showed the kind of expenses that were incurred, such as directors' and consultants' fees, employees salaries, lawyers' fees and rent, all of which indicated that OFM's expenses in the conduct of its business during the relevant period were considerable. In the circumstances, I consider that it was open and appropriate for his Honour to adopt the view that the total amount that OFS paid on behalf of OFM during the relevant period was not inconsiderable and certainly was significantly greater that the $54,000 referred to earlier.

26 Coming back to the appellant's challenge to his Honour's finding of absence of negligence on the part of the bank in its dealings with the two cheques in question, Mr. Nash argued that, in failing to make any enquiry of OFM as to the propriety of the May and June cheques being deposited into the account of OFS, NAB was negligent, even if it were assumed that any relevant enquiry by it would have been fruitless, as was found by his Honour. In that regard, Mr. Nash pointed to what was said by Gavin Duffy, C.J. and Starke, J. in Commercial Bank of Australia Ltd. v. Flannagan[17], namely, that, "as a rule", a bank should not receive for collection a non-negotiable cheque made payable to other than the payee "if there were anything in the cheque or in connection with the circumstances of the case which would suggest that the person lodging it had not a good title to it. But the instruction might be relaxed in the case of clients of good character and repute." A little later,[18] their Honours said:

"Experience has shown that there is a grave risk of misappropriation if managers, agents or servants pay other people's money into their own private accounts. But the Bank, through its officers, took the risk. It accepted [the agent's] statement, and assumed his authority to pay the cheque into his account without the slightest inquiry, though he was the person against whom the true owner required protection."

It seems plain enough that what their Honours said amounts to a general observation as to what banks should do in circumstances where servants of a company pay its cheque into their own account. In that case, the company's agent paid into his own bank account a cheque drawn by his principal in favour of "State tax or bearer". No enquiry was made by the bank of the principal as to the propriety of the transaction, although the agent, when queried by the bank, falsely told it that the cheque was being paid for his fees. It was in that context that the court held, unsurprisingly, that the bank had not discharged the onus of proof to show that it had acted without negligence. It is apparent that the circumstances of that case are materially different from those here, if for no other reason than that fraud was established as a fact in that case whereas it is not present here. Moreover, as I explain more fully later, there would have been be no point in the bank making enquiries of Stanley as to the propriety of the transaction from the point of view of OFM.

27 A good deal of Mr. Nash's argument was directed to the claim that his Honour erred in adopting the view that, because further enquiries of OFM about the propriety of the transaction would have been fruitless, NAB was not negligent in not pursuing them. Counsel argued that, even if further enquiries of OFM would have been non-productive, failure to make them amounted to negligence. In support of this aspect of his case Mr. Nash pointed to the decision of Giles, J. in Hunter BNZ Finance Ltd. v. C.G. Moloney Pty Ltd[19]. In that case, as a result of a fraud practised on it, the finance company made out two cheques to a supplier in respect of non-existing goods, crossed and marked "non negotiable - account payee only." The supplier endorsed the cheques to the fraudster, who deposited them into his own account with the defendant bank. The finance company sought damages from the bank for conversion. Giles, J. held that, because of the fraud, the finance company was entitled to rescind the transaction ab initio and, therefore, the bank would be liable for conversion unless it showed that it acted "without negligence" within the meaning of the predecessor to s.95(1) of the Cheques Act. In the context of analysing whether the bank had shown that it was not negligent, his Honour noted[20] first that, because the cheques were crossed and marked not negotiable, the bank was put on enquiry even though the cheques were apparently regularly endorsed. Giles, J. found[21] that, had the bank made appropriate enquiries, it was probable that the true position would have been revealed to it. In the circumstances, his Honour concluded, since the bank had made no enquiries of the true owner as to the propriety of the transaction, it had acted negligently. By way of contrast, in this case, the learned judge found, as I have said, that further enquiries would have been non-productive.

28 Be that as it may, Giles, J. went on to canvass[22] the divergent views in a number of cases as to whether the bank's failure to make any enquiry concerning the interests of the true owner constitutes negligence on its part, notwithstanding that any enquiry, had it been made, would probably not have revealed the true position. In the end, his Honour concluded[23], on the basis of what was said by way of dicta in a number of those cases, that, even if he had thought that a proper enquiry made by the bank in this case would not have revealed the true position in relation to the cheques, he would have held that the bank was nevertheless negligent by failing to make any enquiry at all. If his Honour's conclusion is to be taken to mean that he was of the view that mere failure by a bank to make enquiries of a potentially relevant source about the propriety of the transaction constitutes negligence on its part, even if that enquiry would have been fruitless, then it is apparent that such a conclusion was not part of the ratio decidendi of his decision.

29 But, for a number of reasons, which include the following, it is not necessary to analyse further the decision in Hunter BNZ or the apparent conflict in the authorities to which Giles, J. referred. First, the learned judge here did not base his ultimate finding of "non-negligence" by the bank solely on the fact that further enquiries by it of OFM would not have produced the response that the transaction was contrary to its interests. As will be explained more fully later, and as I have earlier noted, his Honour came to the impugned conclusion because he considered that, in the circumstances, NAB was entitled to assume that the Initial Payments were being applied in the furtherance of OFM's "Business", as contemplated by the Heads of Agreement, and thus, in its interests. Secondly, as I have said, in contrast to the situation in Hunter BNZ, his Honour found that any further enquiries of OFM, through Stanley, would have been non-productive - a finding that was clearly open, and appropriate, on the evidence.

30 In considering if the bank had established that its was not negligent for the purposes of s.95(1) of the Cheques Act, it should be borne in mind that, in this context, "negligence" is equivalent to "carelessness".[24] As is explained in Weaver and Craigie, Banker and Customer[25], the concept of "negligence" in the context of s.95(1) is not the same as that which underlies the tort of negligence. More particularly, they state:

"Negligence in the sense used here is not the independent tort of negligence but, rather, 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 omission of the collecting bank in a particular factual situation."

The test for determining if a banker was negligent in the collection of a cheque has been formulated by reference to the ordinary practice of bankers. Thus, for example, Lord Dunedin, after quoting with approval the decision of Isaacs, J. in Commissioner of State Savings Bank of Victoria v. Permewan, Wright & Co[26], said, in Commissioners of Taxation v. English, Scottish & Australian Bank Ltd.[27],:

"... the test of negligence is whether the transaction of paying in any given cheque was so out of the ordinary course that it ought to have aroused doubts in the bankers' mind, and caused them to make enquiry."

The reference to the "ordinary course" in this passage is a reference to the ordinary practice of bankers, which plays a key role in determining whether a banker has acted negligently in collecting a cheque. It is not just the procedure of the individual bank or banker to which regard must be had, but to the practice of the banking industry as a whole,[28] although mere concurrence with banking practice does not establish lack of negligence on the part of the bank.[29] As Lord Dunedin cautioned in the ES & A case[30], since the question whether a bank has acted negligently in collecting a cheque is a question of fact, "[it] is rarely possible to lay down rules or statements which will determine what is negligent and what is not." His Lordship's test, however, was effectively adopted by Isaacs and Rich, JJ. in The London Bank of Australia Ltd. v. Kendall[31], where their Honours said[32]:

"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."

31 Thus, the critical question in this appeal is whether his Honour erred in effectively concluding that a fair-minded banker would, in the present circumstances, consider it prudent to do no more than what Cooper did in satisfying himself that the interests of OFM were sufficiently protected, more particularly, whether such a banker would have made further enquiries of OFM as to the propriety of the transaction. In determining this question, all relevant matters must be taken into account[33], including, I think, that, in the circumstances, enquiry of Stanley whether OMF authorised the transaction would have been fruitless. I consider that his Honour did not err in this regard for the following reasons. It is true that Cooper was pressing Stanley in particular to put the account of OFS in order and was, thereby, advancing the interests of NAB. It must also have been apparent to the bank that the only source of funds for this purpose was Tower. But it is inaccurate to say, as the appellant did, that Cooper showed no interest in whether the cheques were being applied essentially in accordance with OFM's directions. What must be recognised is the extent of the relevant information that Cooper had available to him that bore on the propriety of the transactions. Importantly, he knew that the money from Tower had to be applied in accordance with the Heads of Agreement and the Shareholders' Sale and Subscription Agreement, the draft terms of which had been given to him prior to the May cheque. Thus, Cooper was aware that OFM, as a party to the agreements, had agreed to their terms. The agreements constituted an important part of what his Honour called "the basic contractual documentation" that showed, as I have said, that the cheques were to be applied to OFM's "Business". The bank was also aware that OFM conducted its "Business" through OFS in the way I have described and that OFM was therefore required to reimburse OFS for the costs of the operation. Thus, the central question for his Honour was whether a prudent banker would have been satisfied that the payment of the proceeds of the May and June cheques into the OFS bank account was tantamount to OFM using those funds for the purpose of its "Business".[34] In my view, given the circumstances in which OFM carried on its business, it was well open, and appropriate, to conclude, as his Honour did, that such a banker would have considered that the cheques in question were properly applied in the furtherance of its "Business" and, thus, in its interests, so that, in the circumstances, there was nothing out of the ordinary for the money to have been paid into the OFS account. Further, given that Stanley was the effective spokesman for OFM and OFS, and in light of the circumstances I have described, there would have been no point in Cooper making further enquiries of Stanley as to whether OFM agreed to the transaction. True it is that the cheques were crossed and marked as I have indicated, but as Ms Schoff correctly pointed out, this did not prohibit them from being negotiated, as is recognised by s.95 of the Cheques Act.[35] Those words merely put the bank on enquiry as to the title of the endorsee[36] and in the circumstances, the bank fulfilled its duty to OFM by satisfying itself through the "basic contractual documentation" that the payments were being made consistently with its terms. It is not irrelevant that his Honour had the advantage of seeing and hearing Cooper in the witness box and on the basis of his evidence and the surrounding circumstances, forming the view that he was an experienced bank officer who acted in accordance with prudent banking practice. I mention for completeness that, although his Honour noted in his reasons for judgment that further enquiries about the propriety of the transaction would have been fruitless, his ultimate conclusion on this issue did not turn on this finding even though it may have been a factor in his decision. In a sense, his Honour's reference to any further enquiry being fruitless was really no more than the recognition of the obvious, namely, that had Stanley been asked to confirm whether the cheques were being applied in accordance with OFM's wishes, he would have confirmed the position. In the circumstances, it was appropriate for his Honour to conclude that NAB had satisfied the requirements of s.95(1) of the Cheques Act and was, therefore, not liable to the appellant in respect of the two cheques in question.

32 Given this conclusion, it is unnecessary to consider the correctness of what his Honour said by way of dicta in relation to the operation of ss.128 and 129 of the Corporations Act. For completeness, however, I should say that I find no relevant error in his Honour's views as to the operation of those provisions, which I have summarised earlier, or in the exercise of his discretion to allow NAB to rely on them, notwithstanding that it had not raised the matter in its pleadings.

33 Consequently, I would dismiss the appeal.

34 I agree in the disposition of this matter proposed by Chernov, J.A. and I do so for the reasons advanced by him in his judgment.

35 I have had the benefit of reading in draft the judgment of Chernov, J.A. and for the reasons given by his Honour I agree that the appeal ought be dismissed.

[1] It was far from clear, however, how the proceeds of such a sale, other than for the issued capital in the company, would come into the hands of OFM.

[2] "Initial Payment" was then defined to mean $100,000.

[3] It was some time after 7 June 2000 that Tower eventually acquired 40 per cent of the capital of OFM and, thus, control of the company.

[4] His Honour considered that the evidence supported Cygler's concurrence in the endorsement by Stanley and Ponting of the March cheque, noting that he subsequently wrote to the bank in terms that confirmed that he was aware of the transaction and further, that he wrote to Tower confirming the receipt by OFM of the $100,000 and requesting further moneys be paid by Tower to OFM.

[5] Section 128(4) provides that a person is not entitled to make any of the relevant assumptions if at the relevant time they "knew or suspected that the assumption was incorrect".

[6] [1985] VicRp 51; [1985] V.R. 511.

[7] [2003] HCA 24; (2003) 214 C.L.R. 230.

[8] See A.L. Underwood Ltd. v. Bank of Liverpool [1924] 1 K.B. 775 at 793 to 794 per Scrutton, L.J. and Hunter BNZ Finance Ltd. v. C.G. Moloney Pty. Ltd. (1989) 18 N.S.W.L.R. 420 at 443 to 444 per Giles, J.

[9] Young, C.J. and Crockett, J.

[10] See at 253 per McHugh, J and 262 to 263 per Callinan, J. In the reasons for judgment of Gleeson, C.J. and Gummow and Hayne, JJ., their Honours did not refer directly to Roffel, however, their Honours endorsed the view of the House of Lords in Director of Public Prosecutions v. Gomez [1992] UKHL 4; [1993] A.C. 442, where the majority's decision in Roffel was criticised and not followed.

[11] See paragraph [8] above.

[12] Given that I have concluded that the appellant has failed to establish that his Honour erred in his conclusion that the March cheque was lawfully endorsed or in the conclusion that the endorsement was not fraudulent or in breach of fiduciary duty, the question whether the bank was negligent in its dealings with that cheque did not arise for resolution.

[13] See, for example, Marfani & Co. Ltd. v. Midland Bank Ltd. [1968] 1 W.L.R. 956 at 972 per Diplock, L.J; London Bank of Australia Ltd. v. Kendall [1920] HCA 53; (1920) 28 C.L.R. 401; and Mason v. Savings Bank of South Australia [1925] S.A.S.R. 198. The duty of care owed by a bank to the true owner of the cheque arises at the time when the cheque is presented for collection - See Marfani at 972 per Diplock, L.J.

[14] See, for example, Spiteri v. Visyboard Pty. Ltd. [2005] VSCA 132 at [44]- [46] per Ormiston, J.A.

[15] But Dick's evidence also made it apparent that he had no actual knowledge of what these payments were or what they totalled.

[16] McNeil was Tower's representative on the OFM board.

[17] [1932] HCA 51; (1932) 47 C.L.R. 461 at 468.

[18] At 468 to 469.

[19] (1989) 18 N.S.W.L.R. 420.

[20] At 442 to 444.

[21] At 445.

[22] At 447 to 450.

[23] At 451.

[24] Orbit Mining and Trading Co. Ltd. v. Westminster Bank Ltd. [1963] 1 Q.B. 794 at 824 per Harman, L.J.

[25] Weaver and Craigie, The law relating to Banker and Customer in Australia, 3rd edition, Law Book Company, at [9.6710].

[26] [1914] HCA 83; (1914) 19 C.L.R. 457 at 478.

[27] [1920] A.C. 603 at 688.

[28] Rosenhain v. The Commonwealth Bank of Australia [1922] HCA 41; (1922) 31 C.L.R. 46.

[29] See, for example, E.B. Savoury & Co. v. Lloyd's Bank Ltd. [1932] 2 K.B. 122 at 144 per Lawrence, L.J., where his Honour held a banker to be negligent despite following a bank's procedure that had been in place for several decades. His Honour said that "where bankers, solely for convenience of their customers, have adopted a system with an inherent and obvious defect which no reasonably careful banker could fail to observe" negligence may be found.

[30] At 689. See also Permewan Wright at 483 per Gavan Duffy and Rich, JJ.

[31] [1920] HCA 53; (1920) 28 C.L.R. 401.

[32] At 417. See also, for example, Lloyds Bank Ltd. v. The Chartered Bank of India, Australia and China [1929] 1 K.B. 40 at 72 per Sankey, L.J.; Commercial Bank of Australia Ltd. v. Flannagan at 467 per Gavan Duffy, C.J. and Starke, J. and at 469 to 470 per Dixon, J. But also see Lloyds Bank Ltd. v. E.B. Savory & Co. [1933] A.C. 201 at 211 to 215 per Lord Buckmaster. See also Alan L. Tyree, Banking Law in Australia, 4th edition, at 257.

[33] Permewan Wright at 483 - 484 per Gavan Duffy and Rich, JJ.

[34] It is relevant to bear in mind that the two cheques in question were "Initial Payments" that were required by the Heads of Agreement to be paid to OFM or for the purpose of its "Business". The fact that, at a later point in time, when the sale of shares in OFM to Tower was finalised, a parcel of OFM shares was transferred to Tower by the family companies of Stanley and Ponting thereby entitling them to payment, does not mean that it was inappropriate to make the two Initial Payments to OFM in the first instance.

[35] See Permewan Wright at 478 per Isaacs, J. and A.L. Underwood at 793 to 794 per Scrutton, L.J

[36] A.L. Underwood at 793 to 794 per Scrutton, L.J., Hunter BNZ at 443 to 444 per Giles, J.

At a glance

Court

Decision date

Before

Source

Judgment (26 paragraphs)

Parties