A CHEQUE TRANSACTION

Otago Witness, Issue 4039, 11 August 1931, Page 26

A CHEQUE TRANSACTION

JUDGMENT FOR PLAINTIFFS FRANCIS AND TAYLOR v. COMMERCIAL BANK OF AUSTRALIA. Mr Justice Kennedy gave judgment on Friday in the case in which Francis and Taylor, Ltd., of Dunedin (in liquidation), claimed £603 from the Commercial Bank ( of Australia, Ltd., as damages for the conversion of a cheque. Mr J. S. Sinclair appeared for ..he plaintiffs, Mr A. S. Stephens for the defendant bank. His Honor’s judgment was as follows,: — In this action the plaintiff claims £603 for damages for conversion of a cheque. The claim is made n the following circumstances: —Until some time in the year 1925 F. B. Francis carried on in Dunedin the business of land agent and speculative builder. About September, 1925, he entered the motor business as agent for “ Reo ” motor cars and trucks trading under the style of F. B. Francis and Co., and in that, as well as in his former business he had dealings with the Otago and Southland Finance Corporation, Ltd., which in this judgment is sometimes referred to as the finance company. In 1926 he converted his motor business into a company called Francis and Taylor, Ltd., which is sometimes referred to in this judgment as the company. This company had a capital of £lO,OOO, of which F. B. Francis subscribed for shares to the nominal amount of £5OOO and T. R. Taylor, of Invercargill, held the balance. F. B. Francis in his business as land agent and later in his motor business banked with the Commercial Bank of Australia, Ltd. l.he company when formed also banked with that bank. F. B. Francis’s own account was overdrawn and, on the guarantee being cancelled Francis opened, as required by the bank, a further account called F. B- Francis’s No. 2 account, which was always to be kept in credit. The bank was aware from the manager s interview with Francis and with Francis and Taylor of the main details of the new company. The company did not, for some time after its formation, do business with the Otago and Southland Finance Corporation. Ltd., but placed its finance business with a company in which Taylor was in some way concerned. In February, 1927. Francis and Taylor, Ltd., applied to tlie Otago and Southland Finance Corporatoin, Ltd., for an advance in respect of a hire purchase agreement signed by R. W. Stokes and of the relevant piomissory notes, and was informed that the transaction would be entertained only if it involved the opening up of further business with the finance company and was not an isolated transaction. Francis gave this assurance, and the finance company required the completion of what it termed its “ blanket ” form of security before business was done. That security was executed by the seal of Francis and Taylor. Ltd., being affixed thereto at the company’s office, but not in accordance with the articles of association because it was signed by F. B. Francis as director and Jean Campbell as secretary, whereas the articles require that any document, to which the company’s seal is affixed, shall be signed by two directors and the secretary. When the security had been thus completed, the secretary of the finance company handed to F. B. Francis for the company a cheque for £603 crossed and marked not negotiable, payable to the order of Francis and Taylor, Ltd., and took a receipt from the company for the cheque. This cheque was misappropriated bj 7 F. B. Francis who endorsed the cheque "Francis and Taylor, Ltd., F. B. Francis director,” and had it lodged with the Commercial Bank of Australia, Ltd., at Dunedin for collection for the F. B. Francis No. 2 account. The proceeds, when collected, were placed to the credit of that account and were applied by F. B. Francis for his own purposes. Upon the evidence I think there is no doubt that the cheque, which was collected by the bank, was earlier in possession of and became the property of the company. There is equally no doubt that it was then misappropriated by Francis for his own fraudulent purposes, that the bank had no right to deal with it, and that the bank converted the cheque. Bankers who collect cheques foi their customers borrow from their customers the proceeds when collected and. in collecting, exhaust the operation of the cheque. These operations have been held to be conversion in Fine Art Society v. Union Bank of London (1886) 17 Q.B.D. 705; Morison v. London County and Westminster Bank, Ltd (1914), 3 K.B. 356; A. L. Underwood. Ltd. v. Bank of Liverpool (1924) 1 K.B. 775 and in Lloyds Bank v. the Chartered Bank of India, Australia and China (1929) 1 K. 40. The bank will be liable therefore unless it is entitled to protection under section 82 of the Bills of Exchange Act, 1908. which provides that where a bank in good faith and without negligence receives payment for a customer of a cheque crossed generail} 7 or specially to himself and the customer has no title or a defective title thereto, the banker shall not incur any liability to the true owner of the cheque by reason only of having received such payment. It was conceded by the plaintiff that the bank had acted with good faith but it was contended that the bank had not establshed that, in all the circumstances, it had acted without negligence. The onus of establishing circumstances showing the absence of negligence is on the banker; Souchette, Ltd., v. London County, Westminster, and Parr’s Bank, Ltd. (1920), 36 T.L.R., 195. Negligence in this connection is a breach of a statutory 7 duty to the possible true owner, not to the customer, the duty being not to disregard the interests of such true owner: Bissell and Co. v. Fox Brothers and Co. (1885), 51 L.T., 663. In that case at p. 666, Denman, J., whose statement was approved on appeal (1885), 53 L. 193), said "that the negligence contemplated in section 82 must mean the neglect of such reasonable precautions as ought to be taken with reference to the interests, not of the customer who purports to have the authority, but of the principal whose authority he purports to have, the section being framed wholly with reference to the liability of the banker

to the ‘ true owner ’ of the cheque, and not with reference to his liability to his customer.” See also Hannan’s Lake View Central (Ltd.) v. Armstrong and Co. (1900), 16 T.L.R., 236. In Lloyds Bank v. the Chartered Bank of India, Australia, and China (supra) at p. 69, Sankey, L. J„ said: “What is negligence, under the circumstances? The difficulty is that the statute does not speak of any corresponding duty, but leaves that to be inferred. I think the duty of the defendants to the true Owner of the cheque was (1) to exercise the same care and forethought with regard to the cheque paid in by the customer as a reasonable man would bring to bear on similar business of his own, and (2) to provide a reasonable and competent staff to carry out this duty.” The test of, whether in the absence of inquiry, a banker has been negligent was authoritatively stated by Lord Dunedin in Commissioners of Taxation v. English, Scottish and Australian Bank (1920), A.C. 683 at p. 688 as being whether the transaction of paying in any given cheque, coupled with the circumstance 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 inquiry, and later at p. 689 Lord Dunedin said that the bank’s action should be in accord with the “ordinary practice of bankers.” The guidance given by the judgment just refeired to helps to a determination of the question whether inquiry should be made, and it was admitted by counsel for the bank that, in this case, the bank was put upon inquiry. That admission was properly made because the cheque was drawn to the order of the company and was not paid into the company’s account. but was, at its bankers’, upon an endorsement by an employee of the company, paid to the credit of that employee. The rule is that, where there is an indication that the customer is using for his own benefit a cheque prima facie created for the benefit of the company which employs him, and being, the property of that company, this should put the banker upon inquiry. Many cases support this view. Reference may be made to Hannan’s Lake View Central, Ltd., v. Armstrong and Co. (supra) where the secretary of the company endorsed a cheque made payable to the company and paid it into his own account, and A. L. Underwood, Ltd., v. Bank of Liverpool (supra) where a sole director endorsed a cheque payable to his company and paid it into his own account at the bank where the company did not have an account. I think that there were, in this ease, eronnds for suspicion. There were to use the language used by Lord Dunedin in Commissioners of Taxation v. English. Scottish and Australian Bank (supra), circumstances which sounded "such a note of alarm as ought to have put the bank on their guard.” The manager of the defendant bank at Dunedin answering a question, reciting facts in this case. said. " as a rule that would merit the most careful inquiry.” Bankers must inquire not only under but into suspicious circumstances. It may be. as Sir John Paget points out in his Law of Banking, fourth edition, p. 249, “ an awkward matter for the banker to manifest suspicion of bis own customer; but if he refrained from acting on such suspicion, he might easily render himself liable to the true owner, as having neglected his duty to him.” or as Scrutton. L. J., said in A. L. Underwood, Ltd v. Bank of Liverpool (supra), at p. 793. If banks for fear of offending their customers will not make inquiries into unusual circumstances, they must take, with the benefit of not annoying their customer, the risk of liability because they do not inquire.” The next question is whether reasonable inquiries were made. I think the general rule to apply is that stated by Isaacs and Rich, J J., in London Bank of Australia. Ltd. v. Kendall, 28 C.L.S. 401, at p. 417. in the following words: — “ 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.” Banks are not amateur detectives and it must be remembered that the inquiry now being made is ex post facto and that in judging the conduct of the bank one must eliminate the knowledge that one now has, that there was in fact a fraud. Prior to the cheque being paid in, Francis had an interview with the manager of the defendant bank and amongst other things Francis told him he expected to be paying into his No. 2 account a cheque from the Otago and Southland Finance Corporation, Ltd., part of which he stated was to be paid to the company. When the cheque was lodged, it was not in favour of Francis as intimated, but in favour of the company. Such a cheque was plainly, on its face, the property of the company and not of Francis. When the accountant rang the company’s office to inquire, he was informed that Francis was out of the city. On the same day there was paid into the company’s account a cheque for £261 5s drawn on the F. B. Francis No. 2 account. There then being circumstances of suspicion, and there being raised a doubt as to whether Francis was the true owner of the cheque, which was drawn by the finance company, which presumably knew with whom it was dealing, the inquiries made in the interests of the true owner would naturally be directed to ascertaining why the company’s cheque was paid into Francis’s private account and whether Francis had taken by transfer or how it came about that the transaction was not, as the document affirmed it to be, a transaction between the Otago and Southland Finance Corporation, Ltd., and the company, but a transaction between that corporation and F. B. Francis personally The bank could not, without negligence, take any answer as quieting its suspicions or resolving its doubt, nor could it, without negligence, rely upon as being sufficient, without any explanation, the statement that the payment into Francis’s account was in order or that Francis was the true owner, unless perhaps such statement- came from a person of undoubted independence and obvious competency to speak for the payee. In Slingsby v.

Westminster Bank, Ltd. (1931) 1 K.B. 173 at p. 190, Finlay, J. expressed the view that a bank might, without negligence, act upon an explanation made by a customer of the highest repute consistent with information already received, and not on its face improbable. The defendant bank’s duty, if an inquiry was necessary would be, according to an admission by the manager at Dunedin, to take a statement from the customer first and to check it up by reference to the payee.

Tins brings me to a consideration of the question of fact, what inquiries were made. I am satisfied on the evidence that the defendant’s accountant at Dunedin did communicate with the company’s office and was informed that Francis was out of the city. Such an inquiry might well be made without being remembered by the person answering. He speaks further of asking for the secretary and of receiving an explanation which satisfied him. Miss Campbell, the secretary, and Miss Goodall deny any inquiry from the bank. Miss Campbell left business some months after the collection of the cheque. The account spoke of referring the matter, after his inquiry, to the manager. No diary entries in any way recording the inquiry were made by the bank officers concerned. The answer deposed to was one which the secretary of the company could not properly give. No truthful answer could have been given that Francis acquired the cheque in a legitimate way by transfer from the company, or that, in mistake, the cheque . had been made out to the company although it should have been made payable to Francis. Miss Campbell denies the inquiry. Having regard to the way in which the evidence was given by the accountant, she spoke in positive terms of a telephone interview and of an explanation, but only to a general impression of the explanation, I am unable to say that I accept his evidence that she gave him a satisfactory explanation in preference to Miss Campbell’s on this point, or to explain Miss Campbell’s evidence as due to forgetfulness. I have not overlooked the observation that the testimony of Miss Campbell and Miss Goodall was negative in terms. I think there is a probability that an inquiry, explicit enough to involve an answer which might be relied upon, would be remembered, and might be mentioned to Miss Goodall. On the evidence as adduced then, I see no reason why I should accept the evidence of the accountant in preperence to the evidence of Miss Campbell and Miss Goodall, and I treat it as not proved by the defendant bank that its accountant received a satisfactory explanation from the company’s sccretary or was assured that the cheque was not a transaction of Francis and Taylor’s and could go to Francis’s account. I proceed, however, to consider whether, upon the assumption that the bank made inquiry and received the answer stated, those inquiries were, in the circumstances, reasonably sufficient so that it might be said that the bank received payment without negligence. Where inquiries are made the question is as Finlay, J., said in Slingsby v. Westminster Bank, Ltd. (supra), at p. 189, “ whether a reasonably competent and careful bank official would have been satsfied with the answers he received or would have pursued the matter further.” The statement, if made, simply amounted to a confirmation of the regularity of the transaction, without any explanation accounting for the cheque being made out to the company as the owner and pointed to mistake on the part of the drawer, for it is unusual ior a cheque really payable to A to be made payable to B. This statement was not checked by any reference to the only other person in the company, namely Taylor, who was no doubt available on the telephone, nor by a further inquiry from Francis himself to get his explanation nor, in view of the statement sug- I gesting mistake, from an obvious source, namely, the drawer of the cheque. 1 do not say that all these inquiries should have been made, but to make none of them, in the circumstances, was in my view a negligent omission. There is a banking practice with certain other banks in Dunedin not to receive such a cheque for the employee’s account, but to require it to be paid into the account of the employer named in the cheque, and this accords with a practice of collecting banks which Sir John Paget in his “ Law of Banking,” fourth edition, p. 252, speaking of English banking, refers to as “ fairly well established,” “ not to collect for private account any cheque which on the face of it or by indorsement bears evidence of being the property of or intended for the benefit of a company, firm or other entity and which is tendered for collection by a person holding or purporting to hold a fiduciary, official, or subordinate capacity in such company. firm or entity-, whether indorsed by him or not.” This rule, he further says. “ should be rigorously adhered to in all cases, including the case of a cheque drawn by such company, firm or entity in favour of a named payee or order and tendered for collection, ostensibly endorsed, by a representative of such company, firm, or entity, for hie private account.” The practice of some banks, when the amount of the cheque is large, is said to be to receive the customer’s explanation and to check it, in cases, by a reference to the draw 7 er. I think in this case if the statement deposed to by the accountant w 7 as made, then, as it was no real explanation, there should have been such a reference to the drawer of the cheque. It is true that the company’s secretary was a book-keeper and evidently of some intelligence and capacity, but in a one-man company or in small private companies, persons holding the office of secretary are not usually possessed of or allowed to possess such an independent grasp of the business as to be capable of answering as to the regularity of directors’ actions. The bank collected without getting the customer’s explanation, and later inquiries from Francis before the bank had actually received the proceeds might easily have had considerable effect; cf., the observations of Bankee, L.J., at p. 789 and of Scrutton, L.J., at p. 793, in A. L. Underwood, Ltd., v. Bank of Liverpool (supra). It follows that in my opinion the bank did not, in all the circumstances of the case, receive payment without negligence and is liable for conversion. It was, however, finally contended that the cheque had been procured by a false

pretence on the part of Francis, and consequently the company could not sue for the conversion of it. The fact so far as material to dispose of this defence, may be shortly stated. R. W. Stokes was sub-agent of the company at Balelutha. He executed a hire purchase agreement over a Reo truck. The hire purchase agreement recited the receipt of £3OO deposit, which was not received, and Stokes was not given possession of a truck and no record was made in the books of the company. The explanation given was that Stokes entered into this hire purchase arrangement so that he might have a truck immediately available for delivery should he effect a sale. Francis gave Stokes a promissory note for £6OO indemnifying him should he be called upon to pay intalments of hire. It was in respect of this hire purchase agreement and the vehicle the subject of it that Francis, on behalf of the company, applied for an advance. I shall assume as a fact that so far as Francis was concerned, the statements contained in the application were fraudulent, and that the moneys obtained were obtained by a false pretence from the finance company. Although the finance company was induced by Francis’s fraud to advance by cheque £603, it never repudiated the transaction and the company was entitled to the cheque and liable to repay the money advanced. The object of the contract w 7 as not illegal, as in Taylor v. Chester, 38 L.J., Q. 8., 225, nor was the borrowing by the company and the lending by the finance company illegal What was wrong was the fraudulent inducement. The company in making its claim upon the cheque does not rely upon that fraudulent inducement as its cause of action. The plaintiff had at least a possessory title to the cheque, and it was at the conclusion of the case intimated that it was admitted that the cheque became its property. Apart from this admission, I think it clear that its de facto possession was sufficient to support the action for conversion, and it could make no difference by what mode the plaintiff obtained its possession. As Sir John Salmond says in his Law of Torts, seventh edition, p. 403: "Whether honest or dishonest, it is a good title adversus extraneos.” . See also Buckley v. Gross (1863), 3 B. and S., p. 574. This ground of defence then fails. There will accordingly be judgment for the plaintiff against the defendant for £603, with witnesses’ expenses, and disbursements to be fixed by the registrar, aud I certify for one extra day 7 of hearing at £l5 15s.