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Negotiable Instruments
In this module, we focus on financial instruments which replaced the need for physical exchange of money or other valuables in commercial transactions, and which could facilitate complex arrangements, not possible with physical only settlements.
We start with Bills of Exchange and Promissory Notes and then discuss Cheques-- a subset of Bills of Exchange.
A good working knowledge of the Bills of Exchange Act and Cheques Act is required. A physical Negotiable Instrument is a “good” ; (usually associated with a debt). As a result, we must remember contract and conversion, as well as the law of Negotiable Instruments.
Negotiable Instruments-our focus
We will look at the use of negotiable instruments for payment, finance and structuring.
Students will be expected to: Understand the required form and formality for such instruments so they can recognise whether an instrument is or is not a valid negotiable instrument, or what qualities certain characteristics or crossings impart that affect dealing in these instruments.Be able to work through problems involving fraud (with or without forgery) and Understand the contract between customer and banker in the light of both Statute and common law.
A System of payment designed to eliminate the difficulties and risks involved in having large sums of cash, gold or silver always and immediately available and to overcome problems with transporting them over dangerous distances.
Grew out of Merchant practice. Later codified in statute. Still used extensively in trade as they enable seller to arrange collection of account before parting with title to goods.
All negotiable instruments are transferable….bills of exchange, cheques, bearer debentures, promissory notes, some bonds….but not all things transferable are negotiable….share certificates, money orders, IOUs.
As well as payment method, extensive use in liquidity management (ability to discount) and in financing (commercial bill acceptance or paper facilities).
CONCEPT OF NEGOTIABILITY
Characteristics of Negotiable Instruments
• Title is capable of transfer by mere delivery (or where payable “to order”, by endorsement and then delivery)
• No requirement for notice of transfer to be given to person liable. (Contrast s. 12 Conveyancing Act)
• Holder can sue in their own name. • Holder who takes in good faith and for value takes it
free of equities and may obtain better title than transferor.
• A presumption of bona fides and consideration.
What does a Bill of Exchange look like?
No22 Due 12/12/2008
AUD100,000 Sydney 22/07/08
Three months after date pay to the order of M. Jones without days of grace the sum on One Hundred Thousand Dollars
To: R Connor S. Lambert
Negotiable instruments -illustrations of use-payment
DOCUMENTARY COLLECTION FOR AN IMPORTER
What is it? A documentary collection consists of a Bill of Exchange plus various shipping documents relating to the goods you are importing…invoice, bill of lading, other transport documents, insurance policy…delivered to you-via your agent bank. These documents are released to you in exchange for:
On the spot payment (sight documentary collection)Your endorsing the Bill of exchange as a promise to make payment at a future date, as negotiated and specified in the Bill of exchange (term documentary collection)
Who initiates it? Your supplier, once terms have been agreed with you usually via their bank to yours.
Documentary collection
2. Shipment
8. Buyer (importer) 3. Seller (exporter)
7. Presenting bank 5. Remitting Bank
1. Contract of Sale
9a. Payment
9b. Shipping documents
4. Lodgement of shipping documents
11. Payment6. Shipping documents
10. Payment
Documentary Collection
1. Contract is negotiated between buyer seller.2. Method of payment -documentary collection, shipment prior to payment.3. Exporter prepares shipping documents, BOE and instructions4. Documents lodged with remitting bank, who acts in accordance with
instructions from exporter5. Remitting bank examines documents 6. Remitting bank dispatches documents to presenting bank.7. Upon receipt shipping documents, presenting bank presents BOE to
importer8. Importer will either agree to make payment or refuse9a. If importer agrees to payment, payment or acceptance of BOE9b. Shipping documents released to importer on payment or return of
accepted BOE10. Presenting bank makes payment to remitting bank11. Remitting bank makes payment to exporter.
Commercial Bill Acceptance Facility
KD Morris & Sons Ltd (In Liq) v. Bank of Qld Ltd (1980) 146 CLR 165
In 1973, Keith Morris Construction Ltd group was Queensland’s largest building contractor. A subsidiary, KD Morris & Sons Pty Ltd needed $2m. Bank of Qld and Tricontinental agreed to provide Co with commercial bill acceptance facilities of $1m each.
The Company would draw bills payable in 180 days which it could immediately discount with Tricontinental providing the Company with cash to the value of the bills less discount. Each 180 daysbills would be “rolled over”, meaning new bills would take the place of those retired on maturity. Method had advantage to Bank that it involved no actual advance of funds. Instead the money came from the discounter, Tricontinental and ultimately other operators in the commercial bill market to whom Tricontinental might in turn discount the bills. The Bank supplied ready acceptability of the Company’s bills in the market place i.e. credit enhancement. It added its name. In this case, security was required (land) but not always so if credit rating (often dependent on strong cash flow, debt service ability) sufficient.
Negotiable Instruments-use in finance
USING A BILL OF EXCHANGE when structuring transactions/settlements
A in Australia owes B in NZ AUD 100,000 for goodsB owes C in Australia AUD 100,000 for goods
To satisfy B’s debt to C, B could assign the debt owed to B by A to C by means of the statutory machinery for assignment of choses in action (NSW Conveyancing Act)
Instead of A sending currency to B and B sending money to C, B could send a written order to A to pay C the amount of B’s debt.The drawing of a BofE is distinct from the underlying sale of goods.
Sydney 10th March 2005AUD100,00060 days after sight, pay C or order the sum of one hundred thousand Australian dollars (AUD100,000)To: A
AcceptedSigned A………………….. Signed B………………………
To be effective the bill must comply with s. 8 BEAB is drawer, A is drawee (and if A accepts, the acceptor),C is the payeeThis bill is an unconditional order in writing given by B, signed by B, requiring A to pay not on demand, but at a fixed or determinable future time a sum certain in money to the order of C….there is no bearer in this bill
DRAW BILL TO IMPLEMENT ABC transaction
DEFINITION S. 8 BILLS OF EXCHANGE ACT
UNCONDITIONAL ORDER IN WRITING ADDRESSED BY ONE PERSON TO ANOTHER SIGNED BY DRAWER REQUIRING DRAWEE TO PAY ON DEMAND OR AT FIXED OR DETERMINABLE FUTURE TIME A SUM CERTAIN IN MONEY
BILLS OF EXCHANGE
IRREVOCABLE AND UNCONDITIONAL
John Shearer Limited and Arrowdrest Group P/L and Gehl Company (1995) 17 ACSR 350 (1995) 130 ALR 732
John Shearer was a dealer in Agricultural machinery and for many years distributed machinery manufactured by Gehl. Gehl terminated the distributorship and Shearer dishonoured various Bills of Exchange
Gehl served statutory demands pursuant to the provisions of the Corporations Law s.459 (part of 1993 amendments). Shearer claimed it was a new basis whereby a company could apply to the court to set aside that demand by disputing the genuineness of the debt or relying on an offsetting claim.
Court reviewed authorities (under Bills of Exchange Act, possible only to dispute in exceptional circumstances (if bill procured by fraud, duress or for a consideration which had failed,) interaction with the provisions of the corporations law (was not a Code which replaced the law re Bills of Exchange and must be read together) and policy (need for certainty in law merchant).
In view of the importance of the preservation of the law merchant in international and intranational transactions, would not permit law of Bills of Exchange to be amended by implications. It had to fit very specifically within the meanings.
“The general law having made it clear that unliquidated cross claims cannot be relied on to extinguish a claim on a bill of exchnage, the only available conclusion is a finding that John Shearer does not have an offsetting claim”.
Document purported to be Bill of Exchange.US Company sent it to Melbourne Co (R)
Ordered R to pay “Sixty days after sight” approx 1,471 pounds to order Caravel “ with interest at the rate of 8% per annum until arrival of payment in London to cover”.
Was it a Bill of Exchange? A sum certain?
Sum not capable of being ascertained at time fixed for payment
Time fixed for payment 60 days after sight
Sum certain even if it is plus interest provided it can be calculated with certainty at date in question
Interest was to run until arrival of payment in London.Uncertain when or if this would happen
Uncertain both on face document and in fact
Not a Bill of Exchange
Rosenhain v. Commonwealth Bank of Aust. (1922) 31 CLR 46
TRANSFERABILITY - easy, no notice required
SECURITY - no need for cash
DISCOUNT - liquidity when desired
NEGOTIABILITY - transferee can hold free of prior defects in title
PAYMENT - facilitate payments at a distance
FINANCING - commercial paper, flexible, liquid
DISHONOUR - can sue on bill rather than establish facts of debt
DEFENCES LIMITED - no set- off for unliquidated damages
USE IN MULTIPLE TRANSACTION SCENARIO - can eliminate need for some
BILLS OF EXCHANGE ADVANTAGES
INLAND BILL - Drawn and Payable Within Australia
FOREIGN BILL - Any Bill not an inland Bill
More complex procedure on dishonour
Clean foreign bill has no documents attached
Documentary foreign bill has documents attached
Protest necessary for non-acceptance, non-payment
ACCOMMODATION BILLS S.33 - Drawn for purpose of financing
Most commercial paper
Accommodation party lends name
Can improve credit and make it discountable.
INCHOATE OR INCOMPLETE BILLS S. 25 - Lack some material particular
Person in possession prima facie authority to complete
Must be filled within reasonable time and in accordance with authority
BILLS OF EXCHANGE CLASSES OF BILLS
The assent of the drawee to the order Drawee not liable until acceptance Invalid if not written on the bill and signed by Drawee Mere signature enough Person not liable as acceptor unless he has signed as such s. 28
Acceptance can be general or qualified
Qualified acceptance varies effect and must be clear and unambiguous Conditional Partial States expressly that acceptor will only pay at specified place and no other Limits time of acceptance Made by less than all drawees indicated on bill Holder may refuse qualified acceptance and may treat it as dishonoured
for non-acceptance Must dissent within time or deemed to have assented to it
ACCEPTANCE
Parties to a Bill
Drawer-person who issues the order. Usually a creditor of drawee.
Drawee-party being asked to pay. They become the acceptor when they accept the obligation by signing.
Payee-entitled to payment
Indorser-holder of an order bill who negotiates it to another party by delivery
Bearer-person in possession of bill payable to bearer
Holder-everyone who has possession of a bearer bill; or in the case of an order Bill, the original payee or an indorsee.
Holder for value-holder who has given value, or subsequent holder
Holder in due course -see definition in Act
BLANK - Signature of indorser; no indorsee named.
SPECIAL - Signature indorser and indorsee named.
CONDITIONAL - See s.38BEA which permits disregard of condition.
RESTRICTIVE - Further transfer restricted. See s. 40.
SANS RECOURS - No recourse.
Indorser or drawer negatives liability to holder in event dishonour.
INDORSEMENTS
Forged or unauthorised signature. S. 29 Bills of Exchange Act
Subject to the provisions of this Act, where a signature on a bill is forged or placed thereon without the authority of the person whose signature it purports to be, the forged or unauthorized signature is wholly inoperative, and no right to retain the bill or to give a discharge therefor or to enforce payment thereof against any party thereto can be acquired through or under that signature, unless the party against whom it is sought to retain or enforce payment of the bill is precluded from setting up the forgery or want of authority. Provided that nothing in this section shall affect the ratification of an unauthorized signature not amounting to a forgery.
Forged or unauthorized signatures
A person in possession of a Bill under a forged indorsement is not the payee. Because the indorsement is inoperative, they cannot be the indorsee. Because it cannot make the bill payable to bearer (see definition of bearer), it follows that they cannot be a holder (see definition of holder) or a holder in due course (see s. 34, and exception in circumstances and to extent in 60(2)(b))
Subject to the provisions of this Act…in s. 29…include s.12(3) fictitious payee, s. 59(b)(i) estoppel of acceptor, 60(2)(b) estoppel of indorser, and banker protections
Note assumption in s. 35
S. 34
A holder in due course is one who takes a Bill Complete and regular on the face of it Before it was overdue Without notice of dishonour In good faith For value Without notice, at the time bill was negotiated to him, of
any defect in title of person who negotiated it
HOLDER IN DUE COURSE
S. 58 FUNDS IN HANDS OF DRAWEE
A bill of itself does not operate as an assignment of funds in the hands of the drawee available for the payment thereof and the drawee of a bill who does not accept as required by this Act is not liable on the instrument.
S. 59 LIABILITY OF ACCEPTOR
The acceptor…engages that he will pay it according to the tenor of his acceptance; and is precluded from denying to holder in due course, the existence of drawer genuineness of his signature and his capacity and authority to draw the bill and…..
S. 60 LIABILITY OF DRAWER OR INDORSER
The drawer engages that on due presentment it shall be accepted and paid according to its tenor and that if it is dishonoured he will compensate the holder or any indorser who is compelled to pay it, provided that the requisite proceedings on dishonour are duly taken and is precluded from denying to a holder in due course the existence of the payee and his then capacity to endorse.
LIABILITIES OF PARTIES
LIABILITIES OF PARTIESCONT.
S. 61 STRANGER SIGNING BILL LIABLE AS INDORSER
Where a person signs a bill otherwise than as drawer or acceptor, he thereby incurs the liabilities of an indorser to a H in due course.
S. 63 TRANSFEROR BY DELIVERY AND TRANSFEREE
Where the holder of a bill payable to bearer negotiates it by delivery without indorsing it, he is called a transferor by delivery.(who) is not liable on the instrument…warrants to his immediate transferee being a holder for value that the bill is what it purports to be, that he has a right to transfer it, and that at the time of transfer he is not aware of any fact which renders it valueless.
S. 64 PAYMENT IN DUE COURSE - A bill is discharged by payment in due course by or on behalf of the drawee or acceptor.
Payment in due course means payment made at or after maturity of the bill to the holder thereof in good faith and without notice that his title to the bill is defective…….
S. 69 ALTERATION OF A BILL - (1) Where a bill or acceptance is materially altered without the assent of all parties liable on the bill, the bill is avoided except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers.
Provided that where a bill has been materially altered, but the alteration is not apparent, and the bill is in the hands of a holder in due course, such holder may avail himself of the bill as if it had not been altered, and may enforce payment of it according to its original tenor.
(2) In particular, the following alterations are material…any alteration of the date, the sum payable, the time of payment, the place of payment, and, where a bill has been accepted generally, the addition of a place of payment without the acceptor’s assent.
DISCHARGE OF BILLS
Ross drew 2 promissory notes for 10,000 pounds each in favour of Fathi and Faysal Nabulsy Company. He later alleged they were to pay for shares he did not receive.
PNs subsequently indorsed Fathi and Faysul Nabulsy.Handed to Arab Bank who sued Ross and succeeded. Appeal to CA.
Lord Denning
Was Arab bank holder in due course? Depends on whether at time they took it, it was complete and regular on the face of it (which includes back of it). Regularity different to invalidity or liability. Irregular indorsement can still mean liability. Evidence of bankers of City of London they would not have accepted endorsement. Company not description. Part of the name.
Was the irregularity waived? No unconditional waiver
Not holders in due course because of irregularity.
Open to claim as holders, but get no better title than person he took it from
No defect shown in title Nabulsy brothers. Allegations of fraud not proven
Appeal dismissed
ARAB BANK V. ROSS (1952) 2QB 216
In mid May, Toy drew BE to its own order,mistakenly dated 3.12.82; the due date. Accepted by Cassidy. Indorsed by Lumsden, MD of Toy and handed to Heller, financiers of Toy. In June 82, Beech of Heller wrote Invoice No 7190 on Bill. In Sept 82, altered date on bill to 14.5.82. Lumsden initialled alteration. Bill presented to Cassidy 31.12.82. Dishonoured. Heller sued Toy (Receivers) and Cassidy in SC Yeldham J. Irregular on its face. Indorsement irregular-did not mention name indorser. Original date and date of maturity same. (s. 34 not holder in due course if bill not “complete and regular on the face of it”). Prima facie,Plaintiff is holder in due course s. 35(2).Regularity differs from validity and liability (Arab Bank). Would indorsement or obvious error in date reasonably give rise to doubt? No, Lumsden was MD and no doubt his signature was one on behalf of company.s.8. Bill not invalid by reason only undated. Heller was holder in due course. Addition of Invoice No 7190 material alteration? No Change to date material alteration? Refer to s. 69(2)-yes, defined as so. On this ground alone, not assented to by Cassidy, claim against Cassidy fails
HELLER FACTORS V. TOY CORP (1984) 1 NSWLR 121
S. 89 DEFINITION An unconditional promise in writing made by one person
to another signed by the maker engaging to pay on demand, or at a fixed or determinable future time a sum certain in money to or to the order of a specified person or to bearer
Not a Bill of Exchange
BUT
Main BEA provisions apply with modification
Note their use in financing and why
No need to go into underlying debt
If signed by more than, one deemed joint and several
PROMISSORY NOTES
Promissory Notes and Finance
A promise to pay which relies on credit for marketabilitySimple to draw upVery few defencesSummary judgement possibleUnsecuredAlternative to a loan agreement A separate obligation to othersOutside definition of debenture in Corporations ActConsider the Westpoint exampleUsed in international capital raising.
Westpoint
Emu Brewery Mezzanine P/L
Emu Brewery Trust Senior Debt
Provider
Emu Brewery site owner
Westpoint
Development Manager
1st Mortgage2nd Mortgage
1st FF Charge2nd FF Charge
Issued PNs
Guarantee
Emu/Westpoint Promissory Note
PROMISSORY NOTE Promissory Note No: 8518 Expiry Date: 21 August 2006 Issue Date: 21 August 2003
1. Emu Brewery Mezzanine Pty Ltd (Emu Brewery Mezzanine) promises to pay to R & L Andrew Pty Ltd ATF R & L Andrew Superannuation Fund (the Investor)
of 13 Gertrude Street Sunshine VIC 3020 Australia (a) the sum of $71,000 and (b) interest (Interest) in accordance with the terms set out below
2. This Note is non-negotiable and non-transferable
3. The Principal Sum plus 2% will be paid on the Expiry Date
4. Interest will be paid at the rate of 12% per annum on a monthly basis in arrears.
Emu Brewery Mezzanine Ltd (in Liq) v. ASIC (2006)WASCA 105Westpoint use of Promissory Notes
ASIC claimed in cross appeal $35m raised by issue of PNs used were “securities” and Emu/Westpoint offered to issue securities (a debenture) to investors without preparing lodging or providing a disclosure document as required by Corporations Act. Not so, said majority.
Did a right of early repayment prevent there being a fixed or determinable future time for payment? Or, sum certain? No
CHEQUES ACT 1986
DEFINITION s. 10
(1) A cheque is an UNCONDITIONAL ORDER IN WRITING that;
(a) Is addressed by a person to another person (being a FINANCIAL INSTITUTION)
(b) Is signed by the person giving it and
(c) Requires the FINANCIAL INSTITUTION to pay ON DEMAND A SUM CERTAIN in money
(2) An instrument that does not comply with subsection (1) or that orders any act to be done in addition to the payment of money, is not a cheque.
See also:
s. 3 for definitions of FIC INSTITUTION, FINANCIAL INSTITUTION, FINANCIAL INSTITUTION CODES
s. 11 for what is an ORDER
s. 12 for what is the meaning of UNCONDITIONAL ORDER TO PAY
s. 13 for what is meant by ORDER ADDRESSED TO A FINANCIAL INSTITUION
s. 14 for meaning of ORDER TO PAY ON DEMAND
s. 15 for ORDER TO PAY A SUM CERTAIN
CHEQUES
FINANCIAL INSTITUTION means:
a) The Reserve Bank of Australia; or
b) A body corporate that is an ADI (authorised deposit-taking institution) for the purposes of the Banking Act 1959; or
c) An FIC institution; or
d) A person who carries on State banking within the meaning of paragraph 51 (xiii) of the Constitution; or
e) A person (other than a person referred to in paragraph (a) (b) (c) or (d) who carries on the business of banking outside Australia
FIC INSTITUTION means a body corporate that is, for the purposes of any of the Financial Institutions Codes;
a) A building society; or b) A credit union; or c) A special services provider
FINANCIAL INSTITUTIONS CODES means the following codes;
The Financial Institutions (NSW) Code of New South Wales
And so on for the other states.
CHEQUES ACT INTERPRETATION S. 3
s. 11 CHEQUES ACT
Order to pay
An order to pay must be more than an authorization or request to pay.
s. 12 CHEQUES ACT
Unconditional order to pay
(1) An order to pay on a contingency is not an unconditional order to pay and the happening of the event does not make the order an unconditional order to pay.
(2) An order to pay shall not be taken not to be an unconditional order to pay by reason only that the order is coupled with either or both of the following:
(a) An indication of a particular account to be debited by the financial institution to which the order is addressed;
(b) A statement of the transaction giving rise to the order
Definitions cont.
s. 13 CHEQUES ACT
Order addressed to a financial institution
(1) An order to pay is not addressed to a financial institution unless:
(a) The order is addressed to a financial institution and to no other person;
(b) the order is addressed to one financial institution only; and
(c) the financial institution is named, or otherwise indicated with reasonable certainty, in the instrument containing the order.
(2) An order to pay may be an order to pay addressed to a financial institution notwithstanding that a person other than the financial institution on which the instrument containing the order is drawn, the payee or the drawer is specified in the instrument.
Definitions cont.
s.14 CHEQUES ACT
Order to pay on demand
(1) Subject to subsections (2) and (3), an order to pay is an order to pay on demand if:
(a) the order is expressed to require payment on demand, at sight or on presentation; or
(b) no time for payment is expressed in the instrument containing the order.
(2) Subject to subsection 16(3), an order to pay is not an order to pay on demand if the order is expressed to require, or requires by implication, payment otherwise than on demand, at sight or on presentation.
(2) Without limiting the generality of subsection (2), an order to pay is not an order to pay on demand if the order is expressed to require, or requires by implication, payment only:
(a) at or before a particular time; or
(b) where the instrument containing the order is presented at or before a particular time.
Definitions cont.
s. 15 CHEQUES ACT
Order to pay a sum certain
(1) Subject to subsection (2), an order to pay is not an order to pay a sum certain unless the sum ordered to be paid is specified with reasonable certainty in the instrument containing the order.
(2) Where more than one sum is expressed to be payable in an instrument containing an order to pay, the lesser or least, as the case may be, of the sums so expressed to be payable shall be taken to be the only sum ordered to be paid by the instrument.
(3) An order to pay may be an order to pay a sum certain notwithstanding that the order requires a sum to be paid according to a rate of exchange specified in, or to be ascertained as directed by, the instrument containing the order.
(4) Where an instrument contains: (a) an order to pay a specified sum; and (b) an order to pay not more than a specified sum; the instrument shall be taken to require payment of the lesser of the sums so specified.
Definitions cont.
S. 19 CHEQUES ACT
Meaning of specification of person as payee or indorsee
(1) A person shall not be taken to be specified in a cheque as payee or indorsee unless the person:
a) Is named or otherwise indicated with reasonable certainty, in the cheque: and
b) Is not a fictitious or non-existing person
(2) Where the holder for the time being of an office is specified in a cheque as payee or indorsee, the person who is the holder for the time being of the office shall be taken to be named in the cheque as payee or indorsee, as the case may be.
SO---
When is a payee or indorsee NOT a payee or indorsee for the purposes of the Cheque Act?
When: A fictitious person / A non-existing person / Reference is too obscure or uncertain
Definitions cont.
S. 20 CHEQUES ACT
A CHEQUE IS EITHER PAYABLE TO ORDER (REQUIRES DRAWEE TO PAY TO OR TO ORDER OF A PERSON SPECIFIED, OR 2 OR MORE PERSONS JOINTLY OR IN THE ALTERNATIVE AS PAYEE OR INDORSEE S. 21)
OR PAYABLE TO BEARER (IF NOT PAYABLE TO ORDER WITHIN S. 21…SEE S. 22)
ONLY 2 CHOICES!
Definitions cont.
S.23 CHEQUES ACT
A cheque may be converted from payable to bearer to one payable to order.
Where the only, or last , indorsement of a cheque requires the drawee institution to pay the sum ordered to be paid by the cheque to bearer, the holder may, using the signature of the indorser, convert the cheque into a cheque payable to order by adding to, or altering, the indorsement so that the cheque is expressed to require the drawee institution to pay the sum ordered to be paid by the cheque to or to the order of:
a) A person specified in the cheque as indorsee; or
b) 2 or more persons specified in the cheque, jointly or in the alternative, as indorsee.
Definitions cont.
S. 32 CHEQUES ACT
(1) Where a signature is written or placed on a cheque as that of the drawer without the authority of the person whose signature it purports to be (in this subsection referred to as the relevant person), the signature is wholly inoperative as that of the relevant person unless:
(a) the person against whom it is sought to assert a right on the cheque is estopped from denying the genuineness of the signature or the existence of authority for the signature, as the case requires; or
(b) the signature is ratified or adopted by the relevant person; but the signature operates as the signature of the person who wrote or placed it on the cheque in favour of any person who, in good faith and without notice that it had been written or placed on the cheque without the authority of the relevant person, pays the cheque or takes the cheque for value.
UNAUTHORISED SIGNATURE
S.32 CHEQUES ACTCont.
(2) Subject to sections 74 and 92, subsection 93(2), section 94 and subsections 95(1) and (3) and 98(1), where a signature is written or placed on a cheque otherwise than as that of the drawer without the authority of the person whose signature it purports to be (in this subsection referred to as the relevant person), the signature is wholly inoperative as that of the relevant person unless:
(a) the person against whom it is sought to assert a right on the cheque is estopped from denying the genuineness of the signature or the existence of authority for the signature, as the case requires; or
(b) the signature is ratified or adopted by the relevant person;
but the signature operates as the signature of the person who wrote or placed it on the cheque in favour of any person who, in good faith and without notice that it had been written or placed on the cheque without the authority of the relevant person, pays the cheque or takes the cheque for value.
S.50 CHEQUES ACT
(1) The holder (def.s.3)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; (i) Was complete and regular on the face of it; (ii) Was not a stale cheque; and (iii) Did not bear a crossing of the kind referred to in 53(1)(b)…2 parallel transverse lines with the words not negotiable between…; and (b) The holder took the cheque: (i) In good faith; (ii) For value; and (iii) Without notice;
A. Of any dishonour of the cheque; or
B. Of any defect in the title of the person who transferred the cheque to the holder or that the person who transferred the cheque to the holder had no title to the cheque
(2) Without limiting the generality of paragraph (1)(b) the holder of a cheque shall, for the purposes of that paragraph, be deemed to have taken the cheque with notice of a defect in the title of the person who transferred the cheque to the holder if the holder took the cheque with notice that the person transferred the cheque to the holder in breach of faith or under circumstances amounting to a fraud.
HOLDER IN DUE COURSE DEFINED
S. 53 Crossing and crossed cheque defined 2 parallel transverse lines; or 2 parallel transverse lines with the words not negotiable between, or
substantially between, the lines
Just putting the words not negotiable is NOT ENOUGH
s.54 Effect of crossing on payment of a cheque
A crossing has effect as a direction by drawer to drawee not to pay
the cheque otherwise than to a financial institution
s. 55 Effect of taking cheque crossed not negotiable
Where a cheque that bears a crossing of the kind referred to in paragraph 53 (1)(b) is transferred by negotiation to a person, the person does not receive, and is not capable of giving, a better title to the cheque than the title that the person from whom the first mentioned person took the cheque had.
CHEQUES ACT S.53, 54, 55 CHEQUE CROSSINGS
A CHEQUE is • Drawn only on a financial institution • Mostly for commercial transactions within a country • Drawn on a financial institution and payable on demand • Financial institution pays because of banker/customer relationship
rather than acceptance • Is a subset of Bills of Exchange
A BILL OF EXCHANGE • Can be drawn on anyone • Often used for international transactions • Does not use crossings • Accepted by party on whom drawn
A PROMISSORY NOTE • Bilateral legal relationship and not tripartite • Unconditional promise rather than unconditional order
DISTINGUISH CHEQUES from BILLS OF EXCHANGE AND PROMISSORY NOTES
Vucina regularly drew bills upon Vagliano who accepted them. Bills drawn payable to order C Petridi. Glyka, a Vagliano clerk forged number of Vucina Bills. Unwittingly accepted by Vagliano. Glyka forged indorsements by Petridi, cashed bills at Bank of England. By time fraud detected 71,500 pounds paid out! Vagliano Bros sued Bank of England and won.Appeal to Court of Appeal dismissed.Appeal to HL.
Lords Halsbury LC and Lord Herschell
Have bankers paid away money under circumstances enabling Vagliano to refuse to acknowledge payments made on his behalf?
Not bill of exchange because forged. Bore in mind what one would import in mind if it was. Was bank misled into doing something by Vagliano?
Bank misled. Vagliano careless in not checking.
Query settled by Vagliano clerk. If, payable to fictitious person, it is payable to bearer. Bank not obliged to hold up mercantile practice to check signature
BANK OF ENGLAND V. VAGLIANO BROS (1891) AC 107
Mr. Piper was clerk with Clutton and Co. He tricked employer to draw cheques in favour of “George Brett”. No such person.
Piper took cheques, endorsed them as Brett and gave them to Attenborough, pawnbrokers to redeem goods. He was known to pawnbrokers as Brett.
Clutton and Co’s bank paid out on cheques
Piper was found out. Clutton and Co sued pawnbrokers. Not successful. Appeal dismissed. Appeal to HL
Lord Halsbury LC - Cheque made payable to fictitious or nonexistent person still considered payable to bearer although drawer believed it was a real person.
NOTE
Bearer cheque can be negotiated by delivery. Order cheque must be negotiated by endorsement and delivery. Payable to bearer
When it explicitly says Pay Bearer. Last or only endorsement is one in blank. Payee is fictitious or nonexistent person
CLUTTON AND CO V. GEORGE ATTENBOROUGH & SON (1897) AC 90
White pretended to Macbeth he had bought 5,000 shares from Kerr and needed finance. Macbeth drew a cheque in favour of Kerr for 11,250 pounds. White forged Kerr’s indorsement and paid cheque into his own account with NSW Bank.
White was found out. Macbeth sued Bank and won.
Appeal dismissed. Appeal to House of Lords.
Lord Loreburn LC - Bank liable unless could show “fictitious” payee. Could not do so. Where drawer has designated real person as payee, intends him to be payee, impossible payee can be fictitious Distinguish from Vagliano and Clutton. In former, drawer did not intend payee to receive proceeds In Clutton, payee was non-existent person whom no one could or meant to be recipient
NORTH AND SOUTH WALES BANK V. MACBETH (1908) AC 137
Greenwood opened cheque account with Martins. Wife forged signature
Most drawn in favour of non-existing person. She indorsed them and obtained payment from bank.11 months later, Mr. G found her out. Allowed another 7 months to go by before reporting. She then shot herself. He claimed bank could not debit him for cheques. Bank denied claim. He sued and was successful. Appeal to CA successful. Greenwood appealed to HL.
Crockett J - No question of ratification or of adoption. Estoppel?
Essential factors giving rise to estoppel: --A representation or conduct amounting to same to induce a course of conduct --An act or omission resulting from representation, whether actual or by conduct by the person to whom the representation made.--Detriment to such person as a consequence
Mere silence not representation BUT When there is duty and then deliberate silence this may become a representation. As in this case.
Duty to disclose forgery to bank admitted. Appeal dismissed
GREENWOOD V. MARTIN’S BANK (1933) AC 51
THEIR STATUS? • Do not comply with s. 10 definition-- It is not drawn by one person on
another.Drawn by a financial institution on itself.s. 5 clarifies and excludes operation of certain sections with respect to bank cheques.
IS CONFIDENCE IN THEM JUSTIFIED? • Bank has no duty to warn public if cheques stolen. No duty to ensure
they do not come into hands unauthorised persons. See text 28.48. • Not negotiable crossing means holder is not holder in due course.
Which means holder can obtain no better title than person from whom he took cheque.
• Can be met with defence of total failure of consideration. This happened in Sidney Raper case.
• Note however, successful action for misleading and deceptive conduct, in Lyritzis v. Westpac.
• Some attention to problem by ABA • Still situations where they will be dishonoured.
BANK CHEQUES
Jacobsen was American Possessed a bank cheque, called cashiers cheque from Bank California Wife used it to open account for them with CTB 12 days later obtained bank cheque in favour Sidney Raper PL Dishonoured Cashier’s cheque had been dishonoured Raper sued and won and bank appealed to CA
Moffitt P No value given by Raper for cheque. Total failure of consideration Credit in account conditional on clearance of cashier’s cheque Bank cheque equivalent to cash? Not in this case. Unwarranted assumption. Still a cheque
SIDNEY RAPER V. COMMONWEALTH TRADING BANK OF AUSTRALIA (1975) 2 NSWLR 227
Lyritzis opal miners and dealers in Coober Pedy. Mr Lyritzis accepted 4 bank cheques purportedly drawn on ANZ from interstate buyer unknown to him. He alleged that shortly before transaction, Pearson, Manager of W told him that a bank cheque was “as good as cash” and acceptable to any bank as a good and valid order for payment, but failed to advise him that there were circumstances in which a bank cheque could be dishonoured (in particular, that if bank cheque fraudulently obtained and completed, the bank on whom it was drawn could refuse to honour it- $170,000 cheque dishonoured because ANZ said form had been stolen). Interstate buyer disappeared with the opals.
Federal Court SA
Flourishing cash economy. Almost all deals in cash between miners and dealers. Only exceptions being when dealing with trusted and well established friends. W was only bank in town. Turned on credit. Court believed evidence of Lyritzis and Ms. Braun who introduced deal rather than Pearson.
Athanasios Lyritzis and Janelle Ronda Lyritzis v. Westpac Banking Corp. No SG54 of 1992 FED No 812/94
Athanasios Lyritzis and Janelle Ronda Lyritzis v. Westpac Banking Corp. No SG54 of 1992 FED No 812/94
Cont.
ABA Guidelines for Dishonour
1. Forged or counterfeit instruments
2. Bank cheques materially altered
3. Bank cheques reported lost or stolen
4. Failure of consideration for the issue of a bank cheque
5. Court order restraining payment • Advice was misleading /deceptive –failure to warn possibility of dishonour • Circumstances where s. 52 TPA conduct may be constituted by factual
matrix which includes silence as well as overt activity …silence is to be assessed as a circumstances like any other.
• Failure to qualify plainly misleading • No doubt on evidence that Mr. L relied on the advice. • Negligence would also succeed. Established customers…duty to exercise
reasonable care and skill when advising customer….failure to qualify advice a breach of that duty.
MAIN CONTRACTUAL OBLIGATION OF FINANCIAL INSTUTION TO CUSTOMER
CAN BE LIABLE for BREACH OF CONTRACT/DEFAMATION
EXCEPTIONS: BANK CAN REFUSE PAYMENT
STALE CHEQUES (S. 3(5) 15 months; see also ss. 89,60)
COUNTERMAND i.e. stopping. Unambiguous and identify particular cheque concerned, made to responsible person, by drawer s. 90. Note Commercial Bank of Australia v. Younis re mistake in fact.
NOTICE CUSTOMER’S MENTAL INCAPACITY S. 90(1)(b)
NOTICE of CUSTOMER’S DEATH s. 90(1)(c)
NOTICE BANKRUPTCY ss. 125 and 126 of Bankruptcy Act
NOTICE of WINDING UP of A COMPANY
SERVICE of GARNISHEE
POST DATED CHEQUES s. 16
KNOWLEDGE by BANK of DEFECT IN TITLE of PRESENTER
NOTICE OF ASSIGNMENT
DISHONOUR
Hallitt Bros owed Younis money Thought it was $3,000 and gave him a cheque Discovered more like $2,000 Cancelled the $3,000 and gave him a new cheque for
$2,000 He presented both and both paid. Bank sued him on first and succeeded. He appealed.
Hope JA Recovery of money paid under mistake of fact Unjust enrichment for Y to keep the money Bank to recover Note: Might be different if Y had changed his
circumstances in reliance on money
COMMERCIAL BANK OF AUSTRALIA V. YOUNIS (1979) 1NSWLR 444
THE DRAWER’s SIGNATURE - General position is that financial institution cannot debit customer’s account. Unless situation is within s. 32.
INDORSEMENTS - Financial Institution receives protection under s. 94 (1) Not restricted to situation where cheque paid to another financial institution.
94 Protection of drawee institution paying cheque lacking indorsement or with irregular or unauthorised indorsement
(1) Subject to subsection 32(1), where:
(a) the drawee institution, in good faith and without negligence, pays a cheque, whether or not to a financial institution; and
(b) an indorsement has been written or placed on the cheque without the authority of the person whose indorsement it purports to be the drawee institution:
FORGED & UNAUTHORISED ENDORSEMENTS
(c) does not, in paying the cheque, incur any liability by reason only of:
(i) the indorsement having been written or placed on the cheque without the authority of the person whose indorsement it purports to be; or
(ii) its failure to concern itself with the genuineness of, or the existence of authority for, the indorsement; and
(d) shall be deemed to have paid the cheque in due course.
Also protected even where there is no indorsement on an order cheque or the indorsement is irregular, but only if payment made to another financial institution. S.94(2)
(2) Subject to subsection 32(1), where: (a) the drawee institution, in good faith and without negligence, pays a cheque to a financial institution; and
(b) the cheque is not indorsed or is irregularly indorsed; the drawee institution: (c) does not, in paying the cheque, incur any liability by reason only of the absence of, or the irregularity in, the indorsement; and (d) shall be deemed to have paid the cheque in due course.
FORGED & UNAUTHORISED ENDORSEMENTSCont.
CONTRACT PRACTICES AND USAGES OF BANKERS
CUSTOMER DUTIES with respect to forgery, unauthorised signature
1) Duty to take care to prevent fraudulent alterations of cheques which might cause loss to banker Commonwealth Trading Bank of Australia v. Sydney Wide Stores which confirmed Macmillan (English case).
In absence of express agreement to contrary, customer’s duty is limited to duty to refrain from drafting a cheque in such a manner as to facilitate fraud or forgery.
2) Duty to inform bank of any unauthorised cheques as soon as aware
No duty to check statements
Tai Hing Cotton Mill Ltd v. Liu Chong Hing Bank Ltd (1986), Applying Greenwood
Attempts to expand duty have failed:
Tai Hing Cotton Mill Ltd (1986); National Australia Bank Ltd v. Hokit (June 96). But notice in Westpac v. Metlej (1987)-court prepared to contemplate wider duty.
BANKER CUSTOMER RELATIONSHIP
Sydney Wide drew cheques on CTB CAS or order (Computer Accounting Services) Crossed and marked Not negotiable and A/c Payee Only Employee named Prior, added H to CAS=CASH and cashed the cheques Sydney Wide sued the bank and won CTB appealed to HC
Arising from the contract between banker and customer, there is a duty upon the customer to take usual and reasonable precautions in drawing a cheque to prevent a fraudulent alteration which might occasion loss to the banker.
Whether there is a breach of this duty by neglecting some usual and
reasonable precaution in the drawing of cheques is a question of fact.
Appeal allowed and remitted back to SC.
COMMONWEALTH TRADING BANK OF AUSTRALIA V. SYDNEY WIDE STORES (1981) 148CLR 304
TAI HING COTTON MILL V LIU CHONG HING BANK
(1986) 1 AC 80
Leung (accounts clerk) with Tai Hing in HK, forged signature MD over 5 yrs on 300 cheques/HK D5.5m--paid into accounts with names similar to real suppliers. Leung took money,fled to Taiwan. Cheques drawn on 3 banks. Company sued 3 banks and won against Liu Chong. Appeal to CA by banks successful. Appeal to PC by Tai Hing.
Lord Scarman DOES LAW RECOGNISE ANY DUTY OF CARE OWED BY CUSTOMER TO BANK BEYOND: 1) Duty to refrain from drawing cheque in way which facilitates fraud, forgery London Joint Stock Bank
Ltd. V. Macmillan (1918) 2) Duty to inform bank of any forgery as soon as he (customer) becomes aware of it? Greenwood v. Martins Bank Ltd (1933) AC 51 Banks alleged duty wider…implied term in contract …to take reasonable precautions in management of business with bank to prevent forged cheques to be presented…and in tort, duty to check periodic statements and advise of irregularities Test of whether a term should be implied in contract is necessity. Not necessary here. If banks want it, they have to put it in contracts expressly, or use influence to get it into legislation.Any obligations in tort no greater than those in contract. None here
WESTPAC BANKING CORP V. METLEJ
(1987) Aust Torts Rep 80-102
M was a partner in a building partnership with Cheque account with Westpac.2 people to sign cheques, one of whom solicitor. Solicitor signed a number of cheques and M would add signature when it needed to be paid. Kept cheque book in lunch box in car. Someone stole 3 cheques, forged M’s signature and got away with money. M sued Westpac and won. Westpac appealed to CA
Court was prepared to contemplate wider duty than in Tai Hing
However, not necessary
No breach of duty in circumstances
Even if breach, not sufficiently relevant
Legal cause of loss is Westpac failure to detect forgery
NATIONAL AUSTRALIA BANK LIMITED V. HOKIT P/L
(95040542) SCNSW CA
Hokit, R and M operated hairdressing salons. Companies employed Banno as bookkeeper. In 1990-94 Banno signed cheques in name of Mark and Peter. Mark controlled Hokit and later other companies, knew that Banno was signing cheques in his name and was writing amounts larger than amounts recorded. He allowed her to sign his name and gave her signed blank cheques as a means of obtaining cash for himself
WHO BEARS BURDEN FORGED CHEQUES?
Bank argued for extension of customer duties to include 1. Obligation to take reasonable care to prevent presentation forged Cheques 2. Companies estopped from denying regularity of cheques signed because they knew of and acquiesced in her signing other cheques
NATIONAL AUSTRALIA BANK LIMITED V. HOKIT P/L cont.
Appeal dismissed: NAB failed to show any circumstances justifying creation of extension of duties customers owe their banks. Impossible to contend implied term-not necessary to give business efficacy to contract, nor can it be said that term “goes without saying”
Banks do not seem to pay attention to signatures any more.
Bank can increase fees to cover losses or change contract.
The fact that companies knew of and acquiesced in employee signing cheques for certain purposes and did not tell Bank about these arrangements, did not constitute a representation that the forged cheques could be paid and did not generate estoppel.
Failure of Bank to call evidence on matters solely within its knowledge is fatal to argument that, had the Bank known these facts, it would have taken steps to avoid the risk of loss flowing from employee signing her name to unauthorised cheques.
NATIONAL WESTMINSTER BANK V. BARCLAYS BANK
INTERNATIONAL (1975) 1 QB 654
Commander Bill lived in Nigeria and had cheque account with NW. Kept cheque book in locked cupboard. Someone broke in and stole one of the cheques.Cheque brought to Mr. Ismail by Mr. Haider. Ismail said he would pay Haider 10,400 Nigerian pounds for it if it were met. Entered his name as payee and asked Barclays to arrange for special collection
Barclays did so. Cheque honoured and Barclays credited Ismail’s account. Ismail paid Haider. Commander Bill discovered theft and told bank.Bank agreed they could not debit his account. NW sued Barclays and Ismail in HC
Kerr J
Succeeds against both. Circumstances in which it came into hands of Ismail and lack of writing on it reeked of suspicion.
Mistake of fact
Estoppel argued
BANKER CUSTOMER RELATIONSHIP, DUTIES
CROSSINGS
Paying Bank
Drawee bank’s duty is to pay cheques in terms of customer’s order. See ss. 88-94..Where bank pays crossed cheque otherwise than to a bank, it will be liable to the true owner for any loss suffered subject to defences there set out.
Collecting Bank
Risk is that bank may pay cheque to a person who is not true owner.
Bank might be liable in conversion from true owner because indorsement might be forged.
s. 95 Where a bank in good faith and without negligence receives payment, bank does not incur liability to true owner by reason only of having received payment.
For “without negligence” see. S.95
Note in this context both practice of banks generally and internal rules and procedures.
Banker Customer ContractProtection for Banks
Paying bankDuty to pay cheques where sufficient fundsWhere crossed, direction to pay to financial institution. Where it does
so in good faith and without negligence, deemed to be paid in due course (s. 92) and not liable to true owner.
Where payee bank pays order cheque with forged indorsement, whether or not to another financial institution in good faith and without negligence,deeded to have paid the cheque to the true owner (s. 93)
Payee bank also protected even where no indorsement or irregular indorsement if payment to another financial institution in good faith and without negligence (s. 94(2)).
If Drawer’s signature forged, wholly inoperative unless drawer estopped, signature ratified or adopted. (s.32(1)) Tina Motors
Mr. and Mrs I had used car business - Tina Motors Pty Ltd. Cheque account with ANZ. Bank Manager was Hardy. Mrs I could sign cheques. Brother in law Mr. Stella worked in business He forged her signature on cash cheques over 7 months. Paid on
cheques by bank Subsequently found out. Tina Motors sued.
Crockett J
1. Normally Tina Motors would succeed because a signatory did not sign the cheques
2. However in this case evidence showed Mr. Hardy had twice been doubtful of authenticity of signature and been reassured by Mr. I. Mr. I put on inquiry and chose not to examine situation
3. Continuing duty to act with reasonable care to ensure proper working of account
TINA MOTORS V. ANZ BANKING GROUP (1977) VR 205
BANK OF NEW SOUTH WALES V. DERHAM
(1979) 25 ACTR 3
AMP drew a cheque on Bank NSW in favour of Mr. and Mrs Derham.
Stolen by Volters. Forged Derham’s signature on front and wrote “Pay W. Volters” on the back. Paid cheque into ANZ, which collected from Bank NSW.
Derham sued Bank NSW in conversion and money had and received and won on former. No finding on latter. Bank appealed to SC
Bank claimed benefit s. 65 BEA (Paying banker…pays in good faith and in ordinary course of business…). Note Cheques Act now correct Act.
Found to apply. Ordinary course of business despite irregular endorsement because of section and expert evidence other bankers practice.
Also. S. 86…where banker on whom crossed cheque is drawn in good faith and without negligence…pays…found to be in good faith and no negligence here….but no need to discuss.
See s. 94 Cheques Act.
Banker and CustomerProtection for Banks
Collecting Bank
Not liable to true owner where it collects a cheque for a customer who either has no title or a defective title where it acts in good faith and without negligence (s.95)
UNDERWOOD V. BANK OF LIVERPOOL AND MARTINS
(1924) 1 KB 775
Underwood was merchant and had a Cheque account with Bank. He
formed a company, owned all shares except one with wife.Sole director.
Opened cheque account with King and Co.When cheques came in he paid them to own cheque account after indorsement. By the time he died, had misappropriated 8.500 pounds. Company and Lloyds (held debenture and had taken over King) sued Bank and succeeded
Bank appealed to CA
BEA protection to bankers who in good faith without negligence collect crossed cheques for customer.
Bank put on inquiry
No matter that he was sole director etc
Made no suitable inquiry
Can take the consequences
MARFANI AND CO V. MIDLAND BANK
(1968) 1 WLR 956
Kureshy worked for Marfani. Made himself known to restaurateur (Ali) as Mr. Eliaszade. K went to Midland bank and opened cheque account in name of E. Nominated as referees Mr. Ali and Mr. Syeed.Bank wrote to both. Same day Mr. K paid a crossed cheque for 3,000 into account drawn by Marfani in favour of E. Specially cleared. Next day Ali visited bank and told manager that in his opinion E all right.
Within a fortnight Mr. K had withdrawn all money and gone.
Marfani sued Midland without success
Appealed to CA
Was the bank put on inquiry?
Not on facts as presented to judge
No need to upset that
Appeal dismissed
WESTMINSTER BANK V. ZANG (1966) AC 182
Zang handed Tilley cheque for 1,000 pounds in favour of J Tilley or Order. Tilley paid cheque into Tilley Autos A/C with Westminster. Paying in slip said bank reserved right to postpone payment of cheques drawn against unclear effects. Zang’s bank did not meet cheque. Tilleys solicitors obtained cheque from Westminster so he could sue Zang. Suit dismissed, they returned it to W bank. Bank sued Z in HC and succeeded. His appeal allowed. Bank appealed to HL.
Holder defined. Westminster received cheque without indorsement and therefore not holder within BEA act? Bank relied on section of Cheques Act…banker who give value for or has lien on cheque…without indorsement…has such rights as he would have had if, upon delivery, holder had indorsed… Lost any rights by handing cheque over to Tilleys solicitors? Normal practice of bank to require indorsement of cheque by payee when it is to be credited to some account other than payee. Not done here.Tilley handed cheque for collection and appellants received it for collection. Gave value? No. Bank did not establish they had allowed Tilleys Autos to draw against cheque. Appeal dismissed
CROSSINGS --Other Crossings
A/C PAYEE ONLY
NOT MENTIONED IN THE CHEQUES ACT
THEREFORE NO STATUTORY SIGNIFICANCE
CAN, however, PUT COLLECTING BANK ON NOTICE
CAN BE NEGLIGENCE
A bank which collects the proceeds of a cheque crossed “not negotiable-account payee only” for a customer who is NOT the named payee of the cheque without making inquiry as to how the customer came to be paying the cheque into their own account has not acted without negligence and will not be protected by s. 95 against an action in conversion by the true owner of the cheque.
See Universal Guarantees Pty Ltd v. NAB
Found to apply even where there was an apparently proper indorsement of the cheque by the payee. Hunter BNZ Finance Ltd v. CG Maloney P/L (1988) 18 NSWLR 420
UNIVERSAL GUARANTEE
V. NATIONAL BANK OF AUSTRALASIA
(1965) 1 WLR 69
Universal was finance company. Moffitt was acceptance officer for HP applications. He began creating fictitious applications which he accepted. Later, he arranged cheques drawn in favour fictitious applicants. When he banked money for company, he would extract some cash and replace it with one of the cheques endorsed by him back to the company. Stole 60,000 pounds. Moffitt was found out. Company sued the National Bank without success. Appealed to PC Lord Upjohn
In circumstances nothing paid out or in. Debtor creditor relationship unaffected. Analysis on basis paying /collecting banker unrealistic. Has Bank failed in contractual duty? Should have been put on inquiry because it was not paid to payee. Had not been paid through another bank? s. 86 BEA crossing s.87 not negotiable a/c payee etc operate as warning but do not prevent negotiation.
Found nothing suspicious to put bank on inquiry.
Past Exam QMarch 2008 QA1
MARKING GUIDE
Understood Q Negotiable instruments/Cheques, fraud, 2Answered the Q 2 What legal actions Conversion, Cheques Act s. 19, 22, crossings Misleading and deceptive conduct, negligence Fraud, misrepresentaton 8Against whom Flynn, T&C, Opal 2Likely outcome Theoretical actions against Flynn Realistic chance of success in Conversion against T&C 8 Cheques Act s. 95Reasoning 2Other Undesirability of bringing action in negligence because of contributory negligence, difficulties with duty of care 1
TOTAL 25
Past Exam QMarch 2008 QA1 cont. (2)
WHAT LEGAL ACTION?Breach of Contract? Probable answer is that the purported contract between Lillian and Flynn not a contract at all i.e. void-complete lack of consideration, writing and supply of cheques induced by fraud. If there was a contract, because Flynn telling truth regarding Supertanks offer, misrepresentation, whether Flynn was agent of those companies, possible action against Supatanks, bearer cheque question.Fraud? Yes, Flynn. Anyone else? No. Civil or criminal action re fraud? Will it help recover money?Conversion- Who was true owner/entitled to immediate possession? If voic,Lillian. Conversion of cheque by both Flynn and T&C If it is accepted that the cheques were crossed because of the transverse parralel lines, noone could acquire a better (s55) If contract not void, T&C may argue that because the payee was fictitious etc, the cheques became bearer cheques or that Flynn as agent for the other enterprises was entitled to the cheques and not Lillian. T&C unlikely to be able to use s. 95 protection because of its negligence.Indications of negligence may have been ignoring inconsistency between the payee and Flynn's personal account,Ignoring the words Äccount payee only and making no further inquiry and the paucity of checks re Flynn's story.Negligence? T&C likelyMisrepresentation? If a misrepresentation, contract would have been voidable and there might have been an argument that the contract was not avoided before other parties had acted and changed their positions. (T&C) Very weak argument, unlikely to succeed because of the rather clear facts describing fraud.Misleading and deceptive conduct? Yes, definitely by Flynn. T&C NoAGAINST WHOMFlynn Theoretical, because he has disappear T&C More likely to assist in recovering moneyAnyone else Unlikely. Supatanks Inc not involved. No other persons, advisers involved.LIKELY OUTCOMEFlynn Waste of time with reasonsT&C Successful in conversion with reasonsSections of Cheques Act-95 Cases-Nemur v. NAB, Universal case.