9911796707
TMI Blog1968 (5) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... as to Contanglo, £195,322, odd ; and (c) as to the remaining defendants, £232,500, the £195,000 and £232,500 being included in £249,500. (2) An order that the first nine defendants should pay to the official receiver as liquidator of the plaintiff such sums as they were found liable to replace with interest thereon at the rate of five per cent, per annum. The writ, among other things, also claimed damages for breach of duty amongst the first nine defendants and further or alternatively, against District and the Bank of Nova Scotia, damages for negligence in their capacities as bankers to the plaintiff. The facts are fully stated in the judgment. W. A. Bagnall Q.C., J. P. F. E. Warner, J.R. Sykes and R.A. Morritt for the Board of Trade. Cradock did not appear and was not represented. A. J. Balcombe for Contanglo. Robin Dunn Q.C. and K. B. Suenson-Taylor for District. G. B. H. Dillon Q.C, and D. Nicholls for Woodstock. Barlow-Lawson appeared in person. Jacob appeared in person. John Arnold Q.C, and R. B. S. Instone for the Bank of Nova Scotia. Burden appeared in person. Sinclair appeared in person. The trustee of the property of Cradock did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eed. [1966] Ch. 236; [1966] 2 WLR. 571; [1966] 1 All E.R. 945, C.A.; Snook v. London and West Riding Investments Ltd. [1967] 2 QB 786 ; [1967] 2 WLR 1020 ; [1967] 1 All E.R. 518, C.A.; Marfani & Co. Ltd. v. Midland Bank Ltd. [1968] 1 W.L.R. 956; [1967] 3 All E.R. 967, C.A.; Vine v. National Dock Labour Board [1956] 1 Q.B. 658; [1956] 2 W.L.R. 311; [1956] 1 All E.R. 1. ; Amar Singh v. Kulubya [1964] A.C. 142 ; [1963] 3 W.L.R. 513 ; [1963] 3 All E.R. 499, P.C.; Alexanders. Ray son [1936] 1 K.E. 169, C.A.. May 29, 30. Ungoed-Thomas J. read the following judgment. I have divided this judgment up into headings so as to make it more easily identifiable. Introduction The plaintiff This action arises from the collapse of a group of companies, including the plaintiff company, and the investigation of the plaintiff's affairs by inspectors of the Board of Trade. The Board of Trade has brought the action in the name of the plaintiff under its statutory power conferred by section 169(4) of the Companies Act, 1948, now replaced by section 37 of the Companies Act, 1967. In addition, the action is brought with the authority of the liquidator of the company, who would be the proper person to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16, 1967, and the Official Receiver is his trustee in bankruptcy. Cradock is out of the country; he entered appearance but there is before me a motion for judgment against him in default of defence. Cradock's trustee in bankruptcy was added by amendment as tenth defendant with a view to his being bound by any order that may be made. Of the rest of the first nine defendants the personal defendants have appeared in person and the others have been represented by counsel. Contanglo carried on business as a banker and was concerned in takeover bids and acted for Cradock in the first transaction. District were bankers to the plaintiff for a time during the first transaction and the Bank of Nova Scotia were bankers to the plaintiff for a time during the second transaction. Woodstock was a private investment company which received a cheque for the £232,500 from the plaintiff, which it claims was as loan at interest; and it indorsed the cheque over to Cradock which it claims was as a loan at 1 per cent, higher rate of interest. The individual defendants Barlow-Lawson, Jacob, Burden and Sinclair were directors of the plaintiff : Barlow-Lawson as chairman from April 24, 1958, to O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gence in breach of their duty to the plaintiff as their customer in making such payments out of the plaintiff's account with them. It was submitted that the only misapplication relied on in the statement of claim was the use of the plaintiff's money to buy its own shares. The statement of claim, however, alleges misapplication of the plaintiff's money not for the purposes or benefit of the plaintiff but for the purposes and I benefit of named recipients and alternatively, in providing financial assistance for the purchase of shares in the plaintiff by reason of which the plaintiff lost £249,500. The pleadings thus are not, in my view, so limited. The plaintiff in opening limited the misapplication relied on in respect of the £232,500 and £207,500 to financial assistance for the purchase of shares in the plaintiff ; but this left standing the allegations that such misapplication was not for the purposes or benefit of the plaintiff but of the recipients by reason of which the plaintiff lost the money. These claims are disputed on facts and on law and the questions that thus arise on law are of considerable general importance, particularly for banks. The scheme of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he plaintiff's new account with District. In accordance with a resolution of the plaintiff's board to lend £232,500 to Woodstock at 8 per cent, interest, a cheque for £232,500 was drawn on the plaintiff's new account with District in favour of Woodstock; and in accordance with an arrangement that Woodstock should lend that amount at 9 per cent, interest to Cradock, the cheque was indorsed by Woodstock in favour of Cradock, handed to District's representative and paid into Cradock's account with District. The £232,500 thus covered the payment of the £195,000 to Contanglo, and the 79 per cent, of the stock in the plaintiff, bought by Contanglo for Cradock, was in due course registered in one of District Bank's nominee companies as nominee for Cradock. Thus, Cradock obtained the stock, Contanglo the £195,000 paid for the stock and expenses and its own fee, Woodstock a liability for £232,500 from Cradock at I per cent, higher rate of interest than its liability for that amount to the plaintiff ; and the plaintiff, instead of £232,500 cash, obtained an unsecured liability on the part of Woodstock for that amount at 8 per cent, interest. Firs tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, it was of the very essence and purpose of such an operation that the price for the injected properties on sale to the company should be substantially less than the price obtainable on the market, this was apparently treated generally as free from objection. I am not concerned in this case with any objection on such a ground. If, however, the shell company's liquid assets were used not to pay for properties sold to the company, but to pay for the controlling shareholding, which the taker-over bought, this would clearly be a blatant and fraudulent misapplication of the moneys of such a company as the plaintiff. That is what the plaintiff says the first transaction was. The danger, in general, of such a mis-application was clearly recognised by those who were versed in such operations. I shall deal with this in detail, together with the suggested refinements of the shaded area between clear honesty and black dishonesty, when I consider the first case which calls for such a detailed consideration, namely, the case against Contanglo, Mr. Scott of Contanglo proposed to Cradock that he should acquire the stock in the plaintiff company. On October 16,1957, acting on behalf of Cradock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son, of Contanglo's solicitors D. B. Levinson & Co., is that he was a man of very considerable ability and force of character. He, with Scott and one Essex, had acquired a 50 per cent, shareholding in Contanglo, though both Scott and Levinson preferred not to be on the board. Scott said that he was in control of the operation and in charge of policy matters for Contanglo in the first transaction and that Levinson was responsible for implementing that policy. Contanglo arranged with the Whitehall branch of the National Bank to grant it an overdraft for the £235,000 on Levinson's guarantee, supported by securities which he had deposited with the bank. However, Contanglo also had a first charge on the stock units in the plaintiff, purchased for Cradock, for moneys payable by Cradock under his agreement with Contanglo and these were to be in the name of National Bank nominees. Mr. Snell, the branch manager of the National Bank, wrote, also on March 31, to Guthrie & Co. Ltd., the plaintiff's secretaries, that Contanglo was in a position to provide £235,000 for the purchase of the holdings in the plaintiff and added that it had been agreed that the " shares " so purchased sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the loan from Selangor United and that we shall charge you a rate of 10 per cent, per annum on the same amount, making a net fee to us of 2 per cent, for the period in which the money is outstanding. I also confirm that I shall be present at 11 o'clock on Friday at the National Bank Ltd., 15, Whitehall." The fee of 2 per cent, was in fact reduced to 1 per cent, and the figure of £235,799 was erroneous, being more than the balance in the plaintiff's account. On April 23, Cradock telephoned Mr. McMinn, the manager of the Oxford Street branch of the District Bank, and said that he might influence the transfer of the plaintiff's bank account to District. He requested McMinn to prepare a banker's draft in favour of Contanglo for £195,322 and asked for District's representative to attend at the National Whitehall branch to collect a banker's draft in favour of Cradock for £235,000 odd. This was confirmed by a letter of April 24, from Cradock to McMinn. McMinn, reporting on May 20 to his general manager, said : "I understood that the second draft would cover the issue of the first and the arrangement was agreed on this basis." I am completely satisfied that it was on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cheque on its new account with District in favour of Woodstock, which would indorse it in favour of Cradock, and he asked if this re-arrangement would be all right and Reynolds agreed to it; (3) Reynolds thereupon handed over the draft which he had brought with him, drawn by and on District for £195,000 in favour of Contanglo. He either handed it to Cradock who handed it to Levinson or he handed it direct to Levinson, but the difference is immaterial. In the board-meeting stage, although Barlow-Lawson was in the chair formally or, more accurately, nominally in the minutes, Levinson was in complete and exclusive control of the meeting. At this stage, resolutions were passed appointing Jacob as additional director and that Meaden's resignation as director be accepted, that a bank account be opened at the District Bank Oxford Street branch ; that £232,764 odd (which included the proceeds of sale of the tax reserve certificates) on current account with National be transferred to that District branch ; and that £232,500 be deposited with Woodstock at 8 per cent, per annum interest subject to withdrawal on demand. It was also recorded that Meaden, Scott and Levinson wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut a cheque drawn on the plaintiff's account. In view of the draft payable into the plaintiff's account, the plaintiff's cheque would have been as effectual as a draft if it were properly payable to Cradock. The horrifying difficulty was that it was only payable to Cradock by reason of an indorsement for a limited company. McMinn was therefore concerned to make certain that the indorsement was valid. So he se about getting the indorsement confirmed by Woodstock and eventually he obtained the necessary confirmation from the other two directors of Woodstock on May 30, and ultimately in 1959 of a board meeting of Woodstock. But on April 25, he paid the £232,764 6s. 9d. drafts into the plaintiffs account, debited the amount of the cheque for £232,500 to the plaintiff's account, and credited it to Cradock's account. Thus he covered the payment of £195,000 draft. It would appear I from Cradock's account with District, and is stated in a letter of June 16, 1958, from McMinn to his general manager, that the difference between the £195,000 and the £232,500 was used by Cradock for his own purposes and the purposes of his companies. On April 25, Contanglo paid i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Ltd. and M.D.R. Motors Ltd. (for a total of £6,400)1 should be taken over, as to £207,500 by Cradock, and as to £42,000 or the! balance of the indebtedness by Henry Briggs, Son & Co. (Trust) Ltd : that a 1 cheque for £207,500 in settlement of Cradock's liability be handed to Burden's representative for payment into the plaintiff's account; and that bills for a total of £42,000 payable on future specified dates be drawn on Briggs in settlement of Briggs' liability. Jacob and A. Jacobs resigned as directors and Burden and Sinclair were appointed directors. No representative of Woodstock was present when the resolution about taking over Woodstock's liability was passed. On January 27, there was an exchange of cheques for £245,761 I2s. Od. each between Cradock and Woodstock and they passed through Martins Bank where Woodstock and apparently Cradock had accounts. This sum, it is said, represented the £232,500, plus outstanding interest, and Woodstock wrote to Cradock on January 27, 1960, that they had that day "repaid you £242,671 12s. Od. being a principal and part interest on a sum of £232,500." The position about this is by no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On February 9, 1960, the date which the three cheques bore, Burden entered into an agreement with Cradock to purchase all the shares in H. C. Hopper (Norwich) Ltd. for £78,000, payable as to £42,000 in cash and the balance of £36,000 in bills drawn by Cradock and accepted by Burden. Burden was expressed to make the agreement "as agent for and on behalf of " without indicating the principal in any way ; Burden said he intended the plaintiff to have Hopper. There are unsigned minutes of a board meeting of the plaintiff on March 30, 1960, purporting to record a resolution for investment of the plaintiff's money in short-term loans " pending the result of an investigation into an engineering business which it was suggested the company should purchase." Sinclair said that nothing mentioned in this unsigned minute of a resolution was ever considered. In a memorandum of April 5, 1960, to Burden, Sinclair said " particulars as to paying in of requisite assets are awaited." But whatever any particular person may have intended with regard to Hopper, on May 31, 1960, Burden and Cradock cancelled their agreement for its sale to Burden on Cradock accepting bills drawn by Burde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uty. But the question how far they are trustees bears upon the question how other defendants can be made liable as constructive trustees as claimed. On occasion directors have been said to be trustees and on occasion not to be trustees. Like so many interminable arguments in philosophy, economics and everyday life, its resolution depends largely upon definition of terms, in this case of " trustees " and then on the ambit of its proper application to directors. Directors are clearly not trustees identically with trustees of a will or marriage settlement. In particular, so far as at present relevant, they have business to conduct and business functions to perform in a business manner which are not normally at any rate associated with trustees of a will or marriage settlement. All their duties, powers and functions qua directors are fiduciary for and on behalf of the company. So property in their hands or under their control is theirs for the company, i.e., for the company's purposes in accordance with their duties, powers and functions. However much the company's purposes and the directors' duties, powers and functions may differ from the purposes of a strict settlement and the dut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the bank. In the present case there is no dispute about the fact of payments of the plaintiff's moneys out of the plaintiff's bank accounts but only of their nature and significance and whether they amounted to a misapplication. The very application of the plaintiff's moneys of which complaint is made by the plaintiff would have been impossible if the defendant directors did not have and exercise effective control of these moneys. Those directors were the only directors of the company and the directors who were authorised to operate the company's bank account. Indeed, a crucial part of the defence (namely that which relies on the conclusiveness of the mandate) is that they had that control. I will now refer to passages in the authorities. In In re City Equitable Fire Insurance Co. Ltd. [1925] 1 Ch. 407,426; 40 TLR 853, CA Romer J. said : "It has sometimes been said that directors are trustees. If this means no more than that directors in the performance of their duties stand in a fiduciary relationship to the company, the statement is true enough. But if the statement is meant to be an indication by way of analogy of what those duties are, it appears to me to be wholly misleadin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same footing as if they were trustees..." Kay L.J. said [1894] 1 Ch. 616, 637-639.: "I conceive that the directors of every company being the managing agents of a trading concern have considerable authority and power in dealing with outstanding debts due to the concern... but if they deal with the funds of a company, although those funds are not absolutely vested in them, but funds which are under their control, and deal with those funds in a manner which is beyond their powers, then as to that dealing they are treated as having committed a breach of trust...directors are not always trustees. As directors they are not trustees at all. They are only trustees qua the particular property which is put into their hands or under their control, and which they have applied in a manner which is beyond the powers of the company, I conceive that qua such fund they are constructive trustees, or trustees by implication of law.... " In In re Forest of Dean Coal Mining Co. [1878] 10 Ch. D. 450, 452-453 ; 40 LT 287. Sir George Jessel M.R., in dealing with the responsibility of directors in respect of debts due to a company, said: "Traders have a discretion as to whether they shall sue their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loans were not of unusual amount and there was nothing about them to put the board on inquiry. So a director who was not involved in the transaction, otherwise than as a member of the board, and presumed to have just the knowledge disclosed to the board, was held not liable to repay to the company the amount of the loan. The sub-committee was duly appointed and acted within the ambit of its authority in making the loans, its only report was of the loans and the loans qua loans were unexceptionable. The director therefore acted perfectly properly within the ambit of his responsibility, having regard to the proper delegation of responsibility to the sub-committee in accordance with the company's constitution. The objectionable part was concealed by the sub-committee, namely that the loans were but means of purchasing the company's shares with the company's money. In these circumstances it was said "a director cannot be held liable for being defrauded." But that does not touch upon the case of a nominee director putting himself blindly at the disposal of a stranger without status in the company, except the irrelevant status for present purposes of shareholder. The Land Credit Co. ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tee for its customer of the amount to his credit in his bank account: (see, for example, Foley v. Hill [1848] 2 HL Cas. 28, HL; Burdick v. Garrick [1870] 5 Ch. App. 233, CA, per Lord Hatherley LC). In view of this, and the circumstances in which the constructive trusteeship relied on by the plaintiff against the defendants is said to arise, the plaintiff does not rely at all in this case upon the establishment of the first category of constructive trusteeship, but exclusively on the second category. The first category is irrelevant to the plaintiff's case. Soar v. Ashwell [1893] 2 QB. 390 ; Burdick v. Garrick 5 Ch. App. 233. ; In re Barney, Barney v. Barney [1392] 2 Ch. 265; 67 LT 23; Mara v. Browne [1896] 1 Ch. 199; 12 TLR 111, CA; and Williams-Ashman v. Price and Williams [1942] Ch. 219; [1942] 1 All ER 310; 166 LT 359, to which I was referred, fall within that first category. Barnes v. Addy [1874] 9 Ch. App. 244, contains a formulation of the second category of constructive trusteeship, upon which the plaintiff relies. In that case Barnes was husband of the life tenant of the trust, was appointed sole trustee by Addy, the sole surviving trustee, and subsequently he misappropria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not liable as a constructive trustee within the second category, unless he too assists "with knowledge in a dishonest and fraudulent design on the part of the trustees." What knowledge is required to satisfy the second element ? Lord Selborne in Barnes v. Addy 9 Ch. App. 252, refers to one of the solicitors, a potential constructive trustee, as having no "knowledge or suspicion ... of an improper or dishonest design," that "there was nothing to lead him to suppose" that there was an intention to misappropriate; and he says of the other solicitor that "he never knew nor suspected any dishonest purpose." These references leave wide open the question what knowledge is required. Kindersley V.-C. in Bodenham v. Hoskins [1852] 21 LJ Ch. 864, 873, quoted in Shields v. Bank of Ireland [1901] 1 IR 222, 228, indicated that the knowledge required was of circumstances which made it a dishonest and fraudulent breach of trust, though without dishonest intention on the part of the person with that knowledge. The quotation from Kindersley V.-C, in Shields v. Batik of Ireland reads' case (supra) : "I am constrained to arrive at the conclusion that the bankers, although I must exonerate them fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defendant shall be liable in equity, as though he were a trustee. He is made liable in equity as trustee by the imposition or construction of the court of equity. This is done because in accordance with equitable principles applied by the court of equity it is equitable that he should be held liable as though he were a trustee. Trusteeship and constructive trusteeship are equitable conceptions. The court of equity is not administering criminal law but equity. It is equity and not criminal law or even tort or contract that governs whether a person shall be liable in equity as constructive trustee. So, whether a misapplication of a company's funds for the purchase of its shares occasions the imposition of liability as constructive trustees, depends not upon the statutory provision making it a criminal offence, or upon statute or criminal law, or common law conceptions, but upon equity and its principles. As mentioned in argument, there are criminal offences nowadays which are not morally reprehensible and are not even blameworthy. Indeed, it appears that nowadays, by Act of Parliament, a person is made criminal although he can unquestionably and conclusively prove that he did not e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that equity is concerned with knowledge of equitable interests, because it is concerned with fastening upon the conscience of the person with that knowledge. In that case a trustee of a fund saw, in a newspaper, notice of a petition to the Insolvent Debtors' Court presented by his cestui que trust and acted on it. The question was whether a subsequent assignee of the cestui que trust, who gave the trustee formal notice of the assignment, acquired priority over the assignee in insolvency. The case thus did not turn on constructive notice but on the source of actual knowledge which the trustee had. Lord Cairns said [1868] 3 Ch. App. 490: "...but I am quite prepared to say that I think the court would expect to find that those who alleged that the trustee had knowledge of the incumbrance had made it out, not by any evidence of casual conversations, much less by any proof of what would only be constructive notice'--but by proof that the mind of the trustee has in some way been brought to an intelligent apprehension of the nature of the incumbrance which has come upon the property, so that a reasonable man, or an ordinary man of business, would act upon the information and would regu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de not in David Murray's own name, but in that of his daughter. It is not alleged, that he was ever led to suppose the daughter had any beneficial interest in the money; for what purpose then was her name used ? In fact, her name was evidently used as a means of disguising the truth. Perhaps inquiry might not have brought out the truth; but it does not lie in the mouth of William Murray to say this. He made no inquiry, although the circumstances were such as ought to have induced him to do so...It is impossible to permit a man who received, by way of security from a defaulting agent, a deposit of money which had been withdrawn from the funds of his principal, to insist in circumstances like these on his ignorance of the truth. I am clearly of opinion, that William Murray must be treated as a person who had notice of the truth." In a separate short judgment [1857] 7 De GM & G. 520, dealing with interest chargeable on the £2,300, Lord Cranworth referred to that sum as "received from David by William under circumstances which have satisfied me that the latter knew it was the money of the corporation." Clearly what he meant by "knew" in that passage was treated by equity as "hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets, not for money advanced at the time, but in satisfaction of his private debt, because this sale or pledge is prima facie inconsistent with the duty of an executor. I preface both these propositions with the term 'generally speaking,' because they both seem to admit of exceptions. " It is with these observations in mind that a passage relied on by the defendants has to be understood. It reads [1819] 4 Mad. 356: "If Robarts and De Lord had reason to believe that Thomas and Fennell were so misapplying the assets, it would be difficult to find a ground which would make them responsible for paying to their principals the monies which had been placed in their hands for the purpose of being remitted to them: that would be to make every trustee accountable for his conduct in the trust to every agent whom he happened to employ, and would carry the principle of constructive trust to an inconvenient, and, indeed, to an impracticable length." This is a guarded obiter statement. It indicates that it might not be enough to make an agent liable for breach of trust that he pays trust moneys to the trustee his principal, the legal owner to whom they are payable, when he has reason to believe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vity to the intent to make the misapplication. A benefit designed or stipulated for "most readily" establishes it--apparently as evidence of it. How far does shutting one's eyes to circumstances which indicate misapplication to be taken as establishing or constituting such privity? Nor does Lord Westbury deal with this problem LR 3 H.L. 1, 14. In In re Blundell [1888] 40 Ch. D. 370, 381 ; 4 TLR 506, a case of a solicitor's liability as constructive trustee, Stirling J., in considering what was required to make a stranger to a trust liable as constructive trustee, said : "........a stranger to the trust receiving money from the trustee which he knows to be part of the trust estate is not liable as a constructive trustee unless there are facts brought home to him which show that to his knowledge the money is being applied in a manner which is inconsistent with the trust....."; and that a solicitor having then "no notice" of any breach of trust is not liable 40 Ch.D. 370, 383. He also said 40 Ch.D. 382: "The real difficulty in each case is to determine what is sufficient to fix the solicitors with the liability of constructive trustees. As I have said, they must have been parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the whole case I must pronounce these proceedings to have been false, fictitious, and fraudulent; and I am bound, I conceive, by the principles of this court to declare that the National Bank could derive no right under the letters of guarantees of December 8, 1865, and February 6, 1866, which were wholly beyond the powers of the company, and were acted upon for a fraudulent and illegal purpose......." He referred to the transaction as "illegal and fraudulent." LR 8 Eq. 542-543. He dealt with knowledge and notice and said case (supra): "This company was expressly prohibited, by the 90th clause of its articles of association, from purchasing its own shares, a provision strictly proper in itself, and introduced for the protection of the public, and also to satisfy the committee of the Stock Exchange, which never grants a settling-day to a company unless it is prohibited from such a course of dealing......... But it is contended by the learned counsel for the National Bank that they did not know of the rule. But I am of opinion that the circumstances show, and there cannot be a doubt, that it was perfectly known to Sir Joseph McKenna and the other officers of the bank, as it undou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bank as being disentitled to retain money which it receives when it "has reason to believe that the payment is being made in fraud of a third person, and that the person making the payment is handing over in discharge of his debt money which he has no right to hand over." So here again "knowledge," apparently, is not treated as being exclusive of "reason to believe" or being put on inquiry. As in Thomson v. Clydesdale Bank Ltd. [1893] AC 287, so in Shields v. Bank of Ireland [1901] 1 IR 222, 238, the payment of estate money into an executor's private account did not suggest misapplication. So they "were not bound to inquire." In Coleman v. Bucks and Oxon Union Bank [1897] 2 Ch. 243; 76 LT 684, payment by the bank of trust moneys into a trustee's personal account was not a breach of trust. It was without any knowledge that a breach of trust by the trustee was intended and without any intention to benefit themselves. So it does not help on the question of notice of breach. In Backhouse v. Charlton [1878] 8 Ch.D. 444, 449, there was nothing to put the bank on inquiry or suggest constructive notice. It was in those circumstances that Malins, V.-C. said that the bank was justified in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tructive trustee in a dishonest and fraudulent design, is knowledge of circumstances which would indicate to an honest, reasonable man that such a design was being committed or would put him on inquiry, which the stranger failed to make, whether it was being committed. Acts in the circumstances normal in the honest conduct of affairs do not indicate such a misapplication, though compatible with it. And answers to inquiries are prima facie to be presumed to be honest, an aspect of the law which I shall deal with more fully later when considering negligence. I come to the third element, "dishonest and fraudulent design on the part of the trustees." I have already indicated my view, for reasons already given, that this must be understood in accordance with equitable principles for equitable relief. I therefore cannot accept the suggestion that, because an action is not of such a dishonest and fraudulent nature as to amount to some crime, that it is not fraudulent and dishonest in the eyes of equity--or that an intention eventually to restore or give value for property--which it was suggested might provide a good defence to a criminal charge--would of itself make its appropriation an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased, as stated in paragraph 27 of the statement of claim, on "the duty which as bankers they respectively owed to the plaintiff as their customer." The relationship of banker to customer with regard to the customer's current account in credit at the bank is not that of trustee or fiduciary to a beneficiary but sounds in contract (see Foley v. Hill [1848] 2 HL Cas. 28. and Joachimson v. Swiss Bank Corporation [1921] 3 KB 110, 126-127; 37 TLR 534, CA, per Atkin L.J.). In Jarvis v. Moy, Davies, Smith, Vandervell & Co. [1936] 1 K.B. 399, 405 ; 154 LT 365, CA, Greer L.J. stated : "...where the breach of duty alleged arises out of a liability independently of the personal obligation undertaken by contract, it is tort, and it may be tort even though there may happen to be a contract between the parties, if the duty in fact arises independently of that contract. Breach of contract occurs where that which is complained of is a breach of duty arising out of the obligations undertaken by the contract. " Although it was suggested that, in this case, paragraph 27 of the statement of claim alleging negligence is wide enough to cover negligence both in tort and contract, the negligence with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his use : (see Byles on Bills of Exchange, 22nd ed., (1965) pp. 267, 295, 296). Section 60 of the Bills of Exchange Act, 1882, provides protection for a paying bank and section 82 for a collecting bank. The protection given by section 60 is to a paying banker who pays "in good faith and in the ordinary course of business" though negligent. The protection to a collecting banker is to a banker who collects not just "in the ordinary course of business" but "in good faith and without negligence." Section 60 reads as follows: "When a bill payable to order on demand is drawn on a banker, and the banker on whom it is drawn pays the bill in good faith and in the ordinary course of business, it is not incumbent on the banker to show that the indorsement of the payee or any subsequent indorsement was made by or under the authority of the person whose indorsement it purports to be, and the banker is deemed to have paid the bill in due course, although such indorsement has been forged or made without authority." On this the text book (Byles on Bills of Exchange, 22nd ed.) comments at pages 268 and 269 : "This provision protects only the banker on whom the bill or cheque is drawn : it doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HL and Atkin L.J.'s famous judgment in Joachimson v. Swiss Bank Corporation [1921] 3 KB 110, 126-127. Lord Atkinson said in Westminster Bank Ltd. v. Hilton 43 TLR 124, 126: "It is well established that the normal relation between a banker and his customer is that of debtor and creditor, but it is equally well established that quoad the drawing and payment of the customer's cheques as against money of the customer's in the banker's hands the relation is that of principal and agent. The cheque is an order of the principal's addressed to the agent to pay out of the principal's money in the agent's hands the amount of the cheque to the payee thereof. " Atkin LJ., in Joachimson s case, said [1921] 3 KB 110, 126-127.: "The question seems to turn upon the terms of the contract made between banker and customer in ordinary course of business when a current account is opened by the bank. It is said on the one hand that it is a simple contract of loan ; it is admitted that there is added, or superadded, an obligation of the bank to honour the customer's drafts to any amount not exceeding the credit balance at any material time ; but it is contended that this added obligation does not aff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... customer to banker. It would, indeed, seem to me rash, in the absence of compelling considerations, to ascribe particularly to such a judge as Atkin LJ., such a very risky and cramping intention. Bankes LJ. [1921] 3 K.B. 118-119, in the judgment preceding Atkin LJ., had rejected a somewhat similar submission that Foley v. Hill 2 HL Cas. 28, should be treated as making an exhaustive definition of the obligations arising out of the relations of banker and customer.. True, Atkin L.J. in his judgment said [1921] 3 KB 110, 127, "The terms of that contract involve obligations on both sides and require careful statement." It was therefore suggested that he was making a careful statement of all the terms. But he did not say "comprehensive" statement, and his "careful statement" was that "They appear upon consideration to include the following provisions." [1921] 3 KB 110, 127. But the defendants say that, in the careful statement, the word "includes" means "consist of." But this would rob the statement of the carefulness relied on to make it comprehensive. It seems to me that Atkin L.J. is dealing with the mutual obligations of banker and customer, from receipt of moneys into the customer' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , of course, to the difference in the substance of the instructions given). There seems no ground for saying that the duty of care applies to instructions to stop but not to instructions to pay, or vice versa. Certainly no such ground has been suggested. Thus Lord Shaw in Westminster Bank Ltd. v. Hilton 43 TLR 124, 129, refers to the duty of a bank to honour a cheque drawn on a customer's account up to the amount of the customer's credit, and says : "This duty is ended, and on the contrary when the cheque is stopped another duty arises--namely, to refuse payment." Lord Dunedin says 43 TLR 126: "It must always be remembered that a bank can be sued just as much for failing to honour a cheque as for cashing a cheque that had been stopped," and, of course, vice versa. The facts in that case, so far as we need be concerned with them were as follows 43 TLR 124, 125. On August 1, the bank received a telegram purporting to be signed by a customer directing "Stop payment of cheque 117283 amount of £8 1s. 6d. to Poate," On August 2, the customer telephoned the bank branch cashier and the conversation included the following : "Did you get my wire to stop cheque to Poate for £8 1s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough Horridge J. at first instance had, as Lord Dunedin said 43 TLR 126: "exonerated the bank on the simple ground that 117283 was stopped and 117285 was cashed." If the instructions were conclusive and there were no duty of care, then it seems to me that Horridge J. was necessarily right. Further, Lord Dunedin indicated that the duty of care that arose was not limited to checking the accuracy of instructions, when a doubt arose about their expression or meaning, but went beyond that to exercising care that the apparent instructions were in reality the instructions of the customer. Lord Dunedin said [1921] 3 KB. 110, 118, 119, 126, 127, CA: "I was at one time inclined to think that, inasmuch as both the cashier and the manager knew that there was a stop on a cheque they ought, on August 6, to have made certain investigations, but I find that they did do so. They followed the ordinary practice. They looked at the ledger, and the ledger showed that no cheque in favour of Poate had come in. I think, therefore, that the view of the officials was correct that the cheque presented being subsequent to the date of the stop instructions might be a duplicate cheque, and that they were boun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss, be acted upon by the bank, at least to the extent of postponing the honouring of the cheque until further inquiry can be made. But I am not satisfied that the bank is bound as a matter of law to accept an unauthenticated telegram as sufficient authority for the serious step of refusing to pay a cheque." So this case likewise, in my view, goes to indicate that the bank has a duty of care to its customer in respect of the conduct of its customer's business as Bankes L.J. said and not merely in interpreting its customer's instructions; that that duty may in the circumstances require that the bank should make inquiries before acting and for that purpose to postpone honouring the customer's cheque ; and that the test of care required in the performance of the bank's duty is an objective test of reasonableness. Bellamy v. Marjoribanks [1852] 7 Exch. 389, a case before the Bills of Exchange Act, 1882, gave the banks statutory protection, also dealt with the duty of care of a paying bank. The plaintiff drew a cheque on Coutts & Co., payable to one Geary or bearer, and crossed it "Bank of England for the account of the Accountant-General." Geary crossed out the crossing to the Bank of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seeing that the paying banker already owes a duty of carefulness to his customer, it would have been the more obvious to express it." For the banks it was suggested that this merely referred to a duty to take care not to pay otherwise than in accordance with the instructions. I do not read MacKinnon L.J.'s observations in the limited way for which the banks contend. Slessor L.J. [1938] 1 KB 511, 535, treated circumstances which put on inquiry, coupled with the absence of inquiry, as establishing negligence within section 82. B. Liggett (Liverpool ) Ltd. v. Barclays Bank Ltd [1929] 1 KB 48; 43 TLR 449, was referred to. As the law turned on Royal British Bank v. Turquand [1856] 6 E. & B. 327, with which we are not concerned, and the circumstances of negligence were far removed from the circumstances in our transactions, it does not seem to be of material assistance. The cases on the duty of care of paying banks are very few. For the defendant banks it was suggested that this indicated that there was no duty of care on paying banks. Not only is such a negative indication dangerous, but it seems to me that, to conclude that there is no duty of care on paying banks, is contrary to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the money was not the money of Lord Terrington. In that state of circumstances there is no evidence or any possible inference which can be drawn that the agent was applying his principal's money in discharge of any possible liability of his principal' " Then Lord Atkin adds : "Precisely the same state of things exists here ... It seems to me clear that in an omission of an ordinary business precaution, in breach of a plain duty imposed upon a creditor to take reasonable care to see that a known agent paying his own debt to his creditor out of his principal's money is acting within his authority, the bank were negligent in making no inquiry as to their customer's authority to make these payments "; and later he says [1933] AC 1, 17: "the notice found to exist defeats reliance on ostensible equally with actual authority. Neither in the one case nor in the other can the agent be assumed to have authority to pay his own debts with his principal's money." In Penmount Estates Ltd. v. National Provincial Bank Ltd. [1945] 173 LT. 344, the first paragraph of the headnote reads: "The plaintiffs were the payees of a cheque, crossed ' and Co. Not negotiable,' received by a firm of surve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sonable despatch. As it turns out, there were a good many questions on which a lawyer, who is trained very differently from a bank clerk, would probably have had it in mind to cross-examine Addis." So there are an "infinite variety of circumstances" that may be relevant to negligence. "Reasonable despatch" in this passage must, of course, mean reasonable in all the circumstances. It is accepted that, in the ordinary course of business, the decision what course to take with regard to a cheque presented for payment must be taken on the day of its receipt by the bank branch responsible for the decision. But it seems to me that a banker is not compelled at his risk to honour or dishonour his customer's cheque, in the ordinary course, by the end of the day of its receipt, if there are circumstances requiring investigation. The need for despatch and the knowledge of the banker are alike elements which enter into a decision what despatch and what investigation are reasonable in the circumstances. In A.L. Underwood Ltd. v. Bank of Liverpool and Martins [1924] 1 KB 775; 40 TLR 302. CA, so far as material, cheques were drawn in favour of a company, indorsed by a sole director duly authoris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a transaction is "out of the ordinary course of business," "doing something unusual which ought to have attracted the attention of the bank's servants," and where there is "a risk" that wrong is being done (to someone with regard to whom the bank seeks to maintain that it is acting without negligence), then the bank is negligent unless it makes inquiry. It is irrelevant to the passages which I have quoted, that the negligence of the bank to the true owner of the cheque was imposed by statute and did not arise out of contract, or that such negligence is not a ground of claim but a defence in which, under section 82 of the Act of 1882, the burden of proof lay on the bank, instead of on the plaintiff as in contract. Nor is it relevant that the negligence being considered is that of a collecting and not of a paying bank. The passages are not directed to or affected by the considerations which are irrelevant to them. They are directed to what constitutes carelessness within the legal context of negligence, what kind of behaviour amounts to negligence. They show, to my mind, that the standard of care being considered is not some mystery peculiar to banking law, still less that it is li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de against the paying bank. Lord Reading C.J. said with reference to the forgery issue [1914] 3 KB 356, 366: "If, as is admitted, the National Provincial Bank were entitled and indeed bound to honour cheques so signed"--and [1914] 3 KB 363--"The plaintiff makes no complaint against the National Provincial Bank. It is clear that they were bound in pursuance of the directions and authority given in 1888 to honour the said cheques on his account." Buckley L.J. spoke to the same effect [1914] 3 KB 374. These statements must be read in the context of that case, where there was no claim in negligence or otherwise against the paying bank, or any such ground suggested for impugning the banks relying on the mandate to it. They were not general pronouncements of law, which would exclude such claims in negligence or otherwise, and so to read them would import into them a significance to which the court's mind was not directed at all and which they were never intended to bear. On negligence Lord Reading C.J. said [1914] 3 KB 368-369: "For a firm to pay salary or commission or any debt to a manager by cheques made payable to the firm or order, and for a manager to pay cheques so drawn to hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the decision of the High Court of Australia above-mentioned, their Lordships feel bound to say that they cannot agree with the view of the learned Chief Justice in that case where he says that the care to be taken is not less than a man invited to purchase or cash such a cheque for himself might reasonably be expected to take. This seems to their Lordships to apply an inapposite standard, for the simple reason that it is no part of the business or ordinary practice of individuals to cash cheques which are offered to them, whereas it is part of the ordinary business or practice of a bank to collect cheques for their customers. If, therefore, a standard is sought, it must be the standard to be derived from the ordinary practice of bankers, not individuals.' " So it seems to me that the standard of care is that which bankers might reasonably be expected to take according to the ordinary practice of bankers. The test thus seems clearly to be an objective test of reasonableness. These quotations are in line with other cases, already considered, indicating that, in deciding whether there is carelessness in breach of the required standard of care, and whether inquiry ought to be made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred. Banking law is not a separate body of law, though, like innumerable other activities, it has statutory provisions dealing exclusively with it, and, being a distinctive and important activity, text books dealing separately with it. Those aspects of law with which we are at present concerned are aspects of the general law of contract applicable to banking. The principles of that law of contract applicable to banking are the principles of the general law of contract. It seems to me that it is in keeping with this that Atkin L.J. in Hilton v. Westminster Bank Ltd. [1926] 135 LT 358, 362, said, in a passage already quoted, that it is the duty of the bank to exercise "reasonable care and skill," that being a duty which he describes as "arising out of the contract" between banker and customer. It seems to me that the passages quoted, in particular from Atkin L.J. and Bankes L.J. in Hilton v. Westminster Bank Ltd., 135 LT 358, 362, are in keeping with this appreciation. To my mind, in accordance with those quotations, a bank has a duty under its contract with its customer to exercise "reasonable care and skill" in carrying out its part with regard to operations within its contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany" and bind it vis-a-vis the bank. Clearly the signatories, because they were authorised to sign "on behalf of the company," could not rely on the mandate to pay for their own purposes. In reality, they would be signing on their own behalf. Nor could the bank rely on the mandate as conclusive to make such payment for the signatories' purposes out of the company's account. Neither the signatories nor the bank would, in my view, be excused by the mandate from any obligation which existed independent of the mandate, such as obligations under their respective contractual relations with the company. As between the company and the bank, the mandate, in my view, operates within the normal contractual relationships of customer and banker and does not exclude them. These relationships include the normal obligation of using reasonable skill and care. And that duty, on the part of the bank, of using reasonable skill and care, is a duty owed to the other party to the contract, the customer, who in this case is the plaintiff, and not to the authorised signatories. And it extends over the whole range of banking business within that contract. So the duty of skill and care applies to interpreti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and there is a motion for judgment against him. So all I am concerned with, as against Cradock, is whether treating the statement of claim as admitted against him, the claim which it makes against him is established in law. That I will deal with after this judgment and in conjunction with the form of any order against other defendants. That the alleged purpose of using the plaintiff's funds was to finance the purchase of stock in the plaintiff by Cradock has to be established as against the other defendants. Not by default of Cradock's defence but positively. The plaintiff, Woodstock and District agree that if any payment was made out of the plaintiff's account for the purpose of purchasing the plaintiff's shares, it was £232,500 and not merely the £195,000 paid to Contanglo. As the claim against Contanglo is limited to the £195,000, Contanglo is not concerned with this discrepancy in amount. It is likewise agreed between the plaintiff, Woodstock and District that there should be an inquiry whether any part of the £232,500 so paid was in fact applied for the plaintiff's purposes, and, if so, that the amount so applied be deducted from the amount of any l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his could be regarded as making honest what would otherwise be dishonest in any relevant sense, and with that I have already dealt and I have concluded that it cannot. The defendants Barlow-Larson and Jacob The allegation against Barlow-Lawson and Jacob is that they procured that the £232,500 of the plaintiff's money should be misapplied for the purpose of financing stock in the plaintiff by Cradock, in bad faith and in breach of their duties as directors and as part of an arrangement between them, Cradock, Contanglo, District and Woodstock or some of such defendants to which the others were privy. They both deny that they were aware that the plaintiff's money was to be used for such a purpose. Barlow-Lawson had a small engineering business and had before the war been an estate agent in partnership with Scott of Contaglo. He gave the impression of being somewhat flamboyant and happy-go-lucky. He repeatediy stressed that he was chairman of a successful company that had been a shell company. He was very easy in manner but not a person of any weight and not comparable in ability or force of personality with such controllers of operations as Burden or Scott, whom I saw, or, by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e hands and eyes of Mr. Cradock." With regard to the meeting of April 25 he said : "I did not really know what was happening and what was the intention of any of the parties...I trusted everybody there. " Jacob was an employee of Cradock and his companies. He was engaged in managing properties and was paid by those companies £2,500 a year less P.A.Y.E., plus the use of a car and expenses. He was a quieter and abler man than Barlow-Lawson and, doubtless, was an able administrator. He did not give the impression of being an adventurer and he was not of the calibre of the controllers. His evidence, doubtless largely due to failure of recollection, was not such that much confidence can be placed in it. He knew that Cradock was purchasing a controlling interest in the plaintiff, that he wanted a shell company with liquid assets with which he could acquire some of his properties. But no specific properties were mentioned for such acquisition at the time of the first transaction. He knew on April 25, or on the day before, that he was going to be a director of the plaintiff, and he was told before the meeting on that day, that the plaintiff's money would be deposited with Woodstoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted that. He made no inquiries about the resolutions and never considered the interests of other shareholders than Cradock, but did what Cradock, the majority shareholders, asked him to do. He said that, if Cradock acted honestly, the arrangement was honest, if dishonest it was dishonest, but that there seemed nothing wrong with it, within his knowledge at the time, and that he relied on Sarsfield, to whose company the cheque was being paid, whom he had met casually once and knew to be a stockbroker. And Jacob did later buy a small holding of stock in the plaintiff for himself. It seems to me, however, that both Barlow-Lawson and Jacob were nominated as directors of the plaintiff to do exactly as they were told by Cradock, and that that is in fact what they did. They exercised no discretion or volition of their own and they behaved in utter disregard of their duties as directors to the general body of stockholders or creditors or anyone but Cradock. They put themselves in his hands, not as their agent or adviser, but as their controller. They were puppets which had no movement apart from the strings and those strings manipulated by Cradock. They were voices without any mind but t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Sarsfield, in line with his arrangement with Cradock, that a cheque drawn on the plaintiff's account with District, in Woodstock's favour, would be indorsed to Cradock. This scheme was carried out by the necessary resolutions of the plaintiff's board and by payment of £232,764 from the plaintiff's account at National to the plaintiff's account with District and £232,500, out of it, by indorsement into Cradock's account as I have described. It is completely clear that it was only by this use of the plaintiff's £232,500 that the £195,000 payment was effected. Of course, the credit in a bank account is not a total of specific or even floating coins, which are the property of the person whose account it is, but the amount of a debt payable by the bank to the customer in accordance with their agreement. Money paid into a bank account becomes the property of the bank. So the £195,000, even if debited to Cradock's account and credited to Contanglo's account after the £232,500 were credited to Cradock's account, would not be moneys of the plaintiff, in the strict sense which I have indicated. But it was or represented moneys of the plaintiff in the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he passage of the fund from A to B. Such indebtedness would be subsidiary to that operation. It would be a method of achieving, though obscuring it. To say that such indebtedness should in equity prevail over such operation would be to make what is subsidiary paramount. And nonetheless if A's fund passing to B is read as the benefit of the bank's indebtedness to A passing so as to be transformed, to the accompaniment of legal incidents, into the bank's indebtedness to B. Such wizardry is not to defeat equity. So I conclude that £195,000 received by Contanglo were moneys of the plaintiff or, at any rate, sufficiently represented those moneys as to be the proper subject for such a claim in equity to replace them as is made by the plaintiff. It was suggested that the payment of the £195,000 to Contanglo was not for its benefit. Contanglo itself took every conceivable precaution to secure its payment. That is what the elaborate security arrangements which it had exacted from Cradock were for. It appeared that the loss to Contanglo on a winding-up of the plaintiff would be several thousand pounds, although Contanglo might well have been able to obtain a better price for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uire it. There is thus, the origin of the purchase at Contanglo's suggestion, the Contanglo control of the purchase for Cradock, the Contanglo knowledge of its purpose, and Contanglo's business as bankers or financial experts and their expert knowledge of conducting take-overs. But Scott denies any participation or knowledge of how Cradock was to provide the money to pay for the stock. The normal method of providing such money was by bridging finance, the temporary loan from a banker to pay for the shares pending the sale of the taker-over's properties to the company for payment, which would enable him to repay the bank loan. For a taker-over to provide the payment for the shares out of his own moneys would be extremely unlikely. Scott himself said he could not "ever recollect" such a case. Such a take-over, though a reputed millionaire like Cradock, would hardly be expected to keep the amounts required for such payment unemployed, particularly when he was to be paid for properties to be sold to the company and the profits on which were to be realised by the sale of the shares which he had acquired. The realisation of those profits, free of tax by sale of the shares, was, as expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be injected later, with the well-recognised risk that they never might be. In our case there is no question of any security or assurance that properties would be injected. What Contanglo say is that they had no knowledge of and were not concerned about the source for payment of the stock at all. As I have said, the only legitimate purpose suggested for the acquisition of the stock was injection of properties with a view to realisation of the profits on them tax free. But Contanglo does not suggest that it inquired whether Cradock was going to inject properties into the plaintiff on the occasion of his paying Contanglo and taking over the company on April 25. The plaintiff's board would have had to provide for payment of its moneys in return for the properties. That board, until after the £195,000 draft was handed over and, according to Scott himself, taken away from the meeting, consisted of the Contanglo nominees. They had passed no resolution to purchase Cradock properties, nor was there any suggestion that such properties had been identified or valued, or that in any way any preparation had been made or even considered for payment of the plaintiff's moneys for such pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd rightly suspicious ? (A.) Yes." When hearing this cross-examination I had no doubt at all that counsel and Scott were in the first question and answer which I quoted referring to the movement of the plaintiff's money from one bank to another; that "never touched" was anything but a more emphatic way of saying "never moved" and certainly had no connotation of being "touched" in any sense of "touching" for a loan or as a transfer from the company. That that was the true view seems to me to be confirmed by a passage considerably later, towards the end of the cross-examination. Immediately after referring to the resolution to pay the plaintiff's money from National to District, counsel referred to his earlier cross-examination, which I have mentioned, and said; "I was asking you and you agreed with me that the one way to make certain that the company's moneys were not improperly applied in financing the purchase of its shares was to make certain that the company's moneys were not moved, were not touched until the moment came to pay for the property being put into the company. (A.) Absolutely, and that had always been made very clear to us by Mr. Levinson." In re-examination, in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties as a witness which I have mentioned, so far as they might be seen without the vivid impression which he conveyed in the box, and the advantage of the tones of the interchanges between counsel and witness. There are two other matters to which I must refer. The first is a document headed with the plaintiff's name and underneath "Financial position April 22, 1958." It shows a calculation of the cost to Cradock of acquiring the stock, £195,322 5s. 2d. Underneath it shows the plaintiffs assets, namely, Cash at bank, £191,292 ; Tax reserves £5,803, Government securities £38,704, amounting to a total of £235,799, and Assets in East, with which we have not been concerned, amounting only to just over £6,500, making the plaintiff's total net assets £222,652 after deducting £19,688 liabilities. The total purchase price is then shown deducted from the plaintiff's total assets, leaving roughly £27,330. This document was prepared at Scott's instigation. Meaden was concerned in its preparation for Contanglo and said, what is obvious on the face of it, that it showed the plaintiff's net assets and the amount Cradock had to pay for the sto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deducting the cost of acquisition of the stock from the net assets. I am satisfied, as I have explained, that the immediate injection of assets was not contemplated, and that Contanglo knew this perfectly well. But the immediate sale of the plaintiff's securities was carried out by Contanglo, with the result that the plaintiff had cash at the bank before payment by Cradock to Contanglo of an amount exceeding the amount of that payment, and that the plaintiff's cash was moved by Contanglo from National to Cradock's District branch. These observations are unaffected by the consideration relied on by counsel, though not in fact by Scott in his evidence, that in the event Cradock scooped £235,000 of the plaintiff's moneys which were virtually all its assets, and not its assets less liabilities shown on Contanglo's document. It seems to me that taken in conjunction with Scott's explanation of it and the other evidence, the document weighs against Contanglo. There was a great deal of evidence and argument directed to the question whether the Contanglo representatives, Scott, Levinson and Meaden left the meeting of April 25, before the resolution of the plaintiff's board to make a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... completed our transaction on the 24th. For some reason or other, unforeseen reason it may be, Mr. Cradock may not have been able to complete with us. (Q.) You think the whole thing on the 25th might have gone off ? (A.) It could have done quite well." And Scott said that it was Cradock wanting the plaintiff's money moved to District on the 25th and on the agenda for that day's meeting, that set his mind at rest and he knew that Cradock would be able to complete. Contanglo secured, through their nominees on the plaintiff board, that the resolution for that movement was passed. Contanglo knew the amount of money Cradock had to find to pay for his acquisition of the stock; that the plaintiff's assets were liquid ; that without the realisation of securities the plaintiff's balance at the bank was less than the money it required to pay Contanglo for the stock ; that the securities were substantially all realised and credited to the plaintiff's account at National as Contanglo itself had provided, thus bringing the balance at the bank above the amount of the Contanglo draft for the stock; that Cradock had wanted the plaintiff's moneys at National transferred to Martin's Bank and that h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and knowledge of matters alleged in the statement of claim, of such application for the said purposes, and which sum District nevertheless paid and debited to the plaintiff's account. The claim against District is further or alternatively for damages for negligence in performance of the duty which, as bankers, they owed to the plaintiff as their customer, in honouring a cheque for £232,500 drawn on the plaintiff and debiting it to the plaintiff's account, without making any or sufficient inquiry of Barlow-Lawson, Jacob, Cradock and Sarsfield, or any of them, of the purpose for which the £232,500 was being paid to Cradock, by a cheque in favour of Woodstock, indorsed to Cradock. In the claim in equity against District, the allegation that District ought to have known the said purposes does not include any allegation that District ought to have made inquiries, because particulars given of the allegation that District ought to have known did not include any reference to inquiries. This contrasts with the claim of negligence against District, which includes the allegation that District ought to have made inquiries of Barlow-Lawson and others as I have already mentioned. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o accept the indorsed cheque in place of the banker's draft. Reynolds was a responsible official of District, whose knowledge, in my view, is clearly knowledge of District. It is not disputed by District that at the crucial moment of debiting the plaintiff's account and crediting Cradock's account with the £232,500, District knew that the £232,500 came indirectly from the plaintiff to Cradock. Nor do I understand it to be disputed, what is in any case clearly indisputable, that the £232,500 from the plaintiff was cover for the £195,000 payment to Contanglo. As stated for District, "The only defence, therefore, is that they (that is. District) did not know that it was cover for the purchase of the shares by Cradock." Subject to this defence, District clearly assisted in the alleged misapplication of the plaintiff's money. So, in the claim in equity, the question is : Has it been established by direct evidence or inference from the evidence that District knew, or are facts established which would have brought it home to the mind of a reasonable banker, that the plaintiff's £232,500 paid indirectly to Cradock was cover for the purchase of shares in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld "influence " the transfer to him of the account of the plaintiff " in which he had been interested for some time." McMinn replied that he would be interested in having the account. Cradock then asked McMinn to arrange a banker's draft for £195,322 5s. 2d. to Contanglo and for a District representative to take it to the National Bank on April 25, where he would collect in exchange a banker's draft for about £235,000 in favour of Cradock. This arrangement about the drafts was confirmed by a letter to McMinn, signed by Cradock as "Governing director," without specifying of what company, but on notepaper headed with the Cradock Group Headquarters address. So, at that stage, McMinn knew that Cradock could influence the transfer of the plaintiff's account from National Bank to District and that the draft from District to Contanglo was to be covered by a draft to District, to be collected from National Bank. McMinn denied that any other relevant information passed between him and Cradock and this, I have no doubt at all, was true. In particular there was no mention of the plaintiff's moneys being used to cover the Contanglo draft or to pay for stock in the plaintiff. McMin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount as the first loan, unless it was part of a larger loan, which it was not suggested to Reynolds by Sarsfield or Cradock. During the board meeting which followed, Reynolds was in the group apart from the board meeting group and had very little idea of what was going on. After that, he took part in the documentation with regard to the opening of the plaintiff's account, including the receipt of the National drafts and the payment of the Woodstock cheque to Cradock's account. After the single cheque reference the next matter relied, with regard to the claim against District, was the undertaking to District from National given to Reynolds. This was the undertaking dated April 25, 1958, signed by Snell and addressed to the District, Oxford Street branch manager, to deliver to him 713,579 stock units in the plaintiff together with a completed transfer deed in favour of District Bank (London) Nominees Ltd., "as soon as certain formalities of stamping and registration had been complied with." Reynolds' evidence was that it was given to him by a person whom he thought to be a National Bank representative, as he was about to leave the meeting. Reynolds agreed that the undertaking was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined, he set about and eventually obtained proper confirmation of the indorsement. As Reynolds said, there was what he described as " the fixation on the indorsement." The branch had bank instructions about conversion of cheques and the dangers of indorsements. They had no such instructions about the dangers of payments, if in accordance with a mandate to the bank ; and Reynolds had been told that the indorsed cheque represented a loan by the plaintiff to Woodstock and by Woodstock to Cradock and that loan, McMinn said, was "in his mind." So I have no difficulty in believing that these two conscientious bank officials went, if I may so describe it, flat out in blinkers for indorsement with hardly a glance for anything else. McMinn said that when he saw the undertaking he did not connect it with the draft in favour of Contanglo and that he was mystified by the undertaking and decided to wait to hear further on completion of the formalities of stamping and registration mentioned in the undertaking. This is very much a repetition of Reynolds' behaviour when he received the undertaking, and to my mind it is equally in character, but McMinn, despite his slowness and inexperience, agreed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter the meeting upon seeing the undertaking. I pass now from the documents, which I said District relied upon, to a most important document, which is an extract from a minute of McMinn's dated April 25, though, in view of the contents of the minute, it was clearly composed not earlier than April 28, and not later than May 3. For the plaintiff the date most favourable to District is accepted, namely. May 3. The document is headed "Extract from manager's minute book at 413 Oxford Street, London, W.I" and then underneath "Selangor United Rubber Estates Ltd." and the date is April 25, 1958. Then the body of the minute commences : "Our customer, Mr. Francis R. Cradock, has been negotiating the purchase of this public company for some time, and completion took place today. The account has been transferred to us from the National Bank, Whitehall. Form No. 36 has been completed; any two directors may sign on the account. After the resignation of the old board, Mr. Francis Arthur Jacob and Mr. Francis Evelyn Barlow-Lawson were appointed directors. Mr. Jacob is known to us as Mr. Cradock's estate manager, and he has a private account at this office. The [plaintiff's] account was opened wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low-Lawson had already been appointed and, as appeared from the minutes which McMinn received on May 3, Barlow-Lawson was not appointed after the resignation of the old board at all, he was a member of the old board. So McMinn did not see the substitution of a new for an old board mentioned in the minutes, but could only have inferred it from concluding that on completion there was a change in control of the plaintiff. As he agreed when cross-examined on the minute, "I had had time to think of what had happened on April 25 and obviously the control of the company had changed hands, which would imply that the majority shareholding had changed hands" and "that the purchase had been completed" or, perhaps more accurately, the implication was the other way round. Reynolds said that on the buying of control of a company and its completion he would expect payment of the purchase price, transfer of the shares and the appointment of the purchaser's nominees as directors. McMinn says that he assumed that the advance from National Bank "represented the balance (that is, of the plaintiff's account in National) transferred from the National Bank." He then says that the Woodstock cheque was "im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to him and, indeed, could not have occurred to him if, as he said, he did not realise that the shares mentioned in the undertaking had been purchased by Cradock. It is clear that, at the time that the Woodstock cheque was honoured by McMinn, he was fully aware that it was designed to make good Cradock's debt for the Contanglo draft, and in that sense its payment was a benefit designed for District. Its relevance for present purposes is in so far as it bears upon the knowledge which the plaintiff alleges. This relevance is, to my mind, as evidence of District's and of McMinn's personal and official interest in the honouring of the cheque, and thus on the course which they took and the evidence which they give. It is not relied on as an independent ground for establishing liability, apart from the alleged knowledge. So it was, as District well knew, upon the change of control of the plaintiff with a differently constituted board, by completion of the purchase of its majority shareholding, involving payments of its price and handing over of documents of title, that the following events occurred immediately and virtually simultaneously, to District's knowledge : The plaintiff's accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Cradock of the stock in the plaintiff even though McMinn and Reynolds did not then realise that the payment was being so used. This does not seem to me exacting for a bank, or to require from it any unreasonable standard of care, or cause any substantial inconvenience to the conduct of its affairs, as was suggested--although without substantiation by evidence. The evidence showed that the banks put severe limits, as is common knowledge, on powers of bank managers to grant overdrafts and thus risk the bank's money--limits which bear no comparison at all with the amounts at risk of the plaintiff on the Woodstock cheque. The evidence also showed that District gave explicit instructions to avoid their being liable for conversion of cheques, when acting as collecting banks. For my part, I can see no substantial difficulty in banks providing against such exceptional transactions, involving substantial amounts, as in this case, being carried through by officials completely inexperienced in such transactions and unqualified to deal with them. If a bank allows such officials to conduct such business it is asking for the kind of trouble which it has got in this case. It does not seem to me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agree. And when there are added the other matters already considered as relevant to the question whether a reasonable banker would have had knowledge of the purposes for which payment of the plaintiff's moneys indirectly to Cradock was made, the establishment of the plaintiff's case in negligence is correspondingly strengthened. So I conclude that, on negligence too, the plaintiff's case against District is established. The defendant Woodstock The claim against Woodstock is that it is liable to account as constructive trustee for, and repay with interest, £232,500 of the plaintiff's moneys, applied to enable Woodstock to lend £232,500 to Cradock to purchase stock in the plaintiff in the furtherance of an arrangement made by the defendants to the first transaction claim, including Woodstock (or some of them to which the others were privy), or, alternatively received of Woodstock knowing that it was or represented money of the plaintiff which had been so misapplied. It is perfectly clear from Sarsfield's letter of April 23, 1958, to Cradock, which I have already quoted fully, that the plaintiff's £232,500 paid to Woodstock was for the purpose of paying it over to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ," Defendants Cradock and Burden The first two defendants with whom I am concerned in the second transaction are Cradock and Burden, and it will be convenient to deal with them together. Of course, the motion for judgment against Cradock, in default of defence, applies to the claims against him in the second transaction. The claims against Cradock are based on the allegations that he was a party to an arrangement with Burden and Sinclair to misapply the plaintiff's money by the second transaction--in the case of the £207,500 to finance the purchase of the stock in the plaintiff by Burden from Cradock--and that he received the plaintiff's moneys knowing them to be so misapplied. But as in the first transaction Cradock's part in the second transaction, so far as it bears upon the cases with regard to the other defendants, has to be established positively. The claims against Burden are based on the allegations that he misapplied the £207,500 and the £42,000 of the plaintiff's moneys, in bad faith and in breach of his duty as director and in furtherance of an arrangement with Cradock and Sinclair to misapply them, in the case of the £207,500 to finance the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plaintiff which Burden obtained. Burden also agreed that, assuming Cradock's £42,000 cheque to the plaintiff was a real payment of that sum to the plaintiff for the plaintiff's purposes in return for the Briggs bills, then the payment by the plaintiff to Burden of £42,000 was a payment for which the plaintiff got nothing. The facts with regard to the Hopper agreement I have already sufficiently stated; and there is no evidence that comes anywhere near establishing that the plaintiff had any interest in the Hopper agreement. Nor is there any reasonable foundation for concluding that Hopper's assets or any other assets were to be injected into the plaintiff as part of the completion of the purchase of the shares in the plaintiff by Burden, or in return for the £42,000 payment to Burden. So, in accordance with my conclusions already stated on the relevant law, but subject to the questions of law that I shall deal with later, I conclude that Burden is liable to replace the £207,500 and the £42,000 with interest as claimed. The defendant Sinclair The claim against Sinclair is in equity to replace with 5 per cent, interest the sums of £207,500 and & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in settlement of Briggs' liability, and (3) the appointment of Burden and Sinclair as directors in place of Jacobs and Jacob. At the second meeting of that day Sinclair and Burden were present. Sinclair was appointed chairman and Burden secretary, and it was resolved to open a bank account with the Bank of Nova Scotia. The minutes of that meeting record that the minutes of the first meeting of that day were "read, approved and signed by the chairman" and manuscript minutes of that meeting are signed by Sinclair over the date January 26, 1960. Weavers, who were the secretaries of the plaintiff until their resignation at the first board meeting, sent typewritten minutes of that meeting to Adrian Jacobs on January 27. A typewritten copy of the minutes was produced from Weavers' file and signed by Adrian Jacobs. Sinclair maintained at first that he had not signed the manuscript minutes of the first meeting on January 26, because they were in the writing of Atter, who, he said, had no connection with the plaintiff. But it emerged that he was at the time working for Burden or his organisation at Burden's headquarters and in Sinclair's flat. Sinclair then suggested that Atter copied t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regarded as an infernal nuisance," as quickly as possible. (2) that he was trying to give an idea of what he thought Burden was doing, though he did not mean to convey that he knew anything about it. (3) that "combined transactions" in his letter referred to combining questions 3 and 4 together to dispose of them and not to the transactions being combined. (4) That the reference to bridging was made from " hindsight" though, after cross-examination on what he knew on this in September which he did not know in February, he later withdrew his suggestion. In another part of his cross-examination, when his mind was not directed to these letters but to the payment by the plaintiff of the £207,500 cheque in favour of Burden, he said "eventually the money would be paid out of Selangor by way of the cheque that Mr. Burden had received in respect of selling assets to the company. That was the general practice at the time and a well-known method of how these companies were acquired." I have no doubt that Sinclair said that these cheques were bridging operations because he knew perfectly well throughout that they were bridging operations, that is part of a scheme to finance Burden's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been completed. All the cheques had by that time long since been paid. On April 5, Sinclair wrote Burden "Particulars as to the paying in of requisite assets are awaited" and the evidence showed that that meant payment in to the plaintiff was awaited by Sinclair. And Sinclair said he wanted assets paid in, because he was concerned about paying creditors of the plaintiff, who were pressing for payment. But if the cheque was for assets to be injected by Burden and there had been no injection and, therefore, no payment of the cheque, there would hardly have been difficulty about having part of the cheque available to pay the creditors. But it was not suggested that this was ever considered. I am satisfied that Sinclair knew perfectly well that the £207,500 cheque drawn on the plaintiff had been paid as the plaintiff's bank account showed, and that it had been paid without any injection of assets. And in the repetitions over the same ground in his evidence he only once suggested the possibility that Burden might be raising funds from a bank to finance the purchase of the shares. It is clear that Sinclair handed over the plaintiff's cheque, without security, into the control ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms irresistible that he was just a Burden man, doing exactly what Burden told him to do, regardless of his responsibilities, and, for reasons already given in considering the law, the abnegation in favour of Burden does not, in my view, enable him to escape liability. So, subject to the outstanding questions of law, I conclude that Sinclair is liable as claimed with regard to the £42,000 as with regard to the £207,500 paid out of the plaintiff's funds to Burden. The defendant Bank of Nova Scotia The claim against the Bank of Nova Scotia can be dealt with comparatively briefly, despite its importance. The relevant law has already been dealt with and after a very thorough and powerful analysis of the case against it by its counsel, plaintiff's counsel, at the end of the day, presented his case within a comparatively small ambit and, in my view, very rightly and helpfully so. The case is against the Bank of Nova Scotia in equity as constructive trustee to replace the £249,500 with 5 per cent, interest and for damages for common law negligence in performing the duty owed by it as banker to the plaintiff as its customer by paying the £249,500 out of the plain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by the plaintiff to establish that the Bank of Nova Scotia is, in accordance with the law which I have already considered, to be treated as having knowledge because it was put on inquiry and indisputably made none. (1) On February 10, almost immediately after the banking resolutions of January 26, and after the mandate was given, the plaintiff's cheque for £207,500 was paid out of its account at the Bank of Nova Scotia. What is relied on is that this payment was, in itself, and in relation to other entries in the plaintiff's bank account, for a very large sum and that it was paid immediately after the resolutions and mandate. It was suggested that these facts were enough in themselves to put the Bank of Nova Scotia on inquiry. But this payment of £207,500 was not an isolated payment out of the account, but a payment counter-balanced by a payment into the account. It was in fact part of the three cheques circular movement and it was as such that it was presented to and seen by the Bank of Nova Scotia. It therefore seems to me unrealistic and unhelpful to consider what the effect of such payment in isolation would have been, had it occurred--which it did not. (2) The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k him into the manager's room. Evans agreed that Bieber could have asked for the manager because it was a very unusual transaction ; and that he gave his explanation as a serious explanation to have some effect on Evan's mind and, it could be, to set it at rest. Bieber produced the three cheques which he wanted debited and credited to the accounts of the plaintiff and Cradock and an account to be opened for Burden. He explained, either voluntarily or in answer to Evans, that they were for "internal accounting reasons" or "internal book-keeping reasons." Evans filled in three paying-in slips, with copies for the parties, for the payment of the three cheques through their accounts. He had no knowledge of Burden or Bieber, but Bieber had the cheques and Evans considered the position and accepted what Bieber said. Was the result of his consideration wrong and ought a reasonable banker to have made inquiry, which the Bank of Nova Scotia did not make ? There is no suggestion that Evans or the Bank of Nova Scotia was in fact suspicious and Evans denied that he was suspicious. Evans knew that Cradock had had a large holding of stock in the plaintiff in November, 1958, but he did not know ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and if the purpose of the inquiry is served without the inquiry it is so much the better for the saving of words--though not, unfortunately, in this judgment. The explanation stands subject to the criticisms that were made, and rightly made, of it in cross-examination. It is right that the explanation should be dissected verbally, as it was, so that all the implications are brought out clearly for the assistance of the court. But when it comes to judgment, I have to regard it, not as technical terms in conveyancing, or words used with precision in some leisurely legal document, but as more rough and ready language used in a business context and to be accepted or rejected or questioned with expedition. In the Penmount Estates case 173 LT 344, 346 the bank was held not negligent, though, as McKinnon L.J. said, "there were a good many questions on which a lawyer, who is trained very differently from a bank clerk, would probably have had it in mind to cross-examine.'' So regarding the explanation, in the light of all the relevant considerations which I have referred to in considering the law, and of the surrounding circumstances which I have mentioned, it seems to me that the expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied on by Woodstock to exonerate it from its alleged liability which is as constructive trustee on the first transaction. Satisfaction is relied on to exonerate from liability all those who might be held liable as claimed on the first transaction, whether as trustees, constructive trustees or in negligence. First, then, novation. It is claimed by Woodstock and not disputed by the plaintiff that there was a contractual liability, a debt, from Woodstock to the plaintiff with regard to the £232,500 paid under the plaintiff's cheque to Woodstock in the first transaction. The plaintiff, of course in this action claims not on that debt but against Woodstock, inter alios, as constructive trustee to account for and replace that sum. It is not disputed that there was a novation. The issue is whether it was limited to Woodstock's separate debt to the plaintiff or extended to the liability alleged in the action against Woodstock as constructive trustee, jointly and severally with others. In the course of the argument the question arose whether the second transaction was a sham cloaking what did not appear on its surface. The defendants brought forward convincing considerations to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and creditor for money lent ipso facto excludes any conception of constructive or other trust arising out of what establishes the relationship of debtor and creditor." But the submission was kept open for a higher court. It seems to me at least questionable whether novation, as contrasted with release, is applicable to wrongdoing at all as contrasted with contract. But I will not pursue this, as it was not canvassed before me and it does not affect my conclusion. It is sufficient that it was not suggested, nor in my view could it reasonably be suggested, that Cradock and Briggs by novation took over the liability of Woodstock in equity as constructive trustees. So what the submission for Woodstock comes to is that, though it was novation, it was novation with regard to debt only. It could only be elimination with regard to the separate claim in equity. There was no conscious act of such elimination, for example by express release or agreement. Nor, in my view, is it necessarily implied in the novation. It is said, however, that, so far as the same facts establish rights and remedies at common law and equity, then an agreement, where appropriate by release, assignment or novatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst all claims based on the first transaction. The plaintiff and those who are defendants with regard to the second transaction contest this defence of the defendants to the first transaction. The satisfaction relied on is satisfaction of Woodstock's debt to the plaintiff for £232,500 plus outstanding interest at 8 per cent, taken over as to £207,500 by Cradock and as to £42,000 (or the balance of the debt) by Briggs. Any such satisfaction was of the whole of the Woodstock debt, and as that debt was in respect of £232,500 plus interest at 8 per cent., it exceeded the principal amount of £232,500 claimed by the plaintiff and any conceivable rate of interest which the court might allow on it up to the date of such satisfaction. Consequently, if there were satisfaction, as the defendants submit, the plaintiff's loss on the first transaction in respect of which it now claims would have been made good, and there would be no loss in respect of which the defendants could be held liable on the first transaction. The satisfaction of Woodstock's debt is said to be effected in accordance with the plaintiff's resolution of January 26, 1960, which I have mentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , then it was for a purpose made illegal under section 54 of the Companies Act, 1948, and the payments were unlawful and the plaintiff's claim therefore fails ; or, alternatively, that the payment was valid, in which case the payment of £207,500--it was not only admitted but was submitted --was likewise valid and the payment of the £207,500, together with a payment of £42,000, was in satisfaction of the dept with regard to the £232,500 and interest. It is immaterial whether the validity of such payments arose because section 54 did not apply at all or because it did not operate, on its wording, to invalidate the payments in accordance with the first ground of decision in the Victor Battery case [1946] Ch. 242 ; [1946] 1 All ER 519, which I will consider later when dealing with illegality under section 54. Insofar as the plaintiff's claim fails, on the ground of illegality, then there is no need to rely on satisfaction. The defence of satisfaction only becomes material on the footing that illegality does not make the debt to the plaintiff irrecoverable. And it seems to me that, as the payments of £207,500 and £42,000 were in fact made, it is imma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f's claim based on the second transaction. In the case of the Bank of Nova Scotia they are additional to the reasons which have already been given for the failure of the claims against it. In the cases of Burden and Sinclair the absence of receipt by the plaintiff of money capable of being misapplied reverses the decision against them which, as I have indicated, I would otherwise have made. If, however, there was satisfaction, so that the plaintiff obtained the £249,500, for itself and its own purposes, the question then arises whether there was misapplication of those moneys under the second transaction, and who was liable for such misapplication, and whether there was negligence on the part of the Bank of Nova Scotia with regard to those moneys ? With regard to the claim in negligence, it was submitted for the Bank of Nova Scotia that any damage thereby suffered was too remote to be recoverable. Overseas Tankship (U.K.) Ltd, v. Morts Dock & Engineering Co. Ltd. (The Wagon Mound) [1961] AC 388 ; [1961] 2 WLR 126 ; [1961] 1 All. ER 404, PC laid down that in tort "the essential factor in determining liability is whether the damage is of such a kind as the reasonable man shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the plaintiff with regard to the £232,500 (including the £195,000 claimed against Contanglo) and the £207,500, in so far as these claims are based on breach of trust and on constructive trusteeship. Of course, if the plaintiff does not establish the breach of trust or requisite constructive trusteeship, there is no need to rely on the defence of illegality against a claim founded on them. So this defence goes on the assumption that, in the case of the directors, breach of trust or fiduciary duty and, in the case of the other defendants, constructive trusteeship, is established. Section 54 of the Companies Act, 1948, provides that "(1)... it shall not be lawful for a company to give...any financial assistance for the purpose of...a purchase...made or to be made by any person of or for any shares in the company." It is not disputed by the plaintiff that if a contract or "consensual arrangement" is illegal ex facie, or made for an illegal purpose, then the court will not assist in enforcing the contract or "consensual arrangement" (whether, e.g., by specific performance, money judgment, or damages) or to recover property (including money) passed in pursuance of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a source of civil rights in the courts of this country" (per Lord Radcliffe in Boissevain v. Weil [1950] AC 327, 341 ; 66 TLR. (Pt. 1) 771; [1950] 1 All. ER 728, HL (E)). The first two of these cases were contract cases ; and it has been rightly urged for the plaintiff that the words used should be understood in the contractual context in which they occurred. This would still leave open the question whether the words should be confined to contract by the contractual context, or whether they should be read as words of more general significance, of which contract was a particular application. In Boissevain v. Weil [1950] AC 327, the claim was founded primarily in debt for repayment of the sum borrowed in foreign currency, contrary to war-time Defence (Finance) Regulations, 1939. But there was an alternative claim for money had and received, on the principle of unjust enrichment. And the view was expressed, without decision in view of the relevant pleading being inadequate, that whether such a claim for money had and received was based upon an imputed promise to pay or upon the principle of unjust enrichment, the court would not assist (see in particular Lord Radcliffe and Lord Si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the directors had thereby committed a breach of their fiduciary duty to the company and should reimburse the company the sums so illegally applied. It was not contended that the directors were absolved from accounting by reason of the illegality of the loan by the company. Such illegality was clearly before the Privy Council and, if available against such a claim, provided a complete answer to it. Yet the point was neither taken by the defendants nor by the Privy Council; and it seems to me for the very good reason that the company was not relying for its claim on the unlawful loan and the relationship of creditor and debtor thereby created, but upon the misapplication by the directors of the company's moneys by way of the unlawful loan. That is the position with regard to the plaintiff's claim in our case. It was founding its claim, as in our case, not on a wrong done by it as a party to the unlawful loan, but as a wrong done to it by parties owing a fiduciary duty to it. The courts were being invited, as in our case, not to aid illegality but to condemn it. If this were not so, the courts would give redress to companies against directors for misapplication and breach of fiduciar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the directors and constructive trustees for perpetrating that transaction and making the plaintiff company party to it in breach of trust owing to the plaintiff company. The breach of trust includes the making of the plaintiff a party to the illegal transaction. So it seems to me clear on analysis that the plaintiff is not precluded from relying on breach of trust by a party to an illegal transaction, to which the plaintiff itself is a party, when the breach includes the making of the plaintiff a party to that very transaction. Those who proved to be constructive trustees, sharing the responsibility with the directors for the breach of trust, share the liability too. The result is that the plaintiff in this case would not, by reason of illegality, be prevented from being reimbursed money paid by it unlawfully under a transaction to which it is a party. But this does not mean that this would nullify the ordinary operation of illegality with regard to companies and parties outside the company, and not being or treated as being a trustee to it. But it would prevent such operation shielding those whose position or conduct makes them responsible as owing a fiduciary duty or as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th this first ground of decision that I am concerned. What was suggested in argument was that if the debenture in the Victor Battery case [1946] Ch. 242 ; 16 Comp. Cas. 164 being "security" within section 54, was valid, then the loans to Woodstock and to Burden were valid, since "loan" and "security" are treated together on the same footing in section 54, i.e., in the provision that it shall not be lawful for a company to give "whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance..." Roxburgh J. said Ibid. 248 : "The section provides, not that it shall not be lawful for a company to provide a security in order to give financial assistance, but that it shall not be lawful for a company by means of the provision of security to give any financial assistance. In my judgment, 'security' prima facie means 'valid security,' although I do not say that it must mean that. Moreover, the words of the section are not 'purport to give financial assistance' but 'give financial assistance' and I cannot see how an invalid debenture could give any financial assistance. " Thus it was insisted that the security must itself be the means of giving f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such a conclusion. (1) That section 45 of the Companies Act, 1929 (the predecessor of section 54 of the Act of 1948), unlike section 79 of the Act of 1929, does not indicate an intention to avoid the security. But section 79 (now replaced by section 95 of the Act of 1948) was not dealing with illegality, whose consequences are well established under the general law, but with registration of charges, where the consequences of non-registration were not provided by the general law and, therefore, had to be provided in the statute. (2) That the section does not indicate an intention to punish the lender. This is unless, be it added (as in our case) the lender is the company : so the lender in our case does not come within this observation. (3) That to destroy the security, which may be for very large amounts/is out of all proportion to the £100 fine imposed by section 54 of the Act of 1948. This is a common well-recognised consequence accepted by the courts in cases of transactions being made unlawful and participants being subjected to relatively light criminal punishment. That such provisions might prove a positive boon to the principal offenders has been similarly accepted on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may relieve him, either wholly or partly, from his liability on such terms as the court may think fit." There are, therefore, three requirements for relief, namely, that defendant (1) acted honestly, (2) acted reasonably, and (3) that he ought fairly to be excused. The breach of trust relied on is a dishonest breach of trust. Burden I have held liable for such a breach and, therefore, he is outside the requirements of section 448. Similarly, in my view, Sinclair is also outside its requirements. But for Barlow-Lawson and Jacob it may be said that their responsibility for the dishonest breach was because they put themselves at Cradock's disposal as I have described ; and, as I have indicated, it is the alternative view in the case of Sinclair that he similarly put himself at the disposal of Burden. Even assuming that this participation in the breach was not dishonest within the section, yet for them, as directors of a public company, to dispose of large sums, constituting virtually the whole of the plaintiff's assets, without any regard whatsoever for minority shareholders, and without consideration, but blindly at the behest of the majority shareholder who nominated them to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
