Foods Bis Ltd v Riley[2007] QDC 201

DISTRICT COURT OF QUEENSLAND

Contents

Introduction

1. [1]
   The male second plaintiff, Rashmi Gorasia, was born in India and later lived in Malaysia.  In Malaysia, he ran a company involved in the power industry.  When he came to Australia in August 2001, he sold that business.  As part of his visa requirements he was obliged to purchase a business to enable himself and his family to stay here.  One business was Point Bis Pty Ltd which purchased a website Motorpoint.com.au which provided information to the motor industry. Mr Gorasia purchased this business from Ken Eustice and his wife Kay Barker. He met his son Andrew who worked for them.  Andrew Eustice was kept on by the plaintiffs and paid commission for his work.    Andrew Eustice knew Stephen Riley, the first defendant.^[1]  As Riley is an undischarged bankrupt^[2], the action has not proceeded against him.   It is common ground that Andrew Eustice is presently serving a term of imprisonment in South Australia.

2. [2]
   The second plaintiffs’ other business was Foods Bis Ltd, the first plaintiff, which was involved in the food industry. It is common ground that it traded as ‘Tasty Temptations’ from December 2001 to July 2002. The other business was Any Bis Ltd which was a service company. The funds for these businesses were provided by the second plaintiffs who had a bank account with the HSBC at Bundall.

3. [3]
   Andrew Eustice convinced Mr Gorasia that he was able to purchase luxury cars in New South Wales and which Mr Gorasia could on sell in Queensland for a profit.  It was in the course of that activity, with cars being purchased from Steven Riley Autos, that Mr Gorasia gave a cheque to Andrew Eustice in the sum of $185,000.00 drawn in favour of Steven Riley Autos as payee and bearing two transverse parallel lines between which contained the words “account payee only”.   Riley presented it to the second defendant at Bundall.  The manager there, Mr Hartley, sought an urgent clearance by way of a bank warrant from the HSBC in the name of Stephen Riley Autos and the proceeds were subsequently banked to the credit of an account with the second defendant in the name of Stephen Riley who had indorsed the warrant in favour of himself.   This credit was set off against the existing debt of $184,901.49.  The plaintiffs’ case is that the activities of both Andrew Eustice and Riley in the buying and selling of cars were tainted with fraud and that the plaintiffs were victims of a scam.

Issues in the case

4. [4]
   The plaintiffs say that it was never their intention that the cheque for $185,000.00 be paid to the account of, or for the benefit of Riley and that the second defendant had no authority to do so. It is asserted that at all material times the plaintiffs were entitled to possession of the cheque and that the second defendant is guilty of conversion. Alternatively, there is a claim for unjust enrichment against the second defendant.

5. [5]
   The second defendant denies that it was not authorised to pay the monies into the account of Riley, as he gave a valid explanation that Steven Riley Autos was his business and that he was entitled to bank the proceeds to his account. The manager of the second defendant, it is submitted, acted reasonably by making all necessary inquiries, and in any event is protected by the provisions of ss 49,51(1) and (2), 52 and 95 of the Cheques Act 1986 (Cth) (the ‘Cheques Act”). The second defendant pleads that it obtained good title to the cheque upon delivery from Riley. The second defendant denies that it has been unjustly enriched and that any benefit it has received was for good consideration.

6. [6]
   What is not in issue is that Steven Riley Autos was never a registered business name nor was Stephen or Steven Riley Autos Pty Ltd a registered company. It is also agreed that Steven Riley did not conduct a business at Balmain. The plaintiffs’ case is that Riley had only obtained the cheque by being involved in the fraudulent activities of Andrew Eustice and, in presenting the cheque at the time and manner that he did, made false claims to his right to the cheque.

Background evidence

7. [7]
   In order to understand the plaintiffs’ allegations that the activities of Andrew Eustice and Riley were tainted with fraud, it is necessary to look at some of the earlier transactions which involved the plaintiffs in purchasing cars from Riley or his alter ego, Stephen or Steven Riley Autos or Steven Riley Autos Pty Ltd. There is no evidence that cars were ever bought and sold or that Riley conducted a motor sales business.

Contract One – 18 December 2001

8. [8]
   By a document entitled ‘Contract to buy a motor vehicle’^[3] Stephan Riley Autos P/L from Balmain agreed to sell to Any Bis Pty Ltd a Porsche Cabriolet for the sum of $35,000.00.  Mr Gorasia put certain conditions upon the transactions:

1. (a)
   There had to be a written contract for each vehicle with the dealer.

2. (b)
   He would pay the money upon the signing of the contract to the dealer.

3. (c)
   The vehicle would only be delivered to the purchaser after he got the money.

Andrew Eustice would receive a commission on the sale of the vehicle.   A profit of 15 to 20% was expected.  Mr Gorasia paid the monies from the account of the second plaintiffs.  It was intended that if the monies were paid by him and the sale proceeds were directed through any of his companies, then he and his wife would be reimbursed for the original outlay.  He never saw any of the cars he purported to purchase.  The cheque was paid into the account of Riley at the second defendant on 18 December 2001.^[4]  It was originally drawn in the name of Stephan Riley Autos Pty Ltd but then altered before presentation to make the payee Stephan Riley.^[5]  Mr Gorasia could not remember altering it but did not contest that issue.  An urgent clearance was obtained.

9. [9]
   The Porsche was sold for $43,800.00^[6]  to Bay North Automotive.  There was no such business registered.  A cheque in favour of Any Bis Pty Ltd was drawn by Andrew Eustice on the St George Bank Limited at Koragah.^[7]  The original cheque for that amount was dishonoured on presentment on 9 January 2002.^[8]   It should be noted that the sum of $44,000.00 was withdrawn from Riley’s account on 8 January 2002 and paid to Eustice.^[9]  Then by two cheques from Andrew Eustice on 9 January the sum of $43,800.00 was received by Any Bis Pty Ltd.^[10]  

Contract Two – 8 January 2002

10. [10]
    Steven Riley Autos P/L is named as the seller with Any Bis Pty Ltd the customer. The vehicle was a BMW Convertible and the price $69,000.00. It was credited to Riley’s account on 8 January 2002.^[11]  The cheque was drawn by the second plaintiffs on their account.^[12]  The cheque was given to Andrew Eustice to be passed on to Steven Riley Autos Pty Ltd, the payee.   The vehicle was on sold to Capital Corporation.  That entity never existed.  The sale price was $81,500.00.  A cheque from Andrew Eustice for that sum was banked to the credit of Any Biz on 29 January 2002.  A cheque for that amount was dishonoured on presentment.^[13]   It is noted that a similar amount was debited to the account of Riley on 29 January 2002.^[14] Payment to the plaintiffs was recorded on the same day.  Invoices for both the first and second contracts were not provided immediately.  They were received in about April 2002.^[15]

Contracts Three and Four – 22 February 2002

11. [11]
    There were two contracts on the same day. The customer named on contract three was Tasty Temptation. The price of the vehicle, a Porsche 928, was $55,000.00. The fourth contract related to a Rolls Royce for the sum of $97,000.00. Payment was made from Food Bis Ltd in the sum of $55,000.00^[16]  and the second plaintiffs account in the sum of $97,000.00^[17] on 27 February in favour of Steven Riley Autos Pty Ltd.  The sum of $152,000.00 was credited to the account of Riley on 23 January 2002.^[18]   A receipt was issued dated 23 January 2002.^[19]  The Tax Invoice is dated 22 January 2002.^[20]  A document suggesting that the vehicles were on sold was produced by Andrew Eustice.^[21]  It is common ground that Eclipse Autos, which does exist, never purchased the subject vehicles. The sale price was $187,000.00.  There was a deposit of $18,700.00, two sums of $50,000.00 from Steven Riley,^[22] and a further sum of $40,000.00 paid on 25 February.^[23]   This sum was credited to the account of the first plaintiff on 28 February 2002.^[24]  Not all of those monies were paid to the plaintiffs.  The balance owing is not the subject of this action.

Contracts Five and Six – 27 February 2002

12. [12]
    These relate to a BMW 540i Sedan for the sum of $65,000.00 and a BMW 740iL Sedan for $120,000.00.  Steven Riley Autos is nominated as the Licensed Motor Dealer selling same to the buyer Tasty Temptations.  The total purchase price for both was paid by the second plaintiffs by a cheque for $185,000.00 in favour of Steven Riley Autos.^[25]  This is the cheque the subject of the action. It was given to Andrew Eustice by Mr Gorasia to be delivered to Steven Riley Autos.  Eustice agree to do so.  He had been paid in cash for his commissions to that date.

13. [13]
    Of course, the vehicles were never seen by Mr Gorasia. Throughout four of the transactions, Mr Gorasia was told by Andrew Eustice that monies were paid for the cars, the cheques were delivered to the dealer and the cars delivered to the purchasers. As far as the plaintiffs’ case is concerned there were never any such vehicles purchased by any of the named purchasers. In fact, on contracts five and six, Mr Gorasia asked Eustice if he could have the contact details of Steven Riley Autos and talk to them as he was looking for a refund on the cars. It was then that he got the letter from Eustice^[26]  explaining that there were no cars.  The plaintiffs say that it is a reasonable inference that all of the transactions between Stephen Riley Autos Pty Ltd, Steven Riley Autos Pty Ltd or Steven Riley Autos were a sham.  Given what occurred with Eclipse Autos that is an inference open.  Due to the efforts of Andrew Eustice and Steven Riley, the plaintiffs, represented by Mr Gorasia were led into a trap whereby Andrew Eustice defaulted completely in relation to any prospective purchaser.  It seems that funds to pay the plaintiffs in relation to various cars being purchased came from the Steven Riley account with the second defendant.^[27] Also, Exhibit 9 contains some bank cheques in favour of the plaintiffs.  Similar amounts appear as debits in the bank records of Riley with the second defendant.^[28]  In other words, Riley was allowing the Eustice family to pay monies owed by them to the plaintiffs through the use of his account.   One related to the Point Bis business^[29] and another to a rent deposit paid by Mr Gorasia on behalf of Ken Eustice who seemed to be involved in Point Bis.  The bank charge for a bank cheque is $8.00 according to Mr Hartley who identified the transactions.  By using a bank cheque, Mr Gorasia was not aware the funding was coming from Steven Riley who was supposed to be at arms length from Eustice as the supplier of vehicles, not being the notional purchaser as well.  It seems clear that Eustice and Riley were involved in a fraudulent scam.  In the written submissions,^[30] counsel for the plaintiffs lists the reasons why Riley was so involved in a scam.  It is not suggested that Riley signed the contracts.  Those submissions support a finding that the plaintiffs were victims of a fraudulent scheme by both Eustice and Riley.  The letter from Andrew Eustice dated 15 March 2002,^[31] merely confirms what can be inferred from the documents.  It may not be admissible as evidence of the truth against the second defendant.  However, as far as Riley was concerned one of the other participants has revealed the non existent or illusory consideration.   The cash of $25,000.00 referred to in that letter was probably the balance owing on contracts three and four.  Eustice was going to provide a car in exchange but never did.^[32]

14. [14]
    The only occasion that Mr Gorasia met Riley was after these events. Riley was looking for Eustice and came to the office of Mr Gorasia. The latter asked if he was the same person who supplied cars to the plaintiffs. Riley left without further conversation. Riley did not have a business account. If cheques arrived for Steven Riley Autos either he was complicit in the scheme or was an organiser of same. Otherwise, he would have made inquiries certainly of Andrew Eustice. The extent to which Riley’s account was used to facilitate the scam points in one direction: his active participation in the fraudulent receipt of cheques from the plaintiffs or his reckless disregard as to how his account was used. A finding of a scam is limited to contracts five and six in view of the remarks of the High Court in Equuscorp Pty Ltd v Glengallan Investments.^[33]

15. [15]
    Riley has not been called as a witness. The solicitors for the second defendant tendered affidavit material which suggested that the last contact with Riley was in early 2005. No evidence was called as to his whereabouts since that time. It is not necessary to apply the Jones v Dunkel^[34] principle on the facts of this case. The second defendant correctly points out that the bank were seeking indemnity against Riley in respect of any claim by the plaintiffs. He was unlikely to assist the second defendant in any event.   His non-appearance does not affect the findings which can be made based upon the documents.

Second Defendant’s submissions on fraud

16. [16]
    It was submitted that there is no evidence that Riley was acting dishonestly in collecting the cheque. The submissions in support of that proposition and the analysis of same are as follows:

1. (a)
   There is no evidence that he knew of or adopted the contracts or invoices signed in his name.  That submission ignores that as part of the process of getting funds into his account, those documents were required to be signed by someone.

2. (b)
   Riley was not benefiting from Andrew Eustice’s fraud.  It is suggested that he was paying back a substantial part of the funds to the plaintiffs.  That is true, but one has to look at the bigger picture and that is those involved were setting up the plaintiffs for a major loss.  In any event, why buy back vehicles at a higher price unless it was to result in an attractive profit on the final transaction?

3. (c)
   Riley was duped into paying other debts to the plaintiffs.  It reinforces the close connection between Riley and Eustice and his family.

4. (d)
   There is no evidence that Riley ever saw a cheque made out to Steven Riley Autos Pty Ltd or anything similar.  Cheques were presented to Riley’s account for substantial sums.  Surely, he would have made inquiries about the source and the named payee.  Riley sought a special clearance on the cheque for $35,000.00 which was originally made out to Stephan Riley Autos Pty Ltd and then altered to Stephan Riley.  It is not clear from the photocopy whether the deleted words were visible on the original.  If he relied upon Andrew Eustice as the source, then perhaps the scheme was explicable.  If he did not so rely and asked his bank, the name of the payee would have been readily revealed.

5. (e)
   As Riley visited the plaintiffs’ premises after the event, it was not the conduct of a guilty person.  Riley was looking for Andrew Eustice.  His parents had previously owned the business.

6. (f)
   The fact that Steven Riley Autos was not a registered firm does not mean that Riley was not using that name.  In fact some of the cheques were made out to the firm.  He told Hartley, the bank manager, that he was importing vehicles. Why would Andrew Eustice fill out the contracts in the name of the non-registered firm or company?  It is consistent with Riley being involved in the scheme, particularly with cheques being paid into his account in the name of the non-registered firm or company.  It is difficult to accept that Riley was being hoodwinked by the Eustice family with such large sums passing through his account.

7. (g)
   It is far more likely that Riley was being hoodwinked by Eustice than him being aware or suspecting the Eustice scheme.  In light of the nature of the transactions with Riley notionally selling and then buying non-existent cars and many of those transactions appearing in his bank account, that submission is rejected.

The presentation of the cheque for $185,000

17. [17]
    Conveniently, the written submissions of the plaintiffs contain the following:^[35]

1. 16.
   The Second Defendant (“the Bank”) accepts as follows:

1. (a)
   someone has presented a cheque for $320,000.00 on the 21^st of February 2002 payable to Steven Riley;

2. (b)
   it has been credited to the account;

3. (c)
   various cash withdrawals were made on or soon after that deposit totalling $8,450.00 (AB NAB 27);

4. (d)
   someone (presumably Riley) purported to draw a cheque for $95.000.00 against the funds but was not permitted to;

5. (e)
   The collections officer Ms Tunstall was not prepared to permit any such withdrawal.  Her note records that Riley “is not considered good for that amount.”  She also declined the withdrawal for $3000.00.  She was prepared to allow $200.00.  She also advised that if he had business lending, they would have a better picture of who he was (AB NAB 47);

6. (f)
   The cheque was dishonoured and presented again a second time on the 25^th February 2002 (AB NAB 28);

7. (g)
   After the presentation for a second time further cash withdrawals and a series of cheques were written by, presumably, Riley.  This included personal cheques and significant counter cheques totalling approximately $185,000.00.  This left the account overdrawn to $184,901.00;

8. (h)
   The account did not have an overdraft facility;

1. (i)
   The Gorasia cheque for $185,000.00 was delivered to the Bank at the Bundall branch by the First Defendant in person at about 3:30 pm on the 27^th of February 2002;

10. (j)
    The bank would not allow the cheque to be deposited directly into Riley’s account;

4. (k)
   The Bank perceived the cheque as an account payee only and not capable of being deposited into Riley’s account.  The Bank manager, Hartley, had Riley to endorse the cheque to Steven Riley;

4. (l)
   The cheque was never referred to the drawer;

4. (m)
   The Bank Manager the same afternoon, after making preparations in advance, drove to the drawer’s bank, HSBC and obtained a warrant;

4. (n)
   The warrant was payable to ‘Steven Riley Autos’;

4. (o)
   The warrant representing the cheque were credited to Steven Riley’s account;

4. (p)
   The payment into the account discharged the indebtedness.

18. [18]
    Evidence was given on behalf of the second defendant by Julian Hartley who was manager of the Bundall Branch in 2001 and 2002. He did not know Riley who held an account at the branch in the name of ‘Steven John Riley’. Mr Hartley is now a Private Client Manager with the bank. He has had several promotions since the subject presentation of the cheque.

19. [19]
    His first recollection of the Riley account was when tellers asked him to sign bank cheques for withdrawals which Riley carried out on 25 February 2002. Some of these have been discussed^[36] and include one cheque for $40,000.00 paid in respect of the third and fourth contracts.  His signature appears as the required authorisation on the withdrawal slips. At that time there was a credit of over $300,000.00.  Mr Hartley was not concerned about the large number of withdrawals.^[37] Unfortunately, a cheque deposited by Andrew Eustice for $320,000.00, was subsequently dishonoured on 27 February. The account was subject to an indicator which meant that the customer did not have to wait for funds to be cleared before drawing on uncleared cheques.  This dishonoured cheque put the account of Riley into a debit balance of $184,901.49.  Coincidentally, the amount for the bogus purchase of the cars amounted to $185,000.00.

20. [20]
    Mr Hartley then received a telephone call from Cheresa Tunstall, the Collections Officer or Personal Credit Officer with the second defendant in Brisbane.  She made Mr Hartley aware of the overdrawn account.  Mr Hartley contended that the cheque had not been dishonoured when he approved the withdrawals.  Ms Tunstall went so far to suggest that Mr Hartley try to stop presentation of the bank cheques.  None were stopped.  He then spoke to Riley and advised him of the dishonour and that the account was overdrawn and to fix it up urgently. Riley promised another cheque.  The second cheque was also dishonoured. They were both from A K Eustice.  Mr Hartley believed that Riley was making every attempt to remedy the situation.  There were three or four conversations.  Mr Hartley advised Riley to be cautious about receiving any cheques from Eustice.

21. [21]
    By then, Ms Tunstall wanted to get the police involved, but Mr Hartley thought that to be a bit extreme.^[38]   He told Riley that the bank may take legal action if the matter was not attended to.  Mr Hartley did not think that it was a criminal matter.  He was not told anything further about Riley’s account.  By that afternoon, he had a cheque for $185,000.00.  Coincidentally, the fifth and sixth contracts were executed on 27 February and a cheque of that date was the one presented to the second defendant with Steven Riley Autos as the payee.  Mr Hartley was told it was part of the $320,000.00 owed to him by Eustice.  Obviously, that was a falsity.  Mr Hartley did not inquire how the cheque was obtained by Eustice with a different drawer.  He did not know the drawer.  Mr Hartley did ask Riley why the word ‘Autos’ formed part of the name of the payee.  Riley replied that it was how he traded and ‘that’s how he gets his cheques payable to himself’. Mr Hartley was aware that there was a policy about third party cheques but did not look at the policy.^[39]  Mr Hartley took steps to get a special clearance through HSBC. A warrant was obtained from HSBC^[40] and it was endorsed by Riley to himself and banked with the second defendant.

22. [22]
    Further inquiries were made of Riley before the bank accepted the endorsed cheque. Mr Hartley asked Riley if he had banked third party cheques previously and he said that he had. No attempt was made to verify that. Third party registers are kept by the second defendant. Mr Hartley also asked about the drawers and he said to Mr Hartley that ‘he was the middleman, if you like, in between the transactions of the car, purchased for that sum. Mr Eustice would find a buyer and Mr Riley would find the car and naturally, that’s why the cheque was payable to Mr Riley’.^[41]   That confirms the involvement by Riley in the scheme of buying and selling of cars.  It also explains how his account was used.  It may explain why he was providing funds to re-purchase cars which he had just sold to fictitious purchasers.  It was a scam in so far as the plaintiffs were affected on contracts five and six.

23. [23]
    By way of further investigation, Mr Hartley checked the name of Steven Riley Autos in the register for company business name. There was no record of such a business being registered. He did not confront Riley with this information. Rather he was satisfied that there was no other entity which might lay claim to being the payee. It did not occur to Mr Hartley that there was no such business. No accounts were held in the business name. Mr Hartley explained it away by saying that ‘we have a lot of clients who simply use their own personal names for trading matters.’^[42]   On the other hand, the bank would not open an account for a business without a registered name.  Mr Hartley believed Riley to be the true owner of the cheque.  He did not think that there was anything suspicious.^[43] At no stage did Mr Hartley think of contacting the drawers, the second plaintiffs.  They were not clients of the bank to his knowledge.  In fact, one of their companies was.

24. [24]
    Mr Hartley believed that Steven Riley Autos and Steven Riley were one and the same and ‘that was simply the cheque he was given to him and that’s what he negotiated with because it’s his cheque’.^[44]  That particular belief may be relevant to the defence raised by the second defendant under s 50(1)(a) of the Cheques Act.  He did not keep notes of his conversation.

25. [25]
    In cross examination, Mr Hartley confirmed that the conversation with Ms Tunstall about her wanting to get the police in was before the presentation of the cheque for $185,000.00 by Riley.^[45]  It was accepted by Mr Hartley that the cheque crossed ‘account payee only’ means that he would not allow it to be banked other than in accord with the name of the payee.    His attention was drawn to various cheques drawn by Eustice being dishonoured from early December.^[46]  In particular, the cheque for $320,000.00 and the subsequent withdrawals by Riley.  Mr Hartley saw nothing unusual in all of this. He accepted that by late February he was under considerable pressure to get the account regularised.^[47]  That is one reason why he went around to the drawers bank personally and obtained the warrant for the cheque for $185,000.00^[48]   Riley still had to endorse it to himself as the HSBC had endorsed the warrant in favour of Steven Riley Autos.

26. [26]
    Mr Hartley did not think the events to be unusual that a colleague wanted to call in the police, that the cheque for $320,000.00 had been dishonoured twice or that the business was not registered. It is stretching the realms of one’s imagination to accept the events as not unusual. It was suggested that he should have advised HSBC that the cheque was not going into the Steven Riley Autos account and could they check with the drawers. The transcript shows that he answered ‘Yes, I would have done that’.^[49]  It should read ‘Yes, I could have done that’.  He also accepted that he could have said to Riley that the bank would not put the proceeds of the cheque into his account until he provided proof that there is a business conducted as ‘Steven Riley Autos’.^[50]  Also, in the absence of a registered business name, he did not request proof of the operation of a business or whether it had accounts elsewhere.

27. [27]
    Mr Hartley was adamant that Riley had done nothing wrong except take ‘dodgy’ cheques from Eustice.^[51]  He saw Riley as the victim.  He denied that his mind was clouded or that he turned a blind eye in the rush to get the account in order.

The Third Party Cheque Protocol^[52]

28. [28]
    The Protocol provides in relation to a cheque for a similar amount to the present cheque and involving a third party payee:

“…record details on third party cheque register sheet.

• Refer cheques to applicable authorising officer (see GTH 307), advising if customer is known.
• Authorising officer is to authorise negotiation/encashment and initial register (if applicable) if satisfied:
• As to validity of customers right to cheque
• That customer is good for recourse.”

29. [29]
    Apart from having various cheques dishonoured, there was no other evidence which pointed to Riley as being unreliable. He could be described as an established customer but was not known to Mr Hartley. The latter did not check as to whether Riley was ‘good for recourse’. Riley had offered security but this was not confirmed by Mr Hartley. If he had it seems that Riley owned real property but the equity he held is unknown.^[53]

Admissibility of expert evidence of banking practice

30. [30]
    At the outset, it is necessary to note that the endorsement on the subject cheque viz. ‘A/C payee only’ is not an endorsement recognised by the Cheques Act. However, it is generally accepted that it should put the bank on enquiry.^[54]   In Voss’s case^[55] evidence was called by Suncorp from a person with banking experience about prudent banking practices.  He expressed the opinion that Suncorp’s internal procedures were consistent with standard banking procedures.  Objection was taken by Mr Collins for the plaintiffs as to the admissibility of some evidence contained in the report of Mr Debenham, a banking expert.  The question was:

What steps would be taken, consistent with prudent banking practice, in making the decision whether to collect a cheque presented by a customer in circumstances where the named payee of the cheque is not the name of the customer?

31. [31]
    The nature of the steps which should be taken may differ from case to case as evidence by the myriad of cases referred to in argument. This case has some unique features. The extent of such inquiries has not been defined in the cases. Therefore, it would be of assistance to the court to allow such evidence to be given. However, as has been noted elsewhere, the mere concurrence with banking practice may not be definitive of the lack of negligence by a bank in a particular case.^[56]

Evidence of Mr Debenham

32. [32]
    In relation to question one referred to above, Mr Debenham stated that in determining whether to accept a cheque where the named payee is different to the customer’s account name the manager would take one or more of the following steps:^[57]

1. Consider the named payee

1. –Is the named payee an entity that is fully controlled by the person who controls the account into which the cheque is being paid?

33. [33]
    This is a question which Mr Hartley failed to ask Riley. Riley merely informed him that Steven Riley Autos, the payee, was the name of a business which he ran. Mr Hartley did not ask if Riley was in partnership or whatever, but conceded that it would not have been a satisfactory situation if Riley had lacked the authority to put the funds into his own account.^[58]

1. –Is it likely that the difference between the named payee and the account name is a simple mistake?

34. [34]
    Mr Hartley accepted the word of Riley that he traded as Steven Riley Autos and that he had paid in similar cheques previously. Mr Hartley did not check on this even though a Third Party Register is kept by the second defendant:

2. Assess the endorsement (if applicable)

1. –If the cheque has been endorsed to the customer by the named payee, is the endorsement in order.

35. [35]
    In the present case, Riley endorsed the cheque to himself purporting to have authority to do so. No inquiry was made as to whether he did. A check was made by Mr Hartley who established that no such business was registered.

3. Consider the context

1. –Understand the circumstances as to why the customer is depositing the cheque into his account.

36. [36]
    Riley told Mr Hartley that he received the cheque from Eustice who owed him money. Riley’s business, he was told, was importing cars. Eustice was known to Mr Hartley as the drawer of numerous cheques which had been dishonoured in the past. Similar cheques had been banked in the past. Mr Hartley had previously warned Riley about accepted cheques drawn by Eustice but he observed that this was a different drawer named.

4. Speak to the customer

37. [37]
    Mr Hartley had spoken to Riley who was his customer. He had no reason to doubt his story.

38. [38]
    Mr Debenham was asked other questions about the circumstances surrounding the collection of the cheque and expressed the view that the decision of Mr Hartley to collect the cheque in question was in keeping with usual banking practice. When one looks at the facts relevant to question one above, considerable doubt is cast upon the opinion of Mr Debenham. An analysis as to whether negligence has been established can be more conveniently dealt with in the discussion on the defences available in the action.

Action in conversion

39. [39]
    The effect of an indorsement “A/C payee only” was discussed in the case of Commercial Securities & Finance Ltd v ANZ Banking Group (NZ) Ltd^[59].  Hillyer J. often referring to various text references quoted Scrutton LJ in Al Underwood Ltd v Bank of Liverpool^[60]:

If banks for fear of offending their customers will not make inquiries into unusual circumstances, they must take with the benefit of not annoying their customer the risk of liability because they do not inquire . . . [Some] of the cheques were crossed 'Account of payee', one with the addition of the word 'only.' While this addition does not affect the negotiability of an order or bearer cheque, I agree with the view of Rowlatt J in House Property Co v London County and Westminster Bank that when such a cheque is paid into the account of a person who is not a payee the bank is put on inquiry, especially when he is a servant of the payee. In the present case no inquiry at all was made by the bank or its cashiers. The general defences to liability for conversion therefore fail.

40. [40]
    When one looks to the Second Further Amended Statement of Claim of the plaintiffs^[61] the elements of the claim for conversion are set out therein.  Most of the facts relevant to the elements have been discussed above and are proved.  The only issue to be determined is whether the plaintiffs were entitled to possession of the cheque at the time of the presentation of the cheque and the crediting of the proceeds of the cheque to Riley’s account.  The plaintiffs contend that Riley had no entitlement to the cheque nor any authority to endorse it in favour of himself.

41. [41]
    The principle of law applicable can be found in the case of Marfani and Co Ltd v Midland Bank:^[62]

At common law one's duty to one's neighbour who is the owner, or entitled to possession, of any goods is to refrain from doing any voluntary act in relation to his goods which is a usurpation of his proprietary or possessory rights in them. Subject to some exceptions which are irrelevant for the purposes of the present case, it matters not that the doer of the act of usurpation did not know, and could not by the exercise of any reasonable care have known, of his neighbour's interest in the goods. This duty is absolute; he acts at his peril.

A banker's business, of its very nature, exposes him daily to this peril.  His contract with his customer requires him to accept possession of cheques delivered to him by his customer, to present them for payment to the banks on which the cheques are drawn, to receive payment of them and to credit the amount thereof to his own customer's account, either on receipt of the cheques themselves from the customer, or on receipt of actual payment of the cheques from the banks on which they are drawn.  If the customer is not entitled to the cheque which he delivers to his banker for collection, the banker, however, innocent and careful he might have been, would at common law be liable to the true owner of the cheque for the amount of which he receives payment, either as damages for conversion or under the cognate cause of action, based historically on assumpsit, for money had and received.

42. [42]
    Davies JA dealt with the application of that principle as follows:^[63]

1. [13]
   Plainly Ripper held the cheque on Voss’ behalf.  He was not beneficially entitled to it and had no authority to pay it into an account to which he was solely entitled beneficially.  Yet that is what he did.  And if he had no authority to it when he delivered it to Suncorp for collection, Suncorp, however innocent and careful it might have been, was, subject to the specific defences referred to later, liable to conversion to Voss as the true owner for the amount of which it received payment.

43. [43]
    Voss was the drawer of the cheque. The second plaintiffs in the present case were the drawers of the cheque. As far as the plaintiffs were concerned the intended payee was Steven Riley Autos. There is no admissible evidence that Riley had the requisite authority to endorse the cheque. The defences referred to by Davies JA included a defence under s 98 of the Cheques Act. That section applies to a non-bank financial institution and raises similar defences of good faith and without negligence. It was conceded in Voss’ case that Voss was the true owner of the cheque.^[64]  As is the situation in the present case there was no suggestion that the true owner had mislead the bank.^[65]  On the face of it, the only representation which Voss made was that Ripper had a limited authority to deposit the cheque in the account of the trustee of a specific unit trust.   It was paid into an account which Ripper was the sole beneficiary and it was not a unit trust or trust account. Ripper had produced a sham trust deed and so made a fraudulent representation to Suncorp.  It was held that Suncorp acted negligently in failing to observe that Ripper, if acting lawfully, would become the sole owner of the cheque upon its deposit in the account.  Prima facie, the second plaintiffs had some title to the cheque obtained by false representations or fraud.

Void or voidable title

44. [44]
    It may be that it makes no difference to the claim by the plaintiffs if the contract is void or voidable. If there was no contract between the drawer and the payee, the drawer would remain the true owner. If voidable, title would remain with the payee until the contract was avoided for say fraud. eg. the commencement of the proceedings subject to the right of the innocent third party.^[66]

45. [45]
    Admittedly, the present cheque contained only the marking ‘A/c payee only’. The defences under the Cheques Act will be dealt with in due course. It is open to find that it would produce the same result for the second defendant. It was put on inquiry. In Morison v London County and Westminster Bank Ltd^[67], Reading LCJ stated:

The words “account payee” are a direction to the bankers collecting payment that the proceeds when collected are to be applied to the credit of the account of the payee designated on the fact of the cheque.

46. [46]
    The learned authors Weaver and Craigie^[68] state that:

There is however nothing to suggest that the words ‘account payee’ indorsed on a cheque may not have effect particularly in relation to the liability of the collecting banks in conversion, and the decision to approach the matter in this way appears to have been entirely deliberate

47. [47]
    That principle is subject to the defences raised under ss 50 and 95 of the Cheques Act.

Second defendant’s arguments on title

48. [48]
    The submission that the title received by Riley was a voidable title assumes that he was not involved in the fraud or dishonesty by Andrew Eustice. As has been discussed, the use of the bank account points to the involvement by Riley in the re-purchase of the nominated vehicles in contracts one to four. Contracts five and six fall into a different category as no vehicles were purchased and so no consideration arose on the part of Steven Riley Autos or Riley either by way of profit or the provision of vehicles. Notwithstanding that the purported consideration was non-existent or illusory, the second defendant provides reasons for saying that no title passed:

1. a.
   The second plaintiffs had received profits on the ‘phantom sales’ being contracts one to four.  It is submitted that Eustice may have intended to continue with the fraud with repayments and so the potential for profit or consideration existed.^[69]

49. [49]
    That submission overlooks his admission that there were no cars purchased and the subsequent conduct of Riley in cashing the cheque for $185,000.00 to reduce the overdraft. There were no monies held by Riley to fund the phantom sale by the plaintiffs to the proposed non-existent purchasers usually financed by Riley and who might be named in the contracts.

1. b.
   Where a cheque is obtained by fraudulent misrepresentations by a third party, the title obtained is voidable not void.  The exception cited in Citibank v Panandony [2002] NSWCA 375 at [64]sic  is wrong.  That exception is ‘where the contract under which the money has been paid is “a thorough-going fraudulent scheme, in respect of which any purported consideration was non-existent or illusory”. The principle appears inconsistent with the approach taken in Hunter BNZ Finance Ltd v C G Maloney Pty Ltd…Hunter BNZ was adopted by the Court of Appeal NSW in Sanwa Finance Ltd v Finchill Pty Ltd [2001] NSWCA 446 at [22] to [23]…Sanwa was not referred to in Citibank.

50. [50]
    The judgment in the Court of Appeal decision of Citibank v Panandony is of persuasive authority. The Court examined the authorities including the earlier English decision of Bute (Marquess) v Barclays Bank Ltd^[70].  In applying that principle, the Court made the following finding^[71] which is apposite in the present case:

In those circumstances, in my opinion, if the respondents had learned of the true facts before the cheques had been presented for payment, they could, without first avoiding any contract, have demanded immediate return of the cheques and if necessary sought orders to restrain their presentation.  The drawing of the cheques had been induced by fraud, and there was no basis for Mr Brachmanis or the payees or any bearer to assert any entitlement to retain them:  there was no concluded contract that could justify retention, which needed to be avoided.  In my opinion therefore the cases relied on by the primary judge of Bute and the two Victorian cases referred to above applied and the respondents remained the true owners and entitled to immediate possession of the cheques; and the dealings of the appellant with the cheques amounted to conversion of their property.

51. [51]
    Riley cannot stand aside from the actions of Andrew Eustice. As has been discussed, the use of his bank account to fund phantom purchasers on contracts one to four in part or totally show the extent to which he was involved. Eustice was acting in accord with the contracts not signed by Riley but facilitated by the use of his bank account. It is open to infer that Riley and Eustice gradually increased the purchase price and sale price of the vehicles to lure the plaintiffs into thinking there was a market worth staying in.

52. [52]
    An alternative basis relied upon by Hodgen JA^[72] was that  assuming that the ownership or right of possession of the cheques had passed to say Steven Riley Autos, there was no reason to suppose that Riley had the actual authority to endorse the cheque and bank the monies to his own account.

53. [53]
    It is difficult to compare cases in this area of the law as often the factual substratum is different. For example, in Hunter BNZ^[73] two cheques were made out by the finance company to the supplier of goods for the purchase of goods in relation to non-existent sales and marked between two lines “not negotiable-A/C payee only”.  Both cheques were endorsed by the supplier “please pay M” and signed.  The cheques were deposited to the account of M with the bank and collected.  Property in the cheques passed to the supplier because both the finance company and M intended the cheques go to the supplier. This was so even though the finance company did so as a result of the fraud practised upon it and the supplier was a consenting recipient thereof.  Also, as no sales were intended M did not receive the cheque as agent for the drawer which meant that the drawer had title to the cheques.  In the present case, Eustice received the cheques to pass onto Steven Riley Autos. Riley then acted as the alter ego of Steven Riley Autos and he himself endorsed the cheques as part of a fraudulent transaction.  As Edwards^[74] pointed out, the case of Papandony^[75] represented a slightly different version of the same theme in the Hunter BNZ case.  Of course in Papandony, the fraud Brachmaniks tricked the drawer, Papandony, into drawing and passing to him cheques drawn by Papandony’s company.  The present case seems to fall between the two factual scenarios in Hunter BNZ and Papandony.  What is clear is that Eustice acting with Riley obtained a cheque pursuant to “a thorough-going fraudulent scheme, in respect of which any purported consideration was non-existent or illusory”.  This was so at least in respect of contracts five and six involving the subject cheque for $185,000.00.

54. [54]
    The defence submit that the better view is that of Giles J. in Hunter BNZ^[76] and that is the transfer of the cheque was induced by misrepresentation.  If that is so then the plaintiffs must avoid the transfer of title.  In that event, the plaintiffs could not do so as the banks dealing with the cheque at the time was authorised by the person with the voidable title, viz. Riley its customer.  In some ways, that argument has been dealt with above.  However the plaintiffs also contended that Riley had no entitlement to the cheque nor any authority to endorse it.  The second defendant had wrongfully credited the $185,000.00 to Riley’s account which was other than what was authorised by the endorsement “A/c payee only”.  The plaintiffs say they need only establish an entitlement to possession:  that they did not intend the cheque to pass to Riley, there were no vehicles and the cheque was obtained by fraud.  Reliance was placed on the case of NIML Ltd v MAN Financial Australia Ltd.^[77]    In NIML, a fraudulent employee drew cheques in his own favour in pretended exercise of his authority to do so on behalf of the employer.  It was a clear case of the employer/principal remaining the true owner.  More relevantly, his Honour^[78] referred with approval to the case of Midland Bank v Reckitt (1933) AC 1 per Lord Atkin:

The Court of Appeal, rightly as I think, came to the conclusion that the rights of the parties would be determined by the view taken as to these particular transactions. In the first place [the agent] had no actual authority to draw these cheques at all or to receive the proceeds. His only actual authority was to draw cheques for his principal’s purposes. Accordingly, if it can be supposed that [the principal] found [the agent] standing at the counter of the bank waiting to pay in one of the cheques he could, if he knew the true facts, have demanded the immediate delivery of the cheque to [the principal].  It was [the principal’s] property, and [the agent] had no title to it. In these circumstances I have no doubt that the bank in presenting and receiving payment for the cheques converted them.

55. [55]
    Because of the different factual situation, that case may have little relevance to the present case. Riley at no stage was the agent of the plaintiffs. Eustice was their agent for the purposes of the delivery of the cheque to Steven Riley Autos. Of paramount importance in this case is that the whole transaction was tainted with fraud. In that sense, the plaintiffs if they had known the true facts could have demanded the cheque from Eustice or Riley prior to the second defendant collecting the cheque and thereafter demanded the cheque of the second defendant subject to the defences under the Cheques Act.^[79]

56. [56]
    Whether the present ‘contracts’ five and six are void or voidable may not be determinative of the issue. If the third party to the cheque has not provided value for the cheque, then rescission was possible as the third party had not been adversely affected.^[80]  It should be remembered that the payee, Indent, in the Hunter BNZ case existed whereas Steven Riley Autos was a non-entity in the sense it was  not a registered business.  The passing of property in the cheques occurred in Hunter BNZ even though the drawer’s intention was as a result of the fraud by Maloney on the original payee Indent.  As occurred in the Sanwa case, the bringing of the present proceedings by the plaintiffs would effectively rescind the contracts and any title which may have vested in Steven Riley Autos.

57. [57]
    One other point made by the plaintiffs, is that as Steven Riley Autos was a non existent business, then any cheque given in respect of a contract would be a nullity by reason of its non-existence.^[81]  The present case involves Riley who says that he ran the business of Steven Riley Autos.  The defence says that looking at the cheque itself, Stephen Riley Autos is apt to refer to either a corporate entity or a natural person who trades under that name.  It is not clear if he was the only member of the business.  Without deciding the correctness of this argument by the plaintiffs that the contract is a nullity, the point further advances the finding that the fifth and sixth contract were illusory.

The payee was Steven Riley Autos or bearer^[82]

58. [58]
    As an alternative to the argument that Steven Riley traded as Steven Riley Autos, the defence submit that he was the bearer of the cheque when it was presented to the bank and therefore on the fact of the cheque he was within the range of person who could be the intended recipient of the cheque. The case of Hunter BNZ Finance v ANZ Banking Group^[83] is cited as holding to the contrary.  Although not bound by that decision, I would defer to his honour’s finding.  The proposition put by the defence is rejected.

Section 95 of the Cheques Act

59. [59]
    This defence is relied upon by the second defendant.  It provides as follows:

95 Protection of institution collecting cheque for customer or another institution

1. (1)
   Where:

1. (a)
   a financial institution (the collecting institution), in good faith and without negligence:

1. (i)
   receives payment of a cheque for a customer; or

1. (ii)
   receives payment of a cheque and, before or after receiving payment, credits a customer’s account with the sum ordered to be paid by the cheque; and

1. (b)
   the customer has no title, or has a defective title, to the cheque; the  collecting institution does not incur any liability to the true owner by               reason only of having received payment of the cheque.

1. (2)
   Where:

1. (a)
   a financial institution (the collecting institution):

1. (i)
   receives payment of a cheque for a customer; or

1. (ii)
   receives payment of a cheque and, before or after receiving payment, credits a customer’s account with the sum ordered to be paid by the cheque;

1. (b)
   the cheque is a cheque drawn payable to order that has not been transferred by negotiation; and

1. (c)
   the name specified in the cheque as the name of the payee:

1. (i)
   is the same as the name of the customer;

1. (ii)
   is the same as a business name or trade name of the customer; or

1. (iii)
   is so similar to the name of the customer, or a business name or trade name of the customer, that it is reasonable in all the circumstances for the collecting institution to have assumed that the customer was the person intended by the drawer to be the payee; the collecting institution shall not be treated, for the purposes of subsection (1), as having been negligent by reason only of its failure to concern itself with the absence of, or irregularity in, an indorsement of the cheque.

60. [60]
    Conveniently, s 3(2) of the Cheques Act defines an act done in good faith as follows:

A reference in this act to an act or thing being done in good faith is a reference to the act or thing being done honestly, whether or not the act or thing is done negligently

61. [61]
    The submissions of the second defendant^[84] state that if the bank had actual knowledge that the customer had no title or defective title to the cheque collected it would constitute a dishonest act. Similarly, if the bank officer ‘harboured suspicions as to the customer’s entitlement to the cheque and deliberately omitted to undertake an inquiry so as to avoid learning the truth.  Reference was made to Re Webb and Secretary, Department of Social Security.^[85] The Tribunal referred to the decision of Jones v Gordon^[86]:

But then I think that such evidence of carelessness or blindness as I have referred to may with other evidence be good evidence upon the question which, I take it, is the real one, whether he did know that there was something wrong in it. If he was (if I may use the phrase) honestly blundering and careless, and so took a bill of exchange or a bank-note when he ought not to have taken it, still he would be entitled to recover. But if the facts and circumstances are such that the jury, or whoever has to try the question, came to the conclusion that he was not honestly blundering and careless, but that he must have had a suspicion that there was something wrong, and that he refrained from asking questions, not because he was an honest blunderer or a stupid man, but because he thought in his own secret mind — I suspect there is something wrong, and if I ask questions and make farther inquiry, it will no longer be my suspecting it, but my knowing it, and then I shall not be able to recover — I think that is dishonesty. I think, my Lords, that that is established, not only by good sense and reason, but by the authority of the cases themselves.

Lack of good faith

62. [62]
    The plaintiffs contend that Mr Hartley did not act in good faith in the sense that he suspected that something was wrong and declined to make the appropriate inquiries. In other words, he acted dishonestly within the meaning as discussed in Jones v Gordon. One can act in good faith but do so negligently. The submissions in relation to this point by the plaintiff are:^[87]

1. Mr Hartley treated the cheque as a third party cheque;
2. Mr Hartley approved four bank cheques to be paid after a cheque for $320,000.00 had been dishonoured but presented a second time.
3. Riley had spoken to a collections officer Ms Tunstall after he had unsuccessfully attempted to withdraw a cheque for $95,000.00
4. The bank would not open an account without a registered name.
5. Mr Hartley was persistent in chasing Riley. He asked for an explanation about his business. 
6. He did not have any previous dealings with Riley.
7. After a search Mr Hartley found that there was no registered business.  There were no other checks or questions relating to the business.  He said he trusted Riley.

Mr Hartley did not concern himself with whether there were other business partners.  In view of the previous history of cheques being dishonoured, Mr Hartley drove around to the HSBC bank for an urgent clearance by way of warrant.  He did not express any concern to it about the circumstances of the case.  He chose not do so.  He said this was not unusual.

63. [63]
    It is noted that there have been no cases which have found a lack of good faith except where there was clear fraud by an employee of a bank.^[88]  One reason given by the authors is that if negligence is found, the more serious allegation of lack of good faith is practically superfluous in respect of s 95 of the Cheques Act.  In the present case because s 50 of the Cheques Act is also pleaded any finding on this issue will not be superfluous.  In later written submissions^[89] the plaintiffs rely on the Canadian decision of Bank of Montreal v Tourangeau^[90].  The rogue in that case indorsed company cheques to himself.  He had authority of the company to indorse cheques to himself.  He was the sole director.  The court held that the bank had ‘shut its eyes to the facts presented to it’: the history of the deposits and withdrawals, the fact that the bank did not know the rogue personally, the fact that there was no search done relating to the assigned debts and that the plaintiff bank was across the road. The defendant bank was aware of circumstances which gave rise to a suspicion something was wrong but there was a ‘wilful disregard of the means of knowledge or ‘evincing’ a design or fixed purpose to avoid knowing’.^[91] 

64. [64]
    Counsel for the defence submitted that the Bank of Montreal case can be distinguished^[92]:

1. (a)
   first, there was no question that the cheques belonged to corporate entities, not the person who presented them (p. 296.1);

2. (b)
   second, the account into which the sum  was paid was opened on the day of deposit of the third party cheque (303);

3. (c)
   third, the manager of the defendant bank was told that the company kept its account in the branch across the street (303);

4. (d)
   fourth, there was a course of conduct following the first occasion on which a company cheque was collected;

5. (e)
   fifth, it appears the judge found that the manager of the defendant bank suspected at least that the cheques might be subject to some form of security to the plaintiff bank (297.9).

Those distinctions are valid but the facts in the present case throw up other issues.  Counsel for the defence also referred to the earlier submissions^[93]:

65. [65]
    In the present case the onus is on the second defendant to prove that it acted in good faith.^[94]  The question of what inquiries were made is discussed in relation to the question of negligence later in this judgment but apply also in this topic.  The matters which gave rise to concern are as follows:

1. (a)
   the concerns or suspicion of the Collections Officer Ms Tunstall were such that she wanted the police to be called.  She had dealings with Riley on 21 February 2002 which Mr Hartley did not know about.  Mr Hartley did not probe her in relation to why she thought the police were necessary.  He put it down to her being unjustifiably nervous about the overdrawn account.

2. (b)
   Mr Hartley having been told by Riley he was running a business, discovered there was no business name in existence.  He did not question Riley about this but explained it away on the basis that no one else called Steven Riley Autos would be making a claim.  The issue reflected on Riley’s credibility.

3. (c)
   Mr Hartley did not question Riley about other members of the firm of Steven Riley Autos.

4. (d)
   Mr Hartley asked how Riley obtained the cheque and was told Eustice owed him money.  Eustice has paid him cheques which were dishonoured to Mr Hartley’s knowledge, yet he made no inquiry as to the drawer’s relationship with Eustice or Riley.  This seems to breach the second defendant’s policy requiring ‘careful inquiry to establish that the customer had good title to the cheque.^[95]  Mr Hartey accepted what Riley said.

66. [66]
    Counsel for the plaintiffs suggested that Mr Hartley had ‘closed his mind’ to further investigations and that he must have suspected something was wrong but refrained from making further inquiries. I am not prepared to find that this conduct was such as to lead to a finding of dishonesty or that he shut his mind to further inquiries, Such a finding would have serious consequences for a bank officer. It is not justified in the present case. An officer may be careless but not dishonest. In any event, Mr Hartley gave his evidence in a frank and refreshing manner. His evidence was supported by documentary material. I accept his explanations in so far as they negate any lack of good faith. Suspicion requires a positive feeling of actual apprehension or mistrust without the benefit of hindsight. The requirement of good faith is a subjective test.^[96]

Negligence

67. [67]
    Some of the issues raised in the discussion on good faith become relevant on the issue of negligence as well. Of course, if a bank which collects the proceeds of a crossed cheque on behalf of a third party without making any inquiry is guilty of negligence within the meaning of s 95 of the Cheques Act it will have no protection against an action in conversion.^[97]  The onus in a case such as the present is on the second defendant to negate any allegation of carelessness or negligence.^[98]  Davies JA quoted with approval the appropriate test in relation to determining the question of negligence:^[99]

Was the transaction of paying in the given cheque, coupled with the circumstances antecedent and present, so out of the ordinary course that ought to have aroused doubts in the bankers’ minds and caused them to make inquiry.^[100]

…where doubt is once aroused as to the nature and true ownership of the cheque, the nature and extent of the inquiry proper to allay it must be measured by what, in the circumstances, a fair-minded banker, paying due regard to the reasonable exigencies of banking business in relation to the person depositing the cheque, would consider it prudent to do to protect the interests of the true owner whoever he might be.^[101]

68. [68]
    Negligence can be equated to carelessness in this situation. In Oris Funds Management Ltd v National Australia Bank Ltd^[102], Chernov JA with whom the others agree quoted^[103] the learned authors Weaver and Craigie:^[104]

Negligence in the sense used here is not the independent tort of negligence but, rather, is a descriptive epithet which, up to the present time, has been used to describe the overall impression formed in relation to the acts and omissions of the collecting bank in a particular factual situation.

69. [69]
    Chernov JA went on to say the test ‘for determining if a banker was negligent in the collection of a cheque has been formulated by reference to the ordinary practice of bankers.^[105]  His Honour added ‘…although mere concurrence with banking practice does not establish lack of negligence on the part of the bank.’  It is a question of fact.  In support of the finding of negligence, the evidence establishes the following:

1. (a)
   The presentation of an endorsed cheque in the name of a business as payee that Mr Hartley had never heard of;

2. (b)
   The request by Ms Tunstall that the police be called in;

3. (c)
   The various cheques which were dishonoured particularly a cheque for $320,000.00 shortly before the presentment of the cheque for $185,000.00;

4. (d)
   The rapid withdrawal of funds including bank cheques upon the presentation of the cheque for $320,000. The sums were significant given the previous history of the account;

5. (e)
   The lack of evidence including documents relating to the business or other accounts or how it operated or from where;

6. (f)
   Another cheque could have been called for in the name of Steven Riley

7. (g)
   The failure by Mr Hartley to make other inquiries in the telephone book or where the business Steven Riley Autos operated and why it did not have a business account;

8. (h)
   The failure of Mr Hartley to check the Third Party Register to see if similar cheques had been presented and banked in Steven Riley’s account;

1. (i)
   No attempt by Mr Hartley to determine if the second plaintiffs were customers;

10. (j)
    No communication by Mr Hartley with HSBC bank that he held a cheque with Steven Riley Autos as payee and Steven Riley wanted it paid into his account.

70. [70]
    Mr Hartley said he believed what his client Riley told him. His actions were supported by Mr Debenham to whom reference has been made earlier. The defence case is that a bank deals with a large number of cheques every day and cannot be expected to scrutinise each cheque and the circumstances surrounding it with the care and skill of a detective.^[106]  The defence accepts that the addition of the endorsement on the cheque imposes an obligation on the collecting bank to make enquiries before collecting it to an account other than to an account in an identical name to that of the payee.^[107]  The question which has to be answered in this case is whether sufficient inquiries have been made.

Sufficient inquiries?

71. [71]
    There was a complaint that the particulars given by the plaintiff about lack of inquiry were limited.^[108]  However, since the onus is on the second defendant to establish what a prudent banker would have done, this point has little merit.  The issues have been fully litigated and pleaded in the Third Further Amended Defence. Counsel for the second defendant has listed some findings which he says are open on the evidence and which discharge the onus in relation to the negligence question.^[109] These matters are generally referred to in the evidence discussed earlier in these reasons. They generally relate to the manner in which the account had been conducted, the cheques which were dishonoured and the view expressed by Ms Tunstall that the police ought to be called. It should be noted that the diary note of Ms Tunstall^[110] ought to have a heading “Declined wdl $95,000-UCF” and dated 21 February 2002 at 2.13pm.” It was submitted that Mr Hartley made inquiries of Riley of the matters concerning the cheque including the reason for the amount, the name, the form of payee, the identity of the drawer and his relationship to Mr Eustice. Mr Hartley also confirmed that Steven Riley Autos was not a registered firm or company.^[111]  The point was made that as Mr Hartley relied upon what Riley told him it was reasonable for him not to confirm what he had been told or contact HSBC and check with their customer.

72. [72]
    It was submitted for the defence that the withdrawals made by Riley would not be such as to generate suspicion in a reasonable banker. Riley did not appear suspicious and made an offer of security for the overdrawn position. The name of the payee and the person Steven Riley was similar except for the word ‘Autos’. An extraordinarily high degree of diligence should not be expected. In hindsight, it might appear more suspicious now that it is clear that Eustice obtained the cheque as part of a fraudulent scheme.

73. [73]
    It was submitted that Mr Hartley although not referring to bank policy^[112] had in fact complied with it. The manager had to be satisfied of the validity of the customer’s entitlement to the cheque and that the customer is good for recourse.  Although Riley offered security, Mr Hartley did not check on same.  There is evidence that Riley owned real estate but it was not confirmed at the time.  Mr Hartley exercised the judgment called for. He did not however check from any other source to confirm Riley’s version.  In fact, when he did check on the business name, the firm did not exist.  He did not confront Riley about this.  In some ways, Mr Hartley has failed to check the facts on which he relied except from Riley.

74. [74]
    By way of comparison, it is illustrative to look at what occurred in Oris Funds Management case^[113] - Tower, the drawer, made payments to OFM with a view to purchase a minority interest.  The monies paid were treated as loans and each check was endorsed by one or more directors of OFM in favour of third parties related to the directors and applied by the third parties to reduce their indebtedness to the defendant bank.  OFM had no account of its own.  The endorsements by the director were without authority of the board of OFM. The bank’s manager was aware of the transaction between Tower and OFM and the bank’s knowledge of the close relationship between OFS and OFM.  It made no inquiries of OFM about two of the cheques being used to reduce the indebtedness of OFS to the bank.  An inquiry of the endorser would have been fruitless.  There was evidence that OFS had spent not insubstantial amounts on behalf of OFS and OFM carried on its business entirely through OFS, it was open to find that a prudent fair minded banker would have considered that the cheques were applied in the furtherance of the business of OFM when the funds were deposited in the account of OFS. That case can be contrasted to the position of Steve Riley Autos and Riley.  Mr Hartley had no intimate knowledge of the relationship between the two apart from what he was told by Riley. It could not be said that Riley was ‘of good character and repute’ as was the case in Commercial Bank of Australia Ltd v Flannagan.^[114]  In fact, Mr Hartley was told by his Collections Officer to call the police in given the manner in which the account was being conducted prior to the presentation of the subject cheque. Further inquiries in the present case may have revealed the illusory nature of the auto business or the lack of authority of Riley to act as he did.  At this point, it could not be said that inquiries would have been fruitless.  The second defendant carries the onus of proof that any inquiries ‘could not have led to any action which could have protected the true owner’.^[115]

Evidence called by the second defendant

75. [75]
    Apart from Mr Hartley’s evidence which has been discussed, Mr Debenham, a banking expert was called. Some reference to his evidence was made above^[116]   Some doubt was expressed about the weight of his evidence in view of the factual matrix in this case.  One has to look at the aggregate knowledge of the bank.^[117]   Where the bank’s procedures do not cover the situation being dealt with, some independent inquiry should occur.^[118]  The present case was somewhat unusual in that the bank protocol^[119] did not provide all of the answers.  The non-existent business name, the call for police intervention by the Collections Officer and the history of the account all called for some independent inquiry apart from the assurances of the customer Riley. This customer was not a well known Gold Coast identity with a business known to the bank.

76. [76]
    What did emerge from the cross examination of Mr Debenham was as follows:

1. a.
   If the bank is to open an account in a business name the registration of the name is required.^[120]
2. b.
   If a customer who has an account with the bank, but unknown to the manager personally, wishes to deposit a cheque payable to a business name, then it would be necessary to open an account in the business name or make inquiry.  A check would be made to see if it is registered.  If not, the easy solution would be to get a different cheque.^[121]
3. c.
   If the customer is well known, Mr Debenham said that he might deal with him and accept the cheque of the business.
4. d.
   The scenario in the present case was put to Mr Debenham.^[122]  If unknown as a customer, then it becomes a matter of judgment. If there were strong doubts, then Mr Debenham would advise that the customer obtain another cheque made out to him personally.
5. e.
   Another question which Mr Debenham would have asked would be if the person running the business was a sole trader. He accepted that questions about the business such as a bank account or letter head could have been asked.^[123]
6. f.
   If involvement of the police had been suggested by a collections officer he may alter the usual practice he had.   He would be more inclined to be much stricter in the application of the policy or practice.^[124]

77. [77]
    When one looks to the matters raised above^[125] and the evidence of Mr Debenham, the overall impression which one can readily form is that the second defendant has failed to discharge its onus of proof that it has not acted carelessly or negligently.  Inquiry from someone other than the person seeking to have the funds deposited to his account would have been a prudent exercise in the present case.^[126]   The concern of Ms Tunstall ought to have provoked such an inquiry.  She was not called to give evidence nor was there any explanation given for not giving evidence.  No inference is drawn against the second defendant in this case for not calling her.  Mr Hartley, the person who made the decision was called.^[127]  It is accepted that in some cases, a valid explanation from the person seeking to bank the cheque is adequate. That was the situation in the Oris Funds Management case. But as discussed, the knowledge of the bank manager in that case was of a more intimate nature.  As in other cases, Mr Hartley was keen to erase the debit balance in Riley’s account.  In carrying out his duties in the conscientious manner that he did, he achieved that goal.  However, in so doing, there was an element of carelessness in relation to the standing of Riley with the bank and the nature of his business. His inquiries were deficient. It cannot be said that Riley was known to be reliable as a customer.  Even when a customer as payee has a good reputation a failure to make other inquiries can be fatal for the bank.^[128]

Some relevant principles and cases

78. [78]
    It should be the practice of the second defendant to make inquiries as the collecting bank if a cheque is marked ‘A/C payee only’ and asked to be paid into an account different to that of the payee named on the cheque.^[129]

79. [79]
    The cheque obtained by Riley was a bearer cheque made out to Steven Riley Autos as payee. Steven Riley Autos was the payee. “Payee” does not mean the owner of the cheque at the time it was presented, but the name written across the face of the cheque.^[130]  The difference in the present case is that Riley indorsed the cheque ostensibly on behalf of Steven Riley Autos in his own favour and it was paid into his account.

80. [80]
    The words “A/C payee” do not effect the negotiability of “order” or “bearer cheques.”^[131]  In the Dungarvin Trust case Snyman J. summarised the facts and the law as follows:

In the cheque before me the drawer had made it payable to M.A. Gokal & Son (Pty.) Ltd.  Its has struck out the printed words “or bearer” on the cheque behind the name of the payee and it has crossed the cheque and between the crossing has added the words “not negotiable – A/C payee only”.  Now to the effect of the crossing is that the cheque had to be paid into a banking account.  The words “not negotiable” make the cheque subject to the equities.  The words “A/C payee only”, read in conjunction with the crossing, can only mean that it is to be paid into the banking account of the payee only.  So what the drawer has said is that it issues the cheque subject to the equities and requires that it shall be paid into the banking account of the payee only.  These words are of course not a direct instruction prohibiting transfer, but fall into the meaning of the second part of the section – that is that they are words indicating an intention that the cheque should not be transferable.  There seems to be no ambiguity in this or any suggestion of non-transferability.  In my view the crossing and the words convey a clear and definite prohibition against transfer.  It would of course have been better style and more in accordance with the wording of the section if the drawer had used the words “not transferable” instead of the words “A/C payee only” or in addition to those words.  However I am satisfied that in the present case the drawer has unmistakeably indicated his intention to prohibit transfer of the cheque.  His bankers would have been bound to accept his instruction to pay out the cheque for the account of the payee only.

Consequently no person other than the payee had a right to hold this cheque and the plaintiff could not become the lawful holder of the cheque and had no right to claim payment under it.

81. [81]
    In that case the bank was the holder of the cheque. In the present case the words ‘not negotiable’ do not appear on the cheque.^[132]  However, that indorsement is only relevant to the cheque being subject to the equities. ie.  any defence available on the cheque against the payee is also available against a subsequent holder.  Also whether it is a bearer or order cheque is not determinative of the issue.

82. [82]
    The only question for determination in the Dungarvin case was whether the words “A/C payee only” are words prohibiting transfer of a cheque or indicating an intention that it should not be transferable. Snyman J. held that it did.^[133]  In Dungarvin’s case, the court was dealing with s 6(5) of the Bills of Exchange Act which finds an equivalent in s 13(4) of the Bills of Exchange Act 1969 (Cth).  Such a provision does not appear in the Cheques Act.  In fact the Cheques Act s 39 seems to give effect to the proposition that every cheque should be transferable until discharged and that any indorsement on same does not effect transfer by negotiation.^[134]

83. [83]
    Section 40(1) provides that a cheque can be transferred by negotiation from the holder to another person so as to constitute that other person as a holder if in the case of an order cheque it is indorsed by the holder and delivered. In relation to a bearer cheque it need only be delivered. It need not be indorsed. In the present case, given the concession made by the defence, it is important to decide whether it is a bearer cheque or an order cheque as far as this element of s 50(1)(a) is concerned. The other question is – was the cheque transferred by negotiation to the second defendant? The other elements have been discussed with findings in favour of the second defendant. If the second defendant holds as a holder in due course, it holds the cheque free from any defect in title of prior indorsers.^[135]  Obviously, the title of Riley was defective, but this would not prevent the second defendant as a holder in due course from receiving good and complete title.^[136]

84. [84]
    Sections 49, 50 and 51 of the Cheques Act provides as follows:

s 49 Rights acquired by transfer by negotiation

1. (1)
   The holder of a cheque may sue on the cheque in the holder’s own name.

1. (2)
   A holder of a cheque who is a holder in due course:

1. (a)
   holds the cheque free from any defect in the title of prior parties as well as from mere personal defences available to prior parties against one another; and

1. (b)
   may enforce payment of the cheque against any person liable on the cheque.

1. (3)
   Where:

1. (a)
   the title of the holder of a cheque is defective; and

1. (b)
   the holder transfers the cheque by negotiation to a holder in due course;

the holder in due course receives a good and complete title to the cheque.

s 50 Holder in due course defined

1. (1)
   The holder of a cheque is a holder in due course if:

1. (a)
   the cheque was transferred by negotiation to the holder and, at the               time when the holder took the cheque, the cheque:

1. (i)
   was complete and regular on the face of it;

1. (ii)
   was not a stale cheque; and

1. (iii)
   did not bear a crossing of the kind referred to in paragraph 53(1)(b); and

1. (a)
   the holder took the cheque:

1. (i)
   in good faith;

1. (ii)
   for value; and

1. (iii)
   without notice:

1. (A)
   of any dishonour of the cheque; or

1. (B)
   of any defect in the title of the person who transferred the cheque to the holder or that the person who transferred the cheque to the holder had no title to the cheque.

1. (2)
   Without limiting the generality of paragraph (1)(b), the holder of a cheque shall, for the purposes of that paragraph, be deemed to have taken the cheque with notice of a defect in the title of the person who transferred the cheque to the holder if the holder took the cheque with notice that the person transferred the cheque to the holder in breach of faith or under circumstances amounting to a fraud.

51 Presumption that holder is holder in due course

1. (1)
   Subject to subsection (2), the holder of a cheque shall, unless the contrary is proved, be presumed to be a holder in due course.

1. (2)
   Where, in an action or proceeding on a cheque, it is admitted or proved that the drawing or issue, or a transfer by negotiation, of the cheque is affected by fraud, duress or illegality, the holder shall not be presumed, by virtue of subsection (1), to be a holder in due course unless and until the holder proves that, after the alleged fraud, duress or illegality, value was, in good faith, given for the cheque.

Section 53(1)(b) refers to cheques crossed “not negotiable”.  This section is not relevant for present purposes.^[137]

Holder in due course

85. [85]
    In some instances a collecting bank is not a holder in due course. In Slingsby v District Bank Ltd^[138], the cheque did not get into the hands of a holder in due course from when the cheque was drawn to the time it was presented by the collecting bank to the defendant bank.  The fraudulent solicitor was the only person in possession and he was held not to be a holder in due course.  Similarly as Steven Riley has been found to be part of a fraudulent scheme he is not a holder in due course as he lacks good faith.  As payee of a cheque Steven Riley Autos cannot be a holder in due course when the cheque is first delivered as it has not been transferred by negotiation.^[139] 

86. [86]
    It was expressly admitted in Slingsby’s case that the collecting bank was not a holder in due course. It could be considered that the second defendant is in a similar situation, as any holders after the cheque was drawn, were not holders in due course as defined in s 50. However, a collecting bank may be a holder in due course.^[140]  A payee may be included in the definition “holder” e.g. Steven Riley Autos.  It is not a holder in due course:^[141]

A holder in due course...is a person...to whom the bill has been negotiated; and negotiation…implies transfer by indorsement and where necessary, delivery.

87. [87]
    The decision of Scrutton LJ in Slingsby’s case was criticised in Smith v Lloyds TSB Bank plc.^[142]  However, it did not affect the admission in Slingsby’s case on the facts that the collecting bank was not a holder in due course.  In fact Scrutton LJ was of the clear view that it was not.^[143] The second defendant contends that it is a holder in due course.  It has not been argued Riley is a holder in due course.  Riley is tainted with the fraud as discussed. He did not take in good faith.^[144]  The court in Slingsby’s case was concerned with s 64 of the Bills of Exchange Act 1882 relating to a material alteration.  The effect of that provision was to avoid the cheque  between the plaintiffs as drawers and the defendant as the paying bank.  The paying bank could not rely on the defence of paying in good faith and in the ordinary course of business^[145] or good faith and without negligence.^[146]  The court was merely making observations about how the case was conducted between the plaintiffs and the Westminster Bank, before Finlay J.  The Court did not decide the issue.  It was concerned with a different provision to those in the present case.

88. [88]
    ‘Holder’ means(s 3(1)):

1. (a)
   in relation to a cheque payable to order – the payee or an indorsee who is in possession of the cheque as payee or indorsee, as the case may be; and

2. (b)
   in relation to a cheque payable to bearer – the bearer

89. [89]
    The second defendant cannot be a holder if the cheque is an order cheque and so in that event could not be a holder in due course. The second defendant, if it were a person in possession of a cheque which is payable to bearer, is a holder, as well as a collecting bank.

90. [90]
    Section 21 of the Cheques Act provides:

Cheques payable to order

A cheque is payable to order if the cheque is expressed, whether originally or by indorsement, to require the drawee institution to pay the sum ordered to be paid by the cheque to or to the order of:

(a)a person specified in the cheque as payee or indorsee; or

(b)2 or more persons specified in the cheque, jointly or in the alternative, as payee or indorsee.

91. [91]
    The learned authors Edwards & Tucker^[147] provide helpful examples of when a cheque is an order cheque and when a bearer cheque becomes an order cheque.  The latter requires that the word “bearer” be struck out before and endorsement such as “Pay A” can convert a bearer cheque into a drawer cheque.  The learned authors refer to s 23 of the Cheques Act which was deleted in 1998 as has been discussed.  However on their argument the subject cheque for $185,000.00 would still be a bearer cheque.  It is necessary to look at the case as to why s 23 was originally inserted following the decision in Miller Associates (Aust) Pty Ltd v Bennington.^[148]

92. [92]
    It was held in that case that it is not possible by indorsement to change the characteristics of a bearer cheque. Shepherd J. was dealing with ss 13(3)^[149] and 36(2) of the Bills of Exchange Act 1909-1973 (Cth).^[150]  Section 21 of the Cheques Act might put that decision in doubt if the word ‘bearer’ is crossed out. 

“transferred by negotiation”

93. [93]
    For the subject cheque of $185,000.00 to be transferred by negotiation, it must be transferred from a holder to another person so as to constitute that person as a holder.^[151]  The cheque must be transferred by Riley to the bank so as to constitute it as a holder.  In the written submissions^[152] the relevant sections of the Cheques Act are discussed.^[153]  The defence contend that if by indorsing the cheque “Please Pay S. Riley”^[154] Riley changed the cheque from a bearer cheque to an order cheque, then it is accepted that there is no negotiation to the second defendant as to constitute it a holder in due course.  That submission seems to be common ground in this case.  The plaintiffs contend that Steven Riley Autos as holder purported to indorse the cheque to Steven Riley.  In that event Hartley presented a cheque payable to order at HSBC.  Riley was in possession of the cheque on 27 August and he delivered it to the bank for collection.  The issue is whether the cheque remained a bearer cheque when delivered to the bank.  Riley could be considered a ‘holder’ of the cheque.^[155]  Riley purported to act on behalf of Steven Riley Autos.  In the Third Further Amended Defence^[156] it is pleaded that Steven Riley Autos was a name used by Steven Riley.   For present purposes he was its alter ego.  Steven Riley on behalf of Steven Riley Autos then endorsed the cheque to himself.  Section 21 required that Riley indorsed the cheque to a name.  Riley was not a fictitious person.  However, the word “bearer” remained.  The words “a/c payee only” do not affect its transferability.  It was not made to the “order” of anyone.  Thus, the cheque remained a bearer cheque.^[157]

94. [94]
    The second defendant’s case is that the indorsement was done at Mr Hartley’s request so that the cheque had been indorsed to be payable to Riley personally.^[158]  If Riley was not Steven Riley Autos then he could not sign it on behalf of Steven Riley Autos.  It cannot constitute an indorsement by Steven Riley Autos.^[159]  The second defendant’s position under s 95 was that Mr Hartley accepted Riley’s statement that he was Steven Riley Autos, that there had been deposits made of its cheques to the Steven Riley account and that he imported cars as part of a business.^[160]  The second defendant cannot approbate and reprobate.  In fact, it was submitted for the purposes of contracts one to four that Steven Riley Autos entered into contractual relations and consideration passed.  Steven Riley was Steven Riley Autos for the purposes of the indorsement.  If the second defendant received the cheque as a holder in due course the bank would be protected against any claim in conversion.  Negligence as discussed above would be irrelevant.  It does not effect the bank’s position that Riley came into possession of the cheque by a fraud if the other elements of section 50 are satisfied.^[161]  For the bank to be affected by the fraud it would require ‘a wilful and fraudulent absence of inquiry into the circumstances’.^[162]  That aspect was also discussed above under the s 95 defence.

“for value”

95. [95]
    Another aspect to this defence of a holder in due course arises when the collecting bank applied the proceeds of the cheque to Riley’s account which was in debit. In that situation, the collecting bank does not become a holder for value of the cheque at any time before it is cleared.^[163]  As pointed out in the joint judgment of the High Court in KDS Constructions, that once the proceeds are collected, ‘the collecting bank exhausts the operation of the cheque notwithstanding that the paying bank holds it thereafter as a voucher on account of its customer the drawer’.  In the present case, Mr Hartley sought an urgent clearance before the second defendant credited the proceeds of the cheque to Riley’s account.  The High Court in KDS Constructions^[164] referred to the case of Capital and Countries Bank v Gordon^[165] which is distinguishable from the present case as the proceeds in Gordon’s case had been credited to the customer’s account before it was cleared. It was certainly not the intention of Mr Hartley to allow Riley to have the benefit of the proceeds before the cheque was cleared.  In that regard, a similar situation arose in Baker v Barclay’s Bank.^[166]  Baker, the plaintiff and B. carried on business at two places including Hinkley.  B misappropriated nine cheques made out to “Modern Confections” in respect of invoices sent out from the partnership premises at Hinkley.  The cheques were indorsed by B “Modern Confections pp. [G.B.] and also indorsed by J and paid into his account with the defendant bank.  The bank when asked for an explanation was told that B. was the sole proprietor of the business at Hinkley and J. was helping B with the financial side.  The bank manager made no further inquiry and accepted the explanation.  The plaintiff sued the bank in conversion.  The following passages are relevant:^[167]

“The bank contends that both Mr Jeffcott and the bank were holders in due course. There is no evidence, apart from his own story to the bank, of how Mr Jeffcott came into possession of the cheques, but it is submitted that, under s 30, he must be presumed to be a holder in due course until the contrary is proved, and that the contrary has not been proved. I am not prepared, on the evidence that I have, to find that Mr Jeffcott was a party to the fraud. He may or may not have been, and I think that is a point which is left in doubt on the evidence. It is at least possible that he was deceived by Mr Bainbridge as much as the bank was deceived.

I shall consider, therefore, first, the question whether Mr Jeffcott was, on the evidence, a holder in due course. I am not entirely clear how it benefits the bank to establish that he was, but I shall consider the point briefly. I do not think that he was a holder in due course. His story to Mr Jones, if it is to be believed, shows that he became a holder merely for the purpose of administering Mr Bainbridge's money, and not in order that he could claim the title to the cheques so that he could deal with the money as he liked. In short, on his own story, he is to be regarded merely as agent or trustee for Mr Bainbridge. If his story is not to be believed, then the proper explanation of any taking by him is that he did not take in good faith. I do not think that the bank can, in the circumstances of this case, successfully rely on s 30(2). It is, I think, clear, both from the wording of sub-s (2) itself and from the authorities that were decided before 1882, that if fraud is proved at any stage of the transaction, then the burden is shifted. Once I am satisfied, as I am, that the proper inference is that Mr Bainbridge was fraudulent, then the burden is shifted to Mr Jeffcott or to the bank, if it wishes to advance that contention, to prove that Mr Jeffcott took in good faith and for value. I am certainly not prepared in the state of the evidence to find that he did. As I have said, I do not think that there is sufficient evidence in the case for me to find one way or the other whether Mr Jeffcott was a party to the fraud or not. That interpretation has been given to the section since the Act in Tatam v Haslar, but I think it is worth referring to Fitch v Jones, which was decided before the Act was passed, because Lord Campbell CJ shows what is the true position of a man in the position of Mr Jeffcott in this case. Lord Campbell CJ said (5 E & B at p 244):

“The other question is one of general importance. It is, whether in such a case as this it lies on the plaintiff to show that there was consideration for the indorsements, or on the defendant to show that there was none; or in other words whether the facts proved raised a presumption that there was no consideration. It is clear that, when there is illegality or fraud shown in a previous holder, a presumption that there is no consideration for the indorsements does arise; for the person who is guilty of illegality or fraud, and knows that he cannot sue himself, is likely to hand over the instrument to some other person to sue for him. It is not properly that the burthen of proof as to there being consideration is shifted, but that the defendant, on whom the burthen of proof that there was no consideration lies, has by proving fraud or illegality in the former holder raised a prima facie presumption that the plaintiff is agent for that holder, and has therefore, unless that presumption be rebutted, proved that there was no consideration.”

I think it is plain enough that, on Mr Jeffcott's story in this case, he was a holder simply as agent for Mr Bainbridge and his whole story is quite inconsistent with his having given consideration

With regard to the position of the bank itself, it is not suggested that the bank did not take in good faith. It is not suggested that it had any notice of the defect in the title of the person who negotiated it, because “notice” in s 29(1)(b) means actual notice—a very different question from that which I shall have to consider when I come to s 82 of the Act and the question whether the bank was negligent. It is not suggested that the bank had actual notice, but merely that it was put on inquiry. What is suggested is that the bank did not give value, and the question arises which often arises in cases of this sort, namely, whether, when a cheque is given to a bank in these circumstances, the bank takes the cheque giving value for it, and then becoming a holder in due course, or whether the bank takes the cheque merely to collect the amount of the cheque for someone else.

That is a question of fact. The true relationship has to be inferred from the acts of the parties. In this case the only fact which was relied on by counsel for the bank as making the bank a holder in due course was the fact that there was an overdraft on Mr Jeffcott's No 2, or loan, account. If the accounts had been combined, Mr Jeffcott would have been indebted to the bank and, accordingly, it is said that the bank gave value for the cheques. Counsel relies on M'lean v Clydesdale Banking Co. This appears, on the facts of this case, to be a misconception. Since Mr Jones believed, as he says, Mr Jeffcott's story, he must have appreciated that the cheque represented Mr Bainbridge's money and as such the bank could not possibly take it in satisfaction of Mr Jeffcott's debt. There can, therefore, have been no agreement on the part of the bank to give value by taking it as against an existing indebtedness. The point was considered in AL Underwood Ltd v Barclays Bank. Sometimes it has been suggested that, if the bank credits the customer with the amount of the cheque in his account before it has been cleared, by so doing the bank is giving value. I think that the statement of the position which is now accepted is that made by Atkin LJ ([1924] 1 KB at p 805), in AL Underwood Ltd v Barclays Bank, where he said that it was not enough to show merely that the bank had entered the value of the cheques on the credit side of the account on the day on which the bank received the cheques. Atkin LJ went on to say (ibid):

“To constitute value there must be in such a case a contract between banker and customer, express or implied, that the bank will before receipt of the proceeds honour cheques of the customer drawn against the cheques.”

96. [96]
    In the present case, Mr Hartley believed the cheque belonged to Riley as the owner of Steven Riley Autos and took the cheque in satisfaction of Riley’s debt. However there was no agreement between Mr Hartley and Riley that the bank would take the cheque in satisfaction of the overdraft before the proceeds were received. In fact, Mr Hartley’s conduct is to the contrary. He sought an urgent clearance by way of a warrant from the HSBC bank. Baker’s case can be distinguished on this point.

97. [97]
    What existed in the present case was an antecedent debt pursuant to the provisions of s 35(2) of the Cheques Act. The extent of the debt was $184,901.49. It potentially provided the necessary consideration for the cheque of $185,000.00. In Barclays Bank Ltd v Astley Industrial Trust Ltd^[168] the bank came into possession of cheques following fraudulent hire purchase agreements by a motor dealer with the innocent drawer financier.  The bank argued various defences but the relevant one was when the cheques were handed down to the plaintiff bank there was an antecedent debt in the form of a loose overdraft arrangement owing by the motor dealer to the bank.  It was held under an equivalent section to 35(2) of the Cheques Act that this overdraft facility was valuable consideration for the cheques^[169] as was the lien.  Although the cheques were delivered, inter alia, for collection, the bank was held to be a holder who has given value and a holder in due course.  This finding was available apart from any presumption provided for under s 51(2).^[170]

98. [98]
    The plaintiffs contend that the second defendant did not give value for the cheque. The cheque was used to discharge indebtedness held in an unrelated account. It was submitted that it cannot be a payment for value if it is used to discharge the liability of a third party. It is submitted that s 50 can only apply if the cheque discharges the liability of the payee of the cheque. For present purposes, Steven Riley and his business Steven Riley Autos are one and the same.

for value: lien

99. [99]
    It has been held that a bank has a lien on all cheques coming into its possession as a banker for the general balance of moneys due from the customer.^[171]  The lien is over the chose in action and in the case of an overdraft, it is for the extent of the overdraft.

…so long as the cheque is received in good faith and in the ordinary course of business, a payment made to the collecting bank by the paying bank in discharge of that lien cannot amount to a preference, priority or advantage.^[172]

100. [100]
     The High Court was not concerned with a holder in due course situation nor with an action for conversion against the bank. There was neither a pleading nor an argument in the present case which touched upon the lien being relevant to the title to the cheque discussed earlier. The question of the lien was raised in the present case in the context of the second defendant having a lien for the purposes of s 38 of the Cheques Act which provides as follows:

…a holder of a cheque who has a lien on the cheque (whether arising from contract or by operation of law) shall, to the extent of the amount for which the holder has the lien, be conclusively presumed to have taken the cheque for value.

101. [101]
     The second defendant could be considered to have had a lien on the cheque for $185,000.00 which came into its possession as a banker. Riley was overdrawn some $184,901.49 at the time of presentation of the cheque. Can it be presumed to have taken the cheque for value? The requirements of good faith and in the ordinary course of business in the KDS Construction case were related to s 122(1) of the Bankruptcy Act, not the existence or not of a lien in favour of the bank. The second defendant in this case gave up possession of the cheque to HSBC and so may have lost the benefit of a lien over the cheque, a chose in action.^[173]  Given that this case is to be decided on another point, it is unnecessary to reach a concluded view on this issue.

“For value”; “holder in due course”

102. [102]
     One case which touches upon both issues is Midland Bank Ltd v Reckitt.^[174]  The bank had notice in that case that the cheques did not belong to a solicitor, who fraudulently drew cheques of his client for his own purposes and which were paid into his account with the bank with whom he had an overdraft.  The bank was negligent in failing to make inquiry as to the solicitor’s authority to draw cheques on his client’s account and pay them into his account.  The form of the cheque gave the bank notice that the money was not the solicitor’s money.  In relation to two cheques, the bank was held to be negligent as the payees were fictitious but the funds were used by the solicitor subsequently.  The bank claimed to be a holder in due course to the extent of the overdraft existing and into which account they were paid in.  It was held^[175] that the bank was a holder for value to that extent based on the entire payment of the antecedent debt or a lien to the extent of the overdraft.^[176]  However, the notice that the money was not the solicitor’s money, as the solicitor not having the authority or the power of attorney, defeated the bank’s right to be considered a holder in due course.  The bank was put on inquiry in relation to the other cheques except the two cheques paid to fictitious persons and lost the benefit of the defence of acting without negligence in relation to 13 cheques.  In relation to the remaining two cheques, the court held that the notice about lack of authority prevented the bank being a holder in due course.  That probably distinguishes Reckitt’s case from the present as far as being a holder in due course.  The bank was held to be a holder for value because of the lien.  In the present case the HSBC warrant was directed to Steven Riley Autos not Steven Riley.  The question of authority was resolved by Mr Hartley, by accepting Riley’s word.  There was no notice of lack of authority.

Section 51(2): Presumption that holder is holder in due course

103. [103]
     In the present case, there is a finding that Riley, a holder of the cheque, was a party to a fraud involving the drawing of a cheque. Therefore the onus is on the second defendant as holder to prove that after the alleged fraud, value was given for the cheque. A ‘holder’ includes every person in lawful possession including an agent for collection.^[177]  The value, as discussed was in the form of debits to Riley’s account with the bank which occurred on 25 February 2002 and so pursuant to s 38, the second defendant would have a lien on the cheque^[178] which is dated 27 February 2002 and to have taken the cheque for value.  The value was given before the fraudulent acts relating to contracts 5 and 6 and the payment of $185,000.00.  In that event, the second defendant has failed to discharge the onus required under s 51(2).^[179]  The banks value given was premature for the purposes of s 51(2).  Baker’s case^[180] was concerned with Sections 29 and 30 of the Bills of Exchange Act (UK).  Those sections are similar to ss 50 and 51 of the Cheques Act.  This finding does not affect the alternative case put that the second defendant gave value and need not rely on the presumption.^[181]

104. [104]
     The collecting bank gives value when it honours other cheques drawn by the payee against the value of the cheques deposited.^[182]  Also, the learned authors state^[183] that the collecting bank’s role ‘is not necessarily incompatible with the bank’s role at the same time being a holder of the cheque. 

“good faith”

105. [105]
     Section 3(2) defines good faith as:

A reference in this Act to an act or thing being done in good faith is a reference to the act or thing being done honestly, whether or not the act or thing is done negligently

106. [106]
     This had been discussed earlier in the context of s 95 of the Cheques Act. Notwithstanding the persuasive submissions by the plaintiffs^[184], there is nothing in the behaviour of Mr Hartley which could be described as dishonest or that he had a suspicion and ‘shut his eyes and elected not to make further inquiry.^[185]  His denial is accepted.

“Without notice of any defect in title”

107. [107]
     The plaintiffs’ submission is that the second defendant was aware of the defect in title. Riley had no title to the cheque. The business was not registered. Mr Hartley did not inquire as to whether similar cheques had been paid into Riley’s account. However, the section without limiting the generality of s 50(1)(b) requires that before the holder of the cheque could have notice of the defect in title, it has to have notice that someone like Riley transferred the cheque to the holder ‘in breach of faith or under circumstances amounting to a fraud.’ That situation does not exist in the present case, as has been discussed.

Restitution

108. [108]
     The plaintiffs accept the basic principles as to restitution as set out in the defence submissions. It reserved its position in the event of an appeal.^[186]  The second defendant’s submissions were that the plaintiffs failed to bring themselves within the categories required for a claim of restitution to exist.^[187]  As the only basis for restitution made out in the pleadings was based on conversion, the plaintiffs have to choose between an action in conversion or restitution.  As this action failed so does the claim for restitution.  The second defendant relies upon the decision of Commissioners of the State Savings Bank of Victoria v Permewan, Wright & Co Ltd:^[188]

“All persons other than a collecting banker still remained subject to that rule of liability, because they were unnamed, showing that it is not the Statute that creates the liability. The collecting banker, however, if he could show good faith and due care, was permitted to relieve himself from his primá facie responsibility. The due care was necessarily referable to the same object as the primary responsibility, namely, the rights of the true owner. The rightful owner's protection was diminished in this respect for the sake of general financial business, represented by banking transactions. So far as this was necessary, the exemption existed, but not beyond. And necessity went no further than honesty and ordinary care for the true owner's interests.

109. [109]
     The case involved an action for conversion by the plaintiff as drawers and the defendant as the collecting bank. A clerk in the employ of the plaintiff fraudulently deposited the cheques to his account with the defendant bank. The statutory defence under s 88 of the Bills of Exchange Act was held to be a defence to an action for conversion. The bank was held to be negligent for not making due inquiry.

110. [110]
     The plaintiffs accept that in the present case one would be ‘strongly persuaded’^[189] by Australia and New Zealand Banking Group Limited v Westpac Banking Corporation.^[190]  In that case consideration was given by the bank in reducing an overdraft and so it was not unjustly enriched.  In the present case, there was an antecedent debt or overdraft in existence at the time of the presentation of the cheque.  The second defendant has been held to be a holder in due course pursuant to s 50 of the Cheques Act which is a defence to the action for conversion.^[191]  The value of the cheque determines the extent of any damages.^[192]

Conclusion

111. [111]
     The second defendant has proved that it is entitled to rely upon the provisions of s 50 of the Cheques Act as a good defence to the action for conversion or a claim for restitution.

Order

1. Plaintiffs’s action is dismissed.

2. Liberty to apply re costs.