US International Marketing Ltd v National Bank of NZ Ltd [2003] NZCA 436; (2003) 10 TCLR 922; [2004] 1 NZLR 589; [2003] BCL 1069; (2004) 8 NZBLC 101,514 (28 October 2003)

[1] The circumstances which have brought this case on appeal are fully set out in the judgment prepared by Anderson J. So too are the competing submissions. I will therefore not repeat either of those exercises. The crucial question is whether the

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[2] The Bank was faced with competing demands. On the one hand the Bank had its conventional obligation to its customer, US International, to allow it to draw on the funds which stood to its credit. That obligation derived from the straightforward debtor/creditor relationship which exists between a bank and its customer. On the other hand the Bank received a claim from the liquidator of Pakistan Emporium asserting that the sum of $15,073.98, which comprised the greater part of US International’s credit balance, “belonged” to the company in liquidation.

[3] It is important for the efficient and orderly conduct of business affairs that claims by third parties to ownership in equity of funds standing to the credit of a customer with its bank are not allowed too readily to interfere with the normal relationship between the bank and its customer. The bank has a clear prima facie duty to its customer to allow the customer immediate access to those funds for whatever purpose the customer may wish to apply them. A third person asserting a beneficial interest in those funds, entitling the third person to have them frozen by the bank, risks committing the tort of interference with contractual relations if the request is made on a basis which is not justified. What the customer’s loss may be in such circumstances is of course quite another matter.

[4] The law has nevertheless come to recognise that banks may be entitled, indeed obliged, in some circumstances to decline to meet the customer’s demand, if to do so would, in earlier terminology, amount to giving the customer knowing assistance to commit a breach of trust. Major difficulties arose as to the nature of the knowledge which was required before there could be “knowing” assistance. Those difficulties were decisively and convincingly dispelled by the decision of the Privy Council in Royal Brunei Airlines v Tan [1995] UKPC 4; [1995] 2 AC 378. This means that previous decisions under the “knowing” regime have ceased to be of assistance. It is now clear that a bank is entitled to decline to meet a customer’s demand if to do so would, in all the circumstances, provide dishonest assistance. It would be unfortunate if sophistications arose in relation to the concept of dishonesty similar to those which bedevilled the concept of knowledge before the Royal Brunei Airlines decision. I will revert to that subject a little later.

[5] When a bank is faced with a request by a third party that it freeze funds in a customer’s account the bank is required to anticipate what response the Court will make to the circumstances as they appear to the bank. The bank, on any view of the matter, is in an awkward position. By freezing the funds as requested it will be liable to compensate its customer for any ensuing loss if the Court finds that there were insufficient grounds to freeze them. If, on the other hand, the bank declines to freeze the funds and the customer is acting in breach of trust, the bank will be vulnerable to a claim for dishonest assistance by the trust beneficiary if the Court subsequently rules that the funds should have been withheld from the customer. Banks could be forgiven for thinking that the law places them in something of a no win situation.

[6] The Courts must respond by making the position of a bank in circumstances such as these, as clear and as straightforward to apply as possible. The starting point must, in my view, be that the bank’s clear initial duty is to allow its customer immediate access to cleared funds. As noted earlier, too ready or easy an undermining of that obligation will produce much inconvenience and uncertainty in what is a fundamental commercial relationship. Too low a threshold would also undesirably encourage third parties to intervene in the banker/customer relationship for undeserving reasons. The fact that the third party might be liable for interference in the contractual relationship would be only relatively small solace to those damaged by such intervention. The threshold should not, however, be set so high that banks are permitted to facilitate breaches of trust in circumstances when it would clearly be dishonest to do so. It is a matter of striking the right balance at a point in time which must necessarily anticipate the full and careful examination which the matter may later be given in Court.

[7] The dishonest assistance criterion established by the Privy Council in Royal Brunei Airlines, and developed by the House of Lords in Twinsectra Ltd v Yardley and Others [2002] AC 164, combines subjective and objective elements. The conduct of the person concerned is assessed in the light of what that person actually knew at the relevant time. Against these subjectively determined circumstances the honesty or otherwise of the person’s conduct is objectively assessed. As Lord Nicholls said in Royal Brunei Airlines at 389E the standard of

what constitutes honest conduct is not subjective. It is therefore the standard of what a reasonable person would regard as honest or dishonest in the relevant circumstances.

[8] But following Twinsectra it is helpful, in order to avoid misunderstanding, to point out that in the United Kingdom there is a further element of what amounts to dishonest conduct. This element is subjective in that the person concerned must appreciate that their conduct is transgressing ordinary standards of honest behaviour, as Lord Hoffman put it in Twinsectra at 170C. We can leave for another day consideration of what effect, if any, Lord Millett’s powerful dissent in Twinsectra might have on New Zealand law. Resolution of the present case is not affected by which approach is taken. Lord Millett did not consider that the person concerned had to appreciate that their conduct transgressed ordinary standards of honesty. It was sufficient if their conduct did in fact do so. The other three members of the appellate committee, however, took the view reflected in Lord Hoffman’s words noted above.

[9] In the light of the necessary legal approach I consider it helpful to introduce into the present arena the concept of the reasonable banker and to look at the circumstances known to the bank in question through those objective eyes. The principle thus becomes that a bank is entitled to freeze its customer’s account entirely or pro tanto if, but only if: (1) in all the circumstances actually known to the bank, (2) a reasonable banker would know it was dishonest to pay the funds in question to or to the order of its customer, and (if Twinsectra is adopted) (3) the bank itself appreciates that to be so.

[10] There may be some relatively rare circumstances in which a reasonable banker would know it was dishonest to meet its customer’s demand without making further inquiry. If the bank appreciates that to be so, it should make appropriate and timely further inquiry and then assess the position in the light of what that inquiry elicits. Liability will not arise on this basis if the failure to make further inquiry is only negligent; to give rise to liability the failure must be dishonest. Essentially what is required to make a person liable on the basis of failing to make further inquiry is what is often called wilful blindness or, as Lord Nicholls put it in

Royal Brunei Airlines at 389F, deliberately closing one’s eyes or deliberately not asking questions lest one learn something unwelcome.

[11] A test framed along those lines seems to me to reconcile the competing interests and the factors earlier discussed as satisfactorily as the inherent tensions allow. It can be mentioned here that freezing a customer’s account ahead of any actual demand being made by the customer for funds to be paid from the account, may well amount to an anticipatory breach of contract, albeit no loss would ordinarily be capable of ensuing unless and until a subsequent demand was not met.

[12] I turn now to apply the foregoing test to the facts of this case. It is desirable to examine the matter in stages as the relevant events unfolded. The first communication Mr Lithgow of the Bank received from the liquidator, Mr Williams, was the telephone call on 3 December 1997. Nothing of present relevance was said on that occasion. Then came the fax which the liquidator’s solicitors sent to Mr Lithgow and which he received at about 2.24pm on 3 December. The text is set out in Anderson J’s judgment and I will therefore not repeat it here.

[13] The first relevant observation was the statement by the liquidator’s solicitors that, during several High Court hearings, Mr Khan of Pakistan Emporium had represented that the company held a bank cheque of $15,073.98 drawn on an account the number of which was mentioned. All that this would convey to a reasonable banker is that an officer of, or someone associated with Pakistan Emporium, had said in Court that the company held the bank cheque in question. The statement makes no reference to the basis on which the cheque was held or how it came to be released to the person who “placed” it “in another account” which had been identified to the liquidator. The Bank in fact knew that the bank cheque had not been placed in another account; it had been placed back into the same account as that from which the funds which purchased it had been drawn. That account had nothing to do with Pakistan Emporium. This mis-statement of the facts in the letter is of significance because there might reasonably have been more concern if the money had come from a Pakistan Emporium account and had been paid back into a different account. A simple repatriation into the account from which the bank cheque was sourced does

not of itself suggest any impropriety. It suggests rather that the purpose for which the bank cheque was acquired had not for whatever reason come to fruition.

[14] The letter from the liquidator’s solicitors next made the bald conclusory assertion that the funds represented by the bank cheque belonged to the company in liquidation. Mr O’Callahan made the valid point that this statement was no more than mere assertion. No factual basis was given for the assertion. The fact that the bank cheque was once “held” by the company, without more, cannot be regarded as providing any reasonable basis for saying that the funds belonged to the company. It must be seen as significant that the letter did not give any further indication from Mr Khan of Pakistan Emporium as to how the claim for ownership was based. As Mr Khan knew that Pakistan Emporium had held the cheque, he would presumably have been able to say, if asked by the liquidator, how the cheque had come originally to be held and on what basis the claim for ownership was made of funds represented by a cheque payable to “High Court”. Indeed the absence of any reference to how the cheque once held came to be released gave rise to the clear inference that it had been made available in an attempt to stave off a liquidation and had been returned when that purpose was not fulfilled.

[15] To this point I do not consider the solicitor’s letter gave any basis for the Bank pro tanto to freeze US International’s account. Nor do I consider the circumstances were such that a reasonable banker should have felt obliged to make further inquiry to avoid being at risk of being regarded as dishonest if it met a demand by its customer in relation to the funds in question. The fact that an urgent application to the High Court to secure the funds was foreshadowed cannot, in my view, make any difference. A sufficient factual foundation must be laid for the contention that the funds concerned are trust funds. It follows that the Bank acted at least in anticipatory breach of its contract with US International when it agreed to freeze the funds at the solicitor’s request.

[16] Mr Singh of US International did not become fully aware of what had happened until he met Mr Lithgow on 9 December. The liquidator’s “urgent” application to the High Court had not by then resulted in any order being served on the Bank. On 8 December there appears to have been a demand to withdraw

$200.00 which was not met. On 9 December Mr Singh made his position entirely clear to the Bank. He disputed the liquidator’s claim to ownership of the money. Whether he made formal demand at this point is perhaps technically in doubt. The Bank was in breach if he did, and clearly in anticipatory breach if he did not, because it gave an unqualified indication that it would not be meeting any demand if made. Whether any loss was caused by the Bank’s stance is not of course the present issue. What is evident beyond doubt is that, in spite of not having heard any more from the liquidator or the Court after six days, the Bank made it quite clear to Mr Singh that it would not allow him to draw on US International’s account in relation to the disputed funds. At that time I do not consider the Bank had sufficient justification for this stance.

[17] The next step was Mr Singh’s fax of 9 December which reached Mr Lithgow at 9.29am on 10 December. In it Mr Singh said that if the payment due to the Indian concern “was not sent by tomorrow” (meaning by 10 December) he would suffer the stated losses. Whatever may have been the earlier position this was a formal request to the Bank to release the frozen funds. The Bank had still not heard from either the liquidator or the Court. It had made no inquiry and could reasonably have wondered about the “urgency” of the foreshadowed High Court application by the liquidator to secure the funds. In spite of this Mr Lithgow did not agree immediately to release the funds. He considered he now had an obligation to make further inquiry, seemingly of the Court. Clearly Mr Lithgow only reacted in this way after he had received Mr Singh’s fax. He did not think it necessary to check with the liquidator or the Court the previous day when he met with Mr Singh.

[18] Mr Lithgow’s position on receipt of Mr Singh’s fax must be judged in the light of the previous history. The earlier fax from the liquidator’s solicitors did not, as earlier discussed, give rise to any equitable right in the Bank to freeze US International’s account. Nor did it raise any equitable duty to make further inquiry. How then can the position be said to have altered on the morning of

10 December when Mr Lithgow received Mr Singh’s fax? At that time no High Court order had yet been served, no further information had been received from the liquidator or his solicitor, and Mr Singh was now formally demanding access to the funds. In my view there was no basis at that time upon which a

reasonable banker should have known it might be, let alone was dishonest to meet Mr Singh’s demand. In substance there had been no change from the time of the earlier fax. There was therefore no equitable right in the Bank to deny US International access to its funds. Nor was there any equitable duty to make further inquiry which could have justified denying access in the interim. The Bank’s failure to observe its duty at law to its customer cannot in these circumstances be excused in equity by any suggestion that observance of that duty would have constituted dishonest assistance to US International in a breach of trust.

[19] With respect I consider Rodney Hansen J misdirected himself when he gave an affirmative answer to the question whether Mr Lithgow had acted as a reasonable and honest banker would have done in all the circumstances. The issue was not whether Mr Lithgow had acted reasonably and honestly. Rather it was whether it would have been dishonest of him to have allowed US International access to its funds. The one question is not the obverse of the other. I recognise that the Judge did express the matter correctly in his concluding paragraph but his reasoning was clearly influenced by his earlier formulation. As I have endeavoured to demonstrate, there is no basis upon which to allow US International access to its funds could have appeared dishonest to a reasonable banker. Hence the Bank’s breach of its prima facie duty at law to meet its customer’s demand was not in the circumstances justified on any equitable basis associated with concern about dishonestly assisting in a breach of trust.

[20] The Bank should have allowed US International access to its funds immediately it was requested to do so on the morning of 10 December, before it became aware that an order was in the process of being sought in the High Court, and before it was informed a little later that such order had been made. How the funds would have been drawn had the Bank observed its contractual obligations, ie. whether by cheque, electronic transfer or otherwise, may well be relevant to the issue of loss. We do not need to examine at this stage the effect of a freezing order on a cheque which has been drawn before the order was made or served but which is then later presented for payment. Similar issues with regard to other means of drawing the funds must also be left to the next stage of the inquiry.

[21] For these reasons I consider the appeal should be allowed. The Judge’s conclusion that the Bank was excused from acting on US International’s demand by its obligation not dishonestly to assist in a breach of trust and his consequential determination that US International’s claim failed must be set aside. In lieu, I would make a declaration that the Bank acted in breach of its contract with US International when, if not earlier, it received Mr Singh’s fax at 9.29am on 10 December, and did not immediately allow its customer access to its funds. Whether and, if so, to what extent the Bank’s breach of contract occasioned loss to US International is a matter which must now be determined by the High Court.

[22] The Court being unanimous, the appeal is allowed on the basis set out in the preceding paragraph. The respondent must pay the appellant’s costs in this Court which we fix at $6000.00 plus disbursements including counsel’s reasonable travel and accommodation expenses, if any, to be fixed if necessary by the Registrar. Costs in the High Court are to be determined when appropriate by that Court in the light of the result of the appeal.

[23] This appeal is concerned with the duty of a banker faced with a customer’s demand for payment of an account in credit when the bank becomes aware that payment might constitute or facilitate a breach of trust in relation to a third party.

[24] The appellant had two bank accounts with the defendant. One, termed “Balmoral Supermarket” was opened on 24 October 1997. Over the next few months its balance ranged from about $5,000 in credit to about $8,300 overdrawn. The other account, “US International” was opened on 21 November 1997 with a deposit of $75,000. Within ten days that account was overdrawn but then went into credit.

[25] On 28 November the appellant’s sole director, Mr Inderjit Singh, caused the appellant to purchase with funds from the US International account, a bank cheque for $15,073.98 payable to “High Court”. He went to the High Court on that day intending to hand the cheque to a barrister who was appearing for a company, Pakistan Emporium Ltd, which was facing liquidation. Mr Singh told the barrister he was prepared to offer the cheque for the benefit of creditors of Pakistan Emporium Ltd if that would stave off liquidation. Counsel informed the Court that he held a bank cheque which could be used for paying creditors but an order for liquidation was nevertheless made.

[26] On 2 December 1997 Mr Singh again went to the High Court in connection with an application for an order staying the liquidation. He handed the bank cheque to counsel then appearing for Pakistan Emporium, who informed the Court that the bank cheque was still available and could be used to pay creditors; but the application for stay was dismissed.

[27] The barrister returned the cheque to Mr Singh who resold it to the respondent at face value on 3 December 1997. By the end of 3 December the US International account was $17,905.55 in credit and the Balmoral Supermarket account was

[28] Also on 3 December the Court appointed liquidator of Balmoral Supermarket, Mr Bryan Williams, telephoned the manager of the respondent’s Newmarket branch, Mr Lithgow. Mr Williams informed Mr Lithgow of his appointment as liquidator.

[29] At about 2.24 p.m. on 3 December Mr Lithgow received by fax a letter from the liquidator’s solicitors, McVeagh Fleming, stating:

We act for Mr Bryan Williams who was on Friday 28 November 1997 appointed liquidator of Pakistan Emporium Limited.

During several High Court hearings Mr Khan of the company has represented that the company held a bank cheque of $15,073.98 drawn on account number 851045 060596 0998907 03. We understand that the bank

Urgent application will be made to the High Court to secure those funds and we formally ask that those funds be frozen by the Bank in the interim.

[30] Mr Lithgow telephoned McVeagh Fleming to discuss the matter and was told that the liquidator wished to freeze the amount of $15,073.98 because the funds belonged to Pakistan Emporium. He then tried unsuccessfully to communicate with Mr Singh by telephone. He decided to freeze the funds represented by the bank cheque, being fortified in his decision by advice from the bank’s legal department and because the liquidator’s solicitor had told him that a Court order was being sought. On 4 and 5 December he made further unsuccessful attempts to speak with Mr Singh by telephone.

[31] It seems that other officers of the bank thought that the accounts had been entirely frozen. Thus, when Mr Singh’s nephew tried, on Friday 5 December, to bank cash and cheques into the appellant’s account, he was told that the accounts were frozen. The following Monday, 8 December, Mr Singh went to the Balmoral branch where he attempted to deposit cheques and to withdraw $200. A teller informed him the company’s account had been frozen and said that Mr Singh would have to speak with Mr Lithgow. Mr Singh tried to telephone Mr Lithgow from that branch but could not make contact. He tried again to telephone the next day but was told that Mr Lithgow was not available. He then went in person to the Newmarket branch where he met Mr Lithgow to discuss the position. Mr Lithgow showed Mr Singh the letter from McVeagh Fleming. Mr Singh disputed the matter but despite his remonstrations the bank would not allow funds to be drawn in relation to the disputed sum. Later that day Mr Singh allegedly received advice by fax from India that if he did not, by the following day, pay $10,000 in respect of an alleged purchase of land in India, he would forfeit two million rupees deposit on that transaction. The terms of the fax are:

I refer my talk with you over the phone today about more New Zealand ten thousand dollars need to be paid according to the agreement by 12 of December 1997. If payment is not received by urgent T.T on this Friday, you would loss entire 2 million Indian rupees deposit already been paid.

Thus deal would be cancel and I should not be hold responsible for it. Please advice me urgently about the payment an fax me copy of the T.T along with bank detail to I can contact bank in New Delhi. (sic)

[32] Mr Singh forwarded to Mr Lithgow the advice from India under cover of a fax in the following terms:

	9.12.97 URGENT ATT: MR CHRIS LIGTHOW THE NATIONAL BANK NEW MARKET BRANCH AUCKLAND I refer my meeting with you to day and shocked to know that you have
	frozen my company account on the instruction of McVeagh Fleming solicitor, despite my explanation to you that my company has nothing to do with Pakistan Emporium Ltd liquidation.
	McVeagh Fleming and you have no legal right to froze my company account. You are well aware that large amount of funds were deposited by me. Therefore, your action to act on solicitor letter was absolutely wrong. I will make complaint against McVeagh Fleming to the Auckland District Law Society about their unlawful action.
	Please find here with letter I received from India. If payment is not sent by tomorrow I would loss my deposit and business deal in India. Your bank would be responsible for my all damages.
	Kindly fax me your final decision on my home fax no 6270465. You also requested that no information should be given about my company to any person. (sic)
[33]	Mr Lithgow received Mr Singh’s fax at 9.29 a.m. on 10 December.	He

decided it would not be proper to allow the funds to be withdrawn before he had checked whether the High Court had made a preservation order and he sent a fax to Mr Singh to advise him of this decision. As it happened, an application for such an order was made by the liquidator’s solicitors to the High Court at 10.27 a.m. that day. By late morning an order had been made. Mr Lithgow was informed to that effect at about midday and the bank paid the amount of the disputed funds into Court in accordance with the terms of the order. Some months later the order was discharged by consent.

[34] The appellant says that because the bank did not pay on demand it lost about

$731,000 in respect of the land contract in India. Because the hearing in the High Court, in respect of which this appeal is brought, was confined to the question of liability, issues as to damages have been reserved. At this stage the issue is whether the bank had a lawful excuse for not meeting its customer’s demand for payment. There was an argument in the High Court whether demand had been made but Rodney Hansen J held there had been and that finding is not subject to a cross appeal. So the issue on the appeal is concise.

[35] The Judge held that as a general rule a banker is not concerned to inquire into the sources from which its customers derive their money or to pay heed to the claims of third parties to such funds; but that general proposition is qualified by obligations arising out of the bank’s potential liability as a constructive trustee. The Judge held that where a bank knows or has reason to believe that a third party has an entitlement to funds held in a customer’s account, its obligation as a potential constructive trustee for the funds entitles it to refuse to comply with its customer’s instruction: Westpac Banking Corporation v Savin [1985] 2 NZLR 41; Renshaw v Post Office Bank Ltd (1992) 4 NZBLC 102,846. The modification to a bank’s duties to a customer derives from its obligation not to dishonestly assist a breach of trust.

[36] The Judge examined the principle of dishonest assistance in the following terms:

[33] The scope of the duty not to provide dishonest assistance has been authoritatively determined by the Privy Council in Royal Brunei Airlines SdnBhd v Tan [1995] UKPC 4; [1995] 3 All ER 97, [1995] 2 AC 378 (PC). It is now established that to hold a bank liable as constructive trustee for dishonest assistance, the following elements must be established:

[1] The existence of a trust. It is sufficient for this purpose that there be a fiduciary relationship between the trustee and the property of another person.

[d] Dishonesty on the part of the bank. Dishonesty for this purpose involves both an objective and subjective element. The standard is that of reasonable and honest people but the accessory must act with “conscious impropriety”: Royal Brunei at pp 105-6,

[37] The respondent claimed that because it was put on notice of the existence of a trust for the funds in issue, to have made those funds available to the appellant if a trust should be shown to exist would have resulted in dishonestly assisting a breach of trust. The Judge identified the issue in terms of whether the bank, having received notice of a claim by the liquidator, was entitled to refuse the appellant’s demand in pursuance of its obligation not to act dishonestly. In considering that question, all the circumstances known to the bank should be considered including the nature and importance of the proposed transaction, the nature and importance of the bank’s role, the ordinary course of business, the degree of doubt, the alternative courses open to it and the consequences for affected parties. The circumstances will dictate which one or more of possible courses should be taken by an honest person; Royal Brunei Airlines v Tan [1995] UKPC 4; [1995] 2 AC 378 at 390.

[41] In my view, the issue is not whether the Bank would have been liable had it released the funds and the liquidator’s claim later been substantiated. It is whether, on the information available to him, Mr Lithgow acted as an honest person would in the circumstances. That, it seems to me, is the extent to which the contractual duty to comply with a customer’s instruction is modified by the general duty not to provide dishonest assistance. The correlative obligation is to act honestly when in receipt of knowledge of a trust which would or may be breached by acting in accordance with the customer’s instructions.

[39] The Judge was satisfied that the bank acted in accordance with its obligation of honesty in freezing the funds in the first place and declining to release them when demand was later made. He held that the bank manager was bound to treat seriously a notice of claim from a Court appointed liquidator who was acting on legal advice. There was sufficient in the solicitor’s letter to substantiate the liquidator’s position and the advice that steps would be taken to secure the funds by Court order would have provided the bank with further justification to freeze the funds. That showed the liquidator had confidence in the claim. It required only interim action to be taken

by the bank and provided a means for any competing claims to be determined by the Court. The Judge held that the bank’s knowledge that the funds had been returned to the account from whence they came did not provide a sufficient basis for it to disregard the liquidator’s claim. The solicitor’s letter said the cheque had been held out as the property of Pakistan Emporium and the fact that the funds came from the plaintiff’s bank account in the first place does not contradict that claim. Pakistan Emporium could have had a pre-existing interest in the funds or could have acquired an interest as a result of actions on behalf of the appellant following their withdrawal.

[40] The Judge found that demand for the funds to be released was made at the earliest in the course of the meeting on 9 December, although he was inclined to think that no unequivocal demand was made until the following day. In his view the bank manager acted honestly and reasonably in declining to release the funds until he knew the outcome of the liquidator’s application for a preservation order. Accordingly the claim failed.

[41] Mr O’Callahan submitted that the implied contractual duty of a banker to meet a demand is fundamental to the relationship of banker and customer but such duty is, however, modified by the principle that a banker must not dishonestly assist a breach of trust. In his submission the question which a bank ought to ask when a demand is made, is whether it would be dishonest to meet the demand and if the answer is no then the demand ought be met. The Judge rejected that proposition and preferred to ask whether the bank manager had acted as an honest person would in the circumstances. Counsel submitted that was the wrong test and that dishonesty or lack of it in meeting a demand is the only relevant question. To excuse a failure to meet a demand on the basis that a bank acted honestly, even though meeting the demand would not have been dishonest, does not adequately reflect the nature and importance of the banker’s duty to pay on demand.

[42] Applying what counsel submitted was the correct test, he argued that there was no factual basis for the liquidator’s claim other than one known by the bank to

be erroneous. In the context of a claim to ownership of funds by a third party, in order for there to be any question of dishonesty by the bank, the bank would have to be on notice of facts which, if proved, would establish that third party’s claim to the fund. Counsel emphasised the distinction between facts and mere assertions. Although the solicitor’s letter asserted that “those funds belong to the company (in liquidation)” and the letter might convey an impression that funds belonging to the company were drawn on to obtain the cheque and had subsequently been diverted to the appellant, the bank nevertheless knew that the cheque had been obtained using funds which stood to the account of the appellant and had been returned by the appellant to that account. The bank also knew that the cheque was made out to the “High Court” and could therefore be paid only to that payee unless repurchased by the bank. No facts were alleged which might lead the bank to a view that the funds were those of the company in liquidation.

[43] Even if the circumstances were sufficient to put the bank on inquiry it nevertheless made no inquiry. Its only communications to the liquidator were a telephone call on 3 December 1997 to clarify the identity of the company in liquidation; a letter to the liquidator’s solicitors on 4 December confirming that it had stopped the appellant’s accounts and that $15,073.98 representing the bank cheque had been lodged to the appellant’s account; and a telephone call to the liquidator’s solicitors on 10 December to establish whether a preservation order had yet been obtained.

[44] As to communications with the appellant, there seem to have been a number of attempts to telephone Mr Singh to advise him of the position, followed by the meeting of 9 December, but no attempt was made by the bank to inquire further of him about the matter.

[45] Concerning the features which persuaded the Judge, counsel submitted that there is nothing about an assertion by a liquidator in particular that warrants special attention. The only relevance of the standing of a person asserting a claim could be whether particular factual allegations ought be treated as likely to be true. On this basis the bank would have been justified in accepting the liquidator’s word that Mr Khan had “represented that the company held a bank cheque” but nothing more

than that. There was nothing in the letter which suggested that there might be other facts upon which the liquidator relied. Nor was there any significance in the liquidator’s stated intention to apply to the Court. Not the confidence of an applicant but the merits of a claim should be determinative. There was no suggestion that the appellant would be given notice of such an application so that it might contest it.

[46] Turning to the other circumstances which could bear on the bank’s obligation, counsel relied on the nature and importance of the proposed transaction to the appellant; the degree of doubt, on a view most favourable to the liquidator, as to whether the claim could be sustained; the limited disadvantage to the liquidator if the demand had been met, such being a mere loss of money without the same consequences as would attend a failure to meet the demand.

[47] In any event, by 10 December, no application to the Court having been made even though the same was indicated a week previously, the bank should have honoured its primary obligation to its customer and paid the demand.

[48] Mr Chan submitted that the issues include knowing receipt as well as dishonest assistance even though the Judge found the former principle not to apply because, in the Judge’s words, a claim of knowing receipt: “...is confined to cases where the recipient has received the property for his own use and benefit;”.

[49] Counsel submitted that the principle of knowing receipt could apply because the appellant exchanged the bank cheque for funds which it deposited into its cheque account, that not being overdrawn. According to ordinary principles of banking, the appellant lent those funds to the bank and they were mixed together with the bank’s other funds. The bank merely had an obligation to repay the amount of those funds, not the money in specie, on demand. In those circumstances, he submitted, it is not entirely certain whether the bank would have held the funds as a recipient, relevant for the purpose of knowing receipt, or in a lesser capacity. He pointed out that this Court had remarked, in Westpac Banking Corp v MM Kembla New Zealand Ltd [2000] NZCA 319; [2001] 2 NZLR 298 at 316-317, that this area of the law is marked by present

confusion. Given that uncertainty, in counsel’s submission, as a matter of practicality the principle for determining a bank’s right to delay payment to its customer should be the same regardless of whether the particular case involves potential dishonest assistance or knowing receipt. Ultimately the issue is whether, applying the correct legal principle to the facts of the case, the bank was justified in delaying payment to the appellant until the bank knew the outcome of the liquidator’s application for a preservation order.

[50] Counsel submitted that the Judge correctly held that where a bank knows or has reason to believe that a third party has an entitlement to funds held in a customer’s account, the bank’s obligations as a potential constructive trustee for the funds entitles it to refuse to comply with its customer’s instruction; Westpac Banking Corporation v Savin; Renshaw v Post Office Bank Ltd. He submitted that a bank’s obligation to act on a customer’s instruction is not absolute, citing the following passages from Baden, Delvaux and Lecuit v Société General pour Favoriser le Développement du Commerce et de I’Industrie en France SA [1983] BCLC 325 at

[A bank is] entitled to suspend payment pending justifiable investigation. If an inquiry is made and answered, the only relevant question that arises is whether or not that answer would put the honest and reasonable banker on further inquiry. If it does then the bank must continue to refuse to obey its customer’s instructions.

...[T]herefore a bank when put on inquiry remains under a duty not to comply with its customer’s instructions either if it acquires knowledge of the intended misapplication of moneys which it holds or whilst it is pursuing its inquiries. It ceases to be under such duty when it receives information, whether in answer to its inquiries or from another source, that the honest and reasonable banker would accept without further inquiry.

[51] In counsel’s submission the authorities establish a principle which he articulated in the following terms:

A bank, when put on inquiry, remains under a duty not to comply with its customer’s instructions if the bank acquires knowledge of the intended misapplication of monies which it holds, or whilst it is pursuing its inquiries. The bank only ceases to be under such duty when it receives information that the honest and reasonable banker would accept without further inquiry.

[52] Counsel submitted that Rodney Hansen J applied that test in substance and reached a correct result.

[53] Given that the bank’s general obligation to pay the appellant did not arise until demand, and that it could not have paid out after the preservation order was made, the period of time requiring consideration of the banker’s duty in the circumstances was very short. The Judge had found that demand for the funds to be released was made at the earliest in the course of the meeting on 9 December, although he was inclined to think that no unequivocal demand was made until the following day. On that basis, submitted Mr Chan, the relevant period is from

9.29 a.m. on 10 December until approximately mid-day when the preservation order was made. Service of the order, which occurred later in the afternoon of

10 December, was not necessary before an obligation was imposed because the bank had sufficient notice of the order when the liquidator’s solicitors told the bank manager by telephone that the Court had made such an order.

Would an honest and reasonable banker have delayed payment for about two and a half hours in the morning of 10 December, in order to find out whether the Court had made the preservation order?

[55] In counsel’s submission the only possible answer to that question is in the affirmative. The bank had been informed that an application to support the liquidator’s claim was being made to the Court. The appellant had little standing with the bank as the history of dealings, reference to which has been made in paragraph [24] of this judgment, demonstrates.

[56] Moreover, Mr Singh’s fax to the bank indicated that he wanted funds transferred on 10 December and that request could still have been complied with after making inquiries. This was not a case of a mere private individual or company asserting a claim but a liquidator appointed by the High Court in which capacity he was an officer of the Court exercising statutory powers and performing statutory duties.

[57] Counsel submitted that Mr Singh had dealt with the cheque in an unusual way, offering it to Pakistan Emporium creditors to help stave off liquidation but receiving it back when liquidation occurred and then selling it back to the bank. The bank manager’s unchallenged evidence was that it was quite rare in his experience for a customer to buy a bank cheque payable to someone else and then for the customer to redeposit it back into its own account. On its face, the events were irregular and Mr Singh needed to present a good explanation but all he did was assert that the funds belonged to US International and that “my company has nothing to do with Pakistan Emporium Ltd liquidation.” If that were the case, it raises a question why the cheque was offered to the High Court for the benefit of Pakistan Emporium’s creditors. The High Court itself considered there were sufficient circumstances to preserve the funds and the appellant itself put in motion the events that caused the bank to withhold the funds. In all the circumstances the Judge was right to hold that the bank acted honestly and reasonably in declining to release the funds while it checked whether the Court had made a preservation order. That overrode the bank’s usual obligation to pay on the customer’s demand.

[58] It is, rightly, common ground that a banker’s duty to meet its customer’s demand is modified by the equitable principle of dishonest assistance, or accessory liability, in respect of a breach of trust. Where the parties differ is with regard to the articulation of that modifying principle. Mr O’Callahan submitted that the modifying principle is that a banker must not dishonestly assist a breach of trust. Mr Chan submitted that a bank has a duty not to comply with its customer’s instructions if it acquires knowledge of an intended misapplication of monies which it holds or whilst it is pursuing its inquiries.

[59] Mr Chan’s formulation is derived from authorities which contemplate accessory liability where there has been constructive knowledge of a breach of trust in that the accessory had knowledge of circumstances which would indicate the facts to an honest and reasonable person, or had knowledge obtainable from inquiries which an honest and reasonable person would feel obliged to make, or had been put

on inquiry as a result of his or her knowledge of suspicious circumstances. Those authorities include Westpac Banking Corporation v Savin [1985] 2 NZLR 41; Renshaw v Post Office Bank Ltd; and Baden, Delvaux and Lecuit v Société General pour Favoriser le Développement du Commerce et de I’Industrie en France SA.

[60] But the Privy Council in Royal Brunei Airlines and the House of Lords in Twinsectra have determined that the necessary state of mind for accessory liability is dishonesty and that knowledge is better avoided as a defining ingredient of the principle. Lord Nichols of Birkenhead, who made such an observation in Royal Brunei Airlines at 392 G, had stated earlier at 391 C:

To inquire, in such cases, whether a person dishonestly assisted in what is later held to be a breach of trust is to ask a meaningful question, which is capable of being given a meaningful answer. This is not always so if the question is posed in terms of “knowingly” assisted. Framing the question in the latter form all too often leads one into tortuous convolutions about the “sort” of knowledge required, when the truth is that “knowingly” is inapt as a criterion when applied to the gradually darkening spectrum where the differences are of degree and not kind.

[61] Lord Nichols of Birkenhead examined the nature of dishonesty in the following terms:

Before considering this issue further it will be helpful to define the terms being used by looking more closely at what dishonesty means in this context. Whatever may be the position in some criminal or other contexts (see, for instance, Reg v Ghosh [1982] EWCA Crim 2; [1982] QB 1053), in the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another’s property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.

In most situations there is little difficulty in identifying how an honest person would behave. Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others’ property. Unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless.

[62] It is the case that in Twinsectra the concept of dishonesty was discussed in terms of actual knowledge by a defendant to a suit for accessory liability that the impugned conduct was dishonest by the ordinary standards of reasonable and honest people. See, for example, Lord Hoffman at 383 and Lord Hutton at 384. With respect, I have reservations about the practical implications of and implementation of a test refined in that way.

[63] In the present case, Rodney Hansen J has followed the recent directions of the Privy Council and House of Lords in holding that the bank had an obligation not to act dishonestly and in identifying the issue in terms of whether the bank, having received notice of the liquidator’s claim, was entitled to refuse the appellant’s demand in pursuance of the obligation not to act dishonestly. Just as the Privy Council indicated that the issue of dishonesty will be considered in the circumstances of the particular case, so Rodney Hansen J held that all the circumstances known to the bank should be considered, including the nature and importance of the proposed transaction, the nature and importance of the bank’s role, the ordinary course of business, the degree of doubt, the alternative courses open to the bank and the consequences for affected parties.

[64] Mr O’Callahan would support the Judge’s conclusions to that effect but he took issue with the Judge’s translating a modifying duty not to act dishonestly into a modifying duty to act honestly. That the Judge did so appears from paragraph [41] of his judgment reproduced above at paragraph [38]. Rodney Hansen J then subsequently found that “Mr Lithgow acted honestly and reasonably in declining to release the funds until he knew the outcome of the liquidator’s application for a preservation order”.

[65] It is the case that the Judge concluded “that the bank was excused from acting on the plaintiff’s demand by its obligation not to dishonestly assist in a breach of trust.” But the Judge’s reasoning was, it seems, in terms of the principles set out in paragraph [38] of this judgment.

[66] Given my observations about the evolution of a test with which Westpac Banking Corporation v Savin and Renshaw v Post Office Bank Ltd are in some relevant respects inconsistent, the test formulated by Mr Chan in the course of argument, and expressed at paragraph [51] above, cannot be accepted as correct. The principle in question is that a bank is entitled not to meet its customer’s demand if it would be dishonest to do so. Any lesser test would seriously undermine the elemental duty of a bank to pay upon its customer’s demand and could encourage timidity and uncertainty in the banking industry.

[67] It is not possible to describe the requisite test with greater specificity than by reference to all the circumstances. In a banking context these include the weight to be given to the fundamental obligation to meet the customer’s demand compared with the weight which ought sensibly be given to the possibility of a third party’s entitlement. And of course, the nature and extent of the bank’s actual knowledge will be relevant. Absent wilful blindness, facts unknown to a bank could not render dishonest, conduct which otherwise would not be.

[68] Having had the advantage of reading in draft the judgment of Tipping J, I respectfully question whether the principle that a banker is required to pay upon its customer’s demand unless it would be dishonest to do so, should be complicated by a consideration of not only whether conduct is or would be dishonest but also whether a reasonable banker would know that. I am diffident about the implication that although equity may regard certain conduct as dishonest, generally, it will not do so in the case of a bank unless a reasonable banker would also recognise the dishonest nature of the conduct. I do not understand that to be the law. Plainly, however, conduct by a banker which was unreasonable having regard to banking standards might in some circumstances suggest dishonesty.

[69] The nature of the customer’s dealings may be relevant and so also the practices of the business in which the customer may deal. An honest person would not deliberately ignore signs of a possible breach of trust by a customer. And as Lord Nichols observed in Royal Brunei Airlines, an honest person does not deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless.

[70] In this case, the issue of dishonesty must be examined on a hypothesis because the equitable principle is invoked in terms of a defence of observance rather than as a cause of action for breach. This means that the appropriate issue is whether in all the circumstances it would have been dishonest for the respondent to meet the appellant’s demand.

[71] In my view the relevant circumstances are as follows. The appellant was a relatively new customer of the bank and the operation of its account had unusual features. The account was opened on 21 November 1997 with a deposit of $75,000, and within the fortnight between then and the freezing of the account it had gone first into overdraft and then into a credit of just under $18,000. Funds had been withdrawn from it in order to purchase a bank cheque made payable to the High Court, which was then handed to counsel appearing for Pakistan Emporium in defence of the liquidation petition with an indication of a willingness to pay creditors of that company. The advice given to the bank by the liquidator and the liquidator’s solicitors on 3 December was correct in that respect. The bank cheque was then resold to the bank. Mr Lithgow received advice of the Court appointment of a liquidator and an intention to apply urgently to the Court for an order in respect of the funds. He then tried, albeit unsuccessfully, to contact Mr Singh. On

9 December, when he discussed the matter with Mr Singh, the latter insisted that US International had nothing to do with Pakistan Emporium even though the information available to Mr Lithgow indicated a sufficient connection for the appellant at least to offer funds, in the formal setting of High Court proceedings, for the benefit of the company with which it was allegedly unconnected. On Friday

10 December Mr Lithgow received a document purporting to be a fax addressed, not to the appellant but to Mr Singh, saying that he would lose two million rupees

deposit (according to the appellant’s statement of claim such sum represented about

[72] Apart from certain idiosyncratic similarities of expression in the Indian sourced document and Mr Singh’s covering letter, the proposition that a deposit equivalent to $250,000 would be lost if a single payment of $10,000 was not made seems unlikely and all the more so when it is appreciated that the disputed account would have had insufficient funds in it for $10,000 to be paid if the bank cheque tendered to the High Court had been accepted.

[73] But would it have been dishonest for the respondent to have met the demand made, for the appellant, by Mr Singh? In context, the issue of dishonesty has to relate to the possibility of the appellant not being entitled to the money in the account and intending nonetheless to withdraw it. I am bound to say that there was scant evidence, on 3 December, for Mr Lithgow to believe that funds which he knew had originated from the appellant’s account before any representation to the High Court and which had been effectively returned to the appellant’s account, could somehow have been the funds of Pakistan Emporium. There was no additional evidence even a week later. The bank had received the fax from the liquidator’s solicitors but that amounted to little more than an assertion of ownership and advice that a representation had been made to the High Court, not by Mr Singh or anyone who could speak for the appellant but by a “Mr Khan of the company” that is, Pakistan Emporium. By Friday 10 December Mr Lithgow had heard nothing more in relation to the “urgent application” and the week of silence detracted from any weight due to the assertion of ownership. Any reservations there may have been, objectively, about the information given by Mr Singh concerning his need for payment, could not sensibly affect the question of his company’s entitlement to the funds in its own account. Whilst the cogency of the reasons may be relevant to the issue of damages, they have no real relevance to the question of the bank’s obligation to pay.

[74] I agree with Mr O’Callahan’s submission that Rodney Hansen J effectively translated the duty to pay upon the customer’s demand unless it would be dishonest

to do so, into an excuse, for not discharging that duty, of honest and reasonable conduct.

[75] In this case I differ from the Judge’s conclusion that the bank did not breach its contract with the appellant. I do not see why it would have been dishonest for the bank to pay in the circumstances existing at the time of the demand. These amounted to a barely supported assertion by the liquidator’s solicitor and, notwithstanding advice that an urgent application would be made, nothing had happened for a week. In my view, there was no equitable impediment to the bank’s honouring its elemental duty to its customer.

[76] I also would allow the appeal and hold that the respondent breached its contract with the appellant by failing to pay upon its customer’s demand at least by about 9.30 a.m. on 10 December 1997. In my view the bank had also been in breach in refusing to pay the demand for $200 made on 8 December.

[77] I have had the opportunity of reading in draft the judgments of Tipping J and Anderson J. I too consider the appeal should be allowed and I am in substantial agreement with the reasons set out in both judgments.

[78] It is not necessary for the purposes of this appeal to decide on all the nuances of the test for dishonest assistance. It is clear that there are subjective and objective elements to the test. The subjective elements include the state of knowledge of the third party but also his or her personal attributes, such as experience and intelligence

– see the comments of Lord Nicholls in Royal Brunei Airlines v Tan [1995] 2 AC

378, 391B. Whether there is dishonesty is, however, judged objectively. It appears to me that Tipping J’s “reasonable banker” formulation may be able to be seen as merely reinforcing this objective element, while recognising that the subjective elements include a third party’s experience as well as the state of his or her knowledge.

[79] I have some reservations as to whether the final subjective element, as accepted by the majority in Twinsectra v Yardley [2002] AC 164, is necessary or appropriate for New Zealand, but I agree that the issue is better decided in circumstances where it may affect the result of the case.

Court of Appeal of New Zealand

US International Marketing Ltd v National Bank of NZ Ltd [2003] NZCA 436; (2003) 10 TCLR 922; [2004] 1 NZLR 589; [2003] BCL 1069; (2004) 8 NZBLC 101,514 (28 October 2003)