Banking tut types of banker-customer relationship


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  • TheD1 owned all the shares in the D2 which in turn owned all the shares of theplaintiff company, Belmont. The third to sixth defendants were the shareholders of another company,Maximum. The D7 and D8 were directors of Belmont. D3 to D6wished to purchase Belmont and on 3 October 1963 they agreed to sell their shares in Maximum to Belmontfor £500,000 and to purchase the share capital of Belmont from the D2 for £489,000. At aboard meeting of Belmont on 11 October at which the third to sixth defendants were also present, theseventh and eighth defendants, being a majority of Belmont's directors present, resolved that Belmont shouldimplement the agreement of 3 October and the transaction was completed later that day. SubsequentlyBelmont went into liquidation and its receiver commenced an action on behalf of Belmont against all thedefendants alleging that the value of Maximum's shares was only £60,000 and not £500,000, that theprice of £500,000 for Maximum had been arrived at to enable the third to sixth defendants to purchaseBelmont's share capital with money provided by Belmont, in contravention of s 54(1)a of the Companies Act1948, (iii) that the defendants were 'aware or ought to have been aware' that the third to sixth defendantswere unable to purchase Belmont's shares unless they obtained financial assistance from Belmont by itspurchase of Maximum's shares at an inflated price, and, in the statement of claim,(iv) that the defendantshad wrongfully conspired together to carry into effect the sale and purchase of Belmont's share capital incontravention of s 54(1) of the 1948 Act. Belmont claimed damages for conspiracy.
  • The claimants (RBA) appointed a company (BLT) to act as their travel agent for the sale of passenger and cargo transportation. Under the terms of their agreement, BLT was required to account to the airline for all amounts received from the sales. BLT was afforded a 30 day credit period before it was required to pay the airline.The agreement expressly provided that all amount received from the sales of tickets were to be held by BLT on trust for the airline. The money received by BLT was not paid into a separate account but credited to BLT’s current account, to meet the company’s expenditure.This was done to the knowledge and with the assistance of the defendant, who was the managing director of BLT. BLT defaulted its payment to the airline, the claimants sought to make the defendant personally liable on the basis that he assisted the breach of trust.
  • Banking tut types of banker-customer relationship

    2. 2. QUESTIONBanks have been held liable as constructive trustees for having given knowing assistance to the trustees in misusing trust funds. The lawin this area has developed through case law and has become a strong principle in banking law.Elaborate the principles of constructive trustees which involve banks and state your opinion on the application of these principles.
    3. 3. INTRODUCTION In the constructive trustee and beneficiary relationship, the bank is liable as a constructive trustee if it has express notice about a person’s breach of trust and the bank is involved in the said breach. The trust exists without any formality as long as there is a fiduciary relationship between the constructive trustee and the beneficiary’s property. Although no formalities are required to create a constructive trust, there must exist specific trust property.
    4. 4. LIABILITY OF CONSTRUCTIVE TRUSTEEPer Lord Selborne : “Strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal power, transactions perhaps of which a Court of Equity may disapprove, unless (i) those agents receive and become chargeable with some part of the trust property, or (ii) unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees..”The bench of Barnes v Addy formulated 2 types of liability as a constructivetrustee :(a) Receiving/Operating trust property with knowledge (Knowing receipt)(b) Knowingly assisting a dishonest trustee (Knowing/Dishonest assistance)
    5. 5. KNOWING RECEIPT VS KNOWING ASSISTANCE Knowing receipt Knowing assistanceMental State A lack of probity must be Dishonesty, morally reprehensible present. behaviour or lack of probity. Liability Only liable to account for the Liability extends to all losses to the sum received or handled for trust funds due to the trustee’s breach of trust. dishonesty, irrespective whether the trust funds fall into the bank’s hands or not
    6. 6. KNOWING ASSISTANCE (DISHONEST ASSISTANCE)Elements of knowing assistance :(a) There must have been a trust(b) There must have been a misfeasance or breach of trust(c) There must have been assistance rendered by the third party in the breach of trust(d) The accessory must have been dishonest Rowlandson v National Westminister Bank The court held that there was fiduciary relationship between Mrs. M and the bank when the account 608 was opened by the bank. It was clearly a trust account, and with the knowledge of the nature of the account and its history, the bank should have questioned or prevented the withdrawal of A. Thus, the bank was liable to the plaintiffs.
    7. 7. • Depart from the requirement that the BOT must be a dishonest and fraudulent BOT by the trustee for the accessory to be held liable for knowing assistance.• Reasonable banker test was formulated“ the touch stone was whether the third party had knowledge ofcircumstances which would indicate to „an honest, reasonable man‟ that thebreach in question was being committed or would put him on inquiry.
    8. 8. Decision of Selangor was later then rejected by the court of this case.“If and so far as Ungoed-Thomas J intended, as I think he did, to say that it isnot necessary that the breach of trust in respect of which it is sought to makethe defendant liable as a constructive trustee should be fraudulent or dishonest,I respectfully cannot accept that view.”Goff LJ was of the opinion that to depart from this rule would introduce anundesirable degree of uncertainty over what degree of unethical conductwould suffice if dishonesty were not to be the criterion.
    9. 9. BADEN, DELVAUX & LECUIT V SOCIETE GENERALLevel of knowledge has been controversial and what is the level of knowledgerequired to satisfy the claim?1. Actual knowledge2. Deliberate ignorance/willifully shutting eyes to the obvious3. Wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make4. Knowledge of circumstances which would indicate that there has been a breach to an honest and reasonable person5. Knowledge of circumstances which would put an honest and reasonable person on inquiry
    10. 10. • The Court of Appeal held in the favour of defendant on the ground that accessory liability was dependent on the breach of trust being dishonest, whereas the admitted BOT was only the bad result of management and not dishonesty.• However, Privy Council took the opposite view of the law, where it was held that liability under the accessory category of constructive trusteeship required a BOT or other fiduciary duty, but it did not have to be a dishonest one.• Lord Nicholls preferred to regard the dishonesty of the accessory, not of the trustee, as the touchstone of liability.
    11. 11. LORD NICHOLLS AND WHY?A dishonest solicitor persuades a trustee to apply trust property in a way the trusteehonestly believes is permissible but which the solicitor knows full well is a clear breach oftrust. The solicitor deliberately conceals this from the trustee. In consequence, thebeneficiaries suffer a substantial loss. It cannot be right that in such a case the accessoryliability principle would be inapplicable because of the innocence of the trustee.A trustee is proposing to make a payment out of the trust fund to a particular person. Hehonestly believes he is authorized to do so by the terms of the trust deed. He asks asolicitor to carry through the transaction. The solicitor well knows that the proposedpayment would be a plain breach of trust. He also well knows that the trustee mistakenlybelieves otherwise. Dishonestly he leaves the trustee under his misapprehension andprepares the necessary documentation. Again, if the accessory principle is not to beartificially constricted, it ought to be applicable in such a case. • Criticised the Badens Delvaux classification as “best forgotten”.
    12. 12. “DISHONESTY”Twinsectra – the assistant must realize that the conduct would be dishonest byordinary standards of honest and reasonable people. This is described as a“combined” test of subjective and objective elements.First, there has to be some conduct that the ordinary reasonable person wouldregard as dishonest (objective element). Second, the perpetrator must be awarethat what they have done is against what the ordinary reasonable personwould regard as dishonest. That is, even if the perpetrator does notsubjectively believe that what they have done is dishonest, the subjectiveelement is satisfied if they know that other people believe that what they havedone is dishonest.