Story v Advance Bank Australia Limited &

[1993] HCATrans 316

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S103 of 1993

B e t w e e n -

HELEN PATRICIA SUSAN STORY

Applicant

and

ADVANCE BANK AUSTRALIA LIMITED

First Respondent

FLEETWOOD STAR PTY LIMITED

Second Respondent

Application for special leave

to appeal

Story 1 26/10/93

MASON CJ DAWSON J

TOOHEY J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON.TUESDAY, 26 OCTOBER 1993, AT 11.20 AM

Copyright in the High Court of Australia

MR D.M.J. BENNETT, QC: If the Court pleases, I appear with

my learned friend, MS H. COONAN, for the applicant.

(instructed by Stacks)

MR A.M. GRUZMAN:  If it please the Court, I appear for the

first respondent. (instructed by Laurence &

Laurence)

MASON CJ: Yes, Mr Bennett.

MR BENNETT:  Your Honour, I hand up an outline of

submissions and a couple of other documents I may

be referring to.

The first issue arises out of fairly dramatic

provisions of the Companies Code dealing with the

same subject-matter as the Northside case, the

problems of the indoor management rule, but the

section is at page 10 and 11 of the application

book. What it does, among other things, is say

that a company can be bound by forged documents.

The problem in this case is how wide ranging the

effect of that statement is.

May I just very quickly show Your Honours the

section and how the present problem arises.

Your Honours see section 68A(l) is at page l0G, and

it says:

A person having dealings with a company -

we stress those words -

is ..... entitled to make, in relation to those

dealings, -
repeated again -

the assumptions referred to in sub-section (3)

and, in any proceedings -

a third time -

in relation to those dealings, any assertion

by the company that ..... not correct shall be

disregarded.

Jumping ahead a moment, the assumptions in

subsection (3) are basically the genuineness of
documents sealed by the company. There are some

others, but the relevant one is genuineness of a

document. Subsection (2) deals with a slightly

different situation:

Story 2 26/10/93

A person having dealings with a person

who has acquired or purports to have acquired

title to property from a company -

so it is the one step removed case.

Subsection (3) begins with the words:

The assumptions that a person is, by

virtue of sub-section (1) or (2), entitled to

make in relation to dealings with a company -

it is said a fourth time, are as follows: the words "in relation to dealings with a company"

relate back to subsection (1). The words

"acquisition" or "purported acquisition" relate

back to subsection (2), and are therefore not

relevant.

Section 68D then provides that:

Section 68A operates -

(a) to entitle a person to make the

assumptions .....

notwithstanding that ..... an officer, agent or

employee .....

(d) has forged a document that appears to

have been sealed on behalf of the company -

unless there is actual knowledge.

Now, if one were to apply all that literally,

one would have the consequence that if any employee

forges the seals and signatures, the company is

bound, and the whimsical example we give is that if

a cleaner employed by BHP goes to his bank and

says, "My employer has agreed to guarantee my

overdraft," and then produces a document with

forged signatures and seals, that would bind BHP.

Now, the reason it would not, and the modification, or let-out, in these Draconian provisions, lies in the words "a person having dealings with a

company". The section is intended to apply where

there are some dealings to which one can point.

It has been held that one transaction can

constitute dealings. That is sort of a secondary

aspect in this case.	The main concern in this case
is that there were no dealings.	The only dealing

between the company and the Bank was a purported

forged dealing. There was no discussion

whatsoever, at any time, between the company and
the Bank. There was no communication at any time

between the company and the Bank.

Story 26/10/93

What happened was: there was a husband and

wife, who are the sole directors and shareholders,
the company had no activity at the relevant time,
other than owning the matrimonial home. Later it

did, but at the time it was a dormant company which

owned nothing but the matrimonial home, and the

evidence of the Bank was that it knew that. The

evidence of the Bank also was that the principal

debtor, the husband, simply said, "I will get a

mortgage from my company", and he went away and

produced the forged document.

The Bank did deal with a solicitor, and it is common ground - well, it is not common ground, its

a finding - that the solicitor acted only for the

husband, and the Bank knew the solicitor was acting

only for the husband. So there was not a skerrick

of actual communication between the Bank and the

company. Yet, in that situation, the court applies

a section.

DAWSON J:  Why was not the husband the company in all of

this?

MR BENNETT:  Well, he was not really. He had no actual authority, and no, he was not held out. I will

just show Your Honour the way Their Honours put it

because it appears at page 75, and there are two

aspects of that page I should refer Your Honours

to. The first is the passage which, we say,

contains the clear error at M to R where the

Chief Justice says:

It should be added that, since the

subject-matter of s68A, by hypothesis,
includes dealings with purported company

agents who lack actual authority, and, by

virtue of s68D, extends to forged instruments,

the concept of having dealings with a company

must embrace, subject to the

qualifications ..... purported dealings. If the

statutory provisions only extended to cases

where the person representing the company had

actual authority then they would be largely

unnecessary.

Now, there are two problems with that, if one goes

back to the section. The first is that in the

majority of cases, of course, the dealings will be
other transactions. There may not be but, in the

majority of cases, a person having dealings with a

company has a continued course of dealings, and the

other dealings may be authorized. The second

aspect, of course, is that there is a distinction

within subsection (3) between, on the one hand,

"dealings with a company" and, on the other hand, a

"acquisition or purported acquisition" where it is

Story 4 26/10/93

referring to subsection (2). It does not refer to

"a person having dealings with a company" or

"purported dealings with a company".

So, we submit, that passage, that reasoning,

is simply wrong, with respect.

TOOHEY J: Is that crucial to your argument; that is, do you

have to overturn that paragraph in order to make

good your argument?

MR BENNETT: Well, that argument is merely the reason given

for the conclusion. It is not the ratio itself, so

the answer to Your Honour's question is no. But

the second error which appears on that page relates
to the question Your Honour Justice Dawson asked

me. If Your Honour go to page 75E, Your Honour

will see:

Mr and Mrs Story were the only directors,

and the only shareholders of the company. The

evidence showed that Mr Story was the managing

director, and that Mrs Story permitted

Mr Story de facto control of the conduct of the company's business.

The problem with that statement is that there was

no company's business. The only business was

owning the matrimonial home, and really, the

statement can only relate to later activities where

the husband was allowed to have control of

some activities, but that was all after this event.

The company was the registered

proprietor ..... and the bank's willingness to

lend money was conditional upon obtaining a

mortgage over that land.

That is certainly true, but the Bank only dealt

with the husband. It deal with the debtor, and

that no moneys were applied.

If Your Honours look at the pages of

transcript I have given Your Honours, this is

Mr Rouen, who is the solicitor for the Bank, and he

says this, at 197Q:

Q.	In fact, you say that you understand that
Mr Milne acts for the borrower?	A. Yes.
Q.	You did not say you understood he was

acting for the company? A. I did not, no.

Q. And you go on to say ..... documents are

enclosed for execution by, in effect, the

borrower? A. By your client, yes.

Story 26/10/93

Q. And the extent of your enquiry about

Fleetwood Star from Mr Milne was to request a

copy of the trust deed ..... ? A. That is so.

Q. Did you know what business Fleetwood Star carried on? A. No I did not.	I did not know
and never did.

Q. Apart from reference to the possibility of

Fleetwood Star being a trustee, you left, did

you not, entirely up to Mr Milne, or the

borrower, -

now, Mr Milne is the borrower's solicitor -

to secure the execution by the officers of

Fleetwood Star ..... ? A. Yes, I left it either

up to Mr Milne or the borrower, yes.

And, two pages on at 199U, there is one question:

Q. At least on the face of it you had left it

up to the borrower or the borrower's solicitor to procure the execution by the company of the

security documents, had you not? A. That is

so.

So, it is simply incorrect to say there was any transaction at all between the Bank and the

company. Mr Story went in as the borrower, as the

borrower he said, "I will get you a guarantee and

mortgage". The Bank knew that all the company did

was own the matrimonial home, and it left it to him

to get the documents - not as an officer of the

company, but as the borrower.

We would submit that this case raises

squarely, perhaps more squarely than almost any

other facts one can imagine, the question as to

what is meant by the requirement in the section

that one have "dealings with the company". It

raises the questions, first, is one dealing

dealings, the subject dealing, but secondly, more importantly, if the only dealing is that there is

the forged transaction, is that sufficient?

TOOHEY J: Well, it is the second of those propositions that

is caught up in the paragraph to which you took us,

not the first.

MR BENNETT:  Yes, that is so, Your Honour. We submit that

as these sections have now replaced the Northside

case as the source of law in this area, it is a

matter of importance that the meaning of the

sections be determined, particularly having regard

to the dramatic effects to which I have referred.

Story 6 26/10/93

MASON CJ:  Does the legislative history throw any light on

these questions?

MR BENNETT:	Not on this point, Your Honour.
MASON CJ:	None at all?
MR BENNETT:	We had a look at that at the time of the Court

of Appeal hearing, and I remember at the time

thinking it did not really help one way or the

other.

MASON CJ:  One of the problems, of course, is that the

plural includes the singular, and there is not a great deal here to throw any particular light on

the reason why this was cast in the plural, except,

of course, that one would naturally be inclined to

express it in the plural rather than the singular.

MR BENNETT:  Your Honour, we would submit that, the

statutory presumption that the singular includes

the plural and visa versa is one, of course,

subject to contrary intention.

MASON CJ: Yes.

MR BENNETT:  The use of the plural is slightly more unusual

than the use of the singular.

MASON CJ: It is, yes.

MR BENNETT:  Bearing in mind the dramatic consequence, we

would submit it is more likely that it means the

singular but, as I say, I am not dependent upon

that because there is also the point Justice Toohey

asked me about which, in a sense, is the main

point. If I succeed in either of those aspects, I

would succeed on that section.

MASON CJ:  One cannot help feeling that it is more natural to speak of a person having "dealings" with a

company than a person having "a dealing" with a
company, but that perhaps is just a matter of

impression.

MR BENNETT:  Had the opposite been intended one would have

just used it as a gerund, not as a noun, and said

"a person dealing with a company".	That would have
been the natural way to cover it.

MASON CJ: Yes, but the natural way of expressing things

does not automatically occur to a draftsman,

Mr Bennett.

MR BENNETT: Well, as with all these provisions,

Your Honour, had the point been brought to the

draftsman's attention, he could have drafted it

Story 26/10/93

either way to make it clear.	Ex hypothesi, he did
not.	The second point - and we need to succeed on

both to succeed - is the indefeasibility point. significance that has really never been decided.

The short point is: is there a personal equity if the person becoming the registered proprietor is negligent, or careless, or in breach of some standard in relation to the acceptance of the

document. No one has ever looked at that, it is

not discussed in any of the Breskvar v Wall type

line of cases. It is - - -

TOOHEY J: Is it not discussed in Barr v Nickolay?

MR BENNETT:  No, Your Honour, not as I recall. My learned

junior says "not" more positively than I do. There are two single judges of State courts which take an opposite position on this question. It is a

decision which I have handed to Your Honours of

Mr Justice Young in Constanton v Permanent Trustee

where His Honour took the view for which we

contend. That was a forgery case where there was

immediate indefeasibility, and at page 14, at the

bottom, His Honour refers to "personal equities",

and at page 18 there is a short passage two-thirds

of the way down the page in which His Honour says:

The point raised about the finance

company relying on Anthony to do all that had
to be done is quite a strong one. It is quite

clear that if a person entrusts the signing of

a document in his favour to a person who has

moral ascendancy over the proposed signer,

that the person who gets the advantage will be

fixed with the equitable fraud perpetrated by

the agent ..... Moreover, it must be realized

that the finance company had the procedures in

place to stop the sort of fraud that was perpetrated in this case, but failure to

ensure those procedures were properly followed

allowed Anthony to perpetrate the fraud. Had

the finance company actually checked with

Mr Coorey, it would have found that he had

never signed any certificate. Had the finance

company actually checked ..... it would have
seen that Mr Coorey was not an employee -

At the bottom of that page, about eight lines from

the bottom:

It seems to me that in the instant case,

although it is a borderline one, it is on the
conscience of the finance company to retain

its benefits under the mortgage when it is

aware, as it now is, that the benefits it has

received were obtained as a result of forgery,

Story 8 26/10/93

and where, had it implemented its proper

procedures, the fraud would not have been

perpetrated.

Your Honours, that is this case; personal equity because of that type of negligence. The

contrary result was reached in a passage cited at

pages 81 and 82 of the application book in the

judgment of Mr Justice Hayne in the Supreme Court

of Victoria in Vassos v State Bank, and the

relevant sentence - I will only take Your Honours

to the sentence - is at 82H, where His Honour says:

Even if by making reasonable inquiries the

bank could have discovered the fact of the

forgery I do not consider that fact alone

renders its conduct unconscionable.

The problem is one which is of growing

significance today. There is a decision of the

House of Lords, which I have handed to

Your Honours, delivered five days ago, discovered

by extraordinary diligence on the part of - - -

MASON CJ:	It came out by carrier pigeon, did it?
MR BENNETT:	The diligence of my junior knows no bounds.

Your Honour, that is a case involving undue

influence rather than forgery but, in the course of

it, the House of Lords examines the problem of the

co-ownership between husband and wife where the

bank allows the husband to get the wife's

signature, and lays down a rule which virtually
says, "This is not acceptable and banks will lose
if they merely entrust it to the husband to obtain

the wife's signature." The passages are, first of

all, at page 13 at about point 3:

It follows that unless the creditor who

is put on inquiry takes reasonable steps to

satisfy himself that the wife's agreement to	stand surety has been properly obtained, the
creditor will have constructive notice of the wife's rights.

He then says:

What, then are the reasonable steps -

and he says you should get her in and explain it to

her.

The summary expressed at pages 15 and 16 expresses

the same thing.

The importance of it, of course, is not that

it lays down any principle of law applicable in

Story 9 26/10/93

this case, as much as that it shows that this is an

area of increasing importance. The fact that it

was a limited company of two shareholders does not

really distinguish the case from a husband and wife

who are co-owners in the case - - -

DAWSON J:  I was wondering about that. The wife, of course,

is the plaintiff here.	Why is the personal equity
on the part of the wife?

MR BENNETT: There was an order made, Your Honour, which was

not appealed against, under which the wife was

permitted on the basis of a deadlock in the

company - and I think it was section 260 of the

Corporations Law - to make the claim herself

joining the company as a defendant. The company,

of course, is totally hamstrung. It has two

officers who are unable to do anything in

agreement, obviously in relation to this case, and

there is a provision which enables that to be done,

and the order was made and not appealed against.

TOOHEY J:	Can I just ask you, Mr Bennett, without worrying about a lot of detail, what is it that is said to
give rise to a personal equity in this case?
MR BENNETT:	Your Honour, the omissions of the Bank in

relation to the way in which it obtained the

signatures, and whether one uses the phrase

"negligence", "constructive notice", "operating on

conscience", one can express it at a number of

levels of generality, and I have deliberately

refrained from tying it to a specific one, but we

submit where the conduct of the Bank is such that

it fails to do what it ought to do in relation to

verifying the signatures, then there is a personal

equity in favour of the defrauded owner. That is

the issue.

TOOHEY J: Yes.

MR BENNETT:  I should say one other thing. Although this

application suffers from the defect that it

involves two, rather than one, important points,

they are both reasonably short points but, more

importantly, although my client needs to succeed on

both to succeed, if she succeeds on the first

alone, then she would have a claim against the

statutory fund.

DAWSON J:  I was going to ask that, yes.

MR BENNETT: Yes. So, in a sense, although this does not

affect my learned friend, success on the first

count and failure on the second count, although it

would not result in the order being changed, would

make a difference of 100 per cent from the point of

Story 10 26/10/93

view of my client's recovery. It is a case where

there was, in my submission, a serious injustice.

DAWSON J:  Mr Bennett, the personal equity, was it personal equity which the company had, presumably?

MR BENNETT:  Yes, Your Honour. I do not mean personal

equity on her. The personal equity is the equity

of the company, and she seeks to assert the
company's equity as a shareholder joining the
company as defendant. It is rather like the cases
where, under the old law of joinder, where there

are two joint owners of a debt, and one declines to

sue, the other may sue and join - - -

DAWSON J: Yes, I appreciate that, but I am finding some

difficulty in seeing a personal equity in a case

where a company, having two shareholders and two

directors, allows one director to forge a document

in relation to which, on one view of the situation,

the other party is protected against. It is

difficult to see how personal equity arises, is it

not?

MR BENNETT: Well, Your Honour, the personal equity is that

a person taking a dealing under the Real Property

Act is, we submit, notwithstanding immediate

indefeasibility, bound to take certain basic

precautions. If the person fails in a way which

involves disregard of the rights of the true owner

to do that, we say that is capable of being a

personal equity.

DAWSON J:  I did not put what I was saying very well, but

what I was trying to say was, if the Court were

against you on the first point, then the Bank is

entitled to the protection of 68A, and to rely on

the forged signature, and it is hard to see how an

equity arises in that situation?

MR BENNETT:  Your Honour, the equity could arise,

notwithstanding that in law the document is

effective.

DAWSON J: It is not a question of being effective, it is

entitled to rely on the provisions of the section.

MR BENNETT:  Yes, but, Your Honour, the section does not

seek to preclude an equity arising, where it might

otherwise arise. May I give Your Honour this

example. First of all there is, of course, on

page 12, paragraph 68A(4)(b).

DAWSON J: Well, that does not apply.

MR BENNETT:  The problem with that is here there is no

connection or relationship with the company, but we

Story 11 26/10/93

say that is capable of arising in that situation. But, Your Honour, the company is the owner of the land, at law and in equity.

It is a little analogous to the situation in

Gosper where Your Honour recalls there was a

mortgage, by a husband and wife as mortgagors, the

husband forged a variation increasing the amount of

the debt, and obtained the increased money from the

mortgagee. The court said that the wife succeeded

against the bank although it obtained registration

because she had a personal equity, being the equity

of the mortgagor, that she could redeem the

mortgage by payment of the amount shown on the
mortgage without the forgery. It is a little like

that. An owner has an equitable interest as well

as a legal interest in the land. That is capable

of being the equity, if it is taken away, in a manner which operates on the conscience of the

recipient. As Mr Justice Hayne said - - -

DAWSON J: But the manner was dictated by the very person

who was the owner.

MR BENNETT:	It was not, Your Honour, he was not the owner.
DAWSON J:	No, I know - one has to take certain preliminary

steps. He was held out by the company - - -

MR BENNETT:  No.

DAWSON J: Well, that was what was found in the beginning,

that the wife left the business of the company to

the husband - - -

MR BENNETT:	I am sorry, Your Honour - - -
DAWSON J:	- - - he was a director of the company, he forged

a signature, which comes within the terms of

section 68A, upon which the Bank is entitled to

rely.

not consulted when there are two people who are It is not like the case of the wife who is

party to the transaction. There is only one.

MR BENNETT: Well, Your Honour, may I just, with respect

take issue about "holding out". There was no

finding of "holding out". The full extent of the

finding is what I have taken Your Honour to. It is

that she permitted him to have de facto control of the conduct of the company's business. It is hard

to know what that means when there was not any.

There is no suggestion that she said to the Bank,

"He is looking after the affairs of the company,"

or that she did anything which enabled him to do

it.

Story 12 26/10/93

Even if it were so that he attended to matters

like payments of rates, and those aspects of the

company's business which had to be attended to,

even if that is so, that degree of consent or

inactivity does not in any way have anything to do

with what occurred here. This is a simple case

where the Bank said to a debtor, "Go and get the

guarantor's signature," and the fact that the

debtor happens to be one of the directors of the

guarantor, if anything, should put it more on

notice, not less, because just asking the question

rhetorically, what possible benefit could there

have been for the company in entering into this

transaction. That was never asked.

DAWSON J: At the end, it has to be, for a personal equity

to arise, that the Bank failed to do something

which it ought to have done - - -

MR BENNETT:	Yes, Your Honour.
DAWSON J:	- - - or to have done something which it ought

not to have done.

MR BENNETT:  Yes. The section, we submit, does not lay down

an absolute code in relation to that. I have taken

Your Honours to the argument in relation to the

section. In my submission, both questions are

important and it is an appropriate case for special

leave. May it please the Court.

MASON CJ: Yes, thank you, Mr Bennett. What do you say

about this, Mr Gruzman?

MR GRUZMAN:  The section is designed to facilitate

transacting with companies, and in dealing with

companies the plural imports a singular. The

contention of the applicant is that where there is

a dealing, or a proposed transaction, each of the

directors will have to be interrogated as to

whether the company has authority, and that there

cannot be a singular dealing which attracts the

protection of the section. In our submission, that

just cannot be right because the section must be

designed to catch the singular transactions.

MASON CJ: Yes, it would be odd if the provision was so

confined in its operation that it attempted to

provide no protection at all to the individual who

was having a one-off dealing with a company.

MR GRUZMAN:  Yes, and the antecedent negotiations have also

been found to be a dealing as well as the contract

that is made which is a dealing. In this case

Mr Story was the managing director of the company,

he was allowed to hold himself out as the person

Story 13 26/10/93

authorized to enter into the transaction, and did

enter into the transaction.

As to the question of indefeasibility, the

personal equity here is the personal equity of the
company. In this case the company obtained the

benefit of the transaction as demonstrated in the

findings at application book 77J, and the finding

of- His Honour the trial judge which was repeated at

65G. At 77J the Court found that on the question

of fact:

If the issue had been whether, for

purposes of the indoor management rule at

common law, the bank was put upon inquiry as

to whether Mrs Story had authorized and signed
the mortgage, the resolution of that issue

would not have been simple. This was not a

case where the mortgagor company had no

interest in, and received no benefit from,

the loan transaction. The intermingling of

the financial affairs of Mr Story and the

company, which was known to the people who

were the sole shareholders and sole directors,

and the ultimate application of part of the loan funds for the purposes of the company, make the facts of the case significantly

different from those in Northside

Developments.

At page 64N, His Honour the Chief Justice referred to the trial judge's finding:

His Honour was satisfied that although

Mrs Story did not know about the mortgage at

the time it was entered into, if she had known

about it she would have approved of it. When
she later found out the existence of the
mortgage she made no complaint, at least until

she fell into matrimonial dispute with her

husband.

This is a case where there is, in our

submission, no substantial injustice, as the

company obtained at least part of the benefit of

the transaction.

For those reasons, it is submitted that leave

should not be given.

MASON CJ: Yes, thank you, Mr Gruzman. Mr Bennett, do you

want to say anything in reply?

MR BENNETT:  Yes, three short matters. In relation to

antecedent negotiations, Your Honour, the reason I

handed up the section of transcript I did was to

show that there were none. They were with the

Story 14 26/10/93

debtor qua debtor. They were not with Mr Story

qua director or any other officer of the company,

and that was admitted, in effect, by the

cross-examination.

In relation to personal equity, as far as the

company getting some of the money is concerned in

the intermingling, that all occurred later. That

cannot affect the law as at the time of the

transaction that later the husband chose to

intermingle his affairs and the company's affairs

in a way - if that does have a consequence, it

would have a financial consequence which could be

determined if the matter went back.

Finally, in relation to the finding that she

would have approved, we rhetorically say, "So

what?" There was a defence of laches put on and

that was rejected by the trial judge at 48H. The

mere fact that a person might have approved had the

person been asked to sign a document does not in

any way give a forged document any greater effect

that it would otherwise have.	May it please the
Court.

MASON CJ:  Thank you, Mr Bennett. The Court will take a

short adjournment to consider what course we will

take in this matter.

AT 11.53 AM SHORT ADJOURNMENT

UPON RESUMING AT 11.57 AM:

MASON CJ:	The Court is of opinion that the actual decision of the Court of Appeal is not attended with
sufficient doubt to justify the grant of special
leave to appeal.  The application is therefore
refused.
MR GRUZMAN:	I seek costs.
MASON CJ:	You do not oppose costs?
MR BENNETT:	No, Your Honour.
MASON CJ:	The application is refused with costs.

AT 11.58 AM THE MATTER WAS ADJOURNED SINE DIE

Story 15 26/10/93