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LIGGETT (LIVERPOOL) LIMITED
BARCLAYS BANK, LIMITED.
KING’S BENCH DIVISION
1927 APRIL 8.
 1 K.B. 48
BEFORE: WRIGHT J.
BARCLAYS BANK, LIMITED.
Singleton K.C. and Wooll for the defendants.
Greaves-Lord K.C. and N. B. Goldie for the plaintiffs
Solicitor for plaintiffs: G. H. Brabner, Liverpool.
Solicitors for defendants: Rutherford & Co., Liverpool
BANKING AND FINANCE LAW: Banking Practices – Banker – Negligence – Cheques of Company to be signed by two Directors – Payment by Banker of Cheques signed by one Director – Cheques payable to Trade Creditors of Company – Liabilities of Company not increased by Payments – Banker entitled to stand in Place of Creditors.
COMPANY LAW:- Directors of company – Powers and Articles of Company – Instruction to bankers as to signature – Where changed within powers allotted by the Articles – Bank acting on changed instruction – Liability of bank where change was not properly authorized
CHILDREN AND WOMEN LAW:- Women in Business – Appointment as Director of Company with powers to sign check – Where appointment improperly made by husband without authority as prescribed by Articles of Company – Effect
HISTORY AND SUMMARY
The defendants negligently and contrary to instructions paid cheques of their customers, the plaintiff company, which had been signed by one director only. The cheques were drawn in favour of trade creditors of the company in payment for goods supplied to the company in their business. In an action by the company for money had and received:-
Held, that as the liabilities of the company had not been increased by reason of the payment of the cheques, the defendants were protected from liability on equitable grounds, and were entitled to stand in the place of the creditors whom they had paid.
Where bankers have been put upon inquiry with regard to the appointment of a new director of a company, and are guilty of negligence in not investigating the position, they are not entitled to assume that a notice of appointment of an additional director is a valid notice, and that the director was duly appointed.
FURTHER consideration of an action tried at Liverpool Assizes before Wright J. and a special jury.
The following statement of the facts is taken from the judgment of the learned judge:-
The action was brought by B. Liggett (Liverpool), Ld., against Barclays Bank. It is a company which was registered on October 4, 1923, and which was formed to carry on the business of retail provision merchants in Liverpool. The business had been carried on by Mr. B. Liggett as his own business, but a Mr. Melia had bought a half share in the business for 5000l. in cash and thereupon a company was formed, and according to the articles of association of the company there were to be not less than two nor more than three directors. The first directors were to be George Frederick Benjamin Liggett and Edward Melia, and the directors were to have power at any time to appoint any other qualified person to be a director of the company either to fill a casual vacancy or as an addition to the board. The qualification for each director was to be a holding of not less than 500l. nominal value of shares. That qualification was to be acquired within one month of the appointment of a director, and it was provided that the quorum of directors for transacting business should, unless otherwise fixed by the directors, be two. These are the provisions of arts. 23 to 28, which are material for the purposes of this case.
The company, according to the evidence heard at Liverpool, was not solvent when it was registered and was at no subsequent period solvent. Mr. Melia was appointed a director, and was also secretary, Mr. G. F. B. Liggett being not only a director but chairman. Mr. Melia, so far from taking any active part in the conduct of the business from 1924, does not seem to have concerned himself in the management of the affairs of the company; what, however, he did was to keep the control of the company’s banking account. When the company was formed Messrs. Barclays Bank, Ld., were appointed as their bankers and were instructed to honour cheques or bills provided they were signed by any two directors for the time being. These instructions of the directors were dated October 19, 1923. They were signed on behalf of B. Liggett (Liverpool), Ld., by Mr. Liggett and Mr. Melia, and specimen signatures of those two gentlemen were appended to those instructions. The branch of the defendant bank at which the company’s account was opened was at Walton Road, Liverpool. With the appointment and the instructions there were enclosed the certificate of the incorporation of the company for inspection by the bank manager and a copy of the memorandum and articles of association. Mr. Jones, the bank manager, read those documents. Mr. Melia, while leaving the conduct of the business to Mr. Liggett, kept control over the banking account. His signature was necessary to any cheque before the bank would honour it. In the course of 1925 he became doubtful about the way the business was being carried on and consulted his solicitor and an accountant; and he already had reason to think that demands were being made to induce the bank to pay out moneys on cheques without his signature. For that reason about July 19, 1925, he interviewed the bank manager. According to his evidence he told the bank manager that he was having trouble with his fellow director, who was not doing his duty, but what he did insist upon and made clear to the bank manager was that no cheques were to be paid unless they bore, not only the signature of Mr. Liggett, but also his own. By a letter which is undated, but which is said to be in fact July 20, 1925, he reiterated those instructions. The letter is in these terms, addressed to Mr. Jones, Barclays Bank, Walton Road, Liverpool, and signed by Mr. Melia: “By way of confirming our interview I would state that I wish no cheques to be paid out of the above account unless duly signed by Mr. Liggett and myself, as called for in the original authority.” He was occasionally absent from Liverpool, but either at that date or possibly at some earlier date he gave to the bank manager his address and his telephone number in Liverpool, so that if any question arose about the payment of cheques he could at once be communicated with, and that was entered in the bank ledger where the company’s account was entered up. From time to time cheques were drawn and issued by Mr. Liggett signed only by himself, and about the time which I am now dealing with, the end of July or August, it was arranged that if these cheques were presented they should not be paid until Mr. Melia had been communicated with, and had been consulted about them, and on a number of occasions about the end of July Mr. Melia did attend at the bank, having been notified by telephone, and there affixed his signature to cheques which had come in with only one signature attached, and those cheques were thereupon met.
The last occasion, according to Mr. Melia, when he followed that course was August 27 or 28. Mr. Melia at that date had just come back from Ireland, and on August 27 and the first days in September he was at his Liverpool address. Mr. Jones, the bank manager, went away on his holiday in the early part of August and was absent on holiday until September 9. During his absence the affairs at the bank were in charge of the assistant, a Mr. Hicks, who, according to his evidence, was fully conversant with the arrangement which had been made with Mr. Melia. According to Mr. Hicks’s evidence, about the end of August Mr. Liggett came down and saw him and said that Mr. Melia had gone to Ireland, that he had trade cheques which had to be met, and he said: “Meet them, and I will get Mr. Melia to sign them.” Mr. Hicks said: “I will pay them and I will get the duplicates properly signed for the other cheques,” that is to say, cheques not properly signed and which had come back through the Clearing House. In fact that course was adopted as regards three cheques respectively dated August 20, 25 and 25, 1925. These amount in all to a sum of 661l. 12s. 9d., and they were paid on August 27 and 28. Mr. Melia, having come down, signed the cheques; these three cheques formed the first item claimed in the action, and that part of the claim has been withdrawn and I need say no more about it. In addition to that, certain cheques were paid by the bank with only one signature. They are three cheques, two dated August 25, 1925, and one dated August 26, 1925, amounting in all to a sum of 470l. These were paid on August 27, 28 and 31, and were paid on one signature alone. Mr. Hicks had been asked that this should be done, and he was willing to do it apparently because Mr. Liggett had pointed out to him a difficulty that would arise if trade cheques were not honoured, and had said that he would be obliged by Mr. Hicks obtaining the second signature later, which at that time Mr. Hicks must have thought was the signature of Mr. Melia. On September 1 Mr. Hicks received at the bank a notice. It is written on the plaintiff company’s paper dated September 1, 1925, addressed to the manager of Barclays Bank at Walton Road, Liverpool, and signed per pro B. Liggett (Liverpool), Ld., (signed) B. Liggett, chairman, and is in these terms:
“I have to inform you that (Mrs.) Eleanor May Liggett has been appointed an additional director of the above company and we accordingly enclose herewith the new director’s specimen signature. The instructions with reference to the regulation of the bank account will remain the same as hitherto – viz., ‘That cheques should be signed by any two directors for the time being.'”
The notice was sent without the knowledge or authority of Mr. Melia. It was received by Mr. Hicks, and without any further inquiry he accepted it as a binding notice and acted upon it. He said he looked up the articles of association and then thought it covered all that was necessary. The article required not less than two nor more than three directors, and he said that he presumed the new director had been appointed by the chairman. It did not occur to him to ask whether a quorum was present, and he thought that Mr. Melia was in Ireland and was in Ireland at the time he paid the three cheques which I have just referred to as having been paid on one signature. That being the position, Mr. Hicks went on honouring cheques, and when the manager returned he followed the same practice and cheques were honoured from time to time bearing the signature of Mr. Liggett and Mrs. Liggett. No inquiry was made of Mr. Melia; he was not told what the bank were doing or that they were deviating from the practice which he had established – namely, that, no cheques should be paid if they came in with one signature, and if they came in he should be communicated with and his signature obtained before the cheques were met. Cheques were accordingly paid with these signatures between the period of August 27, and, practically speaking (except two small cheques which were paid in October), till the end of September. At the end of September Mr. Melia’s accountant came to the bank and said that he had ascertained that cheques were being paid on the signatures of Mr. and Mrs. Liggett, and pointed out that that was entirely improper; and thereupon, except in a few isolated instances of two small cheques which had been drawn in September and which apparently were not presented until the end of October, the bank made no further payments. In addition to the cheques dealt with in this way there was a bill accepted by Mr. and Mrs. Liggett which was drawn on September 12, 1925, and was paid on September 15. Two bills were paid in August, one on August 14 and the other on August 21, on the signature of George Frederick Benjamin Liggett alone.
It is admitted by the defendants in this action that they are liable in any case upon those bills, and they have paid into Court without a denial of liability the amount of those two bills, which is 106l. 5s. 7d.
Greaves-Lord K.C. and N. B. Goldie for the plaintiffs.
In view of the jury’s finding that the defendants were put on inquiry as to the appointment of Mrs. Liggett as director, they cannot escape liability on the ground that they were entitled to assume that the notice given to them by Mr. Liggett on September 1, 1925, was in order. They wrongfully debited the plaintiffs’ account with the amounts of the cheques signed by Mr. and Mrs. Liggett, and they are, therefore, liable to the plaintiffs to the extent of those sums in an action for money had and received.
[They referred to A. L. Underwood, Ld. v. Bank of Liverpool and Martins. (1)]
Singleton K.C. and Wooll for the defendants.
There was no evidence to support the finding of the jury that the defendants were put on inquiry whether Mrs. Liggett’s appointment was in order. The question of her appointment was one purely of the internal management of the plaintiff company, and the defendants were, therefore, not bound to inquire into it, but were entitled to assume that everything was regular: per Scrutton L.J. in Kreditbank Cassel v. Schenkers, Ld. (2) The defendants were dealing with a matter involving a director in which a director normally would have power to act for the plaintiff company, and they were not obliged to inquire whether or not the formalities required by the articles of association before the director could exercise that power had been complied with: per Atkin L.J. in Kreditbank Cassel v. Schenkers, Ld. (3); see also per Sargant L.J. in Houghton & Co. v. Nothard, Lowe & Wills, Ld. (4); per Astbury J. in In re Fireproof Doors, Ld. (5);
(1)  1 K. B. 775.; (2)  1 K. B. 826; 43 Times L. R. 237, 241.; (3)  1 K. B. 826; 43 Times L. R. 237, 243.; (4)  1 K. B. 246, 266.; (5)  2 Ch. 142, 150.
See also per Lord Halsbury in County of Gloucester Bank v. Rudry Merthyr Steam and House Coal Colliery Co. (1); Mahony v. East Holyford Mining Co. (2).
With regard to damages, the transaction here is equivalent to an advance by the defendants to pay the plaintiffs’ creditors. The plaintiffs have had the full benefit of that advance, and they cannot, therefore, recover from the defendants the amount of the cheques in question: per Scrutton L.J. in A. L. Underwood, Ld. v. Bank of Liverpool and Martins (3); Bannatyne v. MacIver (4); Reid v. Rigby & Co. (5); Baroness Wenlock and Others v. River Dee Co. (6)The test is whether the transaction complained of by the plaintiffs has really added to their liabilities; per Lord Selborne L.C. in Blackburn Building Society v. Cunliffe, Brooks & Co. (7)
Greaves-Lord K.C. in reply. The plaintiffs are entitled to recover the amount of the cheques. The voluntary payment by one person of another’s debts does not entitle the former to recover from the latter the amount so paid. The basis of the decisions in Bannatyne v. MacIver (4) and Reid v. Rigby & Co. (5) was that the money had found its way into the coffers of the defendants and had been used by them. A. L. Underwood, Ld. v. Bank of Liverpool and Martins (8) was an action for conversion, and the sole question considered by Scrutton L.J. in the passages cited was the mitigation of the damages in such an action by redelivery. In Exall v. Partridge (9) Lord Kenyon C.J. demurred to the proposition that where one person benefited by the payment of money by a stranger the law raised an assumpsit against him. The defendants cashed cheques drawn on the plaintiffs’ account which they had no authority to cash, and the plaintiffs are, therefore, entitled to recover: Kepitigalla Rubber Estates, Ld. v. National Bank of India, Ld. (10).
(1)  1 Ch. 629, 633.; (2) (1875) L. R. 7 H. L. 869.; (3)  1 K. B. 775, 794.; (4)  1 K. B. 103.; (5)  2 Q. B. 40.; (6) (1887) 19 Q. B. D. 155.; (7) (1882) 22 Ch. D. 61, 71.; (8)  1 K. B. 775.; (9) (1799) 8 T. R. 308.; (10)  2 K. B. 1010.
WRIGHT J. [after stating the facts continued:]
The question which arises in this action is with reference to all the cheques paid on the signature of George Frederick Benjamin Liggett and Eleanor May Liggett. These cheques, which are considerable in number, amount in all to 5981l. 2s. 1d. As regards the first three cheques, they were drawn on August 25 and 26, and they were paid, one on August 27, one on August 28, and one on August 31, and when they were paid they bore no signature but that of Mr. Liggett. I do not see how the bank can justify the payment of those cheques, because they were clearly paid without any authority or any pretence of authority. As regards the three cheques, the further event which happened was obviously most irregular, because when Mrs. Liggett came to the bank on September 2, Mr. Hicks, who was in charge of the bank, obtained her signature to those three cheques. They had been both drawn and paid before there had even been a semblance of an appointment of her us director. In addition to those cheques there was another cheque drawn on August 29, and certain others, seven in number, drawn on August 31, 1925. These were paid, one on September 2, and the others at various dates between September 4 and 9, and in each case either before they were paid or immediately after they were paid, having been originally signed only by George Frederick Benjamin Liggett, the signature of Mrs. Liggett was obtained to those; and the bank thereupon treated them as being in order; in other words, Mrs. Liggett signed cheques, or purported to sign cheques, as director which were drawn at a date before she was appointed a director. The remaining cheques were dated on various dates from September 1 to 30, and they all bore the signature of Mr. and Mrs. Liggett.
The plaintiffs claim as for money had and received that they are entitled to have repaid to then the amount of those cheques on the ground that the defendant bank had no authority to pay the cheques. That is the issue. The primary defence set up by the defendant bank is one based upon an application of the well known rule which is often referred to as the rule in the Royal British Bank v. Turquand (1), a rule which has been applied in a great many cases to which I have been referred, for instance in Mahony v. East Holyford Mining Co. (2); County of Gloucester Bank v. Rudry Merthyr Steam and House Coal Colliery Co. (3); and quite recently discussed in Houghton & Co. v. Nothard Lowe and Wills, Ld. (4), and even more recently in Kreditbank Cassel v. Schenkers, Ld. (5) The rule as relied on by the defendant bank is that the defendant bank having had the articles of association were entitled to assume that the notice of September 1, 1925, sent to them by the chairman was a valid and proper notice, because according to the articles of association it was possible if the proper steps in the matter of internal management had been taken by the directors of the company that Mrs. Liggett should have been duly appointed an additional director, as the notice stated. I am relieved from any examination of the exact definition of this very respectable but perhaps somewhat ambiguous rule of law, because the plaintiff company in answer to that contention have alleged that the defendant bank in any case is not entitled to the benefit of that rule by reason of the fact that the defendant bank were put on inquiry by the circumstances of the case and were negligent in not investigating the position before they accepted and acted upon the notice of the appointment of a new director. On that issue I put two questions to the jury, and the questions were these: “Was the bank put on inquiry whether the appointment of Mrs. Liggett was in order?” The jury answered: “Yes.” “Secondly, whether the bank was guilty of negligence in paying the bills and cheques complained of?” and again the jury answered “Yes.” Whatever may be the exact scope of the rule in Turquand’scase (1) I think it is quite clear on principle and on the authorities I have already referred to that it can never be relied upon by a person who is put on inquiry.
(1) (1856) 6 E. & B. 327.; (2) L. R. 7 H. L. 869.; (3)  1 Ch. 629.; (4)  1 K. B. 246.; (5)  1 K. B. 826; 43 Times L. R. 237.
The rule proceeds on a presumption that certain acts have been regularly done, and if the circumstances are such that the person claiming the benefit of the rule is really put on inquiry, if there are circumstances which debar that person from relying on the prima facie presumption, then it is clear, I think, that he cannot claim the benefit of the rule; and if, therefore, the answers of the jury to the questions which I put to them stand, it is clear, I think, that this defence will not avail the defendants here.
Mr. Singleton has submitted that there was no evidence upon which the jury could give the answers which they did give. He also submitted when the plaintiffs’ case ended that there was no evidence to go to the jury at this stage and that I ought to have withdrawn the case from the jury. I did not think so, nor do I think that the contention is sound that there was no evidence to go to the jury on the questions which I asked them. I should even go further. If I had been trying the case without a jury I should myself have come to exactly the same conclusion as that which the jury arrived at. The substantial ground on which the jury must have held, and I think have properly held, that the defendant bank was put on inquiry, was this: that Mr. Melia was known to them to be a shareholder and a director of the company and was known to be very anxious that no cheques should be paid without his signature. He had given special directions to that effect and had taken steps to ensure that his signature should be obtained, if it was not originally on cheques, by arranging that the bank could communicate with him. I think under those circumstances the defendant bank ought, before they acted upon an instruction such as that contained in the letter of September 1, 1925, to have communicated with Mr. Melia and ascertained if his concurrence had been obtained to the change, because he had been at the bank as recently as August 26 or 27, and this notice was only dated September 1, and, indeed, it was sent at a time when it was thought Mr. Melia was actually in Ireland. The point to which the attention of the jury was directed was this, that the defendant bank ought to have taken steps to ascertain whether Mr. Melia was concurring in the appointment of a new director. Whether that concurrence was given by his voting for the appointment with the other director, Mr. Liggett, or whether it was given in the more indirect way first by his voting that the quorum of directors should be one instead of two and thereby vesting the power in Mr. Liggett was a matter of minor importance for practical purposes, because if the change was going to be made it could only be made in either way by the concurrence of Mr. Liggett and Mr. Melia. Indeed, I have very grave doubt whether a new director could be appointed without the direct concurrence of both the existing directors. However that may be, the jury had all the circumstances before them, and they came, as I think, to a clear and proper conclusion, and I entirely dissent from the argument that there was no evidence on which they could come to the conclusion which they formed. That being the position, I think the defence based upon the rule to which I have referred fails, and if the matter stopped there, there would be judgment for the plaintiffs for the whole amount claimed.
But a further and somewhat difficult point is then raised by the defendant bank, and that point I have now to decide. The various cheques and the bills were originally all drawn in favour of ordinary trade creditors of the plaintiff company, and the proceeds of those cheques were all applied to the payment for goods supplied to the company. The position was, as from the end of August, 1925, that Mr. Melia withdrew completely from any active part in the management of the business. He had already withdrawn substantially, but his final withdrawal took this form: that he told Mr. Liggett that he would not sign any more cheques. He seemed to have thought that that would put a stop to the conduct of the business altogether. The business was insolvent from the outset, and Mr. Melia and his advisers were anxious, if possible, to close it down. They might, however, have taken a much more definite step for that purpose. In particular Mr. Melia received on the morning of September 1 a notice that a directors’ meeting of the plaintiff company was to be held at 10 o’clock on the morning of the 4th, and on the agenda one of the matters mentioned was the appointment of an additional director. Mr. Melia had been advised by his solicitor that it was unnecessary for him to take any action on that notice, obviously on the view that as there were only two directors and a quorum was two, unless otherwise ordered by the directors, it could not be done with Mr. Melia’s concurrence, as after he had absented himself nothing could be done in his absence; technically that was very sound advice. He took no notice of the meeting, and, indeed, he apparently took no further action or cognizance of what was being done. Mr. Liggett, however, who had conducted the business up to that time, continued to do so. He continued to order goods for the purposes of the business, which was a retail provision business, and those goods were delivered, and had to be paid for, and they were in fact paid for from time to time by the cheques in question and the bills in question, which accordingly discharged a legal liability incurred by the company, because the people who supplied the goods had no notice that the position had in any way been changed. Mr. Liggett was conducting the business, and not only was the company liable, but the company received the goods which were paid for and which were supplied to them for the purposes of the business. Under those circumstances it is contended by the defendant bank that they are entitled to credit for the amounts so paid – that is to say, for all those cheques – in discharging the debts of the company, and they rely upon the equitable doctrine under which a person who has in fact paid the debts of another without authority is allowed to take advantage of his payment. I take the statement of that equitable doctrine in these terms from the language of Scrutton L.J. in the case of A. L. Underwood, Ld. v. Bank of Liverpool and Martins. (1)
(1)  1 K. B. 775.
The question which has been debated, and which is not at all an easy question, is whether on the facts of this case that equity applies. It was said by Sir Walter Greaves-Lord and Mr. Goldie that in law the position here would simply be this, that the bank for this purpose is in the position of a stranger who without the authority of the plaintiff company has paid off the debts of the plaintiff company, and that being so, the payment was a purely voluntary payment so far as the company was concerned, and hence the company, even if it took the benefit, could not be in any way made responsible for the payments so made. For that rule of common law, a rule of common law which cannot be questioned, reliance is placed, amongst others, on the authority of Exall v. Partridge. (1) But the matter must now be decided in a Court which takes cognizance of principles of both law and equity, and the question is whether the equitable principle does apply to the facts of this case. The equitable principle has been applied beyond question over and over again to cases where an agent not having the authority of his principal has borrowed money as on behalf of his principal. Under those circumstances at common law the principal cannot be sued and cannot be made to repay the amount so borrowed, but in equity it has been held that to the extent that the amount so borrowed has been applied in payment of the debts of the principal, the quasi lender is entitled to recover from the quasi borrower. The rule is very clearly stated by Lord Selborne in the case of Blackburn Building Society v. Cunliffe, Brooks & Co. (2) The noble and learned Lord said: “And I think the consistency of the equity allowed in the Cork and Youghal Ry. Co.’s case (3) with the general rule of law that persons who have no borrowing powers cannot, by borrowing, contract debts to the lenders, may be shown in this way.
(1) 8 T. R. 308.; (2) 22 Ch. D. 61, 71.; (3) (1869) L. R. 4 Ch. 748.
The test is: has the transaction really added to the liabilities of the company? If the amount of the company’s liabilities remains in substance unchanged, but there is, merely for the convenience of payment, a change of the creditor, there is no substantial borrowing in the result, so far as relates to the position of the company. Regarded in that light, it is consistent with the general principle of equity, that those who pay legitimate demands which they are bound in some way or other to meet, and have had the benefit of other people’s money advanced to them for that purpose, shall not retain that benefit so as, in substance, to make those other people pay their debts. I take that to be a principle sufficiently sound in equity; and if the result is that by the transaction which assumes the shape of an advance or loan nothing is really added to the liabilities of the company, there has been no real transgression of the principle on which they are prohibited from borrowing.” That principle is well established in respect of borrowings made without authority, and I may refer to the cases of the Baroness Wenlock v. River Dee Co. (1) and Bannatyne v. MacIver (2), in which latter case the principle was applied to a case where the agent who had purported to borrow without authority was the agent, not of the company, but of a private individual. The ground is sometimes put in this way, that the lender or the quasi lender is subrogated to the rights of the creditor who has been paid off. That, obviously, is not precisely true, because no question of subrogation to securities can arise in such a case. The principle has also been applied in Reversion Fund and Insurance Co. v. Maison Cosway, Ld. (3), to the case where the plaintiff, the quasi lending company, actually knew that the quasi borrowing company had no authority to borrow. If this were a case in which the plaintiffs’ account was in debit throughout to the defendant bank, then each of the cheques in question when presented would constitute a request for a loan, and the payment of that cheque would constitute the granting of that loan, and as the cheque and the request were unauthorized the case would be precisely within those authorities I have just referred to.
(1) 19 Q. B. D. 155.; (2)  1 K. B. 103.; (3)  1 K. B. 364.
There was some evidence in this case that at the relevant dates the position of the plaintiff company’s account at the defendant bank was that it was in debit and that there was an overdraft; to the extent that that is so, the position will be, in my judgment, exactly as in the cases I have referred to, and the position will be precisely covered by the authority of those cases. But it is not clear that that was so throughout or, indeed, at all. I have to consider, therefore, what the position would be if when each one of those cheques or any one of these cheques was presented the account was in credit. The position then would be that in paying one of those cheques without authority the defendant bank was taking money which belonged to its customer and paying that away without authority. In other words, the defendant bank would be in possession of a credit balance belonging to the customer, and without the customer’s authority it would be misapplying that credit balance. Does the equity which I have referred to extend to a case of that character? There is only one authority which I have been referred to, and I know of no other, which seems to throw light on this question, and that is Underwood, Ld. v. Bank of Liverpool and Martins. (1) The claim by the plaintiff company there was for conversion of cheques. The plaintiff company was a one-man company, and the one man, the sole director, indorsed certain of the company’s cheques and then paid them to his own account with the defendant bank. The learned judge and the Court of Appeal held that that constituted a conversion, because they were not entitled to collect the proceeds of those cheques and to appropriate the proceeds to the personal account of the sole director, and that being so they were misapplying the property of the plaintiff and were liable for conversion. But it was either shown or indicated with sufficient clearness to justify an inquiry that the proceeds or some of the proceeds of those cheques were used to discharge the liabilities of the company, and the Court of Appeal ordered an inquiry to ascertain if that was so.
(1)  1 K. B. 775, 794.
The Court of Appeal did not expressly say what would be the position if that were so; but as I read their judgment they were disposed to the opinion that in such a case the equity, which I have already referred to as well established as between quasi lenders and quasi borrowers, would apply. Scrutton L.J. states the position in this way: “But I am not sure that the learned judge had in his mind the equitable doctrines under which a person who had in fact paid the debts of another without authority was allowed the advantage of his payments,” and he refers to Bannatyne v. MacIver (1) and Reid v. Rigby & Co. (2) That statement of the equity is, I think, wide enough to cover the question which I have to decide in this case, and although there is a technical difference between a claim in conversion and a claim for money had and received such as I have to deal with in the present action, I do not think that that distinction is of such a nature as to prevent the application in the case before me of the same principles as would apply if the claim had been a claim in conversion. The relationship of a banker and customer is that of debtor and creditor; that is, when the customer’s account is in credit the banker is the debtor of the customer and, therefore, it is only by a figure of speech that the banker misapplies money of his customer which he had in his possession. That statement would be perfectly true if what the banker had in his possession was a bag of coins or a bundle of notes, and if acting upon an authority which was invalid the banker quite honestly although erroneously took a number of coins out of a bag or a number of notes out of a bundle and paid them on the faith of such an authority he would be guilty of conversion and, if I understand the judgment of the Court of Appeal in this case, in that event the banker would be entitled to the benefit of the equity. If that be so, and in principle it seems to me that ought to be so, I cannot see why the same result should not apply in a case like the one before me, where the banker does not handle actual cash or notes, chattels capable of conversion, but by reason of the present system of banking facilities everything is done by way of credit or debit balances.
(1)  1 K. B. 103.; (2)  2 Q. B. 40.
In such a case there is obviously no conversion, but there is misapplication, under an honest mistake as to the validity of the authority, of the credits which constitute the medium of exchange in place of cash. Under these circumstances I think that the equity I have been referred to ought to be extended even in the case where the cheque which was paid was paid out of the credit balance, and was not paid by way of overdraft, so that the banker will be entitled to the benefit of that payment if he can show that that payment went to discharge a legal liability of the customer. The customer in such a case is really no worse off, because the legal liability which has to be discharged is discharged, though it is discharged under circumstances which at common law would not entitle the bank to debit the customer.
The result is that I must order an inquiry, because I have not the facts before me sufficiently to come to a conclusion whether the rule of equity which I have stated does apply, and if so to what extent. The inquiry I order will be addressed to some referee who will report to me. I shall retain seisin of the case and shall deal with all questions of costs and make such final order as the report which follows on the inquiry may seem to require. The inquiry will be as to the exact circumstances under which each one of the cheques and bills complained of was paid, that is to say, what was the state of the plaintiff company’s account with the defendant bank at the date of each payment? Was it made in respect of goods supplied and was it made in the ordinary course of business?