case no: ccrti 1999/0765/b1

In the supreme Court of Judicature
Court of appeal (civil Division)
On appeal from THE mayors and 
city of london court
(HIS HONOUR JUDGE SIMPSON)

rOYAL COURTS OF JUSTICE
STRND, LONDON WC2A 2LL

Thursday 13 aPRIL 2000
Before:

Lord justice evans
and
lord justice may
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Crantrave Ltd
Appellants
-and-

Lloyds Bank plc
RESPONDENT
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(Transcript of the Handed Down Judgment of
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Mr Nicholas Jackson (instructed by Messrs Emrys James & Co) appeared for the appellant
Mr Matthew Phillips (instructed by Messrs Edge & Ellison) appeared for the respondent
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Judgment
As Approved by the Court
Crown Copyright ©

Lord Justice Pill:

	This is an appeal against the judgment of His Honour Simpson given at the Mayor’s and City of London County Court on 8 March 1999. The judge allowed an appeal against an order of District Judge Samuels given on 18 February 1999 whereby he gave summary judgment to Crantrave Ltd against Lloyds Bank plc in the sum of £20,598.93 (including interest of £7,101.78). The claimant company is in liquidation and the action was brought by the Liquidator Mr E S Hunt with the sanction of the Official Receiver. The winding-up order was made on 16 August 1993 pursuant to a petition dated 16 June 1993.

	The judge began his judgment by stating that the facts were agreed and that the argument had proceeded upon a matter of law. In 1993 the company were defendants in an action brought by Mr Sykes and Mr Lister. By an order made on 28 April 1993 the company were required to pay the sum of £150,000 to them. On 7 May 1993, the plaintiffs in that action secured a garnishee order nisi upon the funds of the company with the defendant bank. On or about the 10th of May 1993, the bank paid to solicitors acting for Mr Sykes and Mr Lister the sum of £13,497.50. The garnishee order nisi was not made absolute and the proceedings founded on it were stayed.

	The Liquidator claims that the bank wrongfully and without authority debited the company’s account with that sum and the sum is reclaimed. In their defence, the only point raised by the bank is that “by making the … payments the defendant partially discharged an existing debt of the plaintiff and as a consequence thereof the plaintiff had suffered no loss as a result of the actions of the defendant and is as a consequence not entitled to repayment of monies claimed in the particulars of claim or any sum”. A payment to a third party is agreed but there is no evidence to support the assertion that a debt was discharged.

	In his affidavit, which was before the judge, Mr Hunt confirms the indebtedness and states that “from the company records that are in my possession and from correspondence which I have received from the former directors of the company it is clear to me that no authorisation was given to the defendant as to the payment of the money nor was the payment of the money by the defendant ratified on behalf of the company. I have not ratified or adopted the payment”. A legal submission was included in the affidavit; in the absence of authorisation or ratification, the equitable doctrine of equitable subrogation was not available to the defendant.
	In an affidavit sworn on behalf of the bank in opposition to the application for summary judgment, Mr C A Wright states that “it is inappropriate for the plaintiff to assume the nature of the defence which is clearly pleaded on the basis that the plaintiff has no recoverable loss against the defendant in this action. The plaintiff has accepted that it made payment of monies under the terms for garnishee order nisi but in doing so the defendant discharged a debt of the plaintiff which was due under the terms of the judgment in a sum in excess of £150,000. By making this payment the defendant has discharged a payment due from the plaintiff to the judgment creditor and as such the plaintiff has suffered no loss as a result of the defendant’s actions. In the circumstances I verily believe the defendant has a valid defence to the plaintiff’s claim in this matter”.

	The judge declined to order summary judgment on the basis that the legal point raised on the authority of the Liggett (Liverpool) Ltd v Barclays Bank Ltd [1928] 1 KB 48 was arguable. The judge set out the submissions of the parties fully and stated that “the bank might be able to rely upon the authority of Liggett”. I do not read the latter part of his judgment as a departure from his opening statement that “the facts are agreed and the argument has proceeded upon a matter of law”. The matter of law is whether Liggett applied upon the agreed facts. The Liquidator had not accepted that a debt was partially discharged and had expressly denied ratification. The application to the judge proceeded on the basis that the facts were agreed and, from the pleadings and affidavit, the facts were as I have stated them to be. Ratification was not as such raised by the bank, either in their pleading or in the affidavit on their behalf which went out of its way to affirm the defence as pleaded. The point taken in the pleading and the affidavit, which the judge was asked to resolve, was whether the bank could resist the claim by a customer for money wrongfully paid by the bank out of the customer’s funds with the bank on the ground that, because the payment had partially discharged an existing debt of the customer, no loss had been suffered by the customer. 

	It was submitted by the bank before the judge and before this court that, notwithstanding that the garnishee order nisi was not perfected, a genuine belief that the bank was entitled to act as it did was a defence to the claim. It is further submitted that, on the authority of Liggett, there is an equitable doctrine that the person who pays the debts of another without authority is allowed the benefit of such payment. It is for the company to prove its loss and it has not done so.

	I reject at once the first of those arguments. It is accepted that the belief, however genuine, was not, on the evidence, a reasonable belief. The belief relied on does not give rise to the equity. As to the second point, the bank relies upon the payment to a creditor of the company, in this case a judgment creditor, as establishing the pleaded case that the company has suffered no loss and as giving rise to an equitable doctrine that a banker is entitled to take credit for the payment. 

	For the company, Mr Jackson submits that this is a straightforward claim by the company, in this case by its Liquidator, for the payment to him of the company’s funds held by the bank. Being a straightforward claim for that sum, no further questions of loss arise. If the bank seek to recoup their loss, it is for them to recover the sum from the creditor, if they can. 

	In Liggett, the defendant bank negligently and contrary to instructions paid cheques to their customers which had been signed by one director only when two signatures were required. The cheques were drawn in favour of trade creditors of the company in payment for goods supplied to the company. Wright J stated (p 61) as a 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 peoples money advanced to them for that purpose, shall not retain that benefit so as, in substance, to make those other people pay their debts”.

Wright J applied that principle as between banker and customer (p 63):

“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 referred to ought to be extended even in the case where the cheque 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 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.”
Liggett is cited in Chitty (28th Edn 1999, para 34-317) as authority for “the equitable doctrine that a person who pays the debts of another without authority is allowed the benefit of such payment”. In Halsbury (4th Edn, Vol 3(1) para 175) it is cited to support the proposition that “if such a cheque is paid in discharge of the customer’s debts, the banker is entitled to take credit for it”.

	Liggett was considered in this Court in Re Cleadon Trust Ltd [1939] 1 Ch 286. One of the two directors of a company paid money in discharge of debts owed  by two subsidiary companies and guaranteed by the company in the expectation that the company which benefited thereby would repay him. Its liability under the guarantee would be discharged. The directors were also the directors of the subsidiary companies. A resolution was passed purporting to confirm some of the advances but the resolution was invalid by the company’s articles of association. The company and the subsidiary companies went into liquidation but the assets of the subsidiary companies were insufficient to discharge their liabilities. It was held that there was neither knowledge nor acquiescence on the part of the company rendering it liable at common law under an implied contract to repay the director and, by a majority, Sir Wilfred Greene MR dissenting, there was no equitable principle which imposed any liability on the company because it had never had anything to do with the transactions and the director was not entitled to recover the sums advanced by him.

	Scott LJ stated (p 315) that the company had “never decided to forestall its liabilities as guarantor. It did not do these things, because in the state of legal paralysis in which it was it had no mind, and could not do any one of these things, the legal reason being that they were all matters appertaining to the management of the company and requiring a decision  of the board.” Scott LJ explained Liggett’s case on the basis that the discharge of the company’s debts must be taken to have been made under Liggett’s authority to pay current debts when he had money of the firm’s with which to pay them. Clauson LJ stated (p 321):

“Since the decision in this Court in Falcke v Scottish Imperial Insurance Co (34 Ch D 234, 248), it is, I conceive, not open to this Court to hold that a person who by paying money confers an unsought benefit on another thereby entitles himself to an equitable right of recoupment as against that other.”

Clauson LJ added (p 323):

“It is to be observed that the equity cannot operate against C (the company or the principal) merely because C has in fact received a benefit from B’s action in providing the money: That fact alone, as Falcke’s case has settled (so far as this Court is concerned), would not set up an equity against C. The equity must, it would seem, arise from the fact that C, by himself or by a person authorized to act, in the manner of payment of C’s debts, for C, has used the money so as to obtain a benefit for C. The benefit has not been an unsought benefit conferred on C behind his back. It is a benefit which C has obtained for himself by using (either himself or by his agent) A’s money as his own. It is his conduct in so using A’s money which makes it unconscientious that he should retain the benefit while refusing recognition of A’s just claim to recoupment.”

	Clauson LJ also explained Liggett’s case on the basis that Liggett had authority to pay the company’s debts. Having referred to Liggett’s case, Clauson LJ stated (p 327) that the principle asserted could not be extended:

“so as to cover not only a case where the money provided had been expended by the quasi-borrower or by an agent authorised by him to pay his legitimate debts, but also the case of the money being expended by an outsider with no authority either direct or indirect to pay the quasi-borrower’s debts … In my judgment it results from a survey of the cases upon which the appellants sought to establish the equity on which they rely that no principle can be deduced from them which enables this Court to hold that the mere facts that Mr Creighton made payments which enured to the benefit of the company established an equity in his favour against the company to have recoupment from their funds.”

(It appears to have been assumed that the subsidiaries’ liabilities to their creditors had been discharged in law by the appellant’s payment.)

	Applying Cleadon to the present facts, I regard it as authority for the proposition that, in the absence of authorisation or ratification by the company of the bank’s payment to the third party, the “mere fact” that the bank’s payment enured to the benefit of the company does not establish an equity in favour of the bank against the company. Moreover, even upon Wright J’s formulation in Liggett, in order to establish the equity, the bank would have to show that the payment discharged (at least partially) a legal liability of the customer. In the absence of evidence that the bank’s payment has been made on the customer’s behalf or subsequently ratified by him, the payment to the creditor will not of itself discharge the company’s liability to the creditor (The Law of Restitution, Goff and Jones, 5th edn, p 17, and cases there cited including Barclays Bank v W F Simms (Southern) Ltd [1980] QB 677 and Electricity Supply Nominees Ltd v Thorn EMI Retail Ltd [1991] 63 P & CR 143, 148 per Fox LJ). It is not established in this case that the company’s legal liability to the company’s creditor had been discharged by the voluntary payment by the bank. While stating that the rule appears to be of “little merit”, Goff & Jones by reference to authority, state that “it is not easy to discharge another’s debt in English Law. This will occur only if the debtor authorised or subsequently ratified, the payment”. Thus the two principles coincide and authorisation or ratification is necessary.                  

	It is unnecessary in this appeal to decide general questions as to the circumstances in which another’s debt may be discharged. In present circumstances, the onus is on the bank to set up any equity they assert to defeat their customer’s claim for the return of his money. They may do so by evidence of authorisation or ratification of a payment to a third party but those features are missing in this case. That being so I would decide the case on the basis that, in the absence of such authorisation or ratification, payment to a third party cannot of itself defeat the customer’s claim. However even if, contrary to Cleadon, there may be a defence in the absence of authorisation or ratification, there must at least be evidence that the payment had the effect of discharging the customer’s debt. Merely to assert the absence of loss is not sufficient.

	In relation to a banker, the principle applied appears to me to be soundly based. It is a startling proposition that bankers can pay sums to a third party out of a customer’s account because they believe the customer to be indebted to that third party. I see no difference in principle between a judgment debt and other perceived debts. As against a customer, a contrary principle would place the bank in a position to act as debt collector for creditors of the customer. It would be for a customer who contested a creditor’s claim then to seek relief. The bank could decide in what priority the claims of creditors were to be met out of the sums in the account, without the customer having recourse against the bank. A bankruptcy or liquidation may occur shortly after a payment, as in this case, with possible effects on the rights of creditors generally.

	There will be circumstances in which a Court may intervene to prevent unjust enrichment either by the customer in having his money from the bank as well as having the claim of his creditor met, or by the creditor who has double payment of the debt. The onus is in my judgment on the bank to establish the unjust enrichment on the evidence. In this case not only is there no evidence of authorisation or ratification of the payment to the third party by the customer but there is no evidence of unjust enrichment by the customer. In the absence of authorisation or ratification of the payment, the bank must in my judgment meet this claim and recoup the sum paid, if they can, from the third party to which it was paid.

	Whether under the then existing rules, or under the CPR, a different procedure should have been followed in the County Court is open to argument. With the benefit of hindsight, the bank might have sought to make further enquiries as to the eventual financial position between the company, Mr Sykes and Mr Lister, and others involved in the liquidation. The bank could have, but did not, make further enquiries into the facts or, at least, raised possible factual issues in their affidavit. Instead, they chose to agree facts and rely on a legal proposition which on the agreed facts and in the absence of further evidence must fail. On the limited but agreed facts upon which the judge was invited to make his ruling, he should, in my view have given summary judgment. I find nothing undesirable in a bank which pays money from a customer’s account without authority having an onus placed upon it to establish facts which may enable the bank to escape liability for its wrongful act. 

	I would allow the appeal.

Lord Justice May:

	I agree that this appeal should be allowed for the reasons given by Pill LJ

	Subject to particular banking arrangements, the customer of a bank is entitled to require payment to him by the bank of the full balance credited to his account.  It is, in my view, obvious that the bank cannot, without the customer’s authority or unless there is an obligation imposed on the bank by due process of law, unilaterally choose to pay money to a creditor of the customer and then reduce the credit balance in the customer’s account by debiting the amount of the payment.  If the bank purported to do this, the customer would remain entitled to require payment of the full unreduced credit balance.  This would be a claim for payment of an amount to which the customer is contractually entitled, not a claim for damages for breach of contract.  The customer does not have to prove a loss to justify requiring the bank to pay the full balance of his account.

	In the present case, the defendant bank had no authority, and no purported authority (such as there was in Liggett (Liverpool) Ltd v Barclays Bank Ltd [1928] 1 KB 48), of their customer to make the payment in question and there was no obligation imposed on them by due process of law to make the payment, since the garnishee order had not been made absolute.  It was a gratuitous payment and the bank had no defence to the claim unless they established additional facts.  No equity arises from the circumstances of the payment itself.  The bank simply made a mistake.

	In another case, it might be possible to establish that the customer ratified the gratuitous payment either expressly or by taking advantage of it; or there might conceivably be circumstances not amounting to ratification in which it would nevertheless be unconscionable to allow the customer to recover from the bank the balance of his account without deduction of a payment which the bank had made gratuitously.  But I agree with Pill LJ that no such circumstances were established in this case.

Order: Appeal allowed.  Judgment for the Claimant at the up to date sum which the parties have agreed (£21,840 including judgment).  Claimant to have costs of the appeal and the costs below, to re assessed if not agreed.  Basis of assessment at first instance to be left open to be argued.
(Order does not form part of the approved judgment)