Abbey National Plc v JSF Finance & Currency Exchange Co Ltd. [2006] EWCA Civ 328

Case No A2/2005/1801[2006] EWCA Civ 328
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
CHANCERY DIVISION (COMPANIES COURT)
MR BERNARD LIVESEY QC (SITTING AS A JUDGE OF THE HIGH COURT)
3474/2005
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate Friday, 31 st March 2006
Before
THE CHANCELLOR OF THE HIGH COURTLORD JUSTICE JACOBLORD JUSTICE MOORE-BICK
Between
ABBEY NATIONAL PLCAppellantJSF FINANCE & CURRENCY EXCHANGE CO LTDRespondent
(Transcript of the Handed Down Judgment ofSmith Bernal WordWave Limited190 Fleet Street, London EC4A 2AGTel No: 020 7421 4040 Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Miss Laura John (instructed by DLA Piper Rudnick Gray Cary) for AppellantMr Michael Michell (instructed by Grower Freeman) for Respondent
JudgmentThe Chancellor :
[1]JSF Finance & Currency Exchange Ltd (“JSF”) has carried on the business of a bureau de change from premises in New Oxford Street since 1994. The managing director of JSF is and at all material times has been Mr Mohammad Jawad. On 15th February 2005 Mr Jawad exchanged 40,700 Euros for a counter cheque issued by Abbey National plc on 12th February 2005 payable to JSF for £30,000. The individual with whom he made the exchange purported to be Miss Wendy Baker. The same individual had carried out a similar transaction with JSF in early February when Mr Jawad exchanged 87,000 Euros for a counter cheque issued by Abbey National on 2nd February 2005 payable to JSF for £62,500.[2]In each case the counter cheque indicated that the amount had been debited to a joint account in the names of Mrs V Baker and Miss WJ Baker with Abbey National plc. On the occasion of the first exchange the individual with whom Mr Jawad dealt had provided a copy of a UK Passport in the name of Wendy Baker, a Barclaycard statement addressed to Miss W Baker of 27 Crefeld Close, London, SW8 8EL, two utility bills rendered to Miss W Baker at the same address and an Abbey National Account passbook in the names of Mrs V Baker and Miss WJ Baker. On both occasions Mr Jawad confirmed the validity of the counter cheque with an employee of Abbey National by calling Abbey National’s cheque verification number. On the first occasion he was told that the counter cheque had been correctly issued and everything was in order on the Abbey side. On the second occasion he was told that the counter cheque had been correctly issued and that he might, at his discretion, treat it as cleared funds. On both occasions Mr Jawad lodged the counter cheque with JSF’s bank, the Royal Bank of Scotland, for collection in the ordinary course. But there the similarity ended; though the first counter cheque was duly paid on presentation the second was not.[3]On 23rd February 2005 the Royal Bank of Scotland informed Mr Jawad that the account of JSF had been debited with the sum of £30,000 because the counter cheque from Abbey National in that amount had not been paid on presentation. On further enquiry of the Royal Bank of Scotland Mr Jawad was told that the counter cheque had been countermanded by the customer of Abbey National but had been stamped “item lost in the post”. Mr Jawad wrote to Abbey National on 3rd and 12th March 2005. The only response he got was a telephone call from an employee of Abbey National followed, a few days later, by a further call from Mr Chris Ainsley, a principal fraud investigator for Abbey National, to the effect, in each case, that the matter was in the hands of the Bank’s fraud branch. Mr Jawad then instructed solicitors. They wrote to Abbey National on 13th April 2005 requiring payment of, inter alia, the sum of £30,000 to the account of JSF with the Royal Bank of Scotland by noon on 18th April 2005. The demand was not complied with and on 20th April 2005 JSF issued and served on Abbey National a statutory demand in respect of, inter alia, £30,000. Mr Ainsley acknowledged receipt on the telephone on 28th April 2005. In the absence of any more informative response the solicitors for JSF wrote again on 4th May 2005 threatening to issue a winding up petition at the expiration of the statutory demand on 12th May 2005.[4]On 6th May 2005 solicitors instructed by Abbey National replied. They suggested that there was a clear dispute whether JSF was entitled to the sum of £30,000, that Abbey National was clearly solvent and that the use of the winding up procedure to resolve the dispute was inappropriate. They sought an undertaking from JSF that it would not present a winding up petition. The solicitors for JSF replied the same day seeking details of the alleged dispute and complaining at the conduct of Abbey National not honouring its own negotiable instrument. On 9th May 2005 the solicitors for Abbey set out the contentions of Abbey National. They included the allegation that the individual who procured the counter cheque for £30,000 was an impostor. They maintained that the customers of Abbey National to whose account it had been debited had instructed Abbey National not to pay on the counter cheque. These allegations were subject to detailed refutations in letters from the solicitors for JSF dated 10th and 17th May 2005. They concluded the latter letter by giving notice that unless payment of £30,000 was made by noon on Friday 20th May 2005 a petition for the compulsory winding up of Abbey National would be presented forthwith.[5]On 19th May 2005, without notice to JSF, Abbey National sought and obtained from Park J an injunction restraining JSF from presenting such a petition. The evidence on which Abbey National relied consisted of the affidavit and exhibits thereto of Mr Andrew Horton, a legal executive with the solicitors for Abbey National. The injunction was renewed on 24th May 2005. The application for a final injunction to the like effect came before Mr Bernard Livesey QC, sitting as a deputy High Court judge of the Chancery Division, in July 2005. By then the evidence of Mr Horton had been answered in a long affidavit with exhibits of Mr Jawad made on 26th May 2005 to which Mr Chris Ainsley replied in a affidavit with exhibits made 3rd June 2005. Mr Jawad responded in a further affidavit and an exhibit made on 12th July 2005.[6]In his judgment handed down on 29th July 2005 the Deputy Judge considered that the issue before him was whether the debt for £30,000 claimed by JSF from Abbey National was bona fide disputed on substantial grounds. He considered the evidence before him in some detail and the submissions of counsel for the parties. His conclusion was that though Abbey National disputed the debt bona fide it had failed to demonstrate that it did so on substantial grounds. Accordingly he dismissed its application for an injunction to restrain JSF from presenting a petition to wind up Abbey National based on an unpaid debt of £30,000. The Deputy Judge refused permission to appeal but such permission was granted by Chadwick LJ on 14th September 2005. That is the appeal now before us.

The cause of action available to JSF

[7]Before referring to the judgment of the Deputy Judge and the submissions made to us on this appeal it is necessary to consider the cause of action available to JSF for recovery of the sum of £30,000 from Abbey National. That is the framework within which the evidence before the Deputy Judge, to which I will refer in greater detail later, must be evaluated.[8]In their letter of 9th May 2005 the solicitors for Abbey National suggested that to be entitled to recover £30,000 from Abbey National JSF would have to show that “....he was acting in good faith in accepting the draft, and that he was unaware of the fraud at the time he became the holder of the draft. Further he will need to show that he did not wilfully abstain from reasonable enquiry, where there were suspicious circumstances.” In his affidavit Mr Horton alleged in paragraph 9.1 that JSF “knew or wilfully shut its eyes as to the possibility of fraud in relation to the” counter cheque for £30,000. This allegation was repeated in paragraph 25.2 and submissions to the like effect were made to Park J. In a letter from the solicitors for Abbey National dated 25th May 2005 the allegation was modified. At that stage it was alleged that “your clients have been wilfully blind as to the probability of fraud and in that way have facilitated the fraud.” In his affidavit Mr Jawad complained of the serious allegations being made by Abbey National against JSF without any proper particulars and how they had altered from time to time. He added in paragraph 5:
“I can state clearly that JSF neither knew of any fraud in relation to the counter cheque at the time it was accepted; nor shut its eyes to fraud in relation to the counter-cheque; nor shut its eyes to the possibility of fraud in relation to the counter-cheque; nor shut its eyes or was otherwise ‘wilfully blind’ to the probability of fraud in relation to the counter cheque.”
In the affidavit of Mr Ainsley the allegation changed again. He asserted in paragraph 27 the existence of:
“as a minimum a prima facie case that [JSF] at least wilfully shut its eyes as to the possibility of fraud in relation to the counter cheque.”
[9]This evidence shaped the submissions made to the Deputy Judge. In her skeleton argument counsel for Abbey National asserted in paragraph 5.1 that “JSF knew or must be taken to have known of fraud in relation to [the counter cheque]”. She submitted in paragraph 6 that the only basis on which the application for an injunction was opposed was that there was no evidence of fraud on the part of JSF and therefore no substantial grounds for disputing the debt. In the skeleton argument of counsel for JSF complaint was again made as to the changing nature of Abbey National’s defence to the claim for £30,000 and the lack of proper particulars of the alleged fraud. He pointed out that there was no evidence that JSF knew of the alleged fraud or suspected it but deliberately failed to make enquiry.[10]This was the basis on which the case was put to the Deputy Judge. He summarised the case for Abbey National in paragraph 11 of his judgment as being that: “when Mr Jawad received the payments he either knew that the instruments presented to him had been obtained by a fraud on Abbey or he had ‘blind eye knowledge’.[11]We were concerned that this was not the only or most appropriate formulation of the defence of Abbey National to any claim by JSF for payment of £30,000. Accordingly we invited counsel to address us on the nature of the causes of action available to JSF and of the defences thereto open to Abbey National. In the result the issues have been greatly clarified.[12]The instrument in question is described as a counter cheque. In form it is an unconditional order in writing given by Abbey National to itself to pay JSF only the sum of £30,000. The reference on its face to Mrs V Baker and Miss W.J. Baker is only to identify the customers of Abbey National to whose account the amount of £30,000 is debited. As the drawer and the drawee is the same person, Abbey National, the holder is entitled to treat it as either a bill of exchange or a promissory note, s.5(2) Bills of Exchange Act 1882. It appears to me that the legal effect of such an instrument is identical to that of a banker’s draft. In both cases the account of the customer is debited with the amount of the draft or counter cheque before it is released to the customer. It was explained to us by counsel for Abbey National that the procedure whereby a customer of Abbey National may obtain a banker’s draft differs from that whereby he may obtain a counter cheque both in terms of cost and formality. In the light of those differences Abbey National is prepared to dishonour its counter cheque when in similar circumstances, for commercial reasons, it would not consider dishonouring its own draft. The only warning to the payee or holder that a counter cheque might be treated differently is that which may be implicit in the description it bears on its face. Thus the counter cheque is called a counter cheque and a banker’s draft is so called.[13]It is common ground that once JSF had possession of the counter cheque it was the holder of it for the purposes of the Bills of Exchange Act 1882 by virtue of the definition contained in s.2. Equally it is common ground that, in the absence of any negotiation to JSF, JSF could not be the holder in due course as defined in s.29(1), see R. E. Jones Ltd v Waring & Gillow Ltd [1926] AC 670. Accordingly s.38(2) could not operate to cure any defect in the title of the person who delivered the counter cheque to JSF.[14]In these circumstances counsel for JSF contends that JSF was a holder of the counter cheque for value and that Abbey National was liable to JSF to pay it according to its tenor, ss. 38(1) and 88(1). He submitted that the fact that the counter cheque had been obtained from Abbey National by the fraud of the impostor did not invalidate the instrument or affect the liability of Abbey National unless it was established that JSF knew of the fraud or, having the means of knowledge, wilfully abstained from inquiry. He relied on the statements to that effect in Halsbury’s Laws of England 4th Ed 2002 Reissue Vol 4(1) para 384; Watson v Russell (1862) 3 B & S 34; Talbot v Von Boris [1911] 1 KB 854 and Hasan v Willson [1977] 1 Ll.L.R. 431 as approved and applied in Dextra Bank & Trust Co Ltd v Bank of Jamaica [2002] 1 All ER (Comm) 193 para 22.[15]Counsel for Abbey National submitted that this analysis was wrong on two grounds. The first is that the counter cheque was not delivered to JSF by or with the authority of Abbey National so that the contract on the bill was incomplete and revocable at the time the counter cheque was dishonoured, ss.21(2)(a) and (1). The second is that the counter cheque was unsupported by any consideration adequate to constitute JSF a holder for value. Both these submissions were disputed by counsel for JSF. Further he contended that they were not open to Abbey National unless and until it had amended its appellant’s notice with the permission of this court. He submitted that we should not give such permission because both grounds on which Abbey National rely are bad in law.[16]It is not our function on this appeal to reach any concluded view on either ground. If either is fairly arguable and there is prima facie evidence of the relevant facts then it may constitute a substantial ground for the purpose of considering whether the presentation of a winding up petition should be restrained. It is for that purpose and to that extent that the rival arguments need to be considered. In those circumstances I see no sufficient reason to deny to counsel for Abbey National the opportunity to submit that these points constitute substantial grounds for disputing the liability of Abbey National to JSF. Accordingly I would give permission to amend the appellant’s notice to raise them.[17]It is apparent from the further written arguments of counsel that in relation to the delivery point the crucial question is whether the fraud of the impostor was such as to preclude any contract between her and Abbey National or authority to deliver the counter cheque. Counsel for Abbey National contends that notwithstanding the presumption that Abbey National intended to deal with the individual who asked for the issue of the counter cheque established in Shogun Finance v Hudson [2004] 1 AC 919 the intention of Abbey National was to deal with and only with the customer to whose account the amount of the counter cheque was debited. In seemingly contracting with the impostor Abbey National laboured under such a fundamental mistake that any contract which might otherwise have been concluded between them was void, not merely voidable, for mistake. In the absence of such a contract the impostor had no authority from Abbey National to deliver the counter cheque to JSF.[18]The problem with this submission is that it may be contrary to the decision of Waller J, as he then was, in Citibank NA v Brown Shipley & Co [1991] 2 AER 690. In that case the relevant bank was induced by fraud to issue banker’s drafts. The drafts were paid on presentation and the proceeds paid out to the fraudsters. The paying banks sought to recover the proceeds from the collecting bank as damages for conversion of the drafts. The paying bank contended that the collecting bank obtained no title to the drafts because the fraudsters had no authority from the paying bank to deliver the drafts to the collecting banks. This submission was rejected by Waller J. At page 699 he said:
“So far as authority is concerned, it will usually be very difficult for A to establish that it was of crucial importance to him who actually physically transported the draft to B. In this case, for example, delivery might have been done by post; it might have been done by one or other of the banks’ messengers; it might have been done by some other messenger. It so happened that in this case it was done by someone thought to be the customer or his messenger but that was not of crucial importance. That being so, the authority, as it seems to me, albeit induced by fraud, would not be void; the authority would be actual, even if voidable.”
[19]There is no evidence before the court of the procedures which a customer of Abbey National must follow in order to obtain the issue of a counter cheque or of the steps, if any, that the bank takes to verify the customer’s identity. Nonetheless, since Abbey National is not authorised to debit a customer’s account without proper authority and will have to reimburse the customer if it does so, the true identity of the person who stands at the counter claiming to be the customer cannot be a matter of indifference to it. It seems to me at least arguable, therefore, that in this case the Abbey National intended to deal with, and only with, the true Wendy Baker.[20]It must be assumed that the impersonator of Miss Baker (or possibly someone else acting in collusion with her) delivered the cheque to JSF in exchange for Euros. That delivery was effective to complete the contract on the cheque if it was made with Abbey’s authority.[21]If the argument of counsel for Abbey National is to succeed in the present case it would be necessary for Abbey National to establish that it was fundamental to its willingness to entrust the cheque to her for delivery to JSF that the person at the counter was the real Miss Baker. In my view the case is not quite the same as Citibank v Brown Shipley because the whole transaction was conducted with the person at the counter whose identity may well have been a matter of fundamental importance, at least for some purposes. No doubt Abbey National would say that it would never have drawn the counter cheque, let alone handed it over, if it had not been satisfied that it was dealing with the real Miss Baker, but there are obvious differences between issuing a counter cheque in favour of a named payee and making arrangements for its delivery. Having said that, I think that there is here a point worthy of proper argument which can only be addressed in the light of further evidence.[22]The second ground suggested by counsel for Abbey National is want of consideration for the counter cheque. She points out, correctly, that to be a holder for value JSF must have given value for the counter cheque. As counsel for JSF pointed out it did, namely 40,700 Euros. Counsel for Abbey National replies that this is not enough because, she submits, the consideration must be provided by JSF either to the promisor, namely Abbey National or to a third party at the request, express or implied, of Abbey National, see Chitty on Contracts 29th Ed. Vol. 1 para 3-039. She submits that there could have been no such request where, as here, there is no contract between Abbey National and the impostor. It appears to me that this submission faces at least the same problem as that based on alleged non-delivery. But even if that is overcome it is, I should have thought, at least arguable that a bank which issues a banker’s draft or its equivalent in the form of a counter cheque is inviting the named payee of it to give value in exchange.[23]The third ground of defence to an action by JSF to recover £30,000 from Abbey National based on the undertaking to pay according to the tenor of the counter cheque, see ss. 38(1) and 88(1), is that JSF had notice of the fraud of the impostor. This is the defence established by the authorities on which counsel for JSF relied to which I have referred in paragraph 14 above. Thus Talbot v Von Boris [1911] 1 KB 854 and Hasan v Willson [1977] 1 Ll.L.R. 431 establish, in the words of Robert Goff J, as he then was at page 444 of the latter case:
“I am bound by Talbot v Von Boris to hold that the defendant’s cheque could not be vitiated by the fraud of a third party unless the plaintiff had notice of that fraud, and that the burden rested on the defendant to prove the existence of such notice.....in this context notice is not limited to actual notice, but includes circumstances where the plaintiff had the means of knowledge but wilfully abstained from inquiry.”
[24]Thus the questions to be considered are whether Abbey National has established substantial grounds for its allegations that:(1) in dealing with the impostor, it laboured under such a fundamental mistake that no authority to deliver the counter cheque or request to furnish any consideration in exchange for it can be implied;(2) JSF had the means of knowledge of the impostor’s fraud but wilfully abstained from inquiry.

The Evidence

[25]As I have already indicated the relevant evidence is contained in the affidavits of Mr Horton, Mr Jawad and Mr Ainsley. The affidavit of Mr Horton contains in paragraphs 18 and 19 the only evidence before the court as to the original fraud of the impostor. He said:
“18. I am informed by Mr Ainsley that Mrs and Miss Baker, when they saw that their account had been debited by £30,000, informed their branch of the Bank that they had not caused or authorised this instrument to be drawn. The matter was then passed to Miss Gaye Woodfield, a senior investigator in the Bank’s Fraud department. 19. I am informed by Mr Ainsley that in February 2005 Mrs and Miss Baker attended at a branch of the Bank and confirmed to Miss Gaye Woodfield that neither of them had caused the instrument to be drawn. Miss Woodfield subsequently placed an “Issue Caution” against the instrument, so that when the counter cheque appeared in the Bank’s clearing system to be debited, a caution would appear on screen and the instrument would not be paid. I have not been able to ascertain from the Bank why it was that this instrument was stamped “lost in the post”, I have been informed that the usual stamp would be “payment stopped” and it is likely that a mistake was made in the clearing system. In any event, the instrument was sent back to RBS who, it appears, sent the returned instrument to [JSF].”
[26]Mr Horton sought to put this transaction into context by referring to other transactions in which JSF had been involved. JSF had had accounts with Abbey National until they were closed in September 2003. He gave details of 8 reportedly fraudulent transfers and one reported attempted fraudulent transfer in each case to JSF in the period 2nd December 2002 to 2nd September 2003. The aggregate of the amounts involved, where specified, is £276,107.[27]There is an issue whether the accounts of JSF with Abbey National were closed at the request of JSF or at the insistence of Abbey National. What is not in dispute is that JSF then opened accounts with the Royal Bank of Scotland. In his affidavit Mr Horton then gave some details of seven transactions “confirmed as fraudulent” whereby money of customers of Abbey National were paid to JSF’s accounts with the Royal Bank of Scotland. The face value of those transactions amounts to £334,620. According to Mr Horton these 16 transactions preceded that involving the counter cheque with which we are concerned. In paragraph 16 Mr Horton reported that Mr Ainsley had recently conducted a search of all the Abbey National’s systems but had been unable to identify a single instance of a legitimate payment having been made by a customer of Abbey National to JSF whether by cheque, BACS or CHAPS. In paragraph 25.2 of his affidavit Mr Horton summarised the case for Abbey National as follows:
“The following facts and matters provide as a minimum a prima facie case that [JSF] at the least wilfully shut its eyes as to the possibility of fraud in relation to the counter cheque: 1. the sheer volume of similar fraudulent transactions which have taken place in the last two and a half years; 2. all of which transactions involve identity theft and all of which have [JSF] as the payee; 3. since January 2004 seven payments purportedly from customers of the Bank to [JSF] have been confirmed as fraud; 4. no legitimate payment transfer can be found from a customer of the Bank to [JSF];”
[28]The affidavit of Mr Jawad made on 26th May 2005 contains a lengthy, detailed and fully documented refutation of the allegations made by Mr Horton. In paragraphs 6 to 26 he dealt with the 8 transactions to which Mr Horton had referred which occurred before the accounts of JSF with Abbey National were closed. He summarises his contentions in relation to those transactions in paragraph 27 in these terms:
“The full account of these transactions shows (1) that JSF took proper steps to check the identity of its customers and to confirm with the paying bank that the instruments presented to it for payment were genuine and properly issued; (2) That Abbey accepted that JSF had taken all proper steps; (3) That when a problem with a payment was mentioned to Abbey, JSF gave full information to Abbey and co-operated with their enquiries; (4) That JSF notified the NCIS of the transactions which it was told were fraudulent; (5) That JSF co-operated with the police in their investigations into 2 allegedly fraudulent transactions. I fail to see how the transactions referred to in...Mr Horton’s affidavit can in anyway be said to support the allegation that JSF was fraudulent in relation to the counter cheque for £30,000 referred to in the statutory demand.”
[29]In paragraphs 29 to 39 Mr Jawad dealt in detail with the transactions to which Mr Horton had referred as occurring after the accounts of JSF had been transferred to the Royal Bank of Scotland. His evidence indicates the reasons given by the customers of JSF for wanting substantial amounts of Euros, for example “to buy computer parts”, “personal travelling to Europe”, “for car purchase”, “the purchase of agricultural generators” and “property abroad”. In paragraph 41 he identified three transactions with customers of Abbey National in the period April 2003 to December 2004 in which he contended fraud had not been alleged. He dealt, in paragraphs 42 to 50, in detail with the events surrounding the receipt of the counter cheque for £30,000, the subsequent dealings with Abbey National and the issue of the statutory demand. In paragraph 51 he concluded:
“I can state clearly and honestly, that I did not know when I accepted the counter cheque from Abbey that it had been obtained by fraud. I was not wilfully blind to fraud. I took proper steps to check the identity of my customer and to verify the cheque. If the cheque was indeed obtained by fraud there would seem to be a lamentable deficiency in the security procedures of Abbey. As a very substantial organisation, Abbey is in a much better position to take steps to eliminate the risk of fraud than I am yet it seems now to be seeking to visit upon me the consequences of failings in its own systems. There is no evidence of fraud on the part of JSF and therefore no substantial grounds for disputing the debt owed to JSF.”
[30]In his affidavit made on 3rd June 2005 Mr Ainsley dealt in detail with a number of points raised by Mr Jawad. It is unnecessary to refer to them all. It is plain that they raise many issues on which cross-examination might be expected in any claim for recovery of £30,000 by JSF against Abbey National. But in paragraph 6 he commented that:
“although [JSF] has produced receipts for the large amounts of cash provided (usually in Euros) to its customers it has not provided any account ledgers, bank account details, or any such other financial documentation to show when and if such sums were paid out and when and in what manner such large amounts of cash (especially in relation to the larger transactions) were obtained by [JSF].”
In paragraph 11 he gave details of how the three transactions to which Mr Jawad had referred in paragraph 41 of his affidavit were in fact fraudulent too. In paragraph 27 he summarised the contentions of Abbey National in substantially similar terms to those used by Mr Horton in paragraph 25 of his.[31]In his second affidavit made on 12th July 2005 Mr Jawad explained a substantial number of accounting documents which he exhibited so as to fill the gap on which Mr Ainsley had commented in paragraph 6 of his affidavit. He said in paragraph 6:
“There can be no doubt at all that the Respondent sold to Miss W Baker 40,700 Euros in return for the counter cheque that [Abbey National] has failed to honour. It is [JSF]’s practice as shown by the documentation exhibited to purchase euros from [Direct Currency Exchange plc] as and when required depending on demand, the amount purchased over the counter and exchange rates.”

The judgment of the Deputy Judge

[32]In paragraphs 1 to 10 he set out the basic facts of the case. In paragraph 11 he described the case for Abbey National in the following terms:
“The foundation of Abbey’s case was first mentioned in the letter from their solicitors dated 9th May 2005 but further elaboration was provided in the statements of Mr Horton and Mr Ainsley. Its case comes to this. JSF had originally banked with Abbey but during a 10 month period between December 2002 and September 2003 there were eight actual and one attempted fraudulent transactions. All were cases of identity theft in which an impostor obtained a cheque or transfer of funds from another bank for sums between £18,000 and £57,000 and exchanged them for foreign currency at JSF. Mr Ainsley apparently thought that this was “a remarkably high level of fraudulent transactions for an account of this type” and he could not think of another case involving a customer of the Abbey whose accounts had the same level of fraudulent transaction reports. In the result, Abbey closed JSF’s account during September 2003 and JSF opened an account with the RBS. However, after that date there were seven payments, by a variety of payment methods (i.e. BACS, CHAPS and Cheque) purportedly from Abbey customers paid to JSF which have allegedly been confirmed as fraudulent. These were in respect of payments which individually were between £30,000 and £139,000. Abbey does not say that JSF participated as principal in the fraud on them. They say that when Mr Jawad received the payments he either knew that the instrument presented to him had been obtained by a fraud on Abbey or he had ‘blind-eye knowledge’.”
Counsel for Abbey National accepted before us that that summary, which was substantially repeated by the Deputy Judge in paragraph 23 of his judgment, was both complete and accurate.[33]In paragraphs 12 to 22 he considered the principle he had to apply. He referred to a number of reported cases. In paragraph 22 he concluded:
“...it is plain that the courts have over the years fairly consistently chosen to categorise the test to be applied in the present exercise as one of determining whether the debt was ‘bona fide disputed on substantial grounds’. It is not in my judgment appropriate that I should change the terms in which the test has been traditionally expressed. I am content merely to say that I do not accept that it has been changed in any way...”
It is common ground that the judge correctly directed himself as to the test to be applied.[34]In paragraphs 23 and 24 the Deputy Judge correctly summarised the contentions of the parties. In paragraph 25 he commented:
“It is indeed unfortunate that Abbey sought to prove the underlying fraud of the false Miss Baker so casually. However, had this been the only defect, I would have been inclined not to think that it was fatal to the application.”
Counsel for JSF has not contended that the judge was wrong in reaching that conclusion.[35]In paragraphs 26 to 28 the Deputy Judge commented on the absence of any proper particulars from which knowledge of JSF was to be inferred. His conclusions were expressed in paragraphs 29 to 31 in the following terms:
“29. I now turn to consider the first limb of the ‘blind-eye’ test - whether there is evidence to show that JSF had “a suspicion firmly grounded and targeted on specific facts”
. It proceeds largely on the basis of an allegation that Mr Jawad must have become aware as a result of having suffered from a number of previous transactions, while a customer of RBS, which he must have known were fraudulent because RBS was likely to have told him. In his affidavit Mr Jawad says that there was only one transaction which RBS told him was a fraudulent transaction and there is no evidence to contradict him or reason to believe that he is wrong. As I have indicated, Abbey has not identified a single matter of fact in relation to this transaction which should have put JSF on notice of suspicion as to the fraudulent nature of the transaction. On the contrary, there was much about it that would have put its mind at rest. First of all, there had been the previous transaction with Miss Baker. Mr Jawad had taken the precautions which I have mentioned in paragraphs 4 and 5 of this judgment. The first counter cheque in the sum of £62,500 had been obtained from the Bank, returned to it for correction and replacement with a second; the second was checked as to validity by telephone and subsequently honoured on first presentation. The cheque for £30,000 was therefore the third which JSF received from Miss Baker: Mr Jawad also checked its validity with Abbey by speaking at the telephone to ‘Phil’ on its cheque verification line and was told that he could treat the cheque as cleared funds. It is difficult to see why the previous transaction should have increased Mr Jawad’s level of suspicion rather than his confidence. 30. Even if there were evidence of a suspicion, the second limb of the blind-eye test is whether JSF took a deliberate decision to avoid obtaining confirmation of the facts of which it had the suspicion. The obvious step was to telephone Abbey and ask them to verify the validity of the cheque, but this is exactly what he did do. This is not a case where Abbey has told me what other steps Mr Jawad should have taken. It has not told me what steps Abbey itself took at the time it gave each of the counter cheques to the false Miss Baker so that a comparison could be made between those precautions which JSF took and those which Abbey took. It seems to me that one of the steps which JSF could have taken, prior to the date when he ceased to bank with Abbey, is to write and ask Abbey for advice as to the steps which he should be taking. An analysis of the contemporaneous documentation shows that JSF in fact did just that. In a letter to Abbey on 11th June 2003 Mr Jawad asked “In future may we request our bank to advice (sic) us what more steps we could bring in line with scanning and timely prevention procedures before any mishaps take place which will help all interesting (sic) parties to eliminate widespread panic and undesirable action.” Abbey did not reply to the letter. JSF wrote a second time on 12th August 2003 and asked “In my previous communications I had requested you to please advice whether there is any thing more JSF could do or adopt more effective measures in the eyes of our bank to eliminate such risks re-occurring in the future (as it happened in the above stated two payments were prevented when JSF got desirable timely cooperation from our bank and institutions acting on their own clients behalf.) And yet we have no comfort/help from our bank other then advising us today that you are again considering your actions to close JSF accounts. We find it difficult to understand such reaction from our bank, knowing JSF is not at fault.” Again Abbey did not reply. 31. Accordingly, there is absolutely no basis on which it can be said that a proper allegation of knowing receipt or blind-eye knowledge can be advanced against JSF.” He concluded in paragraph 32 that the grounds on which Abbey National disputed its liability to JSF were “speculative and insubstantial”. JSF wrote a second time on 12th August 2003 and asked

The Appeal

[36]I have set out in paragraphs 15 to 22 above Abbey National’s contentions on the new points raised in respect of delivery and consideration. For the reasons I have indicated I consider that each of them is a substantial ground on which Abbey National now bona fide disputes its liability for £30,000.[37]Abbey National also contends that the Deputy Judge was wrong on the question of notice which was argued before him. They submit that(1) there was sufficient evidence that the claim of JSF was disputed on substantial grounds,(2) there was evidence that JSF had the requisite knowledge,(3) the judge applied the wrong evidential test to the issue before him and(4) the judge failed to consider the other matters which made the process of winding up unsuitable for resolving the issues between the parties. All these grounds are disputed by JSF. It contends that the Deputy Judge was right for the reasons he gave.[38]The principal point on which counsel for Abbey National relied was the failure of the Deputy Judge, as she submitted, sufficiently to evaluate the contentions of Abbey National in the wider context of the previous transactions to which Mr Horton and Mr Ainsley referred. She contrasts the summary of the case for Abbey National in paragraph 11 of the judgment, which I have quoted in paragraph 29, above with the conclusions of the Deputy Judge in paragraph 29 of his judgment quoted in paragraph 32 above. She submits that if all the previous transactions on which Abbey National relies are proved to have been fraudulent and if it is shown that after the event but before 12th February 2005 Mr Jawad knew that they were fraudulent it would be open to a court to infer that this transaction was fraudulent too and that, at the least, Mr Jawad suspected fraud but deliberately abstained from enquiring.[39]I would accept that submission. Although there is less evidence then might have been expected of the circumstances in which Abbey National came to issue the counter cheque, such evidence as has been put forward is in my view sufficient to show that there are real grounds for thinking that Abbey National and its customers, Mrs. and Miss Baker, were the victims of identity fraud in this case.[40]The more difficult question is whether JSF through Mr. Jawad was aware of that fact. It would not matter for that purpose whether he had actual knowledge or what is sometimes called ‘blind eye’ knowledge, that is, a strong suspicion amounting almost to belief combined with an decision to refrain from making enquiries that are expected to reveal the truth for fear of obtaining confirmation of that belief: see Manifest Shipping Co. Ltd v Uni-Polaris Shipping Co. Ltd [2001] UKHL 1, [2003] 1 A.C. 469 per Lord Scott at paragraph 116. It is accepted that Mr. Jawad did not know that the counter cheque had been obtained by fraud. Accordingly Abbey National would have to demonstrate ‘blind eye’ knowledge to justify refusing to pay. But, in order to obtain the relief it was seeking Abbey National had to do no more than satisfy the judge that there was a serious basis for arguing that Mr. Jawad had such knowledge.[41]The judge was not satisfied of that. He considered the circumstances in which the cheque had come into Mr. Jawad’s hands and the steps he had taken to verify its validity, but in my view he failed to take into account the wider circumstances in which the transaction had taken place. These included a number of transactions spread over a period of about 24 months, each of which involved the sale of a large quantity of Euros in cash to a purchaser who gave a questionable explanation of the purposes for which they were required and which eventually proved to have been financed with funds obtained by fraud. It may well be an occupational hazard of those whose business involves the operation of bureaux de change that from time to time they are the target of persons who have obtained funds dishonestly which they wish to convert into another currency. I should be slow, therefore, to draw an adverse inference simply from the fact that JSF had been asked on more than one occasion to sell currency to someone whose funds later turned out to have been obtained dishonestly.[42]However, there comes a time when the circumstances begin to speak for themselves. In the period of nine months between the beginning of December 2002 and the beginning of September 2003 there were eight occasions on which payments to JSF’s bank account were found to have been procured by fraud. Seven of those were CHAPS payments and one a payment by cheque. Five of the CHAPS payments were for amounts of £50,000 or more. In the seventeen months between September 2003 and February 2005, when JSF purchased the counter cheque which gave rise to these proceedings, ten transfers of funds from various customers of Abbey National to JSF have been found to have been procured by fraud. Of these two were CHAPS transfers, one was by banker’s draft, one was by BACS transfer and four by means of counter cheques. Again, the amounts involved were substantial: between £60,000 and £75,000 in each case. There is evidence from Abbey National that it is standard practice in such cases to inform the transferee’s bank that the payment was obtained by fraud and for the transferee’s bank to inform its customer. Whether that in fact occurred in each of these cases cannot be determined at this stage, but there is enough evidence to make it arguable that Mr. Jawad must have known that each of these cases (apart from the last one which occurred only a few days before the transaction with which we are directly concerned) involved a fraud by the impersonation of the customer from whose account the money was drawn.[43]It appears from the evidence of Mr. Jawad that the turnover of JSF during the period in question was around £1 million a year. This means that in the financial year to 31st December 2003 the total value of the transactions affected by fraud was a little under £300,000 (leaving aside three transactions the amounts of which are not given) or nearly one third of its entire turnover. The position for 2004 is similar: the total value of the transactions affected by fraud between September 2003 and February 2005 was about £460,500, equivalent to a little under one third of turnover for a 12 month period. On the face of it these are quite striking figures, but it is impossible to evaluate the evidence properly on the basis of the limited information before us. For example, if JSF handled a large number of transactions of a comparable size and type during the period in question, these particular transactions might not have to be viewed as exceptional; if, on the other hand, they represent a large proportion of transactions of this size, that might suggest that Mr. Jawad must have been aware that this transaction was also being made with funds obtained by fraud. These and similar questions can only be determined at trial.[44]If an experienced banker knows that a series of transactions involving the purchase of large amounts of Euros were all fraudulent and he is asked to participate in another one then he must investigate the propriety of the transaction. And if the enquiries he made before failed to uncover the fact that the transaction was fraudulent then he must consider what other enquiries he needs to make. Enquiry of the paying bank what more to do, as indicated in paragraph 30 of the Deputy Judge’s judgment, may or may not suffice. It is clear that a winding-up petition is not the appropriate procedure by which to resolve these disputes, mutual disclosure and cross-examination of all relevant witnesses is essential. The relevant witnesses will include(1) the customers in respect of each transaction on which Abbey National relies for it has not been established in any court so far that they were indeed impersonated;(2) the officers of Abbey National who deal with that transaction who may be expected to describe in some detail with how they were deceived notwithstanding Abbey National’s own procedures and whether and if so why they answered the enquiries of Mr Jawad in the way he says they did and(3) Mr Jawad. The credibility of all of them will be fundamental to what inferences the judge should draw and the outcome of the case.[45]In short, Abbey National is entitled to rely on similar fact evidence, see O’Brien v Chief Constable for South Wales [2005] 2 AC 534,if it can prove the facts on which it relies and demonstrate that they are indeed similar to those of the transaction in question. They have not done so yet and may have difficulty in doing so in the future. But unless we infer that Abbey National does not have available evidential material with which to do so, in which case the dispute is not bona fide, I find the conclusion that the liability of Abbey National to JSF is disputed on substantial grounds inescapable.[46]The first two grounds were not raised before the Deputy Judge. The third was. The Deputy Judge properly subjected it to anxious scrutiny. The error into which, in my judgment, he fell was to require Abbey National to give particulars in these proceedings comparable to those it would be obliged to give in proceedings by JSF to recover the sum of £30,000 and to give too much weight to the likelihood that Abbey National would be unsuccessful in proving the essential ingredients of their defence to such a claim. It seems to me that the degree of particularity required to support an allegation of fraud in an action is more than that needed to demonstrate substantial grounds for disputing liability such as to make the winding up procedure inappropriate. Similarly once it is established that there are substantial grounds for disputing the claim, which may include issues of law, and that they are advanced honestly the court should not go on to consider the prospects of success of either party to the dispute.[47]For all these reasons I would allow this appeal and grant the injunction sought by Abbey National.

Jacob LJ

[48]I agree.

Moore-Bick LJ

[49]I also agree

Cited in 2 later judgments