It's bad enough paying money to someone by accident. What do you do if the recipient has transferred the money to someone else? A recent case shows that, once you discover the mistake, you shouldn't waste any time letting the other side know about it.

Background

Singleton Earthmoving Pty Ltd was in liquidation.

Wambo had once owed money to Singleton, but had paid it off. Wambo did however, owe money to Quensor. Quensor was no relation to Singleton, but did use a similar trading name.

Apparently confused by the similar names, Wambo paid Singleton the money due to Quensor.

Singleton's records were out of date, so its liquidator believed that Wambo's payment was the payment of a current debt.

The liquidator then directed a transfer of money from Singleton's bank account to his own firm (for disbursements).

When Wambo  found out about the mistaken payment, it informed Singleton and demanded the return of the money. The liquidator claimed that Wambo was still a debtor. Singleton retained the money. Another transfer was made to the liquidators firm's account.

Wambo took Singleton and the liquidator to court.

Did Singleton hold the mistaken payments on trust for Wambo?

Wambo argued that the recipient of money mistakenly paid without consideration holds the money on trust for the payer.

The Court rejected that argument, but this case involved something a bit more: not only had the money been paid by mistake, but the recipient had been informed about the mistake.

The Court said that a constructive trust would arise from the retention of moneys known to have been paid by mistake, and for which there was no consideration (provided the moneys could still be identified at the time that knowledge was acquired).

It would be "against conscience" for Singleton to use the moneys as its own once it knew of Wambo’s mistake.

The fact that the recipient of the money in this case was insolvent did not affect this conclusion. It would, said the Court, be an unwarranted windfall for the company’s creditors to share in the payment.

Did Singleton have the requisite knowledge?

The liquidator's mind was Singleton's mind. On the evidence, the Court concluded that he had not known that the money had been paid by mistake when the first transfer was made to his firm.

In reaching this conclusion, the Court acknowledged that, before authorising the first transfer, the liquidator had known that Singleton's records had not been updated. However, the issue was not whether he ought to have known that the payments were made in error, but whether he "did know that they had been paid by mistake, or whether he wilfully shut his eyes to that possibility, or wilfully and recklessly failed to make inquiries, or had actual knowledge of the circumstances which would indicate the facts to an honest and reasonable person."

That moment only arose when Wambo's solicitors informed him that the payment had been in error. From that time, the money in Singleton's account had been held on trust for Wambo.

The liquidator's liability

Wambo had taken recovery proceedings against Singleton and its liquidator. The liquidator argued that, since he was not a recipient of any money, he could not have any liability for the moneys that had been transferred from Singleton. He pointed out that the transfers had been made to his firm, and that the firm was not a party to the proceedings.

The Court dismissed this argument, on the grounds that any expenses incurred by the liquidator's firm could only have been incurred because the liquidator incurred those expenses and the firm had paid them on his direction.

The only person entitled to be indemnified out of Singleton's assets in respect of expenses incurred in its liquidation was the liquidator.

The Court also dismissed the liquidator's argument that his only fiduciary duty was to Singleton: in this case, a separate fiduciary obligation (owed to Wambo) arose from the circumstances in which the constructive trust arose.

Wambo was also entitled to remedies against Singleton, but as Singleton apparently had no assets, this was, in the Court's words, academic.

The lesson

Although Wambo got some of its money back, it still ended up out of pocket. Even then, it was probably a little fortunate.

As noted above, the Court said that a trust would arise if the moneys could still be identified when the payer notified the recipient about the mistake. In this case, Singleton's bank account was so empty that it was easy to trace the movement of Wambo's money in and out of the account.

The obvious lesson from this case, of course, is to act quickly if you discover that you've made an accidental payment. In fact, it is probably a good idea to let the recipient know as soon as you have reasonable grounds to suspect an accidental payment. A recipient who is put on notice that a payment may have been mistaken will have difficulty resisting a demand for repayment if he goes ahead and disburses the money.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.