Australia: Does collective knowledge of a companys officers equate to company knowledge?

This week's TGIF considers Commonwealth Bank of Australia v Kojic [2016] FCAFC 186, in which the Court questioned whether the knowledge of a company is in fact the collective knowledge of its officers

BACKGROUND

The Kojics

The Kojics instructed their relationship manager at the Commonwealth Bank of Australia (CBA) to issue a bank cheque in the amount of $436,161.97 from their bank account.

The funds were advanced by the Kojics:

  • to enable Southern Construction Services Pty Ltd (SCS) to purchase two properties in South Australia (the Property); and
  • in exchange for a half interest in the Property.

The Kojics were experienced property developers and were aware that they weren't going to be registered on the title as owners of the half interest until sometime after settlement.

SCS

Another employee at CBA was the relationship manager to SCS. Separate to the money issued by the Kojics, CBA agreed to advance to SCS the sum of $480,000.00 to assist with the purchase of the Property, in exchange for a first registered mortgage over the Property. SCS also had other facilities with CBA. All of SCS' facilities were secured by the first registered mortgage over the Property.

SCS was the corporate vehicle of Mr Blanusa and Mr Smith.

The issue – collective knowledge

Sometime after settlement, SCS defaulted on its facilities and CBA took possession and entered into a contract for the sale of the Property.

The Kojics' argument ran as follows:

'...CBA took its mortgage over the [P]roperty at settlement, other than as an acquirer in good faith for value and without notice of any "prior equitable interest" of the Kojics as half owners. CBA therefore held that half interest under a resulting or constructive trust for the Kojics, and breached that trust by applying all the proceeds of sale of the property in discharge of the indebtedness of [SCS's interests] to CBA.'

The relationship managers of each of the Kojics and SCS knew that the Kojics and SCS were clients of CBA and were aware of their respective relationships. However, the relationship managers did not discuss with each other their respective clients' involvement in the transaction.

SCS' relationship manager was not aware that without the Kojics' payment, settlement would not occur. Further, the Kojics' relationship manager did not tell his counterpart that the Kojics' payment was for the purpose of the Kojics getting a half interest in the Property.

CBA argued that the relationship managers had 'knowledge of separate transactions, and not knowledge going to the one transaction.'

DECISION AT FIRST INSTANCE

The Court held that CBA's conduct was unconscionable because of the knowledge it had.

The Court held that the dealings by the Kojics with their relationship managers and SCS with its relationship manager constituted one transaction (not two separate transactions for which each relationship manager was responsible). Both relationship managers knew, in broad terms, what the other was doing for their respective clients, however lacked an overall understanding of the transaction. If the relationship managers had combined their knowledge, settlement would not have occurred (given the Kojics wouldn't have advanced funds as an unsecured creditor and CBA would not have advanced funds with a mortgage over only 50% of the Property).

CBA appealed the decision.

DECISION ON APPEAL

The Full Court reversed the decision.

Unconscionable conduct

The Full Court held that CBA did not act unconscionably. This was so even if the knowledge of the relationship managers was aggregated and attributed to the bank.

Central to this finding was the fact that the Kojics' relationship manager and CBA were not acting in an advisory role for the Kojics and held no fiduciary position. He was not asked for a facility by the Kojics, and he was told of the Kojics' participation (a half interest in the Property) in the context of being asked to arrange a bank cheque. He was not asked for advice and did not assume any responsibility to attend to the Kojics' interests in the transaction. The Kojics were experienced business people who were engaging in a commercial transaction of the kind which was familiar to them.

Further, there was no evidence that either or both of the relationship managers knew that the Kojics did not understand the reach of CBA's mortgage or that various SCS borrowings were secured by the mortgage. While neither of the relationship managers told Mrs Kojic of its reach, that is not to say they knew she was ignorant of it. Mrs Kojic was an experienced property developer, who knew Mr Blanusa well and was involving herself in a transaction in which there was a professional conveyancer who made enquiries with CBA on her behalf. In these circumstances, CBA was entitled to assume that either Mr Blanusa or the Kojics' conveyancer informed the Kojics of the terms of the mortgage or that the Kojics would have enquired about such matters and been given proper answers.

Aggregation of knowledge

The Full Court held that the primary judge erred in aggregating the knowledge of the relationship managers and attributing it to CBA.

The knowledge of the relationship managers could not be aggregated and attributed to CBA where neither individual had acted unconscionably. Nor was there a duty to communicate the information they possessed. As Edelman J stated:

'[i]t is not easy to see how a corporation, which can only act through natural persons, can engage in unconscionable conduct when none of those natural persons acts unconscionably.'

COMMENT

This decision gives banks some comfort that a Court will not readily aggregate the knowledge of employees and attribute it to the bank. However, banks should keep in mind that it may be possible in some circumstances for employees' knowledge to be aggregated and attributed to the bank, where, for example, the employees acted unconscionably. This case suggests that the level of inquiries bank employees must make in relation to their clients' business will depend on factors such as the role its employees assume on behalf of their clients and the degree of business experience of the clients.

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.

Chambers Asia Pacific Awards 2016 Winner – Australia
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