If a bank suspects a breach of trust, can it refuse to carry out its customer's instructions?

This case1 considered the duty of a banker faced with a customer's demand for payment of an account in credit when the bank had become aware that payment might constitute a breach of trust in relation to a third party.

The appellant had two accounts with the bank - "Balmoral Supermarket" and "US International".

The appellant's sole director drew a bank cheque against the US International account and offered it for the benefit of creditors of his supermarket business in an attempt to stave off liquidation. When his attempt was unsuccessful, the appellant re-banked the cheque into the US International account.

The court-appointed liquidator phoned the bank to inform it of his appointment. A letter from the liquidator's solicitors was subsequently sent to the bank claiming that the amount of the bank cheque was funds of the company in liquidation, advising that application was being made to freeze those funds, and requesting that they be frozen pending the outcome of the application.

The bank froze the US International account and when the appellant tried to operate his accounts it was evident that bank employees thought that all his accounts were frozen.

The appellant met with a bank employee and subsequently wrote to the bank advising that:

• the US International account had nothing to do with the Balmoral Supermarket account;
  
  
• he had to make a payment out of the US International account and that failure to do so would result in considerable loss for which he would hold the bank responsible; and
  
  
• the freeze on the accounts should be lifted.

An order was subsequently made for the funds to be paid into court (but a few months later the order was discharged by consent).

The High Court decided that the bank was not liable for refusing to pay funds in US International's account as directed by US International.

The Court of Appeal did not agree with the High Court decision and, in allowing the appeal, decided that:

• a bank has a fundamental obligation to comply with its customer's instructions but is entitled not to if it would be dishonest to do so; and
  
  
• applying the "dishonesty" test, the bank did not justify its refusal to carry out the instructions in this case.
  

1 US International Marketing Limited v The National Bank of New Zealand Limited (Court of Appeal CA 144/02, 28 December 2003, Tipping, Anderson & Glazebrook JJ)

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