Timms v CBA; CBA v Timms [2004] NSWSC 76

A husband and wife (“borrowers”) wanted to take out a loan with the bank to finance their purchase of a business. It was known to the borrowers that the business also conducted its banking with the bank, but at a different branch.

Consequently, when the borrowers attended their local branch to discuss the application for the loan (“the first meeting”), officers of the local branch investigated into the viability of the business by contacting the branch at which the business held their accounts. An audit of the business and an internal memorandum concerning the business, in which the view was that the business was ‘basically sound’, were forwarded to the local branch. The officers at the local branch prepared a loan application for the borrowers and this was sent for approval at the bank’s head office.

When the head office came around to approving the loan, updated bank documents showed that the company was in a ‘parlous financial state’. As a result the head office rejected the loan application. Consequently, the husband wrote to the head office to persuade it to change its mind (“the letter from the husband”). In the letter the borrowers wrote:

“We believe that we have offered more than ample security and that the business is extremely sound. We also believe that the Bank agrees with both these assertions.”

The head office did not reply to this letter but changed its mind and approved the loan but on the condition that the financial statements of the business, which was submitted together with the loan application, be certified by an accountant to be true and accurate.

The purchase was completed but subsequently thereafter, the business entered into voluntary administration. The borrowers alleged that:

1. the bank made representations to them at the first meeting that the business they were proposing to purchase was ‘good’, ‘profitable’ and viable and these were false and misleading in contravention of section 52 of the Trade Practices Act 1974 or in breach of the bank’s fiduciary duty to the borrowers (“first meeting claim”);

2. the bank engaged in misleading conduct in not responding to the letter from the husband, in which the borrowers had asserted that the bank agreed that the business was extremely sound (“the letter claim”); and

3. the bank engaged in misleading conduct by not informing the borrowers that the accounts of the business had not been certified by their accountants as true and accurate (“the certification claim”).

The first meeting claim

Barrett J found that because of the documents that were sent to the local branch, the officers of the local branch were of the opinion, albeit wrongful, that the business was ‘good’. However, based on the evidence, his Honour made a factual finding that the officers did not disclose to the borrowers at the first meeting that the business was ‘good’, ‘profitable’ and ‘viable’. As such, the bank was not liable for misleading and deceptive conduct.

The letter claim

In relation to the claim that the bank had engaged in misleading conduct in its failure to reply to the letter from the husband, Barrett J noted that at paragraph 145 that:

The capacity of silence to constitute conduct that is misleading or deceptive within s.52 of the Trade Practices Act is well established by case law.

The relevant principles were felicitously summarised by Black CJ in Demagogue Pty Limited v Ramensky [1992] FCA 557; (1992) 39 FCR 31, 32: “Silence is to be assessed as a circumstance like any other. To say this is certainly not to impose any general duty of disclosure; the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive.”

Barrett J found that by the letter, the husband had intended merely to put before the bank a package of persuasion such as would make the bank change its mind. His Honour then found that:

In these circumstances it is not possible to characterise the context in which the bank did not respond to Mr Timms’ [the husband’s] assertion of belief that the business was extremely sound and that the bank considered it extremely sound as a context giving rise to a reasonable expectation of specific response by the bank to that assertion.

That is to say, the borrowers did not expect that the bank would respond to the assertions made in the husband’s letter, relevantly, that the bank shared a belief that the business was extremely sound. Accordingly, the bank by its silence had not made a representation of their views on the soundness of the business, which could amount to misleading or deceptive conduct.

The Certification Claim

As mentioned above, the loan granted by the head office was on the condition that the financial statements of the business were certified by an accountant. As transpired, the bank contacted the borrowers’ accountant, who had supplied the financial statements, to certify its accuracy after conducting an investigation. The accountant declined to do so but notwithstanding this the bank made the loan available to the borrowers. 

Hence, the borrowers claimed that the bank had engaged in misleading conduct by failing to inform them that the certification had not been given before the loan was made.

However, from the evidence, Barrett J found that the accountant had reported to the borrowers that the bank had sought a certification from him, which he had declined to give. His Honour found it “virtually inconceivable” that the accountant would have said nothing to his clients about the bank’s request. It follows that the borrowers were not misled into believing that the certification was obtained because they already knew of the contrary.

Breach of fiduciary duty

In relation to the claim that the bank had breached its fiduciary duty to the borrowers, the claim was that the bank owed a duty to prefer the borrowers’ interests to its own, which was breached when it failed to disclose its knowledge that the business was unsound.

Barrett J noted at paragraph 169 that:

Cases in which a bank lending to a customer comes to occupy a fiduciary position in which it must prefer the customer’s interests to its own are rare.

At paragraph 171, his Honour propounds that:

The central test for the existence of fiduciary duty emerging from the joint judgment of Davies, Sheppard and Gummow JJ in Commonwealth Bank of Australia v Smith is whether the bank has, by its actions, engendered in the customer an expectation inconsistent with the bank’s acting in its own interests to protect its position as lender. Such an expectation may arise where “the customer may fairly take it that to a significant extent his interest is consistent with that of the bank in financing the customer for a prudent business venture” [emphasis added].

Barrett J found that that was not the case here. At paragraph 172, he notes that:

Previous transactions between the Timms [borrowers] and the bank had been exclusively of a traditional banker-customer kind. There was nothing in the history of the relationship to suggest that Mr and Mrs Timms relied on the bank for advice. On their own evidence, all their approaches to the bank during a relationship spanning some 20 years related to ordinary banking business, including lending for housing and home extensions as well as financing transactions for investment properties. On the facts as I have found them, Mr and Mrs Timms did not seek, and the bank did not volunteer, advice about the wisdom of the Artrona transaction.

Accordingly, there was no reasonable expectation on the part of the borrowers that the bank would act otherwise than in its own interest as a lender in the transaction. As such, there arose no fiduciary duty to the borrowers, of which was breached by the bank.

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