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Breach of mandate – two signatories required for company account – automatic payment set up by one party
In October 2000 Mr G and his business partner, Mr K, set up a company account. The signing instructions on the account stated that two signatures were required to operate it.
In January 2002 Mr K established an automatic payment from the company account to pay rent on his personal residence. Seventeen payments totalling $6,120 were paid before the automatic payment was cancelled in September 2002. At about this time Mr G and Mr K had a falling out.
Mr G discovered that the automatic payment had been set up by Mr K without his consent. The bank said that, although it had “overlooked” the instruction that all financial transactions were to be authorised by both Mr G and Mr K, Mr K was known to be a director of the company, and it had therefore allowed him to set up the automatic payment at its discretion. The bank suggested that Mr G recover the money directly from Mr K.
Eventually Mr K was removed as a director of the company and as a signatory from the bank account. Mr G tried unsuccessfully to recover the money the company had paid for Mr K’s rent. He then complained to the bank about the breach of mandate in allowing the automatic payment to be set up for Mr K’s rent. The bank was unable to resolve the complaint, and it was referred to my office.
I found that the bank had allowed the company’s account to be operated in breach of the account mandate. The signing authority clearly stated that both Mr G’s and Mr K’s signatures were required to operate the account. It was therefore necessary for the bank to show that the company did not suffer loss as a result of the breach. As there was no evidence that the company had benefited in any way from paying rent for Mr K’s personal residence, it appeared that the rent was a loss to the company. Whilst Mr G had an obligation to mitigate the loss suffered by the company, given the breakdown in his relationship with Mr K and Mr K’s lack of cooperation, it was most unlikely he would be able to recover any money from Mr K.
I therefore recommended that the bank reimburse the company account for the amounts paid in breach of mandate totalling $6,120, plus interest at a rate of 5% per annum from April 2003 (that is six months after the last unauthorised transaction was made) to the date of settlement. Because Mr G had to obtain legal advice and pursue legal action (unsuccessfully) against Mr K, I also recommended that the bank pay a contribution of $500 towards Mr G’s legal costs.
The complaint was settled on this basis.