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Some time ago Rory White asked in relation to Barclays Bank v. Simms [1980] 1 QB 677: "What was the legal basis for the bank making good the drawer company's account?"

Paul Matthews replied: "The bank has no legal basis for debiting the drawer's account, since the drawer has not (now) authorised this."

On a related note, what if the bank did have a legal basis for debiting the drawer's account and yet tried to claim the money back from the payee? Consider this scenario. A potentially insolvent company (the "Payor") desired to pay off an inter-company debt owed to its sister company in the hope that the payment would fall outside the preference period should it go into liquidation later. However the signatory to its bank account was unavailable to sign the bank instruction to transfer. In order that the payment could be made immediately, a director of the Payor forged the signature of the signatory and sent the payment instruction to the bank by fax. The bank duly paid thinking that the signature was genuine. It later turned out that the Payor returned to profitability and did not go into liquidation.

Under ordinary circumstances, the bank cannot debit the Payor's account on the basis of a forged signature as it was acting without mandate (Natwest v Barclays Bank [1975] QB 654, 666). However the bank has an indemnity in relation to instructions sent by fax along these lines: "In consideration of the bank accepting and acting on any instructions received from the Payor by fax, the Payor agrees to indemnify the bank against all losses incurred by the bank as a consequence of the bank acting on such instructions and irrevocably authorise the bank to debit the Payor's account immediately with all sums paid by the bank in respect of such instructions, provided the bank was not negligent". An indemnity of this sort is not uncommon. Assuming that the bank was not negligent, it seems that in these circumstances the bank can debit the Payor's account because the instruction was sent to the bank by fax and the bank did act on it.

Having debited the Payor's account, can the bank also claim the money back from the payee on the ground of mistake as to the authenticity of the signature? The bank would argue as follows. The bank would not have effected the payment instruction but for its mistake as to the authenticity of the signature. But it was in fact acting without mandate (Natwest v Barclays Bank [1975] QB 654, 666). Since the bank was acting without mandate, the payee did not give consideration for the payment and thus was liable to repay the bank (Barclays Bank v. Simms). The fact that the bank has debited the Payor's account pursuant to the indemnity is irrelevant because passing on is not a defence.

This doesn't sound right, does it?

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