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The Importance Of Document Verification For Banking Transactions
December 2009 | Finance | Business Bulletin

It is a standard requirement that, prior to any drawdown of credit facilities, banks are furnished with certified extracts of board resolutions approving the banking transactions and authorising the execution of contracts. Such extracts usually include resolutions delegating authority to the signatories to enter into the contracts.

In the recent case of Skandinaviska Enskilda Banken AB (Publ), Singapore Branch v Asia Pacific Breweries (Singapore) Pte Ltd and Another and Another Suit [2009] SGHC 197, this requirement was discussed at length in the court’s consideration of the issues relating to the law of agency.

Facts of the case

Chia Teck Leng ("Chia") misappropriated the funds of his employer Asia Pacific Breweries (Singapore) Pte Ltd ("APBS") by defrauding five international banks. By using his position as finance manager of APBS, he made use of APBS’s name to obtain substantial credit and loan facilities from the banks.

After the fraud was discovered, four of the banks brought actions against APBS. Two of the banks abandoned their actions during trial, leaving Skandinaviska Enskilda Banken AB (Publ), Singapore Branch ("SEB") and Bayerische Hypo-Und Vereinsbank Aktiengesellschaft ("HVB") to continue with their actions to recover the sums owed under the credit and loan facilities.

The issues were whether:

This article will focus on the agency issue.

Express and implied actual authority

The Singapore High Court held that there was no express or implied actual authority given to Chia. The banks required directors' resolutions to be furnished. Since the directors' resolutions furnished were false, they had no legal effect. The SEB facility letters and HVB facility letter signed by Chia were therefore invalid and not binding on APBS.

After considering the course and scope of Chia's employment with APBS, the court found that there was no actual authority granted to Chia since (a) fraud nullifies the actual authority of the agent; (b) the banks had not proven Chia's actual authority based on the course and scope of Chia’s employment; and (c) the internal documents examined did not confer any relevant authority upon Chia to commit APBS to the SEB facilities and HVB facility.

The banks' standard requirement of a certified extract of a board resolution covering the transaction contradicted the banks' claim that Chia had implied actual authority, as APBS's finance manager, to warrant or represent forged documents as genuine. This was because he could negotiate and commit the company to the banking facilities only if empowered by the board.

Further, the banks' facility letters expressly provided for the persons they regarded as being qualified to certify as a true copy an extract of the board resolution. These persons did not include the finance manager. The banks' officers were also required to check and verify the documents received including the certified extract of the board resolutions.

Ostensible authority

Ostensible authority is the outward appearance of the agent's authority as others see it. The onus of proving ostensible authority lay on the banks. The banks had to fulfill four factors as specified in Diplock LJ's judgment in Freeman & Lockyer v Burkhurst Park Properties (Mangal) Ltd [1964] 2 QB 480. The four factors were:

The first consideration was whether forgery of a representation would nullify a forged document for all purposes. In this regard, a distinction was made between a loose forgery and a strict forgery. In the former, genuine signatures and seals were used but without the company’s authority. In the latter, the signatures and seals themselves were forged. Generally, the principal is allowed to deny the forgery in strict forgeries although in certain exceptions the principal may be estopped from denying the forgery if it had represented the documents as genuine.

Chia’s fraud was a strict forgery. On the evidence, the banks only dealt with one senior employee of APBS, namely Chia. No authorised person in APBS held out Chia as having authority to enter into and execute the SEB facilities and HVB facility. As such, APBS was not stopped from denying the forgery.

The banks also had not established a representation by APBS that Chia had apparent authority to warrant the genuineness of the certified extracts of the board resolutions or to communicate the board's approval of the transactions. Furthermore, the banks' own requirement for a certified extract of a board resolution for each transaction as a condition precedent undermined the banks' case for ostensible authority.

The court highlighted the need to verify the identity and signature of the corporate officers certifying as true the extracts of the board resolutions to safeguard the banks' own interests and to take reasonable steps to ensure proper execution of important documentation.

On the facts:

Further, the court noted that the banks dealt only with Chia and did not take reasonable steps, such as the following, to verify and ensure that the extracts of board resolutions and documentation were in proper order:

The banks' impression that the certified extracts of the board resolutions were properly executed, and hence in order, was founded entirely on the banks' limited verification of those certified extracts. On the evidence, the banks willingly accepted the certified extracts and willingly took the risk of forgery and Chia's lack of authority. Consequently, (1) the rules of apparent authority could not be fulfilled and would not apply, and (2) the attendant risks/factors that could vitiate the transactions including the risk of forgery fell on the banks.

The banks were also required to act reasonably in relying upon the representation. The banks would fail if they were put on inquiry and unreasonably failed to make the necessary inquiries about the employee's authority. Again, there could be no reliance on Chia's apparent authority since the banks required a certified extract of a board resolution. Chia's reasons and explanations to the banks for the loans also did not make commercial sense and should have prompted the banks' inquiry. There was also non compliance with the banks' internal manuals and failure to address or inquire about the glaringly obvious discrepancies in the documentation that accompanied the applications. By their conduct, the banks took the risk of fraud and the court therefore found no reasonable reliance to satisfy the third factor of Diplock LJ's judgment.

Hence, the court concluded that Chia had neither actual nor ostensible authority to bind APBS and APBS was not contractually liable for repayment of the outstanding loans and interest.

Conclusion

This case illustrates the importance of adhering to the requirements of standard banking practice. This includes taking reasonable steps to verify and ensure that board resolutions are in proper order, no matter who the customer is, to verify the representation of ostensible authority and that reliance on such authority is justified. Banks may be eager to develop a banking relationship with a customer they regard as "good credit". However, if the banks choose to ignore such requirements and fail to make reasonable inquiries on any discrepancy or irregularity found, they would assume the risk of fraud and any lack of authority and run the risk of the transaction being nullified.