Can the knowledge of several employees be aggregated and attributed to the company?

What you need to know

• Knowledge, beliefs, opinions or state of minds of persons closely and relevantly connected to a company can be attributed to the company.
• One cannot simply aggregate the knowledge held by different officers or employees of a company, who are individually unaware of fraud or any wrongdoing, to create a notional person with a dishonest intent so as to attribute it to the company. 
• However, in certain circumstances, knowledge of fraud by employees may be aggregated to determine culpability of a company where there is a duty and opportunity to communicate it to the other.

Facts

In Commonwealth Bank of Australia v Kojic [2016] FCAFC 186, Marija Kojic and Dragutin Kojic entered into a joint venture with Smelisha Blanusa (via Southern Construction Services Pty Ltd, a corporate vehicle of Mr Blanusa) for the purchase of property in South Australia.

The Kojics and Mr Blanusa banked with CBA and made financial arrangements for the purchase of the property with CBA. A first ranking mortgage over the property was registered under Mr Blanusa’s (and various companies under his control) name. The Kojics made a payment of $436,161 to CBA. The payment took the form of an unsecured loan as the Kojics took no steps to take security for the payment. Mr Blanusa subsequently defaulted in his repayments to the CBA, which took possession of the property under the mortgage and sold it.

Proceedings

The Kojics brought proceedings against CBA to recover their payment in equity and alleged that the CBA had engaged in unconscionable conduct as it was aware of Kojic’s’ interest in the property and was in breach of its fiduciary duties.

Decision and reasoning

In the first instance, the trial judge held that the bank had acted unconscionably in the transaction by knowingly improving its position as a secured creditor at the expense of the Kojics.

The Full Federal Court overturned the primary judgment and held that as CBA was not acting in an advisory role for the Kojics, it did not owe them a fiduciary duty. Further, CBA’s knowledge that the Kojics were experienced property developers, and its lack of awareness of the Kojic’s misunderstanding as to the extent of Mr Blanusa’s interest in the property also meant that there was no factual basis to meet the standard for unconscionable conduct.

The Full Federal Court also considered whether the knowledge of several employees could be aggregated in determining the knowledge of an institution where there is a duty and opportunity for the employees to communicate the information to each other. It held that the knowledge of a number of persons without fraudulent intent could not be aggregated to create a notional person with dishonest intent. Therefore, the knowledge of the two CBA employees involved could not be aggregated in the circumstances of this case.

What does this mean for you?

Companies that have an advisory role in transactions will need to be aware of the fiduciary duties they owe to their customers and that it may be required to disclose certain information to its customers. This case also serves as a reminder that whilst knowledge of key employees can be attributed to a company, in certain circumstances, knowledge of employees can also be aggregated to determine culpability of a company.