In Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd the Court of Appeal upheld a decision that the appellant bank had breached the Quincecare duty of care which it owed to its corporate customer by making payments without proper enquiry, in circumstances in which a reasonable banker would have been on notice that the customer's director was perpetrating a fraud.
The bank had paid away $204 million – reducing the customer's account balance to zero – at the instigation of one of the directors (who was also the sole shareholder) of the customer. It was common ground between the parties that the shareholder director was acting fraudulently in issuing those payment instructions.
The Court of Appeal upheld that the fraudulent shareholder director's conduct could not be attributed to the customer, and as such, the illegality defence would not defeat the bank's liability for breaching its Quincecare duty to the customer.
The defendant/appellant bank, Daiwa Capital Markets Europe Ltd, was the London subsidiary of a Japanese investment bank and brokerage company. In 2006 the bank entered into a lending relationship with Saad Investment Company Ltd, which was part of the Saad group (a Saudi Arabian conglomerate owned by Mr Al Sanea).
The claimant/respondent company, Singularis Holdings Ltd, was incorporated in the Cayman Islands. Its function was to manage Al Sanea's personal assets and it was not part of the Saad group. At all relevant times, Al Sanea was the sole shareholder and one of the directors of the company.
On April 13 2007 the bank entered into a global master securities lending agreement with the company, under which the bank provided loan financing to enable the company to buy shares. In turn, the shares stood as security for the loan and the bank was entitled to make further margin calls in certain circumstances.
Various events in 2009 gave cause for concern as to the company's ability to meet future margin calls. The bank therefore decided to unwind its existing positions with the company, which it managed to do amicably. On June 4 2009 the bank completed the sale of the shares which it held as collateral. The proceeds of the sales combined with the cash margin in the client account meant that the balance on the company's account with the bank stood at $204 million.
In light of the matters which had prompted the bank to unwind the positions, on June 5 2009 its head of compliance division circulated an internal email which stated:
"As you are all aware the SAAD group and some of the related individuals and entities have been experiencing well publicised problems including downgrades and the freezing of bank accounts. Under these circumstances can I re-emphasise the need for care and caution in terms of any activity on their accounts with us. Singularis have reasonably large sums of client money lodged with us and we need to ensure we maintain appropriate oversight of both further deposits and requests for payments… We should therefore ensure that any funds received relate to normal business activities and, if they are unsolicited, can clearly be linked back to their normal investment business… Clearly any payment requests we receive must be properly authorised and be 'appropriate' in the context of our business relationship with them. If there are any doubts or concerns please contact compliance or legal…"
Between June 12 and July 27 2009 the bank received requests for eight payments from the company's accounts to various accounts of companies which were also wholly owned by Al Sanea or otherwise indicated to be Saad group entities. For many of those payment instructions, the bank authorised the transfer without making any further enquiries. For one of the payments – $180 million to be paid to Saad Specialist Hospital Company – while the bank asked the reason for the payment, it was satisfied by contradictory explanations and supporting documents and proceeded to effect the transfer.
Following the final payment on July 27 2009 the company's account balance with the bank was reduced to zero. On July 24 2009 the Grand Court of the Cayman Islands issued a worldwide freezing order against assets of the Saad group. Al Sanea placed the company in voluntary liquidation on August 24 2009.
On July 18 2014 the company, acting by its joint official liquidators, issued a claim against the bank for approximately $204 million on two alternative bases. First, it claimed that the bank had dishonestly assisted Al Sanea's breach of fiduciary duty in removing the money from the company's account for the benefit of himself or other Saad group companies, to the detriment of the company's creditors. Second, it claimed that the bank had breached its duty of care to its customer by authorising the payments and negligently failing to realise that Al Sanea was committing a fraud on the company and misappropriating its money.
The trial judge was satisfied that the eight payments amounted to a misappropriation of the company's assets and a breach of fiduciary duty by Al Sanea; he must have known that the company was insolvent, or on the verge of insolvency, and therefore had a duty to act in the creditors' best interests.
The first basis was rejected by the trial judge. Applying the test in Twinsectra Ltd v Yardley ( UKHL 12), the bank's personnel had not acted dishonestly in approving the payments, even in the sense of turning a blind eye to the obvious shortcomings in the explanations which were given to them. Rather, they had not understood what was needed from them (even in light of the June 5 2009 email) in order to fulfil the appellant's obligation to its customer, because management had not properly explained this to them.
The second basis succeeded at first instance. The trial judge held that the bank owed a duty of care to its customer (as established in Barclays Bank plc v Quincecare Ltd ( 4 All ER 363)) in respect of money in its client account. The duty established in Quincecare provides that a bank will be liable to its customer in negligence if it makes a payment in circumstances where it had reasonable grounds for believing that the payment instruction was an attempt to misappropriate its customer's funds. In such circumstances, the bank has a duty to make reasonable enquiries rather than simply following the instruction.
However, the damages payable by the bank were reduced by 25% to take account of the company's contributory negligence. The bank appealed the decision.
In upholding the trial judge's decision, the Court of Appeal considered five key issues, which are addressed below.
Should Al Sanea's fraud be attributed to the company (so as to bar its claim on grounds of illegality)?
The Court of Appeal dismissed this ground. The judgment provides a useful analysis of the relevant authorities on the question of attribution of a director's fraudulent conduct to a company, including Bilta (UK) Ltd (in liquidation) v Nazir (No 2) ( AC 1) and the dicta in Stone & Rolls Ltd v Moore Stephens (a firm) ( 1 AC 1391).
The Court of Appeal's starting point was to consider, on the authorities, what was meant by a 'one-man company' for the purposes of attribution, and accepted the meaning adopted by the majority in Bilta: "a company in which, whether there was one or more than one controller, there were no innocent directors or shareholders". The trial judge had concluded that there was no basis to find that the other directors had been complicit in misappropriating the money, and this was therefore not a case of a one-man company.
The Court of Appeal also gave importance to the fact the company had not been created purely for the purpose of perpetrating the fraud (unlike the company in Stone & Rolls) – rather, the wrongdoing took place only over a short period at the end of the company's otherwise legitimate business life.
If the fraudulent activity were attributed to the company, would its claim against the bank be barred by an illegality defence?
It followed from the failure of Ground 1 that the Court of Appeal also dismissed this ground. While providing useful commentary on the test set out in Patel v Mirza ( UKSC 42), the judgment concluded that there was no need to consider the issue if Al Senea's fraudulent conduct had not been found to be attributable to the company.
The Court of Appeal also held that to bar the claim would undermine the "carefully calibrated" Quincecare duty which would be a disproportionate response, especially given the extensive nature of the bank's breaches and the fraud being so obvious.
Grounds 3 and 4
If not defeated by an illegality defence, is the claim defeated by either:
- lack of causation, because the company (with Al Senea's fraud attributed to it) was not relying on performance by the bank of its duty; or
- an equal and opposite claim by the bank against the company (with Al Senea's fraud attributed to it) in deceit?
Given that both of these grounds also relied on the attribution of Al Sanea's conduct to the company, it followed from the above that these also failed. However, on both the causation and "equal and opposite claim in deceit" arguments, the Court of Appeal held that, even if attribution had been found, the grounds would still have failed on the following bases:
- Causation – if the bank had refused to make the payments (and properly performed its duty), the independent directors would have become aware of Al Sanea's fraud and the losses would have been avoided; and
- Deceit – the Court of Appeal highlighted the circular nature of the argument: that the bank would seek to escape liability by placing reliance on the existence of a fraud that was itself a pre-condition for its own liability (ie, the fraud which, with the proper performance of its Quincecare duty, the bank ought to have detected).
Did the Quincecare duty apply where only the creditors of a company stood to benefit?
The Court of Appeal upheld the decision that the Quincecare duty was owed to the company and not directly to its creditors, and that duty would still apply even where only the company's creditors stood to benefit from the proceedings.
In the context of ever-increasing volumes of banking transactions and sophisticated transfer frauds, this judgment may provide a route for redress for banking customers that fall victim to a fraud in circumstances where it is reasonable to expect the bank to have made proper enquiries and identified unusual characteristics of the proposed transactions rather than simply following instructions.
The first-instance judgment noted that it would not be contrary to the public interest to allow the claim to succeed, and in fact that denying the claim would have a material negative impact on the growing reliance on banks to help reduce financial crime. This might signal a judicial warning to banks that they should be actively taking greater responsibility in combating financial crime and protecting their customers from fraudulent activities on their accounts.
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