Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2019]

Introduction

In October 2017, we reported on the first instance decision of Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2017]. Almost exactly two years later, the Supreme Court has handed down judgment in which the first instance and Court of Appeal decisions have been upheld.

The Facts

Mr Al Sanea was the sole shareholder, a director, Chairman, president and treasurer of Singularis. Although there were six other directors, they did not exercise any influence over the management of the company. Mr Al Sanea was empowered to take decisions on behalf of Singularis and was a signatory of its bank accounts.

Daiwa is the London subsidiary of a Japanese investment bank and brokerage firm. In mid-2009, Daiwa held approximately US$204 million to Singularis’ account. Over a period of 6 weeks, Mr Al Sanea approved eight instructions to Daiwa to transfer those funds to entities related to him. It was subsequently found that these transfers were a misappropriation of Singularis’ funds as there was no proper basis for them.

Five years later, Singularis (by its joint liquidators) brought a claim against Daiwa to recover the misappropriated funds. Singularis brought the claim on the basis that Daiwa had breached the Quincecare duty of care it owed to Singularis as it had failed to prevent the misappropriation of Singularis’ funds.

By way of reminder, in Barclays Bank plc v Quincecare Ltd [1992] Steyn J held that:

(i) subject to its duty to execute an order promptly, it was an implied term of the contract between a bank and its customer that the bank would use reasonable skill and care in executing the customer’s orders;

(ii) there would be liability if the bank executed an order knowing it to be dishonestly given, “shut its eyes” to the obvious fact of the dishonesty, or acted recklessly in failing to make such inquiries as an honest and reasonable man would make; and

(iii) the bank should refrain from executing an order if there were reasonable grounds for believing that the order was an attempt to misappropriate funds.

The High Court found that Daiwa had breached its Quincecare duty of care as: "any reasonable banker would have realised that there were many obvious, even glaring, signs that Mr Al Sanea was perpetrating a fraud on the company when he instructed the money to be paid to other parts of his business operations".

Daiwa appealed. The focus of the issues that the Supreme Court was asked to consider was whether Daiwa had any defence to its breach of the Quincecare duty of care. Specifically, whether: (i) Mr Al Sanea’s fraudulent state of mind could be attributed to Singularis; and (ii) if it could, whether the illegality defence was available to Daiwa.

Attribution

Daiwa had argued that that the extent of Mr Al Senea’s control over Singularis was such that his fraudulent conduct should be attributed to Singularis which would, in effect, give grounds on which to defeat Singularis’ claim.

Daiwa relied on the much criticised decision of Stone & Rolls Ltd v Moore Stephens [2009] in which the knowledge of the “directing mind” of the company was attributed to the company itself. Lady Hale, noting that Stone & Rolls could be “laid to rest”, stated that “the answer to any question whether to attribute the knowledge of the fraudulent director to the company is always to be found in consideration of the context and the purpose for which the attribution is relevant”.

In Singularis, the context was Daiwa's breach of its Quincecare duty of care, the purpose of which was to protect Singularis against misappropriation of its funds. To attribute Mr Al Senea’s fraudulent conduct to Singlaris (which had an otherwise reputable and innocent board of directors) would unjustly deprive Singularis of the protection afforded by Quincecare.

Illegality Defence

The illegality relied on by Daiwa was Mr Al Sanea’s provision of documents which he knew to be false and his breach of his fiduciary duty towards Singularis. In addition to rejecting Daiwa’s attribution argument, the lower courts had also rejected Daiwa’s illegality defence on the basis that the test in Patel v Mirza [2016] was not met. More information on how the Patel v Mirza test was applied in the first instance decision can be found in our previous article here.

The Supreme Court took the view that there had been no error in the judge’s approach in applying the Patel v Mirza. Further, the Court of Appeal had found that “barring Singularis’ claim would serve to undermine the carefully calibrated Quincecare duty and would not be a proportionate response, particularly where Daiwa’s breaches were so extensive and the fraud was so obvious”.

Comment

The facts of Singularis were unusual as the fact that a fraud was being committed by Mr Al Senea was, or ought to have been, obvious to Daiwia. In cases where a fraud is concealed, the prospects of a finding of liability are more finely balances. Nevertheless, the Supreme Court’s decision brings to the fore the importance of financial instructions having proper safeguards and governance in place to identify, and halt, fraudulent transfers. This is likely to become increasingly important to financial institutions and their insurers as more business is transacted online and the sophistication of the tactics used by cyber criminals increases.