Bank held liable for breach of Quincecare duty

Bank held liable for breach of Quincecare duty

Bank held liable for breach of Quincecare duty

The Supreme Court has handed down the first judgment upholding a claim against a bank for breach of the “Quincecare” duty owed to its customer.

 

The “Quincecare” duty

The “Quincecare” duty originated from Barclays Bank Quincecare Ltd [1992] 4 All ER 363. The duty requires financial institutions not to carry out requested transactions when it is on notice that the transactions might be an attempt to misappropriate the customer’s funds.

The Facts

In the Singularis [2019] UKSC 50 case, Daiwa Capital Markets Europe Limited (“Daiwa”) held funds for its customer Singularis Holdings Limited (“Singularis”). Mr Al Sanea was the sole shareholder, chairman, president, treasurer and a director of Singularis. He instructed Daiwa to transfer the sums on Singularis’ account to several companies. Daiwa complied with these instructions. Mr Al Sanea then placed Singularis into liquidation.

The result of these transactions was that Singularis had no funds to meet its financial obligations and was insolvent. Creditors of Singularis therefore lost significant sums of money. Singularis, acting through its joint liquidators, subsequently brought a claim against Daiwa for:

  • dishonest assistance in Mr Al Sanea’s breach of fiduciary duty in misapplying Singularis’ funds (so ensuring that Singularis was insolvent); and
  • breach of the Quincecare duty of care owed by Daiwa to Singularis by giving effect to the payment instructions.

The High Court dismissed the claim against Daiwa for dishonest assistance. However, the High Court held that Daiwa had breached its Quincecare duty, and found that Daiwa could not argue that Mr Al Sanea’s dishonest intentions should be attributed to his company, Singularis. This was an important finding, as it prevented Daiwa from defending the Quincecare claim on the basis of illegality (if Singularis was itself a party to the fraudulent conduct, the illegality defence would preclude Singularis from pursuing the claim for breach of the Quincecare duty of care against Daiwa).

The Court of Appeal unanimously dismissed Daiwa’s appeal against this finding, confirming that Mr Al Sanea’s fraudulent knowledge and conduct should not be attributed to the company and that the bank was liable for breach of its duty of care. Daiwa did not appeal against the finding of liability for the breach of Quincecare duty. However, Daiwa did appeal to the Supreme Court on the question of attribution (i.e. whether Mr Al Sanea’s dishonest intentions should be attributed to Singularis, so founding a defence of illegality to the liquidators’ claims).

Supreme Court Decision

On the issue of attribution, the Supreme Court considered the controversial case of Stone & Rolls [2009] UKHL 39. In that case, a company was prevented from suing its auditors for failing to detect fraud on the basis that the individual owner, manager and controller of the company (who had committed the fraud), had knowledge of his fraudulent activities and this knowledge was attributed to the company as its “directing mind and will”, and consequently the illegality defence applied.

The Supreme Court held that in Singularis, there could be no attribution because Singularis was not a single-man company and the other directors of Singularis could not have Mr Singularis’ dishonest intentions attributed to them. The Supreme Court went on to confirm that in any event there is no principle of law that in any proceedings where a one-man company is suing a third party for breach of a duty owed to it by that third party, the fraudulent conduct of a sole director is to be attributed to the company. Accordingly, the Supreme Court concluded that Mr Al Sanea’s actions in this case should not be attributed to Singularis.

On the issue of causation, the Supreme Court held that the unusual facts of this case put Daiwa on notice of possible fraud by Mr Al Sanea and gave rise to the duty to protect Singularis against harm inflicted on it by the actions of one of its directors.  Had it not been for Daiwa’s breach of the Quincecare duty, the monies would still be in Singularis’ account.

With regards to illegality, the Supreme Court applied the test laid down in Patel v Mirza [2016] UKSC 42. It was stated in that case that the rationale of the illegality doctrine is that a claim would be contrary to public interest to enforce if to do so would be harmful to the integrity of the legal system. In assessing whether the public interest would be harmed the court must consider:

  • the underlying purpose of the prohibition (that claims based on illegal purposes should not be allowed to succeed) and whether that purpose will be enhanced by denial of the claim;
  • any other relevant public policy on which the denial of the claim may have an impact; and
  • whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts.

The Supreme Court held that the illegal actions of Mr Al Sanea were not sufficient to found a defence to the liquidators’ claims. If Mr Al Sanea’s fraud were attributed to Singularis and/or if the illegality defence were allowed to succeed, that would have the effect of preventing Singularis from reclaiming the misappropriated funds and this would:

  • not enhance the purpose of the illegality prohibition;
  • have a material impact on the growing reliance on financial instructions to play an important part in reducing and uncovering financial crime and money laundering; and
  • constitute a disproportionate and unfair response to any wrongdoing on the part of Singularis.

Daiwa’s defences were therefore dismissed.

Points to note

  • The answer to whether knowledge of a fraudulent director can be attributed to the company is to be found in consideration of the context and the purpose for which the attribution is relevant, not just in whether the company is a “one-man company” (and will always depend on the facts of each case). Therefore, Stone and Rolls appears no longer to be good law.
  • Financial institutions with inadequate safeguards and processes face significant risks if they allow suspicious transactions to be processed. This decision is likely to be of significant interest to financial institutions which may need to review their protocols governing the processing of instructions where a red flag has been or may be raised about possible dishonest or fraudulent intent.

Contact our experts for further advice

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