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The Case of a Negligent Bank

12 February 2020
Author: Sergey Budylin
Mass media:

Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2019] UKSC 50 (30 October 2019)


In this case, resolved by the UK Supreme Court, the issue was whether or not a bank may be held liable for a breach by a signatory of a company’s bank account of his fiduciary duties towards the company.  The Supreme Court answered in the positive.

This is a story about a Cayman Islands company (Singularis Holdings Ltd), its Saudi Arabian owner (Maan Al Sanea), and a Japanese investment bank with a subsidiary in London (Daiwa Capital Markets Europe Ltd).

A director and the sole shareholder of the company signed several payment instructions to transfer a large amount (US$204 mln) from company’s bank account.  The bank, despite apparently dubious grounds stated as a reason for the transaction, transferred the money without further inquiries.

Some later the company went bankrupt.  The liquidators of the company, acting in the interests of its creditors, sued the bank on behalf of the company for the full amount of the transfers.  The idea was that the director siphoned the money out of the company in breach of his fiduciary duties, and the bank should have refused to effect the transfers.

The bank countered that the company was essentially a one-man company, being completely controlled by the director.  So, according to the bank, any actions of the director should be attributed to the company itself (the “attribution argument”).  If so, the company cannot now sue the bank for assisting in any acts of the director.

Technically, the claim of the company had two grounds.

  1. Dishonest assistance. According to the claim, the bank “dishonestly assisted” the director to breach his fiduciary duties to the company.
  2. Breach of “Quincecare duty”. According to the claim, the bank breached the duty, the existence of which has been established by an earlier case (Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363). The case states that a bank is 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 the funds of its customer.

The first claim was rejected in the first instance and has not been revived in higher instances.  According to the High Court, while the payments were misappropriations of company’s money by the director, the bank did not actually know about it, so the bank cannot be said to dishonestly assist the director.

As for the second ground, the High Court found that any reasonable banker would have realised there were “many obvious, even glaring, signs that [the director] was perpetrating a fraud on the company” and that he was “using the funds for his own purpose and not for the purpose of benefiting [the company]”.  Accordingly, the bank was held liable.

The bank’s appeal concerning the “Quincecare claim” was rejected by the Court of Appeal and ended up with the Supreme Court.  Like the lower courts, the Supreme Court rejected bank’s arguments, including the “attribution argument.”  The Court emphasized that a company is a separate legal entity and a fraud of its director should not be attributed to the company.  Otherwise the whole Quincecare duty, intended to protect the company from the fraud of its authorized representative, would have been meaningless.

LADY HALE: (with whom Lord Reed, Lord Lloyd-Jones, Lord Sales and Lord Thomas agree)

“The context of this case is the breach by the company’s investment bank and broker of its Quincecare duty of care towards the company. The purpose of that duty is to protect the company against just the sort of misappropriation of its funds as took place here. By definition, this is done by a trusted agent of the company who is authorised to withdraw its money from the account. To attribute the fraud of that person to the company would be, as the judge put it, to “denude the duty of any value in cases where it is most needed” (para 184). If the appellant’s argument were to be accepted in a case such as this, there would in reality be no Quincecare duty of care or its breach would cease to have consequences. This would be a retrograde step.”

In the end the bank was held liable for effecting the transfer.

It should be emphasized that a bank is not automatically liable for any fraudulent transfer from the account of its customer.  The bank also does not have a specific duty to check whether or not a transfer is fraudulent.  However, if the bank is “put on inquiry”, that is, there are obvious signs of fraud, then the Quincecare duty arises, and the bank may be held liable in case of effecting the transfer.   As the Court of Appeal said, “it will be a rare situation for a bank to be put on inquiry; there is a high threshold“.

This case was unusual in the sense that here, as the High Court found, there had been “glaring” signs of fraud.  So banks normally seem to be reasonably safe.  However, the Supreme Court obviously intended to expand to some extent duties of financial institutions and make them to bear a share for stopping frauds.

So probably banks would better look into their internal procedures to make sure that in case of clear signs of fraud against a client, such as director’s fraud against his own company, the transfer will be stopped.

may be interesting