The Supreme Court has handed down its eagerly awaited judgment in the case of Singularis Ltd v Daiwa Capital Markets Europe Ltd. The decision, made on October 31, is the first reported case of a bank having been found to have breached a so-called Quincecare duty, but is also significant because of the appellant bank’s unsuccessful attempt to attribute the fraudulent conduct of its customer’s director to his company.
Our expert view
Singularis merits reflection from a risk perspective, because the case is about banks’ potential civil liability for processing fraudulent instructions, but the question of potential criminal and regulatory penalties should not be overlooked.
David Farnell, partner in the firm’s litigation services team (specialising in banking and finance disputes), said the Supreme Court had made a “common sense decision”.
“This will provideclarity for banks and their advisers about the extent to which they might defend Quincecare claims. Really the message is that if a bank has been negligent, then it would appear that in the absence of very exceptional circumstances, the court is unlikely to deny its customer a remedy on the ground of illegality,” he added
“All banks must of course be wary of fraud and put robust procedures in place to protect their customers from fraudulent instructions. From the detailed judgment, I can see that in this particular case, the court seems to have drawn a distinction between Daiwa, which is a relatively small investment bank, and large retail banks who receive many thousands of customers’ payment instructions daily. That distinction might be significant in determining whether a particular bank is, in specific circumstances, ‘on inquiry’, but that is all. It would be foolhardy for larger banks to assume that their duty of care is somehow less exacting in light of this decision.
“The preferred practice of many banks is to place distressed corporate connections under specialised relationship management, which might well have avoided the kind of mistakes that Daiwa made in this particular case.”
Dan Stowers, partner in our regulation, business crime and compliance team, said
“This is a welcome decision on the duties owed by financial institutions to their corporate customers in circumstances of fraud and an area where we expect to see further development in coming years, but two points arise:
“First, the Supreme Court’s decision against the attribution of fraudulent conduct to the company, appears sensible, but, in a criminal law context, difficult to rationalise when you bear in mind that Al Sanea was the only director who exercised any influence over the company and the only mandated signatory for the company’s bank accounts. The other seven must have had fiduciary duties, after all. It looks a pragmatic decision, in the sense that the Supreme Court appears to have stood back and looked in broad terms at whether it would be fair to attribute blame to the company where only an eighth of the directorship had been behaving fraudulently. From a criminal law perspective, the Serious Fraud Office or other law enforcement body, were they investigating this matter, might not be so sympathetic. Nor does the identification principle require them to be – the actions of a controlling mind would be sufficient.
“Second, the civil courts have recognised that it would be a rare situation, for a bank in its day to day business, to be put on inquiry [of fraudulent conduct] given the high threshold. It is, however, clear that once there are ‘reasonable grounds to believe’ that such conduct is taking place, the bank is under a positive duty to investigate the fraud. It is only after taking those steps that a ‘reasonable banker’ would be expected to do in these circumstances that the bank should go on to progress the transaction. However, once this stage of inquiry is reached, the bank should have already considered, or be in the process of considering, all of its duties. This includes not only contractual duties, but also those under anti-money laundering and tax evasion legislation, in order to identify potential criminal and regulatory liabilities that flow from its actions, or its failure to take action, in circumstances where it could be said that the bank is facilitating or involved in the transacting of criminal property.”
The Quincecare duty derives from the case of Barclays Bank v Quincecare (1988), which held that it is an implied term of a contract between a bank and its customer that the bank must not execute instructions if it is put on notice, or has reasonable grounds to believe, that the instructions are an attempt to misappropriate funds.
The court recognised the need to ensure that the law did not impose too burdensome an obligation on banks, hampering the effective transacting of bank business. On the other side of the coin, the court was keen to ensure that the law should guard against the facilitation of fraud and impose a reasonable standard of care, so as to protect customers and third parties.
To balance these competing interests, the court settled a “sensible compromise”. The bank’s duty is therefore as follows:
“a banker must refrain from executing an order if and for as long as the banker is ‘put on inquiry’ in the sense that he has reasonable grounds (although not necessarily proof) for believing that an order is an attempt to misappropriate the fund of the [customer]”.
In Singularis, the claimant was a Cayman Islands-registered company set up to manage its sole shareholder Mr Maan Al Sanea’s assets. He was head of the Saad Group and one of Singularis’s seven directors, but the others exercised no real influence over the company and Mr Al Sanea was the only mandated signatory for the company’s bank accounts.
Daiwa, an investment bank (and not a deposit taker), lent Singularis funds with which to acquire a portfolio of shares, over which the bank took security. In 2009 the Saad Group collapsed, and Daiwa learned that creditors had moved to freeze Mr Al Sanea’s assets. Daiwa enforced its security and discharged the loan, leaving a surplus in Singularis’s account of USD$204 million.
On receipt of instructions from Mr Al Sanea, Daiwa effected various payments to third parties, who subsequently passed the money to Mr Al Sanea. The surplus was dissipated, Singularis was unable to pay its creditors and subsequently became the subject of a winding-up order. Its liquidators commenced proceedings against Daiwa, claiming (among other things) that it should restore the surplus to the account, because it had breached its Quincecare duty.
The High Court found that Daiwa had been negligent, because it should have been obvious to its officers that Mr Sanea’s instructions were to effect payments for his personal benefit, rather than the company’s. Daiwa’s head of compliance had warned staff only a few days before the relevant transactions that “any payment requests [from Singularis] must be properly authorised and be appropriate”, emphasising the “need for care and caution”, but to no avail. Daiwa’s employees processed the instructions without conducting enquiries to confirm that they were legitimate. These failings were symptomatic of “a dysfunctional structure” according to Rose J.
Daiwa had breached its Quincecare duty and was ordered to restore the surplus (subject to a 25% reduction to allow for Singularis’s contributory negligence). Daiwa’s appeal was subsequently dismissed by the Court of Appeal.
Issues in the Supreme Court
Daiwa appealed again to the Supreme Court. The main issue was whether Mr Al Sanea’s fraudulent conduct was attributable to the company, so that Singularis should be denied a remedy because of the ex turpi causa principle.
The principle is that it would be contrary to the public interest for the civil courts to enforce a claim which had arisen from illegality. Daiwa cited the House of Lords case of Stone & Rolls Ltd v Moore Stephens (2009), where the Supreme Court’s predecessor had held that the principle applied to companies and that the fraud of a company’s dominant director and shareholder could be attributed to the company itself. The Supreme Court had reviewed that decision in Bilta (UK) Ltd v Nazir (No 2) (2015) and stated that a defence of illegality could be run in certain circumstances, where there were no innocent directors or shareholders.
In Singularis, Daiwa argued that its customer had been a “one-man company” and Mr Al Sanea’s fraudulent conduct should therefore be attributed to his company.
The Supreme Court decided unanimously that the facts of Singularis differed from those of Bilta and that there was no evidence to show that Mr Al Sanea’s fellow directors had been aware of his fraudulent conduct, nor any reason why they should have been complicit in his misappropriation of the company’s funds. Consequently, the fraud could not be attributed to the company.
Helpfully, the court determined the apparent conflict between the Quincecare and Bilta decisions. It said that to answer the question of whether to attribute a fraudulent director’s knowledge to his company, it was necessary to consider the context and the purpose for which attribution is relevant. The court also reiterated the purpose of the Quincecare duty: it is meant to protect a company against the misappropriation of its funds, but if the fraud of its trusted agent is attributed to the company itself, that attribution will effectively remove the practical value of the duty.
Throughout this case, the courts saw no reason to treat Daiwa as anything other than a bank and therefore subject to the Quincecare duty, even though Daiwa was not a deposit taker.Daiwa satisfied the broad common law definition of a bank, even though it would not have fallen within the more exacting FCA and PRA definitions, which require a bank’s activities to include deposit taking.