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Banks not liable to customers’ creditors in latest Quincecare ruling

The Court of Appeal has recently upheld an appeal by HSBC against a High Court ruling which refused to strike out a claim against it for breach of its Quincecare duty when it unwittingly got caught up in a Ponzi scheme. The decision limits the scope of the Quincecare duty and will be welcomed by financial institutions.

Summary

  • The Quincecare duty is defined as being “where a banker must refrain from executing an order if and for as long as the banker is ‘put on inquiry’ …that the order is an attempt to misappropriate the funds of the company.”
  • This case hinged on the fact that the liquidators of the claimant claimed that HSBC ought to have been aware of its fraudulent activity and should have frozen payments from the claimant’s accounts 7 months earlier than it did.
  • The Court of Appeal criticised the High Court’s reasoning for refusing to strike out the Quincecare claim as it assumed that HSBC owed a direct duty to the claimant’s creditors.
  • It was held that whilst the claimant’s directors owed a duty to its creditors during the relevant period, HSBC did not.

Background

We considered the High Court ruling in Stanford International Bank Ltd (In Liquidation) v HSBC Bank Plc [2020] EWHC 2232 (Ch) in our recent review of developments in the Quincecare duty which can be found here: https://tenetlaw.co.uk/articles/quincecare-duty-a-review-of-developments/.

The case arises out of the operation of a Ponzi scheme involving Stanford International Bank Ltd (“SIB”). SIB was run by Robert Allen Stanford (the ultimate beneficial owner of SIB), who was later convicted in the US for a $7 billion Ponzi scheme. The case against HSBC hinged on the fact that the liquidators of SIB claimed that HSBC ought to have been aware of Mr Stanford’s fraudulent activity some 7 months prior to the date on which it stopped making payments in accordance with mandates received, and therefore HSBC was liable for payments made during this period.

SIB’s claim was twofold:

  1. The first claim was for damages for breach of the Quincecare duty (where a banker must refrain from executing an order if and for as long as the banker is ‘put on inquiry’ that the order is an attempt to misappropriate the funds of the company);
  2. The second claim was for an account or equitable compensation in respect of HSBC’s alleged dishonest and/or reckless assistance in breaches of trust and fiduciary duty undertaken by Mr Stanford.

On the first claim, HSBC alleged that SIB suffered no loss as, on a net asset basis, it was no worse off as a result of the HSBC’s actions. This was due to the fact that payments made extinguished SIB’s liabilities to deposit holders. The High Court, however, disagreed and considered that had HSBC frozen SIB’s bank accounts in August 2008, although SIB would have still been heavily insolvent, SIB would have had £80m available for the liquidators to pursue claims and for distribution to its creditors. Therefore, the loss of £80m was a real loss and the High Court refused to strike out the claim.

The High Court struck out the second claim on the basis that SIB had failed to plead that any individual within HSBC had actually been dishonest but had pleaded a case of dishonesty against HSBC collectively. The judgment concluded that no case could be made against HSBC that relied upon aggregating the knowledge of different individuals if none of them was alleged to have been dishonest.

Court of Appeal decision

The Court of Appeal disliked the judge’s reasoning in respect of the first claim as it assumed that HSBC owed a direct duty to SIB’s creditors. The Court of Appeal (following Singularis v Daiwa) stated that HSBC’s duty was to SIB alone, not its creditors. Furthermore, in terms of “net assets”, they considered SIB’s position was the same at the end of the period in question as it was at the start. The error in the judge’s reasoning, it was said, was to “…confuse the company’s position before and after the inception of an insolvency process.”

HSBC argued that SIB could not have sustained a loss as payments made were to its creditors thereby reducing its indebtedness pound for pound. However, SIB argued that its insolvent state meant that cash was crucial, and it would have had at least £80 million more cash in February 2009 had HSBC performed its duty. It would then have been able to pay other creditors more once its insolvency process began. However, it was noted that having more cash available upon commencement of an insolvency process for liquidators to pursue claims and distribute to creditors is a benefit to creditors but not to the company whilst it is trading.

The fact is that during the relevant period, although the company was insolvent it had not yet entered liquidation and therefore, whilst its directors owed a duty to the company’s creditors during this period, HSBC did not.

The Court of Appeal upheld the High Court’s ruling on the second claim on the basis that SIB failed to allege that anyone at HSBC had the necessary dishonesty or blind eye knowledge of Mr Stanford’s fraud or of the Ponzi scheme for which SIB was being used, and so that too remains struck out.

Comment

This decision will be welcomed by financial institutions who have been recently targeted in a rising number of cases alleging breach of the Quincecare duty. Whilst early indications were that the Quincecare duty may fill the void in protecting customers from the consequences of fraudulent behaviour, the Courts have since declined to stray from its narrow origins. This case limits the scope of the Quincecare duty making it clear that it will not extend to customers’ creditors.

Should you require any further advice relating to this subject matter, please do not hesitate to get in touch at hello@tenetlaw.co.uk

Published on May 4, 2021

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