At the end of last month, the Supreme Court gave judgment in Singularis Holdings Limited (In Official Liquidation) v Daiwa Capital Markets Europe Ltd¹.This is the first case in which a bank has been held to have breached its Quincecare duty². Lady Hale gave the leading judgment, upholding the Court of Appeal decision given by Sir Geoffrey Vos³.

The Quincecare duty is the implied duty between a bank and its customer that the bank will use reasonable skill and care in executing the customer's orders – including that the bank should refrain from executing those orders if it is put on inquiry by having reasonable grounds for believing that the order is an attempt to misappropriate funds.

Welcome guidance

The case gives some indication as to what sort of behaviour amounts to breach of the Quincecare duty by a bank, and also explores potential defences to the breach (which all fail here). It also gives some welcome guidance on the law relating to attribution in cases involving fraud. The Court also held that a fraud perpetrated by an individual who was the dominating influence over the company's affairs was not attributable to the company in the circumstances of this case, and the bank's breach of the Quincecare duty was not defeated by the existence of such fraud.

What happened

Singularis Holdings Limited was a Cayman Islands company set up to manage the personal assets of Mr Al Sanea. Mr Al Sanea was its sole shareholder, a director and chairman of the company. There were six other reputable but inactive directors. Mr Al Sanea had extensive executive authority. The company had substantial business interests, and a variety of funding arrangements.

Daiwa Capital Markets Europe Ltd, the London subsidiary of a Japanese investment bank and brokerage company, entered into a stock-financing relationship with Singularis. The stock was sold and the financing repaid, leaving Daiwa holding US$204 million in Singularis' account.

The backdrop to the case is that, in late May/early June 2009, Singularis was in financial difficulty and had a number of substantial creditors. Between 12 June and 27 July 2009, Daiwa was instructed by Singularis to make eight payments transferring the full US$204 million out of the account to the Saad Specialist Hospital Company and to, or for the benefit of, two other companies (referred to as the Saad Air companies). The payment instructions were given by Mr Al Sanea, who had the authority to do so. It transpired that each of the payments was a misappropriation of Singularis' funds, as there was no proper business purpose for the transfers. Shortly after the transfers, the company went into liquidation owing substantial sums to creditors.

Singularis, acting through its liquidators, brought a claim against Daiwa for the amount of the payments on the basis of: dishonest assistance by Daiwa relating to Mr Al Sanea's breach of fiduciary duty in misapplying company funds; and breach of the Quincecare duty, by giving effect to the payment instruction.

First instance decision – and what amounts to a breach of the Quincecare duty

At first instance⁴, Mrs Justice Rose dismissed the dishonest assistance claim on the basis that the bank employees had not acted dishonestly. She upheld the claim for breach of the Quincecare duty on the basis that Daiwa was negligent in making the payments, saying there were "many obvious, even glaring signs, that Mr Al Sanea was perpetrating a fraud on the company", but "no-one in fact exercised care or caution or monitored the accounts, and no-one checked that anyone else was actually doing any exercising or monitoring either". She awarded damages to the value of the misappropriated amount (but deducted 25% for contributory negligence by Mr Al Sanea and the inactive directors).

In last month's Court of Appeal decision in JP Morgan Chase Bank NA v The Federal Republic of Nigeria⁵, an ongoing piece of litigation in which the Quincecare duty is also being considered, Lady Justice Rose said that "the question of what a bank should do when it suspects that a payment instruction ought not to be executed will vary according to the particular facts of the case". In the first instance decision in Singularis, she pointed to the following "particular facts of the case" demonstrating Daiwa's negligence:

• Daiwa was aware of the dire financial straits in which Mr Al Sanea and his other companies were in at the end of May and in early June 2009.

• It was aware that Singularis might have other creditors with an interest in the money.

• There was plenty of evidence to put Daiwa on notice that there was something seriously wrong with the way in which Mr Al Sanea was operating the account (e.g. the appearance of US$80 million in the account when some of Mr Al Sanea's other bank accounts were frozen).

• Daiwa was alive to the possibility that the agreement to pay the Saad Specialist Hospital Company was a sham.

• There was a striking contrast between the way in which some payment requests were processed (e.g. involving discussions with the bank's legal and compliance functions) and how the disputed payments were handled (e.g. involving no such discussions).

• Ultimately it was clear that Mr Al Sanea was using the funds for his own purposes and not for the benefit of the company.

While every case turns on its own facts, this list of factors gives some helpful illustrations for banks when considering their duty of reasonable skill and care – and, in particular, when assessing whether a payment instruction should be executed or not. Additionally, such considerations may also lead in parallel to the bank needing to consider whether grounds for suspicion in respect of proceeds of crime may exist, and therefore whether it has obligations under the Proceeds of Crime Act 2002 to file a serious activity report to the National Crime Agency.

Court of Appeal and Supreme Court – the defences raised, and why they failed

Daiwa appealed. The issue for the Court of Appeal (which dismissed Daiwa's appeal) – and, subsequently, for the Supreme Court – was not whether there had been a breach of the Quincecare duty (which, on the facts, Lady Hale said was "incontrovertible"), but whether Daiwa had any defence to the claim. Daiwa argued that as Singularis was effectively a one-man company, with Mr Al Sanea as its controlling will and mind, the fraud should be attributed to the company – and the Quincecare claim against Daiwa should fail for: illegality; lack of causation; and/or because of a countervailing claim for deceit.

Giving the Supreme Court judgment, Lady Hale agreed with the Court of Appeal that, whether or not Mr Al Sanea's fraud was attributed to the company, those defences would fail in any event.

• Illegality: The main illegality relied on by Daiwa was Mr Al Sanea's breach of fiduciary duty. The Court reiterated that the essential rationale of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the public interest. It was therefore necessary to consider the purpose of the prohibition which has been breached, any other public policy considerations and the need for proportionality. The Court held that fiduciary duties are intended to protect a company from becoming the victim of the wrongful exercise of power by the company's officers. That purpose would not be enhanced by preventing the company's recovery of money wrongfully removed from its account. Denial of the claim would undermine the public interest in requiring banks to play an important part in uncovering financial crime and money laundering.

• Causation: Daiwa argued that if the fraud was attributed to the company, its loss was caused by its own fault and not by Daiwa's. However, the Court held that this was a rare example where a duty arises to protect a party from causing itself harm. The whole purpose of the Quincecare duty is to protect a bank's customer from the harm caused by people for whom the customer is, one way or another, responsible. Here, the loss was caused not by the fraud, but by Daiwa's breach of duty of care on the basis that, had it not been for the breach, the money would still be in the account and be available to creditors.

• Countervailing claim in deceit: Daiwa argued that because it would have an equal and countervailing claim in deceit against Singularis, the claim in negligence against Daiwa should fail for circularity. The Court held that this did not work: "The existence of the fraud was a precondition of Singularis' claim for breach of Daiwa's Quincecare duty, and it would be a surprising result if Daiwa, having breached that duty, could escape liability by placing reliance on the fraud that was a precondition for its liability".

• On the subject of attribution, Lady Hale concluded that, for the purpose of the Quincecare duty, the fraud of Mr Al Sanea was not to be attributed to the company. The basic principle was that a properly incorporated company has an identity and legal personality separate from its shareholders and directors. The answer to the question of whether to attribute knowledge of a fraudulent director to a company is always to be found in the context of the case and the purpose for which the attribution is relevant. Here, the context is Daiwa's breach of Quincecare duty and the purpose of that duty is to protect the company against just the sort of misappropriation of its funds as happened in this case. To attribute the fraud of a trusted agent of Singularis, to Singularis itself, would denude the Quincecare duty of any value in cases where it is needed most.

Why this decision matters

Some interesting points can be taken away from the case:

• The case is a useful illustration of the consequences of a breach of the Quincecare duty of care. The decision should cause banks to pause, and consider their systems and controls around detection and prevention of financial crime, in particular in light of Mrs Justice Rose's findings in relation to Daiwa's conduct (see above), not least because Daiwa's deficiencies and inconsistencies in this regard have left it with a liability of around US$150 million.

• The case shows that the Quincecare duty does not just arise in the context of retail banks or licensed deposit takers: in this case, Daiwa was an investment bank/brokerage business. The receipt of US$80 million into Singularis' account at Daiwa for no apparent reason in June 2009 was, according to witness evidence at first instance, "a surprising and extremely unusual event" and caused concern, due to the fact that Daiwa was not a licensed deposit taker and was not therefore allowed to operate a bank account for its clients. The case shows that the Quincecare duty will potentially apply to any institution which holds customer money on deposit, irrespective of whether or not it is licensed to do so.

• At first instance, Mrs Justice Rose hinted that the Quincecare duty may be more burdensome on an institution which operates fewer accounts, in the sense that it would be easier to spot anomalies. She said: "Daiwa was not administering hundreds of bank accounts with thousands of payment instructions every week. It was not impractical to expect Daiwa to look carefully at the instructions that were given for payments out of the account and they were aware that they needed to do so". However, she did not take this any further, saying "In the circumstances of this case I do not need to decide whether the Quincecare duty should be modified to reflect the particular circumstances of this bank account", as the signs of fraud were so obvious, and the breach easy to establish.

• The case also provides some helpful guidance in the difficult area of attribution of fraudulent knowledge or conduct to a company, and helps clarify some of the previous conflicting case law in this area, in particular in relation to the House of Lords case of Stone & Rolls Ltd v Moore Stephens⁶, which has prompted much debate and criticism over the years. In that case, the House of Lords, by a majority, held that knowledge of a fraud perpetrated by an individual who was the directing mind and will of the company was to be attributed to the company. However, this case, whilst not overruled, has now been restricted to its own facts and "can finally be laid to rest". The current position is that the answer to the question of whether to attribute knowledge of a fraudulent director to the company is always to be found in consideration of the context and the purpose for which the attribution is relevant.

• Insolvency practitioners should take note of the case in relation to reclaiming money for company creditors who have been defrauded.

What next?

The case of The Federal Republic of Nigeria v JP Morgan Chase, which is due to proceed to trial, will hopefully provide further authority on the circumstances in which a Quincecare duty arises (or doesn't). So, watch this space. The Quincecare duty appears to be having its moment.

1. [2019] UKSC 50

2. so-called after Barclays Bank Plc v Quincecare Ltd and Another [1992] 4 All ER 363

3. [2018] EWCA Civ 84

4. [2017] EWHC 257 (Ch)

5. [2019] EWCA Civ 1641

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