On 30 October 2019 the Supreme Court of England and Wales handed down its decision in Singularis Holdings Limited (In Official Liquidation) v Daiwa Capital Markets Europe, the first case to find a breach of the Quincecare duty of care. The breach of duty itself was well established in the lower courts: Daiwa, the London subsidiary of a Japanese investment bank and brokerage firm, had made eight payments out of money held to the account of its client Singularis, a company set up to manage the investments of Saudi Arabian businessman Maan Al Sanea, in circumstances where there were “many obvious, even glaring signs that Mr Al Sanea was perpetuating a fraud on the company” and that he was using the funds for his own purposes and not for the benefit of Singularis.
The question for the Supreme Court was whether there was a defence for Daiwa on the basis that Mr Al Sanea’s fraud should be attributed to the company, given that he was the dominant influence over the affairs of the company. If so, Daiwa argued that the Quincecare claim would fail for illegality, causation, or because it would then have a countervailing claim against the company in deceit. However, the Supreme Court (with Lady Hale giving judgment) upheld the Court of Appeal’s decision that Mr Al Sanea’s fraud could not be attributed to Singularis, and therefore that Daiwa’s defences failed.
What is the Quincecare duty of care and why was it breached in this case?
The Quincecare duty (first articulated in Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363) obliges banks to refrain from executing a customer’s order if, and for so long as, the bank is ‘on inquiry’ that the order is an attempt to defraud the customer.
In this case, the instructions to make the eight payments had been given with the approval of Mr Al Sanea, the sole shareholder, the chairman and a director of Singularis. However, the High Court concluded that any reasonable banker would have realised that Mr Al Sanea was defrauding the company and using the funds for his own purposes (and this finding was not challenged in the upper courts): Daiwa was aware of the company’s severe financial difficulties at the time of the payments, Daiwa was aware that Singularis might have substantial 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 that Mr Al Sanea was operating the Singularis account, and Daiwa was alive to the possibility that the reason for some of the payments was a front rather than a genuine obligation. Despite all of this, and despite Daiwa’s Head of Compliance cautioning that the bank should carefully interrogate any payment instructions from Singularis and ensure that payments related to normal business activities, Daiwa made most of the payments without any investigation, and some of the payments after very initial investigations only (without interrogating the material received from those investigations).
Why couldn’t Mr Al Sanea’s fraud be attributed to Singularis?
After considering the authorities, and particularly the controversial Stone & Rolls Ltd v Moore Stephens [2009] UKHL 39, the Supreme Court concluded that the correct approach to the question of whether a fraudulent director’s knowledge can be attributed to a company involves a consideration of the context and purpose for which the attribution is relevant. The context of this case was Daiwa’s breach of its Quincecare duty of care towards Singularis. Lady Hale noted that the purpose of that duty is to protect the company against “just the sort of misappropriation of its funds as took place here”, which, by definition, is done by a trusted agent of the company who is authorised to withdraw money from the account. To attribute the fraud of that person to the company would (in the words of the High Court judge) “denude the duty of any value in cases where it is most needed”; there would in reality be no Quincecare duty of care or its breach would cease to have consequences. Lady Hale noted that this would be a “retrograde step”.
What does the Supreme Court’s decision mean for the Quincecare duty of care?
The Supreme Court’s decision underscores just how much emphasis the courts are placing on the role of banks and other financial institutions in identifying and preventing financial crime. The scope of the duty is yet to be seriously tested, given that the breach in this case was a clear one, and Daiwa did very little to mitigate the risks of making the payments in question. However, banks and other financial institutions should consider the Quincecare duty separately alongside their existing anti-money laundering obligations. The scope of the duty itself is likely to be examined more thoroughly in other cases currently before the courts.
