In this alert, we consider a further case addressing the limits of the so-called Quincecare duty, an English law duty owed by banks to their customers that requires them to refrain from executing instructions when put on inquiry that those instructions may be an attempt to misappropriate a customer’s funds.
Earlier this year, we reported on a recent High Court decision, Fiona Philipp v Barclays Bank UK plc, which underlined the willingness of the Courts to police the Quincecare duty. In that case, the Court confirmed that the duty could not arise where the customer was an individual who had personally authorised the relevant instruction.
A restrained approach to the proper scope of the Quincecare duty was on display again in last week’s Court of Appeal decision in Stanford International Bank Limited (In Liquidation) and HSBC Bank Plc.[1] This judgment, arising out of the well-known collapse of Allen Stanford’s operations, has confirmed that Quincecare claims will generally not be available to insolvency practitioners looking to recover losses suffered by creditors following corporate insolvencies. The decision also contains important judicial commentary regarding the high threshold that must be met before a bank can be found to have acted dishonestly in support of a fraudulent scheme. This alert explores each of these points in turn below.
The Decision
Stanford International Bank Limited (“SIB”), which held a number of accounts with HSBC, went into liquidation in 2009. SIB’s liquidators brought claims against HSBC arguing that it had breached its Quincecare duty by complying with payment instructions for a period of about six months prior to SIB’s liquidation, as a result of which the funds available to creditors had been reduced. SIB also claimed equitable compensation for HSBC’s alleged dishonest assistance in breaches of trust and fiduciary duty committed against SIB by Mr. Stanford.
The Quincecare Claim
Overturning the decision of the first-instance judge, the Court of Appeal was clear that SIB’s Quincecare claim was not sustainable. Noting that the payments executed by HSBC had been made to discharge debts that were properly due and payable, the judgment held that the payment of those sums were not losses suffered by SIB; the reduction in its assets caused by those payments was matched by an equivalent reduction in liabilities, with the result that its net asset position remained the same. While creditors might be left out of pocket as a result of the outflow of cash from the company bank accounts, HSBC (unlike the SIB directors) owed no duties to those creditors. As a result, the Court of Appeal held that SIB’s Quincecare claim could not succeed, since it had not suffered the losses which it claimed.
Following this decision, future Quincecare claims by insolvency practitioners seeking recovery for creditors will have to demonstrate losses suffered by the company itself. Notably, the Court of Appeal in SIB contemplated that the outcome could have been different if it had been alleged by the Claimant that HSBC’s failure to prevent payments had caused SIB itself to suffer, consequential losses. However, SIB had specifically disavowed this line of argument in the proceedings.
The Dishonest Assistance Claim
The Court of Appeal also rejected SIB’s claim that the bank had dishonestly assisted Mr. Stanford in his fraudulent activities. It had not been pleaded that anyone at HSBC was aware that Mr. Stanford was engaged in a fraud, and it was unclear on what basis any individual in HSBC could be said to have turned a blind eye to the fraud (i.e. so as to satisfy the test for recklessness that could also allow a claim in dishonest assistance to proceed). While SIB did allege, as the Court of Appeal put it, “gross neglect on a grand scale”, that was insufficient to maintain a claim in dishonest assistance.
Financial institutions will note with particular interest the short shrift given by the Court of Appeal to SIB’s attempts to argue that the test for dishonesty should be lowered for large corporations. SIB argued that HSBC should be found to have acted dishonestly if it could be demonstrated that the systems and controls in the bank were so deficient that it failed to realise what should have been obvious, namely that SIB was a massive fraudulent scheme. Sir Geoffrey Vos MR was dismissive of this argument, characterising the test for dishonest assistance as well-settled, and holding that “SIB cannot hide behind the fact that HSBC is a large corporation. That makes no difference. As the cases show, if dishonesty and blind eye knowledge is to be alleged against corporations, large or small, it has to be evidenced by the dishonesty of one or more natural persons.”
If you have any questions concerning the material discussed in this client alert, please contact the members of our London Dispute Resolution group.
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