Bank’s Quincecare duty and dishonest assistance

The English High Court has recently handed down an important judgment in relation to the Quincecare duty and dishonest assistance.

In a preliminary hearing the Court considered an application by the defendant bank (the “Bank”), to strike out, or obtain reverse summary judgment, on two elements of the claim brought by the joint liquidators of Stanford International Bank Ltd (“SIB”). The liquidators contended that SIB was operating a Ponzi scheme fraud since its establishment in 1986, until it went into receivership in 2009. SIB alleged that the Bank breached its Quincecare duty of care to take sufficient care that monies paid out from accounts, operated for SIB by the Bank, were being properly paid out. SIB further claimed against the Bank for dishonest assistance relating to breaches of fiduciary duty by the ultimate beneficial owner of SIB (the “Owner”).

Background

The Quincecare duty arises when bankers are asked to make payments in circumstances in which there are reasonable grounds to suspect a possible fraud. Banks then owe a duty of care to their customers to refrain from making payments. When “on inquiry” in this way, banks have a positive duty to investigate the potential fraud. They have to be satisfied, by enquiring as far as a reasonable banker could be expected to do so, that the payment is not fraudulent before they can be “off inquiry” and go on to comply with their contractual obligations and make the payment.

Facts

The basis of the claim brought by SIB was that, from its inception, SIB was operated as a Ponzi scheme; it sold certificates of deposits to investors, promising high rates of interest, and subsequently used the money of new investors to pay out those who wanted to redeem their investments. This scheme resulted in SIB becoming insolvent to the sum of approximately £5 billion.

The Bank acted as SIB’s correspondent bank from 2003 onwards and operated four accounts for SIB. SIB claimed that the Quincecare duty required the Bank to have determined, by 1 August 2008, that something was wrong with the manner in which SIB was conducting business, and to have ensured that payments out of the accounts were frozen. However, the accounts were not frozen until a later date, in February 2009. It is alleged that £118 million was paid out by the Bank during this six-month period, whereby SIB claimed that, if the Bank had complied with its Quincecare duty, none of that money would have been paid out. With the exception of one payment to the England and Wales Cricket Board, for $3 million, all other payments made during this period were to individual investors who had claims against SIB for the return of their capital and interest. The Court noted, however, that SIB only had £80 million in its accounts on 1 August 2008, and that the additional sums paid out were likely derivative of payments into the account by new depositors during the six-month period in question.

SIB’s claim was to recover the sums paid out by the Bank during the period from 1 August 2008 to February 2009, regardless of whether that sum was £118 million or £80 million. Whilst the Bank accepted that there was a sufficiently arguable case of breach of the Quincecare duty, they countered by arguing that a Quincecare duty claim is a common law claim for damages for breach of a tortious duty, or of an implied contractual duty, where the remedy is damages to compensate for loss. On this basis, the Bank argued that SIB had suffered no loss as it was no worse off on a net-asset basis after the payments had been made: the payments reduced the assets of SIB, but also relieved them of equivalent contractual liabilities to their investors. The Bank therefore applied to strike out the claim, or to obtain reverse summary judgment under CPR 24, on the ground that SIB had suffered no loss.

In addition to its Quincecare claim, SIB claimed against the Bank for dishonest assistance in relation to breaches of fiduciary duty by the Owner. Whilst it was not disputed that the Owner owed fiduciary duties to SIB and that they had breached them, the Bank rejected the argument that they had assisted the Owner in a dishonest manner. The Bank therefore applied to strike out this claim on the basis that the allegation of dishonesty was not sufficiently pleaded in the statements of case.

The Quincecare allegation

The Court began by dealing with the Quincecare allegation, focusing first on the $3 million payment made to the England and Wales Cricket Board. The Court noted that there was no suggestion that SIB were liable to make this payment, as they were for every other payment out of the accounts during the relevant six-month period. Furthermore, the Court highlighted that, even if the Owner was liable to make this payment, it does not follow that SIB was under any obligation to make or facilitate it. The payment was therefore capable of constituting a loss in a manner unlike any of the others, as no corresponding liability of SIB’s was extinguished or reduced by virtue of the payment. The Court therefore held that they would not strike out any claim relating to the $3 million payment, and therefore would allow the claim to go forward, because if the Bank had frozen the accounts on 1 August 2008, this payment would never have been made.

The Court then turned its attention to the remainder of the Quincecare allegation, focusing on the loss argument made by the Bank. The Court started by acknowledging that, with the exception of the $3 million payment to the England and Wales Cricket Board, all other payments made out of the accounts run by the Bank, on behalf of SIB, ultimately discharged proper contractual liabilities of SIB. The Court further recognised that it is trite law that, in a suit for damages, credit has to be given against loss suffered for benefits that were obtained by virtue of the wrong that caused the loss.

The Court recognised that in the case of a solvent person, taking £x from that person and using it to discharge a liability of that person, also worth £x, could result in that person being no worse off. The Court recognised that there may be other losses such as the deprivation of cash flow for which damages can be awarded.

In the case of an insolvent company, the Court held that once the liabilities of a person vastly exceed their assets it makes no difference whether they become slightly more or less insolvent. This is because there will be nothing leftover for the company. In that scenario an insolvent company would be worse off by having £80m-£118m wrongfully extracted from its bank accounts. This is because the company would have a large pool of creditors and having £80-£118m in its bank accounts would be its actual assets. The fact that payment of the sums reduced the insolvent company’s liability was not an answer because it still meant the company was insolvent and had a different mix of creditors.

The Court, however, left open the possibility for the Bank to make a claim to adjust damages in light of the fact that the payments made during the six-month period resulted in a very small increase in the dividend available to those creditors who were not preferred by the payments.

The Court therefore dismissed the application for strike out or reverse summary judgment of the Quincecare claim.

The dishonest assistance allegation

The Court concluded by discussing the dishonest assistance allegation brought by SIB, surrounding the question of whether the Bank acted dishonestly, noting that the claim was not against any one particular individual, but rather the Bank as a whole. This point was crucial, as the Court highlighted that, under both Armstrong v Strain [1952] and Greenridge Luton One Ltd v Kempton Investments Ltd [2016], it is not possible to making a finding of composite fraud; English law does not aggregate two innocent minds to make a dishonest whole. The Court noted that the notion of ‘innocent’, in this context, simply means someone who is not dishonest. Therefore, as no single individual was alleged to have been dishonest, the Court felt it was impossible to make a dishonest assistance claim against the Bank; SIB could not amalgamate the knowledge of innocent people working for the Bank, to make a case that the Bank was dishonest.

The Court also laid to the rest the claim, brought by SIB, that the Bank acted with corporate recklessness, and that this, in itself, is sufficient to amount to dishonesty. Whilst it was confirmed that recklessness can amount to dishonesty, it was highlighted that this is not always the case; even if the Bank had acted recklessly by not detecting SIB’s fraud, the Court held that if that was due to a lack of suspicion, however obvious the fraud was, then the Bank did not act dishonestly. The Court went further, and held that a claim against the Bank for dishonesty based on blind-eye knowledge would require targeted suspicion, and that it was not pleaded by SIB that the Bank did not investigate the affairs of SIB closer because they were suspicious of the fraud, and did not want that suspicion to materialise.

The Court ruled that the dishonest assistance claim would be struck out. However, by striking out the claim rather than granting summary judgment, it was open to SIB to re-plead a case of dishonesty following disclosure if SIB was able to get sufficient evidence to show that certain individuals at the Bank had acted with dishonesty.

Comment

SIB’s case against the Bank continues on the allegation of breach of the Quincecare duty of care. The judge did not discuss the merits of the alleged breach, nor were the factors that led to the alleged breach on 1 August 2008 elucidated. Nevertheless, this case provides a useful addition to the body of case law surrounding the Quincecare duty. For our previous analysis of another judgment on the Quincecare duty please click here.

Furthermore, financial institutions can benefit from the reinforcement of the law on dishonest assistance, with this case having confirmed that the aggregation of knowledge is not compatible with the law on fraud in England and Wales.