The Court of Appeal has handed down a judgment allowing a Bank’s request to strike out the majority of a claim brought against it in relation to alleged breach of the Quincecare duty and providing further guidance on the essential ingredients for a dishonest assistance claim against a large organisation.
In 2019, the joint liquidators of SIB brought a claim against the Bank in which they alleged that SIB had been operating a Ponzi scheme fraud since its inception in 1986 until entering receivership in 2009. The claim relates to a fraud by SIB involving the sale of Certificates of Deposits to investors of SIB via SIB accounts held with and operated by the Bank. SIB alleged that the Bank breached its Quincecare duty (arising when bankers are requested to make payments from customers’ accounts where reasonable grounds exist to suspect a potential fraud), in that proper care should have been taken by the Bank to ensure that monies being paid out from the SIB accounts (which were operated by the Bank) were being done so properly. SIB also advanced claims against the Bank for dishonest assistance relating to breaches of fiduciary duty by the ultimate beneficial owner of SIB.
For further detail of the underlying facts of the claim and commentary on the High Court’s decision, please see our previous LawNow available here.
The High Court decision
In relation to the Bank’s alleged breach of its Quincecare duty, SIB sought to recover the sums paid out by the Bank during the period from 1 August 2008 (the alleged date the Quincecare duty required the Bank to determine that something was wrong) to February 2009 (when the SIB accounts held by the Bank were frozen).
The Bank applied to strike out the Quincecare allegation or to obtain a reverse summary judgment, arguing that SIB had suffered no loss as it was no worse off on a net-asset basis after the payments had been made. This is because the sums paid out by the Bank were debts of SIB properly due to the investors in question, and SIB’s balance sheet was unaffected in net terms by their discharge.
The High Court had dismissed the Bank’s application. It held that the fact that the Bank paid sums which reduced SIB’s liability did not mean that SIB suffered no loss as SIB was insolvent in any event and had a mix of creditors it was still liable to.
The Bank also applied to strike out SIB’s dishonest assistance claim. The High Court held that as no single individual at the Bank was alleged to have been dishonest, it was impossible to establish a dishonest assistance claim against it and rejected SIB’s claim that the Bank acted with corporate recklessness. Therefore, the dishonest assistance claim was struck-out.
For further detail and commentary on the High Court decision, please see our previous LawNow available here.
Court of Appeal decision
- Bank’s Quincecare duty
The Bank appealed the High Court’s decision not to strike out the Quincecare allegation.
The Court of Appeal accepted the Bank’s argument that the monies paid out of the SIB accounts had not caused SIB to suffer loss. This was on the basis that SIB itself did not lose anything as a result of the payment to discharge creditors and to another account in its own name. Its net asset position at the end of the period was the same as at the beginning.
The fact that there may be more cash available upon the eventual inception of its insolvency “for the liquidators to pursue such claims as they thought they could usefully pursue and for distribution to its creditors” is a benefit to creditors but not to the company whilst it is trading. In circumstances where the Bank did not owe any duty to SIB’s creditors, this was not a relevant factor in considering the loss suffered by SIB as a result of the alleged breach of the Quincecare duty.
Accordingly, the Court of Appeal reversed the decision of the High Court and struck out SIB’s claim for breach of the Quincecare duty.
- Dishonest assistance
SIB also appealed the High Court’s decision to strike out its dishonest assistance claim against the Bank.
SIB alleged that the Bank:
“recklessly allowed systems to develop and a culture to become engrained in its employees which failed to pay any proper heed to the requirements of due diligence in the operation of correspondent banking relationships including in particular with SIB. This allowed warning signs and red flags to be missed and/or ignored and permitted SIB to be operated as a dishonest Ponzi scheme under the umbrella of its correspondent banking relationship…
dishonestly and/or recklessly assisted … [Mr Stanford] in the perpetration of the fraud … by providing and continuing to operate the Accounts, which were a key mechanism in acting as a conduit for investor funds in furtherance of the fraud on SIB”.
Importantly, SIB noted that there was not any one individual employed by Bank who it alleged had sufficient actual knowledge to be liable personally, or for the Bank to be liable vicariously, for dishonest assistance.
The Court of Appeal started with reiterating that for there to be liability for dishonest assistance it was important to establish dishonesty first - the actual state of knowledge and belief as to relevant facts forms a crucial part of the first stage of the test of dishonesty. Once this is established, it must be objectively assessed to determine whether the person’s conduct was dishonest according to the standards of ordinary decent people. This is where blind-eye knowledge comes into play and for that to apply two conditions to be satisfied:
- the existence of a suspicion that certain facts may exist; and
- a decision to refrain from taking any step to confirm their existence.
The Court of Appeal explained that “Blind-eye knowledge cannot be constituted by a decision not to enquire into an untargeted or speculative suspicion”.
The Court of Appeal agreed with the High Court reasoning that English law does not aggregate two innocent minds to make a dishonest whole.
In dismissing SIB’s appeal, the Court of Appeal relied on the fact that:
- SIB was unable to identify any specific employee at Bank who it was alleged was dishonest or had blind-eye knowledge.
- SIB was effectively alleging gross neglect on a grand scale. Allowing this would amount to permitting parties to bring a claim for dishonesty based on gross negligence.
- SIB was seeking to hide behind the Bank being a large organisation. The Court of Appeal was clear – this should make no difference and subjective dishonesty has to be established before other factors can be looked at:
“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. The rules that have been laid down as to what amounts to dishonesty for the purposes of dishonest assistance cannot be circumvented”.
This decision provides clarity to the essential ingredients of two claims commonly threatened against banks, breach of Quincecare duties and dishonest assistance. As such, it will be welcomed by banks which have seen a recent increase in Quincecare claims in particular.
Co-authored by Ellie Lifely, Trainee Solicitor.