Recent judgments in the UK consider Quincecare duty of care relevant to deposit holding financial institutions processing payment mandates

The UK Supreme Court has recently upheld a claim for breach of the so-called Quincecare duty of care, which requires a financial institution to refrain from executing a customer’s payment mandate if (and so long as) it is “put on inquiry” that the payment order is an attempt to misappropriate its customer’s funds: Singularis Holdings Ltd (In Official Liquidation) (A Company Incorporated in the Cayman Islands) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50.  The UK Supreme Court's judgment in this case follows hot on the heels of the English Court of Appeal's refusal to strike out a separate claim for breach of a Quincecare duty (in JP Morgan Chase Bank NA v The Federal Republic of Nigeria [2019] EWCA Civ 1641).  Of itself, the English Court of Appeal decision has, arguably, expanded the scope of the Quincecare duty of care.

The expanded scope in JP Morgan does not yet apply in Hong Kong. At present, the traditional Quincecare duty continues to apply: see DEX Asia Ltd v DBS Bank (HK) Ltd [2009] 5 HKLRD 160 and more recently PT Tugu Pratama Indonesia v Citibank N.A. [2018] 5 HKLRD 277, in which the Court of First Instance considered, obiter, the extent to which a bank's duty of care owed to its customers requires the bank to make inquiries of suspicious transactions in their bank accounts.  The expanded scope of the Quincecare duty of care may, however, be considered in Hong Kong sooner rather than later, if Tugu Pratama were to be appealed.

The judicial attention that this cause of action is currently receiving in England & Wales, and to some extent, in Hong Kong, highlights this as a risk area for financial institutions handling client payments.  In particular, there is litigation risk where there are inadequate safeguards/processes governing payment processing at financial institutions.  This is a good time for financial institutions to review safeguards governing payment processing, and also review the protocols in place governing what steps must be taken in the event a red flag is raised.

Further, the UK Supreme Court decision in Singularis is also of significance to corporate claimants – and insolvency office holders – in particular in clarifying the test for corporate attribution in England & Wales. The court declared that the often criticised decision in Stone & Rolls Ltd v Moore Stephens [2009] UKHL 39 (considered here and here) can “finally be laid to rest”. In particular, it confirmed that whether the knowledge of a fraudulent director can be attributed to the company is always to be found in consideration of the context and the purpose for which the attribution is relevant – even in the case of a “one-man company”.  This clarification is welcome as the law in England & Wales is now somewhat aligned to the Hong Kong position set out in the Court of Final Appeal decision of Moulin Global Eyecare Trading Limited (in liquidation) v The Commissioner of Inland Revenue FACV 5/2013, in which Lord Walker provided welcome clarification on whether the fraudulent knowledge of directors can be attributed to a company.  Lord Walker, in that case, admitted that his analysis in Stone & Rolls was wrong, in particular, to regard the fraud exception as being of general application, regardless of the nature of the proceedings.

JP Morgan – Quincecare duty of care

The claimant brought a claim against the defendant bank to recover funds held in its depository account, which the bank paid out in accordance with instructions given by the claimant (from persons authorised to give those instructions under the terms governing the account). The claimant alleged that the payments were made by the bank in breach of its Quincecare duty. This is the duty imposed on a bank to refrain from executing an order if (and for as long as) it is 'put on inquiry' in the sense that it has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of its customer. This is an objective test, judged by the standard of an ordinary prudent banker. The bank applied for reverse summary judgment/strike out on various grounds, including that there was no Quincecare duty of care applicable on the facts because such a duty was inconsistent with, or was excluded by, the express terms of the depository agreement. The English High Court refused the bank's application and the bank appealed. The English Court of Appeal upheld the High Court's decision, rejecting all grounds of appeal put forward by the bank. There are three particularly significant points arising from the judgment.

Amongst those, the English Court of Appeal held that, in most cases, the Quincecare duty will require “something more” from the bank than simply pausing and refusing to pay out on the mandate when put on enquiry that the order is an attempt to misappropriate funds.  The effect is that the Quincecare duty comprises both (i) a negative duty to refrain from making payment; and (ii) a positive duty on the bank proactively to do "something more". In the English Court of Appeal’s view, these negative and positive duties carry equal weight, and neither is separate nor subsidiary nor additional to the other. In the High Court, the judge inclined to the view that the positive duty was a duty of enquiry. However, the English Court of Appeal’s formulation of the positive duty is not limited to one of enquiry or investigation and for that reason it has arguably expanded the scope of the Quincecare duty. The English Court of Appeal, however, consciously avoided identifying factors which might be relevant to assessing what the “something more” is or might consist of, thus offering banks little practical guidance; it will instead and unhelpfully depend on the facts of the case in question.  Other significant points are discussed in detail in our blog post here.

Quincecare duty of care in Hong Kong

The arguably expanded scope of the Quincecare duty of care in JP Morgan does not yet apply in Hong Kong.  At present, the traditional Quincecare duty continues to apply.  The Quincecare duty was considered and applied in Hong Kong in DEX Asia Ltd v DBS Bank (HK) Ltd [2009] 5 HKLRD 160 and more recently in PT Tugu Pratama Indonesia v Citibank N.A. [2018] 5 HKLRD 277, in which the Court of First Instance considered, obiter, the extent to which a bank's duty of care owed to its customers requires the bank to make inquiries of suspicious transactions in their bank accounts.  The expanded scope of the Quincecare duty of care may, however, be considered in Hong Kong sooner rather than later if Tugu Pratama were to be appealed.

In Tugu Pratama, rogue directors of the plaintiff (an insurance company) instructed the defendant bank to make payments in excess of US$50 million (over four years) to their personal accounts from the plaintiff's private banking account. The plaintiff alleged that the payments constituted misappropriation of its money and were made without its authority. Instructions for the payments, however, were given in accordance with the account opening mandate.  The Honourable Mr. Justice Anthony Chan held that the defendant bank had acted in breach of its duty of care to the plaintiff by effecting the payments (but on the facts of the case he held that the Plaintiff’s claim was time-barred).

Following both Barclays Bank Plc. v. Quince Care Limited and another [1992] 4 All ER 363 and DEX Asia, Anthony Chan J held that, in assessing whether the bank was put on inquiry, factors such as (i) the standing of the corporate customer; (ii) the bank’s knowledge of the signatory; (iii) the amount involved; (iv) the need for a prompt transfer; (v) the presence of unusual features; and (vi) the scope and means available to the bank for making reasonable inquiries, were all relevant.  Importantly, the judge held that the duty of inquiry is only triggered in a clear case.  Whilst it is a duty not to facilitate a fraud practised on its customer, it is clearly not the function of a bank to act as a fraud detector.  Had it been otherwise, banks would have to employ teams of additional and specialist staff to carry out such detective work.  This is contrary to the banking relationship, which is founded on trust. Therefore, the threshold which triggers the bank's duty to make inquiries is quite high.

On the facts of the case, the factors that led the judge to conclude that the defendant bank had acted in breach of its Quincecare duty of care included the fact that there was no apparent connection between the plaintiff's business and the payments, which were of high value, frequent, and often were directed by the directors into their personal accounts. In addition, there was little other activity on the account. The judge held that these factors, when viewed together, were sufficiently indicative of fraud to put the bank on enquiry.

In practice, some of the factors banks should look at when processing instructions include: (i) the connection between payments and the company's business; (ii) the identities of the payees (e.g., in particular where they are directors of the company); and (iii) the value and frequency of the payments.

Singularis – corporate attribution where breach of Quincecare duty has been established

The claimant held sums on deposit with the defendant bank. An authorised signatory had extensive powers to take decisions on behalf of the claimant including signing powers over the company's bank accounts, and was the sole shareholder, a director and also chairman, president and treasurer of the company. In 2009, the bank was instructed by the authorised signatory on the account to make payments out of the claimant's account. The defendant bank approved and completed the transfers notwithstanding “many obvious, even glaring, signs that the authorised signatory was perpetrating a fraud on the company” and that he “was clearly using the funds for his own purposes and not for the purpose of benefiting the company”. It was common ground at trial that the authorised signatory was acting fraudulently when he instigated the transfers. In 2014, the claimant (acting by its joint official liquidators) issued a claim against the defendant bank for US$204m, the total of the sums transferred in 2009.  The matter went all the way up to the Supreme Court. The English High Court held that the bank acted in breach of its Quincecare duty by making the payments in question without proper inquiry.  The decision on the breach of Quincecare duty was not appealed.  The issue for the Supreme Court was of corporate attribution - whether the fraudulent state of mind of the authorised signatory could be attributed to the company (which had been defrauded) and, if so, whether the claim for breach of the Quincecare duty could be defeated by the defence of illegality (and certain other grounds of defence).  The Supreme Court found against the defendant on both points.  The Supreme Court's decision and analysis is discussed in detail in our blog post here.

 Corporate attribution in Hong Kong

The law on corporate attribution in Hong Kong is neatly summarised in Moulin Global Eyecare Trading Limited (in liquidation) v The Commissioner of Inland Revenue FACV 5/2013, in which the Hong Kong Court of Final Appeal provided clarification on whether the fraudulent knowledge of directors can be attributed to a company.

The former directors of the company fraudulently inflated the profits of the company and paid almost HK$89 million in inflated profits tax to the Inland Revenue. When the company was subsequently wound up, and provisional liquidators appointed, the liquidators attempted to reclaim the tax paid, on the basis that the Company had not made any taxable profits in the relevant years. For a detailed discussion, please see our blog post here.

The majority of the Court of Final Appeal upheld the Court of Appeal’s decision and ruled, on the facts of the case, that the fraudulent knowledge of the company's former directors regarding inflation of profits should be attributed to the company. Accordingly, the fraud exception did not apply and the liquidators of the company could not rely on provisions of the Inland Revenue Ordinance to claim repayment of excess tax payments made to the Inland Revenue.

The Court of Final Appeal in Moulin held (similar to the decision in Singularis) that context is crucial, such that questions of attribution are always sensitive to the factual and statutory background and the nature of the proceedings in which they arise.  In Singularis, it was held that whether knowledge of a fraudulent director can be attributed to the company is to be found in consideration of the context and the purpose for which the attribution is relevant, including where it is a 'one-man show', effectively laying the often criticised decision in Stone & Rolls to rest. In the Hong Kong case of Moulin, Lord Walker admitted that his analysis in Stone & Rolls was wrong, in particular to regard the fraud exception as being of general application, regardless of the nature of proceedings.

Lord Walker in Moulin, however, went further and shelved cases into two distinct categories - namely "redress' and "liability" cases - the former being cases where the company is suing the director/officer for wrongs done to it and the latter being cases where the third party is suing the company for a wrong done.  For liability cases, he held that the fraud exception does not apply i.e., fraudulent knowledge of directors can be attributed to a company whilst for "redress" cases, fraudulent knowledge of directors cannot be attributed to the company.  He further went on to hold that there are some cases that fall in between and do not fit into either liability or redress categories. There is no clear analysis for these cases apart from a general view that "there is no reason for the law to apply the fraud exception".  These cases include claims against insurers or auditors who have, for value, undertaken to provide protection against the risk of internal fraud, or to use reasonable professional skill to uncover internal fraud.  As it was held in Quincecare, in the relationship between a banker and a customer, there is an implied term of the contract that the bank will observe reasonable skill and care in executing the customer's orders.  Arguably, therefore, claims against banks would fall into this middle category.  We have yet to see how the courts in Hong Kong will apply corporate attribution where the bank is held to have breached its Quincecare duty of care towards a company whose directors have fraudulently transferred money out of a company's accounts at the detriment of the company.  If such a case was to see its day in the Hong Kong courts, the UK Supreme court's analysis in Singularis may provide helpful guidance.