High Court considers Quincecare and dishonest assistance claims against bank in context of Ponzi scheme

The trend of claims against financial institutions alleging breach of the so-called Quincecare duty continues to grow, with the most recent judgment from the High Court refusing to strike out such a claim on the ground that the claimant had suffered no loss because it was an insolvent Ponzi scheme. A parallel claim against the bank for dishonest assistance has, however, been struck out: Stanford International Bank Ltd v HSBC Bank plc [2020] EWHC 2232 (Ch).

In this case, the court considered claims brought by the liquidators of Stanford International Bank Limited (SIB), the infamous Ponzi scheme masterminded by Robert Allen Stanford, the former billionaire who was well known for sponsoring a multi-million pound series of cricket matches with the England and Wales Cricket Board (ECB), before the fraud was exposed and Mr Stanford was convicted in the United States.

The liquidators of SIB have brought proceedings against a correspondent bank (the Bank) that operated various accounts for SIB (which paid out/received deposits to/from investors), arguing that the Quincecare duty required the Bank to have recognised the red flags by 1 August 2008 (at the latest) and to have “sent the balloon up”, freezing the payments to investors out of the accounts and thereby exposing the fraud. The liquidators claim the monies paid out in the period from 1 August 2008 until the accounts were actually frozen in February 2009.

The present judgment relates to a novel application made by the Bank to strike out or seek reverse summary judgment in respect of the Quincecare claim on the basis that SIB has no claim in damages as it suffered no loss. The Bank argued that SIB suffered no loss because its net asset position remained the same during the relevant period: the payments out to investors reduced SIB’s assets, but equally discharged SIB’s liabilities to investors by the same amount.

While the court accepted that the net asset position of a solvent company may remain the same in these circumstances, it found that the position may very well be different for an insolvent individual or company (such as SIB); and said that the counterfactual scenario must be interrogated for the purpose of assessing damages. Here, the court held that if the Bank had frozen the accounts on 1 August 2008, SIB would have had £80 million of assets in its accounts with the Bank. It would have had a very large number of creditors, but it would have had that money in its accounts and available for the liquidators to pursue claims. The court found that SIB did not need to give credit for the fact that it had been saved £80 million of liabilities, because SIB was still just as insolvent, but with a slightly different mix of creditors.

There are a number of Quincecare duty claims progressing through the courts, but still only one finally determined case in which the duty has been found to be owed and breached (see our blog post: Supreme Court upholds first successful claim for breach of the so-called “Quincecare” duty of care). The decision in SIB v HSBC therefore provides a helpful addition to this body of case law, as financial institutions continue to grapple with the emerging litigation risks associated with processing client payments.

The court granted a separate application made by the Bank to strike out the liquidators’ claim for dishonest assistance in relation to breaches of fiduciary duty owed to SIB by Mr Stanford. It held that the allegation of dishonesty was not sufficiently pleaded in the statements of case, clarifying a number of issues in relation to aggregation of knowledge, corporate recklessness and blind-eye knowledge, which are discussed in further detail below.

Background

The underlying claim was brought by the liquidators of the claimant (SIB). SIB was an Antiguan bank, alleged by the liquidators to have been operating a Ponzi scheme fraud since its inception.

The defendant Bank operated various accounts as a correspondent bank for SIB from 2003 onwards. The liquidators claimed that the Bank breached its so-called Quincecare duty of care to take sufficient care that monies paid out from the accounts under its control were being properly paid out. The liquidators argued that the Quincecare duty required the Bank to have reached the conclusion by 1 August 2008 (at the latest) that there was something very wrong and to have frozen payments out of the accounts. Instead, the accounts continued to operate until circa February 2009. The claim was to recover the sums paid out by the Bank during that period, amounting to approximately £118 million (although it is worth noting that the balance in the accounts on 1 August 2008 was £80 million, with the difference between this figure and the amount paid out during the relevant period likely due to new depositors paying into the account).

The payments made by the Bank during this period were made (directly or indirectly) to individual investors holding certificates of deposit who had claims on SIB for the return of their capital and interest, save for one payment to the ECB (which is not considered further in this blog post).

The Bank argued that a Quincecare duty claim is a common law claim for damages for breach of a tortious duty (or an implied contractual duty), and so the remedy is damages to compensate for loss suffered. It said that SIB had no claim for damages, because on a net asset basis it was no worse off as a result of the Bank’s actions: the payment of £118 million reduced SIB’s assets by £118 million, but it equally discharged SIB’s liabilities by the same amount. This was because monies paid out by the Bank went (ultimately) to deposit-holders in satisfaction of their contractual rights against SIB.

The Bank applied to strike out the claim, or obtain reverse summary judgment under CPR Part 24, on the ground that SIB had suffered no loss. For the purpose of the application, the Bank accepted that there was a sufficiently arguable case of breach of the Quincecare duty.

In addition to its Quincecare claim, the liquidators brought a claim against the Bank for dishonest assistance in relation to breaches of fiduciary duty owed to SIB by Mr Stanford, the ultimate beneficial owner of SIB who has now been convicted in the United States. The Bank applied to strike out the dishonest assistance claim on the basis that the allegation of dishonesty was not sufficiently pleaded in the statements of case.

Decision

The court described the Bank’s argument on loss in respect of the Quincecare allegation as “simple and beguiling attractive”, but ultimately refused to strike out or grant summary judgment. The court did strike out the allegation of dishonest assistance.

Quincecare duty

The court acknowledged that it is trite law that (with some exceptions) a party suing for damages arising from an alleged wrongdoing must give credit against the loss claimed for any benefits obtained as a result of the same wrongdoing.

In the case of a solvent company, the court said that paying £100 of its money and discharging £100 of its liabilities, on the one hand reduces its assets but on the other hand is offset by a corresponding benefit to the company by reducing the creditors that have to be paid. Accordingly the net asset position of the solvent company is the same.

However, the claimant’s case was that SIB was always heavily insolvent (somewhere in the region of £4 to 5 billion) and the court accepted that the position may very well be different for an insolvent individual or company.  Taking the example above, the court said that if the company is insolvent, then paying £100 on the one hand reduces its assets, but that is not offset by a corresponding benefit to the company and a reduction in its liabilities, as it still does not have enough to pay them all, and it still has no net assets at all.

In a case such as this, where the claimant is insolvent, the court said that the counterfactual scenario must be interrogated for the purpose of assessing damages. The relevant counterfactual scenario in this case was described by the court as follows:

• As at 1 August 2008, SIB had the sum of £80 million in its accounts with the Bank.
• If the Bank had frozen the accounts on that date, the Ponzi scheme would have been uncovered and SIB would have collapsed into insolvent liquidation on or around that date.
• In that scenario, SIB would have had £80 million of assets available to it. It would have had a very large number of creditors, but it would have that money in its accounts with the Bank.
• Had SIB had the £80 million, it would have had that money available for the liquidators to pursue such claims as they thought they could usefully pursue and for distribution to its creditors.

As a result of what actually happened, SIB did not have the £80 million. Assuming (for the purpose of the application) that the Bank breached its Quincecare duty, the court said that effect of the breach was to deprive SIB of the opportunity to use the £80 million as described above. The court held that this was a real loss and it was contrary to “instinctive and common sense reaction to the facts” to describe SIB as currently being in exactly the same financial position as it would have been on 1 August 2008.

The claimant’s argument on the “no net assets” point (with which the court agreed), was put concisely as follows:

“…once your liabilities vastly exceed your assets, it really is a matter of indifference to you whether you have £5bn of liabilities or £6bn of liabilities. If your assets are only in the hundreds of millions, on any view you are hopelessly and irredeemably insolvent. You therefore have no net assets on any view, but a net liability, and if that net liability is only £5bn instead of £6bn (or £5.118bn), that does not make any difference to you – you still have no net assets.”

In the court’s view, SIB did not need to give credit for the fact that it had been saved £80 million of liabilities, because it did not make SIB any better off, it was still just as insolvent as it was, but with a slightly different mix of creditors.

The Bank argued that the position of SIB as the company (as opposed to the creditors) was no worse off by having £80 million of its assets wrongfully extracted from its bank accounts, given that there would be nothing left over for the company or its shareholders on any view. In this context, the Bank pointed out that the Quincecare duty is only owed to the company and not to its creditors. However, the court rejected this argument, because under the counterfactual scenario, SIB would have had £80 million in the bank, rather than nothing.

Accordingly, the court dismissed the application for reverse summary judgment or strike out of the Quincecare loss claim (for the balance over and above the ECB payment). The court was not asked decide the point on a final basis in favour of the claimant, and so it will technically be open to the Bank to continue to run these arguments at trial.

Dishonest assistance

In respect of the dishonest assistance claim, the only point argued before the court was whether there was a sufficient plea of dishonesty against the Bank to survive the strike out application. The court held that there was not, and the key themes of its analysis are considered further below.

Aggregation of knowledge

Counsel for the claimant acknowledged that he was unwilling to plead dishonesty against any particular individual at the Bank, because he did not have the material to do so at that stage of the proceedings. The claimant therefore pleaded a case of dishonesty against the Bank collectively, on the basis that if disclosure revealed a case that could be properly pleaded against individuals at the Bank, the claimant would seek to amend to do so.

The court noted that it is a thoroughly well-established principle of English law that one cannot aggregate two innocent minds to make a dishonest whole: see Armstrong v Strain [1952] KB 232. As such, the court held that no case could be made against the Bank that relied on aggregating knowledge held by different people at the Bank if none of those individuals was alleged to be dishonest.

Corporate recklessness

In the alternative, the claimant argued that the Bank acted with “corporate recklessness”. The court considered the question of whether corporate recklessness is sufficient to amount to dishonesty in the context of a dishonest assistance claim.

The claimant submitted that recklessness could amount to dishonesty, as per the statement by Lord Herschell in Derry v Peek (1889) 14 App Cas 337. In this case Lord Herschell explained the meaning of “fraud” in the context of a claim for deceit, saying said that fraud is proved where it is shown that a false representation has been made: (1) knowingly; or (2) without belief in its truth; or (3) recklessly, careless whether it be true or false.

The claimant built on the analysis in Derry v Peek to allege a case of corporate recklessness against the Bank for not knowing or caring whether SIB was being run properly not, or was a fraud on its investors, saying this was sufficient to amount to dishonesty in a dishonest assistance claim.

The court disagreed. It held that the words of Lord Herschell cannot be transposed into a generalised allegation that if one does not know or care about something one is dishonest in relation to it. Lord Herschell was dealing specifically with a claim in deceit (a tort that depends on fraudulent misrepresentation) and the court in this case said the claimant’s argument was an attempt to stretch his words beyond their proper application. One could not simply say that companies that act recklessly in the sense of not knowing and not caring are therefore dishonest.

The court considered the sharp distinction between honesty and dishonesty discussed in Agip (Africa) Ltd) v Jackson [1990] Ch 265 at 293E. The court said that this was relevant when considering why the Bank did not ask questions that would have revealed the nature of SIB’s business as a fraud. If questions were not asked because the Bank/its employees did not suspect wrongdoing, then they were not dishonest, even if they ignored the Bank’s own policies, and it did not assist to say that they had developed an ingrained culture of failing to obtain knowledge.

Blind-eye knowledge

The claimant also alleged that the Bank turned a blind eye as to whether SIB was being run dishonestly.

On the question of what will amount to blind-eye knowledge, the court considered the speech of Lord Scott in Twinsectra v Yardley [2002] UKHL 12, which was also referred to by the Court of Appeal in Group Seven Ltd v Nasir [2019] EWCA Civ 614. In summary, this confirms that blind-eye knowledge requires targeted suspicion and a deliberate decision not to look.

Absent an allegation of targeted suspicion and of a deliberate decision not to look (which did not appear in the claimant’s statements of case), the court found that the allegations made against the Bank could not be characterised as allegations of dishonesty.

Strike out

Accordingly, the court struck out the dishonest assistance claim. It noted that, by striking out  the claim rather than granting summary judgment, the claimant would preserve the opportunity to seek to re-plead a case of dishonesty following disclosure, if it could properly do so.

Note: In October 2020, the Court of Appeal allowed the defendant's application for permission to appeal. The appeal hearing was floated for 23/24 March 2021.

In April 2021, the Court of Appeal allowed the defendant's appeal on the High Court's refusal to strike out or grant summary judgment on the claim for losses in respect of payments paid out in discharge of genuine debts by way of interest and capital due to the holders of the certificates of deposits issued by SIB and dismissed the claimant's appeal on the High Court's decision to strike out the dishonest assistance claim. See our blog post on the Court of Appeal's decision for details.

In June 2021, the claimant applied to the Supreme Court for permission to appeal the Court of Appeal's decision to strike out its Quincecare loss claim against the defendant. The claimant has not, however, sought permission to appeal on the Court of Appeal's decision to strike out its dishonest assistance claim.

In September 2021, the Supreme Court allowed the claimant's application for permission to appeal.