Supreme Court strikes out Quincecare claim where no loss suffered by insolvent Ponzi scheme

The Supreme Court has upheld the Court of Appeal's decision to strike out a claim brought by the liquidators of a Ponzi scheme against its correspondent bank, alleging that the bank breached its so-called Quincecare duty to take sufficient care that monies paid out from the accounts under its control were being paid out properly: Stanford International Bank Ltd (In Liquidation) v HSBC Bank PLC [2022] UKSC 34.

This is the second case considering the Quincecare duty to reach the Supreme Court, the first being Singularis Holdings v Daiwa Capital Markets [2019] UKSC 50 (see our blog post). While the present Supreme Court judgment did not consider the scope of the Quincecare duty expressly, it highlights that the court will consider the question of whether any pecuniary loss has been suffered in such cases with a critical eye. It also demonstrates that the court is prepared to deal with Quincecare claims on a summary basis where appropriate, in contrast with some recent unsuccessful applications (see our blog posts here and here). Finally, the judgment places heavy emphasis on retaining the narrow boundaries of the Quincecare duty, so that it does not unduly interfere with commercial certainty and the ability of a bank to act upon the payment instructions given to it by its customer promptly and without fear.

The appeal concerned £116m paid to genuine investors (directly or indirectly) from the bank's account, in the period between when the claimants said the bank should have recognised the “red flags” and stopped processing its customer’s payments (thereby exposing the fraud), and the date upon which the accounts were eventually frozen by the bank. The precise scope and content of the Quincecare duty was not critical for the present appeal. Assuming (for the purpose of the strike out application) that the bank owed and breached the duty, the appeal considered whether that breach gave rise to any recoverable loss suffered by the claimant. The claimant argued that it had lost the chance of discharging the debts owed to investors who were wise or lucky enough to redeem their investment early, for a few pence in the pound, rather than those investors being paid out in full.

By a majority of 4:1 (Lord Sales dissenting), the Supreme Court held that the claimant had no claim in damages because it suffered no loss. The Supreme Court considered the nature of the chance that the claimant had lost. In the counterfactual scenario where the bank had complied with its Quincecare duty and disobeyed the claimant's instructions, the claimant would have had an extra £116m to its credit. However, even if this meant that all the customers received the same dividend (i.e. there was no longer any distinction between those investors who redeemed their investment early and those who did not), no additional customer indebtedness would be paid off.

The dissenting judgment of Lord Sales provided some interesting (obiter) commentary on the Quincecare duty, suggesting that (in principle) the formulation of the duty covers payments made to creditors where a company is in a situation of "hopeless insolvency", just as much as any other kind of misappropriation. However, this is likely to have limited impact since banks are not expected to police the solvency of their customers, and the test of "hopeless insolvency" is such a stringent one that examples in practice will be rare.

We consider the decision in further detail below.

Background

The underlying claim was brought by the liquidators of the claimant (SIB). SIB was a company incorporated in Antigua and Barbuda, which operated a Ponzi scheme fraud until its collapse in 2009.

The defendant bank (Bank) provided correspondent banking services for SIB from 2003 onwards. Those accounts were frozen on 17 February 2009, following news that the beneficial owner and controller of SIB (Mr Robert Allen Stanford) had been charged by the US Securities and Exchange Commission.

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. The claim was to recover the sums paid out by the Bank during the period from 1 August 2008 and 17 February 2009. The claim concerned £116m paid to customers (directly or indirectly) from the Bank's accounts. There was no consequential loss claimed by 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. 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 £116 million reduced SIB’s assets by £116 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.

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, 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.

By way of background and context, in separate but related proceedings brought by the liquidators in Antigua and pursued on appeal to the Privy Council, it was held that there was no possibility of recovering the money from the customers who had been wise or lucky enough to redeem their investment and be paid out in full: see In re Stanford International Bank Ltd [2019] UKPC 45; [2020] 1 BCLC 446.

High Court decision

The High Court’s reasoning is discussed in our previous banking litigation blog post.

In summary, the High Court dismissed the Bank’s application for reverse summary judgment or strike out of the Quincecare loss claim. It found that, absent the Bank’s breach of its Quincecare duty, the funds sitting in SIB’s accounts as at 1 August 2008 (£80 million) would have been available to pay creditors when insolvency supervened. It agreed with the claimants that, because of SIB’s state of insolvency, SIB had “no net assets”. Accordingly, although the payment of £116 million reduced SIB’s assets by £116 million, the payment did not discharge SIB’s liabilities, because SIB was insolvent and had no assets on any view, but a net liability.

The High Court did strike out the allegation of dishonest assistance, finding that the plea of dishonesty against the Bank was insufficient.

The Bank appealed against the High Court’s refusal to strike out the Quincecare loss claim or to grant reverse summary judgment, whereas SIB appealed against the High Court’s strike out of the allegation of dishonest assistance.

Court of Appeal decision

The Court of Appeal's reasoning is discussed in our previous banking litigation blog post.

The Court of Appeal overturned the decision of the High Court on the Quincecare duty, finding that SIB had no claim in damages because it suffered no loss. The way the Ponzi scheme operated, payments made by the Bank to genuine investors reduced the company’s assets, but equally discharged the company’s liabilities to those investors by the same amount. The net asset position therefore remained the same in the period between 1 August 2008 and 17 February 2009.

The Court of Appeal said that the High Court erred in its reasoning by proceeding on the basis that the bank owed a direct duty to the company’s creditors, which it did not. The High Court had confused the company’s position before and after the inception of an insolvency process. Before an insolvency process commences (and the statutory insolvency regime is invoked), the fact that a company has slightly lower liabilities is a corresponding benefit to its net asset position, even if the company is in a heavily insolvent position. Having more cash available upon the eventual inception of its insolvency for the liquidators to pursue claims and for distribution to creditors, is a benefit to creditors, but not to the company while it is still trading.

The Court of Appeal upheld the High Court’s decision to strike out the dishonest assistance claim, emphasising that dishonesty and blind-eye knowledge allegations against corporations (large or small) must still be evidenced by the dishonesty of one or more natural persons.

SIB appealed to the Supreme Court in respect of the Quincecare duty claim only.

Supreme Court decision

By a majority of 4:1, the Supreme Court dismissed SIB’s appeal and upheld the Court of Appeal's decision to strike out the Quincecare claim, thus dismissing the claim in full.

The appeal proceeded on the basis of two critical assumptions: (1) that there had been a breach by the Bank of the Quincecare duty; and (2) that the Quincecare duty may be breached where there is nothing wrong with the transaction itself but where the bank is put on notice of some background fraudulent activity being carried on by the person purporting to authorise the payment from the customer’s account.

During the course of the appeal, SIB accepted that the net asset point which formed the basis of the Court of Appeal's decision was a good one. SIB recognised that the £116m payments out relieved it of £116m debt that it owed under contracts with its customers, and so there was no depletion of the company's net assets in the amount paid away. Accordingly, SIB put its allegations on an alternative basis, arguing that the damage it suffered was the loss of a chance, as per Chaplin v Hicks [1911] 2 KB 786 and Allied Maples Group Ltd v Simmons & Simmons [1995] EWCA Civ 17. The Supreme Court's analysis of the loss of a chance case is considered in further detail below.

Loss of a chance case

SIB said that at the time the disputed payments were made, SIB was hopelessly insolvent and it has since gone into liquidation. It argued that if the Bank had not made the payments, those debts would still have been owed to the customers who withdrew their funds in full and escaped without loss (the "early investors"). Those early investors would then have to prove their debts in the liquidation and would be likely to receive a dividend of only a few pence in the pound. SIB’s loss was, therefore, the loss of the chance of discharging those debts owed to the early investors for a few pence in the pound.

In the leading judgment given by Lady Rose (with whom Lord Hodge and Lord Kitchin agreed), the Supreme Court considered the nature of the chance that SIB had lost. In the counterfactual scenario where the Bank had complied with its Quincecare duty and disobeyed Mr Stanford’s instruction to pay out SIB’s money, SIB would have had an extra £116m to its credit. However, even if this meant that all the customers received the same dividend (i.e. there was no longer any distinction between early and late investors), no additional customer indebtedness would be paid off.

SIB argued that the chance lost was a chance for SIB to act more fairly as between customers, by making sure that the early investors did not benefit at the expense of the late investors. However, Lady Rose concluded that SIB had not suffered the loss of a chance that had any pecuniary value to it and so there was nothing recoverable on its pleaded case.

The concurring judgment of Lord Leggatt reached the same conclusion: that the amount that SIB "lost" by paying the early investors in full was offset by the equal amount that SIB "gained" by paying the late investors less than they would otherwise have received. In Lord Leggatt's judgment, SIB's argument was flawed because it disregarded the net loss rule (as per British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673).

The "breach date rule"

As part of Lord Leggatt's discussion of how the court should address the value of the chance that was lost when the Bank made the payments, he gave some commentary on the "breach date rule".

In summary, the Bank argued that, as a matter of law, loss caused by breach of a duty owed under a contract or in tort is generally to be assessed as at the date of breach. However, SIB submitted that the court could take account of a contingent event at the date of breach of contract, which has since arisen, i.e. the court could have regard to the fact that the chance of a liquidation as at 1 August has turned into an actual liquidation. SIB said that, when assessing the chance that it lost when the payments were made, the value should be calculated by taking the likelihood of the liquidation happening as 100%.

In the view of Lord Leggatt, this was "unnecessarily complicated and involves a misunderstanding of the relevant legal principles". He said that there is no such rule of law that loss caused by a breach of duty is generally assessed as at the date of the breach (as per Bunge SA v Nidera BV (formerly Nidera Handelscompagnie BV) [2015] UKSC 43).

Limits of the Quincecare duty

While the scope of the Quincecare duty was not an issue in this appeal, the dissenting judgment of Lord Sales gave some interesting (obiter) commentary on the coherence of the law and the limits of the duty.

He emphasised that the Quincecare duty should be kept within narrow bounds, so that it does not unduly interfere with the conduct of commerce. In ordinary circumstances, a bank should be able to act upon the payment instructions given to it by its customer promptly and without fear. The Quincecare duty qualifies that position, balancing commercial certainty for the bank against the need for some reassurance that the payment instruction was legitimate. The impact of the Quincecare duty should be kept within bounds by a strict approach governing when it applies, and by careful analysis of the scope of the duty.

In the view of Lord Sales, the formulation of the Quincecare duty covers the situation where the order is an attempt to misappropriate the funds of a company by using them to make full payments which ought not to be made to creditors in a situation of "hopeless insolvency", just as much as any other kind of misappropriation. He said that the company suffers a loss in both situations because its own funds are misappropriated. However, since the test of hopeless insolvency is such a stringent one, it will only be in a rare case that a bank will be found to have knowledge of this or to be on notice of it to the requisite standard. Banks are not expected to police the solvency of their customers as an ordinary incident of the service they provide.

Director's duties owed to a company on the verge of insolvency

Lord Leggatt and Lord Sales considered, in some detail, the nature of the fiduciary duty owed by a director to a company on the verge of going into insolvent liquidation. Their observations will be of interest to insolvency practitioners, in particular the analysis of the recent decision of the Supreme Court in BTI 2014 LLC v Sequana SA [2022] UKSC 25 (see this briefing prepared by our Restructuring, Turnaround and Insolvency team).