Court of Appeal overturns decision that suggested damages might be calculated differently where claimant is hopelessly insolvent

The Court of Appeal has struck out Quincecare duty and dishonest assistance claims brought by the liquidators of a company operating a Ponzi scheme against a correspondent bank that operated various accounts for the company. In doing so, the Court of Appeal confirmed that the scope of the Quincecare duty, which may arise in the context of a financial institution processing client payments, is limited to protecting customers of the financial institution, and does not extend to protect the customer’s creditors: Stanford International Bank Ltd v HSBC Bank plc [2021] EWCA Civ 535.

The Court of Appeal found that the company had no claim in damages because it suffered no loss, overturning the High Court's decision which had refused to strike out the claim (see our post here). The High Court relied on the company’s state of insolvency as a key factor, finding that if the bank had performed its Quincecare duty, then more cash would have been available to pay other creditors once the company’s insolvency process began (at a later date). However, in the Court of Appeal’s view, the problem with this argument was that it proceeded on the basis that the bank owed a direct duty to the company’s creditors, which it did not.

It said the High Court erred in its reasoning by confusing 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 is a benefit to creditors, but not to the company while it is still trading.

For more information see this post on our Banking Litigation Notes blog.