On 30 October 2019, the Supreme Court handed down its decision in Singularis Holdings Limited (In Official Liquidation) v Daiwa Capital Markets Europe. This is the first case in which the court has found that there was a breach by a bank of the (long recognised) Quincecare duty to its customer.
Bank’s Duty to Protect Customers
The “Quincecare duty” is a duty of care on the part of a banker, towards its customer in executing its orders, the purpose of which is to protect the customer against misappropriation of its funds by a trusted agent who was authorised to withdraw its money from the account – a director, say, with a joint and several mandate to withdraw money from the bank account, who “goes rogue”, and draws money out of the bank account in a fraud on the company, its creditors and/or shareholders.
Failure by the Bank in Singularis to Protect its Customer
In Singularis, it was held that the bank had breached this duty of care when it transferred funds out of a company's account on the instructions of its chairman (who was one of 7 directors) and sole shareholder. The chairman instructed the bank to make payments out of the customer-company’s account, totalling about $204 million, into companies in his business group. All of those payments were a misappropriation of the customer-company’s funds.
The customer-company then went into liquidation. The liquidators brought the claim against the bank, to seek recovery of the money paid out.
Bank had no Defence
The Supreme Court held that the bank had clearly breached its Quincecare duty of care to the company; and the only question was whether it had any defence.
The Supreme Court held that the fraudulent intent of the chairman could not be attributed to the company – which might otherwise have given the bank an “illegality” defence, to the effect that the customer should not be able to benefit from its own fraud, in pursuing a claim against the bank. The chairman and the company were two different legal entities, and the fraudulent intent of the man did not affect the ability of the company to make and succeed in its claim.
The Supreme Court also dismissed a “causation” defence. It held that the purpose of the Quincecare duty is to protect the bank’s customer from the harm that might be caused by people for whom the customer was, in one way or another, responsible. The Supreme Court held that, in this case, the loss had been caused by the bank’s breach of its duty of care in failing to prevent the transfers being made; and was not caused by the chairman’s dishonesty, in and of itself. Had it not been for the breach of the Quincecare duty, the money would still have been in the customer-company’s account, and available to the liquidators and creditors.
Concluding Comments
If directors of a company have a bank account that allows any one of them to make withdrawals from the account, and there are, subsequently, grounds for believing that one of the directors is misappropriating funds from the account, it may make sense to ask the bank to change the mandate from a “joint and several” mandate, to a “joint” mandate, at least until the matter has been investigated. A bank should have difficulty in refusing such a request, made on reasonable grounds, if it wants to avoid, or at least reduce, the risk of being held liable, itself, for breach of a Quincecare duty to its corporate customer.