Singularis Holdings in the Supreme Court: The Quincecare Duty of Care is alive and well, while the case of Stone & Rolls Ltd is finally laid to rest

Singularis Holdings in the Supreme Court: The Quincecare Duty of Care is alive and well, while the case of Stone & Rolls Ltd is finally laid to rest


CategoryNews, Articles Author Michael McParland QC Date

There is a “Happy Halloween” present from the Supreme Court for commercial fraud claimant litigators. In the important case of Singularis Holdings Ltd (In Official Liquidation) -v- Daiwa Capital Markets Europe Ltd [2019] UKSC 50,  handed down on 30 October 2019, the Supreme Court has upheld the existence of a bank’s Quincecare duty of care, even where the instructions which resulted in a claimant company being defrauded was given by that company’s sole director and controlling mind, and have also finally laying to rest the much criticised case of Stone & Rolls Ltd v Moore Stephens [2009] UKHL 39; [2009] 1 AC 1391 that had been used to attribute the fraud of a director of a one-man company to the company itself.

A Bank’s Quincecare Duty of Care

In Barclays Bank plc v Quincecare Ltd [1992] 3 All ER 363, Steyn J held that it was an implied term of the contract between a bank and its customer that the bank would use reasonable skill and care in and about executing the customers orders; this was subject to the conflicting duty to execute those orders promptly so as to avoid causing financial loss to the customer, but there would be liability if the bank executed the order knowing it to be dishonestly given, or shut its eyes to the obvious fact of the dishonesty, or acted recklessly in failing to make such inquiries as an honest and reasonable man would make; and the bank should refrain from executing an order if and for so long as it was put on inquiry by having reasonable grounds for believing that the order was an attempt to misappropriate funds.

Singularis: The essential facts

Singularis, a Cayman Islands company, was set up to manage the personal assets of a Saudi Arabian businessman (Mr Al Sanea) who was its sole shareholder, a director and also its chairman, president and treasurer. There were six other directors, all reputable people, but non exercised any influence over the management of the company. Very extensive powers were delegated to Mr Al Sanea to take decision on behalf of the company, including signing powers over the company’s bank account. Singularis was a substantial business traded for some years and ran up debts doing so. It also had a substantial sum of money standing to its credit, as a result of its legitimate business activities, with its broker-bankers (Daiwa).

The appellant, Daiwa, was the London subsidiary of a Japanese investment bank. In 2007, it entered into a stock financing arrangement with Singularis. Daiwa provided Singularis with loan financing to enable it to purchase shares were the security for the repayment of the loan. In June 2009, all the shares were sold, the loan was repaid, and Daiwa was left holding a cash surplus for the account of Singularis. Together with a sum of US$80 m deposited by Singularis in June 2009, the total held to Singularis’ account was approximately US$240 m.

When it appeared that the company was running into difficulties, Mr Al Sanea (its “directing mind” and sole shareholder) fraudulently deprived Singularis of that money by directing Daiwa to put it away. The court at first instance (Rose J) had found that Daiwa should have realised that something suspicious was going on and suspended payment until it had made reasonable enquiries to satisfy itself that the payments were properly to be made. The company (and through the company its creditors) had been the victim of Daiwa’s negligence.

The issue on appeal in Singularis

The issue before the Supreme Court in Singularis was whether such a claim for breach of a bank’s Quincecare duty of care was defeated if the company’s instructions were given by the company’s Chairman and sole share-holder who was the “dominant influence over the affairs of the company”?

Could Mr Al Sanea’s fraud be attributed to the company? Daiwa argued that if the fraud was attributed to the company, then Singularis’ loss was caused by its own fault and not by the fault of Daiwa.

If attribution to the company could be established, the bank raised three possible defences to the company’s claim: illegality, causation, or by an equal and opposite claim against the company in deceit.

No attribution to Singularis

The Supreme Court unanimously held that for the purpose of the Quincecare duty of care, the fraud of Mr Al Sanea was not to be attributed to SIngularis.

Roll Away the Stone

Importantly, Daiwa prayed in aid of its attribution argument the much-criticised decision of the House of Lords in Stone & Rolls Ltd v Moore Stephens [2009] UKHL 39; [2009] 1 AC 1391. In that case the claimant company was owned, controlled and managed by a Mr Stojevic, who had procured the company to engage in fraud upon banks. The company was sued for deceit by one of the banks and went into liquidation. The company then brought proceedings against its auditors, alleging that they had been negligent in failing to detect and prevent Mr Stojevic’s activities. The auditors applied to strike out the claim on the basis that Mr Stojevic’s fraud was to be attributed to the company. The trial judge refused to strike it out, on the basis that such fraud was “the very thing” that the solicitors were employed to detect. The Court of Appeal held (pre- Patel v Mirza) that, as the company had to rely upon the illegality to found its claim, the defence of illegality was made out. The House of Lords, by a majority, held that, as Mr Stojevic was the beneficial owner and “directing mind and will” of the company, knowledge of his fraudulent activities was to be attributed to the company, so the company could not complain that the auditors had failed to detect it.

Stone & Rolls was controversial and was analysed in detail by 7 Justices in Bilta (UK) Ltd v Nazir (No. 2) [2015] UKSC 23; [2016] AC 1.

The Supreme Court in Singularis noted that after Bilta, it had been thought that the majority decision in Bilta had established a rule of law that the dishonesty of the controlling mind in a “one-man” company could be attributed to the company, whatever the context and purpose of the attribution in question. The Supreme Court thought this was the wrong interpretation.

Instead, Lady Hale, giving the unanimous judgment of the Court, held that:

  1. “But in any event, in my view, the judge was correct also to say that “there is no principle of law that in any proceedings where the company is suing a third party for breach of duty owed to it by that third party, the fraudulent conduct of a director is to be attributed to the company if it is a one-man company”. In her view, what emerged from Bilta was that “the answer to any question whether to attribute the knowledge of the fraudulent director to the company is always to be found in consideration of the context and the purpose for which the attribution is relevant” (para. 182). I agree and, if that is the guiding principle, then Stone & Rolls can finally be laid to rest.
  2. The context of this case is the breach by the company’s investment bank and broker of its Quincecare duty of care towards the company. The purpose of that duty is to protect the company against just the sort of misappropriation of its funds as took place here. By definition, this is done by a trusted agent of the company who is authorized to withdraw its money from its account. To attribute the fraud of that person to the company would be, as the judge put it, to “denude the duty of any value in cases where it is most needed” (para. 184). If the appellant’s argument were to be accepted in a case such as this, there would in reality be no Quincecare duty of care or its breach would cease to have consequences. This would be a retrograde step”.

Furthermore, the Supreme Court also held that, even if it had been prepared to attribute the fraud of its controlling mind to the company, none of the three potential defences advanced by Daiwa succeeded.

Conclusion

This is an important judgment, both in the context of this specific duty of care, but also in relation to the question of attribution, especially the laying to rest of Stone & Rolls, and the recasting of the decision in Bilta.


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