UK: Clarification For Banks On The Quincecare Duty And Dishonest Assistance

Summary.

In Stanford International Bank Ltd (In Liquidation) v HSBC Bank Plc [2021] EWCA Civ 535, the English Court of Appeal  allowed an appeal by HSBC resulting in the strike out of two claims brought by Stanford International Bank Ltd (SIB) against HSBC, first, for losses associated with an alleged breach of the bank's "Quincecare" duty; and secondly based on allegations of  dishonest assistance. This is a welcome judgment, clarifying the scope of the 'Quincecare' duty owed by banks to their customers, and providing guidance on 'collective' dishonest assistance against a corporate entity.

One of the largest and most prolonged Ponzi schemes in history. SIB was a bank based in the Caribbean and owned by Mr. Robert Allen Stanford from 1990 until its collapse into insolvent liquidation on 15 April 2009, with debts in excess of US$5 billion. Mr. Stanford was convicted of fraud in the United States in 2012 and is currently serving a 110-year sentence for using SIB as a vehicle for the Ponzi scheme by misappropriating over 80% of the monies contributed by investors. SIB sold a large number of certificates of deposits (CDs) to investors, promising generous rates of interest. The scheme continued by using the money of new investors to pay out those who wanted to redeem their investments.

SIB alleged breach of the Quincecare duty and dishonest assistance against HSBC. SIB held various accounts with HSBC from 2003 onwards. It emerged that approximately £118 million was paid out of SIB's accounts in a period during which SIB claimed that the Quincecare duty required HSBC to have identified issues with SIB's accounts and to have frozen payments out of them. SIB contended that if HSBC had done so, approximately £80 million would have remained in the accounts rather than having been paid out to the holders of CDs. 

SIB also alleged that HSBC had dishonestly assisted Mr Stanford in his breaches of fiduciary duty.  This was based on allegations of corporate recklessness and/or by reference to the aggregated knowledge held by the individuals within HSBC.  

At first instance, the dishonest assistance claim was struck out.

Since SIB could not plead dishonesty against at least one relevant individual, it had no foundation for a claim in dishonest assistance.  This was a necessary element of the cause of action and could not be avoided by attempts to aggregate the knowledge of a number of employees none of whom were themselves alleged to be dishonest.   

The Quincecare duty point survived the first instance challenge by HSBC.  HSBC had submitted that because the sums paid out by HSBC to the CD holders discharged a contractual liability which SIB owed to them, SIB suffered no loss by reason of the payments.  The debts which SIB owed to the investors on the CDs were reduced by the amounts paid to them from SIB's accounts.  Nugee J's reasoning was that because SIB was insolvent had the money not been paid out of the accounts, SIB would have had additional funds for the liquidators to distribute to creditors in SIB's insolvency. The fact that SIB had lower liabilities to the CD holders was not of a corresponding benefit to SIB in the heavily and inevitably insolvent position in which it found itself.

The Court of Appeal allowed HSBC's appeal on the issue of loss and dismissed SIB's appeal on the dishonest assistance claim. The 'Quincecare' duty, whereby "a banker must refrain from executing an order if and for as long as the banker is 'put on enquiry'" was established in the case of Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363. In the SIB case, The Master of the Rolls (with whom Lord Justices Moylan and Arnold agreed) cited his well-known passage in Singularis Holdings Ltd (In Liquidation) v Daiwa Capital Markets Europe Ltd [2018] 1 WLR 2777, that the Quincecare duty is owed to the bank's customer and not directly to the customer's creditors, even though the customer was on the verge of insolvency. He stated that: "...the scope of the Quincecare duty 

[was] narrow and well-defined. It [was] to protect a banker's customer from losing funds held in a bank account with that banker, whilst the circumstances put the banker on inquiry". Nugee J had erred by confusing SIB's position before and after the inception of an insolvency process. SIB was trading and was not in any formal insolvency process when the payments to the CD holders were made. If a company is trading, even insolvently, money paid to a creditor reduces the company's assets, but also its liabilities. SIB did not lose anything as a result of the payment to discharge the creditors.

The Court of Appeal was also clear that the relevant test is dishonesty and not anything less (such as gross negligence).  The Master of the Rolls said that "if a plea of dishonesty were to be permitted in these circumstances, it would be to allow blind eye knowledge to be constituted by a decision not to enquire into an untargeted or speculative suspicion rather than a targeted and specific one. It would be to allow gross negligence to be the basis for a finding of dishonesty, which can never be the case." However large the organisation against whom the allegations are made, dishonesty and blind eye knowledge still require that one or more natural persons are themselves dishonest.   

Clarification for banks on the scope of their 'Quincecare' duty and dishonest assistance. The Court of Appeal's judgment will be of interest to banks with respect to their Quincecare duty, especially in an insolvency context.

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SIB appealed to the Supreme Court. The appeal was heard on 19 January 2021 and judgment is awaited. Judgments of the Supreme Court tend to follow between three to nine months after the conclusion of an appeal hearing.

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