Case Update: Can an action against a bank for breach of Quincecare duty of care be defeated by Defence of Illegality?
Published November 7, 2019
On 30 October 2019, the UK Supreme Court delivered its decision in the case of Singularis Holdings Ltd (In Official Liquidation) (A Company Incorporated in the Cayman Islands) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50.
In essence, the Supreme Court held that:-
(a) There is no principle of law that in any proceedings where the company is suing a third party for breach of a 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;
(b) 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;
(c) Even if the fraudulent conduct of a director of a one-man company can be attributed to the company, relying on the test laid down by the Supreme Court in Patel v Mirza, a Bank cannot rely on the defence of illegality to defeat the claim for breach of Quincecare Duty as it would, in essence, be harmful to the public interest and the integrity of the legal system;
(d) The purpose of the Quincecare duty is to protect a bank’s customers from the harm caused by people for whom the customer is, one way or another, responsible and thus the argument of causation (that the company’s loss is caused by its own fault because the fraud is attributed to the company) cannot succeed; and
(e) The defence of countervailing claim in deceit advanced by the bank cannot stand in view that the existence of the fraud was a precondition for a claim based on breach of Quincecare duty and it would be a surprising result if the bank, having breached that duty, could escape liability by placing reliance on the existence of the fraud that was itself a pre-condition for its liability.
Salient Facts of the Case
The Appellant, Daiwa, which is the London subsidiary of a Japanese investment bank and brokerage firm, entered into a stock financing arrangement with the Respondent company,Singularis, whereby Daiwa provided Singularis with loan financing to enable it to purchase shares which were the security for the repayment of the loan.
At all material times, Mr Al Sanea was Singularis’ sole shareholder, a director and also its chairman, president and treasurer and it was not disputed that very extensive powers were delegated to Mr Al Sanea to take decisions on behalf of Singularis, including signing powers over the company’s bank accounts.
Between 12 June and 27 July 2009, Singularis through Mr Al Sanea instructed Daiwa to make eight (8) payments out of the money held to Singularis’ account, five (5) of those payments were to Saad Specialist Hospital Company and the rest to Saad Air.
On 18 September 2009, Singularis was wound up by a compulsory winding up order and joint liquidators were appointed.
On 18 July 2014, Singularis, acting through its joint liquidators, brought a claim against Daiwa for the full amount of the payments on two bases:
(1) dishonest assistance in Mr Alsanea’ breach of fiduciary duty in misapplying the company’s funds; and
(2) breach of the Quincecare duty of care to the company by giving effect to the payment instructions.
The High Court dismissed the dishonest assistance claim but upheld the negligence claim. Singularis did not appeal against the dismissal of the dishonest assistance claim. Daiwa did appeal against the finding of liability on the negligence claim to which the Court of Appeal [2018] EWCA Civ 84 unanimously dismissed and held that:-
(1) that Mr Al Sanea’s fraudulent state of mind could not be attributed to the company; but
(2) even if it could, the claim would still have succeeded – the bank’s negligence had caused the loss, it was not defeated by a defence of illegality, or by an equal and opposite claim by the bank for the company’s deceit.Daiwa then appealed to the Supreme Court on the question of attribution and its consequences as follows: -
(a) In an action against a bank for breach of Quincecare duty of care, when can the actions (fraud) of a dominant personality, who owns and controls a company, even though there are other directors, be attributed to the company?
(b) If they are attributed to the company, is the claim defeated (i) by illegality; (ii) by lack of causation because the bank’s duty of care does not extend to protecting the company from its own wrongdoing or because the company did not rely upon its performance; or (iii) by an equal and countervailing claim in deceit?
DEFENCE OF ILLEGALITY
The President of the Supreme Court, Lady Hale, in delivering the Judgment, agreed with the Courts below that the illegality defence raised by Daiwa must be rejected on two (2) grounds: -
(i) Mr Al Sanea’s fraud could not be attributed to Singularis for the purpose of breach of Quincecare Duty; and in any event
(ii) the test for a successful illegality defence, laid down by the Supreme Court in Patel v Mirza was not met.
For those who have yet to read the Supreme Court’s Judgment in Patel v Mirza, Lady Hale has succinctly summarised the gist of the case as follows: -
“14. Patel v Mirza was a restitution claim. Mr Patel agreed to pay £620,000 to Mr Mirza on the basis that Mr Mirza would use it to bet on the price of shares using inside information that Mr Mirza expected to receive. This was a conspiracy to commit the offence of insider dealing contrary to section 52 of the Criminal Justice Act 1993. However, the inside information was not forthcoming and the bets were never placed. Mr Patel asked for this money back and Mr Mirza refused. He argued that the claim was barred by illegality because Mr Patel would have to prove the illegal agreement under which the money was paid in order to prove that the purpose has failed and he should get it back. A panel of nine Supreme Court Justices was convened to hear the appeal, because of the perceived conflict between the decisions of this Court in Hounga v Allen [2014] UKSC 47; [2014] 1 WLR 2889, Les Laboratories Servier v Apotex Inc [2014] UKSC 55; [2015] AC 430, and Bilta (UK) Ltd v Nazir (No 2) [2015] UKSC 23; [2016] AC 1. By a majority of six to three, the Court rejected the approach in Tinsley v Milligan [1994] 1 AC 340, which depended on whether or not the claimant had to plead the illegal agreement in order to succeed. Instead it adopted the approach summed up by Lord Toulson, who gave the leading judgment, at para 120:
“The essential rationale of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system... In assessing whether the public interest would be harmed in that way, it is necessary (a) to consider the underlying purpose of the prohibition which has been transgressed and whether the purpose will be enhanced by denial of the claim, (b) to consider any other relevant public policy on which the denial of the claim may have an impact and (c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts.
” 15. In that case, it was not contrary to the public interest to allow Mr Mirza to recover the money which he had paid for an illegal purpose but which had not been used for that purpose”
In assessing and weighing the public interest in relation to breach of Quincecare Duty, the Supreme Court agreed with the Courts below that the purpose of the prohibition of breach of fiduciary obligation was to protect the company from becoming the victim of the wrongful exercise of power by officers of the company. The Supreme Court cited the High Court’s judgment (para 218) as follow: -
“It would not enhance the integrity of the law to undermine that balance by denying the claim on grounds of illegality in a case where, ex hypothesi, the exceptional circumstances needed for the duty to arise and be breached are found to be present.”
Even though it is recognised that the purpose of protecting the bank would be enhanced by denial of the claim, the Court took the view that such purpose was achieved by ensuring that the bank was only liable to repay the money if the Quincecare duty was breach. On top of that, it was also held that the denial of the claim would have a material impact upon the growing reliance on banks and other financial institutions to play an important part in reducing and uncovering financial crime and money laundering and if a regulated entity could escape from the consequences of failing to identify and prevent financial crime by casting on the customer the illegal conduct of its employees that policy would be undermined.
Overruled Stone & Rolls Ltd v Moore Stephens
Daiwa relied on the decision of the House of Lords in Stone & Rolls Ltd v Moore Stephens [2009] UKHL 39 (“Stone & Rolls”) in seeking to establish attribution in this case.
In Stone & Rolls, the claimant company was owned, controlled and managed by a Mr Stojevic, who had procured the company to engage in frauds 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 auditors were employed to detect. The Court of Appeal held 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.
The Supreme Court in this case overruled Stone & Rolls and held that there is no principle of law that in any proceedings where the company is suing a third party for breach of a 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. Furthermore, 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.
Lady Hale concluded by saying that: -
“35. … 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.”
Malaysia’s Position
Quincecare duty has long been recognised by Malaysian Courts and this can be seen in:-
(a) the Federal Court case of Abdul Rahim Abdul Hamid & Ors v Perdana Merchant Bankers Bhd & Ors [2006] 5 MLJ 1;
(b) the Court of Appeal case of Aseambankers Malaysia Bhd & Ors v Shencourt Sdn Bhd & Anor [2014] 4 MLJ 619; and
(c) the Court of Appeal case of Public Bank Bhd & Anor v Exporaya Sdn Bhd.
However, it is still not clear whether the principles laid down by the Supreme Court in Singularis would be applied in Malaysia especially on whether a defence of illegality can be raised successfully against the claim for breach of Quincecare duty. Therefore, it will be interesting to see if we have a Malaysian authority on this in the near future.
Published by Chuar Kia Lin
Partner of Pierre Chuah & Associates
