Clarification for banks on the Quincecare duty and dishonest assistance
In Stanford International Bank Ltd (In Liquidation) v HSBC Bank Plc  EWCA Civ 535, the English Court of Appeal (CA) allowed an appeal by HSBC resulting in the strike out of a claim brought by Stanford International Bank Ltd (SIB) against HSBC, for alleged losses in respect of payments made in the discharge of certain debts owed by SIB, and at the same time, dismissed SIB’s appeal against a decision to strike out its claim against HSBC for 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 (CD) 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 between 1 August 2008 and 17 February 2009. SIB claimed that the Quincecare duty required HSBC to have identified issues with SIB’s accounts by 1 August 2008, at the latest, and to have frozen payments out of the accounts. 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. Instead, the accounts remained active until February 2009, when Mr Stanford was charged by the US authorities.
SIB’s second claim was in respect of HSBC’s alleged dishonest assistance in relation to breaches of fiduciary duty by Mr. Stanford. SIB claimed that HSBC as an entity, was to be regarded as having had knowledge of the facts and matters amounting to dishonesty, because it acted with corporate recklessness and/or by reference to the aggregated knowledge held by the individuals within HSBC. It is alleged that HSBC thereby turned a blind eye as to whether SIB was being run dishonestly and continued to allow SIB to operate its bank accounts.
HSBC applied for summary judgment, but only the dishonest assistance claim was struck out. HSBC submitted that because the sums paid out by HSBC to the CD holders discharged a contractual liability which SIB owed to them, SIB’s balance sheet was unaffected in net terms and SIB was no worse off. In other words, SIB had suffered no loss that was capable of sounding in damages as the investors had received their contractual entitlement to capital and interest by virtue of the terms of redemption of the CDs issued by SIB. However, Nugee J held that SIB’s state of insolvency meant that if HSBC had performed its duty, SIB would have had at least an additional £80 million available as at February 2009, for the liquidators to distribute to the creditors in SIB’s insolvency. The fact that SIB had slightly lower liabilities as a result of the discharge to the CD holders, was not of a corresponding benefit to SIB in the heavily and inevitably insolvent position in which it found itself.
In relation to the dishonesty claim against HSBC for continuing to allow SIB to operate its bank accounts, the point turned on the adequacy of the plea of dishonesty. In the absence of evidence allowing SIB to plead dishonesty against at least one individual whose dishonesty was attributable to HSBC, there was no case that could be made against HSBC. Nor could SIB aggregate the knowledge held by different people within HSBC, if none of those individuals were alleged to be dishonest, in order to attribute guilt to HSBC.
The Court of Appeal allowed HSBC’s appeal on the loss claim 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  4 All ER 363. In his judgment 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  1 WLR 2777, that a banker’s Quincecare duty was owed to its 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. The fact that SIB had slightly lower liabilities as a result of the payments to the CD holders was a corresponding benefit to its net asset position, even if it was in a heavily insolvent position. SIB did not lose anything as a result of the payment to discharge the creditors.
The Court of Appeal also rejected SIB’s argument that the scale of HSBC’s alleged neglect amounted to an exception to the well settled principles of dishonesty. The Master of the Rolls opined 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.” It made no difference to SIB’s claim that HSBC was a large corporation. Dishonesty and blind eye knowledge must still be evidenced by the dishonesty of one or more natural persons. The rules as to what constitutes dishonesty for the purposes of dishonest assistance are not a developing area of law and cannot be circumvented.
Clarification for banks on the scope of their ‘Quincecare’ duty and dishonest assistance. In conclusion, the Court of Appeal ruled that Nugee J was wrong to refuse to strike out the loss claim and that the removal of approximately £118 million from SIB’s accounts to be paid to genuine creditors of SIB between 1 August 2018 and 17 February 2019 “did not reduce [SIB’s] net asset position”. The Court of Appeal’s judgment will be of interest to banks with respect to their Quincecare duty, especially in an insolvency context.
In addition, the Court of Appeal upheld Nugee J’s decision to strike out SIB’s claim for dishonest assistance because SIB could not “allege that anyone at HSBC had the necessary dishonesty or blind eye knowledge” of SIB’s Ponzi scheme. The issue of ‘collective’ dishonest assistance is likely to be reconsidered later this year in a full trial scheduled for October 2021.
Patrick O’Kane, Trainee Solicitor in London, Glenys Newall, Managing PSL in London
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