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In this post, Emilija Lazarevic, a trainee solicitor in the litigation team at CMS, previews the decision awaited from the UK Supreme Court in the matter of Stanford International Bank Ltd (In Liquidation) v HSBC Bank Plc.

On 19 January 2022, the Supreme Court heard the appeal in Stanford International Bank Ltd (In Liquidation) v HSBC Bank Plc. The appeal turns on whether a company in liquidation can be considered to have suffered loss where, while it is still trading, its bank pays money out of the company’s accounts to discharge debts owed by the company. It is likely that this case will further set out the limits of the Quincecare duty, following a spate of recent high-profile cases in this area.

Factual Background

In April 2009 the claimant went into insolvent liquidation after being used as a vehicle for a Ponzi scheme fraud. It held accounts with the defendant.

The claimant’s liquidators brought a claim for a loss amounting to £116.1 million. A sum of £118.5 million had been paid out of the claimant’s accounts between August 2008, when the liquidators considered that the defendant should have frozen the accounts, and February 2009, when the defendant did freeze the accounts. The claimant contended that had the accounts been frozen by August 2008, the monies would have remained there rather than being paid away to holders of Certificates of Deposit, which were issued by the claimant.

Damages were sought by the claimant for breach of an implied duty owed by the bank to its customers, as explained in Barclays Bank plc v Quincecare Ltd [1992] 4 All E.R. 363. In this case it was established that “a banker must refrain from executing an order if and for as long as the banker is ‘put on inquiry’ in the sense that he has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company”.

Procedural History

The defendant sought a summary judgment and/or striking out from the High Court in respect of the claim, of which there were two elements. The first element related to the defendant’s alleged breach of implied duty, as considered in Quincecare. The second element concerned the defendant’s alleged dishonest assistance.

At first instance, the court granted the application in part. It was held that it was not appropriate to strike out or grant summary judgment in respect of the Quincecare breach. On the alleged facts, if the company’s accounts were frozen when they should have been, the claimant would have possessed an extra £118 million in assets, which would have allowed the liquidators to pursue the company’s own claims and distribute any winnings to the creditors. The liquidators were deprived of such opportunities owing to the defendant’s alleged breach, and the court considered this to be a real loss to the company.

The plea relating to dishonest assistance was struck out on the basis that dishonesty had not been pleaded against any particular individual working for the defendant. The defendant relied on aggregate information held by different individuals, and as those individuals could not be said to be dishonest, no case could be made against the defendant. The claimant argued that corporate recklessness could amount to dishonesty, but this was not accepted by the court.

The defendant bank appealed against the High Court’s decision not to strike out the loss claim, and the claimant appealed against the decision to strike out its claim of dishonest assistance.

The defendant’s appeal was allowed. The Court of Appeal held that, although if the accounts had been frozen at the appropriate time the claimant would have been able to pay its creditors once the insolvency process began, the defendant’s duty had been to the claimant alone and not the creditors (citing Singularis Holdings Ltd (in Liquidation) v Daiwa Capital Markets Europe Ltd [2018] EWCA Civ 84).

Furthermore, it was held that the previous judge had mistakenly confused the claimant company’s position before and after the inception of insolvency proceedings. In its view, the true distinction is between a company that is trading and a company in respect of which a winding up process has commenced, not between a solvent trading company and an insolvent trading company. If an insolvent company is trading, money paid to a creditor would reduce the assets of the company, but it would also reduce the company’s liabilities. In other words, the company’s overall net asset position would remain unchanged. On that basis, having more cash available upon the insolvency would be a benefit to the creditors rather than to the company itself while it was trading. As a result, the claimant was deemed to have suffered no loss and so the claim could not succeed.

The claimant’s appeal was dismissed. It was held that the previous judge was correct in stating that dishonesty could not properly be alleged by adding the knowledge of one innocent person to another (citing Armstrong v Strain [1952] 1 K.B 232 and Greenridge Luton One Ltd v Kempton Investments Ltd [2016] EWHC 91 (Ch)).

Comment

The Court of Appeal has limited the scope of the Quincecare duty by confirming that it cannot extend to a customer’s creditors. It has also established that negligent or reckless practices by banks will not be sufficient to fulfil the meaning of “dishonesty”, which is required for a dishonest assistance claim to succeed.

If the UK Supreme Court ruling favours the Court of Appeal judgment, this may deter future claimants from pursuing similar claims against banks that have been unknowingly involved in processing Ponzi scheme payments. Such a ruling would be welcomed by financial institutions that operate client accounts and process payments in accordance with client instruction.