Bank security

Case Alert - Fraud, bank liability and attribution

Singularis Holdings Ltd v Daiwa Capital Markets Ltd

Overview

A decision of the United Kingdom Supreme Court[1] illustrates severe liability consequences for banks that carry out payment instructions when there are warning signs of fraud or misappropriation.

The Supreme Court rejected a defence that the fraud of the company’s controlling shareholder and director could be attributed to the plaintiff company. Accordingly, it upheld the decision of the Court of Appeal, confirming the investment bank’s liability for payments exceeding US$204 million (less a 25% deduction for contributory negligence).

Facts

Mr Al Sanea was the sole shareholder of the company (Singularis), one of six directors, and its chairman, president and treasurer. Mr Al Sanea had very extensive management powers, including signing powers over the bank accounts. The other directors, while reputable, did not exercise any influence over the management of the company.

In June 2009, Singularis held US$204 million in its account with Daiwa (an investment bank and brokerage firm).  Between 12 June and 27 July 2009 Mr Al Sanea instructed Daiwa to pay out those funds in eight payments made to three different entities. From the company’s perspective (as later assessed by the Court), there was no proper basis for making those payments.  On 20 August 2009, Mr Al Sanea placed the company in liquidation. 

The company (through its liquidators) brought a claim against Daiwa for: (i) dishonest assistance; and (ii) breach of the Quincecare duty of care.[2] The High Court dismissed the dishonest assistance claim, because the Daiwa employees had acted honestly.[3] However, the negligence claim was upheld. The Judge held that any reasonable banker would have realised that there were many obvious, even glaring, signs that Mr Al Sanea was perpetrating a fraud on the company for his own purposes. For various reasons identified in the judgment, everyone had recognised that the account needed to be closely monitored given the risk of misappropriation, yet no-one actually took those measures.[4]

Daiwa unsuccessfully appealed against the finding of liability on the negligence claim to the Court of Appeal.  The appeal to the Supreme Court was on the question of attribution and its consequences:

(a)        Attribution: When can the actions of a dominant personality who owns and controls a company (even though there are other directors) be attributed to the company?

(b)        Consequences: If actions are attributed, is the claim defeated by:

(i)          illegality;

(ii)        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.

Legal analysis

The foundation for the Supreme Court’s approach was set by the New Zealand case Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 3 NZLR 7 (PC).  In Meridian Global, the Privy Council rejected a simplistic “directing mind and will” test to determine when the acts of corporate agents should be attributed to a company.  Instead, the “rules of attribution” involve:

(a)        primary rules – found in the constitution and those implied by company law;

(b)        general rules – from agency and vicarious liability; and

(c)        “exceptional cases” or “special rules of attribution” – these are identified as a matter of interpretation by asking, in a specific context: “Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc of the company?”

Two subsequent cases have been controversial in terms of exactly what “special rules” they stand for:

(a)       In Stone & Rolls Ltd v Moore Stephens,[5] a claim against auditors was struck out because a company with a sole shareholder/director (and therefore with attributed knowledge) could not complain that auditors had negligently failed to identify that person’s fraud.

(b)        In Bilta (UK) Ltd v Nazir (No 2),[6] it was held that where a company has been the victim of wrongdoing by its directors, that wrongdoing cannot be attributed to the company as a defence to a claim brought by the company’s liquidator against the directors and their co-conspirators.

In Singularis, the Supreme Court rejected Daiwa’s argument that Stone & Rolls meant dishonesty of the “controlling mind” in a one-person company could always be attributed to the company.  Rather, attribution (even for a sole shareholder/director company) always depends on context and purpose.[7] The outcome in Stone & Rolls was not necessarily wrong in its context, because an auditor’s duty is to report on the company’s accounts to those having a proprietary interest in the company or concerned with its management and control.  If the company already knows the true position, then the auditor’s negligence does not cause the loss.[8] In contrast, the purpose of a banker’s duty of care is to protect the company against misappropriation of its funds by a trusted agent who is authorised to withdraw its money from the account.  To attribute the fraud of that person to the company would be to denude the duty of any value.[9]

Even if attribution were available, the Supreme Court concluded that this would not have provided a defence under any of the three grounds:

(a)        Illegality: The test for illegality as laid down in Patel v Mirza[10] is one of whether 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.[11] No such concern arose with enforcement of this claim.[12]

(b)        Causation: The purpose of the Quincecare duty of care is to protect the bank’s customers from misconduct by their own agents. In terms of timing, the fraudulent instruction gave rise to the duty of care, making that breach the true cause of loss.[13]

(c)        Deceit: Similarly, the existence of the fraud was a pre-condition of Daiwa’s duty, rendering it contradictory to allow Daiwa to rely on that fraud to escape liability.[14]

Singularis highlights the risks for a bank paying out funds when there are warning signs of fraud.  On the other hand, the risks of not following payment instructions were illustrated in Westpac New Zealand Ltd v MAP and Associates Ltd.[15]  In that case, the Supreme Court held that the bank was liable for declining to make payment when it had genuine concerns, but not a sufficient factual basis for a “strong suspicion of a breach of trust, coupled with a deliberate decision not to make inquiry”.[16] 

Further complexities arise with the prohibition against tipping off when money-laundering is suspected.[17]

Conclusion

It has been readily acknowledged that banks are placed in an awkward position when there are concerns about possible misappropriation, given that payment decisions must be made promptly based on limited information.[18]  Banks face liability either way if a court later (with the benefit of hindsight) reaches a different view as to whether or not the mandate should have been followed.  This reflects a policy decision about who should bear such losses and manage the risks (including potentially by contractual terms with the customer[19]).

However, the facts of Singularis were unusual because there were glaring signs of a fraud risk and a decision had been made that the account needed to be closely monitored given the risk of misappropriation.  The investment bank failed to implement those precautions, which is why it ran into problems under its duty of care.  These facts will not arise in most day-to-day customer-banker relationships.

[1] Singularis Holdings Ltd v Daiwa Capital Markets Ltd [2019] UKSC 50, [2019] 3 WLR 997.

[2] In Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363, the Court held that there was an implied term that the bank would use reasonable skill and care in executing the customer’s orders, subject to the conflicting duty to execute those orders promptly so as to avoid causing financial loss to the customer. The bank would be liable if it 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.  The bank should refrain from executing an order if put on inquiry by having reasonable grounds for believing that the order was an attempt to misappropriate funds.

[3] Singularis Holdings Ltd v Daiwa Capital Markets Ltd [2019] UKSC 50, [2019] 3 WLR 997 at [7].

[4] Singularis Holdings Ltd v Daiwa Capital Markets Ltd [2019] UKSC 50, [2019] 3 WLR 997 at [11].

[5] Stone & Rolls Ltd v Moore Stephens [2009] 1 AC 1391 (UKHL),

[6] Bilta (UK) Ltd v Nazir (No 2) [2016] AC 1 (UKSC).

[7] Singularis Holdings Ltd v Daiwa Capital Markets Ltd [2019] UKSC 50, [2019] 3 WLR 997 at [34].

[8] Singularis Holdings Ltd v Daiwa Capital Markets Ltd [2019] UKSC 50, [2019] 3 WLR 997 at [36].

[9] Singularis Holdings Ltd v Daiwa Capital Markets Ltd [2019] UKSC 50, [2019] 3 WLR 997 at [35].

[10] Patel v Mirza [2017] AC 467 (UKSC), which rejected the approach in Tinsley v Milligan [1994] 1 AC 340.

[11] Singularis Holdings Ltd v Daiwa Capital Markets Ltd [2019] UKSC 50, [2019] 3 WLR 997 at [14].

[12] Singularis Holdings Ltd v Daiwa Capital Markets Ltd [2019] UKSC 50, [2019] 3 WLR 997 at [16] and [21].

[13] Singularis Holdings Ltd v Daiwa Capital Markets Ltd [2019] UKSC 50, [2019] 3 WLR 997 at [23].

[14] Singularis Holdings Ltd v Daiwa Capital Markets Ltd [2019] UKSC 50, [2019] 3 WLR 997 at [25].

[15] Westpac New Zealand Ltd v MAP and Associates Ltd [2011] 3 NZLR 751 (SC).

[16] Westpac New Zealand Ltd v MAP and Associates Ltd [2011] 3 NZLR 751 (SC) at [27].  Note that there was no suggestion of any breach of the Quincecare duty of care on the facts (see footnote 7).

[17] Anti-Money Laundering and Countering Financing of Terrorism Act 2009, ss 46 and 94.

[18] Westpac New Zealand Ltd v MAP and Associates Ltd [2011] 3 NZLR 751 (SC) at [15].

[19] Westpac New Zealand Ltd v MAP and Associates Ltd [2011] 3 NZLR 751 (SC) at [12] and [22].