Quincecare and Fraud – Bankers' Duties and Deep Pockets

In scenarios of financial distress, particularly having a fraud and insolvency overlay, actions to recuperate money in many cases are targeted at organizations. The best looking targets are those with deep pockets, such as banks.

The past Twelve months have experienced a flurry of cases involving claims of breach from the Quincecare duty. A number of interesting points emerged from these recent cases.

Federal Republic of Nigeria v JP Morgan Chase Bank, NA [2021] EWHC 347

The FRN was seeking to recover $875 million locked in an account with JPM which JPM had transferred to third party entities. The FRN alleged that JPM have been put on inquiry whether those transfers were part of a corrupt scheme. Critically, JPM had filed six suspicious activity reports using the National Crime Agency according of the instructions, and had received consent in the NCA to make the payments.

The Court of Appeal decided the case is going to trial. A legal court said that it might be possible theoretically for an entire agreement clause to exclude the Quincecare duty, but that would need to be very explicitly drafted. In this case, the entire agreement clause within the relevant depository agreement didn't avoid the Quincecare duty from arising. Neither did related exclusion clauses assist JPM.

The Court wasn't attracted to an argument that JPM ought to be allowed to depend on an indemnity requiring the client to indemnify the bank against third party claims. It might be extraordinary if your contract could be interpreted to achieve the effect that a customer, being the victim of fraud, should compensate the financial institution which had facilitated the fraud’s perpetration.

Singularis v Daiwa [2021]

Daiwa made payments of around $200 million from the Singularis account to various entities around the instructions of AS, who had been the only shareholder of Singularis. When Singularis went into liquidation, the liquidators made claims against Daiwa to recuperate those payments. Our prime Court found that Daiwa had acted in breach of their Quincecare duty because of obvious signs the payments were fraudulent and for the advantage of AS.

On appeal, one of the key arguments relied on by Daiwa was that Singularis would be a one man company, such that the fraud of AS should be attributed to Singularis itself. The final Court held that Singularis was not a one man company, because it were built with a number of directors. A legal court emphasised that the reason for the Quincecare duty would be to protect the customer against this kind of fraud, which would denude any practical value of the job whether it was disapplied in cases where it was most needed. It was also not available to Daiwa to plead illegality on the part of Singularis because that will undermine the policy of requiring banks to experience a role in combating money laundering.

Stanford International Bank Ltd v HSBC Bank plc [2021] EWHC 2232

The liquidators of SIB were asserting claims against HSBC because of its role in making substantial payments from various SIB accounts . HSBC was trying to possess the claims dismissed in an early stage.

The court held that there would be a valid distinction to make in instances where the claimant is insolvent. When it comes to a solvent claimant, if your bank pays money out which results in a genuine relieve debts owed by the company, that makes no difference to the company’s net asset position. However, when it comes to an insolvent company, paying out significant monies depletes the funds who have been readily available for liquidators to pursue claims. The court refused to strike out the claims.

Hamblin v World First Ltd [2021] EWHC 2383

Here, an allegation of breach of Quincecare duty was made against WF, a payment services provider. Carrying out a fraud, the claimants transferred lb140,000 into M’s account with WF, that was misappropriated. The claimants were looking to bring a derivative action on behalf of M against WF, including on the basis that WF was at breach of their Quincecare duty. A legal court dismissed WF’s application for summary judgment on the number of grounds. Around the application of the Quincecare duty, a legal court was prepared to accept that the Quincecare duty might be believed to apply to a payment services provider. Additionally, it followed the approach taken in Singularis, that knowledge held through the fraudsters shouldn't be attributed to M, and that the issue of attribution should be thought about in the full context at trial.

Comments

In these cases, you will see real concentrate on the steps taken by banks in respect of cash laundering flags and suspicious transaction reports, and just how they have handled any tensions between that process as well as their Quincecare duties owed to customers. Banks should be alive to the risk that allowing payments may help to perpetuate a long running fraud, like a Ponzi scheme. We now have a significant body of case law emerging.

The further decisions within the pipeline for next year will state the extent to which claims against banks is going to be viable in the event of fraud and insolvency. In the present climate, this really is likely to be very important in framing the remedies open to stakeholders, such as shareholders and liquidators, when dealing with the aftermath of fraud.