Bank’s liability for failing to prevent fraud

4th November 2019

68711055 s
31425714 s
92156765 s

The Supreme Court has very recently (30th October 2019) handed down judgment in the case of Singularis Holdings Ltd (In Official Liquidation) v Daiwa Capital Markets Europe Ltd

For many years, banks in England have been subject to what is commonly referred to as the Quincecare duty (following the case of Barclays Bank PLC v Quincecare Limited). 

The decision in Quincecare was that there is an implied term of the contract between a bank and it’s customer which imposed upon the bank a duty of care not to carry out the customer’s order if the bank knows that the order has been given dishonestly.  The duty also makes the bank liable if it shuts it’s eyes to obvious dishonesty or is reckless by failing to make appropriate enquiries. 

However it had been argued that the Quincecare duty did not apply in circumstances where the customer is a company and the instructions to the bank were given by the sole shareholder who, in effect, controls the company.

This was the situation in the Singularis case.  Mr Al Sanea, the sole shareholder and the controller of Singularis, gave instructions to Daiwa, the company’s bank, to pay out a cash surplus of $204M to a third party which left Singularis unable to pay it’s creditors. 

The liquidators of Singularis brought claims against Daiwa including a claim for breach of the Quincecare duty. 

Daiwa raised a number of defences to the claim including one that, as Mr Al Sanea was the controlling mind of the company, any fraud by him should be attributed to the company so that a claim based on the Quincecare duty must fail on the ground of illegality and various other grounds. 

The Supreme Court unanimously dismissed Daiwa’s argument.  The only substantive judgment being given by Lady Hale and she held the bank liable for the losses suffered by Singularis as a result of Daiwa’s breach of its Quincecare duty.

This judgment is likely to be of great significance and places a greater onus on banks to question instructions given on behalf of closely controlled companies to make it harder for their owners to commit fraud on the company and it’s creditors.

Howard Colman