In the recent UK Supreme Court decision of Singularis Holdings Ltd (In Official Liquidation) v Daiwa Capital Markets Europe Ltd, it was held that Daiwa must not “shut its eyes” to obvious dishonesty when processing client instructions, pursuant to its “Quincecare duty”.
Singularis was a company incorporated in the Cayman Islands and held personal assets for Mr Maan Al Sanea, who was both a director and shareholder – although he was not the sole director. Singularis held assets of Mr Maan Al Sanea in the sum of US$204m which represented a surplus from a share sale. Daiwa transferred the surplus to third parties acting on the instructions of Mr Al Sanea, despite “glaring” signs that something was wrong with the operation of the account. Singularis was subsequently placed in liquidation and its claim against Daiwa included breach of the Quincecare duty of care. The Court of Appeal and the Supreme Court upheld the finding that Daiwa breached its duty of care and was therefore liable to pay Singularis for the sums fraudulently transferred out, with a 25% deduction for Singularis’ contributory negligence. It was held that a bank must ensure that: (i) it is alert to potentially dishonest instructions; (ii) it does not “shut its eyes” to obvious dishonesty and (iii) it does not act recklessly by failing to investigate potentially suspicious instructions.
The Supreme Court considered the second limb of Stone & Rolls (as clarified in Jetivia SA v Bilta (UK) Limited (in liquidation)) ie the illegality defence being available to third parties, such as a bank, where there are no innocent directors or shareholders (a “one-man company”). It was held that this defence was not available to Daiwa, since Singularis was not a one-man company, and therefore Singularis should not have that knowledge of fraud attributed to it. It remains to be seen how this case will affect creditors of one-man companies and auditor negligence claims more generally.
The Supreme Court held that it was in the public interest to uphold the Quincecare duty of care since: (i) banks play an important part in uncovering financial crime and money laundering; and (ii) the duty protects the bank’s customers against misappropriation. We can now expect transfers to be more closely scrutinised since banks will want to avoid liability for the original fraud of others.
See a summary of the judgment by Lady Hale here.