The Singapore Law Gazette

Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd: A Bank’s Quincecare Duty Revisited

The English High Court recently released a decision wherein the defendant bank was found liable for its breach of its “Quincecare” duty to the plaintiff company for paying away large sums of money to various third parties at the instigation of the plaintiff company’s sole shareholder who also held directorship. This article examines the scope of the “Quincecare” duty of banks, the relevance of the doctrines of illegality and attribution in a breach of the “Quincecare” duty, as well as the practical implications of the decision for banks and other financial institutions in Singapore.

Introduction: The Quincecare Duty

Fraudulent Transactions and a Bank’s Duty of Care

As executory agents, banks and other like financial institutions are constantly on guard against fraudulent and suspicious transactions, including those which are executed without due approvals by the client or (in the case of a corporate personality) its controllers, or for improper or illegal objectives. Such transactions may lead to clients commencing lawsuits against their banks or financial handlers for a breach of duty, as the English High Court case of Barclays Bank Plc v Quincecare Ltd and Another (Quincecare) aptly illustrates.¹ Barclays Bank Plc v Quincecare Ltd and Another [1992] 4 All ER 363 (“Quincecare”).

In Quincecare, the chairman of the defendant company (Chairman) misappropriated more than £344,840.00 of a £400,000.00 loan (Loan) from the plaintiff bank to the defendant company. The Chairman instructed the bank’s transfer of £344,840.00 of the Loan to his solicitors, followed by another £24,237.00 to a company of which he was the alter ego, and cited the retirement of an inter-company debt as the reason for the latter. The Chairman subsequently absconded with the transferred sum of £344,840.00 to the United States of America (Misappropriated Sum). The plaintiff bank sued to recover the Misappropriated Sum and outstanding interest on the same from the defendant company as well as the guarantors of the Loan. The defendant company counterclaimed against the plaintiff bank for a purported breach of the latter’s duty to exercise reasonable care and skill in carrying out the former’s instructions by paying away the Misappropriated Sum.

Formulation of the “Quincecare Duty”

Steyn J, who delivered the judgment, held that there was an implied term of the contract between banks and customers that a bank would observe reasonable skill and care in executing their customers’ order. If a bank executed a customer’s order to transfer money knowing it to be “dishonestly given, shutting its eyes to the obvious fact of the dishonesty or acting recklessly in failing to make such inquiries as an honest and reasonable man would make”, it would be in breach of its duty of care.² Quincecare at p 376.

The duty as formulated above is subject to a number of caveats. First, it is generally subordinate to a bank’s other conflicting contractual duties to the customer, for example, where it has received a valid and proper order which it is bound to execute.³ Ibid. Second, the law should not impose too burdensome an obligation on bankers which hampers the effective transacting of banking business – it suffices to say 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 necessary proof) for believing that the order is an attempt to misappropriate the funds of the company”.⁴ Ibid. The abovementioned duty, together with its caveats as aforesaid, shall be referred to in this article as the “Quincecare Duty”.

On the facts of the case, the plaintiff bank had no reason to suspect that the Chairman was about to embark on an audacious fraud. It was reasonable for the plaintiff bank’s employees to think that the solicitors were acting for Quincecare – a point duly reinforced by the fact that the solicitors testified at trial that they were not entirely sure who they had been acting for⁵ Quincecare at p 379. – and for timely transfers to be made to the same.⁶ Quincecare at p 381. The fact that the Loan had been split into several transfers was also not capable of casting doubt on the legality of the entire transaction.⁷ Quincecare at p 379. In the premises, the plaintiff bank had not been put on inquiry as to the wrongdoing of the Chairman. The defendant company’s counterclaim therefore failed and judgment was entered for the plaintiff bank.

The approach of Steyn J in Quincecare was subsequently referred to with approval by the English Court of Appeal in the case of Lipkin Gorman (a firm) v Karpnale Limited,⁸ Lipkin Gorman (a firm) v Karpnale Ltd [1989] 1 WLR 1340 (CA). a point which was not challenged on appeal to the House of Lords by the plaintiff.⁹ Lipkin Gorman (a firm) v Karpnale Ltd [1992] 4 All ER 331 (HL).

In Singapore’s context, the Singapore Court of Appeal has also endorsed the existence and applicability of the Quincecare Duty, as seen by its decision in Hsu Ann Mei Amy (personal representative of the estate of Hwang Cheng Tsu Hsu, deceased) v Overseas-Chinese Banking Corp Ltd (Amy Hsu).¹⁰ Hsu Ann Mei Amy (personal representative of the estate of Hwang Cheng Tsu Hsu, deceased) v Overseas-Chinese Banking Corp Ltd [2011] 2 SLR 178 (“Amy Hsu”). The issue considered by the Singapore Court of Appeal in Amy Hsu was, however, considerably narrower and related to whether it had been reasonable for the respondent bank to refuse to carry out certain instructions from its client based on its suspicions that the appellant client might not have understood the full legal implications and possible detriments of such instructions.¹¹ Amy Hsu at [23]. The Singapore Court of Appeal cited Quincecare for the proposition that:¹² Ibid.

“… where a bank has good reason to believe or suspect that a customer’s mandate may not be genuine or may not represent his or her true intention, the bank is entitled to refuse to comply with the mandate. Conversely, if a bank fails to comply with its client’s instructions under circumstances where a reasonably prudent bank would not have been put on notice, then the bank may be acting in breach of its duty to comply with the client’s instructions.” [Emphasis in original]

The Singularis Decision

The Relevant Facts in Singularis

Despite the apparent significance of and express recognition given to the Quincecare Duty in both English and Singapore jurisprudence, it appears that no bank has ever been made liable for a breach of its Quincecare Duty to a client – not until the English High Court handed down its judgment in Singularis Holdings Ltd (In Official Liquidation) (A Company Incorporated in The Cayman Islands) v Daiwa Capital Markets Europe Ltd (Singularis).¹³ Singularis Holdings Ltd (In Official Liquidation) (A Company Incorporated in The Cayman Islands) v Daiwa Capital Markets Europe Ltd [2017] EWHC 257 (Ch) (“Singularis”). On appeal to the English Court of Appeal, the English High Court’s decision in Singularis was also upheld.¹⁴ Singularis Holdings Ltd (In Official Liquidation) (A Company Incorporated in The Cayman Islands) v Daiwa Capital Markets Europe Ltd [2018] EWCA Civ 84 (“Singularis CA”)

In Singularis, the defendant bank (Daiwa) paid out large sums of money to third parties at the instigation of Mr Al Sanea, who was one of the directors and the sole shareholder of the plaintiff company (Singularis Ltd). Singularis Ltd was set up by Mr Al Sanea for the purpose of managing his personal assets; assets which did not belong to the conglomerate he owned (Saad Group). Daiwa held a sum of some US$204 million in a segregated client account, of which the sum of US$124 million was derived from surplus collateral arising from Daiwa’s closure of its longstanding secured lending relationship with Singularis Ltd in June 2009, and the balance arriving in the account on 2 June 2009.¹⁵ Singularis at [1]–[105].

Just within a month alone from June to July 2009, Mr Al Sanea caused Daiwa to make payments in the names of three companies within the Saad Group. Eight of these payments were subsequently disputed by the liquidators of Singularis Ltd. These disputed payments were claimed from the defendant bank on two bases, namely that: (1) the employees of Daiwa had dishonestly assisted Mr Al Sanea to breach his fiduciary duties in removing the money from Singularis for the benefit of either himself or of companies in the Saad Group; and (2) Daiwa was in breach of the Quincecare Duty which it owed to Singularis Ltd by negligently failing to realise that Mr Al Sanea was committing a fraud on the company when he instructed Daiwa to pay the money to third parties.¹⁶ Singularis at [2]–[3].

The Holding of the English High Court

In its decision, the English High Court was unequivocal in holding that Daiwa did, in fact, owe Singularis Ltd a Quincecare Duty and had breached the same. Amongst the reasons given, the English High Court stated the following:

1. First, unlike the position of the plaintiff bank in Quincecare, Daiwa had not been administering hundreds of bank accounts with thousands of payment instructions every week. As such, it was not impractical to expect Daiwa to scrutinise payment instructions more carefully. In the case of Daiwa’s segregated client account, it was unusual for monies in a customer account not to be paid back to another account in that same customer’s name.¹⁷ Singularis at [191].
2. Second, the senior management of Daiwa was well aware of the dire financial straits that Mr Al Sanea and the Saad Group found themselves in, including press reports about the freezing of Mr Al Sanea’s assets and the withdrawal of credit facilities from the group.¹⁸ Singularis at [193]. While Singularis Ltd was not part of the Saad Group, Daiwa was well aware that Singularis Ltd’s financial health was fully dependant on Mr Al Sanea’s continuous financial contributions. It had no reason not to fully appreciate that there was a distinct possibility that the financial troubles afflicting him and the Saad Group could hinder that.¹⁹ Singularis at [194]–[195]. Moreover, Daiwa was aware that Mr Al Sanea would have tried to protect his wealth outside the Saad Group in the form of his assets in Singularis Ltd.
3. Third, Daiwa was aware that creditors of Singularis Ltd may have had substantial interests in the monies held on behalf of Singularis Ltd. While the employees of Daiwa that transacted the disputed payments did not have such knowledge, it was still information within Daiwa’s corporate knowledge and should have influenced how they transacted the disputed payments.²⁰ Singularis at [197].
4. Fourth, the presence of the sum of US$80 million appearing in Singularis Ltd’s account with Daiwa shortly after Mr Al Sanea’s and Saad Group’s assets had been frozen should have raised the suspicion that Mr Al Sanea intended to use the account of Singularis Ltd (which had not been frozen) with Daiwa to bypass the restrictions imposed on them.
5. Fifth, Daiwa made a transfer of the sum of US$180 million to a third party company that was part of the Saad Group despite the fact that the reason for the transfer was inconsistent and two radically different explanations were given.²¹ Singularis at [90] and [200].
6. Sixth, Daiwa failed to recognise the signs that a fraud was being perpetrated at every level within it, up to the senior management, despite ample evidence that senior executives had sent a “wealth of emails” to his colleagues stressing that great care and caution had to be taken in relation to the transactions authorised by Mr Al Sanea.²² Singularis at [202]; see also Singularis CA at [29]. Worse still, the Daiwa employees who executed Mr Al Sanea’s instructions were never fully aware of the worries that the senior executives had in relation to Singularis Ltd.²³ Singularis at [203]. Indeed, the English High Court stated its finding that:²⁴ Ibid.
   

   “… no one told Mr Metcalfe [Daiwa’s employee] that despite the previous good relationship with Singularis, he had to examine carefully any explanation given to support a payment and make sure that he checked properly with the Legal and Compliance departments before authorising the payment.”

Attribution and Illegality: Appeal to the English Court of Appeal

In its defence, Daiwa argued that Singularis Ltd’s claim for recovery of the misappropriated monies should be barred on the ground of illegality and also because Mr Al Sanea’s fraudulent actions was attributable to Singularis Ltd. The English High Court dismissed Daiwa’s defence of illegality and attribution. Unsatisfied, Daiwa appealed to the English Court of Appeal.²⁵ Singularis at [214]–[231]. Daiwa also lodged a limited appeal on the grounds that no claim could lie against Daiwa where a claim against Daiwa for breach of its Quincecare Duty was for the benefit of Singularis Ltd’s creditors. This was shortly dismissed.

After considering the United Kingdom Supreme Court (UK Supreme Court) decisions in Bilta (UK) Ltd (in liquidation) v Nazir (No 2) (Bilta)²⁶ [2016] AC 1. and Patel v Mirza (Patel),²⁷ [2016] UKSC 42. the English Court of Appeal held that the relevant test to be applied for attribution in the context of a defence of illegality (Attribution Test) was whether Singularis Ltd was:²⁸ Singularis CA at [53].

“… a “one-man company” … namely “a company in which, whether there was one or more than one controller, there were no innocent directors or shareholders”[.]”

If Singularis Ltd had been such a “one-man company”, the fraud of the trusted officer, namely Mr Al Sanea, would have been attributable to Singularis Ltd. In relation to the requisite standard of “innocence” in the Attribution Test, the English Court of Appeal, in affirming the English High Court’s finding of Singularis,²⁹ Singularis at [189]. appeared to suggest that anything less than complicity on the part of the said shareholders or directors in the company in the fraudulent or dishonest transaction would satisfy the requirements of “innocence”. On the facts of the case, apart from Mr Al Sanea, the other directors of Singularis Ltd were neither complicit in the fraud nor recklessly indifferent but only contributorily negligent.³⁰ Singularis CA at [55]. Singularis Ltd also had a large and genuine business carried out over a number of years before the perpetuation of the fraud.³¹ Singularis CA at [56].

In the circumstances, while Mr Al Sanea had been the directing mind and will of Singularis Ltd, the latter did have a functioning, albeit negligent and innocent board. It would have, therefore, been wrong to attribute Mr Al Sanea’s conduct and knowledge to Singularis Ltd. On this basis, Singularis Ltd was not to be barred from bringing its claim against Daiwa.³² Singularis CA at [58].

Further Analysis

Attribution, Illegality and the Quincecare Duty: A Narrower Way Forward in Singapore?

The Singularis decision may be considered significant in two aspects. First, it provides guidance as to what would be considered a clear and unambiguous breach of the Quincecare Duty on the part of a financial institution. Second, it highlights the importance of an ex turpi causa defence in a claim against a financial institution for breach of Quincecare Duty – where fraudulent transactions are concerned, such a defence could well be viable depending on the applicable functional and substantive rules of attribution, as well as the particular facts of each case.

Insofar as the applicable rules of attribution are concerned, it remains to be seen whether the Singapore Courts will, in a similar factual scenario, endorse the English approach in Singularis and Singularis CA in declining to attribute the knowledge of entrusted officers perpetuating a fraud on their companies. Indeed, in its decision in Ho Kang Peng v Scintronix Corp Ltd (Ho Kang Peng),³³ [2014] 3 SLR 329. the Singapore Court of Appeal endorsed the reasoning of the English Court of Appeal in Bilta (UK) Ltd (in liquidation) and Others v Nazir and Others (No 2)³⁴ [2014] Ch 52. – that a company is not to be treated as a victim where a claim is brought against it by a third-party victim for the wrongdoing of an agent or director of the former:³⁵ Ho Kang Peng v Scintronix Corp Ltd [2014] 3 SLR 329 at [69]–[70].

“More importantly, Patten LJ highlighted, along the same vein as Mummery LJ, the difference between cases where knowledge was attributed to the company from its directors for the purpose of a third party victim bringing a claim against the company itself and cases which concerned the company as the victim bringing an action against its directors for breach of duty[.]

…

We agree with the distinction drawn by Mummery and Patten LJJ in the cases above that while a company should be bound by the improper acts of the directors at the suit of an innocent third party, that rule should not apply where the suit is at the instance of the company itself against the directors for their breach of duties.”

The passage in Ho Kang Peng above may perhaps be reconciled with the approach of the English Courts in Singularis and Singularis CA on the basis that Daiwa could not have been considered an innocent third-party victim that could have availed itself of a claim against Singularis Ltd. The converse is true – Daiwa owed Singularis Ltd a duty to help safeguard the latter insofar as fraudulent transactions were concerned. Having breached that duty, it does not lie in the mouth of Daiwa to claim the status of victim. The English High Court in Singularis seemed to hint as much when it stated that:³⁶ Singularis at [184].

“The issue for the court in this case is therefore whether, in the context of a claim by the company against a bank for breach of the Quincecare duty, the director’s fraud should be attributed to the company in order to defeat the claim. In my judgment, it would not be right to do so because such an attribution would denude the duty of any value in cases where it is most needed ... Theexistence of the duty is therefore predicated on the assumption that the person whose fraud is suspected is a trusted employee or officer. So the duty when it arises is a duty to save the company from the fraudulent conduct of that trusted person.”

As the Singapore Court of Appeal in Ho Kang Peng did not have the opportunity to consider the application of the UK Supreme Court authorities of Bilta and Patel, and by extension the Attribution Test as applied in Singularis and Singularis CA, the Attribution Test may yet be subject to further qualifications with regards to the scope of its application and the principles underlying its formulation.

The impact of the Singularis decision also transcends tortious claims as the circumstances that ought to put a reasonable bank on inquiry would possibly be relevant to claims that are advanced upon a breach of a bank’s contractual duties to its customers. The Singapore High Court released its grounds of decision in Major Shipping & trading Inc v Standard Chartered Bank (Singapore) Ltd,³⁷ [2018] SGHC 4. which dealt with a similar factual situation.

The plaintiff company in that case had sued the defendant bank for remittances from its bank account which it claimed, were not authorised, but attributable to a fraudster which had assumed the identity of the plaintiff company. In deciding whether the defendant bank had acted in good faith in executing the disputed transactions, Kannan Ramesh J went on to consider whether a number of alleged “red flags” should have put the defendant bank on inquiry, and concluded that they did not. While the plaintiff company’s claims were advanced on the basis of a breach of a contractual duty of care by the defendant bank, its arguments centred around the negligence of the bank, which brings to mind Steyn J’s dicta in Quincecare that “the duties in contract and tort are coextensive”.³⁸ Singularis at [168].

Practical Implications for Financial Services Providers

To mitigate against or minimise the risk of liability for fraudulent transactions, banks and financial institutions may wish to consider reviewing their terms of engagement and mandates for execution to include provisions which: (1) provide for the indemnification of the banks or financial institutions by the corporate client relating to fraudulent transactions originating from or attributable to employees of their clients; or (2) provide that all transactions executed by the banks or financial institutions on the instructions of an authorised and designated signatory would be deemed to have been in pursuit of lawful and proper purposes.

However, banks and financial institutions must be alive to the possibility that such provisions may be subject to challenge under the provisions of the Unfair Contract Terms Act (Cap 396, 1994 Rev Ed) for unreasonableness in their scope of exclusion,³⁹ See Part I, First Schedule and Second Schedule of the Unfair Contract Terms Act (Cap 396, 1994 Rev Ed). in which case much would turn on the precise formulation of the Quincecare Duty in every particular factual matrix. It will be recalled that a bank’s duty to exercise reasonable skill and care in respect of executing transactions was expressed by Steyn J to be “subject to the bank’s other conflicting contractual duties”.⁴⁰ See paragraph 4 above.

It would also be wise to consider implementing additional safeguards where the movement of large sums of monies are concerned. For instance, banks could specify additional prerequisites for executing the transfer of large sums such as: (1) requiring multiple levels of approval from more than a single designated signatory within the corporate client; (2) requesting more information about the intended purpose of the transfers and cross-checking for similar patterns of transfer;⁴¹ To this end, banks are not required to be corporate detectives. See Steyn J’s comments in Quincecare at p 380. and (3) checking on the corporate client’s capacity to make such transfers. While such measures entail additional compliance costs, it would be sensible for banks and financial institutions to err on the side of caution.

In any event, notwithstanding the possible contractual safeguards proposed by these authors, banks and financial institutions should nonetheless ensure that employees across all levels have been trained and exposed to case studies, so that they are alert to the need for real-time monitoring and vigilance where a client’s portfolio or account is concerned. Organisations should also look to bolster their institutional capacity to detect symptomatic “red flags” and other indicia of fraud and collusion by employing analytical tools and ensuring that internal teams are kept up-to-date with the latest developments concerning their clients.

Conclusion

The Singularis and Singularis CA decisions have thrust into the spotlight the increasingly important role of banks in the fight against financial crime and fraud, and the need for appropriate levels of supervision and vigilance within financial institutions. Nonetheless, questions remain as to the precise scope of the Quincecare Duty, as well as the principles of attribution for the purposes of a defence of ex turpi causa relating to the same. In this respect, further clarification by the Singapore Courts will certainly be welcomed.