Supreme Court leaves door ajar: considering issues of loss in Quincecare claim
The law around the Quincecare duty continues to develop with the recent Supreme Court judgment in Stanford International Bank Limited (in Liquidation) v HSBC Bank plc  UKSC 34.
Stanford International Bank Limited (SIB) had been used as a vehicle for a substantial Ponzi scheme. In essence, when customers requested the withdrawal of the funds following the supposed maturation of the product they had purchased, the withdrawal would be made from capital invested by other customers. SIB entered liquidation in April 2009 with debts of $ 5 billion. SIB’s former chairman, Robert Stanford, was sentenced to 110 years in a US prison for his involvement in the scheme.
The Joint Liquidators of SIB claimed that HSBC had breached its Quincecare duty. This was on the basis that it was alleged HSBC had allowed payments to be made from SIB’s accounts in circumstances where HSBC was on notice that SIB’s business was a fraudulent ponzi scheme. It was suggested that if HSBC had complied with its Quincecare duty, various payments made from HSBC accounts between:
- 1 August 2008 - the date SIB says that HSBC was on notice and should have frozen the accounts - and
- 17 February 2009 - the date on which HSBC in fact froze the accounts,
would not have been made.
In total HSBC transferred £116 million to SIB customers in this period. The customers who received all of the monies due to them prior to 17 February 2009 were referred to as “Early Customers” by the Supreme Court. The remaining customers, who had not withdrawn their funds, were referred to as “Late Customers”.
The detailed first instance and appellate history of the case is set out in our previous blog.
Supreme Court appeal
The issue on appeal to the Supreme Court was, assuming hypothetically that there had been a breach by HSBC of its Quincecare duty, whether SIB had actually suffered a loss if payments were made by HSBC to discharge debts it owed to certain customers in an equivalent amount.
SIB’s previous arguments before the Court of Appeal were slightly amended such that its loss was characterised as a loss of chance, i.e. that SIB had lost the chance to discharge its debts to all customers (both the Early and Late Customers) for only a few pence in the pound and to act more fairly between customers.
The lead judgment of Lady Rose JSC noted that the position the Court was asked to consider was a counterfactual world. This was a hypothetical situation in which SIB had not repaid the Early Customers and, accordingly, SIB had an additional £116m in funds. However, in this counterfactual scenario, SIB would not have discharged its debt to any of the Early Customers. Therefore, there would be no distinction between Early and Late Customers – everyone would be in the same pool of customers who, at the moment of liquidation, were owed money and would share on the same footing in the liquidation. Lady Rose JSC considered that this counterfactual world could not support SIB’s loss of chance argument.
Lady Rose considered that the chance of being able to discharge a debt to Early Customers by paying them 12p in the pound instead of the full amount they were due was matched by the risk of having to pay the Late Customers 12p instead of 5p to discharge the same debt. As such, no additional indebtedness would have been paid off in the counterfactual. In fact, exactly the same amount of indebtedness would be extinguished upon the company’s dissolution, only the distributions of payments are different depending on when the customer withdrew their funds. Lord Leggatt commented that "There is no way of escaping the simple truth that paying a valid debt does not reduce the payer’s wealth".
Furthermore, in relation to SIB’s fairness argument, Lady Rose JSC considered that this would not be a pecuniary loss suffered by SIB.
The Supreme Court accordingly dismissed SIB’s appeal, by a majority of 4:1, and upheld the Court of Appeal’s order striking out the Quincecare claim.
Lord Sales JSC delivered the dissenting judgment, concluding that SIB did in fact suffer a loss of a chance. This was because at the time the sums were paid out SIB was hopelessly insolvent and could not lawfully have paid redemption payments to the Early Customers. The sums paid out of SIB’s accounts would have been retained in the accounts and placed under the control of the liquidators to swell the assets available in the jurisdiction. This would have meant that the liquidators of SIB would have had a larger fund of assets available to them to pursue possible claims against third parties, which could increase the value of the dividend to creditors.
Lord Sales JSC commented more generally about the scope of the Quincecare duty, namely that “it should be kept within narrow bounds, lest it interfere unduly with the conduct of commerce”. He commented that a bank should be able to act upon the payment instructions of its customer promptly and without fear. However, the existence of the Quincecare duty restricts the bank and the solution to ensuring the duty is not too onerous on banks is by properly analysing the duty itself rather than distorting the duty with the question of whether or not the company has suffered loss.
Lord Sales JSC drew parallels between:
- the situation in which a bank must refrain from executing an order for so long as the bank is on inquiry that it is or may be an attempt to misappropriate the funds of the company; and
- where the order is an attempt to misappropriate funds of a company to use them to make payments which should not be made to creditors in a situation of hopeless insolvency.
Lord Sales cautioned that the test of hopeless insolvency is a stringent one, i.e. no light at the end of the tunnel, so it will only be in rare cases that a bank will be deemed to be on notice to the requisite standard. He commented that “Banks are not expected to police the solvency of their customers as an ordinary incident of the service they provide.”
Finally, Lord Sales SJC commented that in Quincecare  4 All ER 363, Steyn J reasoned that the bank, when transferring money from a customer’s account, was acting as agent and therefore owed fiduciary duties to its customer. Lord Sales SJC considered that “there is no significant distinction between the duties of directors and officers of a company and the Quincecare duty owed by a bank”.
As the courts continue to carefully calibrate the extent and nature of the Quincecare duty, this decision clarifies the scope of the Quincecare duty in insolvency scenarios. While the majority considered SIB had not suffered any loss, it is notable that the dissenting opinion of Lord Sales SJC was that such a loss had in fact been suffered.
While the claimant in this case failed to persuade the majority of the Supreme Court that it had suffered a loss, it is clear that the decision was extremely fact-specific. It is also important to highlight that the majority in the Supreme Court did not seek to restrict the scope of the Quincecare duty in a way that rules out all future Quincecare claims where payments deplete assets available to the customer for distribution in the insolvency context.
The dissenting judgment by Lord Sales may go on to be influential in future Quincecare claims, particularly given his comment that the original formulation of the position in the Quincecare case itself could equally cover a situation where “the order is an attempt to misappropriate the funds of a company by using them to make full payments which ought not to be made to creditors in a situation of hopeless insolvency”.
Meanwhile, the Quincecare duty continues to be examined and refined by the courts in other cases. The Supreme Court recently heard the appeal of the summary judgment in Philipp v Barclays Bank UK PLC in relation to an authorised push payment fraud (we discussed the Court of Appeal’s judgment in that case). Litigants and practitioners will be eager to see how this dynamic area of law will develop further.