FML Timeline: Singularis Holdings Limited (Claimant/Respondent) -v- Daiwa Capital Markets Europe Limited (Defendant/Appellant)

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Singularis was an investment vehicle for the personal wealth of a Saudi businessman, Mr Al Sanea, who was its dominant director and sole shareholder. In the midst of the financial crisis in 2009, despite evidence of Singluaris’s precarious finances, Daiwa adhered to a series of payment instructions from Mr Al Sanea which had the effect of emptying the company’s client account with the bank. Singularis subsequently became insolvent in August 2009, and Mr Al Sanea’s instructions subsequently turned out to be fraudulent on the basis that, in his capacity as a director, he knew of the company’s proximity to insolvency and therefore that he had a duty to act in the best interests of the company’s creditors.

Singularis, acting by its liquidators, was successful at trial in obtaining damages to the amount of the fraudulent payments through proceedings for negligence against Daiwa. This was on the basis that, applying Barclays Bank Plc v Quincecare Ltd, Daiwa had breached its duty of care to Singularis in making the payments without any proper inquiry, because any reasonable banker would have realised that Mr Al Sanea was perpetrating a fraud on the company. However, the trial judge reduced the damages awarded by 25% on account of the contributory negligence of Singularis in allowing the fraud.

Decision

This was an unsuccessful appeal by Daiwa.

The key issue for consideration by the Court of Appeal was whether Daiwa could plead the defence of illegality to defeat the claim in negligence. To succeed, Daiwa sought to prove that Mr Al Sanea’s fraudulent and illegal acts as a director could be attributed to the company. In the alternative, because the only persons who suffered losses were Singularis’s creditors, Daiwa sought to argue that, because the Quincecare duty did not extend to protecting the interests of creditors, the claim could be dismissed.

The Illegality Defence

The Court of Appeal rejected the illegality defence in finding that Mr Al Sanea’s acts could not be attributed to Singularis. On an application of Bilta (UK) Ltd v Nazir (No 2), this followed for two reasons. Firstly, the Court decided that the authorities had held that a “one-man company” (the kind of company where a director’s actions can be attributed to it) is a company which has no innocent directors or shareholders. Because Singularis had a number of other acting directors at the time of the fraudulent instructions, who although contributorily negligent were not recklessly indifferent to the fraud, it could not therefore be categorised as a one-man company. Secondly, the Court held that on these facts the trial judge was correct to hold that to allow such an attribution would “denude” the Quincecare duty of any value in those cases where it is most needed, because the duty is predicated on the assumption that the person whose fraud is suspected will be a trusted employee or officer.

Can the Quincecare duty apply where only creditors of a company stand to benefit from it?

As to the scope of the Quincecare duty, the Court of Appeal found that the essence of the duty is to protect funds from fraudulent disposition, and the fact that vindicating this right will benefit only creditors is irrelevant. The duty should not be varied or restricted depending on the state of solvency of the company.

General remarks

Throughout the judgment, it is clear that the Court disagreed with Daiwa’s overarching approach in relying on the existence of prior fraud as a defence. This is because that prior fraud is itself an “essential ingredient” of a claim for breach of the Quincecare duty. Because of this, to allow the appeal would have been to carve the heart out of the Quincecare duty.

Noteworthy/ Novel points

The Court of Appeal was aware that this is the first case where it has found against a bank in respect of the Quincecare duty. Notwithstanding that, it stated that it is a high threshold needed to put a bank on inquiry such that the duty will be invoked, because it is important that the law supports an element of trust in the banker/customer relationship.

In the course of considering the law on “one-man companies” and attributing acts of directors, the court opined that this will always be a question of a judge’s interpretation of the factual context.

Finally, the court stated that there is a large difference between the duties of auditors and bankers, and therefore that authorities relating to duties of the former will rarely be helpful in deciding cases relating to duties owed by the latter.