A bank’s duty to spot misappropriation by a company director

Key Points

• Banks owe an implied duty to their corporate customers to use reasonable skill and care in executing their orders (known as the Quincecare duty). In accordance with that duty, a bank should refrain from executing a payment instruction if and for so long as the bank has reasonable grounds for believing that the instruction is an attempt to misappropriate funds.
• Following an allegation of breach of duty, the bank raised three defences, each of which depended upon the acts of the individual who was the dominant influence being attributed to the company.
• The Supreme Court refused to attribute the acts of the individual to the company. It did so on the basis that attribution should be determined based on the context and the purpose for which the attribution is relevant. In this case, the context was a breach by a bank of its Quincecare duty, the purpose of which is to protect the company against a misappropriation of its funds by its agents. Attribution would therefore denude that duty of any value.
• The case illustrates the importance for banks of monitoring carefully significant instructions from directors, particularly where the company is in financial difficulty. Even if the director who gives the instructions is the dominant influence over the company’s affairs, the bank is unlikely to be able to rely on defences which have as their basis the attribution of the director’s acts to the company if the context is a breach by the bank of its Quincecare duty.

Background

Singularis Holdings Limited (Singularis) was a company with a substantial business that traded for some years and ran up debts in doing so. It also had a substantial sum of money standing to its credit with its broker-bankers, Daiwa. When it appeared that it was running into difficulties, Singularis’ directing mind and sole shareholder instructed Daiwa to pay the money away. There was no evidence that Singularis’ other directors were involved.

Following decisions at first instance and in the Court of Appeal in favour of the claimant, the issues for the Supreme Court to decide were:

1. When can the actions of a dominant personality who owns and controls a company, even though there are other directors, be attributed to the company?
2. If they are attributed to the company, is the Quincecare claim defeated by (i) illegality; (ii) lack of causation; or (iii) an equal and countervailing claim in deceit?

Attribution

Daiwa argued that, as Singularis was effectively a one-man company, the actions of the controlling mind and will should be attributed to the company. The Supreme Court disagreed, finding that:

• Singularis was not a one man company but had a board of reputable people and a substantial business;
• there was no evidence to show that the other directors were involved;
• in any event, there is no principle of law that in any proceedings where the company is suing a third party for breach of a duty owed to it by that third party, the conduct of a director is to be attributed to the company if it is a one-man company.

In the Court’s view the answer to the question whether to attribute the knowledge of the director to the company is found in consideration of the context and the purpose for which the attribution is relevant. Here, the context was a breach by the bank of its Quincecare duty of care towards the company. The purpose of that duty is to protect the company against just the sort of misappropriation of funds by an insider to the company that in fact took place. To attribute the actions of that person to the company would be to denude the duty of any value in cases where it is most needed.

Illegality

Daiwa asserted a defence based on illegality, the illegality relied upon the provision of documents known to be false and the breach of fiduciary duty towards Singularis. However, this depended upon the attribution of those actions to Singularis, meaning that the defence was bound to fail once the finding on attribution had been made.

Causation

Daiwa argued that, if the director's acts are attributed to the company, the company’s loss is caused by its own fault and not by the fault of Daiwa. The absence of attribution meant that this defence also failed and, in any event, the Supreme Court found that the loss was caused not by any dishonesty but by Daiwa’s breach of its duty of care. The instruction to Daiwa gave rise to the duty of care which the bank breached, thus causing the loss, and not the other way around.

Countervailing claim in deceit

Daiwa also claimed that because it would have an equal and countervailing claim in deceit against Singularis, the company’s claim in negligence should fail for circularity. Again, this claim depended upon the attribution of the director's acts to Singularis and therefore failed. Moreover, the Supreme Court considered Daiwa’s breach of its Qunicecare duty, and not the director's misrepresentations, to be the cause of Daiwa’s exposure to the claim for Singularis’ loss.

Commentary

This decision should be noted by those advising financial institutions on their dealings with customers where suspicions arise as to instructions given regarding company bank accounts. In practical terms, banks will be expected to make enquiries to confirm the accuracy of instructions that raise suspicions. Where the instructions come from the company’s dominant personality enquiries should be made of others at the company, on the basis that the acts of that person are unlikely to be attributed to the company. Banks would also be advised to record the steps taken to verify the instructions, so as to protect themselves from an allegation that the Quincecare duty was breached.

Practitioners can expect would-be claimants to push the limits of what the bank is required to do in discharging its Quincecare duty. Recent cases before the courts have seen claimants seek to extend the scope of that duty by reference to other more general features of the regulatory regime. The Singularis ruling will also help insolvency practitioners pursue claims against banks as an alternative route to recovery of sums wrongfully dissipated by directors. Accordingly, whilst the Singularis case affirms the duty itself and the difficulties of avoiding it by means of defences based on attribution, defendant banks can nonetheless seek to keep it within its proper scope.

Singularis Holdings Ltd (in official liquidation)(A company incorporated in the Cayman Islands) v Daiwa Capital Markets Europe Ltd [2019] UKSC50