The United Kingdom Supreme Court recently handed down its decision in Singularis Holdings Limited (In Official Liquidation) v Daiwa Capital Markets Europe Limited [2019] UKSC 50, [2019] 3 WLR 997, a dispute arising from the Saad Group collapse.
In this matter the Appellant bank, Daiwa Capital Markets Europe Limited (Daiwa) had made payments out of accounts held by the Respondent, Singularis Holdings Limited (Singularis) at the direction of Mr Maan Al Sanea (Mr Al Sanea), the dominating influence of the company’s affairs. These payments had no genuine business purpose. Singularis was successful, at trial and on appeal, in establishing that Daiwa had breached its “Quincecare” duty,[1] under which banks have a duty to “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 … for believing that the order is an attempt to misappropriate the funds of the company”. Daiwa had unsuccessfully argued that the fraudulent actions of Mr Al Sanea ought to be attributed to Singularis, and that it could thereby rely on the defences of illegality, causation and an equal and opposite claim in deceit against Singularis to defeat the Quincecare claim.
In rejecting both the Appellant’s arguments on attribution and each of the proposed defences, the Supreme Court made some significant observations about the nature of the Quincecare duty including the situations in which it arises, the role of loss causation, and the balance it strikes in performing an illegality analysis. The Supreme Court also took the opportunity to review the jurisprudence on attribution, and in doing so held that the controversial precedent of Stone & Rolls Ltd v Moore Stephens [2009] 1 AC 1391 (Stone & Rolls) would thereafter no longer be authoritative on attribution and could “finally be laid to rest”.
Facts
Singularis, was established in 2006 to manage the personal assets of Mr Al Sanea. It was a substantial trading company with legitimate business activities throughout its existence. Mr Al Sanea (together with six other reputable directors) was a director of Singularis, and also its chairman, president, treasurer and sole shareholder. Mr Al Sanea was vested with sole signing powers over Singularis’ bank accounts, and no other director exercised any influence over the management of Singularis. In 2007, Daiwa bank provided loan financing to Singularis for a purchase of shares, resulting (when the shares were sold) with a US$204ml cash surplus held by Daiwa. In accordance with instructions from Mr Al Sanea, Daiwa paid out those funds to third parties. Those payments had no genuine business purpose for Singularis, but were misappropriations of its funds that left Singularis unable to meet the demands of its creditors. In 2009, Singularis was placed first in voluntary and then in supervised liquidation. In 2014, Singularis (through its liquidators) brought a claim against Daiwa alleging that it had (i) dishonestly assisted Mr Al Sanea’s breach of fiduciary duty; and (ii) breached its duty of care (Quincecare duty) in negligently failing to realise Mr Al Sanea was committing a fraud on the company.
The Judgment at First Instance
At first instance, Rose J found that Daiwa had not acted dishonestly in authorising the payments constituting Mr Al Sanea’s fraud, but that it had breached its Quincecare duty.[2] It was held the Saad group’s public difficulties and Daiwa’s compliance division’s internal correspondence clearly demonstrated that Daiwa had been put on inquiry, and thus that completing the transfers had constituted a clear breach of duty that caused Singularis’ losses.
The judge rejected Daiwa’s argument that the fraud of Mr Al Sanea should be attributed to Singularis due to it being a “one-man company” as per Stone & Rolls, finding that the question of attribution, as set out in Bilta (UK) Ltd (in liquidation) v Nazir (No 2) [2016] AC 1 (Bilta), depended on the context and purpose for which it was contended. In the present context, attributing to a bank customer the actions of a fraudulent director for the purpose of defeating a Quincecare claim would render that duty toothless. It was further found that despite the other Singularis directors’ near total lack of supervisory function or meetings throughout 2008-2009, they were still professional businesspeople, so Singularis was not a “one-man company” in the Stone & Rolls sense.
In any event, Rose J considered Daiwa’s illegality defence in light of the factors set out in Patel v Mirza [2017] AC 467 (Patel v Mirza), ultimately finding that the defence failed and that, to the extent Singularis was responsible for its own loss, a finding of contributory negligence was a more proportionate response. The judge further rejected the argument that Daiwa had a corresponding claim against Singularis in the tort of deceit, but ultimately reduced the award of damages by 25% for contributory negligence, given Mr Al Sanea’s fraudulent conduct and the other directors’ lack of adequate supervision.
Judgment of the Court of Appeal
The Court of Appeal upheld Rose J’s findings.[3] Sir Geoffrey Vos, delivering the judgment of the Court of Appeal, rejected Daiwa’s argument that the judge had erred in failing to attribute the fraud of Mr Al Sanea to Singularis on the grounds that Singularis was in effect a “one-man company” as the term was used in Stone & Rolls. Aside from recognising Bilta as the leading authority on attribution and questioning the continuing relevance of Stone & Rolls, the Court of Appeal held that in the absence of any findings at trial that the other directors (apart from Mr Al Sanea) were complicit in Mr Al Sanea’s misappropriations, it was not open to the Court to find that Singularis was a “one-man company”. The Court of Appeal found attribution inappropriate in the context of a Quincecare claim.
The Court of Appeal further held that, had Daiwa succeeded on the attribution point, it still ought not to have succeeded on the test for illegality in Patel v Mirza. It found that since Rose J had not proceeded on a legally erroneous basis, the Court should not interfere merely because it might have taken a different view (although the Court held that it would have agreed with Rose J on this issue, in any event). Primarily, the Court of Appeal accepted Singularis’ argument that it would be contrary to public policy to bar its claim and thus undermine the carefully calibrated Quincecare duty. This would be a disproportionate response to Mr Al Sanea’s fraud and the other directors’ failures, in circumstances where Daiwa’s own breaches were so extensive and the fraud was so obvious. This was especially so where the alternative option of reducing damages through contributory negligence was available.
Whilst acknowledging that it was bound by previous decisions, the Court further commented that it did not find the concept of a “one-man company” particularly helpful in resolving the issue of attribution, which was always going to be highly context specific, requiring a detailed consideration of the nature of the claim, the purpose of the attribution and the relationship between the parties. As such, ascertaining whether a company fell within the definition of a “one-man company” was of limited use in deciding the issue.
Judgment of the Supreme Court
Lady Hale, delivering the judgment of the Supreme Court, acknowledged at the outset that the judge’s finding at first instance that Daiwa had breached its Quincecare duty to Singularis was not the subject of the appeal and was in any event correct (at [10]-[12]).
The Supreme Court thereby identified the key issue as whether Daiwa had a defence to the claim of breach of the Quincecare duty, the three possibilities given being illegality, causation and an equal and opposite claim in deceit (at [1], [9]).
Illegality
The Supreme Court considered the conclusions of both the judge at first instance and the Court of Appeal that, even if attribution were made out, the test for illegality as laid down in Patel v Mirza was not met. The correct approach was summarised by Lord Toulson in Patel v Mirza at para 120 as follows:
“The essential rationale of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system … In assessing whether the public interest would be harmed in that way, it is necessary (a) to consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim, (b) to consider any other relevant public policy on which the denial of the claim may have an impact and (c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts.”
The Supreme Court went on to identify the relevant illegal conduct of Mr Al Sanea, being the knowing provision of false statements and the breach of his fiduciary duty toward Singularis. The Supreme Court thereafter made the following observations in relation to the illegality test, leading to the conclusion that the decision at first instance was correct (at [16]-[21]):
Significantly, however, the Supreme Court recorded its reservations on the Court of Appeal’s views on the role of an appellate court reviewing the illegality defence. The Court of Appeal had held that “an appellate court should only interfere if the first instance judge has proceeded on an erroneous legal basis, taken into account matters that were legally irrelevant, or failed to take into account matters that were legally relevant”.[4] This was apparently at odds with the view expressed by Lord Neuberger in Patel v Mirza[5] that applying the defence was “not akin to the exercise of a discretion”. On this point, the Supreme Court noted that there were cases pending before the Supreme Court dealing with illegality, and that it should not be assumed that the approach of the Court of Appeal would be adopted (at [21]). This suggests that a definitive ruling by the Supreme Court as to the role of an appellate court in an illegality defence may be imminent.
Causation and deceit – the ‘very thing’
The Supreme Court rejected Daiwa’s argument that the loss suffered by Singularis was not caused by Daiwa’s failures but by its own actions, being those of Mr Al Sanea. It held that the very purpose of the Quincecare duty was to protect the bank’s customers from the actions of the customer’s agents, such that in this case the duty only arose after Daiwa received the fraudulent instruction to pay out funds, making the breach of that duty the true cause of the loss (at [24]).
Similarly, the Supreme Court upheld the findings of the lower courts on Daiwa’s defence of an equal and opposite claim in deceit, emphasising that the existence of Mr Al Sanea’s fraud was a precondition of Daiwa’s duty, rendering it contradictory to allow Daiwa to rely on that fraud to escape liability for its breach of duty (at [25])
Attribution
Daiwa’s primary argument in support of the attribution of Mr Sanea’s fraudulent knowledge and conduct to Singularis, was that Singularis was in effect a one-man company, that Mr Al Sanea was its controlling mind and will, and that his fraud therefore ought to be attributed to Singularis. Daiwa relied heavily on the decision in Stone & Rolls, where the majority in the House of Lords had held that the fraudulent knowledge of the beneficial owner and “directing mind and will” of a company could be attributed to the company, so as to defeat its claim that the auditors had failed to detect this fraud.
The Supreme Court began its analysis with a review of basic principles of company law, including the separate legal personality of a company and the decision in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, in which Lord Hoffman had identified three levels of attribution, being (a) the primary rule arising from the company’s own constitutional documents, (b) the ordinary rules of agency and vicarious liability, and(c) particular rules of law resolving issues not covered by the former rules.
The Supreme Court then considered Stone & Rolls and its mixed treatment in Bilta. In Bilta the Supreme Court had unanimously held that where a company was the victim of wrongdoing by its directors, and the liquidators of that company brought a claim against those directors and their co-conspirators, the wrongdoing of the directors could not be attributed to the company to defeat that claim. Key aspects of the decision in Bilta highlighted by the Supreme Court in Singularis were as follows (at [30]-[32]):
The Supreme Court in Singularis sought to go one step further, expressly rejecting the rule of law purportedly established in Stone & Rolls that the dishonesty of the controlling mind in a “one-man company” could be attributed to the company regardless of context, and that the key question was therefore what constituted an innocent director (at [33]-[34]). Beyond upholding the finding of the Court of Appeal that Singularis was not a “one-man company” due to its reputable directors and substantial business activities, the Supreme Court endorsed the judge’s holding that “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 fraudulent conduct of a director is to be attributed to the company if it is a one-man company” (at 34]). Having accepted that the guiding principle was always to be the context and purpose of the attribution, Lady Hale concluded that “Stone & Rolls can finally be laid to rest” (at [34]).
From this, the Supreme Court engaged in a straightforward consideration of the nature of the Quincecare duty, its purpose of protecting companies from the wrongdoing of its agents, and the fact that there will always be a wrongdoing by the company by definition for the issue of the Quincecare duty to arise. The Supreme Court ultimately endorsed the judge’s finding that attributing Mr Al Sanea’s fraud to Singularis in this context would “denude the duty of any value in cases where it was most needed”, and held that breaches of the duty would have no consequences if the appeal was allowed (at [35]).
The Supreme Court also rejected Daiwa’s argument that it would be odd if a claim for breach of duty which would succeed against a bank would fail against auditors, on the basis that they are different duties occurring at different stages in relation to the primary fraud (at [36]-[38]).
The Court concluded that the suspicious activities of Mr Al Sanea ought to have been apparent to Daiwa and have led to Daiwa suspending payments until reasonable enquiries had been made as to their legitimacy or otherwise. Daiwa failed to do so and Singularis (and its creditors) was the victim of Daiwa’s negligence. It was therefore right that the appeal should succeed (at [40]).
The Supreme Court’s clarification on the scope and application of the principles of attribution within the context of the illegality defence is to be welcomed. Further, the Supreme Court’s death knell of Stone & Rolls is consistent with decisions of intermediate and final appellate courts in other jurisdictions who have acknowledged that the decision was “an extreme case on its facts … [which arose in] extreme and exceptional circumstances”[6] and was generally of “limited assistance” [7].
[1] See Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363.
[2] See Singularis Holdings Ltd (In Official Liquidation) v Daiwa Capital Markets Europe Ltd [2017] EWHC 257 (Ch).
[3] See Singularis Holdings Ltd (In Official Liquidation) v Daiwa Capital Markets Europe Ltd [2018] EWCA Civ 84.
[4] See Singularis Holdings Ltd (In Official Liquidation) v Daiwa Capital Markets Europe Ltd [2018] EWCA Civ 84 at [65].
[5] See Patel v Mirza [2017] AC 467 at [175].
[6] See Moulin Global Eyecare Trading Ltd v Commissioner of Inland Revenue (2014) 17 HKCFAR 218 at 267 [100] and 279 [133] per Lord Walker NPJ (Hong Kong Court of Final Appeal).
[7] See Livent Inc v Deloitte & Touche [2016] 393 DLR (4th) 1 at [138], [147] per Blair JA (Ontario Court of Appeal).
