Singularis: a warning to all institutions handling client monies

Banking and Finance Litigation Update

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The recent case of Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2017] EWHC 257 (Ch) (Singularis) is an important decision affecting any institution that handles client payments, including banks. It decided that a stock broker was liable in negligence for having breached its duty of care to its customer, Singularis Holdings Ltd (in liquidation) (Singularis), by paying monies out of its client account on the instruction of one of Singularis' directors and its only shareholder, Mr Al Sanea.

Background

Daiwa paid $204 million of Singularis' funds to bank accounts not in the name of Singularis but to related entities. Various warning signs were present that indicated Mr Al Sanea's instructions may not have been bona fide. The money paid out was lost. The liquidators of Singularis sought repayment by Daiwa.

The claim in negligence

25 years ago the case of Barclays Bank Plc v Quincecare [1992] 4 All ER 363 established that a bank will be liable to its customer for damages in negligence if it makes a payment in circumstances where it had reasonable grounds for believing that the instruction to make the payment was an attempt to misappropriate the funds of its customer. This is commonly described as a Quincecare duty.

Daiwa advanced two arguments as to why it should not be subject to a Quincecare duty:

  1. The claim was precluded by the fact that the claim was being brought on behalf of the creditors
  2. Singularis was precluded from bringing the claim because it was a "one-man company"

On the first point, Daiwa relied on passages in Stone & Rolls Ltd (in liquidation) v Moore Stephens (a firm) [2009] UKHL 39 (Stone & Rolls), as emphasising that a duty that is owed to the company customer is not owed to the creditors of the company. This was rejected by the judge, Mrs Justice Rose.

On the second submission, Daiwa relied upon the dicta of the Supreme Court in Jetvia SA & anr v Bilta Limited (in liquidation) & ors [2015] UKSC 23 (Bilta) arguing that Singularis' claim was defeated by the attribution of Mr Al Sanea's fraud to the company. This argument was also rejected by the judge, who found that, in any event, on the facts of the case, Singularis was not a "one-man company" (in the sense that that term was used in Stone & Rolls and Bilta) as there were other professional and experienced businessmen, who were also directors of Singularis. Mr Al Sanea was merely a singular, rogue director.

Breach of the Quincecare duty by Daiwa

Mrs Justice Rose held: "The Quincecare duty…require[s] a bank to do something more than accept at face value whatever strange documents and implausible explanations are proffered by the officers of a company facing serious financial difficulties".

Daiwa breached that duty as "any reasonable banker would have realised that there were many obvious, even glaring, signs that Mr Al Sanea was perpetrating a fraud on the company when he instructed the money to be paid to other parts of his business operations".

The defence of illegality

Could Daiwa escape liability on the basis that Mr Al Sanea’s illegal behaviour should be attributed to Singularis, which would effectively mean that Singularis would have to rely on its own illegality to bring its claim?

No. The judge had already found that Singularis was not a "one-man company". Further, Singularis was not a company, like Stone & Rolls, created purely to perpetrate a fraud. She held that the defence of illegality should fail because of the very nature of the duty relied upon by Singularis, ie the Quincecare duty. The existence of that duty is predicated on the assumption that the person whose fraud is suspected is a trusted employee or officer, so when the duty arises it is a duty to save the company from the fraudulent conduct of that trusted person. She concluded that it would not be right to attribute Mr Al Sanea’s wrongdoing to Singularis "because such an attribution would denude the duty of any value in cases where it is most needed".

Daiwa was ordered to pay Singularis $152,806,425. Damages were reduced by 25% to reflect Singularis' contributory negligence, pursuant to the Law Reform (Contributory Negligence) Act 1945.

A warning to all institutions that handle client monies

The judge described the case before her as "unusual". Many of the factors cited in previous cases as to why it would be impracticable to impose too heavy a duty on a bank did not apply here as Daiwa was not a bank and was not "administrating hundreds of bank accounts with thousands of payment instructions every week".

Whilst Singularis therefore undoubtedly represents a worrying trend towards imposing a heavier duty on financial institutions in monitoring a client's account, application of the dicta in Singularis to cases against "everyday" banking institutions would arguably be a step too far, and encroach upon the well-trodden principles outlined in earlier cases.

The decision in Singularis should not be overlooked however, and indeed the judge refers to Daiwa several times as a "bank" in her judgment. Singularis represents a stark warning to any institution that holds client funds and highlights the risks associated with what may ordinarily be viewed as payment requests made in line with the contractual relationship between a client and its advisor/bank.

What should institutions do to ensure they do not fall victim to the same type of fraud?

The judge was critical of Daiwa for failing to make adequately clear to the individuals who handled the payment requests what steps they should take to verify them. Had Daiwa ensured that all individuals were aware of the risks and the steps necessary prior to authorising any requests, it is likely that no payments would have been authorised.

Institutions should ensure that sufficient anti-fraud controls are in place and that, as soon as any suspicion arises in relation to a customer, appropriate flags are placed on their accounts. Individuals responsible for processing and/or authorising payments should be made aware of the clear and defined process they must follow.