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Guidance on when a financial institution can be held liable for failing to refuse to act on fraudulent payment instructions from a customer

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management - Other

29-06-2018

 

Singularis Holdings Limited (In Liquidation) v Daiwa Capital Markets Europe Limited [2018] EWCA Civ 84

Facts of the case

– Daiwa, the subsidiary of the Japanese investment bank and brokerage firm, Daiwa Security SMBC Co Ltd, entered into a lending relationship with Singularis, a Cayman-incorporated company set up to manage the personal assets of businessman Maan Al Sanea. The lending was secured by share and cash collateral.

– Mr Al Sanea’s group of companies, including Singularis, encountered financial difficulties in 2009 resulting in Singularis entering into voluntary liquidation in August 2009.

– However, prior to this Daiwa had accepted various fraudulent instructions to make payments from Singularis’ client account to Mr Al Sanea’s Saad group of companies.

– Senior management within Daiwa had been aware of the financial difficulties of the group and of the existence of foreign freezing orders, but made the payments anyway. Singularis’ liquidators sued Daiwa to recover the funds paid away.

The decision

– The judge at first instance rejected Singularis’ arguments that Daiwa dishonestly assisted Mr Al Sanea in authorising the payments.

– However, it was held that Daiwa had negligently breached the duty of care derived from the case of Barclays Bank v Quincecare [1992] 4 All ER 363 that “a banker must 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 (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company…”. The Court awarded damages of just over $150m.

– The Court of Appeal upheld the decision that Mr Al Sanea’s fraud could not be attributed to Singularis and that Daiwa could accordingly not rely on the defence of illegality. Any fault of Singularis was reflected by a finding of contributory negligence and a consequent reduction in damages of 25%, a decision that was upheld by the Court of Appeal. 

Analysis and practical advice

– Whilst not a “court order” decision, the case provides useful guidance on when financial institutions might be liable in negligence for missing “red flags” and authorising suspicious payment instructions. Consideration of a financial institution’s Quincecare duty will often be a necessary component of a bank’s process when deciding whether a payment instruction can be made pursuant to the terms of a freezing order over a particular account (as freezing orders are often obtained against Respondents which are in distressed situations).

– The Court of Appeal acknowledged that it would be rare for defendants to be liable for breach of the Quincecare duty: the starting point is that “trust, not distrust, is the basis of a bank’s dealings with its customers…”.

– We understand it is the first example of a defendant being held liable for breach of the Quincecare duty. However, this was a case where the high threshold for liability had been met due to the “many obvious, even glaring, signs” that Mr Al Sanea was perpetrating a fraud on Singularis.

– The availability of the illegality defence to defendants in these circumstances is likely to be limited: it was held that “it would not be right to [attribute Mr Al Sanea’s knowledge to Singularis] because such an attribution would denude the duty [owed by Daiwa] of any value in cases where it is most needed”. The Claimant’s own fault in failing to prevent the fraud, however, could be accounted for by the concept of contributory negligence. 

 

 

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