We recently published an article on APP fraud, ahead of the Supreme Court's decision in Stanford International Bank Ltd (In Liquidation) v HSBC Bank plc. That decision has now been published. This article looks at the further impact of the Supreme Court decision in this case.
Where did we get to?
The UK's domestic payment process is undergoing a significant overhaul with many operative and regulatory impediments. A significant driver for this change is the upsurge in online payment fraud, particularly Authorised Push Payment (APP) fraud. This is where a payer instructs their payment service provider to send money from their account to another account, and is tricked into making an APP to an account controlled by someone, other than the intended recipient.
The Quincecare duty (established from Barclays Bank plc v Quincecare Ltd) is a duty of care that banks owe to their customers in circumstances where the banks have reasonable grounds to believe that instructions provided by customers are an attempt to misappropriate funds. To protect customers, banks were able to refuse complying with the instruction. Here, we see that banks are increasingly expected by the regulator and the courts to play a significant role in preventing financial crime. In some cases, banks may be obligated to take positive steps to investigate whether a payment instruction is an attempt to defraud its customer.
Caselaw following Quincecare has said:
"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." (Singularis Holdings Ltd (In Official Liquidation) v Daiwa Capital Markets Europe Ltd)
It is essential for a bank to understand when they are put 'on inquiry' i.e. where they question the circumstances of a payment which could give rise to a customer being defrauded. The bank would then immediately owe a Quincecare duty of care.
"…banks with relevant reasonable grounds for belief should not sit back and do nothing" (Andrew Burrows J, The Federal Republic of Nigeria v JP Morgan Chase Bank)
The Quincecare duty is not limited to circumstances where the bank was instructed by a customer's agent. As soon as a bank is on inquiry that an instruction is an attempt to misappropriate funds, the duty is capable of being applied (Court of Appeal in Philipp v Barclays Bank plc).
This highlights that there is not just a negative duty to refrain from executing a payment instruction where there are reasonable grounds to suspect fraud, but also a positive duty to investigate any such suspicion.
Stanford International Bank Ltd (In Liquidation) v HSBC Bank plc
Stanford International Bank (SIB) entered insolvency in April 2009. SIB says it was defrauded by its owner, Mr Stanford, who was operating a Ponzi fraud scheme some years before SIB's liquidation. SIB's customers started asking for their money back in 2008.
SIB's liquidators brought proceedings against HSBC, who had operated various accounts for SIB until they were frozen in February 2009. One of the claims was that HSBC negligently failed to spot signs that SIB was being run as a Ponzi scheme having been put on notice that instructions to make payments may have been part of a fraud (the Quincecare claim).
SIB argued that by 1 August 2008 at the latest, HSBC was under a Quincecare duty of care to refuse to accept Mr Stanford's instructions as to what to do with the balance standing in SIB's accounts meaning payments made between 1 August 2008 and February 2009 should not have been made.
HSBC made an application to strike out or to reverse summary judgment in respect of the liquidator's Quincecare claim, on the basis that SIB had suffered no loss and therefore had no claim in damages.
High Court decision
The Court held that SIB would have had assets of £116m if HSBC had frozen the accounts on 1 August 2008. It would have had a very large number of creditors, but it would have also had that money in its accounts and available for the liquidators to pursue claims.
The Court could not factually find justifiable reason to strike out the Quincecare claim or to award summary judgment. HSBC was unsuccessful and SIB's Quincecare claim survived.
Court of Appeal decision
On Appeal, the Court found in HSBC's favour in respect of the Quincecare claim and struck it out. It stated that the High Court had made an error in its reasoning by confusing the company's position before and after the inception of an insolvency process. In the eventual inception of its insolvency, if the company had more cash flow for the liquidators to pursue claims and for distribution to creditors, it would be a benefit to creditors, but not so much to the company while it was trading.
The Supreme Court decision
Since then, the case has been heard on further appeal in the Supreme Court. The Supreme Court was asked to consider whether, even if HSBC did owe a Quincecare duty and had breached it, this gave rise to a recoverable loss by SIB. It did not look at whether HSBC did actually owe such a duty or whether it did actually breach it.
The Supreme Court published its judgment on 21 December 2022. It held that:
Where HSBC actioned instructions that may have been part of a fraud, but which resulted in creditors being repaid, then regardless of whether it had a Quincecare duty and, if it did, had breached it, the fact that SIB was in liquidation and that the relevant funds would still have been due to creditors, meant that SIB had no recoverable loss to claim.
The Court looked at two groups of customers:
- The "early customers" who escaped without loss because they withdrew their funds before the scheme collapsed and were paid out of the disputed payments
- The "late customers", who did not withdraw funds in time and so risk losing almost all their money.
SIB’s case evolved in the course of the proceedings. Firstly, it said that if HSBC had not wrongly paid out the £116m from SIB’s bank account, then that money would still be in its bank account and SIB would therefore be better off by that amount. In the usual Quincecare case, that is the correct approach to loss, because the money misappropriated does not relieve the company of any liability it owes, and so is merely a depletion of the company’s net assets. However, that approach is too simplistic, because in fact the £116m paid out did relieve SIB of £116m worth of debt that it owed under the contracts to the early customers.
SIB then said that the damage it suffered is the loss of a chance. At the time the disputed payments were made, the company was hopelessly insolvent and it has since gone into liquidation. SIB argues that if HSBC had not made the payments, those debts would still be owed to the early customers. Those early customers would have to prove their debts in the liquidation and would be likely to receive a dividend of only a few pence in the pound. SIB’s loss is, therefore, the loss of the chance of discharging those debts for a few pence in the pound, that being the difference between the payment wrongly made by HSBC to the early customers of 100 pence in the pound, and the dividend that the early customers would have received if they had had to prove in the liquidation. Putting aside questions as to whether such a loss is within the scope of the Quincecare duty, it is clearly not a pecuniary loss suffered by SIB.
The Supreme Court therefore dismissed the appeal by majority, agreeing with the Court of Appeal that the Quincecare claim must be struck out. It found that even if HSBC had not made the payments, the monies would have been discharged in paying the customers. This meant SIB had no recoverable loss. It had not suffered the loss of a chance that has any pecuniary value to it.
However, it is interesting to note Lord Sales' dissenting judgment. He acknowledged that it was common ground that if HSBC had complied with the Quincecare duty, the relevant funds would have remained in SIB’s accounts until it was put into liquidation in April 2009 when such funds would have been placed under the control of the liquidators to swell the assets available in the liquidation. He goes on to say, however, that SIB would not have paid the early customers the full debts due to them, which were in fact, by reason of SIB’s insolvency, not liable to be paid in full by the company and which, had the truth been known to it (acting by relevant and honest office-holders) it would have chosen not to pay. In the liquidation, all customers would have received only a small proportion of the debt due to them, but at a higher dividend than will in fact be paid to the late customers.
In addition, the liquidators of SIB would have had a larger fund of assets available to them to pursue possible claims against third parties, with a view to increasing the dividend which might be payable. In these circumstances, Lord Sales considered that the company has in fact suffered a loss. As a result of the alleged breach of the Quincecare duty by HSBC, there has been a diversion of the funds in the HSBC accounts from all creditors to the early customers at a time when SIB's own interest in the proper administration of its affairs was that the funds should have been retained in order that they could be paid to all the creditors. This diversion of funds to an improper destination represents a loss to the company itself.
If HSBC had complied with its Quincecare duty, SIB would still have had that fund of £116m in its accounts and would have been liable to be placed into insolvent liquidation immediately. It then would have entered liquidation with that fund in its hands. SIB paid the early customers more to discharge the debts due to them than they were truly worth at the time, thereby depleting its assets without full value in return and reducing what was available to it to spend in other ways it would have chosen had it appreciated what its true responsibilities were.
Lord Sales goes on to say that the Quincecare duty should be kept within narrow bounds. In ordinary circumstances, a bank should be able to act upon the payment instructions given to it by its customer promptly and without fear. However, the very existence of the Quincecare duty qualifies that position. He says that the solution to keeping its effect within proper bounds lies in analysis of the scope of the duty itself as to when it applies, not in distorting the question whether the company has suffered loss.
Whilst we now have the Supreme Court decision from the Stanford case, this will not be the last word on the wider subject, particularly given the Supreme Court in Stanford did not consider the scope of the Quincecare duty or whether it was breached. The Philipp case mentioned above is also due to be heard in the Supreme Court early this year. Look out for further updates on that.
For now, the boundaries of the Quincecare duty remain fast-evolving. The trend of claims against financial institutions alleging breach of the Quincecare duty is rapidly on the rise. It seems that banks need to be more vigilant than ever of their positive duty to act upon any suspicion of fraud. However, a claimant who claims that a Quincecare duty is owed still needs to prove a recoverable loss.