No loss? No Quincecare claim … the Supreme Court judgment in Stanford International Bank v HSBC

The Supreme Court has handed down its judgment in Stanford International Bank Ltd v HSBC Bank plc¹, deciding that there was no pecuniary loss suffered by the Claimant and therefore no basis for a Quincecare claim.

Stanford International Bank Ltd (SIB) had been run as a Ponzi scheme. The question on this appeal was whether payments of £116m made out of bank accounts belonging to SIB with HSBC Bank plc (HSBC) to some of its genuine customers, made shortly before SIB's liquidation, could be subject to a Quincecare claim (ie arguing that HSBC had a duty not to carry out payment instructions due to being on notice that they may have been made as part of a fraud).  This hinged on the central issue of whether or not SIB could establish that it has suffered loss. 

The majority of the court found that there had been no loss or loss of a chance.  The principal reason for this was that the £116m paid out would have otherwise simply been distributed in the liquidation, giving the creditors (which would then have included the customers otherwise paid shortly before the liquidation) a higher dividend than they would have received otherwise. 

Commentary

While the majority judgment itself does not analyse the scope of the Quincecare duty but focuses on the loss analysis in the insolvency context, it is still noteworthy from a Quincecare perspective, especially as the duty has received considerable judicial attention recently. 

The dissenting judgment of Lord Sales (who in contrast to the majority found that SIB had suffered a loss) also makes some interesting observations about the duty.  In particular, he considers that whilst the Quincecare duty should be kept within "narrow bounds", it covers a situation where the payment instruction is an attempt to misappropriate company funds by making payments which ought not to be made to creditors in a situation of "hopeless insolvency", (just as much as any other kind of misappropriation). 

Later in 2023, we can expect further guidance from the Supreme Court which will be deciding the appeal in Philipp v Barclays, a case where the question of a Quincecare claim arose in an authorised push payment fraud context (for our analysis of the Court of Appeal decision see here). The hearing of that appeal takes place in early February.  

Background

The claimant, SIB, was a company incorporated in Antigua and Barbuda which collapsed in February 2009. Until then, it was beneficially owned and controlled by Robert Allen Stanford. From about 2003 until SIB's collapse, the company had in fact been run as a large Ponzi scheme, so that customers who requested withdrawals of money from SIB or when products allegedly sold to them "matured", this would be paid to them from capital invested by other customers. In February 2009 Mr Stanford was charged with fraud in the United States and is currently serving a 110 year prison sentence. In April 2009, liquidators were appointed over SIB by the Antiguan court. HSBC had provided correspondent banking services to SIB in relation to four accounts.

History of the proceedings 

SIB had made a claim against HSBC in the English courts in March 2018, claiming a breach of HSBC's Quincecare duty and dishonest or reckless assistance in Mr Stanford's breaches of duty. HSBC applied for strike out of the claims, and the High Court dismissed HSBC's application in relation to the Quincecare duty but granted it in relation to the dishonest assistance claim.

Both parties appealed, and the Court of Appeal struck out both the Quincecare duty claim and the dishonest assistance claim.

This appeal to the Supreme Court concerned only the Quincecare duty claim, and focused on the sum of £116m paid to customers from the HSBC bank accounts before SIB's liquidation which settled valid debts of SIB customers. SIB argued that there were many warning signs putting HSBC on notice that SIB's business was a fraud, and that HSBC was under a Quincecare duty of care to refuse to act on t Mr Stanford's instructions relating to SIB's bank accounts.

The appeal focused on the question whether, even if HSBC did owe the duty and was in breach of that duty, that breach had given rise to any recoverable loss to SIB. The court highlighted that therefore the judgment did not concern the scope of the Quincecare duty.

Majority decision: SIB has not suffered any loss, so that no Quincecare claim arises

The Supreme Court focused on whether there had been any loss that could be relevant to the Quincecare claim. It decided (agreeing with the Court of Appeal) that the Quincecare claim should be struck out, because SIB had not suffered the loss of a chance that had any pecuniary value. There was therefore nothing to recover on its pleaded case.

The court looked at two categories of customers: "early customers" who withdrew all their funds before the collapse and suffered no loss, and "late customers" who did not withdraw their funds in time. The court proceeded on the assumption that the Quincecare duty may be breached where there was nothing wrong with the transaction itself, but the bank was put on notice of some background fraudulent activity carried out by the person purporting to authorise the payment from the customer's account.

It considered in particular the nature of the chance that SIB lost if HSBC had complied with its Quincecare duty and had not followed Mr Stanford's instructions to pay out SIB's money. The court found that in this counterfactual world, SIB would have had an extra £116m. At the same time, SIB would not have discharged any of the payments due to the early customers, prior to liquidation. If this had happened, there would no longer be any distinction between early and late customers. Instead, everyone would become a late customer, who is trying to redeem their investment but is unable to do so because the scheme has collapsed and the monies have been frozen. There would only be one pool of customers who at the moment of liquidation were owed money.

If those customers then shared pari passu in the liquidation, they would have these debts discharged for the same dividend as part of the same winding up procedure. In this counterfactual world where there would be an additional £116m for the liquidators to distribute, customers would receive a higher dividend, eg 12 pence in the pound instead of 5 pence. This would mean that a higher percentage of the debt originally owed to each customer would be discharged.

However, the "chance" of being able to discharge a debt owed to an early customer by paying them 12 pence instead of 100 pence they were in fact paid, was matched by the "risk" of having to pay the late customers 12 pence instead of 5 pence to discharge the debt owed to them. The chance must be quantified as exactly the same amount as that risk. The court found that no additional customer indebtedness is paid off, but that the exact same amount of indebtedness is in effect extinguished "for free" on the company's dissolution. Therefore, the chance lost to SIB as a result of HSBC's breach was not a chance either to pay more money overall to the pool of indistinguishable customers or a chance to discharge more of their indebtedness for free.

The court rejected an argument that SIB lost a chance to act more fairly as between customers by making sure that the early customers by happenstance received 100 pence at the expense of the late customers who only received 5 pence, and that everyone should receive 12. The court found that this was clearly not a pecuniary loss suffered by SIB and this fairness argument was not something the court could assess.

The court also rejected an argument that a parallel could be drawn with liability of directors for breach of their fiduciary duties, and in particular the case of Liquidator of West Mercia Safetywear Ltd v Dodd² where a misfeasant director was required to repay sums to the insolvent company even though those sums had been used to extinguish an existing liability. This had nothing to do with liability for breach of duty where there is no loss.

The separate decision of Lord Leggatt

Leggatt LJ concurred with the majority but issued a separate judgment. He found similarly that SIB had not suffered loss by making payments for which it received full value. He concluded that SIB's net asset position was unchanged after the payment of the £116m, as SIB owed the money that was paid out.

The judge noted that SIB did not make a claim for consequential loss, for example arguing that HSBC should have frozen the accounts months earlier in 2008 rather than February 2009, so that liquidation would have happened earlier and further liabilities would have been avoided. Nor did SIB allege any other consequential loss. The judge concluded there was no escaping the simple truth that paying a valid debt does not reduce the payer's wealth.

In line with the majority, the judge rejected the argument that SIB had effectively lost the chance of paying the investors only a small dividend in the liquidation, and instead paid them in full. This was because the argument was based on the premise that loss caused by breach of duty is to be assessed as at the date of the breach, but there was no such rule.

The judge noted that there could be no loss for SIB, since if the £116m paid out had been retained, SIB would have been required to pay higher dividends in the liquidation, which were higher by this total amount. The amount "lost" by SIB by paying the early customers in full was therefore offset by the equal amount that SIB "gained" by paying the unfortunate investors less than they would otherwise have received. Losses and gains arising from a breach of contract or tort must be netted off against each other, and only any net loss awarded as damages.

The judge separately considered an argument based on West Mercia, also considered by the majority that a payment can cause loss to an insolvent company even though it discharges a debt owed by the company. Considering various authorities on the matter, the judge concluded that, unlike Mercia, here there were no allegations of fiduciary duty, but this was a common law claim for damages for breach of a duty of care owed in contract and tort, and the exact implications of West Mercia and related authorities need not be decided. There was no indication that the law on breach of fiduciary duty had diluted the basic compensatory principle used for awarding damages for breach of contract and in tort. The judge also considered that the Supreme Court decision in Sequana³,  which affirmed that there is a duty owed by directors of an insolvent company to the interests of creditors, was irrelevant here, as this was not a case of a breach of fiduciary duties.

The dissenting judgment of Lord Sales

SIB has suffered loss

Sales LJ provided a dissenting judgment, holding in the main that unlike the majority view, there had been a loss to SIB. It was common ground that had HSBC complied with its Quincecare duty, the funds would have remained in SIB's accounts until liquidation. The consequence would have been that the sums would have increased the assets available in the liquidation. SIB would not have paid the early customers full face value of the debts which were in fact, by reason of the insolvency, not liable to be paid in full, and had the truth been known, SIB would have chosen not to pay.

Further, had the liquidators of SIB had a larger fund of assets available to them, they would have been able to pursue possible claims against third parties to increase the dividend payable. In these circumstances, it could be said that the company had suffered a loss.

As a result of the alleged breach of Quincecare duty by HSBC, there had been a diversion of funds away from the general creditors as a class into the hands of the early customers when SIB's own interest in the proper administration of its affairs was that the funds should have been retained in order to pay the general creditors. This diversion of funds to an improper destination represented a loss to the company itself.

The judge also considered West Mercia and the duty a director owes a company to protect its creditors as a general body when the company is on the verge of insolvent liquidation, and concluded that here loss had been suffered by SIB as its funds had been depleted by being used for improper purposes.

Quincecare duty

In relation to the Quincecare duty, Sales LJ noted that the solution to keeping its effect within "proper bounds" lay in the analysis of the duty itself, not in "distorting" the question whether the company had suffered loss. There should be a strict approach governing when it applies according to the standard of care under it and by careful analysis of the scope of the duty. However, this did not affect the issue here which was whether SIB had suffered loss on a simple "but for" analysis.

The judge concluded that the formulation of the Quincecare duty covered a situation where the order by the customer is an attempt to misappropriate company funds by making payments which ought not to be made to creditors in a situation of "hopeless insolvency", just as much as any other kind of misappropriation. The company suffers a loss in both situations because funds are misappropriated.

Sales LJ noted that where a director or company officer in a hopeless insolvency situation was indeed misappropriating the funds by paying full value to some creditors, a bank that has knowledge of this or is on notice to the requisite standard cannot treat the instruction as legitimate. However, since the "hopeless insolvency" test was so stringent, it would be rare to find that the bank had this knowledge or notice to the requisite standard.

He further noted that a bank will typically have far less knowledge of a company's affairs than the directors and officers of the company. On this basis, the circumstances in which a bank has any real uncertainty in knowing how to react to a payment instruction are likely to be more limited.

Referring to the Quincecare decision itself⁴,  Sales LJ reasoned that there was no significant distinction between the duties of directors and officers of a company and the Quincecare duty owed by the bank;  they both owe fiduciary duties and a duty to exercise reasonable skill and care.

The judge further concluded that it was inherent in the Quincecare duty that some element of uncertainty was introduced between bank and corporate customer, but by stating the standard of care (in the original Quincecare decision), Steyn J had considered that an appropriate fair balance between competing considerations had been struck.

In contrast to the majority view, Sales LJ examines the substantive scope of the Quincecare duty in this dissent, and does not focus purely on the issue of loss. While he considers that the duty must remain withing "proper bounds", it is noteworthy that the door is open for a Quincecare claim against a bank in the "hopeless insolvency" situation, even if in practice this might be a relatively rare occurrence. Since the majority did not consider the substantive scope of the duty, this could prove to be an influential dissenting judgment, because it is not – so far as the substance of the duty is concerned - contradicted by the majority view.

¹ [2022] UKSC 34

² (1988) 4 BCC 30

³ BTI 2014 LLC v Sequana SA [2022] UKSC 25

⁴ Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363, see para 137