Introduction

In the case of Stanford International Bank Ltd (in liquidation) v HSBC Bank PLC [2021] EWCA Civ 535, which concerns a negligence claim for breach of Quincecare duty and dishonest assistance against the defendant bank, the English Court of Appeal (“CA”) unanimously found in favour of HSBC Bank plc (“HSBC”) and struck out both claims.

Background

Stanford International Bank Limited (“SIB”), which collapsed into liquidation in 2009, held multiple accounts with HSBC between 2003 to 2009 (“Accounts”). SIB had debts in excess of US$5 billion arising from its being use as the vehicle for one of the largest Ponzi schemes in history. The liquidators of SIB (“Liquidators”) made two claims against HSBC as follows:

1.        SIB claimed that HSBC has breached the implied contractual and/or tortious duty owed towards SIB such that HSBC should refrain from executing transfer orders when HSBC had reasonable grounds for believing that the orders are attempts to misappropriate the funds of SIB (Quincecare duty) (the “Loss Claim”); and

2.        SIB also claimed that they are entitled to an account or equitable compensation in respect of HSBC’s alleged dishonest and/or reckless assistance in breaches of trust and fiduciary duty undertaken by Robert Allen Stanford, SIB’s Chairman and perpetrator of the Ponzi scheme (the “Dishonest Assistance Claim”).

For the Loss Claim, SIB alleged that approximately £118.5 million was paid out of SIB’s Accounts during the period when HSBC ought to have frozen the Accounts. SIB argued that SIB’s state of insolvency made the cash crucial to SIB and it would have had (at least) £80 million more cash as at 17 February 2009 if HSBC had putatively performed its duty. It would then have been able to pay its creditors more once insolvency process began. For the Dishonest Assistance Claim, SIB submitted that the test of dishonesty or recklessness for large corporations, like HSBC, is or should be different to that applicable to individuals. Also, the allegation of dishonest assistance should not be struck out merely because SIB is not able to identify directors, officers or employees who had the relevant state of knowledge.

At first instance, HSBC applied to Mr Justice Nugee (“Judge”) to strike out the Loss Claim and the Dishonest Assistance Claim. The Judge refused to strike out the Loss Claim but struck out the Dishonest Assistance Claim. In relation to the Loss Claim, the Judge distinguished between a solvent trading company and an insolvent trading company. The Judge held that if the company is solvent, paying out money to discharge liabilities would result in both a reduction in assets and a corresponding benefit to the company by reducing its indebtedness. However, when the company is insolvent, the payment reduces the company’s assets but is not offset by a corresponding benefit as the company does not have enough to pay its liabilities. Both parties appealed.

Rulings in the Court of Appeal

Loss Claim

The CA explained that the Quincecare duty was “narrow and well-defined” to protect a banker’s customer from losing funds held in a bank account with that banker who was put on inquiry and such Quincecare duty was owed to the customer but not to the customer’s creditors even when the customer was on the verge of being insolvent.

The CA is of the view that the Judge has erred in distinguishing a solvent trading company from an insolvent trading company. As long as the company is trading (before the insolvency proceedings begin), while payments made to creditors bring about a reduction in its assets, they also bring a corresponding benefit of a reduction in its liabilities, however small the reduction in liabilities may be.

Dishonest Assistance Claim

The CA followed the two-stage test for dishonesty as laid down in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378. Firstly, the court should ascertain the defendant’s actual state of knowledge and belief as to the facts. Secondly, whether the defendant’s conduct was honest or dishonest according to the standards of ordinary decent people. For imputation of blind-eye knowledge, the CA referred to the decision in Manifest Shipping & Co Ltd v. Uni-Polaris Insurance Co Ltd [2003] 1 AC 469 and held that two conditions must be satisfied, (i) the existence of a suspicion that certain facts may exist, and (ii) a conscious decision to refrain from taking any step to confirm their existence.

The CA agrees with the Judge’s ruling on three bases. Firstly, SIB has failed to allege that any specific employee of HSBC was dishonest or suspected the Ponzi fraud and made a conscious decision to refrain from asking questions. Secondly, the SIB’s allegation relied on gross negligence which would allow blind eye knowledge to be constituted by a decision not to enquire into an untargeted or speculative suspicion rather than a targeted and specific one. Thirdly, if dishonesty and blind eye knowledge is to be alleged against corporations, it has to be evidenced by the dishonesty of one or more natural persons. The subjective dishonesty must originate from the dishonesty of a person within the corporation or the blind-eye knowledge of such a person.

In the end, the CA held that the judge was wrong to refuse to strike out the Loss Claim as there was no reduction in SIB’s net asset position and the Judge was right to strike out the Dishonest Assistance Claim. Subsequent to the CA Judgment, SIB further appealed to the Supreme Court regarding the Loss Claim issue. The appeal was heard on 19 January 2022 with judgement reserved. It remains to be seen how Quincecare duty can be applied as a ground for liquidators to recover funds paid out to creditors.