UK Supreme Court finds Daiwa Capital Markets in breach of its Duty and upholds $153 million Negligence Claim

The UK Supreme Court, in the much anticipated judgment in Singularis Holdings Ltd (the “Respondent”) v Daiwa Capital Markets Europe Ltd (the “Appellant”) [2019] UKSC 50, have unanimously ruled that the Appellant Bank had breached its duty to protect the Respondent. The Respondent was at all times material, the manager to the assets of Maan Al Sanea, a Saudi billionaire.

Summary of the facts in Singularis

Singularis (now in liquidation) was registered in the Cayman Islands in order to manage the personal assets of Mr Al Sanea who was the sole shareholder, a director, chairman, president and treasurer of the Respondent. In 2007 they entered into a stock financing arrangement with Daiwa, the London subsidiary of a Japanese investment bank.

Daiwa provided Singularis with loan financing which enabled it to purchase shares. Those shares were later sold in 2009, leaving Daiwa holding a surplus of $204 million. Between 12 June and 27 July 2009, Daiwa were instructed by Singularis to make eight payments of this cash surplus, to Saad Specialist Hospital Company and Saad Air. These payments were deemed a misappropriation of funds as it rendered the Respondent unable to meet the demands of its creditors.

In 2009, Al Sanea placed Singularis into voluntary liquidation. Following this the Grand Court of the Cayman Islands made a compulsory winding up order and joint liquidators were appointed. Those liquidators brought a claim against Daiwa in 2014 for the full amount of the payments. There were two bases for the claim:

1. Dishonest assistance in Mr Al Sanea’s breach of fiduciary duty in misapplying the company’s funds; and

2. Breach of the Quincecare duty of care to the company by giving effect to the payment instructions.

The first basis was dismissed in the Chancery Division of the High Court, as it was held that the Daiwa employees had acted honestly. However, the negligence claim was upheld with a deduction of 25% under the Law Reform (Contributory Negligence) Act 1945 to reflect the contributory fault of Mr Al Sanea and the company’s inactive directors

What is the Quincecare duty of care?

In the famous case of Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363, Steyn J held there is an implied term in any contract between a bank and its customers, that in the case where a bank knows a customer’s order is being given dishonestly or shut their eyes to it, the Bank owes a duty of care not to execute that order. This duty includes the instance where the bank acts recklessly in failing to make inquiries. 

The difficulty for banks is that they must balance their use of reasonable skill and care in and about executing the customer’s orders, with the conflicting duty to execute their orders in a timely manner. Thus, avoiding causing financial loss to the customer.

Who is to blame for the loss: the fraudulent director or the bank for failing to spot this fraud?                                               

It was accepted that Al Sanea breached his fiduciary duty in misappropriating funds from Singularis in order to prevent creditors from accessing them.

Therefore this only left the question: whether there was a Quincecare duty of care in this instance?

Lady Hale stated that:

“Any reasonable banker would have realised that there were many obvious, even glaring, signs that Al Sanea was perpetrating a fraud on the company. He was clearly using the funds for his own purposes and not for the purpose of benefiting Singularis”.

Lady Hale Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2019] UKSC 50, 11

Daiwa disputed this point, arguing that the fraud should be attributed to Singularis, thus proving their loss was caused by its own fault and not theirs. To forward this point Daiwa cited Lord Hoffman who referred to:

the sound intuition that there is a difference between protecting people against harm caused to them by third parties and protecting them against harm which they inflict upon themselves … People of full age and sound understanding must look after themselves and take responsibility for their actions”.

Reeves v Comr of Police of the Metropolis [2000] 1 AC 360, at 368

However, Lord Hoffman proceeded to say:

“This philosophy expresses itself in the fact that … a duty to protect a person of full understanding from causing harm to himself is very rare indeed. But, once it is admitted that this is the rare case in which such a duty is owed, it seems to me self-contradictory to say that the breach could not have been a cause of the harm because the victim caused it to himself”

Reeves v Comr of Police of the Metropolis [2000] 1 AC 360, at 368

This seems to be the case here, as the strict purpose of the Quincecare duty is to protect a bank’s customers from the harm caused by people for whom the customer is responsible.

If it had not been for the breach of the Appellant’s (i.e. the Bank) duty of care, the money would still be available for the liquidators and the creditors alike.

Did Daiwa act negligently?

Lady Hale agreed with the Counsel for the respondent, Jonathan Crow QC, who boldly asserted at the outset of his submissions that this case was in fact “bristling with simplicity”. Singularis, a company with a substantial business, traded for years and ran up debts in doing so. Additionally, it had a substantial sum of money standing to its credit, as a result of its legitimate business activities, with its broker-bankers.

When it appeared that the company was running into difficulties, its “directing mind” and sole shareholder fraudulently deprived the company of that money by directing Daiwa to pay it away. Daiwa should have realised that something suspicious was going on and suspended payment until it had made reasonable enquiries to satisfy itself that the payments were properly to be made.

Lady Hale Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2019] UKSC 50, 39

Therefore, it was clear to Lady Hale (dissenting) that the company (and through the company its creditors) was clearly a victim of Daiwa’s negligence.

What does this mean for Banks who fail to spot fraudulent activity? Will banks be held to be negligent?

In short: yes. The Law Lords were scathing towards the Bank in this case for failing to spot the obvious fraud of the director. This means liquidators not only have a claim against a fraudulent director but also or alternatively against a Bank for failing to act with the reasonable care and skill expected to spot such fraud at the outset.

This case has cemented the public interest in requiring banks to play an important part in uncovering financial crime and money laundering, reinforcing the role of lenders in tackling financial crime.

This judgment will definitely please the creditors of Singularis, which have been pursuing Al-Sanea after his family defaulted in 2009 following the global financial crisis.

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