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On 15 April 2021 , the Court of Appeal delivered its judgment in Stanford International Bank Limited (in Liquidation) v HSBC Bank Plc. This case provides guidance on the interpretation of commercial dishonesty and clarification on the Quincecare duty, both of which are common, but complex, issues arising in banking disputes.
Stanford International Bank (SIB) was established in 1990 by Robert Allen Stanford and owned by him until its liquidation on 15 April 2009. The Stanford Financial Group very publicly collapsed in 2009 after an investigation by the U.S Securities and Exchange Commission and the FBI. The Group was found to be responsible for a massive Ponzi scheme, misappropriating billions of dollars from its investors and this ultimately led to Mr Stanford being sentenced to prison for 110 years. At the time of the Group's collapse, SIB had debts of over $5 billion owed to various creditors.
During its life, HSBC held and operated multiple accounts for SIB (the Accounts). Like many cases where insolvency practitioners are expected to pursue viable claims, the liquidators of SIB (British accounting firm Vantis) sought to recover creditors' losses by asserting that HSBC breached their duties to SIB or were otherwise liable as an accessory to the fraud.
SIB's two claims were as follows:
This Court of Appeal judgment considers the parties' respective cross-appeals of that decision.
SIB asserted a breach of the Quincecare duty, established in the case of Barclays Bank Plc v Quincecare Ltd. In that case, Steyn J held 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 effect of this duty is to hold banks liable for misuse of a customer's accounts when they should have intervened.
The Quincecare claim centred on payments totalling £118.5 million from the Accounts to various holders of Certificates of Deposit (CDs) made between 1 August 2008 and 17 February 2009. SIB stated that the Accounts should have been frozen by 1 August 2008 at the latest and, had HSBC done so, SIB would have had an extra £80 million available. SIB asserted that HSBC's failure to recognise that the payments may be fraudulent and freeze the accounts, was a breach of its Quincecare duty.
The Court decided that by using the funds in the Accounts and paying money to the holders of the CDs, SIB offset some of its liabilities and did not suffer any loss. SIB itself admitted that its net value was not any less after the monies had been paid out. Further, it was confirmed that, under the Quincecare duty, HSBC owed a duty to SIB and not SIB's creditors.
Consequently, the Court of Appeal overturned the first instance decision and decided that SIB had no claim under the Quincecare duty.
SIB failed in their appeal of the Dishonest Assistance claim and the first instance decision to strike out was upheld.
SIB alleged that by failing to recognise the fraudulent activity of SIB, HSBC were dishonest or otherwise reckless and so should be held jointly liable for the losses. SIB argued that the test for corporate dishonesty should be subjective and reflective of the differences between large and smaller corporations. In the alternative, SIB sought to persuade the Court that HSBC's conduct amounted to, at least, turning a blind eye and this was sufficient to give rise to the Dishonest Assistance claim.
The Court held that there could not be any dishonesty from HSBC where SIB had failed to identify any individuals within HSBC who acted dishonestly. The test for dishonesty is a two-part test which first looks at the subjective state of mind and/or knowledge of an individual, followed by an objective test focussed on what a reasonable person would or should do with this knowledge. However, where no individuals could be identified, it was impossible to prove this.
The decision has provided three helpful findings in relation to the dishonesty element required for dishonest assistance claim in such circumstances:
The Court of Appeal's decision in favour of HSBC provides welcome clarification as to the (often tested) scope of the Quincecare duty. The Court confirmed that the Quincecare duty is only owed to a bank's customers, and not their creditors, reiterating the position in the Singularis case.
It is also a reminder that the Court will apply serious consideration to allegations of dishonesty and broad suggestions of 'corporate recklessness' will not do. And whilst dishonesty can take the form of turning a blind eye, the Court reiterated that there needed to be knowledge or suspicion of something specific.
SIB's failure to identify any individuals within the bank that acted dishonestly was fatal to the Dishonest Assistance claim and its attempt to vary its application for large corporates failed. The Court confirmed that a natural person that had acted dishonestly had to be identified – rejecting SIB's reliance on the recent decision in Sofer v Swissindependent Trustees SA  EWCA Civ 669.
The decision is a reassuring one for financial institutions facing increasing numbers of claims referring to alleged breaches of the Quincecare duty and unspecific dishonest assistance claims where the true rogue responsible for the fraud has long since exited stage left.