Bank negligent after paying out client money on fraudulent instruction from sole director

Out-Law News | 14 Feb 2018 | 5:23 pm | 3 min. read

A bank which made payments from a client account on the fraudulent instruction of the client's director and sole shareholder was liable in negligence after the client company went into liquidation, the Court of Appeal has confirmed.

The court stressed, however, that this was an "unusual" case; and it was unlikely that banks would face a "flurry of similar claims", according to financial litigation expert Caroline Hearn of Pinsent Masons, the law firm behind Out-Law.com.

"Both the Court of Appeal and High Court were keen to stress that this was an exceptional case, the circumstances of which are unlikely to often arise, and that there remains a high threshold for such a duty to arise," she said.

"The 'Quincecare duty' is there to guard against the facilitation of fraud to protect bank customers and innocent third parties. However, where a bank has concerns about a customer being in financial difficulty it should pay close attention to any unusual payment instructions received from one director of it," she said.

The case is the first in which a court has found against a bank in respect of the 'Quincecare duty' of care that it owes to its customers to prevent fraudulent transactions. Banks are not generally liable to compensate customers for fraudulent payments if the customer authorised the payment. However, in the 1992 Quincecare case, the court held that a banker was under a duty to refuse an ordered payment where "he has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company".

The Court of Appeal agreed with the trial judge that it was irrelevant that, in this case, it was the company's creditors rather than the company itself that suffered the loss. The claim was brought by the liquidated company, and the court did not have to consider that that money would be used to pay back creditors if the company succeeded in its claim, the judge said.

Daiwa, the London subsidiary of a Japanese investment bank and brokerage company, made a number of substantial payments during June and July from the client account of Singularis Holdings Ltd, a company incorporated in the Cayman Islands and which is now in liquidation. The payments were requested by a Mr Maan Al Sanea, a director of the company and its sole shareholder. In all but one instance, the payments were approved without query by staff at Daiwa.

The payments were made against a backdrop of widely-reported financial difficulties affecting the Saad Group, a Saudi conglomerate owned by Al Sanea, and other related individuals. In May 2009, the Saudi Arabian Monetary Authority froze Al Sanea's assets. Rating agencies Moody's and Standard and Poor's downgraded the Saad group's credit ratings, and the company attempted to restructure its lending commitments with 40 of its lending banks. Daiwa itself had already decided to unwind its involvement with Singularis.

By the end of July 2009, the balance of the Singularis account stood at zero following the various disbursements made by Daiwa. On 20 August 2009, Al Sanea placed the company into voluntary liquidation. Claims against the company by its creditors ran into the hundreds of millions of dollars, and remained at this level by the time of the trial.

The liquidators brought a claim against Daiwa for the amount withdrawn from the Singularis client account during June and July 2009, which amounted to around $204 million. It based its claim either on Daiwa dishonestly assisting Al Sanea's breach of the fiduciary duty he owed to Singularis, or in negligence. The High Court dismissed the first basis of the claim, but found for Singularis on the negligence point. The judge did, however, reduce damages by 25% due to Al Sanea's fraudulent conduct.

The Court of Appeal agreed. This was an exceptional case in which the bank had been 'put on inquiry', to quote the judge in the Quincecare case. The duty, as outlined in that case, therefore applied.

"The judge found … that 'any reasonable banker would have realised that there were many obvious, even glaring, signs that Mr Al Sanea was perpetrating a fraud on the company when he instructed that the money be paid to other parts of his business operations'," the appeal judge said. "This case is, therefore, an unusual one, the circumstances of which are unlikely often to arise."

"As [the judge] said in [the Quincecare case]: trust, not distrust, is the basis of a bank's dealings with its customers; and full weight must be given to this consideration before one can conclude that the banker had reasonable grounds for thinking that the order was part of a fraudulent scheme to defraud the company. He continued by saying that the law should guard against the facilitation of fraud, and exact a reasonable standard of care in order to combat fraud and to protect bank customers and innocent third parties. I respectfully agree," he said.