Supreme Court: bank failed in duty to detect 'one man company' fraud

The Supreme Court, in a unanimous judgment, dismissed an appeal brought by the bank. The bank, Daiwa, had argued that as the company, Singularis, was effectively a one-man company, the fraudulent instructions of Saudi businessman Maan Al Sanea should be attributed to the company.

However, Supreme Court judge Lady Hale said that it was irrelevant whether or not the fraud was attributable to the company, which is now in liquidation. The bank had still breached its duty of care to its customer, the company, when it made the payments, and had therefore acted negligently, she said.

Lady Hale said that any decision that the dishonesty of the company's 'controlling mind' could be attributed to that company had to be considered with "the context and the purpose for which the attribution is relevant". Here, the context was the breach by the bank of its duty of care towards Singularis.

"The purpose of that duty is to protect the company against just the sort of misappropriation of its funds as took place here," she said.

"By definition, this is done by a trusted agent of the company who is authorised to withdraw its money from the account. To attribute the fraud of that person to the company would be, as the [trial] judge put it, to 'denude the duty of any value in cases where it is most needed' ... This would be a retrograde step," she said.

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".

Quoting Daiwa's lawyer, Lady Hale said that the case was "bristling with simplicity".

"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," she said. "The company (and through the company its creditors) has been the victim of Daiwa's negligence."

Banking litigation expert Mike Hawthorne of Pinsent Masons, the law firm behind Out-Law, com, said there was "no simple legal rule" governing 'attribution' cases, in which a director's knowledge of his own fraud is attributable to the company.

"The Supreme Court, in this case, decided that the so-called 'one man company' exception is not in fact a part of the law in this area," he said. "Even in 'one man companies' there is no presumption that the company has knowledge of its director's own fraud on the company. Instead, the question of whether the director's knowledge should prevent the company from being able to sue a bank of other third party should be answered by reference to the context in which the fraud occurred, and the different degrees of responsibility held by the company and the third party."

"Applying that balancing exercise to the facts of this case, the Supreme Court held that the balance came down in favour of the company. Yes, the director was at fault in defrauding the company, but on the other hand the bank's duty to prevent the fraud was triggered by the fact that there was a fraud, and it would not be just for the bank to fully escape the consequences of its own breach of duty just because the director was also at fault," he said.

"The narrow point to take out of this decision is that the attribution defence is a dead end in cases where a bank is being sued for breach of duty in failing to prevent fraud. The wider point is that the boundaries of where attribution of knowledge will fall as between a company and a director are no clearer today than they were before this decision," he said.

Daiwa, the London subsidiary of a Japanese investment bank and brokerage company, made a number of substantial payments from the client account of Singularis Holdings Ltd, a company incorporated in the Cayman Islands. The payments were requested by Al Sanea, a director of the company and its sole shareholder, and directed to other companies owned or controlled by Al Sanea. The payments were made against a backdrop of widely-reported financial difficulties affecting Al Sanea and his companies.

Singularis was liquidated in September 2009. By this time, the balance of the company account was zero and claims against the company by its creditors ran into the hundreds of millions of dollars. The liquidators brought a claim against Daiwa for the amounts withdrawn from the Singularis client account on the instructions of Al Sanea. They based the 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, reducing damages by 25% due to Al Sanea's fraudulent conduct. The Court of Appeal upheld the judgment on appeal.