Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2019] UKSC 50

Singularis' chairman and sole shareholder fraudulently directed Daiwa, its broker-bank, to make payments totalling US$204m, misappropriating company funds. The Supreme Court held Daiwa breached its Quincecare duty and the chairman's fraud could not be attributed to the company to defeat the claim.

Facts

Singularis Holdings Ltd was a Cayman Islands company established to manage the personal assets of Mr Maan Al Sanea, a Saudi businessman. Mr Al Sanea was its sole shareholder, a director, and its chairman, president and treasurer. Although there were six other reputable directors, they exercised no influence over management, and Mr Al Sanea held extensive delegated powers, including signing authority over the company’s bank accounts.

Daiwa Capital Markets Europe Ltd, the London subsidiary of a Japanese investment bank, had entered into a stock financing arrangement with Singularis in 2007. By June 2009, following the sale of shares and repayment of the associated loan, Daiwa held approximately US$204m for Singularis’ account. Between 12 June and 27 July 2009, on Mr Al Sanea’s instructions, Daiwa made eight payments totalling approximately US$204.5m to Saad Specialist Hospital Company and entities connected with Saad Air. The trial judge (Rose J) held that each payment was a misappropriation of Singularis’ funds, there being no proper basis for any of them.

Singularis was placed in voluntary liquidation in August 2009 and compulsorily wound up the following month. The liquidators brought proceedings against Daiwa for (i) dishonest assistance and (ii) breach of the Quincecare duty of care. The dishonest assistance claim failed; the negligence claim succeeded, subject to a 25% reduction for contributory negligence. The Court of Appeal dismissed Daiwa’s appeal.

Issues

Two broad issues arose before the Supreme Court:

• When can the actions of a dominant personality who owns and controls a company, albeit with other directors in place, be attributed to the company?
• If such attribution operates, is the Quincecare claim defeated by (i) illegality; (ii) lack of causation (either because the bank’s duty does not extend to protecting the company from its own wrongdoing, or because the company did not rely on the bank’s performance); or (iii) an equal and countervailing claim in deceit?

Arguments

Daiwa’s submissions

Daiwa argued that as Singularis was effectively a one-man company and Mr Al Sanea was its directing mind and will, his fraud was attributable to the company. This triggered three defences: an illegality defence under Patel v Mirza; a causation argument that the company had inflicted the harm upon itself (invoking Lord Hoffmann’s reasoning in Reeves v Commissioner of Police of the Metropolis); and an equal and opposite claim in deceit that would extinguish the company’s negligence claim. Daiwa also relied on Stone & Rolls Ltd v Moore Stephens and contended it would be anomalous for a company to recover against a negligent bank where it could not recover against a negligent auditor, and that companies should not be treated more favourably than individuals (citing Luscombe v Roberts).

Singularis’ submissions

Counsel for Singularis, Jonathan Crow QC, submitted that the case was

bristling with simplicity

. The loss was caused by Daiwa’s breach of its Quincecare duty, not by the fraud itself. The purpose of the duty was precisely to protect the company from this kind of misappropriation by trusted agents, and attribution would negate the duty. The relevant principle from Bilta (UK) Ltd v Nazir (No 2) was that attribution depends on the context and purpose for which it is sought.

Judgment

Breach of the Quincecare duty

Lady Hale (with whom Lord Reed, Lord Lloyd-Jones, Lord Sales and Lord Thomas agreed) affirmed the trial judge’s unchallenged findings that there were

many obvious, even glaring, signs that Mr Al Sanea was perpetrating a fraud on the company

. Daiwa was aware of the dire financial straits of the Saad group, of Singularis’ potential creditors, and of features of the account which should have prompted suspicion. The judge had found that

Everyone recognised that the account needed to be closely monitored … But no one in fact exercised care or caution or monitored the account themselves and no one checked that anyone else was actually doing any exercising or monitoring either

. Breach of the duty articulated in Barclays Bank plc v Quincecare Ltd was incontrovertible.

Attribution

Lady Hale returned to first principles in Salomon v A Salomon and Co Ltd and the three-tier analysis in Meridian Global Funds Management Asia Ltd v Securities Commission. She noted the extensive criticism of Stone & Rolls in Bilta, where Lords Toulson and Hodge had stated that Stone & Rolls

should be regarded as a case which has no majority ratio decidendi

and Lord Neuberger had said it should be

put ‘on one side in a pile and marked “not to be looked at again”‘

.

The guiding principle from Bilta is that the answer to any attribution question depends on the context and purpose for which attribution is relevant. Applying that principle, the context here was a breach of the Quincecare duty whose very purpose was to protect the company against misappropriation by a trusted agent with authority to withdraw funds. To attribute the fraud of such an agent to the company would, in the judge’s words,

denude the duty of any value in cases where it is most needed

. Singularis was in any event not a “one-man company” in the sense used in Stone & Rolls, having a board of reputable people and a substantial business.

Lady Hale distinguished the position of auditors (whose duties differ and for whom causation may not be established if the company already knows the true position) and emphasised that companies possess separate legal personality:

The shareholders own the company. They do not own its assets and a sole shareholder can steal from his own company

.

The defences (obiter)

Even had attribution been established, none of the defences would have succeeded:

• Illegality: Applying Patel v Mirza, the trial judge correctly concluded that denying the claim would not enhance the integrity of the legal system. The Quincecare duty already strikes a careful balance, and denial would undermine the public interest in banks and financial institutions helping to uncover financial crime and money laundering. The contributory negligence deduction offered a more proportionate adjustment than the blunt instrument of illegality. Lady Hale noted reservations about the Court of Appeal’s statement on appellate review of the illegality defence but did not resolve the point.
• Causation: This was the rare case in which a duty to protect from self-inflicted harm was owed, and the fraudulent instructions were the very occasion giving rise to the duty. The loss flowed from Daiwa’s breach.
• Countervailing claim in deceit: Following the reasoning of Evans-Lombe J in the Barings litigation, the very duty breached was to guard against such fraudulent instructions, so Daiwa could not rely on the fraud to escape liability.

Implications

The decision confirms and strengthens the Quincecare duty owed by banks and brokers to their customers. A financial institution cannot, by invoking attribution of a controlling individual’s fraud to the corporate customer, neutralise its own duty of care to detect and halt suspicious payments. The case firmly endorses the context-and-purpose approach to attribution articulated in Bilta and effectively confines Stone & Rolls to its own facts.

The judgment is significant for corporate customers, liquidators and creditors: where a trusted agent misappropriates company funds through a bank or broker that has failed to heed obvious warning signs, liquidators retain a claim against the financial institution notwithstanding that the fraudulent instructions emanated from a dominant shareholder-director. Equally, banks and brokers are reminded that the regulatory role of financial institutions in combating financial crime reinforces rather than displaces civil liability under Quincecare.

The decision does not displace the separate position of auditors, whose duties and causation analysis differ, and it leaves open for future consideration certain questions about the scope of the illegality defence on appellate review. It also reaffirms, by reference to Salomon, the enduring separation of corporate personality: a sole shareholder can steal from his own company, and the company’s claim to recover those stolen funds is not to be defeated by labels such as “one-man company”.

Verdict: The appeal was dismissed. The trial judge’s order holding Daiwa liable for breach of its Quincecare duty of care, subject to a 25% reduction for contributory negligence, was upheld.

Source: Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2019] UKSC 50