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29 September 2020
In Stanford International Bank Ltd v HSBC Bank Plc,(1) the High Court held that banks may be liable for breaches of the Quincecare duty even where the customer's net assets have not been reduced by the breach.
Stanford International Bank Ltd (SIB) was an Antiguan bank run and beneficially owned by Robert Allen Stanford, which went into liquidation following a fraud, attracting wide publicity at the time. SIB sold certificates of deposits to investors promising generous interest rates. The view of SIB's joint liquidators was that the entire bank was a Ponzi scheme, which survived by securing new investors and using their money to pay out the old investors which wished to redeem their investments. In 2012 Stanford was convicted of fraud in the United States and sentenced to 111 years' imprisonment. SIB was estimated to be insolvent to the tune of £5 billion with more than 80% of the monies contributed by investors misappropriated.
HSBC Bank PLC was a correspondent bank for SIB from 2003 onwards and operated four accounts in various currencies: sterling, dollar, euro and Swiss franc. Between August 2008 and February 2009, HSBC paid out £118 million from the accounts. Apart from one payment of £3 million, which was made to the England and Wales Cricket Board, all payments were made to investors. It is not known whether SIB was obligated to make the payment to this cricket board.
SIB, through its liquidators, alleges that HSBC owed a duty to it to take sufficient care that monies paid from accounts under its control were properly paid out (the Quincecare duty).(2) SIB alleges that HSBC had a duty to freeze payments out of its accounts when it realised that something was wrong. The date that the accounts should have been frozen, according to SIB, was 1 August 2008. The accounts were in fact not frozen until February 2009, when Stanford was charged by the US authorities. SIB claimed that if the accounts had been frozen on 1 August 2008, an additional £118 million would have been available to creditors.
HSBC's position is that a claim for breach of the Quincecare duty is a common law claim for breach of an implied contractual duty (effectively, a duty of care) or a tortious duty of care, meaning that the appropriate remedy would be damages. It is trite law (with some exceptions) that a claim for damages must give credit against the loss suffered for any benefits that have been obtained by virtue of the wrong that is claimed. In this case, HSBC argued that whenever a payment was made by SIB, the reduction in assets (ie, the payment to investors) equally reduced SIB's liabilities to its investors. On this argument, even if HSBC had breached any duty of care, SIB had suffered no loss as a result.
It was on this basis that HSBC made an application for strike out or summary judgment against SIB, arguing that on a net-asset basis, SIB was in an equal position and had not suffered any loss.
Mr Justice Nugee dismissed HSBC's application for strike out or summary judgment.
In determining the existence of loss, the judge distinguished between solvent and insolvent companies. He gave the following example: if £100 of a solvent person's (or solvent corporate entity's) money is taken and used to discharge a debt owed by that person, the person will be no worse off overall. They may not have the money which they had previously, but they would not have the liability which they had previously either, and their net-asset position would be the same.
However, the judge held that the position would be different in the case of an insolvent individual or company, such as SIB. Using the above example again, an insolvent company paying £100 would reduce its assets, but this would not have a neutral effect on its net-asset position because it has no net assets – only its net liabilities are reduced.
SIB alleged that HSBC should have frozen its accounts on 1 August 2008, which is when, according to SIB, HSBC should have known that SIB could not repay its certificates. As at 1 August 2008, SIB had £80 million available to it in its accounts. The judge queried whether the true value of the claim should therefore be £80 million (being the amount in the accounts when HSBC should have realised that something was wrong) rather than £118 million. However, the judge said that as it had not been argued before him, it was not for him to decide. In any event, the judge acknowledged that SIB could have had £80 million less liabilities if the accounts were frozen on 1 August 2008, but was not willing to accept HSBC's argument that any payments out after that point did not constitute a loss.
In examining the nature of the Quincecare duty, the judge noted that it is owed to the company and not to the creditors. He held that the correct question was whether the company was worse off by having £118 million (or £80 million) of its assets wrongfully extracted from its bank accounts. The judge concluded that it was. No credit was to be given for the fact that SIB was able to reduce some of its liabilities, as it was still insolvent in any event.
If SIB had had the £118 million or £80 million, it would have had money available for liquidators to pursue such claims as they thought they could usefully pursue for distribution to creditors. In the judge's view, this was a real loss; to say otherwise was "contrary to one's instinctive and common-sense reaction to the facts".(3)
For the above reasons, the judge dismissed the application for summary judgment or strike out of the Quincecare loss claim for the balance over and above the payment to the England and Wales Cricket Board.
The Quincecare duty has gained increasing profile in recent years, including as the subject of a Supreme Court judgment in 2019.(4) This judgment provides a useful review of the application of the duty and introduces the interesting suggestion that damages may be assessed differently where an individual or company is "hopelessly and irredeemably insolvent". This may give liquidators an additional avenue to pursue lost monies beyond the realm of Quincecare claims.
The judge noted that while this was only an application for strike out or summary judgment and HSBC may choose to pursue the same arguments at trial, he hoped that the views expressed would be of assistance. Further judgments on the scope and application of the Quincecare duty are expected.
For further information on this topic please contact Harriet Evans or Davina Given at RPC by telephone (+44 20 3060 6000) or email (Harriet.Evans@rpc.co.uk or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
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