Bank beats ‘novel’ attempt to use Quincecare to benefit creditors of failed firm

Liquidators for Stanford International Bank (SIB), which sold investment products to international customers from its base in Antigua and Barbuda until its liquidation in 2009, argued that the business suffered a loss between 2008 and 2009 when HSBC allowed SIB’s owner, Robert Allen Stanford, to authorise payments to some of SIB’s creditors totalling £116 million.

In February 2009, Stanford was charged by the US Securities and Exchange Commission. Officials accused Stanford and some of his associates of running SIB as a large Ponzi scheme since 2003. Customer withdrawals and payments when investment products supposedly matured were being made from capital invested by other customers, rather than investment proceeds.

When Stanford was charged, the four bank accounts that SIB held with HSBC were frozen. But from August 2008, prior to his arrest, Stanford purportedly authorised payments totalling £116m to pay SIB’s customers. SIB’s liquidators claimed that HSBC were aware that the payments authorised by Stanford could have been part of a fraud, and therefore had a duty of care to SIB, known as a Quincecare duty. They argued that HSBC should have refused to accept Stanford’s instructions to pay out money from the accounts.

HSBC’s application for summary judgment to strike out SIB’s claim was refused by the High Court but was successful upon appeal. SIB appealed to the Supreme Court, which held by a majority decision that, even if HSBC owed a Quincecare duty to SIB and had breached its duty, the breach did not give rise to any recoverable losses for SIB or its creditors.

Jacob Hay of Pinsent Masons said SIB’s appeal was an attempt to use Quincecare for the benefit of a company’s creditors in liquidation in “novel” circumstances. “Underlying SIB’s claim is the suggestion that HSBC should not have complied with ostensibly valid instructions to make payments to genuine creditors of the company. Rather than suggesting that the payments themselves were fraudulent, as has been the case in ‘classic’ Quincecare cases, SIB argued that the HSBC should not have complied with the instructions because it should have known that SIB’s business model as a whole was fraudulent,” he said.

Hay added that such a requirement would impose “an even greater level of investigatory responsibility on banks” than has been suggested in the existing cases. “Most of the existing case law around the Quincecare duty has presented the duty as one requiring the bank to prevent a customer from suffering a loss of funds arising out of the making of a payment without proper authorisation. In this case, the suggestion was essentially that the duty could go as far as requiring a bank to protect a customer from becoming insolvent or from the effects of that insolvency,” Hay said.

He added: “While it was assumed to be possible for the purposes of the appeal, this particular point of law seems questionable. Instead, the Lords Justices focused on whether SIB suffered a recoverable loss due to HSBC’s actions at all. In his concurring judgment, however, Lord Leggatt does hint at some doubt over the concept of Quincecare, writing that ‘it is not intuitively obvious why a bank should be liable for carrying out its customer’s instructions’. Given the increasing number of Quincecare cases before the courts, this comment may signpost a full examination of the duty to follow.”

Handing down her lead judgment, Lady Rose distinguished between the SIB customers who had withdrawn their funds from the firm early – each receiving a portion of the £116m in payments from SIB’s accounts with HSBC – and those who did not withdraw their funds before it collapsed. She held that the disputed HSBC payments did not amount to a monetary loss for SIB, because the payments relieved the firm of its liability to the customers who had withdrawn their funds early.

If HSBC had, hypothetically, refused to accept Stanford’s instructions, Lady Rose said SIB would have retained £116m upon its liquidation – but would not have discharged any of the debts it owed to the customers that withdrew their funds early. These customers, along with those who did not withdraw their funds before SIB’s collapse, would then also be able to claim a dividend in the insolvency proceedings.

The majority did agree that, with an extra £116m for the liquidators to distribute, each of the customers would have received a fairer dividend – rather than some receiving all of the money they were owed, and others receiving just a small proportion of their funds. But the Court held that precisely the same amount of SIB’s debt was extinguished when the company was dissolved; a fact that does not change in the hypothetical scenario. It found, therefore, that there was no recoverable loss.

Gemma Kaplan of Pinsent Masons said: “The court refused to consider the issue of fairness in relation to the payments made. It found that it was not an issue that it could investigate as the Antiguan liquidator had already obtained a court order under insolvency laws which determined that the liquidators could not recover the payments to the customers who withdrew their funds early.”

“However, the court was prepared to look at the potential liability of a director who in breach of his fiduciary duties to the company, causes an insolvency company to pay off certain company debts. It found that there may be cases whether the director can be required to pay the company in respect of those payments,” Kaplan said.

She added: “This decision provides welcome clarification for both financial institutions and insolvency practitioners on the scope of the Quincecare duty and maintains the current legal position previously set out in Singularis that the Quincecare duty is only owed to a bank's customers, and not their creditors.”