Singularis Holdings Ltd (in liquidation): a cautionary tale for banking institutions?


Author: Wing Tang, Tom Bolam


Banks are generally not liable to compensate customers for fraudulent payments if the customer authorised the payment.  However, in Barclays Bank Plc v Quincecare Ltd [1992] 2 All E.R. 363 it was held that banks owe a duty to prevent fraudulent transactions if the bank has reasonable grounds for believing that the customer authorisation is an attempt to misappropriate the funds of the company.

In the recent decision of Singularis Holdings Ltd (in liquidation) v Daiwa Capital Markets Europe Ltd [2018] EWHC Civ 84, Daiwa Capital Markets Europe Limited appealed against a High Court decision that it owed a Quincecare duty of care to its customer to prevent fraudulent transactions.

Facts

The case relates to Daiwa Capital Markets Europe Limited (Daiwa), an investment bank and stockbroker, who made payments to third parties from funds held in the client account of Singularis Holdings Limited (Singularis) on the instructions of Mr Al Sanea, a director and sole shareholder of Singularis.  The payments were fraudulent, as they were designed to defraud creditors of the company by transferring funds to other companies associated with Mr Al Sanea shortly before Singularis went into liquidation.  Although it was accepted that Mr Al Sanea acted fraudulently when directing the payments, the court nevertheless held that Daiwa was liable in negligence as it breached its duty to protect its customers and third parties against fraud under Quincecare.

Daiwa appealed the decision on five grounds.  The central argument advanced by Daiwa was that, as a director, Mr Al Sanea’s fraudulent act was attributable to the company, and therefore a defence of illegality is available to allow the bank to defeat a claim in negligence and breach of contract brought by its customer.

The court dismissed the appeal.  It was held that Mr Al Sanea’s fraudulent knowledge should not be attributed to Singularis so as to avoid the bank’s duty and bar the liquidators’ Quincecare claim on grounds of illegality.  The judge commented that for a bank to be put on notice of a potentially fraudulent transaction, a high threshold has to be met.  The law should guard against the facilitation of fraud and exact a reasonable standard of care to combat this.  In this case, “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 court therefore affirmed the High Court’s decision and expressed the opinion that the High Court judge made no error of principle.

Conclusion

Whilst the judge commented that the case was very unusual, and the circumstances are unlikely to arise often, this decision will no doubt raise concerns for banks as to their potential liability for fraud perpetuated by their customers.

Tom Bolam, Senior Associate, Fladgate LLP (tbolam@fladgate.com)

Wing Tang, Trainee Solicitor, Fladgate LLP (w-ytang@fladgate.com)

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