In the recent decision of Singularis Holdings Limited (in liq) v Daiwa Capital Markets Europe Ltd,1 the Supreme Court affirmed a bank’s liability to a corporate customer for the misappropriation of funds by one of the customer’s directors for the first time. In order to contextualise the case this article will first examine the origin of this duty of care. Then, it will explain the reasoning adopted by the Court, before finally offering some views on the impact of this decision on the banking industry generally. It concludes that although it is the first decision to impose liability on a bank for a breach of the Quincecare duty of care, it is unlikely to affect pre-existing robust banking practices to a great extent, nor to open the floodgates in practice.
The Quincecare duty of care
It is a fundamental principle of banking law that “the primary duty of a paying bank is to honour its customer’s instructions and make payments as instructed in accordance with its mandate”.2 This important principle ensures that there are no undue delays for customers accessing their bank funds.
However, such a blanket rule has its drawbacks. Under this rule, if a rogue director of a company dishonestly gives the bank instructions to transfer money out of the company’s account, then the bank must do so, even if it would cause the company significant harm. To protect the interests of bank customers and third parties, the courts have developed an additional principle to safeguard against this form of fraud which imposes a reasonable standard of care on banks.3 This principle—known as the Quincecare duty of care—arose out of a case involving a bank which had lent money to a corporate borrower. The funds were paid into the corporate borrower’s account, but the chairman of the company subsequently requested the bank to transfer a large portion of the borrowed funds to the account of a firm of solicitors that had acted for him on a previous occasion. However, those solicitors were not acting for the company at the time, but rather, were assisting the chairman to transfer all the funds away to the United States. The bank then sued the guarantor of the loan for repayment of the loan.
In the course of determining whether the guarantor had any defences against the bank’s claim, Lord Steyn set out the following principle in relation to whether the bank in fact owed a duty of care to the corporate borrower not to pay out the money on the chairman’s instructions:4
“A banker must refrain from executing an order if and for as long as the banker is ‘put on inquiry’ in the sense that he has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company … And, the external standard of the likely perception of an ordinary prudent banker is the governing one.”
On the facts of the case, the defence failed on the basis that the bank’s conduct did not meet the threshold.
The Quincecare principle appears to strike a reasonable balance between allowing the bank to process genuine transactions efficiently, and imposing some limit on the bank’s ability to do so where something is amiss. A bank is entitled to start from the assumption that a transaction is genuine and valid and that its customer is honest, and would only need to question a transaction when there is reason to do so. Examples of such circumstances include where ‘any reasonable cashier would hesitate to pay a cheque at once and refer it to his or her superior, and when any reasonable superior would hesitate to authorise payment without inquiry’;5 or where there is a ‘serious or real possibility albeit not amounting to a probability that its customer might be defrauded’.6
However, until recently, no case against a bank for breach of its Quincecare duty of care has succeeded. For example, in Lipkin Gorman, the bank manager knew that the partner of a law firm had a gambling problem, but still allowed that partner to empty the firm’s bank account using cheques that were only signed by that partner. Even in those circumstances, the Court ruled that imposing liability would impose a “wholly unrealistic duty” on banks to continually monitor for signs that a corporate customer’s signatory might be abusing his signing powers.7 Accordingly, it is clear that the realities of the sheer volume of banking transactions weigh so strongly on a Court’s mind that it would only be in truly exceptional circumstances that the Court would impose liability. This gives banks a certain level of comfort that the duty of care does not require constant monitoring of all of its customers’ accounts for potentially fraudulent activity.
Background to Singularis
It is in this context that the recent Supreme Court case of Singularis is of interest, being the first case to impose liability for a breach of the bank’s Quincecare duty of care.
Singularis Holdings Limited was a company set up to manage the personal assets of Mr Al Sanea. Mr Al Sanea was Singularis’s sole shareholder, as well as a director and chairman. In this role, Mr Al Sanea had signing powers over the company’s bank accounts. Singularis entered into an arrangement with an investment bank called Daiwa Capital Markets Europe Limited. As a result of this arrangement, Daiwa eventually held a cash surplus in the account of Singularis of US$204 million. In the meantime, the bank became aware that Mr Al Sanea was in dire financial straits, with his assets having been frozen by the Saudi authorities. Within approximately a month, Mr Al Sanea gave instructions on behalf of Singularis to make eight payments totalling US$204 million to Saad Specialist Hospital Company and Saad Air, even though there was no proper basis for any of those transactions. Daiwa duly honoured those instructions without further investigation, and paid out all the money from Singularis’s account – effectively allowing Mr Al Sanea to misappropriate those funds.
Mr Al Sanea then put the company into voluntary liquidation. In order to recover funds to be distributed to creditors in Singularis’s liquidation, the liquidators brought a claim against Daiwa for recovery of the amounts of the payments, based on Daiwa’s breach of the Quincecare duty of care owed to Singularis by giving effect to Mr Al Sanea’s payment instructions.
The High Court ruled that in the circumstances, there was a clear breach of the Quincecare duty of care. In doing so, it took into account the following factors:
(a) Mr Al Sanea was using the funds for his own purposes and not for the purposes of benefiting Singularis;8
(b) The bank was aware of Mr Al Sanea’s and Singularis’s dire financial straits;9
(c) The bank was aware that Singularis might have other substantial creditors with an interest in the money;10
(d) The bank was put on notice that there were significant issues with the way that Mr Al Sanea was operating the Singularis account;11
(e) The bank was aware of the possibility that there was a front or a cover rather than a genuine obligation in relation to some transactions;12 and
(f) There was a striking contrast between the processing of different payments, with the impugned payments often being simply signed off without consultation or discussion with anyone.13
Based on the above factors, the Court concluded that there was a breach because:
“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.” 14
Daiwa appealed the decision to the Court of Appeal, and then to the Supreme Court. Daiwa accepted the finding that on its face, there had been a breach of the Quincecare duty of care. However, it relevantly argued that it had a defence to the claim—namely that Mr Al Sanea was Singularis’s directing mind and will, and that therefore, his fraud can be attributed to Singularis. Daiwa’s argument was that if Singularis was implicated in the fraud, then the claim against Daiwa is defeated by illegality, lack of causation, or because of an equal or opposite claim for the company’s deceit against Daiwa.15
Supreme Court’s ruling
The Supreme Court traversed a number of previous authorities regarding attribution of a fraudulent director’s knowledge to a company. These included:
(a) Meridian Global Funds Management Asia Ltd v Securities Commission, where the House of Lords identified three levels of attribution: firstly, the express rules of attribution in the company’s constitution; secondly, the rules of agency and vicarious liability; and finally, if neither of these apply, based on the construction of the particular rule in relation to which attribution is required;16
(b) Stone & Rolls Ltd v Moore Stephens, where the Court ruled that the fraudulent activities of the beneficial owner and directing mind and will of the company were to be attributed to the company;17
(c) Bilta (UK) Ltd v Nazir (No 2), which limited Stone & Rolls to its facts, and has been interpreted as meaning that the dishonesty of the controlling mind in a one man company could be attributed to the company.18
Ultimately, the Supreme Court did not specifically decide which of these three cases governed the situation here. Rather, it ruled that the guiding principle for attributing a director’s fraudulent knowledge to a company is always to be found in consideration of the context and the purpose for which the attribution is relevant.19 In this case, the context to be considered is the Quincecare duty of care. The purpose of this duty is to protect the company against the misappropriation of funds by a trusted agent of the company who is authorised to withdraw its money from the account – that is, the very sort of misappropriation that occurred here. If in these circumstances, the fraud of the trusted agent is attributed to the company, then in practice, the Quincecare duty would be rendered redundant. Stepping back, the Supreme Court also recognised the reality that “companies are different from individuals. They have their own legal existence and personality separate from that of any of the individuals who own or run them. The shareholders own the company. They do not own its assets and a sole shareholder can steal from his own company.”20 Accordingly, there is no reason in principle that a director’s intentions must always be attributed to the company, and this determination is highly dependent on context.
Because of its conclusion on attribution, the Supreme Court did not consider further arguments regarding illegality, causation or deceit.
What is the impact of this decision on banks?
Since the Quincecare duty of care has existed for some 25 years without any successful cases ever having been brought against a bank, some may have considered it to be a theoretical duty since the threshold for breach is so high that it would never have any practical application. Thus, some consternation may be caused by the Supreme Court’s findings that not only could the Quincecare duty found liability against a bank, but also that a fraudulent director’s state of mind could not be attributed to the company for the purposes of this duty. There may be the view that if the courts will now impose such liability, it could cause further cases to be brought and open the floodgates. Indeed, banks may understandably query whether it is just to impose liability on the bank for the acts of a fraudulent director, given that it is the failure of the company’s corporate governance processes that has created the situation in the first place. Should the company not pay for its own failures, or seek recovery from the fraudulent director instead?
However, the result reached in the case can be justified. First, on the point of attribution, there is some artificiality in saying that the director’s fraudulent intentions should be attributed to the company when it is the company that is being defrauded. The Supreme Court’s decision simply acknowledges the reality that the intent of fraudulent directors who act outside the scope of their duties no longer act as the company.
Further, from a policy perspective, as this case illustrates, often companies are unable to protect their own assets against the managing director who has control over all of its affairs—indeed, that is the very nature of one-person companies. In such circumstances, the banks who have close dealings with such a director are perhaps in the best position to assess any suspicious circumstances giving rise to a transaction, and to prevent them from occurring, rather than accepting the signatory’s suspicious actions at face value. Given that this duty and its protective purpose have now become settled law, it follows that it would be antithetical to this purpose to allow the bank to plead the defence that the rogue director’s fraud should be attributed to the company.
In any event, it would be too simplistic to conclude that it is the company that would suffer the ultimate harm from the fraud if the bank is not liable. In the case of one-person companies, it is often to one director’s advantage to transfer all the funds out of the company, leaving the company as an empty shell. The company, being an empty shell, has nothing to lose—the parties that lose out are any existing creditors that would otherwise have been paid out in a liquidation. Indeed, in this case, it was Singularis’s liquidation that led to the claim being brought against the bank. In circumstances of liquidation, it is often the case that either the director can no longer be located, or even if located, he or she no longer has any assets worth pursuing. When the situation effectively becomes a choice of balancing the interests of a bank that had some power to prevent such loss, and the interests of creditors who had no power to do so, it is not surprising that the balance might be struck against the bank.
Furthermore, although liability was imposed in this case, it must be remembered that generally, the courts continue to require exceptional circumstances before imposing such liability. The Quincecare duty is not so exacting that it requires banks to scrutinise every transaction to look for suspicious activity, but rather it only arises where the situation has become so obvious to the bank in its day-to-day transactions that any reasonable bank would make further inquiries. In practice, this is not very different from other existing duties that banks are required to comply with, such as reporting suspicious activity under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. It simply requires banks to have in place procedures that would allow a rogue signatory’s fraud to be treated as suspicious activity and inquired into further procedures that one would expect to already be in place.
Accordingly, although Singularis is the first decision ever to impose liability for a breach of the Quincecare duty of care, it is the author’s opinion that it is a sound decision that merely affirms that banks must take care when honouring its customer’s mandate in situations that raise suspicions as to the signatory’s true authority. It is unlikely in practice to affect pre-existing robust banking practices to a great extent, nor to open the floodgates.
 Singularis Holdings Ltd (in liq) v Daiwa Capital Markets Europe Ltd  UKSC 50 (Singularis SC).
 John Odgers QC (ed), Paget’s Law of Banking (15th edn, LexisNexis 2018) [23.1].
 Barclays Bank plc v Quincecare Ltd  4 All ER 363, 376.
 ibid 376.
 Lipkin Gorman v Karpnale Ltd  1 WLR 1340 (CA), 1356 (May LJ). Lipkin Gorman was overturned on appeal, but not on the points relating to a banker’s duty of care.
 ibid 1378 (Parker LJ).
 ibid 1381.
 Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd  EWHC 257 at .
 ibid –.
 ibid .
 ibid .
 ibid .
 ibid .
 ibid .
 Singularis (SC) (n 1) .
 Meridian Global Funds Management Asia Ltd v Securities Commission  2 AC 500 (HL).
 Stone & Rolls Ltd v Moore Stephens  UKHL 39;  1 AC 391.
 Bilta (UK) Ltd v Nazir (No 2)  UKSC 23,  AC 1, as discussed in Singularis (SC) at .
 Singularis (SC) (n 1) .
 Singularis (SC) (n 1) .