Jeddah Waterfront , Saudi Arabia

Singularis Holdings v Daiwa Capital Markets

Posted on 15/04/2020 · Posted in Expert Witness, Financial Litigation, Fraud

This case is notable for two reasons: it is the first time the Supreme Court has upheld a claim for breach of the so-called Quincecare duty of care, and it has also provided some welcome clarification on the test for when the actions of a director/shareholder can be attributed to the company. The Quincecare duty is named after a case in 1992 involving Barclays bank. It was held that there is an implied contractual term between financial institutions and their customers that the institution will not carry out a customer’s order if it knows (or is put on inquiry) that the instruction may have been given fraudulently.

Singularis was a company based in the Cayman Islands. It was set up to manage the personal assets of a Saudi Arabian businessman, Maan Al Sanea, who was a director, chairman, treasurer, president and signatory on the company’s bank accounts. He was the sole shareholder. There were six other directors of Singularis but they did not exercise any influence over the management or make any decisions relating to the running of the company.

Neither a borrower nor a lender be.”
William Shakespeare

The company had an account with the defendant, a subsidiary of a Japanese investment bank, who provided loan-financing services. At the time in question they held some US$204m on behalf of Singularis which was the sale proceeds of various shareholdings. In June and July 2009, Mr. Al Sanea instructed the bank to make eight substantial payments effectively drawing down all the funds in the account. The payments were all made to other companies owned and controlled by Mr.Al Sanea ( referred to in court as ‘the Saad group ’) and were made with little attempt by the bank to ask for any explanation. This was despite the fact that the bank’s head of compliance had sent an internal email warning of the Saad group’s fragile financial position: some accounts had been frozen and there were ‘well publicized problems’. He said ‘I re-emphasise the need for care and caution in terms of any activity on their accounts with us…..’.

In September 2009 Singularis was put into liquidation by Mr Al Sanea after a compulsory winding up order was made by the Grand Court of the Cayman Islands.

The liquidators brought claims against Diawa for the full amounts of the payments made running up to the liquidation on the grounds that:

  1. they dishonestly assisted Mr. Al Sanea in breaching his fiduciary duty in misapplying the company’s funds; and
  2. their Quincecare duty of care towards the company had been breached in that they executed Mr. Al Sanea’s payment instructions without reasonable inquiry or caution.

At first instance the case came before Mrs. Justice Rose who handed down a lengthy judgement in favour of the liquidators. She stated that ‘Any reasonable banker would have realised that there were many obvious signs that Mr. Al Sanea was perpetrating a fraud on the company’. His assets had been frozen by the Saudi authorities, there had been adverse press reports about the withdrawal of credit facilities, and there were substantial creditors. Furthermore, the circumstances surrounding the actual transactions were suspicious: US$80m was paid into the account just after the other accounts in the group had been frozen and there was the sudden appearance of previously unknown contracts and dodgy paperwork to justify payments out of the account. It should have been obvious that Mr. Al Sanea was using the unfrozen Singularis account to bypass restrictions on the other frozen accounts. The fact that the payments were fraudulent was not contested. The Judge deducted 25% from the successful claim by the liquidators on the basis of contributory negligence by Singularis in allowing Mr. Al Sadea to act without restraint.

The Court of Appeal unanimously dismissed Daiwa’s appeal and upheld the negligence claim. Daiwa then appealed to the Supreme Court arguing that the fraud should be attributed to Singularis as Mr. Al Sanea was its controlling mind and the company’s loss was therefore caused by itself. The Supreme Court upheld the decisions of the lower courts and held that a financial institution owes a Quincecare duty to its customer even in circumstances where the instructions which led to the loss were given by someone as closely connected to the company as Mr. Al Sanea. Daiwa had failed to exercise that duty of care towards Singularis. The Judges said “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”. He was clearly using the funds for his own purposes and not for the purpose of benefiting Singularis (para 192). First, Daiwa was well aware of the dire financial straits in which Mr Al Sanea and the Saad group found themselves at the end of May and in early June 2009 (paras 193-196). Second, it was aware that Singularis might have other substantial creditors with an interest in the money (para 197). Third, there was plenty of evidence to put Daiwa on notice that there was something seriously wrong with the way that Mr Al Sanea was operating the Singularis account (para 199). Fourth, it was alive to the possibility that the agreement with the hospital was a front or a cover rather than a genuine obligation (para 200). Fifth, there was a striking contrast between the way in which some payment requests were processed and how the disputed payments were handled (para 201). In short “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” (para 202).” Singularis was a distinct legal entity separate to its directors and shareholders and cannot take responsibility for the actions of human beings unless completely in line with its constitution and articles. It is regarded that the key point related to the fact that the instructions would not have been fraudulent had Singularis not been in financial difficulties, a fact of which Daiwa was unaware. Crucially, the Courts just said that Daiwa should have suspected that Singularis was in financial difficulties and that, if it had, it would have been alert to the potential fraud. It lost the case because it did not suspect where the Courts considered it should have done.

This is the first case where a bank has been found liable for breaching its Quincecare duty of care to its customer. The duty also applies to other entities which may hold assets on behalf of customers and follow payment instructions.

Link to High Court Judgement: Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2017] EWHC 257 (Ch) (16 February 2017)

Link to Court of Appeal Judgement: Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2018] EWCA Civ 84 (01 February 2018)

Link to Supreme Court Judgement: Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd (Rev 1) [2019] UKSC 50 (30 October 2019)

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