By Herbert Smith Freehills LLP From Lexology

United Kingdom October 31 2019

The Supreme Court has upheld the first successful claim for breach of the so-called Quincecare duty of care, which requires a financial institution to refrain from executing a customer’s payment mandate if (and so long as) it is “put on inquiry” that the order is an attempt to misappropriate its customer’s funds: Singularis Holdings Ltd (In Official Liquidation) (A Company Incorporated in the Cayman Islands) v Daiwa Capital Markets Europe Ltd[2019] UKSC 50. The Supreme Court’s judgment in this case follows hot on the heels of the Court of Appeal’s refusal to strike out a separate claim for breach of a Quincecare duty (see our banking litigation blog post on that decision here).

In the present case, breach of the Quincecare duty was established at first instance and not appealed. The issue for the Supreme Court was whether the fraudulent state of mind of the authorised signatory could be attributed to the company which had been defrauded and, if so, whether the claim for breach of the Quincecare duty could be defeated by the defence of illegality (and certain other grounds of defence). The Supreme Court found against the bank in respect of both points.

The decision has important implications for financial institutions, as it demonstrates the challenges they are likely to face in seeking to establish an illegality defence in circumstances where the existence and breach of aQuincecare duty has been established. It therefore highlights the importance of having in place appropriate safeguards and procedures governing payment processing.

It is also of significance to corporate claimants – and insolvency office holders – in particular in clarifying the test for corporate attribution. The court declared that the often criticised decision in Stone & Rolls Ltd v Moore Stephens [2009] UKHL 39 (considered here and here) can “finally be laid to rest”. In particular, it confirmed that whether the knowledge of a fraudulent director can be attributed to the company is always to be found in consideration of the context and the purpose for which the attribution is relevant – even in the case of a “one-man company”.

SOURCE: https://www.lexology.com/library/detail.aspx?g=60e99bd1-9e9e-4771-bfce-2b7531d6e04a