Duty of care owed by bank to customer to prevent fraudulent transactions

08 Mar 2017

The High Court has held that a bank owed a duty of care to its customer when on notice that an agent acting for the customer was misusing his authority.  In the case of Singularis Holdings Limited (in Official Liquidation) v Daiwa Capital Markets Europe Limited [2017] EWHC 257 (Ch), a bank was liable in negligence to its customer since it was on notice that its customer was at risk of being defrauded by its director but failed to stop payments made for the purpose of misappropriating funds of the company.

The Facts

Singularis Holdings Limited ("Singularis") was part of the Saad Group owned by Maan Al Sanea, a wealthy Saudi businessman.  Until June 2009, Daiwa Capital Markets Europe Limited ("Daiwa"), a London based subsidiary of a Japanese investment bank, was holding over $200 million of Singularis' funds.  During May 2009, increasing evidence emerged that Singularis was close to insolvency.  Employees at Daiwa became aware on 31 May 2009 that Mr Al Sanea's assets had been frozen by the Saudi Arabian authorities and that the Saad Group had requested that its lenders restructure their loans. 

However, between 2 June and 27 July 2009, Mr Al Sanea made a number of requests to pay a total of $204 million to third parties connected with the Saad Group.  Although senior management at Daiwa recognised that there needed to be legitimate reasons for Singularis to be making payments, employees at the bank made the payments without checking whether the recipients were genuine creditors of Singularis.  The sums paid out were lost to Singularis, which subsequently went into voluntary liquidation.  The liquidators commenced proceedings against Daiwa for recovery of the amounts paid out.

Held

The court accepted that Mr Al Sanea acted in breach of his fiduciary duty to Singularis by instructing Daiwa to make the payments to the third parties.  Since the company was either insolvent or close to insolvency, Mr Al Sanea was bound to take into account the interests of creditors as well as his own interests as the sole shareholder. 

The court rejected the claim that employees at Daiwa had dishonestly assisted Mr Al Sanea to defraud Singularis of the money.  Although they assisted him, there was no evidence that they did so dishonestly.  However, the court agreed that Daiwa was liable in negligence since it was in breach of the duty owed by a bank to its customers as set out in Barclays Bank Plc v Quincecare Limited and Another [1992] 4 All ER 363.  The court rejected the argument that since Mr Al Sanea was the sole director of the company, his fraud should be attributed to the company.  The Judge concluded that such an attribution would deprive the Quincecare duty of any value.  She further concluded that 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 money be paid to other parts of his business operation.  He was clearly using the funds for his own purposes and not for the purposes of Singularis. 

The senior management at Daiwa was well aware of the dire financial straits that Mr Al Sanea and the Saad Group found themselves in at the end of May and early June 2009.  Daiwa was also aware that Singularis may have had other substantial creditors with an interest in the money held in Daiwa’s account.  Although the Quincecare duty did not require a bank to become paranoid about the honesty of those it did business with in normal circumstances, it did require a bank to do something more than accept at face value strange documents or implausible explanations provided by a company facing serious financial difficulty.  Although Daiwa’s senior executives recognised that great care and extreme caution should be exercised in handling Singularis' account, in fact, no care or caution was taken in the handling of the account itself.  In making the disputed payments without proper or any enquiry, Daiwa was negligent and was liable to repay the money to Singularis.

Comment

Although the general legal position is that banks are not liable to compensate customers who have been the victim of a fraud where the customers have authorised the payment, this case is a reminder that a bank may still be liable where the payment has been authorised fraudulently by an agent of the company, such as a director.  In circumstances where there are clear signs that the customer is at risk of being defrauded, the bank is on notice to act with due care and attention to payment requests.  If the bank fails to take such care, it may be liable in negligence to the customer to repay the money fraudulently paid out. 

In effect, this duty can be seen as an extension of the principle that banks are generally liable to customers where the payment has not been authorised by the customer (unless the customer has acted with gross negligence).  To date, the courts have recognised the difficulties posed for banks of recognising when a customer may be at risk of being defrauded because of the vast number and speed of modern banking transactions and have therefore set a high threshold for this duty of care to arise.  However, we expect this area of law to be further tested in the courts, given the rapidly growing number and variety of financial frauds.  

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