Daiwa transferred about US$204.5 million on the fraudulent instructions of a director authorised to act for Singularis. The trial judge found that obvious warning signs should have led Daiwa to make inquiries before paying. The Supreme Court considered whether the director’s fraud could be attributed to Singularis so as to defeat the company’s negligence claim.
The payments
Singularis was a Cayman Islands company formed to manage the personal assets of Maan Al Sanea. He was its sole shareholder, a director, and its chairman, president and treasurer. Six other reputable directors exercised no influence, while extensive powers, including authority over the company’s accounts, were delegated to him. The company had carried on a substantial legitimate business.
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Daiwa, a London investment bank and broker, entered a stock financing arrangement with Singularis in 2007. By June 2009 the shares had been sold and the loan repaid. Together with a US$80 million deposit, approximately US$204 million stood to Singularis’ account. Between 12 June and 27 July 2009, Daiwa made eight payments totalling approximately US$204.5 million on instructions approved by Mr Al Sanea: five to the Saad Specialist Hospital Company and three to or for Saad Air companies. Rose J found that each payment was a misappropriation, and there was no appeal against that finding. Mr Al Sanea placed Singularis in voluntary liquidation on 20 August 2009, and the Cayman court made a compulsory winding-up order on 18 September 2009.
The proceedings below
In 2014 the liquidators claimed the payments, less recoveries, for dishonest assistance in Mr Al Sanea’s breach of fiduciary duty and for breach of the Quincecare duty. As explained in Barclays Bank plc v Quincecare Ltd, that duty requires a bank to use reasonable care in executing a customer’s orders and to refrain from executing an order while it has reasonable grounds for believing that the order is an attempt to misappropriate funds.
Rose J dismissed dishonest assistance because Daiwa’s employees had acted honestly. She upheld the negligence claim, deducting 25% under the Law Reform (Contributory Negligence) Act 1945 for the fault of Mr Al Sanea and the inactive directors. The Court of Appeal dismissed Daiwa’s appeal. Daiwa then appealed on attribution and its consequences: if the fraud were the company’s, was the claim defeated by illegality, lack of causation, or an equal claim in deceit?
A clear breach of duty
The unappealed findings were that the hospital agreement was a sham and that none of the payments had a proper basis. Mr Al Sanea could not ratify them as sole shareholder. He knew that Singularis was on the verge of insolvency, and his duty as director was to its creditors rather than to other Saad group companies.
Rose J also found a clear Quincecare breach. Any reasonable banker would have seen many obvious signs that Mr Al Sanea was using the funds for his own purposes. Daiwa knew of his and the Saad group’s financial distress, of possible competing creditors, of serious problems in the operation of the account, and of the risk that the hospital agreement was a cover. Requests were handled inconsistently. Although the need for close monitoring was recognised, nobody monitored the account or checked that anyone else was doing so. Lady Hale, with whom Lord Reed, Lord Lloyd-Jones, Lord Sales and Lord Thomas agreed, described that breach as incontrovertible.
The suggested defences
Even assuming attribution, Lady Hale considered none of Daiwa’s defences promising. On illegality, the courts below had applied Patel v Mirza and asked whether denying the claim would harm the integrity of the legal system. The prohibitions relied on—breach of fiduciary duty and, for some payments, knowingly false documents—protect a company from misappropriation by its officers as well as protecting a bank from deceit. Refusing recovery would not enhance those purposes. The bank’s protection already lies in a carefully balanced duty that creates liability only in exceptional circumstances. Denial would also weaken the role expected of banks in uncovering financial crime and would be disproportionate, particularly because contributory negligence permits a more precise adjustment. Lady Hale agreed. She recorded, without deciding, a reservation about the Court of Appeal’s view that an appellate court should disturb an illegality conclusion only where the judge erred in the legal factors considered.
The causation argument also failed. The Quincecare duty is a duty to protect the customer from harm caused by people for whom the customer is responsible. Without Daiwa’s breach, the money would have remained available to the liquidators and creditors. The fraudulent instruction gave rise to the duty, and the breach caused the loss. Daiwa’s proposed counterclaim in deceit was a variant of the same point. As Rose J held by reference to the Barings decisions, Daiwa’s duty was to guard against being misled by precisely such instructions. Its breach, not Mr Al Sanea’s misrepresentations, caused its exposure. The Court of Appeal added that a bank should not escape a duty for which the fraud was a precondition by relying on that fraud.
Why the fraud was not attributed
Daiwa argued that Singularis was effectively a one-man company, so the fraud of its controlling mind was its own fraud. Lady Hale started from Salomon v A Salomon and Co Ltd: a company has a legal personality separate from its shareholders and directors, and calling it a one-man company does not resolve attribution. As Lord Hoffmann explained in Meridian Global Funds Management Asia Ltd v Securities Commission, attribution may come from the constitution, from ordinary agency and vicarious liability, or, for a particular legal rule, from the context and purpose of that rule.
Stone & Rolls Ltd v Moore Stephens, where auditors defeated a claim by attributing a sole controller’s fraud to the company, does not create a general rule. In Bilta (UK) Ltd v Nazir (No 2), the Court held that where a company is the victim of wrongdoing by its directors, that wrongdoing cannot be attributed to the company as a defence to the liquidator’s claim. The answer always depends on context and purpose. Observations in Bilta had wrongly been treated as deciding that dishonesty by the controlling mind of a one-man company is invariably attributed to it. There is no such principle.
Rose J had in any event found that Singularis was not a one-man company in the relevant sense. It had a reputable board and a substantial business, and the other directors were not shown to have been involved in or aware of the misappropriation. More importantly, the purpose of the Quincecare duty is to protect the company from misappropriation by the trusted agent authorised to withdraw its money. Attributing that agent’s fraud to the company would remove the duty’s value in the cases where it is most needed. Daiwa’s comparison with negligent auditors failed because their reporting duty is different and may cause no loss where the company already knows the truth. Nor is a company to be treated as though it were an individual: shareholders own the company, not its assets, and a sole shareholder can steal from it.
Verdict: The Court unanimously dismissed Daiwa’s appeal. The director’s fraud did not bar the company’s claim for breach of duty. The trial judge’s order stood, including the 25% reduction for contributory negligence. The separate dishonest-assistance claim had failed.
