The recent case of Stanford International Bank Ltd (In Liquidation) (Appellant) (SIB) v. HSBC Bank PLC (Respondent) (HSBC)¹ confirms that a bank only owes its customers a Quincecare duty (i.e. an implied term and a co-extensive duty of care owed by the bank to its customer to refrain from making or executing a payment when the bank is put on inquiry that a payment instruction from its customer may be a result of fraud) and such duty does not extend to creditors of its customers. This UK Supreme Court case considered the question of whether, under a Quincecare duty, the Liquidators of SIB could recover damages from HSBC for the loss of chance suffered in respect of payments made to the early subscribers of a Ponzi scheme, who successfully withdrew their funds in full and escaped without loss (earlier customers) despite SIB’s insolvency and to the detriment of subscribers who were subsequently unable to withdraw their funds and suffered loss (later customers).

Background

SIB was a company in liquidation, incorporated in Antigua and Barbuda. In 2003, the chairman of SIB, Robert Allen Stanford, began his Ponzi scheme whereby he used SIB as a vehicle to sell certificates of deposit to international customers offering a good rate of return. However, the interest paid in respect of the certificates was in fact paid out of capital invested by the later customers. In 2008, an increasing number of SIB’s customers requested withdrawals, which eventually caused the company to collapse in February 2009.

Questions considered by the court

Whether making payments to the earlier customers while insolvent constituted a loss of chance

The question considered by the Supreme Court was, even if HSBC did owe a Quincecare duty and was in breach of that duty, whether it had given rise to any recoverable loss on SIB’s pleaded case. SIB alleged that the damage it had suffered as a result of HSBC making payments totalling £116 million was the loss of a chance. The argument was that, at the time the disputed payments were made, SIB was hopelessly insolvent and it had since gone into liquidation. SIB argued that if HSBC had not made the payments, those debts would still be owed to the earlier customers. Those earlier customers would have to prove their debts in the liquidation and would be likely to receive a dividend of only a few pence in the pound. SIB’s loss was, therefore, the loss of the chance of discharging those debts for a few pence in the pound.

Having heard submissions from both sides, the court concentrated on the nature of the chance that SIB had lost. If HSBC had disobeyed Mr Stanford’s instruction to pay out SIB’s money, the counterfactual was SIB had an extra £116 million to its credit. On the other hand, it would not have, prior to going into liquidation, discharged any of the payments due to the earlier customers. In that situation, there was no longer any distinction between earlier and later customers - everyone became a later customer who tried to redeem their investment but were refused redemption because the scheme collapsed and the monies were frozen. There would then be only one pool comprising all customers who, at the moment of liquidation, were owed money and had not at that point received money to which they were entitled.

The court held that the “chance” of being able to discharge a debt owed to an earlier customer by paying them a few pence instead of what they were in fact paid was matched by the “risk” of having to pay the later customers more on dissolution. Counsel for SIB further argued that the chance lost was also for SIB to act more fairly as between customers by making sure that the earlier customers did, by happenstance, benefit by receiving their full investments at the expense of the later customers who only got a few pence. The court ruled that such a loss was clearly not a pecuniary loss of the type covered under the Quincecare duty suffered by SIB.

Whether payment made to offset an insolvent company's liability can constitute loss

In her obiter dictum, Lady Rose accepted that there may well be situations where a director was properly regarded as malfeasant and required to repay sums to the insolvent company even though those sums had been used to offset the existing liability of a company. For example, the case of Liquidator of West Mercia Safetywear Ltd v. Dodd (1988) 4 BCC 30 illustrated one such situation where the director as guarantor benefited personally from the purported repayment of the company’s debt. However, this related to a director’s duty rather than a Quincecare duty, which had no bearing on the present case. On directors’ duties in insolvency, see Directors’ duty to wind up insolvent companies published on 14 November 2022.

Commentary

Given that a Quincecare duty is a key risk area for financial institutions handling client payments, and financial institutions are potentially fertile ground for liquidators to claw back funds for the benefit of creditors, this UK Supreme Court decision is helpful in giving banks some comfort that payments from an insolvent company are unlikely to be recoverable by its liquidators from a bank under the Quincecare duty. It appears that, as long as the payment made was used to offset a company’s existing liability, there should prima facie be no loss suffered by the company, which is the only category of loss recoverable under a Quincecare duty. It will be interesting to see whether the courts in Hong Kong will apply the same analysis, if faced with similar factual scenarios in insolvency cases.

1. [2022] UKSC 34.

A litigation team trainee, Jacky Cheung, is one of the authors. His email is jacky.cheung@dentons.com.