The Quincecare duty bowls out HSBC
The High Court has held that banks may be liable for breaches of the Quincecare duty even where the customer's net assets have not been reduced by the breach; Stanford International Bank Ltd v HSBC Bank Plc(1)Facts
Stanford International Bank Ltd (SIB) was an Antiguan bank run and beneficially owned by Mr Robert Allen Stanford, which went into liquidation following a fraud and attracted wide publicity at the time. SIB sold certificates of deposits to investors promising generous rates of interest. The view of SIB's joint liquidators is that the entire bank was a Ponzi scheme, which survived by securing new investors and using their money to pay out the old investors who wished to redeem their investments. Mr Stanford was convicted of fraud in the United States in 2012 and sentenced to 111 years' imprisonment. SIB is estimated to be insolvent to the tune of £5bn with over 80% of the monies contributed by investors misappropriated.
HSBC Bank PLC was a correspondent bank for SIB from 2003 onwards and operated four accounts in various currencies: sterling, dollar, euro and Swiss franc. Between August 2008 and February 2009, HSBC paid out £118m from the accounts. Save for one payment of £3m, which was made to the England and Wales Cricket Board, all payments were made to investors. It is not known whether SIB was under an obligation to make the payment to this cricket board.
SIB's claim and HSBC's application
SIB, through its liquidators, alleges that HSBC owed a duty to it to take sufficient care that monies paid from accounts under its control were properly paid out (the Quincecare duty(2)). SIB alleges that HSBC had a duty to freeze payments out of its accounts when it realised that something was not right. The date that the accounts should have been frozen, according to SIB, was 1 August 2008. The accounts were in fact not frozen until February 2009, when Mr Stanford was charged by the US authorities. SIB claimed that if the accounts had been frozen on 1 August 2008, there would have been an additional £118m available to creditors.
HSBC's position is that a claim for breach of the Quincecare duty is a common law claim for breach of an implied contractual duty (effectively a duty of care), or a tortious duty of care, meaning that the appropriate remedy would be damages. It is trite law (with some exceptions) that a claim for damages has to give credit against the loss suffered for any benefits that have been obtained by virtue of the wrong that is claimed. In this case, HSBC argued that whenever a payment was made by SIB, the reduction in assets (i.e. the payment to investors) equally reduced SIB's liabilities to its investors. On this argument, even if HSBC had breached any duty of care, SIB had suffered no loss as a result.
It was on this basis that HSBC made an application for strike out or summary judgment against SIB, arguing that on a net asset basis, SIB was in an equal position and had not suffered any loss.
Mr Justice Nugee dismissed HSBC's application for strike out or summary judgment.
In determining the existence of loss, the judge distinguished between solvent and insolvent companies. He gave the example of a solvent person (or a solvent corporate entity). If £100 of that person's money is taken and used to discharge a debt owed by that person, the person would be no worse off overall. They may not have the money which they had previously, but they would not have the liability which they had previously either, and their net asset position would be the same.
However, the judge held that the position would be different in the case of an insolvent individual or company, such as SIB. Taking the above example again, an insolvent company paying £100 on the one hand reduces its assets, but that does not have a neutral effect on its net asset position because it has no net assets. Only its net liabilities are reduced.
SIB alleged that HSBC should have frozen its accounts on 1 August 2008, which is when, according to SIB, HSBC should have known that SIB could not repay its certificates. As at 1 August 2008, SIB had £80m available to it in its accounts. The judge queried whether the true value of the claim should therefore be £80m (being the amount in the accounts when the balloon should have gone up) rather than £118m but said that as it had not been argued before him, it was not for him to decide. In any event, the judge acknowledged that SIB potentially would have had £80m less liabilities if the accounts were frozen on 1 August 2008 but was not willing to accept HSBC's argument that any payments out after that point did not constitute a loss.
In examining the nature of the Quincecare duty, the judge noted that the duty is owed to the company and not to the creditors. He held that the correct question was whether the company was worse off by having £118m (or £80m) of its assets wrongfully extracted from its bank accounts. The judge concluded that it was. No credit was to be given for the fact that SIB was able to reduce some of its liabilities, as it was still insolvent in any event.
If SIB had the £118m or £80m, it would have had money available for liquidators to pursue such claims as they thought they could usefully pursue for distribution to creditors. In the judge's view, this was a real loss. To say otherwise, was "contrary to one's instinctive and common-sense reaction to the facts".(3)
For the reasons given above, the judge dismissed the application for summary judgement or strike out of the Quincecare loss claim for the balance over and above the payment to the England and Wales Cricket Board.
The Quincecare duty has gained increasing profile in recent years, including as the subject of a Supreme Court judgment in 2019.(4) This judgment provides a useful review of the application of the duty and introduces the interesting suggestion that damages may be assessed differently where an individual or company is "hopelessly and irredeemably insolvent". This may give liquidators an additional avenue to pursue lost monies beyond the realm of Quincecare claims.
The judge noted that while this was only an application for strike out or summary judgment and that HSBC may choose to pursue the same arguments at trial, he hoped the views expressed would be of assistance. Expect further judgments to come on the scope and application of the Quincecare duty.
(1)  EWHC 2232 (Ch)
(2) Barclays Bank Plc v Quincecare Ltd  4 AER 363
(3) Barclays Bank Plc v Quincecare Ltd  4 AER 363, para 41
(4) Singularis Holdings Ltd (In Official Liquidation) v Daiwa Capital Markets Europe Ltd  UKSC 50