No loss in Quincecare duty case where wrongful payment discharges insolvent company's debt: the Supreme Court's decision in Stanford International Bank v HSBC

HSBC Bank plc (HSBC) had provided banking services for Stanford International Bank Ltd (SIB).  It transpired that SIB was a Ponzi scheme, which collapsed in 2009 owing estimated billions of US dollars.  SIB's liquidators brought a claim against HSBC, alleging (insofar as is relevant to the Supreme Court's decision) that, prior to the discovery of the scheme, in making payments from SIB's account to SIB's own customers, HSBC had been in breach of the Quincecare duty.  Under the Quincecare duty a bank must refuse to comply with a payment instruction given by a person mandated by its customer to give such an instruction when the bank is on notice that the instruction may be part of a fraud on the customer.  The claim concerned the approximately £116m paid out to those customers of SIB that happened to withdraw their funds before the Ponzi scheme unravelled (the "early customers").  HSBC applied to have this claim struck out and, although unsuccessful in the High Court, was successful in the Court of Appeal.

The Supreme Court affirmed the Court of Appeal's judgment.  The decision did not determine whether the Quincecare duty could extend to these circumstances and made no findings on whether the duty had been breached.  Instead, the focus was solely on whether, even if HSBC did owe a relevant duty of care and was in breach, that breach had caused any recoverable loss to SIB.  

The Quincecare duty claim is a common law claim for breach of a contractual or tortious duty, and damages can therefore only be awarded to compensate for loss.  In the High Court, Nugee J observed that if someone takes £100 from a solvent person and uses it to discharge a debt owed by that person, then the person is overall no worse off.  However, he considered the position may be different in the case of an insolvent person or company.  If the money had not been paid out by HSBC to the early customers, SIB would have had £80 million more in cash.  SIB would have had that money available for the liquidators to pursue claims and for distribution to its creditors, and the loss of that opportunity was, in Nugee J's view, a real loss.

The Court of Appeal allowed HSBC's appeal, on the basis that the Quincecare duty is owed by the bank to its customer the company and not to the company's creditors.  Having more cash available on insolvency was a benefit to creditors, it held, but not to the company.

In the Supreme Court, SIB argued its loss was the loss of the chance to discharge the debts of the early customers for a few pence in the pound; that is, the difference between the payment to the early customers of 100 pence in the pound, and the dividend those early customers would have received if they had to prove in the liquidation.

Lady Rose, writing for the majority, rejected this argument.  If HSBC had complied with its Quincecare duty and disobeyed Mr Stanford's instruction to pay out SIB's money, the counterfactual was that SIB would have an extra £116m to its credit, and would not have discharged any of the payments due to the early customers.  The class of creditors entitled to prove in the liquidation would therefore be swelled, and there would be no distinction between "early" and "late" customers.  Lady Rose held that the "chance" of being able to discharge a debt owed to an early customer by paying them, for example, 12 pence instead of the 100 they were in fact paid, was matched by the "risk" of having to pay the late customers 12 pence instead of five.  The chance therefore must be quantified as the same as the risk. 

Lord Leggatt, writing separately, concurred with the outcome, and similarly found that SIB's argument was flawed because it disregarded the net loss rule: the basic rule that in awarding damages for breach of contract or in tort, losses and gains arising from the breach must be netted off against each other.  Lord Leggatt considered also whether the recent BTI v Sequana case, in which the Supreme Court affirmed that directors of an insolvent company owe a fiduciary duty to have regard to the interests of its creditors, could impact the analysis.  He held it could not, because it "would be contrary to first principles to posit that, at some (imprecise) point on a path that leads to a company going into insolvent liquidation, the nature of its legal personality changes, such that, from then on, any disposition of the company’s assets is treated as a loss to the company even if it discharges a liability and so leaves the company’s net asset position unchanged".  He emphasised the need for clear rules and legal certainty in the insolvency context.

Lord Sales dissented, citing Lord Reed in Sequana, that where on a true view of SIB's affairs insolvent liquidation was unavoidable, "the interests of the shareholders drop out of the picture, and the company's interests can be treated as equivalent to those of the creditors alone".  At the time of the payment to the early customers, Lord Sales considered that SIB's interest was fully aligned with that of the general body of creditors.  The payments meant SIB lost assets that in its own interest it would have chosen and been obliged to spend by way of distribution to its general body of creditors.

Lord Sales thought that the majority's net loss analysis had left out two critical factors.  First, SIB paid the early customers more to discharge their debts than they were truly worth at the time, thereby depleting its assets without full value in return and reducing what it could spend in ways it would have chosen had it appreciated its "true responsibilities".  Second, "corporate personality is not a pure abstraction, but has substantive content by reference to the interests which it exists to represent, serve and protect".  Lord Sales considered those interests at the time of the relevant payments to be those of the general class of creditors, given SIB's insolvency.

This decision provides some important guidance on how loss can be assessed in a Quincecare duty claim, given that these claims will often involve insolvent companies.   While confined to the issue of loss, this guidance will be helpful as we continue to see more Quincecare duty claims before the courts.  The Court's decision can be found here: Stanford International Bank Ltd v HSBC Bank PLC [2022] UKSC 34 (21 December 2022) (bailii.org).