Fri 04 Sep 2020

Ponzi Schemes, Fraud, Bank Disbursements and the "Quincecare Duty of Care"

Stanford International Bank Ltd (in liquidation) v HSBC Bank plc

The name Robert Allen Stanford will no doubt be familiar to many readers as being that of the gentleman currently serving 111 years in a US federal prison having been found guilty in 2012 of fraud through his running of a US$7 billion Ponzi scheme.  The fraud involved a company called Stanford International Bank Ltd ("SIB"), which was an investment bank incorporated in Antigua of which Mr Stanford was the ultimate beneficial owner.  SIB issued certificates of deposit to investors in return for cash subscriptions.  Funds paid to existing investors for the redemption of their certificates of deposit were derived from subscriptions received from new investors for new certificates of deposit issue to them, and not from the investment returns generated by SIB (if any) - in other words, it was a classic Ponzi scheme on an enormous scale.

SIB used HSBC Bank plc ("HSBC") as its correspondent bank and held a number of bank accounts with HSBC denominated in various currencies from which payments were disbursed by HSBC in accordance with SIB's instructions from time to time.

The liquidators of SIB have brought an action against HSBC in the Chancery Division of the High Court in England claiming, amongst other pleas of action, that HSBC was in breach of its "Quincecare duty of care" to SIB by disbursing several payments from those bank accounts totalling £118mn after HSBC ought to have been aware that SIB was engaged in fraudulent activity, and therefore seeking damages from HSBC in the total amount of those disbursements.

The case has not proceeded to a full hearing yet, but the court has heard an application by HSBC to have the claim struck-out on two discrete grounds.  The judgment of the court in respect of that application was delivered by Mr Justice Nugee on 31 July 2020 - see Stanford International Bank Ltd (in liquidation) v HSBC Bank plc [2020] EWHC 2232 (Ch).

The "Quincecare duty of care"

Before getting into an analysis of Nugee J's preliminary judgment in SIB v HSBC it is perhaps worth having a quick look at the so-called "Quincecare duty of care".

This duty is owed by a bank to its customers when disbursing payments on behalf of its customer and it arises from the case of Barclays Bank plc v Quincecare Ltd and another [1992] 4 All ER 363.

Quincecare involved a fraud perpetrated by a Mr Harry Stiller, who was a director of Quincecare Limited, which was a company set-up to acquire title to a number of pharmacy stores.  In order to finance this acquisition, Quincecare Limited arranged a £400,000 loan facility with Barclays Bank plc.  One of the conditions upon which the loan facility was made available to Quincecare Limited was that a deed of guarantee was delivered-up to the bank by UniChem Limited as guarantor of Quincecare's liabilities under the loan facility.  UniChem had an interest in the pharmacy stores since it had a semi-exclusive contract to supply pharmaceutical products to those stores.

Upon satisfaction of the various conditions precedent to the availability of the loan facility (including delivery of the UniChem guarantee), Mr Stiller (purporting to act on behalf of Quincecare Limited in accordance with its mandate in place with Barclays) drew-down on the loan facility by arranging for Barclays to disburse the sum of £344,840 to a firm of solicitors in Dorset whom Mr Stiller held out to be the solicitors acting for Quincecare Limited in the acquisition of the pharmacy stores.  However, the monies were not in fact used to acquire the stores - instead, Mr Stiller instructed the firm of solicitors to wire the monies to a bank account in the United States of America, following which Mr Stiller promptly absconded to the US and made off with the funds.

Barclays brought an action against Quincecare Limited and UniChem seeking payment of the monies disbursed on the basis of either Quincecare's principal liability as borrower of the loan facility or UniChem's contingent liability as guarantor thereof.  UniChem and Quincecare defended the action by claiming that, in disbursing the monies to the Dorset solicitors without further enquiry, Barclays was in breach of a duty of care owed to Quincecare and therefore counter-claiming for a payment in damages that would extinguish Barclays' claim.

In the course of his judgment in favour of Barclays, Steyn J made some pertinent remarks about the nature of the duty of care owed by a bank to its customer in this regard.  He pointed out that the principal relationship between a bank and its customer in respect of bank accounts is that of creditor and debtor, but when it comes to the drawing of cheques on a customer's account or the execution of payment orders from an account, the relationship is that of agent and principal.  As agent, the bank owes fiduciary duties to its customer when executing orders on behalf of its customer and, in so doing, a bank is bound to "observe reasonable care and skill in and about exercising the customer's orders".

Steyn J then went on to make the following remarks (which are worth quoting in full):

"Given that the bank owes a legal duty to exercise reasonable care in and about executing a customer's order to transfer money, it is nevertheless a duty which must generally speaking be subordinate to the bank's other conflicting contractual duties. [O]ne is considering a case where the bank received a valid and proper order which it is prima facie bound to execute promptly on pain of incurring liability for consequential loss to the customer. How are these conflicting duties to be reconciled in a case where the customer suffers loss because it is subsequently established that the order to transfer money was an act of misappropriation of money by the director or officer? If the bank executes the order knowing it to be dishonestly given, shutting its eyes to the obvious fact of the dishonesty, or acting recklessly in failing to make such inquiries as an honest and reasonable man would make, no problem arises: the bank will plainly be liable. But in real life such a stark situation seldom arises. The critical question is: what lesser state of knowledge on the part of the bank will oblige the bank to make inquiries as to the legitimacy of the order? In judging where the line is to be drawn there are countervailing policy considerations. The law should not impose too burdensome an obligation on bankers, which hampers the effective transacting of banking business unnecessarily. On the other hand, the law should guard against the facilitation of fraud, and exact a reasonable standard of care in order to combat fraud and to protect bank customers and innocent third parties. To hold that a bank is only liable when it has displayed a lack of probity would be much too restrictive an approach. On the other hand, to impose liability whenever speculation might suggest dishonesty would impose wholly impractical standards on bankers. In my judgment the sensible compromise, which strikes a fair balance between competing considerations, is simply to say that a banker must refrain from executing an order if and for as long as the banker is 'put on inquiry' in the sense that he has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company……. And, the external standard of the likely perception of an ordinary prudent banker is the governing one. That in my judgment is not too high a standard."

Hence the judgment establishes what was referred to in SIB v HSBC as the "Quincecare duty of care".


As mentioned above, this hearing does not amount to a final judgment on the case.  It is merely a preliminary hearing on an application to strike out the claim made by HSBC.  However, there are some interesting aspects of the judgment pertaining to the "Quincecare duty of care" which perhaps hint at the direction of travel in terms of the ultimate outcome of the case should it reach a full hearing.

The facts of the case

The facts here are relatively straightforward and can be summarised quite quickly.  In essence, SIB is heavily insolvent with a net liability position on its balance sheet of some US$5 billion, representing the balance between its assets and the claims of its investors (being the holders of the certificates of deposit issued by SIB).  HSBC, as correspondent bank, operated four bank accounts for SIB, each denominated in a different currency.  It is alleged by the liquidators of SIB that, in disbursing sums from those accounts in a total amount of around £118mn between 1 August 2008 and February 2009, HSBC was in breach of its "Quincecare duty of care" owed to SIB since it ought to have been aware that something was very wrong during that period and should have frozen the accounts.  Accordingly, SIB alleges, HSBC had failed to take sufficient care to see that the monies were being paid out from its accounts for a proper purpose and it is therefore liable in damages for the full amount of the disbursed payments as a result of its negligence in this regard.  If this claim for damages were successful then the liquidators of SIB would be in funds of some £118mn which could thereafter be disbursed to the various creditors of SIB or be used to fund the liquidation.

HSBC's application to strike out the claim was based on what Nugee J described as a "simple and beguilingly attractive point" taken by HSBC's counsel[1].  Namely that the monies disbursed by HSBC from the relevant accounts were paid to existing investors in redemption of the certificates of deposit held by those investors.  Accordingly, whilst disbursement of each such payment represented a dissipation of an asset of SIB, it also resulted in a corresponding and equal extinguishment of a liability of SIB in the form of the redemption of the applicable certificate of deposit in the amount disbursed.  Accordingly, each such transaction, when taken together on a net basis, was in fact balance sheet neutral for SIB and did not affect either its net asset or net liability position.  Accordingly, SIB could not have suffered a loss for which there could be a claim in damages and therefore the claim must fail and should be struck out.

Nugee J's judgment

The first point made in the course of the judgment in this regard is that one has to draw a distinction between a solvent company and an insolvent company when making the analysis as to whether there has been a loss upon which to found a claim of damages based on this fact pattern.

Taking the case of a solvent company, if an agent were to wrongfully pay £1mn of the company's money in satisfaction of a debt due by the company, then prima facie there is no loss to the company and there will be no claim in damages.  However, if the £1mn had been set aside by the company to fund contractual completion of an acquisition of a property and the disbursement of that money meant the company could not complete on the contractual completion date then the company would suffer loss in the form of penalty interest and, possibly, the loss of the deal and therefore the loss of future investment returns in respect of the property.  Whilst it is possible therefore to conceive of circumstances in which a solvent company would suffer loss, Nugee J found himself in broad agreement with counsel for HSBC that, in most cases pertaining to a solvent company, whilst there may have been a breach of duty in the dissipation of the relevant funds by the agent or third party, there would not be a loss upon which to found a claim because of the corresponding extinguishment of a liability in an equal amount.

However, the position is different when it comes to an insolvent company, and particularly a company as hopelessly insolvent as SIB.  In the circumstances of the case, SIB is insolvent owing net liabilities of some US$5bn.  Had HSBC frozen the bank accounts in August 2008 as SIB alleges it ought to have done, then SIB would have had actual assets available to it of some £80mn to £118mn, although its net liabilities would still have been in the sum of billions of dollars.  As regards the company, therefore, It is somewhat irrelevant whether it has assets of £nil or £118mn.  It is still hopelessly insolvent - therefore, the fact that there has been a corresponding extinguishment of liabilities does not benefit the company at all.  However, there clearly is a benefit to the company in liquidation to have those monies available to it as the liquidators could then utilise those monies to pursue other claims, or to otherwise fund the expenses of the liquidation, or to make payments to other creditors.  In other words, Nugee J found that, if the case is made out by SIB that HSBC is in breach of its "Quincecare duty of care", then there is a loss to the company that could found a claim in damages.

Further observations

The Ponzi scheme argument

There is an interesting section in the judgment in which Nugee J analyses whether counsel for HSBC's submission on the net asset / liability effect of the disbursements from the accounts was correct in the particular circumstances of SIB, which was being operated as a Ponzi scheme.  This line of argument was not raised by counsel for SIB so, in fact, Nugee J did not have to dispose of it, but he raised it in any event, as follows:

"….. [T]he precise amount of liabilities that SIB had [as] a result of being allowed to run on for another 6 months or so may be very different because, as with all Ponzi schemes, one has to keep sucking in new investors to pay out the old ones. The evidence is that from September 2008 there were various large withdrawals in favour of depositors (something which has been pleaded as a mini run on the bank), and since more than £80m was paid out, it seems probable that new depositors had to be, and were, found to fund (at least in part) those payments, so without a full investigation, one cannot tell whether the total quantum of liabilities as at February 2009 was in fact greater than the total liabilities would have been back in August 2008. It is certainly not self-evident, at any rate to me, that the overall liabilities would have been £118m, or even £80m, less. That itself seems to me to be a point which gives one pause for thought…...)"

In effect, what Nugee J is saying here is that, whilst certificates of deposit held by existing investors were redeemed by the HSBC payments, it is likely to be the case that a detailed analysis will show that fresh certificates of deposit were issued to new investors in order to fund those payments since that is how Ponzi schemes operate in practice.  Accordingly, the balance sheet position would not have been neutral since the net position would have been that SIB's liabilities would have remained more or less the same, but its assets would have been dissipated.

It's not clear why counsel for SIB did not run this argument, although there is a suggestion that it is because he believed that SIB's hopeless and irretrievable insolvency was a complete answer to the application.

The dishonest assistance claim

HSBC also sought to strike out SIB's claim that HSBC had dishonestly assisted SIB and Mr Stanford in the operation of the Ponzi scheme.  The basis upon which it did so appears to be that SIB has not alleged that any one individual within HSBC had knowledge that SIB was, in fact, a Ponzi scheme or that Mr Stanford was engaged in an enormous fraud on his investors.  Since there could be no aggregation of knowledge between HSBC as agent and SIB as principal per the case of Greenridge Luton One Ltd v Kempton Investments Ltd [2016] EWHC 91 (Ch), the claim must fail and should be struck out or, alternatively, summary award should be made in favour of HSBC.

Nugee J was not prepared to make summary judgment in favour of HSBC in this regard as he noted that SIB was still in the process of seeking disclosure of evidence.  Through the disclosures made to date, SIB had not been able to adduce any evidence of knowledge of fraud within HSBC, although since the disclosure process is ongoing, Nugee J accepted that such evidence may be adduced in due course.  He therefore struck the claim leaving open the possibility that SIB might reclaim under this head if evidence of knowledge arose from the disclosure exercise.


SIB's case against HSBC therefore continues on the basis of the alleged breach of the "Quincecare duty of care".  It is not clear from the judgment the precise circumstances pertaining to SIB and the Ponzi scheme which were apparent in August 2008 which lead SIB to claim that HSBC should have been on notice that something was very badly wrong with the business model and therefore that it should have frozen the accounts at that date.  This will no doubt become clear if the case reaches a full hearing and does not settle in the meantime.  However, during the course of his judgment, Nugee J noted that HSBC accepts that there is a sufficiently arguable case of breach of duty that could proceed to a full hearing.  Their argument, which failed, was simply that, if there had been a breach of duty, then SIB had not suffered a loss and therefore there was no basis upon which to bring a claim in damages.

It is also interesting that Nugee J has left the door open for SIB to bring a further claim based on dishonest assistance if it can find evidence that there was knowledge within HSBC that SIB was a fraudulent Ponzi scheme during the period of time during which the various payments at issue were disbursed by it.

We await the court's final judgment with interest. 

[1] The use of the term "beguilingly" perhaps hinting at the eventual outcome of the judgment…

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