knowledge 9 August 2017 |

Handling Client Monies?  Liability for Processing Payment Instructions

The Case

Daiwa (a stock broker subsidiary of a large Japanese bank) held approximately US$204 million in a segregated client account for Singularis.  Singularis was a vehicle used by a wealthy business man, Maan Al Sanea, to manage some of his wealth.  Between mid-June and mid-July 2009, Daiwa paid out that money, on Mr Al Sanea’s instructions, to accounts in the names of companies within a separate group controlled by him.  Shortly after, Singularis was put into liquidation and the monies were lost to Singularis’ creditors.  The liquidators sued Daiwa for the money lost as a result of those transfers.

The Issues

The court considered a number of issues that were disputed between the parties. 

Was Mr Al Sanea in breach of his fiduciary duty (as director) when instructing payments from Singularis’ account to 3rd party companies which he controlled?

Yes.  The court held that the facts alleged by Mr Al Sanea to justify Singularis’ obligation to make the US$204 million payments were either unsupported by any evidence or clearly a sham, invented to convince Daiwa to make the payments.  Singularis had no obligation to make the payments.  There was clearly no benefit to it doing so (as a legal entity separate from its shareholder) and Mr Al Sanea was, therefore, acting in breach of his fiduciary duty as director.

Interestingly, the court also considered whether Mr Al Sanea (a sole shareholder) could have ratified such gratuitous payments to third parties, notwithstanding the lack of benefit to Singularis.  It was agreed by all parties that a shareholder of a solvent company could do so.  However, as a director is required to act in the interests of the company’s creditors where a company is insolvent or of doubtful solvency, such ratification was no longer available.  

Did Daiwa Have a Duty of Care to Singularis not to Process the Payment Instructions?

Yes.  The court considered the critical issue of whether Daiwa could be held negligent for processing the payment instruction. Crucially, the court held that Daiwa’s duty to Singularis extended beyond simple formal compliance with instructions.  In particular, the court found that Daiwa (though not a bank itself) was subject to a “Quincecare duty” ³  to Singularis. 

The Quincecare duty is, in essence, a duty owed by a “bank” to its client to refrain from executing a payment instruction where it has “…reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company…”.  The standard by which the duty is measured is “…the external standard of the likely perception of an ordinary prudent banker…”⁴.

Was the Duty Breached by Daiwa?

Yes. On the facts, the court had no hesitation in finding that Daiwa had acted negligently and was liable to Singularis.  Interestingly, many facts considered relevant were known to senior management in Daiwa but not necessarily to the people making the payments.  Ultimately, the court viewed Daiwa as “…having a dysfunctional structure leading to a sequence of events where everyone assumes that someone else is dealing with investigating the disputed payments but no one troubles to check whether that is right or not”. 

Daiwa’s Terms of Business

Daiwa’s terms of business included a number of provisions that could have been used in its defence (eg, excluding liability for negligence; entitling Daiwa to assume all instructions were validly given).  However, Daiwa could not produce convincing evidence that the terms of business had been issued.

Daiwa’s Liability

Having considered and discounted some additional defences, the court found Daiwa fully liable for the loss caused to Singularis.  Singularis was held contributorily negligent in the amount of 25%, leaving Daiwa with a net liability of US$152,806,425 (plus costs).

Comment

Box-ticking is not a defence; nor is communication-disconnect. This case provides an important warning of the very real risks that arise where an institution’s culture does not promote meaningful thought about what it is doing.  Institutions must have processes that are not only efficient but also ensure that important information is acted upon and not just talked about at senior levels.  Ensuring that business terms which govern the commercial relationship (and invariably attempt to reduce the liability of an institution to its clients) are issued to clients ought to be a basic and simple process to complete.  While the case is not binding, it will be of persuasive authority in Ireland should similar facts come before the courts.