![]() |
[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback] | |
United Kingdom Supreme Court |
||
You are here: BAILII >> Databases >> United Kingdom Supreme Court >> Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd (Rev 1) [2019] UKSC 50 (30 October 2019) URL: http://www.bailii.org/uk/cases/UKSC/2019/50.html Cite as: [2020] Lloyd's Rep FC 54, [2019] Bus LR 3086, [2020] AC 1189, [2019] 2 CLC 743, [2020] 1 All ER 383, [2019] WLR(D) 608, [2020] PNLR 5, [2020] 1 Lloyd's Rep 47, [2019] UKSC 50, [2019] 3 WLR 997, [2020] 1 All ER (Comm) 1, [2020] BCC 89, [2020] 2 BCLC 392 |
[New search]
[Context]
[View without highlighting]
[Printable PDF version]
[Buy ICLR report: [2019] Bus LR 3086]
[Buy ICLR report: [2020] AC 1189]
[Buy ICLR report: [2019] 3 WLR 997]
[View ICLR summary: [2019] WLR(D) 608]
[Help]
[2019] UKSC 50
On appeal from: [2018] EWCA Civ 84
JUDGMENT
|
before
Lady Hale, President Lord Reed, Deputy President Lord Lloyd-Jones Lord Sales Lord Thomas
|
JUDGMENT GIVEN ON |
|
|
30 October 2019 |
|
|
Heard on 23 and 24 July 2019 |
Appellant |
|
Respondent |
John McCaughran QC |
|
Jonathan Crow QC |
Michael Watkins |
|
Andrew de Mestre QC |
(Instructed by Ashurst LLP (London)) |
|
(Instructed by Jenner & Block London LLP) |
LADY HALE: (with whom Lord Reed, Lord Lloyd-Jones, Lord Sales and Lord Thomas agree)
The background
2.
The respondent company, “Singularis”,
is a company registered in the
Cayman Islands, set up to manage the personal assets of a Saudi Arabian
business man, Maan Al Sanea, separately from his business group. At all times
material to this claim, Mr Al Sanea was its sole shareholder, a director and
also its chairman, president and treasurer. There were six other directors, who
were reputable people, but did not exercise any influence over the management
of the company. Very extensive powers were delegated to Mr Al Sanea to take
decisions on behalf of the company, including signing powers over the company’s
bank accounts. The company had a substantial and legitimate business, carried
out over a number of years before the relevant events, for which it borrowed
substantial sums of money under a variety of funding arrangements.
3.
The appellant, Daiwa, is the London subsidiary of a Japanese investment
bank and brokerage firm. In 2007, it entered into a stock financing arrangement
with Singularis.
Daiwa provided
Singularis
with loan financing to enable it to
purchase shares which were the security for the repayment of the loan. In June
2009, all the shares were sold, the loan was repaid, and Daiwa was left holding
a cash surplus for the account of
Singularis.
Together with a sum of US$80m
deposited by
Singularis
in June 2009, the total held to
Singularis’
account was
approximately US$204m.
4.
Between 12 June and 27 July 2009, Daiwa was instructed by Singularis
to
make eight payments, totalling approximately US$204,500,000, out of the money
held to
Singularis’
account. Five of those payments were to the Saad Specialist
Hospital Company. Three of them were to or for the benefit of Saad Air (A320 No
2) Ltd and Saad Air (A340-600) Ltd (together, “Saad Air”). Those instructions
were given with the approval of Mr Al Sanea who, as between
Singularis
and
Daiwa, had authority to give instructions to make the payments. Daiwa made
those payments. The judge held that each of the payments was indeed a
misappropriation of
Singularis’
funds because there was no proper basis for any
of them. There has been no appeal against that finding.
5.
On 20 August 2009, Mr Al Sanea placed Singularis
in voluntary
liquidation. On 18 September 2009 the Grand Court of the Cayman Islands made a
compulsory winding up order and joint liquidators were appointed.
6.
On 18 July 2014, Singularis,
acting through its joint liquidators,
brought a claim against Daiwa for the full amount of the payments (less any
sums recovered either from Mr Al Sanea or the recipients of the payments).
There were two bases for the claim: (1) dishonest assistance in Mr Al Sanea’s
breach of fiduciary duty in misapplying the company’s funds; and (2) breach of
the Quincecare duty of care to the company by giving effect to the
payment instructions.
7. In the Chancery Division of the High Court, Rose J dismissed the dishonest assistance claim because Daiwa’s employees had acted honestly. However, she upheld the negligence claim, while making a deduction of 25% under the Law Reform (Contributory Negligence) Act 1945 to reflect the contributory fault of Mr Al Sanea and the company’s inactive directors, for which the company was responsible: [2017] EWHC 257 (Ch); [2017] Bus LR 1386.
8.
Singularis
did not appeal against the dismissal of the dishonest
assistance claim. Daiwa did appeal against the finding of liability on the negligence
claim. The Court of Appeal unanimously dismissed the appeal: [2018] EWCA Civ 84; [2018] 1 WLR 2777. In brief, it held (1) that Mr Al Sanea’s fraudulent
state of mind could not be attributed to the company; but (2) even if it could,
the claim would still have succeeded - the bank’s negligence had caused the
loss, it was not defeated by a defence of illegality, or by an equal and
opposite claim by the bank for the company’s deceit; and (3) the judge’s
finding of 25% contributory negligence was a reasonable one.
The starting point
10.
The starting point must be the judge’s findings, none of which is under
appeal. She held that there was no good reason to make the payments to Saad Air
and that it was a breach of fiduciary duty for Mr Al Sanea to direct Singularis
to make them (para 120). She also held that the agreement made between
Singularis
and the hospital to pay the expenses of the hospital was a sham and
the five payments were a misappropriation of the company’s money by Mr Al Sanea
in breach of his fiduciary duty (paras 121-127). As sole shareholder he was not
entitled to ratify the misappropriation of company funds because he must have
known that the company was on the verge of insolvency and his duty as director
was to act in the best interests of the company’s creditors. This precluded
making gratuitous payments to other companies in the Saad group to the
detriment of
Singularis’
creditors (paras 128-137).
11.
She went on to hold that Daiwa was in breach of the Quincecare duty
on the facts of the case. Any reasonable banker would have realised that there
were “many obvious, even glaring, signs that Mr Al Sanea was perpetrating a
fraud on the company”. He was clearly using the funds for his own purposes and
not for the purpose of benefiting Singularis
(para 192). First, Daiwa was well
aware of the dire financial straits in which Mr Al Sanea and the Saad group
found themselves at the end of May and in early June 2009 (paras 193-196).
Second, it was aware that
Singularis
might have other substantial creditors
with an interest in the money (para 197). Third, there was plenty of evidence
to put Daiwa on notice that there was something seriously wrong with the way
that Mr Al Sanea was operating the
Singularis
account (para 199). Fourth, it
was alive to the possibility that the agreement with the hospital was a front
or a cover rather than a genuine obligation (para 200). Fifth, there was a
striking contrast between the way in which some payment requests were processed
and how the disputed payments were handled (para 201). In short “Everyone
recognised that the account needed to be closely monitored … But no one in fact
exercised care or caution or monitored the account themselves and no one
checked that anyone else was actually doing any exercising or monitoring
either” (para 202).
12.
On the basis of those findings, the judge held that there was a clear
breach of Daiwa’s Quincecare duty of care to Singularis.
That is
incontrovertible. The issue for this Court, as in the courts below, is whether
Daiwa has any defence to that claim. The issue of attribution has to be seen in
the context of the possible defences to which it might give rise. Were
attribution to be established, Daiwa raises three possible defences. It is
worth giving a brief account of each of these before turning to the question of
attribution. It will be seen that, even if attribution were established, none
of them is a very promising basis for denying liability.
Illegality
13. Both the judge and the Court of Appeal rejected the illegality defence raised by Daiwa on two grounds: first, that Mr Al Sanea’s fraud could not be attributed to the company - ie held to be the company’s fraud - for this purpose (Rose J, paras 208 to 215; CA, paras 50 to 60); and second, in any event, the test for a successful illegality defence, laid down by this Court in Patel v Mirza [2016] UKSC 42; [2017] AC 467, was not met (Rose J, paras 216 to 220; CA, paras 61 to 67).
14. Patel v Mirza was a restitution claim. Mr Patel agreed to pay £620,000 to Mr Mirza on the basis that Mr Mirza would use it to bet on the price of shares using inside information that Mr Mirza expected to receive. This was a conspiracy to commit the offence of insider dealing contrary to section 52 of the Criminal Justice Act 1993. However, the inside information was not forthcoming and the bets were never placed. Mr Patel asked for his money back and Mr Mirza refused. He argued that the claim was barred by illegality because Mr Patel would have to prove the illegal agreement under which the money was paid in order to prove that the purpose had failed and he should get it back. A panel of nine Supreme Court Justices was convened to hear the appeal, because of the perceived conflict between the decisions of this Court in Hounga v Allen [2014] UKSC 47; [2014] 1 WLR 2889, Les Laboratoires Servier v Apotex Inc [2014] UKSC 55; [2015] AC 430, and Bilta (UK) Ltd v Nazir (No 2) [2015] UKSC 23; [2016] AC 1. By a majority of six to three, the Court rejected the approach of the House of Lords in Tinsley v Milligan [1994] 1 AC 340, which depended on whether or not the claimant had to plead the illegal agreement in order to succeed. Instead it adopted the approach summed up by Lord Toulson, who gave the leading judgment, at para 120:
“The essential rationale of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system … In assessing whether the public interest would be harmed in that way, it is necessary (a) to consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim, (b) to consider any other relevant public policy on which the denial of the claim may have an impact and (c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts.”
16.
In this case, the illegality relied on was, in relation to some of the
payments, Mr Al Sanea’s provision of documents which he knew to be false and,
in relation to all of the payments, his breach of his fiduciary duty towards
Singularis.
The judge held that the purpose of the prohibition of breach of
fiduciary obligation was to protect the company from becoming the victim of the
wrongful exercise of power by officers of the company. That purpose would
certainly not be enhanced by preventing the company from getting back the money
which had been wrongfully removed from its account. The purpose of the
prohibition of making false statements was both to protect the bank from being
deceived and the company from having its funds misappropriated. Although the
purpose of protecting the bank would be enhanced by denial of the claim, that
purpose was achieved by ensuring that the bank was only liable to repay the
money if the Quincecare duty was breached: that duty struck a careful
balance between the interests of the customer and the interests of the bank.
“It would not enhance the integrity of the law to undermine that balance by
denying the claim on grounds of illegality in a case where, ex hypothesi, the
exceptional circumstances needed for the duty to arise and be breached are
found to be present.” (para 218)
18.
Finally, denial of the claim would be an unfair and disproportionate
response to any wrongdoing on the part of Singularis.
The possibility of making
a deduction for contributory negligence on the customer’s part enables the
court to make a more appropriate adjustment than the rather blunt instrument of
the illegality defence (para 220).
19.
The Court of Appeal took the view that there was no error in the judge’s
approach. Barring Singularis’
claim would serve to undermine the carefully
calibrated Quincecare duty and would not be a proportionate response,
particularly where Daiwa’s breaches were so extensive and the fraud was so
obvious (para 66).
Causation
22. Daiwa argues that, if the fraud is attributed to the company, the company’s loss is caused by its own fault and not by the fault of Daiwa. In Reeves v Comr of Police of the Metropolis [2000] 1 AC 360, at 368, Lord Hoffmann referred to “the sound intuition that there is a difference between protecting people against harm caused to them by third parties and protecting them against harm which they inflict upon themselves … People of full age and sound understanding must look after themselves and take responsibility for their actions”. This was a case, argues Daiwa, in which the company inflicted the harm upon itself.
Countervailing claim in deceit
24.
Daiwa argues that because it would have an equal and countervailing
claim in deceit against the company, the company’s claim in negligence should
fail for circularity. They paid out because of the company’s deceit and
therefore have a claim against the company for any loss suffered by their
exposure to Singularis’
claim. This cancels out the company’s claim against
them for negligence in failing to detect the fraud. This is a variant of the
causation argument and the judge answered it by reference to two decisions of
Evans-Lombe J in Barings plc v Coopers & Lybrand (No 2) [2002] EWHC 461 (Ch); [2002] 2 BCLC 410 and [2003] EWHC 1319 (Ch); [2003] PNLR 34. These
were proceedings brought by Barings against their auditors for failing to
detect the dealings of Mr Nick Leeson which led to the downfall of the bank.
The first decision concerned the allegation of the auditors that they had been
deceived by Barings’ finance director into accepting figures which he knew to
be false. That claim failed on the facts, but had it succeeded, the judge would
have held that Barings were vicariously responsible for the deception and this
would have defeated the negligence claim. The second decision concerned the
activities of Mr Leeson. Fraudulent though they were, they did not defeat the
bank’s claim because it was the very duty of the auditors to detect the fraud.
Thus, in this case, the judge held that Daiwa “owed
Singularis
a duty to guard
against being misled into paying away
Singularis’
money by just such fraudulent
instructions. Their breach, and not Mr Al Sanea’s misrepresentations, is the
cause of their exposure to the claim for
Singularis’
loss” (Rose J, para 228).
25.
Daiwa sought to distinguish Barings on the basis that Barings
were merely vicariously liable for Mr Leeson’s fraud, whereas, if it is right
about attribution, in this case the fraud is the fraud of the company itself
and not just one of its employees. The Court of Appeal rejected this argument
and upheld the reasoning of the judge: “The existence of the fraud was a
precondition for Singularis’
claim based on breach of Daiwa’s Quincecare duty,
and it would be a surprising result if Daiwa, having breached that duty, could
escape liability by placing reliance on the existence of the fraud that was
itself a pre-condition for its liability” (CA, para 79).
Attribution
26.
Daiwa argues that, as Singularis
was effectively a one-man company and
Mr Al Sanea was its controlling mind and will, his fraud is to be attributed to
the company, with the consequence that its Quincecare claim against
Daiwa is defeated, either by illegality, or for lack of causation, or because
of an equal and opposite claim for the company’s deceit. To examine such an
assertion, it is necessary to go back to basic principles.
27. The starting point has to be the principle established by the House of Lords in Salomon v A Salomon and Co Ltd [1897] AC 22, that a properly incorporated company has an identity and legal personality quite separate from that of its subscribers, shareholders and directors. Mr Salomon had established the company, with his family, to buy his boot and shoe manufacturing business at a time when it was solvent. When it later became insolvent, he was entitled to enforce the debentures granted by the company in part payment of the price and he was not obliged to indemnify the company against the claims of its creditors. It is also worth recalling the words of Lord Macnaghten, at p 53, that “It has become the fashion to call companies of this class ‘one-man companies’. That is a taking nickname, but it does not help one much in the way of argument”.
28. Companies being fictional persons, they have of course to act through the medium of real human beings. So the issue is when the acts and intentions of real human beings are to be treated as the acts and intentions of the company. The classic exposition is to be found in the Opinion of the Judicial Committee of the Privy Council in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, delivered by Lord Hoffmann. He identified three levels of attribution (at pp 506-507). The primary rule is contained in the company’s constitution, its articles of association, which will typically say that the decisions of the shareholders or of the board of directors are to be the decision of the company on certain matters. But this will not cover the whole field of the company’s decision-making. For this, the ordinary rules of agency and vicarious liability, which apply to natural persons just as much as to companies, will normally supply the answer. However there will be some particular rules of law to which neither of these principles supplies the answer. The question is not then one of metaphysics but of construction of the particular rule in question.
29. In seeking to establish attribution in this case, Daiwa prays in aid the decision of the House of Lords in Stone & Rolls Ltd v Moore Stephens [2009] UKHL 39; [2009] 1 AC 1391. The claimant company was owned, controlled and managed by a Mr Stojevic, who had procured the company to engage in frauds upon banks. The company was sued for deceit by one of the banks and went into liquidation. The company then brought proceedings against its auditors, alleging that they had been negligent in failing to detect and prevent Mr Stojevic’s activities. The auditors applied to strike out the claim on the basis that Mr Stojevic’s fraud was to be attributed to the company. The trial judge refused to strike it out, on the basis that such fraud was “the very thing” that the auditors were employed to detect. The Court of Appeal held that, as the company had to rely upon the illegality to found its claim, the defence of illegality was made out (this was, of course, before Patel v Mirza). The House of Lords, by a majority, held that, as Mr Stojevic was the beneficial owner and “directing mind and will” of the company, knowledge of his fraudulent activities was to be attributed to the company, so the company could not complain that the auditors had failed to detect it. Lord Mance, dissenting, pointed out that this deprived the company’s creditors of a remedy, as it was only the company which could sue the auditors for their negligence. It appears that what principally divided their lordships was whether the auditors had to have regard to the interests of creditors even though they owed them no duty of care.
30. Stone & Rolls has prompted much debate and criticism. It was analysed in detail by a panel of seven Justices of this Court in Bilta (UK) Ltd v Nazir (No 2) [2015] UKSC 23; [2016] AC 1. The company and its liquidators brought claims against its directors and others who were alleged to have dishonestly assisted the directors in a conspiracy to defraud the company. The claim was defended on the basis that the fraud of its directors was attributable to the company which could not then make a claim against the other conspirators relying on its own illegality. This court held unanimously that where a company has been the victim of wrongdoing by its directors, the wrongdoing of the directors cannot be attributed to the company as a defence to a claim brought against the directors - and their co-conspirators - by the company’s liquidator for the loss suffered by the company as a result of the wrongdoing. The court explained that the key to any question of attribution was always to be found in considerations of the context and the purpose for which the attribution was relevant. Where the purpose was to apportion responsibility between the company and its agents so as to determine their rights and liabilities to one another, the answer might not be the same as where the purpose was to apportion responsibility between the company and a third party.
32. Subject to the two points with which he agreed, Lord Neuberger said this:
“[T]he time has come in my view for us to hold that the decision in Stone & Rolls should as Lord Denning MR graphically put it in relation to another case in In re King, decd [1963] Ch 459, 483, be put ‘on one side in a pile and marked “not to be looked at again”’. Without disrespect to the thinking and research that went into the reasoning of the five Law Lords in that case, and although persuasive points and observations may be found from each of the individual opinions, it is not in the interests of the future clarity of the law for it to be treated as authoritative or of assistance save as already indicated.” (para 30)
33.
Unfortunately, the majority’s acceptance of the second point has been
treated as if it established a rule of law that the dishonesty of the
controlling mind in a “one-man company” could be attributed to the company -
with the consequences discussed earlier - whatever the context and purpose of
the attribution in question. Thus there was much argument in this case about
what was meant by “innocent” directors and whether this included innocent but
inactive directors who should have been paying more attention to what Mr Al
Sanea was doing. The judge found that Singularis was not a one-man company in
the sense that the phrase was used in Stone & Rolls and Bilta
(Rose J, para 212). The company had a board of reputable people and a
substantial business. There was no evidence to show that the other directors
were involved in or aware of Mr Al Sanea’s actions. There was no reason why
they should have been complicit in his misappropriation of the money (para
189). The Court of Appeal held that, on those findings of fact, she had made no
error of law (CA, para 54).
Conclusion
40. This appeal should be dismissed and the judge’s order should stand.