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Banks, Ponzi schemes and the Quincecare duty- the way the cookie crumbles

24 Sep 2020

It is a marvel that Stanford International Bank Ltd (In liquidation) (SIB), masqueraded undetected as a Ponzi scheme bank for over 23 years! The cookie crumbled in February 2009 when its ultimate beneficial owner, Mr Stanford, was arrested and convicted in the US for fraud. Liquidators were appointed taking over a US$5 billion debt owed to duped investors.

HSBC was SIB’s correspondent bank for four accounts from 2003.

SIB’s liquidators issued a two-fold claim against HSBC to recover damages for sums paid from its accounts from 1 August 2008 alleging:

  1. HSBC breached its Barclay’s Bank v Quincecare Ltd duty when it failed to take sufficient care when releasing payments from SIB’s accounts and failed to freeze the accounts from August 2008;
  2. HSBC provided dishonest assistance to SIB when it continued the operation of the accounts beyond August 2008.

The Quincecare duty was reviewed in the Supreme Court decision Singularis Holdings Ltd (In liquidation) v Daiwa Capital Markets Europe Ltd, see our blog on this here.

HSBC applied for strike out or summary judgment on both grounds of SIB’s claim. Arguing for the strikeout of the breach of Quincecare duty, HSBC contended that the payments discharged proper contractual liabilities of SIB. They were made to legitimate investors who, according to a separate ruling of the Privy Council, were equity’s darlings and were entitled to keep their payments. HSBC contended that while the payments diminished SIB’s assets, its liabilities were being discharged. Therefore, on a net assets basis, SIB was no worse off. Being no worse off, it had no claim for damages and the claim should be struck out.

SIB argued that it suffered a loss of £80 million in payments made from 1 August 2008 because HSBC breached its Quincecare duty to freeze the accounts.

The Court was satisfied that SIB’s claim on the Quincecare duty was not so obviously hopeless to warrant a strikeout or summary judgment. There was a loss to SIB as the £80m was no longer available, as actual assets, to assist the liquidators to pursue further claims.

Ruling on SIB’s claim of dishonest assistance, this was struck out on the following reasoning:

  1. Dishonest assistance needs dishonesty and nothing less will do.
  2. The fact finder must identify the actual subjective state of mind of a defendant and test it against an objective test of whether it is honest or not.
  3. One cannot aggregate two innocent minds to make a dishonest whole. Since none of the HSBC staff were alleged to be dishonest, there could be no case against HSBC for dishonest assistance.
  4. Innocent doesn’t mean blameless in everything, it refers to people who are not dishonest.
  5. Simply being very bad at what you should be doing is not dishonesty. There could have been some scope for the claim to be salvaged if SIB pleaded “blind eye knowledge”. That is, alleging that HSBC had a targeted suspicion grounded on specific facts and failed to look at it because it did not want to know them.

In the current desperate financial times brought on by a pandemic, we can expect more Ponzi schemes but banks are reminded to heed closely their Quincecare duty. They must not act recklessly by failing to investigate potentially suspicious instructions.

You may view a copy of the judgment here.


Marcia Mcfarlane Harneys front portrait image on a grey background
Peter Ferrer Harneys front portrait image on a grey background
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