Quincecare claims in a liquidation

In some jurisdictions, including the Isle of Man, company insolvency very often involves the winding up of service providers (i.e. companies which have provided corporate and/or trustee administration services to others), or the client companies which have had services provided to them. In those circumstances, a liquidator may find it necessary to trace the flow of money between a service provider’s bank account and/or one operated by the service provider as trustee on behalf of a client (e.g. for payment of the service provider’s fees) and/or from and to third party accounts, often held with the same banking organisation. When this flow of money constitutes a potential investment, or an asset of a service provider client for example, then the liquidator may have to consider whether the transaction was appropriate, can be undone and/or whether any claim lies on behalf of the client entity, and if so whether that could operate as against the bank for wrongfully allowing the payment (later in this series I will explore the extent to which liquidators have a duty to investigate potential claims against third parties on behalf of clients of companies being wound up).

Scope of the Quincecare duty

A "Quincecare duty" is one which may be implied into a contract between bank and customer to require the bank to use reasonable skill and care in and about executing the customer's orders, which may involve in some circumstances refusing to do so. In accordance with the duty “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” (Barclays Bank v Quincecare [1992] 4 All ER 363 at 376).

An alternative formulation of the duty, as expressed by Slade LJ, puts it thus: “the question must be whether, if a reasonable and honest banker knew of the relevant facts he would have considered that there was a serious or real possibility, albeit not amounting to a probability that his customer might be being defrauded.”

Dishonest conduct will plainly suffice, as will shutting one’s eyes to the obvious fact of dishonesty. Further, recklessly failing to make such inquiries as an honest and reasonable person would make may also give rise to a breach of duty (Singularis Holdings v Daiwa Capital [2019] UKSC 50 at [1])

A bank should refrain from executing an order if, and for so long as it was, put on inquiry by having reasonable grounds for believing that the order was an attempt to misappropriate funds. If the customer establishes that there was a serious and real possibility that the party requesting payments be made were so instructing otherwise than for the proper purposes of the beneficiary, it may be in breach of duty in continuing to effect payments. The bank would then be negligent, notwithstanding that it did not appreciate that the grounds afforded a reasonable basis for suspecting fraud and was not therefore dishonest.

The standard to be applied is that of the ordinary prudent banker, armed with whatever knowledge the bank had at the time it made the relevant payments, it follows that a key issue in any claim is what the bank knew, and when it knew it. The following factors were identified as relevant to the question of inquiry in Quincecare:

• The standing of the corporate customer
• The bank's knowledge of the signatory
• The amount involved
• The need for a prompt transfer
• The presence of unusual features, and
• The scope and means for making reasonable inquiries

There is one particular factor which will often be decisive. That is the consideration that, in the absence of telling indications to the contrary, a banker will usually approach a suggestion that a director of a corporate customer is trying to defraud the company with an initial reaction of “instinctive disbelief.”

Quincecare establishes that speculation and amateur detective work on the part of a bank have no place in fixing a bank, objectively, with knowledge or belief sufficient to put a payment instruction on hold (Phillip v Barclays Bank UK Plc 6 [2017] EWHC 257 (Ch)).

The court in Singularis repeated the point made in Quincecare that the multiplicity of transactions that the bank is dealing with on behalf of its customers, and the limited time available to assess them, will be relevant to whether the bank was on inquiry. There is some indication in the authorities that the bank’s knowledge for Quincecare purposes is its corporate knowledge, rather than the knowledge of a particular employee. In Singularis an employee, once aware of a fact had since forgotten it at the time of authorising a transaction, but it was held to subsist as corporate knowledge.

Inevitably, the more one individual or a few individuals can be fixed with relevant knowledge, the easier it will be to argue the bank was on inquiry. The seniority of the individual(s) identified will be a relevant factor (Federal Republic of Nigeria v JP Morgan Chase).

Where the liquidated company is trustee of client funds

Where a company in liquidation was a trustee of client funds it will have held bank accounts directly with banks in its own name, albeit the funds in the account were held beneficially on trust for the underlying beneficiaries in accordance with the terms of the trust. In these scenarios, it was the company in the first instance, as trustee, which may have suffered losses from the breach of any duties owed by a bank, in making payments on instruction, which duties were owed to the company as the customer.

Any action pursued by the company ((per the liquidator) as trustee against a bank would have as its aim the recovery of funds improperly paid away from the “trusts’ ” account. Any recoveries against a bank would constitute recoveries for the trust alone, as the underlying cause of action against the bank arose in the administration of the trust, and itself likely constitutes trust property (see for example Lewin on Trusts 20th Ed at 47-007 and see Bayley v SG Associates [2014] EWHC 782 (Ch)), therefore falling outside of the scope of the company’s assets in liquidation. Thus, if the company (per the liquidator) was to sue and obtain recoveries, these would be for the trust beneficiaries, rather than unsecured creditors as a general class.

Further, the general rule applicable to standing is that the trustee is the proper claimant in respect of breach of contract and tort-based claims where the trust suffers loss (see generally Lewin on Trusts 20th Ed at 47-001 onwards). This will encompass a claim based upon the Quincecare duty, owed in contract and tort (Lewin at 43-051 and see Webster v Sandersons Solicitors [2009] EWCA Civ 830). A beneficiary may attempt a derivative action if the liquidator (as trustee) refuses to proceed, or can seek to compel the trustee to take action by way of an administration action. Alternatively, a beneficiary can pursue a claim directly for dishonest assistance.

In the event that a company, per the liquidator, is inclined to pursue an action as trustee it would be prudent to secure the liquidators’ costs position by way of pre-emptive directions of a Beddoe nature as to the commencement of a claim, together with Berkley Applegate relief as to anticipated costs to draw costs from the trust property only.

Alternative approaches (dependent upon circumstances) may be to:

1. allow the beneficiaries to pursue a derivative action,
2. assign the trust’s cause of action to the beneficiaries absolutely so that they can pursue recoveries directly, or
3. secure the appointment of new trustees who can then consider whether to pursue the claim or not.

Where the company in liquidation is administrator

Where a company was an intermediary administrator for client companies then it did not transfer its own funds to a bank and did not therefore sustain a loss directly. Any loss suffered as a result of a bank effecting payment instructions which the company provided was a loss sustained by the client companies whose monies were transferred as a result.

The Quincecare duty is, on one level, a duty implied into the banking contract existing between the bank and the client company in respect of which it is for the client company to pursue an action as the relevant party to whom the implied duty is owed. This is confirmed in the Isle of Man in RBSI v JP SPC 4.

This position may be affected by any express provision in the contract between bank and client giving the company in liquidation rights of suit directly or impliedly within the scope of the Contracts (Rights of Third Parties) Act 2001.

Damian Molyneux is a director of M&P Legal specialising in, amongst other things, liquidations. He can be contacted on dpm@mplegal.im This article does not constitute legal advice, specific advice should be sought for individual circumstances.

Damian acknowledges (with thanks) the assistance of James Saunders of New Square Chambers.

Back to top