Emerging banking compliance litigation risks: SIB v HSBC – A curate’s egg – Paul Brehony

By Paul Brehony

Partner Paul Brehony examines the recent case of Stanford International Bank (SIB) v HSBC, the latest to consider claims against banks alleging breach of the “Quincecare” duty, and discusses how the court scrutinised whether systemic and procedural compliance failures by banks could potentially expose a bank to accessory liability claims, in Thomson Reuters Regulatory Intelligence.

Paul’s article was published in Thomson Reuters Regulatory Intelligence, on 16 October 2020.

The recent case of Stanford International Bank (SIB) v HSBC [2020] EWHC 2232 (Ch) has attracted attention within the legal and banking professions, in part because of the notoriety of one of the main protagonists (especially among cricket followers), but mainly because it is the latest case to consider claims against banks alleging breach of the “Quincecare” duty; a species of claim which is increasingly “en vogue”. An issue that was perhaps overlooked in all the Quincecare hullabaloo was that the court also scrutinised whether systemic and procedural compliance failures by banks could, of themselves, potentially expose a bank to accessory liability claims.

Facts of the case

The facts of this case are set out in detail in the judgment. In summary, the claim is being brought by the liquidators of SIB against its former correspondent bankers, HSBC, whom they argue were culpably slow on the uptake in relation to the massive fraud perpetrated on SIB by Allen Stanford — the second-biggest Ponzi scheme in history. It should be emphasised this was a summary application to strike out/dismiss, and not a factual ruling at trial. It is nonetheless significant.

Quincecare claim

As intimated above, the application itself could probably be regarded as a “score draw” in that the bank’s attempt to strike out SIB’s Quincecare claim on the basis it suffered no loss failed, while the bank was successful in striking out the accessory liability claim – in this instance framed in dishonest assistance. To continue a footballing analogy, the liquidators probably got the “away goal” given the judge left open a route for them to revisit dishonest assistance should any further material emerge on disclosure.

SIB alleged that HSBC failed, in breach of its duty under Barclays Bank Plc v Quincecare Ltd [1992] 4 AER 363, to take sufficient care to see that the monies that were being paid out from accounts under its control were being properly paid out (the Quincecare duty). HSBC accepted that there was a sufficiently arguable case of breach of this duty except in one important respect. It sought to argue the claim was bound to fail as the estate had suffered no loss given that the payments which HSBC paid out after the proverbial balloon should have gone up were actually to SIB deposit-holders and thus creditors of the estate in any event (thus the flow of loss was neutral to the estate). The court held this may well have been a viable argument were the estate solvent, but insolvent estates were dealt with differently. As Nugee J put it:

“It does seem to me that on the alleged facts of this case SIB would be better off if the balloon had gone up on August 1, 2008, as it is said it should have done. It would then have had actual assets of £80m and the fact that it would have had slightly lower liabilities, indeed lower liabilities by £80m … does not seem to me to be of a corresponding benefit to the company in the heavily and inevitably insolvent position in which it found itself. Further, had SIB had the £80m, it would have had that money available for the liquidators to pursue such claims as they thought they could usefully pursue and for distribution to its creditors. The assumed and alleged breaches by HSBC have deprived it of that opportunity, and that seems to me to be a real loss.”

Claim for accessory liability

Turning to the parallel claim for accessory liability, this was put as a claim for dishonest assistance (a constructive trust remedy commonly used to pin third parties with liability but which, as the name infers, requires some element of individual dishonesty). In this instance, notwithstanding an extensive investigation, the liquidators had been unable to identify evidence of individual dishonesty within the bank. However, they accused HSBC of serial systemic, cultural and procedural failings on top of serial incompetence, within a structure in which knowledge and decision-making were fatally siloed. They used these allegations to argue that these failings were so serious as to amount to corporate or institutional recklessness and that this recklessness could, of itself, amount to dishonesty and thus make good the absence of a dishonest individual within the organisation (normally a requirement).

While the judge was unwilling to strike out the Quincecare claim based on HSBC’s arguments in relation to loss, the attempt to pin accessory liability on the bank based on its alleged institutional incompetence was given short shrift. The judge was firmly of the view that recklessness in this context could not amount to dishonesty and that it was well-established that knowledge could not be aggregated in this context (any more than incompetence could be).

There was no shortage of legal obstacles to a claim based on institutional or corporate recklessness. What was perhaps slightly surprising, however, given: (i) the current legislative “mood music”; and (ii) existing corporate criminal liability for “failure to prevent” offences, was that the argument did not at least survive a summary strike-out application.

Specifically, given that the Criminal Finances Act introduced corporate criminal liability for failure to prevent or facilitate tax evasion, plus a suite of other offences under consideration which are similar in nature (failure to prevent money laundering, bribery, economic crime, etc.), there was real concern that a claim developing institutional or corporate recklessness might have survived strike-out and had its day in the sun at court. This was before even considering recklessness in the context of corporate manslaughter.

From a compliance perspective, it was a relief that claims such as this, which rely heavily on the application of hindsight, ignore the realities of both resource constraints and international banking practice, which were not given significant credence in the context of accessory liability.

Judge’s conclusion

The judge concluded that an allegation of “simply being very bad at what it [the bank] should be doing” was insufficient. While the judge’s premise may not sit easily with many observers, it is perhaps a reminder that, whatever one’s views of today’s parliamentarians, judges remain reluctant to second-guess them. It remains to be seen whether, at some point in the future, some species of “failure to prevent” offence enters the statute books which might deal with the (alleged) circumstances of this case.

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