Supreme Court Judgment: Quincecare and no net loss

21 December, 2022

The Supreme Court today handed down judgment upholding the Court of Appeal’s decision to strike out all but £2.4m of a Quincecare claim brought by the liquidators of Stanford International Bank plc (in liquidation) (“SIB”) against HSBC Bank plc (“HSBC”).

SIB was the vehicle used by Robert Allen Stanford for one of the largest and most prolonged Ponzi schemes in history. Its liquidators brought claims against HSBC in dishonest assistance and for breach of the Quincecare duty.

The dishonest assistance claim was struck out by Mr Justice Nugee (as he then was) in July 2020, and that decision was upheld by the Court of Appeal ([2021] EWCA Civ 535) and not appealed to the Supreme Court.

SIB’s Quincecare claim was to the £118.5m which it said should not have been paid out of SIB’s accounts with HSBC after 1 August 2008, had HSBC performed its Quincecare duty to SIB. All but £2.4m of the £118.5m paid out was paid to (a) accounts in SIB’s name held with another bank and (b) SIB’s creditors.

Mr Justice Nugee had refused to strike out the Quincecare claim but the Court of Appeal held that SIB could not have sustained a loss by transferring money to accounts it held with another bank, or by paying its creditors and thereby reducing its indebtedness pound for pound.

By a majority, the Supreme Court dismissed SIB’s appeal against the Court of Appeal’s decision to strike out the Quincecare claim. Lady Rose gave the lead judgment, with which Lord Hodge and Lord Kitchin agreed. Lord Leggatt, in agreement with Lady Rose, gave a concurring judgment. Lord Sales gave a dissenting judgment.

The judgment is Stanford International Bank Ltd (In Liquidation) v HSBC Bank plc [2022] UKSC 34.

The Supreme Court has published the following summary of the reasons for the judgment.

The Supreme Court distinguishes between two sets of SIB’s customers. First, customers who escaped without loss because they withdrew their funds (as they were contractually entitled to do) before the SIB scheme collapsed and so were paid from the disputed payments (referred to as the “early customers”). Second, customers who risk losing almost all their money because they did not withdraw their funds before the collapse (referred to as the “late customers”)[8].

The majority hold that the disputed payments which relieved SIB of its liability to its early customers do not amount to a monetary loss [26];[29];[31]. In the hypothetical scenario where HSBC had complied with its Quincecare duty, SIB might have had an extra £116 million on liquidation. However, it also would not have discharged any of the debts it owed to the early customers so they would also claim a dividend in the insolvency alongside the late customers. As there would be an extra £116 million for the liquidators to distribute, all the customers would get, say, 12 pence in the pound rather than the early customers getting 100 pence and the late customers only five pence. But precisely the same amount of SIB’s debt would be extinguished when the company is dissolved in both the hypothetical and real-world scenario [25]. There is therefore no recoverable loss.

The fairness or unfairness of the payments made is not a matter that the court can investigate or assess in this context [26]. That is a matter of policy within the applicable insolvency regime and an earlier set of proceedings in the Antiguan liquidation had determined that the liquidators could not recover payments made to the early customers.

Addressing a sub-issue, the majority hold that where a director, in breach of their fiduciary duties to a company, causes an insolvent company to pay off certain company debts, there may be cases where the director can be required to repay the insolvent company in respect of the payments. However, this fiduciary liability does not mean there is a more general principle that a person who is negligent can be liable where the negligence results in no monetary loss [34].

Lord Leggatt agrees with Lady Rose that SIB has not suffered loss because of the disputed payments [40];[55];[57];[86]. He holds that the fundamental principle of separate corporate personality means the interests of a company are in law distinct from those of the persons who have economic interests in the company. Thus, the losses suffered by a company are not the same as the losses suffered by its creditors. While there may be correlation between these different losses, in order to keep the law coherent, the distinction between them should not be blurred [81]. Lord Leggatt also agrees with the majority with regard to the sub-issue on the liability of directors [75].

Lord Sales dissents. In his view SIB has suffered a loss [91]. At the relevant times SIB was hopelessly insolvent. Therefore, SIB could not lawfully have paid the early customers the face value of the debts and, if it had not been deceived by Mr Stanford, it would not have chosen to do so; instead, it would have retained its money to spend on other, lawful purposes. Payment of more than was necessary to the early customers depleted SIB’s assets which constitutes a loss to SIB [93]-[94]. It is not correct to treat the company as a pure abstraction [110]-[111]. When SIB paid the early customers, its corporate personality in law was a vehicle to protect the general creditors as a whole. The funds used to make the disputed payments will not be used to pay the general creditors as a whole, as they should have been. This diversion of funds is a loss to SIB [93];[100];[107]-[113];[117]. In relation to the sub-issue, Lord Sales holds that his view provides a clear explanation as to a director’s liability in this context. In law, the interests of a company which is hopelessly insolvent are fully aligned with those of its creditors as a general body. If a company’s money, under the control of the directors, is paid out to discharge the debts of some creditors out of the general body of creditors, the interests of the creditors as a general body, and hence the interests of the company, are prejudiced and this can give rise to recoverable loss [128]-[129].

The judgment is available here.

Louise Hutton KC was instructed (together with Patricia Robertson KC and Christopher Langley) for HSBC by David Flack, Oliver Shipway and Rory McGrath at Eversheds Sutherland.