LADY HALE: (with whom Lord
Reed, Lord Lloyd-Jones, Lord Sales and Lord Thomas agree)
1.
Counsel for the respondent, Jonathan Crow QC, boldly asserted at the
outset of his submissions that “this case is in fact bristling with simplicity”.
The issue is certainly a simple one. The claim is brought by a company (through
its liquidators) against its investment bank and broker for breach of the
so-called Quincecare duty of care. In Barclays Bank plc v Quincecare
Ltd [1992] 4 All ER 363, Steyn J held that it was an implied term of the
contract between a bank and its customer that the bank would use reasonable
skill and care in and about executing the customer’s orders; this was subject
to the conflicting duty to execute those orders promptly so as to avoid causing
financial loss to the customer; but there would be liability if the bank
executed the order knowing it to be dishonestly given, or shut its eyes to the
obvious fact of the dishonesty, or acted recklessly in failing to make such
inquiries as an honest and reasonable man would make; and the 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. The issue in this case is whether such a claim is
defeated if the company’s instructions were given by the company’s Chairman and
sole share-holder who was the “dominant influence over the affairs of the
company”. Can his fraud be attributed to the company? And if so, is the claim
then defeated, whether on grounds of illegality, of causation, or by an equal
and opposite claim against the company in deceit?
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.
9.
Daiwa now appeals to this Court on the question of attribution and its
consequences. Two broad issues arise. (1) When can the actions of a dominant
personality, such as Mr Al Sanea, who owns and controls a company, even though
there are other directors, be attributed to the company? (2) If they are
attributed to the company, is the claim defeated (i) by illegality; (ii) by
lack of causation because the bank’s duty of care does not extend to protecting
the company from its own wrongdoing or because the company did not rely upon
its performance; or (iii) by an equal and countervailing claim in deceit?
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.”
15.
In that case, it was not contrary to the public interest to allow Mr Patel
to recover the money which he had paid for an illegal purpose but which had not
been used for that purpose. In wanting it back he was seeking to unwind the
arrangement, not to profit from it.
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)
17.
Turning to whether there might be any other relevant public interests,
she held that denial of the claim would have a material impact upon the growing
reliance on banks and other financial institutions to play an important part in
reducing and uncovering financial crime and money laundering. If a regulated
entity could escape from the consequences of failing to identify and prevent
financial crime by casting on the customer the illegal conduct of its employees
that policy would be undermined (para 219).
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).
20.
Mr John McCaughran QC, who appears for Daiwa, argues that the judge went
wrong at each stage of the analysis. The purpose of the prohibition of deceit
is to encourage honest dealing. The integrity of the legal system is not
enhanced by allowing fraudulent companies to recover damages in respect of
their fraud. If this is adequately addressed by the carefully calibrated Quincecare
duty, it leaves no room for the application of the illegality defence. As to
the public policy of enlisting banks and financial institutions in the fight
against financial crime and money laundering, there already existed important
incentives in the regulatory regime for banks and brokers to detect financial
crime. There was no need for a further incentive in the form of a damages claim
by the company. Denying the claim would be a proportionate response to the
company’s wrongdoing.
21.
Daiwa’s arguments necessarily depend upon a finding that Mr Al Sanea’s
fraud was the company’s fraud, an issue which is discussed later. But even if
it was, in my view the judge’s conclusion was correct for the reasons she gave.
I should, however, record my reservations about the view expressed by the Court
of Appeal as to the role of an appellate court in relation to the illegality
defence: that “an appellate court should only interfere if the first instance
judge has proceeded on an erroneous legal basis, taken into account matters
that were legally irrelevant, or failed to take into account matters that were
legally relevant” (para 65). Daiwa point out that applying the defence is “not
akin to the exercise of discretion” (citing Lord Neuberger in Patel v Mirza,
at para 175) and an appellate court is as well placed to evaluate the arguments
as is the trial judge. It is not necessary to resolve this in order to resolve
this appeal and there are cases concerning the illegality defence pending in
the Supreme Court where it should not be assumed that this Court will endorse
the approach of the Court of Appeal.
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.
23.
Against that, Lord Hoffmann went on to say that “This philosophy
expresses itself in the fact that … a duty to protect a person of full
understanding from causing harm to himself is very rare indeed. But, once it is
admitted that this is the rare case in which such a duty is owed, it seems to
me self-contradictory to say that the breach could not have been a cause of the
harm because the victim caused it to himself”. This is just such a case: the
purpose of the Quincecare duty is to protect a bank’s customers
from the harm caused by people for whom the customer is, one way or another,
responsible. Hence Mr Crow argues that the loss was caused, not by the
dishonesty, but by Daiwa’s breach of its duty of care. Had it not been for that
breach, the money would still have been in the company’s account and available
to the liquidators and creditors. This was not a case where the company’s act
came after Daiwa’s breach of duty (unlike Reeves, where the prisoner’s
suicide came after the police’s breach of duty). The fraudulent instruction to Daiwa
gave rise to the duty of care which the bank breached, thus causing the loss.
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.
31.
Stone & Rolls was a case between a company and a third party.
Lords Toulson and Hodge, after analysing the judgments in detail, reached the
conclusion (para 154) that “it should be regarded as a case which has no
majority ratio decidendi. It stands as authority for the point which it
decided, namely that on the facts of that case no claim lay against the
auditors, but nothing more”. Lord Sumption identified three points for which it
was authority (para 80), but Lord Neuberger, with whom Lord Clarke and Lord Carnwath
agreed, agreed with only two of these (para 26). The first was that an
illegality defence cannot be run by a third party against a company where there
are innocent shareholders or directors. The second was that the defence was
available, albeit only on some occasions, where there are no innocent directors
or shareholders. Lord Mance agreed with the first of these but as to the second
he commented that it “appears [to be] a factually correct representation of the
outcome of Stone & Rolls, though the present appeal does not raise
the correctness in law of that outcome, which may one day fall for
reconsideration” (para 50).
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).
34.
I agree. But in any event, in my view, the judge was correct also to say
that “there is no principle of law that in any proceedings where the company is
suing a third party for breach of a duty owed to it by that third party, the
fraudulent conduct of a director is to be attributed to the company if it is a
one-man company”. In her view, what emerged from Bilta was that “the
answer to any question whether to attribute the knowledge of the fraudulent
director to the company is always to be found in consideration of the context
and the purpose for which the attribution is relevant” (para 182). I agree and,
if that is the guiding principle, then Stone & Rolls can finally be
laid to rest.
35.
The context of this case is the breach by the company’s investment bank
and broker of its Quincecare duty of care towards the company. The
purpose of that duty is to protect the company against just the sort of
misappropriation of its funds as took place here. By definition, this is done
by a trusted agent of the company who is authorised to withdraw its money from
the account. To attribute the fraud of that person to the company would be, as
the judge put it, to “denude the duty of any value in cases where it is most
needed” (para 184). If the appellant’s argument were to be accepted in a case
such as this, there would in reality be no Quincecare duty of care or
its breach would cease to have consequences. This would be a retrograde step.
36.
Daiwa makes two further arguments - essentially policy arguments
-against this conclusion. First, it argues that it is odd if the claim of a
company arising out of the dishonest activities of its “directing mind and
will” against a negligent auditor fails (as in Stone & Rolls and in Berg
Sons & Co Ltd v Adams [1993] BCLC 1045) but a claim against a negligent
bank or broker succeeds. But (quite apart from the difficulties of Stone
& Rolls) this ignores the fact that the duties of auditors are
different from the duties of banks and brokers. The auditor’s duty is to report
on the company’s accounts to those having a proprietary interest in the company
or concerned with its management and control. If the company already knows the
true position (as in Berg) then the auditor’s negligence does not cause
the loss.
37.
Second, Daiwa argues that the law should not treat a company more
favourably than an individual. In Luscombe v Roberts (1962) 106 SJ 373,
a solicitor’s claim against his negligent accountants failed because he knew
that what he was doing - transferring money from his clients’ account into his
firm’s account and using it for his own purposes - was wrong. But companies are
different from individuals. They have their own legal existence and personality
separate from that of any of the individuals who own or run them. The
shareholders own the company. They do not own its assets and a sole shareholder
can steal from his own company.
38.
I therefore see nothing in those arguments to detract from the
conclusion reached - that, for the purpose of the Quincecare duty of
care, the fraud of Mr Al Sanea is not to be attributed to the company. However,
even if it were, for the reasons given earlier, none of the defences advanced
by Daiwa would succeed.
Conclusion
39.
In reaching this conclusion in such short order, I mean no disrespect to
the lengthy arguments of counsel or to the impressive judgments in the courts
below. But Mr Crow was correct to say that this case is bristling with
simplicity. A company with a substantial business traded for some years and ran
up debts in doing so. It also had a substantial sum of money standing to its
credit, as a result of its legitimate business activities, with its
broker-bankers. When it appeared that the company was running into
difficulties, its “directing mind” and sole shareholder fraudulently deprived
the company of that money by directing Daiwa to pay it away. Daiwa should have
realised that something suspicious was going on and suspended payment until it
had made reasonable enquiries to satisfy itself that the payments were properly
to be made. The company (and through the company its creditors) has been the
victim of Daiwa’s negligence.
40.
This appeal should be dismissed and the judge’s order should stand.
