Ponzi schemes, the Quincecare duty of care and dishonest assistance
The following looks at the recent decision in Stanford International Bank Ltd -v- HSBC Bank plc  EWHC 2232 (Ch), which considers issues of dishonest assistance and Ponzi schemes.
This concerned a Ponzi scheme involving Stanford International Bank Ltd (SIB).
SIB was an Antiguan bank run by its beneficial owner, Robert Allen Stanford, who was convicted in the United States for a $7 billion Ponzi scheme.
SIB sold certificates of deposits to investors in return for cash and generous rates of interest.
Funds from new investors were used to pay existing investors for redeemed certificates.
SIB was insolvent with debts of c.£5 billion, and its liquidators brought a claim against HSBC Bank plc (HSBC).
The claims were:
- Breach of 'Quincecare duty of care.'
- Dishonest assistance in relation to breaches of fiduciary duty by Mr Stanford
- HSBC applied to the High Court to have these two aspects of the claim struck out or to obtain a reverse summary judgment.
'Quincecare' duty of care
- This duty comes from
- the case of Barclays Bank plc -v- Quincecare Ltd  4 AER 363, and
- is a duty owed by a bank to its customers when disbursing payments on behalf of its customer.
- A bank should refrain from executing payments if and for as long as it was 'put on enquiry' that the payment may be fraudulent.
- The liquidators claimed that HSBC ought to have been aware of SIB's fraudulent activity by 1 August 2008.
- However, payments continued to be made from its accounts until February 2009, when Mr Stanford was charged by the U.S. authorities.
- Therefore, it was claimed that HSBC was in breach by disbursing around £118 million / £80 million (N.B. there was some doubt about the exact amount disbursed) after it should have become aware of the fraudulent activity and frozen the accounts, and therefore sought damages to that amount.
- In English law, damages are compensatory, and they are primarily awarded to compensate a party for losses incurred.
- HSBC claimed that SIB suffered no loss as the monies paid out discharged SIB's contractual liabilities to the certificate of deposit holders.
What if the company is insolvent?
- SIB was irredeemably insolvent.
- Had HSBC frozen SIB's accounts on 1 August 2008, SIB would have had some £80 million available to it. At the same time, it would have had significant liabilities.
- Nugee J took the view that despite being heavily insolvent,
- SIB was worse off by having £118 million / £80 million of its assets wrongfully extracted from its bank accounts.
- A saving of £118 million / £80 million of liabilities would not make SIB any better off - it would still be as insolvent as it was but with a different mix of creditors.
- Some adjustment to the damages may have been appropriate as the total pool of creditors had been reduced by £118 million / £80 million.
Nugee J analysed the position as follows:
- If a company is a solvent,
- then paying £100 of its money and discharging £100 of its liabilities, on the one hand, reduces its assets but, on the other hand, is offset by a corresponding benefit to the company by reducing the creditors that have to be paid; but
- if the company is insolvent,
- then paying £100, on the one hand, reduces its assets, but that is not offset by a corresponding benefit to the company and a reduction in its liabilities, as it still does not have enough to pay them all and there has not in fact been any increase in its net assets as it still has no net assets at all.
- Held - the Quincecare allegation was not struck out.
- The liquidators' claim against HSBC for dishonest assistance, in relation to Mr Stanford's breaches of fiduciary duties to SIB, by continuing to operate the accounts from 1 August 2008 onwards was, however, struck out.
- Dishonest assistance requires 'dishonesty'.
- Knowledge held by people working for HSBC, who were not themselves dishonest, could not be used to argue that HSBC was dishonest.
- No dishonesty was pleaded against any particular individual.
- One cannot aggregate two innocent minds to make a dishonest whole, i.e. their aggregate knowledge would have been knowing a fraud or dishonesty.
- The liquidators argued that 'corporate recklessness', and not knowing or caring whether SIB was being appropriately run or not, was sufficient to amount to dishonesty.
- The court disagreed. It was not pleaded that HSBC failed to make inquiries because it was suspicious but did not want to know.
- The Quincecare argument was not struck out and so carries forward to trial.
- The dishonest assistance argument was struck out on the basis of lack of evidence of knowledge on the part of HSBC.
- There is the possibility for SIB to bring a claim of dishonest assistance if knowledge can be found within HSBC that SIB was a fraudulent Ponzi scheme from 1 August 2008 onwards.
- The case is currently on track for a five-week trial in October 2021.