Ending The 'Blunt Force' Of The Illegality Defence In Stone & Rolls

Singularis (In Official Liquidation) -v- Daiwa Capital Markets Europe Ltd [2019] UKSC 50

The Supreme Court has handed down its much awaited decision...

Overview

The decision in this appeal by Daiwa focuses on whether the actions of a dominant personality owner-director should be attributed to the company; and, if so, whether a claim by the company against its bank should fail by reason of illegality, among others.

The Supreme Court justices have held unanimously that the fraud by the owner-director (Mr Al Sanea) was not attributable to the company, and therefore the illegality defence does not apply (although the defence would have failed in any event due to other reasons).

This decision confirms a trend seen in several cases since Moore Stephens (a firm) -v- Stone & Rolls Limited (in liquidation) [2009] UKHL 39 that rejects the 'one man band' illegality defence. In doing so it permits a more nuanced deduction for contributory negligence, rather than the 'all or nothing' "blunt instrument of the illegality defence".

Background facts

Singularis is a company registered in the Cayman Islands and set up to manage the personal assets of Mr Al Sanea. He was the sole shareholder, a director and also Singularis' chairman, president and treasurer. The company's six other directors were reputable but had no influence on its running.

The appellant, Daiwa, is the London subsidiary of a Japanese investment bank and brokerage firm.

In 2009 Mr Al Sanea instructed Daiwa to make eight payments, totalling approximately US$204,500,000, out of Singularis' account. Daiwa duly made those payments, which were fairly obvious misappropriations of Singularis' funds and relied on documentation provided by Mr Al Sanea which he knew to be false.

Having been put into voluntary liquidation, the liquidators brought a claim against Daiwa in 2014 for the full amount of the payments, based on (i) its alleged dishonest assistance in Mr Al Sanea's breach of fiduciary duty and (ii) breach of Daiwa's Quincecare duty of care to the company, by reason of Daiwa's having given effect to payment instructions which it ought in the circumstances to have questioned.

Judgment

The illegality defence is founded on the basis that a valid claim does not arise in connection with a claimant's own illegal act.

The Supreme Court unanimously upheld the First Instance Judge's rejection of Daiwa's illegality argument on the basis that Singularis' fraud could not be attributed to the company...