Ponzi Schemes, The Quincecare Duty Of Care And Dishonest Assistance

• Published date: 14 December 2020
• Subject Matter: Corporate/Commercial Law, Criminal Law, Corporate and Company Law, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Hill Dickinson
• Author: Ms Saba Mumraz

We look at the recent decision in Stanford International Bank Ltd -v- HSBC Bank plc [2020] EWHC 2232 (Ch), which considers issues of dishonest assistance and Ponzi schemes.

Facts

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 [1992] 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 US 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.

Damages

In English law, damages are compensatory, 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...