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Stanford International Bank Ltd In Liquidation v HSBC Bank PLC

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    The Supreme Court have dismissed the appeal by SIB against the Court of Appeal's earlier decision in which they struck-out SIB's "Quincecare" duty claim against HSBC. They did so on the basis that where monies had been paid to creditors of SIB in discharge of debts owed to those creditors, SIB had suffered no loss of a chance that had any pecuniary value to SIB, and hence there was nothing recoverable on SIB's pleaded case. Paying a valid debt did not reduce the payer’s wealth. A "net loss" rule applied in awarding damages for breach of contract or in tort so that losses and gains arising from the breach must be netted off against each other and only any net loss awarded as damages. 


    SIB is a company incorporated in Antigua and Barbuda that went into liquidation in 2009. SIB was owned and controlled by Robert Allen Stanford (Stanford). Most of its business was selling investment products to international customers. However, from 2003 to 2009, SIB was being run as a large Ponzi scheme by Stanford and others. Customer withdrawals and payments made when investment products supposedly matured were made from capital invested by other customers rather than investment proceeds. In 2008, many customers requested withdrawals from SIB, fearing that it may become insolvent.

    SIB had bank accounts with HSBC. These accounts were frozen by HSBC in February 2009 following action  taken by the US SEC against Stanford. Prior to the accounts being frozen, from August 2008, Stanford purportedly authorised various payments from the accounts. The appeal concerned payments from the accounts totalling £116 million which was used to pay SIB’s customers, some directly from those accounts and some after money was transferred by HSBC to SIB’s account with a different bank in Toronto (the disputed payments).

    SIB claimed that HSBC was on notice that the instructions to make the disputed payments may have been part of a fraud and it alleged that HSBC was under a Quincecare duty of care to refuse to accept Stanford’s instructions to pay out money from the accounts (the “Quincecare claim”). HSBC succeeded before the Court of Appeal. SIB appealed to the Supreme Court.

    The Appeal

    The sole basis of the appeal concerned solely whether, assuming hypothetically that HSBC did owe SIB the Quincecare duty and was in breach of that duty, that breach gave rise to any recoverable loss by SIB.

    In the lead judgment by Lady Rose, the Court distinguished between customers who withdrew their funds in full and escaped without loss ("early customers") and customers who did not withdraw their funds before collapse and who now risked losing almost all their money as creditors able to recover only a small dividend (about 5 per cent) in the liquidation ("late customers"). Antiguan insolvency law contained no statutory provision for the avoidance of fraudulent or wrongful preferences. It was recognised that this uneven distribution of loss among investors in the fraudulent scheme might be described as "capricious".

    The appeal proceeded on the hypothetical basis that there had been a breach by HSBC of the Quincecare duty.

    SIB’s case was originally put on the basis that if HSBC had not wrongly paid out the £116 million from its bank account, then that money would still be in its bank account and SIB would therefore be better off to the extent of that amount. In the usual Quincecare case, that is how loss would be approached, because the monies misappropriated do not go to relieve the company of any genuine liability it owes and there is a depletion of the company’s net assets in the amount paid away. However, it appeared that SIB now recognised that this was too simplistic because the £116 million in payments out of its account did relieve it of £116 million of debt that it owed, and apparently accepted that the net asset point which formed the basis of the Court of Appeal’s decision is a good one.

    SIB now put its allegations as to loss on the basis that the damage it suffered was the result of the loss of a chance; at the time the disputed payments were made, the company was hopelessly insolvent and it had since gone into liquidation. SIB argued that, if HSBC had not made the payments, those debts would still be owed to the early customers. Those early customers would have to prove their debts in the liquidation and would be likely to receive a dividend of only a few pence in the pound. SIB’s loss, therefore, was the loss of the chance to discharge those debts for a few pence in the pound. 

    The loss caused to SIB was therefore said to be the difference between the payment wrongly made by HSBC to the early customers of 100 pence in the pound, and the dividend that the early customers would have received if they had had to prove their debts in the liquidation. 

    Concentrating on the nature of the chance that SIB has lost, if HSBC had complied with its Quincecare duty and disobeyed Stanford’s instruction to pay out SIB’s money, the counterfactual world is one in which SIB has an extra £116 million to its credit. It would not, prior to going into liquidation, have discharged any of the payments due to the early customers. In that situation, there is no longer any distinction between early and late customers - everyone becomes a late customer who has tried to redeem their investment but has been refused because the scheme has collapsed and the monies have all been frozen. There would then be only one pool comprising all the customers who, at the moment of liquidation, were owed money and had not at that point received any money to which they were entitled.

    Assuming that all those customers then share pari passu in the liquidation, they would all have those debts "discharged" for the same dividend as part of the same winding-up procedure. In the counterfactual world where there is an extra £116 million for the liquidators to distribute, one might assume that all customers will get a higher dividend, say 12p in the pound, rather than the 5p in the pound that the late customers would ultimately receive in the real world. That would mean that a higher percentage of the debt that was originally owed to each customer would be "discharged" when SIB is dissolved. However, the "chance" of being able to discharge a debt owed to an early customer by paying them 12p instead of the 100p they were in fact paid, was matched by the “risk” of having to pay the late customers 12p instead of 5p to “discharge” the debt owed to them on dissolution. The chance must, in the circumstances, be quantified as exactly the same amount as that risk. No additional customer indebtedness is paid off: exactly the same amount of indebtedness is in effect extinguished "for free" on the company’s dissolution. The chance that was lost to SIB as a result of HSBC’s breach was not, therefore, a chance either to pay more money overall to the pool of indistinguishable customers, or a chance to "discharge" more of their indebtedness for free. 

    SIB argued that the chance that was lost was the chance to act more fairly as between customers by making sure that the early customers did not, by happenstance, benefit by receiving 100p at the expense of the late customers who only get 5p - everyone should just get 12p. Putting aside questions as to whether such a loss is within the scope of the Quincecare duty, SIB clearly did not suffer a pecuniary loss. The fairness or otherwise of any particular early or late customer having been paid or not paid was not a matter that the Court could investigate or assess. 

    SIB also argued that it could be said that money would have been saved by discharging the early customers' debts of 100p by paying them only 12p separately from the extra money that would have to be spent by paying the late customers 12p rather than 5p. The Court held that the fact that the saved money would have been spent to benefit the late customers was simply how SIB would have used the money if it had not been paid away. SIB also argued that the fact that, when the bank account holder vindicates its rights against the bank, it is only the creditors who will benefit rather than the account holder itself is irrelevant to the question of whether the account holder has such a right. That argument failed because it ignored the fact that in the counterfactual world where the money had not been paid away, there are no early or late customers, only customers. 

    It would have been a breach of contract for SIB to refuse to pay the early customers when they requested redemption of their supposed investment. The fact that remedial powers to adjust the rights of creditors as the liquidators deem fit are available in the UK but not in Antigua did not affect the outcome. On this basis, the Supreme Court agreed with the conclusion of the Court of Appeal that the Quincecare claim must be struck out because SIB has not suffered the loss of a chance that had any pecuniary value and hence there is nothing recoverable on its pleaded case.

    In a concurring judgment, Lord Leggatt observed that the Court of Appeal had accepted that it was plausible to imagine that making the disputed payments might have caused consequential loss to SIB: for example, if HSBC had frozen the accounts earlier than it did, i.e. before February 2009, this might conceivably have caused SIB to go into liquidation at an earlier date  and thereby avoid incurring further liabilities. But SIB had not made any such claim. 

    As to SIB's argued case, he said "There is no way of escaping the simple truth that paying a valid debt does not reduce the payer’s wealth". SIB's case disregarded the net loss rule: the basic rule that applies in awarding damages for breach of contract or in tort that losses and gains arising from the breach must be netted off against each other and only any net loss awarded as damages.

    He separately observed that there was no "date of breach" rule that, as a matter of law, loss caused by breach of a duty owed under a contract or in tort is generally to be assessed as at the date of breach. Losses caused by breach of a contractual or common law duty routinely occur after the date of the breach and are generally to be assessed at the date when the loss occurred or the date when damages are awarded, whichever is earlier. 

    Lord Sales in a dissenting judgment held that SIB had suffered a loss. 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 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 constituted a loss to SIB. It was not correct to treat SIB as a pure abstraction. When paying 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 would not now be used to pay the general creditors as a whole, as they should have been, and this diversion of funds is a loss to SIB. 


    We think it is difficult to take issue with the logic of applying the "net loss" rule on the facts of this case. However, the Supreme Court has only recently delivered its judgment in BTI 2014 LLC -v- Sequana SA [2022] UKSC 25 (Sequana). Lord Sales considered Sequana was relevant to the question of loss. Precisely how the two decisions interrelate is an interesting question.

    AuthorDavid Capps

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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