Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd

The Claimant (‘Singularis’) brings this claim to recover about $204 million that in early June 2009 was held for its benefit in a segregated client account by the Defendant stock broker (‘Daiwa’). At that time, Singularis was wholly owned by Maan Al Sanea, a wealthy businessman who also owned a substantial business group called the Saad Group based in Saudi Arabia. The money in the client account came from two main sources. About $124 million was surplus collateral that was left over when Daiwa closed down a long standing, secured lending relationship it had with Singularis at the beginning of June 2009. About $80 million had arrived in Singularis’ account with Daiwa on 2 June 2009 in circumstances that I shall describe later.

Over the course of a month between mid June and mid July 2009, Daiwa paid out that money on Mr Al Sanea’s instructions to bank accounts in the names of three other companies within the Saad Group rather than back to a bank account of Singularis. There are eight disputed payments in all, ranging in size from just over $1 million to one payment of $180 million. The money has now been lost to Singularis.

Singularis was incorporated in the Cayman Islands and is now in the hands of liquidators appointed by order of the Grand Court of the Cayman Islands. The liquidators claim back the money from Daiwa on two bases. The first is that Singularis alleges that the employees of Daiwa who authorised the payments dishonestly assisted Mr Al Sanea’s breach of fiduciary duty in removing the money from Singularis for the benefit either of himself or of companies in the Saad Group. The second basis is that Daiwa was in breach of the duty of care owed by a bank to its client by negligently failing to realise that Mr Al Sanea was committing a fraud on the company and misappropriating Singularis’ monies when he instructed Daiwa to pay the money to third parties. Singularis rely on the duty owed by the bank to its client as described by the Court of Appeal in Lipkin Gorman (a firm) v Karpnale Limited [1989] 1 WLR 1340 and by Steyn J in Barclays Bank plc v Quincecare Ltd and another [1992] 4 All ER 363.

Daiwa defends the claim on the basis that Singularis has not established that Mr Al Sanea was acting in breach of fiduciary duty when asking for the money to be paid to his other companies. They say that Mr Al Sanea was the sole shareholder of Singularis and entitled to move the money to other companies in his control if he so wished. They say that no one in Daiwa acted dishonestly in their dealings with the payments so the claim for dishonest assistance is not made out. As regards the claim in negligence, they say that there was nothing in the surrounding circumstances to alert Daiwa to the possibility that Mr Al Sanea was acting improperly. They also raise a number of legal defences to the claim, asserting for example that the claim is barred by illegality or that the Quincecare duty does not arise in the circumstances of this case. Some of these legal defences boil down to an assertion that any fraudulent conduct on the part of Mr Al Sanea must be treated as the misconduct of Singularis itself so that Singularis is precluded from bringing this claim against Daiwa, even if Daiwa were negligent. Finally, Daiwa relies on clauses in its standard terms of business which it says are binding on Singularis and which exclude Daiwa’s liability except for gross negligence.

Singularis, Mr Al Sanea and the Saad Group

Singularis was incorporated in the Cayman Islands on 3 October 2006 under the name of Saad Investments Finance Company (No. 7) Limited. It changed its name to Singularis Holdings Limited on 21 December 2006. From incorporation until the appointment of the liquidators in September 2009 Singularis’ registered office was in the Cayman Islands. The sole shareholder of Singularis as from 30 December 2008 was Mr Al Sanea. Before that date the ultimate beneficiary of the shares in Singularis was the Saad STAR Trust which was a Cayman Island trust settled by Mr Al Sanea. Singularis was set up to manage Mr Al Sanea’s personal assets outside the Saad Group. Singularis was not therefore consolidated with the Saad Group companies. There were a number of directors of Singularis in addition to Mr Al Sanea, including Mr Al Sanea’s wife Sana Abdulaziz Al Gosaibi, his daughter and four other people. Mr Al Sanea’s wife is significant in this narrative because the first problems affecting the Saad Group appear to have arisen from a default by a group of companies owned by the Al Gosaibi family.

Mr Al Sanea is the founder and Chairman of the Saad Group of companies. In 2006 and 2007 Daiwa was provided with a copy of Mr Al Sanea’s personal net worth statements, endorsed by PriceWaterhouse Coopers (‘PwC’) showing him to be a very wealthy man indeed. One Daiwa witness described Mr Al Sanea as an attractive, honest and admirable business person.

A number of companies within the Saad Group play an important role in the events giving rise to this claim:

Singularis called only one witness in support of their claim, Stephen Akers. Mr Akers is a partner of Grant Thornton UK LLP and was appointed together with Hugh Dickson and Mark Byers also of Grant Thornton to be the Joint Officials Liquidators of Singularis. Mr Akers was a straightforward and truthful witness though of course he was not able to give evidence about the events from which these claims arise.

Daiwa

Daiwa Capital Markets Europe Ltd (‘Daiwa’) is the London based subsidiary of the Japanese investment bank and brokerage company Daiwa Securities SMBC Co Ltd headquartered in Tokyo (‘Daiwa Tokyo’). In May 2008 Daiwa was principally an equity and bond brokerage business, specialising in the sale of Asian stocks to European investors, facilitating European issuers of notes to sell those notes in the Japanese market through Daiwa and more general bond and equities brokerage and repo activity. One important point to note is that it was not a licensed deposit taker and so could not operate ordinary bank accounts for its clients.

One of the Daiwa witnesses, Mr Blanchard, noted in his witness statement some of the differences between the culture in a Japanese company compared with that in a ‘Western’ organisation. He described a certain lack of sophistication and a tendency to treat counterparties with the utmost respect. It was not suggested, however, that some different legal test applied to Daiwa from that which would apply to any company doing business in London or that their conduct should be judged by a standard different from the standard set out in the relevant case law.

Daiwa called eight witnesses. Some of them were able to give evidence primarily about the events leading up to the ending of the relationship between Daiwa and Singularis and some gave evidence about the making of the disputed payments:

Mr Metcalfe and Mr Hudson are the employees who are alleged to have been dishonest in their authorisation of the disputed payments. I therefore deal with their credibility in more detail later. As regards the other witnesses I consider that they were all honest witnesses doing their best to assist the court when giving their oral evidence. One striking feature of the trial was that the tenor of the Daiwa witnesses’ written evidence was markedly different from their oral evidence. In their written statements they firmly downplayed the significance of the events that were unfolding at the end of May and beginning of June, whereas in cross-examination they readily agreed that the events were really very worrying indeed. For example, in his witness statement, Mr Blanchard referred to the Bloomberg article published on Sunday 31 May 2009 about the freezing of Mr Al Sanea’s bank accounts in Saudi Arabia. He says in his written evidence “This article did not make positive reading” and that although this might have signalled deeper problems for Singularis, it was difficult to draw conclusions about events. He went on “I noted however that the freeze related to [Mr Al Sanea] and not Singularis and therefore Daiwa did not have any evidence that Singularis was experiencing financial difficulties”. In cross-examination however he readily agreed that the news on 31 May was “like a bombshell” and did not attempt to minimise the gravity of what was happening so far as the future of Singularis was concerned. Similarly, some of the witnesses when describing their thoughts and concerns over the period 24 May – 1 June 2009 referred to the fact that share prices had recovered from the lows of 2008 and were on an upwards trajectory. For example, Mr Sakashita said in his written evidence that by May 2009 the value of Singularis’ stock held as collateral for the loans “had recovered materially from the lows of January 2009” so that he was “more relaxed” about the credit risk Daiwa faced from Singularis in May than he was in January. However, he and other witnesses whose written evidence referred to the recovery of stock prices as alleviating their concerns readily accepted in cross-examination that in this period of unprecedented stock market turbulence, shares were just as likely to fall dramatically again as they were to continue to rise. Other passages in the written evidence in which the witnesses described factors from which they drew comfort at the time as regards Singularis’ financial health, such as the promises of future actions given at a meeting with Mr Wetherall in March 2009 or the rosy picture appearing from Singularis financial information provided in September 2008 were also largely undermined in cross-examination when the witnesses accepted that none of the promises had been fulfilled and the September 2008 figures were hopelessly out of date by mid 2009.

In light of this I have relied more on the oral evidence of the witnesses than on their written evidence. That oral evidence about their reactions at the time to unfolding events is much more consistent with the contemporaneous documents, and with commercial business sense, than the more anodyne written statements.

Other Daiwa personnel involved in this narrative who did not give evidence include:

Expert witnesses

Both sides instructed experts on the scope of the regulatory obligations to which Daiwa was subject at the time. Singularis’ expert was Simon Elvidge. Mr Elvidge is a former Chief Compliance Officer and Money Laundering Reporting Officer with over 20 years of experience. The Defendant’s expert witness was Oliver Lodge. He has also worked as Head of Compliance and Money Laundering Reporting Officer for clients over many years. Both experts also gave their opinion on the market standards and best practices in place as at 2009. Following the close of the evidence from the factual witnesses, it was agreed by the parties that much of the material in the expert reports was no longer relevant.

The early relationship between Singularis and Daiwa: November 2006 to August 2007

The relationship between Daiwa and the Saad Group started when Daiwa provided SICL with repurchase agreement financing for the acquisition by SICL of an Emirates International Bank bond. Daiwa subsequently financed SICL’s acquisition of shares in HSBC Holdings Plc ("HSBC"). SICL and Daiwa entered into a Global Master Repurchase Agreement on 8 October 2006 for the purpose of this repo. In November 2006 the relationship between SICL and Daiwa expanded when they signed a Global Master Stock Lending Agreement.

In January 2007 Mr Wetherall of SFS came to visit Daiwa in London. Daiwa and Singularis entered into a Global Master Securities Lending Agreement on 13 April 2007 (later amended). At the same time Daiwa was provided with a guarantee from SICL for up to 5.5% of the market value of the transactions between Daiwa and Singularis and a separate unlimited guarantee from Mr Al Sanea personally. A few days later, the rights in relation to these HSBC shares and the related financing agreements were novated from SICL to Singularis by a novation agreement dated 16 April 2007 between Daiwa, SICL and Singularis. On the same day Singularis notified the Stock Exchange of its interest in more than 3% of the shares in HSBC. I will consider in more detail the way in which the account was set up in the context of the issue as to whether Daiwa’s standard terms of business applied to the relationship between the parties.

Thereafter Daiwa also financed the acquisition by Singularis of further shares in HSBC and in BNP Paribas SA ("BNP") and JP Morgan Chase & Co ("JP Morgan"). These shareholdings were acquired between April and November 2007 and were purchased largely with debt financing provided by large international banks. According to Mr Akers, as at 30 April 2008, Singularis' liabilities to banks and other financial institutions exceeded $14.6 billion. Singularis’ shareholdings in HSBC, BNP and JPM comprised the vast majority of Singularis’ equity portfolio. As at 30 April 2008, Singularis’ equity portfolio was almost entirely invested in financial institutions in the United Kingdom (US$ 6.6 billion) and in France (US$ 3.8 billion). Singularis’ shareholding in HSBC was the most significant of its three substantial shareholdings.

Under the terms of the stock lending agreement between Daiwa and Singularis, Daiwa was entitled to hold a margin or ‘haircut’ of a certain percentage of the total value of the shares lent to Daiwa. If the value of the shares fell such that Daiwa’s margin was less than the prescribed percentage, Daiwa was entitled to call for additional margin to bring the haircut back to the prescribed level. If the price of the shares rose so that Daiwa was holding more cash than the prescribed percentage in margin, Singularis was entitled to call some of the margin back. At the outset of the relationship, the prescribed level of collateral which Daiwa was entitled to hold was 5%. This grew to 10 per cent by October 2008. The collateral management team within Daiwa would decide on a daily basis whether any additional margin was due. Instructions to Daiwa about movements into and out of the Singularis account were given by a SWIFT instruction as the most secure way of authenticating that the instruction comes from the person authorised to deal with the account.

In about June 2007, the guarantee that SICL had given for Singularis’ obligations to Daiwa was released and replaced by an additional pledge of $90 million held by Daiwa as collateral. This sum of $90 million was the subject of discussion in mid 2009 as its status as support for the stock lending agreement was not entirely clear.

Three aspects of the relationship between Daiwa and SICL/Singularis at this stage emerge from the evidence. First, the relationship was the single most profitable relationship for Daiwa over the years 2007 to 2009. Daiwa made profits on the transaction partly by lending out the stock to other market counterparties and partly by charging interest on the money loaned to Singularis. In an email from Mr Roberts to Mr Kosuge in early February 2009, Mr Roberts said that between March 2007 and the end of January 2009 Daiwa had earned about £13.8 million from trading with Singularis. A great deal of management time and effort was put into maintaining the relationship. Mr Kosuge said that Mr Al Sanea was one of the wealthiest and most sophisticated businessman in Saudi Arabia at the time and Daiwa valued its business relations with the entities which he controlled, including Singularis.

Secondly, Singularis was a very unusual client because it was a private company owned by a high net worth individual rather than a financial institution. This was a unique relationship in that Daiwa did not have any similar size stock lending arrangement with any other counterparty at the time. It was therefore closely monitored by the credit risk function within Daiwa. Mr Blanchard’s evidence was that he was concerned that Daiwa in London did not have the understanding and experience to conduct business safely with high net worth individuals, especially those from emerging markets. Mr Blanchard was also concerned that the collateral management function in Daiwa was not run to the market standard needed if Daiwa were to develop more business of the kind that required frequent assessments of risk and collateral requirements. His evidence was that he was looking for a way to bring the relationship with Singularis to an end as soon as the stock market turbulence that brought matters to a head started.

Thirdly, the nature of the business conducted with Singularis was unusual. It was the reverse of a normal stock lending agreement under which, typically, the owner of the shares (the lender) transfers the shares to the borrower and the borrower posts cash collateral equal to the value of the shares plus a specified percentage referred to as the margin or haircut. That collateral is not regarded as a loan to the lender but is security to make sure that the lender gets the shares back. The rationale for the stock lending transaction between Daiwa and Singularis was different. Daiwa lent money to Singularis to buy the shares and then Daiwa received the shares as collateral for what was in effect a commercial loan. This was really more a form of secured lending, the money loaned being secured by the deposit of the shares and margin. Mr Day described the relationship as ‘collateralised name lending’ by which he meant that Daiwa lent to Singularis on the basis of Mr Al Sanea’s name and on the understanding that Mr Al Sanea would fund any future collateral requirements if Singularis could not do so from its own reserves. In return Daiwa held a significant amount of collateral in the form of the share stocks and cash.

Mr Metcalfe describes the information provided to the Credit Risk Department about Singularis on an ongoing basis. The function of the credit risk department is to identify the risk that the counterparty will not settle an obligation when due or at all. Credit Risk checks that the level of collateral held for the client is adequate and also receives and reviews updated financial information about a counterparty as and when it becomes available. Credit Risk sometimes visits the client to discuss their current performance and future plans. From time to time Credit Risk will produce a Credit Review Memorandum setting out a more detailed analysis of the credit risk associated with a client. Mr Metcalfe accepted in his witness statement that because Singularis was a private company, published information about its finances was scarce.

On 20 August 2007 the Credit Risk department in Daiwa produced a report on Singularis, based on the most recent set of financial reports for Singularis dated 30 June 2007 and audited by PwC. By this time the stock markets had begun to slide as a result of the first signs of the sub-prime mortgage crisis in the USA. The credit review noted that Singularis had conducted $1.131 billion of share purchases with Daiwa and that Daiwa had financed $1.664 billion of those shares. Between 8 and 16 August 2007 the value of the stock held by Daiwa fell by about $163 million. In addition, Singularis had committed to execute a further $533 million of cash trades through Daiwa. In preparation for the review, Mr Metcalfe spoke to Mr Ravi Uppal, the Financial Controller of the Saad Group in Geneva, and put to him various questions that Mr Sakashita had wanted clarified about the financial accounts. He reported to senior management that he asked Mr Uppal “if there was a limit to the level of Saad group support” for Singularis’ liquidity. Mr Uppal had said that Mr Al Sanea would not have made the decision to invest in three banks if he did not have the capital to cover market movements. Mr Metcalfe interpreted this as meaning that it was reasonable to expect that support from Mr Al Sanea would continue. Mr Uppal also told Mr Metcalfe that Singularis was viewed as a ‘pension fund for the next generation of the family’. The company’s strategy was to invest for a five to seven year period and this strategy was reviewed every six months. Mr Uppal said in relation to the current market declines that ‘if HSBC dropped 50p it would be viewed as a buying opportunity’. Mr Metcalfe concluded that it was a very good discussion and ‘provided clear statements of high levels of available liquidity to meet current market margin calls’.

In the credit review of 20 August 2007, Mr Metcalfe recorded his assessment that the risk of Singularis not being able to meet a margin call was ‘very low’ and the risk of Mr Al Sanea defaulting on his guarantee was ‘very low’. He recognised in the report that Singularis was ‘reliant on cash injections from Mr Maan Al Sanea (via shareholder loans &/or equity increases) to maintain sufficient liquidity to meet collateral calls’. This meant that Singularis’ liquidity was constrained by Mr Al Sanea’s willingness to divert funds from his other businesses to Singularis but Mr Metcalfe was certain that Mr Al Sanea was able and willing to do so. Mr Metcalfe also noted that the experience to date with Singularis has been very positive and proactive. As far as Mr Al Sanea himself was concerned, Mr Metcalfe said:

“3)

Mr. Al-Sanea is a very high profile & wealthy businessman in Saudi Arabia. His wealth & cash flow is driven from his ownership of the Saad Group of Companies. Such group reported 1H2007 net income of $715mn and equity of $7.4bn (excluding $3bn of personal loans to the group). His personal reputation & standing within Saudi business/political arenas is immensely important to him. As such, we believe that it is highly unlikely Mr. Al-Sanea would not fulfil his financial obligations to us.

Mr Al-Sanea has said to the [Daiwa] Relationship manager “counterparties that stick by the Saad Group during uncertain market conditions will become core members of the inner-circle”. This is very much in keeping with Saudi culture.”

Despite this very positive review, the senior management in Daiwa recognised that care had to be taken with this relationship. In mid-August 2007 Mr Sakashita wrote to his colleagues in Tokyo that the performance of the banking sector was in ‘a very critical situation’ because of the downturn triggered by the sub-prime mortgage crisis. He continued that ‘extremely careful risk management is required’ for the financial dealings with the Saad Group. Mr Kosuge and the President of Daiwa in London, Mr Nakamura, also sent a report to senior management in Daiwa Tokyo on 20 August 2007 about financial transactions with the Saad Group. They reported that given the situation of the market turbulence, ‘although the risks have not become greater, we will still have to proceed carefully due to the recent drastic changes in the stock market’. Mr Kosuge accepted in cross-examination that from this time onwards, the Singularis account was under close scrutiny as a matter of risk management.

Mr Metcalfe, however, did not recall this message being relayed to the Credit Risk department. Mr Wright also said that he was not aware that the relationship had come under particular scrutiny from August 2007.

The period September 2007 to the end of 2008

In September 2007, senior management from Daiwa travelled to Geneva to meet Mr Wetherall and one of Singularis’ directors, Mr Hart. Mr Metcalfe was also present at this meeting. Mr Metcalfe’s evidence is that they were told that the business was in good shape and that the market turmoil had had no impact on them. Mr Metcalfe recalls that Mr Hart confirmed that all of Singularis’ cash came from Mr Al Sanea but that even if HSBC shares were to fall by 30 per cent, Mr Al Sanea would still have enough cash reserves to cover margin calls. At this meeting the Daiwa people were also told about Singularis’ other lenders. They were told that these included Citigroup, Credit Suisse International, Commerzbank (formerly Dresdner Bank AG London Branch), Lehman Brothers International (Europe) and Royal Bank of Scotland plc in addition to Daiwa. Mr Metcalfe’s evidence is that he did not know the specifics of their funding arrangements, but that he knew that each of the funders was bigger and more powerful than Daiwa. He drew comfort from the fact that each of them must have done their own due diligence on Singularis and found that it was an acceptable counterparty. At this time, the Daiwa management also asked for details of Mr Al Sanea’s personal net worth and were told it was about $15 billion and that this figure had been audited by PwC.

There was a further meeting with SFS personnel in Geneva on 14 November 2007 when Mr Metcalfe was again reassured by Mr Wetherall that despite the very substantial drop in share prices over the summer, Singularis was invested for the long term and had plenty of cash to ride out this storm. Similar messages were received when there were discussions between the parties in response to more severe falls in share prices.

In March 2008 there was a further credit review of Singularis by Mr Metcalfe. Again this was a very upbeat report, having regard to the way that Singularis had shown itself to be able to meet very substantial margin obligations and that its representatives had confirmed to Daiwa the long term nature of its investments.

In June 2008 there was an internal audit report produced within Daiwa called “Thematic Review of Fraud” (‘the Thematic Review’). This document, which is referred to in Mr Wright’s witness statement, seems in my judgment to provide a wake up call for the Daiwa management which they would have done well to heed. The Executive Summary of the Thematic Review refers to the Financial Conduct Authority’s report on the importance of antifraud measures in the investment banking industry. The FCA had highlighted that, although investment banks tended to have some general controls to mitigate the risk of fraud:

“The main areas that the report highlighted which should be addressed or improved are that senior management should be more proactive in taking responsibility for identifying and assessing fraud risk, as well as ensuring that there is clear and appropriate allocation of anti-fraud responsibilities within firms.”

The Thematic Review refers to the objective of the audit being to evaluate and report on the adequacy and effectiveness of internal controls related to fraud. The Key Issues identified in the Executive Summary included that “Management have not performed a structured assessment of fraud risk within the Firm” and that “Accountability for fraud has not been clearly defined within senior management and committee structure”.

The body of the Thematic Review highlighted various problems within Daiwa:

Although Mr Wright refers to this document as one of a number of reviews that ‘may be relevant’ he does not mention any action that he took to implement what was said there.

At the start of September 2008, Daiwa received a copy of Singularis’ audited financial statements for the year ending 30 April 2008. In the covering letter, Mr Al Sanea said that he had injected about $7.5 billion into the firm to cover its obligations and that he would inject more money if necessary. His view was that the worst was past and that 2009 “will surprise to the upside”. This optimism was, as we know, not justified as over the weekend of 14/15 September 2008 the Lehman Brothers bank went into administration. Mr Metcalfe knew that Saad Group was exposed to Lehman because of a discussion a few days earlier on 9 September 2008 in which Mr Wetherall had referred to that exposure. Immediately following the collapse of Lehman Bros, Mr Roberts spoke to SFS in Geneva and reported back that Saad Group owed more money to Lehman than Lehman owed to Saad. SFS had reassured him that they could cover that exposure from cash. Shortly after Mr Roberts emailed his colleagues again reporting a ‘Saad update’ to the effect that the overall borrowings owed by Singularis to Lehman exceed the value of the stocks held as margin by Lehman. Thus it was clear that from this date Lehman had an uncovered and unsecured claim against Singularis. Mr Metcalfe accepted in evidence that nothing happened thereafter to suggest that that exposure had been removed and Lehman repaid.

In October 2008, Daiwa received a set of 6 month interim accounts from Singularis for the period to 5 October 2008. These had been reviewed by PwC and no qualification had been made. Mr Metcalfe wrote to his colleagues noting that Singularis’ investment portfolio did not seem to have suffered as much as some stocks and that the accounts showed ‘substantial unencumbered cash liquidity amounting to $6.8bn’.

the period 1 January 2009 to 21 May 2009

On 2 January 2009 there was a stock exchange announcement that Singularis had reduced its shareholding of HSBC stocks from 3.24% of the total share capital of HSBC to 2.97%. This would have involved a sale of several hundreds of millions of dollars of stock. There was some discussion about the implications of this sale of stock within the London Daiwa senior management. Mr Sakashita asked in an email of 9 January 2009 why Singularis was disposing of shares or why it was organising further lines of credit if the company had such a strong cash position as shown on their balance sheet in October 2008. Mr Roberts wrote an email to Mr Sakashita amongst others on 8 January 2009 playing down the significance of the development. He ascribed the move to ‘political infighting’ between two German banks with Singularis being very much the injured party. Mr Sakashita probed a little further but Mr Roberts replied stressing the conservative nature of the Saad group’s investment strategy and the value that Mr Al Sanea placed on strong business relationships with business friends who ‘stick by you in times of difficulty’.

Then on 21 January 2009 came the news that Singularis had decided to sell its total shareholding in JP Morgan comprising about 7.1 million shares. Mr Roberts wrote to Mr Kosuge and Mr Sakashita and others informing them of this. He again made light of this sale as nothing to worry about, saying that the stake in JP Morgan ‘was never a core fundamental investment’ for Singularis and Mr Al Sanea. The Daiwa witnesses accepted in cross-examination that this was the first time they had been told by anyone that the JP Morgan investment was not intended to be held by Singularis for the long term and that it was not regarded as the same kind of core investment as the HSBC and BNP shares.

This sale of JP Morgan shares by Singularis triggered the Tokyo senior management to call for a full and urgent review of the overall relationship between Singularis and Daiwa. Mr Smither wrote round to a number of people (including Mr Stanley who was the head of Risk Management though not Mr Metcalfe) asking for information to be provided urgently about the current position of the trades. This request was then cascaded down to various people including Mr Metcalfe and others in the Credit Risk department and to people in the Market Risk department. Mr Metcalfe was asked to provide copies of the last review and financials on Singularis and copies of controlling legal documents. Mr Kosuge was made aware of Singularis’ sales of stock by Mr Sakashita. A note that he made in a notebook on 11 February 2009 disclosed during the course of the trial indicates that he or at least someone at the meeting suggested that this was a change of policy on the part of Singularis and that they should have a meeting with Singularis as soon as possible.

In fact it appears that a visit had already been arranged for senior Daiwa management to Saudi Arabia for the end of January 2009. The visit took place on 24 and 25 January 2009 and the itinerary included a visit to the Saad Specialist Hospital, to a school and to an industrial facility.

Also towards the end of January 2009 there was a review carried out by the solicitors Allen & Overy organised by Mr Massey. According to Mr Massey the review focused on three aspects of the relationship between Daiwa and Singularis; (i) whether anything needed to be done to tie in the $90 million additional pledged collateral to be sure that it would be available to offset any liability of Singularis to Daiwa; (ii) more generally to clarify Daiwa’s rights over collateral held; and (iii) to consider whether the arrangement between the companies should be replaced with a different kind of agreement form, namely a repo standard agreement rather than a stock lending standard agreement. The result of this review was that Daiwa realised that it needed to make some changes to the wording of the agreements with Singularis. Following the review, in early February it was decided that Mr Sakashita, Mr Smither, Mr Roberts and Mr Metcalfe should visit Saad in Geneva to undertake a detailed overall review of the Singularis account. Mr Sakashita said that he was concerned to find out what Singularis’ cash position was and the nature of the assets held by Singularis that were reported as cash in the balance sheet. Delays in organising this meant that the meeting only took place on 19 March 2009.

In the meantime there was a meeting of the London Senior Risk Committee on 12 February 2009. Mr Metcalfe reported that Singularis had been reducing its JP Morgan and HSBC positions, leading to a reduction of its financing requirements. He noted that the prices of all three stocks in which Singularis had been invested were down significantly with liquidity being squeezed:

“He said large losses were being crystallised on the portfolio and that if these positions were being hedged elsewhere, [Daiwa] were not seeing them. Mr Sakashita asked that the account continued to be monitored carefully.”

The next important event was the meeting between Daiwa and SFS/Singularis on 19 March 2009 in Geneva (‘the 19 March Meeting’). Those attending were Mr Hart and Mr Wetherall from SFS and Mr Roberts, Mr Faure (head of the Risk department which covered market risk, operational risk and credit risk), Mr Metcalfe and Mr Smither from Daiwa. The main purpose of the meeting from Daiwa’s point of view was to obtain some updated financial information about the Saad Group and to get Singularis’ agreement to restructure the legal documentation and increase the level of collateral. A detailed note prepared by Mr Smither recorded what happened at the meeting with some additional comments added in later by Daiwa personnel:

The Daiwa witnesses said in their written evidence that they were reassured by what was discussed at the 19 March Meeting. However, they had to accept when questioned at the trial that nothing that had been promised by SFS was actually delivered. There was no additional financial information provided about Singularis or Mr Al Sanea; there was no agreement forthcoming on an increase in the haircut and there was no agreement to revise the legal documentation.

The events of late May 2009 to 2 June 2009

On Sunday 24 May 2009 Mr Kitabatake, the branch manager of Daiwa’s Dubai office, circulated a news article from the publication MEED (a Middle Eastern business newspaper) giving the news that the Al Gosaibi family had defaulted on a $1 billion debt in Saudi Arabia. The relevance of this was that Mr Al Sanea’s wife was from the Al Gosaibi family. The article reported that Saudi bankers with exposure to the group had said that the group had defaulted on three types of financial instruments. One senior banker was reported as saying that there were a lot of banks exposed and a lot of debt. The Al Gosaibi group was described as ‘the bluest of the blue chip companies in the country’ and blamed the withdrawal of credit lines on the wish of banks to reduce their loan books.

When the Daiwa people returned to work on Tuesday 26 May 2009 after the bank holiday Monday, Mr Day checked the margin available to Daiwa from Singularis to ensure that Daiwa was adequately protected. He concluded that Daiwa had plenty of margin in hand. There was an exchange of emails within Daiwa discussing whether the weekend’s development amounted to an ‘event of default’ by Singularis under the governing trade documentation and also seeking information about the collateral position of Daiwa vis a vis Singularis. Mr Day wanted to know from the credit department ‘how closely Mr Al Sanea’s core business in Saudi Arabia was linked to that of the Al Gosaibi family’. Mr Sakashita wrote to colleagues on 26 May 2009 that they should assume that some of the credit lines granted to the Saad group may not be extended – they needed to monitor closely the liquidity situation of Saudi companies.

By 28 May 2009, even the client-leaning Mr Roberts’ view as expressed to senior Daiwa colleagues was that the Al Gosaibi issue could be ‘slightly more problematic than originally thought’. He thought that it would be prudent for Daiwa to monitor all cash movements within SICL and Singularis very closely. It was recognised within Daiwa that there was possible contagion between the Al Gosaibi family and other Saudi family firms and that even though there were no direct business connections, ‘the Saad group could get tarred with the Al Gosaibi brush’.

There was a meeting in the morning of 28 May 2009 of senior people to discuss the situation. Those attending were Mr Kosuge, Mr Komatsu, Mr Blanchard, Mr Faure, Mr Sakashita, Mr Day, Mr Smither and Mr Metcalfe. During the meeting Mr Kimura (Daiwa’s man in Bahrain) called in to the meeting with more bad news. The Saad Group was reported to be seeking to reschedule its debts with its banking funders and there was said to be a 75% probability that it would default. Mr Kosuge said at the meeting that Daiwa should pay attention to the share prices of HSBC and BNP because if they started to fall, that would thin out the level of surplus margin Daiwa held in the Singularis account and this could be a negative trend. The concern expressed at the meeting was that if other brokers started to sell off the holdings of HSBC and BNP that they held as collateral for loans to Singularis, that might depress the share price further. Mr Sakashita said in giving evidence that he realised at this point that Saad Group’s situation had become very bad.

At lunchtime on 28 May, Mr Blanchard reported to Daiwa Tokyo the decisions taken at the meeting. These were that Daiwa would not pay any cash back to Singularis even if they requested it. Further, Daiwa would seek more legal advice about their termination rights and they would telephone Singularis straight away to proceed with the request made at the 19 March Meeting to increase the haircut and tie in the $90 million additional money in more firmly as collateral. Mr Blanchard followed this up with an email on 29 May 2009 telling his colleagues that there were three potential ways forward; an ‘amicable reduction of the risk within days’; a hedge or ‘we pull the plug and exit more abruptly if they do not entertain any of the amicable solutions’.

Mr Sakashita also drafted a long email to senior people in Tokyo on 28 May setting out the position and before sending it he checked its content with Mr Kosuge. This was sent to Tokyo from London on the evening of 28 May. Mr Sakashita told his colleagues of the reports that the Saad Group had filed a petition seeking to reschedule its debts and that there was a rumour that it was about to default. He referred to the possibility that bank lenders might get into a ‘panic mindset’ following the Al Gosaibi default and that there was a high risk of the Saad Group ‘running into a major difficulty with respect to liquidity’. He then turned to the likely effect on the other companies in the group. He said that Singularis is outside the Saad Group’s consolidation so that it is ‘slightly shielded from the risk’. He went on:

“However, because the owner is the same, funds may flow from [Singularis] into Saad in order to support the Saad group, in which case [Singularis] will be put in a tight situation as well. Alternatively, funds may be retained in [Singularis] in order to preserve the personal assets.”

Mr Sakashita referred in that email to the recent change in Singularis’ behaviour. This change was that over the past three days, Singularis had started to call for the return to it of excess margin held in the Daiwa client account. Previously Singularis had been content to let the excess margin lie in their account with Daiwa. In fact, the margin report for Singularis shows that on 26th May 2009 $44.6 million dollars had been repaid by Daiwa to Singularis; on 27th May $2.6 million was repaid and on 28th May $1 million had been withdrawn by Singularis from its margin account. Mr Sakashita told the senior Tokyo management that they had decided to refuse to return any further margin so as to stop cash ‘draining out of the company’.

On the afternoon of Friday 29 May 2009 there was a phone call between Mr Sakashita, Mr Blanchard, Mr Day and Mr Roberts on the Daiwa side and Mr Wetherall on the Singularis side. What happened was reported by Mr Sakashita to the senior management in Tokyo on the evening of 29 May. The record indicates that Mr Blanchard was fairly blunt in his questioning of Mr Wetherall, pointing out that nothing had happened about the contract review issue raised in March. Mr Wetherall was reassuring both as to the solidity of the Saad Group and about his appreciation that Daiwa might need to take steps to protect its position.

On Sunday 31 May 2009, two further serious negative developments came to Daiwa’s attention. The first was when the news came through from Bloomberg on the Sunday morning that Mr Al Sanea’s assets and those of his family had been frozen by the Saudi Arabian monetary authority. Mr Kosuge accepted at trial that this had been very alarming news for Daiwa. Mr Sakashita and Mr Metcalfe accepted that this was unprecedented in their experience and was very serious news indeed. Mr Day’s response was to arrange an emergency meeting for 7am on the Monday morning and to seek confirmation whether this meant that Singularis was in default of the contractual documents with Daiwa or whether Daiwa had to wait until a payment was missed before they could close out their relationship with Singularis. Mr Metcalfe forwarded the article to Mr Faure and said that his initial view was that this did not constitute a formal event of default though he had not checked this with the Legal department.

The second piece of news arrived from Mr Kimura in Bahrain early on the Sunday morning saying that the Saad Group was reported to have written to 40 lender banks requesting the restructuring of its loans.

There was a great deal of emailing among anxious Daiwa executives during the course of that Sunday. The consensus was reached in Daiwa that on the Monday they would unwind the positions with Singularis either with Singularis’ agreement or without it. Mr Blanchard emailed round to say that they would talk to SFS in Geneva on 1 June to unwind the trades amicably but that if no agreement was reached then Daiwa would exit anyway. In the meantime, Mr Blanchard said, ‘no cash should go out’. Mr Metcalfe accepted that by this stage there were concerns that since his accounts had been frozen Mr Al Sanea would not be able to inject more cash into Singularis if that were needed because of further falls in the value of the stock held.

At about 3 pm on 31 May 2009, Mr Blanchard wrote round to his colleagues in the following terms:

“I think we should also have in mind the possibility of not only a liquidity run but also a fraud, a major loss on speculative bets at his level, or something like that. It is unusual that a central bank would freeze the accounts of a locally powerful businessman even when there is a pending restructuring of the foreign debts of its group. There is something fishy.”

The Claimant not surprisingly relies on this email as evidence that even at this fairly early stage, senior people at Daiwa suspected that fraudulent misconduct might be behind the startling events in the Middle East. Mr Blanchard denied that this was actually in his mind at the time. He said that at the time this was just speculation on his part; he did not have any reason for suspecting foul play but that he said this to jog the Japanese management out of what he considered a complacent and inappropriate reluctance to exit what was becoming a potentially disastrous relationship. He therefore sent this email “to shake the tree” and push the management to agreeing to close out the relationship whether or not there was a formal act of default. I accept that evidence and I find that at this stage there was no real concern that fraud might be at the bottom of Mr Al Sanea’s problems.

That did not of course, reduce the seriousness of those problems so far as Daiwa’s position was concerned. It is clear that at this early stage, worries about the continued solvency of Singularis were in the minds of the Daiwa executives. Very early on Monday 1 June, Mr Kimura in Bahrain emailed colleagues in Daiwa with some more news about the reasons for the freeze of Mr Al Sanea’s assets.

“The reason of SAMA circular is that one of Al Sanea’s powerful investment partner complained to Saudi regulator that Al Sanea borrowed from banks but doesn’t repay his debt to his borrowers and it would expose other partners to huge risk. The complaint used the wording “misused, mismanaged” the borrowed money from banks. Therefore, Saudi regulator order SAMA to issue the circular. Originally it was reported that Al Sanea is a sleeping director of the board of TIBC [The International Bank Corporation, a large bank in Bahrain], but he was actually an influential stake holder of the bank and got a huge loan from the bank as an individual and in addition with his partners’ names to invest into many project in Saudi and other countries. TIBC’s default reason is his default of the loan from the bank. …

It seems that he has a big dispute with some Saudi powerful ex-investment partner. That unknown partner must be more powerful than Al Sanea, otherwise Saudi regulator would not listen to him. Possibly the member of Al Gosaibi family.”

Also on the morning of Monday 1 June 2009, Mr Blanchard reported to Daiwa Tokyo on the weekend’s developments and the decision to exit the relationship come what may:

“As you probably already know, things accelerated over the week-end with the Saudi Central Bank’s decision to freeze Al Sanea’s accounts in Saudi. This is very unusual and goes much further than a usual Group debt restructuring case. The rumour (from Kimura San’s information) is that there might be large amounts of money borrowed by Al Sanea from TIBC and that he failed to repay. Something of this nature could well have happened.

In any case, the solvability of Al Sanea is now clearly in question and the legal situation may quickly become unstable if creditors try to claw money back at Al Sanea’s level and to seek Court injunctions overseas, etc. It is therefore necessary to exit more quickly that envisaged last friday. This morning, we have asked Singularis, by phone, to give us an instruction to sell part of the portfolio in order to repay Daiwa’s loan. But we are now also preparing necessary legal steps in order to give notice of termination of this facility (which is rolled over on a daily basis) this afternoon London time if they do not give their instruction before that. We will call their Geneva office to advise them at the same time, by the beginning of this afternoon.”

Later on 1 June, Mr Roberts called Mr Wetherall in Geneva to discuss closing out the transactions. SFS agreed that the trades should be terminated by Daiwa selling the stock and using that and the cash collateral held to pay off the loans Daiwa had made to Singularis. Daiwa acted immediately and all the shares were sold by 5 pm on that day. Mr Faure emailed Mr Metcalfe to say “So we are finally out of this trade and maybe out of this relationship. This is a relief”. Other Daiwa witnesses also confirmed in their evidence that it was a huge relief for them that Daiwa had been able to get out of the trades with the client’s consent and without suffering any losses. Only Mr Metcalfe expressed some sadness because he had been working with the people at SFS for a very long time and the relationship had ended ‘just like that’.

Over 2 and 3 June 2009, the fortunes of the Saad Group continued to spiral downwards as its trading partners started to absorb the news about the freezing of Mr Al Sanea’s assets. Moody’s reported that it had cut the rating for the Saad Group down to ‘junk’ and on 2 June Moody’s withdrew its ratings on Saad Group entities completely ‘due to the lack of information on the troubled conglomerate’. Mr Metcalfe said he would have been watching Bloomberg and seeing the ratings fall. He accepted that this was a bad thing as far as Singularis was concerned. On 2 June 2009 Standard & Poor’s downgraded the Saad Group’s rating to D (default) and then, on the same day, withdrew coverage. Daiwa’s witnesses accepted that this was an alarming development and a cause for concern.

Events between 2 June and the first of the disputed payments

On 2 June came the first request to pay some of the monies left in Singularis’ account out to a third party recipient. SFS people in Geneva asked Daiwa to pay out sums to individuals in SFS. A meeting was called with Mr Blanchard, Mr Sakashita, Mr Roberts, Mr Massey and Mr Wright to discuss the request for the payments because it was such an unusual event. None of those present now recalls much about what was discussed. Mr Sakashita’s evidence was that his primary concern was the possibility that the request was from employees of Saad in Geneva trying to embezzle money and that the payment request was not authentic, in the sense that it was not made with the authority of Mr Al Sanea. It appears that people in Daiwa thought that employees of other companies in the Saad Group had not been paid their salaries because of liquidity problems within the group and were trying to access this Singularis money to make up the sums due to them.

The decision was taken to refuse the payment request and Mr Roberts rang Geneva to tell them this. He reported back the very strong reaction this engendered:

“Have just spoken to SICL Geneva.

They were deeply upset that we were unable to assist (much more so than I anticipated). Indeed the phone was literally slammed down on me!

I guess that currently individuals within SICL are under a lot of stress, and the danger is that by adopting this stance we run the risk of joining the ranks of Citigroup etc who have been seen to let the group down in their hour of greatest need!

Although I did not rule out Daiwa facilitating this Swift altogether, I said it was likely to take time for appropriate approval to be granted after we consultation with various regulatory experts etc.

Is there any way we can reconsider maybe sending one sum to a UK Banking entity?

Thoughts?

Nick”

This caused Daiwa to review their response to see if there was a way they could justify complying with the request. Mr Blanchard thought that there was, namely that if it could be established that the individuals had provided services to Singularis for which Singularis had agreed to pay, then the payment could be made. After some further email discussion it was agreed that the individuals were covered by a service agreement to which Singularis was a party and that they did provide services from time to time to Singularis so that it was legitimate for them to be paid by Singularis. Mr Wright said:

“I’d agree with that. The risk is that we are later challenged over their authenticity and “should we have made them” in which case we can respond (1) there is no suspicion of criminal activity therefore no need to report to authorities for approval (2) the payments are exceptional but so are the circumstances and the transactions are supported by documentation”

In fact these payments were not made out of the Singularis account though none of the witnesses was able to say why not. The Claimant says that the event was significant because it shows that the concern of the Daiwa executives was not simply about whether the SWIFT instruction was properly authorised but also that payments out of the Singularis account to someone other than Singularis had to be examined to see if there was a legitimate reason for Singularis to be making that payment. It was only because Mr Blanchard was satisfied that the individuals had performed services for Singularis for which Singularis had agreed to pay that it was appropriate to authorise the payment. It seems therefore that Daiwa did recognise that its obligation was to check that the payments were being made pursuant to a genuine obligation on the part of Singularis. However, the scope of the duty imposed on Daiwa is a matter of law and cannot be affected by what care the executives thought they should take. The legal duty is discussed later.

On 2 June 2009, another problematic event occurred. The sum of $80 million was received into the Singularis account with Daiwa for no apparent reason. On 3 June, Mr Day alerted his colleagues to the arrival of this money pointing out that the money did not relate to any open position held by Singularis with Daiwa. Mr Wright agreed when asked about this in the witness box that this was a surprising and extremely unusual event. The concern that the payment caused in Daiwa was that Daiwa was not a licensed deposit taker and was not therefore allowed to operate a bank account for its clients. Mr Wright recalled discussing this with Mr Day and with others. He accepted that it was important to find out why this money had been paid. He accepted that this was a red flag in terms of concerns about money laundering and financial crime more generally. However, there appears to be no record of any internal discussions or of any discussions with SFS about this.

Mr Massey was not involved in any further handling of this. He did not consider it was part of his remit in the Legal department to ensure that Daiwa was acting in accordance with its regulatory obligations – he regarded that as a matter for the Compliance department.

By 3 June all the shares held as collateral for Singularis had been sold by Daiwa. But there was still the outstanding relationship between Daiwa and SICL in relation to the EBI bond that had been the first transaction between the parties. Daiwa had asked SICL to provide further margin of about $3 million but that money had not been paid. The question arose within Daiwa whether part of the money sitting in the Singularis account could be used to cover this obligation of SICL. Mr Metcalfe recognised at the time that it was unlikely that the money would be paid by SICL. This was because SICL’s bank was Citibank which held the bank accounts for the various Saad Group companies. Citibank were unlikely to agree to release money from those accounts to pay the margin if they were exercising rights of set off across Saad Group bank accounts. Mr Massey spoke to Tim House, a partner at Allen & Overy, to discuss whether it would be appropriate for money in the Singularis account to be used for the purpose of paying the margin call on the SICL account.

One of the things that came up in this discussion was the need to show that there would be some corporate benefit to Singularis for the payment. Mr Franks of Allen & Overy wrote to Mr Massey on 3 June 2009 saying that from a contractual perspective the payment could be achieved. He also referred to the question of corporate benefit. Mr Franks raised the question whether in the light of the current financial status of the Saad group the payment could be challenged as a preference or other transaction at an undervalue. The concern was that Singularis was giving up its rights to the excess collateral:

“… To the extent that Singularis is in a suspect period, the question is whether Singularis’ foregoing of that claim is a preference or transaction at an undervalue. This will be very fact specific and will partly depend on whether there are any other benefits to Singularis in entering into this arrangement. If Daiwa is aware of any financial difficulties of Singularis, it is likely that the burden of establishing that there was no preference will (from a practical perspective) be more difficult. Of course this would be a question of BVI law, but assuming that BVI law were equivalent to English law, I would have a concerned that (absent other circumstances to the contrary) this could be challenged.”

The reference there to BVI law was in error since Singularis is registered in the Cayman Islands.

After further internal discussion, Mr Massey pressed Allen & Overy for some clear advice on whether it was acceptable to use some of the funds in the Singularis account to meet the SICL margin call. According to the email Mr Massey sent to Mr Sakashita the advice was that because of the uncertain factual situation, it was not possible to say that the arrangement was safe from challenge. However Allen & Overy had been pragmatic in saying that having some money immediately is better than waiting for it and that where a counterparty is struggling to make payments quickly, creditors will normally take what assets are available. The money in Singularis’ account was used to pay the SICL margin call.

On 4 June 2009 the contracts for the sale of the shares that Daiwa had been holding as collateral were settled. The shares were sold for a combined total of $622 million which was used to repay part of the outstanding sums owed by Singularis to Daiwa of $986 million. The balance of the sums owing were paid from the cash margin held by Daiwa in Singularis’ account of $392 million. This left a surplus of $28 million which, taken together with a 4.5% cash deposit made in June 2007 and a further $80 million received on 2 June 2009 as I have described, left Daiwa holding approximately $204 million for the account of Singularis at this date.

There is plenty of evidence that all the senior people in Daiwa were well aware of the need to take care in the handling of monies coming into and out of Singularis’ account after the stock lending relationship had been closed out. As well as the justified consternation at the arrival of the $80 million on 2 June, the detailed discussions of the proposed payments to individuals on 2 June and the discussions about the $3 million SICL margin call, Mr Wright told an Executive Committee meeting on 3 June 2009 that Daiwa “needs to be cautious in dealings with this client particularly in regards to the operation of their accounts with us”.

This led to the circulation on 5 June 2009 of an email by Mr Wright to a number of senior and more junior staff instructing them to be careful in their dealings with the Singularis account. The email is worth setting out in full and went, amongst others, to Mr Metcalfe and Mr Hudson:

“As you are all aware the SAAD group and some of the related individuals and entities have been experiencing well publicised problems including downgrades and the freezing of bank accounts. Under these circumstances can I reemphasise the need for care and caution in terms of any activity on their accounts with us. Singularis have reasonably large sums of client money lodged with us and we need to ensure we maintain appropriate oversight of both further deposits and requests for payments. We are not a bank and do not have banking licence and for reasons both regulatory and reputational cannot be seen to be acting as their ‘bank account’. We should therefore ensure that any funds received relate to normal business activities and, if they are unsolicited, can clearly be linked back to their normal investment business (e.g. funds from liquidation of positions). Clearly any payment requests we receive must be properly authorised and be ‘appropriate’ in the context of our business relationship with them. If there are any doubts or concerns please contact Compliance or Legal.

Lastly, our understanding is that the problems that SAAD group is experiencing are fiscal in nature, if that information should change then it is vital that this is communicated to Compliance/Legal as soon as possible so we can take any action necessary.

If there is anyone else who needs to see this note, please forward as necessary.

David”

This email was put to the Daiwa witnesses in cross examination. They accepted that they had never seen an email in these terms sent round about a customer. Mr Wright’s evidence in his witness statement was that the email:

“… was an attempt to keep people focussed, to ask them to consider whether any activity on SICL or Singularis’ accounts with Daiwa, including payments in or out, passed the ‘smell test’, and to refer anything to Legal or Compliance that they were unsure of”

As to what he meant by the need for payment requests to “be ‘appropriate’ in the context” of Daiwa’s business relationship with Singularis, Mr Wright explained it in this way:

“Q. … Now, in relation to the payments out, it wasn't enough just to have a proper Swift request, was it, it also had to be appropriate in the context of the business relationship?

A. That's what I say here, yes.

Q. That meant that you would need to know why the payment was being made. Is that right?

A. Sorry, could you repeat that?

Q. All right, I'll ask it in a slightly different way: in order to know whether the payment was appropriate, whoever was dealing with the payment would need to understand why the proposed payment was being made. Is that right?

A. I don't think in this email I was setting out a fixed process or a policy as such. I was giving broad guidance on the subject to make sure, if we did get payment requests, that people were thinking about those in the context of, you know, is it properly authorised, do we understand the -- who it's being paid to.

Q. Right. Although you didn't spell it out, in order for anyone who received this to then make a decision whether a payment request was appropriate, that person would need to understand why the payment was being made?

MRS JUSTICE ROSE: Is your question limited to third party payments?

MR MILES: Yes, it is.

MRS JUSTICE ROSE: Yes, perhaps make that clear.

MR MILES: Yes. In relation to third party payments, why the payment was being made.

A. And/or is there a valid -- is there an explanation for that, for that payment, yes.

Q. Yes.

A. Yes.

Q. In fact, this email was really prompted by the prospect of third party payments, wasn't it, because you wouldn't have regarded, at this stage, payments back to an account of Singularis itself as really raising these problems, would you?

A. No.

Q. So you're agreeing with me that this part of the email was really concerned with third party payments?

A. Yes.”

Unsurprisingly, the presence of a very large outstanding balance held by Daiwa of cash for Singularis caused concern within Daiwa. There were emails to and fro discussing what they should propose to Singularis should happen to the money. On the evening of 5 June 2009 Mr Sakashita sent an email report to senior management in Tokyo. By this stage he was making daily reports to Tokyo. He told them that Daiwa held slightly more than $200 million in cash in the Singularis account. He said ‘We have called for extreme caution in regard to the inflow and outflow of the fund in this account’ and he attached the 5 June email from Mr Wright. In his witness statement Mr Sakashita said that he thought that if something were to happen to Singularis, Daiwa should expect legal challenges from their creditors. In his oral evidence he stressed, however, that he did not think that Singularis was at risk of insolvency at this point. However, the records show, and Mr Sakashita accepted when it was put to him that by early June 2009, the share prices were dropping again, although they were still above where they had been in March.

In the days following Mr Wright’s email, there was more bad news reported in the press. Mr Kitabatake circulated an article from the Financial Times reporting that Western banks had begun to close down credit lines to Mr Al Sanea and the Saad Group. This move came after an instruction from the United Arab Emirates’ central bank restricting lenders’ business with Saad or related companies until further notice. The UAE Central Bank had also told banks that they could offset any credit facilities with the Saad Group against deposits held by the companies. Other banks who had loaned money to Mr Al Sanea were starting to sell off their holdings of collateral shares. The Saad Group had appointed advisers to help with the restructuring of its debts. There was a meeting of the London Risk Committee of Daiwa at which Mr Blanchard reported on the close out of the Singularis relationship, emphasising the fact that Daiwa ‘had escaped from disaster by a narrow margin’. Mr Sakashita is recorded as having said that Daiwa should have taken steps to reduce its positions as soon as it had heard about the problems of the Al Gosaibi family the week before.

The disputed payments: 12 June – 27 July 2009

$10 million and $3 million payments on 12 June to SSHC

On 12 June 2009 Daiwa received requests for $10 million and $3 million to be made from the Singularis account to SSHC. Instructions were received by SWIFT. Both payments were approved without any investigation by Mr Hudson. Mr Metcalfe also approved the payment of $10 million.

A puzzling aspect of this case is why it fell to Mr Metcalfe to handle payment requests made by SFS in relation to Singularis’ account. Mr Metcalfe’s evidence was that he did not have much experience of dealing with payment requests as it was not part of his day to day job. The processing of payments would normally be handled by the operations team. He says that, based on his limited understanding of payments and Mr Wright’s email, he knew that a payment request needed to be supported by a SWIFT instruction and that if he had any doubts about whether it was appropriate he needed to talk to Compliance or Legal. Mr Metcalfe also said that by the time he came to deal with the payments, he no longer had any reason to think about Singularis’ financial position because Daiwa was no longer a creditor of Singularis, in fact it was Singularis which was owed money by Daiwa. He did not know who Singularis’ other creditors were but assumed that, like Daiwa, they would be secured with sufficient collateral to cover their exposure.

Mr Sakashita said in cross examination that he did not know at the time that the transfer of $180 million was being dealt with by Mr Metcalfe in Credit Risk. He found Mr Metcalfe’s involvement surprising because he was not a member of the Compliance team and he was not part of the senior management of Daiwa. Mr Sakashita agreed that Mr Metcalfe had not been the right person to deal with this issue. Mr Wright also accepted that Mr Metcalfe would not have been in a good position to form a view on Compliance issues and that there should have been someone from senior management overseeing the process.

As regards these 12 June payments, Mr Metcalfe signed the SWIFT document for the $10 million but not the $3 million. He said that he does not remember considering this payment at the time. He would have been asked to sign the SWIFT message to confirm that Daiwa no longer had any credit risk on the trade and that therefore the funds could be released. He accepted that on reading this at the time, he would have realised that this was a payment not back to Singularis but to a third party. He accepted that, in the light of Mr Wright’s email, he should have realised that it was important to establish that this was an appropriate payment. He did not ask himself why this payment was being made. He denied when it was put to him that he failed to ask the question because he thought he would get an unhelpful answer. It was put to him that Daiwa wanted to get rid of this money in the light of the growing scandal about Mr Al Sanea but Mr Metcalfe says that this did not occur to him in relation to this payment.

Mr Hudson also gave evidence about these payments. He was contacted on 12 June about these requests by Mr Churchill (who worked in Settlements). Mr Hudson could not remember what he discussed with Mr Churchill or whether there had been any discussion about who SSHC was. Mr Hudson approved the payments by email on 12 June. He accepted that Mr Churchill would not have been in a position to tell him anything about the payee. At the time, he says, he did not consider it necessary to check anything about why the payment was being made. The only check he carried out was whether the payee was on a list of people subject to international sanctions. When he was cross-examined about his approval of the payment, Mr Hudson accepted that Mr Churchill was relying on him to say whether it was alright to make the payment requested. But despite having received the email from Mr Wright, he carried out no checks as to the purpose of the payment:

“Q. … You didn't give any thought to whether this might be -- this might involve any misappropriation of assets from Singularis?

A. I had no suspicion that this was, no.

Q. You didn't give any thought to that question?

A. I don't recall giving any conscious thought but ...

Q. I am not going to ask you about your unconscious thoughts. I mean, did you think about -- did you give any thought at all to whether there was a risk of misappropriation of assets from Singularis by this payment to a hospital in Saudi Arabia?

A. I don't recall considering that. However, I also had the memo of 5 [June] which said, you know, we do not suspect this is criminal activity, and so I was starting off on that basis, I believe, that everyone thought this was a fiscal situation, no one believed this was any sort of criminal activity with a long-established client. So I'm not saying I ignored the possibility ... but I can't consider -- I can't remember thinking this isn't misappropriation.

Q. And you didn't give any thought to the purpose of the payment beyond just assuming that it was to another Saad Group company; is that right?

A. Yes, I viewed -- as I said, I viewed all these companies as belonging to the same beneficial owner, so I had no suspicion.

Q. I mean, you didn't even know, or check, that it was a Saad Group company, did you?

A. I don't believe I did at the time. With hindsight I should have done.

Q. It was just an assumption you made?

A. Yes.

Q. Did you even know the name of the company that it was being paid to, do you think?

A. I must have known the name in order to put the details in the system or to have the check made.

Q. So it was just an assumption you made without knowing anything about the relationship between these companies?

A. Yes.”

Mr Hudson went on to say that he had assumed that senior management were monitoring the account and would be aware of this payment but he did not himself notify them of it and he accepted that he had no basis for making that assumption. He thought the request for payment had come through Mr Roberts but he did not ask Mr Roberts any questions about it. He also denied firmly that he had avoided asking questions because he did not want to know the answer.

Payment of $180 million to SSHC on 18 June 2009

On 16 June 2009 there was further bad news from the Middle East. Under the strap line “Saad, Saad story in Bahrain” a news article referred to the convulsions that had shaken the Saad and Al Gosaibi conglomerates with the Omani banking authorities announcing a $127 million exposure to ‘the troubled Saad empire’. It also noted that Al Gosaibi said that it had uncovered evidence of substantial financial irregularities relating to the falsification of documents used to secure credit lines. Investigators were said to be poring over the books of two banks associated with the Al Gosaibi family and Mr Al Sanea.

Also on 16 June 2009 Daiwa received a request to transfer $180 million from the Singularis account to SSHC. There was a conversation that day between Mr Roberts and Mr Wetherall about the payment. Mr Metcalfe wrote to Mr Wetherall referring to this and saying:

“For the record my Compliance people have asked for confirmation that the proposed payment to Saad Hospitals is made pursuant to an appropriate corporate obligation of Singularis Holdings Ltd. Could you please provide me with this confirmation”

Mr Metcalfe could not recall anything independently of the email about who he spoke to in Compliance or what they discussed. He said in his witness statement that he must have spoken to Mr Massey in Legal because the phrase “appropriate corporate obligation” was not a phrase he would have used. In his oral evidence he was less sure about this – he may have picked up that phrase if someone from Compliance had used it. Mr Wright and Mr Hudson do not recall any discussions with Mr Metcalfe about the payment at this point. Mr Metcalfe appreciated that Singularis was separate from SSHC and from Mr Al Sanea but he denied that he thought at the time that Mr Al Sanea might want to move money to his other companies given that his own accounts had been frozen. Although Mr Metcalfe accepted that he knew from the previous September that Lehman Brothers might well still have unsecured debt from Singularis, this was not in his mind at the time he authorised the payments.

In the mid afternoon of 17 June 2009 Mr Wetherall wrote back to Mr Roberts and Mr Metcalfe in response to the request for confirmation of the corporate obligation. He sent a single line email asking if the attached letter would satisfy Daiwa’s compliance people. There were in fact two documents attached to that email. The first was dated 17 June 2009 and appeared to be a debit note on headed paper of Saad Trading addressed to Singularis in the Cayman Islands saying that “We have charged your account with US$322,067,386 towards the sale of securities to Singularis Holdings as per details below” and then set out various amounts of stock in HSBC, BNP and JP Morgan as having been sold in January or March 2009. The debit note purported to be signed by the Chief Accountant. What the debit note appeared to record was that Saad Trading had, in January and March 2009, sold very large volumes of stock to Singularis and that Singularis owed many millions of dollars to Saad Trading to pay for this stock. The amounts involved were $132 million of HSBC stock, $129 million of BNP stock and about $60.6 million in J P Morgan stock. This therefore appeared to record that Singularis owed Saad Trading over $322 million for the purchase of this stock.

The second document attached to Mr Wetherall’s email was a payment request from Saad Trading to Singularis also dated 17 June 2009 asking them to pay $180 million to SSHC in part settlement of the debit note dated 17 June 2009.

When he was questioned about this at the trial, Mr Metcalfe said that he did not notice that the date on both documents actually post-dated the request he had made to Mr Wetherall for the justification for the payment. Mr Metcalfe accepted that he probably had not read this as carefully as he should have done even though it was his responsibility to take reasonable care to make sure that the payment was a proper one. He agreed that he had never been told in early 2009 that Singularis had been making these major share purchases. He was also not aware that the purchases purporting to be evidenced by the debit note were directly contrary to what Daiwa had been told previously. What Daiwa knew was that Singularis had been selling, not buying, very large quantities of HSBC and JP Morgan shares in January 2009. At the 19 March Meeting SFS had told Daiwa that they had reduced their holding in BNP and had been actively selling off their JP Morgan shares. No one at the 19 March Meeting had mentioned that by that time Singularis owed $322 million to Saad Trading, even though the purpose of that meeting had been to explore the financial position of Singularis. Mr Wetherall had also said at the 19 March Meeting that neither Singularis nor SFS had made any major share investments in 2009, a very odd statement if in fact it had bought $322 million of stock a few days earlier on 6 and 9 March 2009.

When he received the documents from Mr Wetherall, Mr Metcalfe went to see Mr Massey and showed him the two documents that Mr Wetherall had sent through. Together they drafted a reply to Mr Wetherall thanking him for the documents but saying that it remained unclear what corporate benefit Saad Trading had in redirecting a debt owed to it by Singularis for the benefit of the hospital. The email added “It would be far easier for us if these funds could be paid to [a Singularis] account. Please advise if this is possible”. Mr Metcalfe could not remember whether he did press Mr Wetherall when they next spoke as to why the money could not be paid back to Singularis as the simplest thing. He cannot remember whether he asked or if he did, what reason he was given by Mr Wetherall why this was not possible.

Mr Wetherall then sent Mr Metcalfe three further documents which he said he trusted would assist Daiwa’s compliance process. Those were three bills of sale which purported to show that historically there had been a trust arrangement under which Singularis was holding shares on trust for Saad Trading and that Saad Trading had then sold the shares in three transactions to Singularis in January and March 2009. Mr Metcalfe did not know whether he showed the bills of sale to Mr Massey.

Unlike the earlier payments of $10 million and $3 million, there was some senior management involvement on the question whether the $180 million should be paid. Mr Sakashita wrote on 17 June 2009 to Daiwa Tokyo telling them about the instruction to move the money to the hospital company, SSHC. He said that Daiwa was contractually obliged to comply with the instruction “unless there is a strong suspicion that the money transfer is clearly associated with a criminal act”. He referred to their in-house lawyer’s advice being ‘to confirm the purpose of the fund transfer as a precautionary measure’ and said that an arrangement would be made.

Mr Kosuge was one of the recipients of that email. Ten minutes later he wrote back to Mr Sakashita saying words to the effect:

“It is problematic when they use a hospital as a front/cover. Practically speaking, since we will be making a transfer to a recipient other than Singularis, please handle this matter extremely carefully by discussing it well with the Compliance and Legal teams.”

The words I have italicised there were the subject of much debate during the hearing with the Japanese interpreter who was translating for some of the witnesses. The word signified by the Japanese symbol used by Mr Kosuge has no direct English equivalent. Different translations of the email used the word ‘cloak’ or ‘shell’, the sense being of an outer cover into which something is put to hide or protect it. In cross-examination Mr Kosuge said that his concern was that it would be embarrassing for Daiwa if the money was being sent to somewhere where it should not be sent. He thought that it was Mr Sakashita’s responsibility to check that this was done properly and that all the necessary people who needed to be told and approved did so.

Mr Sakashita accepted when questioned about this that Mr Kosuge’s concern was that the money was being channelled elsewhere. He accepted also that the reason for this concern was that payment should only be made to a genuine creditor of Singularis. He accepted that it was important that the Compliance and Legal teams checked the appropriateness of the information provided to support the payment to see whether it was viable information or not. But Mr Sakashita does not remember whether he talked to anyone in the Legal department or to Mr Roberts about the transfer of the $180 million. Mr Metcalfe’s evidence was that no one told him of any concern that SSHC might be a front or cover or that it might be being used to channel monies to other companies in the Saad Group.

On the morning of 18 June 2009, Mr Metcalfe had a phone call with SFS in Geneva regarding the proposed payment of $180 million. Mr Metcalfe then emailed Mr Massey to say that he would like to get Mr Massey’s view on the ‘structure’ that SFS had proposed. The ‘structure’ is apparent from the email that Mr Wetherall sent to Mr Metcalfe at about midday on 18 June. The email said:

“Jonathan,

As per our discussion, please find the attached Agreement between [Singularis and SSHC] and [SSHC] Invoice.

I trust that they correctly reflect the appropriate corporate obligation between the two parties and will satisfy the requirements of your compliance team.

Please call me if you have further questions.

Thanks once again for bearing with us on this matter.

Kind regards

Mike”

The agreement attached to that email of 18 June 2009 gave a completely different explanation for the proposed payment of $180 million from the explanation arising from the supposed purchases of large volumes of shares by Singularis from Saad Trading discussed the previous day. It was a two-page document dated 2 January 2009 and signed by Mr Al Sanea on behalf of Singularis and also by Mr Al Sanea on behalf of SSHC. It purported to record an agreement whereby Singularis undertook to pay on written demand all running and administrative costs for the hospital in Saudi Arabia for the year of 2009 (‘the Hospital Expenses Agreement’). In addition, Mr Wetherall sent through an invoice dated 18 June 2009 from SSHC to Singularis purporting to be an invoice for administrative and running expenses for the year 2009 in the sum of $180 million. Less than half an hour later Mr Metcalfe emailed back to Mr Wetherall saying that “the documents are acceptable and fully satisfy our compliance team”. He asked Mr Wetherall to send him the SWIFT instruction to trigger the payment.

There was some uncertainty about whether Mr Metcalfe spoke to anyone in either Legal or Compliance about the new documents in that half hour period between his receiving them and giving approval. He recalled having some discussion with someone about these documents but was not able to say whether it was with someone from Compliance or Legal. Mr Wright’s evidence was clear that before preparing for the trial he had not seen the two conflicting sets of documents sent through by Mr Wetherall. In any event it seems clear that there cannot have been any significant consideration of the background facts and there is no written record of any discussion. Mr Metcalfe then emailed Mr Roberts to say that Mr Wetherall had provided him ‘with necessary documentation that ticked all compliance/legal boxes’ and that the payment would be made that day, as it duly was.

Payments of $1,090,000 and $2,935,000 to Saad Air on 1 July 2009

In early July there were further requests for payments from the Singularis account, this time to be directed to HSH Nordbank for the benefit of Saad Air. The payments were of $1,090,000 and $2,935,000. Mr Hudson authorised these payments. He says that these payments were referred to him most likely by someone in the Settlements Department but he was not able to remember anything further as to how they came to him. He had no information about what Saad Air was or about the purpose of the payments and he made no effort to find out any information about, for example, how it was related to Singularis. He thought his only job was to check whether the recipient was covered by a sanctions regime or was precluded as a terrorist organisation. On cross-examination he explained what had happened:

“Q. We've seen that you didn't ask any questions at all about any of these payments. The only thing you did was do your check on the computer; isn't that right?”

A. Yes, that's right.

Q. You didn't check whether senior management were aware of them.

A. No, I assumed they were but I didn't check.

Q. You didn't seek to find out the purposes of the payments on any of these cases?

A. No.

Q. You made an assumption that the payee was something to do with Mr Al Sanea but you had no other information about the payees.

A. That's right.

Q. And you didn't make any enquiries to ensure that these payments were in respect of obligations to the payees, did you?

A. No, I didn't.”

Payment of $5.2 million to SSHC on 8 July 2009

On 8 July 2009 Mr Roberts wrote to SFS, including Mr Wetherall, telling them Singularis had about $5.3 million left in its account which Daiwa was happy for them to withdraw. SFS promptly sent Mr Roberts an invoice which Mr Roberts forwarded to Mr Metcalfe. The invoice purported to be another invoice from SSHC to Singularis, pursuant to the Hospital Expenses Agreement demanding payment for administrative and running expenses in the sum of $5.2 million. Mr Metcalfe authorised the payment without any further queries and, it appears, without notifying anyone in senior management.

Payment of $1,093,000 to Saad Air on 20 July 2009

A SWIFT instruction was received from SFS asking for $1,093,000 to be paid to Saad Air from Singularis’ account. This was approved by Mr Hudson after checking that the recipient was not on the sanctions list including whether it was a terrorist organisation. When the computer indicated that Saad Air was not on the warned list, Mr Hudson approved the payment. He assumed that the recipient was connected in some way with Mr Al Sanea but made no inquiries as to whether Singularis owed any obligation to Saad Air which might explain the payment.

Payment of $1,174,900 to SSHC on 27 July 2009

The final payment made by Daiwa was on 27 July 2009 when it transferred $1,174,900 from Singularis’ account to SSHC. The payment was approved by Mr Hudson following the same minimal checks as in relation to the Saad Air payments.

Events after the making of the challenged payments

On 24 July 2009 a worldwide freezing order was made by the Grand Court in the Cayman Islands against the assets of the Saad Group. On 20 August 2009, Mr Al Sanea, in his capacity as the sole shareholder of Singularis, resolved to place Singularis into voluntary liquidation. Two Cayman Island joint voluntary liquidators were appointed on 24 August 2009.

On 1 September 2009, the administrators of Lehman Brothers International (Europe) (‘LBIE’) issued a default and termination notice in respect of the brokerage agreement between LBIE and Singularis. LBIE is an unlimited company which was the main European trading company of the Lehman group. They cited Singularis’ failure to repay the amount of $1.6 billion (excluding accrued fees and interest) required by a demand letter they had sent to Singularis on 21 July 2009. Although LBIE held shares owned by Singularis as security, as at 1 September 2009 the value of this security was around $1.3 billion and so the loans were under-secured.

A proportion of Singularis’ liabilities to LBIE were subsequently discharged following the sale of the remaining shares held by LBIE as collateral under its financing arrangements with Singularis. LBIE has asserted a claim in the liquidation of Singularis in the sum of US$143,785,190.

On 14 September 2009, SICL, in its capacity as a creditor of Singularis, presented a petition seeking an order that the voluntary winding up of Singularis continue under the supervision of the Grand Court of the Cayman Islands. The grounds for SICL’s petition were, amongst other things, that Singularis was, or was likely to become, insolvent (based upon an unpaid debt in the sum of $171,246,254.17 owed by Singularis to SICL). On 18 September 2009, the Grand Court of the Cayman Islands made an order that the winding up of Singularis continue under the supervision of the Grand Court and appointed three partners of Grant Thornton as Joint Official Liquidators.

Mr Akers’ evidence is that there remain substantial creditors' claims, running into hundreds of millions of US dollars, in the winding up of Singularis. By way of overview, the following amounts are currently claimed in the liquidation:

One of the issues arising in the liquidation is the authenticity of a promissory note issued by the Ahmad Hamad Al Gosaibi & Brothers Company (‘AHAB’) to Singularis. There are proceedings brought in the Grand Court of the Cayman Islands against Mr Al Sanea by AHAB and others (the ‘AHAB Proceedings’). In those proceedings, AHAB claim against Mr Al Sanea for alleged breaches of fiduciary duty that they say Mr Al Sanea owed to AHAB. It is alleged that Singularis assisted with that breach. Singularis disputes the claim made against it by AHAB and also brings a counterclaim relying on a promissory note dated 28 January 2009, by which AHAB unconditionally promised to pay to the order of Singularis the sum of $4.5 billion on demand (the "Promissory Note"). The counterclaim advanced by Singularis in the AHAB Proceedings is disputed by AHAB and AHAB disputes the authenticity of the Promissory Note.

According to Mr Akers, the liquidators’ work has been hampered by a lack of cooperation on the part of Mr Al Sanea in particular as regards obtaining documents. Mr Al Sanea is in breach of various court orders granted to the liquidators against him in the Grand Court requiring him to submit information, deliver up property and attend for oral examination. Mr Akers also says that Mr Al Sanea caused a large amount of documentation to be removed from the offices of SFS in Geneva shortly before he put Singularis into liquidation. That evidence was not challenged by Daiwa.

In addition to bringing this claim against Daiwa in London, the liquidators of Singularis have pursued other claims on behalf of Singularis in respect of some or all of these payments in the Grand Court, in Saudi Arabia and in other proceedings in London. The liquidators will give credit for any monies they recover in those proceedings.

The first step for Singularis to take to make good their claim to recover the money paid away by Daiwa is to establish that Mr Al Sanea acted in breach of his fiduciary duty to Singularis by instructing Daiwa to make the payments to third parties. Given that Mr Al Sanea was the sole shareholder of Singularis as well as a director, Singularis must show that the company was insolvent or in a state of doubtful solvency such that the directors were bound to take into account the interests of creditors of Singularis as well as the interests of the shareholder.

Daiwa also contend that the payments were not a breach of duty by Mr Al Sanea because Singularis’ accounts show that the company owed a substantial amount of money to Mr Al Sanea. They say that Mr Al Sanea was entitled to be repaid this money that he had loaned to the company and that the repayment does not constitute an unlawful preference according to the insolvency law in force in the Cayman Islands.

If Mr Al Sanea was in breach of his fiduciary duty and was not entitled to repay himself from the funds, the next issue is whether the personnel in Daiwa dishonestly assisted Mr Al Sanea to defraud Singularis of the money. There is no doubt that they did assist him by making the payments. The issue here is whether they did so dishonestly, applying the test for dishonesty expounded in the case law. If Singularis can make good their claim based on dishonest assistance then that is enough to entitle Singularis to the relief that it seeks. None of the defences raised by Daiwa to the negligence claim applies to the dishonest assistance claim.

If the dishonest assistance claim fails, Singularis fall back on their claim in negligence and breach of contract relying on the duty owed by a bank to its customers expounded in Barclays Bank plc v Quincecare Ltd and another [1992] 4 All ER 363 (‘Quincecare’). It is clear on the authorities that these two duties are co-extensive when the contract does not provide an alternative basis. There are various issues as to whether the Quincecare duty applies in the circumstances of this case, particularly if Singularis was a one-man company so that Mr Al Sanea’s knowledge and conduct should be attributed to Singularis.

If the Quincecare duty does apply here, the next question is whether Daiwa was in breach of that duty. This depends on an analysis of the facts. If there was a breach of duty, there are a number of legal defences on which Daiwa seeks to rely:

If none of the legal defences avails Daiwa and they are liable to repay the money to Singularis, there is finally the issue of whether a deduction should be made on account of Singularis’ contributory negligence.

Was there a prima facie breach of fiduciary duty by Mr Al Sanea?

There is no question here but that Mr Al Sanea had a mandate to give instructions to Singularis about what should happen to the monies in the client account. The allegation made by Singularis which is common to both the dishonest assistance claim and the negligence claim is Singularis’ allegation that Mr Al Sanea acted in breach of his fiduciary duty to Singularis when giving the instructions to pay the money to SSHC and Saad Air. The first issue is therefore whether Mr Al Sanea was in breach of his duties to Singularis in giving instructions for the payments to be made. This point is not dependent on the question of what Daiwa knew or ought to have suspected about the payments but is the more straightforward question of whether these payments were a misappropriation of the money by Mr Al Sanea for the benefit of the other companies, SSHC and Saad Air.

About $5.1 million was paid by Singularis to Saad Air. There is no explanation as to why Singularis was paying these amounts. The nature of Singularis’ business does not indicate that there would be any reason for the officers of the company to need to travel on legitimate company business to the extent of incurring expenses of $5 million. There were no payments out to Saad Air over the years when Singularis held the account with Daiwa and I can think of no reason why there should suddenly be $5 million of travel costs incurred within a period of less than a month. I find that these were not legitimate expenses properly incurred on behalf of Singularis and that it was a breach of fiduciary duty for Mr Al Sanea to direct that Singularis pay these monies to Saad Air.

About $199,400,000 was paid by Singularis to SSHC. Whether or not this was a legitimate payment depends on whether I am satisfied that the Hospital Expenses Agreement was genuine so that Singularis had really undertaken on 2 January 2009 to pay for the administrative and running costs of the SSHC hospital. On the evidence before me I am fully satisfied that the Hospital Expenses Agreement is a fraudulent document, fabricated by Mr Al Sanea or at least with his knowledge and approval for the sake of satisfying Daiwa’s compliance department and extracting the money from the Singularis account. My reasons for coming to that conclusion are as follows.

First, the Hospital Expenses Agreement was the second explanation produced within two days by SFS in Geneva in response to Mr Metcalfe’s request for evidence supporting a genuine obligation from Singularis to SSHC. It was sent after the first explanation (the supposed payments due from Singularis to Saad Trading for the purchase of large shareholdings in January and March 2009) did not do the trick. If this obligation had existed, there is no reason why Mr Wetherall would not have immediately provided it when asked by Mr Metcalfe to explain why Singularis should be paying $180 million to SSHC.

Secondly, there is no possible reason why an investment company like Singularis should agree to pay the administrative and running expenses of a large hospital in Saudi Arabia for the year 2009. There is plenty of evidence to show that SSHC was a highly profitable business earning substantial revenues. The Saad Group annual report for 2006 (provided to Daiwa in May 2007) showed that SSHC operated a modern private hospital business in Saudi Arabia and that the hospital has 600 beds. It operated as an independent profit centre for the Saad Group and had made profits of $19 million on revenues of $157 million (after taking into account interest and depreciation). It had net assets of about $470 million. Mr Kosuge, who visited the hospital in January 2009, recalled that it was a large hospital with facilities including rooms for special patients, such as members of the Saudi royal family. He recalled that the hospital was a luxurious building with six or seven floors and a large entrance with a long reception desk and reception area. On their visit, the Daiwa personnel were shown the suites in the hospital that were designed for wealthy patients with large bedrooms, dining rooms and large reception rooms in which a lot of people could gather. An interim report of the Saad Group for the half year to 30 June 2008 showed that SSHC had a net income for the six month period of just under SAR94 million (about $25 million). Expenses (other than non-cash items such as depreciation) were some SAR293 million (about $78 million) while cash and cash equivalents increased by nearly SAR37 million to just over SAR 364 million (about $100 million). This was clearly not a charitable institution needing support from other companies inside or outside the Saad Group.

Thirdly, if this was a genuine obligation on the part of Singularis it is surprising that nothing had been said about the existence of the agreement before 18 June 2009. If, a few weeks before the Daiwa senior executives visited Saudi on 24/25 January 2009, Singularis had agreed to pay the expenses of the hospital that year, one would have expected this to be mentioned in the presentation given to the Daiwa executives when they toured the hospital. But no one from Daiwa knew about this. Further at the 19 March Meeting nothing was said about Singularis having recently taken on an open ended and potential very substantial liability to pay these expenses during the course of 2009.

Fourthly, it seems particularly improbable that Singularis would have entered into the Hospital Expenses Agreement on 2 January 2009. It was in early January 2009 that Singularis started selling off its shares in J P Morgan and HSBC. When Mr Roberts sought an explanation for this from SFS because of the disquiet generated in Daiwa about whether this indicated that Singularis was facing liquidity problems, nothing was said about needing to free up cash to meet this new liability.

Fifthly, the unchallenged evidence of Mr Akers is that neither the Hospital Expenses Agreement nor the debit notes are among the documents found at Singularis’ registered office in the Cayman Islands. The law firm at whose offices Singularis is registered have told Mr Akers that they have no record of having received the debit note from SSHC to Singularis on 18 June 2009 and that they are not aware of the Hospital Expenses Agreement. It is true that Mr Al Sanea has caused documents to be removed from some of the group’s offices, but there is no reason why he should want to remove that agreement if it really evidences a justification for his instruction that these payments should be made. Further, Mr Akers says that the joint liquidators have written to SSHC requesting information in respect of the payments made and asking for their copy of the agreement. SSHC has not responded to that request. I consider it significant that SSHC has not raised the existence of this agreement in response to a claim from the liquidators to recover the monies from the hospital.

I find, therefore, that the Hospital Expenses Agreement is a sham. There was no obligation on the part of Singularis to pay the expenses of the hospital and the agreement was created simply to provide some documentation to persuade Daiwa to make the payment. There was no benefit to Singularis in making the gratuitous payments to the hospital. The five payments made from the Singularis account to SSHC were therefore a misappropriation of Singularis’ money by Mr Al Sanea in breach of his fiduciary duty to Singularis.

Could Mr Al Sanea as sole shareholder of Singularis ratify any misappropriation of Singularis’ funds?

If these payments were prima facie a misappropriation of Singularis’ assets, could Mr Al Sanea as the sole shareholder have ratified the payments and so prevented them from being a breach of fiduciary duty?

Both parties accepted that as a matter of general principle a director of a solvent company, acting with the unanimous approval of the company’s shareholders, may, without acting wrongfully, make payments to or for the benefit of a related company. This is so, irrespective of whether the paying company is under any pre-existing obligation to make the payments.

The position is different if the paying company is insolvent or of doubtful solvency at the time the payments are made. Although the relevant law governing the operation of Singularis is the law of Grand Cayman, the test to be applied was agreed by the parties to be that discussed in the well-known English cases such as West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 and Australian authorities such as Nicholson v Permakraft (NZ) Ltd [1985] 1 NZ LR 242. I reviewed those cases in my recent judgment in BTI 2014 LLC v Sequana SA [2016] EWHC 1686 (Ch) at paragraphs 464-484. The essence of the test applied in the long line of cases is that the directors ought in their conduct of the company’s business to be anticipating the insolvency of the company because the company is in a precarious financial situation or on the brink of insolvency.

Daiwa argue that there is nothing in the evidence to suggest that Singularis was in a parlous financial state in June and July 2009 or that its directors ought to have been anticipating the insolvency of the company. They say that the evidence shows that the company could face a cash problem if the market moved against it and if Mr Al Sanea’s account freeze were to continue. But, they say, the market did not move against it and such financial difficulties as it did face resulted from the dispute with AHAB, the Lehman default and SICL calling in its inter-company debt. For these reasons, Daiwa submit, the financial condition of Singularis was not an obstacle to Mr Al Sanea ratifying or authorising the payments.

In my judgment there is overwhelming evidence in this case that Singularis was, at the least, in a highly precarious state and heading towards insolvency at the time Mr Al Sanea instructed the payments to be made. On this point the question again is not what Daiwa knew about Singularis’ position but what Mr Al Sanea must have known about Singularis’ financial difficulties and hence whose interests he was bound to take into account when taking decisions about Singularis’ affairs.

Singularis became insolvent shortly after the last payment when Mr Al Sanea put the company into voluntary liquidation on 20 August 2009. In other proceedings arising from this insolvency Mr Al Sanea made an affirmation on 2 December 2009 in which he explained the reason for this. He said:

"following consultation with my advisers (and without waiving privilege), I had formed the view that [Singularis’] asset position was considerably weaker than it formerly had been; that even if it was not already insolvent, which it might have been, its insolvency was probably inevitable."

By June 2009, Singularis had at least one very substantial external creditor, LBIE, whose liability was ultimately quantified at some $238 million. The only means of paying this liability were either a further injection of funds from Mr Al Sanea himself or any excess funds held by Singularis at other banks. But Mr Al Sanea’s assets had been frozen and funds held at other banks were subject to any rights of set off those banks may have had against those funds.

Singularis had been and was all along dependent for its continued existence on Mr Al Sanea. Although of course Singularis is a separate legal entity from Mr Al Sanea and from other companies within the Saad Group, Singularis’ fortunes were intimately bound up with those of Mr Al Sanea and the Saad Group. It was apparent that from the end of May onwards that those fortunes had taken a strong downturn and showed no signs of reviving in light of the withdrawal of credit lines from banks to the Saad Group and of the downgrading and then withdrawal of credit ratings for the Saad Group by Moody’s and S&P.

Daiwa has suggested that Singularis’ position as to the solvency of Singularis is inconsistent with the case the Joint Liquidators have advanced in other proceedings. This is based on the counterclaim made by Singularis in the AHAB Proceedings in which it seeks judgment against AHAB on the Promissory Note for $4.5 billion, or alternatively recovery of various treasury deposits alleged to have been made by Singularis with AHAB in a similar amount. However, Mr Al Sanea must have been aware by June/July 2009 of the serious dispute between the Saad Group and AHAB about their financial relationship. Mr Al Sanea cannot possibly have thought, given that AHAB had instigated the freezing of his and his family’s accounts, that AHAB would hand over $4.5 billion on the strength of the Promissory Note as soon as Singularis asked for the money. In fact, AHAB’s liability under the Promissory Note is hotly disputed and that litigation is currently ongoing in the Cayman Islands. AHAB’s assets had also been frozen by Saudi regulatory authorities in May 2009 and the Al Gosaibi family had their own troubles as reported in the financial press. Mr Akers notes in his witness statement that as a consequence of the freeze imposed by the Saudi Arabian regulatory authorities on the assets of AHAB in around May 2009, it would not have been possible for AHAB to make any payment under the Promissory Note at that time (even if AHAB had not contested the authenticity of the Promissory Note at that time). I reject the suggestion that the Promissory Note could have given Mr Al Sanea any comfort at the time of the disputed payments about Singularis’ future prospects.

In my judgment Mr Al Sanea must have known that Singularis was insolvent or on the verge of insolvency and that it had major creditors other than himself. Therefore, his duty to Singularis as a 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 the creditors of Singularis.

Was Mr Al Sanea entitled to make the payments to himself by way of releasing Singularis’ debts to him?

Daiwa point out that in the April 2008 and October 2008 accounts for Singularis, an amount in excess of $5 billion was recorded as “funds contributed by shareholder”. The notes to those accounts explained that these amounts were “non-interest bearing” and that Mr Al Sanea had confirmed his intention to capitalise them in the future. There is no evidence to suggest that he had in fact capitalised these sums prior to the making of the payments. Singularis has asserted in other proceedings that the $5 billion amounted to shareholder loans, such that the sums were owned by Singularis but owed to Mr Al Sanea by way of a debt that was repayable on demand. Mr Al Sanea must have been a substantial creditor at the date of the earlier payments in June 2009. The effect of this evidence was that Mr Al Sanea could call for repayment of those loans, including by directing payments to third party companies like Saad Air, unless they constituted an unlawful preference. Daiwa submit that Mr Al Sanea, in his capacity as a creditor, was in principle entitled to call in those loans at any time, irrespective of whether it would be for the benefit of Singularis.

This point has been raised in other proceedings brought by the Joint Liquidators against Saad Air to recover the sums paid by Singularis to Saad Air. Singularis’ answer to the point in those proceedings is to rely on the provisions of section 239 of the Insolvency Act 1986 and its equivalent in Cayman Law which provide for the reversal of transactions amounting to an unlawful preference. In short, it was contended that the payments to Saad Air were made with the intention to prefer Mr Al Sanea’s position as creditor over those of other creditors at the time. In these proceedings, however, Daiwa complain that Singularis has not included in its pleaded case against Daiwa any allegation to the effect that the disputed payments were an unlawful preference. Moreover, Daiwa argue that section 145(1) of the Cayman Islands Companies Law is applicable here and that it differs from the corresponding provision in sections 239 and 240 of our Insolvency Act 1986 because it only allows the unwinding of payments if Singularis was actually insolvent at the time of the payments or that it so became as a result of them. It is not sufficient under Cayman Islands law to show that Singularis was on the verge of insolvency, which was the focus of Singularis’ case at trial.

Singularis have a number of answers to this point. First they point out that it was never pleaded in Daiwa’s defence that the payments comprised a repayment of loans Mr Al Sanea had made to Singularis. Mr Miles QC appearing for Singularis submits that this is not a simply a technical point. If the point had been pleaded by Daiwa, then Singularis could have pleaded in response that any such repayment of a loan was an unlawful preference. There could then have been a proper examination of the relevant Cayman Island statutory provisions and how they apply. As it is, this point has only emerged at a late stage. It has not been pleaded as a reason for the payments in Daiwa’s defence in these proceedings. There was a brief reference to it in Daiwa’s written opening though that did not refer to the relevant Cayman Islands law. Singularis has not had an opportunity to prepare and present a proper response on the point.

In my judgment it would not be fair to allow Daiwa to rely on provisions of Cayman Islands insolvency law raised for the first time in their closing submissions to argue a point about whether the payments could or could not be an unlawful preference. I cannot simply look at the wording of a single provision taken from the relevant Cayman Islands law and conclude, on the basis of submissions from one party only, that its scope is very different from that of the equivalent English provision. It would be unfair to criticise Singularis for not pleading that the payments were an unlawful preference when they never realised that they had to meet a case that the disputed payments should be regarded as the repayment to Mr Al Sanea of his loans. That was never put forward by Mr Wetherall as a reason for the payments in the email correspondence between him and Mr Metcalfe or Mr Hudson at the time. On the contrary, the two explanations that were put forward for the largest payment of $180 million were inconsistent with such a suggestion since Mr Wetherall went to some pains to put forward two much more complicated justifications for the payments.

I therefore decline to consider this point because it was not part of the pleaded case and Singularis have not had an adequate opportunity to deal with it.

The test for dishonesty in this context is that set out by the House of Lords in Twinsectra Ltd v Yardley and others [2002] UKHL 12. There Lord Hutton, with whom Lord Slynn of Hadley, Lord Steyn and Lord Hoffmann agreed, described the three possible standards which can be applied to determine whether a person has acted dishonestly. There is a purely subjective standard whereby a person is only regarded as dishonest if he transgresses his own standard of honesty even if that standard is contrary to that of reasonable and honest people; there is the purely objective standard whereby a person acts dishonestly if his conduct is dishonest by ordinary standards of reasonable and honest people, even if he does not realise this, and there is a combined standard:

“… which combines an objective test and a subjective test, and which requires that before there can be a finding of dishonesty it must be established that the defendant's conduct was dishonest by the ordinary standards of reasonable and honest people and that he himself realised that by those standards his conduct was dishonest”

His Lordship, having considered the test that had been applied by Lord Nicholls of Birkenhead in the earlier case of Royal Brunei Airlines Snd Bhd v Tan [1995] 2 AC 378 confirmed that dishonesty is a necessary ingredient of accessory liability and that (at paragraph 36):

“dishonesty requires knowledge by the defendant that what he was doing would be regarded as dishonest by honest people, although he should not escape a finding of dishonesty because he sets his own standards of honesty and does not regard as dishonest what he knows would offend the normally accepted standards of honest conduct.”

In Barlow Clowes International Ltd v Eurotrust International Ltd [2005] UKPC 37, Lord Hoffmann considered whether it must be shown that the alleged dishonest assister turned his mind to the ordinary standards of honest behaviour and to whether his conduct fell below those standards. He held that it was not necessary. It was only necessary to show that the defendant’s knowledge of the transaction rendered his participation contrary to normally acceptable standards of honest conduct. He did not need to be shown to have had reflections about what those normally acceptable standards were.

It is clear that wilful blindness will satisfy the test for dishonesty. An honest person does not “deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless”: Royal Brunei, per Lord Nicholls at p. 389F-G. It is therefore no defence for a defendant to say that he did not realise that he was acting dishonestly: Starglade Properties Ltd v Nash [2010] EWCA Civ 1314 at paragraph 32 and my judgment in Goldtrail Travel Ltd v Aydin & Ors [2014] EWHC 1587 at paragraphs 143-5.

Mr Miles accepted that Singularis has to show that a particular person within Daiwa was dishonest. There is an important difference between being incompetent – even grossly incompetent - and being dishonest. The person that Singularis identify as having been dishonest in relation to the payments of $180 million on 18 June 2009 and the payment of $5.2 million on 8 July 2009 is Mr Metcalfe. As regards all the payments except the $180 million payment on 18 June, Singularis also allege that Mr Hudson was dishonest.

As regards Mr Metcalfe, Singularis submits that his conduct went beyond what an honest person would do in the circumstances. They say that in relation in particular to the $180 million payment, no honest person in his position, knowing what he did, would have approved the payment without asking further questions. The same is true of the $5.2 million payment. They say that this is a case where he turned a blind eye. He did not make the enquiries that would be obvious to any honest person because he did not want to know the answer. They point in particular to what Mr Metcalfe told Mr Roberts in his email of 18 June that Mr Wetherall had provided him ‘with necessary documentation that ticked all compliance/legal boxes’. They submit that that was a dishonest statement because he knew that he had not properly explained the situation to anyone in the Compliance or Legal departments or got any formal approval.

As to Mr Hudson, Singularis says that no honest person would have acted in the way he did, making the payments without asking a single question.

I am satisfied on the evidence in this case that neither Mr Metcalfe nor Mr Hudson behaved dishonestly in approving the payments, even in the sense of turning a blind eye to what I regard as the very obvious shortcomings in the material provided to them. Rather they did not understand, despite Mr Wright’s email of 5 June 2009, what they had to do in order for Daiwa to fulfil its obligations to Singularis.

So far as Mr Hudson is concerned, his evidence in the witness box was patently frank and open. Although he had seen Mr Wright’s email of 5 June, he was never told that something more was expected of him than to carry out the checks that he had always carried out as to whether the recipient was on the list of sanctioned or terrorist organisations. He could not be expected to know the scope of the legal duties incumbent on Daiwa in handling the money. Indeed some of the correspondence cascaded down to Mr Hudson was misleading since it suggested that there would only be a problem if there was evidence that the Saad Group’s financial problems were ‘criminal’ rather than ‘fiscal’ and stating further that there was no evidence as at the date of the email that this was the case. There was no explanation of where the borderline between ‘criminal’ and ‘fiscal’ lay for this purpose and no assistance as to what kinds of circumstances should prompt Mr Hudson to do something more than he was accustomed to doing.

As will become apparent when I consider the issue of Daiwa’s negligence, the explanation for Mr Hudson’s conduct in approving these payments without asking any questions was not dishonesty on his part but rather a failure on the part of Daiwa’s management to explain to him properly what else he ought to have done or to put in place any procedures to ensure that proper action was taken. There is no basis for finding that he was in any way dishonest in his handling of the approvals and I find that there was no dishonest assistance in relation to the payments which he approved.

The position of Mr Metcalfe is more problematic. Again, his evidence in the witness box was given with great clarity and openness and he resisted any temptation to embellish his evidence to excuse his own conduct. He frankly admitted that he should have been more sceptical about the documents Mr Wetherall provided to him to justify the payment of the $180 million. But when it was put to him that he deliberately refrained from asking questions because he was turning a blind eye to an obvious fraud, he was emphatic that that was not true.

I have already held that the Hospital Expenses Agreement was a sham document. It was probably created and signed by Mr Al Sanea shortly before it was sent to Mr Metcalfe in response to his request for some evidence of a legal obligation supporting the proposed payment of $180 million. Some of the factors that push me to that conclusion should have been obvious to Mr Metcalfe as well, in particular the fact that this agreement and accompanying invoice was produced like a rabbit from a magician’s hat after the first explanation was rejected. But even on the slightly expanded concept of dishonesty discussed in the authorities, I accept Mr McCaughran QC’s submission on behalf of Daiwa that it is not enough to show that looked at objectively the documents provided to justify the payment were clearly bogus, Singularis have to show that Mr Metcalfe realised that the documents were very odd indeed.

I am satisfied that Mr Metcalfe did not question the authenticity of the documents because he also was not properly instructed as to what he needed to do in response to Mr Wright’s email. For some reason which no one was able to explain he was put in charge of authorising these payments despite being inexperienced in such matters and despite the fact that important concerns expressed by senior management were not passed on to him.

Some of the factors that point clearly to the falsity of the documents were not in the forefront of Mr Metcalfe’s mind by June 2009 although he accepted that he had been told about them earlier. For example, although Mr Metcalfe attended the 19 March Meeting and was aware at that point that Daiwa was looking for information about the financial state of Singularis, it is not altogether surprising that he did not ask himself in June why the existence of the Hospital Expenses Agreement had not been mentioned at that meeting.

I also take into account three other factors. First, Mr Metcalfe had worked with Mr Wetherall and other people at SFS over a number of years and had formed the view that they were honest and reputable people. He was slow to form suspicions that they would have a hand in a fraud of this kind. I consider he was rather naïve not to recognise that people who are entirely honest when financial matters are going well can give in to the temptation to act dishonestly when they are facing a slide into financial ruin. He also failed to realise that Daiwa should have been concerned not only with Mr Wetherall’s honesty but with that of Mr Al Sanea. Mr Wetherall may well have come under pressure to engage in conduct which he would not have agreed to in other circumstances. But to be naïve is not the same as to be dishonest.

Secondly I accept the point that Daiwa make which is that Mr Metcalfe had no possible motive for acting dishonestly in this situation. As Mann J put it in Mortgage Agency Services Number One Limited v Cripps Harries LLP [2016] EWHC 2483 (Ch) at paragraph 88 (rejecting a claim in deceit against a solicitor):

“By and large dishonest people are dishonest for a reason. They tend not to be dishonest wilfully or just for fun. Establishing a motive for deceit, or conspiracy, is not a legal requirement, but if a motive cannot be detected or plausibly suggested then wrongful intention (to tell a deliberate lie in order to deceive) is less likely. The less likely the motive, the less likely the intention to deceive, or to conspire unlawfully. In many, if not most, fraud cases this would not be a particularly live point. The defendant is often a person who would be a direct beneficiary of the fraud, and a plausible motive is, to that extent, relatively easily propounded. The present case is, however, different.”

The two motives suggested by Singularis seem to me implausible. The first was that Mr Metcalfe knew that Daiwa was very concerned to be rid of the money in the Singularis account because of its concern that it might be regarded as temporarily operating a bank account when it was not licensed to do so. I do not believe that this thought was in Mr Metcalfe’s mind when he approved the payments, even if he was aware that there was this problem in holding onto the cash. It would be very odd to decide to conspire in a substantial fraudulent transaction as a way of avoiding a much less serious regulatory transgression.

The alternative proposed motive was that Mr Metcalfe wanted to help Mr Wetherall whom he trusted and therefore closed his eyes to the impropriety of what was being done. Again, that strikes me as a very unlikely motive for someone to authorise a payment of such a substantial amount of money. The absence of any plausible motive for Mr Metcalfe having acted dishonestly is a material factor against any such finding.

The third factor is that there was at least some attempt by Mr Metcalfe to involve other people in the decision whether to approve the payment or not. Although it appears that Mr Metcalfe did not speak to Mr Massey or Mr Wright, at least at any length, between the time he received the Hospital Expenses Agreement and the time he told Mr Wetherall that the payment would be approved, he had discussed the first explanation given with Mr Massey. It is inconsistent with a dishonest intention for Mr Metcalfe to involve others in the approval of the payment.

I therefore find that the claim based on dishonest assistance of breach of fiduciary duty fails because Mr Hudson and Mr Metcalfe did not act dishonestly when approving the making of the payments.

The scope of the bank’s duty under Lipkin Gorman and Quincecare

The scope of the duty owed by a bank to its customer to refuse to implement a valid instruction to pay money out of the customer’s account was considered in Lipkin Gorman (a firm) v Karpnale Limited [1989] 1 WLR 1340 (‘Lipkin’). In that case Mr Cass, a partner in the appellant firm of solicitors withdrew a large amount of money from the solicitors’ bank account for which he was a signatory and lost it gambling at a casino. Mr Cass had a personal account with the bank which had also been used to cover gambling expenses. The solicitors brought a claim against the club and the bank. The trial judge found that the bank’s manager Mr Fox knew that Mr Cass had been gambling because of his withdrawals of funds from his personal account and that the manager did not believe Mr Cass’ assurance that his addiction was under control. Mr Fox did not inform the solicitors that Mr Cass was gambling or that large amounts of money were being withdrawn from the client account under Mr Cass’ authority and he made no inquiry as to the propriety of those withdrawals. The trial judge held that the bank’s manager had either shut his eyes to the obvious or had wilfully or recklessly failed to make the proper inquiries as to the source of the funds. He held that the bank had been in breach of its duty to the solicitors and was liable as a constructive trustee of the money.

The Court of Appeal allowed the bank’s appeal. May LJ dealt first with a point on the scope of the pleaded case against the bank and held that the pleaded case was inadequate to base a finding of fraud or dishonesty on Mr Fox’s part. He then turned to the claim against the bank based on contract and negligence. May LJ stressed that the circumstances in which a bank could be held to be under a duty to exercise any degree of care in deciding whether to honour a client’s cheque which he has been instructed to pay would be exceptional. The bank’s obligation to honour cheques is largely automatic and mechanical. However, counsel for the bank accepted that if a bank knows of facts which a reasonable bank manager would think are probably dishonest then inquiry would be appropriate. May LJ said:

“For my part I would hesitate to try to lay down any detailed rules in this context. In the simple case of a current account in credit the basic obligation on the banker is to pay his customer’s cheques in accordance with his mandate. Having in mind the vast numbers of cheques which are presented for payment every day in this country, whether over a bank counter or through the clearing bank, it is, in my opinion, only when the circumstances are such that any reasonable cashier would hesitate to pay a cheque at once and refer it to his or her superior, and when any reasonable superior would hesitate to authorise payment without inquiry, that a cheque should not be paid immediately on presentation and such inquiry made. Further, it would, I think, be only in rare circumstances, and only when any reasonable bank manager would do the same, that a manager should instruct his staff to refer all or some of his customer’s cheques to him before they are paid.”

May LJ considered the facts and accepted that a single phone call from the bank to one of the partners in the solicitors’ firm would have brought the enterprise to a close. Was there any duty on the bank to make such a call? He held that there was not because it would have been a breach of the bank’s duty to Mr Cass as its customer to disclose to the solicitors the knowledge that Mr Cass was a compulsive gambler.

Parker LJ held that it was not necessary for the customer to show a want of probity on the part of the bank in order to establish a breach of the bank’s duty of care.

“If a reasonable banker would have had reasonable ground for believing that Cass was operating the client account in fraud, then, in continuing to pay the case cheques without inquiry the bank would, in my view, be negligent and thus liable for breach of contract, albeit neither Mr. Fox nor anyone else appreciated that the acts did afford reasonable grounds and was thus innocent of any sort of dishonesty.”

Parker LJ went on:

“I would not, however, accept that a bank could always properly pay if it had reasonable grounds for a belief falling short of probability. The question must be whether, if a reasonable and honest banker knew of the relevant facts, he would have considered that there was a serious or real possibility, albeit not amounting to a probability, that its customer might be being defrauded, or, in this case, that there was a serious or real possibility that Cass was drawing on the client account and using the funds so obtained for his own and not the solicitors’ or beneficiaries’ purposes. That, at least, the customer must establish. If it is established, then in my view a reasonable banker would be in breach of duty if he continued to pay cheques without inquiry. He could not simply sit back and ignore the situation. In order so to establish the customer cannot, of course, rely on matters which a meticulous ex post facto examination would have brought to light. Such an examination may well show that it was indeed obvious what Cass was doing, but in the present case the inquiry is simply whether Mr. Fox, and therefore the bank, had, on the basis of the facts and banking practices established at the time, reason to believe that there was a serious possibility that Cass was misusing his authority to sign under the mandate in order to obtain and misapply the case handed to Chapman in fraud of the solicitors.”

May LJ in Lipkin cited with approval the judgment of Steyn J in Quincecare which had been decided between the first instance and Court of Appeal decisions in Lipkin. In Quincecare Barclays Bank had loaned £400,000 to a company, Quincecare, formed to purchase four chemist shops. The chairman of the company caused about £340,000 to be drawn down and misapplied the money for his dishonest purposes. The bank sued Quincecare and the guarantor of the debt. Steyn J handed down judgment between the date of the first instance decision in Lipkin and the date of the Court of Appeal decision. The central issue in the case related to the question whether the bank had acted in breach of duty towards Quincecare. Steyn J said that the most substantial issue in the case was whether the bank, in executing the order to transfer the money was put on notice that the chairman was acting for his own benefit or for an unauthorised purpose. Steyn J examined the nature of the relationship between a bank and its customer in the context of a bank transferring money from a current account on the customer’s instructions (though he said that he could not overlook the fact that the chairman could have achieved his dishonest purpose by writing a cheque on the account instead). He held first that it is an implied term of the contract between the bank and the customer that the bank will observe reasonable skill and care in and about executing the customer’s orders. He went on to hold that a banker may in such cases be sued in tort as well as in contract, but that the duties in contract and tort are coextensive.

Steyn J went on to say that in approaching the problem, everything will depend on the facts of the particular case. Relevant factors may be the standing of the corporate customer, the bank’s knowledge of the signatory, the amount involved, the need for a prompt transfer, the presence of unusual features and the scope and means for making reasonable inquiries. But he referred to one particular feature as often being decisive, namely that a bank does not conduct its business on the basis that its customers may be fraudulent: “it is right to say that trust, not distrust, is also the basis of a bank’s dealing with its customers”. Full weight must, he said, be given to this consideration before one is entitled in a given case to conclude that the banker had reasonable grounds for thinking that the order was part of a fraudulent scheme to defraud the company. Steyn J also warned against the dangers of hindsight when combing through documents in the bank’s possession for indications that the chairman was an untrustworthy person. One must make allowance for the fact that in human affairs judgments of character and integrity are notoriously subjective and variable, and banking officials suffer from the same handicap. He expressed the test to be applied in the following terms:

“In my judgment the sensible compromise, which strikes a fair balance between competing considerations, is simply to say that a banker must refrain from executing an order if and for as long as the bank is ‘put on inquiry’ in the sense that he has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company. … And, the external standard of the likely perception of an ordinary prudent banker is the governing one. That in my judgment is not too high a standard.”

The judge then examined whether anything occurred which would have given the bank’s personnel reasonable grounds to believe that the chairman was about to commit a major fraud. He emphasised the kinds of factors that are not relevant in the instant case, such as the multiplicity of transactions that the bank is dealing with on behalf of its customers and the limited time available – a matter of minutes – in which bank personnel had to consider and take decisions on any one transaction. He noted that there ‘was nothing odd’ in the way the instruction had been given. Overall he concluded that the bank had no reason to suspect that the chairman was about to embark on an audacious fraud.

Was Daiwa subject to a Quincecare duty in respect of the money in the Singularis account?

Daiwa raise a number of threshold points which they submit prevent Singularis from being able to rely on the Quincecare duty in this case.

Is the claim precluded by the fact that the claim is being brought on behalf of the creditors?

Mr McCaughran argued that it is important to consider whether the claim that is being brought falls within the scope of the duty owed by Daiwa. In the present case he relied on certain passages in Stone & Rolls Ltd (in liquidation) v Moore Stephens (a firm) [2009] UKHL 39 (‘Stone & Rolls’) as emphasising that a duty that is owed to the company is not owed to the creditors of the company. In the present case, given that Singularis contend that it was of doubtful solvency at the time the payments were made, no cause of action can have arisen because at that point the interests of the creditors had intruded. The only people likely to benefit from any damages recovered from Daiwa as a result of these proceedings are the creditors of Singularis. He recognises that so far as directors of a company are concerned, once the company is insolvent or of doubtful solvency the creditors’ interests intrude and they come within the scope of the directors’ fiduciary duty. The issue here, Mr McCaughran submitted, is whether the Quincecare duty owed by Daiwa has the same elasticity as the directors’ fiduciary duty. He submitted that it does not; the creditors of Singularis are the only people who suffer a loss and since creditors are not within the scope of the Quincecare duty, the claim fails for that reason.

I reject this argument. It is accepted by Singularis that the Quincecare duty is not owed directly to creditors. It is owed to the company and it is the company that is bringing this claim against Daiwa. The fact that the ultimate recipients of any damages awarded will include Singularis’ creditors does not preclude the company from pursuing this action. There is no principle of law which requires or entitles the court to consider what a party who has a valid cause of action for a loss intends to do with the money he or she recovers if successful in proceedings based on that cause of action. The solvency or insolvency of Singularis makes no difference to this aspect of the case.

Is Singularis precluded from bringing the claim because it was a one-man company?

Many of the points raised by Daiwa in defending the negligence claim depend on an assertion that Mr Al Sanea was in control of the company at the material time. There was some lack of clarity about what was meant by a company being a ‘one-man company’ in the various contexts in which the point was raised. The phrase is usually used to refer to a company where the sole shareholder is also the sole director - or at least the sole active shareholder and director of the company - so that all decisions made about the company’s affairs are in effect his decision. For that purpose, if there are other shareholders and directors, it may be necessary to inquire whether they exercised any independent influence on decisions about what the company would do. In other contexts, however, the existence of other shareholders or directors may be relevant not because they are active or inactive but because they may be innocent of any involvement in the fraud that the controller has perpetrated against the company.

It was not clear to me whether Daiwa was asserting that Singularis was a one- man company in both those senses. Certainly, Mr McCaughran submitted, it was a one-man company in the sense that Mr Al Sanea controlled everything Singularis did. There is no evidence to suggest that any of the other directors of Singularis exerted any influence over what happened even in respect of decisions taken to close out the relationship with Daiwa or to put the company into voluntary liquidation in August 2009. However, I did not understand Daiwa to assert positively that the other directors of Singularis knew what Mr Al Sanea was instructing Daiwa to do with the money held in the Singularis account. Daiwa argue that this does not matter because the reason why Mr Al Sanea’s fraud is attributed to the company is because of his control, not because of the absence of innocent directors or shareholders. Mr McCaughran submitted that one can explain why the claim fails either on the basis that there is a breach of duty but no causation because the company knows everything that needs to be known about the fraud or because there is no breach of duty because a bank cannot be required to protect a company against a fraud of which it is fully aware itself.

In support of this submission Daiwa rely on the judgment of Hobhouse J in Berg Sons & Co Ltd & ors v Adams & ors [1992] B.C.C. 661 (‘Berg’). That case concerned an action brought by an insolvent company’s liquidators against the former auditors in respect of alleged losses caused by the auditors’ negligence in preparing the audited accounts. All the shares in the company were beneficially owned by one person, Mr Golechha, and it was he who had provided the information on which the auditors had based their opinion. It was not proved that there was any fraud by Mr Golechha. Hobhouse J held that the claim failed because however one identified the company, it was not misled and no fraud was practised upon it. This was, the judge said:

“a simple and unsurprising consequence of the fact that every physical manifestation of the company Berg was Mr Golechha himself. Any company must as a last resort if it is to allege that it was fraudulently misled, be able to point to some natural person who was misled by the fraud. That the plaintiffs cannot do.”

Hobhouse J stated that although, of course, the company was a different legal entity from Mr Golechha, he was the directing mind and will of the company – his knowledge was the company’s knowledge and there was no body of shareholders to whom the auditors’ certificate was addressed other than him.

Daiwa also relied on comments of the members of the House of Lords in Stone & Rolls. For example Lord Phillips of Worth Matravers at paragraph 80 said that:

“ … it is very difficult to see how the law can rationally hold an auditor liable when the entire shareholder body and the entire management is embodied in a single individual who knows everything because he has done everything.”

Lord Walker of Gestingthorpe also referred to the ‘sole actor’ exception at paragraphs 157 onwards in Stone & Rolls and Lord Brown of Eaton-under-Heywood gave a forthright description of the principles to be applied in the opening passages of his speech.

Perhaps the clearest statement in support of Daiwa’s submissions on this point is that of Lord Sumption at paragraph 91 of the judgments of the Supreme Court in Jetivia SA & anr v Bilta Limited (in liquidation) & ors [2015] UKSC 23 (‘Bilta’). Lord Sumption was considering the attribution of the director’s fraud to the company in two contrasting situations; first where the claim is brought by the company against its former director and secondly where the claim is brought by the company against a third party. In the former, it would be a “remarkable paradox” if the attribution of the director’s fraud to the company defeated the company’s claim against him. As to the second, Lord Sumption said this:

“The position is different where the company is suing a third party who was not involved in the directors’ breach of duty for an indemnity against its consequences. In the first place, the defendant in that case, although presumably in breach of his own distinct duty, is not seeking to attribute his own wrong or state of mind to the company or to rely on his breach of duty to avoid liability. Secondly, as between the company and the outside world, there is no principled reason not to identify it with its directing mind in the ordinary way. For a person, whether natural or corporate, who is culpable of fraud to say to an innocent but negligent outsider that he should have stopped him in his dishonest enterprise is as clear a case for the application of the illegality defence as one could have.”

The upshot of Mr McCaughran’s submissions was that where the director of a one-man company perpetrates a fraud on that company then the company has a claim against him for breach of fiduciary duty and against a third party for dishonest assistance – that is the result of the Bilta case. But where there is no dishonesty that is the limit of the company’s claims. The company’s claim against a third party in negligence is defeated by the attribution of the director’s fraud to the company.

In my judgment 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. I do not accept that Bilta is authority for any such broad proposition. What emerges from Bilta is 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. That is why it does not make sense to attribute the fraud to the company when the suit is against the director himself. That does not mean, however, that it will always be appropriate to attribute the fraud to the company when the suit is against a third party in negligence. Lord Sumption in the paragraph following the one cited above from Bilta himself said that:

“The technique of applying the general rules of agency and then an exception for cases directly founded upon a breach of duty to the company is a valuable tool of analysis, but it is no more than that. Another way of putting the same point is to treat it as illustrating the broader point made by Lord Hoffmann in Meridian Global that the attribution of legal responsibility for the act of an agent depends on the purpose for which attribution is relevant. Where the purpose of attribution is to apportion responsibility between a company and its agents so as to determine their rights and liabilities to each other, the result will not necessarily be the same as it is in a case where the purpose is to apportion responsibility between the company and a third party.”

The reference to Lord Hoffmann there is to Lord Hoffmann’s speech in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 (‘Meridian’). He stated that the rule of attribution is a matter of interpretation or construction of the relevant substantive rule, illustrating the point by the contrasting decisions of the House of Lords in Tesco Supermarkets Ltd v Nattrass [1972] AC 153 and In re Supply of Ready Mixed Concrete (No. 2) [1994] 3 W.L.R. 1249. It is necessary to tailor the attribution rule to the terms and policies of the substantive rule for which it is being applied. The decision of Lord Hoffmann in Meridian was referred to with approval by Lord Mance in Bilta.

The issue for the court in this case is therefore whether, in the context of a claim by the company against a bank for breach of the Quincecare duty, the director’s fraud should be attributed to the company in order to defeat the claim. In my judgment it would not be right to do so because such an attribution would denude the duty of any value in cases where it is most needed. The duty is only relevant in a situation where the instructions to pay out the money are given by the person who has been entrusted by the company as a signatory on the bank account. If there were no properly authorised instruction to transfer the money, the company would not need to rely on the Quincecare duty. The existence of the duty is therefore predicated on the assumption that the person whose fraud is suspected is a trusted employee or officer. So the duty when it arises is a duty to save the company from the fraudulent conduct of that trusted person. This is a very different duty from the duty on auditors to report to shareholders about the affairs of the company.

I do not consider that any contrary conclusion can be gleaned from the speeches of the House of Lords in Stone & Rolls. Stone & Rolls has long been regarded as a problematic case. It was decided by a majority of three to two and the speeches of the three do not disclose any clear single ratio. The Supreme Court more recently in Bilta revisited those speeches and attempted to draw out what principles can properly be regarded as having been established by that case. The Supreme Court also gave a strong warning about the dangers of casting around in the speeches of the House in Stone & Rolls for support for different propositions. Lord Neuberger stated (paragraph 24) that so far as it is to be regarded as strictly binding authority, Stone & Rolls is best treated as a case which solely decided that the Court of Appeal was right to conclude that, on the facts of the particular case, the illegality defence succeeded and that the claim should be struck out. Having set out the three points that he thought could be drawn out of the speeches, Lord Neuberger continued:

“Subject to these points, the 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 [1963] Ch 459, 483, be “put on one side 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.”

Lord Toulson and Lord Hodge agreed (paragraph 154) that Stone & Rolls 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.

Stone & Rolls was dealing with a very different duty from the one here. To pick out short passages from the various speeches and try to draw from them a principle that is not one of the principles that the Supreme Court said in Bilta might be drawn from the earlier case would be to ignore the very clear guidance of the Supreme Court. I therefore resist Mr McCaughran’s suggestion that I should, in effect, rush in where the Supreme Court has warned judges that they should fear to tread.

In any event, on the facts of this case, the evidence does not suggest that Singularis was a one-man company in the sense that that term was being used in Stone & Rolls and Bilta. There were other directors here. They included professional and experienced businessmen who were not relatives of Mr Al Sanea. The board of directors was made up of:

It is true that they do not appear to have performed any kind of supervisory function even when the fortunes of the Saad Group and Singularis started to decline. There does not appear to have been any board meeting held in 2008 and 2009. There is no evidence to show that they were involved in or aware of Mr Al Sanea’s actions. Daiwa point out that on the facts of Berg, there was an innocent director, Mr McCall, who was a partner in the firm of solicitors who used to act for Berg. He was described as a wholly non-executive director who received no remuneration and took no part in the running of the company. That did not prevent the conduct of Mr Golechha being attributed to Berg so as to defeat the company’s claim. However, these factual issues are a question of degree; the existence of a single other director may not prevent the company from having effectively a sole proprietor and a sole director for this purpose. In my judgment the position of Singularis is different here. Even though Mr Al Sanea was the dominant influence over the affairs of the company, it had a board of reputable people and a substantial business. I make no finding as to whether the directors at any stage exercised any influence over the management of the company but I cannot make any findings either that they were complicit in the misappropriation of the money – there is no reason why they should have been. Therefore, on the facts this defence fails.

I find that Singularis is entitled to rely on the Quincecare duty owed to it by Daiwa and is not precluded from such reliance either because it was of doubtful solvency at the time of the payments or because Mr Al Sanea was the sole directing mind of the company as regards the misappropriation of funds.

Was Daiwa in breach of the Quincecare duty on the facts of this case?

This is an unusual case because many of the factors put forward by the judges in Lipkin and Quincecare as to why it would be impractical to impose too heavy a duty on a bank do not apply here. Daiwa was not administering hundreds of bank accounts with thousands of payment instructions every week. It was not impractical to expect Daiwa to look carefully at the instructions that were given for payments out of the account and they were aware that they needed to do so. Whereas the vast majority of payments out of an ordinary current account are made to third party recipients, the Daiwa witnesses accepted that it was highly unusual, if not unique in their experience, for money in a customer account not to be paid back to another account in that customer’s name. Mr Metcalfe told Mr Wetherall that Daiwa would prefer to pay the money back to Singularis rather than to a third party – a request that would not make any sense in a normal banking relationship. Daiwa say that their position was similar to that of an ordinary bank in that they were under an obligation to pay the money out to their client or to someone on the client’s instruction. The countervailing Quincecare duty entitling or requiring them to disobey that instruction must not be too burdensome since the bank may fear being damned if it does make the payment and damned if it does not.

In the circumstances of this case I do not need to decide whether the Quincecare duty should be modified to reflect the particular circumstances of this bank account. I have no hesitation in finding that Daiwa was in breach of the duty of care that it owed to Singularis described by the courts in Lipkin and Quincecare. 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 when he instructed that the money to be paid to other parts of his business operations. He was clearly using the funds for his own purposes and not for the purpose of benefiting Singularis. In making the disputed payments without proper or any inquiry, Daiwa were negligent and are liable to repay the money to Singularis.

What were these signs? First, the senior management of Daiwa were well aware of the dire financial straits that Mr Al Sanea and the Saad Group found themselves in at the end of May and early June 2009. I have described these in the earlier sections of this judgment. The indicators included the freezing of Mr Al Sanea’s assets by the Saudi authorities and the reports in the press about the withdrawal of credit facilities and the need for the group to restructure its very substantial debts and the downgrading and then immediate withdrawal by Moody’s and S&P of their credit rating for the group. It is hard to think of what clearer indication there could have been that Singularis was in a very precarious financial state.

The Daiwa witnesses in some of their written evidence tried to draw a distinction between the troubles engulfing Mr Al Sanea and the Saad Group at the end of May and the financial position of Singularis as a separate legal entity. They refer to the healthy balance sheet provided for the period up to October 2008 and the recovery of the share prices between March and June. That evidence does not stand up to any scrutiny. Daiwa did not act as if it had no concerns about Singularis’ health when acting to protect Daiwa’s own interests. The events of Sunday 31 May and Monday 1 June show that Daiwa was extremely concerned about the risks involved for Daiwa in continuing its relationship with Singularis. They fully appreciated that Mr Al Sanea might become unable or unwilling to continue to pour money into Singularis. The decision of the Daiwa management that they would close down the relationship on 1 June, whether or not they had the consent of SFS, thereby taking the risk that this would expose them to later legal challenge shows the lengths to which they were prepared to go to avoid any loss to themselves from the potential collapse of the group. That is not the conduct of a bank which has confidence in the financial health of a long term counterparty.

Daiwa was fully aware that Singularis was dependent on Mr Al Sanea for funding even though it was not consolidated into the Saad Group. All the credit reports prepared by Mr Metcalfe stressed the reliance of Singularis on Mr Al Sanea’s continued support when the market was turning against banking shares. Daiwa management realised that the stresses and strains that Mr Al Sanea was under might make him jump one of two ways – he could start extracting money from Singularis to support other companies in the Saad group or he could try to protect his personal wealth in Singularis outside the Saad group. Even before the requests for the disputed payments there were signs that the latter was happening. Daiwa were aware that Singularis had started to ask for excess margin to be returned to it whereas it had previously been content to leave the excess in the Singularis account (see paragraph 52, above).

The Daiwa witnesses accepted in cross examination that the October balance sheet was no longer of any value as an indicator of Singularis’ health by June 2009. They also accepted that to the extent that they had taken comfort at the 19 March Meeting from SFS’ promises of more up to date financial data about Mr Al Sanea’s net worth and an increase in the haircut, that comfort was no longer there by June. No further financial information was provided and there was no agreement to an increase in the haircut.

Secondly, Daiwa was aware that Singularis may have other substantial creditors with an interest in the money held in their account. I found earlier that Mr Metcalfe might not have had in mind the fact that Singularis owed a substantial amount of money to Lehman Bros. But that information was within Daiwa’s corporate knowledge and should have influenced the way that Daiwa treated Singularis’ money. Daiwa management knew that other banks were selling off the collateral they held for Singularis. References were made at the 19 March Meeting to Singularis having hedged its exposures but Daiwa neither asked for nor was provided with any information about such hedging. There was no basis for Daiwa to assume that Singularis would emerge from its financial difficulties with no creditors looking to the excess money in the Daiwa account. This is not a case where the bank could have continued to act on Mr Al Sanea’s instructions on the basis that he was entitled to move money around his own companies even if there was no particular benefit to the particular entity holding the account.

Thirdly, Daiwa say that they were entitled to assume that Mr Al Sanea and the people in Geneva were honest. Mr Massey said in his evidence that he did not doubt the honesty and integrity of the people involved at SFS in providing the evidence of a corporate obligation to support the making of the payment. He said that Daiwa was not involved in “some sort of paranoid investigation of every single fact” that SFS put forward because that is not a valid way of conduct business. I accept that the Quincecare duty does not require a bank to become paranoid about the honesty of those it does business with in normal circumstances. But the Quincecare duty does require a bank to do something more than accept at face value whatever strange documents and implausible explanations are proffered by the officers of a company facing serious financial difficulties.

There was plenty of evidence to put Mr Massey and his colleagues on notice that there was something seriously wrong with the way that Mr Al Sanea was operating the Singularis account with Daiwa. There was the appearance of $80 million in the Singularis account on 2 June, shortly after Mr Al Sanea’s and Saad Group’s other bank accounts had been frozen. Although the receipt rightly caused some consternation within Daiwa, they do not seem to have drawn the obvious conclusion that Mr Al Sanea intended to use the unfrozen Singularis account to bypass the restrictions imposed on the Group by the Saudi authorities. There was the strange request on 2 June to pay sums to individuals within SFS; the extreme reaction of SFS staff slamming down the phone when Mr Roberts told them that Daiwa initially refused to make the payment and then the fact that the payments did not go ahead anyway for a reason no one seems to know.

Fourthly and perhaps most significantly there was the production of the supposed Hospital Expenses Agreement which had never been mentioned before but which was conveniently produced to justify a very substantial payment out of Singularis’ funds. Both Mr Kosuge and Mr Sakashita were alive to the possibility at least that the money was being paid to SSHC not because of some genuine obligation on the part of Singularis to meet the running expenses of the hospital but simply as a conduit to get the money back from Daiwa without it being paid to Singularis. That was, I find, the purport of Mr Kosuge’s email of 17 June 2009 referring to the possibility that the payment to the Hospital was a front or cover rather than a genuine obligation. Mr Sakashita’s evidence was that he understood the nature of Mr Kosuge’s concern. Again, although the inconsistencies between this agreement and the earlier information provided about Singularis’ affairs may not have struck Mr Metcalfe, they would have come to mind if more care had been taken to consider whether the agreement was likely to be genuine.

Fifthly there is a striking contrast between how some payment requests were processed and how the disputed payments were handled. The request on 2 June for the payments to be made to individuals was the subject of discussion between management and in-house legal and compliance functions. The decision whether to use part of the $80 million received to pay the $3 million margin call owed to Daiwa by SICL was also the subject of extensive discussion at very senior level and of consultation with external legal advisers. However, in respect of most of the disputed payments Mr Hudson and Mr Metcalfe simply signed off on them without any consultation or discussion with anyone. The payments to Saad Air were not queried at all and the initial payments to SSHC on 12 June 2009 were made without any questions being asked.

I do not regard Mr Metcalfe or Mr Hudson as wholly or even primarily to blame for the failure of Daiwa to fulfil its duty of care to Singularis. There was a failure at every level. What emerges from the evidence is a wealth of emails being sent by each senior executive to his colleagues in London and Tokyo stressing how great care, extreme caution and so forth must be exercised in handling any requests for payment from the Singularis account. Everyone recognised that the account needed to be closely monitored even after the trading relationship between the parties had been brought to an end. 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.

None of the witnesses in Daiwa could explain why Mr Metcalfe or Mr Hudson were handling these payments; no one explained to them what they needed to do. They were not put fully in the picture about the worries that senior management had about the handling of the account and about the risks of wrongdoing. No one told Mr Hudson that he had to do something more than check that the recipient was not a terrorist organisation and no one told Mr Metcalfe that despite the previous good relationship with Singularis, he had to examine carefully any explanation given to support a payment and make sure that he checked properly with the Legal and Compliance departments before authorising the payment. The messages coming from Mr Wright were incorrect and confusing to the extent that they suggested that Daiwa need only be concerned if there was evidence that Mr Al Sanea’s financial problems were the result of criminal activity.

I agree with Mr Miles’ description of Daiwa here as having a dysfunctional structure leading to a sequence of events where everyone assumes that someone else is dealing with investigating the disputed payments but no one troubles to check whether that is right or not. What went wrong was that no one seems to have considered it his job to make the inquiries that Mr Wright said should be made or to ensure that the right people were tasked with dealing with payment requests.

This failure is all the more surprising given that it was predicted by the Thematic Review which warned a year earlier that “[i]f accountability for fraud is not clearly defined there may be confusion with regards to whose responsibility it would be to ensure there are sufficient anti-fraud controls in place.” It was remarkable that when Mr Kosuge was asked at the close of his cross-examination who he thought should have been in charge of checking whether the payment of $180 million was a proper one, his answer was confused and confusing. The real answer is that no one was in charge of protecting Singularis’ interest in the money.

The defence of illegality

Daiwa submit that Singularis’ claim in negligence is defeated by the defence of illegality. The Supreme Court has recently revisited the test for illegality. In Patel v Mirza [2016] UKSC 42, Mr Patel had given Mr Mirza £620,000 pursuant to an agreement that the money would be used to bet on the price of Royal Bank of Scotland shares on the basis of inside information that Mr Patel thought he was going to receive. That agreement amounted to a conspiracy to commit an offence of insider dealing contrary to section 52 of the Criminal Justice Act 1993. Mr Patel did not receive that information and the bets were never placed. When he sued Mr Mirza for the return of the money, Mr Mirza contended that it was contrary to public policy for the courts to lend their aid to Mr Patel whose claim was reliant on illegality. In analysing the defence of illegality, Lord Toulson SCJ, with whom four of their Lordships (of a panel of nine) agreed said, having reviewed the authorities:

“99.

Looking behind the maxims, there are two broad discernible policy reasons for the common law doctrine of illegality as a defence to a civil claim. One is that a person should not be allowed to profit from his own wrongdoing. The other, linked, consideration is that the law should be coherent and not self-defeating, condoning illegality by giving with the left hand what it takes with the right hand.”

100.

Lord Goff observed in the Spycatcher case, Attorney General v Guardian Newspapers Ltd (No 2) [1990] 1 AC 109, 286, that the “statement that a man shall not be allowed to profit from his own wrong is in very general terms, and does not of itself provide any sure guidance to the solution of a problem in any particular case”. In Hall v Hebert [1993] 2 SCR 159 McLachlin J favoured giving a narrow meaning to profit but, more fundamentally, she expressed the view (at 175-176) that, as a rationale, the statement that a plaintiff will not be allowed to profit from his or her own wrongdoing does not fully explain why particular claims have been rejected, and that it may have the undesirable effect of tempting judges to focus on whether the plaintiff is “getting something” out of the wrongdoing, rather than on the question whether allowing recovery for something which was illegal would produce inconsistency and disharmony in the law, and so cause damage to the integrity of the legal system.

That is a valuable insight, with which I agree. I agree also with Professor Burrows’ observation that this expression leaves open what is meant by inconsistency (or disharmony) in a particular case, but I do not see this as a weakness. It is not a matter which can be determined mechanistically. So how is the court to determine the matter if not by some mechanistic process? …”

In conclusion Lord Toulson said:

“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 (or, possibly, certain aspects of public morality, the boundaries of which have never been made entirely clear and which do not arise for consideration in this case). 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. Within that framework, various factors may be relevant, but it would be a mistake to suggest that the court is free to decide a case in an undisciplined way. The public interest is best served by a principled and transparent assessment of the considerations identified, rather than by the application of a formal approach capable of producing results which may appear arbitrary, unjust or disproportionate.”

Attribution of Mr Al Sanea’s wrongdoing to Singularis

Since Mr Patel was an individual, the Supreme Court did not have to grapple there with the question that arises in this case namely whether Mr Al Sanea’s illegal conduct should be treated as the illegal conduct of Singularis so as to defeat Singularis’ claim against Daiwa. Daiwa says that Singularis’ claim for breach of duty of care is barred by the principle of ex turpi causa because the wrongdoing of Mr Al Sanea is to be attributed to Singularis which is therefore relying on its own illegality. The relevant wrongdoing is said to be Mr Al Sanea’s deceit of Daiwa into making the Payments. Before I come to apply the three-fold test in Patel v Mirza it is therefore necessary to consider that preliminary question of whether Mr Al Sanea’s illegal conduct is to be attributed to Singularis.

Daiwa argue that Mr Al Sanea’s conduct is to be attributed to Singularis either on the basis of company law principles, in particular the Hampshire Land principle discussed in Bilta or because Singularis is vicariously liable for Mr Al Sanea’s conduct.

I have already considered the authorities for the proposition that the key to any question of attribution is ultimately always to be found in considerations of context and purpose: see per Lord Mance in Bilta at paragraph 41. Lord Sumption in Bilta, analysing the speeches of the House of Lords in Stone & Rolls, said that Lord Phillips and Lord Walker had in the earlier case agreed on three points for which the case was accordingly authority. The first was that the illegality defence is available against a company only where it was directly, as opposed to vicariously, responsible for it. Secondly, the majority rejected the argument that once it was shown that the directing mind and will of a company had caused it to defraud a third party, then the illegality defence barred any claim which relied on that fraud to found its cause of action. The House of Lords in Stone & Rolls concluded that that was too broad a proposition because it would involve the attribution of the agent’s dishonesty to the company even where there were innocent directors or shareholders. Accordingly, they had regarded it as critical that Stone & Rolls was a one-man company in the sense that there were no innocent directors or shareholders. Thirdly, Lord Sumption stated, Lord Phillips and Lord Walker were agreed in Stone & Rolls that as between a one-man company and a third party, the latter could raise the illegality defence on account of the agent’s dishonesty, at any rate where it was not itself involved in the dishonesty.

Lord Neuberger in Bilta agreed with the second proposition that the defence of illegality ‘is not available where there are innocent shareholders (or, it appears, directors)’. He also agreed that if there are no innocent shareholders or directors then the defence is sometimes, but not always available. But Lord Neuberger did not agree that the first proposition, namely that the illegality defence is only available where the company is directly as opposed to vicariously responsible for the illegality, could be derived from Stone & Rolls. He preferred to leave entirely open the question whether vicarious responsibility might be enough. Lord Mance also declined to endorse Lord Sumption’s suggestion that a distinction between personal and vicarious liability was central to the application of the illegality defence: paragraph 48 of Bilta. Lords Clarke and Carnwath agreed with Lord Neuberger’s judgment.

I have already found that Singularis was not a one-man company in the sense that the House of Lords in Stone & Rolls and the Supreme Court in Bilta were using that phrase. The directors were not men or women of straw. I will consider the behaviour of the Board later in relation to the question of contributory negligence. Here it suffices to say that even though Mr Al Sanea was sole shareholder and also the only director who took an active part in the management and operation of Singularis so far as these events are concerned, that does not appear to be the relevant test for this purpose. As to the involvement of the other directors, Daiwa point out that there is no evidence of any board meetings during the course of 2009 and that the minutes of earlier board meetings bear the hallmarks of formal documents which may not record genuine discussion or debate about the company. They also point out that very extensive powers were delegated to Mr Al Sanea by the board to take decisions on behalf of the company, including signing powers on the company’s accounts. On the other hand, Singularis was not a company like Stone & Rolls, created purely to perpetrate the fraud. It was established for the purpose of carrying out substantial and legitimate transactions, for which it borrowed substantial sums of money under a variety of funding agreements. It therefore had a large and genuine business carried out over a number of years before the events the Court is concerned with here.

Further, Lord Toulson and Lord Hodge JJSC said at the opening of their judgment in Bilta that in any case where a defence of illegality is raised, “it is necessary to begin by considering the nature of the particular claim brought by the particular claimant and the relationship between the parties”: paragraph 122. I consider that the defence of illegality should fail because of the nature of the duty relied on by Singularis here, as I have described in a different context in paragraph 184, above.

I do not consider that the issue of whether attribution can be made through the concept of vicarious liability rather than direct attribution arises in this case. There may be cases where the issue arises whether the illegal conduct of a relatively junior employee who could not otherwise be described as the directing mind of the company should be attributed to the company. Vicarious liability may be relevant in those circumstances. I accept the submission of Mr Miles that if a company is to be fixed with vicarious liability for the actions of its directors, then it is difficult to see why the existence or otherwise of innocent directors was regarded as relevant by the Supreme Court in Bilta.

In my judgment the dishonest conduct of Mr Al Sanea should not be attributed to Singularis so as to provide Daiwa with a defence of illegality.

The test in Patel v Mirza

In case I am wrong in coming to that conclusion, I will briefly consider how the three-fold test set out by the Supreme Court in Patel v Mirza would apply. Applying the test set out by Lord Toulson points firmly in favour of rejecting the illegality defence put forward by Daiwa. It would not be contrary to the public interest to allow Singularis to enforce its claim, nor would it be harmful to the integrity of the legal system for this claim to succeed.

Daiwa identify two illegal acts or prohibitions that have been transgressed to adopt the wording of Lord Toulson setting out the first limb of the test. These are Mr Al Sanea’s provision of documents which he knew to be false in order to induce Mr Metcalfe to make some of the payments or, in relation to all of the payments, Mr Al Sanea’s breach of his fiduciary duty towards Singularis. I note here that no bogus documents were produced in relation to the payments to Saad Air or in relation to the first payments to SSHC. But I am prepared to assume for present purposes (without so finding) that there was some implied representation in the SWIFT payment instruction that there was a legitimate reason for that payment to be made.

The purpose of the prohibition on breach of fiduciary duty is clearly to protect the company from becoming a victim of the wrongful exercise of power by the officers of the company. That purpose will certainly not be enhanced by preventing Singularis from claiming the money back. The purpose of the former prohibition, as it arises in this case, is two-fold; to protect the bank from being deceived and to protect the company from having its funds misappropriated. Although one could say that the purpose of protecting the bank would be enhanced by denial of the claim, that purpose is achieved here by ensuring that the bank can only be liable if the Quincecare duty is breached. The balance between the competing interests of the customer and the bank as the two victims of the deceit is struck here by the carefully calibrated threshold of the Quincecare duty taking into account the factors that were discussed by the judges in Lipkin and Quincecare. 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. Neither allowing nor denying the claim is likely to affect the conduct of dishonest directors like Mr Al Sanea.

Turning to the second limb of the Patel v Mirza test, I accept Singularis’ submission that denial of the claim would have a material impact on the growing reliance on banks and other financial institutions to play an important part in reducing and uncovering financial crime and money laundering. Both expert witnesses described how these matters have been the subject of substantial policy focus by the Financial Conduct Authority for a number of years. That was what prompted the commissioning of Daiwa’s Thematic Review the recommendations of which might, if implemented, have avoided the current proceedings. If, however, a regulated entity can escape from the consequences of failing to identify and prevent financial crime by casting on the customer the illegal conduct of its mandated employee, that policy will be undermined.

Thirdly I consider that denial of the claim would be an unfair and disproportionate response to the wrongdoing on the part of Singularis. That is particularly so in the present case where, as I discuss below, the possibility of making a deduction to reflect any 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.

Does Daiwa have an equal and opposite claim in deceit against Singularis?

Daiwa say that they are the victims of Mr Al Sanea’s deceitful conduct if they were persuaded to make the third party payments by the creation of bogus documents by Mr Al Sanea. They argue that the elements of the tort of deceit are made out, namely that there was a false representation known to be untrue; that it was made in circumstances in which it was intended to be acted upon and that loss has resulted from the deceit. Further Daiwa rely on authority for the proposition that a claim of deceit cannot be defeated by an assertion that the deceived person was negligent in failing to realise that what he was being told was untrue. Daiwa therefore say that the claim by Singularis against them is offset exactly by the claim that Daiwa has against Singularis for deceit. Singularis accept that for the purposes of this stage of the claim, Singularis is to be treated as vicariously liable for Mr Al Sanea’s actions, and indeed for the actions of other director of Singularis, though they reserve the right to take a different stance if this case goes further.

In my judgment this point has been decided against Daiwa by the decision of Evans-Lombe J in the Barings litigation. In those proceedings Barings was suing its auditors for failing to spot the fraudulent conduct of their trader Mr Leeson. There were two judgments which are relevant. The first Barings plc (in liquidation) and another v Coopers & Lybrand (a firm) and others (No. 2) [2002] EWHC 461 (Ch) was a judgment on a preliminary issue (‘the first Barings judgment’). The issue was whether the finance director of Barings, Mr Jones, had made fraudulent misrepresentations in various letters sent to the auditors when they were instructed. The judge ruled that the misrepresentations had not been fraudulent. However, he went on to consider whether, if the misrepresentations of Mr Jones had been fraudulent, that would have resulted in the auditors having an equal and opposite claim against Barings to cancel out any liability for their own breach of duty. He stated, obiter, that as a matter of principle it would have had that result because Barings would be vicariously liable for Mr Jones’ deceit.

At the main trial of Barings’ claim, the defence relied on various fraudulent misrepresentations that Mr Leeson had made to the auditors about the state of various accounts they were looking at. The judge found that Barings was vicariously liable for Mr Leeson’s deceit. However, he held that the deceit claim failed because there was no causative link between the fraudulent misrepresentations made by Mr Leeson and the loss that the auditor would suffer if they were liable to Barings: Barings plc (in liquidation) and another v Coopers & Lybrand (a firm) and others (No. 2) [2003] EWHC 1319 (Ch) (‘the Main Barings judgment’). Evans-Lombe J explained the distinction between the causative effect of Mr Jones’ misrepresentations and that of Mr Leeson’s fraudulent statements. The factor that was not present in relation to the former was that it was not alleged that the auditors were negligent in failing to spot Mr Jones’ alleged fraud: see paragraph 725 of the Main Barings judgment. By contrast, the judge held that the auditors were negligent in failing to see that two of Mr Leeson’s representations were false. He went on (D&T being the auditors):

“In the case of these two representations, D&T were negligent in failing to detect the falsity of the very representations which they now claim induced them to suffer loss. It would seem surprising if D&T were able to extinguish their liability for that failure by bringing a claim in deceit based on those representations and invoking Standard Chartered Bank [sc. Standard Chartered Bank v Pakistan National Shipping [2002] WLR 1547]. Almost any auditors’ negligence case based on a failure to detect fraud at an audit client will involve deception of the auditors by the fraudster. If the auditor has an automatic and complete defence to any negligence claim by bringing a counterclaim in deceit, it is surprising indeed that the auditors in none of the audit cases I referred to in this judgment took that course. Yet, as D&T admit, this argument “has not been run before”.

Evans-Lombe J then applied the causation test set out in the speech of Lord Nicholls in Kuwait Airways v Iraqi Airways (No.s 4 and 5) [2002] 2 WLR 1353. Lord Nicholls noted that in most cases, a judge has an ‘immediate intuitive response’ to the question of how far the responsibility of the defendant ought fairly to extend. Where such informed common sense fails to give an obvious answer, it is of crucial importance to identify the purpose of the relevant cause of action and the nature and scope of the defendant’s obligation in the particular circumstances. What was the ambit of the defendant’s duty? In respect of what risks or damage does the law seek to afford protection by means of the particular tort?

In the Main Barings judgment, Evans-Lombe J held (paragraph 729) that although there was no doubt that Leeson’s deceit was a ‘but for’ cause of the auditor’s exposure, his immediate intuitive response was that that exposure was caused by the breach of the auditor’s duty. The auditors had a contractual duty to Barings to investigate the truth of the representations made to them by Leeson. They failed to investigate them properly and Barings was suing them for breach of that duty. That breach was the cause of their loss. Those representations were merely the subject matter upon which the auditors should have exercised their professional skill and failed to do so. That contrasted with the preliminary issue. There was no allegation that the auditors should have detected the falsity of Mr Jones’ representation letters. Barings could not argue that the auditors’ loss was caused by their failure to do so.

Evans-Lombe J also drew a distinction between his case and the cases which have held that the maker of a fraudulent representation, A, cannot rely on the negligence of the claimant, B, in believing him:

“The present case is different. Here, B was under a pre-existing contractual duty owed to A’s employer to test the truthfulness of A’s statements. Had B performed his duty, he would have realised the statements were false. B failed in that duty and believed the statements. His only loss is his liability to A’s employer for failure to perform that duty. A’s employer can say “it was your job to check the truth of what A said. You cannot sue me for being deceived when, if you had done your job, you would not have been.”

However, the judge accepted that the answer on causation was not obvious and that he needed to have regard to the purpose of the relevant cause of action and the nature and scope of the defendant’s obligation. He held that an outside third party who was misled by Leeson’s false statements into entering into a transaction would be able to recover all losses flowing from that transaction. But the auditors were not an outside third party. They were in breach of a pre-existing duty, owed to Barings, to guard against being misled by just such false statements. Having regard to the policy of the two rules, it was clear, he held, that the rule imposing liability on the auditors for their breach should prevail.

The same reasoning applies in the instant case. By June 2009, as I have held, Daiwa was under a duty to investigate carefully payments out of the Singularis account in case they were a misappropriation of the company’s money. In respect of most of the payments they asked no questions at all. In respect of the largest, they asked the question but were satisfied with an answer that they should have realised was false and could not have withstood any proper scrutiny on their part. They 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.

The inevitable misappropriation of the money

A further point relied on by Daiwa is that there should be no award of damages in this case because if Daiwa had insisted in paying the money back to an account in Singularis’ name with another bank, Mr Al Sanea would most likely have found a way to misappropriate the money anyway.

I do not regard this defence, assuming that it is available as a matter of law to Daiwa, as being made out on the facts. The evidence shows that Daiwa were keen to pay the money back into an account in Singularis’ name. We do not know why Mr Wetherall was so resistant to the idea – presumably he was merely reflecting Mr Al Sanea’s strong wish that the money not simply be paid back to Singularis. Mr Metcalfe has not kept any record of any discussion he had with Mr Wetherall in that regard or what reason was given why that obviously sensible course could not be taken. One can speculate why that might have been. If the money had been paid into an account in Singularis’ name, the bank concerned may have been able to set that money off against debts that Singularis owed the bank. Daiwa management were aware, from an article in the Financial Times circulated to them on 11 June 2009 that the UAE Central Bank had told banks that they may offset any credit facilities with the Saad Group against deposits held by the companies. When Mr Metcalfe was discussing with Mr Sakashita whether to use $3 million of the mysterious $80 million to pay SICL’s margin call, he recognised that SICL’s bankers Citibank were very unlikely to pay the margin payment on behalf of Saad. This was because they had probably triggered a right of offset of Saad funds against any exposure they might have to any of the Saad Group subsidiaries that were by that time in default of their revolving credit facilities. Although, of course, Singularis is not formally part of the Saad Group, it may well be that Mr Al Sanea wanted to keep the Daiwa money out of other Singularis accounts because those bankers had rights of set off for debts owed to them either by Singularis or by other companies controlled by Mr Al Sanea.

I bear in mind also that it was only a short time after the disputed payments were made that Singularis was in the hands of court appointed administrators. I do not consider that it is possible to conclude that Mr Al Sanea would have been able to misappropriate the monies even if Daiwa had fulfilled its duty of care towards Singularis.

The application of Daiwa’s terms of business

In Daiwa’s defence it is asserted that Singularis agreed to Daiwa’s standard terms of business. The basis on which it is alleged that these terms bind Singularis is that it was Daiwa’s practice to notify clients of the terms of business by sending them to clients at the same time as the client classification letter. They invite the court to assume that they did so in this case. The Defence asserts three bases on which Singularis is bound; Singularis expressly agreed the terms of business or alternatively impliedly agreed them, alternatively the terms applied between the parties by course of conduct and by reason of the notification of the terms as sent by Daiwa and by reason of Singularis never having notified Daiwa of any other terms on which it wanted to do business.

Clause 8.1 of the Terms of Business provided as follows (the Company being Daiwa):

"Without prejudice to the specific provisions of these Terms neither the Company, nor its officers, directors, employees or agents shall be liable for any loss suffered by the Client, except to the extent that the same is caused by the Company's officer's, director's, employee's or agent's gross negligence, wilful default or fraud."

Clause 8.3 of the Terms of Business provided as follows:

"The Client will indemnify the Company, its officers, directors, employees and agents including where applicable a Broker against any cost, loss, liability or expense whatsoever which may be suffered or incurred by the Company and/or them directly or indirectly in connection with, or as a result of, any service performed or action permitted under these Terms, including where applicable any liabilities to a Broker, except to the extent that the same is caused by the Company's and/or their gross negligence, wilful default or fraud."

Clause 17 of the Terms of Business provided as follows:

“Clause 17.2:

"The Client confirms and undertakes that they have and will have all necessary consents ... and authorities to enable all Transactions in Investments under these Terms to be effected and that in respect of each such Transaction all Applicable Regulations have been and (so far as the Client can ensure) will be complied with."

Clause 17.3:

"The Client confirms that any information given to the Company ... is complete, accurate and not misleading in any material respect."

Clause 17.7 (a):

"The Company shall not be bound to act in accordance with the instructions of any person, other than the Client, and the Company's liabilities hereunder shall be fully discharged by performing the same in the Client's favour notwithstanding any instructions received from the Client's principal and any notice received that the Client's authority to act on behalf of that principal has been revoked or varied."

Clause 17.7 (b):

"The Client authorises the Company to rely and act on, and treat as fully authorised by and binding upon the Client, any order, instruction or communication (by whatever means transmitted and whether or not in writing) which purports to have been given and which is reasonably accepted by the Company in good faith as having been given by the Client or on the Client's behalf, without further enquiry on the Company's part as to the genuineness, authority or identity of the person giving or purporting to give such instructions and regardless of the circumstances prevailing at the time; and the Client will be responsible for and bound by all contracts, obligations, costs and expenses entered into or assumed by the Company on the Client's behalf in consequence of or in connection with such orders, instructions or communications."

The different ways in which Daiwa alleges that the terms of business applied between the parties are all founded on the averment that its standard terms of business were sent to Singularis. I turn therefore to consider the evidence to support that averment.

When Singularis were taken on as a client in April 2007, it was sent a market counterparty notice, signed by Mr Wright saying that Daiwa were going to treat Singularis as a market counterparty for the purpose of FSA rules. Mr Wright said that his signature would have been appended automatically to this letter and he did not personally review the accuracy of the categorisation – he relied on people in his team to do so.

In addition to this, there was an internal process whereby Daiwa would assign its own risk assessment level to the client between 1 (not risky) and 4 (very risky). The designation was reviewed periodically and the frequency of review depended on how risky the client was considered to be. In his witness statement, Mr Hudson had said that Singularis was given a risk assessment of 2. When he was sworn in, Mr Hudson had to correct this because he had subsequently seen documents indicating that Singularis’ risk assessment was 3, not 2. No explanation was given for this correction other than there were two conflicting documents within Daiwa which Mr Hudson had now seen. Mr Hudson accepted that ordinarily a Cayman Island company would be given a lower risk assessment level of 2. So some factors other than Singularis being incorporated in the Cayman Islands must have influenced the assessment if in fact it was given a rating of 3. Neither Mr Hudson nor Mr Wright could explain why that risk designation might have been given; there seems to be no record of why Singularis was considered more risky than a typical Cayman Island company.

There is no record of if or when terms of business were sent out to Singularis. Mr Hudson’s evidence was that once the Compliance Department had carried out its initial checks and approved the client as a counterparty for Daiwa, a hard copy of Daiwa’s standard terms would be sent to the client by the Compliance Department together with a letter setting out the client’s regulatory classification. He said in his witness statement that the terms of business and the classification letter were sent out by normal post but that Daiwa do not keep any records of the notices and terms of business that are sent out. Mr Wright confirmed that this was standard practice at the time. The client classification is recorded on Daiwa’s computer database but no record is made of sending out the terms of business. The most that Mr Hudson can say about Singularis is that since Daiwa’s database shows that the client classification letter was sent to Daiwa he had no reason to believe that Daiwa’s terms of business were not sent to Singularis at the same time. The letter asked the client to return a signed copy of the terms of business. But Mr Wright said that it was common for clients not to do so and it was not Daiwa’s policy or practice to chase for a signed copy of these from each client.

Mr Hudson accepted that the Daiwa database was wrong as to the date on which the market counterparty notice was sent to Singularis. The date given in the database is as 7 September 2006. Mr Hudson accepted that this cannot be right because Singularis was only taken on as a client in April 2007 when the SICL agreement was novated. A possible explanation for the wrong date was that someone had just copied across some of the details from the SICL account to the new Singularis account and had failed to change the date.

Further, it appears that the market counterparty notice was in fact also wrong. The undated letter states that Daiwa will treat Singularis as a market counterparty because it believes that Singularis fulfils one of five listed criteria, namely it was a bank, a central bank, a government, a state investment body, an FSA regulated firms or overseas financial institution. Mr Wright accepted that actually Singularis does not fulfil any of those five criteria. Mr Wright’s evidence when this was put to him was that he could not explain why this market counterparty notice had been sent to Singularis, he was not involved in the categorisation and no records were kept of any reasons. His expectation was that if a client received a counterparty notice and felt for whatever reason that Daiwa had inappropriately categorised them, then they would write back and decline the categorisation and ask to be re-categorised. In fact someone from SFS did email Daiwa on 24 April 2007 saying that they had received the market counterparty notice and querying whether Singularis fell into any of the relevant categories. These seems to have been no response from Daiwa to this query. The email does not mention having received the terms of business.

In the light of the haphazard way in which the induction of Singularis as a Daiwa client was carried out, there is no possible basis on which I can find that the company was sent Daiwa’s standard terms of business. Daiwa is not therefore entitled to rely on those terms to defeat Singularis’ claim.

Contributory negligence

Singularis accept that the final stage in this case is to consider whether to make a deduction from the amount of damages that would otherwise be payable to Singularis to reflect the company’s contributory negligence. This emerges from the analysis applied by Evans-Lombe J in the Barings case to the effect that for this purpose, Barings was vicariously liable for the deceit of Mr Leeson.

I must therefore consider whether to make an apportionment under the Law Reform (Contributory Negligence) Act 1945 (‘the 1945 Act’). Section 1(1) of the 1945 Act provides that where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage. The damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant's share in the responsibility for the damage. Subsection (2) provides that where such a reduction is made, the court must find and record the total damages which would have been recoverable if the claimant had not been at fault.

The amount of damages that Singularis is claiming and for which I have found that Daiwa is liable, subject to this point, to pay is $203,741,900 plus interest. That principal sum is made up of the amount of the disputed payments being $204,494,900 less recoveries of $753,000 made so far in other proceedings relating to the same loss.

In the Main Barings judgment, Evans-Lombe J considered that there were three kinds of contributory negligence on the part of Barings. The first arose from its vicarious liability for Mr Leeson’s fraudulent conduct, the second arose from the failures of the board of directors to monitor and supervise Mr Leeson’s conduct, and the third arose from the failings of people employed by a sister company of Barings, BSL, to which Barings had delegated part of the task of supervising certain of Barings’ activities. At paragraph 903 of his judgment, Evans-Lombe J recorded the concession made by Barings that it was responsible for the fault in the management of its business even where other companies in the Barings Group employed the individuals concerned. He described that concession as inevitable because directors have both collectively and individually a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company's business to enable them properly to discharge their duties as directors. The exercise of a power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions.

The learned judge in Barings made graded deductions of different amounts over different periods. Broadly speaking, for the period when the element of contributory negligence on the part of the bank comprised the fraudulent conduct, the deduction was 50 per cent. The judge said that although Mr Leeson's fraudulent unauthorised trading was overwhelmingly the most important cause of Barings’ loss, in common sense terms, he had to recognise the auditors’ fault in failing to detect that fraud and therefore could not attribute to it the overwhelming causative influence which it would otherwise have. Over later periods when the contributory negligence also comprised additional failures of management to exercise proper control and supervision over Mr Leeson, the deduction rose to 80 per cent.

In these proceedings, the parties were far apart on the size of any deduction I should make. Singularis argued by analogy with what the judge said in Barings, that it would be wrong to make a deduction of more than 50 per cent since Singularis’ contributory negligence only ever comprised the basic fact of Mr Al Sanea’s fraud. However, they argue that no deduction is appropriate in the circumstances of this case or, if I did not agree with that, then a small deduction of no more than 20% should be made. This is because of the difference in the nature of the duty owed in the Barings case and the present case. The duty of auditors is not just to identify fraud but to carry out the very complex task of ensuring, apart from any fraud or misconduct, that the accounts give a fair view. Here, the whole focus of the duty of care which Daiwa breached is to identify fraudulent instructions to pay out the customer’s money. Singularis rely on the case of Reeves v Metropolitan Police Commissioner [2000] 1 AC 360 where the issue of the contributory negligence of a prisoner who had committed suicide had to be assessed in a claim against the police for negligently failing to prevent the prisoner from harming himself. The prisoner’s contribution was assessed at 50% because although his action was, of course, a substantial cause of his death, the police were in breach of a duty imposed by law to guard against that very act. That case also held that ‘fault’ within the meaning of section 4 of the 1945 Act could include intentional acts as well as negligence, so that Mr Al Sanea’s conduct should be included here.

Daiwa argued that the 50 per cent contribution should be exceeded here because since Singularis was a one-man company, Mr Al Sanea’s fraudulent conduct should be attributed to it on company law grounds as well as by the application of the principles of vicarious liability. I have already explained why I have rejected that argument in other contexts. Daiwa also argue that Singularis’ contributory negligence did not only comprise Mr Al Sanea’s conduct but also the apparent failure of the board of directors to pay attention to what was happening and the conduct of Mr Wetherall should be taken into account even though he worked for SFS just as the conduct of BSL was taken into account in assessing the extent of Baring’s negligence.

My conclusion on this point is that the deduction made for Singularis’ contributory negligence should be 25 per cent. I accept the point made by Singularis that the duty owed by Daiwa here is different from the duty owed by the auditors to Barings because the very thing that Daiwa were supposed to protect Singularis from was the deliberate wrongdoing of Mr Al Sanea. The situation here is less extreme than the situation in Reeves where a deduction of 50 per cent was made.

I consider that the failure of Singularis’ board of directors does weigh in the balance too. There is no evidence about what communications if any took place between Mr Al Sanea and the directors in the last weeks of Singularis’ existence. But those were business people who lent their names to the company knowing that outsiders would take some comfort from the fact that there were people involved in the management other than Mr Al Sanea who were experienced, respectable and financially astute directors. Those directors must have been aware, even if only from the same press reports that Daiwa was receiving, that the company of which they were directors was travelling through very rough waters. They seem to have made no attempt to contact Daiwa independently either before or after the relationship between Daiwa and Singularis was closed down to find out what was happening. As regards Mr Wetherall’s involvement, I do not regard it as fair to treat that as something separate from and additional to Mr Al Sanea’s conduct.

In conclusion I find that: