The claimant company was wholly owned by S, who had sole signing powers over its bank accounts, and as a director acted as its chairman, president and treasurer. There were six others directors but they did not exercise any influence over the management of the company. A large sum of money was held for the company’s benefit in a segregated client account by the defendant, the London subsidiary of a Japanese investment bank and brokerage business. At that time the company was in financial difficulties but S, in breach of his fiduciary duty to the company, instructed the defendant to pay out those funds to entities with which he was associated rather than back to a bank account of the company, which shortly afterwards was placed in voluntary liquidation. The company’s liquidators sought recovery of the money alleging, among other things, that the defendant had breached the duty of care owed by a bank to its customer to refrain from executing an instruction to make a payment out of the customer’s account where it had reasonable grounds to believe that a fraud was being carried out. The defendant contended that since the company had been effectively a one-man company, in the sense that S was the only person directing its affairs, there had been nobody else of whom it could reasonably have made inquiry or from whom it could have taken instructions. On that basis it claimed that any fraudulent conduct on the part of S was to be treated as the misconduct of the company, with the consequences that (i) the company had been complicit in the fraudulent activity and could not bring a claim arising from its own illegal activity (“the illegality defence”), (ii) the company’s loss had been caused by its own fault and not by that of the defendant, so there was no causation in law (“the causation argument”) and (iii) the defendant would have an equal and countervailing claim in deceit. The judge held that the company was not a one-man company, that S’s actions amounted to a misappropriation of the company’s money when he must have known that it was on the verge of insolvency, that any reasonable banker would have realised that there were obvious signs that S was perpetrating a fraud on the company, that S’s misconduct could not be attributed to the company and so the defences did not arise but were, in any event, without merit, and that the defendant was therefore liable to the company.The Court of Appeal affirmed the judge’s decision.
On the defendant’s appeal—
Held, appeal dismissed. On a claim by a company against a bank for breach of its duty of care to prevent a withdrawal of funds from its account by one of the company’s directors when it had reason to suspect the transaction to be fraudulent, there was no principle of law that the fraudulent conduct of the director was to be attributed to the company if it was a one-man company. Rather, the answer to any question whether to attribute the knowledge of a fraudulent director to the company was always to be found in consideration of the context and the purpose for which the attribution was relevant. Where the context was the breach by the company’s bankers of its duty of care towards the company in executing its orders, the purpose of that duty was to protect the company against misappropriation of its funds by a trusted agent of the company who was authorised to withdraw its money from the account. To attribute that person’s fraud to the company would be to denude the duty of any value. It followed that, without even having to have recourse to the judge’s correct finding that the company was not a one-man company, the fraud of S was not to be attributed to it so as to bring into play any of the three claimed defences. In any event, none of those defences would have succeeded. The test for a successful illegality defence would not been met. And the causation argument would have failed because it was the fraudulent instruction to the defendant which had given rise to the duty of care which the defendant had then breached, thus causing the loss, and which in turn precluded any countervailing claim. Accordingly, since there had been a clear breach of the defendant’s duty of care to the company in respect of which it had no defence, the judge’s order would stand (paras 12, 13–18, 21, 22–23, 24, 29–35, 38–40).
John McCaughran QC and Michael Watkins (instructed by Ashurst llp) for the defendant.
Jonathan Crow QC and Andrew de Mestre QC (instructed by Jenner & Block London llp) for the claimant.