Case Study: What about the banks?

Introduction

A case was referred to Manolete concerning suspicious cash withdrawals out of the Company’s bank account.  When reviewing the case, of course targeting the director – in this case the sole director and only person with access to the bank account – sprung to mind.  However, what about the involvement of the bank?

Quincecare claims

These claims get their name from the case of Barclays Bank plc v Quincecare Ltd.  This case established a duty on banks not to execute payment instructions from an agent of a customer where the bank has reasonable grounds to suspect that the payment is part of a fraud on the company.  Instead, banks are required to make further enquiries to satisfy themselves that the payment is proper before executing the payment instruction.

Claims can be brought if it can be established that:

• A payment instruction was given by an agent of the bank’s customer (i.e., a director on behalf of a company).
• There were circumstances that put the bank on notice that a fraud might be occurring.
• The bank did not make any enquiries, or any sufficient enquiries.
• The company suffered a loss as a result of the payment or payments.

Manolete’s assessment of the claim

In the case assigned to Manolete, the director of the Company had withdrawn over £800,000 in cash from the Company’s bank account over a period of around one year.

Manolete carefully reviewed the circumstances:

Was a payment instruction given by an agent of the bank’s customer

Yes – a director acts as agent of the Company.

Were there circumstances that put the bank on notice that a fraud might be occurring?

The key pieces of evidence will always be an analysis of the bank statements, the account opening documentation/mandate, and other relevant correspondence with the bank.

In this case, the correspondence with the bank was limited to the account opening form.  These forms usually include entries such as the nature of the company and the anticipated turnover.  These can then be used to form a backdrop to what the bank knew when it was dealing with the Company.  In this case, the Company activity was specified as the provision of labour, and the anticipated turnover was £200,000.

As for the bank analysis, the circumstances were striking.  Cash withdrawals were made in round figure sums and at an average amount of £20,000 at a time – the type of level that has to be ordered in advance to withdraw.  Totalling over £800,000 in a year is clearly in excess of the anticipated £200,000 of turnover.

Further, the bank analysis shows multiple payments of non-round sum amounts at regular intervals to names individuals – indicative that the labour was being paid by bank transfer.

Clearly, a fraud may have been occurring.

Did the bank make any enquiries or any sufficient enquiries?

This case was interesting in that on three occasions the bank did appear to make enquiries.  The problem was, those enquiries were woefully insufficient.  They confirmed that the director had said the cash was for wages.  However, as set out above from an analysis of the bank account that explanation does not bear scrutiny.

Did the Company suffer loss?

The loss sought in this case was the amount of the payments.  This will often be the case, but this is a developing area of law and loss can in some cases be higher (albeit discussion on this is outside the scope of this case study).

Progress of the claim

Manolete took an assignment of the claim on conventional terms including sharing the net proceeds of the claim and providing a complete indemnity for adverse costs to the liquidator off our balance sheet as a listed company.  We paid solicitors and counsel for their work, not requiring them to work on a contingency basis.

Within just four months of assignment a fully particularised letter before action was sent.  The bank failed to engage and proceedings were issued five months thereafter.  The case was settled one year after issuing on favourable terms with payment of a six-figure sum within three weeks of terms being agreed. 

Summary

At Manolete we have dealt with a number of Quincecare claims and achieved settlements. These claims are challenging, requiring careful analysis and invariably it is necessary to issue proceedings. Manolete can add real value, having not only with the financial strength to support the claim, but also expertise in this developing area.

Alexandra Withers - Associate Director (North East)

Alexandra@manolete-partners.com | 07413 242320