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31 Jan 2023

Is relief from liability a loss? (and other Quincecare questions): Stanford v HSBC


In Stanford International Bank Ltd v HSBC Bank PLC [2022] UKSC 34, the Supreme Court upheld the Court of Appeal's decision striking out almost all of Stanford's claim against HSBC. The key issue for the Supreme Court in this case was not the scope of the Quincecare duty itself but whether Stanford had suffered any loss. The majority (Lord Sales dissenting) concluded that a Quincecare claim did not exist because no loss (or loss of chance) had been suffered. While the majority judgment focuses on the question of loss in the context of an insolvent liquidation, the judgment contains some interesting analysis on the interpretation and scope of the Quincecare duty, particularly in an insolvency context.

The claim – at a glance

Stanford claimed against HSBC for breach of the Quincecare duty and dishonest assistance. HSBC had effected payments out of Stanford's account (on Mr Stanford's instructions) at a time when, it was alleged, HSBC knew or should have known that Mr Stanford was using his company to operate a massive Ponzi scheme. Stanford went into insolvent liquidation shortly afterwards. At first instance, the court refused to strike out/grant reverse summary judgment on Stanford's claim. However, the Court of Appeal overturned that decision, holding that Stanford had suffered no loss and so had no claim. This was because most of the payments (approximately £116 million out of £118 million) were made to genuine creditors of Stanford (the 'early customers'). Because the payments reduced Stanford's liabilities, the Court of Appeal held that even if HSBC had acted in breach of the Quincecare duty, Stanford had suffered no loss (the 'net loss principle'). The Court of Appeal did not further consider whether or not there had been a breach of the Quincecare duty, confirming only that the Quincecare duty is not owed to creditors.

On appeal to the Supreme Court, Stanford accepted the strength of the Court of Appeal's finding on the net loss principle. Instead of pleading a direct loss, it alleged its damages were for loss of chance. It argued that had the payments not been effected by HSBC, the 'early customers' would have had to prove their loss in the insolvent liquidation, and would have likely received only a few pence in the pound, instead of the repayment of their debts in full. Stanford's loss was therefore the loss of the chance of discharging those debts at a lower price or, in the alternative, the loss of the chance of paying all creditors fairly.

The Supreme Court rejected these arguments, finding that Stanford had not suffered a loss of a chance that had any pecuniary value to it, and that the fairness of the payments to creditors was not a matter the court could investigate or assess. The majority of the Supreme Court also had no hesitation in allowing the point to be decided on a summary basis, potentially narrowing the scope for arguments over the Quincecare doctrine (at least as it applies in the insolvency context) and its suitability for determination other than at trial.

Is relief from a liability a loss?

For the purposes of the Supreme Court appeal, it was assumed that there had been a breach of the Quincecare duty. The key question for the court was whether that assumed breach could have caused any loss.

Stanford argued that had HSBC not effected the payments, its liquidators would have had £116 million more to distribute to its creditors. It lost the chance, in effect, of choosing how to use an increased sum of money in an insolvent liquidation.

Lady Rose, giving the leading judgment, held this was simply not a pecuniary loss. Had HSBC not discharged the debts to the 'early customers' in full, there would be no distinction between the 'early customers' and other creditors. There would be one pool of creditors who, assuming they all shared pari passu, would have their debts discharged by the same amount. In that scenario, the 'chance' of paying the 'early customers' less, would be the same as the 'risk' of having to pay the 'late customers' more. The clear conclusion was that there was no loss.

Lord Leggatt expanded on the net loss principle, namely that the gains and losses arising from a breach of contract or tort must be 'netted off against each other' and only the net loss awarded as damages. Stanford had argued that the ability to make lower payments to all creditors in the liquidation was not a benefit, whereas the payment in full to the 'early customers' was a loss, meaning no 'netting off' was applicable. Lord Leggatt rejected this point, holding that the liquidators could not 'have their cake and eat it'. Either the consequences of the liquidation process were to be taken into account (in which case netting off applied) or they were not (in which case there was simply no loss at all).

Is there a 'date of breach' rule?

Lord Leggatt also addressed the law on the date at which loss is assessed. HSBC had argued that loss caused by a breach of duty (owed in contract or tort) should be assessed as at the date of breach. However, this is not a rule of law. Such losses routinely occur after the date of breach and are generally assessed at whichever is the earlier date out of when the loss occurred or when the damages are awarded. While there is a separate rule (termed the 'market mitigation rule') which provides that in cases involving loss or damage to goods, it is often appropriate to assess damages as at the date at which the claimant could have reasonably secured an adequate substitute, this rule had no application here.

The dissenting view

Lord Sales gave a dissenting judgment, in which he reached the contrary conclusion on the question of loss. In his view, the fact that the liquidators would have had a larger fund of assets available to them (from which they could have pursued claims against third parties), did represent a loss suffered by the company. The diversion of funds from the 'general creditor' class to the 'early customers' was , he considered, also a loss to the company itself. HSBC's (assumed) breach of the Quincecare duty had, Lord Sales found, 'disabled' Stanford from performing its proper functions of protecting and safeguarding the interests of its creditors as a general body. Lord Sales did not consider this a loss of chance, rather a loss established by a comparison between the 'actual position in the real world' and the position in the 'counterfactual world', in which the £116 million had not been paid out.

Questions of Quincecare

While the majority did not really grapple with the scope of the Quincecare duty, Lord Sales made the following points:

  1. The Quincecare duty must be kept within 'narrow bounds' but this can be achieved by analysis of the duty itself, instead of 'distorting' the question of whether a company has suffered loss.
  2. The Quincecare duty could apply to a scenario where the instruction to the bank is an attempt to misappropriate a company's funds by using them to make 'full payments which ought not to be made to creditors in a situation of hopeless insolvency' (i.e. the case here).
  3. When a bank acts on an order to effect a payment from a company's account, it acts as agent to the company and owes it a fiduciary duty and a duty to exercise reasonable skill and care1. In that context, there is no significant distinction between the duties of directors of a company and the Quincecare duty owed by a bank.

While these are not findings of the majority (and not binding), they indicate the degree of uncertainty which remains regarding the scope of the Quincecare doctrine. Although the existence of a bank's fiduciary duty to its customer was first established in Barclays Bank v Quincecare2, the duty has not previously been likened to the duty which a director owes to a company. If the Quincecare duty owed by a bank is to be treated as the same as the duty a director owes to a company, can it really be kept within the 'narrow bounds' necessary to avoid undue interference with the 'conduct of commerce'? In Lord Sales' view, it is inherent in the duty that some element of uncertainty is introduced into the relationship between a bank and its corporate customer. While that may be true, it is of scant comfort to banks attempting to navigate their legal duties in relation to their customers' instructions.


1 Barclays Bank plc v Quincecare Ltd and another [1992] 4 All ER 363

2 Ibid