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This article has been repurposed from Linkedin, published 4 February 2022.

In January 2022, an appeal in the case of Stanford International Bank v HSBC Bank was argued before the UK Supreme Court. The assumed facts (the proceedings involved a strike out) were that the claimant, now in liquidation, had not been a bona fide bank. Rather, it was nothing more than a vehicle for a Ponzi scheme. Some of the funds raised under the scheme had been held in an account with HSBC.

The essential allegation was that HSBC, at a certain stage, ought to have realised that the claimant’s controller, Mr Stanford, was running a Ponzi scheme, and from that point should have declined to follow his instructions to pay out moneys from the account. Instead, HSBC paid out at least £80 million under Mr Stanford’s direction. 

For the sake of argument, it was also assumed that HSBC owed its customer a duty of care in these circumstances, the so-called “Quincecare duty”. That the existence and scope of this duty is controversial was not before the Court.

The point of contention was that, except for some US$3million paid to the England and Wales Cricket Board, all the moneys paid out by HSBC went to actual creditors of the claimant. As such, HSBC argued, the claimant had not suffered any net loss from the putative breach of duty. The claimant had less cash on hand, but its indebtedness was commensurately lower. 

This argument had been rejected at first instance ([2020] EWHC 2232 (Ch)) but the Court of Appeal ([2021] EWCA Civ 535) accepted it. The UK Supreme Court granted leave for the point to be argued afresh before it.

In the course of the oral hearing before the UK Supreme Court, much was made by the appellant of the fact that in West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 a director was held liable for breaching his duties to the claimant company when he applied company moneys to pay a debt owed by the company. An argument by the director that the company had not suffered a net loss was rejected by the Court of Appeal. 

That Court accepted an argument that once a company becomes insolvent directors owe a duty to conduct its affairs in a way that avoids prejudicing the financial position of the generality of creditors. The duty can be mediated through a claim by the company. In Stanford, HSBC argued that, while directors may owe such duties, outside parties such as HSBC do not.

There was a much simpler explanation for West Mercia than the one actually provided in that case. Crucially, the debt the company paid off was owed to its parent company. A long line of cases holds that it is a breach of trust for company insiders (whether directors or shareholders) once a company is irresolvably insolvent to discharge insider debt ahead of outsider debt. None of the debt discharged in Stanford v HSBC was in the former category.

I argue that this broader notion, fomented in West Mercia, of a general duty on directors to consider the interests of creditors once a company is insolvent, is misconceived. As it happens, these issues are also currently before the UK Supreme Court (see BTI v Sequana SA, argued in May 2021). It is possible that the Supreme Court in Sequana will ultimately not need to decide these points. However, if the Court explains West Mercia in the way I suggest then the issue before the Supreme Court in Stanford will be rather easier to determine.

Directors’ Powers and Duties, 3rd edition

Peter Watts QC has recently published the third edition of his book, Directors’ Powers and Duties (Lexis Nexis). As an international expert in company law and agency law, Peter’s text will be useful to lawyers practising in these fields, both in New Zealand and overseas. 

The updated edition covers significant common law developments from the major Commonwealth jurisdictions, and incorporates selected corporate law literature from the United States. 

The chapter on directors’ duties after insolvency has been heavily revised and expanded, to address the major changes to the law fomented in the Debut Homes decision in the New Zealand Supreme Court and the Court of Appeal’s decision in Mainzeal.

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"Written by one of New Zealand's top scholars in company law, this edition includes the latest developments in this important area of law since its last publication in 2015." – Lexis Nexis