The Hamblins also sought permission to bring a derivative action on behalf of RND for repayment of the money.  This claim also failed at first instance as the judge held that, despite the initial shortcomings in the checks regarding the opening of the account, there was no reason to suspect any attempt of misappropriation of funds. The judge found that Moorwand’s regulatory failings were not matters which “had any relevance to a common law and contract case”.

The Hamblins appealed and were successful.  In his judgment, Mr Justice Marcus Smith held:

i. The first instance judge had wrongly equated RND’s agent (the fraudster) with RND itself, such that he regarded the knowledge of the agent as that of the company.

ii. This was an error of law.  It was clear from the decision in Re Hampshire Land Co [1896] 2 Ch 743 and subsequent cases, including Singularis, that the knowledge of a director acting in fraud of their corporate principal is not to be attributed to the company. The case is properly understood as concerning an innocent principal (RND) which was the victim of a fraud by a fraudster impersonating its agent, which gave unauthorised payment instructions to its other agent (Moorwand).

iii. By equating the fraudster’s knowledge with that of RND, the first instance judge wrongly discounted a number of factors relevant to whether Moorwand was put on inquiry that the fraudulent payment instructions were made without authority. These included:

a. The inconsistency between how RND’s business was described in its application form (“online marketing and lead generation”) and how the account was used (i.e., to purchase a watch and trade in bitcoin).

b. There was a good deal of material to suggest that the fraudster purporting to act for RND was not the real Mr Stanfield, who was the agent authorised by RND to give instructions.

iv. The first instance judge had wrongly found that where facts are relevant to one duty they are, ipso facto, irrelevant to another.  As such, the judge was wrong to ignore the facts (i.e., onboarding failures) that were relevant to regulatory breaches on the part of Moorwand and conclude that they were irrelevant to the factual question of whether the Quincecare duty arose.  Whether Moorwand was put on inquiry is a question of fact that must be considered in light of all of the relevant history, which included the facts that were relevant to deciding the separate legal issue of Moorwand’s regulatory failings.

Accordingly, Mr Justice Marcus Smith found that (when one considered the full relevant history, including the facts described at (iii) above) Moorwand was on inquiry and should not have processed the transaction without satisfying itself that the payment instructions it was receiving were proper and not a fraud on RND.  It failed to do so and so made payments outside its mandate.  Moorwand was therefore ordered to restore the Hamblins’ Funds to the electronic wallet it held for RND but, as Mr Justice Marcus Smith noted, this could be a pyrrhic victory as RND was in administration and there was no guarantee that the Hamblins would receive the monies. In addition, the Hamblins’ claim for damages failed due to a contractual exclusion of liability.

Commentary

There has been much debate over the circumstances in which the knowledge of a company’s director can be attributed to the company, particularly in companies with sole directors (typically referred to as “one-man companies”).  The Supreme Court confirmed in Singularis that there is no “rule of law that the dishonesty of a controlling mind in a ‘one-man company’ could be attributed to the company […] whatever the context and purpose of the attribution in question”.

Singularis concerned a legitimate company (i.e., one not set up for a fraudulent purpose) whose director, in the knowledge that the company was on the verge of insolvency, instructed its brokerage firm to pay away the company’s money in a series of sham transactions. The Supreme Court found that the shareholder’s/director’s knowledge of the fraud was not attributed to the company, in part because such a finding would “denude the [Quincecare] duty of any value in cases where it is most needed”. This is because the purpose of the Quincecare duty is to protect the company against the misappropriation of its funds by a trusted agent who is authorised by the company to withdraw money from the account.

The court’s application of Singularis to RND (a company set up for the purpose of defrauding third parties) may sit uncomfortably with banks and PSPs, who may feel aggrieved that companies set up for fraudulent purposes are not attributed with the knowledge of their fraudulent agent.  In particular, the judge’s conclusion that the agent was acting in fraud of its principal, RND, for the purpose of RND’s claim against the PSP may, at first blush, seem slightly artificial to banks and PSPs given the purpose for which the company was established.

However, it is difficult to see how the court could have come to a different conclusion in view of Singularis and the purpose of the Quincecare duty, where the focus of the analysis is on whether the bank was put on inquiry by reference to the relevant history and factual background.  This may, or may not, include the bank’s or PSP’s knowledge of the purpose for which the company was established, but that purpose can obviously change over time.  In addition, it is important not to lose sight of the fact that in this case: (i) Moorwand was on notice that “fake” documents were provided by the fraudulent agent to set up RND’s account; and (ii) while it later became apparent that the purpose for which RND was set up by its fraudulent agent was in furtherance of the agent’s fraud, the stated purpose of its business from the perspective of Moorwand was “online marketing and lead generation”. The fact that RND was acting outside of this stated purpose ought to have put Moorwand on inquiry, such that it was ordered to return the Hamblins’ Funds to RND.

It will be interesting to see if this case leads to an increase in the number of derivative claims brought against banks, PSPs and other financial institutions, particularly in respect of APP fraud where the Quincecare duty is not usually engaged.

Finally, it is notable that a claim for damages was successfully defended by reliance on an exclusion clause in the contract between Moorwand and RND. The clause did not operate to exclude restoration of the funds, however, and only extended to claims for damages. As noted by the judge, a clause that excluded the restoration of funds would effectively render a bank’s or PSP’s mandate meaningless and the courts are therefore likely to be very reluctant to interpret a clause in this way.

Client Alert 2025-154