Gary Orritt explains the latest Quincecare case, and how it might affect obligations on banks in future corporate fraud cases.

Where owner directors use a company as a vehicle for a fraudulent scheme, do they have actual authority to do so? Put another way, is there a distinction between a fraud by the company, and the classic Quincecare scenario, where a rogue director steals a company’s assets in a multi-director and/or owner firm (i.e. a fraud on the company)?

The judgment of Mr Justice Butcher in [2025] EWHC 3036 (Comm) represents the latest round of Quincecare litigation in the Commercial Court.

Butcher J dismissed the bulk of the parties’ applications, concluding that the majority of the issues could only be decided at trial, when all of the facts are known.

The fraud

These proceedings involve claims that arise out of a large-scale fraud, known as “asset-backed lending” (“ABL”) fraud.

In short:

• There are three relevant companies, Arena Holdings, Arena TV and Sentinel. They each had accounts with the Defendant banks. They are now insolvent.
• The directors of the two Arena Claimants purported to acquire equipment.
• The equipment was sold to an “intermediary” (often Sentinel).
• The “intermediary” sold the equipment (subject to a hire purchase agreement) to one of 55 lenders.
• The funds from the lender were then sent to the Arena Accounts (minus 1% commission).

The vast majority of the equipment did not exist. Of 8,196 pieces of equipment, there were in fact only 66 pieces. Over £1 billion was paid into the Arena Accounts as part of the fraud. From the Sentinel Account, 99% of the £1.085 billion paid by lenders was paid on to the Arena Claimants.

Funds were either misappropriated for the benefit of the directors or related parties, or used in a Ponzi-like manner (i.e. inflating turnover and repaying the loans).

Importantly for this case, there were no “innocent” directors (or shareholders) to prevent the directors from carrying out this fraud.

The case against the banks

The claims are essentially that, in processing payment instructions from the Claimants’ various accounts, the banks breached their banking mandates and/or that the banks breached their duty of care. In other words, the relevant payment instructions were unauthorised. If that is correct, it would require the banks to reconstitute the accounts for each transaction found to have been made without appropriate authority.

This is in effect an allegation that the Defendants breached the so-called Quincecare duty, described by Lord Leggatt in Philipp v Barclays¹ in the following terms:

“Where a bank is ‘put on inquiry’ in the sense of having reasonable grounds for believing that a payment instruction given by an agent purportedly on behalf of the customer is an attempt to defraud the customer, this duty requires the bank to refrain from executing the instruction without first making inquiries to verify that the instruction has actually been authorised by the customer.”

As we discuss further below, the vital issue for this judgment centres around whether, as agents, the directors of the Claimants had the actual authority of the Claimants to provide payment instructions to the banks. If the case proceeds to trial, the court will also ask whether the banks were “on inquiry” – if not, the banks would be able to rely on the directors’ ostensible authority.

Did the directors have actual authority?

The Defendant banks’ pleaded case is that the directors did have actual authority. This was stated to derive from:

• the directors’ control of the Claimants, and/or
• pursuant to the mandates and terms and conditions applicable to the bank accounts.

Further, that the mandate meant that the banks were entitled to act on the instructions of the directors without making further inquiries.

The banks emphasised that there was a distinction between a fraud by the company versus a fraud on the company. Breaking that down further, it was accepted that there could be no actual authority where the agent was acting in their own interest and against the interests of the company. But where those interests aligned, the position was different.

The Claimants’ position is that the directors could not have had actual authority to give payment instructions because they were defrauding the companies. That none of the payment activity was “for lawful commercial purposes”, and it was in breach of the directors’ fiduciary duties.

The Claimants relied on the following passage from Article 23 in Bowstead & Reynolds on Agency, which was endorsed by the Supreme Court in Philipp:

“Authority to act as agent includes only authority to act honestly in pursuit of the interests of the principal.”

This was amplified by section 172(1) of the Companies Act 2006 which states that “[a] director must act in the way he considers, in good faith, would be most likely to promote the success of the company.”

Overall, the Claimants submitted that there was no case law authority for the Defendants’ position on actual authority.

Other issues

Other key aspects at the hearing included:

• Scope of duty – The Arena Claimants sought to claim certain “losses arising from the continuation of the ABL Fraud”. These were effectively authorised payments which, the Arena Claimants said, would not have been made but for the fraud. This was a target for strike out.
• Director control – The Defendants’ position was that the directors’ control of the Claimant companies gave them actual authority. A similar argument was made by reference to the mandates and contractual terms between the banks and the companies.
• Counterclaims – The Defendant banks bring counterclaims in deceit and unlawful means conspiracy. This fall-back position essentially alleges that the Claimant companies ought to be liable for the fraud even if the directors are found to have been acting without authority. The Arena Claimants argued that this was unsustainable as a matter of law, by reference to the rules of attribution² and vicarious liability.

What was decided?

Butcher J refused to strike out the claims or the counterclaim, or grant summary judgment in respect of them, and he also largely dismissed the Arena Claimants’ application. In general, this was because the issues at hand needed to be resolved at trial with the aid of full disclosure and evidence.

In reaching his decision, Butcher J helpfully summarised the strengths of each side’s position on actual authority. In favour of the Claimants, it was arguable that:

• Bowstead Article 23 correctly stated the law on actual authority, and there was no gloss to be placed on it so as to “confine [it] to cases where the agent was ‘defrauding the principal’”.
• There was “no realistic or workable distinction which can be drawn, in a case such as the present, between frauds on and by the principal”. Butcher J noted that the scheme had rendered the Claimants insolvent, and that the “overarching purpose” appeared to be to extract funds for the fraudulent directors’ benefit.
• Cases that were cited did not necessarily support the arguments that were advanced.
• “There is a serious argument that the articles [of a company] cannot be construed to give authority for acts in breach of the s. 172(1) duty”.

However, Butcher J also stated that there were “serious arguments tending in [the Defendants’] favour” including:

• Documents or instruments which conferred authority ought to be given a “wide construction”, thus reducing the risk of reaching unprincipled outcomes.
• There was “little doubt” that careless and negligent acts of an agent bind the principle, but less clear that there was actual authority for such acts.
• It was questionable whether the Claimants’ position gave adequate protection to third parties. The level of proof required when applying the ostensible authority doctrine “may be burdensome, costly and inconvenient, especially in cases where there are many third parties involved”.

Comment

It is important to recognise that this was a hearing at the summary stage. There are some limitations in terms of takeaways as a result. Little has been decided. The issues that were debated are not only complex, but in many respects, rather novel. It would be unsurprising if the claims, or at least the issues involved, end up in the Supreme Court. Although the Supreme Court gave a clear decision in Philipp, the fact-pattern of this case is very different. Philipp involved authorised payment instructions by an individual, not a corporate fraud.

There are several regrettable examples of fraudulent schemes such as this, where companies have been used as a vehicle for fraud. Clear judicial guidance will be important for future cases. Logically, if the Claimants are correct in their claims (both on authority and the lack of a viable counterclaim), this could result in some perverse outcomes where single director/owner companies are used to perpetrate frauds.

It is also unclear what precisely a bank ought to do once it is on inquiry. It is impractical to ascertain actual authority with the fraudster as the only individual to contact.

If the Defendants are found liable, this leaves open the question as to whether banks might in future seek to contract out of the Quincecare duty and/or introduce express terms in contracts to (where possible) address such an outcome.

Source

1. Philipp v Barclays Bank UK PLC [2023] UKSC 25
2. It was argued that this was rejected by the Supreme Court in Singularis Holdings Ltd v Daiwa Capital Markets Ltd [2020] AC 1189