Case BriefsForeign Courts

Supreme Court of United Kingdom: In the instant case where the question was that whether the Court has jurisdiction to direct members of a charitable company on how to exercise their powers in the absence of a breach of fiduciary duty, the 5 Judge Bench of Lord Reed, J. (President), Lord Wilson, Lord Briggs, Lady Arden, and Lord Kitchin, JJ., citing the instant case to be a rare exception to the principle of non- intervention, held unanimously that members of charitable companies have fiduciary duties, therefore the Court has jurisdiction to direct the members vis-à-vis exercising their powers in the absence of a breach of fiduciary duty. It was further observed that the Court’s priority is to see that fiduciaries for the charity perform their duties in the way most likely to achieve its continued existence notwithstanding what has been held to be in effect an existential threat to the proper governance of the charity.

The Children’s Investment Fund Foundation (CIFF) is a charitable company founded by Sir Christopher Hohn and Ms Jamie Cooper in 2002, helping children in developing countries. These proceedings stem from the steps the founders took to resolve difficulties arising in the management of the company after their marriage ended. Specifically, they agreed that in exchange for a grant of $360 million to Big Win Philanthropy, a charity founded by Ms Cooper, she would resign as a member and trustee of CIFF. Under Section 217 of the Companies Act, 2006, and Section 201 of the Charities Act, 2011 payments by a company in connection with the loss of office of a director (here Ms Cooper) must be approved by the members of the company and the Charity Commission. CIFF had only three members, two of whom, namely Sir Christopher and Ms Cooper had to recuse themselves from the vote.

Thus, only Dr Marko Lehtimaki could vote on the proposal. The Chancellor of the High Court held that the grant would be in CIFF’s best interests and ordered Dr. Lehtimaki to vote for the resolution approving the grant. Dr Lehtimaki appealed against that order, and the Court of Appeal allowed the appeal holding that, in the absence of a breach of fiduciary duty, the Court could not direct Dr Lehtimaki on how he should exercise his powers. Ms. Cooper therefore preferred an appeal to the Supreme Court seeking an order requiring Dr. Lehtimäki to vote in favour of the resolution. Per contra Dr. Lehtimäki and Sir Christopher Hohn contended that no such order can be made as a member is not a fiduciary; even if he was, then there is a principle of trust and charity law that the Court does not generally intervene in the exercise of a fiduciary’s discretion unless he is acting improperly or unreasonably as per the non-intervention principle; and, that Section 217 precluded the Court from giving Dr Lehtimaki the direction to vote.

Perusing the contentions, the provisions concerned and the principle of non-intervention, the Court observed that the distinguishing characteristic of a fiduciary is that he owes a single-minded duty of loyalty in matters covered by his duty. A member of a charitable company in principle owes this duty. A charitable company itself is analogous to a charitable trustee, in the sense that it holds its assets subject to a binding obligation to apply them for charitable purposes only. It was further observed that the concept that a fiduciary is entitled to form his own subjective judgment about a matter assumes that there are different conclusions about the matter which might reasonably be reached.

The Court noted that this care is a rare exception to the non-intervention principle because of the existential threat to CIFF caused by the deeply felt dissension between the two founders. Charities operate within a public law framework, where the Court does not in general substitute its own judgment for that of the decision maker. However, the purpose of Section 217 of Companies Act, 2006 is to ensure adequate disclosure to, and approval by, the company’s members, and the right to vote can be restricted by the company’s constitution. In circumstances, where the matter is internal to the charitable company, the Court can in an appropriate case direct one of its members how to vote. [Lehtimaki v. Cooper, [2020] UKSC 33, decided on 29-07-2020]

Case BriefsForeign Courts

Supreme Court of the United Kingdom: A Full Bench of Lady Hale (President), Lord Reed (Deputy President), Lord Lloyd Jones, Lord Sales, and Lord Thomas, dismissed the appeal filed by a bank.

In the present case, the respondent company, “Singularis”, is registered in the Cayman Islands, which was set up to manage the personal assets of Mr Maan Al Sanea. He was the company’s sole shareholder and also one of the directors. The other 6 directors did not have any influence over the company’s management. A loan financing for the purchase of shares was provided to Singularis in 2007, by the appellant investment bank i.e., Diawa. This loan was also the security for the repayment of the loan. In the year 2009, after the shares were sold and the loans were repaid, a surplus amount of money (US$204m) was held by the bank for the account of the respondent company. As per the instruction given by Al Sanea, Daiwa paid out the surplus funds to third parties. The payments were misappropriation of Singularis’ fund and as a result of that Singularis was unable to meet the demands of the creditors. Singularis consequently entered into liquidation. On 18.09.2009, the Cayman Islands made a winding-up order and a joint liquidator were appointed for the same.

Respondent company herein (Singularis) held a certain sum of money as a deposit with the appellant bank (Daiwa). In 2009, the bank Daiwa was instructed by an authorised signatory of Singularis (Mr. Al Sanea) to make payments out of Singularis’ account. The Bank approved and completed the transfers notwithstanding many obvious and glaring signs that Mr. Al Sanea was perpetrating a fraud on the company. In 2014, Singularis issued a claim against the bank for USD 204 million (the total amount transferred in 2009). There were two bases for the claim: (i) dishonest assistance in Al Sanea’s breach of fiduciary duty in misapplying Singularis’ funds; and (ii) breach of the Quincecare duty of care owed by the Bank to Singularis by giving effect to the payment instructions.

The Quincecare duty arises when bankers are asked to make payments in circumstances where there are reasonable grounds to suspect possible fraud. In such a situation, banks owe a duty of care to their customers to refrain from making payments. When “on inquiry” in this way, banks have a positive duty to investigate the potential fraud, they have to be satisfied, by enquiring as far a reasonable banker could be expected to do so, that the payment is not fraudulent before they can be “off inquiry” and go on to comply with their contractual obligations and make the payment.

The claim allowed by the High court was the breach of the Quincecare duty of care. Since Daiwa’s appeal against the finding of liability on the negligence was dismissed, it appealed to the Supreme Court.

The main issue which arose in this matter was, whether the appellant bank was in the breach of its duty towards their customers by transferring the money regardless of circumstances which were suspicious. Also, whether the customer’s claim against the bank was precluded by the fact that the fraudulent acts of the director should be attributed to the customer so as to bar the claim of the customer against the bank.

According to the findings of the case, the judge held that there was a clear breach of Quincecare duty of care by the appellant bank towards the respondent company. The possible defences raised by Daiwa were: illegality, causation, countervailing claim in deceit and attribution. The Court opined that whether or not Mr. Al Sanea’s fraud was attributed to the company, the said defences would fail in any circumstance. It was held that Daiwa was liable to Singularis for its breach of Quincecare duty. It was the appellant bank’s duty to realise something suspicious was going on and a reasonable inquiry should have been done for the same. Due to Daiwa’s negligence, the company (and through the company, its creditors) had to suffer and be victims of fraudulent incidents.

Thus, the claims of Daiwa were dismissed and the judgment of the trial court was upheld. [Singularis Holdings Ltd. v. Daiwa Capital Markets Europe Ltd., [2019] 3 WLR 997, decided on 30-10-2019]