James C. Fisher

Concluding its judgment in Singularis Holdings v Daiwa Capital Markets (2019), the Supreme Court perceived facts ‘bristling with simplicity’. The ‘directing mind’ and sole shareholder of Singularis Holdings (Mr Al Sanea) fraudulently deprived the company of funds by directing Daiwa Capital Markets, the company bankers, to pay it away. Daiwa negligently failed to suspect impropriety and suspend the payments.

Why did such an apparently simple case require resolution in the Supreme Court? As explained in my recent article in the Northern Ireland Legal Quarterly, the answer lies in renewed confusion about corporate attribution in the context of illegality – the product of a recent quick-fire succession of Supreme Court decisions on the ‘ex turpi causa’ principle, culminating in Patel v Mirza (2016).

Daiwa accepted breach of its duty to Singularis but denied liability on one or more of three grounds:

1. Singularis’ loss resulted from its own acts, not Daiwa’s breach of duty;
2. Daiwa had a countervailing action in deceit, rendering Singularis’ claim circular; and
3. Singularis’ claim was barred for illegality.

Conspicuously, all these objections presupposed that Al Sanea’s fraud on the company was attributable to the company itself.

The Supreme Court rejected all potential defences; Al Sanea’s fraud should not be attributed to the company and each defence would fail even if it were to be so attributed. After swiftly exposing the logical flaws in the first two objections (causation and circularity), the Court discussed illegality and attribution. It accepted Patel as the authoritative rendition of the illegality rule in English law, requiring courts to decide whether the claimant’s illegal acts bar an otherwise valid claim by considering: ‘(a) ... the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim, (b) ... any other relevant public policy on which the denial of the claim may have an impact and (c) ... whether denial of the claim would be a proportionate response to the illegality’.

The Supreme Court recalled approvingly the approach and conclusions about illegality at trial and in the Court of Appeal, which had intimately considered: (i) the negative policy implications of barring the claim (namely reducing the consequences for banks who fail to scrutinise potentially fraudulent actions, thus potentially facilitating financial crime), and (ii) the disproportionate unfairness on Singularis of seeing its claim frustrated entirely.

Daiwa had relied on Bilta (UK) Ltd v Nazir (No 2) (2015) and, ultimately, Stone & Rolls Ltd v Moore Stephens (2009) to argue that the actions of a sole ‘directing mind and will’ must be attributed to the company in the context of an illegality enquiry. The court in Daiwa read the majority in Bilta as extracting from Stone & Rolls a rule that the illegality defence can only be available to defendants such as Daiwa in the absence of innocent shareholders or directors, not a rule that the defence is always available in the absence of such innocent persons. Rather the Supreme Court endorsed Rose J’s conclusion that ‘the answer to any question whether to attribute the knowledge of the fraudulent director to the company is always to be found in consideration of the context and the purpose for which the attribution is relevant’.

Nonetheless the Supreme Court’s ratio is far less novel than Patel might be thought to invite. Indeed, Patel left enduring questions about the interaction between its own policy-laden illegality test and other relevant legal doctrines and the status of prior case law. Daiwa can be understood as a motion to insulate older, more orthodox approaches to attribution from Patel’s disruptive potential.

In Bilta, the Supreme Court held unanimously that the crimes of a company director also constituting a breach of fiduciary duty could not be attributed to the company when the liquidators sued the director for that breach. Their reasoning, however, differed markedly. For Lord Sumption, the rules of corporate attribution applied ‘regardless of the nature of the claim or the parties involved’. The majority, however, held that ‘[t]he primary question for the court is whether [the company’s] claim against the directors ... is barred by the doctrine of illegality’, so there was ‘no need ... to get into the subject of attribution’. The success or failure of the action turned simply on ‘whether it is contrary to public policy’ that the claim should succeed. On this approach, whenever illegality exists in the factual history of the dispute, the attribution enquiry is subsumed into the illegality test – whether public policy, holistically considered, demands the success of the claim, or its defeat.

Patel clearly endorses this expansionist momentum in the illegality doctrine. In Patel, Lords Sumption, Mance and Clarke allowed the claimant’s action for restitution for total failure of basis on orthodox, reliance grounds: the claimant did not have to invoke the illegal purpose of the transfer to establish a cause of action, which must therefore succeed regardless of the circumstantial criminality. But the majority thought it unprincipled not to integrate the criminal character of the parties’ project into its decision; the illegality must determine the success or failure of the claim, even though reference to illegality was unnecessary to establish a complete cause of action. Patel therefore consciously abolishes the long-standing normative assumption that the law should distinguish between (i) illegality constitutive of a claim and (ii) illegality that is merely part of its history.

Daiwa is significant chiefly because it at least partially arrests this trajectory. True enough, the court accepted that attribution is a purposive, contextual enquiry which ‘has to be seen in the context of the possible defences to which it might give rise’. But with respect specifically to the place of the illegality rule in attribution cases, the Supreme Court echoed Lord Sumption’s minority position in Bilta, casting attribution and illegality as logically separable, cumulative questions, rather than deciding attribution through the policy-balancing test.

Daiwa is the first Supreme Court confirmation of an observable trend at the Court of Appeal level of reading down the radical consequences of Patel for the structures and categories of private law, emphasising the continued authority of cases decided on logic plainly at odds with that of the (presently) leading case on illegality.

Profound disagreement over the illegality doctrine is probably interminable. But, if the new, flexible and policy-attentive illegality formula leaves intact the authority of un-Patelian case law and does not actually require courts to reason in novel ways, what precisely was the point of Patel?