Royal Bank of Scotland International Ltd v JP SPC 4 and another

JurisdictionUK Non-devolved
JudgeLord Hamblen,Lord Burrows,Lord Briggs,Lord Kitchin,Lady Rose
Judgment Date12 May 2022
Neutral Citation[2022] UKPC 18
CourtPrivy Council
Docket NumberPrivy Council Appeal No 0044 of 2020
Royal Bank of Scotland International Ltd
(Respondent)
and
JP SPC 4 and another
(Appellants) (Isle of Man)

[2022] UKPC 18

before

Lord Briggs

Lord Kitchin

Lord Hamblen

Lord Burrows

Lady Rose

Privy Council Appeal No 0044 of 2020

Privy Council

Easter Term

From the High Court of Justice of the Isle of Man (Staff of Government Division)

Appellants (JP SPC 4 and JP SPC 1)

Stephen Auld QC

Oscar Schonfeld

(Instructed by Keystone Law (Douglas))

Respondent

Giles Wheeler QC

(Instructed by Appleby (Isle of Man) LLC (Douglas))

Heard on 10 February 2022

Lord Burrows

Lord Hamblen AND( with whom Lord Briggs, Lord Kitchin and Lady Rose agree)

1. Introduction
1

This appeal concerns whether a bank owes a duty of care in the tort of negligence to a person who is known to be the beneficial owner of moneys held in the account of a customer of the bank and who has been defrauded by the customer.

2

The alleged facts engage two problematic areas for the tort of negligence. The first is that the type of loss in question is pure economic loss (as opposed to economic loss directly consequent on personal injury or property damage). The second is that the relevant conduct of the defendant is an omission (as opposed to a positive act) in the sense that the conduct complained of consists of a failure to prevent the wrongdoing of a third party causing loss to the claimant. It is well established that, in those problematic areas, whether a duty of care is owed does not rest simply on whether the defendant should reasonably have foreseen that the loss to the claimant was likely. Rather for there to be a duty of care owed there are additional limiting requirements. See generally, on these two problematic areas, James Goudkamp and Donal Nolan, Winfield and Jolowicz on Tort, 20th ed (2020), paras 5–029 to 5–039, 5–048 to 5–056; Clerk and Lindsell on Torts, 23rd ed (2021), paras 7–51 to 7–68, 7–104 to 7–156.

3

The beneficial owner is the first claimant in the proceedings and appellant in the appeal (“the Fund”). It is a Cayman Island based investment fund which established a scheme by which investors were to seek a profit by lending to solicitors in England and Wales to finance their pursuit of high-volume, low-value litigation (“the Scheme”). The customer is an Isle of Man company, Synergy (Isle of Man) Ltd (“SIOM”), through whom the loans were to be advanced and repaid. The bank is the defendant in the proceedings and respondent in the appeal (“the Bank”).

4

SIOM held two bank accounts (“the Accounts”) with the Bank; one of those accounts was used to pay out loans and the other was used to receive repayments. Although the Accounts were held with the Bank by SIOM, the money held in those accounts is alleged to have belonged beneficially to the Fund, as the Bank is alleged to have known.

5

The Fund has commenced proceedings against the Bank before the Isle of Man courts. The allegation advanced in these proceedings is that SIOM and two of the individuals behind it were parties to a fraud by which money beneficially belonging to the Fund was paid out for the benefit of those individuals (or their associated companies or other associates) rather than by way of legitimate investments of the kind that the Scheme was intended to make.

6

The Fund alleges that the Bank owed it a “duty of care in tort to exercise reasonable care and skill”. The effect of that duty is said to be that, “if the circumstances were such that a reasonable banker would have had grounds for considering that there was a serious or real possibility that the [Fund] was being defrauded and/or its funds were being misapplied …, [the Bank] was obliged not to honour instructions in relation to [the Accounts] until such time as it had made reasonable enquiry and satisfied itself as to the propriety of the conduct of [the Accounts]”. The effect of the alleged duty, if established, would be that the Bank was under a duty to take reasonable care to protect the Fund from losses caused by the fraudulent misappropriation of funds from the Accounts.

7

The losses which the Fund seeks to recover from the Bank are losses which the Fund allegedly suffered as a consequence of the fraud but which the Fund alleges the Bank ought to have prevented. The Bank is not itself alleged to be a party to, or otherwise responsible for, the fraud.

8

The Bank applied to strike out or summarily dismiss the claim on the basis that there is no arguable pleaded basis on which the Fund can establish that the Bank owed it the alleged duty of care. That application was dismissed at first instance by Deemster Wild in a judgment of 15 October 2019. The Bank's appeal was allowed by the High Court of Justice of the Isle of Man Staff of Government (Appeal Division) (Judge of Appeal Storey QC and Deemster Collas) (“the Court of Appeal”) in a judgment of 9 March 2020 (“the Judgment”). Permission to appeal was granted by the Privy Council by order dated 13 January 2021.

2. The Fund's factual case
9

The Fund's factual case is as set out in its Amended Particulars of Claim and the witness statement of John Paul Royle of Grant Thornton Specialist Services (Cayman) Ltd (“Grant Thornton”), one of the Fund's joint receivers, which was provided in response to the Bank's strike out/summary judgment application. The facts are agreed only to the extent that it is agreed that the Bank's application fell to be determined (and this appeal falls to be determined) on the basis that the Fund would be able to prove at trial the pleaded facts as they allege them to be.

(i) The parties and the Accounts
10

The Fund is an investment vehicle incorporated in the Cayman Islands as part of the Scheme. Under the Scheme investors subscribed to the Fund in response to and in accordance with the terms of the Offering Memoranda. The subscribed funds were to be lent onward by the Fund to solicitors in England and Wales for the purposes of those solicitors pursuing low-value, high-volume claims such as Payment Protection Insurance claims. The basis of the Scheme was that these claims would be profitable for the solicitors and that the loans would be repaid to the Fund with interest. The Fund is in receivership. The receivers are directors of Grant Thornton.

11

The Bank was part of the RBS Banking Group and carried on business in the Isle of Man. Pursuant to the Scheme, the funds flowed from the Fund's account in Cayman to an account held at the Bank (the “Main Account”) by SIOM. SIOM was described in the Offering Memoranda as the “Loan Originator/Manager”, responsible for the disposition and investment of fund moneys in accordance with the terms of the Scheme documentation. SIOM was specifically used to handle investors' moneys offshore which were remitted from the Main Account to law firm borrowers and other third parties. Loans repaid by law firms were paid into a separate account with the Bank (the “Repayment Account”) also held by SIOM.

12

SIOM was an Isle of Man company owned by Mr Timothy Schools (“Mr Schools”) and Mr David Kennedy (“Mr Kennedy”) (subsequently Mr Schools alone). Mr Schools was a solicitor and Mr Kennedy an independent financial adviser and together they had conceived the Scheme.

13

Mr Schools and Mr Kennedy also jointly owned The Synergy Solution Ltd (“TSSL”) which was described as the “Fund Manager” under the Scheme, and they had their own private interests in profiting from the Scheme. Given SIOM's role handling and holding investor funds under the Scheme arrangements, a fiduciary services provider regulated in the Isle of Man was appointed to provide independent directors of SIOM. These directors were to manage SIOM, including the exercise of day to day control of the Main and Repayment Accounts. In practice, however, SIOM was at all material times under Mr Schools' and/or Mr Kennedy's direct or indirect control.

(ii) The operation of the Scheme
14

At the outset of the Scheme in 2009, Clearwater Fiduciary Services Ltd (“Clearwater”) was appointed as fiduciary services provider. Two of its directors, Ms Victoria Prentice and Mr John Bingham, were appointed directors of SIOM. Immediately following the first receipt of investor funds into the Main Account, Ms Prentice and Mr Bingham gave notice to resign their services, stating to Mr Schools and Mr Kennedy that the documentation published in respect of the Scheme was “wholly inaccurate” and that they had concerns about reputational risk because of the manner of the proposed operation of the Scheme. Shortly thereafter, the initial investor funds were returned from the Main Account to the Fund and Clearwater, Ms Prentice and Mr Bingham were replaced by Turnstone (Isle of Man) Ltd (“Turnstone”) as fiduciary services provider, and Peacock Management Ltd, a subsidiary of Turnstone, was appointed as SIOM's sole director.

(iii) The alleged fraud
15

Mr Schools and Mr Kennedy, through SIOM, misapplied the Fund's moneys, using the Main Account such that, rather than the flow of funds being from the Fund to the solicitors for the pursuit of legal cases and paid back upon case settlement or success, moneys were diverted from the Main Account directly or via another account at the Bank held by SIOM (the “House Account”) to numerous third party accounts. The payments into those third party accounts were ultimately for the benefit of Mr Schools and Mr Kennedy, such payments being contrary to the scope of SIOM's authority under the Scheme documentation.

16

Between July 2009 and October 2012, approximately £110m of investors' money was transferred from the Main Account, purportedly to law firms as loans made as part of the supposed investment, but of this amount only £65m in fact went to law firms. Mr Schools and Mr Kennedy were able to transfer approximately £37.8m from the Main Account, in some cases via the House Account, to various third parties (excluding the law firms) in which they had a...

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