By Hans Tjio

This blogpost combines two recent research pieces about how regulation and private law can find a meeting point in the proper purpose rule in company law/equity which could underpin entity and individual duties to take into account considerations external to the relationship which gives rise to such duties.

There has been deregulation in commercial/corporate law for the last few decades This has removed certain mechanisms that provided protection against fraud and risk, such as rules maintaining capital in a company. Private law has had to respond to these changes and, while it has held the fort somewhat, there are clearly still difficulties that need to be resolved, not least that it stands accused of overreaching into the regulatory space: see Lord Leggatt in Philipp v Barclays Bank [2023] UKSC 25 at paragraphs 22-24.

There, the UK Supreme Court held that a victim who is the direct author of her own loss, as with authorized push payment fraud practiced on her by external parties, could not sue her bank based on the Quincecare duty of care. Following PT Asuransi Tugu v Citibank [2023] HKCFA 3 (noted by my colleague Jeremiah Lau in ‘Limitation in Bank Fraud Claims: Effect of Account Closure’ (2023) 82(2) Cambridge Law Journal 224), the Supreme Court held that the basis of that duty was a bank being put on notice that an agent of its customer acted fraudulently in authorizing payments from the account. Consequently, it could not be used to make a bank liable for external fraud practised on its customer. To do so would be inconsistent with the banker-customer relationship under which the bank is contractually bound to observe its client’s instructions.

My working paper ‘Preventing Fraud on Bank Customers and Creditors’, which will be revised substantially, was not bold enough in suggesting that the right language regarding liability must be attached to the wrongs that are seen today (compare Chua Rui Yuan, ‘The Quincecare duty: an unnecessary gloss’ [2023] JBL 161, which Lord Leggatt cited). I did point out that any common law duty based on failure to prevent external fraud on the part of banks may only be contextual and founded on a court’s willingness to accept regulatory standards in deciding on facilitator negligence, even if that may not have been the case in the past with respect to the more direct liability of financial institutions (e.g., in mis-selling financial products). It is clear that Quincecare does not extend that far as Lord Leggatt said that it would put the bank in an impossible position, having to disobey its customer who had properly authorised it to transfer funds out of her account. It is not the role of private law by itself to provide a ‘fair balance’ (at paragraph 67), but one for regulation. The amended piece will be published as a chapter in the forthcoming volume, Paul S Davies and H Tjio eds, Fraud and Risk in Commercial Law (Hart Publishing, 2024) which will also carry contributions by my NUS Law colleagues, Tan Cheng Han, Kelvin Low, Timothy Chan and Tan Weiming.

It is not only negligence but the best interest duty, which today is often fiduciary in nature, that may have been overworked in trying to incorporate external requirements and we should explore whether other duties, such as one to act for proper purposes, can provide a better understanding of why, if at all, a bank may have to protect its bank customer against external fraud affecting her accounts. This task is the focus of my second paper, ‘Sustainable Directors’ Duties and Reasonable Shareholders’, which will be published in the European Business Organisation Law Review. This discusses how directors’ duties to act in the company’s best interest, which in the UK translates to one promoting the success of the company, also finds it difficult to accommodate other considerations given its shareholder-centricity. It works well when the company’s and shareholders’ interests are aligned. But company law has found it hard to determine when directors cannot deal with company assets in a way that harms its creditors (the best interest duty requiring insolvency or at least its inevitability in BTI 2014 LLC v Sequana [2022] UKSC 25 before creditor interests are taken into account even though the dividend payment there to its holding company was held to be an undervalued transaction intended to defraud creditors).

The problem is that many private law duties are not ‘standalone’ (Paul B. Miller & Andrew S. Gold , 2015) or ‘undirected’ (Susan Bright and Ben McFarlane , 2023). A duty of care is owed to a neighbour and fiduciary duties to a principal. This makes it intellectually challenging to incorporate external requirements such as anti-money laundering or cybersecurity rules, non-shareholder interests or environmental, social and governance (ESG) constraints. This is because non-compliance may not lead to any quantifiable damage to the party to whom the duty is owed (although in Sequana there was loss as the holding company was insolvent and could not restore the dividends). Costs are in fact created by compliance, not breach.

Where ESG and corporate purposes are concerned, which may otherwise contradict enhancing shareholder value (as well as existing shareholder protection) as an established paradigm of company law, this paper builds on earlier suggestions that the proper purpose rule has a part to play in balancing the interests of corporate constituents both inter and intra se and even to consider the position of future or reasonable shareholders. The test of what is in the best interest of the company may not provide enough traction in this regard, nor should it. This, together with the negligence claim, attempted derivatively against its directors failed in ClientEarth v Shell Plc [2023] EWHC 1897. In a departure from the usual position, the petitioners, who had purchased a small shareholding, has had to pay Shell’s costs for trying to get the company to adopt a more environmentally friendly approach when 80-odd percent of its shareholders had approved Shell’s existing strategy. Given that signal, a different tack may be needed, and the suggestion is that the proper purpose rule could nudge private law away from compensation to compliance. It is to ‘regulate the exercise of authority’ (Flannigan, 2019) and requires constitutionality, fairness and faithfulness to powers.

Keywords:  Bank Liability, Philipp, Fiduciary Duties, Sequana, ESG

AUTHOR INFORMATION

Professor Hans Tjio is the CJ Koh Professor of Law and the Director, EW Barker Centre for Law & Business at NUS Law.
Email:  lawtjioh@nus.edu.sg