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The Hong Kong Court of First Instance has confirmed that, absent facts suggesting there is a real possibility that a transaction might be wrongful or improper, the presence of unusual or highly suspicious features in a customer's instructions alone will not be sufficient to hold a financial institution liable for breach of its Quincecare duty of care.

Background

In Excel Courage Holdings Limited v Seto Ming Wai & CLC Securities Limited [2024] HKCFI 984, the Plaintiff was a company incorporated in the BVI and an owner of shares in two listed companies (the "Shares”). On 24 September 2013, the Plaintiffs' sole shareholder and director at the material time, Mr. Wong, opened a securities account with CLC Securities Limited ("CLC”). The next day, Mr. Wong caused the Shares to be transferred to the newly opened account at CLC (the "Account”). Mr. Wong then gave instructions for the Shares to be transferred to various accounts of four unconnected individuals (the "Recipients”) held with CLC (the "Transfers”). The Plaintiff did not receive consideration for the Transfers, and the Recipients ultimately sold the Shares.

Against this background, the Plaintiff commenced litigation against CLC and its relationship manager, Ms. Seto, who had been dealing with Mr. Wong, claiming, among other matters, that by executing the Transfers, CLC had breached its Quincecare duty of care owed to the Plaintiff.

Decision

To determine whether the Quincecare duty of care was engaged, Harris J referred to the recent  Hong Kong Court of Final Appeal decision in PT Asuransi Tugu Pratama Indonesia TBK v Citibank N.A. [2023] HKCFA 3 (see our blogpost), in which Lord Sumption NPJ held "if there are features of transaction apparent to a bank that indicate wrongdoing unless there is some special explanation, then an explanation must be sought”. Further, "if a bank actually knows of facts which to their face indicate a want of actual authority, it is not entitled to proceed regardless without inquiry”. On the other hand, if a transaction is not apparently improper even without inquiry, there is no duty for a bank or financial institution to make inquiries, such that the Quincecare duty of care simply does not arise.

CLC argued that there had been features known to CLC, which unless explained, that pointed to Mr. Wong misappropriating the Plaintiff's assets via the Transfers. However, for the Quincecare duty of care to be engaged, the Plaintiff needed to show there were features of the Transfers suggesting "impropriety of some sort, which might involve a wrong done to the company and require[d] explanation”. Harris J further pointed out that this would require something materially more than non-compliance with regulatory best practice, or "a general irregularity in the structuring or documenting of a transaction”.

In this case, Harris J held that, although the Transfers were unusual, on balance the totality of the information did not suggest a serious or real possibility of wrongdoing that involved misappropriation of the Plaintiff's assets or an improper depletion of them.

Comments

This decision provides helpful and practical guidance on the circumstances required for the Quincecare duty of care to be engaged.

There is no doubt that the Quincecare duty of care serves to protect customers from the risks arising from fraudulent or improper transactions. However, the Hong Kong Court is steadfast in preventing this duty from turning into an unjustifiably cumbersome burden on banks and financial institutions and their employees.

For further information, please contact Jojo Fan, Partner, Rachael Shek, Partner, Hannah Cassidy, Partner, Simone Hui, Senior Consultant, Timothy Shaw, Senior Associate, or your usual Herbert Smith Freehills contact.

 

 

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Rachael Shek

Partner, Hong Kong

Rachael Shek
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Jojo Fan

Partner, Hong Kong

Jojo Fan
Hannah Cassidy photo

Hannah Cassidy

Partner, Head of Financial Services Regulatory, Asia, Hong Kong

Hannah Cassidy
Simone Hui photo

Simone Hui

Senior Consultant, Hong Kong

Simone Hui
Timothy Shaw photo

Timothy Shaw

Senior Associate, Hong Kong

Timothy Shaw

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Rachael Shek photo

Rachael Shek

Partner, Hong Kong

Rachael Shek
Jojo Fan photo

Jojo Fan

Partner, Hong Kong

Jojo Fan
Hannah Cassidy photo

Hannah Cassidy

Partner, Head of Financial Services Regulatory, Asia, Hong Kong

Hannah Cassidy
Simone Hui photo

Simone Hui

Senior Consultant, Hong Kong

Simone Hui
Timothy Shaw photo

Timothy Shaw

Senior Associate, Hong Kong

Timothy Shaw
Rachael Shek Jojo Fan Hannah Cassidy Simone Hui Timothy Shaw