UK: A new litigation risk for PSPs? Quincecare claim brought by derivative action is successful

This latest High Court case² involves the APP fraud victims using the mechanism of a derivative action to bring a claim against the receiving PSP for £160,000, being the amount they lost through the fraud.  Derivative actions are where a claim vesting in a company is brought by a claimant on behalf of the company whose claim it is, and who is permitted by the court to pursue the course of action on the company’s behalf. In this case, the claimants brought a claim on behalf of the company set up by the fraudster as a vehicle for the fraud, against the PSP with whom the company had an account and into which the victims’ stolen funds were received. In short, the claimants were “standing in” for the company in the litigation.

The claimants’ derivative action against the PSP comprised claims for (i) breach of mandate and/or breach of the Quincecare duty and (ii) breach of the Payment Services Regulations 2009 (PSRs).   Their action was unsuccessful at first instance, but was successful (on (i)) on appeal, leading the court to order the PSP to restore their stolen funds to the company’s account for the use of the company.  That said, and as the judge noted, it may prove to be a Pyrrhic victory for the claimants as the company is now in administration and its assets must be distributed in accordance with insolvency rules.  How much of their stolen money the claimants will get back, if any, will depend on where they rank as creditors in the company’s administration.

Since 7 October 2024, where the payment is a UK payment made using the Faster Payments or CHAPS systems, victims of APP fraud can try to reclaim their losses through the APP mandatory reimbursement scheme. Under the scheme, the victim, if eligible, may be reimbursed for their losses up to £85,000.  In cases where the facts pre-date the scheme, or which involve payments made using other UK payment systems, or international payments, or where losses exceed £85,000, the scheme will not assist, and APP fraud victims are left with their rights under the general law.

In light of this recent case, the use of a derivative action against the bank which received the stolen funds may appear to offer a route for APP fraud victims who fall outside the scheme, but note that the basis for the derivative claim itself has not been fully tested.  The first instance judge granted permission for the derivative claim to be brought by the victims, who are creditors of the company, but the rationale behind his decision is not known as his judgment was ex tempore and is not in the public domain – and, further, the PSP did not challenge the permission on appeal, so the grounds for the derivative claim were not considered in this later, and most recent judgment.

Facts

Moorwand is a PSP and Electronic Money Institution regulated by the Financial Conduct Authority which offers to its customers, amongst other services, an electronic wallet which records stored value and allows users to make electronic transactions in a variety of currencies, as well as in bitcoin.

RND Global Ltd (RND), which is now in administration, held an account with Moorwand and was permitted by Moorwand to operate an electronic wallet which enabled it to make and receive payments in pounds sterling, Euros and bitcoin.  The relationship between RND and Moorwand was governed by an agreement between them.

Mr and Mrs Hamblin were victims of an APP fraud whereby, believing it was an investment, were tricked into making a payment of £160,000 to RND, where it was held for some time in RND’s electronic wallet with Moorwand. The money was subsequently paid out of RND’s electronic wallet by Moorwand pursuant to payment instructions given by RND’s agent, a Mr Stanfield, to Moorwand. The transactions which resulted in the paying away of the Hamblins’ £160,000 included transactions in bitcoin and the purchase of a luxury watch at £34,500.

The Hamblins commenced proceedings seeking to recover the £160,000 that they had lost through the APP fraud.  They brought:

• A claim in their own right against Moorwand for repayment of the money paid by them to RND.
• An application for permission to bring a derivative action on behalf of RND against Moorwand. The derivative action comprised:
  • a claim that Moorwand had breached its mandate by debiting RND’s account when it (Moorwand) was on inquiry that the payment instructions made on behalf of RND by its agent, Mr Stanfield, might be unauthorised by RND and/or that Moorwand had acted in breach of contract or other duty in debiting RND’s account (the Duty Claim).
  • a claim that payments out of the account RND held with Moorwand were unauthorised within the meaning of regulation 55 of the PSRs (the PSR Claim).

Decision of His Honour Judge Mark Raeside KC

The case was heard before His Honour Judge Mark Raeside KC (the Judge) in 2024, who gave an ex tempore judgment after a four day trial in which he:

• dismissed the claimants’ claim in their own right against Moorwand.
• granted the claimants permission to bring the Duty Claim against Moorwand but, ultimately, dismissed the claim on the basis that it was not well founded – and, even if it was well-founded, it was excluded by an exclusion clause in the agreement between RND and Moorwand.
• dismissed the PSR Claim.

The claimants applied for permission to appeal the Judge’s decision to dismiss the Duty Claim and the PSR Claim.

The appeal before Mr Justice Marcus Smith

The case came before Mr Justice Marcus Smith in the High Court in March 2025 where he considered the substantive appeal and the application for permission to appeal on a “rolled up” basis.

The three issues for determination were whether the Judge was correct to:

• dismiss the Duty Claim.
• decide that, even if the Duty Claim was well-founded, it was nevertheless excluded by an exclusion clause in the agreement between RND and Moorwand.
• dismiss the PSR Claim. 

The Duty Claim

Smith J referred to the Supreme Court’s significant judgment in Philipp, which helpfully summarised certain legal principles relevant to this case, including the following:

• The PSP’s primary duty is to carry out the customer’s payment instruction (unless the PSP has a reasonable and valid concern that do to so would lead it to incur a legal liability, such as dishonestly assisting with a breach of trust or for money laundering).
• In a situation where the payment instruction comes from the customer’s agent, and the PSP knows or suspects dishonesty on the part of the agent, the PSP has a duty to exercise reasonable skill and care in executing its customer’s instructions. This requires the PSP to make inquiries to ascertain whether the instruction given is one actually authorised by its customer (the Quincecare duty). If, in such a situation, the PSP executes the payment instruction without making such inquiries the PSP will be acting in breach of the Quincecare duty – and will also be acting in breach of its mandate (given an agent has no actual authority to act fraudulently in their own interests and not bona fide in the interests of their principal).
• Where no such knowledge or suspicion arises on the part of the PSP, the Quincecare duty does not arise and, if the agent is acting fraudulently, the PSP is protected from a claim for breach of mandate by its customer by ostensible authority (i.e. where a PSP relies on the apparent authority of an agent who has no actual authority).

The present case involved consideration of payment instructions given by a Mr Stanfield, RND’s agent, on behalf of RND to Moorwand. Smith J identified certain errors in the Judge’s reasoning:

• The Judge incorrectly equated RND’s agent, Mr Stanfield, with RND itself, such that he regarded the knowledge of the fraudulent agent as that of the innocent company. This was an error of law. He said that it has been clear, since the decision in Re Hampshire Land Co³, that the knowledge of a director acting in fraud of their corporate principal is not to be attributed to the company.
• By equating Mr Stanfield with RND, the Judge failed to appreciate the significance of a number of factors which went to the central question of whether Moorwand had been put on inquiry and breached its Quincecare duty to RND.  These factors included:
  • The discrepancy between RND’s business on the one hand, which was stated, in documents provided to Moorwand when setting up its account, to be a marketing consultancy – and the actual conduct of that business on the other hand, as evidenced by the transactions on its account (such as the purchase of bitcoin and a luxury watch).
  • That Mr Stanfield, the person authorised to act as agent for RND, was no such thing but was, as the evidence heavily suggested, a fraudster masquerading as the real Mr Stanfield (who was himself a real person who had been the victim of identity theft).
• The Judge also erred in drawing a line between facts that went to Moorwand’s failure to comply with regulatory duties (such as the failure to monitor for money laundering) and facts going to Moorwand’s duty of inquiry/Quincecare duty. Whilst regulatory failures may not be relevant to the Quincecare duty, it is an error to assert, as the Judge appears to have done, that where facts are relevant to one duty they are, ipso facto, irrelevant to another. 

Smith J held that, on the evidence, Moorward was on inquiry; indeed, it was subjectively aware that further inquiries needed to be made at the very outset of opening RND’s account.   He said that Moorwand should not have debited the account of RND without satisfying itself, while being on inquiry, that the payment instruction it was receiving from Mr Stanfield was proper and not in fraud of RND.  In other words, the PSP had acted in breach its Quincecare duty and its mandate to RND.

For this reason, he granted permission to appeal this ground and, further, held that the appeal on this ground should succeed.

The exclusion clause

The agreement between RND and Moorwand contained an exclusion clause which, in essence, excluded Moorwand from liability for claims for damages arising out of, or connected with, the agreement.

The Judge had found that the Duty Claim was excluded by the clause, but Smith J held that the clause applied to claims for damages only and not claims, such as the Duty Claim, where the remedy was reinstatement of the account.

Moreover, he observed that, if the exclusion clause were to be read as excluding reinstatement of the account it would, in effect, render Moorwand’s mandate meaningless as it would be able to disregard the limits of its mandate without consequence whatever the nature of its conduct (unless fraudulent).

In conclusion, Smith J found that the claim for reinstatement of the account was not excluded by the exclusion clause.  He granted permission to appeal this ground, and allowed the appeal.

The PSR Claim

The claimants contended (on RND’s behalf) that the payments out of the account RND held with Moorwand were unauthorised within the meaning of regulation 55 of the PSRs.

Regulation 55 provides that the payment transaction is to be regarded as having been authorised by the payer only if the payer has given its consent to the execution of the payment transaction.

The meaning of “consent” is therefore central to the question of whether a payment transaction is authorised. Consent is defined for these purposes by regulation 55(2) which provides, amongst other things, that it must be given in the form and in accordance with the procedure agreed between the payer and its PSP.

Regulation 55 imposes a purely mechanical requirement on the PSP to observe the procedures agreed between it and its customer – and it could not be said that the procedures regarding payment instructions from RND were disregarded by Moorwand. On the contrary, they were punctiliously observed.  Smith J added that the point is that the punctilious observance of the mechanics of a mandate does not absolve a PSP from observing the Quincecare duty where it arises, as it does here⁴.  The PSR Claim therefore failed and Smith J refused the appeal (as well as, of course, permission to appeal).

Conclusion

In conclusion, the Duty Claim succeeded and the appeal was allowed to this extent. Smith J ordered Moorwand to restore the monies improperly paid away from the RND account back to that account for the use of RND.

If you have any questions about the issues raised in this article, please get in touch with one of the contacts listed or your usual contact at Hogan Lovells.

Authored by Daniela Vella and Philip Parish.