Case law update: Arena Television Ltd (in liquidation) and another v Bank of Scotland plc

The case relates to what the claimants, Arena Television Limited and Arena Holdings Limited (both in liquidation) (collectively "Arena"), refer to as a large-scale asset backed lending fraud (or "ABL fraud") perpetrated by two of its directors, Mr Yeowart and Mr Hopkinson (the "Directors").

The High Court's judgment considers the application of the Supreme Court's judgment in Philipp v Barclays Bank UK PLC, concerning the scope of the Quincecare duty, to ABL fraud cases involving the question of director authority.

The Quincecare duty provides that where a bank has reasonable grounds to believe that an instruction is an attempt to misappropriate a customer's funds, it has a duty to refrain from executing that instruction. In Philipp v Barclays Bank UK PLC, the Supreme Court confirmed that the scope of the Quincecare duty is limited to circumstances where an agent is acting on a customer's / principal's behalf.

The facts

In this case, Arena alleges that the Directors sourced or purported to source equipment and procure Arena to sell it to an ‘intermediary’, who would in turn sell it to a lender (with the intermediary retaining a 1% commission from the purchase price). At the same time, the Directors would sign a hire-purchase agreement with the lender on behalf of Arena, pursuant to which Arena would be permitted to use the equipment in return for monthly payments (with an option to buy).

Arena claims that over £1.2 billion of asset backed lending was obtained for a purported 8,196 pieces of equipment, when only 66 pieces of equipment actually existed. Upon discovery of the alleged ABL fraud in 2021, administrators were appointed over Arena and the Directors fled the jurisdiction.

The issue

Arena argues that there were a number of facts which would have caused a reasonably skilful and careful banker to make inquiries as to whether the transactions passing through the companies' account were authorised.

In particular, Arena argues that it would have been apparent to the defendant banks from internal reporting systems, when carrying out periodic reviews, extending fresh credit, and / or when Arena went into its overdraft that:

• Arena was dependant on the proceeds of fresh asset backed lending and payments from intermediaries rather than trading revenue.
• The use and volume of the ABL and the use of its accounts was inconsistent with Arena's legitimate business activities and use of the equipment. 
• Substantial payments were being made from its accounts for the personal use of the Directors.

The defendant banks deny Arena's claim, arguing that:

• The Directors had actual authority to give the payment instructions by reason of their control of Arena and the relevant account mandates.
• If they are liable to Arena for the ABL fraud, then Arena is liable to them for the same sums in deceit (on the basis that Arena is vicariously liable for fraudulent representations made by the Directors) and / or conspiracy (on the basis that Arena and the Directors wrongfully and with intent caused injury by unlawful means).

Judgment

The High Court has rejected the defendant banks' applications for summary judgment, finding it to be appropriate that the issue of the extent of the actual authority of the Directors be resolved at trial.

In particular, the High Court found that while the scope of a bank's duty of care does not extend to protecting customers against authorised payments (or the consequences of transactions), it was arguable and with a real prospect of success in this case that:

• In the absence of express agreement of the principal, an agent only has actual authority to act honestly in pursuit of the interests of the principal.
• There is no realistic or workable distinction which can be drawn between frauds on and frauds by the principal.
• The authorities relied upon by the defendant banks do not establish a general proposition as to when an agent will have actual authority to make fraudulent misrepresentations.
• Where the actual authority of the Directors derives from the terms of articles of association, that authority does not extend to acts done in breach of the directors’ duty under s. 172(1) of the Companies Act 2006 (i.e. to promote the success of the company for the benefit of its members as a whole).

Further, while the High Court found that it was at least arguable that the terms of the mandate agreed were of possible relevance to the extent of the actual authority of the Directors, it did not appear arguable that the specific terms relied upon by the defendant banks gave the Directors actual authority to conduct fraud on third parties.

Conclusion

The High Court's refusal to grant summary judgment suggests that the mere existence of an account mandate, or the fact that a director exercises control over a company, may not in and of itself evidence actual authority to conduct fraudulent transactions. Until the issues in this case have been determined at trial, banks should therefore remain vigilant and ensure that that their systems are robust enough to monitor and identify red flags, such as use of company accounts which is not consistent with legitimate business activities, even where a payment instruction is made by a director who on the face of it has authority to instruct a bank under the terms of an account mandate. 

If you would like to discuss the High Court's judgment or its impact in more detail, please do get in touch with Ben Hay or with Gena Ritchie.

For further information please get in touch with a member of the Fraud team.