IPA 2025 membership and licence renewals now open

Case law update

An insolvency case law update prepared by Rachel Grant, Associate Director at Manolete Partners PLC.


Bass, Pagden and Bronia Buchan Associates Limited v Bronia Rachel Buchan 2021 EWHC 2740 (Ch). 14 October 2021

Brief background

Ms Buchanan was the sole director of Bronia Buchan Associates Limited (“the Company”) which provided client representation for actors.

Following the Company’s liquidation, the liquidator queried a debit entry on the director’s drawings ledger of £225,571 described as “Adjustment to Historical Data” and a corresponding credit entry on the director’s current account ledger for the same amount and with the same description.  In making these entries, the director was attempting to reclassify the director’s loan as remuneration to avoid having to repay the loan.

The director argued the sums she received should have been recorded as salary and her official salary of around £6,000 per annum was not commensurate with the hours she worked and the responsibilities she held. She made this argument despite the fact that she had signed and approved the Company accounts for a number of years clearly declaring a salary and a loan account. She also claimed she relied at all times on professional advice. The advice she said she received was not however supported by the evidence before the Court.

Judge Burton found there were no grounds to conclude that the true nature of the payments made to the director was salary.  She confirmed that salary and dividend payments are the only two methods by which a director/shareholder may lawfully take money out of a company (other than directors being reimbursed for expenditure incurred on a company’s behalf).

Judge Burton commented that “it is simply not open to a director to recreate history and the basis on which they have historically received money from a company.”   Significantly more was paid to the director than was expressly accounted for as salary and dividend and the burden of proof lay with Ms Buchanan to show that she was entitled to receive these monies.

Points to note/message for IPs

The circumstances of this case will be familiar.  When IPs request payment of an outstanding director’s loan, the director will often argue there is no outstanding loan and that the payments made were salary or remuneration for work done by the director.

This decision of Judge Burton provides a helpful summary of the relevant case law and makes it clear that it is not open to a director to reclassify or re-characterise payments when it suits them to do so. The case also confirms that the onus of proof is on the director to show entitlement to payments received.

Finally, the case usefully confirms that the limitation period starts from the date of the demand for repayment by the IP.


Sekers Fabrics Ltd v Clydesdale Bank plc [2021] CSOH 89

Brief background

Sekers were the victim of authorised push payment (“APP”) fraud. APP fraud involves a fraudster contacting a bank customer and tricking the customer into authorising payment to an account controlled by the fraudster. Typically, the fraudster will claim to be calling from the bank to warn the customer of the need to move funds urgently to a safe account.

Two of Sekers’ cashiers received a call from a fraudster who gave his name as “Steve” and claimed to be from the Bank’s fraud team. He said that the Company’s bank account had been blocked by the Bank as a precautionary measure but he would work to unblock the account.

The cashiers sought reassurance that the call was genuine from the Bank’s helpdesk and the Company’s relationship manager. The helpdesk said they would look into matters and the relationship manager asked the cashiers to try and obtain Steve’s full name and email that to her, but no further advice was given to the cashiers. The cashiers were not told to do nothing until the caller’s true identity had been clarified and the Bank did nothing to suspend activity on the Company’s account until the position was clarified.  The cashiers felt reassured that everything seemed to be in order and payments of £566,000 were authorised by the cashiers.

The decision

Sekers argued that in these circumstances, the bank had breached both the Quincecare duty and the Bank’s general implied duty to exercise reasonable skill and care.

It is generally accepted that complying with payment instructions is the primary obligation of a bank but, following the 1992 Quincecare case, it was identified that a duty would arise (“the Quincecare duty”) where a bank had reasonable grounds for believing that the person authorising a payment was operating the account in order to misappropriate funds.

An English decision earlier this year (Philipp v Barclays Bank UK Plc [2021]) limited the Quincecare duty to situations where there was misappropriation of a customer’s funds by internal fraud by a bank employee. The Quincecare duty was held not to apply to payments authorised by the customer herself  without the complicity of a bank employee. That decision is being appealed.

Lord Clark noted the circumstances in Sekers were clearly different from those in Phillip; “there were no reasonable grounds in Philipp to intervene whereas in Sekers the pursuer had actively sought the bank’s reassurance that the intended transactions were genuine.”

Lord Clark was satisfied that there was a duty on the bank to exercise reasonable skill and care but the scope of that duty and whether it had been breached depended on the facts of the case. He noted, in particular, the importance of the communications the cashiers had with the Bank.

“If there had been no such discussions on matters arising before the authorisation of payment, and this was merely a case of payment being made by authorised individuals, the restricted Quincecare duty, covering the execution of instructions, would have resulted in the pursuer’s case being irrelevant. But given that there were these discussions and the inquiries made, the issue is how the general duty to exercise reasonable skill and care operates, and what is its nature and scope, in the present context.

The nature and scope of that duty in circumstances such as the present is not determined in the case law. There are specific examples, as listed in Paget’s Law of Banking (at [4.25]-[4.26]) of a bank’s particular duties falling within the general duty. Without full evidence on the factual circumstances here it would be inappropriate for me to conclude on the nature and scope of any duty in this case. But I certainly cannot rule out the existence of such a duty “

Points to note/message for IPs

The decision confirms that as a general principle banks have a duty to apply reasonable skill and care in their dealings with customers, although the scope of that duty and whether it has been breached will depend on the facts and circumstances of each case.  

The crucial point in the Sekers case was that the bank were put on notice by the Company of a potential fraud and by ignoring this, the bank breached its general duty of care taking it outwith both the Philipp situation and beyond the Quincecare duty.

Online fraud is increasing, with both individuals and businesses being targeted.  Following the pandemic, there have also been many reports of misappropriation of CBILS by directors, with funds received being quickly paid away to the director’s personal accounts or connected companies or being used to pay off a director’s mortgage or pay a car dealerships.

IPs will review a company’s bank account to identify any potentially challengeable payments or transactions, and anomalous or unexplained payments will be investigated. As part of their investigations, IPs should consider whether a fraud may have been perpetrated on the company and against whom action might be taken.

Recovery from the fraudster or director who has perpetrated the fraud may not be possible but IPs should also consider if there are grounds for taking action against the company’s bank.

There can be significant hurdles in recovering losses from banks, given the narrow scope of the Quincecare duty but if there is evidence that the bank was put on notice that there were grounds for suspecting fraudulent activity and the bank should have, but failed, to make enquiries, prospects of establishing a breach of the bank’s general duty of care have certainly improved following Sekers.

Content courtesy of IPA corporate partner Manolete Partners PLC.