Bank of Credit and Commerce International SA ((in Liquidation)) (No. 15), Re; Bank of India v Morris

This is the judgment of the court (to which each member of the court has contributed) on an appeal brought by the Bank of India (BoI) against an order made by Patten J on 26 ^th March 2004, whereby he gave a judgment in favour of the liquidators (the liquidators) of BCCI SA and BCCI (Overseas) Limited (together BCCI), in the sum of US$82,302,941, with interest and costs.

The liquidators' claim was brought against BoI pursuant to sub-section (2) of section 213 of the Insolvency Act 1986 (the 1986 Act). That section (section 213) relates to liability for fraudulent trading. It provides as follows:

"(1) If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect.

(2) The court, on the application of the liquidator may declare that any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned are to be liable to make such contributions (if any) to the company's assets as the court thinks proper."

Factual background

BCCI was established in 1972 and achieved rapid growth during the 1980s. It collapsed in July 1991, with a deficiency as regards creditors in the region of US$10 billion. By that time BCCI had grown to the extent of having 110 branches in 41 countries and a number of representative offices. BCCI SA had 24 branches in this jurisdiction and its head office was in the City of London.

Until 1988 the President and Chief Executive of BCCI was Mr. Hasan Abedi. His deputy was Mr. Naqvi, who took over as Chief Executive when Mr. Abedi became ill. Mr Akbar was a senior employee of BCCI's Central Treasury Division (the CTD) in London. The CTD operated from BCCI SA's offices in London until 1986, but all its activities were booked and recorded in the name of BCCI (Overseas) Ltd (BCCI Overseas) in the Cayman Islands.

BCCI incurred substantial losses through poor lending decisions and unsuccessful metal trading on its own account. The Khalil group of companies, which were owned and controlled by Mr. Abdul Raouf Khalil, a Saudi Arabian business man, were among the borrowers who, by the early 1980s, had a number of heavily overdrawn accounts with BCCI. To conceal these losses the CTD embarked on a systematic and wide scale fraud involving the manipulation of account balances. This practice was initiated by Messrs. Abedi and Naqvi and was operated by Mr Akbar through the CTD. Mr. Akbar was the account officer for the Khalil group, and was also the person responsible for many, if not most, of the fraudulent transactions carried out by the CTD to hide BCCI's worsening financial position.

Subsequently, Mr Akbar was convicted of offences involving five transactions with BoI concerning the falsification of documents relating to the loan applications of Maram Trading Company Limited (Maram), a company which he controlled.

The transactions between BoI and BCCI that are in issue in this case are similar in nature to other transactions that BCCI entered into with three other Indian banks, and with two Swiss Banks. The liquidators have brought proceedings against two of the banks, BoI and the State Bank of India, but not against the others. Of the total of US$377 million received by BCCI Overseas under the arrangements with these banks, some US$332 million was credited to the Khalil group accounts to give the false impression that the indebtedness was being serviced.

The application before Patten J concerned six transactions involving BoI and BCCI. The issue was, in summary terms, whether those at BoI responsible for entering into five of those transactions knew that they were thereby assisting BCCI to perpetrate a fraud on its creditors. It was common ground that this allegation of knowledge must involve a finding of dishonesty.

The transactions

The first of the six transactions was initiated in the autumn of 1981 when Mr. Samant of BoI contacted Mr. Mewawalla at BCCI to ask him whether BCCI would be prepared to place a deposit with BoI. It was apparently BoI's policy, and that of other Indian banks, to obtain at its year-end as many deposits as possible, as the existence of large scale deposits was seen as an important measure of a bank's success. Mr. Samant's approach to Mr. Mewawalla was said to be in accordance with this policy. At the time, Mr. Mewawalla, who was not called as a witness, worked in the International Department of BCCI.

In response to the approach from Mr. Samant, on 12 November 1981, Mr Mewawalla informed Mr. Samant that BCCI was prepared to place a deposit of £10m for three months at a rate of 15% per annum on terms that BoI was required to lend this amount to a borrower named by BCCI at 15.125%. The security for the loan was to be an irrevocable letter of guarantee by BCCI.

The purpose of this rather extraordinary transaction from BCCI's point of view was said to be to improve its earnings to advances ratio. The Judge held that he could not say whether it was Mr. Mewawalla or Mr. Samant who provided this explanation for the transactions, but he said that it was not disputed that Mr. Mewawalla made it clear to Mr. Samant that the transaction was for the benefit of BCCI in that its purpose was the improvement of its accounts or profits at its year end. In a telex that Mr. Samant sent to BoI's head offices on 12 November 1981, he stated that:

"BCCI is doing this obviously to show a good ratio of earnings against their advances…"

Therefore Mr. Samant and the board of BoI were all well aware of what was understood to be BCCI's reason for the transactions.

The first transaction, like each of the subsequent transactions (save for the fifth where there was no loan) had the following features:

(1) It was arranged between Mr. Mewawalla for BCCI and Mr. Samant for BoI;

(2) It involved a fixed deposit by BCCI with BoI at a fixed rate;

(3) BoI was required by BCCI to make a fixed term loan, for the same period as the deposit, to Maram, at a rate of interest 0.125% above the rate on the deposit;

(4) BCCI gave BoI an irrevocable guarantee of the loan;

(5) at the end of the fixed period, BoI repaid the deposit and interest thereon to BCCI and, through BCCI, received repayment of the loan and interest.

BoI did not dispute that BCCI's CTD used the monies provided by BoI pursuant to the six transactions to credit heavily overdrawn accounts that Mr. Khalil and his group of companies held with BCCI. The purpose of this exercise was to give the false impression that these accounts were being serviced and the indebtedness being repaid, at least to some extent, by the customer. BoI also did not, and does not, dispute that BCCI did not disclose the guarantees to its auditors. The issue for the Judge was what, if anything, BoI knew of the CTD's fraud.

Knowledge of fraud

There was no dispute about the relevant alleged knowledge in question being "blind-eye" knowledge. It was further agreed that the elements of what was required for this type of knowledge were accurately described in the speech of Lord Scott of Foscote in Manifest Shipping Company Limited v Uni-Polaris Company Limited[2003] 1 AC 469 at para. 116, which was quoted by Patten J, at para. 13 of the judgment in this case:

"In summary, blind-eye knowledge requires, in my opinion, a suspicion that the relevant facts do exist and a deliberate decision to avoid confirming that they exist. But a warning should be sounded. Suspicion is a word that can be used to describe a state-of-mind that may, at one extreme, be no more than a vague feeling of unease and, at the other extreme, reflect a firm belief in the existence of the relevant facts. In my opinion, in order for there to be blind-eye knowledge, the suspicion must be firmly grounded and targeted on specific facts. The deliberate decision must be a decision to avoid obtaining confirmation of facts in whose existence the individual has good reason to believe. To allow blind-eye knowledge to be constituted by a decision not to enquire into an untargeted or speculative suspicion would be to allow negligence, albeit gross, to be the basis of a finding of privity."

The Judge held that:

"Dishonesty as such is not in terms a condition of liability under s.213. But if knowledge of the fraud in either of the senses indicated above is established, Mr. Hirst [Counsel then appearing for BoI] accepts that it must follow that BoI was dishonest."

In relation to the first transaction the Judge found that none of the BoI employees, including Mr. Samant, had the relevant knowledge. In relation to the second transaction the Judge held that Mr. Samant did have the relevant knowledge, as he did in relation to the third, fourth and fifth transactions. The Judge further held that his knowledge should be attributed to BoI. Mr. Samant resigned from BoI in June 1985, although his resignation only took effect in November 1985. He was not, therefore, working for BoI at the time...