Cloverbay Ltd (Joint Administrators) v Bank of Credit and Commerce International SA

This is an appeal from a decision of Harman J. sitting in the Companies Court. The judge set aside an order made by the Registrar under section 236(2) (c) of the Insolvency Act 1986 that Bank of Credit and Commerce International SA ("BCCI") by two named persons attend to be examined on oath in connection with the affairs of Cloverbay Limited. The application for that order was made by a Mr Withall and Mr Buller who had been appointed administrators of Cloverbay by an Order of Millett J. dated 22nd March 1989.

Cloverbay carried on business supplying air conditioning and refrigerating equipment to the Middle East. Its managing director was a Mr Zafar Zaid; his son, Jafar, also played a role in the business. Its bankers included BCCI. Accounts were held at the Brompton Road Branch of BCCI where the Manager at the relevant times was a Mr Rizvi and the Assistant Manager Mr Malik.

Charterhouse Export Finance Limited and Charterhouse Export Credit Limited ("Charterhouse") confirmed contracts by suppliers to Cloverbay and provided credit to buyers from Cloverbay. Following the discovery of apparent irregularities, in July 1987 Charterhouse started proceedings in the Commercial Court against BCCI. In the course of that action, Charterhouse obtained orders under the Bankers' Books Evidence Act requiring the production of certain documents. Amongst the documents produced were cheques drawn by Cloverbay in favour of persons who, on investigation, claimed to have no knowledge of Cloverbay. Notwithstanding the fact that the crossings on some of the cheques do not appear to have been opened in accordance with Cloverbay's mandate to BCCI, some cheques appear to have been paid out in cash and others to have been endorsed over on behalf of the payees without the authority or knowledge of the payees.

Messrs Clifford Chance (as solicitors for Charterhouse) raised these apparent irregularities with BCCI. In response BCCI sent to Clifford Chance a memorandum dated 24th February 1988 from the Manager of BCCI's Brompton Road branch. That memorandum was said to have been prepared by Mr Malik. It disclosed that Mr Zafar Zaid personally went to the Brompton Road branch with the cheques in question to see the Manager, Mr Rizvi. Mr Zaid would first open the crossing on the cheque (purportedly on behalf of Cloverbay). He then represented himself as the authorised representative of the payees on each of the cheques and then endorsed over the cheque on behalf of the payee in favour of third parties including Mr Zaid and his wife. When Clifford Chance subsequently asked for further information relating to further cheques no clear information as to how they had been dealt with was forthcoming. The eventual outcome of the Commercial Court action was that Cloverbay withdrew its defence and Charterhouse was awarded damages amounting to nearly £7.5 million.

Charterhouse advanced the claim against BCCI that the cheques ought not to have been met because they were not validly uncrossed and Mr Zaid had no authority from the payees to direct payment to anybody else. Charterhouse further claimed that BCCI knew or ought to have known that the monies were being withdrawn improperly. Charterhouse therefore claimed that BCCI was liable to recoup them.

It was in those circumstances that Charterhouse applied for and obtained the appointment of the Joint Administrators. Since the transactions in question had all taken place between 1979 and 1982, it was plain that time was running for the purposes of the Limitation Act against a number of possible claims which might be made by Cloverbay against BCCI. In the circumstances the Administrators issued (but have not served) a protective writ against BCCI claiming, inter alia, breach of the Bank's mandate and knowing participation by BCCI in fraudulent breaches of trust.

The Joint Administrators then obtained from Hoffmann J. an ex parte order under section 236 requiring BCCI to produce all books, records and memoranda relating to dealings with Cloverbay's accounts with BCCI. BCCI applied to set aside this order but on 18th May 1989 Vinelott J. refused to set it aside: see [1989] 5 BCC 732.

As a result of that order a large number of other documents were produced by BCCI. These disclosed a number of other transactions (in addition to those previously disclosed to Charterhouse) where the opening of the crossing on cheques and the endorsement over to bodies related to Mr Zaid appeared to have taken place. The documents produced did not include any contemporaneous memoranda kept by BCCI recording the dealings with the accounts.

All the documents disclosed were put before counsel specialising in banking matters. He expressed the preliminary view that, on the face of it, BCCI's involvement appeared to be as bad a course of conduct on the part of any bank as he had seen but that the Administrators would need to investigate further in order to establish whether BCCI had any explanation for what had occurred or, indeed, any other possible defences. Following that advice, the Joint Administrators applied for the oral examination under section 236 of Mr Rizvi and Mr Malik.

One of the Joint Administrators, Mr Withall, filed a confidential report in which he stated that he considered that such examination "would be the only effective way of investigating the manner in which…[the] cheques were processed by BCCI," for the following reasons:

Before explaining the reasons given by Harman J. for setting aside the order, I must refer in outline to the applicable law.Section 236(2) of the Insolvency Act 1986 provides as follows:

"(2) The Court may, on the application of the office holder, summon to appear before it—

• (a) Any officer of the company,

• (b) Any person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or

• (c) Any person whom the Court thinks capable of giving information concerning the promotion, formation, business, dealings, affairs or property of the company."

This provision has a long statutory history. Although the words of the section confer a general discretion on the court, over the years the courts have given certain guidance as to the proper basis for the exercise of the discretion. Most of the relevant authorities are reviewed by Slade J. in Re Castle New Homes Limited [1979] 1 W.L.R. 1075 and I will not repeat them. I am in agreement with much of the analysis of Slade J., in particular with the basic proposition that the exercise of the discretion involves the balancing of the requirements of the liquidator or administrator to obtain information on the one hand against the possible oppression to the person sought to be examined on the other. But Slade J. went further and stated a more detailed rule for carrying out that balancing exercise in cases such as the present where there is a real possibility that the person seeking an order for examination will start an action against the person sought to be examined. He said this at pages 1089–90:

"Briefly, to summarise the principles relating to the 'balance' question relevant for the present purposes, as I deduce them from the authorities, they are these. The court will always be concerned to avoid vexation, oppression or injustice in making an order under section [236]. If the evidence shows that the purpose of a liquidator in seeking the examination is to achieve an advantage beyond that available to the ordinary litigant, in litigation which he has already commenced or which he has definitely decided to commence, the predisposition of the court may well be to refuse an immediate order for examination, unless the liquidator can show special grounds to the contrary. If, however, it appears from the evidence that the object of the liquidator is simply to elicit information which will enable or assist him to decide whether or not his company has a valid claim against a third party, the court will approach the liquidator's application with no such predisposition. While it will still be anxious in such a case to avoid oppression, it will also bear in mind that one of the very purposes of section [236] is to enable the liquidator 'as effectively as possible and…with as little expense as possible and with as much expedition as possible, to complete his function as liquidator…'; and that to assist him in this manner may inevitably involve giving him a degree of advantage which would not be...