A Cautionary Tale for Liquidators
On April 12, 2006, in a judgment to deal with costs and other outstanding issues, Mr Justice Tomlinson, a Judge of the English High Court, was highly critical of the claim brought by the English liquidators (the Liquidators) of the Bank of Credit Commerce International (BCCI) against the Bank of England (BoE). The claim alleged misfeasance in public office on the part of the bank in relation to its licensing and supervision of BCCI, a Luxembourg incorporated bank that collapsed in 1991. The judge's criticisms covered not only the merits of the claim itself but also the manner in which it was conducted on behalf of the Liquidators. The claim had been filed in 1993, but it was not until November 2004, when the trial itself had been underway for almost two years, that the claim was abandoned by the Liquidators. The judge ordered that the BoE's costs of defending the claim (estimated to be well in excess of £70 million before interest) were to be paid by the claimants on the so-called indemnity basis, which is the highest basis of recovery of costs that the English courts can order. So how and why did it all go so wrong for the Liquidators, and what lessons can be learned?
First, a potted history of BCCI, whose spectacular collapse in 1991 created worldwide headlines and caused loss to many thousands of small depositors in very many countries. BCCI was founded by Pakistan-born Agha Hassan Abedi in 1972. His first target was Middle Eastern oil money, and BCCI opened a large number of operations in the Middle East. It also had retail branch operations in countries like England, which were often located to attract business from immigrant communities. By 1979, BCCI had opened 35 branches in England, more than any other foreign bank. The BCCI Group's rapid expansion eventually led to it having operations in more than 70 countries, including countries as far-flung as Australia, Botswana, Colombia, Cyprus, Macau, the Philippines, Senegal, and Trinidad and Tobago. But throughout its life, BCCI never shook off its controversial image. Rumours persisted about its business methods, and there were a number of high-profile incidents, including the indictment in 1988 of seven BCCI officials in Tampa, Fla., for money-laundering and drug-trafficking offenses.
In the early 1990s, investigations by BCCI's auditors on behalf of its supervisors revealed problems in its asset base and later (in the first half of 1991) showed that there had been widespread fraud within BCCI, including fictitious loans and the misappropriation of deposits and security given to BCCI. The BCCI Group was shut down in July 1991 following action taken by international banking supervisors initiated by the BoE.
The BoE's role in determining monetary policy is well-known, but perhaps less well-known is the fact that until 2000, when the Financial Services Authority was established and took over that role, it was also responsible for the supervision of all banking and deposit-taking institutions in the United Kingdom. The BoE was not the only banking supervisor involved in the supervision of the BCCI Group, whose geographical reach meant that many other banking supervisors were involved including those in Luxembourg (the home country of its holding company and main operating company), France, Hong Kong, Spain, Switzerland and the United Arab Emirates.
The collapse of the BCCI Group in 1991 led to a spate of litigation in a variety of jurisdictions. Some of the more unusual suits were the so-called "stigma claims." These were claims brought in England by ex-employees of BCCI who sued their ex-employer on the basis that the stigma attaching to the BCCI name following the its collapse had damaged their future employment prospects. But most of the litigation that BCCI was involved in was as claimant rather than defendant, as the Liquidators sought to recover money for its depositors. The Liquidators' targets included the Bank of America (at one time a shareholder in BCCI), Price Waterhouse and Ernst & Whinney (its auditors at various times), the State Bank of India, and the Luxembourg supervisory authority IML. By December 2005, the Liquidators had returned total dividends amounting to $6.2 billion, equating a total return of 81 percent to ordinary admitted creditors.
Probably the largest claim brought by the Liquidators was that against the BoE. The Liquidators had commenced this claim in 1993, and because the BoE has statutory immunity unless it is shown to have acted in bad faith, the Liquidators had to pursue a cause of action alleging dishonesty. They claimed that the BoE had committed "misfeasance in public office"—at that time an obscure and little-used tort.
Much time was spent in complex legal argument as to the definition of what exactly constituted "misfeasance in public office" and, in particular, as to what was necessary to prove as to the mental state of the defendant for such a claim to succeed. Specifically, the BoE contended that the Liquidators had to show not only that it had knowingly acted unlawfully, but also that it had been motivated by a dishonest or bad-faith purpose. Further, the BoE argued that the claim against it should be struck out (i.e., dismissed without the need for a trial) because the Liquidators had no evidence to support an allegation that the BoE had the state of mind that needed to be proved. Both the first-instance judge and the Court of Appeal (by a majority of 2:1) agreed with the BoE that the claim should be struck out.
Finally, the House of Lords (the U.K.'s highest court), in two judgments in 2001, definitively laid down the elements of the tort that had to be proved by the Liquidators. In short, the Liquidators had to prove that BoE officials had acted unlawfully in their supervision of BCCI, and that they had known (or were recklessly indifferent to the fact) that they were acting unlawfully. They also had to prove that the BoE officials had acted dishonestly (or in bad faith) and had known that their unlawful act would probably cause loss to the depositors.
Although the House of Lords fixed a high test for a claim for misfeasance, it overturned the Court of Appeal order dismissing the claim and said that the claim should go to trial. So in mid 2001, the preparations for trial began. The Liquidators' claim that was to be tried was that the BoE had acted unlawfully in granting BCCI a license to operate in the United Kingdom in the late 1970s and in not revoking the license after it was granted. They also alleged that the BoE ought to have taken on the "consolidated supervision" of the BCCI Group worldwide rather than focusing, as it did, on BCCI's U.K. operations. Twenty-three BoE officials were each alleged by the Liquidators to have acted dishonestly in that they were said to have been knowingly and deliberately involved in the unlawful acts over a period of more than a decade. It was further alleged (as it had to be) that the officials not only knew that their behaviour was unlawful, but also that they knew that their unlawful acts would be likely cause loss to depositors. In other words, the Liquidators set out to prove that a large number of BoE officials had acted unlawfully and dishonestly over a period of more than a decade—accusations that were described by Mr. Justice Tomlinson in his April judgment as "an immense catalogue of outrageous behaviour."
The target that was set for the Liquidators in order to succeed against the BoE was therefore a very high one. Not least of the obstacles the Liquidators had to overcome was the inherent improbability that those involved (who were, in many cases, distinguished officials in senior positions in the BoE) would set out knowingly and deliberately to break the law. The Liquidators were not alleging that the officials had been bribed or otherwise stood to gain personally in any way.
The BoE is a document-rich organisation, and it provided the Liquidators with many thousands of volumes of disclosure. It also served witness statements from each of the accused officials still living, all denying any wrongdoing. The statements were vast, exceeding 6,000 pages in aggregate, with some individual statements exceeding 1,000 pages in length. Three retired governors of the BoE served witness statements. In contrast, the Liquidators did not serve any witness statements, presumably because they were unable to find any person able to give evidence in support of their very serious allegations.
The trial commenced in January 2004 and continued for 22 months before it was discontinued by the Liquidators. During those 22 months, the Liquidators' counsel addressed the court in opening speeches for 86 days spanning about six months. The BoE's counsel replied in a speech lasting for 119 days, beginning in July 2004 and ending in May 2005.
Of its 23 possible witnesses, the BoE intended, by the time its counsel had addressed the court at such length, to call only two. The first of these gave evidence for seven weeks after the judge (in a decision that was affirmed by the Court of Appeal) ordered that the witness could not be cross-examined for 10 or more weeks as the Liquidators' counsel intended. The BoE's second witness was in the sixth week of cross-examination when the trial was, without prior notice to the court or to the BoE, abandoned by the Liquidators.
Following that abandonment, the bank applied for the fullest possible recovery of its costs and for the judge to exonerate those of its officials that had faced years of allegations that they had behaved dishonestly and with callous disregard for the interests of depositors in BCCI, the very people they had been seeking to protect. It was this application that led to the April 12 judgment.
The Liquidators' case was described by the judge as "a structure built on occasion not even on sand but on air." The judge was especially critical of the somewhat-casual approach taken by the Liquidators to making allegations of dishonesty, commenting that they "were prepared to make such allegations as suited their purposes at a particular time, without regard to whether for different purposes they were at other times and in other places advancing diametrically inconsistent allegations" and that "allegations of dishonesty were being levelled against officials...for no better reason than that if their conduct was presumed to have been honest it represented an insuperable obstacle to the liquidators providing their case."
Indeed, Mr. Justice Tomlinson said that by late 2004 he had become so concerned about the case that he had consulted the Lord Chief Justice (the most senior judge in the United Kingdom), saying that the case was a "farce" and that it "had the capacity to damage the reputation of our legal system." Regrettably, the judge and the Lord Chief Justice concluded at that time that nothing could be done.
When the proceedings were discontinued a year later, it was only following the intervention of the BCCI creditors' committee and a separate hearing before the Chancellor (another High Court Judge who retained a supervisory jurisdiction over the liquidation) to whom the Liquidators had applied for directions. After a private hearing, the Chancellor concluded that continuation of the litigation was no longer in the best interests of the creditors, and he directed that the action be discontinued. Mr. Justice Tomlinson's comments in his April judgment make it clear that he thought that this step was taken by the Liquidators far too late.
The abject failure of the case against the BoE will stand as a model for how badly wrong a litigation strategy pursued by liquidators can go. What lessons can be learned?
First, it is clear that the judge thought that the Liquidators (and those advising them) were too slow to realise the hopelessness of the case they were pursuing. There were various opportunities for them to have done so, not least when the BoE disclosed contemporaneous documents, many of which the judge later found were completely inconsistent with, and put a lie to, the Liquidators' allegations. Another was when the BoE's opening comments during the trial had exposed what the judge described as the "myriad hopeless inconsistencies and implausibilities in the Liquidators' case." It is clear that liquidators, suing in a representative capacity, should continuously monitor and critically assess litigation they are bringing and that they be prepared to abandon that litigation (regardless of the costs consequences) if it has no realistic prospect of success.
Secondly, the judge was critical of two aspects of the Liquidators' use of the press in the litigation. The Liquidators had actively courted publicity with respect to their claim (employing a public relations agency for the purpose), but he considered that the material provided to the press to be so selective that it constituted "a cynical and grotesque operation." He was also critical of the Liquidators' use of a public relations campaign to embarrass the BoE in order to put pressure on it to capitulate and agree to some form of compromise settlement with the Liquidators. In their press release issued at the time of the discontinuance, the Liquidators sought to characterise the BoE's unwillingness to succumb to the pressure of the trial and the adverse press coverage that accompanied it as unreasonable and uncommercial. The judge described this press release as "lamentable."
Finally, the role of BCCI's creditors' committee was crucially important. The creditors' committee initiated the process that led to the discontinuance by resolving, in September 2005, that the claim should be discontinued. This appears to have led the Liquidators to seek directions from the Chancellor. Had the creditors not intervened, it is far from clear that this step would have been taken. It is vitally important that the creditors' committee in circumstances such as these be kept well-informed by the liquidators who, after all, are acting on their behalf. In large cases, it will usually be appropriate for the committee to be independently advised so that the creditors can critically assess the course of action being pursued in their name by the liquidators and, if necessary, provide meaningful advice, on an ongoing basis, in relation to the wisdom of it. A strategy that may have appeared well-advised may become risky or problematic as circumstances change and matters develop, and it is important that the creditors' committee be kept abreast of developments so that its views are soundly based in fact and its advice meaningful.