A Cautionary Tale for Liquidators

<b>Editor's Note:</b> <i>This month brings news which may shock those
American readers who have had limited exposure to the conduct of litigation
in other countries. The unsuccessful plaintiffs in a large piece of U.K. litigation
have been ordered to pay costs in excess of $150 million to the successful defendant.
Outside the United States, the so-called "American costs rule" (under
which parties pay their own costs of litigation whether they are successful
or not) is often cited as one of the main reasons why plaintiffs in U.S. proceedings
will launch a weak case to see what sort of settlement might be offered. The
theory is, presumably, that defendants might pay something to avoid the costs
of defending cases that may rise slightly above the level of the spurious but
fall well short of the meritorious. Whether this observation is fair or not,
the U.K. litigation against the Bank of England brought by the liquidators of
BCCI is an example of just how ill-advised the "try on" approach can
be in jurisdictions where the loser pays costs of the other side, whether plaintiff
or defendant.</i></blockquote>

<p>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?
</p><p>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.
</p><p>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.
</p><p>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.
</p><p>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 &amp; 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.
</p><p>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.
</p><p>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>i.e.</i>, 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.

</p><p>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 <i>they had known</i>
(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.
</p><p>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 <i>knew</i> 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."
</p><p>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.
</p><p>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.
</p><p>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.
</p><p>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.
</p><p>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.
</p><p>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."
</p><p>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.
</p><p>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.
</p><p>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?

</p><p>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.
</p><p>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."
</p><p>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.
</p>