Morris v Bank of India [2005] EWCA Civ 693

The liquidators of BCCI sought contribution from Bank of India under section 213 Insolvency Act 1986 for fraudulent trading. The central issue was whether Mr Samant's blind-eye knowledge of BCCI's fraud could be attributed to Bank of India. The Court of Appeal upheld the finding that Bank of India was knowingly a party to fraudulent trading through attribution of its senior employee's knowledge.

Facts

BCCI collapsed in 1991 with a deficiency of approximately US$10 billion. The Central Treasury Division of BCCI, operated by Mr Akbar under the direction of Mr Abedi and Mr Naqvi, perpetrated systematic fraud to conceal substantial losses by manipulating account balances. Between 1981 and 1985, Bank of India (BoI) entered into six transactions with BCCI involving back-to-back deposits and loans through Maram Trading Company. These transactions were negotiated by Mr Samant, BoI’s Chief Manager for UK and European branches, with Mr Mewawalla of BCCI. The funds received by BCCI were credited to the heavily overdrawn accounts of the Khalil group to create a false impression that debts were being serviced.

The Transactions

Each transaction followed a similar pattern: BCCI placed a fixed deposit with BoI at a fixed rate; BoI was required to make a loan for the same period to Maram at a rate 0.125% above the deposit rate; BCCI guaranteed the loan; at maturity, the arrangements were reversed. The purported rationale given to Mr Samant was that BCCI wished to improve its earnings to advances ratio, though this explanation was demonstrably false upon examination of BCCI’s published accounts.

Issues

The principal issues before the Court of Appeal were: (1) whether the trial judge was correct to find that Mr Samant had blind-eye knowledge of BCCI’s fraud from the second transaction onwards; (2) whether Mr Samant’s knowledge should be attributed to BoI for the purposes of section 213 of the Insolvency Act 1986; and (3) whether BoI’s participation was sufficiently connected to BCCI’s fraudulent trading to attract liability.

Judgment

Mr Samant’s Knowledge

The Court of Appeal upheld Patten J’s finding that Mr Samant possessed blind-eye knowledge of BCCI’s fraud. The court noted multiple factors supporting this conclusion: the transactions broke every rule of lending; Mr Samant failed to make any enquiries about the borrower or the true purpose of the transactions; the explanation given for BCCI’s participation was inconsistent with its published accounts; and Mr Samant’s performance as a witness was found to be unreliable and untruthful.

“I do have real concerns about the way in which these transactions were handled by BoI’s Head Office… The Board of BoI had, through Mr Shukla, a real concern about the purpose of these transactions at the time of both the first and second transactions. But they were content to delegate the supervision of the transaction and the ultimate decision whether to proceed to Mr Samant.”

Attribution of Knowledge

The Court applied the principles from Meridian Global Funds Management Asia Limited v Securities Commission [1995] 2 AC 500, holding that attribution of knowledge to a company under section 213 requires consideration of the policy and purpose of the legislation. Lord Hoffmann’s approach was quoted approvingly:

“In such a case, the court must fashion a special rule of attribution for that particular rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc of the company?”

The court held that limiting attribution to the board would emasculate the effectiveness of section 213. Mr Samant was the person with authority to deal with BCCI in respect of the relevant transactions. The board gave him blanket permission to proceed with borrowers nominated by BCCI and accepted his recommendations without proper scrutiny.

Factors for Attribution

The court identified relevant factors for attribution under section 213: the agent’s seniority within the company; the agent’s significance and freedom to act in the context of the particular transaction; and the degree to which the board was informed and put on inquiry. Applying these factors, attribution was clearly appropriate given Mr Samant’s senior position, his free hand in negotiations, the suspicious nature of the transactions, and the board’s ready acceptance of unconvincing explanations.

Implications

This decision provides important guidance on the attribution of knowledge to companies under section 213 of the Insolvency Act 1986. It confirms that the directing mind and will test is not the exclusive basis for attribution; the policy of the legislation requires consideration of who had authority to conduct the relevant transactions. Companies cannot escape liability by delegating decisions to senior managers whilst remaining wilfully ignorant. The case also confirms that companies can be liable as outsiders to fraudulent trading where their employees possess the requisite knowledge, even where board members are personally innocent. The decision emphasises the compensatory purpose of section 213 as distinct from criminal liability under section 458 of the Companies Act 1985.

Verdict: The appeal and cross-appeal were both dismissed. Bank of India was held liable under section 213 of the Insolvency Act 1986 to contribute US$82,302,941 plus interest and costs to BCCI’s assets.

Source: Morris v Bank of India [2005] EWCA Civ 693