Bank to be brought to account over BCCI collapse

Liquidators of failed lender seek £1bn damages in High Court case starting next month

As this year's festive celebrations pass, and new year resolutions are still uppermost in many people's minds, there will be plenty in the City who will be looking into the past. They will be taken, via a high-profile court case, back more than 30 years to the establishment in Britain of a bank which was seemingly a great success story, before it collapsed dramatically in the biggest corporate failure in its sector.

The case, to be heard in the same High Court room as the recent inquiry into the death of the government scientist David Kelly, will see the recounting in meticulous detail of the story of Bank of Credit and Commerce International.

The bank, set up in Pakistan and with clients all over the Middle East and America, first came to Britain in 1972. Having become one of Britain's most popular lending and savings institutions, its smoky glass and stainless steel fittings a familiar sight on high streets across the country, it imploded nearly 20 years later, in July 1991. Its collapse was the result of over-extending itself through a series of massive loans to borrowers such as the Pakistani Gokal family dynasty, who were then unable to pay up.

Those in the dock when the case begins on 12 January will not be the colourful characters who set up BCCI, nicknamed over the years the Bank of Corruption and Criminal Incompetence, allowing it to fall apart owing $10bn (£6bn) to more than 80,000 depositors.

Instead it will be the Bank of England which must take the stand, to defend itself against charges of dishonesty in the way it regulated BCCI, and to ward off a claim for compensation of nearly £1bn from creditors.

If the liquidator bringing the case is delving into the past, it is using a completely unprecedented approach to the law to do so. The Bank no longer regulates the financial sector, but it did in the 1980s and, as such, has immunity against any action brought on the grounds of incompetence. That is just as well, as even the Bank itself privately admits some awful mistakes were made in the way BCCI was overseen.

The case will instead be fought over whether the Bank was guilty of misfeasance in public office. To prove it, the liquidator, Deloitte & Touche, will have to persuade the judge that the Bank was not only incompetent, but also reckless and even dishonest in the way it oversaw the company.

This much harder legal test would, if proved, be a devastating blow to one of the world's pre-eminent central banks and it is a slur that the Bank's current Governor, Mervyn King, is prepared to go to great lengths to fight, despite never being involved personally in the BCCI fiasco. Mr King has given the go ahead for funds to meet spiralling legal costs and to calling some of the Bank's former grandees, including the former governor Sir Eddie George out of retirement to take the stand in its defence.

Until now, public opinion and most legal judgments have come down in favour of the Bank. The liquidator has also attracted criticism for ramping up costs by fighting in various courts for the Bank to disclose reams of documents it claims are relevant to the case.

The tide could, however, be turning. The liquidator published accounts earlier this year showing it had so far managed to claw back 75p in the pound for creditors from various parts of the BCCI empire.

A surprise decision by the House of Lords in 2001 has also given renewed hope on the legal front. The ruling forced the Bank to hand over information which Lovells, acting for the creditors' side, hopes will support allegations that up to 21 employees of the Bankflouted their duty.

Much of the case - which could take a year to hear - will centre on arguments by the liquidator that BCCI was a can of worms which the Bank simply did not want to take responsibility for. It will say the Bank hid behind the pretence that BCCI's principal place of business was in Luxembourg, because that was where its registered office was, and it was therefore the responsibility of that country's regulators.

That could be tricky. Documents to be aired in court, including reports from the late Brian Gent, the former head of the Bank's banking supervision division, will show that even some of the Bank's own officials thought the fact that BCCI had more than 40 branches spread across Britain, and its nerve centre in Leadenhall Street in the City, demonstrated that the Luxembourg incorporation was "something of a fiction".

Another line the liquidators will pursue is that the Bank shied away from clamping down on BCCI because it would have been politically awkward. Here was a lender which, unlike the stuffy high street clearing banks, had attracted customers in their droves from migrant communities from countries such as Pakistan and India.

And at the other end of the scale, money from wealthy Middle Eastern businessmen was passing through BCCI, very often into London's financial markets. Being seen to be unfriendly to either group, it will be argued, would have been unsavoury for the Bank.

But there are obvious weaknesses in the liquidators' argument. It will be hard to convince the judge, Mr Justice Tomlinson, that 21 individuals, some of whose roles did not even overlap, acted apparently on their own accord to deceive a series of Bank governors about the true, dire, state of BCCI.

Deloitte will probably not have to prove the allegations of dishonesty against all 21, although if the case is to have any legs at all it will probably have to be able to persuade the judge that at least most of the seven more senior individuals being accused were guilty of misfeasance.

Deloitte's case also relies on extracts from documents. Some of those will no doubt be highly embarrassing for the Bank, butit will argue that its open and honest regulatory regime is the very reason papers exist from the time, from officials expressing strong views about BCCI's health.

Even if the liquidators manage to prove misfeasance, it could still mean the creditors do not see any cash. The Bank could argue it was BCCI's Pakistani founder, Hassan Agha Abedi, and his executives who brought on the downfall of BCCI, not the regulator, and therefore it should not be liable to reimburse depositors.

That might be another legal case for another day, and one the lawyers might secretly not be too upset about because of the fees it could generate.

But in the meantime, the prospect that BCCI's final legacy could be to stain the reputation of the Bank of England and some distinguished individuals who worked there could be occupying a few minds as the Christmas celebrations draw near.

THE LEGAL GRAVY TRAIN

The liquidators are accusing 21 employees of the Bank of misfeasance over a 20-year period. Many have now left the bank, either by retiring or moving to other jobs - including to the current banking regulator, the Financial Services Authority.

It is 11 years since the liquidator of BCCI issued a writ against the Bank of England. Since then the High Court, the Court of Appeal and the House of Lords have all heard aspects of the case.

The new hearing in the High Court, which begins on 12 January, is likely to take a year, with the opening submission by the liquidator alone scheduled for an eight to 12-week run.

Legal costs so far are estimated at £20m and could rise to £50m by the end of the case. The Bank alone is spending about £1m a month on its defence.

The paperwork is also immense. The Bank had to disclose more than 300,000 documents and there will be 125 lever arch files for reference during the trial.