QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| (1) THREE RIVERS DISTRICT COUNCIL AND OTHERS
- and –
(2) BANK OF CREDIT AND COMMERCE INTERNATIONAL SA
|- and -
|THE GOVERNOR AND COMPANY OF THE BANK OF ENGLAND
Nicholas Stadlen QC, Mark Phillips QC, Bankim Thanki QC, Ben Valentin, Henry King and Tom Smith (instructed by Freshfields Bruckhaus Deringer) for the Defendant
Hearing dates: 30 and 31 January 2006
Crown Copyright ©
Mr Justice Tomlinson:
"MR POLLOCK: My Lord, as your Lordship knows, the liquidators are officers of the court and from time to time seek the guidance and direction of the Chancellor. The liquidators applied to the court for directions. That application came before the Chancellor and was heard over a period of three days. The Chancellor heard the arguments of the liquidators, the Luxembourg liquidators and the English Liquidation Committee. In a reserved judgment given earlier today, he held that it was no longer in the best interests of the creditors for the litigation to continue, and he directed that the action be discontinued……. The proceedings before the Chancellor are private, but he has authorised a statement in these terms, and I can say nothing more….. without running the risk of being in contempt of court."
MR JUSTICE TOMLINSON: I see. So the proceedings are at an end, subject to any further applications that may be made?
MR POLLOCK: Yes, I should simply say that any such applications, my Lord, would have to be made in due course, and in proper form, because, of course, of the necessity of ensuring that the Chancellor has an opportunity to give any such directions as he would wish.
MR JUSTICE TOMLINSON: Right. Do I follow from that that the formal position is that you will serve notice of discontinuance?
MR POLLOCK: My Lord, we may already have done so. If not, it is being done. I think, as we speak, so I would simply ask your Lordship to rise so that we may clear our stuff away and leave, since we in fact have no more instructions, we are no longer instructed to stay here."
"Unrepentant to the last, they [the liquidators] yesterday cynically blamed both the length and costs of the case on the supposed unreasonableness of the Bank, and tried to make out that the Bank's refusal to negotiate a commercial settlement was in some way a dishonourable approach to the matter. Dear oh dear."
One passage in that Press Release read as follows: -
"The Bank has invested a very substantial amount of money in its defence and this has increased the costs required to be spent by the Liquidators. The Bank's own costs have been running at approximately double the level of the Liquidators' costs. The case has continued far longer than anticipated, with far greater costs than expected, and it could continue for several years to come. The Bank has made it very clear that normal commercial considerations do not apply to this issue and it will not negotiate."
In the Notes for Editors there appeared the following passage: -
"The Liquidators have previously made a number of abortive attempts to negotiate a settlement. The Bank's position was that it would not negotiate any form of compromise."
The inference which I derive from this document is that the liquidators pursued the claim for the length of time which they did in the belief, expectation or hope that the Bank would ultimately agree some form of compromise settlement in order to avoid the criticisms and embarrassment to which it would be exposed in a public trial. The public relations campaign was obviously designed to put pressure on the Bank to capitulate in that fashion.
The Bank's application after the liquidators' discontinuance
"1. That the Bank is entitled to be paid by BCCI SA (in liquidation) ("the Claimants") all of its outstanding costs of the action (save for those listed in the Schedule hereto) on an indemnity basis on each of the following grounds and/or for such other reasons as to the Court seem just:
(i) the claim, in terms of its nature, scope and the manner in which it was conducted by the Claimants was exceptional and out of the norm;
(ii) the allegations made by the Claimants against the Bank and its officials were of the utmost gravity but were without any proper foundation in evidence or logic;
(iii) the Claimants' case, which had closed over a year before the action was discontinued, was without merit and would, if the matter had proceeded to judgment, have resulted in a resounding defeat for the Claimants;
(iv) the claim was framed with a wide and nebulous ambit and its basis shifted repeatedly as allegations were added, abandoned or reformulated in a manner which obscured the case which the Bank had to meet;
(v) numerous allegations were advanced which were inconsistent and/or scandalous and/or irrelevant and/or unpleaded;
(vi) the Claimants themselves accepted that some of the serious allegations of dishonesty made against individual Bank officials were only based on slender evidence and they made no attempt at trial to make good many of those allegations;
(vii) numerous documents of fundamental importance to central issues in the action, which were wholly inconsistent with the Claimants' case, were not drawn to the attention of the Court by the Claimants, notwithstanding that they were available to them;
(viii) the Claimants advanced for six months through one of their Leading Counsel a factual case which, even if it had been proved, would not, applying the legal submissions advanced by another of their Leading Counsel, have established misfeasance in public office or enabled the Claimants to succeed;
(ix) the manner in which the claim was conducted was inappropriate, including the unreasonable and inhumane approach to the length of cross examination, the priority which appears to have been given to obtaining a commercial settlement of the action and the offensive treatment of the Court, the Bank's officials, former officials and witnesses, the Bank and the Bank's legal representatives and other natural and legal persons involved in some way or other with BCCI SA or its associated companies;
(x) notwithstanding the absence of any proper foundation for the serious allegations against the Bank and its officials, the Claimants deliberately courted publicity for such allegations and for other matters calculated to embarrass the Bank before and during the trial; and
(xi) notwithstanding their discontinuance of the action, the Claimants failed to offer any apology to the Bank or to the Bank's officials or witnesses for the inconvenience and distress caused by the pursuit of their claim over the preceding twelve years, or to withdraw their allegations of dishonesty and acknowledge that they were unfounded, but sought instead publicly to criticise the Bank for the length of time which the claim had taken to reach the point at which it was eventually abandoned and also for failing to negotiate a compromise of the action.
2. That the Claimants do pay to the Bank all of its outstanding costs of the action (save for those listed in the Schedule hereto) on an indemnity basis, such costs to be the subject of a detailed assessment, if not agreed.
8. That the Claimants do pay the Bank's costs of this application on the indemnity basis, to be the subject of an assessment, if not agreed.
The Bank invites the Court to state that the allegations against the Bank and its officials and former officials were unfounded and wholly unsupported by the evidence and should not have been made and/or maintained by the Claimants and to give reasons for that conclusion."
The indemnity basis of assessment
Correspondence between the issue of the Bank's application and the hearing of the application on 30 and 31 January 2006
"We do not see any basis on which it is appropriate for indemnity costs to be awarded in relation to any parts of the action prior to the end of 2002 or early 2003 (being the appropriate date, on your analysis, on which it should have become apparent to the Claimants from the documents disclosed by the Bank that the action should have been discontinued).
We comment briefly on the "invitation" to the court contained in paragraph 8 of your client's application. We do not see on what basis the court has jurisdiction to entertain such an application. If the Bank pursues this matter it does so at its own risk as to costs and the liquidators should under no circumstances be liable for any further costs in connection with such an application."
"Whilst the liquidators have now made an open offer agreeing the Bank's claim for costs in its entirety they wish to make it plain that, contrary to what appears in the Bank's written submissions, they do not concede that the Bank is entitled to such an order by virtue of the matters advanced in paragraph one of the application or in the submissions themselves. Rather, the liquidators and the Liquidation Committee simply wish to rule a line under this litigation.
We will deal separately with the invitation to make a statement exonerating the Bank and its officials, with the claim for the ongoing costs of that invitation and with the suggestion that the judge ought to give assistance to the Costs Judge."
"The purpose of this letter is to inform His Lordship as to the current state of affairs in these proceedings.
We attach a copy of an open letter to Freshfields dated 14 December 2005 by which the Claimants have agreed to all the financial provisions as to costs requested by the Bank in its application up to 9 December 2005. The Claimants have agreed to pay the Bank's costs of its application on an indemnity basis up to that point, i.e. the date upon which the Bank's written submissions were served. There is therefore no outstanding contest as to costs and the action is at an end.
As regards the Bank's invitation to His Lordship to conduct a further hearing to accede to the invitation at the end of the Bank's application Notice dated 25 November 2005, the position is as follows.
Now that agreement has been reached on the financial provisions consequent upon the discontinuance, that is an end of this residual aspect of the proceedings and the Court no longer has any jurisdiction for any further hearings to deal with the Bank's invitation or to make a costs order in respect thereof. It follows from the fact that proceedings, including issues of costs, are at an end, that the Claimants have no continuing liability to the Bank under paragraph 8 of the Bank's application after 9 December 2005. They also reserve the right to object before the Costs Judge to much of the cost of the 350 pages of submissions served on us on 9 December 2005 which go well beyond what was required to deal with the basis of assessment of those costs which our clients had not agreed in our open letter of 28 November 2005 to pay on the indemnity basis.
In the event that the Court concludes both that it has jurisdiction and that it is proper to entertain the Bank's invitation, the English Liquidators of BCCI SA find themselves in the position that they do not have the required sanction to take part and it is plain to the Liquidators that there is no realistic prospect of their obtaining such sanction. In particular the Claimants have no sanction to spend any money on:
(a) filing evidence; (b) answering the Bank's written submissions dated 9 December 2005; and
(c) appearing in court.
It is obvious from merely glancing at the index to the 350 pages of submissions (not counting the file of annexures) that any effective answer to that document would require work by the Claimants and their full legal team on the scale of what would have been needed for the purposes of their final submissions at the end of the trial.
On any view, as at 2 November 2005, this was a part-heard case in which the Claimants had not yet replied to the Bank's lengthy defence argument. The circumstances of this case are therefore entirely different from those in the case law relied on by the Bank.
In these circumstances it is respectfully suggested that His Lordship should conclude that he is functus and that he therefore lacks jurisdiction to conduct the process which the Bank has invited him to undertake. Even if His Lordship were to take the view that he retains some jurisdiction he should conclude that it would be impossible for him to conduct the process on any fair or judicial basis. In any event, we note that His Lordship has already made certain remarks at the hearing on 2 November 2005 intended to exonerate Mr Cooke and the other Bank officials.
In paragraph 8 of the application, the Bank seeks the costs of the proceedings after 9 December 2005 up to the hearing in January next year. Given, as noted above, that these proceedings are at an end and there is no jurisdiction to deal with the Bank's invitation, alternatively that it would not be appropriate for him to do so, the question of these costs simply does not arise.
Finally, we address Section H of the Bank's written submissions (paragraphs 546 to 550) in which the Bank seeks further "assistance" for the Costs Judge. We maintain that it would not be appropriate for his Lordship to make generalised remarks designed to assist the Costs Judge. The Claimants accept that this was an extremely complex and weighty case but, beyond stating that accepted fact, we do not see what detailed assistance His Lordship could offer without conducting the type of enquiry which will be undertaken by the Costs Judge. One of the main issues will be whether it was appropriate for the Bank's legal team to incur costs at a level which was so very considerably higher than those of the Claimants. General statements by his Lordship will be of no real help in the detailed assessment and, in any event, no "assistance" furnished by his Lordship would bind the Costs Judge if he was otherwise of the view, for example, that the costs incurred by the Bank were neither reasonable nor reasonably incurred."
"As you will see, the Claimants' position remains as set out in our letter to you of 23 December 2005 and they will not be represented at the hearing on 30 January 2006."
So far as material, the letter to Freshfields read: -
"2. The relief sought by the Bank in paragraph 1 of its application is otiose given that no issue arises in relation to the basis of assessment of the Bank's costs, all of which have been agreed up to 9 December 2005. The Bank's claim for costs after that date is purely circular. It seeks to claim them on the basis that there are outstanding issues when in truth there are none save for the one minor point which we address below (assistance to be given to the Costs Judge). The Bank originally sought exoneration for itself and its officials in a judgment in respect of its claim for indemnity costs. Now that the basis of assessment has been agreed by the Claimants, it seeks to manufacture an issue in order to prolong these proceedings.
3. Your clients are maintaining their "invitation" to the Judge to exonerate the Bank and its officials and, in support of that application, you rely upon two cases ( Donovan and Jordan) which are far removed from the facts in the present case. In Donovan, the parties had invited the Judge to dismiss the action as a judicial act. In those circumstances, the Judge clearly had continuing jurisdiction. Moreover, as we understand it, in Donovan all of the evidence of the main witnesses had been completed. In Jordan, the Judge had finalised his judgment and was about to deliver it following completion of all of the evidence and closing submissions at the time the notice of discontinuance was filed. We are not aware of any case in which there has been a separate hearing 3 months after an action has been discontinued and in circumstances where the evidence had not even been completed. Even if the Judge does have jurisdiction to hear this matter, it appears to us that the comments which he has already made amount to the exoneration which the Bank seeks.
4. In reality, there is only one small point outstanding and that is the Bank's request that guidance should be given to the Costs Judge. Given that the Liquidators do not have sanction to attend the hearing on 30 January 2006, this is a matter which could easily be dealt with on paper. Mr Justice Tomlinson now has the parties' submissions. In such circumstances there is no need to incur additional costs."
I note that the liquidators in this letter appear to accept that I do at the least retain jurisdiction to give guidance to the Costs Judge.
The brief words of exoneration on 2 November 2005
"I will just say this, Mr Cooke, there have been some very, very serious allegations made against you, and indeed against your colleagues. I have been studying the documents in this case now for a very long time, I have heard detailed submissions on them from both sides, I have heard you give evidence for, I think it is now twenty days, and I heard your former colleague Mr Quinn before you give evidence for twenty eight days.
Although obviously I would have to consider further developments, had the trial continued, although obviously I would have had to consider further submissions in due course, my careful study of the documents and my consideration of them, and of all the inherent probabilities, and my consideration of Mr Quinn's evidence and of your evidence, have left me in no doubt that the very serious allegations of impropriety and dishonesty against you are wholly without foundation………………………………….......
it follows, as night follows day, that the observations I have made about Mr Cooke and Mr Quinn apply equally to every officer of the Bank. I have seen no foundation for any allegation of dishonesty against any officer of the Bank at any stage."
I also said this at the end of Mr Stadlen's remarks on that day: -
"…..I propose to say very little this morning for a number of reasons, but mainly because, as I anticipated would be the case, I am likely to be seised of yet further applications in which I shall have to consider the conduct of this action as a whole………..I would just say this, that it has been a matter of surprise to me for about a year now that the action was being pursued……."
Does the court have jurisdiction and should it exercise it?
"So where, then, does the public interest lie? In my judgment, there can only be one answer. Jordan has chosen to make serious allegations against a public company and to question the veracity and motivation of one, or possibly two, indeed of its senior officers. It has done so in a public arena. It has done so in pursuit of a claim for millions of pounds. As Jordan must also have expected, it has done so in circumstances which were bound to attract, and have attracted, considerable media interest. Now, in effect, Jordan says no one should be told the outcome. "At the very last second, we have found a way in which we can run up the white flag and stifle the court from publicly announcing its decision on the allegations we have made [and] pursued to date."
In my judgment that is designed to create a serious injustice, which this Court should not tolerate. Vodaphone and its officers are entitled to know the conclusions that the Court has reached on the matters alleged against them. The media also has a legitimate public interest in being informed of the outcome of the matter on which it has reported. Vodaphone and its officers are entitled, if so advised, publicly to comment on that outcome. If they are vindicated by the judgment, it would be unjust that they should not be able to have that publicly established.
Unlike the Prudential case, where there was a countervailing public interest in supporting settlements, I can discern no public interest at all which would be served by the course which Jordan advocates. I would add that there are features of the evidence and conduct of these proceedings which of themselves make it in the public interest that the judgment should be delivered.
In my judgment, therefore, not only am I entitled to proceed to hand down my judgment but it is right that I should do so."
The circumstances in which indemnity costs may be awarded
"(4) In deciding what order (if any) to make about costs, the court must have regard to all the circumstances, including –
(a) the conduct of all the parties;
(b) whether a party has succeeded on part of his case, even if he has not been wholly successful….
(5) The conduct of the parties includes -
(a) conduct before, as well as during, the proceedings….
(b) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;
(c) the manner in which a party has pursued or defended his case or a particular allegation or issue……….."
I have already referred to the guidance given by Lord Woolf in the Excelsior case as to the circumstances in which an indemnity order may be appropriate – where there is some conduct or some circumstance which takes the case out of the norm. I agree with the Bank that the authorities, including IPC Media Ltd v. Highbury Leisure Publishing Ltd  EWHC 283 (Ch)(Laddie J), Cambridge Antibody Technology Ltd v. Abbot Biotechnology Ltd  EWHC 357 (Ch)(Laddie J), Amoco (UK) Exploration Co v. British American Offshore Ltd  BLR 135 (Langley J) and Cepheus Shipping Corporation v. Guardian Royal Exchange Plc  1 LL Rep. 647 (Mance J) demonstrate that the following principles should guide the Court's determination whether the Claimants should be required to pay the Bank's costs of the action on an indemnity basis: -
(1) The court should have regard to all the circumstances of the case and the discretion to award indemnity costs is extremely wide.
(2) The critical requirement before an indemnity order can be made in the successful defendant's favour is that there must be some conduct or some circumstance which takes the case out of the norm.
(3) Insofar as the conduct of the unsuccessful claimant is relied on as a ground for ordering indemnity costs, the test is not conduct attracting moral condemnation, which is an a fortiori ground, but rather unreasonableness.
(4) The court can and should have regard to the conduct of an unsuccessful claimant during the proceedings, both before and during the trial, as well as whether it was reasonable for the claimant to raise and pursue particular allegations and the manner in which the claimant pursued its case and its allegations.
(5) Where a claim is speculative, weak, opportunistic or thin, a claimant who chooses to pursue it is taking a high risk and can expect to pay indemnity costs if it fails.
(6) A fortiori, where the claim includes allegations of dishonesty, let alone allegations of conduct meriting an award to the claimant of exemplary damages, and those allegations are pursued aggressively inter alia by hostile cross examination.
(7) Where the unsuccessful allegations are the subject of extensive publicity, especially where it has been courted by the unsuccessful claimant, that is a further ground.
(8) The following circumstances take a case out of the norm and justify an order for indemnity costs, particularly when taken in combination with the fact that a defendant has discontinued only at a very late stage in proceedings;
(a) Where the claimant advances and aggressively pursues serious and wide ranging allegations of dishonesty or impropriety over an extended period of time;
(b) Where the claimant advances and aggressively pursues such allegations, despite the lack of any foundation in the documentary evidence for those allegations, and maintains the allegations, without apology, to the bitter end;
(c) Where the claimant actively seeks to court publicity for its serious allegations both before and during the trial in the international, national and local media;
(d) Where the claimant, by its conduct, turns a case into an unprecedented factual enquiry by the pursuit of an unjustified case;
(e) Where the claimant pursues a claim which is, to put it most charitably, thin and, in some respects, far-fetched;
(f) Where the claimant pursues a claim which is irreconcilable with the contemporaneous documents;
(g) Where a claimant commences and pursues large-scale and expensive litigation in circumstances calculated to exert commercial pressure on a defendant, and during the course of the trial of the action, the claimant resorts to advancing a constantly changing case in order to justify the allegations which it has made, only then to suffer a resounding defeat.
The liquidators' case in a nutshell
"Branches of Overseas Deposit-Taking Institutions.
15. Branches of overseas deposit-taking institutions operating in the United Kingdom will, like deposit-takers incorporated in this country, need to hold a licence or be recognised as a bank in order to take deposits. The Bank will be concerned to ensure that they conform to appropriate standards in the conduct of their business, but the arrangements for their prudential supervision will remain primarily a matter for the supervisory authorities in the country of origin. Branches of overseas deposit-taking institutions will not be required to have separate endowment capital in the UK. Branches of overseas deposit-taking institutions with head offices elsewhere in the EEC which are licensed in the UK may be entitled to use the banking names by which they are known in their country of origin."
What this reflects is that the supervision of branches of overseas banks was not a primary mischief sought to be addressed by the 1979 Banking Act. There is no evidence that Parliament intended in that regard to deviate from the principles upon which the existing international supervisory regime was based. The country of origin of BCCI SA was Luxembourg. Nothing in the White Paper or said in debates in Parliament alerted the Bank to any suggestion that by using in s.3(5) the expression "principal place of business" Parliament intended to introduce a criterion which differed from the country of origin of the institution. It is however the use of that expression in s.3(5) which forms the bedrock of the liquidators' allegation that the Bank acted dishonestly. The draft of the Banking Bill published in November 1977 used this formulation. The liquidators say that Mr Peter Cooke, Head of Banking Supervision and others agreed as from about the middle of 1978 (this was something of a moveable feast) that the application of BCCI SA when in due course it was received would have to be dealt with corruptly. The liquidators say that Mr Cooke and others realised that, whatever its place of origin, the "principal place of business" of BCCI SA was by then to be found in London because of the extent to which its central mind and management was to be found in its Leadenhall Street branch in the City of London. They therefore determined that this conclusion would not be acknowledged. It would become a "non-issue." The motive alleged for this approach seems to be two-fold. One alleged motive is that the Bank did not wish to have to refuse a licence to BCCI SA. It is suggested that, had the Bank attempted to satisfy itself about the relevant criteria without any entitlement to rely upon the satisfaction of the Luxembourg authorities as in certain respects determinative, it would have been unable to do so, but that it was unwilling to rock the international supervisory boat in the manner which a refusal would involve. It was suggested that this would involve an affront to a fellow member of the international supervisory club, Luxembourg. Secondly it is suggested that Mr Cooke and others thought that if they acknowledged that the "principal place of business" of BCCI SA was in London and yet wished to grant it a licence, they could only satisfy themselves as to the initial fulfilment of the criteria and carry out their supervisory function thereafter by assuming supervisory responsibility on a consolidated basis for the BCCI Group as a whole, including BCCI Overseas, the Cayman Islands company. This was something which, allegedly, they were determined not to do. It was the "running away from" this alleged responsibility which formed the backdrop for all of the liquidators' attack upon the Bank's conduct.
"It is true that this litigation is concerned with events starting in the 1970s and continuing until the collapse of BCCI in 1991. In many ways, the most important of those events in terms of the Claimants' case is the licensing of BCCI SA in 1980 and the process which led thereto.
It is said by the Claimants that the Defendants acted deliberately unlawfully in licensing BCCI SA in that they relied upon assurances from the Luxembourg Supervisory Authority in circumstances where they knew that the statute did not permit such reliance.
It is said that they did so either knowing that, in consequence of their unlawful action, depositors in BCCI SA would probably suffer loss, or recklessly knowing that there was a serious risk of such a consequence.
I should emphasise that I am only summarising. The precise formulation of the tort is a matter of controversy and I shall need, in due course, to address the issue in detail and with care. The foregoing will suffice for present circumstances and is not intended to be definitive.
It is the need to conceal the unlawfulness of that initial exercise which is said to have informed, in large part, the conduct of Bank officials thereafter right through until ultimate closure of BCCI in 1991.
The liquidators do, quite independently, assert that the Bank's supervision of BCCI SA was itself conducted in a knowingly unlawful manner.
Put broadly, it is said that the Bank should have regarded itself as the primary, parent supervisor of BCCI SA, rather than simply the host supervisor of branches of an overseas bank, and that, in conducting the supervision of BCCI SA, the Bank should have taken greater steps to satisfy itself as to the soundness of the BCCI Group as a whole, of which BCCI SA and its branches in the UK formed an interdependent part. Again, I stress that this is intended only as a broad, non-definitive summary.
It is the desire to avoid the responsibility for conducting this supervisory exercise which is said to have provided a, and perhaps the principal motive for dishonestly treating BCCI SA as an overseas bank in 1980 and for dishonestly expressing satisfaction with the nature and scope of Luxembourg supervision of BCCI SA, rather than acknowledging that, as is alleged, its principal place of business was in London, or not in Luxembourg, and acknowledging that the Bank for that reason, as is alleged, bore a statutory responsibility for assuming the primary supervisory role. Again, I summarise.
It can be seen, therefore, that it is of the utmost importance to the liquidators to establish that the licensing exercise in 1980 was conducted in a knowingly unlawful manner.
So far as concerns the post-licensing claim, the unlawfulness lies in part in the failure properly or adequately to include the Group as a whole within the supervisory purview of the Bank, but it is the reluctance ever to undertake that task which is said to have induced Bank officials to act unlawfully in the first place.
Whilst that reluctance is said also to have informed the Bank's post-licensing conduct, much of what Bank officials did throughout the post-licensing period has been attacked as motivated by a desire to conceal from those outside the Bank's banking supervision division the known unlawfulness of the licensing exercise; in the jargon of the case, the guilty secret."
The failure to revoke claim
"The case as it has been presented before me has assumed a somewhat different aspect. The post-April 1990 claim has not been abandoned, but the Claimants recognise that, unless they can demonstrate that the Bank had been guilty of misfeasance, or perhaps misconduct, before then, their prospects of demonstrating some quite independent misfeasance in that period must be slight.
Mr Pollock expressly so acknowledged in relation to the post-December 1990 period on Day 76, pp.180-181, and, indeed, on Day 78 at p.13, where he suggested that the Bank must have thought that Abu Dhabi would do whatever was necessary.
If that is good for the post-December 1990 period, it must logically be good also for the post-April 1990 period. I have already observed that I do not know what case, if any, is going to be put to Mr Quinn in respect of this period on the assumption that no earlier misfeasance or misconduct had occurred."
"1 MR JUSTICE TOMLINSON: Again, I will be corrected if I am
2 wrong, but Mr Pollock effectively abandoned the failure
3 to revoke claim.
4 MR STADLEN: He did, yes.
5 MR JUSTICE TOMLINSON: And I do not think that Mr Pollock
6 attempted to identify any single day, or any single
7 incident, in the light of which it is the liquidators'
8 case that it was misfeasance either to fail to revoke or
9 to fail to threaten to revoke.
10 MR STADLEN: My Lord, I think that is right.
11 MR JUSTICE TOMLINSON: That being the case, that case has
Lord Neill was in court that day. He did not correct me. Mr Pollock addressed me on the Claimants' post-licensing case all afternoon on Day 146 and for much of the morning on Day 147. He did not suggest that I or for that matter the Bank was wrong to regard the failure to revoke claim as effectively having been abandoned.
"We refer to the recent submissions of Mr Stadlen in relation to the status of the Claimants' post-licensing claim.
Contrary to Mr Stadlen's assertion, nothing Mr Pollock said during the course of his submissions last week (on Days 146 and 147) was "new", or sought to raise a new case, and the Claimants have abandoned nothing, whether formally or effectively. No doubt the Bank will proceed with its opening submissions on this basis.
cc. clerk to Mr Justice Tomlinson."
I shall have to return to that letter later. Not surprisingly it produced a discussion on the next day, Day 151, as to the precise meaning of the letter. Miss Clare Montgomery QC was then the senior counsel present on behalf of the liquidators. There took place the following exchange: -
"MR JUSTICE TOMLINSON: Well, it raises a question as to quite what is meant in this letter, as to whether it meant nothing had been abandoned formally or effectively on Days 146 and 147, or nothing has been abandoned formally or effectively at any stage in the trial.
MR STADLEN: Well, my learned friend Miss Montgomery is here. No doubt she can tell your Lordship.
MR JUSTICE TOMLINSON: Miss Montgomery?
MISS MONTGOMERY: My Lord, it meant that nothing has been abandoned. We have not abandoned our revocation claim, and we have not abandoned the consolidated supervision claim. We have adopted the policy, as we told your Lordship, and Mr Stadlen at the beginning of his address on two occasions, of seeking to answer in reply, rather than by way of interruption, points with which we disagree in the course of his opening of his case.
MR JUSTICE TOMLINSON: Yes, but when this letter says that nothing has been abandoned effectively, am I to read that as meaning that the failure to revoke case has not effectively been abandoned?
MISS MONTGOMERY: Your Lordship is.
MR JUSTICE TOMLINSON: I see. Thank you.
MR STADLEN: I was going to say there Your Lordship has it from the horse's mouth. The trouble is we have three horses, and that is not meant disrespectfully. It is simply meant to indicate that in this case your Lordship hears submissions from three leading counsel and, as we have seen, on points of vital importance your Lordship is told different things by different counsel on different occasions.
MR JUSTICE TOMLINSON: Miss Montgomery, I expect you can understand from my point of view, can you not, that if in a trial of this sort I say in open court, in Lord Neill's presence, "I will be corrected if I am wrong that Mr Pollock effectively abandoned the failure to revoke claim", that I am a little puzzled to be told that I have that wrong two months later.
MISS MONTGOMERY: My Lord, it is a question of policy. Your Lordship, and indeed Mr Stadlen, has said many things with which we profoundly disagree over the course of his very long opening of his case. We took the view, as we explained to your Lordship at the beginning, that it was not helpful, indeed it would smack of the Punch and Judy, for us to get up at every point and say, "No, we do not agree with that, no, we do not agree with this", and in those circumstances what we propose to so is at some appropriate moment deal with it in full by way of reply, because frankly it is very difficult to know where to start. Certainly we have taken the view that it is impossible to deal with many of Mr Stadlen's points by way of a truncated dialogue with your Lordship which is interleaved into his submissions.
MR JUSTICE TOMLINSON: I can quite understand the desire not to interrupt Mr Stadlen, but if I say from the bench that I will be corrected if I am wrong, that this has effectively been abandoned, and it is plain, then, that I am putting some supplementary questions so as to understand what is left, one would have expected someone to put me out of my misery.
MISS MONTGOMERY: My Lord, if we were mistaken in not rising on that occasion, we were wrong. But, as I say, Day 87, page 180, Day 92, page 159, we did make it clear.
When your Lordship asks us a direct question, we of course will answer, but absent a direct question we have thought it right to stay silent, because our experience has been that as soon as we rise and say anything, it just leads to a further reiteration of Mr Stadlen's openings.
MR JUSTICE TOMLINSON: Thank you, Miss Montgomery."
"We were put under considerable pressure by your Lordship to get a move on. … If your Lordship had wanted us to do it on a much longer basis, taking every single one of these points at length, perfectly prepared to do it, that is why I said at the end: we are not abandoning anything, I am adopting everything that is in our pleadings… Now, if I am wrong to do that I am perfectly happy to go back and start some of it again."
I have to say that the suggestion that the failure to revoke claim had not been developed in argument because of some pressure of time brought to bear by me I regard as particularly absurd. The failure to revoke claim was effectively abandoned on Day 1 of the trial. It was not a question of "taking every single one of these points at length." Mr Pollock had failed to put forward any case, whether briefly or at length, that the Bank had committed misfeasance by failing to revoke, whether on identified occasions or otherwise, even on the occasions which might have been regarded as likely to be the high water mark of this allegation, viz the aftermath of the Treasury losses episode in 1986 and the post-Tampa January 1990 Review Committee. I then asked "so I am to assume, am I, then, that it is in fact your case that the Bank was in breach of duty, what, on every day from licensing onwards?" and I was given the answer:
"MR POLLOCK: Yes, because the Bank knew from every day from
licensing onwards, and indeed from pre-licensing, that this was a dangerous institution that was not properly supervised and, therefore, ought not to be there. If I make that point good, then it must follow that in failing to revoke they were acting wrongfully. If I do not make that point good, it does not arise."
I leave on one side that that answer was inconsistent with the answer to an earlier question of mine given on Day 136 that on every day during the 1980s the Bank had a duty to conduct consolidated supervision of the BCCI Group. By the end of the Bank's opening submissions, Day 204, it appeared to me that the failure to revoke claim was now on the front burner. There occurred the following exchange on that day: -
"MR JUSTICE TOMLINSON: So the misfeasance must lie in the
failure, in the absence of a restructuring, the failure to revoke the authorisation to accept deposits.
MR POLLOCK: At the end of the day, if the Bank cannot bring about a satisfactory supervisory situation, it has no choice but to revoke.
MR JUSTICE TOMLINSON: Right. So that is on –
MR POLLOCK: Because otherwise it is deliberately allowing an institution to continue to take deposits where it is not satisfied and cannot be satisfied -- whether by its own means or by reliance on another -- that the criteria are being met. The objective of the Act is that institutions which do not meet the criteria and cannot be brought to meet the criteria within a reasonable timeframe should not be allowed to take deposits.
MR JUSTICE TOMLINSON: That means, I would have thought, with the greatest respect, that the failure to revoke is, therefore, on the front burner rather than the back burner."
The allegation of unlawful failure by the Bank to carry out consolidated supervision of the BCCI Group
"Certain concerns about the structure of the Group do however remain at the present time over and above the shareholding of ICIC and the as yet unformed trusts which we have been discussing with you recently; the principal concern is that the Group operates in so many countries without the supervisory authorities in any one being in a position to take an overall view of the total operation."
This was said by Lord Neill to be the high water mark of the liquidators' case so far as concerns the Bank's appreciation of the risk of loss consequent upon the absence of consolidated supervision of the Group. It was a document placed on the file and copied to the Chief Cashier Mr Page against whom no allegation of dishonesty was made. If the Bank knew that it was "running away" from a duty cast upon it with knowledge as to the likely consequences sufficient to render such conduct misfeasance it is to say the least odd that it advertised the source of that knowledge to BCCI itself. Herein lies another point with which the liquidators never sought to grapple. The liquidators made their allegations from the vantage point afforded by hindsight but without acknowledging that that was where they stood. Techniques of banking supervision were in the 1980s in their relative infancy. International supervisory cooperation was in its very early days. The key point here is whether the risk of contagion from an unsupervised, or relatively unsupervised, sister institution, BCCI Overseas, within the BCCI Group under the umbrella of the Group non-bank holding company BCCI Holdings SA, was perceived as a danger against which it was the responsibility of the supervisors of BCCI SA to guard depositors in the institution. The question can be put more generally – should supervisors have regarded as unsafe any institution whose sister institutions were not subject to overall consolidated supervision by a single responsible supervisor. One can argue about what the answer to that question ought to have been, although to produce an answer uninfluenced by hindsight is difficult. However that is not the relevant question where the allegation against the Bank is not of negligence but of bad faith and dishonesty. The documentary evidence as to the contemporary approach was quite overwhelming. No international banking supervisor at the time regarded the situation which I have described as giving rise to an unacceptable danger to depositors against the risks inherent in which they had to be protected. To suggest that a failure to do what no other supervisor contemporaneously thought necessary or appropriate is of itself necessarily evidence of dishonesty is simply futile. Yet this was the liquidators' case. The full weight of the documentary evidence concerning the contemporary international approach to consolidated supervision and the risks inherent in its absence did not become apparent until Mr Stadlen opened the case for the Bank. It had all been disclosed by the Bank prior to the trial. Its impact upon me was correspondingly devastating. No doubt I was deficient in my comprehension of what little I had previously been shown. However, it rapidly became apparent to me during Mr Stadlen's exposition that at no stage during the Claimants' presentation of their case had I had a proper grasp of this subject, or of the weight of the documentation which bore thereon.
"MR JUSTICE TOMLINSON: But given that the starting point is the need to put in place a proper system of supervision so that you have not got the invisible places, that is the starting point, now the Governor and the Deputy Governor knew perfectly well that there were these invisible places which were not subject to proper supervision; so why are not the Governor and the Deputy Governor from time to time equally guilty of misfeasance, knowing perfectly well that no effort was being made to grapple with that situation.
MR POLLOCK: If they said to themselves – because we do not know what their state of mind was, my Lord, we do not have enough information. If my learned friend wishes to say that if we are right the Governor and Deputy Governor must equally have been misfeasant, that is fine by us."
Pausing there, there are at least two difficulties with Mr Pollock's response. Perhaps it was not intended to be taken seriously. However the point is that on the liquidators' case the Governors and the Deputy Governors from time to time did have all the information that they required on this point because they knew that no one was attempting consolidated supervision. Mr Pollock's response appears to be contrary to the Claimants' pleaded case that the impugned officials within the BSD concealed the true position from the Governors. This was reiterated in paragraph 2.4 of the Amended Reply which reads: -
"……So far as the Claimants are aware at present, the true position in relation to BCCI was at all material times withheld by the Bank's Supervision Division from Lord Richardson and Lord Kingsdown."
Furthermore on Day 84 Lord Neill summarised to me the submission that he had made to the House of Lords to the following effect –
"….We never suggested in our pleading that the Governor had acted in bad faith or was responsible for these decisions. I was expressly asked the question in the House of Lords: are you making any charge of bad faith against either Governor? to which I replied "No." They were not kept posted with information. They did not know."
My exchange with Mr Pollock on Day 204 continued as follows: -
"MR JUSTICE TOMLINSON: And all members of BOBS, because they knew about the absence of consolidated supervision. They knew about the unsupervised places.
MR POLLOCK: Is your Lordship suggesting that if enough respectable people know that they are being misfeasant, it ceases to be misfeasant?
MR JUSTICE TOMLINSON: No, I am not suggesting that for one moment. I am suggesting that it may cast light on whether it was perceived to be a duty to act in that way.
MR POLLOCK: Not really, my Lord, because this is a matter of analysis of the state of mind of those people we are concerned with. There are other people whose state of mind may also be subject to analysis, if we wanted to do so, but it is not necessary. All that is necessary for us is to ask your Lordship to form a conclusion, having looked at the documents and heard the two witnesses that your Lordship is going to hear, as to whether or not, in particular in Mr Cooke's mind, he understood that the system was unsatisfactory, that something ought to be done about it, that the Bank was obliged to do something about it, and decided not to.
If your Lordship comes to that conclusion, it really does not matter how many people might have shared that view, or perhaps did not share that view, because they could not be bothered to think about it or because they were too busy, or whatever.
What matters is Mr Cooke's state of mind. If your Lordship comes and assumes that was his state of mind, no light on Mr Cooke's state of mind is shed by an analysis of what others might also have thought, because ex hypothesi your Lordship has come to the conclusion that Mr Cooke had a misfeasant state of mind.
It is interesting to note that by now the various allegations of misfeasance had resolved themselves to an allegation that Mr Cooke knew that the Bank was obliged to do something about an unsatisfactory system and decided not to do anything. It would be hard to square this approach with Lord Neill's acceptance of the correctness of the observation by Lord Hobhouse in his second speech in the House of Lords that the tort required, in the case of a failure to act, a failure to do a specific act which it was the legal obligation of the Defendant to do. It must have been unlawful for the Defendants not to take some particular step at any given time – see per Lord Hobhouse at paragraphs 167 and 172 of his speech, pp.286 and 288 of the report. Lord Hobhouse did not dissent from the rest of their Lordships as to the manner in which the requirements of the tort should be formulated but rather on the question whether the Claimants could show a sufficiently arguable case that they could prove facts satisfying the relevant requirements. In his argument before me Lord Neill placed considerable reliance upon the manner in which Lord Hobhouse had expressed himself in his first speech. As it happens the observations to which I have just referred came in Lord Hobhouse's second, dissenting, speech. But that does not detract from their accuracy, as Lord Neill accepted. Mr Pollock's approach by this stage of the trial is impossible to reconcile with the legal analysis earlier espoused by Lord Neill. Leaving that point on one side I found simply astonishing the suggestion that the fact that the Governors and the members of the Board of Banking Supervision did not think that the situation as they knew it to be imposed upon the Bank a duty to carry out consolidated supervision of the Group cast no light upon whether the same situation was perceived by those in the Banking Supervision Division as giving rise to such a duty. If the absence of full consolidated supervision was "a danger in itself" such as to give rise to a duty to act and of itself sufficient to give rise to the mental element as to loss required by the tort of misfeasance it is impossible to see how an evaluation of the state of mind of the Governors and the members of the Board of Banking Supervision could not be relevant to an evaluation whether or not members of the Banking Supervision Division with the same knowledge had a misfeasant state of mind. As I remarked on the next day of the trial, it was at that point that I stopped asking questions.
The questions posed on Day 130 of the trial
"(1) Is it alleged that it was misfeasance by the Bank to fail to refuse a licence on the ground alone that it could not be satisfied about prudence because no supervisor was doing consolidated supervision of the group of which SA formed a part?"
(Day 136 answer: Yes)
(2) Suppose that the grant of the licence was not itself an act of misfeasance. Is it said to have been an act of misfeasance on the part of the Bank on every day after licensing to be failing to do consolidated supervision of the group as a whole?"
(Day 136 answer: Yes)
(3) If the answer to that is 'yes', … assuming the grant of the licence was not itself misfeasance, is it accepted by the Liquidators that post-licensing the only way in which the Bank could have carried out consolidated supervision of the group would in fact have been if they were in a position to revoke the licence, either to revoke it or to threaten to revoke it in circumstances in which they could carry out the threat?"
(Day 136 answer: No)
(4) Is it alleged by the Liquidators that it was misfeasance by the Bank to fail to grant only a transitional licence in order that BCCI could in some way be given an opportunity to restructure so as to permit consolidated supervision?"
(Day 136 answer: This is not how the case is put.)"
I explained that the point of the third question was that if the grant of the licence was not of itself an act of misfeasance, it seemed that the only way in which a case could be constructed that the Bank was acting illegally post-licensing in failing to do something different from what it was doing was if the Bank was misfeasant in failing to revoke or to threaten to revoke because otherwise it could not change the status quo. The consequence of that was that if the Claimants did not have a case that there was an occasion on which it was an act of misfeasance to fail to revoke the licence or to threaten to revoke the licence, there was, as I saw it, simply no cause of action in misfeasance subsequent to the grant of the licence based upon a failure to carry out consolidated supervision, which ex hypothesi required a restructuring before it could be done. It will be recalled that it was at this stage of the trial my uncontroverted and publicly expressed understanding that the liquidators had effectively abandoned the failure to revoke claim. It was on the very same day that I expressed that uncontroverted understanding that Lord Neill accepted that the question which I had to ask myself at every point was whether I could identify a specific thing which the Bank should have done and which it was misfeasance to fail to have done.
"Now, we have assumed that in posing the questions which your Lordship has put to us that your Lordship has used 'consolidated supervision' in the same way as we have, which is not in any narrow or technical sense but as a convenient label to describe the process of securing the provision of adequate supervisory information on the BCCI Group as a whole, so that an informed view could be taken as to whether SA met or continued to meet the statutory criteria."
It is quite true that Mr Pollock had in opening said that the Bank had failed to secure the provision of adequate supervisory information on the BCCI Group as a whole which in turn meant that it could not come to an informed view as to whether BCCI SA met or continued to meet the statutory criteria. I had not myself understood that that was all that was meant by failure to do consolidated supervision, and I do not think that the Bank so understood the case against it either. If the Bank's post-licensing duty was so nebulous, it was difficult to think that there could be identified positive steps that the Bank knew its duty compelled it to take but which steps it was not taking. The Bank was constantly digging and delving. Ultimately the setting up of the College of Regulators in 1987 was accepted by Mr Pollock to be an adequate discharge of the Bank's duty in this regard, as I shall explain below. However that may be I would not have expressed questions two, three and four as I did if I had understood that that is all that the liquidators meant by their allegation of a failure to do consolidated supervision.
"MR JUSTICE TOMLINSON: ……Now I appreciate that you say that a proper performance of a duty to supervise in the general sense would have led ultimately either to consolidated supervision of the group by someone, or revocation, or possibly even to something else, but it follows, I think, from how you put it in on Days 146 and 147 that, contrary to the positive answer to question 2, it is not in fact now alleged that on every day after licensing the Bank was in breach of duty in failing itself to do prudential consolidated supervision of the group in the cajole, warn, et cetera, sense.
That is what I understood to be effectively abandoned on Days 146 and 147 by the way in which you put it.
Now, am I not right about that?
MR POLLOCK: I will think about it.
MR JUSTICE TOMLINSON: Right, well then can I give you something else to think about, because you will appreciate that the letter says that that has not been effectively abandoned.
MR POLLOCK: Yes.
MR JUSTICE TOMLINSON: Well, that is how I am told I was to understand it.
MR POLLOCK: Yes, the letter is intended to indicate, my Lord, that we have not abandoned anything - -
MR JUSTICE TOMLINSON: Can I just deal with - -
MR POLLOCK: - - unless I have explicitly and expressly said so.
MR JUSTICE TOMLINSON: Well, if you have not explicitly and expressly said so, the way in which you have put it is inconsistent, in my current way of thinking, with the maintenance of the case that on every day there was a breach of the sort which I have described. If you want time to think about that, so be it. But that is as it seems to me, that it is wholly inconsistent.
"MR JUSTICE TOMLINSON: ……I am with you 100 per cent that one can over-analyse these issues in advance and that things sometimes look different at the end of the case, but I believe that, in relation to consolidated supervision, we have alighted on an important point of principle where it is very important for the witnesses to know in advance what is said, because either it is said against them, "Well, you had to carry out this informational process to see what needed to be done", or it is said against them, "You did appreciate from day one that you were under an obligation to carry out what we will call consolidated supervision of the group and you had to get yourself in a position in which either you did that or you just closed them down".
That, to my way of thinking, is two rather different attacks on them, and it is quite important for me to know which is the nature of the attack and I think it is equally important for the witnesses to know what is the nature of the attack on them before they go into the witness-box.
So I am still not 100 percent convinced that it is your case that on every given day they knew that they should be carrying consolidated supervision, because that seems to me wholly inimical to the way you put it on Days 146 and 147.
MR POLLOCK: Well, what I was trying to do on Day 146 and Day 147 was dispose of what I thought was an oddity which we suspected had crept into your Lordship's thinking which was that, as I put it, consolidated supervision was a fixed and immutable concept which required that if you were not on day one carrying out full blown consolidated supervision, including sitting in the office, whatever, on the other side of the world, telling them how to run their provisioning and so on, well, that had to be our allegation.
MR JUSTICE TOMLINSON: I thought it was your allegation.
MR POLLOCK: Well - -
MR JUSTICE TOMLINSON: I am not saying it has to be your allegation; I thought it was your allegation. I think Mr Stadlen thought it was your allegation.
Mr POLLOCK: Well - -
MR JUSTICE TOMLINSON: That is what he was here to meet. That is what he was - -
MR POLLOCK: So your Lordship is suggesting that it was genuinely thought that our case was that on whatever date it is in August, the first daty in which they have a licence, if the Bank was not standing in every single one of BCCI Group's worldwide offices cajoling, warning, advising, and so on, that we were saying that is what they had to have been doing on that day?
MR JUSTICE TOMLINSON: That is exactly what we understood you to be saying, and that was why Mr Stadlen was saying we cannot understand why this case is put against us because, on anyone's showing, on anyone's case, it takes time to get to the position in which you can do it and, he would say, you may not ever be able to get there. That is why he was saying: it is an incomprehensible case, but that is it's case I have to meet. And I understood that to be the case. That is why I asked my question 2, because I could not understand how anyone could be advancing such a case, but you told me that you were.
Would you like to go away and think about consolidated supervision a little more, Mr Pollock? For the moment, I am proceeding on the basis of what you said on Days 146 and 147. Which, to my way of thinking, means that the answer to question 2 is "no", not "yes".
MR POLLOCK: Yes. Well, as long as your lordship does not expect me to rush back immediately, that is fine."
"MR POLLOCK: One imagines, my Lord, that consolidated
supervision frequently has to be carried out as a matter
MR JUSTICE TOMLINSON: Yes.
MR POLLOCK: Given that the world is divided up into
a series of territorial jurisdictions, there may frequently be cases where you say: well, I, the supervisor sitting here in this particular jurisdiction, do not have a police power to go and batter down the doors over there, but I am supervising an institution which is connected. Now, how am I going to satisfy myself, and how am I going to supervise another institution if I think it is a good idea to do so? The answer is: well, you are going to have to go and talk to everyone and set up a system which will allow to you do so. Your Lordship will recall that effectively this is what the College set out to do."
That being the case, there was no proper basis upon which the liquidators could continue to claim that the Bank was acting in knowing defiance of its legal duty between 1987, when the College was set up, and the arrival of the PriceWaterhouse report in April 1990. That allegation was not however withdrawn. But it went further than that. As early in the history as mid 1983 the Bank was told that the IML, the Luxembourg supervisory authority and the parental and primary supervisor of BCCI SA, intended to attempt to discover much more about what went on elsewhere within the Group by requiring of BCCI SA that it include in its periodical returns information on a consolidated Group basis, an exercise with which the Board of BCCI Holdings SA agreed to cooperate. When Mr Walton of the Bank's Banking Supervision Division subsequently reviewed extracts from the consolidated information which the IML had received he noted that "the information is sufficiently detailed to give us comfort that the Luxembourg authorities would have the necessary material to supervise adequately on a consolidated basis if the information was available regularly." On Day 146 Mr Pollock accepted that it would not necessarily have been misfeasant on the part of the Bank to await the outcome of that exercise by the IML. In truth it was impossible to contend that the Bank had not already embarked upon a relevant voyage of discovery. Whether the voyage should have been undertaken with more urgency or with a different vessel was not the question which I had to determine. The liquidators' claim was, as it had to be if they were to demonstrate misfeasance as opposed to negligence, of a deliberate failure ever to contemplate setting out on the voyage for fear of what would be discovered in its course. I have already referred to the fact that there was constant digging and delving, as the history of Treasury visits, loan book reviews, systems and controls reviews, enhanced supervision, the College, Section 39 reports, the post-April 1990 investigation and finally the Section 41 report bear eloquent witness.
"Thus, in the 12 years between the first Statement of Claim and Day 153 of the trial, the Claimants' post-licensing claim evolved from (1) failing to revoke knowing the criteria were not fulfilled to (2) failing to revoke knowing every day for 11 years that the discretion could not lawfully be exercised against revocation to (3) revocation not being the only legal option open to the Bank, and (4) as a cause of action being on the back burner through the 1980s and unrealistic post-April 1990 when the Bank was in rescue mode; to (5) failure to do consolidated supervision of the Group every day for 11 years, to (6) failure to embark on a voyage of discovery notwithstanding that it was accepted that the College was a lawful example of a voyage of discovery."
The case continued for a further 103 days after Day 153. It also has to be remarked that the Bank had to prepare to meet the case on every basis on which it was put forward. The extraordinary manner in which the Claimants' case was made to change to fit the exigencies of the moment would alone justify an award of indemnity costs. It will also be highly relevant to any consideration by the Costs Judge of the reasonableness of the Bank's expenditure in preparing to meet these many and varied allegations.
The allegation that the grant of the licence was an act of misfeasance
"Q: I suggest, Mr Cooke, that this episode demonstrates an absolute determination on your part and indeed on the part of BAMMSS not to investigate in the case of BCCI in case you found out things that might make difficulties?
A: No, not at all. Not at all. For what reason?
Q: Well, why did you not?
A: For what reason would we have taken that positive step not to do something?
Q: Because you might then have had to refuse it a licence?
A: Well, why would that have worried us?
Q: You tell me.
A: Well, I cannot.
Q: Very well.
A: It is a strange motive."
"104. I have more difficulty with the question whether there is material to support the pleading in Schedule 3 that at the time of licensing the Bank knew that loss was probable or that it had the state of mind regarding loss to depositors and potential depositors that amounted to recklessness. There is no direct evidence of this in the available documents, and I am not confident that they contain any material which suggests that contemporary documentary evidence to this effect is likely to become available. At best for the Claimants, it appears that is a matter which will have to be inferred from other evidence.
105. But it seems to me, as events unfold, this part of the case gathers momentum and that the available material makes it clear that the Bank knew by April 1990 at the latest that, unless a rescue could be put in hand in time by the Abu Dhabi Government, BCCI would collapse and that serious loss to depositors would then be inevitable."
Lord Steyn at paragraph 7 of his second speech, p.238 of the report said: -
"My conclusion is therefore strongly influenced by the events from April 1990. On the other hand, I also take the view that the earlier part of the history cannot be excised. The interests of justice require that the entire action should be permitted to go to trial. This conclusion involves no judgment about the likely outcome of the case but merely a finding that the threshold requirement for striking out has not been satisfied."
Lord Hutton was if anything still less encouraging. At paragraph 138, pp.274-275 of the report he said this: -
"In my opinion the Bank cannot validly contend that on the documentary evidence available to them the plaintiffs have no real prospect of succeeding in establishing that the Bank knowingly and in a deliberate way abused its statutory powers in failing to revoke BCCI's licence after it had been granted….."
And at paragraph 150, p.279 he continued: -
"The Bank's application has been to strike out the entire action. The Bank's case that the plaintiffs have no reasonable prospect of success can be more strongly advanced in respect of the allegations relating to the earlier part of the history of the Bank's dealings with BCCI. But having regard to the extent to which the allegations in respect of the entire period from 1979 to 1991 are interwoven and interrelated I consider that it would not be appropriate to consider striking out certain parts of the claim and that the entire action should be permitted to proceed to trial."
"…. By the time it came to the Review Committee the first time, it came on the basis of a recommendation to grant a licence but refuse recognition. I was conscious that Mr Cooke had made his views fairly plain, that he expected it to be a licence without prejudging it, and he had written a note to the Governor to that effect before.
Q: In April of 1979?
A: Yes, I was conscious of that. Coming to it as a member of the Review Committee, I did raise the question in the Assessment Committee: are we sure we ought to give this thing even a licence?
Q: In the Review Committee?
A: In the Review Committee, yes. There was a discussion about that. First of all, Mr Cooke made the point that the Review Committee was primarily there to consider the recommendation to refuse recognition. Nevertheless, he did conduct a fairly brief discussion on the lines of "Brian, what ground would you have? I know you don't like this bank, I know you wish it wasn't here, but the Act does not say that we can just refuse a licence if we don't like it. If we hear a lot of worrying things about them we have to set out what our actual grounds would be." I remember some discussion about "Just because you have a lot of press comment and worries by other banks who will not deal with them, that is not a ground; it would not stand up." I remember commenting on the qualifications of the accounts of ICIC, I think it was that were based on the fact that the auditors could not satisfy themselves about the value of a significant figure in the balance sheet, and I said that might conceivably be quoted as grounds for saying that one of the controllers is not fit and proper. The general view, I think, in the rest of the Review Committee was that it was a very artificial argument and device to throw out of the United Kingdom, if you like, what apparently on the figures and everything else seemed to be a very profitable and expanding, well-capitalised bank, and that there was a general presumption in the way the Bank of England approached all applications from overseas banks as if this were regarded - - leaving aside the debate we have heard about, that was not an issue - - that it was the intention of the legislators and everybody else in Parliament that the Bank of England would not be carrying out detailed supervision of overseas banks. It would deal with the matter, as I said earlier, by relying on assurances where they were forthcoming, from overseas regulators, such as Luxembourg. So that when challenged in the Review Committee as to how one would deal with that we did briefly rehearse the possibilities. One could actually reject Luxembourg and say "I don't think they are in a position to know." That was considered to be political. It would be very difficult and unlikely to succeed and the alternative would have been to say "Well, we don't have to rely on the assurance from Luxembourg, the Act does say 'may rely'", but then I was faced with the question "Well, how else would you make up your mind? How else would you get the information which would enable you and lead you to reach a different conclusion from the one that Luxembourg had reached as a supervisor?" The fact is that I had to concede that we did not really have any contradictory information. It would theoretically have been open to the bank to make sufficient inquiries on its own account, saying "Luxembourg is not in a position to make this judgment, we are not going to take any notice of it; let us make our own inquiries." It would have been extremely difficult in practice, we acknowledge that. We would have had to have replicated the Luxembourg attempts over the years in a very short period of time. Clearly we would have had to take account of their views, and we were sure that they would have been prayed in aid by BCCI had we sought to refuse. There was nowhere else, no other supervisor thinking at that time, that it would have been practical to consult. We had a brief discussion about taking the views of the UAE which was not in dispute. Generally it was clear to me after this discussion that I was going to be in a minority of one in hankering after a refusal for authority, and I think I was persuaded, and accepted, that it would be a very difficult high profile decision, unlikely to be upheld at appeal if we took it.
Q: So somewhat reluctantly you acquiesced in the decision?
The "dawn raid" in Basle, February 1980
"Now let us turn to recent developments. I said earlier that a number of events in the last decade have led to an intensification of our involvement in supervision. First there has been a great increase in the number of banks in London; foreign banks have opened branches and subsidiaries here or have joined together in the newly-emerging consortium banks to operate in the euro-currency market and, in the domestic sector, there has been the rapid growth of what have become generally known as secondary banks, made possible by the existence of the Sterling Interbank market. These growths have presented us with an obvious problem of workload but also with problems about who takes ultimate responsibility for different types of bank. But a more important associated problem springs from the nature of these new wholesale markets in sterling and in euro-currencies; they have allowed many institutions, including the new banks, to obtain funds for onward lending on a scale previously quite impossible for them and have meant that sickness in one bank could rapidly develop into an epidemic effecting a whole range of banks, even banks which did not have direct contact with the bank where the infection had first broken out.
With the collapse of the property market in late 1973 some of these newly-developed lending books in sterling became of doubtful quality and very illiquid; lenders on the wholesale markets suddenly withdrew the deposits which had financed these lending books and there was a real chance of an epidemic of the type to which I have just referred affecting the whole system. This situation led us to review during 1974 our methods of support and supervision and the range of institutions coming within our preview.
Also during 1974 a number of serious losses suffered by banks in different countries operating in the foreign exchange in euro-currency wholesale markets and the failure of one or two small banks among them led to similar reactions – withdrawals of funds and dangers of ripple reactions – in these markets. Once again we, in common with the similar supervisory authorities in other countries whose banks were active in these markets, were again forced to refine our supervisory techniques.
Another factor contributing to more extensive supervision has been growing sensitivity about the protection of depositors; this has led to us taking a closer interest than hitherto in institutions low down on the ladder of recognition. Finally, joining the European Economic Community has led to discussion of harmonisation of our approach to supervision with that of our partner countries and so inevitably we have had to think again about how we operate. ……………………………………..
The next recent development to which I should refer is that we have clarified with banks in London associated with overseas banks, with their shareholder banks and with other shareholder banks, where responsibilities for supervision and responsibilities for support lie. Our contentions, which have been generally accepted by those banks, are; first, that branches of overseas banks here are integral parts of the banks to which they belong and are thus primarily the concern, not of us as the central bank of the host country, but of their parents and of their parents' central bank or other supervisory authorities for both supervision and support; second, that, whilst – on practical grounds – we accept supervisory responsibility for banks registered here but owned overseas, such ownership entails responsibility for support, whether the bank concerned is wholly owned or is owned by a consortium; and third, that British-owned banks – and we as their supervisory authority – must accept like responsibilities for their branches and subsidiaries overseas and for their investments in banks overseas."
It is plain that Mr Blunden's and thus the Bank's approach at this stage was that the criterion determining where supervisory responsibility lay was place of incorporation – of registration to use Mr Blunden's exact word.
Thus the Deputy General Manager of the Bank of Ireland wrote: -
"As the regulatory authority for Irish banks, the proposals also raise a question of principle for the Central Bank of Ireland concerning the relative positions of national supervisory authorities. The requirement that Irish banks operating in the US disclose to the US supervisory authority quite detailed information relating to their non-US operations suggests that the information is to be used by your Board for the purpose of prudential regulation. Indeed, the preamble to your press release of 29 October stated that the revised reporting procedure was designed "to assure that the Board obtained sufficient financial information to assess the foreign organisations' consolidated operation, general financial condition, an ability to serve as a continuing source of strength to their US banking operations.
Such an extension of the role of the US supervisory authority would appear to conflict with the principle agreed by the Governors of the G.10 countries and Switzerland in 1975, namely, that the primary responsibility for the supervision of banks incorporated in a particular country belongs to the central bank or other supervisory authority of that country."
On 11 March 1980 the Deutsche Bundesbank wrote: -
"But the principles of the "Concordat" endorsed by the Central Bank Governors of the G/10 countries and Switzerland in 1975 should be applied, according to which the primary responsibility for supervising banks with establishments abroad rests with the supervisory authorities of the country in which the parent bank has its registered office."
In its reply the Dutch Central Bank used the language of "head-
office or parent bank" regarding this as synonymous with "the supervisor at home." The Swiss response speaks directly of the violation of the sovereign rights of the parent country and continues "if such a system of banking supervision as the one proposed by the Federal Reserve Board prevailed, this would hardly raise the quality of prudential supervision; on the contrary, it would mean a redundant and unproductive overlapping in the work of the different supervisory authorities."
The response from the Banque de France was explicit in its assertion of its understanding that primary supervision lay with the authorities in the country of incorporation, Monsieur Richon writing: -
" J'ajoute que cette attention semble peu compatible avec la declaration de principe approuvé par le Governeurs de Banque Centrales du Groupe de Dix en 1975, qui confiait aux authorités de tutelle du pays d'origine d'une banque l'essentiel de la surveillance d'un établissement."
Broadly similar if less explicitly expressed sentiments were communicated by the authorities in Italy, Canada and the European Union.
"British Bank of the Middle East
BBME has applied to the Treasury for permission to transfer its head office from London to Hong Kong. The Bank faces a severe test of adjustment to the new political and trading environment in the Middle East and the move reflects a desire that its board and senior management should be more closely integrated with its parent, the Hong Kong and Shanghai Bank. It is intended that the transfer should be completed by the end of this year.
BBME is incorporated in England by Royal Charter. This will not change following the transfer. A guiding principle of supervision is that primary responsibility should fall to the authorities of the country in which a bank is incorporated; in this case the British connection is emphasised by the trading name. However, although BBME will retain a London branch, the bulk of its business will be undertaken outside the UK and we will no longer have the same access to the officers directing the bank's affairs. This raises the question whether effective supervision can be exercised from London. It may be that that the main supervisory responsibility should pass to Hong Kong but before accepting this change we would wish to be assured that the Hong Kong authorities were in a position to carry it out satisfactorily."
On 12 November 1979 Mr Thompson sent to Mr Kirby a short note which read as follows: -
"I should be grateful if you would replace the second paragraph on BBME in the Governor's Hong Kong brief with the following: -
BBME is incorporated in England by Royal Charter. This will not change following the transfer. But a guiding principle of supervision is that primary responsibility should fall to the authorities of the country in which a bank maintains its principal place of business. Although BBME will retain a London branch, the bulk of its business will be undertaken outside the UK and we will no longer have the same access to the officers directing the bank's affairs. In principle, the main supervisory responsibility should pass to Hong Kong but before accepting this change we would wish to be assured that the Hong Kong authorities were in a position to carry it out."
This document was not copied to anyone. There is no evidence that Mr Cooke saw it. It is by no means clear what Mr Thompson meant by principal place of business. It is also unclear what he meant by " the bulk of its business will be undertaken outside the UK." Where he uses that expression in the first note, it seems to be describing the new situation which would follow the move of head office. Yet as its name suggests the bulk of BBME's business was in the Middle East, and in that respect the change of location of head office would change nothing. The interesting thing to note about both versions of the text is that Mr Thompson was not apparently under the impression that so far as concerned the incidence of responsibility for primary supervision the new Act mandated one result rather than another. This was a theme which he repeated in subsequent notes.
Mr Nicolle met representatives of the bank in March 1979. His note following the meeting contains the following passages: -
"The whole of the bank's operations are carried out in this country. All that is in Madrid is a board and presumably duplicate books of account. We discussed the banking legislation. I pointed out that Clause 3(5) which enables us to take into account views of overseas supervisory authorities only applies where a bank has its principal place of business outside the UK. In Banco Espanol's case the principal place of business appeared to be in the UK. However I thought that in practice we would still look to the Banco de Espana to certify financial soundness etc. for us."
Pausing there it seems likely that what Mr Nicolle had in mind by principal place of business was that the bulk of the business or operations, indeed the whole of the business and operations was or were carried out in the UK. The presence of the board in Madrid might tend to suggest that central mind and management was located there rather than in London. The note continues: -
"Monthly, head office reports to Banco Exterior the principal headings in the balance sheet. Problem loans are reported initially when the trouble arises and then quarterly a progress report follows. Profit and loss account is drawn up monthly and also reported in Madrid. The UK auditors are Spicer & Pegler who make a full inspection, including loan quality annually and report to Madrid. Half yearly they make a more cursory check. Within the UK a manager's assistant carries out some inspections of the branches reporting to the UK management. The inspection from the Spanish authorities seems to be made, not by the Banco de Espana as BSPG [Mr Gent] understood at the last interview, but Banco Exterior. This bank has recently engaged a roving international inspector so that these visits will become more regular in future. I tried but failed to understand the exact relationship between these visits and the Spanish supervisory authority. Whether the supervisors regard themselves as inspecting Banco Espanol I am not sure. This is a point we should take up with them in discussion. It is arguable that we should supervise Banco Espanol ourselves; we must ensure that there is complete understanding of whose responsibility it is."
Mr Nicolle's note of November 1979 was written consequent upon the new general manager of BEL being brought to the Bank for an introduction. Mr Nicolle's note began: -
"Discussion turned to their Banking Act application. It is evident that they have done little thinking since I broached with them earlier this year the problem of their "principal place of business." I suspect that this is in the UK which I was told that it was for tax purposes, though Lopez would like to think, as indeed would I, that their registered Spanish office is legally their principal place. All of their operations, and their executive management are in London."
At this point there was an asterisk and a corresponding footnote which read: -
"FLH [Hall] tells me that "principal place of business" is essentially synonymous, amongst company law experts, with "place of central management and control." This term is a little more consistent with Madrid, rather than London, being the principal place."
The text of the note continued: -
"I asked my visitors to consult their lawyers before discussing their application with their masters in Madrid, which they intend to do in the next week or so. I made it clear that if they could not state that their principal place of business was outside the UK, we could not recognise them via a s.3(5) and that this might lead to us concluding that we might have to supervise BEL as a UK bank though this seemed to me an unwelcome result."
It speaks volumes that Mr Nicolle thought it appropriate to ask his visitors to consult their lawyers, sc. their Spanish lawyers, on the question of the location of their principal place of business. This was in fact a question governed by English law. It depended on the true construction of the Act. Once the relevant facts were established, it was a question about which the Bank had to satisfy itself, directing itself as to the meaning of the expression in the Act. The views of the applicant bank and its lawyers were barely relevant, still less determinative. It is plain that Mr Nicolle had not analysed matters in this way, and plain that his own thinking on the meaning of the expression principal place of business was confused and inconclusive.
Mr Hall annotated this note as follows: -
"It may be that the principal place of business – which I think is to be equated with place of central management and control – is in Spain and, in that case, the problem fades away. If not we must go the s.3(3) route. In that event we are not of course precluded from seeking the views of the Spanish authorities but would need, I think, to be satisfied that the specific terms of paragraphs three and six (or seven and ten) of Schedule 2 are fulfilled rather than rely on some general assertion from Banco de Espana about management and financial soundness. In that sense we arguably do have an enhanced duty of care under s.3(3) as opposed to s.3(5). I think this is what AWN [Nicolle] may be driving at in his first [illegible] paragraphs overleaf; and I share his reservations about going the s. 3(3) route unless we are prepared to accept BEL as a UK responsibility."
Mr Nicolle received conflicting advice from his senior colleagues. Mr Coleby said "let us set out on the 3(5) route." Mr Barnes by contrast said:-
"I don't see any major practical difficulty in treating BEL as effectively a UK subsidiary and getting a comfort letter. Better that than creating an anomaly."
This was the 3(3) route. Mr Cooke did not see this note at that time.
In August of 1978 the Bank had told the Hong Kong authorities that in the case of the two Hong Kong bank subsidiaries the Bank saw a primary supervisory responsibility as falling within the Bank's jurisdiction. Reference to the exchange which took place on that occasion is very instructive. Mr Cooke had plainly made clear to Mr Hutson of the Hong Kong authorities that the Bank regarded itself as responsible for the supervision of all British registered companies – this was of course a practical application of the place of incorporation rule. The reaction from the Hong Kong supervisors when this was reported back to their head office was that while they fully understood the Bank's concern to cover all British registered companies they felt that as the Board of Mercantile and the effective control of Mercantile's business were to be found in Hong Kong it would be more appropriate for prudential supervision purposes if Mercantile were supervised in the same way as the Hong Kong head office operation. Mr Cooke said that the Bank had no absolutely hard and fast position on this and that his principal concern was to ensure that all UK registered banking operations were adequately supervised.
Reverting to Mr Thompson's 21 November 1979 note after referring to this exchange of views in August 1978 he went on to point out that in the case of NBNZ the supervisory responsibility remained undefined. It was not supervised by the New Zealand authorities. NBNZ regarded the Bank as its supervisor although the Bank had not in practice sought to supervise it directly other than through Lloyd's consolidated position. The note continued: -
"Two questions arise. First, is it sensible and practical to assume primary supervisory responsibility for these banks? Second, is the fact that we have not sought assurances from the Hong Kong and New Zealand supervisors for BBME and NBNZ likely to prove an impediment to their recognition?……………………………. In justifying our desire to exercise primary supervisory authority for BBME and Mercantile we suggested that a guiding principle was that the responsibility should fall to the authorities of the country of incorporation. However, our experience with Mercantile demonstrates that without access to the management based overseas and without a regular set of returns covering non-UK business it is difficult effectively to exercise control. Mills, the London manager of Mercantile, who doubles as the manager of the Hong Kong Bank, could answer few of our questions about Mercantile's business except after lengthy correspondence with the Hong Kong head office. This suggests that our guiding principle should be to ascribe primary supervisory responsibility to the country of an institution's principal place of business. This would not prevent us having some supervisory role over institutions incorporated here but having their centre of operations elsewhere. Having established the willingness of the authorities where the head office is located to undertake the task in relation to the world wide commitments of the institution, our supervision would focus on its UK activities in the same way as we look at other branch operations. If this is accepted, we will need to approach our opposite numbers in Hong Kong and New Zealand."
The first thing to be said about this is that it perhaps explains the shift of emphasis as between the first and second versions of Mr Thompson's briefing note to the Governor written two weeks previously. It may have derived from practical experience with Mercantile. Secondly it again seems that for Mr Thompson principal place of business is being equated with centre of operations, which is perhaps the same as bulk of business.
Mr Coleby annotated the note as follows: -
"I support CJT's [Thompson's] conclusion – namely that "principal place of business" rather than "place of incorporation" should be the main criterion for judging where the principal supervisory responsibility should lie. We need to ensure that in these cases the relevant authority accepts that responsibility – and, of course, that we continue to carry out such duties of supervision as arise through consolidation of subsidiaries of UK banks."
Again this does not suggest that Mr Coleby had in mind that the Act mandated any particular conclusion. Mr Cooke commented on Mr Coleby's annotation as follows: -
"I am not sure I go along with your conclusion at least until I see more closely the impact it could have if applied to us. I think too it cuts across an implicit bit of the Concordat. My preference would be to hold our present position while floating over the Hong Kong and New Zealand authorities the questions in our mind."
"It was generally accepted that the responsibility for supervising banks lay with the supervisory authority where the parent was situated. It was contrary to this principle to require information about UK activities of a UK bank with a US branch, and, even more so, its activities elsewhere in the world, even when conducted through subsidiaries and partly owned associates."
On the same day as producing this report Mr Hayward produced a first draft response for Mr Cooke to send to the Secretary of the Board of Governors of the Fed in response to his letter of 2 November 1979 to the Governor of the Bank to which I referred at paragraph 95 above. In it he wrote: -
" While in many respects it is, I believe, for the banks affected to comment on these proposals, there are aspects of principle raised by the proposals on reporting, which it is appropriate for me to deal with here. I have no comment on the proposal limiting inter-state deposit-taking.
The most important is the now well established principle that it is the responsibility of the supervisory authority, where a bank's major activities are situated, to exercise primary supervisory authority over that bank and its overseas branches throughout the world."
This is an interesting error, for it underscores Mr Hayward's belief that a bank's major activities were likely to be found in the place where it was situated, i.e. incorporated. In most cases these would coincide – neither necessarily corresponds with the principal place of business, assuming that to mean where central mind and management are to be found.
Mr Kirbyshire, with copy to the Governor's Private Secretary, Mr McMahon, Mr Payton, Mr Balfour, Mr Hayward and Mr Gilchrist corrected the error. On 19 December 1979 he proposed the following wording: -
"In its present form these proposed requirements seems to us to run counter to the agreed principle that the primary responsibility for supervising banks incorporated in a particular country rests with the central bank or other regulatory authorities of that country."
This is plainly a reference to the Concordat. Any assertion that, in putting forward this formulation Mr Kirbyshire, who had nothing to do with the supervision of BCCI, was seeking to mislead the Governor, or that he was motivated by a desire to establish this principle, contrary to what he knew to be the accepted or correct approach, in order to anticipate problems that would have to be addressed in the light of BCCI's application for recognition under the 1979 Act would be fanciful. My recollection is that Mr Kirbyshire was nonetheless accused of dishonesty in relation to this revision.
In connection with this draft application Mr Nicolle produced a note for the record dated 14 January. It read as follows: -
"I spoke to Lopez about their draft application. He confirmed that they had cleared with their head office the answer to question four which said that Banco Espanol did not come under the supervision of the Banco de Espana. I asked him to make sure, before the application was finally sent in to us that the Banco de Espana were also aware of the answer. I also told him that if we were to become the supervisory authority for this bank then, following the receipt of the application, we would require further information under the Act in regard to their capital, profit and loss account etc. The result of this would almost certainly be that they would not appear on an early list."
Mr Coleby sent a copy of this note to Mr Cooke with the added annotation: -
"We have not yet had the intended meeting to discuss the question of country of incorporation vs. country of principal place of business as the determinant of supervisory responsibility. This provides an example."
Again, this note is simply not consistent with any suggestion that Mr Coleby had, at this time, a clear understanding that in relation to overseas banks the Act mandated an approach which looked to the principal place of business rather than place of incorporation as a determinant criterion. Indeed the contemporary material suggests that until Mr Thompson's notes had suggested the possibility of a departure, by agreement, from the place of incorporation rule, it was place of incorporation which Mr Coleby regarded as being ultimately conclusive. That conclusion is particularly reinforced by a memorandum written by Mr Coleby in March 1978 on the topic of UK branches of overseas banks. He particularly had in mind BCCI and Banco Espanol. He spoke of cases where the UK branches conducted business which approached half or even more of the bank's total business. He expressed misgivings over ceding prime responsibility for supervision to the authorities of the home country however thorough going and effective their supervisory arrangements might be. By home country here he necessarily meant country of incorporation. His misgivings stemmed from the fact that the place of incorporation rule meant that the Bank was obliged to accept that primary supervisory responsibility lay in the country of incorporation. Had there been no such rule, there would have been nothing about which to have misgivings.
"Accept if mutually agreed, otherwise place of incorporation determines. Raise in Basle."
What Mr Cooke was "accepting" was in fact Mr Thompson's suggestion in his note of 21 November 1979, with which Mr Coleby had expressed his agreement. What Mr Cooke was indicating was that he saw the possibility of departing from the place of incorporation rule if it was mutually agreed between the supervisory authorities in the place of incorporation and those in the principal place of business, but that in the absence of such agreement the place of incorporation would have to continue to be the determinant criterion. It can firstly be said that this would be an unlikely exchange of messages between two persons who were at the time engaged upon a strategy described to ensure that the application of BCCI went through without reference to the principal place of business issue, whatever principal place of business may have been thought to mean. Secondly, it is clear from the manner in which Mr Cooke did subsequently raise the matter in Basle that it was not at that stage established in his mind that principal place of business meant place of central management and control. When he did raise it, he raised it in terms of "true centre of operations" which he explicitly equated with a case where "by far the greater part of a bank's business was conducted" in a centre other than the place of incorporation. This he then described as the principal place of business.
"The Principle of Home Country Supervision
The banks support the view being taken by the supervisory authorities in the United Kingdom that each part of a banking group should be treated as an integral part of the whole for supervisory purposes and that it is the supervisory authority of the country where the head office is situated that should have prime overall responsibility. Thus, operations of United Kingdom banks in overseas territories would be considered as relevant to the Bank of England's assessment of whether a bank satisfied the requirements for recognition laid down by the UK Banking Act 1979. Discussions in the forum of the EEC and the group of 10 are also tending to lead in this direction.
The UK Banking Act also carries the principle further in s.5(sic) by allowing the supervisory authority to regard itself as satisfied, in the case of an institution whose principle (sic) place of business is in a country or territory outside the United Kingdom, that such criteria are fulfilled if:-
(a) the relevant supervisory authorities inform the Bank that they are satisfied with respect to the management of the institution and its overall financial soundness; and
(b) the Bank is satisfied as to nature and scope of the supervision exercised by those authorities."
On 7 February 1980 Mr Thompson proposed a redraft. He may well have had in mind Mr Kirbyshire's correction of Mr Hayward's draft response to the Fed – he will certainly have had in mind his own revision of Mr Kirbyshire's redraft. Relevant parts of his proposed redraft read as follows: -
"The banks support the view taken by the supervisory authorities in the United Kingdom that the responsibility for the supervision of a particular bank should rest with the appropriate regulatory body of the country in which that bank is incorporated. ………………………………………………………………………
We would draw to your attention and commend to you the practice of the UK authorities in assessing the financial soundness of branches of foreign banks in the UK. This has now been given statutory effect in the UK Banking Act, and allows the Bank of England discretion to consider that the criteria for the prudent operation of branches are fulfilled if
(a) the relevant overseas supervisory authorities inform the Bank that they are satisfied with respect to the management of the institution and its overall financial soundness; and
(b) the Bank is satisfied as to the nature and scope of the supervision exercised by those authorities."
This was set out by Mr Thompson in a note for the record, a copy of which Mr R Brown of BAMMSS sent to Mr Cooke with the following annotation: -
"For Basle you might like to be aware of Chris Thompson's comment on the BBA submission to the Fed on their proposed new reporting requirements for foreign banks. The BBA has got the point about home country supervision slightly confused."
This was three weeks before the impending 18th meeting of the Basle Committee on 28 and 29 February 1980. At this stage neither Mr Thompson nor Mr Brown had anything whatever to do with BCCI and it is plain that they cannot have been motivated to mislead third parties by a realisation of the alleged problems which BCCI's application for recognition brought in its train.
"In its consideration of the concept of parental responsibility, the Concordat defined the parent country as the country of incorporation. He believed, however, that the Committee might usefully consider some modification of that principle where a bank incorporated in one country based its true centre of operation in a different country. In such cases, it would seem logical to consider the country of operation as the parent country for the purposes of the Concordat.
He therefore proposed that the Committee should agree that the country-of-incorporation rule should apply except in obvious cases where by far the greater part of a bank's business was conducted in another centre and where the supervisory authority of the country of incorporation and the supervisory authority in the country which was the principal place of business both agreed that responsibility should be taken over by the latter."
"So, it is quite interesting, we would suggest, my Lord, that you have to try and analyse what Mr Cooke was up to. Why did Mr Cooke suddenly raise this issue with the Basle Committee? We have seen that the issue had arisen in the Bank and one rather suspects that one was that Mr Cooke was hoping that he could obtain some support from the members of the Cooke Committee for the position which we say he wanted to adopt, which was the primacy of the place of incorporation as the indicator, and we would say that was a BCCI driven point. Now, there was some urgency in this matter because, as your Lordship can see, the Basle Committee was due later in 1980 to have a meeting with supervisors from offshore centres……. So Mr Cooke's approach was to raise it, apparently without any advance warning, during the course of the discussion so that he could get a position on the record, we would say, before it had really been thought about."
Mr Pollock was not deterred in this submission by it being pointed out to him that for this strategy to work, Mr Coleby, Mr Barnes and Mr Byatt would need to have been squared in advance, lest they correct Mr Cooke, and also that Mr Dealtry of the BIS might have intervened had he thought something incorrect was being said. A measure of the lack of consideration apparently given to this allegation is that Mr Pollock was evidently unaware that Mr Barnes had been present at this meeting and, I suspect, unaware of Mr Byatt's presence too. Perhaps, he speculated, they might not have read the Concordat as recently as had Mr Cooke, perhaps Mr Barnes might not have read it at all.
"The allegation that Mr Cooke was attempting, in the face of the other supervisors, to alter the entire basis on which the Basle Concordat operated and the basis on which possibly hundreds of international banks were supervised, in order to avoid responsibility for BCCI SA was always beyond fantasy.
It is utterly inconceivable that if what Mr Cooke had said to the Committee was indeed wrong this would not have been corrected by the other members of the Committee, who were amongst the world's leading experts on banking supervision.
Further, these members had specifically been asked to re-read the Concordat in advance of the November 1979 meeting and had discussed it at that meeting.
It was also utterly inconceivable that Mr Cooke would have dared even to attempt to mislead his fellow supervisors knowing that they were experts in this area and, even less so, knowing that they had very recently been re-reading and discussing the Concordat at his own behest.
The overwhelming evidence always showed that Mr Cooke was of course right in indicating that it was understood that the parent supervisor of a bank would be found in its country of incorporation. It was for this reason that he was not corrected by anyone else present. Moreover, the very nature of Mr Cooke's proposal which was to be discussed, namely, the "exception" to the place of incorporation "rule" itself proceeded on the basis that there was such a "rule" to which it would be an exception.
In relation to motive, the contemporary documents clearly demonstrated that these statements from Mr Cooke directly resulted from the experiences in relation to Banco Espanol and the British overseas banks and had nothing at all to do with BCCI SA. Further, it was absurd to suggest that Mr Cooke was motivated by a desire to avoid responsibility for BCCI SA when the very exception which he was proposing might have led to such responsibility being laid at the door of the Bank. [i.e. because Luxembourg might suggest that the greater part of BCCI SA's business was conducted in another centre.]
There was never a motive. This was one of the many defects in the Claimants' case to which it has always been obvious from the outset that there could never be an answer. If Mr Cooke's motive had been to ensure that primary responsibility for the supervision of BCCI SA should remain with the LBC, it would have been counter-productive for him to propose an exception to an existing rule which would have ensured that it did so."
"The Concordat clearly regarded (although it did not specifically define) the parent country as the country of incorporation of the parent bank."
This led Mr Pollock to make the following submission:
"No decision has been taken. All one has is Mr Cooke's untrue assertion, put forward out of the blue in February, that the Concordat defined it, which was now being toned down although we would say still misleadingly so, because either someone had pointed it out or Mr Cooke may well have thought himself that by the time the next meeting took place a lot of people would have read the Concordat."
Mr Pollock also said this:
"When you come to look at the way he formulates it at the next meeting, he retracts it and says no, it was not defined. So someone has come to him and says: no, you are wrong. What he does is he goes to the line and says it may not have been defined but it was implicit…..it may mean that he was flying a kite and people did say no, you cannot do that."
"… the Committee is agreed that the country of incorporation rule should continue to prevail except in obvious cases where the major part of a bank's business is conducted in another centre and where the supervisory authority of the country of incorporation and the supervisory authority of the country which is the principal place of business both agree that parental responsibility should be taken over by the latter."
"…I want to make it quite plain that what I am about to say to your Lordship is something that all of us have considered very carefully, and is adopted as a collegiate matter."
I was under no illusion what Mr Pollock intended to convey by this minatory preface. He wanted to emphasise that on this sensitive issue where my enquiry might have suggested a question in my mind whether this allegation could responsibly be maintained the response which I was about to receive carried the imprimatur of Lord Neill. The answer I was given was as follows:
"MR POLLOCK: The Claimants also submitted in opening that if Mr Cooke said that the Concordat defined the parent country as the place of incorporation, he did so knowing that statement to be untrue. This allegation is not withdrawn.
If on the other hand, and as now seems likely, he said or intended to convey that the parent supervisor would normally be found in the bank's place of incorporation, this would not have been a knowingly untrue statement.
In the latter case, the claimants would not allege that Mr Cooke was deliberately setting out to mislead his fellow supervisors as to the terms of the Concordat.
The Claimants' case is that it appears from the terms of the record of the meeting that Mr Cooke was, first, raising for consideration with his fellow supervisors a problem of which he was acutely aware, namely that unless a fellow supervisor had access to a Bank's management and principal operations, he would almost certainly be incapable of carrying out adequate and effective supervision of that bank, and, second, proposing a method of dealing with the problem, which meant that there would be no presumption of supervisory responsibility for a bank incorporated in another country unless the supervisor in question had specifically agreed to assume responsibility.
Mr Cooke knew that his proposal, if adopted, would minimise any pressure on the Bank to take responsibility for the supervision of BCCI or, for that matter, any other bank similarly circumstanced for which it did not wish to take responsibility.
MR JUSTICE TOMLINSON: So you are not alleging that he deliberately set out to mislead them?
MR POLLOCK: I hope I made it plain. We say that if he did say that the Concordat defined, yes. If, as we think it likely on the documents, he did not – but until Mr Cooke gives evidence about that what can one say? But your Lordship is quite right, we are saying it now seems likely he simply intended to convey that the parent supervisor would normally be found in the Bank's place of incorporation, no, he did not set out to mislead them.
There it is. That is what I have said. We have tried to make it as clear as possible.
If Mr Cooke comes into the witness box and says, "No, no, what I said was quite clear, I said the Concordat defines, explicitly defines, the parent country as the place of incorporation," well, then I would cross examine him on the basis that could not have made that statement knowing it to be true.
MR JUSTICE TOMLINSON: And that he was intending to mislead thereby?
MR POLLOCK: Well, yes, my Lord.
MR JUSTICE TOMLINSON: Dishonestly intending to mislead?
MR PLLOCK: Why does one make an untrue statement?
MR JUSTICE TOMLINSON: Right, thank you very much, Mr Pollock."
My immediate understanding was that the allegation had been withdrawn. However I reflected over the weekend upon the answer given and having studied it I realised that it was unsatisfactory. On Day 119 I said this: -
"15 This is an important point for a number of reasons.
16 It was put forward as an integral part of the claimants'
17 case to the effect that the contemporary international
18 understanding was not as Mr Cooke asserted it to be.
19 Subsequent reference to disclosed documents not shown to
20 me by the claimants has suggested that this is not
21 a sensible proposition. It is not an area in which I
22 shall receive any further evidence, concerned as I am on
23 this narrow point with the contemporary non-Bank of
24 England perception.
25 It was put forward as an example of the lengths to
1 which Mr Cooke was said to be prepared to resort in
2 order to further his dishonest purposes. The sting in
3 that allegation does not lie simply in the point whether
4 the definition of the rule was explicit or implicit; it
5 is a far more wide-reaching allegation of dishonest
6 conduct of a particularly disreputable and dishonourable
8 If, on the basis of the evidence as it stands, that
9 allegation is no longer made, it should be unequivocally
10 withdrawn. If it is pursued, that too should be
11 confirmed in unequivocal terms.
12 So the position is that the claimants have not
13 provided the clarification for which I asked. I would
14 like to know whether, as of now, the claimants assert
15 that at the Basle meeting in February, or in the paper
16 produced for the June 1980 meeting, Mr Cooke was
17 dishonestly setting out to mislead his fellow
18 supervisors by getting on to the record a statement of
19 the existing position which he knew to be in
20 substance -- and I emphasise "in substance" --
22 I shall expect a proper answer to this question when
23 the court convenes on Monday, 29th November.
24 I choose my words with care. It is a matter of
25 surprise, disappointment and concern that after
1 two weeks' deliberation a legal team of this calibre has
2 supplied to the court the answer which I was given last
"5 It is plain as a pikestaff from these documents what
6 was the general drift of what he was getting across:
7 hitherto, we have regarded ourselves as operating on the
8 basis that this is where the primary responsibility
9 lies, and I am suggesting that possibly we should depart
10 from that."
This discussion led me to conclude, as I made clear on Day 124, that the allegation against Mr Cooke had not been withdrawn at all, although Mr Pollock did on that day withdraw any allegation that Mr Cooke had had a dishonest purpose in preparing the paper for the June 1980 meeting, on the assumption that is that he had had a hand in the drafting. The result of all this was that Mr Cooke was left in the most unsatisfactory position of the Claimants seeking to put their case, and purporting to withdraw serious allegations which they had previously made, upon the basis that Mr Cooke had said something at the February 1980 meeting which both the record and the inherent probabilities demonstrated conclusively that he had not said. In the event that Mr Cooke went into the witness box and said that what he had said on that occasion was exactly what he was reported as having said the Claimants reserved the right to revive their allegation of dishonesty. This was an odd way of dealing with a point which was central to the liquidators' attack not just upon Mr Cooke but also upon the Bank as a whole. The Bank has submitted that it was also typical of the pattern whereby the Claimants were prepared to make wild fanciful allegations, which were plainly unsupported by and/or inconsistent with the documents and, when confronted by the hopelessness of an allegation, twisted and turned so as to preserve the allegation or the ability to put it in cross examination. I agree. The collapse of the "dawn raid" allegation signified the failure of the liquidators' attack upon the Bank's bona fides when it explained the thinking which informed its approach to the licensing of BCCI SA. It was of profound significance which no doubt explains the reluctance of the liquidators' Counsel to acknowledge unequivocally, as they should have done, that this grave allegation of disreputable, dishonourable and dishonest behaviour by Mr Cooke should never have been made.
Conclusions on the allegation of misfeasance at licensing
Other allegations of dishonesty
"The Claimants sprayed around unpleaded allegations without restraint to the effect that a conspiracy had been dishonestly hatched at an internal meeting shown in Mr Cooke's and Mr Mallett's diaries as scheduled to take place at 11.30am on Friday 16 December 1983.
(a) The genesis of the meeting was said by Mr Pollock to be that because Mr Gent "and his team" were concerned that the Bank should take on the consolidated supervision of the BCCI Group and thought they would have to push Mr Cooke forward, Mr Gent had manoeuvred Mr Cooke into calling the meeting, in order to make sure that the legal position over PPOB was addressed and considered.
In fact, however, Mr Gent's note of 5 December 1983 had advocated not that the Bank undertake consolidated supervision of the BCCI Group, but that it require the UK operations to be incorporated as a UK subsidiary – as Mr Pollock had accepted on Day 43, page 106. Nor had Mr Lynas' note of 19 October been advocating consolidated supervision either; rather, it recommended that the Bank press for local incorporation of UK operations.
(b) Nevertheless, Mr Pollock alleged that Messrs Gent and Lynas appeared at the meeting to have pushed Mr Cooke into agreeing that the approach to the Governor should indicate that the ultimate goal was consolidated supervision of a restructured group by the Bank. (This was, needless to say, flatly contrary to the pleaded allegation that Mr Gent's motive for misfeasance was to avoid the Bank having to become the lead supervisor in relation to BCCI or the consolidated supervisor of the BCCI Group.)
(c) Mr Pollock's allegations as to what had happened at the meeting were:
(i)"Mr Gent … must have been at this meeting reasonably persuasive because he and Mr Lynas appear to have been able to push Mr Cooke into agreeing that the approach to the Governor should indicate that the ultimate goal was consolidated supervision of a restructured group by the Bank"; and
(ii)that those at the meeting (whom he noted were "a very large number of people, including a couple from the legal department, Mr Cobbold and his colleague") had decided to mislead the Governor both as to the question of meeting the criteria for recognition and by "[leaving] out of account the situation that arises under the Banking Act if the main place of business is in the UK". So, a shockingly large conspiracy, involving for the first time people such as Mr Cobbold and Mr Thompson.
(d) It was a forensic necessity that some reason needed to be offered for why all these people should be prepared to deceive the Governor in this way. The Claimants' ludicrous suggestion was articulated by Mr Pollock in the following terms: "they were worried that if they told the Governor the truth … they would find themselves moving at very considerable speed towards the idea that they had to go to Abedi and say, "You move your headquarters here in the sense of your top, legally incorporated bank, we take over full consolidated supervision, or else we close you down, that is your choice." And that would have happened. Apart from that, in our respectful submission it is very difficult to see an acceptable reason for simply concealing this from the Governor…"
(e) Why would Mr Cobbold or Mr Thompson (who were from Group 1, not supervisors) care about that? Was not moving at very considerable speed towards consolidated supervision precisely what Mr Gent "and his team" had called the meeting in order to achieve? Was it not the Claimants' pleaded case that the strategy suggested in the resulting paper was of "incorporation of a United Kingdom holding company"?
Any of these questions would have been sufficient to hole this theory below the waterline. The question which the Court alighted upon was the one about Mr Thompson.
(i) Mr Thompson (who is now dead) was alleged to have been part of this conspiracy on the strength of his initials being in Mr Cooke's appointments diary for this meeting (though not in Mr Mallett's). Mr Pollock had no hesitation in accusing him of participation in the conspiracy:
"Given that you have had a decision, this decision would have – approach it this way – had to be taken by a very large number of people, including a couple from the legal department, Mr Cobbold and his colleague, because they had all sat down on 16th December and talked this through at some length, …"
(ii) On Day 108, the Court queried how that allegation was to be understood, given that it appeared from Miss Montgomery's submissions the previous day that no "malign motives" were to be ascribed to Mr Thompson. The answer, after some wriggling, appeared to be that perhaps there was another meeting after the one in the diary at 11.30am, although Mr Pollock had of course said that Mr Lynas' subsequent note reflected the sense of that meeting, or at least Mr Lynas' understanding of it.
(iii) The necessity for the Claimants to postulate an inner circle of conspiracy, from which Mr Cobbold, Mr Thompson and (Miss Montgomery said) "possibly" Mr Langley were excluded, was symptomatic not just of their willingness to spray allegations of misfeasance around at random, but of the way in which their conspiracy theories ran into the problem that too many people were involved for them to have any credibility. Again and again the Court was presented with conspiracies where the natural response was that that was surely rather a high-risk strategy of deceit, given that X, Y and Z would either have to be squared in advance or might have butted in to blow the gaffe. Here, the Claimants began, on the basis of two inconsistent diary entries, by asking the Court to find that there was a meeting at which all the participants decided for no rational reason whatsoever to deceive the Governor of the Bank of England, then, when asked how that could be so if one of the participants had done nothing wrong, suggested that maybe there had been a further meeting without that person."
Inconsistencies between the liquidators' case as presented orally and their pleaded case
"Finally, and perhaps most important of all, arrangements currently being developed for consolidated supervision in Luxembourg ignore the reality that, with the Group Treasury located in London, the Group's mind and management is in the UK and the market increasingly thinks of the Group as UK-based."
In addition to allowing this to go forward to the Governor unchanged, Mr Cooke himself added a sentence to the draft which said of the main branch office in London (Leadenhall Street) – "This branch is for all practical purposes the group headquarters." He also added to the suggested observation that BCCI SA had little more than a Head Office in Luxembourg the qualification that the Head Office in Luxembourg was "nominal." These were not the actions of a man who had hitherto assiduously withheld information of this sort from the Governor lest the possible implications thereof be worked out.
Further assistance to the Costs Judge
"Having said this, we would not wish you or the Liquidation Committee to make the mistake of believing that there can be any genuine comparison between your clients' legal costs and the Bank's costs. There are a number of reasons why the Bank's legal expenses are greater than your clients', the most important of which is the fact that the Bank had to respond fully and accurately to each and every allegation made by your clients whether in its pleaded case, in its "Criticism Documents" or in the oral submissions made at trial by Mr Pollock QC. Numerous allegations were made by your clients, without any apparent regard to whether or not they were supported by the evidence or whether or not they were consistent with other allegations which your clients were making. These allegations were often of the most serious kind, accusing Bank officials of acting dishonestly. The allegations were constantly changing and the case pursued by your clients at trial was not the case that your clients had pleaded. It was a necessary consequence of all of this that the Bank had to consider (and where necessary investigate), both by reference to contemporary documents and the recollection of the witnesses, all these allegations so that they could be accurately and fully answered. The burden placed on the Bank in having to respond carefully and painstakingly to countless vague and unparticularised allegations was a direct consequence of the way in which your clients put their case and inevitably added very considerably to the costs incurred by the Bank.
More particularly, there are a number of specific ways in which the burden of this action was borne by the Bank rather than by your clients, only the most obvious of which are set out below:
1. Witness statements: Your clients served no witness statements. The Bank served statements for 23 witnesses, many of considerable length, including two which were over 1,000 pages long. We enclose a list of those statements at Table D. The statements covered events over a period of 20 years. It was a massive exercise to identify the documents over 20 years relevant to each witness, then to provide each witness with the documents so that they could go through them and then to take them through not only the chronology as revealed by those documents but also through the relevant allegations in the 1,135 page Particulars of Claim. All of this was necessary prior to having meetings (often very many) with the witnesses which led to the production of draft statements which were themselves the subject of much detailed work as the witnesses reviewed and revised their statements at further meetings with the legal team until they were satisfied that the statements were, so far as possible, accurate. Further we then had to keep witnesses informed throughout the trial as yet further allegations were made.
2. Defence: The Bank had to undertake a very considerable exercise in the preparation of its Defence in order to correct the selective and misleading impression given by the 1,135 page Particulars of Claim, in which unparticularised allegations were scattered – rather in the same way that new unpleaded allegations were scattered by Mr Pollock during the course of the trial – in the hope that some would hit a target. The Bank had to respond to all such allegations and therefore had to deal with every single misleading allegation and omission in its Defence, which ran to no less than 2,250 pages of pure text.
3. Bank's disclosure: Since the trial comprised, in effect, an inquiry into the conduct of the Bank and its officials, the Bank's documents naturally formed the core of the Trial Bundle which comprised 192 lever arch files, as set out in Table E. Indeed 86% of the documents referred to at trial were disclosed by the Bank. It was a massive exercise for our firm to give disclosure of hundreds of thousands of documents and then to respond to various requests from you for yet further disclosure. It takes virtually no time to make these requests and yet a great deal of time to respond to them. Of course, we accept that the lawyers on your side had to read the documents that were disclosed but so did the lawyers on the Bank's side who were not themselves directly involved in the disclosure process.
4. Liquidators' disclosure: Although the Liquidators also provided a considerable volume of disclosure, the Bank quickly took the view that this was very largely useless – both in terms of its relevance to the case and the impenetrably poor way in which it had been listed and disclosed – and consequently made very few requests for further disclosure from the Liquidators. The way in which it was listed, by special dispensation of the Court and at your request, was very largely by box or file, thereby saving an enormous amount of time. Indeed, one of our assistants memorably looked into one box of disclosure to find that it only contained a broken chair leg. Moreover, the disclosure which was given by your clients seems in many cases to have been prepared by Deloittes, not your firm and, as we have said, we do not know whether you have included their costs in your £38 million figure. Furthermore, they had reviewed a large volume of BCCI's core documents and tagged these for disclosure in the Three Rivers case whilst reviewing those documents in the course of other earlier major litigation which they initiated, notably against the auditors and Bank of America, thus no doubt resulting in a saving of the costs which would otherwise have been attributable to the Three Rivers case.
5. Trial: At trial the Bank had to respond at great length to the submissions made by Mr Pollock QC in opening your clients' case. Given the partial, inaccurate and misleading submissions made on behalf of your clients it was necessary to address the court for 119 days by reference to the documents in the trial bundle, many of which had never been drawn to the court's attention. In relation to these oral submissions Mr Justice Tomlinson observed to Mr Stadlen QC on 2 November:
"You addressed me at enormous length on the documents in this case, as a result of which I had a far better understanding than I might otherwise have had …".
Not only was it necessary to address the Court orally at such length, but the Bank also handed up a further 195 documents during the course of its submissions (filling 14 or more lever arch files), the majority of which were written submissions specifically prepared in order to respond to allegations made by your clients."