MORRIS & others v BANK OF AMERICA & NATIONAL TRUST SAVINGS ASSOCIATION & others [2002] EWCA Civ 425

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
(The Hon Mr Justice Lloyd)
[2002] EWCA Civ 425Case No Case No: 2002/0074Venue Royal Courts of Justice, Strand,, London, WC2A 2LL
Between
MORRIS & othersAppellantsBANK OF AMERICA & NATIONAL TRUST SAVINGS ASSOCIATION & othersRespondents
Before
Lord Justice Simon BrownLord Justice ChadwickLady Justice HaleMr R Sheldon QC, Mr R Dicker QC & Dr F Oditah (instructed by Messrs Lovells) for the AppellantsMr J Brisby QC, Mr R Hill & Mr A de Mestre (instructed by Messrs Mayer Brown Rowe & Maw) for the RespondentsDate 25 March 2002

Lord Justice Chadwick :

These

[1]proceedings are brought by the joint liquidators of Bank of Credit and Commerce International SA (“BCCI SA”) and Bank of Credit & Commerce International (Overseas) Limited (“BCCI Overseas”) against Bank of America National Trust and Savings Association (“BoA”), BankAmerica Corporation (“BAC”) and BankAmerica International Financial Corporation (“BIFC”) for relief under section 213 of the Insolvency Act 1986. The section is in these terms:
“(1) If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any other fraudulent purpose, the following has effect. (2) The court, on the application of the liquidator, may declare that any persons who were knowingly parties to the carrying of the business in the manner above-mentioned are to be liable to make such contributions (if any) to the company’s assets as the court thinks proper.”
[2]The proceedings were commenced in February 1998 by an application in the liquidation of the two BCCI companies. Points of Claim were served on 3 March 1998. On 2 April 1998 BoA and the other BankAmerica corporations applied for an order striking out the proceedings. That application came before Mr Justice Lloyd in October 1998. After a preliminary review (extending over at least two days’ reading and three days’ hearing) he was satisfied that the attempt to demonstrate that the liquidators’ case was obviously unsustainable would involve “the court undertaking an exercise which it is not proper that the court should enter upon”; and, accordingly, he declined to entertain the application. The Court of Appeal upheld that decision, treating it as fully justified in the light of the remarks of Lord Templeman in Williams & Humbert Ltd v W & H Trade Marks (Jersey) Ltd [1986] AC 368, at pages 435-436,. The judgment of the Court (Lord Justice Morritt, Lord Justice Brooke and Lord Justice Sedley) was delivered by Lord Justice Morritt on 21 December 1999. It is reported at [2000] 1 All ER 954.[3]At paragraphs 7 to 14 of that judgment the Court set out the background to the liquidators’ claim, based upon an analysis of the case then pleaded. It is unnecessary to attempt that exercise afresh. The convenient course is to adopt those paragraphs as part of this judgment:
“7 Bank of Credit and Commerce International SA (SA) was incorporated in Luxembourg in 1972. Bank of Credit and Commerce International (Overseas) Ltd (Overseas) was incorporated in the Cayman Islands in 1975. Both were formed to carry on the business of banking and were duly authorised in the jurisdictions of their respective incorporation. The former but not the latter was also authorised to carry on the business of banking in the United Kingdom. In 1976 both of them became subsidiaries of BCCI Holdings (Luxembourg) SA (Holdings). The moving spirit behind BCCI was Mr Agha Hasan Abedi. The businesses of SA and Overseas were both similar and intermingled. As is now notorious the group collapsed in 1991 and all three companies are now in compulsory winding up in at least one jurisdiction (paras 3-15 of the points of claim). 8. Mr Abedi was also concerned with International Credit and Investment Co Ltd, a company incorporated in Liechtenstein in 1973, the successor to its business, International Credit and Investment Co Overseas Ltd, a company incorporated in the Cayman Islands in 1976 and the latter’s holding company ICIC Holdings Ltd which was also incorporated in the Cayman Islands in 1977. Unless it is necessary to distinguish between them we will refer to these companies generically as ‘ICIC’. The liquidators assert that ICIC was controlled by BCCI and was directed by Mr Abedi and other persons acting under his direction. It is alleged that ICIC was used by BCCI to hold shares in BCCI and as a vehicle for the purchase by BCCI of its own shares from BoA (paras 16-20 of the points of claim). 9. In paras 27 and 28 the liquidators set out the fraud in the conduct of the business of BCCI on which they rely and the causes of the insolvency and collapse of BCCI which they allege. The latter includes the artificial inflation of the group’s capital by the acquisition of its own shares through nominees and the declaration and capitalisation of stock dividends out of fictitious profits. Paragraphs 29 to 33 deal with the initial capital of BCCI on its formation. Paragraphs 34 to 80 deal with the subsequent apparent, but as alleged fictitious, increases in capital. For present purposes it is sufficient to record that SA was formed pursuant to a memorandum of understanding dated 5 June 1972 which recorded that BoA would subscribe for 25% of the initial share capital of $2.5m and the management group would assume full responsibility for providing the balance. Of the balance of 75%, 60% would be subscribed by two named shareholders who would grant options over those shares to the management group. In the event the balance of 75% was subscribed by a number of individuals resident in the Middle East referred to in the points of claim as ‘the Middle East Investors’. They granted options and powers of attorney to Mr Abedi as required by the memorandum of understanding. The liquidators allege that the acquisition of such shares by the Middle Eastern Investors or some of them were funded by ‘non-performing and evergreen’ loans from BCCI which ‘were not intended to be repaid by the Middle Eastern Investors’. By June 1980, as alleged by the liquidators, the only real capital SA or Holdings had was $4.8m provided by BoA; the rest of the reported capital was fraudulently misstated. 10. In addition to being a major shareholder BoA also provided banking facilities to BCCI. As either a member in or banker to BCCI BoA carried out a number of audit and credit examinations of BCCI between 1974 and 1977. Details of these and other examinations or investigations into the affairs of BCCI are contained at paras 81 to 125 of the points of claim. In general terms they recorded the increasing concern of BoA as to its involvement with BCCI. For present purposes it is only necessary to refer to a few of them. They are a memorandum dated 8 March 1977 (the March 1977 memorandum) indicating in some detail the growing concern of BoA as to the imprudent banking practices of BCCI (para 102); a confidential report dated 23 September 1977 to a senior officer of BoA written by Mr Frank Winfield (the Winfield report) (para 104); a letter from Mr Poort and Mr Trueblood, who had been concerned in the credit examination of BCCI for 1977 carried out between 3 October and 25 November 1977, to the vice-president of BoA credit examination department dated 12 December 1977 (the Poort and Trueblood letter) accompanying the 1977 credit examination report and the report, dated February 1978, of Mr Vaez, an examiner with BoA’s regulatory body, OCC, following a review of some of BoA’s files (the OCC memorandum). 11. In paras 126 to 158 the liquidators describe what is called the divestiture. This is the process whereby BoA disposed of its shareholding in BCCI. There are a number of material features to which we should refer. The background to the divestiture was the resolution of the executive council of BoA passed on 30 November 1977 to divest from BCCI and to begin the reduction of its credit lines with a view to disengaging from BCCI in due course and the content of the Poort and Trueblood letter with the credit examination report into BCCI for 1977 sent to the senior officers of BoA on 12 December 1977. The letter had reiterated the problems of BCCI including inadequate reserves, unsatisfactory accounting records, incomplete credit files and loan collection difficulties. Eleven days later, on 23 December 1977, BoA entered into an agreement with ICIC whereby ICIC would buy the BoA’s shares in BCCI for a minimum price of $32.4m over a three year period from 1978 to 1980. The agreement contained no express provision whereby BoA would lend to ICIC the money necessary to complete the purchase. The liquidators allege that it was in fact so agreed or understood at the time. The agreement was completed by purchases over the years 1978 to 1980 and they were in fact funded by BoA pursuant to three separate loan agreements with ICIC made in June 1978, 1979 and 1980. The liquidators allege that, contrary to the various press releases and statements made by BoA at the time, the reason for the divestiture was the concern of BoA as to the banking practices of BCCI and the substantial effect of the arrangement was the repurchase by BCCI of those of its shares then held by BoA. The liquidators also allege that the ostensible loan to ICIC was repaid by BCCI by the transfer of funds to BoA’s branch office in Bahrain. 12. A summary of the liquidators’ case on fraudulent trading, divided into Case I and Case II, and BoA’s participation in both cases is contained in paras 159 to 166. Case I covers the period between 1977 and 1983, Case II covers the entire period from the time of incorporation to 1991. For the purposes of this appeal it is only necessary to note the allegations made in relation to Case I. It is alleged in para 159.3 that: ‘Between 1977 and 1983 the business of BCCI SA was carried on with intent to defraud its creditors and depositors and/or the creditors of any other person and/or for a fraudulent purpose, namely to mislead its regulators as follows . . . 159.3 The Middle Eastern Investors or some of them were nominees for Abedi (who was in turn a nominee for BCCI). The shares in BCCI Holdings registered in the names of the Middle Eastern Investors or some of them were funded by non-performing and evergreen loans booked in BCCI SA (which loans were not intended to be repaid) and therefore did not represent real capital. Further or alternatively, by recording shares in their names when they or some of them were BCCI nominees, BCCI thereby misrepresented to the regulators, its depositors and creditors, the amount of its capital and the identity of the beneficial owner of its shares.’ The alleged participation of BoA, ignoring for present purposes the separate corporate bodies, was selling the shares in BCCI, lending the repurchase price ostensibly to ICIC but in reality to BCCI and receiving repayments thereof from BCCI. 13. In paras 167 to 172 the liquidators deal with the knowledge they allege BoA to have had concerning Case I. In para 169 it is alleged: ‘In entering into the divestiture agreement and/or in receiving the divestiture payments [BoA] knew or was recklessly indifferent or deliberately blind to the fact that . . . 169.4 BCCI Holdings and/or BCCI SA was largely capitalising itself in that it owned 70% of its issued share capital alternatively owned at least 50% thereof by December 1977 by reason of the facts that : 169.4.1 The Middle Eastern Investors or some of them were nominees for Abedi (who in turn was a nominee for BCCI) and the shares registered in their names were funded by non-performing and evergreen loans provided by the BCCI Group (which loans were not intended to be repaid) . . . 169.4.2 ICIC which . . . owned 70% of the issued share capital of BCCI Holdings, (a) was not a separate entity from BCCI; (b) had no self-generated earnings and derived almost all its income from dividends which it received from BCCI most of which dividends were stock; (c) was controlled and funded by BCCI Group; (d) was used by BCCI as a vehicle to hold shares in BCCI . . .’ Paragraph 170 indicates what the liquidators will rely on in support of the allegations of knowledge contained in para 169. Paragraph 170.4 sets out in 14 sub-paragraphs, . . . , the matters relied on in support of the allegation that BoA knew that BCCI was capitalising itself through the Middle Eastern Investors or some of them. Paragraph 170.5 does the same in relation to the allegation of knowledge that: ‘(a) ICIC Overseas was not a separate operating entity from BCCI; (b) had no self-generated earnings and derived almost all its income from dividends which it received from BCCI most of which dividends were stock; (c) was controlled and funded by the BCCI Group; (d) was used by BCCI as a vehicle to hold its own shares [and to buy back the BoA Group’s shares in BCCI]; (e) could not fund out of its own resources (or those of BCCI’s management) payment for shares in BCCI which it held or the subordinated loans which it gave to BCCI Holdings or BCCI SA [or the purchase price for the BoA Group’s shares in BCCI which it purportedly bought or the repayment of the divestiture loans from BoA] and as a result (i) the real purchaser of [BoA’s] shares in BCCI Holdings was BCCI SA and/or BCCI Holdings; (ii) the real borrower of the divestiture loans was BCCI SA; (iii) the repayment of the divestiture loans would be effected by BCCI SA (as was in fact the case) and (iv) accordingly the divestiture would inevitably exacerbate BCCI SA’s underlying capital . . .’ There follow 29 paragraphs or sub-paragraphs . . . 14. In paras 173 to 186 the liquidators set out the detail of their Case II consisting of misrepresentations as to ownership and inflation of capital and earnings, the secret acquisition of control of foreign institutions, non-performing loans and bribes. The alleged knowledge of BoA is set out in detail in paragraph 187 which contains 58 paragraphs or sub-paragraphs. In paras 189 to 226 the liquidators set out further matters on which they rely as constituting the further knowing participation in the fraudulent activities of BCCI after 1978. These include the allegation that notwithstanding the resolution of the executive council of BoA passed on 30 November 1997 BoA in fact increased its credit lines to BCCI. The conclusion, expressed in para 228, is that BoA is liable to contribute to the assets of BCCI the amount of the deficiency with regard to its creditors estimated to be at least $6bn.”
[4]The subsequent progress of the proceedings is conveniently summarised in paragraphs 5 and 6 of the judgment which has led to the present application before this Court; that is to say, the judgment which Mr Justice Lloyd was to deliver on 21 December 2001: 5. . . . By that stage [following the dismissal of the appeal against his order of 23 October 1998] it was the end of 1999, the Points of Claim had been amended to deal with some points which needed modification, as became apparent during the hearing before me, and Points of Defence had been served, and it was necessary to get on with the preparation for trial. As to that the Court of Appeal gave some general guidance, which I have found, and continue to find, helpful. The Court of Appeal said, more specifically, that the liquidators ought to provide further clarification of their case for saying that Bank of America knew of the fraudulent trading, and they did so, answering a request from Bank of America, on 23 March 2000. Since then I have heard six case management conferences, not counting the hearing on which this judgment is given. 6. In April 2000 I fixed January 2002 as the starting date for the trial, for which I was given a provisional estimate of 3 to 6 months. In April 2001, however, I directed that the trial should commence in October 2002, and should not include the issues of quantum in relation to the liquidators’ Case II (on which I also ordered that no further disclosure should be made until after the first trial). There is a fairly elaborate and detailed timetable leading to the first trial, which has been reviewed at each case management conference, and which has, for the most part, been adhered to closely by the parties.”[5]The judge went on to explain that discovery had been “a gargantuan task” since, as he put it “the breadth of the allegations about the fraudulent trading has rendered potentially relevant a vast range of the conduct of the business of BCCI between 1972 and 1991 . . . and the allegations about Bank of America’s knowledge have rendered potentially relevant a great deal of documentation in Bank of America’s files.” He referred to the importance which he, and the parties, attached to the preparation of agreed trial bundles – in hard copy and electronic form. He said this, at paragraph 7 of his judgment:
“It is essential to get the document database into a state as close as possible to its final form in good time for all the relevant documents to be able to be put to expert and factual witnesses, and it also essential for trial bundles to be finalised no later than the fixed date, in order that proper preparation for the trial itself, including skeleton arguments, can be carried out in a reasonably orderly and efficient way.”
[6]The judgment to which reference has just been made arose out a case management conference on 13 and 14 December 2001. Among the matters for consideration at that hearing was an application by the liquidators for permission to re-amend the points of claim and to amend the reply. The judge refused to allow most of the amendments sought. He did so for the reason which he gave at paragraph 41 of his judgment:
“All in all I consider that to make these amendments would add to the case significantly and inappropriately, might well require additional disclosure and would require substantial additional review and analysis of the documentation required for trial. This would render unworkable the presently prescribed programme for completion of the Bank of America’s analysis of the documents and requests for inclusion in the database. That is set on a timetable, sought by the liquidators, which is tight already and should not be allowed to slip.”
The amendments for which he gave permission were confined to “a limitation of the case to the investors who are said to be nominees, and without introducing the new ways of putting that plea.”[7]The judge’s decision is reflected in the order which he made on 21 December 2001. Paragraph 1 of that order is in these terms, so far as material:
“The parties shall have permission to amend the Statements of Case as follows:- 1.1 The Applicants shall have permission to re-amend the Amended Points of Claim in accordance with paragraphs 56 and 57 of the Judgment of Mr Justice Lloyd handed down on 21 December 2001 (the Judgment”) . . . 1.2 The Respondents shall have permission to amend the Points of Defence, limited to a response to the Re-Amended Points of Claim and as directed in paragraph 57 of the Judgment . . . 1.3 The Applicants shall have leave to amend the Points of Reply, limited to a response to the Amended Points of Defence and as directed in paragraph 57 of the Judgment . . . 1.4 Save as aforesaid, permission to amend the Amended Points of Claim and the Points of Reply in the form of the draft before the Court is refused.”
That order has to be read with paragraphs 56 and 57 of the judgment:
“56. In the result I will permit the liquidators to re-amend the Amended Points of Claim, but not as they seek. It will be for their legal team to reformulate the amendments, but in principle the position is as follows: i) There will be no allegation of nomineeship in relation to any of the subscribers to the initial share capital in 1972. ii) An allegation of nomineeship on the basis already made, will be allowed to continue as regards three named subscribers to the 1973 share issue, as set out in paragraph 39 of the proposed Re-Amended Points of Claim. iii) No allegation of nomineeship will be allowed as regards any of the shares taken under the rights issues in 1977, 1978 and 1979. iv) The new formulations of the case set out in paragraphs 32B.2 and 32B.3 of the proposed Re-Amended Points of Claim may not be advanced. v) Equally, the Points of Reply may not be amended as proposed in paragraph 62.4.4 of the draft. 57. At the same time the opportunity should be taken to bring into the Points of Claim, and successive statements of case, such minor amendments as have been agreed between the parties over the last couple of years, . . .”
[8]It is clear, from the reasons which he gave when refusing permission to appeal to this Court, that the judge saw his order as an exercise of case management powers within his discretion as the judge assigned to this complex litigation. The liquidators seek permission from this Court to appeal from paragraph 1 of the order of 21 December 2001 – and also from paragraphs 5 to 9 which contain orders as to costs. The application in relation to the later paragraphs of the order are not addressed in this judgment. The application has been listed for hearing with the appeal to follow (if permission be granted). There is some degree of urgency; not only because the parties need to know the outcome of the application (and any appeal) in order that they can continue their preparations for trial, but also because (as we understand the position) there is a further case management conference before the judge on 26 and 27 March 2002.[9]It is rare for this Court to entertain –and even more rare for it to allow – an appeal against a case management decision of a judge who will be the judge at trial; a fortiori , in a case of this nature where, as assigned judge, the judge has accumulated knowledge of the background over the course of a number of interlocutory hearings during the past two years or more which this Court cannot begin to match. We were reminded by Mr Brisby QC, counsel for BoA and the other two BankAmerica corporations, of observations in this Court in two recent appeals, Wembley National Stadium Ltd v Wembley (London) Ltd (unreported, 28 November 2000) at paragraphs 54 and 59, and Collins v CPS Fuels Ltd [2001] EWCA Civ 1597 (unreported, 9 October 2001) at paragraph 53. As Lord Justice Jonathan Parker put it in the Wembley case:
“By its nature case management is quintessentially a matter for the court in which the proceedings are being conducted, and the scope for intervention by an appellate court in relation to case management decisions taken by that court is necessarily limited in my view. Only in the most compelling circumstances, as I see it, would intervention of that kind be warranted.”
[10]The liquidators recognise that hurdle. They seek to surmount it by asserting that the judge made a fundamental error when he concluded that the proposed amendments raise a new case. As it is put, in paragraph 5 of the skeleton argument submitted on their behalf:
“Lloyd J’s error, in concluding that the amendments raised a new case, vitiated the entirety of his reasoning. Permitting the amendments would not have added to the case and would not have either broadened the scope of disclosure nor jeopardised the timetable to trial. On the contrary the proposed amendments reduced the scope of the existing allegations and would have reduced the task of preparing for trial.”
At first sight the submission that an experienced judge, who has become familiar with a case, however complex, in the course of a number of interlocutory hearings, has made a fundamental error in failing to understand (a) what was the claimants’ pleaded case (prior to the proposed amendments) and (b) what the effect of the proposed amendments would be on that pleaded case, is bold indeed. Nevertheless, that is the submission which this Court has to address; and, if it is made good, there is obvious force in the submission that the judge’s error has vitiated the reasoning which underlies his case management decision. A decision to refuse to allow amendments to a statement of case which do not introduce new issues but which have the effect of narrowing the existing issues would be difficult, if not impossible, to justify.[11]In order to understand the criticism of the judgment below which the liquidators seek to make, it is pertinent to have in mind that, to succeed in a claim for relief under section 213 of the Insolvency Act 1986, it is necessary to establish three elements:(i) that the business of the company has been carried on with intent to defraud creditors of the company or for some other fraudulent purpose (fraudulent trading),(ii) that the person against whom relief is sought was party to the fraudulent trading; and(iii) that he was “knowingly” a party to that fraudulent trading. In relation to that third element this Court observed, at paragraph 25 of its judgment in the earlier appeal ([2000] 1 All ER 954, 963 g ), that:
“It is common ground for the purposes of the appeal that ‘knowingly’ includes wilful blindness or reckless indifference and that to succeed on a claim under section 213 of the 1986 Act it is necessary to show that the defendant acted dishonestly.”
It has not been suggested that we should approach the matter on a different basis.[12]It is no surprise, therefore, that the points of claim make allegations of fraudulent trading, participation and knowledge. The allegations of fraudulent trading are made in paragraphs 159, 159A and 160 (Case I) and paragraph 161 (Case II) of the amended points of claim.[13]Paragraph 159 begins with the introductory words:
“159 Between 1977 and 1983 the business of BCCI SA was carried on with intent to defraud its creditors and depositors and/or the creditors of any other person and/or for a fraudulent purpose ("fraudulent trading case I") as follows: . . .”
There follow 17 sub-paragraphs of particulars. Sub-paragraph 159.3 is set out in the citation from the earlier judgment of this Court ([2000] 1 All ER 954, 959 c-e , at paragraph 12) and it is unnecessary to set it out again. But it is material to note the allegations in the following sub-paragraphs: 159.1 At all material times BCCI SA, as a bank, was required inter alia by the LBC [Luxembourg Banking Commission – the regulator] to have and maintain a capital to deposit ratio of 3%. It never had that amount of capital, whether in 1977 or in June 1980 when the divestiture of the last tranche of BAC’s and BIFC’s shares in BCCI Holdings was completed. 159.2 After September 1976, BAC and BIFC did not make any capital contributions to BCCI Holdings or BCCI SA. The only real capital which BCCI Holdings and BCCI SA had was the US$4.8 million paid by the BOA Group. . . . 159.4 According to BOA's credit examiners, in 1977 ICIC Overseas owned and/or controlled 70% of BCCI Holdings' issued shares. ICIC Overseas was controlled by the BCCI Group and used by the BCCI Group as a vehicle to hold and own its own shares and to repurchase the shares of the BOA Group in BCCI Holdings between 1978 and 1980. The shares registered in its name and/or in the names of its nominees were under the control of the BCCI Group and were funded by loans booked in BCCI SA, BCCI Overseas and/or other entities owned and/or controlled by the BCCI Group. Such shares did not therefore represent real capital, but misrepresented to its regulators, depositors and creditors the amount and beneficial ownership of BCCI's capital. . . . 159.8 By December 1977, the only real capital supporting BCCI SA's and BCCI Overseas's deposits of about US$1.7 billion was the US$4.8 million contributed by the BOA Group, of which US$1.5 million was contributed to BCCI SA prior to December 1975. US$4.8 million could not support the deposits of BCCI SA and/or BCCI Overseas, whether in 1977 or at any time thereafter up to and including the completion of the divestiture in1980. . . . 159.11 When the last tranche of BAC's and BIFC's shares in BCCI Holdings was purportedly sold to ICIC Overseas in June 1980, the US$4.8 million capital paid into BCCI Holdings by the BOA Group was withdrawn from BCCI Holdings at a cost to BCCI SA of US$47.75 million, leaving the BCCI Group with no capital (at least initially) to support the existing and/or future deposits of BCCI SA and/or BCCI Overseas. 159.12 Notwithstanding that BCCI SA lacked the capital prescribed by the LBC, it continued to trade and in the process incurred further debts and attracted further deposits, and misapplied the deposits placed with it inter alia in funding the divestiture payments made to each of BOA, BAC and BIFC. 159.13 In any event, in 1977 and at all times thereafter up to and including completion of the divestiture in 1980, BCCI Holdings' shares were worthless because inter alia (a) its published capital funds did not exist; (b) the only real capital was the US$4.8 million contributed by the BOA Group, which had in fact been lost; and (c), no third party was interested in BCCI Holdings' shares. . . . 159.15 As a result of the divestiture, BCCI Holdings owned (at least initially) all or most of its own shares. 159.16 In view of the foregoing, it was inevitable that the divestiture would exacerbate BCCI SA’s underlying lack of capital, as was in fact the case.” Paragraph 159A contains the allegation that the true reasons for BOA Group's divestiture of its shares in BCCI Holdings were the fraudulently misstated recorded capital and the real concerns of the BOA Group about, inter alia, the banking practices and financial condition of the BCCI Group, as pleaded in pleaded in paragraphs 34 to 125 of the amended points of claim.[14]Paragraph 161 (case II) is in these terms, so far as material:
“161. Further or alternatively, at all material times the businesses of BCCI SA and/or BCCI Overseas were carried on with intent to defraud their creditors and depositors and/or the creditors of any other person and/or for a fraudulent purpose namely to mislead the regulators of BCCI SA and/or BCCI Overseas ("fraudulent trading case II") by: 161.1 misrepresenting the ownership of BCCI Holdings' shares and/or the ultimate ownership of BCCI SA's and/or BCCI Overseas' shares; and/or 161.2 misrepresenting the amount of BCCI Holdings' share capital and/or the capital of BCCI SA and/or BCCI Overseas; and/or 161.3 . . . and by so doing prejudicing the interests of their creditors and depositors and misleading their own regulators.”
[15]Paragraphs 162 to 163A (Case I) and paragraph 164 (Case II) of the amended points of claim contain a summary of the allegations that BoA, BAC and BIFC participated in BCCI SA’s and BCCI Overseas’ fraudulent trading. More detailed allegations are contained in paragraphs 165 to 172 (Case I) and paragraphs 173 to 226 (Case II). The allegations of knowledge on the part of BoA, BAC and BIFC, and so of knowing participation in fraudulent trading, are made in paragraphs 169 to 172 (Case I) and paragraphs 187, 188 and 227 (Case II).[16]Paragraph 169 (Case I knowledge) begins with the introductory words:
“169 In entering into the divestiture agreement and/or in receiving the divestiture payments BOA, BAC and BIFC and each of them knew or was recklessly indifferent or deliberately blind to the fact that: . . .”
The divestiture agreement was entered into in December 1977. Divestiture was not completed until June 1980; divestiture payments, funded by loan agreements between BoA and ICIC being received in the period 1978-1983. So, as is common ground, the allegation of knowledge made in the introductory words of paragraph 169 is apt to cover both knowledge acquired before December 1977 and retained throughout that period and knowledge acquired after December 1977 during divestiture payments were received.[17]There follow, in paragraph 169, five sub-paragraphs, of which two are of particular relevance:
“169.1 BCCI SA did not have the amount of capital which it was required to have and maintain by inter alia the LBC, alternatively BCCI SA's recorded share capital was fraudulently misstated.” . . . 169.4 BCCI Holdings and/or BCCI SA was largely capitalising itself in that it owned 70% of its issued capital alternatively owned at least 50% thereof by December1977 by reason of the facts that: 169.4.1 The Middle Eastern investors or some of them were nominees for Abedi (who was in turn a nominee for BCCI). and/or the BCCI Group and the shares registered in their names were funded by non performing and evergreen loans provided by the BCCI Group (which loans were not intended to be repaid) as pleaded in paragraphs 32, 32A, 39 and 80.4.1 above. 169.4.2 ICIC which, according to BOA’s credit examiners, owned 70% of the issued share capital of BCCI Holdings, (a) was not a separate operating entity from BCCI; (b) had no self-generated earnings and derived almost all its income from dividends which it received from BCCI most of which dividends were stock; (c) was controlled and funded by the BCCI Group; (d) was used by BCCI as a vehicle to hold shares in BCCI; and (e) could not in any event fund out of its own resources (or those of BCCI's management) (i) payment for the shares in BCCI which it held or the subordinated loans which it purportedly provided to BCCI Holdings and/or BCCI SA; (ii) payment for the shares of BAC or BIFC in BCCI Holdings which it purportedly purchased nor could it repay out of its own resources (or those of BCCI's management) any loan required to finance the said purchase. 169.4.3 BCCI SA had no other source of capital apart from BCCI Holdings, which in turn had no sources of capital outside the BOA Group as, so far as material no third party was interested in acquiring shares in BCCI Holdings.”
[18]Paragraph 170, and sub-paragraph 170.1, of the amended points of claim are in these terms:
“170. In support of the allegations of knowledge contained in paragraph 169 above, the Applicants will rely inter alia upon the following (in the following sub-paragraphs an allegation that BOA, BAC, BIFC and each of them knew a fact includes an allegation that BOA, BAC, BIFC and each of them was recklessly indifferent or deliberately blind to the fact): 170.1 In relation to the contention that BOA, BAC, BIFC and each of them knew that BCCI SA did not have the amount of capital which it was required to have and maintain by inter alia the LBC, alternatively that BCCI SA's recorded capital was fraudulently misstated the Applicants will rely upon the facts and matters pleaded in paragraphs 170.2 to 170.5 below.”
Paragraph 170.4, as this Court pointed out in its earlier judgment (at paragraph 13), sets out in 14 sub-paragraphs matters upon which the liquidators will rely “inter alia” in relation to the allegation (made in paragraph 169.4 and sub-paragraph 169.4.1) that “BCCI Holdings and/or BCCI SA was capitalising itself through the Middle Eastern Investors or some of them”.[19]Paragraph 188 (Case II knowledge) is in these terms:
“188 Without prejudice to the generality of the foregoing, the Applicants will contend that BOA continued to participate in BCCI SA's and/or BCCI Overseas' fraudulent trading after 1978 in the manner alleged in paragraphs 189 to 226 below in circumstances where it knew that BCCI SA and/or BCCI Overseas were trading in the manner pleaded in paragraph 161 and 173 to 185A above or in circumstances where it had no reason to believe that BCCI SA and/or BCCI Overseas had ceased to trade in that manner, alternatively, BOA was recklessly indifferent whether or not BCCI SA and/or BCCI Overseas continued to trade in that manner, being solely interested in the profitability of its relationship with BCCI SA and/or BCCI Overseas. In support of this contention, the Applicants will rely inter alia upon the following: . . .”
There follow 28 sub-paragraphs of particulars. It is to be noted that the allegation that BoA knew that BCCI SA and BCCI Overseas were trading “in the manner pleaded in paragraph 161” incorporates an allegation of knowledge that the businesses of BCCI SA and BCCI Overseas were being carried on with intent to defraud the regulators by “misrepresenting the amount of BCCI Holdings’ share capital and/or the share capital of BCCI SA and BCCI Overseas” – see paragraph 161.2, which has been set out earlier in this judgment.[20]The allegations in paragraphs 159.1, 159.2, 159.11 and 161.2, – that BCCI SA, as a bank, was required by the regulator to maintain a specified capital to deposit ratio; that it never (throughout the period to June 1980) had the capital to meet that requirement; that the only capital which BCCI SA and BCCI Holdings did have was the US$4.8 million introduced by BoA and the other companies in the BankAmerica group; that after divestiture BCCI SA (and BCCI Overseas) had no capital to support deposits; and that, at all material times, the businesses of BCCI SA and BCCI Overseas were being carried on with intent to defraud the regulators by misrepresenting the amount of the capital available – have to be read in the light of earlier allegations in the amended points of claim. It is convenient to refer, first, to paragraph 28: "28. The fraudulent activities carried out within the BCCI Group by Abedi, Naqvi and other persons working under their direction included the following:28.1 The concealment of the beneficial ownership of shares in BCCI Holdings and/or BCCI SA and/or BCCI Overseas, including the financing by BCCI SA and/or BCCI Overseas of secret purchases of BCCI Holdings' own shares by BCCI Holdings through ICIC Overseas and other nominees and the use of secret repurchase and other hold harmless arrangements.28.2 The overstatement of BCCI SA's and/or BCCI Holdings' capital by (a) the concealed purchase by BCCI SA and/or BCCI Holdings of its or their own shares and the funding of such purchases by BCCI SA and/or BCCI Overseas and/or other entities controlled by the BCCI Group; . .”[21]There follow, in paragraphs 29 to 80 of the amended points of claim, particulars of the formation of BCCI SA in 1972 (paragraphs 29 to 33) and the alleged under-capitalisation of the BCCI Group between 1972 and 1980 (paragraphs 34 to 80). Particulars of the initial capitalisation are at paragraph 32:
“32. On incorporation, BCCI SA had a paid up capital of US$2.5 million. BOA subscribed US$500,000. BOA's Italian subsidiary, Banca D'America E D'Italia ("BAI"), subscribed US$125,000. (BOA and its affiliates are hereafter referred to as "the BOA Group"). The balance of the subscription money (US$1,875,000) was credited to a number of Middle Eastern shareholders ("the Middle Eastern investors") including Sheikh Zayed to whom US$500,000 was credited, representing 10,000 shares. The Middle Eastern investors granted Abedi call options (exercisable at any time), general powers of attorney to deal with the shares as he liked and general proxies (without instructions) to vote the shares. The terms of the call options (which inter alia empowered Abedi to sign the share register as evidence of the exercise of the call options) and powers of attorney were approved by BOA. The shares registered in the names of the Middle Eastern investors or some of them were funded by non performing and evergreen loans booked in BCCI SA, which loans were not intended to be repaid by the Middle Eastern investors. On or about 28 December 1976, Sheikh Zayed sold to ICIC 10,000 BCCI shares.”
That allegation was supplemented by paragraph 32A, introduced by amendment in January 1999 – that is to say, shortly after Mr Justice Lloyd had refused to strike out the proceedings and before the first hearing in the Court of Appeal:
“32A At all material times the shares held by the Middle Eastern investors or some of them pursuant to nominee and/or guaranteed buyback arrangements with Abedi were beneficially owned and/or controlled and funded by BCCI. References hereafter to the Middle Eastern investors or shareholders do not and are not intended to include Abu Dhabi Investment Authority (“ADIA”) which acquired shares in BCCI in 1981 or Sheikh Mahfouz who became a BCCI shareholder in 1986.”
A strict construction of the expression “the Middle Eastern investors” as defined in paragraph 32 would lead to the view that those within that expression were only Middle Eastern shareholders who had subscribed (or were credited as having subscribed) to shares in BCCI SA on its incorporation in 1972. It is common ground, however, that the expression was not intended to be read, and has not been read, in that limited sense. The expression was intended to include all Middle Eastern shareholders from time to time (other than those expressly excluded by paragraph 32A).[22]Particulars of seven occasions on which the capital of BCCI SA or BCCI Holdings was, or was purportedly, increased are given. The first, in 1973, is pleaded in these terms (so far as material), at paragraph 39:
“39. In order to correct its gross undercapitalisation BCCI SA resolved to double its paid up capital to US$5 million. US$500,000 was subscribed by BOA. BIFC subscribed US$125,000. US$875,000 was credited to a new set of Middle Eastern investors funded wholly or partly by non performing and evergreen loans from BCCI SA's Abu Dhabi branch (which loans were not intended to be repaid) from which the funds were transferred to BCCI SA's account with BOA Luxembourg SA, one of BOA's subsidiaries. . . .”
The second, in 1975, is pleaded at paragraph 52:
“52 On or about 31 December 1975, BCCI Holdings acquired 154,000 BCCI SA shares representing 70% of BCCI SA's issued and recorded paid up share capital and issued equivalent shares in BCCI Holdings to BCCI SA's former shareholders. At the same time, the recorded share capital of BCCI Holdings was increased from US$7.7 million to US$13,697,000 by the issue of 119,940 shares for cash. ICIC Limited, which had no self-generated earnings and had a recorded net worth of less than US$100,000, was credited with US$5,637,000 while US$360,000 was credited to two Middle Eastern investors. As a result, Abedi and/or the BCCI Group controlled all the issued share capital of BCCI Holdings pending the exchange by the BOA Group of its BCCI SA shares in return for an equivalent number of shares in BCCI Holdings. . . .”
[23]The other five occasions on which capital was increased were after the divestiture agreement had been entered into in December 1977. The pleaded case is at paragraphs 65, 70 and 71, 76 and 77 of the amended points of claim. So far as material the allegations are these:
“65. . . . on 29 December 1977, BCCI Holdings increased its recorded share capital by US$20 million (from US$30 million to US$50 million): US$10 million by way of stock dividends; US$10 million by way of a rights issue of 200,000 US$50 shares at US$ 125 each. . . . . . . 70. In December 1978, BCCI SA again increased its recorded share capital to US$40 million by issuing 160,000 shares to BCCI Holdings for cash. At the same time, BCCI Holdings purportedly gave BCCI SA a new subordinated loan of US$15 million. . . . 71. At an extraordinary general meeting of BCCI Holdings held on 22 December 1978, the recorded share capital of BCCI Holdings was increased from US$50 million to US$70 million by a purported rights issue of 400,000 shares of US$50 each at US$125 each. . . . 76 In December 1979, the recorded share capital of BCCI Holdings was increased from US$70 million to US$90 million by (a) declaring and capitalising a stock dividend of US$5 million and (b) a rights issue of 300,000 US$50 shares (with a face value of US$15 million) for US$125 each. The premium of US$22.5 million was credited to the "General and Other Reserves". It appears from BCCI Holdings' board minutes of a meeting held on or about 28 December 1979 that the entire US$37.5 million (share capital and premium) was " transferred to a reserve account for shares to be allotted to Mr Aijaz Afridi acting for third parties ", notwithstanding that the recorded capital increase was attributed to a rights issue. . . . 77. In February 1980, the recorded share capital of BCCI Holdings was increased from US$90 million to US$95 million by the declaration and capitalisation of a US$5 million stock dividend. In or around April 1980, the recorded share capital was further increased by US$15 million to US$110 million. That increase was attributed to a rights issue of 300,000 US$50 shares for US$125 each. . . .”
[24]Paragraph 80 of the amended points of claim begins with these introductory words:
“80. Notwithstanding the above purported increases of BCCI SA’s and/or BCCI Holdings' share capital or capital funds, between 1972 and June 1980, the recorded capital of BCCI SA and/or BCCI Holdings was fraudulently misstated in that the only real capital which BCCI SA and BCCI Holdings had was the capital contributed by the BOA Group totalling US$4.8 million. Further or alternatively, BCCI SA never had the amount of capital which, as a bank, it was required to have and maintain by inter alia the LBC for the following reasons: . . .”
[25]It is implicit in the allegation that “Notwithstanding the above purported increases of BCCI SA’s and/or BCCI Holdings’ share capital or capital funds, between 1972 and June 1980 . . . the only real capital which BCCI SA and BCCI Holdings had was the capital contributed by the BOA Group totalling US$4.8 million” that no “real” capital (other than the capital subscribed by the BOA Group) was introduced at the time of the 1972, 1973 or 1975 capital issues; and, further, that no “real” capital was introduced at the time of the 1977, 1978, 1979 or 1980 capital issues. The allegation is made explicit, in relation to the pre-December 1977 capital issues, by paragraph 80.4.1:
“80.4 BCCI Holdings and/or BCCI SA was largely capitalising itself in that it owned 70% of its issued capital, alternatively owned at least 50% of its issued capital, by December 1977: 80.4.1 The Middle Eastern investors or some of them were nominees for Abedi who was in turn a nominee for BCCI and the shares registered in their names were funded by non performing and evergreen loans provided by the BCCI Group as pleaded in paragraphs 32 and 39 above, which loans were not intended to be repaid. Accordingly, the shares registered in the names of the Middle Eastern investors or some of them did not represent real capital to BCCI Holdings or BCCI SA nor were they sources of capital to BCCI Holdings or BCCI SA. Further or alternatively, by recording shares in the names of the Middle Eastern investors when they or some of them were nominees for BCCI, BCCI thereby misrepresented to its depositors, creditors and regulators the amount of its capital and the identity of the beneficial owner of its shares and/or the fact that the shares were funded and controlled by BCCI.”
There is no comparable plea, in express terms, in relation to the 1977 to 1980 issues. But it is not in doubt that a comparable allegation must follow from the introductory words of paragraph 80. The point is reinforced by the allegations in paragraphs 156.2 and 158, and in 159 (in particular, at sub-paragraphs 159.11 and 159.13) to which reference has already been made. The allegations in paragraphs 156.2 and 158 of the amended points of claim are these:
“156 Throughout the period of the divestiture, the BOA Group knew that BCCI Holdings’ shares were worthless because inter alia: . . . 156.2 The only real capital was the US$4.8 million contributed by the BOA Group which had been lost. . . . . . . 158 As a result of the divestiture, BCCI Holdings owned (at least initially) all its shares, financed by BCCI SA through the misapplication of depositors’ monies.”
[26]The further amendments to the amended points of claim, for which permission was sought from the judge, include amendments which are intended to make explicit that which would otherwise have been implied. It is proposed that paragraphs 65, 71 and 76 be amended by adding to those paragraphs the following allegations:
“65 . . . In relation to the increase of share capital, in December 1977, BCCI Holdings’ board resolved to allot the shares to Afridi for subscription on behalf of unspecified third parties. The shares allotted to Afridi were subsequently registered in the names of a number of Middle Eastern investors. Such Middle Eastern investors included Sheikh Khalifa, Prince Pahlavi, Al Soweidi, Sheikh Faisal Al Qasimi, Majid Futtaim, Sheikh Adham, Sheikh Sultan Al Qasimi, Stock Holdings, Crescent Holdings and Ghaith Pharaon, each of whom was funded by a non recourse and/or evergreen loan booked in BCCI and/or its affiliates. . . . 71. ... On 10 November 1978, BCCI Holdings’ board resolved to allot the 1978 rights shares to Afridi acting on behalf of unidentified third parties. The shares were allotted to Afridi and subsequently registered in the names of a number of Middle Eastern investors. Such Middle Eastern investors included Sheikh Khalifa, Prince Pahlavi, Al Soweidi, Sheikh Adham, Sheikh Sultan Al Qasimi, Stock Holdings, Crescent Holdings, Ali Reza and Swaleh Naqvi, each of whom was funded by a non recourse and/or evergreen loan booked in BCCI and/or its affiliates. . . . 76. ... The 1979 rights shares were allotted to Afridi and subsequently registered in the names of a number of Middle Eastern investors, including Sheikh Khalifa, Al Soweidi, Sheikh Faisal Al Qasimi, Sheikh Adham, Stock Holdings, Crescent Holdings, Swaleh Naqvi, Prince Salman Al Saud, Prince Khalid Rahman, Ghaith Pharaon, Harib bin Sultan, Prince Naif Al Saud, Ziad Shaath, Wabel Pharaon, Butti bin Bishr, A R Khalil and Mohammed Hammoud. The shares registered in the names of the identified Middle Eastern investors were funded by non recourse and/or evergreen loans booked in BCCI and/or its affiliates.”
[27]Those proposed amendments are to be reflected by an amendment to sub-paragraphs 80.4 and 80.4.1. If amended the sub-paragraphs would read: “80.4 BCCI Holdings and/or BCCI SA was largely capitalising itself in that it owned at least 50% of its issued capital, as at 31 December 1977, 31 December 1978, 31 December 1979 and 30 June 1980: 80.4.1 The Middle Eastern investors identified in paragraphs 32A or some of them were nominees for Abedi who was in turn a nominee for BCCI. The shares registered in the names of such Middle Eastern investors identified in paragraph 32A above were funded by non recourse and/or evergreen loans provided by BCCI or its affiliates, which loans were not intended to be repaid. . . . [*] Accordingly, the shares registered in the names of the Middle Eastern investors identified in paragraphs 32A . . . [*] (save Sheikh Zayed) or some of them did not represent real capital to BCCI Holdings or BCCI SA nor were they sources of capital to BCCI Holdings or BCCI SA. Further or alternatively, by recording shares in the names of such Middle Eastern investors when they or some of them were nominees for BCCI, BCCI thereby misrepresented to its depositors, creditors and regulators the amount of its capital and the identity of the beneficial owner of its shares and/or the fact that the shares were funded and controlled by BCCI.” [*Note: the words omitted relate to a further allegation, introduced by a proposed paragraph 32B which is outside the scope of this judgment][28]In order to appreciate, fully, the scope of the further amendments which the liquidators seek to make to paragraph 80, and (to a lesser extent) to paragraphs 65, 71 and 76, it is necessary to have mind that, by an amendment proposed to paragraph 32, “Middle Eastern Investors” would be redefined to mean “all persons who subscribed BCCI shares between 1972 and June 1980, other than ICIC and the BOA Group”; and that it is proposed that paragraph 32A be amended to read:
“32A In relation to share issues by BCCI SA and/or BCCI Holdings between September 1972 and June 1980 referred to in paragraphs 32, 39, 65, 71 and 76 of these Re-Amended Points of Claim, the shares registered in the names of the Middle Eastern investors identified in those paragraphs were funded by non recourse and/or evergreen loans booked in BCCI and/or its affiliates. Such Middle Eastern investors are Sheikh Khalifa, Prince Pahlavi, Al Soweidi, Sheikh Faisal Al Qasimi, Majid Futtaim, Sheikh Adham, Sheikh Sultan Al Qasimi, Stock Holdings, Crescent Holdings, Ghaith Pharaon, Ali Reza, Swaleh Naqvi, Prince Salman Al Saud, Prince Khalid Rahman, Harib bin Sultan, Prince Naif Al Saud, Ziad Shaath, Wabel Pharaon, Butti bin Bishr, A R Khalil and Mohammed Hammoud or any of them. Such shares were held by these Middle Eastern investors or some of them pursuant to nominee and/or guaranteed buyback arrangements with Abedi and were beneficially owned and/or controlled and funded by BCCI.”
It can be seen, however, that the amended paragraph 32A (although it may add clarity to the pleading as a whole) adds nothing to the amendments which it is proposed to make to paragraphs 65, 71, 76 and 80.4. The amendment proposed to paragraph 32A does no more than rehearse the effect of the amendments to those later paragraphs.[29]At first sight the effect of the judge’s order, limiting (as it does) permission to re-amend the amended points of claim to amendments which conform to the principles set out in paragraphs 56 and 57 of the judgment of 21 December 2001, would preclude the proposed amendments to paragraphs 65, 71, 76 and 80.4. Sub-paragraph 56(iii) of the judgment provides, in terms, that “No allegation of nomineeship will be allowed as regards any of the shares taken under the rights issues in 1977, 1978 and 1979”.[30]The application was opened by Mr Sheldon QC on behalf of the liquidators on the basis that that was, indeed, the effect of the order of 21 December 2001. He submitted that the order, and the judgment to which it gives effect, demonstrated that the judge had failed to appreciate that the amendments which the liquidators sought to make to paragraphs 65, 71, 76 and 80.4 did not introduce a new case. They did no more than make explicit what had been implicit (and, he submitted, so understood by BoA) in the pleading as it already stood. And the judge’s failure to appreciate that the amendments proposed to those paragraphs did not introduce a new case coloured his approach to the amendments which the liquidators sought to make to sub-paragraphs 159.3 (fraudulent trading Case I) and to sub-paragraphs 169.4 and 170.4 (knowledge Case I); in particular, to the allegation of knowledge which it is sought to introduce as sub-paragraph 170.4.15.[31]It came as a surprise, therefore, to learn from Mr Brisby QC on the afternoon of the second day of this application (and an hour or more into his own submissions) that BoA and his other clients had no objection to the amendments to paragraphs 32A, 65, 71 and 76 for which the liquidators had sought permission from the judge. Moreover, he submitted, the judge had never intended to refuse permission in respect of those amendments; and to read the order of 21 December 2001, and paragraph 56(iii) of the judgment, in a sense which had that effect was to misconstrue the judge’s intentions. The judge’s intention, it was said, was to allow amendments to paragraphs 32A, 65, 71 and 76 (and, perhaps, also to sub-paragraph 80.4 save in relation to allegations based on paragraph 32B) but not to allow the amendments to paragraphs 159.3 (fraudulent trading) or paragraphs 169.4 and 170.4 (knowledge). There was no fundamental misunderstanding; the judge approached the amendments to the later paragraphs in the knowledge that he was allowing the amendments to the earlier paragraphs.[32]Before addressing the question whether or not, in the light of his judgment as a whole, it would be right to conclude that, notwithstanding the apparently clear words in paragraph 56(iii) of that judgment, the judge did intend to allow the amendments to paragraphs 32A, 65, 71, 76 and 80.4 (excluding allegations based on paragraph 32B), it is convenient to note the amendments to sub-paragraphs 159.3, 169.4 and 170.4.15 which the liquidators seek to make. If further amended those sub-paragraphs would read:
“159.3 The Middle Eastern investors identified in paragraph 32A or some of them were nominees for Abedi (who was in turn a nominee for BCCI). The shares in BCCI Holdings registered in the names of the Middle Eastern investors identified in paragraph 32A above were funded by non recourse and/or evergreen loans booked in BCCI SA, BCCI Overseas and/or BCCI’s affiliates (which loans were not intended to be repaid). . . . [*]. Accordingly, the shares registered in the names of the Middle Eastern investors identified in paragraphs 32A . . . [*] (save Sheikh Zayed) or some of them did not represent real capital. Further or alternatively, by recording shares in the names of such Middle Eastern investors when they or some of them were BCCI nominees, BCCI thereby misrepresented to the regulators, its depositors and creditors, the amount of its capital and the identity of the beneficial owner of its shares and/or the fact that the shares were funded and controlled by BCCI. [*Note: the words omitted relate to a further allegation, introduced by a proposed paragraph 32B which is outside the scope of this judgment. They are the same words as those omitted from the text of paragraph 80.4 earlier in this judgment] . . . 169 In entering into the divestiture agreement and/or in receiving the divestiture payments BOA, BAC and BIFC and each of them knew or was recklessly indifferent or deliberately blind to the fact that: . . . 169.4 BCCI Holdings and/or BCCI SA was largely capitalising itself in that it owned at least 50% of its issued capital as at 31 December 1977, 31 December 1978, 31 December 1979 and 30 June 1980 by reason of the facts that: 169.4.1 The Middle Eastern investors identified in paragraph 32A or some of them were nominees for Abedi (who was in turn a nominee for BCCI). The shares registered in the names of the Middle Eastern investors identified in paragraph 32A above were funded by non recourse and/or evergreen loans provided by the BCCI Group (which loans were not intended to be repaid) as pleaded in paragraphs 32, 32A . . . [*] 39, 65, 71, 76 and 80.4.1 above. . . . [*]. Accordingly, the shares registered in the names of the Middle Eastern investors identified in paragraphs 32A . . . [*] (save Sheikh Zayed) or some of them did not represent real capital nor were they sources of capital to BCCI Holdings or BCCI SA. Further or alternatively, by recording shares in the names of such Middle Eastern investors when they or some of them were nominees for BCCI, BCCI thereby misrepresented to its depositors, creditors and regulators the amount of its capital and the identity of the beneficial owner of its shares and/or the fact that the shares were funded and controlled by BCCI. [*Note: see earlier notes: the same words are omitted] . . . 170.4 In relation to the allegation that BOA, BAC, BIFC and each of them knew that BCCI SA and/or BCCI Holdings was capitalising itself through the Middle Eastern investors identified in paragraph 32A .. .above (save Sheikh Zayed) or some of them, the Applicants will rely inter alia upon the follow. 170.4.1 At BCCI Holdings’ board meetings in December 1977, November 1978 and December 1979, the board resolved that BCCI Holdings should undertake the 1977, 1978 and 1979 rights issues respectively. On each occasion, the board resolved to allot the rights shares to Mr Afridi (a BCCI employee) acting on behalf of unspecified third parties. On each occasion, the rights shares were allotted to Mr Afridi and subsequently registered in the names of certain Middle Eastern investors and ICIC. Among such Middle Eastern investors were those identified in paragraphs 65, 71 and 76 above, each of whom was funded by a non recourse and/or evergreen loan booked in BCCI and/or its affiliates. The manner in which BCCI Holdings’ board resolved and carried out the 1977, 1978 and 1979 rights issues, in particular, the allotment of the rights shares to Mr Afridi acting on behalf of unspecified third parties, raised real doubts as to the substance of the capital increases effected by each of those 3 rights issues. The minutes of the December 1977 BCCI Holdings board meeting at which the allotment to Mr Afridi was authorised and/or confirmed were signed by Mr Lamarche, a BOA Senior Vice President. Mr Lamarche attended the BCCI Holdings board meetings in November 1978 and December 1979 at which the 1978 and 1979 rights issues were authorised and/or confirmed.”
[33]Paragraph 159.3 does contain, and if amended, would contain, no allegation of knowledge. It is in terms which are indistinguishable from paragraph 80.4.1. If it be right to allow the proposed amendment to paragraph 80.4.1 (excluding allegations based on paragraph 32B) it is impossible to see what objection there could be to the amendment proposed to paragraph 159.3. Paragraph 169.4.1 is, also, in terms which are indistinguishable from paragraphs 80.4.1 and 159.3. Paragraph 169.4 is indistinguisable from paragraph 80.4. But in the context of paragraph 169 those sub-paragraphs contain an allegation of knowledge. The effect of paragraph 169, and the two dependent sub-paragraphs, if amended, would be to allege (in express terms) that BoA, BAC and BIFC knew the matters in paragraph 80.4 and 159.3 (in relation to misstatement of capital) which are said to constitute fraudulent trading. But it must be noted that the allegation that the BoA parties knew that BCCI SA’s capital was fraudulently misstated had always been part of the liquidators’ pleaded case – see paragraphs 169.1, and paragraphs 188 and 161.2.[34]Paragraph 170.4.1 is derived from an answer given on 20 March 2000 to a request for clarification made by BoA and its co-respondents on 24 January 2000. The request, so far as material, was in these terms:
“ 13. Reckless indifference [ and 14. Deliberate blindness] : If it is alleged that BOA, BOA and BIFC were recklessly indifferent[/deliberately blind] in relation to any of the facts alleged in PoC [Points of Claim] paragraphs 169 and 169.4.1 [(and if and to the extent that the Liquidators intend to advance a case in relation to deliberate blindness which is different from that advanced in relation to reckless indifference)], please explain the following matters: 13.2[/14.2] The basis for the allegation that each such individual was recklessly indifferent[/deliberately blind], explaining in particular: . . . (1) Whether, and if so how and from what date, it is alleged that he actually knew any of the underlying facts and/or the contents of any of the documents pleaded in the particulars in PoC paragraphs 170.4.1 to .14 (specifying which underlying facts and contents, if not all). (2) The enquiries which it is alleged that each such individual should, if he had been acting honestly, have made as a result of having such actual knowledge, and of whom such enquiries should have been made . . .”
The answer included, under paragraph 13.2(f), the following paragraph:
“13.2(f) Further, the manner in which BCCI carried out its rights issues on 29 December 1977 and in December 1978 and December 1979 whereby all the shares were allotted to Mr Afridi for subscription on behalf of unspecified third parties should have raised real doubts as to the substance of the capital increases effected by the rights issues which were taken up ostensibly by ICIC and the Middle Eastern investors. The minutes of the December 1977 BCCI Holdings board meeting at which the allotment to Mr Afridi was authorised were signed by Mr Lamarche. Mr Lamarche attended the BCCI Holdings board meetings in November 1978 and December 1979 at which the 1978 and 1979 rights issues were authorised and/or confirmed. Mr Lamarche should have enquired as to the (i) identities of the unspecified third parties on whose behalf Mr Afridi was subscribing all the rights shares; and (b) [sic] the source of funding for the shares being allotted to Mr Afridi.”
It is clear, therefore, that the point that the liquidators now wish to plead as particulars of knowledge under paragraph 170.4 was identified – and was given as clarification of the allegation of knowledge under paragraph 169 – some two years ago. It can be said, of course, that an allegation as to what Mr Lamarche should have done in December 1978 and December 1979 is not properly included as an answer to a request for clarification of the allegation of reckless indifference or deliberate blindness in relation to the facts pleaded at paragraph 169.4.1 of the amended points of claim as they stood in January 2000. But that point was not taken at the time. The complaint, in a letter from BoA’s solicitors dated 14 July 2000, was that the liquidators had not given adequate clarification of the enquiries which it was alleged should have been made; not that the clarification given related to a period in respect of which no allegation of knowledge had been made – see, in particular, the reference to paragraph 13.2(f) of the clarification in paragraph 32 of the skeleton argument on behalf of BoA prepared for use at a case management conference held on 27 July 2000; and the response at paragraph 11 in the letter from the liquidators’ solicitors dated 13 November 2000.[35]The analysis of the amendments proposed to sub-paragraphs 159.3, 169.4 and 170.4.15 points to the conclusion that, if the judge had intended to allow the amendments to paragraphs 65, 71 and 76, and to paragraph 80.4 (save in relation to the allegation based on paragraph 32B),(i) he would not have disallowed the amendment to paragraph 159.3; and(ii) it is by no means clear that he would have regarded the allegations of knowledge in paragraphs 169.4 and 170.4.15 as making a new case. It is necessary to return, therefore, to the question whether or not, in the light of his judgment as a whole, it would be right to conclude that, notwithstanding the apparently clear words in paragraph 56(iii) of that judgment, the judge did intend to allow the amendments to paragraphs 32A, 65, 71, 76 and 80.4 (excluding allegations based on paragraph 32B).[36]There are a number of indications, some stronger than others, which suggest that he did not intend to allow amendments to those paragraphs; and that – as might be expected - the clear words of paragraph 56(iii) do mean what they say. The judge addressed the proposed amendment to paragraph 32A at paragraph 23 of his judgment. He said this:
“This [paragraph 32A] is a referential paragraph, bringing together matters alleged in five others: Paragraph 32 as regards the 1972 subscriptions, 39 for the 1973 issue, and 65, 71 and 76 for the rights issues in 1977, 1978 and 1979. As regards 1973, paragraph 39 is limited to refer specifically only to three shareholders who took shares on that occasion. As for the later rights issues, the Amended Points of Claim does not allege in terms that the subscribers were nominees funded by BCCI, whereas the Re-Amended Points of Claim would do so in relation to identified individuals.”
The contrast between the grant of permission to amend in relation to paragraph 39 of the points of claim (the 1973 rights issue) in paragraph 56(ii) of the judgment and the refusal of permission in relation to “allegations of nomineeship . . . as regards any of the shares taken under the rights issues in 1977, 1978 and 1979” (paragraphs 65, 71 and 76 of the points of claim) in paragraph 56(iii) of the judgment is a precise reflection of the judge’s analysis in paragraph 23 of his judgment. It is plain that, in paragraph 23 of his judgment, he is not addressing allegations of knowledge.[37]In paragraph 25 of his judgment

the judge referred to paragraph 80.4 of the amended points of claim:

“Paragraph 80.4 would be amended to refer to the position at dates after 1977, up to June 1980, and consequential changes would be made to paragraphs 159 and 169.”
There is no recognition, in that sentence, that the amendment to paragraph 80.4 (excluding the allegations based on paragraph 32B) is itself consequential on the amendments to paragraphs 65, 71 and 76. The judge is right to treat the proposed amendment to paragraph 159 as consequential on the amendment to paragraph 80.4; but it is pertinent to note that, in the same sentence, he also treats paragraph 169 as consequential on that amendment. If he had intended to draw the distinction between fraudulent trading on the part of the BCCI companies, and knowledge of the fraud on the part of the BoA companies, it is difficult to accept that he would have expressed himself as he did in paragraph 25 of his judgment. And it is difficult to accept that he would not have referred to the proposed new paragraph 170.4.15.[38]In paragraph 28 of his judgment the judge refers to what he describes as Mr Brisby’s objection “to the inclusion (he says for the first time) of the 1977 to 1979 rights issues.” Again, it is difficult to accept that he would have described the submission in those terms if he had appreciated that Mr Brisby’s objection (as put in this Court) was not to the inclusion of allegations of nomineeship in relation to the 1977 to 1979 rights issues (by amendment to paragraphs 65, 71, 76, 80.4 and 159.3 of the amended points of claim) but only to the amendments of knowledge which the liquidators seek to introduce under paragraphs 169.4 and 170.4.15.[39]In paragraph 30 of his judgment

the judge expressed the view that:

“It is clear that the proposed re-amendments would be new ways of putting the case.”
But, for the reasons explained earlier in this judgment, that is not an apt description of the amendments to paragraphs 65, 71, 76 and 80.4. The allegation that the 1977, 1978 and 1979 rights issues were taken up by nominees is implicit in the allegation that, in the period December 1977 to June 1980 BCCI Holdings and BCCI SA had no real capital other than the US$4.8 million subscribed by the BankAmerica group.[40]The clearest indication of the judge’s understanding and intention is to be found in paragraphs 40, and 43 and 44, of his judgment. Paragraph 40 is in these terms: “Mr Sheldon made a particular point, in relation to the 1977 to 1979 rights issues, about the inclusion of paragraph 13.2(f) in the liquidators’ First Clarification [of 20 March 2000], which he says shows there is nothing new, even in terms of what is directly and expressly at issue on the statements of case, in the case about the 1977 to 1979 rights issues. However Mr Brisby is entitled to say that this is supposed to be clarification of a case already made in the Points of Claim, and the passage dealing with the 1977 to 1979 rights issues is conspicuous by the absence of anything suggesting that there is anything wrong with what went on then: see paragraphs 65, 71 and 76. It is true that the Points of Claim allege that Bank of America had relevant knowledge after 1977, but as regards Case I that is not, for the most part, said to be based on any particular matter arising after December 1977. Clearly Bank of America would retain, at least for a while, knowledge that it had acquired by the time of the divestiture agreement. [emphasis added] The words emphasised point strongly to the conclusion that the judge thought that the liquidators were seeking to advance a new case in relation to the effect of the rights issues on the “real” capital available to BCCI Holdings and BCCI SA. But, as has already been pointed out, the allegation that the 1977 to 1979 rights issues did not lead to any increase in real capital is implicit in the amended points of claim as they stand.[41]In the last sentence of paragraph 43 of his judgment the judge indicated that he intended to permit an amendment which consists “of a limitation of the case to the investors who are said to be nominees, and without introducing new ways of putting that plea.” He went on, at paragraph 44 to say this:
“As I see it, the effect of this is to exclude any plea of nomineeship in relation to the shares subscribed for in 1972, to leave in the allegation that three of the subscriptions in 1973 were funded by non-recourse or evergreen loans from BCCI (as set out in the proposed draft re-amended version of paragraph 39 of the Points of Claim), to exclude the case sought to be made about the 1977, 1978 and 1979 rights issues in paragraphs 65, 71 and 76, and to exclude the new cases sought to be made in paragraphs 32B2 and 3. In consequence 32A will refer only to the three investors named in paragraph 39, and paragraph 32B1 will also be so limited . The Points of Reply will also not be amended as proposed in paragraph 62.4.4. . . .”
[emphasis added] In the light of that paragraph, which is consistent with all that has gone before in the judge’s judgment, it is impossible to accept Mr Brisby'’ submission that the judge had never intended to refuse permission in respect of the amendments to paragraphs 65, 71 and 76; and that to read the order of 21 December 2001, and paragraph 56(iii) of the judgment, in a sense which had that effect was to misconstrue the judge’s intentions. It is quite plain that the judge did intend to refuse permission in respect of those amendments; and that he did so because he thought that those amendments raised a new case.[42]It follows that Mr Sheldon QC is correct. The judge has misunderstood the liquidators’ case as to the 1977 to 1979 rights issues in a fundamental respect. It may well be that the very complex – perhaps unnecessarily complex - amended points of claim were not analysed and explained to him in the detail and with the care in which they have been analysed and explained to us. There is an obvious danger, in litigation of this nature, that judge and counsel will become so familiar with it that they will assume that each knows what has been alleged without the need for detailed analysis. Be that as it may, it is impossible to avoid the conclusion that the judge’s misunderstanding of the liquidators’ case as to the 1977 to 1979 rights issues has flawed his approach to what should have been a case management decision; but which, on a true analysis, has had the much wider effect of preventing the liquidators from advancing a case which was always implicit in their pleadings. In my view paragraph 1 of the order of 21 December 2001 should be set aside.[43]The question, then, is what course this Court should now take. There are other issues to be resolved on this application; but it is unsatisfactory to attempt to resolve them without determining whether or not the amendments to the paragraphs which are the subject of this judgment should be made. In my view the sensible course, having allowed this application and the appeal to the extent necessary to set aside paragraph 1 of the judge’s order, is to remit further consideration of the application for permission to amend to the judge, so that he can consider all matters afresh in the light of the judgments in this Court. Whether or not to allow amendments, having a true understanding of the liquidators’ case and the effect upon it of the proposed amendments is, indeed, a case management decision. The judge is in a much better position than this Court to take case management decisions. Lady Justice Hale:[44]I agree.

Lord Justice Simon Brown:

[45]I also agree.

Order

Application for permission to appeal granted, appeal allowed with costs and the matter to be remitted to the judge below in accordance with the final paragraph of Chadwick LJ’s judgment. Permission to appeal granted on the question of indemnity costs, not to be heard until completion of all proceedings at first instance. (Order does not form part of the approved judgment)

Cited in 2 later judgments