Morris & Ors v Bank of India [2004] EWHC 528 (Ch)

“1. The BCCI Group (which for convenience I shall refer to simply as “BCCI”) was established in 1972 with the incorporation and licensing of Bank of Credit and Commerce International SA (“BCCI SA”) as a bank under the laws of the Grand Duchy of Luxembourg. This was followed by the incorporation of BCCI Holdings (Luxembourg) SA (“BCCI Holdings”) on 13th December 1974 and the incorporation and licensing of Bank of Credit and Commerce International (Overseas) Limited (“BCCI Overseas”) in the Cayman Islands on 24th November 1975. BCCI Holdings became the parent company of BCCI SA and BCCI Overseas, but did not itself carry on any banking business. BCCI SA and BCCI Overseas were the principal operating subsidiaries and are the companies which feature in the transactions with which this action is concerned. Between them these two companies had over 110 operating branches in 41 countries and a further 18 representative offices in 17 countries at the time when BCCI collapsed in July 1991. In the United Kingdom (including the Isle of Man) BCCI SA had 24 branches, with a head office at 100 Leadenhall Street in the City of London. No group company was ever incorporated in any part of the United Kingdom, but BCCI SA carried on business as a licensed deposit-taker subject to the regulatory supervision of the Bank of England under the Banking Act 1979. 2. At the time of the collapse in July 1991 the deficiency as regards the creditors of BCCI SA and BCCI Overseas was estimated to be in the region of US $10bn. Since then, however, as a result of the actions of the liquidators, it has been possible to secure dividends of 60 cents in the US dollar for the benefit of creditors, largely funded from recoveries which the liquidators have been able to obtain against third parties. This action is part of that continuing process. The claim against State Bank of India (“SBI”) is that it knowingly participated in a fraudulent scheme devised by BCCI to enable it to manipulate its balance sheet for the year ended December 1983, so as to present a false account of its assets and liquidity. I shall come to the detail of the scheme later in this judgment, but it can be briefly summarised as follows. In October 1983 SBI received an approach from a Mr Ajay Krishnan Puri, purporting to act on behalf of a company called Notan Trading and Investments Limited (“Notan”). This company was incorporated in Liechtenstein on 7th September 1982, with Liechtenstein-based directors, and had earlier that year opened deposit and current accounts with SBI. Part of SBI’s disclosure comprises a certified resolution of Notan dated 28th July 1983, on headed notepaper, with a PO Box in the Sultanate of Oman given as the address of its administrative office. The registered office of the company was another PO Box number in Liechtenstein. The resolution authorised the opening of a bank account for the company with SBI and in terms empowered the bank to act on the joint instructions of Mr Puri and a Mr Ziauddin Akbar for the purpose of honouring cheques or making any other payments into or out of the account. The resolution was also signed by Mr Akbar as the authorised signatory for the Board of Directors of Notan, and the SBI standard form of request for banking facilities was signed by Mr Akbar and Mr Puri on the same day. As part of that same process both Mr Akbar and Mr Puri provided a specimen of their signatures for mandate purposes, which, in the case of Mr Akbar, gave an address at 22 Basing Hill, London NW3. 3. Mr Akbar was at the time a senior figure in the Central Treasury Division (“CTD”) of BCCI in London and, as it subsequently transpired, was personally responsible for many, if not most, of the fraudulent transactions carried out by BCCI to hide its worsening financial position in the early 1980s. He was not a director of Notan and in his subsequent interviews with the Serious Fraud Office he said that Notan had been set up to assist Mr Puri to obtain a work permit. It is, however, clear that the primary purpose of establishing Notan was to assist BCCI in carrying out its fraudulent accounting practices, and the company was controlled by Mr Akbar out of the CTD in London. 4. BCCI was founded with capital from Arab investors in the Gulf states. It achieved rapid growth and, by the end of 1989, employed about 14,000 staff in more than 70 countries. Until 1988 the President and Chief Executive of BCCI was Mr Agha Hasan Abedi. During the same period he had as his deputy Mr Swaleh Naqvi, who took over as Chief Executive Officer when Mr Abedi fell ill in 1988. Having no lender of last resort, it was necessary for BCCI to maintain a high level of liquidity. By the early 1980s it had incurred significant losses through poor lending (particularly in relation to a number of borrowers in the Gulf and Saudi Arabia) and from unsuccessful metal trading on its own account. One of these borrowers was a Mr Abdul Raouf Khalil, a Saudi Arabian businessman who operated and controlled the Khalil Group of Companies. They maintained a number of accounts with BCCI which were heavily overdrawn, although it is right to add that by 1983 some (and perhaps most) of this apparent indebtedness may itself have been due to the manipulation of the accounts by BCCI with the active co-operation of Mr Khalil, as part of the wider fraud I am about to come to. 5. In order to conceal these and other losses and to maintain public confidence in the bank, BCCI embarked on a systematic and wide-scale fraud involving the manipulation of account balances, with the twin objectives of concealing losses and boosting apparent profits. Investigations have revealed that this practice was initiated by Mr Abedi and Mr Naqvi and was operated by Mr Akbar through the CTD in London. It was successful in deceiving the auditors and regulators of both BCCI SA and BCCI Overseas, together with their customers and depositors. The evidence of the liquidators, based on a report prepared for the Serious Fraud Office, is that BCCI was insolvent from at least 1983. The CTD had been established in 1977 and operated from BCCI SA’s offices in Leadenhall Street until about October 1986, when it was moved to Abu Dhabi. The CTD managed and controlled the surplus funds of BCCI and was managed by BCCI SA under a management agreement with BCCI Overseas. However, the treasury activities were all booked and recorded in the name of BCCI Overseas in Grand Cayman, and BCCI SA accounted for its own funds, managed by the CTD, as inter-company debts due from BCCI Overseas. 6. Mr Akbar controlled the CTD and reported direct to Mr Naqvi. He was also the Account Officer for the Khalil Group and controlled the accounting of the Grand Cayman branch of BCCI Overseas. He eventually resigned from BCCI in 1986. On 28th September 1993 he pleaded guilty at the Central Criminal Court to 16 counts of false accounting, contrary to s.17 of the Theft Act 1968 and was sentenced to six years’ imprisonment on each count, the sentences to run concurrently. Counts 13 and 14 relate to the two loan transactions with which this action is concerned. 7. Notan had both US dollar and sterling accounts with SBI. Up to the end of October 1983 the combined receipts into its US dollar accounts amounted to some $2.342m, against which there had been a payment out of just over $1m. In the same period there had been payments into its sterling accounts (including interest) of some £142,623, and payments out to a variety of payees, including Mr Puri himself, in a total sum of £53,567. Then on 5th October 1983 Mr Puri, without any prior discussion, approached SBI for a loan of US $20m, which it required for a period of three months on what is described as a spread-over basis. The loan was to be guaranteed by a prime London bank (later identified as BCCI SA) which would also deposit funds in the same amount prior to the drawdown of the loan to Notan, and for a term expiring five days after the Notan loan became repayable. Mr Puri told SBI that no lien was to be marked on the deposited funds and that the loan to Notan would be required urgently by the beginning of November. The transaction, as it eventually emerged, was that SBI agreed to provide Notan with a loan of US $20m for a term of three months, to be drawn down on 1st November 1983. Under the terms of the facility letter as amended, BCCI SA was to deposit an equivalent sum of US $20m with SBI for the duration of the loan plus four days, so as to provide the necessary funding for the entire term of the loan. It was also to provide a guarantee, on terms satisfactory to SBI, to repay the loan to Notan in the event that it was not repaid at maturity. Interest on the loan to Notan was to be at a rate of a half percent per annum above the rate of interest payable by SBI on BCCI’s matching deposit. The guarantee provided for under the terms of the facility letter was executed by Mr Akbar and two other BCCI Treasury employees on or about 28th October 1983 on behalf of BCCI SA and contained an express right of set-off. In addition, on 31st October 1983, BCCI SA deposited the sum of US $20m with SBI in its account in New York with Citibank until 6th February 1984 at an interest rate of 9.3125% per annum and accounted for the deposit by debiting the sum to BCCI Overseas’ nostro account at Bank of America in New York. The loan to Notan was drawn down on 1st November by SBI remitting the US $20m from its account with Citibank to an account of BCCI SA at the Bank of America in New York (No. 48586050). 8. The payment instructions from Notan received by SBI on 1st November were signed by Mr Puri and Mr Akbar, and requested the $20m to be transferred to BCCI SA’s account without specifying any sub-account in the name of Notan. As I shall explain later in this judgment, one of the principal allegations made by the liquidators is that the terms of these payment instructions put SBI on notice that the monies were being routed back to BCCI for its own use beneficially, rather than being disbursed to BCCI for the credit of Notan. What is known (but is not alleged to have been known by SBI at the time) is that the monies, when received, were accounted for by BCCI SA as a transfer to the credit of an account (No. 01001279) with BCCI Overseas in the name of Mr Khalil. On 30th December the monies were then transferred from that account to a metals trading account in the name of BCCI Overseas (No. 90511109) which had been used for speculative purchases of silver and had a negative balance. 9. On 5th December 1983 SBI agreed to lend Notan a further sum of $20m on almost identical terms. The monies were disbursed on 15th December and were repayable on 1st February 1984. BCCI SA again provided the funding by prior deposit of a matching sum with SBI and gave a guarantee for the loan, including the contractual right of set-off. Its own deposit was for a period expiring on 6th February 1984. As in the case of the first loan, the monies, when drawn down, were remitted to BCCI SA’s account with the Bank of America and then credited to BCCI Overseas’ nostro account. They were then used by BCCI Overseas to credit the overdrawn Khalil account. As a result of this and other credit transfers from other sources, BCCI was able to convert a debit balance of US $85,280,341 into a credit balance for year end purposes of US $9,261,646.17. The auditors were prepared on this basis to treat BCCI’s exposure to the Khalil Group as fully collectable and made no provision in respect of their borrowings. However, by 13th January 1984 (following the repayment and reversal of most of the credits) the Khalil account No. 01001279 had once again become overdrawn by more than US $155m. Both the Notan loans were repaid on 1st February 1984 by a transfer from BCCI SA to SBI of the sum of US $40,754,861.12, representing repayment of the sums due plus interest. On 6th February SBI paid US $40,779,147.67 to BCCI SA. The excess of the interest over that payable by Notan to SBI is accounted for by the longer term of the BCCI deposit.”

“1. BOI admits the facts found in paragraphs 1-9 of the judgment of Patten J in Morris & ors v State Bank of India [2003] EWHC 1868 (Ch.). 2. BOI has already admitted by paragraph 13 of its re-amended points of defence that pursuant to section 11 of the Civil Evidence Act 1968 Akbar must be taken to have committed the offences of which he was convicted. Those included the following counts relating to transactions nos 3 and 4 (1) Count 15: on or about the 24th October 1983 he dishonestly and with a view to gain for himself of another or with intent to cause to another concurred in falsifying documents required for an accounting purpose, namely an application to the Bank of India in the name of Maram Trading Company Limited for a loan of $60m which were false in a material particular in that a board resolution and a letter of application purported to be genuine documents signed by AR Khalil on behalf of Maram Trading Company Limited (D1/1/15) (2) Count 16: on or about the 10th September 1984 he dishonestly and with a view to gain for himself of another or with intent to cause to another concurred in falsifying documents required for an accounting purpose, namely an application to the Bank of India in the name of Maram Trading Company Limited for a loan of $75m which were false in a material particular in that a board resolution and a letter of application purported to be genuine documents signed by AR Khalil on behalf of Maram Trading Company Limited (D1/1/16).” 3. BOI further admits the factual basis for those convictions as set out at in the transcript of the proceedings before Scott-Baker J at the Central Criminal Court on 27 September 1993 (D1/2/67): BCCI makes its own deposit of its own money with the relevant bank. The money is then lent to Maram and used by Akbar for the purposes he had in mind, and the evidence shows that Akbar controlled Maram in effect. 4. BOI further admits that substantially the same fraud as those that formed the basis of Counts 15 and 16 was also committed by BCCI in relation to transactions 1, 2 and 6. In particular BOI admits that BCCI forged the signature of Khalil on the following documents: (1) the board resolution (C1/79) and letter of request (C1/77) relating to transaction no.1 (2) the board resolution (C1/182) and letter of request (C1/184 relating to transaction no.4 (3) the board resolution (C4/160) and letter of request (C4/159) relating to transaction no.6. 5. BOI further admits that monies that BOI thought it was lending to Maram were used by BCCI for its own purposes. 6. BOI further admits that BCCI fraudulently concealed from its auditors and consequently failed to record in its accounts its guarantee liabilities to BOI in respect of the loans to Maram. 7. The fifth transaction appears to have involved a mutual placement of deposits between BOI and BCCI, with no loan to Maram being involved. BOI admits that BCCI falsely accounted for BOI’s placement by not recognising its liability to repay the same and interest thereon. 8. Accordingly BOI admits that the conduct of BCCI admitted above constituted carrying on of the business of BCCI for fraudulent purposes within the meaning of section 213 of the Insolvency Act 1986. 9. BOI admits that by its involvement in transactions 1-6 it unknowingly participated in the carrying on of the business of BCCI for fraudulent purposes. 10. BOI denies that it knowingly participated in any respect in any such fraud. Nothing in this Statement of Admissions is intended to derogate from the generality of that denial.” (1) Count 15: on or about the 24th October 1983 he dishonestly and with a view to gain for himself of another or with intent to cause to another concurred in falsifying documents required for an accounting purpose, namely an application to the Bank of India in the name of Maram Trading Company Limited for a loan of $60m which were false in a material particular in that a board resolution and a letter of application purported to be genuine documents signed by AR Khalil on behalf of Maram Trading Company Limited (D1/1/15) (2) Count 16: on or about the 10th September 1984 he dishonestly and with a view to gain for himself of another or with intent to cause to another concurred in falsifying documents required for an accounting purpose, namely an application to the Bank of India in the name of Maram Trading Company Limited for a loan of $75m which were false in a material particular in that a board resolution and a letter of application purported to be genuine documents signed by AR Khalil on behalf of Maram Trading Company Limited (D1/1/16).”

“Knowledge includes deliberately shutting ones eyes to the obvious, provided that the fraudulent nature of the transactions did in fact appear obvious to those who dealt with these matters at SBI at the relevant time. It is well established that it is no defence to say that one declined to ask questions, when the only reason for not doing so was an actual appreciation that the answers to those questions would be likely to disclose the existence of a fraud. But liability in such cases depends upon that stage of consciousness having been reached. His submission, which I accept, is that one needs to be careful to draw a distinction between a conscious appreciation of the true nature of the business being carried on and a failure, however negligent, to appreciate that fraud was being perpetrated. The case for SBI is that at no time during the course of these transactions did it in fact suspect that anything untoward was going on. The essentials of what is required in order to establish so-called blind-eye knowledge are set out in the speech of Lord Scott of Foscote in the recent decision of the House of Lords in Manifest Shipping Company Limited v. Uni-Polaris Company Limited [2003] 1 AC 469, where Lord Scott at paragraph 116 says this: ‘In summary, blind-eye knowledge requires, in my opinion, a suspicion that the relevant facts do exist and a deliberate decision to avoid confirming that they exist. But a warning should be sounded. Suspicion is a word that can be used to describe a state-of-mind that may, at one extreme, be no more than a vague feeling of unease and, at the other extreme, reflect a firm belief in the existence of the relevant facts. In my opinion, in order for there to be blind-eye knowledge, the suspicion must be firmly grounded and targeted on specific facts. The deliberate decision must be a decision to avoid obtaining confirmation of facts in whose existence the individual has good reason to believe. To allow blind-eye knowledge to be constituted by a decision not to enquire into an untargeted or speculative suspicion would be to allow negligence, albeit gross, to be the basis of a finding of privity.’ ”

“82. … it is not an invariable rule that the lower standard of proof must be applied in civil proceedings. I think that there are good reasons, in the interests of fairness, for applying the higher standard when allegations are made of criminal or quasi-criminal conduct which, if proved, would have serious consequences for the person against whom they are made. 83. … There is now a substantial body of opinion that, if the case for an order such as a banning order or a sex offender order is to be made out, account should be taken of the seriousness of the matters to be proved and the implications of proving them. It has also been recognised that if this is done the civil standard of proof will for all practical purposes be indistinguishable from the criminal standard: seeB v. Chief Constable of Avon & Somerset Constabulary [2002] 1 WLR 340, 354, para 31, per Lord Bingham of Cornhill CJ; Gough v. Chief Constable of the Derbyshire Constabulary [2002] QB 1213, 1242-1243, para 90, per Lord Phillips of Worth Matravers MR. As Mr Crow pointed out, the condition in section 1(1)(b) of the Crime and Disorder Act 1998 that a prohibition order is necessary to protect persons in the local government area fromfurther anti-social acts raises a question which is a matter for evaluation and assessment. But the condition in section 1 (1)(a) that the defendant has acted in an anti-social manner raises serious questions of fact, and the implications for him of proving that he has acted in this way are also serious. I would hold that the standard of proof that ought to be applied in these cases to allegations about the defendant’s conduct is the criminal standard.”

“ Until the recent case of Re H (Minors) [1996] AC 563 the leading English case on the standard of proof in civil cases in which serious allegations of misconduct such as fraud were in issue was Hornal v Neuberger Products Ltd [1957] 1 QB 247. In a passage (at 266) often quoted in later cases, Morris LJ approved the dictum of Denning LJ in Bater v Bater [1951] P 35 at 37 that there must be a ‘degree of probability which is proportionate to the subject-matter’. Lord Denning repeated the same formula in the House of Lords in Blyth v Blyth [1966] AC 643 at 669. In R v Home Secretary, ex p Khawaja [1984] AC 74 at 114 Lord Scarman examined all the previous cases and said the same: ‘A preponderance of probability suffices but the degree of probability must be such that the court is satisfied. The judge followed this line of authority. He said (at para 5.3.1) that the civil standard of a balance of probabilities was appropriate but that ‘the degree of probability must be commensurate with the occasion and proportionate to the subject matter’. He commented that in a case of fraud, this meant that in effect the standard was no different from ‘beyond reasonable doubt’. In Re H (Minors) [1996] AC 563 at 586-587 Lord Nicholls of Birkenhead pointed out that if proof is required on a preponderance of probabilities (ie, a probability of >0.5 on a scale from 0 (impossibility) to 1 (certainty) ), it is inconsistent to require a ‘degree of probability commensurate with the occasion’. This suggests some other degree of probability, higher than >0.5, somewhere between the civil standard and the criminal standard, which the courts have wisely never attempted to define as a point on the probability scale. The correct analysis is that the court is not looking for a higher degree of probability. It is only that the more inherently improbable the act in question, the more compelling will be the evidence needed to satisfy the court on a preponderance of probability.”

“As per our recent telephone conversation we have pleasure in introducing the abovementioned customer to whom you have agreed to allow the following facilities on the terms and conditions mentioned below: Name of borrower: Name of facility: Loan Period: Three months from date of loan Amount: Stg pnds 10,000,000 32. (sterling pounds 10 million) In consideration of your allowing the abovementioned facilities we hereby irrevocably guarantee the repayment on the due date of the principal amount together with interest at 1/8% over National Westminster Bank base rate. The borrower will have option to repay the loan before the due date by giving one month’s notice. We thank you for accommodating the above client and look forward to the opportunity of doing business of mutual interest with you in the future. Unquote”

“BCCI is doing this obviously to show a good ratio of earnings against their advances. I do not think we should or even could go into detailed legal documentation because in the UK, no bank or licensed deposit taking company can afford to back out of its commitment in the eyes of Bank of England. I would have myself gone ahead with this transaction in view of urgency but since there have been some misgivings in the past about BCCI in Head Office, I thought of seeking your prior approval. I recommend approval without any hesitation. BCCI is a very big, aggressive institution with 45 branches in the UK.”

“Q. But the reason that the transaction was being suggested by Mr Mewawalla was because it suited BCCI’s purposes; it was not for any purpose, that you were aware of, of the borrower itself? A. No, I was not aware of the borrower then at all. Q. But you were not aware of any other purpose of the borrower; the only purpose you were aware of was BCCI’s purpose of improving its accounts? A. My own purpose was to improve the deposits and BCCI wanted to reduce their outstandings on this particular borrower, who might have been overdrawn. Q. But they are not ultimately reducing their outstandings, are they? They are simply entering into a transaction which gives the appearance of reducing them for a few weeks over the year end and then they are to be restored, are they not, and that was your understanding of the situation? A. Yes, it was going back to the account that it will restore the position, or probably they may have arranged for any other thing that the deposit will go back to BCCI. They may have meanwhile submitted a proposal to the head office to increase the limit of the borrower, because Bank of India has done it fairly often for customers whose drawings were about the sanction limit. We have requested them to go to another Indian bank but of course we did not give any guarantee for that, that is all. Q. Indeed, as you understood it, this was to be a borrowing under which BOI, as the proposal was originally put to you, would have no recourse to the borrower? A. Yes, I agree with you. In the sense that as long as BCCI guarantee was there, we are not really worried about the borrower at all.”

“ … but the whole point again, look, as far as the London office was concerned and head office was concerned, the whole proposal was on the guarantee of BCCI, and who the borrower was, was not really of any consequence at all in this transaction.”

“3. We note that so far as your Bank is concerned, you would not receive from the Borrower any signed document whatever. We comment it is exceedingly curious, and we would think most unusual, for a Bank to allow a loan facility without receiving in return any document from that Borrower. It seems to us that you would be hard put to recover the loan from the Borrower without any written documentation, and without any acknowledgment of loan. We doubt whether your Bank would be prepared to accede to such an arrangement whether or not there was any satisfactory guarantee backing you, whether from BCCI, or elsewhere. 4. We note that on the terms proposed the Borrower can repay on one month’s notice, but in your turn you do not seem to have the right to repay early BCCI. Thus you might be left with £10M and be unable to place that money at even Natwest Base Rate. 5. We note that your Bank would not receive any security from the Borrower, and that the only security offered by BCCI is their guarantee. In regard to that guarantee we think that at the moment there is insufficient rights for your Bank to set-off your Bank’s obligation to repay on the due date against that guarantee. By this we mean that BCCI will call for their funds which may not have been repaid to you by the Borrower and the guarantee, certainly in the form currently suggested, would in our view be ineffective as a “defence” to repayment.”

“ On receipt of your considered opinion, I have discussed the matter with BCCI and they are agreeable to have a letter of request for a loan as well as any other simple security document executed by the borrower. Such borrower is likely to be a corporation (i.e. a limited company). As regards the period of deposit from BCCI and the period of advance to BCCI’s customer, I had already advised BCCI that it will be the same in all respects but I am sorry I did not mention it in my letter to you. In brief, if the deposit is for three months the advance will also be for three months and there will be no option in favour of BCCI. In order to ensure there is no outlay of funds from our Bank, I have arranged with BCCI that they will lend us £10 million (which will be a deposit in our books) which in turn will be lent to the nominated customer of BCCI. If this amount is placed under our lien by BCCI, it will be reflected in their Balance Sheet and will not achieve the purpose for which this transaction is undertaken. I would, therefore, confirm that we certainly will not have the right of set off. I would, therefore, request you to draft for our Bank the minimum possible security documents to be executed by the borrower as well as by the guarantor, BCCI, as you deem fit to ensure the safety of the transaction. However, BCCI will not execute a guarantee under seal.”

“The borrower is a Grand Cayman company of a big Middle Eastern group banking with BCCI. The company (borrower) has only a nominal capital like any other tax haven company and its name will really signify nothing much to us.”

“Since the amount involved is large, please consult the solicitors at each stage and enter into the deal only after the documents are executed according to their satisfaction. I understand that 2 or 3 other banks have already completed similar deals with BCCI against a simple letter from BCCI as indicated in my telex of 12th November 1981.”

“3. We agree with the Board Resolution as amended by you, assuming you are satisfied that Mr Khalil is a Director of the Company, and that you are satisfied that the Borrower Company remains properly constituted (we understand from our telephone conversation, that you are prepared to rely on BCCI on these points with which we concur). ………. 6. With reference to your penultimate paragraph, please refer to paragraph 6 of our letter of the 18th November, pointing out that the Bank of India will have no security from the Borrower Company, although you will of course have the guarantee of BCCI.”

“ There will be a letter of request from the borrower (off-shore company), board resolution etc. The advance will be guaranteed by BCCI. We will ensure that deposit and advance will be for matching period. The entire documentation will be finalised by our solicitors. You are aware that last year, Head Office had kindly approved such a deal at my request for pounds ten million. I would recommend pounds thirty million this year because: 1) The amount will be ‘pure’ deposits 2) We get 1/8% interest differential without any outlay of funds. BCCI is a big, aggressive institution with 45 branches in UK. BCCI is doing this deal obviously to show a good ratio of earnings against their advances. Recommended.”

“ The BCCI proposal now under consideration will result, without any outlay of funds on our part, in an income of about £12,500 (Rs. 2 lacs app.). Having regard to the attractive return and risk-free nature of the proposition, we recommend that BCCI offer be accepted.” “ The BCCI proposal now under consideration will result, without any outlay of funds on our part, in an income of about £12,500 (Rs. 2 lacs app.). Having regard to the attractive return and risk-free nature of the proposition, we recommend that BCCI offer be accepted.”

“This profit expressed as a return on average shareholders’ equity for the year was 20 per cent, while pre-tax profits produced a return of 2.06% on Average Assets for the year.”

“ .... The central point in our decision-making process was not the reason why BCCI was doing this transaction, but the proposal essentially consisted of two sets. One is a loan to be given to a borrower to be guaranteed by BCCI with funds being provided by BCCI, for a matching period, to Bank of India. That proposal was standing on its own merits, regardless of the reasons advanced by the BCCI for doing this transaction. I would submit that on a hypothetical basis, if a proposal had come from Mr Samant making a proposition that: I have received a proposal to this effect, namely BCCI wants us to lend the money to a borrower to be introduced by them, for which they are willing to provide a guarantee and for which they are also willing to fund us for a matching period with an interest differential, we would still have approved of the transaction. The question of what were the objectives of the BCCI in doing this transaction to my mind are incidental to the transaction and not the central issue in our decision-making process. Q. But if you were given no reason you would want to know why on earth is BCCI doing this, would you not, to satisfy yourself that you were not getting involved in anything improper? A. Certainly, sir, we would have, and that satisfaction was provided when Mr Samant had given this explanation, which on a prima facie basis seemed to make sense to us.”

“ …. When this reasoning was given we applied a simple arithmetic, namely this is what -- I must at this stage say, sir, when we looked at that statement in 1981, we looked at that statement on the basis of a set of knowledge and beliefs which we had at that particular time, compared to the set of knowledge and beliefs which we have today. Today our knowledge and beliefs is based on the fact that BCCI committed one of the most massive frauds in the banking industry. It was hiding certain transactions from their auditors, it was not entirely truthful in whatever they were saying and some of its executives were also guilty of fraud. But in 1981, when we did the transaction, we operated on a set of knowledge and beliefs based on the fact that BCCI was a very respectable and responsible bank, based in London, which was considered to be the Mecca of the financial centre of the world, and secondly, it consisted of very competent professionals, some of whom were drawn from the Subcontinent and whom many of my colleagues knew to be very competent. And thirdly, when they make a statement there is no reason for us to believe that a respectable bank managed by responsible officials would like to make a statement which is neither truthful nor factually correct and we, looking at it from the head office, there was no reason for us to subject the statement to such intense scrutiny as is being done today on the basis of knowledge which was gained through a period of two decades.”

“Dear Homi Reference our……discussion, my bank agreeable up to pounds 30 million (sterling pounds thirty million). Please keep your London office informed. I read in the press that you are painting the town red. How is Roshan? Our gang misses you both.”

“Many thanks yr tlx 12th Aug. Happy to know that you hv lined up arrangements as discussed. Shall conclude deal in 2nd week of Sept upon my return to Ldn. Heartiest congratulations on your promotion as DGM.”

“Q. That does not look like a performing loan? A. Why not? From the best of accounts at the end of the year, in fact it would be their very good account that they will try to take it out of the balance sheet because they would be confident at the end of the year that money will be given back to them because he is a good customer.”

“The BCCI proposal will result, without any outlay of funds on our part, in an income of about US $18,750- to US $37,500- (Rs. 1.87 to 3.75 lacs approximately) depending on the maturity date of the deposit/advance. Having regard to the attractive return and risk-free nature of the proposition and since BCCI wanted our consent to this transaction before 11th October, 1983 this was approved by the Executive Director on 9.10.1983. We now seek the Board’s confirmation therefor.”

“The motivation for mobilisation of deposit is spread by giving advances. When the earnings ratio against advances improves it gives a better spread and thereby a better position.”

“We do it in small lots every fortnight say $20m or so - this you could discuss with Mr Mewawalla at the appropriate time.”

“The loan may be disbursed in 3 or 4 tranches. But it will be ensured that the maturity date of deposit and due date of loan match, so that deposit is not repaid before loan is due and we do not need to borrow funds in the market. Further the loan will be paid on due date only.”

“BCCI is a vast organisation with a large network in U.K. and it wishes to enter into these deals to show a good ratio of earnings against its advances.”

“As regards the security of repayment, the Chief Manager, UK & European Branches had advised in 1981 that no bank or licensed deposit taking institution in the U.K. could afford to go back on its commitment in the eyes of the Bank of England. For all the past 3 deals BCCI’s nominee borrower has been a Grand Cayman Company called Maram Trading Co. Ltd. and in each case the deposit and the corresponding advance were repaid on the common due date.”

“ I could not agree with your views more. BCCI is not prepared to give a letter of set-off because they will not be able to show the amount as a ‘free’ lending to another bank. Hence the deposit is backed by a letter of guarantee. I would entirely agree with you that our Bank would be entitled to set off against the liability of BCCI under its guarantee against the deposit payable by us to BCCI. I would certainly make a reference to our Solicitors once again. But I would rather go by your considered opinion than by our Solicitors’ opinion in U.K.”

“Q. And the usual deal, according to what you said in your evidence before, was calculated on BCCI’s part to improve its assets to advances, its earnings to advances ratio? A. Yes. Q. The first deal would not do that? A. It would not, but the second deal would do and they were prepared to do both the deals, so I presume that if only the first deal is done, they would not have done the second deal in any case, because that is how -- Q. Why do you refer to the first deal as being part of the usual deal; it is not, is it? A. It is not usual in the sense that is how he mentioned. It only means that: this is the kind of deal, the way that you did it all along, that we will give you a deposit and you give an advance to our customer. I am not so precise in this handwritten note on the basis of what he mentioned to me. It is not verbatim mentioned, because these are only the points which are mentioned.”

“Q. Did you discuss with Mr Mewawalla the purpose of this transaction? A. No, I did not, because as far as I was concerned, my purpose was to have the deposit and his purpose, he had already mentioned that: it will improve my ratio. Q. What on earth was the purpose of having it two periods, one from August to November and then from December to February? A. He is straightaway putting the two proposals together, so my purpose is sufficiently served by the second. Q. Is that really it, Mr Samant, that you thought the second proposal squared with what had been done previously, so, therefore, you did not have to ask any questions about the first? A. Yes, there was no reason for me to ask, because as far as Mewawalla was concerned, now, I was sure he was an extremely honest man and BCCI, we never thought would do anything which was not honest and correct. Q. You have said that on several occasions, Mr Samant, but I suggest to you that you, certainly by this stage and I would suggest from a very early stage, appreciated that this was a dishonest transaction that BCCI was indulging in. A. I did not know, nor did anyone from head office, who were always in sort of absolutely in knowledge of most of the banks that they dealt with.”

“[It] would have been carried out for the same purpose, namely, to increase BOI’s deposits for balance sheet purposes. What BCCI did with BOI’s deposit of US $50m was not something that BOI could enquire about.”

“Samant admitted that these transactions were ‘window dressing’, and that they had had such an arrangement with BCCI for the past three years (at HO's instigation, naturally!). JBCA warned B of I that such transactions were neither attractive nor acceptable, saying that whilst many banks indulged in window dressing, there were limits. He told Samant to warn Bombay not to indulge in such practices through London.”

“Too old to gauge the scale of present activities”

“In view of the past satisfactory experience, good relationship with BCCI, a margin of 1/8% without any outlay of funds and safety of advance, the Manager, London Branch who is also the Acting Chief Manager, UK & European Branches has recommended sanction of a limit of USD 100 m..”

“Q What I am asking is why you were suggesting that deposits of at least $20 to £25 million should be place at Cayman Islands branch and I am suggesting to you that that can have no tax purpose behind it, can it? A. No, sir, it would have maximised our deposit. Q. But your deposits are maximised whether they are in Cayman Islands or London or elsewhere, are they not? A. Yes. Q. So that does not explain that suggestion? A. No, actually, since I said I think yesterday I was talking about it, since we are going there, if we can get some deposits from Maram through BCCI, because Maram was also, it is noticed that it is registered at Cayman Islands, so this is the idea, if we can get it is better for us. Q. So you are now talking of getting some deposits from Maram; is that what you are saying, not from BCCI, but from Maram? A. BCCI, Maram, whoever puts it, we would like to use that $20 to $25 million. Q. Who is it that you are expecting to get deposits from, Maram or BCCI? A. We have used the word “BCCI” here. BCCI can do it through Maram or BCCI’s presence there, they work in all these places, I think, so they could have done it. It is just a thought coming from the person who prepared it and I agreed with that, and I signed it also. Q. When you said that BCCI could do it through Maram, that suggests that BCCI could do with Maram whatever it wants? A. No, I did not say that. I did not mean that. It came to our mind -- first it originated from the person who prepared this note -- I cannot find a signature here -- it came from him: it is a good idea if we get another $20-$25 million deposit there, which would help us to maximise our deposit. Q. But it is part of the arrangement that is here being varied, is it not, that BCCI will place deposits? A. We said to arrange, that you should arrange. Whether they place it or not, that also I cannot remember now. And it is also in here somewhere, because it is my general manager’s handwriting, “if possible”.”

“My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation.”

“ The company's primary rules of attribution together with the general principles of agency, vicarious liability and so forth are usually sufficient to enable one to determine its rights and obligations. In exceptional cases, however, they will not provide an answer. This will be the case when a rule of law, either expressly or by implication, excludes attribution on the basis of the general principles of agency or vicarious liability. For example, a rule may be stated in language primarily applicable to a natural person and require some act or state of mind on the part of that person "himself," as opposed to his servants or agents. This is generally true of rules of the criminal law, which ordinarily impose liability only for the actus reus and mens rea of the defendant himself. How is such a rule to be applied to a company? One possibility is that the court may come to the conclusion that the rule was not intended to apply to companies at all; for example, a law which created an offence for which the only penalty was community service. Another possibility is that the court might interpret the law as meaning that it could apply to a company only on the basis of its primary rules of attribution, i.e. if the act giving rise to liability was specifically authorised by a resolution of the board or an unanimous agreement of the shareholders. But there will be many cases in which neither of these solutions is satisfactory; in which the court considers that the law was intended to apply to companies and that, although it excludes ordinary vicarious liability, insistence on the primary rules of attribution would in practice defeat that intention. In such a case, the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy.”

“ 48. In my view, the tribunal were correct in attributing the acts and knowledge of the site agents to the company. I start with ss 60(1) and 77(4) simply because the tribunal’s reasoning is directed to those provisions (see p 10, para 24). The policy of those provisions is to discourage the dishonest evasion of VAT, and to give the commissioners an extended period in which to make assessments where VAT has been lost as a result of the dishonest evasion of VAT. That policy would be frustrated if the acts and knowledge of all those employees who have a part to play in the making and receiving of supplies were not to be attributed to the company for the purposes of ss 60(1) and 77(4). If the only persons whose acts and knowledge may be attributed to a company are those who are responsible for running the affairs of the company as a whole, and those involved in its VAT activities, then the policy to which I have referred would be seriously undermined. As Mr Parker points out, it would encourage those prepared to engage in fraud or turn a blind eye to set up separate VAT accounts departments for that purpose. Moreover, it would discriminate against small companies that do not have separate accounts departments insulated from what happens on site or in contracts departments. 49. I would hold, therefore, that the acts and knowledge of all those employees of a company who have a part to play in the making and receiving of supplies, as well as those involved in its VAT arrangements, are to be attributed to the employing company for the purposes of ss 60(1) and 77(4).”