01 June 2006

Fraud and trust litigation news - summer: Fraudulent trading

Morris v Bank Of India [2005] EWCA Civ 693, Court of Appeal (Civil Division), (Mummery LJ, Neuberger LJ, Munby J)

The facts of the case

Twenty years after the transactions in question the Court of Appeal upheld Patten J's judgment of 26 March 2004 that the 2nd, 3rd, 4th and 5th transactions conducted by Mr Samant for the Bank of India with Mr Mewawalla at BCCI were in breach of section 213 of the Insolvency Act 1986; that is, were carried on with intent to defraud creditors.  As entitled by virtue of section 213(2) the liquidators of BCCI, Mr Morris and others applied to the Court, and obtained, a declaration that the Bank of India was knowingly a party to these fraudulent transactions and thus under section 213(2) was liable to make “such contributions (if any) to the company's assets as the Court thinks proper”.

The Bank of India thus found itself liable not for any fraud perpetrated on itself, or on the other parties to the transaction in question – BCCI; but to the creditors of BCCI.  This was not an event that the Bank of India's auditors had spotted: it did not affect the Bank of India's assets in any way.  Nevertheless the Bank of India were found liable in the sum of US$43.231m and interest.

The decision

Mr Samant was found to be dishonest, but as Patten J stated in his judgment “No one suggested that the Board of the Bank of India was in any sense dishonest”.  Vicarious liability was not an issue before Patten J and wasn't before the Court of Appeal, notwithstanding an application by the liquidators of BCCI to amend to add such a claim.

Points of interest

The most interesting part of the Court of Appeal's judgment relates to the Bank of India's knowledge of BCCI's fraud.  Mr Samant's knowledge was the “blind-eye” variety.

On what criteria would Mr Samant's knowledge be regarded as corporate knowledge of the Bank of India in order to found liability under section 213 of the Insolvency Act 1986?  Mr Samant was not a director of the Bank of India although, as Patten J found, he was the person who “had the authority to deal” in relation to the relevant transactions.

The Court of Appeal in upholding the judgment of Patten J decided that, typically, knowledge would be regarded as corporate knowledge if factors such as the following applied:

(i)      The age and importance or seniority in the hierarchy of the company: the more senior they are, the easier it is to attribute their knowledge to that of the company.

(ii)     The agent's significance and freedom to act in the context of the particular transaction: the more it is “his” transaction, the more he is effectively left to get on with it by the Board, the easier it is to attribute the agent's knowledge to the company.

(iii)    The degree to which the Board is informed, and the extent to which it can be said that it was, in the broadest sense, put on enquiry:  the greater the grounds of suspicion or even concern or questioning, the easier it is to attribute if questions were not raised or answers were too easily accepted by the Board.

The core reasoning for deciding the case this way is set out by the Court of Appeal in a quotation from the judgment of Patten J:

“The only question I have to decide is whether Mr Samant's knowledge is to be attributed to the Bank of India so as to found liability under Section 213.  In my judgment it is.  It seems to me that to allow the Bank of India to shelter behind an argument that the only relevant knowledge was that of the Board would be to defeat the policy of the Act.  It would allow Banks such as the Bank of India, which choose to rubber stamp the recommendations of their senior managers without ensuring that all proper and due diligence has been carried out, simply to sidestep liability by relying on their own ineptitude.”

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