Morris & Ors v Bank of India

Liability under Insolvency Act 1986, section 213 requires actual contemporaneous knowledge that assistance is being given to a fraudulent business. Negligence, however serious, is insufficient. Knowledge may include deliberately shutting one’s eyes to a firmly grounded and targeted suspicion. A company may be fixed with an employee’s knowledge where attribution is necessary to fulfil the statutory purpose, even though the employee is not its directing mind. A contribution must bear a reasonable relationship to the loss caused or contributed to by the fraudulent assistance. The claim succeeded because the responsible bank officer knowingly continued to facilitate circular transactions designed to support BCCI’s fraudulent presentation of its financial position.

The liquidators of BCCI SA and BCCI Overseas sought compensation from Bank of India under section 213 of the Insolvency Act 1986. Six arrangements involved deposits by BCCI, matching advances by Bank of India to a BCCI-nominated company, and repayment funded through BCCI. The arrangements were used to improve the apparent financial position of the BCCI group and conceal bad debts and liabilities.

The central issues were whether Bank of India knew, when it participated, that the transactions assisted BCCI’s fraud, whether the knowledge of the responsible officer was attributable to the bank, and what contribution was appropriate.

1. Liability established. Bank of India knowingly participated in BCCI’s fraudulent business through the relevant transactions and was liable to contribute under section 213 of the Insolvency Act 1986.
2. Section 213 requires actual contemporaneous knowledge that the company was, or was likely to be, engaged in false accounting or other fraud. It is not enough that the defendant was negligent or failed to appreciate an obvious danger. The relevant state of mind may, however, be established by blind-eye knowledge: a firmly grounded and targeted suspicion, coupled with a deliberate decision not to confirm it. The approach in Manifest Shipping Company Limited v Uni-Polaris Company Limited [2003] 1 AC 469 was adopted.
3. The court preferred the balance-of-probabilities analysis explained in Aktieselskabet Dansk Skibsfinansiering v Brothers [2001] 2 BCLC 324. The seriousness of the allegation affects the quality of evidence required, but does not create a separate intermediate standard of proof.
4. The transactions were artificial and circular. The nominated borrower had no substantial independent role, BCCI supplied the funding and repayment, and the stated explanation concerning the earnings-to-advances ratio was implausible. By the second transaction, the responsible officer knew, at least in the blind-eye sense, that he was probably dealing with a fraud. The later transactions reinforced that conclusion.
5. Under the statutory-purpose approach in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, the officer’s knowledge was attributable to Bank of India. He had authority in substance to negotiate and implement the transactions. Restricting attribution to the board would frustrate section 213’s purpose.
6. The contribution had to bear a reasonable relationship to the loss caused or contributed to by the conduct, as explained in Morphitis v Bernasconi [2003] 2 BCLC 53. The court accepted the liquidators’ loss methodology, adjusted the denominator to include other relevant sources of funds, and assessed the principal contribution at US $43.231 million.
7. Interest was awarded from the date of liquidation at base rate plus 1 per cent, subject to any further submissions.

First-instance decision. No prior appellate decision is stated in the judgment.