Bank of India v Morris & Ors

For civil liability for fraudulent trading under Insolvency Act 1986 section 213, a company’s knowledge is not confined to that of its board or persons formally authorised by board resolution. The statutory purpose may require the knowledge of a senior employee who had practical authority over the relevant transactions to be attributed to the company.

Attribution depends on all the circumstances. Material considerations include the employee’s seniority, freedom and responsibility in the transactions, the information available to the board, and whether grounds for suspicion were inadequately investigated. An employee’s breach of duty, or the company’s characterisation as a secondary victim, does not necessarily prevent attribution.

The liquidators of BCCI obtained judgment against the Bank of India for US$82,302,941 under section 213(2) of the Insolvency Act 1986. Patten J found that a senior Bank of India manager, Mr Samant, had blind-eye knowledge that four circular transactions were assisting BCCI’s fraudulent trading. He attributed that knowledge to the bank.

The bank appealed, challenging the finding of dishonesty, the attribution of Mr Samant’s knowledge and the connection between the transactions and BCCI’s fraud. The liquidators cross-appealed against the refusal to find two directors dishonest. They also sought permission to add an out-of-time claim that the bank was vicariously liable for Mr Samant’s conduct.

The central issues were whether the factual findings could be disturbed, whose knowledge counted as the bank’s knowledge under section 213, and whether the proposed claim arose from the same or substantially the same facts as the pleaded claim.

1. Appeal and cross-appeal dismissed. Patten J was entitled to find that Mr Samant had blind-eye knowledge of BCCI’s fraud in the second to fifth transactions. The transactions were artificial, commercially extraordinary and unsupported by normal lending enquiries. Their increasing scale, circular structure and departure from their purported purpose supported the finding. The trial judge had evaluated the witnesses and documentary evidence over a lengthy trial, and the appellate court would not substitute its own assessment.

2. The refusal to find Mr Shukla and Mr Vaghul dishonest was also upheld. Their reliance on Mr Samant was consistent with their having doubts but lacking the targeted suspicion and deliberate avoidance required for blind-eye knowledge. A refusal to find fraud should be displaced only on the clearest grounds.

3. Section 213 of the Insolvency Act 1986 required a special, context-sensitive rule of corporate attribution. Its paramount civil purpose is to compensate creditors harmed by fraudulent trading. Restricting attribution to the board or persons formally authorised by resolution would ignore commercial reality and risk emasculating the provision.

4. Whether an employee’s knowledge is attributable depends on the particular facts. Relevant considerations include the employee’s seniority; the employee’s significance, responsibility and freedom in the transaction; the board’s information and grounds for concern; and the adequacy of its inquiries. Mr Samant was a senior manager, introduced and negotiated the transactions, had practical authority to complete them and was relied upon by the board. His knowledge was therefore attributable to the bank. His breach of duty and the bank’s asserted status as a secondary victim did not prevent attribution.

5. The liquidators’ proposed vicarious-liability claim was a new claim after expiry of the limitation period. It required investigation of new factual issues, including whether Mr Samant was personally a party to the fraud, whether he negotiated and implemented each transaction, and whether he acted in the course of his employment. It did not arise from the same or substantially the same facts as the existing claim. Permission to amend was refused.

1. Court of Appeal (Civil Division): The bank’s appeal and the liquidators’ cross-appeal were dismissed. The liquidators’ application to add a vicarious-liability claim was refused: [2005] EWCA Civ 693 .

2. High Court, Chancery Division, Companies Court: Patten J entered judgment for the liquidators for US$82,302,941, with interest and costs, under section 213(2) of the Insolvency Act 1986. No neutral or report citation is stated.