Vol 2 (2005) - Issue 5

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Bank Liable due to Employee’s Knowledge: Bank of India v Christopher Morris & 6 others [2005] EWCA Civ 693, All ER 242 (22 June 2005)

Introduction

This is the first reported case in England in which a bank has been held liable for fraudulent trading on the basis of the knowledge of an employee. The Court of Appeal held, on a claim brought under Section 213 of the Insolvency Act 1986, that the Bank of India (BoI) was ‘knowingly’ a party to the fraudulent trading of the Bank of Credit and Commerce International (BCCI) through the ‘knowledge’ of a senior employee (Mr S) of BoI, who was not on BoI’s board of directors. The Court set out some guidelines for an organization to avoid being attributed with knowledge of the improper activities of its agents or employees and thereby held to account for resulting losses.

Background

The judgment arose out of the collapse of BCCI in July 1991, at which time BCCI owed some USD 10 billion to its creditors. In order to conceal its substantial losses, BCCI’s Central Treasury Division had embarked on a systematic and wide-scale fraud involving manipulation of account balances. This included six of BCCI’s numerous transactions with BoI, through which BCCI had used receipts from BoI to credit heavily overdrawn accounts to convey the false impression that the indebtedness was being repaid to some extent by its customers.

The first instance action

BCCI’s liquidators had brought a claim against BoI pursuant to Section 213 of the Insolvency Act 1986. It should be noted that for an applicant to succeed under Section 213, he/she must show knowledge on the part of the party assisting in carrying on business fraudulently.

The specific question addressed by Patten J in the High Court was therefore whether the BoI employee who entered into the six transactions with BCCI knew that they were thereby assisting BCCI to perpetrate a fraud on its creditors. Patten J accepted that the relevant test was for ‘blind-eye’ knowledge and referred to previous case law establishing the test, as requiring, in summary: ‘ a suspicion that the relevant facts do exist and a deliberate decision to avoid confirming that they exist’. Applying the test, Patten J. found that Mr S had the relevant knowledge in respect of four of the six transactions and this finding of dishonesty was sufficient to impute liability to BoI for fraudulent trading under Section 213.

Appeal

BoI appealed against Patten J’s findings and made the following submissions:

(1) Patten J had been wrong, as a matter of fact, to conclude that Mr S had been dishonest in respect of the transactions identified;

(2) In any event, as a matter of law, Mr S’s dishonesty could not and should not be attributed to BoI because Mr S was not a director of BoI, nor did he have authority from the board to enter into the transactions with BCCI on behalf of BoI;

(3) The evidence did not establish a sufficient connection between the transactions and the board members’ personal knowledge of BCCI’s intention to deceive its creditors so as to bring BoI within the scope of Section 213; and

(4) It was contrary to the policy of the insolvency legislation and unjust to attribute Mr S’s know-ledge to BoI, who was itself a ‘secondary victim’ of Mr S’s unlawful conduct as an employee.