Liquidation

Overview

The closure and subsequent liquidation of the Bank of Credit and Commerce International (BCCI) in July 1991 remains one of the most significant and widely debated events in the history of international banking.

Although BCCI’s closure is commonly portrayed as the inevitable collapse of an insolvent institution riddled with widespread fraud, the position at the time was considerably more complex. During the period immediately preceding the closure, BCCI’s majority shareholders in Abu Dhabi had already provided substantial financial support to address problem loans, losses and previously unrecorded liabilities. They were also actively involved in restructuring efforts intended to stabilise the bank and enable it to continue operating.

The events of July 1991 therefore occurred at a time when:

discussions with the Bank of England concerning a comprehensive restructuring programme were continuing, with the involvement of BCCI’s external auditors, Price Waterhouse;
the Abu Dhabi majority shareholders had demonstrated their willingness to provide financial support on a significant scale;
further discussions with regulators, led principally by the Bank of England, were still taking place; and
proposals for reorganising BCCI into a group of separately regulated banks remained under consideration.

The liquidation that followed should therefore be understood within this broader financial, regulatory and shareholder context.

Compulsory Liquidation

On 5 July 1991, regulatory authorities in a number of jurisdictions took coordinated action to suspend BCCI’s operations.

This action followed a meeting in Luxembourg called by the Bank of England and the Luxembourg Monetary Institute, commonly referred to as the IML. The meeting was attended by Mr Ganim Mazrui, a member of BCCI’s Board of Directors who represented the majority Abu Dhabi shareholders.

Mr Mazrui attended the meeting in the apparent expectation that the regulators would consider, and potentially approve, a final restructuring programme. This followed the provision of a further US$650 million by the Abu Dhabi shareholders to strengthen BCCI’s capital. The amount had reportedly been transferred on 4 July 1991, just one day before the closure was announced.

At that stage:

the Abu Dhabi majority shareholders had already provided financial support estimated at US$5.1 billion during 1990, including cash, guarantees and promissory notes;
Updated restructuring proposals had been presented to the Bank of England and other regulators;
additional capital support was under consideration; and
a view remained among a number of shareholders, employees, creditors and other stakeholders that BCCI was not beyond rescue and could still be stabilised through restructuring.

The Meeting in Luxembourg on 5 July 1991

According to the Report of Lord Justice Bingham, published in October 1992, the Bank of England and the IML, acting with the European members of the College of Regulators responsible for supervising BCCI, had already held confidential discussions concerning coordinated action against the bank.

These discussions followed consideration of the Section 41 investigation undertaken by Price Waterhouse. The report raised serious concerns, including allegations of false accounting, concealed losses, unrecorded liabilities, irregular lending and transactions involving major customers and persons connected with the bank.

There was also an allegation concerning Mr Mazrui’s involvement in shareholding arrangements and his certification of a shareholder-related loan. However, the allegation was disputed and, according to the Abu Dhabi shareholders’ position, was never satisfactorily verified.

The purpose of the meeting on 5 July appears to have been to inform Mr Mazrui of the regulators’ decision and to seek his agreement to an orderly closure or liquidation of BCCI. The UAE Central Bank, although a member of the College of Regulators, was not included in the final discussions among the European regulators that led to the closure decision.

The announcement came as a considerable shock to Mr Mazrui. According to reports of the meeting, he indicated that Abu Dhabi might be willing to increase its financial support to as much as US$7 billion. By that stage, however, the decision to close the bank had already been taken.

Price Waterhouse is also reported to have expressed concern earlier about the Bank of England’s decision to move towards closure and the widespread disruption that closure would cause. On the basis of the financial support including thr additiolnal US$650 million already committed by Abu Dhabi, it appears that the regulators believed customer deposits and other liabilities could be fully protected. That assumption proved to have serious consequences once the closure commenced and Abu Dhabi withdrew all support. The Bank of England had never informed any representative of Abu Dhabi at any time that the investigation might lead to the immediate closure of BCCI.

Mr Mazrui reportedly reacted strongly to the announcement and consulted the authorities in Abu Dhabi. Following those consultations, the transfer of US$650 million made on 4 July 1991 was immediately recalled. Proceedings were also commenced in the Abu Dhabi courts to prevent the removal or use of the promissory notes issued and held in Abu Dhabi as part of the wider financial support package.

The withdrawal of the US$650 million and the restrictions placed upon the promissory notes contributed to the difficult and disorderly circumstances in which the provisional liquidation began.

Court Proceedings Following the Closure

Following the announcement of BCCI’s closure:

the Bank of England and the IML presented applications to the courts in London and Luxembourg seeking the winding up of BCCI and the appointment of liquidators;

the Abu Dhabi shareholders sought an adjournment of the winding-up proceedings in the UK to allow further consideration of restructuring or reopening the bank;
creditors and former employees appeared in the United Kingdom proceedings and supported the request for additional time; and
the High Court granted a limited adjournment to enable the majority shareholders to consider whether a viable restructuring or reopening proposal could be developed.

During the adjournment period, negotiations took place between Abu Dhabi and the regulators, principally the Bank of England. These discussions did not ultimately lead to an agreement.

According to statements subsequently issued by the Abu Dhabi shareholders, the restructuring proposals were not pursued in part because the conditions required by the regulators were regarded as difficult or unacceptable. Once the shareholders decided not to proceed further, the process moved towards formal compulsory liquidation.

Provisional Liquidation

In the immediate aftermath of the closure announcement, courts in the United Kingdom, Luxembourg and other jurisdictions appointed joint provisional liquidators to take control of BCCI’s affairs.

Provisional liquidation is an interim protective procedure. It does not necessarily amount to a final determination that a company must be wound up. Its principal purposes are to:

secure and preserve the company’s assets;
prevent the dissipation or unauthorised transfer of funds;
safeguard accounting records and financial information;
maintain control over the company’s affairs; and
protect the collective interests of creditors until the court determines the winding-up petition.

In BCCI’s case, provisional liquidation reflected:

the international scale of the bank’s operations;
the complexity of its corporate and financial structure;
the large number of branches, subsidiaries and affiliated entities;
the need to protect assets located in numerous jurisdictions; and
the requirement for coordinated action by courts and insolvency practitioners in several countries.

The joint provisional liquidators acted under the supervision of the courts and owed duties to the general body of creditors rather than to any individual shareholder, depositor, employee or regulator.

Timeline of Key Events, 1990–1992

1990

The Abu Dhabi majority shareholders provided financial support upto US$5.1 billion. The support included cash, guarantees and promissory notes and followed internal investigations into BCCI’s financial position.

Restructuring proposals were developed and presented to regulators, including the Bank of England. These proposals were intended to reorganise BCCI, address problem assets and establish separately regulated banking entities.

Early 1991

Discussions continued between BCCI, the Abu Dhabi shareholders, Price Waterhouse and regulators led by the Bank of England concerning the restructuring and stabilisation of the bank.

Preparations were made for further capital support and a broader reorganisation of the BCCI Group.

The Bank of England commissioned Price Waterhouse, BCCI’s external auditor, to conduct an investigation under section 41 of the Banking Act 1987. Section 41 permitted the Bank of England to appoint investigators where it considered an examination necessary for the protection of depositors. The investigators could require access to the bank’s books, records, accounts, information and explanations.

A draft of the Section 41 report was delivered to the Bank of England on 24 June 1991. This appears to have been the point at which the Bank concluded that the proposed restructuring could no longer proceed. By 1 July 1991, confidential steps were being taken to coordinate the closure of BCCI across several jurisdictions.

4 July 1991

The Abu Dhabi majority shareholders, apparently unaware that the Bank of England had decided to proceed towards closure on the basis of the Section 41 investigation, provided a further capital contribution of approximately US$650 million.

The Section 41 report had not been disclosed to the Abu Dhabi shareholders or, according to their account, shared with the UAE Central Bank before the closure decision was implemented.

The withdrawal of the US$650 million transfer by Abu Dhabi was later referred to in a letter dated 24 March 1994 from the BCCI liquidators.

5 July 1991

At the meeting in Luxembourg, the Bank of England and the IML informed the representative of the Abu Dhabi majority shareholders that BCCI would be closed.

Following consultation with Abu Dhabi, the shareholders recalled the US$650 million transferred on 4 July 1991. The recall was reportedly successful because the transfer instructions had not yet been processed, 4 July being the United States Independence Day public holiday.

At approximately the same time, Abu Dhabi took steps through its courts to prevent the removal, use or enforcement of promissory notes issued as part of the wider financial support package.

Coordinated regulatory action resulted in applications being made to courts in several jurisdictions to suspend or close BCCI’s operations.

In England, the Bank of England presented a petition in the High Court seeking:

the winding up of Bank of Credit and Commerce International S.A.; and
the immediate appointment of provisional liquidators.

The High Court appointed Christopher Morris, John Richards and Nicholas Lyle of Touche Ross & Co. as joint provisional liquidators. The Court also issued letters of request to facilitate related appointments in Scotland and the Isle of Man.

The petition presented on 5 July remained pending. The Court did not make the final English winding-up order until 14 January 1992.

30 July 1991

When the petition returned to the High Court on 30 July 1991, the Bank of England sought an immediate winding-up order.

The joint provisional liquidators opposed immediate winding up and supported an application by the Abu Dhabi interests for an adjournment. The purpose of the adjournment was to allow further time to determine whether BCCI could be reopened, reconstructed or reorganised.

Creditors and former employees also supported the request for additional time.

The High Court granted a limited adjournment to facilitate discussions with Abu Dhabi and to enable the shareholders to consider whether a viable rescue or reopening proposal could be presented.

August to October 1991

Negotiations continued between the Abu Dhabi shareholders, the Bank of England, other regulators and the provisional liquidators.

The discussions concerned the possible restructuring, reopening or transfer of parts of BCCI’s business. They also addressed the terms on which further financial support might be provided.

The negotiations ultimately did not succeed. Abu Dhabi subsequently issued a statement in October 1991 explaining its position and the reasons why it had decided not to proceed with further restructuring proposals.

Late 1991

Following the failure of the restructuring discussions, the courts and provisional liquidators moved towards formal winding up.

Further hearings took place to coordinate the proceedings in England, Luxembourg, the Cayman Islands and other jurisdictions.

1992: Formal Winding-Up Orders

3 January 1992: The Luxembourg court ordered the winding up of BCCI S.A.
14 January 1992: The High Court in England made a compulsory winding-up order in respect of BCCI S.A.
14 January 1992: The court in the Cayman Islands made compulsory winding-up orders in respect of BCCI (Overseas) Ltd and affiliated International Credit and Investment Company entities. BCCI (Overseas) Ltd was legally separate from BCCI S.A., which was incorporated in Luxembourg.
11 June 1992: BCCI Holdings was placed into liquidation.

Shareholder Perspective and Context

Statements issued by the Abu Dhabi majority shareholders following the closure provide an additional and important perspective on the events of 1991.

According to those statements:

substantial financial support had already been committed before the closure;
a restructuring programme remained under active consideration when the regulators intervened;
further shareholder support was potentially available;
the provision of additional support depended upon agreement with the regulatory authorities; and
the closure decision was implemented without the shareholders having been given a full opportunity to respond to the findings of the Section 41 investigation.

The shareholders maintained that, had the restructuring programme been implemented, BCCI might have continued operating through a group of separately capitalised and regulated banks.

This perspective differs from the widely reported narrative that BCCI had been hopelessly insolvent for several years before its closure. Such descriptions may not fully reflect the position in mid-1991, following the intervention of the Abu Dhabi shareholders, the provision of substantial financial support and the development of restructuring proposals.

However, the prospects of successful restructuring depended upon several uncertain matters, including:

the true extent of BCCI’s losses and liabilities;
the enforceability and availability of shareholder guarantees and promissory notes;
the willingness of Abu Dhabi to provide further support;
the acceptance of the restructuring proposals by regulators; and
whether confidence among depositors, counterparties and international regulators could have been restored.

From Closure to Liquidation

Following the conclusion of the discussions and the decision not to proceed with restructuring, BCCI moved from provisional control into full liquidation under court supervision.

The liquidation involved:

the appointment of liquidators in numerous jurisdictions;
coordination among courts in Luxembourg, the United Kingdom, the Cayman Islands and elsewhere;
the submission, assessment and settlement of creditor claims;
the tracing, preservation and recovery of assets;
proceedings against former directors, officers, auditors and third parties; and
arrangements for distributing recovered funds to creditors.

The liquidation of BCCI became one of the largest and reportedly the most complex cross-border insolvency exercises undertaken.

It involved:

asset tracing and recovery across numerous countries;
claims by depositors, institutional creditors and former employees throughout the world;
extensive litigation extending over several decades;
coordination among different legal systems and insolvency regimes; and
substantial administrative and professional costs.

Although significant recoveries were ultimately achieved, the process also demonstrated the considerable difficulties involved in resolving the affairs of a global bank operating through a complicated network of branches, subsidiaries, nominees and affiliated companies. The total cost of the liquidation (fees expenses) amounted to a questionable sum of £1.2 billion approximately, with £435m ($697million) in UK alone.

Countries That Did Not Proceed with the Liquidation of BCCI’s Local Operations

A number of countries, particularly in Asia, Africa and the developing world, where BCCI’s local operations were profitable and provided valuable banking services, did not consider liquidation to be in the best interests of depositors, borrowers, employees or the wider economy.

The central banks and governments of those countries were concerned that an abrupt closure would:

cause losses to local depositors;
interrupt credit facilities available to businesses;
damage trade finance and remittance arrangements;
create unemployment;
disrupt confidence in the domestic banking system; and
impose unnecessary economic hardship where the local branches remained viable.

Different solutions were therefore adopted in different jurisdictions.

In some countries, BCCI branches were permitted to continue operating temporarily under the direct supervision of the central bank. In others, the local operations were transferred, merged, recapitalised or sold to another financial institution.

Examples included:

the transfer or integration of BCCI’s operations with the Bank of Baroda in India;
the acquisition or transfer of operations to Habib Bank in Pakistan;
recapitalisation arrangements involving customer deposits or local financial support in Bangladesh; and
the sale of viable operations to other banks or private investors in certain jurisdictions.

These differing approaches indicate that the closure of BCCI did not result in an identical outcome in every country. Some authorities concluded that preserving, transferring or recapitalising viable local operations would produce a better result than immediate liquidation.

The experience of these countries is relevant to the wider debate over whether the complete and coordinated closure of BCCI in July 1991 was the only available course, or whether a more selective restructuring, recapitalisation or transfer of viable operations could have reduced the losses and disruption suffered by depositors, employees and customers.

Read more:

Statement of Abu Dhabi Shareholders on BCCI Closure
Letter dated 24 March 1994 from BCCI Liquidator
BCCI wind-up fees £435m in UK | This is Money
Summary of Selected Key Chapters of the Bingham Report