The proceedings are generally known as the Three Rivers litigation because Three Rivers District Council In the United Kingdom and other BCCI depositors appeared as the named plaintiffs.
That description can be misleading. The litigation was pursued under the direction of BCCI’s liquidators, Deloitte, for the intended benefit of the liquidation estate and creditors. Its substantial legal costs were paid from funds otherwise available to the liquidation.
It is therefore more accurate to describe it as litigation pursued and funded by the BCCI liquidators using Three Rivers District Council and other depositors as the named plaintiffs.
The action began in 1993 and continued for approximately twelve years. The eventual claim was reported at approximately £850 million, although different figures appeared at different stages. This matter is examined because the failure of the litigation is sometimes treated as having resolved every question about the Bank of England’s handling of BCCI. In fact, the proceedings concerned a narrower claim of misfeasance in public office and did not determine the separate questions surrounding the abandonment of the Abu Dhabi-backed restructuring and BCCI’s closure in July 1991.
In the United Kingdom, misfeasance in public office is a form of misconduct involving the misuse of official power. In this civil case, the liquidators had to show that Bank of England officials knowingly acted beyond their lawful powers, either intending to cause harm or knowing - or being recklessly indifferent to whether - their conduct was unlawful and likely to cause loss.
Why did the BCCI liquidators not sue in their own names?
The BCCI liquidators were not depositors with BCCI or suffer the risk of losses for which compensation was claimed. Those alleged losses belonged to BCCI’s depositors.
Three Rivers District Council had itself deposited public funds with BCCI and suffered a loss when BCCI was closed. It therefore had a direct financial interest and was used, together with other depositors, as a named plaintiff and representative claimant.
The court proceedings were nevertheless organised and pursued by BCCI’s liquidators for the intended benefit of the wider body of creditors. Its substantial legal costs, including the consequences of the failed action, were to be met from the assets of the liquidation.
Accordingly, the proceedings were formally brought in the names of Three Rivers District Council and other depositors, but were in substance pursued and funded by the BCCI liquidators.
What case did the liquidators pursue?
The liquidators did not bring a general inquiry into every aspect of the Bank of England’s handling of BCCI.
Nor was the action an appeal against the decision to close BCCI in July 1991.
The principal claim was for misfeasance in public office. In broad terms, the plaintiffs (depositors) alleged that senior Bank of England officials had acted unlawfully and dishonestly, or with conscious disregard for whether their conduct was lawful and whether depositors would suffer loss.
The allegations extended across much of the Bank’s supervisory relationship with BCCI. They included claims that the Bank of England:
- licensed BCCI despite knowing that the statutory requirements had not been satisfied;
- subsequently permitted BCCI to continue accepting deposits despite serious regulatory deficiencies;
- deliberately closed its eyes to information showing that BCCI should not remain authorised;
- failed to revoke BCCI’s authorisation or require its closure at a substantially earlier date;
- knowingly exposed existing and future depositors to losses; and
- in later versions of the case, allowed officials to mislead the Bank’s governing bodies, government or Parliament about the supervision of BCCI.
The BCCI liquidators also advanced a claim based upon the European Community’s First Banking Directive, contending that failures in authorisation and supervision gave depositors an enforceable right to compensation.
This second claim ultimately failed. The courts held that the Directive did not create the individual right to damages asserted by the plaintiffs.
Why was misfeasance alleged instead of negligence?
The liquidators faced a major legal obstacle. The statutory framework substantially protected the Bank of England and its officials from ordinary claims based merely upon negligence.
It was therefore insufficient to prove that the Bank of Englad:
- made serious mistakes;
- exercised poor regulatory judgment;
- failed to investigate adequately;
- placed excessive reliance upon auditors or other regulators;
- misunderstood BCCI’s structure; or
- should reasonably have intervened earlier.
To recover damages for misfeasance in public office, the plaintiffs had to establish something much more serious: deliberate unlawfulness, bad faith or subjective recklessness amounting to dishonesty, together with knowledge that the conduct would probably injure the depositors represented in the action.
That requirement shaped the entire litigation. What might have supported a strong case of regulatory failure did not necessarily prove the dishonesty required for misfeasance.
The central contradiction in the liquidators’ case
The case pursued by the liquidators rested substantially upon the proposition that the Bank of England should have intervened against BCCI earlier.
That was fundamentally different from asking whether, in June and July 1991, the Bank:
- abandoned an agreed and substantially funded restructuring without sufficient justification;
- acted prematurely upon an unfinished draft Section 41 report;
- failed to give Price Waterhouse a proper opportunity to explain or finalise that report;
- excluded Abu Dhabi from the decisive discussions;
- failed to consider less destructive alternatives;
- delayed announcing closure until after Abu Dhabi transferred a further US$650 million; or
- incorrectly assumed that Abu Dhabi’s financial commitments would remain available after closure.
Indeed, there was an obvious tension between the two cases. A plaintiff alleging that the Bank dishonestly failed to close BCCI much earlier could not easily make the contrary case that the Bank acted wrongly by closing it in July 1991 instead of allowing restructuring to proceed.
This contradiction helps explain why the issues now raised on this website were not placed at the centre of the Three Rivers proceedings.
The Bank of England’s defence
The Bank comprehensively denied the allegations of dishonesty and bad faith.
Its defence was, in substance, that:
- its officials had exercised supervisory judgment in exceptionally difficult circumstances;
- BCCI was incorporated and principally regulated outside the United Kingdom;
- responsibility was divided among regulators in different jurisdictions;
- the Bank had been entitled to take account of information supplied by BCCI’s auditors and other supervisory authorities;
- mistakes, omissions or regulatory misjudgments did not establish dishonesty;
- no official knowingly exercised statutory powers unlawfully with the intention of injuring depositors;
- the plaintiffs could not prove that any particular official possessed the knowledge or dishonest state of mind required for misfeasance;
- the plaintiffs could not establish that the alleged conduct caused the losses claimed by individual depositors; and
- the European Banking Directive did not confer the private right to damages alleged.
The Bank also relied heavily upon the distinction between criticism of regulation and proof of personal dishonesty. That became the decisive weakness in the liquidators’ case.
What Did the Courts Decide?
Before the main case could proceed tio trial, the courts had to decide whether the BCCI liquidators’ allegations, if eventually proved by evidence, could amount to a valid legal claim against the Bank of England.
The dispute reached the House of Lords, which at that time was the United Kingdom’s highest court. Its judicial functions were transferred in 2009 to the newly established Supreme Court of the United Kingdom.
In 2000, the House of Lords considered what must be proved to establish misfeasance in public office - meaning that a public official knowingly used, or deliberately misused, official powers unlawfully and was aware that this would probably cause harm. It did not decide that Bank of England officials had acted dishonestly, nor did it award compensation to depositors.
The House of Lords decided only that a properly pleaded claim could proceed if the plaintiffs could later prove that Bank officials:
- exercised public powers unlawfully;
- knew that their conduct was unlawful, or were consciously reckless about it;
- knew that their conduct would probably cause loss to BCCI depositors; and
- actually caused the losses being claimed.
Making mistakes, exercising poor judgment or supervising BCCI negligently would not be enough. The plaintiffs had to prove deliberate wrongdoing, bad faith or the required form of dishonesty.
The ruling therefore allowed the liquidators an opportunity to pursue and prove their misfeasance claim. It did not establish that the allegations were true or that the Bank of England was liable.
The separate claim based on European banking law did not succeed. The courts held that the relevant European directive did not give individual depositors the right to claim compensation from the Bank of England.
The case was then returned to the lower court so that the allegations could be examined against the evidence. The liquidators ultimately withdrew the claim before that process resulted in a completed judgment on the full case.
The trial and withdrawal of the claim
The trial before Mr Justice Tomlinson began in January 2004 in the Commercial Court, part of the High Court of Justice in London, began in January 2004.
The proceedings became extraordinarily lengthy. The liquidators’ opening reportedly occupied approximately 80 court days, while the Bank’s response lasted approximately 119 days. By the time the proceedings ended, the trial itself had occupied approximately 257 days.
The allegations had also expanded considerably. Numerous present and former Bank officials were accused of dishonesty, with some allegations extending to the misleading of Parliament.
In November 2005, before the trial produced a completed judgment determining the claim in the ordinary way, the liquidators discontinued the proceedings. This followed a decision by the Chancellor of the High Court, Sir Andrew Morritt, that continuing the litigation was no longer in the interests of BCCI’s creditors.
The allegations of dishonesty were unconditionally withdrawn.
The Bank of England described this as complete vindication and stated that the judge had characterised the allegations against 22 members of its staff as “wholly without foundation.” That statement must be understood as the Bank’s account of the outcome, although it reflected the judge’s emphatic view of the dishonesty allegations. Bank of England statement, 2 November 2005
Mr Justice Tomlinson’s criticism of the liquidators
Mr Justice Tomlinson’s subsequent judgment was devastating concerning both the allegations of dishonesty and the manner in which the litigation had been conducted.
He disclosed that he had warned the Lord Chief Justice that the case had become a “farce” and possessed the capacity to damage the reputation of the legal system.
He described some allegations as “simply bizarre” and said parts of the case had been built “not even on sand, but rather on air.”
He was especially critical of:
- the breadth and gravity of the dishonesty allegations;
- the absence of an adequate evidential foundation for accusations against individual officials;
- the continuation of the case after its fundamental weaknesses should have become apparent;
- the extraordinary length, complexity and cost of the proceedings; and
- what he considered an attempt to use publicity to place settlement pressure upon the Bank.
He regarded the Bank’s entitlement to indemnity costs as exceptionally clear. The Bank reportedly sought approximately £73 million in legal costs and a further amount for lost interest, while the liquidators’ own costs were reported at approximately £38 million. Both sides’ costs ultimately affected the resources available to creditors. Contemporary report on the costs proceedings
These criticisms cannot responsibly be omitted from any account of the litigation. Accusing public officials personally of dishonesty is an exceptionally serious step. The liquidators pursued those allegations for years, at enormous cost to the liquidation, and eventually withdrew them unconditionally.
What did the final judgment establish?
The outcome established that the BCCI liquidators were unable or unwilling to continue supporting the allegations of dishonesty upon which their misfeasance case depended.
It also resulted in the strong judicial exoneration of the officials who had been accused.
But it is important to describe the procedural outcome precisely. The liquidators withdrew their case before the court delivered a completed merits judgment after hearing and evaluating the entire case in the usual way.
Mr Justice Tomlinson’s subsequent judgment explained why he regarded the allegations of dishonesty as unfounded and why he considered the Bank of England entitled to recover its legal costs on an indemnity basis - a more favourable basis of assessment reflecting his serious criticism of the way the claim had been pursued.
The judgment was delivered after the liquidators had withdrawn the case. It was therefore not a final judgment reached after the court had heard all the evidence and decided every allegation at the end of a completed trial.
Nor did it convert the litigation into a public inquiry examining every aspect of the Bank’s conduct. The judge was concerned with the specific case brought by the liquidators: whether identified Bank officials had knowingly or dishonestly misused their public powers and thereby caused losses to depositors.
He was not required to determine the wider questions surrounding:
- the adequacy of the Bank’s supervision of BCCI;
- the decision to abandon the Abu Dhabi-supported restructuring;
- the use of the draft Section 41 report;
- the exclusion of Abu Dhabi from the closure preparations;
- Price Waterhouse’s objections to immediate closure;
- the timing of the US$650 million transfer; or
- why closure was announced on 5 July 1991.
Indeed, Mr Justice Tomlinson expressly made clear that his rejection of the dishonesty allegations did not mean that the Bank of England was beyond criticism for permitting BCCI to continue conducting business in the United Kingdom.
The judgment therefore strongly rejected the liquidators’ allegations of dishonesty, but it did not determine whether every aspect of BCCI’s supervision, restructuring and closure had been properly handled.
Most importantly, Mr Justice Tomlinson expressly made clear that his rejection of the dishonesty allegations did not mean that the Bank of England was beyond criticism for permitting BCCI to continue conducting business in the United Kingdom. Report of Mr Justice Tomlinson’s judgment
The distinction is important:
The litigation failed to establish dishonesty or misfeasance in public office. It did not establish that every supervisory decision made by the Bank of England was correct, reasonable or beyond criticism.
Why were the closure issues raised on this website not determined?
The issues examined on this website were not necessarily considered immaterial as matters of history or public accountability. They were largely outside the legal case that the liquidators chose to pursue.
There were several reasons.
1. The litigation was about compensation, not a general investigation
The court was deciding whether the named depositors had a legal right to damages. It was not commissioned to conduct a general investigation into BCCI’s closure or to identify the regulatory course that would best have protected all depositors.
A court determines the pleaded causes of action. It does not ordinarily answer every important historical question arising from the same events.
2. The principal allegation was failure to close BCCI earlier
The liquidators argued substantially that the Bank should have revoked BCCI’s authorisation or prevented it from accepting deposits years before July 1991.
The website raises a different question: whether, by June 1991, the Bank should have permitted a substantially funded restructuring to proceed instead of organising worldwide closure.
Those positions are not identical and may be difficult to reconcile.
3. Misfeasance required proof of personal dishonesty
Questions about whether the Bank:
- acted fairly towards Abu Dhabi;
- properly assessed Price Waterhouse’s objections;
- evaluated alternatives to closure;
- misunderstood the consequences of liquidation;
- miscalculated Abu Dhabi’s response; or
- delayed its announcement for an undisclosed reason
could reveal serious regulatory failure without necessarily proving that an identified official acted dishonestly with the state of mind required by the tort.
The legal threshold may therefore have excluded questions that remain highly relevant to public accountability.
4. The timing of closure was not the pleaded foundation of the loss
The plaintiffs’ principal case was that depositors suffered losses because BCCI had been permitted to accept deposits when it should not have been authorised.
The question whether closure was deliberately withheld until after the US$650 million transfer concerns a different chain of events and a different possible explanation of depositor losses.
It raises questions about:
- Abu Dhabi’s position as majority shareholder and financial supporter;
- the survival of the restructuring package;
- the Bank’s expectations about the availability of that support after closure;
- the treatment of a member of the College of Regulators; and
- whether liquidation produced greater losses than the available restructuring alternative.
Those issues did not fit comfortably into the liquidators’ chosen theory that BCCI should have been closed earlier.
5. The litigation ended without completing the evidential process
Because the liquidators discontinued the action, there was no completed trial resolving every factual dispute arising from the Bank’s records, the Section 41 process, the closure preparations and communications with Abu Dhabi.
The withdrawal resolved the dishonesty claim against the Bank’s officials. It did not answer questions that had never formed a properly pleaded and investigated part of that claim.
A critical assessment of the liquidators’ strategy
The liquidators were entitled to investigate whether the Bank’s supervisory failures gave depositors a legal claim. The House of Lords’ willingness to permit a properly pleaded misfeasance case to continue shows that the proposed cause of action was not legally frivolous at its inception.
However, the strategy became deeply problematic.
The liquidators converted serious evidence of possible regulatory failure into extensive allegations of personal dishonesty. That imposed a burden of proof far higher than showing incompetence, negligence, poor judgment or institutional failure.
They also pursued a theory concentrated upon the Bank’s failure to close BCCI earlier. That approach left little room for examining whether the action finally taken in July 1991 was itself unnecessary, premature or deliberately timed.
As the case expanded, the liquidators accused increasing numbers of officials while committing substantial liquidation funds to proceedings that ultimately produced no recovery for creditors. The unconditional withdrawal and the judge’s findings show that the evidential basis for the dishonesty allegations was inadequate.
The liquidators should be criticised for:
- pursuing allegations of dishonesty beyond what the evidence could sustain;
- allowing the proceedings to expand to disproportionate length and cost;
- using creditor funds to support a case carrying exceptional litigation risk;
- failing to reassess the claim sufficiently early; and
- concentrating upon an exceptionally difficult tort rather than ensuring that the broader questions of regulatory accountability were independently examined.
That criticism, however, should not be converted into a wider proposition that the Bank’s conduct was therefore beyond examination.
What the litigation did not decide
The Three Rivers proceedings did not determine:
- whether the draft Section 41 report contained sufficiently new and conclusive evidence to justify abandoning restructuring;
- why the Bank moved so rapidly from supporting restructuring to organising closure;
- what communications took place with the United States authorities before the decision;
- why Abu Dhabi and the UAE Central Bank were excluded from the closure preparations;
- what Abu Dhabi was told while it continued performing its financial commitments;
- why the closure was announced on 5 July, one day after the US$650 million transfer;
- whether the Bank expected Abu Dhabi’s financial package to remain available after closure;
- whether the possibility of Abu Dhabi recalling or acting upon its financial instruments was properly considered;
- whether Price Waterhouse’s objections and warnings were adequately evaluated;
- whether viable operations could have been preserved; or
- whether closure ultimately protected depositors more effectively than the funded restructuring.
These issues were not rejected after comprehensive judicial examination. They were largely not the questions the liquidators asked the court to decide.
Conclusion
The Three Rivers litigation was a major defeat for the BCCI liquidators. Their allegations of dishonesty were withdrawn, the accused Bank officials were strongly exonerated, the judge condemned important aspects of the case, and substantial costs were borne by the liquidation.
Those conclusions should be stated plainly.
But the Bank of England’s successful defence of an exceptionally demanding misfeasance claim should not be presented as a judicial finding that every aspect of its supervision or closure of BCCI was justified.
The litigation asked principally whether Bank officials dishonestly failed to close BCCI earlier. It did not ask whether the Bank acted properly when it abandoned restructuring in June 1991, excluded Abu Dhabi from the closure preparations, permitted the final US$650 million transfer to be made and waited until 5 July to announce closure.
The unanswered question is therefore not whether the liquidators proved dishonesty. They did not.
It is this:
Why did litigation funded from the BCCI liquidation concentrate upon alleging that the Bank of England should have closed BCCI earlier, while leaving substantially unexamined the Bank’s decision to destroy the funded restructuring - and the timing and consequences of the closure it actually imposed?