The liquidators of the Bank of Credit and Commerce had not been able to establish for the purposes of s.213 Insolvency Act 1986 that the circumstances of loan transactions with the State Bank of India were such that they should have been alerted to the likelihood that it had been dealing with a fraud.Claim by liquidators of the Bank of Credit and Commerce International ('BCCI') under s.213 Insolvency Act 1986 against the State Bank of India ('SBI'), as part of a continuing process of fund recoveries following the collapse of BCCI , on the basis that SBI had knowingly participated in a fraudulent scheme devised by BCCI to enable it to present a false account of its assets and liquidity. By the 1980's BCCI had incurred significant losses and in order to conceal them it embarked on a wide-scale fraud. As part of one of the frauds a senior member of BCCI had established a company ('Notan'), which entered into two loan transactions with SBI. BCCI deposited funds for the same amounts as the loans with SBI prior to drawdown and also provided guarantees to repay them if Notan defaulted. The loan monies were received by BCCI who then utilised them for its own purposes to manipulate its balance sheet. BCCI explained to SBI that it preferred to provide a guarantee rather than a lien because a lien would have to be referred to in BCCI's end of year accounts and that it could not make the loans directly to Notan due to "balance sheet constraints". BCCI concealed from its auditors the existence of the guarantees in favour of SBI, as well as the utilisation of the SBI loan monies in the reduction of overdrawn accounts. The liquidators contended that SBI had actual knowledge of, or was deliberately blind or recklessly indifferent to, the fraudulent nature of the transactions. Their evidence was based on a comparative exercise involving an analysis of the way in which SBI had handled the transactions viewed against the standards to be expected of a hypothetical competent and honest bank.HELD: (1) Whether SBI had knowledge of the fraud would include blind-eye knowledge, which required a suspicion that the relevant facts did exist and a deliberate decision to avoid confirming that they did exist. (2) In the banking world no bank liked creating a charge over its assets, therefore the explanation for preferring a guarantee was reasonable and one that SBI had been entitled to accept. (3) Although there had been no real enquiries about the financial standing of Notan or the reasons why it had required the loan, this was because the terms of BCCI's guarantee meant that SBI would incur no funding risk in the transaction. These factors meant that the credit risk in the transaction was effectively with BCCI and the creditworthiness of the borrower was not looked into. (4) The reference to "balance sheet constraints" would not have struck anyone at SBI as an incredible explanation for the absence of a direct loan. (4) It could not be said in all the circumstances that the explanations given to SBI should have alerted them to the likelihood that it had been dealing with a fraud.Claim dismissed.
 EWHC 1868 (Ch)