Law Report: BCCI agreement over creditors approved by court: Re the Bank of Credit and Commerce International SA - Court of Appeal (Lord Justice Dillon, Lord Justice Russell and Lord Justice Farquharson), 17 July 1992.

Where the assets of insolvent companies and of the sequestrated estate were so confused that it was impossible to define the assets of each, it was open to the liquidator to enter into a compromise agreement which involved a variation in the rights of creditors in the exercise of the compromise powers under section 167 of the Insolvency Act 1986 rather than by a formal scheme under section 425 of the Companies Act 1985.

The Court of Appeal dismissed an appeal by certain creditors of BCCI SA from an order of Sir Donald Nicholls VC on 12 June 1992 approving a pooling and a contribution agreement. BCCI SA and BCCI (Overseas) Ltd were companies which carried on the business of bankers and deposit takers. Both became insolvent with massive deficiencies as a result of frauds perpetrated by those who managed the companies. BCCI SA was in liquidation in England.

After negotiations with the majority shareholders of BCCI SA in Abu Dhabi, which was also a major creditor, the liquidators, exercising their compromise powers under section 167 of the Insolvency Act 1986, had achieved a complicated contribution agreement which was a compromise of cross-claims between the Abu Dhabi interests and the liquidators in England and in other countries. A pooling agreement provided for the pooling of assets and liabilities of BCCI SA and BCCI (Overseas) because the affairs of BCCI SA and BCCI (Overseas) were so intertwined.

On the liquidators' application under paragraphs 2 and 3 of Part I of Schedule 4 to the 1986 Act for the court's sanction of the agreements there was no evidence that any creditor, except the Deposit Protection Board and the Abu Dhabi authorities, favoured implementation of the agreements. Sir Donald Nicholls VC sanctioned the agreements.

The appellants, two representatives of the BCCI Depositors Protection Association who were members of the creditors' committee, appealed on the grounds that despite section 195 of the 1986 Act which provides that the court may have regard to the wishes of creditors and direct creditors' meetings to be held, the Vice-Chancellor had rejected the overwhelming view of the majority of creditors and substituted his own view that it was in the interests of the creditors of BCCI SA that the agreements be approved. The appellants also argued that the agreements could not be approved under the compromise powers but only under section 425 of the Companies Act 1985.

David Hunt QC and Leslie Kosmin (Richards Butler) for the appellant creditors; Peter Scott QC, Richard Sykes QC and Richard Hacker (Simmons & Simmons) for the majority shareholders of BCCI Holdings (Luxembourg) SA; Michael Crystal QC, Sir Thomas Stockdale, Martin Pascoe and Richard Sheldon (Lovell White Durrant) for the liquidators.

LORD JUSTICE DILLON said that there were 47 branches and offices of BCCI SA in 13 jurisdictions. The total creditors of BCCI SA and BCCI (Overseas) was 310,000.

It was wholly impracticable to hold a creditors' meeting of the creditors of BCCI SA with appropriate classes whether under section 435 of the Companies Act 1985 or under section 195 of the Insolvency Act or at all.

Turning to the law as to giving effect to majority votes of creditors, section 195 required the court to have regard to the wishes of the majority of creditors, which although not conclusive, possessed great weight, and that where those wishes were reasonable the court ought to follow them in the absence of special circumstances. In Re ABC Coupler and Engineering Co Ltd (1961) 1 WLR 243 the words 'in the absence of special circumstances' were of cardinal importance.

In the complexities of the present case the judge was not necessarily precluded by the views of the majority of the creditors' committee from forming his own decision on the agreements. The word in section 195 was 'may' and not 'shall' and he had a residuary discretion where there were 'special circumstances' as there were in the present case.

Turning to section 425 of the Companies Act 1985 it was held in Re Trix Ltd (1970) 1 WLR 1421 that the proper way to distribute the assets of a company other than strictly in accordance with creditors' rights was by a scheme of arrangement under the predecessor of section 425 and not by the compromise powers which would deprive non-assenting creditors of the court's protection.

However, in Re Taylor (1992) BCC 440, the Inner House of the Court of Session decided that compromise powers were to be given the wide meaning that they permitted the liquidator to enter into any compromise arrangement with creditors that might have been entered into by the company itself. That would cover a compromise by BCCI SA with BCCI (Overseas) to resolve all their mutual dealings.

Re Taylor was also authority that if it was established that the assets of the companies and of the sequestrated estate were so confused that it was not possible to identify the assets of each and it was practically impossible to determine who the true debtors were, it would be open to the liquidator to enter into a compromise arrangement in the exercise of the compromise powers rather than by scheme under the predecessor of section 425. Re Trix was therefore, in the circumstances prevailing in Re Taylor, set on one side.

As in the case of Taylor it was necessary for the matter here to be dealt with under the compromise powers. The Vice-Chancellor had a discretion to approve the agreements.

Lord Justice Russell and Lord Justice Farquharson agreed.