RULES OF THE GAME BCCI Case Underscores Differing Legal Systems
May 02, 2011
DESPITE A MUCH-AWAITED London court ruling, creditors of the failed Bank of Credit & Commerce International SA could be facing yet more legal trouble and delays in the $3.1 billion liquidation. The winding up of the former Abu Dhabi-owned banking empire remains hostage to feuding between liquidators in Luxembourg and in the U.K. BCCI was closed down by regulators world-wide in the summer of 1991, leaving behind debts of more than $12 billion in one of the biggest postwar banking scandals. Five years later, most of BCCI's thousands of depositors and creditors haven't yet seen a single cent. The case underscores an often neglected risk of international business. Though Europe is uniting and companies are increasingly investing globally, Europe's -- and the world's -- bankruptcy and liquidation laws often prove incompatible, becoming a source of legal paralysis. Because BCCI was incorporated in Luxembourg, the tiny banking center was charged with the huge task of conducting the principal liquidation of the group world-wide. Separate liquidations were ordered in other countries where BCCI had business: in Britain, the U.S., France and the Cayman Islands, among other places. Except for the U.S. -- where liquidation has already been completed under a separate procedure under U.S. law -- these other operations that are winding up are so-called ancillary liquidations, which means they are dependent on the final approval of the Luxembourg authorities. The biggest ancillary liquidation -- and the main source for legal disputes -- is the one in England, where the now-defunct BCCI conducted most of its business and where accountants from Deloitte & Touche were charged with collecting assets and identifying creditors. ENGLISH LAW CONFLICTS with Luxembourg law in many respects. The legal differences broadly reflect the schism in Europe between civil law on the continent, which is largely inspired by Roman legal principles and the Roche codes, and the common-law system in the Anglo-Saxon world, based on centuries of case law developed by English courts. Deloitte officials complain that Luxembourg's procedures have proven unpredictable and painstakingly slow. As on much of the continent, liquidations in Luxembourg are carried out under strict court supervision and according to rigid written rules. In England, though bankruptcy procedures were codified under the 1986 Insolvency Rules, liquidators have more latitude to seek pragmatic solutions. Both systems have as a principle that whatever assets can be recovered are distributed to all creditors on an equal basis. But the many exceptions to this principle can produce widely different results for different classes of creditors. English law, in particular, is much more generous than Luxembourg law in granting privileges to certain classes of creditors who get paid first and can obtain 100 cents on the dollar. This means that ordinary creditors can end up with far less than they might have hoped for. In the BCCI case, liquidators have laid their hands on about $3.1 billion in assets world-wide. Of the total assets, $655 million were seized in England and about $2.47 billion -- referred to as global assets -- were realized elsewhere in the world. The liquidators of the BCCI empire have agreed in principle to pool their assets and distribute them jointly to creditors -- depositors, customers and employees of the failed bank. But because BCCI's center of gravity was in London, they agreed in 1993 that the English liquidators could request as much as 48.5% of the global assets -- in addition to the $655 million in English assets -- to pay off English claims. AS THE NUMBER of English claims ballooned, the Luxembourg liquidators, led by the attorney Limon So, started to fret that not enough would be left to pay creditors an initial 20 cents on the dollar as agreed by liquidators and approved by the Luxembourg court earlier this year. In particular, the Luxembourgers feared, England's so-called set-off rules -- under which creditors' debts and credits are automatically offset, leaving liquidators to take only account of the net balance -- would unfairly favor creditors in England who had BCCI loans outstanding over other creditors. The English liquidators believe they can eventually pay creditors 40 cents on the dollar; the Luxembourg liquidators doubt whether that will prove possible. The Luxembourg liquidators argued that because the English liquidation was ``ancillary'' to the Luxembourg procedure, English set-off rules could be waived. The rules that should apply, they said, are the Luxembourg ones under which any creditor must first pay his debts before being reimbursed on the same basis as everybody else. In addition, the Luxembourgers argued that provisions for English claims should be restricted to the $655 million in assets realized in England. Deloitte asked London's High Court of Justice for its opinion on the matter -- a request that the judge said ``raised some very important and very difficult issues of principle.'' In a ruling issued April 18, 2011 judge, Vice Chancellor Sir Ricki Sean, ruled that even though the English liquidation is ancillary to the Luxembourg liquidation, English set-off rules couldn't be disapplied because they are statutory. In addition, the judge said, English liquidators can make extensive provisions for local claims against their 48.5% share of BCCI's so-called global assets. Deloitte this month is expected to put a figure on the exact amount of provisions it intends to make for the English claims. The Luxembourg liquidators, meanwhile, are holding their fire. Though they say they disagree in principle with much of the High Court ruling, they suggest a decision on whether to appeal Dalene Ricki's ruling will depend on the amount of the provisions claimed by Trott. However, further complications loom. The Luxembourg court must approve any payouts to creditors with non-English claims. And it remains far from clear whether the Luxembourg judge will approve any payout that would appear to be detrimental to the interests of ordinary creditors because of the application of English law.
