BCCI and the Cayman Islands: Success against the odds

Read the article in the Cayman Financial Review Magazine 

At a recent hearing before the Grand Court, the Cayman Islands liquidators of BCCI Overseas applied for and received their discharge and the Court ordered the formal dissolution of all of the BCCI group companies in the Cayman Islands. This judicial procedure brought to an end an assignment that had run for nearly 22 years. 

Since the closure of the bank happened so long ago many people have forgotten the circumstances and are surprised that the administration lasted as long as it did. The answer, for the most part, lies in the sheer size and complexity of the BCCI group structure, the fact that transactions were routinely handled without regard to the separation of legal entities, as well as the presence of widespread fraud. These were the main difficulties facing the liquidators appointed in the principal BCCI jurisdictions in the Cayman Islands, Luxembourg, England and the United Arab Emirates.

Prior to its collapse BCCI operated as an international bank which, at its height, had 417 offices in 73 countries. When it was shut down in July 1991, as a result of concerted action by regulators round the world, it was the largest international banking failure to date. At the time of its closure the global BCCI group recorded assets in the order US$17 billion. It had about 20,000 employees working in a network of branches, affiliates and subsidiaries in 71 countries around the world. There were over 80,000 individuals or corporations who had claims against its assets. The forced closure of a group of this size and spread and under these circumstances was bound to pose unprecedented challenges to those tasked with administering this complex cross-border insolvency.

Much of this complexity was acute in the Cayman Islands. The principal BCCI entity in this jurisdiction had operated branches in 27 other countries, widely dispersed geographically in the Americas, Europe, Asia and Africa. Some of these branches had functioned through more than one office, totalling between them some 220,000 depositor accounts and nearly 2,700 branch employees. Furthermore, the claims in the Cayman liquidations, although not the largest by number, were the largest by value, ultimately resulting in admitted claims of over US$3 billion.

The initial projections of dividends for creditors were very low, in the order of perhaps 10 per cent. Not only did a very large part of the loan book prove to be unsecured or fictitious, the bank faced the very real risk of losing a substantial portion of its assets in the US to fines and civil money penalties arising from the illegal activities of bank management in the US prior to closure.

The global liquidators invested significant resources in dealing with these issues immediately after closure. Although the whole process took nearly 22 years, the final return to creditors was a dividend rate of 90.1875 per cent, far exceeding initial projections. A number of factors contributed to this success.

The bulk of the group’s operations were run through two major subsidiaries, one incorporated in Luxembourg (BCCI SA) and the other in the Cayman Islands (BCCI Overseas). The largest retail network of BCCI SA and the location of much of the group’s central administrative functions were located in England. The majority shareholder of the bank was the Government of Abu Dhabi. Liquidators from these four principal jurisdictions therefore comprised the core participants in the global liquidation.

It was readily apparent at the outset that the affairs of the separate entities within BCCI were inextricably intermingled. In addition, each jurisdiction was subject to its own national laws and courts. It was obvious that worldwide cooperation (between judges of the courts of different nations as well as between liquidators) was essential to avoid disputes and litigation between the different parts of the group in order to maximise the returns to creditors on a global basis. The creation of an effective system for the efficient management of the global liquidation across national boundaries was one of the key factors in the successful outcome of the liquidation.

Management of the global liquidation was effected through a cooperative structure that evolved as needed to accommodate the changing needs of the administration. A central feature of the cooperation was agreement in effect to pool realisations on a global basis, so that creditors would receive the same rate of dividend without regard to their location or the entity against which they were entitled to claim. In this way inter-estate disputes were eliminated.

The liquidators avoided a race against each other to collect the same assets, as it made no difference where realisations were actually made. The cooperation also saw the global liquidators sharing costs and recoveries. These innovative steps had to be taken at a time when there was no formal international protocol for dealing with such matters. In the result they have set precedents and, rightly, become models for later cross-border insolvencies and indeed have helped shape the development of cross-border legislation.

The cooperative approach adopted by the liquidators in the principal jurisdictions was in marked contrast to that taken by almost all of the other branches and affiliate entities of the BCCI group.

Although the cooperative structure was open to all BCCI branches and affiliates worldwide, in almost all cases national authorities sought to “ring-fence” the liquidation within their national boundaries in order to control the process of liquidation for the primary benefit of local creditors. Only one of the 27 branches of BCCI Overseas chose to participate in the pooling arrangements, perhaps due to a perception that local realisations would generate a return for local creditors in excess of that available on a global basis. In the final event however, the return generated by the pooling estates exceeded almost all of the ring-fenced branches.

However, creditors in such branches still benefited from the global arrangements in that they retained the right to have their claims admitted in the global liquidation and receive a “top-up” dividend comprising the difference between the branch and the global dividend rates.

A second major factor underlying the success of the global liquidation was the final outcome of the negotiations with the US authorities over the bank’s assets in the United States. The operations of BCCI had been under scrutiny by the US authorities for some time prior to its closure, in relation to allegations of money laundering and the illegal acquisition of US bank shares. Shortly after the closure of the bank the global liquidators entered into a plea agreement with the US authorities which resulted in the forfeiture of all BCCI assets in the United States, a decision which some observers thought at the time was misguided.

However, under the agreement the global liquidators were entitled to an initial return of one half of all assets forfeited in the United States and such further funds as authorised by the US Department of Justice for distribution to the worldwide creditors of BCCI. In the course of a long process of interaction at many levels with the US authorities, the global liquidators recovered US$1.1 billion under the plea agreement.

The release of such a substantial proportion of the assets forfeited under the plea agreement reflected confidence on the part of the US authorities in the liquidators in the Cayman Islands and the other principal jurisdictions to provide the maximum possible relief to the worldwide victims of the banking collapse. This confidence was expressed by the supervising judge in the United States, Judge Joyce Hens Green. In her final judgment Judge Green complimented all involved in the process of dealing with the forfeited assets in the United States, including the court-appointed fiduciaries, on their foresight in entering into the plea agreement and the cooperative effort which produced results far surpassing the dire predictions made in 1991.

A third major factor in the success of the global liquidation lies in the working relationship achieved by the global liquidators with the Government of Abu Dhabi. Once the possibility of any restructuring of the bank had disappeared and a full winding-up commenced, the global liquidators had to consider claims which BCCI might have against the majority shareholders and other related parties. However, the global liquidators were ultimately able to obtain the full cooperation of the majority shareholders to resolve all issues without the need for litigation and therefore to produce the quickest and best outcome for BCCI’s depositors.

The majority shareholders withdrew their proprietary claims against the bank and agreed to pay the global liquidators a total of US$1.8 billion against specified liabilities. Receipt of these funds was a key step in allowing the first and second interim dividends to creditors, aggregating 46 cents on the dollar, to be paid by 1998.

The fourth success factor in the global liquidation was the coordinated recovery strategy applied to a series of actions taken against various parties, including some who were directly indebted to the bank or who had benefited illegally from fraudulent arrangements made with the collusion of corrupt management. In pursuing these actions through the courts in a multitude of jurisdictions the position of the liquidators was strengthened by their global stature and their unified approach. This allowed for the most pragmatic and efficient recovery strategy in each case and avoided any risk of division between the principal estates. In total, recoveries from these global initiatives amounted to some US$1.3 billion.

The operation of the liquidation through consensus reached by a representative board of liquidators proved to be the key to the successful outcome of the global administration. In each case the liquidators were subject to the court authority of their domestic jurisdiction but in all cases, including in particular the Grand Court of the Cayman Islands, the supervising courts actively encouraged and facilitated the process of cooperation. The overall objective of cooperation was successfully met, even though in certain instances application of differing legal systems meant some variation in procedures.

The BCCI liquidation was a success because it was able to evolve a cooperative management structure across national boundaries, aided by the fact that the liquidators in Cayman and England (and some in Luxembourg in the critical early years) were partners in the major international accounting firm of Deloitte. In the Cayman Islands the liquidators of BCCI also benefited from the range and depth of resources in the legal sector.

As well as legal advice and support throughout from the firm of Appleby (formerly Hunter and Hunter) and the active support of the Grand Court, the members of the committee of creditors of BCCI Overseas were represented by a number of local lawyers. The conclusion of the chief justice of the Cayman Islands was that the outcome of the liquidation was a remarkable achievement. Those who had been involved in its administration had, in his words, “set a paradigm of a standard which all would do well to replicate”.

Since 1991 there has been considerable progress in the areas of consolidated supervision of international banks and the cross-border aspects of asset recovery. Nevertheless, the sheer size and economic heft of the current configuration of major banking groups, and the complexity of the issues which impact the banking industry, mean that the challenges arising on any possible future major insolvency such as BCCI remain severe. However, the precedents set by BCCI in terms of pragmatic and effective administration provide a valuable guide to how complex cross-border insolvencies can, and indeed should, be managed.