Bank of England in the dock over BCCI collapse

Today, the Royal Courts of Justice will host the opening of a trial unprecedented in British legal history: at stake, the Bank of England's reputation, the honour of three of its former governors, and £1bn of taxpayers' money.

The Bank of England stands accused of lying to the Government and the wider world for nearly 20 years over the notorious collapse of the Bank of Credit and Commerce International. Never before has it been sued.

The Chancellor, Gordon Brown, too, can be expected to find the action, brought by creditors of the collapsed bank, uncomfortable. To have to implement the compensation scheme he called for while in opposition, as the creditors demand, would cost the Treasury dear.

So Court 73, which last year housed the Hutton inquiry into the death of David Kelly, will host what will in effect be another trial of the British establishment. This time, it could last 18 months, and rack up legal bills of £50m.

The Bank's task? To defend itself over the way it regulated BCCI. Nicknamed the Bank of Corruption and Criminal Incompetence, BCCI collapsed in July 1991, after it lent huge amounts of ordinary depositors' money to a small number of investors, who were then unable to repay the loans. The failure - the biggest ever by a British bank - left 80,000 depositors, many in Britain, owed more than £5bn.

As BCCI's regulator, the episode was a huge embarrassment for the Bank, which will see the litany of its mistakes raked over again in meticulous detail at the hearing at the High Court in London.

At the time of the collapse, Mr Brown was a young firebrand on the Opposition benches. He called for compensation to be paid to the thousands of individuals and local authorities who found their cash wiped away.

His demand could now come back to haunt him. If Deloitte & Touche, the liquidator of BCCI bringing the case against the Bank, succeeds, it will be the Treasury that has to find £1bn of public money to settle the compensation bill.

As serious as the financial ramifications is the potential blow to the reputation of the Bank of England. The Bank is not just being charged with being incompetent for failing to act despite years of warnings about BCCI - it is immune from such cases. Instead Deloitte, through its City law firm Lovells, is levelling the unusual charge of misfeasance in public office. To succeed, it must prove Bank officials not only made mistakes, but also acted dishonestly and recklessly by failing to perform their official duties while knowing that the omissions put depositors' money at risk.

The Bank strenuously denies this and has marshalled three former governors - the recently retired Sir Eddie George, Robin Leigh-Pemberton, now Lord Kingsdown, and Lord Richardson, now 88, governor between 1973 and 1983 - to give evidence.

Gordon Pollock, one of the highest-paid QCs in Britain, who is acting for the liquidators, will draw upon 300,000 documents which have been disclosed by the Bank. One report suggested he will earn £3m.

Mr Pollock, whose opening submission is set to last nearly three months, will aim to score points with some highly embarrassing revelations, including details of the repeated warnings by Bank staff that BCCI's finances were in a mess.

One 1982 memo likely to be mentioned in court described BCCI as "on its way to becoming the financial equivalent of the Titanic". Peter Cooke, a high-ranking official, will be shown to have described Agha Hasan Abedi, BCCI's chairman, as "the living personification of Uriah Heep".

Central to the case will be the charge that the Bank treated BCCI as a hot potato, spending critical years in the 1970s and 1980s denying it was the lead regulator in charge of overseeing BCCI. The Bank instead claimed the Luxembourg authorities, where BCCI has its head office, were responsible for policing it. In its defence, the Bank will argue it honestly believed Luxembourg was in charge for BCCI during much of the period. It will also try to justify the repeated warnings by Bank officials as evidence that it ran and open and honest regime, rather than a dishonest and secretive one.

Mervyn King, current governor of the Bank, will not have to give evidence because he was not employed there when BCCI went under. But Mr King has decided to fight the case rather than settle, in order to defend the Bank's reputation.

Gordon Brown In opposition, said taxpayers should pay out
Eddie George Bank's deputy governor when BCCI collapsed
Robin Leigh-Pemberton As Governor, was ultimately responsible