Law Report: Foreign bank may not be sued: Polly Peck International plc v Nadir and others - Court of Appeal (Lord Justice Glidewell, Lord Justice McCowan and Lord Justice Hoffmann), 17 March 1993.

In order to establish a strong enough case to justify invoking the court's extraterritorial jurisdiction against a foreign bank, which was alleged to have knowingly assisted in the commission of an alleged fraud or to have knowingly received money paid in breach of fiduciary duty, it had to be shown that the bank had in its possession information which ought to have put it on inquiry and that it should, in the circumstances, have asked questions about the money passing through its account. A sudden increase in the size of transactions was insufficient.

The Court of Appeal by a majority allowed an appeal by the fourth defendant, the Central Bank of the Turkish Republic of Northern Cyprus, against the refusal by Mr Justice Knox (the Independent, 2 September 1992) to discharge leave to serve a writ on it outside the jurisdiction.

Leave had been granted by Mr Justice Millett on 21 October 1991, on the ex parte application of the plaintiff, Polly Peck International plc, acting through its administrators. They claimed that the first defendant, Asil Nadir, when chairman and chief executive of the company, had fraudulently misappropriated about pounds 371m, of which about pounds 45m had passed through an account maintained by the fourth defendant bank with the Midland Bank in London, and that the defendant bank should be liable as a constructive trustee.

But the court concluded the case against the bank was not strong enough to justify granting leave, under Order 11, rule 1(1)(t), to serve a writ outside the jurisdiction.

Philip Heslop QC and Richard Millett (Theodore Goddard) for the bank; Nicholas Chambers QC, Leslie Kosmin and Sandra Bristoll (Alsop Wilkinson) for Polly Peck.

LORD JUSTICE HOFFMANN said it was accepted for the purposes of this application that Mr Nadir owed a fiduciary duty to Polly Peck and that the payments to the bank were in breach of that duty. The question was how much the bank knew or ought to have known about the alleged fraud.

Primary reliance was placed on knowing receipt, liability for which depended on the beneficial receipt of money or property known to belong in equity to someone else. Liability for knowing assistance, however, required actual knowledge of the fraud.

If Polly Peck had a good arguable case for saying that the bank should have asked questions about why the money was passing through its account, it would have at least an arguable case under both heads. Polly Peck's main case was that the bank should have been alerted to the possibility of fraud by, first, the scale of the sterling transfers in relation to the legitimate needs of Polly Peck's business in Northern Cyprus, and secondly, by the method by which it drew upon its account and in particular that such large sums were drawn in cash.

His Lordship was quite unimpressed by the argument based simply on the scale of the transfers. Given Polly Peck's audited turnover in the Turkish zone, and given that there was plainly a great deal of capital investment going on in the relevant period, the scale of transfers was not surprising and seemed to provide no evidence that the bank should have suspected that Mr Nadir was perpetrating a fraud upon his company.

The evidence most strongly relied on was the scale of monthly cash withdrawals, which rose from pounds 350,000 in 1989 to more than over pounds 1m in 1990. But the business was expanding into areas, such as construction, in which cash payments in local currency were the norm. The bank might have wondered what kind of business was being pursued but there was no ground for saying it should have suspected dishonesty.

In his Lordship's judgment, the evidence adduced by Polly Peck did not pass the threshold of persuasion necessary for service out of the jurisdiction, and this deficiency was not made good by any inferences which could be drawn from the evidence given or not given by the bank or the lack of cooperation by Mr Nadir.

LORD JUSTICE GLIDEWELL gave a concurring judgment. LORD JUSTICE McCOWAN dissented, saying that in the light of the sheer scale of the funds which were moved to organisations controlled by Mr Nadir in Northern Cyprus, and in the light of inconsistences in the affidavit evidence of the bank's governor, the plaintiff had a good arguable case. The evidence was as strong as could reasonably be expected in the circumstances.