A Thinking Business publication
At the start of 2024, some 15 years after being appointed to manage the wind down of failed Bahraini financial institution The International Banking Corporation (TIBC), Trowers & Hamlins was able to make its first payment to creditors waiting to recover bad debts. With more payouts expected imminently, one of the firm’s longest-running mandates is approaching its end.
TIBC collapsed into administration in the middle of 2009, just as the global financial crisis was reverberating through banking systems around the world, and Trowers got the call from the Central Bank of Bahrain (CBB) to act as administrator. It is unusual for a law firm to assume such a role, but the regulator could see then that the task of managing the insolvency of TICB effectively would require focus on asset recovery and significant litigation, so Trowers fitted the bill.
Initially called on to spend a month unravelling the complexities of TIBC’s balance sheet issues, 25 Trowers lawyers flew to Bahrain to investigate. Today, the end is in sight after a prolonged legal saga that put the firm at the heart of managing the consequences of one of the Middle East’s biggest ever corporate defaults.
Nick Edmondes, now a Partner based in Trowers’ Kuala Lumpur office but part of the team from day one, says: “As one of the original group of 25 lawyers that was parachuted into Bahrain in August 2009, there is a real emotional connection to this case.
“Being part of such a large, committed and successful team, winning various critical judgments along the way, has been a career highlight for many of us.”
Uncovering a fraud
TIBC was fully owned by a conglomerate called Ahmad Hamad Algosaibi & Brothers (AHAB) run by the powerful Algosaibi family of Saudi Arabia. When the team arrived in Bahrain, both AHAB and TIBC were on the brink of failure.
The Trowers team assumed control of the bank, working with multiple stakeholders and insurers around the world, closing out trading accounts, winding down non-essential costs and interviewing staff to catalogue the complex situation.
What they discovered was a balance sheet that stated there were $3.9 billion in assets, with $2.5 billion of outstanding liabilities. The outstanding net assets of $1.4 billion turned out to be theoretical as they found almost all of the cash had been removed.
With further investigation, an industrial-scale fraud was revealed. Many of TIBC’s lending activities were essentially entirely fictitious, and along with other TIBC businesses such as currency trading, these activities helped mask a sophisticated Ponzi scheme within the Money Exchange part of AHAB. New money was being raised to pay off old liabilities, flying under the radar of auditors and regulators.
As Trowers focused in on the TIBC loan book and sought to understand it, they discovered fraud underpinned by identity theft. Individuals had their identities stolen and those identities were used to take out loans, only for the money to go into The Money Exchange accounts instead of the borrowers.
There were around 90 loans to Saudi businesses, sometimes secured by charges over properties, all of which were entirely fake. The loan book was then used to enable further debt raising in the global financial markets, fuelling the Ponzi scheme.
Trowers Partner Deborah Howard remembers uncovering the details: “When we realised this was a fraud underpinned by people that had had their identities stolen, we started calling these supposed borrowers.
“I remember speaking to a cobbler and telling him we had paperwork suggesting he had borrowed $40 million. He nearly fainted.”
A protracted legal battle
Creditors faced a choice, to either put the bank into liquidation and risk getting very little of their lost money back, or to fund an administration to pursue recovery actions, including in respect of the fictitious loan book lending. Trowers was successful in raising close to $30 million from TIBC’s largest creditors to fund that strategy.
Trowers pursued multiple claims, including one against the bank’s auditors that ultimately settled out of court, along with a number of recovery claims against AHAB.
Among the principal targets for recovery were two loan-book related claims against AHAB for $1.8 billion, which were brought in the Bahrain Chamber for Dispute Resolution, and a further claim related to the defaulted repayment of $730 million of foreign exchange transactions by AHAB to TIBC, which they pursued in Saudi Arabia.
The Algosaibi family claimed to know nothing of the fraudulent activity and blamed it all on Maan Al Sanea, a son-in-law of one of the partners who had run both The Money Exchange and TIBC. That came to a head in a claim brought by AHAB in the Cayman Islands against Al Sanea and a number of companies that had been under his control, in which the Algosaibis claimed to be victims of fraud and sought to recover $6 billion.
Trowers Commercial Litigation Partner Alex Burton says: “That case ran for years and the year-long trial was the longest claim in Cayman history. In a deeply critical judgment, the Cayman court found that AHAB had known of and authorised the fraudulent borrowing and the Ponzi scheme that had defrauded more than a hundred banks.”
Trowers successfully secured judgments against AHAB for the full value of the $1.8 billion loan book cases and was also successful in other recovery claims. All the funding provided by creditors to pursue the claims was then also repaid.
In 2020, AHAB launched a financial restructuring under the new Saudi Bankruptcy Law. AHAB had consistently sought to avoid any acknowledgement of TIBC as a creditor but, using its winning judgments as leverage in court and in negotiations, Trowers was successful in having TIBC formally recognised as AHAB’s single largest creditor. With nearly a quarter of all claims, TIBC secured a seat on the creditors’ committee, which would prove instrumental in driving the recovery process.
Paying back lost money
In order to get money back to out-of-pocket lenders, TIBC had to be placed into liquidation. Trowers was appointed liquidator and paid its first distribution to TIBC’s creditors last year, totalling $264 million, or 14 cents in the dollar.
To give the distribution figures context, for a long time following the commencement of the TIBC administration, its debt traded at around one cent in the dollar: the bank had massive liabilities and no real assets. The creditors’ confidence in the recovery strategy led to a significantly more positive outcome than the market had anticipated.
In April 2024, TIBC received another payout from AHAB totalling $13 million, but there is still more to come. With AHAB’s Saudi real estate assets subjected to asset freezes and bureaucracy, another distribution is expected in the first half of 2025 but the long tail of the liquidation may take years to conclude.
TIBC was one of the first two banks to be placed in administration by the special insolvency provisions of the Banking Law in Bahrain, so Trowers lawyers have been breaking new ground from day one.
“That process had never been tested or tried out, which meant almost everything being done was a first for Bahrain and often for the region,” says Howard.
She adds: “To make, win and enforce claims against the Algosaibis under new bankruptcy laws in Saudi Arabia was also a huge challenge, made even more difficult by the fact that there was no funding for the costs of bringing claims.”
That meant the administration had to seek, again as a first, funding from its creditors to support years of asset recovery work. The fact that those creditors will get a meaningful chunk of their losses back from the failed bank is a huge success.
“TIBC was set up as a fraud on the international creditors that lent it money,” says Edmondes.
“There are lessons to be learned for international banks when it comes to making sure that the banks they are lending to have a sound footing and are properly financed. “They should check accounts and make sure they do their own due diligence.”
The TIBC story is one of hard work, determination and collaboration over a lengthy period of time, with Trowers operating seamlessly across borders and navigating multiple legal systems and evolving regulations to ensure bad debts were recovered.
