Deloitte, the liquidator for BCCI, dropped its £1 billion claim against the Bank of England, bringing to a sudden end their unprecedented 12-year legal battle.

The liquidator had sought to prove that the Bank had acted dishonestly when in 1979 it licensed BCCI as a deposit taker, and during the Bank’s subsequent supervision of BCCI. Deloitte’s lawyers argued that the Bank had failed to protect depositors from the world’s biggest bank fraud, which emerged with BCCI’s collapse in 1991 with £9 billion owing.

Deloitte’s withdrawal of the case took the Bank of England by surprise. Last week the creditors’ committee made private submissions to Sir Andrew Morritt, head of the High Court’s Chancery division, to drop the case. The creditors’ committee, which represents 6,500 account holders and local councils, had decided to throw in the towel in September, having recouped about three quarters of what they were owed.

Last night legal experts gave warning that Mervyn King, the Governor of the Bank of England, who has steadfastly refused to settle out of court, could demand that Deloitte and its lawyers pay the Bank’s costs out of their own coffers. Usually any successful claim against the liquidator would be entirely paid for out of the estate.

Lawyers for the liquidator, appearing at the High Court yesterday, brought the case to a close and abruptly left the courtroom.

When telephoned later and asked to return to hear a response by the Bank and the judge, the liquidators dispatched two junior lawyers back to court.

One of the QCs acting for the Bank said: “It was slightly surreal. It was like the Marie Celeste on the other side of the court.”

Nicholas Stadlen, QC, for the Bank, then described the liquidators’ action as “unconditional surrender”. He told the judge: “The claimants’ discontinuance is a vindication of the Bank and the 22 impugned officials and of the iron determination of two successive Governors to defend the action at enormous cost.” He added: “The boot is on the other foot and the day of reckoning beckons. It is time for the spotlight to shift to the other side of the court.”

The Bank has spent £70 million defending the action, while the liquidators have spent about £35 million. Last month it emerged that the Bank had refused three approaches by the liquidators to settle out of court.

It is the first time that the Bank has been sued in its history and Mr King was determined to avoid any suggestion of guilt. Mr King said: “There has never been a shred of evidence to support these disgraceful allegations and the case has collapsed as we always knew it would. The Bank will be seeking the largest possible compensation for its costs.”

Legal experts said the Bank stood a good chance of recovering its £70 million costs after the judge, Mr Justice Tomlinson, said that every allegation of dishonesty against its officers had been “without foundation”. He said: “It has been a matter of surprise to me for about a year now that the action was being pursued.”

Leading lawyers had been sceptical about the case from the start because the liquidators claimed misfeasance, or dishonesty, which is unusually hard to prove.

The liquidators said that the BCCI English creditors’ committee had always been supportive of the legal action.

“The bank has invested a very substantial amount of money in its defence and this has increased the costs required to be spent by the liquidators,” they said.

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