The British central bank is battling a legal case in the High Court in central London launched by BCCI liquidators Deloitte and Touche, who are seeking compensation for some of the failed bank's thousands of depositors.
Deloitte and Touche, which represents 6000 BCCI creditors in the UK, claims the Bank of England wrongfully granted BCCI a licence – and has not acted quickly enough to withdraw it.
Gordon Pollock QC, lawyer for Deloitte and Touche, told the court up to a dozen Bank of England officials gave evidence to an inquiry into the saga in 1992 that they knew to be untrue or misleading.
Nicholas Stadlen QC, representing the Bank of England replied:
"That is one of the outrageous allegations which in due course the Bank (of England) will invite your Lordship to reject, along with the paranoid conspiracy allegations which have been dripped into the liquidators' opening with ever increasing recourse to the outer reaches of fantasy."
"That is one of the outrageous allegations which in due course the Bank (of England) will invite your Lordship to reject, along with the paranoid conspiracy allegations which have been dripped into the liquidators' opening with ever increasing recourse to the outer reaches of fantasy"
Nicholas Stadlen QC,
Bank of England representative
He added: "The submissions represent a scraping of the bottom of the barrel and a measure of the desperation of the liquidators."
Pollock has declined to name the officials he accuses of lying, saying he would put the allegations to the court when the Bank of England's witnesses are called.
The Bank of England was Britain's financial regulator when BCCI imploded amid a welter of fraud and corruption charges.
The court battle, expected to drag on for a year or more, is the culmination of more than a decade of efforts by Deloitte and Touche.
But as the Bank of England is immune from all claims of negligence, the liquidators' lawyers must show that the central bank is guilty of "misfeasance", meaning that it knew it was acting dishonestly.
They argue that the Bank of England was aware that BCCI's main place of business was London - giving it a duty to regulate the bank - even though BCCI was officially based in Luxembourg.
BCCI was set up in the 1970s by a group of high-ranking Pakistanis including its head, Agha Hasan Abadi.
Among a string of heavyweight witnesses the Bank of England plans to call to defend its honour are three previous governors, including Sir Edward George, the central bank's head until last June.
The case was adjourned for a week while the liquidators go to the Court of Appeal over an issue related to the disclosure of documents.