A Jersey-based subsidiary of Abbey National has said it is maintaining its right to sue the directors of MMI Stockbrokers despite stating that it is now "satisfied" about the alleged misappropriation of £1.4 million of its funds for the benefit of two directors of MMI, now in liquidation, and people connected to them.

MMI's liquidator, Mr Tom Kavanagh, described this as an "extraordinary turn of events" in an affidavit read to the High Court by his counsel, Mr Bill Shipsey SC, yesterday.

The Jersey firm, Cater Allen Nominees, did not have sufficient funds to cover the £1.4 million when debited in 1998 and 1999. But the High Court had previously heard that the firm was no longer pursuing the alleged misappropriation.

This development meant that a fraud case by the liquidator against all seven board members of MMI would be "extremely difficult to maintain", Mr Kavanagh's affidavit said. At yesterday's hearing, he sought directions from Ms Justice Laffoy on the future conduct of the case.

The Court heard that Cater Allen has told the liquidator that it still believes a discretionary account it held with MMI was managed in a "reckless and negligent" manner resulting in "very substantial" losses.

"This suggests that Cater Allen is now retrospectively authorising the debiting of its account to the tune of £1.4 million when it had already intimated to me that it is suing the directors for gross mismanagement and misconduct of Cater Allen's affairs.

"Cater Allen was initially portraying itself as the victim of unlawful conduct by the directors and [said] that its account should not have been debited because it never received the payment and had no knowledge of the payments. "It now, however, appears to be acquiescing in or consenting to the debiting of its own account whilst at the same time maintaining an astonishing entitlement to sue the directors and MMI for gross negligence and misconduct."

Mr Shipsey read a letter, dated February 7th, from Mr Kavanagh's solicitors to Cater Allen's lawyers in which the liquidator sought a "detailed explanation" of its decision not to pursue the £1.4 million. "It is simply incomprehensible that your client should express its satisfaction with such a state of affairs while, at the same time, maintaining that you have a claim against MMI and its directors," it said.

Cater Allen's solicitors responded in a letter dated February 22nd. "Our client's instructions are that due to confidentiality, the trustees are not prepared to enter into correspondence . . . concerning the private internal workings of its own trusts."

Mr Shipsey claimed Cater Allen was putting up "the veil" of a trust, but he was "not really sure" what its implications were. Ms Justice Laffoy asked whether "the basis of the liquidator's case is that other parties benefited from the £1.4 million that belonged to Cater Allen?" Mr Shipsey said: "If there was enough money in the client account."

Referring to the money, Cater Allen's solicitors letter said: "Our client has already informed you that it is satisfied with respect to these transfers and, therefore, there is no question of your client seeking to recover the transferred funds which are our client's funds. Our client can, if it so desires, pursue its own remedies."