CBL directors attack Reserve Bank, vow to fight on

Peter Harris, managing director of financial risk insurer CBL Corporation, pictured in 2015, has vowed to fight on. Photo/File.

CBL director-shareholders Peter Harris and Alastair Hutchison remain defiant in the face of serious allegations levelled at them and the broken insurance group they controlled.

They have now hit back at the Reserve Bank and what they say was a "pre-determined" set of actions taken by the regulator that ultimately "destroyed the company".

In a document mailout to CBL Corp shareholders, Harris and Hutchison outline their dispute with the RBNZ, their history of the collapse of subsidiary CBL Insurance (CBLI) and the actions taken leading up to liquidation.

They said the RBNZ put CBLI into an effective straight-jacket in August 2017, prevented it from taking steps to improve its position and then set about justifying its actions while "siding' with a French regulator's plan to "force out" of France any overseas-based insurers underwriting French construction insurance business.

They have also questioned the robustness of an independent review into the RBNZ's handling of the CBLI case and wider implications for the insurance regulatory regime. The bank has commissioned John Trowbridge and Mary Scholtens QC to do the review going back to CBLI's licensing in 2013 with key findings to be made public next year.

"Given our experience thus far we are sceptical that this will be anything other than a smoke screen to justify the RBNZ actions," Harris and Hutchison said.

CBLI was placed in liquidation two weeks ago at the High Court in Auckland after the directors were unable to gain support from major creditors, including large European insurers Elite and Alpha, for a restructuring proposal.

When CBLI withdrew its opposition to the liquidation, the RBNZ was able to outline its case under the protection of open court with no rebuttal from CBL Insurance.

The bank gave evidence of CBLI's increasing levels of insolvency, failure to comply with the regulator's directions and other allegations of serious impropriety.

Analysis of CBLI's balance sheet showed massive breaches of the required solvency margin for insurance companies dating back to 2013, before the parent company floated on the stock exchange.

L to R: Shareholder Alistair Hutchison, chairman Sir John Wells and managing director Peter Harris when CBL listed on the NZX. Photo/File.

Citing recent affidavit evidence from Geoff Atkins, principal of Australian-based Actuary Finity Consulting, RBNZ's lawyer Nathan Gedye highlighted how CBL Insurance's balance sheet was insolvent by $86.6 million in 2013, $102m in 2014, $104m in 2015 and $98.6m in 2016.

By the end of June this year CBLI's net liability position had blown out to between $128.2m and $275m in June.

"The Reserve Bank's belief is that the company and its directors have failed to disclose the true state of the company for many years," Gedye said.

"These insolvencies, according to Mr Atkins, pre-dated the IPO and they certainly bear directly on the disclosures made to the Reserve Bank both to acquire and hold its licence and in every ISR return that was made.

"The bank's view is that based on Mr Atkin's evidence, the information provided to the bank was dishonestly incorrect and that there is a consistent pattern to it over the years 2013 to 2017."

In their letter to shareholders, Harris and Hutchison described the allegations made by the RBNZ about directors misreporting or concealing items about solvency as unproven, untested and false.

"RBNZ has made a number of solvency allegations without due questioning, without verification, and using reports with material mistakes and an obvious lack of knowledge. PWC and Deloitte would take 4-5 months to do a robust year-end or a half-year process. Finity did their latest half-year review, as at 30 June 2018, over a weekend."

However, Justice Patricia Courtney said she was satisfied by the RBNZ's evidence when ordering the liquidation. In her judgement, she said the transactions described in evidence "suggested a preparedness to manipulate records on which third parties, including the regulator, relied.

"They suggested a lack of candour in dealing with the company's auditors and the regulator. The Bank asserted that, in these circumstances, it was justified in expressing a lack of confidence in the conduct and management of the company's affairs and I agree."

CBL Corp remains in voluntary administration and the outlook for shareholders of a company once worth $750m is dire.

CBL Insurance liquidators Kare Johnstone and Andrew Grenfell of McGrathNicol are responsible for maximising recoveries for creditors and pursuing any legal action while the Financial Markets Authority and Serious Fraud Office run their own investigations.

Meanwhile, Harris said he and Hutchison will continue to work with the CBL liquidator to try and ensure a better outcome for New Zealand policyholders.

"Under our proposal, the residual creditors and NZ policyholders would have been fully paid. Under the RBNZ's liquidation proposal they will make a substantial loss."