Serious Fraud Office favourite Crimes Act charge of ‘theft by person in a special relationship’ turned to custard in failed prosecutions against management of insurer CBL Insurance: Peter Harris and Carden Mulholland. They stole nothing. Reserve Bank directives were of no legal effect. And supposed misrepresentation of CBL funds held at the National Bank of Samoa was not proved; Bank paperwork supported CBL’s claim that 12.5 million euros lodged with the Bank was the unencumbered property of CBL Insurance.
CBL Insurance Ltd had little attachment to New Zealand, other than a stock exchange listing. Barely one per cent of its business underwrote local risks. The company is currently in liquidation. Insolvency specialists McGrathNicol are winding down operations. Out of court settlements have been negotiated with CBL’s former directors and professional advisers for amounts yet to be disclosed.
Separately, Serious Fraud Office prosecuted former CBL Insurance chief executive officer Peter Harris and former chief financial officer Carden Mulholland on a raft of dishonesty charges. They were found not guilty on all charges after a three-month High Court trial.
Primary charges alleged theft by authorising company payments allegedly in breach of Reserve Bank directives.
Reserve Bank regulates the insurance industry. In what is described as a ‘light-handed’ regime, it has power to investigate insurers in financial difficulty, indirectly taking control by mandating steps to be taken by management of troubled insurers. This can include an order shutting down operations.
The High Court was told Reserve Bank was alerted to potential solvency issues at CBL in 2016 with a query from sister regulator in Gibraltar seeking information. CBL at that time was reinsuring some eighty per cent of a Gibraltar-based insurer’s business: Elite Insurance. CBL’s solvency was critical to the solvency of Elite. Reserve Bank inquiries led to a series of communications with CBL, resulting in CBL having to ‘consult’ with the Bank before committing to substantial transactions.
Justice Robinson ruled deals in excess of specified limits were not illegal. Requiring ‘consultation’ was not a ‘directive’ where failure to comply could lead to criminal prosecution.
Wording in other Reserve Bank communications with CBL similarly were not enforceable as ‘directives;’ they were predicated on further enquiries being carried out, or applied only to future business, not continuation of transactions CBL had previously entered into.
Messrs Carden and Mulholland also faced charges that they had misrepresented the status of a 12.5 million euro deposit in CBL’s name held with the National Bank of Samoa.
Insurers cashflow solvency is measured by the liquidity of assets which can be realised promptly to meet claims. Cash on hand is the most liquid; loans to company directors are considered the least liquid.
In its financial statements, CBL represented the 12.5 million euro deposit in Samoa as an on-call term deposit. It held a letter from the Bank to this effect. Prosecutors said that was not the commercial reality; the term deposit was held as security to ensure repayment of off-shore borrowings and was not immediately available as cash.
Justice Robinson ruled CBL management was entitled to assume the Bank’s letter represented the true position. Management was not dishonest in treating the on-call deposit as ‘cash or cash-equivalent’ when determining CBL’s solvency.
When interim liquidators took control of CBL, the bank in Samoa refused to release these funds saying the deposit had been set-off against inter-related offshore borrowing. Not only were there no funds available, the Bank said it would be proving in CBL’s liquidation for legal fees and penalty interest.
R. v. Harris & Mulholland – High Court (21.09.23)
23.163