Liquidating Clico: Avoiding the pitfalls

Introduction
My notes of the meeting which President Bharrat Jagdeo held with policyholders of the failed insurance giant Clico Life & General Insurance Company (SA) Limited, or Clico, for short, quote him as saying that “Everybody will get back every cent of their money.” The meeting took place at the National Cultural Centre and provided the opportunity for the President to tell policyholders about his administration’s arrangements for them to recover the billions of dollars which they had all but written off following the collapse of the Guyana company about one month after the dramatic meltdown of the Trinidad and Tobago parent which sent a financial tsunami across the Caribbean Sea.

I believe that the President will come to regret the generosity of his boast. Liquidation is a long and winding road with pitfalls, abysses and craters along the way. It is a hugely technical task. There has never been a liquidation of this magnitude and this complexity ever undertaken in Guyana. It involves novel issues of both legalities and illegalities with the potential for adversarial challenges at almost every stage, particularly given the President’s apparent desire to treat the whole issue as a public relations stunt rather than a serious legal process. Troublingly, the President has signalled that he intends to control the process, an illegality which would be compounded if the Bank of Guyana as liquidator allows him to take charge.

Cheque writing
The initial evidence is not encouraging. Last Thursday, as the President was in full political flight, he turned to the Governor of the Bank of Guyana and enquired from him “when would the cheques be ready?” Uncomfortably, the Governor could do nothing but to indicate that he would work with the President’s time-frame. He too may regret those words.

A liquidator is not simply a cheque writer or some backroom clerk. He becomes a legal officer and his actions are subject to challenge and review by the court. His appointment is made under the Insurance Act 1998, but the liquidation is carried out under the provisions of the Companies Act 1991. As I will attempt to show, the winding-up provisions of the Companies Act are not only deficient at best, but do not cater for the specialist type of animal that insurance business is. That means that periodic recourse to the courts for guidance and direction may be necessary, as well as recourse to the archaic Insolvency Act which has in some cases over-lapping, and in other cases, conflicting provisions. We will get into a more detailed discussion on these later, but for now here are some immediate challenges to what the President has proposed.

Some initial challenges
Section 74 of the Insurance Act under Part XII – Intervention, Judicial Management and Winding Up provides as follows:

“In the case of an insurer which carries on both long-term and general insurance business:

a) the assets representing long-term insurance business funds shall be available only for meeting the liabilities of the insurer attributable to that insurance business; and

b) the other assets of the insurer shall be available only for meeting the liabilities of the insurer attributable to its other insurance business.”

What this says is no commingling, cook in separate pots.

And let us turn to section 77 of the same Act which provides in subsection (1) that “where an insurer is being wound up by or subject to the supervision of the Court or voluntarily, the value of a policy of any class or of a liability under a policy required to be valued in the winding up shall be determined by an actuary; and the liquidator, in the case of all persons appearing by the books of the company or association to be entitled to or interested in policies granted by the company or association, shall give notice of that value to such persons and in such a manner as the Court directs.”

The person to whom such a notice is given has two full weeks to dispute the amount so stated. There goes the Governor’s 2-3 weeks estimate.

An unholy mess
And here is where it really becomes both interesting and confusing. The court has ruled as “unauthorised, illegal and unenforceable” one of the principal debts owing by Clico to “policyholders,” that is some nine billion dollars in Executive Flexible Premium Annuities. Clearly, such debts do not fall under section 74 (a) or (b) and the question has to be resolved whether any money, however small or from whatever source, can be paid by the liquidator to any such “policyholder.” And lurking in the background is the Financial Institutions Act 1995 (FIA) which includes additional procedures that might be relevant to these transactions.

What we have here is an unholy mess created by Ms Gita Singh-Knight as CEO of Clico with her illegal transmission of funds to another Clico company; Ms Maria van Beek as Commissioner of Insurance and her poor oversight; the Bank of Guyana that failed to act in the face of the illegalities; and their political masters, the President and the Finance Minister. I believe the role of the Chief Justice (ag) in the winding up of Clico is far from over and he will have to call on all his immense legal talent and capacity for gruelling research to clean this stable called Clico.

Some help
But let us look back a bit. Less than one week before the meeting at the NCC, the Chief Justice had ordered that the Guyana company be wound up and that the Bank of Guyana be appointed the liquidator. It must be remembered that the Bank of Guyana had already been functioning as the Judicial Manager of the failed company, following an application by the then Commissioner of Insurance Maria van Beek, who later departed these shores after being shot in one of the still-to-be-solved crimes of recent times. Following that incident the Insurance Act was amended to place responsibility for the insurance sector within the Bank of Guyana which has been in control of Clico since then, incredibly with direct control being exercised by Ms Singh-Knight.

That role by the Bank of Guyana should certainly help the liquidation process since it would have been in possession of vital information about the state of the company’s finances and the demands which it, as liquidator, would be confronting. The ruling by the Chief Justice was instructive in that he addressed unequivocally the conduct by Clico which had led to its failure. The company through its attorney had gone to court in an effort to stem the liquidation process. The success of that strategy required it to establish that the statutory fund did not apply to the nine billion dollars it had received under Executive Flexible Premium Annuities.

Ring-fence
The Chief Justice found that it was not open to Clico to contend in the proceedings that it had been acting illegally in contravention of the FIA. He ruled that the company was estopped from contending that part of its business transactions (the Executive Flexible Premium Annuities) was not in the nature of insurance business and therefore “unauthorised, illegal and unenforceable.”

While we may boast of having ring-fenced the country’s financial sector, we certainly left a gaping hole through which billions were illegally sent out of the country. This ruling is a vindication of the position long since taken in these columns that the EFPA that were being issued Ponzi-style, were financial instruments and not insurance policies. It is unthinkable given the widespread marketing of these annuities that the Bank of Guyana was not aware that a major entity was issuing instruments in contravention of the FIA. It can hardly be to its credit to say in its defence that it was relying on the Commissioner of Insurance as the principal regulator for the insurance sector to do her work.

No wonder that the company and the government would not want the list of persons who were paid out in the company’s dying days to be made public. It would embarrass too may and dim the much vaunted gloss. But wait, section 150 of the act provides that every document deposited with the Commissioner of Insurance under the act shall be open to inspection and copies thereof may be procured by any person on payment of such fee as the Minister may direct. In my view, the fee payment applies only to making copies, not the inspection which is a matter of statutory right.

Globe Trust
This column will address the financial and legal implications of the major elements of the package announced by the President, but before I do so I think it would be useful to comment on some of the allegations and slanderous statements he made at his meeting about persons associated with another failed institution, Globe Trust and Investment Company Limited. The President would have appeared less uninformed had he sought from his legal officers the facts surrounding Globe Trust. In that matter, the Bank of Guyana had moved to liquidate the company without following the steps required by the law. The court ruled against the Bank, noting serious regulatory failures by that body over the operations of Globe Trust.

To save the institution in which many low income African-Guyanese had placed their life’s savings, the directors of the institution explored a number of options including government input to save the institution. Neither the Bank of Guyana nor the government supported such a move. Similarly the Bank of Guyana did not support a re-organisation plan which the directors had asked me to prepare. In other words not only was the Bank of Guyana derelict in its oversight duties in relation to Globe Trust, but from day one it seemed determined to shut down the poorly managed, undercapitalised, nascent financial institution.

Unfathomable
And when it finally got its way and an administrator and later a liquidator appointed, the Bank of Guyana did not support the issue to Globe Trust of a banking licence which would have made it a very attractive and valuable proposition. It is unfathomable why those who had the power to save the institution would not do so. It has been close to eight years since the Bank of Guyana has been in control of Globe Trust. During that time it has not faced a single challenge from anyone, even though then Chief Justice Carl Singh’s finding that the Bank of Guyana had been partly to blame for Globe Trust’s failure, provided a good cause of action. For the President to accuse anyone of being responsible for him not honouring his government’s commitment to pay the small depositors of the institution is complete nonsense and utter deception. Since he wants to appear generous to African Guyanese, let him keep his promise. Since he thinks I have the power or the influence to stop him, I publicly and seriously promise not to stand in his way.

The maligned directors
The President also gave the audience the impression that the directors of Globe Trust had taken money from the institution to buy shares in it. The President should not be so loose with the truth. Called upon to increase its capital base, some directors mortgaged their houses to provide security for a book entry transaction to increase the company’s share capital with the corresponding entry being a loan account. No money was paid to any of those directors. Rather, it was an act of blind faith, born of pressing need and demonstrative of exceptional selflessness by those persons in an effort to save the institution following the introduction of the FIA and its stringent rules about capital base.

The President once again promises an investigation into Globe Trust in which the government has not put a black cent. But he is linking it to an investigation into Clico into which billions of public dollars are being paid. We will wait and see whether that oft-made promise is a not too cleverly-disguised attempt to take the pressure off the government increasingly pressed to investigate Clico and bring to justice those who breached the laws and shipped billions of dollars of Guyanese funds including more than six billion dollars belonging to the workers of this country via the National Insurance Scheme, about which incidentally the President said practically nothing.

Next week: I will begin an analysis of the legal hurdles and financial challenges that the liquidator would have to overcome and the policyholders of Clico would have to accept. In the meanwhile I would strongly recommend to the Bank of Guyana that it seek out the advice of the top legal brains in the country. This is time for sober thinking and careful action. Not for pandering to irresponsible political leadership or endorsing false expectations.

It’s not too late for President to honour promise to Globe Trust depositors

The Kaieteur News of Thursday April 9, 2009 reported the Office of the President (OP) as stating that I and other (sic) directors of Globe Trust blocked payout of up to $100,000 each to 5,404 depositors of the financial institution. Apparently OP produced a “critique” to support its allegation that it was certain that up to “$235M would have been recovered from the realizable assets of Globe Trust”. I will deal briefly with the allegation, indicate my role in the Globe Trust imbroglio and offer a possible reason for President Jagdeo’s breach of promise.

The allegation though malicious and misleading is not surprising. It is also a mathematical impossibility. Even a junior clerk in the Office of the President could have told the manufacturer of the allegation that 5,404 times $100,000 is $540.4M. Where would the balance of $305.4 M ($540.4 M – $$235 M) have come from? But even the figure of $235 M is what the Liquidator very recently said was actually collected to date.

The architects of the allegation obviously intended to divert attention from my assertion – which I now repeat – that Jagdeo on August 3, 2001 had promised that approximately 2,000 small depositors defined by him as those with savings “in the vicinity of about $10,000 each” would get back their money. Instead of responding to my factual assertion, they create this absurd allegation and spurious diversion.

Second, I never was a director of Globe Trust or had a direct role in the Globe Trust case. Ram & McRae was retained by the institution to advise on and prepare a restructuring plan to address the difficulties being faced by the company. I was not a party to the action No 429/P in which Bank of Guyana (BoG) was the petitioner and Globe Trust was the respondent. I appeared as a witness to explain what came to be referred to as the Ram & McRae plan. I should add that the plan itself had identified as a first step – partly for administrative reasons – the repayment of all the under $10,000 accounts. In other words, there was no opposition to Jagdeo’s pledge which by coincidence was consistent with the Ram & McRae plan.

The basis of the intervention by Globe Trust in the legal action was that the BoG had acted outside of the law (the Financial Institutions Act) when on September 20, 2001 it took possession of Globe Trust “for the purpose of liquidation”. Then Chief Justice Carl Singh in his prompt, written judgment found that the decision by the BoG “manifested its misconception of its powers”; that the determination by the BoG that Globe Trust could not be restored to financial soundness was made “in a manner that was unfair to Globe Trust”; and that Globe Trust had been “unfairly treated”. The Chief Justice however did not hesitate to criticise the directors of Globe Trust for their “failure to act decisively in the face of lax, loose and grossly incompetent management.”

I should add that as set out in the written submission of Attorney-at-Law Stephen Fraser for Globe Trust, its intervention and proposed restructuring plan was not an objection to the Bank of Guyana assuming possession. In fact the point was made by Globe Trust director Professor Clive Thomas and emphasised by Mr. Fraser that the foundation of the Ram & McRae plan was that it would operate under the protection of the Financial Institutions Act. The premature and high-handed manner in which the Bank of Guyana acted leads inescapably to the conclusion that it did not want Globe Trust to survive.

Regarding the President’s failure to honour his commitment, it is possible that he forgot, which is human. But my belief is that when he made his promise on August 3, 2001 he hoped to neutralise popular opposition to an unlawful and politics-driven decision that had already been made but not yet announced – to liquidate Globe Trust. The liquidation announcement came seven weeks later. In the end he got both his wishes, i.e. the liquidation of Globe Trust and preempting any opposition. No need then to bother about any commitment.

A final thought. For years I have tried unsuccessfully to get the President not to make unlawful and unconstitutional spending out of the Lotto funds and more recently out of the Privatisation proceeds. Now OP would have the public believe that I prevented the President from meeting an obligation he made in good faith. Like their math, this just does not add up.

But it is still not too late. The President’s guarantee on Clico involving failures by his people is the equivalent of a blank cheque for billions and billions. He knows the exact and comparatively modest exposure on Globe Trust. It is far easier and clearly less costly for him to honour that commitment. I am not in his way.