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Predictions of sugar’s demise premature and exaggerated

Introduction
President Jagdeo can be extremely unpredictable if not irrational at times. He must be a speechwriter’s worst nightmare and make his PR people nervous, although he is a gift to newscasters and reporters. He does not like delivering set statements, and even when one has been prepared for him, his extemporaneous and ad lib comments are often the ones that attract more attention and draw more comments. How serious and dangerous that can be from a head of state was on full display with Jagdeo’s recent pronouncement about the prospects for sugar.

There was the President commissioning a water treatment plant in Corriverton, Berbice two Thursdays ago. Here was an opportunity for the President to rally his troops, mobilise his party’s supporters and strike at the opposition seemingly engaged in its own ‘goat-aint-bite them’ circus. It was an opportunity to tell the people, one and all, what the $1.4 billion water investment by the government would do for them, and that it was the keeping of another promise; and to reassure them that they can expect the same level of services as the people in far away Georgetown in terms of access to higher education, state of the art medical facilities, house lots and computers. That while Demerara has only one bridge, he Jagdeo had already delivered one over the Berbice River and that but for the short-sighted constitution, under his watch the country would see its first international bridge, this time linking with Suriname. It was an opportunity of which political dreams are made. He could have dazzled. After all, he was in the party’s home, its playground and base, where he could count on an even more adulatory welcome than that orchestrated for him in Buxton recently.

Sugar in trouble
Instead the President surrealistically misused the opportunity to lament that the Skeldon Factory was not delivering the expected results and as a result the “sugar industry is in trouble.” He did not stop there. Speaking about the US$200 million Chinese-built factory that has had more than its fair share of birth pains, the economist said somberly if it “doesn’t work well the sugar industry is dead.” In case anyone had missed the profound and grave pronouncement he repeated: “It’s dead. It’s as simple as that….”

Responding to the Stabroek News report on the pronouncement, bloggers’ explanations for the President’s outbursts were wide-ranging, not many of them particularly flattering. But perhaps the President might have been told something by one of his unofficial sources in the area, something which he felt he should deal with immediately and publicly. Or that he realises that the failure of the Skeldon factory, the centerpiece of the Skeldon Sugar Modernisation Project is his baby, for which he was prepared to defy the World Bank, informed local public opinion, stark realities and risk US$200 million.

When persons like Professor Clive Thomas, Tony Vieira and Ramon Gaskin were raising doubts about the project – rather than just the factory – and its potential consequences, the President lined up former Guysuco top brasses Messrs Vic Oditt, Ronald Alli and Dr Ian McDonald to sing its praises and the underlying vision. They could not accept that the British would shed their much vaunted decency and cut the Caribbean loose, exposing us to the vagaries and realities of the marketplace. The latter group of gentlemen ignored the clear signs that the preferential markets could not and would not survive a globalised world, that the younger leaders in Britain and France do not recognise or feel constrained by any historical bloodlines, that the Caribbean does not really matter. Most significantly, however, they completely ignored the elementary point that sugar comes from cane grown in the fields. Absent that element, the factory can do little. Fixing that will not serve the problem.

Irrational
Even now the President seems to demonstrate some irrationality by referring to the 36% cut in the preferential price, something that was on the cards long before his government took the plunge and moved into the investment. It was the President who had a big hand in the choice of the Chinese as the preferred suppliers and contractors of the plant, over the more experienced Indians, for reasons that make fascinating speculation. We are learning to our great cost that while the Chinese are good at low-cost production, their mark-ups are huge and when they deliver shoddy or even dangerous products, their powerful and assertive government is ready to stoutly defend.

The President is also bringing fresh insights into the factors and influences that drove the Skeldon Project. He noted in his speech that the government had hoped that it would have produced sugar at a lower cost so that the average cost would have allowed them to “to break even at least at the world market level.” The careful reader would notice that when speaking of successes the President speaks of “my government” but in failures it is “the government.”

But it is his adventure into costs that I find astounding and misinformed and that sent me back to schooldays. Break-even analysis is indeed a necessary management tool used in investment appraisal to determine the minimum level of revenue or sales from production that would be required to cover all the fixed costs like rent, office salaries, insurance, property taxes, obsolescence, etc, and the variable costs like material input, production wages, etc.

Breaking the point of confusion
The relevance of break-even analysis in the sugar industry is to determine the minimum level of production of cane and sale of sugar at their expected costs and prices which would have to be met to avoid a loss. Using assumptions about costs and revenue, the management accountant would prepare a break-even chart to show the break-even point, ie the point at which total costs just equal total revenue. For the President, and no doubt his immediate Berbice audience, that appears to have been a point of confusion.

In a business like Guysuco’s, where there are several estates with their own levels of fixed and variable costs, a break-even chart – even with the limitations inherent in projections and assumptions, both about costs and revenue – is an absolute necessity. Or rather charts, since one should be prepared for each estate to serve as the basis for decision-making in the corporation’s boardroom and the cabinet room of its sole shareholder. The problem is that Guysuco has more than its fair share of financial accountants who can tell you all about the latest IFRS but not since the highly regarded Sugrim Mohan left the corporation decades ago, has there been any management accountant of note to speak with knowledge and authority about costs, their behaviour and their consequences.

Even – or perhaps when – confronting dangers, the President can be rather daring, sometimes recklessly so. So he went on to assure his audience, that even if it meant personally, he would get involved to fix the problems created by a “few people,” to ensure that the factory delivers the kind of results that it should deliver. In 2009 when he announced the turnaround plan, the President also used the word “personally” to describe his actions. Yet, a final copy of the turnaround plan was hardly off the photocopier when it missed its projected targets for the first period and it is on track for doing so again this year. In darts, the chances of hitting the bull’s eye recede with distance from the board. It must be the same with sugar.

Choosing the whipping boys
The President could hardly tell the nation that the plan was an exercise in unguarded optimism, given the prominent role in its preparation played by directors handpicked by him such as Mr Keith Burrowes and Mrs Gita Singh-Knight. Nor could he blame the corporation’s longest serving director Mr Donald Ramotar, the ruling party’s General Secretary and the person who will likely decide on the role Mr Jagdeo will play in Guyana’s affairs post 2011. Nor the Chairman of the Board and the President’s Permanent Secretary Dr Nanda Gopaul, who is only one person away from Jagdeo’s personal involvement in the corporation.

Perennial whipping boys Booker Tate were given marching orders more than a year ago, while Mr Errol Hanoman, appointed CEO after Booker Tate’s departure, left not too long after. Usually, the corporation’s production problems and operational performance have been attributed to unfavourable weather conditions to which we can now add climate change. Conditions have been rather favourable recently so this must wait for another time. Corriverton in pre-election season would not have been a good time and place to blame the workers, whose role as voters is far more important now. And we are no longer hearing about legal action against the Chinese to enforce the clauses in the contract to compensate for poor and late performance. This time, according to President Jagdeo, it is a few people “messing up.” Of course he did not even entertain the possibility that some politicians, including himself, may have been the ones who have messed up. That would be expecting far too much.

Jagdeo’s message
From Georgetown, it did not seem good politics to have been as dramatic and careless as he was, but what is more troubling is the message that the President sent to the Demerara estates, that they cannot survive without Skeldon, their drip and lifeline; to the other stakeholders directly involved in sugar at Skeldon, that the future is far, far from certain; to the workers, that they need to rethink their occupational choices; and to the country, that a PPP/C would not allow Skeldon to fail, no matter what it costs the public purse.

This column was never convinced about the glowing claims about Skeldon but will not be included among those who are now tempted to say, “I told them so.” It has described Guysuco as too big to succeed but I am yet hopeful that the situation is not irretrievable, that we can yet be saved from President Jagdeo’s apocalyptic fears. But it would be if we fail to recognise and accept that the problem goes beyond the factory and its managers. Agriculture Minister Robert Persaud announced during a surprise visit to the factory last week that foreigners would be imported from India to work along with the Chinese in the factory.

That will solve part of the problem while adding significantly to the salaries bill of the corporation and creating more problems with the sugar unions.

It will not solve the problems in the fields which many think are as serious.

Conclusion
If the President does get involved as he has said he might, then he needs to do some housecleaning and would have to rethink his dream team of directors and their turnaround plan. He will need to see how the factory can be organised within the limitations and prospects for the filed operations in Skeldon. He will have to consider how much more money the country can afford to plow into the industry. He will need to ensure that he is advised by at least one competent management accountant and a sugar economist, relying less on spreadsheets done by his financial accountants.

One thing the management accountant will tell him is that there is in that field of accounting a sacred principle that says that sunk costs are irrelevant, that if future inflows and benefits do not exceed future outflows, then cut your losses, and put your money elsewhere. The economist will put it more intelligibly: do not throw good money after bad money.

But then neither of them would understand the overriding consideration of the p word – politics!

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Liquidating Clico: Avoiding the pitfalls

Introduction
When I started this series on the failed insurance company I chose the title because of a sincere belief that those who were entrusted with powers and duties for the liquidation of Clico would act responsibly and professionally, and would ensure, at a minimum, full compliance with statutory requirements and ethical standards. Part 1 appeared before the court amended its original order making the Bank of Guyana the liquidator, the amendment appointing in its place, Mr Lawrence Williams in his personal capacity. The significance and ramifications of that change did not seem to affect the conduct of Mr Williams and the Bank of Guyana who together have operated not in accordance with the law but as a cheque-writer seemingly carrying out the publicly announced wishes of the chief politician. That was what the President seems to have expected of Mr Williams as Governor of the Bank, acting as the court-appointed liquidator. He and his team appear to have acted on those wishes rather than in conformity with Part V of the Companies Act under which the liquidation was ordered.

This effective impunity exists because of the way the court normally operates. Once it has pronounced on a matter, either by an order or a decision, it has no further role in the matter. Lawyers, who have historically and almost invariably used Latin to encapsulate major legal principles – and to sound learned – refer to the judicial officer becoming functus officio. The Chief Justice could cringe at how the law in the case of Clico is being abused, but he has little power to do anything about it. The law has detailed provisions regulating the conduct of the liquidator, mechanisms for accounting, accountability and oversight, and a role for the Official Receiver. None of these is being observed. In fact as I pointed out in a letter to the press earlier this week, the process has been handed to or taken over by unauthorised persons who legally have no role in the matter.

Just pay the cheques
It is not that any of these is being done surreptitiously or under the radar. No, they are done in the full glare of publicity and with a disdainful disregard for the law, even by lawyers. And condoned and encouraged by well-meaning individuals arguing that persons have waited long enough to get back their money so the law or some columnist must not get in the way! Just pay the cheques.

The major starting point for the liquidation after due notification would be the statement of affairs summarising the assets and liabilities of the company and indicating their relative ranking. This has not been done and the liquidator has failed to carry out his first major duty. Unauthorised persons have been inserted in the process while the Official Receiver has either been shut out or has stayed out. That is more than personality or formality. It has to do with reporting to the court and investigating into conduct, including frauds.

So what might the financial picture have looked like in the statement of affairs, a document that is required to be filed on the public records? The reality is that the public will never know since the liquidator has chosen not to file one. The Judicial Manager did present to the court a statement of net assets as at February 28, 2009, more than eighteen months ago. The picture presented then was as follows:

Value of net assets
The difference between the carrying values of the liabilities and their best and worst case scenarios is that the liabilities of $4.9 billion did not include the actuarial values of the outstanding policies, those that were genuine insurance policies and those high interest earning instruments that were being sold Ponzi-like and bought by unthinking but often educated individuals looking to make more than an average buck. Those so-called policies were described in the recent court papers as illegal.

Measuring of the loss
What the figures mean is that if assets are sold for the values shown as best case and liabilities met at those values, Clico’s depositors and policyholders would lose $8.1 billion. If they realise and are met at the amounts shown as worst case, the loss climbs to $11.9 billion.

We got lucky and received roughly $3 billion from the Caricom Petroleum Fund, thereby reducing the potential loss on the best case scenario to $5.1 billion and $8.9 billion on a worst case.

The liquidator needs to go after every asset of the company but he may find that there will be pluses and minuses. For example, there are some 4,285,224 shares in Banks DIH Limited valued G$51,422,688 not in the name of Clico and therefore excluded from net assets. Similarly excluded from the value of net property is a property located at 19 Smythtown, New Amsterdam, Berbice with an estimated value of $2 million.

On the other hand, the Judicial Manager has optimistically included a forced sale value of the Camp Street palace at $1.2 billion on a best case and a value of $750 million on a worst case. In fact it seems that the realised value on an arm’s length forced sale may be more around $500 million. President Jagdeo, an economist who has found novel and sometimes illegal means of granting subsidies, has suggested that the government might be interested in buying the asset at a premium!

Another source of inflows is from the various inter-company balances with companies that may have assets on which the liquidator can put his/their hands. Clico Bahamas is dead while CRL, a Clico subsidiary located in Guyana, owes Clico Guyana some $2.2 billion on a loan on which neither capital nor interest was being paid but which the auditors Deloitte and Touche have shown at their unimpaired values. In the statement of net assets at February 28, 2009 prepared by another accounting firm, the CRL balance is shown at nil value, because of doubts about the guarantee. But the loan is secured by a guarantee from the parent CL Financial and a first debenture over the assets of CRL so there may be some assets which can be sold and some money recovered by the liquidator. And on the other side of the balance sheet, Clico Guyana owes Clico Trinidad $941 million, which I think it is safe to say they will not have the gall to claim and which in any case should not be paid.

Priority of payments
Where the assets of a company being wound up are not sufficient to pay the liabilities, the order of payment is crucial. In such a case, who should be paid first is governed by the Companies Act which provides that in a winding up, there shall be paid in priority to all other debts (emphasis mine):

(a) all local government rates and all public taxes of every description due from the company within the period of twelve months before the relevant date and not exceeding in the whole one year’s rates and taxes;

(b) all wages and salary of any employee in respect of services rendered to the company during the period of four months before the relevant date;

(c) all wages of any employee, whether payable for time or piece work, in respect of services rendered to the company during the period of four months before the relevant date; or [sic]

(d) contributions payable under the National Insurance and Social Security Act.

The GRA
These persons/entities including the NIS and the GRA have statutory priority, but indications are that the liquidator is ignoring this, and it has gone unchallenged by these statutory bodies. In fact, the GRA is doubly affected because its staff pension scheme which is administered by Clico is in no different position from the other schemes with Clico. It has been told that the liquidator and the team to which he has unlawfully delegated his statutory function will look at them after the first set of money has been exhausted. And to make the bad worse, the first cheques that are being written are not to entities such as the legal and proper pension schemes with possibly tens of thousands of members but to unsecured creditors whose policies even the company now admits were illegal.

The NIS
The amount of the deficit in the best case scenario is within the range invested in Clico by the National Insurance Scheme whose 2008 financial statements show close to one hundred million dollars in accrued income and six billion dollars of unimpaired assets. Admitting that this six billion dollars investment is no longer earning any income for the Scheme, NIS chairman Dr Roger Luncheon is quoted in the Stabroek News as expressing confidence of full recovery since that is what the President promised. It might have been useful for Dr Luncheon to consult with another of his board members, the delegated liquidator Mr Maurice Solomon to get some idea if and when this money will be recouped.

The reality facing the NIS is that its fund is now impaired even as the President tries to fill the hole created by the unlawful conduct of the directors of Clico. Does it matter to him and those who so carelessly invested in the Ponzi-like scheme offered by Clico that they are being rewarded at the expense of the NIS? No wonder then that several months after its completion, the Minister of Finance is contravening the law and withholding the tabling of the 2008 NIS Annual Report in the National Assembly.

No legal sanctions
It is all now history and the public is willing to forget that the NIS was part of the arrangement with Mr Lawrence Duprey, our own Allen Stanford, under which the NIS would invest in Clico to allow the latter to invest in the Berbice Bridge Company Inc (BBCI). Some ghosts do come back to haunt us even as Clico’s director Ms Gita Singh-Knight remains not only an integral part of Clico but also chairperson of BBCI.

Despite all the laws and the rules governing liquidations, nothing will come out of the illegalities that have characterised Clico’s operations over the past several years. There are too many secrets to hide and personalities to protect. Breaking the laws by the Jagdeo administration is commonplace, and if the President can delegate his immunity as he seems to have done at the cultural centre, what is there to prevent Mr Lawrence Williams delegating his in personam duties? After all, this is how things operate in Guyana and this region.

Bet
Without placing anything on the table, I would bet that no one will be brought up under section 446 of the Companies Act 1991 dealing with fraudulent trading and operating Clico “with reckless disregard of the company’s obligation to pay its debts and liabilities; or with reckless disregard of the insufficiency of the company’s assets to satisfy its debts and liabilities.”

Or under section 447 of the Companies Act which provides in part that if any past or present officer or liquidator of the company is guilty of any misfeasance or breach of trust in relation to the company, the court can order the person to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust as the court thinks just.

But it is section 448 that provides the reason why there will be no investigation into Clico’s affairs. It would mean that the court, either on the application of any person interested in the winding up or on its own motion, direct the liquidator to refer the matter to the Director of Public Prosecutions. Sections 446 to 448 clearly do not apply to Clico.

All that is being done illegally could with some imagination have been done legally. For now, Business Page will give up on thinking that it can persuade those involved to mend their ways. It will turn its attention to other things.

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Bank of Guyana disposed of Clico assets on Friday

I learnt to my consternation that at the Clico Head Office last Friday, the Bank of Guyana (BoG) purported to dispose of assets of the beleaguered insurance company. Consternation because by that time the BoG and its attorneys should have been notified or ought to have known that it was unlawful for it to act as liquidator, and that under section 449 (b) of the Companies Act 1991, it was guilty of an offence.

Consternation too because among the high officials participating in the activities last Friday were Ms Marcia Nadir-Sharma, attorney-at-law and Deputy CEO of NICIL, which should have no hand in matters relating to the liquidation of Clico assets, or any other Clico matters, period. Instead Ms Nadir-Sharma acted as the co-ordinator of the proceedings. Commissioner of Insurance (ag), Ms Tracey Gibson, also an attorney-at-law, and Mr Maurice Solomon, Chartered Accountant, were also among those present.

My understanding is that the government might be interested in the huge building in Camp Street to house government ministries, and NICIL which has earned quite an unfavourable reputation over the past few years, would be in a conflict of interest. This building has a market value of $1,503M. I understand, however, that the highest bid was $450M.

Ms Gibson has been unavailable to perform her statutory duty under section 150 of the Insurance Act to allow members of the public to inspect documents filed under that act, but presents herself at a liquidation process in which her office has no legal, statutory or moral role. In fact, had her office acted as the law required it to in relation to Clico, we would not now be in this eleven billion dollar mess. It must be said, however, that Ms Gibson was not Commissioner while policyholders’ money was being shipped unlawfully out of Guyana and took no active part in Friday’s proceedings. If she was there at all, then it ought to have been to see that no hanky-panky took place. Now, let us see what she is going to do about the improprieties she witnessed.
For his part, Mr Maurice Solomon is a long-standing director of the board of NIS which is responsible for the ill-advised and poorly supervised multi-billion dollar investment in Clico, the timing, probabilities and consequences of full recovery of which are in considerable doubt. My information is that at the proceedings, Mr Solomon was variously described as the “BoG representative” and as “the Liquidator.” Interestingly, Mr Solomon’s firm is also the auditor of the New Building Society to which Clico sold its shares and which is now to be brought under the FIA!

At the apex of this, is the Bank of Guyana and its Governor Mr Lawrence Williams, prepared to ignore section 449, other provisions of the law and an order of the court.

Today, days after the issue of the amended order by the Chief Justice (ag) revoking the appointment of the Bank of Guyana as liquidator, the Deputy Governor of the Bank is quoted as making official pronouncements regarding Clico’s liquidation, not only compounding the section 449 offence but acting in contempt of the order by the court. But this is Guyana – where the law is routinely, casually and flagrantly breached, where professionals abandon the rule of law in favour of silence and profits, where the press is missing at crucial times, and where all of this is sanctioned or permitted by those responsible for upholding and enforcing the law. It is time to say that Guyana ‘really gone,’ that there is no hope for our bleeding country.

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Liquidating CLICO: Avoiding the pitfalls – part 2

Introduction
As I write this column from Trinidad, I notice that the news in the print media and the discussion and talk shows are about the financial implications to the country arising from the collapse of Clico. The TT$12 billion owed to some quarter million Clico Trinidad depositors represents about a quarter of the TT$49 billion national budget, indicating the significant ‘adverse multiplier’ effect on the economy. It is interesting, however, to observe the contrasting sentiments in the two countries, one close to the top of the economic wealth league in the Caribbean, the other close to the bottom. In Trinidad, the first response by the state was to go to the National Assembly and to make appropriate legislation. In Guyana, it was a resolution, of dubious legal force.

More than one year later, the Senate in Trinidad and Tobago is still grappling with the implications of the failure, and the Finance Minister and government senators remind the population that every time money is paid to Clico investors, it is coming from their taxes. In Guyana all the ruling politicians seem to care about is how soon the cheques will be ready. Of course at this stage, the Government of Guyana has not put a single cent into Clico and by a perverse coincidence, it can actually gain millions from capital gains taxes and withholding taxes on the interest paid on some of the so-called insurance policies.

I believe the contrasting responses are due in part to the fact that there exists in Trinidad some level of a political culture while in Guyana, there is none. And that the public is far more informed, savvy and courageous than its Guyana counterpart. Or it is because in Guyana elections are coming up while in Trinidad they have already had theirs. In Guyana, taking from the Treasury to which the whole country contributes to fund repayment of high-risk investments made by a relatively small number of persons is regarded as a sign of leadership to be admired and applauded. In Trinidad, they worry about the impact of the bailout on the economy, and while there is sympathy for the persons with life insurance policies and for those credit unions that had invested in Clico’s high-interest EFPA, the general feeling is that those who invested millions in those annuities did so out of pure greed and ought to have known the risk associated with a 7-8 % rate of interest when the market rate was 3-4%. The feeling is that the loss is a consequence of such risk-taking and should not be underwritten by the taxpayer.

Huge NIS loss
That sentiment should have equal validity in Guyana. In any country, persons deciding to invest tens of millions – and in the case of the NIS, billions of dollars – in a company should at least have had the good sense to ask for that company’s most recent audited financial statements. Rather than taking the word of the Clico’s directors and its salesmen whose only interest was huge commissions, they would have noted that Clico actually admitted in its 2007 financial statements, without quantification, that it was in “non-compliance” with section 55 of the Insurance Act requiring that 85% of its statutory fund be invested locally.

The NIS which has around seven and a half billion dollars invested in Clico has an Investment Committee on which sits one of the country’s senior accountants and one of its senior bankers. Should the workers or the taxpayers of this country suffer to the tune of those billions while those individuals are not even called upon to explain their poor judgment, if not outright negligence? This then raises the question whether the reluctance is due to the fact that the chain of responsibility might lead to the Finance Minister and the President and his cabinet who would have been involved, at some time, in the decision on the investment of those billions. No wonder that the powers that be are unwilling to comply with the NIS Act and make public the 2008 annual report of the NIS which, despite the statements of the Chamber of Commerce and FITUG has already lost tens of millions in interest alone on its Clico investments. In Guyana, there is no need to inform oneself before making high-sounding pronouncements or extending accolades.

The auditors
In my view it was also remiss of the auditors Deloitte and Touche not to have insisted that Clico quantify the extent of the non-compliance by the company with section 55 of the Insurance Act and not to have qualified their audit opinion in that regard, including noting in the audit report, the extent of the breach. Instead the auditors on April 23, 2008 gave a clean opinion on the 2007 financial statements, about ten months before the company collapsed. The only comment in their report is a statement under the heading ‘Report on Other Legal and Statutory Requirements’ to an unquantified statement tucked away in note 28 to the financial statements.

An equally or perhaps even more critical issue is that the auditors, by only dealing with section 55, is saying that the investment made by Clico is not impaired, which is clearly and dangerously wrong.

Unfortunately in Guyana this is passing without any comment from the accounting profession or any investigation by the accounting regulator, the Institute of Chartered Accountants of Guyana. This must surely be an issue for the liquidator, the Official Receiver or the President’s promised inquiry into the collapse of the company. And an issue too for those who may yet lose tens and hundreds of millions – and in the case of the NIS billions – of dollars of the capital invested in the company.

A unique country
Clearly then not only does Guyana have its own unique set of problems, but the need to protect the sacred cows takes precedence over accountability, while the long term is defined in terms of the electoral cycle, with the close of the current cycle merely one year from now. It was therefore important for the President to tell the policyholders that none of them will lose a cent, even if he did not say where the money will come from and equally significantly, does not appear to understand some of the implications of his own proposals. For example, at his National Cultural Centre meeting, the President included as a potential source of funds, the sale of a portfolio of policies. If that is indeed the intention – and that would not be a bad idea – any sale of what are effectively liabilities would have to be accompanied by matching assets which have long since evaporated across the Caribbean Sea. That approach does not provide funds but allows the continuity of the policy, though most likely on altered and less favourable terms.

Legal advice
In closing last week, I made bold to recommend to the Bank of Guyana that it should seek out the advice of the top legal brains in the country as it proceeds with the liquidation. I called for sober thinking and careful action, for it to avoid the attraction of pandering to irresponsible political leadership or endorsing false expectations. It may not be true that cheques are already being prepared in Camp Street, but for sure the Bank of Guyana has published an advertisement in the newspapers inviting policyholders to visit Clico Guyana’s office at 191 Camp Street, Georgetown on specific dates and to take along their policy contracts and a valid form of identification “to facilitate processing,” whatever that means.

Instead, under section 77 of the Insurance Act, the liquidator is required to give to the policyholder notice of the value of the policy as determined by the actuary and the policyholder has fourteen days to dispute the amount. That does not seem to be happening, and if it does not, it would breach the act under liquidation as it was under judicial management which specifically barred Ms Singh-Knight from any role in the judicial management.

As desirable as it might seem that everyone should get back their money, it is hardly open to the government or one of its most senior officials to be openly flouting the law. The government has the wherewithal to amend the law as it sees fit. Confronted with a similar kind of bailout, the US enacted several pieces of legislation including the Emergency Economic Stabilisation Act of 2008 under which the Troubled Assets Relief Programme (TARP) was created. Trinidad also passed special legislation to deal with Clico. Let us not engage in illegality and if we need to amend the law to achieve a desired objective, so let it be.

No role in liquidation
I will deal with the priority of payments later but for now, I continue to entertain fears about the course the liquidation process is taking. I called the Governor on a number of occasions this past week only to be told he was in a meeting/on the telephone. Unusually for him, he never returned my calls. I also called on the telephone, and am aware that a person called at the Office of the Commissioner of Insurance, seeking to inspect and to procure copies of documents deposited under the act, a right provided under section 150 of the Insurance Act.

The person was told that the Commissioner was busy on Clico and would not be able to meet with him for several weeks. Does the Commissioner not know that she has no role in Clico’s liquidation?

Statutory duties
Let us recall that Clico’s winding-up was ordered under Part V of the Companies Act 1991. There are some drafting problems apparent in the relevant provisions of the Insurance Act and the words ‘mutatis mutandis’ should surely have appeared in that act since the Companies Act does not deal with the unique insurance animal. But some things are clear and their breach constitutes an offence.

For example, before taking any action as liquidator, the person appointed is required to notify the Registrar of the appointment and give security in such manner as the court may direct; and must provide the Official Receiver with information, access to, and facilities for inspecting the books and documents of the company. There is nothing to indicate that this has been done.

It is not clear whether section 366 would apply in Clico’s case where a Judicial Manager had preceded the appointment of the liquidator. This section requires a statement of affairs to be prepared and submitted to the Official Receiver, containing some very detailed information on assets, liabilities, creditors, etc. After receiving this statement, the Official Receiver is required to submit a) a preliminary report to the court on the company’s capital; b) its estimated amount of assets and liabilities; c) if the company has failed, the causes of the failure; and d) whether in his opinion further inquiry is desirable as to any matter relating to the promotion, formation or failure of the company, or the conduct of the business thereof.

Generally, a statement of affairs is an absolute prerequisite in receiverships and liquidations and I do not see how or why it should be different in the case of an insurance company that was under judicial management. Indeed, the statement of affairs would seem to be a necessity if the judicial manager is to account for his/her stewardship.

The Official Receiver may also make further reports, stating among other things, whether in his opinion any fraud has been committed by any person in relation to the company since the formation thereof, and any other matters which in his opinion it is desirable to bring to the notice of the court.

Stop press
I have just learnt that the Chief Justice has amended the Order naming the Bank of Guyana as the liquidator of Clico and has instead named Mr Lawrence Williams, the Governor of the Bank. That amendment would seem to have been necessary to bring the order in line with the Companies Act which does not allow a corporate body to be a liquidator.

This is more than a change of form, and has important implications for the person appointed. It is a personal appointment and Mr Williams now assumes personal liability for his actions. Since it is a winding up by the court he must act strictly in accordance with the act. If he wants to appoint an attorney-at-law or other agent to assist him in the performance of his duties, he needs the sanction either of the court or of the committee of inspection provided for under Part V. He may, however, without special approval, appoint an agent to do any business which he is unable to do himself which would suggest those acts requiring exclusive skills which he does not have, such as customs brokerage. Since it is a personal appointment and his powers are conferred within the pillars of the act, Mr Williams will not be able to delegate any of those powers but must exercise them personally.

As Governor, Mr Williams did not seem too concerned about the statutory provisions that set the legal parameters within which the Bank of Guyana as liquidator had to operate. The advertisements for the sale of properties did not suggest that the Bank was au fait or concerned that such sale required that the properties be vested in the liquidator. With personal liability at stake, the need for care is greater.

Within days of this column’s assessment of pitfalls, abysses and craters littering the path of liquidation and my belief that the role of the Chief Justice (ag) in the winding up of Clico is far from over, have been borne out. Old people have a saying, ‘More haste, less speed.’ The new liquidator should take note.

Next week, I will look at Clico’s debts on liquidation and the statutory order of priority.

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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.