ChrisRam.net

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.

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.