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Under Scrutiny: Directors’ duties

3/12/2012

By Stephen Alleyne

From time immemorial we have had people in Barbados accepting directorships on the boards of companies and statutory corporations without ever addressing their minds to the serious duty the law imposes on them as directors, but I feel that is about to change in the wake of the collapse of CLICO.

Clearly, the role of an individual director is not to sit passively while certain co-directors – who may be considered king-pins or may even be shareholders in the entity they serve – dictate to them or do as they wish carte blanche. Each director is under the law answerable for his performance during his or her tenure of service.

To bring this into perspective, it is always good to look first at what the legislation says about the particular area of law. Under section 95(1) of the Companies Act, Chapter 308, every director of a company in exercising his powers and discharging his duties is required to: (a) act honestly and in good faith with a view to the best interests of the company; and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

The Act goes on to say in section 95(2) that a director, in determining what the best interests of the company are, must have regard to the interests of the company’s employees in general and the interests of the company’s shareholders. However, what section 95(3) of the Act says is extremely important: it goes on to say that the duty imposed on the directors by section 95(2) is owed to the company alone, and that it is enforceable the same way as any other fiduciary duty that the directors owed to a company.

What the Act has done in the section 95(2) is to make it clear that the duties imposed on company directors under section 95 are indeed fiduciary duties and has also made it clear that there are other fiduciary duties imposed on company directors by law, besides those spelt out in the Act. To glean and understand the other fiduciary duties imposed on company directors, it is necessary to examine the common law to understand how they have evolved and continue to evolve, an exercise which it is impossible to achieve in a single article.

Case study

In the recent Cayman Islands case of Weavering Macro Fixed Income Fund Limited (In Liquidation) v Stefan Peterson and Hans Ekstrom, a case decided in the Grand Court of the Cayman Islands, for example, the official liquidators of the Macro Fund brought a claim against Stefan Peterson (Stefan) and Hans Ekstrom, two of the directors of the Macro Fund, for damages for breach of their duties as directors of the fund.

The Macro Fund was incorporate in 2003 as an open-ended investment company, and, except for the composition of its board of directors, it had a conventional management structure. However, Magnus Peterson, the brother of Stefan and stepson Ekstrom, was the owner and controller of Weavering Capital (UK) Limited, the investment manager of the fund. He had appointed Stefan and Ekstrom as directors of the fund to meet minimum “legal requirements without burdening himself with a real board of directors who could be expected to perform their supervisory role in an ordinary businesslike manner”. Ekstrom by then had retired and Stefan had been working for an insurance company in Oslo.

The practice in the Cayman Islands is that investment management, administrative and accounting functions are delegated to professional service providers, but a company’s independent non-executive directors retain a high level supervisory role. Those three functions were in this case properly delegated to one of Magnus Peterson’s company and PNC Global Investments Servicing (Europe) Limited, but that did not absolve the two directors, ostensible as they may seem, from the duty imposed on them by law. They had hardly, if ever, attended any directors’ meetings and all they had done was to rubberstamp various documents delivered to them. The liquidators alleged that they were in breach of their duty to exercise independent judgment, to exercise reasonable care, skill and diligence and to act in the interests of the Macro Fund.

Having found that the structure of the Macro Fund was not materially different from other open-ended investment companies registered under the mutual funds law of the Cayman Islands, the court, adapting conventional company law principles in the circumstances, concluded that the relevant principles of law were, among other things, that:

• Whilst independent directors rarely have the technical expertise and experience to be able to monitor sophisticated investment strategies and trading techniques in a direct hands-on manner, they are expected to satisfy themselves (on a continuing basis) that the fund is complying with investment restrictions set out in the offering documents and to acquire a proper understanding of the financial results of the investment and trading activity, without which they would not be in a position to perform an overall supervisory role.

• It is their duty to satisfy themselves that there is an appropriate division of function and responsibility between the investment manager and administrator. They need to satisfy themselves, on a continuing basis, that the various services providers are performing their functions in accordance with the terms of their respective contracts and that the managerial and/or administrative functions which ought to be performed are left undone.

• Independent directors must do more than simply react to whatever problems may be brought to their attention by the other professional service providers. They must apply their minds and exercise an independent judgment in respect of all matters falling within the scope of their supervisory responsibilities.

• Reviews of financial accounts must be conducted in an inquisitorial manner, the directors making appropriate enquiries of the administrator and auditor. The directors are not entitled to assume that the other service providers have all performed their respective roles (actual or perceived) and therefore do not need to be supervised in any way whatsoever.

• Independent directors are expected to be able to read a balance sheet and have a basic understanding of the audit process. If they accept a responsibility for a fund’s financial statements (by issuing management representation letters and signing financial statements), it is their duty to exercise an independent judgment in satisfying themselves that the financial statements do present fairly the fund’s financial condition.

The court found in conclusion that the two directors here were guilty of willful neglect and default because they consciously chose not to perform their duties to the Macro Fund, or at least not in a meaningful way. The court awarded damages in the sum of US$111 million against each of the directors and costs.

These principles of law discussed in this case should stir the minds of all directors in this country and make them understand that their appointments come with a heavy responsibility. Directors must not be mere automatons who sit passively and take instructions from other directors of the boards they serve, but must use their own judgment in the decisions they make. Of course, under the Companies Act, a director may dissent to a resolution passed or action taken at a meeting, but he must request that his dissent be entered in the minutes of the meeting and he must send his written dissent to the secretary of the meeting before it is adjourned or to the registered office of the company.

(Stephen Alleyne is an attorney-at-law and former member of the Royal Barbados Police Force.
e-mail: swalleyne@hotmail.com)

Source: http://www.barbadosadvocate.com/newsitem.asp?more=loca..&NewsID=23364

ONLY HUMAN: Life after CLICO

By Sanka Price | Wed, March 07, 2012 – 12:00 AM

To Barbadians who do not have insurance policies with CLICO International Life (CIL), the revelations emanating from the judicial manager’s forensic audit are more tragic twists in the ongoing saga of this once powerful conglomerate.

We can shake our heads in disbelief at how the money of trusting people was misused with little regard for transparency and accountability by a company one would have expected better from.

And I thank God that I never put a cent of my hard-earned cash into anything that company was selling.

But for the 27 000 CIL policyholders who did invest, this heart-rending public drama is their reality.

This sad, sordid story on CIL is not only a disillusioning tale about bad management of a multimillion-dollar entity, a lack of stringent regulation by the appropriate Government agencies, questionable money deals by prominent individuals and, now, posturing by politicians from both parties instead of a bipartisan approach to plug the legislative holes this tragic episode was allowed to slip through.

Rather, this affair is about people and how they have been disadvantaged. In the last few weeks I have encountered some of these individuals and today will share some of their stories.

Following a column I did last month I was contacted by a woman who explained how she returned to Barbados after living overseas for more than 30 years. She had a personal accumulation of about $300 000 and with a child preparing to return overseas to study, and her not being able to get a job here, she put her lifetime savings in a fixed deposit with CIL as that company offered the highest interest rate.

“I made a deposit with a reputable company with a guarantee that I would get my money back with more interest,” she said.

Today this woman is in her early 50s, still unemployed and admitted that sometimes she does not know where she will get money from to just buy food. She owes everyone money, and her child, now overseas, is struggling as she cannot support him as planned. Her CIL policy has long matured but she cannot get any of her money.

Another woman related her story: “In 2004, I wanted to find a no- to low-risk home for my life savings so that I could either convert them into an annuity, or take the cash and decide how best to ensure my continuing financial stability. I was introduced to a CLICO agent, who offered me a ten-year plan which served the purpose well. After eight years, I could even take out my savings plus interest with no penalties, or convert the accumulated amount into an annuity.

“Being in receipt of a pension, I set aside enough savings for additional expenses during those eight years. At the time, interest rates were around 4.5 per cent, so contrary to popular belief, the interest rate for a ten-year savings plan of 6.5 per cent was not that outstanding, and was not even guaranteed for the entire period.

“However, I looked at CLICO’s history and its sheer size and regional presence, and when I asked around, comments included the perhaps prophetic, “it is as safe as it gets. If CLICO goes down, Barbados goes down”.

“Now I have had to borrow money and run up debt and may have to sell my house in order not to face my final years in misery.”

The third is a 55-year-old female who now finds herself working late-night hours for a minimum wage just to survive.

This mother of three married early but literally had to run from her abusive husband. She said: “I was not 30 yet, with three children who the court had awarded me sole custody of. Both my parents were dead, and I wanted no contact with my ex – therefore no support.

“I worked hard for many years; I held two jobs, 8 a.m. to 4 p.m. at my day job, then 6 p.m. until at my night job. This was necessary in order to support my children.

“Later I was in a long-time relationship, and after about ten years of living together I decided to go after my dream of owning my own home. I secured a mortgage from CLICO, paid all the fees myself, and moved into my dream home. Two years later, because my partner did not live up to his commitments, I could not continue to make the mortgage payments alone. CLICO did not hesitate to take my home.

“In 2008 and in my own business, my trusted insurance agent suggested it would be better to transfer my pension to CLICO. This I did, and in September 2008, a cheque was deposited with them. Exactly one week later, the news broke of CLICO’s financial situation, and from that day I have been trying to get my money.

“CLICO took my home. I have no business, just scraps left. I have sold almost everything I own to pay bills . . . all because CLICO has every cent I have slaved for for 33 years.”

Source: http://www.nationnews.com/articles/view/only-human-life-after-clico/

Update from the Judicial Manager of CIL

Barbados: Tuesday February 21, 2012 – Deloitte Consulting Ltd. (represented by Oliver Jordan and Patrick Toppin) the Judicial Manager of CLICO International Life Insurance Limited (“CIL“ or “the Company”) yesterday reported to the High Court of Barbados (“the Court”) on the status of its efforts to identify an investor with the depth of management and financial capacity to acquire the operations of CIL, with the aim of completion by mid-2012 of the possible sale of the assets and policyholder liabilities of the Company.

The Judicial Manager also presented the Court with its recommendations arising from the Forensic Audit that was commissioned on the Company.

A key objective of the Forensic Audit was to investigate the “Amounts due from related companies” which totalled Bds$370million at the date of appointment of the Judicial Manager. The forensic team was able to identify substantially all of the intercompany balances during the course of the audit. It was however noted that access to documentation, held by related entities which are not subject to judicial management, would be necessary to establish the validity of certain transactions.

In light of its primary mandate to identify a course of action that is most advantageous to CIL’s policyholders, a recommendation was made by the Judicial Manager, and accepted by the Court, for the Financial Services Commission of Barbados (“the FSC”) to initiate, with the assistance of the appropriate government agencies, further investigations into the significant transactions identified in the Forensic Report and pursue any required criminal and/or civil legal actions.

The Judicial Manager undertook to cooperate with the FSC and any other agencies to provide such information that the Judicial Manager possesses, if required, during the conduct of these investigations.

The Judicial Manager wishes to assure policyholders that all efforts are being made to expedite the process of transferring of CIL’s business to a qualified investor and that it will continue to provide updates as key milestones in this process are achieved.

Any and all queries concerning policies can be directed to the company via established lines of communication. Additionally, the Judicial Manager has established a dedicated email address of clicojudicialmanager.bb@deloitte.com for direct communication concerning the Judicial Management process.

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About Deloitte: Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they operate. Deloitte’s approximately 182,000 professionals are committed to becoming the standard of excellence. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte Touche Tohmatsu Limited is a private company limited by guarantee incorporated in England & Wales under company number 07271800, and its registered office is Hill House, 1 Little New Street, London, EC4A 3TR, United Kingdom.

‘Regulators stood idly by’

SUNDAY EXPRESS – CLICO

Ex-State counsel: Unforgivably gross and reckless dereliction of duty

By Camini Marajh Head Investigative Desk
Story Created: Dec 17, 2011 at 11:44 PM ECT
Story Updated: Dec 17, 2011 at 11:44 PM ECT

For  close to two decades, State regulators kept rogue insurance giant CLICO in their gunsight, but never fired the proverbial warning shot that could have saved the day.

Now, nearly three years past intervention and $7.3 billion taxpayers’ dollars later, new evidence obtained by the Sunday Express shows that State and Government officials knew the country’s number one insurer was not only routinely breaking the rules, but was operating well outside the law.

Official correspondence, sent under cover of strict confidentiality, shows that for close to two decades, State regulators registered quiet displeasure, issued stern warnings, raised myriad red flags and watched disapproving from the sidelines as the country’s largest insurer hurtled toward near-collapse, with not a word to the investing public.

State officials, tasked with the responsibility of protecting policyholders and the financial system from accounting ingenuity and breaches of the law by maverick financial firms like CLICO, did nothing to police the renegade insurance company and avert the financial disaster that, from all the evidence on hand, was long in coming. No alarm bells were rung or threat of intervention made. Instead, regulators continued to quietly list the same litany of repeated acts of law-breaking to a defiant CLICO, which continued to take high-risk acquisition gambles with policyholders’ money. And even as senior executives and the parent company, CL Financial Ltd, continued to use CLICO as their personal piggy bank, the message to the investing public was that all was well.

Central Bank, Government officials and State regulators all stood by and allowed CLICO to conduct business as usual and to continue to use policyholders’ funds to provide guarantees to affiliate CL Financial companies, knowing that the insurer had liquidity issues and had breached its Statutory Fund obligations, as required by the insurance act. In December 2008, exactly one month before State intervention, CLICO was running a Statutory Fund deficit of $2.5 billion. The fund is designed to hold assets in trust for the protection of policyholders.

Sudeesh Shivarattan, a former senior State counsel at the Board of Inland Revenue, former lecturer in tax law at the Hugh Wooding Law School and editor of Dominion tax cases, Canada, said the Central Bank was “grossly negligent and, indeed, breached its fiduciary obligations to policyholders”, who, he contended, relied on the bank’s supervisory authority to ensure compliance with the law and maintenance of the Statutory Fund.

“Unquestionably, the Central Bank was the absolute custodian of the Statutory Fund and, therefore, was in absolute control,” he told the Sunday Express, pointing to Section 37 (4) of the Insurance Act, which states, in part: “Every company carrying on a long-term insurance business in Trinidad and Tobago shall place in trust in Trinidad and Tobago assets equal to its liability contingency reserves with respect to its Trinidad and Tobago policyholders as established by the balance sheet of the company as at the end of its last financial year.”

Shivarattan said the Statutory Fund was, by law, in the nature of collateral security for policyholders and that “the Central Bank knowingly and recklessly failed to discharge its mandatory statutory duties”. He said: “For this unforgivably gross and reckless dereliction of duty, the Governor of the Central Bank and his entire board of directors should resign and be made personally liable for the losses suffered by policyholders.”

Financial analyst Ved Seereeram said Central Bank, by its complicit silence, aided and abetted CL Financial executives in repeated acts of corporate misconduct and law-breaking. A former Citi banker, Seereeram contended that Central Bank was guilty of a dereliction of duty. He said if the regulators and external auditors had acted sooner on the concerns raised 16 years ago by former permanent secretary in the Ministry of Finance and former Republic Bank chairman Frank Barsotti, now deceased, “the problems could have been rectified, if not confined. Certainly, the financial hole would have been a lot smaller”.

Both experts agree there were other culpable players who contributed to the making of the CL Financial debacle, namely, the external auditors PriceWaterhouseCoopers (PwC), which signed off on the annual financial accounts, and the directors and officers who were entrusted to manage the affairs of CLICO, CL Financial Ltd, CLICO Investment Bank (CIB) and British American Insurance Co Ltd.

Recent disclosures at the public commission of enquiry into the collapse of CL Financial Ltd portray a conglomerate run amok with directors and executives who were unusually adept at exploiting the weaknesses in the corporate governance structure, engaged in acts of self-dealing and asset buys to the financial detriment of the group and routinely breached and evaded regulation, including the Board of Inland Revenue. The group’s top brass traded accusations as to who benefitted from which deal and who was to blame for taking the country’s largest conglomerate down a precipitous slope. Lawrence Duprey’s CL Financial group controlled assets in excess of $100 billion in 32 countries before it crashed in January 2009.

Its investment bank, which was the first casualty of the 2009 collapse, engaged in sloppy lending practices, failed to keep proper accounts, showed more capital than it had on its books, financed private deals for directors and senior executives, practically gave away depositors’ money to executives and favoured customers and paid fat commissions to bank executives for loans brought in (including non-performing loans), according to documents seen by this newspaper.

As detailed in previous Sunday Express reports, millions of dollars were advanced, often without documentation and sometimes in violation of CIB’s own lending limits. A post-mortem analysis of the accounts by Ernst & Young found glaring evidence of loose management and board oversight, vague paper-trails on many inter-group and related-party transactions, material inaccuracies in the management accounts, non-compliance of monthly financial statements with generally accepted accounting principles and a loan portfolio that comprised a significant percentage of high-risk real estate projects, among other things.

But the rogue conduct and systemic deterioration of prudential banking standards at CIB was well known to the Inspector of Financial Institutions, Carl Hiralal, who, in making the case for Central Bank’s intervention under Section 44D on January 29, 2009, detailed the bank’s poor financial condition and compliance track record. In his eight-page report to the Governor of the Central Bank, Hiralal noted: “CIB has failed to supply timely and accurate returns. Despite receiving several letters on the matter, CIB failed to institute effective measures to correct the situation.”

He cited the bank’s penchant for fudging numbers (overstating of balance sheet figures and profit margins) and violations committed under the Financial Institutions Act, specifically, the granting of unsecured credit facilities to a single client. He said unsecured lending to DCG Properties (over US$73 million) was 29.8 per cent of CIB’s capital base at December 31, 2007.

The Ernst & Young analysis found that CIB did not pay corporate taxes for the years 2007 to 2009 and, in fact, had serious liquidity problems since 2007. The CL Financial-run investment bank was given a clean 2007 audit by PwC. In keeping with the CL Financial tradition of tardy filings, the 2007 accounts were signed off late, November 2008 to be exact.

The Inspector did not disclose how CIB got so totally over-leveraged and under-regulated or why his office allowed the precarious situation to develop to the point of liquidation. Perhaps the answer lies in the complex connections between State regulators who take their cue from Government officials and the close relationships between prominent political figures and wealthy and influential business leaders.

Where is the Clico exit strategy?

Once again there is a buzz about a possible solution to the Clico issue, which as far as I see it, has weighed down the economy since September 8, 2010—that is two weeks short of a year. Last Friday, Guardian associate editor, Asha Javeed, got word that the Government’s exit strategy for the holders of the Executive Flexible Premium Annuity with investments of over $75,000 included offering them shares in an investment holding company which would be structured in a manner similar to National Enterprises Ltd.  Read full article… 

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