The interim liquidators of CBL Insurance can’t make a deal with the firm’s largest creditor Elite Insurance as it’s beyond their powers, according to the High Court.
Elite is CBLI’s largest creditor, accounting for approximately 68 percent of CBLI’s claims liabilities. The deal would have seen CBLI’s liability to Elite removed from the balance sheet in exchange for a mixture of cash and non-cash assets. The amounts involved were redacted from the judgment issued Friday.
The High Court ordered CBL Insurance be placed into interim liquidation in late February on an application by the Reserve Bank as the insurer’s prudential supervisor. The central bank said CBL Insurance breached solvency margins and statutory directions. CBL Insurance is a unit of NZX-listed CBL Corp, which is in voluntary administration. CBL reinsured risk in the French construction industry underwritten by Elite.
The interim liquidators – McGrathNicol’s Kare Johnstone and Andrew Grenfell – argued the agreement with Elite would benefit all CBLI’s creditors and sought to execute the deal ahead of the substantive liquidation application to be heard in the High Court at Auckland from Nov. 12.
They argued the remaining creditors would be in a better position as a result of removing the exposure to Elite than if Elite were to be treated in the same way as all other creditors.
The Reserve Bank consented to the application but CBLI’s second largest creditor – Alpha Insurance – showed “strenuous opposition,” as did CLBI itself, and its shareholder LBC Holdings.
Justice Patricia Courtney noted several arguments raised in opposition, including that it was unreasonable for an interim liquidator to pay some 85 percent of the company’s cash to a single creditor. Elite was also a distressed business, other statutory processes were more appropriate, the agreement wasn’t within the usual activities of the business, and the agreement would not have the support of the other creditors.
“There is merit in all the points raised in opposition,” according to the judgment, which concluded the commutation agreement is “beyond the scope of the Interim liquidators’ powers.”
“Although the interim liquidators do have the powers of a liquidator, they may only exercise those powers for the purpose of maintaining the value of the company’s assets and, in my view, that is not the case here,” Justice Courtney said.
According to the judgment, the proposed transaction represents steps usually in the province of a liquidator rather than an interim liquidator. The agreement also compromises the debt, which is also a power usually exercised by a liquidator. And the agreement results in the disposition of a number of the firm’s assets – including most of its cash – “whereas it is generally for the liquidator to realise the company’s assets for the benefit of all creditors.”
The Reserve Bank said it supported the transaction negotiated by the interim liquidators, “but accepts the court’s finding that it cannot be effected in interim liquidation.”
“This outcome reinforces the Reserve Bank’s desire for the full liquidation of CBL Insurance.”