Lessons learned from the collapse of CBL

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CBL Insurance Ltd was a licensed insurer, which suddenly went from being an up-and-coming company to the subject of a complex and highly publicised insolvency.

A range of court proceedings have followed, relating to insolvency, contractual interpretation, and court procedure, all of which will provide useful guidance for the future.

CBL Insurance began its New Zealand operations mostly through insurance for builders’ warranties. In the 1990s it expanded overseas, mainly in France. At the end of its operations, only 1 per cent of its business was New Zealand based, and CBL Insurance was primarily a reinsurer.

CBL Insurance was a wholly-owned subsidiary of CBL Corporation Ltd. CBL Corporation was listed on both the New Zealand and Australian stock exchanges in October 2015. At the time share trading was halted in early 2018, it was valued at almost $750 million. As a licensed insurer, CBL had to comply with prudential solvency standards, and needed to hold sufficient reserves for future claims, in a context where a claim could be filed at any time within ten years of the end of the policy period. In 2017, European regulators started investigating the reserving levels of CBL’s ceding insurers, and an investigation began in New Zealand. CBL Insurance was placed into interim liquidation in February 2018, and went into full liquidation in November 2018. CBL Corporation went into liquidation in May 2019.

As a result of the liquidations, the directors and the chief financial officer faced multiple claims from regulators, shareholders, and liquidators. These included:

  • A claim by the Financial Markets Authority (FMA) for alleged failures to comply with continuous disclosure obligations and misleading and deceptive conduct;
  • A claim by the FMA alleging false or misleading statements in documents for the initial public offering (IPO);
  • Two separate class action proceedings brought by shareholders, alleging false or misleading statements in IPO documents, breach of continuous disclosure obligations, and misleading and deceptive conduct;
  • Claims by the liquidators of CBL Insurance and CBL Corporation for breach of directors’ duties; and
  • Criminal charges by the Serious Fraud Office (SFO) against former officers of CBL.

The CBL proceedings have traversed a broad spectrum of legal issues and are likely to result in judgments, particularly in the FMA proceedings, which may provide a useful precedent on the FMA’s powers and directors’ liability under the Financial Markets Conduct Act. In addition, there have been a number of interlocutory hearings that have provided useful guidance on other matters, often unrelated to the subject matter of the substantive proceedings.

Powers of an interim liquidator
One of the initial decisions in the CBL proceedings relates to the role of an interim liquidator. The primary role of an interim liquidator is to preserve the status quo. In this case, the interim liquidators sought directions from the High Court to allow them to enter into a compromise with CBL’s largest creditor, however Justice Courtney, in Re CBL Insurance Ltd (in liq) [2019] 2 NZLR 262, decided that this was beyond the scope of the interim liquidators’ powers. The agreement would have the effect of crystallising the value of the creditor’s claim and compromising the debt, both of which should be actions of the liquidator, not an interim liquidator.

Interim liquidations are not a regular occurrence, so this decision gives some welcome guidance on the extent of an interim liquidator’s powers.

Listing Rules and interim liquidations
Before being placed into liquidation, CBL Corporation was in voluntary administration. During that time, it was still officially listed on the New Zealand Stock Exchange. The FMA sought rulings on whether the disclosure obligations imposed by the Listing Rules continue to apply to a company in voluntary administration, and, if so, whether they are discharged by the voluntary administrator complying with the periodic reporting obligations imposed on voluntary administrators by the Companies Act 1993.

Justice Venning held, in Financial Markets Authority v Jackson [2018] NZHC 2052; [2019] NZCCLR 23, that an administration puts a freeze on trading in the company’s shares: shares in the company may not
be transferred and the rights or liabilities of a shareholder cannot be altered. The purpose of the continuous disclosure obligations is to provide the market with material information relating to the issuer to preserve the integrity of the market. Since a company in administration is not able to participate in the market, the disclosure obligations are not vital. The Judge decided that the continuous disclosure obligations are suspended when a listed issuer (of debt or equity securities) is placed into voluntary administration. Instead, the disclosure and reporting obligations of an issuer in administration are replaced by those contained in the Companies Act 1993.

Priority of proceedings
When multiple proceedings relate to the same subject matter, the order in which they are dealt with can be important.

The defendants (CBL’s directors and CFO), and the shareholders, sought a joint trial to deal with liability issues for both the FMA and the shareholder proceedings. This would have resulted in one trial covering liability in four proceedings, dealing with the nature, extent and timing of the contraventions alleged. Evidence would relate to all four proceedings, and one liability judgment could be issued on all claims. Quantum and penalties could then be dealt with later, if needed.

Justice Gault, in Livingstone v CBL Corporation Ltd (in liq) [2022] NZHC 1734), decided that:

  • there was a reasonable degree of commonality between the two sets of proceedings, particularly because this was not a case where there were different threshold assessments in the different proceedings requiring different evaluations of the evidence;
  • there is no principle that the FMA is entitled to any priority in the order of hearings;
  • although the pecuniary penalty hearing in the FMA proceedings need not await determination of compensation to be paid to shareholders, compensation that has already been paid(voluntarily or otherwise) is a mandatory consideration for the Court in determining the appropriate quantum of pecuniary penalties; and
  • if the proceedings were not heard together there would be a risk of inconsistent findings.

Justice Gault therefore decided that the FMA and shareholder proceedings would be heard together.

Claims against overseas insurers
One of the shareholders’ early applications centred around the ability to claim directly against CBL’s insurer under section 9 of the Law Reform Act 1936. This section creates a statutory charge in favour of third-party claimants on monies that become payable by an insurer to an insured in relation to the liability of the insured to the claimants. Its purpose is to overcome the unfairness that arises when insurance proceeds are paid to the general pool of creditors of an insolvent insured rather than to the party who had suffered the loss to which the policy responded.

CBL claimed that their policies were underwritten and administered by entities having their places of business overseas. However, there was evidence that one of the insurers, while based in London, also had an office in New Zealand. All of this evidence was hearsay, as the insurers were not before the Court.

Justice Lang, in Livingstone v CBL Corporation Ltd (in liq), [2021] NZHC 755, confirmed the position that section 9 does not have extraterritorial effect. In the future, it may not be as easy for insurers to claim that they are based out of New Zealand and therefore avoid the effects of section 9.

Claims against professional advisors
The proceedings brought by the liquidator of CBL Insurance involved claims against former directors and officers of CBL, and also its professional advisors, Pricewaterhousecoopers (PWC), and an employee and a partner of PWC. A PWC employee, and a partner, had acted as CBL’s appointed actuary, a position required by the Insurance (Prudential Supervision) Act 2010) (IPSA). There were two relevant provisions in PWC’s terms of engagement:

  • a limitation of liability clause, limiting liability to five times the fees; and
  • an agreement that the client relationship is with PWC and that claims will not be brought against any employees or partners of PWC.

The claim was the first to determine whether any duties under IPSA gave right to a private right of action. Justice Gault, in CBL Insurance Ltd (in liq) v Harris [2021] NZHC 1393 (a strike-out application), decided that “the IPSA statutory scheme does not indicate a legislative intention that a licensed insurer has a private action for breach of statutory duty against its appointed actuary. The IPSA regime does not create a cause of action for breach of statutory duty by a licensed insurer against its appointed actuary.”

Justice Gault also determined that there was nothing in IPSA that implied that appointed actuaries would be prohibited from agreeing with the licensed insurer to limit their civil liability to the insurer, whether for breach of contract or negligence. The provisions in the engagement letter were upheld, and the claims against the employer and partner were struck out, while the claim against PWC was limited by the liability cap. This case has proven useful guidance, in particular on the application of limitation of liability clauses.

Class actions
Until relatively recently, class actions were rare in New Zealand. Although development of a Class Actions Act is now under consideration, the current method for bringing a class action claim is to rely on the High Court Rule for “representative proceedings”. The procedural details of class action litigation, including whether a class should be opt-in or opt-out, are determined on a case-by-case basis.

Previous class action litigation often resulted in lengthy skirmishes between parties on the procedural aspects, often being appealed to the Court of Appeal and then to the Supreme Court, taking years before the substance of a claim can be dealt with. Interestingly the CBL class action orders were resolved without the need for court intervention, despite circumstances where there were two separate (but potentially overlapping) actions from shareholders.

There have been a number of cases in New Zealand outlining the criteria for representative orders, which no doubt assisted in the agreement reached in the CBL class actions.

Directors’ duties
Breaches of directors’ duties have been a hot topic in New Zealand in recent years, with the Supreme Court’s decision in Madsen-Ries (as liquidators of Debut Homes Ltd (in Liq)) v Cooper [2021] 1 NZLR 43 and the pending Supreme Court decision in the Mainzeal litigation (on appeal from the Court of Appeal’s decision of Yan v Mainzeal Property and Construction Ltd (in liq) [2021] 3 NZLR 598)¹.

Debut Homes decided that a breach of directors’ duties will occur by continuing to trade where a director knows, or ought to know, that continued trading will result in a shortfall to creditors and the company is not salvageable. The Supreme Court said that:

“it is not legitimate to enter into a course of action to ensure some creditors have a higher return where this is at the expense of incurring new liabilities which will not be paid. In other words, it is not legitimate to ‘rob Peter to pay Paul’.”

The Supreme Court also confirmed that the fiduciary duty to act in the company’s best interests is subjective. However, where, in an insolvency or near insolvency situation, a director fails to consider the interests of all creditors, there will be a breach.

In Mainzeal, the Court of Appeal said when a company enters troubled financial waters, an on- going “sober assessment” as to the company’s likely future income and prospects is required. If, following that sober assessment, a return to solvency is unlikely, directors must cease trading or follow the formal mechanisms in the Act, including taking steps to appoint an administrator.

The Supreme Court’s decision in Mainzeal is eagerly awaited, and the legislative review called for by the Court of Appeal in that case may still happen.

The extent to which the CBL proceeding provide further guidance remains to be seen. It is safe to say however that the current economic climate in New Zealand is bound to generate a number of construction related cases, in particular the liability of directors of failed companies.

Special thanks to Partner Tanya Wood and Senior Associate Daniel Robinson for preparing this article. For further information, or to discuss further please contact Tanya, Daniel or one of our insurance law specialists

¹ This decision was released on Friday 25 August 2023. Click here to read an article on the decision, as prepared by our litigation and dispute resolution team.

Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.

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