CLICO policyholders lose in Privy Council… Now saddled with hefty legal bill

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The United Clico Policyholders Group has lost its appeal before the Judicial Committee of the Privy Council and its members now face a hefty legal bill.

The British Law Lords handed down a 37-page judgment on Tuesday morning, ending a five-year legal battle which saw the policyholders first winning in the High Court, losing in the Court of Appeal, and now losing in the Privy Council.

The judgment was delivered by Lords Neuberger, Mance, Clarke, Sumption, and Carnwath.

Peter Knox QC and Ramesh Lawrence Maharaj SC, appeared for the policyholders, while Howard Stevens QC, Rowan Pennington -Benton, and Professor Satvinder Juss, represented the Attorney General.

The issues before the Privy Council were:

a) Did the representations made by or on behalf of the government during 2009 give rise to a “legitimate expectation” that resident policyholders in the position of the appellants would be fully protected?
b) If so, was the government entitled in law to resile from the expectation so created?

FACTS

The appellants, who are all residents of Trinidad and Tobago, are holders of life policies issued by the Colonial Life Insurance Company (CLICO). Their claim arises out of the banking crisis in early 2009 when CLICO was in serious financial difficulties.

That claim is based on assurances of support for CLICO given by the then government, which they say created a “legitimate expectation” enforceable in law. They assert that, following the elections in May 2010, the new government failed to honor that expectation, and that they are entitled to relief accordingly.

Their claim succeeded in the High Court but failed in the Court of Appeal. Factual background CLICO. CLICO is a company regulated by the Insurance Act and is a subsidiary of a holding company, CL Financial Ltd (CLF); one of CLICO’s subsidiaries is CLICO Investment Bank (CIB). As the Court of Appeal noted, CLF was the largest private conglomerate in Trinidad and Tobago.

The reported value of its assets was equivalent to more than 70% of the country’s gross domestic product, and a substantial part of those assets are in the financial sector. Under section 37(1) of the Insurance Act, CLICO was required to establish and maintain a statutory fund to cover its liabilities to policyholders under long-term insurance business. Section 37(4) of the same Act required CLICO to maintain a fund in Trinidad and Tobago with sufficient assets to cover its liability (including its contingency reserves) to policyholders’ resident in Trinidad and Tobago.

The Insurance Act contained investment rules for such Funds, including, for example, in section 46 and Schedule 2, a prohibition on investment in more than 30% of the shares of a single company. There were also restrictive rules for the valuation of assets in such Funds.

Under section 80(1) of the Insurance Act, policyholders protected by a Fund are to be treated in preference to other creditors in insolvency, and in such an event the assets and liabilities of the Fund are to be assessed separately and, with the exception of any surplus, used only to pay off liabilities of the Fund.

CLICO was under the general supervision of the Central Bank of Trinidad and Tobago. Under section 41 of the Insurance Act, it was required to report to the Central Bank with particulars of the assets and liabilities of the Fund.

Section 44D of the Central Bank Act gave the Central Bank power to take control of a financial institution and to take all steps it considered necessary to protect the interests of depositors and creditors of the institution, where it was of the opinion that those interests are threatened, or that the institution was likely to be insolvent or that it was not maintaining high standards of probity or sound business practices.

Section 44F(5) of the Central Bank Act required the Central Bank to comply with general or special directions of the Minister.

The appellants all held versions of a CLICO policy called the Executive Flexible Premium Annuity (EFPA). These policies were distinguished by the offer of relatively high-interest rates paid out on the premium for a fixed initial period.

Patrick Manning

Patrick Manning

They also included provision for an annuity on the life of the policyholder, and (as is now common ground) were thus within the definition of “long term insurance business” for the purposes of the Insurance Act. The crisis and the government’s response.

In January 2009, the Central Bank became aware that CIB had serious liquidity problems, and that both CIB and CLICO were in substantial deficit. On 24 January 2009, the Central Bank advised the Minister of Finance, Karen Nunez-Teshiera and the Prime Minister Patrick Manning, that there would be a run on both institutions if the problems became public.

On 30 January 2009, the Central Bank took control of CIB using its emergency powers under section 44D of the Central Bank Act. On the same day the government and CLF came to an agreement which was set out in a Memorandum of Understanding (the MoU). The preamble of the MoU recorded that CLF had asked for the government’s intervention in the “rehabilitation” of CIB, CLICO and another subsidiary British American Insurance Company (BA).

It stated: “The financial condition of CIB, CLICO and BA threaten the interest of depositors, policyholders and creditors of these institutions and pose a danger of disruption or damage to the financial system of Trinidad and Tobago.” The agreement had been reached to correct the financial position of the three companies and to protect the interests of their depositors, policyholders and creditors.

Among other things:

a) CLF agreed to sell its shareholdings in a number of identified companies and such other assets as might be necessary, and to apply the proceeds (a) to correct CIB’s financial position, and (b) to ensure that CLICO’s and BA’s statutory fund requirements were satisfied.

b) The government agreed to provide collateralized loan financing to CLICO and BA to meet any residual statutory fund deficit which might still exist after this sale of CLF’s shareholdings and assets. c) CLF agreed that CLICO and BA would restructure their operations to conform to traditional life insurance business in a manner to be approved by the Central Bank. d) CLF was required to make full and fair disclosure of the liabilities and assets of companies within the group.

On 6 February 2009 the Central Bank Act was amended to extend the Central Bank’s powers of intervention under section 44D to cover insurance companies. On 13 February 2009 the Central Bank took control of CLICO. A statement issued by the Central Bank on that day said: “These steps would convince policyholders that CLICO has the full backing and commitment of the Government and the Central Bank of Trinidad and Tobago. Policyholders should also feel confident that their funds are protected and this should encourage the maximum roll-over of policyholder funds.

At worst, to facilitate an orderly recovery of CLICO, we would request that policyholder to do not seek withdrawals before their maturity dates …” The appellants rely on a number of public statements, made at this time and over the following months, about the nature of the government’s support for CLICO.

It is unnecessary to set them all out. Some were qualified specifically by reference to the conditions of the MoU, but others were not so qualified. For example, on 15 February 2009 a full-page advertisement was placed in local newspapers in the name of CLICO (signed by the new Chief Executive, Mr. Musaib-Ali, appointed at or about the time of the takeover by the Central Bank).

“CLICO [TRINIDAD] wishes to assure all its Policyholders and Clients that our normal business operations will continue. All terms and conditions of existing policy contracts will be honored. All Policyholders’ funds are guaranteed by the Government of Trinidad and Tobago and the Central Bank.” (original emphasis).

In a Parliamentary answer on 24 June 2009, the Minister of Finance referred to “the restructuring agreement … carried out in the Memorandum of Understanding signed with [CLF]” under which the government was “committed to restructuring [CLF] as a going concern” to ensure that other creditors and shareholders would “at the end of the day … get back and recoup all of their losses or potential losses”.

But that was “not a guarantee to them”. She explained: “We guarantee the policyholders and resident of this country, that is our guarantee, but we are committed to seeing that CLICO becomes a going concern because we want to ensure that the money that the taxpayers have invested are recouped, and in so doing the persons to whom you spoke will therefore benefit because that will be part of the whole exercise of creating solvency for CLICO and [CLF].”

On 24 July 2009 the Cabinet approved funding of $5 billion to facilitate the restructuring of CLICO and BA. The initial injection through the Central Bank of $1.2 billion was later increased to $1.9 billion. Further funding of $3.1 billion was provided in the form of government bonds issued directly to CLICO and placed in the Fund to reduce the deficit. They were to be drawn upon to meet liabilities as they arose and which CLICO was not able to meet.

CLICO continued to trade under the control of the Central Bank, but problems continued into the following year. On 13 January 2010, in an interview, the Minister of Finance spoke of the wide implications of the CLICO intervention: “I would say everyone will get their money but in the context of the enormity of the situation and the fact that it will affect us all. It is not just those who invested. If you do not contain it, it can have a contagion effect on the whole economy.

What it requires is the confidence of the people of Trinidad and Tobago and the patience and understanding that it is a national issue and understand the enormity of the situation …” In March 2010, in media briefing, the Governor of the Central Bank explained that CLF’s assets had been “far more leveraged” than originally thought, the contribution from the sale of assets in the short to medium term was likely to be much lower than envisaged, and values had been affected by the weakness of both the local stock market and the real estate market.

Options were being considered for restructuring CLICO. A preliminary report from consultants had recommended that CLICO should be split into two units, one dealing with traditional insurance and the other with the “workout” of the short-term deposits. All of the options required extensions to the periods of payment upon maturity as there were insufficient funds to deal with the short-term deposit products. A change of government.

Winston Dookeran

Winston Dookeran

On 24 May 2010 there was a general election, and this led to a new administration. The new Minister of Finance, Mr. Winston Dookeran, stated in his evidence in these proceedings that CLICO was “the biggest and most difficult issue” that he had had to deal with in preparing the government’s first budget due in September. He noted also that the International Monetary Fund considered the stability of Trinidad and Tobago’s economic outlook to be heavily dependent on the resolution of CLICO’s restructuring.

In June 2010 the government appointed an expert select committee to provide recommendations on the way forward for CLICO and the Group. Its mandate required it to make recommendations on “a preferred solution, from a menu of options, for the repayment of CLICO’s traditional and non-traditional (EFPA) insurance liability products”, a financial reorganisation plan for CLF, and a “clear path and timetable” for the government to “exit its loan capital position and restore public confidence”.

At the end of July the committee reported on three options (in summary): i) Provide no further funding and liquidate CLICO and BA; ii) Fully fund the entire asset shortfall of CLICO and BA and repay all creditors based on contractual terms (not just policyholders protected by the statutory fund); iii) Provide $75,000 to all EFPA and Mutual Fund policyholders (including non-residents not protected by the fund), and pay remaining liabilities by government bonds spread over a 20-year period.

On 12 August the Cabinet considered the report and approved option (iii). On 8 September 2010, in his budget statement to the House of Assembly, Mr. Dookeran reported on the position of CLICO. He made critical observations about the actions taken by the previous administration, which, he said, had treated it as a liquidity issue that could be covered in the short-to-medium term, but had done so without full information on the financial conditions of the companies.

He described this as “a reckless assumption” which had cost the nation significant public funds involving more than 10% of the country’s gross domestic product, and affecting 250,000 of its citizens. He also made reference to the “numerous public statements” made by the then Minister of Finance, the Central Bank and CLICO, assuring depositors that their money was safe and would be protected by the government. Total funding provided up to May 2010 had amounted to approximately $7.3 billion.

Announcing the government’s proposals he said that the traditional insurance business would be separated from short-term investment business, and that “the obligation to the 225,000 policyholders would be honored, backed by the statutory fund. For short term investors (including EFPA holders), the government would make “an initial partial payment of a maximum of $75,000 … intended to bring relief to the small depositors”.

This would result in full payment to “approximately 45% of the 25,000 investors in these products, including more than 140 credit unions and 15 trade unions”. Those whose principal balances exceeded $75,000 would be paid through “a government IOU amortized over 20 years at zero interest” structured in such a way that it could be traded on the secondary markets, thereby creating “a measure of immediate liquidity for the depositors”.

On 9 September 2010, pursuant to a direction of the Minister of Finance, CLICO placed a moratorium on all EFPA transactions and all payments to EFPA policyholders. It continued to collect premiums from traditional policyholders and to pay out claims.

In a media briefing on 28 September, Mr. Dookeran commented on suggestions that the government was not honoring the “guarantee” given by the previous administration.

He accepted that there had been “utterances of guarantees”, but he contended that, in order to be effective, they would have required parliamentary appropriations which had not been obtained. Accordingly, these guarantees had “no backing, either in terms of the allocation of funds through the parliament or certainly in any other way”. He explained: “What we have done instead, we have allocated in our budget $3.2 billion … and we will be issuing bonds so that the individual will have certainty now of getting back his principal, albeit over some years …”

On 1 October 2010, in a speech to the House of Representatives, the then Prime Minister, Kamla Persad-Bissessar also criticized the former administration’s handling of the CLICO matter. In particular, she criticized it for adopting a “narrow view” directed solely to local investors covered by the statutory fund, and ignoring the 1,100 investors in EFPAs from outside the country, worth some $12 billion.

The government was under “no legal obligation” to put in more public money to help those placed in this position because of “mismanagement on the part of the former administration” or of the companies themselves. In the following year, on 29 April 2011 the appellants wrote to the Prime Minister challenging the legality of the government’s proposals, on the grounds (inter alia) that they would frustrate their legitimate expectations arising out of promises by the previous administration, and asking for further information about CLICO’s assets. Following further exchanges, in August 2011 they sent a draft application for judicial review.

THE REVISED PLAN

Meanwhile, the Cabinet was considering further options aimed at improving the return to policy-holders. On 14 September 2011 the Minister of Finance announced an “enhanced payout regime” for those EFPA policyholders with balances greater than $75,000. Under the new proposals, policyholders could exchange their bonds with maturities of 11 to 20 years for units in a new entity, thereby obtaining a value equivalent to the face value of those bonds.

As a result, the average return would be in the order of 92% of the value of the principal balances of their holdings. The new entity was set up in 2012 and named the CLICO Investment Fund. On 20 September 2011 the Central Bank Act was amended to prohibit proceedings against an institution (such as CLICO) which had been taken under control under section 44D of that Act.

From the time the new bailout plan was devised (either in its original form or as revised in September 2011), it was a condition that investors should either give up their rights against the statutory fund and take up the government’s bailout plan or stand on their rights. The final deadline for acceptance was 30 November 2012.

On the appellants’ case, up to two weeks before that deadline, and in spite of numerous requests, they were given no information as to the status of the fund and the rights that they were being asked to give up. More recent developments 24.

Since the High Court decision, on 27 and 28 March 2015 the Central Bank announced that policyholders would receive 85% of their contractual entitlements within three months (principal balances plus contractual interest), and those sums have been paid.

As to the balance of 15%, this was said to depend on the sale of one of CLICO’s assets, Methanol Holdings International Ltd (“MHIL”). In 2009 CLF transferred shares in both Methanol Holdings (Trinidad) Ltd (“MHTL”) and MHIL to CLICO. These shares, together with the MHTL and MHIL shares already held by CLICO, constituted about a third of CLICO’s total assets.

The transfer of the shares prompted arbitration proceedings, brought by the holders of preference rights in the shares. The proceedings were only resolved in 2013. The tribunal ordered that the MHTL shares be transferred for value to the holder of the preference rights. The value of which they were to be sold was determined in 2014.

Justice Joan Charles

Justice Joan Charles

The present proceedings were commenced by the appellants against the Attorney General (on behalf of the government) on 1 December 2011. On 18 April 2012 Justice Joan Charles granted leave to apply for judicial review.

She rejected the government’s argument that the appellants had been guilty of delay, on the ground that “significant changes” had been made to the government’s proposal between 8 September 2010 and 14 September 2011, so that the latter date should be taken as the point at which the decision subject to challenge was taken.

She heard the application over three days in November 2012, and she gave judgment on 12 March 2013 upholding the claim. She ordered the respondents to make arrangements to secure that the appellants recovered 100% of CLICO’s contractual liability to them.

In July 2015, the Court of Appeal (Chief Justice Ivor Archie, Justice Rajendra Narine and Justice Gregory Smith) heard the appeal, which they allowed on 23 June 2014 in a single judgment given by Justice Narine.

The Law Lords agreed with the Court of Appeal and dismissed the appeal of the policyholders.

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