CBL Insurance Limited (in liquidation) (CBLI) generated more than its share of litigation last year. 2018 marked the first occasion on which the High Court has ruled on an application by the Reserve Bank of New Zealand (Reserve Bank) for the liquidation of an insurer, under the Insurance (Prudential Supervision) Act 2010 (Act).

The Reserve Bank harboured concerns about the adequacy of CBLI’s reserves, which were borne out by investigation, leading to the application for liquidation.

CBLI was placed into interim liquidation in February 2018, the High Court having been satisfied that the threshold for appointment of interim liquidators was met. Section 151 of the Act provides that the High Court can appoint liquidators for a licensed insurance company if satisfied that:

  • the insurer is unable to pay its debts; or
  • the insurer is failing to maintain a solvency margin; or
  • the insurer has persistently or seriously failed to comply with any direction imposed by or under the Act or the Insurance (Prudential Supervision) Regulations 2010; or
  • it is just and equitable that the insurer be put into liquidation.

The situation soon raised questions as to scope of the powers of interim liquidators. In Re CBL Insurance Limited (in liquidation) [2018] NZHC 2547, the interim liquidators were seeking to manage negotiate the troubled waters with CIBL’s biggest creditor by entering into a commutation agreement. They applied under section 284 of the Companies Act 1993 for directions that they had the power to do so.

The High Court held that although the direction sought was available under section 284 generally, the proposed arrangement was outside the powers of an interim liquidator. Interim liquidators could only use their powers in order to maintain the value of assets. Here, although the proposed transaction would have annulled CBLI’s liability to a major creditor, this would have taken place in exchange for various cash and non-cash assets.

In Reserve Bank of New Zealand v CBL Insurance Limited [2018] NZHC 2969, the Reserve Bank pressed ahead for liquidation, with all opposition eventually withdrawn. After a full hearing the High Court delivered its detailed analysis and judgment: CBLI had failed badly to comply with the minimum solvency margin under the Act, and had also failed to comply with a Reserve Bank direction.

Those issues would be enough in themselves to justify an order for liquidation, but the High Court also found that it would be just an equitable to order liquidation, taking into account the company’s balance sheets and evidence of a lack of integrity. There was a significant deficit in CBLI’s asset position and certain conduct of its senior management had been questionable. Accordingly, CBLI was placed into liquidation.