Crimes Act 1961 – Insurance (Prudential) Supervision Act 2010 – Reserve Bank of New Zealand – CBL Insurance – criminal fraud – beyond reasonable doubt – judge-alone trial – obtaining by deception – false accounting – theft in a special relationship

R v Harris & Mulholland [2023] NZHC 2635 per Robinson J

CBL Insurance (CBLI) was one of the larger insurance companies in New Zealand at the time of its collapse in November 2018. Incorporated in New Zealand in the early 1970s, CBLI started providing insurance cover for builders’ warranties but by the time of its lilquidation, only a sliver of its business (1%) was based locally. Its parent was CBL Corporation (CBL Corp), a listed company on the New Zealand and Australian stock exchanges. When share trading was halted in early 2018, CBL Corp was worth almost $750 million.

Much of CBLI’s overseas business was promoted by two managing general agents, who worked with brokers to source and write insurance business and acted on behalf of “ceding” insurers, which give up a portion or all the insurance risk to another insurer. Of its overseas business, CBLI reinsured three European cedant insurers of the French construction industry: the Gibraltar-domiciled Elite Insurance, Alpha Insurance (domiciled in Denmark), and Ireland’s CBL Insurance Europe DAC. In 2017, European regulators started investigating the reserving levels of CBL Corp’s ceding insurers and an investigation began in New Zealand.

Given its New Zealand operations, CBLI was a licensed insurer and subject to the oversight of the Reserve Bank of New Zealand (RBNZ), the “home country” regulator and prudential supervisor of the insurance sector. Under the Insurance (Prudential) Supervision Act 2010, CBLI had to comply with prudential solvency standards and hold sufficient reserves of capital to absorb losses before policyholders were affected. Concerned about imprudent management and breach of regulatory directions, New Zealand’s central bank applied in February 2018 to put CBLI into interim liquidation. Full liquidation followed in November 2018. CBL Corp collapsed in May 2019.

At the time, Peter Alan Harris was CBLI chief executive and managing director while Carden James Mulholland served as chief financial officer. Following an investigation by the Serious Fraud Office (SFO), the pair were charged with fraud under the Crimes Act 1961.

Specifically, Harris faced five counts of theft by a person in a special relationship, two counts of obtaining by deception and one count of false accounting (charges one to eight). Mulholland was charged as a secondary party to one count of theft by special relationship (charge two), and as a co-defendant on one count of obtaining by deception and one count of false accounting (charges seven and eight).

The eight charges could be split into two broad groups: charges one to five alleged theft in special relationship (Crimes Act, s 220), relating to five statutory directions the RBNZ issued to CBLI and CBL Corp under the IPSA. Charges six to eight alleged obtaining by deception (ss 240 and 242 of the Crimes Act) and false accounting (s 260 of the Crimes Act). These charges concerned a payment known as the “Samoa transaction”. On 15 October 2015, CBLI deposited €12.5 million with the National Bank of Samoa (NBoS). On the same day, the bank lent the sum to Federal Pacific Group (Singapore) (FPGS). Also on the same day, FPGS lent the money to Alpha (which CBLI had reinsured). CBLI, together with former CBLI director Alistair Hutchison, personally guaranteed the arrangement.

In early 2020, Harris and Mulholland pleaded not guilty to the SFO’s case, which was due for trial in September 2021. However, it was rescheduled to April 2023 after Hutchison, who was facing a separate trial on one count of obtaining by deception, died.

After a nearly two-month trial, Justice Michael Robinson found Harris and Mulholland not guilty on all charges. The SFO has since sought leave to appeal two of those not-guilty verdicts. The pair (and Hutchison’s estate) also face charges under the Financial Markets Conduct Act 2013. Set for trial in April 2024, the case relates to documentation supporting CBL Corp’s initial public offer in 2015.

Regulatory framework

Enacted in 2010, the IPSA comprehensively outlines a framework for the prudential regulation and supervision of New Zealand insurance companies. They must be licensed and comply with the terms of their licences and with the Act. As part of its supervision function, the RBNZ may require a licensed insurer to supply information about any matters relating to its business, operation or management – including in times of distress. In such circumstances, the central bank may request an investigation into the insurer’s affairs, direct the company to prepare a recovery plan and, in certain situations, restrict its actions. The RBNZ must meet the following criteria, under pt 4, subpt 2 of the IPSA, to make a valid written direction:

• the central bank must believe one of the paragraphs in s 143(1) applies;
• the bank has reasonable grounds to believe so;
• the direction states the grounds upon which it is being given; and
• the substance of the direction falls within the prescribed scope in s 144, which sets out the ways in which a licensed insurer may be required to act or not act. The direction must not prevent renewals of insurance contracts originally entered into before the direction was given.

The RBNZ is empowered, by s 55, to issue solvency standards. Among other things, these may prescribe the minimum amount of capital a licensed insurer must hold and maintain, the methods for determining a solvency margin and its maintenance, and the methods for valuing an insurer’s assets or liabilities.

An insurer’s solvency margin is the difference between its actual and minimum solvency capital. Often expressed as a solvency ratio, the margin is calculated by dividing the actual solvency capital by the minimum quantity. Calculations made under solvency standards essentially categorise an insurer’s assets and apply a risk charge to their absolute value. The more easily or reliably an asset might become available to pay claims, the lower the risk charge would be. Unencumbered cash, for example, had a realisability risk of 0.5% while amounts loaned to an insurer’s directors or subject to change had a risk of 100%.

CBLI’s licence conditions required it maintain a solvency margin of $0, or a solvency ratio of 100%. In other words, CBLI had to maintain realisable assets of twice the amount determined as the level of solvency under the relevant solvency standard. This margin was later increased to 170% as per an RBNZ direction.

The Samoa transaction – charge six

The Crown argued the €12.5m deposited in the Samoa transaction constituted collateral for the NBoS/FPGS loan. As such, a risk charge of 100% should have applied. However, due to Harris and Mulholland’s deceptive omission, the deposit was treated as a cash deposit, with a risk charge of 15% and then 0.5%. Had the correct risk charge, based on the circular character of the actual transactions, been applied to the term deposit, CBLI’s solvency margin would’ve fallen under the 100% requirement as a condition of its licence.

On the sixth charge of obtaining benefit by deception, the Crown had to prove beyond reasonable doubt that Harris directly or indirectly obtained the €12.5m that FPGS paid to Alpha, and that Harris used a fraudulent stratagem to obtain the benefit, in the knowledge he was acting dishonestly.

The court wasn’t convinced. Willing commercial parties lawfully entered into the transactions, which were fully documented by NBoS’ solicitors, the judge held. “There was nothing inherently dishonest about the transactions. The documents were intended to take effect according to their terms. There is no suggestion they were a sham,” said Robinson J, who also doubted the 100% risk charge. Evidence suggested the risk rating might have been 40%, while CBLI’s appointed actuaries testified the appropriate charge, in their mind, was 15%.

“Even if Mr Harris’ intention was for CBLI to arrange its affairs in a way that was most efficient in terms of calculating its solvency margin, I am not satisfied beyond reasonable doubt that in doing so he was acting fraudulently, that is, with knowledge he was acting in breach of his legal obligations.” Charge six was dismissed on this basis, although the judge found, obiter, that he wasn’t sure Harris used the alleged strategy to intentionally deceive the RBNZ or that Harris believed the transactions were unlawful. The judge didn’t address whether the stratagem was a material cause of a benefit being obtained.

Charge seven

The co-defendants were alleged to have deceptively omitted to disclose that the term deposit and the surety bond were loan collateral. The benefit they were said to have obtained was the ability for CBLI to claim a lower risk charge under the solvency standard.

Robinson J wasn’t satisfied, though. The form of undertaking gave NBoS contractual rights against CBLI, including requiring the insurance company to pay any part of the amount owing to it by FPGS if it defaulted on the €12.5m loan. However, the surety bond – described by Robinson J as “something of a generic boiler-plate clause” – made no reference to security over the term deposit or set-off rights against it. “The contractual documentation does not appear to give NBoS a security interest in (or charge over) the deposit, or any set-off rights against it. This appears to be by design. Contractual provisions that might have provided NBoS with such rights were removed by NBoS’s solicitors during the drafting process,” the judge said. Harris and Mulholland were found not guilty.

Charge eight

The pair were charged with false accounting under s 260(b) of the Crimes Act. With an intent to deceive, the men were alleged to have left out of the 2014 CBLI annual report that the term deposit and surety bond were loan collateral. For similar reasons as under charge seven, the judge wasn’t satisfied beyond reasonable doubt the eighth charge was made out.

“The evidence also left me unsure as to whether (and if so, how) deposits would have been reported differently in the CBLI Group Annual Report if it was collateral for the NBoS/FPGS loan, as alleged,” Robinson J said. “For these reasons, I find both Mr Harris and Mr Mulholland not guilty of charge 8.”

RBNZ directions – charge one

On the first five charges, the court found not one of the directions the RBNZ issued to CBLI, and on which the insurer allegedly breached, was lawful.

Breaching IPSA directions is a criminal offence, of which officers or employees of a licensed insurer can be jailed for up to three months, be fined up to $200,000, or both. However, the SFO charged Harris (and Mulholland) with theft in a special relationship under s 220 of the Crimes Act, for which seven years’ imprisonment is the maximum penalty.

Section 220 requires the Crown to prove, beyond reasonable doubt, the accused has control of property and holds it in circumstances that required they deal with it or any resultant proceeds in accordance with the requirements of another person. Moreover, the accused know about these circumstances and still intentionally deals with the property or resultant proceeds in breach of them (as per R v Douglas [2012] NZHC 1746).

A preliminary question for Robinson J was whether s 143 directions were “requirements” under s 220. Harris argued, as a “complete answer” to the RBNZ directions charges, that non-compliance with a direction affecting CBLI’s property couldn’t amount to theft. He reasoned the RBNZ didn’t have any contractual or other rights over CBLI’s property and the regulator and the company weren’t in a special relationship. The Crown argued the directions were “requirements”, arising from the RBNZ’s statutory power to impose directions and conditions on an insurer’s licence.

The judge accepted the Crown’s position. CBLI couldn’t carry on business without a licence from the RBNZ; it would otherwise have been an offence to do so and could result in the licence being cancelled. While the IPSA didn’t explicitly insert obligations into CBLI’s contracts of insurance with policyholders or cedants, the obligation to comply with a s 143 direction was essential to the contracts from which CBLI received its funds, Robinson J said. “This is not to say that all s 143 directions will be ‘requirements’ for the purposes of s 220. Whether any particular s 143 direction amounts to a s 220 requirement will depend on the precise terms of the direction and the reasons for which it was imposed.”

Charges four and five

Starting with the earliest direction, issued on 25 June 2017, the High Court analysed charges four and five. The RBNZ’s first direction was issued on the basis that CBLI might be doing business imprudently and required the company to refrain from taking steps that would see it increase its insurance risk. Charges four and five concerned actions CBLI took after RBNZ issued the directions, in which it executed changes to agreements that were, however, entered into before the directions were issued.

Justice Robinson had little difficulty finding CBLI’s CEO and managing director had control over the money used in the actions that the Crown alleged constituted the offence. But that control had to be subject to RBNZ requirements under the IPSA. This question depended on whether the direction was validly issued.

Evidence suggested the RBNZ was concerned CBLI might have been “under-reserved” but was seeking to increase its insurance risk in purchasing the remaining Elite shares it didn’t already own. Meetings between CBLI and RBNZ officers occurred at the same time as McGrathNicol started investigating CBLI’s position at the central bank’s request. Until this investigation was completed, RBNZ officers maintained a “holding pattern”.

Harris argued the RBNZ lacked reasonable cause to believe CBLI was being managed imprudently. If the bank needed the investigation to confirm or dispel what was, at the time, only a suspicion, it couldn’t have held reasonable cause to believe. The judge agreed – that CBLI “may not be carrying on its business” prudently was a conclusion amounting to suspicion, insufficient to empower the RBNZ to issue the first direction. “Suspicion and belief may all be degrees of certainty, but they are different degrees of certainty,” Robinson J said. “In the context of IPSA the difference between suspicion and belief is substantive and important.” As the issue of the first direction was invalid, charges four and five fell away.

Charges two and three

Issued on 22 November 2017, the second direction required CBLI to consult with the RBNZ before entering into contracts involving payments or transfers of assets exceeding NZ$5m. A third direction, issued on 29 January 2018, defined “consult” as CBLI giving the central bank enough information to inform its decision on the proposed transaction, receiving the bank’s feedback and taking it into account before entering the transaction.

Harris was alleged to have authorised collateral payments totalling NZ$13.2 to American insurance company United Specialty. In so doing, he intentionally dealt with CBLI’s funds contrary to the requirement to consult. Mulholland was alleged to have intentionally helped his CEO make the payments constituting charge two.

Harris made the same “suspicion, not belief” argument, as well as arguing a requirement to consult wasn’t a s 220 “requirement”. He succeeded with both arguments – in particular, the requirement to consult was essentially procedural in nature, the judge held, rather than a requirement that CBLI deal or not deal with its property in a specific way. As Harris was found not guilty on charge two, Mulholland was found not guilty.

Charge one

Harris allegedly authorised a €25m payment from CBLI to Alpha, an intentional dealing of the insurer’s funds in breach of the RBNZ’s fourth direction of 12 February 2018. The day before, CBLI informed the central bank it had agreed to reduce its reinsurance exposure to the Danish cedant insurer by making a €25m payment in consideration of a credit reduction of €27m of current and future reinsurance claims.

CBLI’s view was that the payment fell within its ordinary course of business. Nevertheless, CBLI wanted to discuss the matter with the central bank before any payment was made. The fourth direction forbade CBLI from making the payment and any other transactions worth NZ$1m without the bank’s prior written permission.

Justice Robinson was satisfied beyond reasonable doubt that Harris intentionally dealt with CBLI’s funds in a way that he knew would breach the fourth direction. However, the judge said that not following the direction wasn’t a theft under the Crimes Act. The direction effectively prohibited CBLI from performing its otherwise lawful and contractual obligations. Even if it were valid, “it is difficult to imagine that when s 220 was enacted in 2003 that Parliament would have intended that the performance of otherwise lawful contractual obligations to third parties should be theft”.

Crucially, the direction was rendered invalid because it didn’t state the grounds upon which it was given – that the RBNZ believed either solvency margins or prudent business were at play. Instead, the bank’s stated concern about equitable treatment between policyholders and creditors – for which RBNZ argued was a plain reference to CBLI’s solvency – was about potential outcomes in the event CBLI collapsed. At the time, liquidation was merely hypothetical; no decision had been made to liquidate. And the bank’s independent investigation hadn’t been completed.

“I am not satisfied that a s 143 direction can amount to a ‘requirement’ for the purposes of s 220 in circumstances where the RBNZ has not strictly complied with the mandatory statutory requirements placed upon it.”

Applicable principles: Crimes Act 1961 – Insurance (Prudential) Supervision Act 2010 – theft by person in special relationship – whether Harris (H) had control over property in circumstances that required he deal with it in accordance with the requirements of the RBNZ – whether H knew of the requirement to deal with the property in accordance with the RBNZ directions and dealt with the property otherwise than in accordance with the directions – obtaining by deception – whether H obtained a pecuniary advantage directly or indirectly – whether H engaged in a fraudulent stratagem with the intent to deceive. Whether the stratagem was a material cause of H obtaining a benefit. Whether H believed that engaging in the stratagem was not lawful – whether H and Mulholland (M) omitted to disclose material where they were obliged to do so – whether H and M’s omission was with the intention to deceive – whether benefit was obtained by that deception – false accounting – whether H and M omitted any material particular from any book or account or other documents with the intent to obtain a benefit by deceit.

Held: Harris was found not guilty on all eight counts; Mulholland not guilty on three charges.

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