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Directors’ Explanation Of Standard’s Failure

(New Zealand Press Association) ,

DUNEDIN, April 28. Further details of the events leading up to the failure of the Standard Insurance Company are given in a long circular letter to shareholders today from the chairman of directors (Mr Edgar C. Hazlett).

The circular letter takes the form of a report to shareholders which will be presented at the extraordinary general meeting of the company to be held in Dunedin on May 8. Mr Hazlett says the disaster which overtook the company was caused by one man—or possibly two men.

Explaining the directors’ reason for lodging a petition with the Court in Sydney, Mr Hazlett said they were concerned lest the company’s interests be prejudiced by the filing of the petition by a Sydney creditor of the company.

called capital or to have issued a debenture over the undertaking would immediately have made the public aware of the difficulties of the company and further diminished its business and goodwill. There was little alternative but to realise further assets and the Sydney building was sold to the New Zealand Insurance company for £A505.000. “Even with these resources and the overdraft facilities, it was becoming increasingly obvious that the company's assets would not be sufficient to meet all claims unless substantial recoveries were made from the H. and S. group. “Negotiations were later

The directors’ report is as follows:—‘lncredible as it may seem, the present disaster has been brought upon the company by the acts of one. possibly two, men.” The report says one of these men in December, 1958, received, and acknowledged in writing, a direction from the company’s head office that in future large financial bonds were not to be issued without approval from head office. Again, in February. 1960. he received. and similarly acknowledged, an instruction that the directors had resolved that no further mortgage or finance bonds would be issued.

The report says that in direct defiance of these instructions. and for motives not yet clear to the board, this employee who held power of attorney for the company continued to issue bonds in the company’s name, taking elaborate precautions to conceal his actions from members of the staff of the branch concerned, with one exception.

The report says of the Sydney manager that there is no indication of his having received any direct monetary benefit or having misappropriated any funds. The report continues:— “It is difficult to ascribe a motive, but it would appear that he took this step in the first case to cover a relatively minor error of judgment which, if admitted to head office, would have easily and readily been absorbed as a normal loss.” Visit to Sydney "The circumstances which resulted in the visit of the assistant general manager and the auditor to Sydney were previously explained to shareholders,” says the report.

“Their investigations at first concerned some performance of contract bonds which had originally been issued to a contracting organisation in the usual course of the Standard's insurance business.

"Irregularities were discovered and the investigations finally uncovered that certain fully reinsured policies had been wrongfully replaced by unauthorised and unrecorded bonds which were not reinsured in the normal manner.

“A far more comprehensive investigation was then immediately commenced and an exhaustive search made of the company’s strongroom, safe deposits and premises. Secreted in one of the unused staff lockers in the staff locker and recreation rooms were found carbon copies of unauthorised and unrecorded finance guarantee bonds aggregating approximately £A2 million.”

The report says that immediately one officer of the company was visited at his home, all his authority was cancelled, his keys were taken, and he was suspended from duty. Further investigation indicated that a second officer was involved, and he. too. was suspended. "The carbon copies of the bonds were the only existing and somewhat incomplete record of the bonds issued, for in practically every case, no proposal for insurance had been completed, and the usual counter-indemnities against the principal debtor had not been executed. No Premiums Charged “Above all, no premiums had been charged or received nor any entries made in the books and records, and because of this suppression no re-insurances could possibly be arranged. It was apparent that bond forms had been privately printed and that all records had been deliberately suppressed. “It was found htat many of these unauthorised and suppressed bonds had been issued in middle and late 1959. They were suppressed apparently because permission from head office to issue was not applied for. and in any case would not have been given, even though at that time full facilities for the very satisfactory reinsurance were available. “One matter should be clearly understood, and that is the practice of re-insur-ance. Normally, any insurance company when it has accepted a substantial risk, passes on the major part of risk to other companies, chaining for itself usually only a limited proportion of the risk ”

The report says this was done by the Standard as normal practice when it issued guarantee bonds, but it was obvious that when the officer concerned concealed the issue of bonds from his own head office, he also was unable to re-insure without disclosing his disobedience of his ipstructiors. Fall Liability

“Consequently. Standard was liable on these bonds for the full amount, and not as would be normal, only on a part of them. This has been the main factor in raising the company's liability to such fantastic amounts. “In February, 1960, because

of the wishes of the reinsurers to withdraw from finance and guarantee bonds in Australia. instructions were issued to all the company's branch executives in that country, that no further finance or solvency bonds were to be issued. This instruction did not apply to performance of contract, fidelity, Customs, land agent's and similar type of bonds, for which adequate re-insurance facilities were still available.”

The report says the power of attorney held by the Sydney manager was still required for these particular bond insurances, but he continued to issue and to suppress finance guarantee bonds, principally in respect of amounts borrowed by the major units of the H. and S. group. H. and S. Group “Immediately the irregularities were discovered the advice of the company’s Sydney solicitors, who in turn engaged eminent Queen’s counsel, was taken by the investigators. Negotiations were immediately commenced with the representatives of the H. and S. group with a view to regularising the position as to premiums, counterindemnities, and to obtain adequate collateral security. “A most urgent matter was to ensure that the H. and S. group could provide sufficient liquid resources to repay the loans guaranteed by the standard as they became due. The H. and S. group were at that time on the market to obtain £A500.000 of secured debenture capital, but as a result of the Treasury restrictions on the Australian economy, this issue was unsuccessful.

“An interim investigation was made of the assets and liabilities of the group, and while these disclosed substantial short-term creditors and some heavy losses, particularly in connexion with the International Shipping and Export Agency Pty., Ltd., it also disclosed substantial assets in land, buildings, business, and other ventures.

“While the position, because of tile extent of the subsidiary and associated companies of the H. and S group, was most involved, it was originally assessed that, given time, and an orderly realisation of some of the major assets, the group could, from their own resources and by re-arranging finance, redeem many of the loans guaranteed by the Standard. “It was expected that some claims would be made on the Standard, but it was not considered that they would reach the substantial figures which have now had to be met. Accordingly, arrangements were made for temporary but substantial overdraft facilities with the company’s bankers in Sydney.

“The effect of the financial and economic'restrictions imposed by the Australian Government at that particular time, however, was much more serious than anticipated. and resulted in a drying up of normal sources of funds and also immediate calls for repayment of many of the loans. Repudiation Considered "The company’s representatives and the board considered repudiating the finance bonds, but legal advice did not support such action in the circumstances then existing, and, in addition. the directors well realised the serious implications of any repudiation by an insurance company of the act of any of its servants, whether authorised or not.

"An insurance company, like a bank, requires a high reputation for integrity for its customers pay their premiums first and rely on the integrity, assets, and reputation of the company to pay at a later date any claim that may arise under a policy. Quite apart from the moral issue, the directors knew that to repudiate on any policy would immediately irreparably damage the company’s reputation, and its business, particularly in Australia. would quickly flow awsy.’’

Further overdraft facilities were arranged, the report says, and a merger approach made early in February to a major insurance company. These negotiations failed. Other approaches were made to several substantial Australian and overseas insurance companies, and an approach was also made to the New Zealand Government, to whom the implications of a possible insurance company failure on the New Zealand financial structure where emphasised. All the efforts were without success.

“During all these negotiations substantial claims were still being submitted, and it was becoming apparent that because of the Australian economy and because of rumour, as well as the inability of the H. and S group to regain some measure of liquidity. Standard could not meet further claims without realising or pledging more of its assets or calling up ot the uncalled capital.

“To have called up the un-

commenced with the National Insurance Company of New Zealand to re-insure the Standard’s net unexpired liability and this arrangement enabled the Standard's insurance business to be protected short term, but the, attendant complications, particularly with the threat of an Australian bondholder forcing Standard into liquidation, were so difficult that it was finally arranged with the National that they would purchase the goodwill of Standard’s insurance business.

“Your directors most emphatically repeat that had it not been for the maintenance of the Standard’s insurance confidence, and the action of the National in reinsuring the Standard's normal policies, there would not have been any goodwill left to sell, for by that time confidence, particularly in Sydney, was being lost. Some of the large brokerage firms were cancelling their Standard Insurance policies and insuring elsewhere. “One other insurance company was undertaking a comprehensive drive to undermine the Standard’s reputation, to contact its agents and clients and take away its insurances from the Standard, and to offer employment to some members of its staff.

“Your directors wish to acknowledge publicly . the debt which the Standard owes to the National Company in their spontaneous support of the Standard in its time of great distress. Thanks to the action of the National, the goodwill of the Standard’s insurance business was saved and this must be to the ultimate advantage of shareholders.

“In addition, the policyholders have been protected on claims arising after 4 p.m. on March 31, 1961, and protection of employment has been afforded to the Standard’s loyal and efficient staff. “Arrangements had to be made to give the National security to protect them in the unexpired premiums which must be paid over to them on the takeover of the Standard’s insurance portfolio. The payment for the goodwill of the Standard is dependent upon the exact amount of business which can be successfully transferred to the National, and will not be known until after March 31, 1962. The cooperation of the National Insurance board of directors and their management in the urgent and extensive negotiations has been splendid. Shareholders and policyholders in the Standard Are therefore urged to show their loyalty by retaining their insurances with the National, where it will be handled by the Standard division and the Standard staff. Reasons For Petition

“It is now desired to explain to shareholders the reasons why your directors lodged a petition and made application to the Court for appointment of a provisional liquidator before shareholders had the opportunity of considering the resolution on the agenda of the extraordinary general meeting. “With the abnormal and extensive claims being made in Australia, the Standard’s liauid assets are almost exhausted, though there are still some realisable assets that- are not secured to the National or to our bankers.”

Permanent link to this item
Hononga pūmau ki tēnei tūemi

https://paperspast.natlib.govt.nz/newspapers/CHP19610429.2.75

Bibliographic details
Ngā taipitopito pukapuka

Press, Volume C, Issue 29500, 29 April 1961, Page 9

Word count
Tapeke kupu
2,077

Directors’ Explanation Of Standard’s Failure Press, Volume C, Issue 29500, 29 April 1961, Page 9

Directors’ Explanation Of Standard’s Failure Press, Volume C, Issue 29500, 29 April 1961, Page 9

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