Northstar Financial Services (Bermuda) Ltd

• Jurisdiction: Bermuda
• Judge: Hargun CJ
• Judgment Date: 28 July 2023
• Docket Number: COMPANIES (WINDING-UP)
• Court: Supreme Court (Bermuda)

In the Matter of Northstar Financial Services (Bermuda) Ltd.

And in the Matter of Omnia Ltd.

And in the Matter of the Companies Act 1981

And in the Matter of the Insurance Act 1978

And in the Matter of the Investment Business Act 2003

And in the Matter of the Segregated Accounts Companies Act 2000

And in the Matter of the Private Acts Listed at Appendix 1

[2023] SC (Bda) 57 Civ. 28 July 2023

Before:

The Hon. Chief Justice Hargun

COMPANIES (WINDING-UP)

2020: Nos. 304 & 305

In The Supreme Court of Bermuda

COMMERCIAL JURISDICTION

Appearances:

Mr Michael Todd KC of Erskine Chambers and Ms Christina Herrero of Marshall Diel & Myers Limited for the Joint Provisional Liquidators

Mr Edward Davies KC of Erskine Chambers and Ms Jennifer A Haworth of MJM Limited for the Variable Representatives

Mr Christopher Tidmarsh KC of 5 Stone Buildings and Mr Nicholas Miles of Kennedys Chudleigh Limited for the Fixed Representative

Mr Matthew Collings KC of Maitland Chambers and Mr John Blackwood of Chancery Legal for the General Representative

The requirements of the Segregated Accounts Companies Act 2000 for the establishment of a “segregated account”; whether a segregated account established by the mere keeping of records; what must those records say or identify in order to establish a segregated account; whether commingling of funds precludes the operation of segregation; the requirements for “linkage” for assets, rights, contributions, liabilities and obligations to an account; whether principles of tracing apply in determining whether an asset is linked to a segregated account; the proper approach to the construction of the SAC Act; determining the legislative intent underpinning the SAC Act; the extent that assets linked or allocated to a segregated account are to be held for the benefit of the relevant segregated account having regard to the requirements of the SAC Act; to what extent creditors in respect of any segregated accounts have claims against the general assets of the company under the SAC Act

Hargun CJ

Introduction

1 Over a period of five days in April 2023 the Court heard an application on behalf of Rachelle Ann Frisby and John Johnston, the Joint Provisional Liquidators (“ JPLs”) of both Northstar Financial Services (Bermuda) Ltd. (in liquidation) (“ Northstar”) and Omnia Ltd. (in liquidation) (“ Omnia”), made by summons dated 1 June 2021, as amended on 26 July 2021, seeking determination of the following issues (“ the Segregation Issues”), such determination being necessary for this Court to give directions to the JPLs:

• (a) To what extent, if any, have Northstar and Omnia (“ the Company or Companies”) established segregated or separate accounts in respect of investments made in it or policies 1 issued by it (“ the Segregated Accounts”)?

• (b) To what extent, if any, are the assets of Northstar and Omnia to be held exclusively for the benefit of any such Segregated Accounts?

• (c) To what extent, if any, do claimants in respect of any Segregated Accounts have claims against the general assets of Northstar and Omnia?

2 By Order dated 26 August 2021 the Court made the following representations order in relation to the hearing of the Segregation Issues:

• (a) an investor or Policyholder 2 in one of the Companies holding only variable investments would represent the interests of investors or Policyholders holding variable investments (“ the Variable Class”);

• (b) an investor or Policyholder in one of the Companies holding only fixed investments would represent the interests of investors or Policyholders holding fixed and indexed investments (“ the Fixed Class”); and

• (c) a creditor of one of the Companies not holding any such investments or Policies would represent the interests of creditors not holding fixed, indexed or variable investments (“ the General Class”).

3 No suitable representative for the General Class having been identified, on 13 December 2021, the Court granted an order appointing John Blackwood of Chancery Legal as legal representative of the General Class.

The Background

4 The background to these applications is uncontroversial and is helpfully set out in the written submissions filed on behalf of the JPLs (summarising the Northstar Report dated 1 June 2022 (“ the Northstar Report”) and the Omnia Report dated 6 September 2022 (“ the Omnia Report”) produced pursuant to paragraph 4 of the Orders dated 26 August 2021).

Northstar

5 Northstar was incorporated in Bermuda on 18 February 1998 under the name “ Nationwide Financial Services (Bermuda) Ltd” and has since undergone several name changes and amalgamations with other corporate entities. The Company amalgamated with Metlife International Insurance Ltd (“ Metlife”) on 1 June 2007 and NFSB Investment Ltd on 14 November 2012. In August 2018, BMX Bermuda Holdings Ltd (“ BMX”) (an entity ultimately beneficially controlled by Mr Greg Lindberg (“Mr Lindberg”)) acquired the entire issued share capital of the Company. Northstar was registered under its current name on 6 April 2006.

6 The Policies issued by Northstar (and those assumed by Northstar following the Metlife amalgamation) were variously subject to three different Private Acts: the Nationwide Financial Services (Bermuda) Ltd. Act 1998 (“ the Nationwide Act”), the Citicorp International Insurance Company Ltd. Act 1999 (“ the Citicorp Act”), and the Northstar Act 3. On 4 April 2008, Northstar was registered as a segregated accounts company under the Segregated Accounts Companies Act 2000 (“ the SAC Act”).

7 Following the acquisition of Northstar by BMX in August 2018, a significant proportion of the liquid fixed income securities owned by Northstar were replaced with illiquid debt instruments and equity issued by entities affiliated with Mr Lindberg. That is a matter of ongoing investigation and the principal subject of the complaint issued by the JPLs on 4 January 2023 in the United States Bankruptcy Court for the Southern District of New York in respect of historical alleged wrongdoing in relation to the affairs of the Companies by Mr Lindberg, his associates and corporate entities affiliated with him (“ the US Complaint”).

8 As a result of the amalgamations which occurred over time, Northstar traditionally viewed its business through three different “ blocks”: the Nationwide Business, the Metlife Business, and the Northstar Business.

Omnia

9 Omnia was incorporated in Bermuda on 15 May 2000 under the name “ Sage Life (Bermuda) Ltd” and has since undergone several changes of name. Between 2003 and 2016, Omnia formed part of the Old Mutual group of companies.

10 On 30 June 2017, Omnia was acquired by PBX. As in the case of Northstar, following this acquisition a significant proportion of the investment-grade assets held by Omnia were replaced with illiquid debt instruments and equity issued by entities affiliated with Mr Lindberg. Mr Lindberg and his affiliated entities' conduct in relation to Omnia is also a matter of ongoing investigation and is addressed in the US Complaint.

11 Between 2000 and 2009 Omnia sold various Policies under fixed and variable annuity contracts, primarily under Products 4 known as the Universal Investment Plan (“ UIP”),

Guaranteed Rate Plan (“ GRP”) and Guaranteed Index Plan (“ GIP”). Omnia was never registered under the SAC Act. Instead, it purported to establish segregated accounts under two Private Acts. Policies were initially issued and administered under the Sage Life (Bermuda) Ltd. (Segregated Accounts) Act 1999 (“ the Sage Act”), and latterly (from 4 April 2004) under the Omnia (Bermuda) Ltd. (Segregated Accounts) Consolidation and Amendment Act 2004 (“ the Omnia Act”). Except for the SWAP Product held by Liffey, the JPLs do not currently have access to any Policy contract forms in respect of Policies issued under the Sage Act

Northstar Business

12 Northstar's business involved the sale and management of investment and annuity products under three broad categories of Business:

• (a) Investment business written under the Northstar Act (“ Northstar Business”). The Northstar Business postdates Northstar's registration under the SAC Act.

• (b) Long-term insurance business issued prior to Northstar's registration under the SAC Act pursuant to the Nationwide Act (“ Nationwide Business”).

• (c) Insurance business written by Metlife under the Citicorp Act (“ Metlife Business”). The Metlife Business included segregated and non-segregated products and predates Northstar's registration under the SAC Act.

13 Northstar issued 104 different iterations of Products under 33 broad categories of Product. For example, a Product with the designation “ Global Advantage” had different iterations (for example, “ Global Advantage I” and “ Global Advantage II”) with each iteration having variations in the form of underlying contract issued to Policyholders.

14 Northstar's marketing literature divided the Products it sold into three categories: (i) fixed rate investment plans; (ii) variable investment plans; and (iii) indexed investment plans. Some of the Products sold by Northstar provided for participation in only one kind of investment (for example, only “ fixed” investment) while others permitted investment of funds in different kinds of investment (for example, allocating some funds to “ fixed” investment and some to “ variable” investment).

15 Variable investment plans enabled Policyholders to invest in a range of different mutual fund assets, with the return being “ variable” in the sense that return would depend on the performance of the underlying mutual fund investment.

16 Fixed investment plans were those that sought to guarantee a particular defined return to Policyholders over a set period. The Policyholder would provide funds to Northstar, and Northstar would invest those funds, with a view to using the proceeds of that investment to pay Policyholders a guaranteed...