There's at least $7 million missing from the Bermuda Fire & Marine Insurance Co. Ltd. accounts.

The mystery of the missing $7 million came to light in documents submitted in Supreme Court during testimony by John Patterson, the company's former chief accountant and secretary during the 1991 reorganisation.

Under questioning from Clare Montgomery, lawyer for Bermuda Fire's liquidator, Mr. Patterson said he couldn't account for how in the six months from December 30, 1990 Bermuda Fire's liabilities fell by $7 million to about $40 million.

The company's year end accounts for the 1990 year listed the liabilities of the international business as $47 million. Yet in the June 30, 1991 proforma balance sheet used for the reorganisation, the liabilities had dramatically fallen to about $40 million.

In his witness statement Bermuda Fire's auditor Tom Miller stated he couldn't remember how the figure fell by $7 million, the court heard yesterday. Mr.

Miller is a partner at Cooper & Lines which is being sued in the case.

After the reorganisation in September 1991, when BF&M Ltd. was created as a separate company to hold the profitable domestic business, Bermuda Fire was left solely with the runoff international business. The company is stated to have $40 million in liabilities and $52 million in assets. If the $40 million is a mistake which no-one noticed then the company would have been left with a $5 million surplus instead of $12 million as stated on the balance sheet.

The company went into liquidation in 1993 with some $450 million in debt, according to the liquidator.

Ms Montgomery yesterday suggested that there was "no sensible explanation'' for how the liabilities fell by $7 million.

The international liabilities were made up of loss reserves, discounted bad debt reserves, and discounted figures for fees to an agent.

Riddle over missing $7 million Mr. Patterson said he would like to see the supporting documentation to see how the figure fell. Ms Montgomery said the liquidator could find only one piece of documentation which suggested how the figure could have fallen.

She continues questioning Mr. Patterson on the point today.

Earlier in the day Mr. Patterson testified that he understood the purpose of the reorganisation was to give Bermuda Fire a more "modern structure''. He was asked about Mr. Miller's document which laid out a five part plan in which the business was to be split.

Mr. Miller then concluded with a paragraph titled "The Necessity of `Going all the Way''' in which he advised that the profitable local business would be lost under the mounting losses from the international business unless what became BF&M Ltd. was created.

He advised that "assuming the worse'', the company "will not be able to withstand the ever increasing losses'' and that "Unless all of the subsidiaries are stripped out they will have to liquidate'' with Bermuda Fire.

Ms Montgomery asked whether the memo represented the rationale for the reorganisation.

"It is not my understanding of the reorganisation,'' Mr. Patterson said. "It was to create separate accounting centres...I have never been privy to the word stripping. It was never the intent.'' He was also questioned about a September 5 meeting he had with Conyers Dill & Pearman partner John Collis in which a memo refers to him being concerned that if too many assets were taken out of Bermuda Fire "then the creditors might cause trouble''.

"I have trouble interpreting what Mr. Collis meant here,'' Mr. Patterson said.

Ms Montgomery asked whether such a concern had arisen.

"No. I think it was down to the nuts and bolts at this time,'' he said.

He was asked why Bermuda Fire shareholders were given a share dividend in BF&M after the reorganisation.

He replied that it was to give them a direct ownership in BF&M.

Ms Montgomery suggested that the shareholders would still have held an interest in BF&M since it was 100 percent owned by Bermuda Fire and that there wasn't a need for the dividend.

She suggested that the purpose of the dividend was to insure that if Bermuda Fire went into liquidation the rest of the business wouldn't be affected.

Mr. Patterson said such a scenario was discussed at finance committee meetings.

Ms Montgomery asked whether the word "liquidation'' had been used.

"It was what they discussed as a worse case scenario -- a what if,'' Mr.

Patterson replied.

"They appreciated that it might come to pass?'' she asked.

"They all took that into consideration,'' he replied. Mr. Patterson also testified that he was instructed to amend the minutes of a June 24 finance committee meeting to take out words by director Donald Lines referring to the international business having "potential for claims in excess of its capacity to meet the same''.

The words were taken out and the altered minutes were subsequently approved.

Mr. Patterson said chairman Charles Collis had instructed him to take out the words. The minutes had been drafted by a Conyers Dill & Pearman lawyer.

"I don't recall Mr. Lines as making that emphatic statement,'' Mr. Patterson said.

In the draft minutes by the lawyer Mr. Lines is arguing against the creation of a holding company to hold separate subsidiaries for the international and domestic business. Mr. Lines, who was chief executive of the Bank of Bermuda at the time, was arguing for a separation as eventually completed in 1991.

The lawyer's draft minutes recorded Mr. Lines as stating the "banks were likely to be reluctant to underwrite a share issue by Holdco where Holdco had a subsidiary with the potential for claims in excess of its capacity to meet the same''.

Mr. Montgomery asked him what he believed was Mr. Lines' view about what was wrong about Holdco.

"He was completely against it and the others were for it,'' Mr. Patterson said. "They decided to go his way.'' Clare Montgomery