Bermuda Fire & Marine Co. Ltd. auditor Cooper & Lines did not believe that the company was insolvent or that the 1991 reorganisation would harm international creditors, a court heard yesterday.

Ian Croxford, lawyer for Cooper & Lines, yesterday denied allegations that the firm was negligent by failing to properly make provisions for millions of dollars in potential claims from Bermuda Fire's international business.

Bermuda Fire's liquidator Ernst & Young is suing Cooper & Lines, among others, for the firm's involvement in the creation of BF&M Ltd. as a separate company to hold the company's domestic business.

Cooper & Lines was Bermuda Fire's auditors and produced a proforma balance sheet which showed the company would have a $12 million surplus after stock in BF&M were given to shareholders as a special dividend.

David Lines and Tom Miller of Cooper & Lines were also involved in meetings of the finance committee leading up to the 1991 reorganisation and share dividend. Mr. Miller also wrote a memorandum on the "necessity to go all the way'' in the reorganisation by creating a separate company to hold Bermuda Fire's domestic business.

The liquidator claims Bermuda Fire's 1990 annual financial report and the proforma balance sheet were incorrect and Bermuda Fire was actually insolvent at the time.

Mr. Croxford denied the claims and said Cooper & Lines provided all of the necessary information for the board of directors to reach a decision about the share dividend.

"At the material times, my client believed that BFMIC (Bermuda Fire) was not insolvent, that the reorganisation would not prejudice creditors, and that it was a perfectly proper transaction,'' Mr. Croxford told Supreme Court Puisne Judge Vincent Meerabux. "What is more, my Lord, those beliefs or that belief were, as we say, in the light of the instructions given to Coopers, and the work it had carried out, they were perfectly reasonable beliefs to hold.'' Allegations Cooper & Lines should have made liability provisions for pollution claims and bad debt were incorrect, Mr. Croxford claimed. He argued that Bermuda Fire got into trouble in 1993 because reinsurers stopped paying claims on business written through Weavers Underwriters, the London managing agency contracted by the company.

The liquidator will have to show Bermuda Fire was insolvent in 1991 and so far no evidence has been advanced, he said. Cooper & Lines prepared all financial statements -- in particular the proforma balance sheet -- according to Canadian standards of generally accepted accounting principles (GAAP), he said.

Under Canadian accounting principles Bermuda Fire was not required to make provisions for potential future pollution claims or for bad debt on such liabilities he said.

Estimates for such provisions were not possible at the time. Bermuda Fire's board also believed the company was protected from pollution claims by exclusion clauses under policies written in the London market, he said.

While the clauses still left Bermuda Fire open to accidental pollution, the problems hitting the insurance market at the time was over sites that had been polluted over long periods of time.

"Canadian GAAP did not require or indeed did not permit the making of provision for such contingencies,'' Mr. Croxford claimed. "This remained the position for the proforma financial statements.'' Mr. Croxford will also argue that Cooper & Lines did not provide business advice to Bermuda Fire. The firm provided accountancy information and advice.

While the board relied on financial statements provided by Cooper & Lines, the firm was instructed not to carry out a valuation exercise for Bermuda Fire.

Insolvency claims denied by auditor Bermuda Fire's board of directors had all the relevant figures needed to make a decision on splitting Bermuda Fire in two and making the share dividend.

"The process which the parties went through, and the decision which they came to, that is those on the board of BFMIC, in particular deciding to distribute the dividend in specie, was a decision they could properly have come to.'' Allegations by the liquidator that Cooper & Lines should have carried out further investigations were therefore wrong, he claimed.

"The board of BFMIC decided to hive off its profitable domestic business,'' Mr. Croxford said. "We say that was a business decision taken by BFMIC and not by Cooper & Lines. Cooper & Lines was not engaged by BFMIC to take that business decision, or indeed to give business advice, and it did not do so.'' Mr. Croxford continues his opening argument today.

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