factual Background
5 The factual background to Mr Burroughs' disqualification is set out in detail in the decision of the Administrative Appeals Tribunal (constituted by Deputy President Wright) in Burroughs v Australian Prudential Regulation Authority [2007] AATA 1960 (the AAT decision).
6 Mr Burroughs was employed as the Group Reinsurance Manager of FAI General Insurance Ltd (FAI) from November 1996 to April 1999. Although nominally a manager, Mr Burroughs was not regarded as part of the senior management of FAI (AAT at [37]). Mr Burroughs reported directly to Mr Daniel Wilkie, a senior manager and Chief Operating Officer of FAI Insurances Ltd and a director of FAI (at [7]).
7 In early 1999, FAI was taken over by the HIH group of companies (HIH). The subsequent collapse of HIH has been widely documented and was the subject of a Royal Commission at which Mr Burroughs appeared as a witness (at [2]).
8 One of the findings of the Royal Commissioner was that 'the adverse financial and managerial consequences of HIH's takeover of FAI…were a substantial contributing cause and an important circumstance surrounding the collapse of HIH'. In particular, the collapse was caused by the unexpected losses incurred by HIH from the under-provisioning of FAI (at [6]).
9 Mr Burroughs' conduct in relation to a number of reinsurance transactions that are described below contributed to the concealment of the under-provisioning from FAI's auditors.
10 In December 1997, Mr Burroughs was instructed by Mr Wilkie to research the possibility of a "reinsurance solution" to address FAI's claims reserving position. At this time, Mr Burroughs' understanding was that FAI had a shortfall in its reserves in the order of AUD 67 million with regard to two professional indemnity insurance schemes (at [10]).
11 Mr Burroughs consulted with the insurance broker Willis Faber & Dumas Ltd (Willis Faber) and two reinsurance companies, Gerling Global Reinsurance Aus P/L (Gerling) and Hannover Re. In an e-mail to Mr Wilkie about the problems of finding a reinsurance solution, Mr Burroughs expressed a commitment to upholding the professional standards of the insurance industry, stating in an e-mail to Mr Wilkie on 15 January 1998:
I don't want to be part of deals unless they are squeaky clean and raise no problems with auditors, ATO and ISC. (at [11])
12 The AAT accepted the evidence that when Mr Burroughs embarked on the task assigned to him of investigating a "reinsurance solution", he was 'plainly most concerned that anything he prepared should properly be constituted with relevant risk transfer so as to pass muster with auditors and regulatory authorities' (at [37]).
13 The negotiations with Willis Faber, Gerling and Hannover Re for a reinsurance contract did not come to fruition. As a result, Mr Wilkie, together with Mr Timothy Mainprize, the finance director of FAI, met with representatives of General & Cologne Re Australasia Ltd (Cologne Re) on 18 March 1998 with a view to agreeing on a reinsurance solution that would strengthen FAI's claims reserving position. The Cologne Re representatives were Mr Lindsay Self (general manager of Cologne Re's Treaty Department), Mr Tore Ellingsen and Mr Milan Vukelic (both members of Cologne Re's Alternative Solutions Division). Mr Burroughs was not present at that meeting (at [12]).
14 Following the meeting, Mr Self emailed Mr John Houldsworth (Chief Underwriter of Cologne Reinsurance Company (Dublin) Ltd), Mr Vukelic, Mr Ellingsen, Mr John Lindsay Smith (Treaty Manager at Cologne Re) and Mr Geoffrey Barnum (Managing Director of Cologne Re). The e-mail stated that:
(a) Mr Wilkie and Mr Mainprize had confirmed that the reserves 'will be taken up by them over three years' and would likely be $25 million in year 1, $20 million in year 2 and $20 million in year 3, thereby amounting to a total of $65 million.
(b) Mr Wilkie and Mr Mainprize had agreed that Mr Rodney Adler (CEO and Director of FAI), Mr Mainprize, Mr Wilkie, Mr Niran Peiris (Group Financial Controller at FAI) and Mr Burroughs would be the only people at FAI privy to the transaction with Cologne Re.
(c) Otherwise, only the recipients of the e-mail would know of the transaction with Cologne Re (at [12]).
15 On or about 25 March 1998, Mr Ellingsen drafted an aggregate excess of loss contract (AXOL). It referred to three sections of cover (Year 2000 cover; professional indemnity and non-recoverable insurance) and provided that Cologne Re would reinsure certain risks up to an overall aggregate limit of $65 million with a 'basic premium' of $55 million to be held "on deposit" by the reinsured on behalf of Cologne Re until 1 July 2002. The draft AXOL stated that the contract would be cashless in the sense that Cologne Re would not be required to make cash payments before 1 July 2002. Further, it included an offset clause that provided:
…either party at its discretion may setoff against any amounts due from the other party hereunder or under any other agreements between the parties hereto any amounts which are due under this or those other agreements ([13])
16 It was originally proposed that the $10 million risk (the difference between $65 million aggregate limit and the $55 million basic premium) would be made up by other reinsurance business profitable to Cologne Re. This sum was referred to as the "good business" (at [14]). Following a review of FAI's underwriting and claims file conducted by Mr April, Mr Smith, Mr Self and Mr Ellingsen, however, Cologne Re concluded that FAI was under-reserved by approximately $65 million in the relevant portfolios. Around late April 1998, therefore, Cologne Re and FAI agreed to include an additional term in the AXOL contract that FAI would take out with Cologne Re a $12.5 million premium in addition to the $55 million basic premium (at [15]).
17 Mr Burroughs was instructed by Mr Wilkie to 'negotiate some supporting business with GCRA (Cologne Re) for a premium of around $12.5 million'. Mr Wilkie said the business should have a 'good claims history' and the negotiations should proceed 'as quickly as possible' (at [17]).
18 Between 27 April and 30 April 1998, Mr Burroughs, on behalf of FAI, entered into negotiations with Mr Smith, on behalf of Cologne Re, and agreed on terms of 6 reinsurances ("the six slips") to be written in connection with the proposed AXOL contract. Mr Smith prepared and signed the six slips for the following types of cover:
(a) Builders warranty - excess of loss reinsurance;
(b) North America property - retrocession excess of loss;
(c) Performance and Licensing Boards - runoff excess of loss;
(d) Professional Indemnity, Directors and Officers Liability - aggregate excess of loss;
(e) Professional Indemnity, Directors and Officers Liability - aggregate deductible buyout; and
(f) Professional Indemnity, Directors and Officers Liability (New Zealand only) - stop loss.
19 The premium under the six slips was to be payable in two equal instalments of $6.25 million on 1 May 1998 and 1 July 1998 respectively (at [17]).
20 Mr Wilkie said that Mr Self, on behalf of Cologne Re, had informed Mr Wilkie that Cologne Re wanted confirmation in written form that no claims would be made under the six slips. On 1 May 1998, Mr Wilkie rang Mr Burroughs to say that he had agreed to Mr Self's request and to instruct Mr Burroughs to give effect to the request. Mr Burroughs subsequently drafted a "side letter" dated 1 May 1998 to the effect that in spite of the contractual intentions of the reinsurance contracts, FAI would not seek reinsurance recoveries under the six slips unless mutually agreed by both parties (at [18]). Mr Burroughs gave oral evidence at the AAT hearing that he was the author of the "side letter" and this evidence was accepted (at [38]).
21 The AAT finding was that upon accepting Mr Wilkie's instruction to give effect to Cologne Re's request, Mr Burroughs 'was aware that the process in which he was engaged would prevent the overall transaction from being properly accounted for as reinsurance' (at [38]). The AAT concluded that Mr Burroughs 'succumbed to momentary cowardice in the face of the domineering demands of (Mr) Wilkie'. Nevertheless, Mr Burroughs was aware that in preparing the side letter, which was kept separate from the Cologne Re documents, that there was a 'high risk or strong probability that it may be utilised or supressed to mislead auditors or others as to the true nature of the transaction'. He 'accepted Mr Wilkie's instruction without demur, argument or debate, recognising both the purpose and effect of what he was doing' (at [39]).
22 The first AXOL contract was signed on 6 May 1988 by Mr Self and Mr Smith on behalf of Cologne Re and Mr Wilkie and Mr Robert Baulderstone (FAI's group secretary) on behalf of FAI. It was backdated to 16 March 1998 at the request of FAI and provided for:
(a) Maximum recoveries of $65 million against premiums of $55 million
(b) The contract to be cashless with FAI to hold its premium payments "on deposit" for Cologne Re until 1 July 2003 and Cologne Re would not be required to pay for recoveries until on or after that date
(c) An offset clause where recoveries could be set off against premiums due under the contract and due under 'any other agreements' (at [19]).
23 On 6 May 1998, Cologne Re wrote a letter signed by Mr Self to FAI which stated:
…We hereby agree that should the performance of the aggregate excess of loss reinsurance contract made between our companies, be prohibited or rendered inoperable in consequence of any law or regulation which is in force in Australia then we will suspend the cover provided under those contracts set out in your letter dated 1 May 1998 and return in full any premiums already paid thereunder less any claims paid or due for payment (at [20]).
24 As of 6 May 1998, therefore, FAI had ceded no risk to Cologne Re. The AXOL contract could therefore not be accounted for as reinsurance and was, in effect, a sham. It enabled FAI to account that certain premiums were in respect of policies that were fully reinsured when they were in fact provisions against losses for under-reserved sums. As a result, FAI overstated its profits for the financial year ended 30 June 1998 in the order of $35 million (at [31]). The AXOL contract, each of the six slips and the side letter were prepared as separate documents and the true state of FAI's financial affairs thereby was obscured from the auditors and any other outsider who might happen to take an interest in the company.
25 A finding of the Royal Commissioner was that Mr Burroughs 'understood' and 'sought to facilitate' FAI's purpose of ensuring that the removal of risk transfer was not apparent on the face of either the AXOL (contract) or the six (slips) (at [33]).
26 It should be noted that between 23 and 26 June 1998, the first AXOL contract was replaced by a second AXOL contract. Mr Burroughs, however, was not involved in the negotiation of this second contract (at [22]).
27 FAI was audited by Arthur Anderson in August 1998. Mr Burroughs met with the senior auditor of Arthur Anderson, Mr Daniel Vanderkemp, with a view to guiding him through the documents in relation to the Cologne Re/FAI transaction and answering any questions pertaining to it. In that meeting, Mr Burroughs failed to mention the six slips and the side letter to Mr Vanderkemp (at [23]).
28 The AAT was satisfied that by virtue of his involvement in the whole of the Cologne Re/FAI transaction, Mr Burroughs must have been aware of the 'high likelihood' that the absence of a genuine reinsurance transaction had been concealed from the auditors. The finding of the AAT was that in failing to disclose the relevant documents, Mr Burroughs' conduct was 'deceitful and improper' (at [40]).