The decision to split off Bermuda Fire & Marine Co. Ltd.'s domestic business into BF&M Ltd. was a sound decision which ultimately provided a benefit to the company's creditors, a court heard yesterday.

Elizabeth Gloster, lawyer for domestic insurer BF&M, disputed claims made by Bermuda Fire liquidators that the 1991 split of the company was a fraudulent transaction designed to remove profitable assets from the reach of liquidators.

"The separation of the domestic from the international business was a perfectly proper thing to do with a bonafide business rationale,'' Ms Gloster told the court yesterday in her opening argument before Supreme Court Judge Vincent Meerabux.

She said the BF&M board made the right decision based on the information before them. Splitting the company into separate "profit centres'' was considered a more "modern'' business practice she claimed.

She also said that the reorganisation -- through the sale of the domestic business to BF&M Ltd. -- ultimately provided Bermuda Fire with a "substantial stake'' in the new company and a "stable and continuing'' source of income.

That income benefited the run-off operations and its international policy holders, she claimed. Bermuda Fire's domestic business was transferred to BF&M at a value of $56 million consisting of 2.88 million shares worth $33.2 million in the new company, $10 million in cash, one million nine percent convertible redeemable preference shares, and a $3.5 million seven percent note.

The shares in BF&M were dividended out to Bermuda Fire shareholders, and the $10 million was used to redeem the company's preference shares. Ms Gloster said in the end Bermuda Fire was still receiving $1.14 million annually from the preference shares and the note from BF&M. The notes were paid off in 1993.

Bermuda Fire continues to hold an estimated 18 percent stake in BF&M through the convertible preference shares.

Ms Gloster also claimed the liquidators were alleging the fraud occurred when the shares in BF&M were distributed to Bermuda Fire shareholders, an action which had nothing to with BF&M.

She also disputed the liquidator's claim that the five directors on Bermuda Fire's finance committee were the decision makers for the company. It was the full board of directors who made the decisions and they acted on the professional advice provided by auditors Cooper & Lines and law firm Conyers Dill & Pearman, she said.

The five former directors, the shareholders who received the BF&M shares in 1991, Cooper & Lines and Conyers Dill & Pearman are defendants in the case.

Each are being represented separately. Bermuda Fire liquidator Ernst & Young alleges the former directors were the "directing mind and will'' of the board and were responsible for what they say was a fraud on the international creditors.

"The decision to carry out the 1991 reorganisation and the decision to dividend out the common shares in specie was a decision taken by the full board,'' Ms Gloster said. "It was not taken by the individual directors.'' Based on professional advice the board believed Bermuda Fire was not insolvent and that the international creditors would not be harmed by the special share dividend in BF&M.

The board also considered the policyholders' interests in making the decision to create BF&M Ms Gloster said. After a meeting on July 9 the board of directors asked for more information about the reorganisation. Conyers Dill & Pearman subsequently sent them a guide on the proposal.

In the guide Conyers Dill & Pearman stated that if the proposed share dividend to shareholders would make Bermuda Fire insolvent then their duty was not to approve such an action, Ms Gloster said.

She also said four of the company's former directors would later testify that the decision to create BF&M was made on the commercial grounds as the local reputation of the domestic business was being harmed by allegations stemming from the international operation.

The four thought the transaction would benefit the domestic business and leave the run off international operation with enough of a surplus to remain solvent.

"This case must not be approached with the 20/20 vision of hindsight,'' she said. "It was not foreseen by the board that BFMIC (Bermuda Fire) would be insolvent.'' She disputed claims by liquidator's lawyer Gabriel Moss that minutes of key Bermuda Fire meetings had been produced by Conyers Dill & Pearman lawyer Martin Lane in advance to cover up their intention to defraud creditors.