The spectre of 870 BF&M Ltd. shareholders appearing in Supreme Court to testify about whether or not they knew Bermuda Fire & Insurance Co. Ltd. was insolvent in 1991, was raised in court yesterday.

If the company's liquidator wins the current case underway in Supreme Court then a second trial is due to begin afterward to determine whether each of the 1084 shareholders in BF&M being sued knew Bermuda Fire was insolvent.

Richard Millett, who is defending 827 of the shareholders, yesterday claimed they were innocent bystanders who had been wrongfully brought into the case by the company's liquidator Ernst & Young.

He argued that under the law the share dividend in BF&M given to them in 1991 could not be considered a fraudulent conveyance of property since they would not have known whether the company was insolvent or not.

He said the liquidator would therefore have to prove each of the 1084 shareholders individually knew the company was insolvent. The liquidator is attempting to seize back the shares in BF&M that were wrongfully given to Bermuda Fire shareholders as dividend in 1991.

Mr. Millett is defending a group that formed as a result of the suit. Opening a list of his clients, Mr. Millett said the shareholders of Bermuda Fire represented a microcosm of the Island and were "family trusts, husbands, and wives''.

These included Somerset Pharmacy Ltd. and the director and church wardens of St. Mary's Church and the liquidator couldn't claim they were involved in a conspiracy to defraud American creditors.

"There is no smoke room big enough to accommodate them,'' he told Puisne Judge Vincent Meerabux. "These people are innocent. These people have to come before the witness box and prove their innocence of a fraud.'' He said such a second trial would be a "burlesque'' in which ordinary folk would be cross examined about their knowledge of Bermuda Fire's bad debt, pollution losses and incurred but not reported liabilities.

He argued that the dividend was paid out of shareholders' equity and rightfully belonged to them and not the creditors.

Liquidator Ernst & Young is expected to call the first witness to appear in the Bermuda Fire civil case tomorrow. Ian Michie, the former actuary for Bermuda Fire's life insurance business, will be the first witness on the stand.

Gabriel Moss, lawyer for the liquidator, said in his opening argument that Mr.

Michie was increasingly concerned during the 1980s about the amounts of money being transferred out of the life business to cover losses from the international operations.

Peter Rodger, legal advisor for the Bank of N.T. Butterfield and Son Ltd., is scheduled to appear next Monday. He is appearing under subpoena. He will be testifying about his memorandum over a $5 million loan the bank was advancing to BF&M in 1991. The money was to be paid over the Bermuda Fire and used, along with another $5 million from the Bank of Bermuda to pay off preference shareholders.

In the memorandum Mr. Rodger asks whether the bank should get assurances that the transfer of Bermuda Fire's domestic business to BF&M was not a fraudulent conveyance of property under the Companies Act.

Mr. Moss will be calling former Royal Gazette reporter David Marchant next week. Mr. Marchant is going to be questioned about an interview he had while at the Gazette with Bermuda Fire's chairman Charles Collis. Keith White, Bermuda Fire's former manager of international operations, is also scheduled to appear. Mr. White is appearing under subpoena and is an executive at Bermuda-based ACE Ltd.

Ernst & Young partner John McKenna, a liquidator of Bermuda Fire, is also scheduled to appear to give evidence in the case. He won't testify until near the end of the case.