The 1991 creation of BF&M Ltd. out of Bermuda Fire & Marine Co. Ltd.'s profitable domestic assets was not a fraud, but a sound business decision that benefited the company and its international policyholders, a court heard yesterday.

Elizabeth Gloster, BF&M's lawyer, yesterday disputed claims by Bermuda Fire liquidators that the 1991 split was a fraudulent transaction designed to remove profitable assets from the reach of creditors.

Bermuda Fire collapsed under the weight of international claims in 1993. The liquidators are suing for damages and the return of equity in BF&M.

"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 Supreme Court yesterday in her opening argument before Puisne Judge Vincent Meerabux.

She claimed the 1991 reorganisation ultimately provided Bermuda Fire with a "substantial stake'' in BF&M and a "stable and continuing'' source of income.

After the 1991 split Bermuda Fire received $1.14 million annually from BF&M preference shares and a debt note. 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.

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, Ms Gloster claimed.

She said the evidence would show Bermuda Fire's board also considered the policyholders' interests in making the decision to create BF&M. 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. The four believed 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.'' Ms Gloster continues with her opening presentation today.

Liquidators Ernst & Young are suing the defendants for damages over the company's collapse in 1993. The five former directors, the shareholders who received the BF&M shares in 1991, Cooper & Lines and Conyers Dill & Pearman are also defendants in the case. Each are being represented separately.

The five former directors are William Cox, Donald Lines, Gregory Haycock, Michael Collier, and Charles Collis -- now deceased. For more see Page 41