The Company set up a scheme in 2014 which sought investment for claims against financial institutions for mis-sold investment bonds to be pursued by a claims management company (CMC). The loans made by the Company to the CMC for this purpose were covered by an insurance policy in the name of the Company. The Scheme was marketed to potential investors through a marketing brochure, of which there were numerous versions during the operation of the Scheme.

The FCA began to investigate the Company in 2015 expressing concerns that the Scheme was an unregulated collective investment scheme under section 235 FSMA and then later suggesting that the Company was accepting deposits within the meaning of Article 5 RAO 2001. The Company stopped receiving investments after March 2016.
In October 2016, the Company entered into voluntary liquidation and liquidators were appointed who began their investigations into the Company and the operation of the scheme, which had received approximately £3.3 million into the Company, of which the Company had only paid out just over £230,000 to investors in returns. During investigations it became clear that the brochures contained false information, the CMC was using the funds to pursue PPI claims rather than bond mis-selling claims and the parties involved with the scheme had received just under £2.2million either personally or into connected companies.

In January 2019, the Liquidators of the Company brought an application against 9 respondents including the sole de jure director of the company, individuals involved in setting up the scheme, the marketing agent and the insurance broker. The Application contained allegations of breach of director’s duties, breach of fiduciary duties, conspiracy, fraudulent and wrongful trading, dishonest assistance and transactions at an undervalue.

Quality of evidence

There were criticisms of the quality of the Liquidator’s investigations particularly when it came to gathering documents and the unequal treatment of the respondents [61]. This resulted in challenges to authenticity of documents and clear gaps in evidence where it became obvious that the settled parties had been selective in what evidence had been provided to the Liquidator. There were also criticisms of other parties whose disclosure was deemed to be incomplete without any reason. In considering the documentary evidence, the court categorised it according to its source [81-82].

Settlement agreements

Of the 9 respondents, two settled pre-trial and two during the trial. The court had to determine whether the settlement agreements barred the Applicants from pursuing the same claims or claims which were closely analogous with the settled claims against the existing respondents. The test for claims against joint tortfeasors was implication of terms and for joint and several joint tortfeasors, it was a matter of interpretation of the agreement. In both respects the court found that the settlement agreements did not bar the Applicants from continuing the claim against the remaining respondents [480]. Mr Justice Meade recognised that this is an area of law which is relatively undeveloped and gives a detailed overview of the relevant cases [400-451].

De facto director

The trial took place before the judgment of Re Keeping Kids Company [2021] EWHC 175 (Ch) was published, however the court’s attention was drawn to this decision in written closing submissions and the Judge relied on the detailed articulation of the principles in that judgment which were consistent with what the parties had agreed in the agreed points of law [238-239]. The court did not accept R3’s position that he was an arms length consultant and found him to be a de facto director.

Following on from that decision, the court also found that R3 was in breach of his duties and guilty of wrongful trading as well as fraudulent trading.

Transactions at an undervalue

By the end of the trial there were only claims against two of the Respondents for TUV; R3, found to be a de facto director of the Company and R6, the insurance broker. For the former, the court determined that he had not provided the services or sufficient services for which payments were claimed and so the payments were TUVs. For the latter, the issue was slightly more complicated. The Applicants argued that the Company got no value from the insurance policy because the payments were part of the operation of the Scheme which was not carried out in the Company’s interest because it was a fraud from the start and the Company was therefore doomed. Mr Justice Meade said this [at 297 and 299]:

“This is a radical and, so far as I am aware, novel point. It asserts that a transaction may be transaction at an undervalue within the meaning of s. 238 even if it took place at a freely negotiated market price, if events affecting the company but extraneous to the transaction (and of which the other party could have no knowledge) mean that the company was doomed. It would seem to have the effect that every transaction by a doomed company would be a transaction at an undervalue.”

“In my view, the Court should look to the bargained-for benefits and detriments, within the scope of the transaction or series of transactions under consideration. I think that is established by the cases referred to in Goode to which I have referred above. There is no basis in s. 238 for looking to events extraneous to the transaction(s) in the way that the Applicants contend. The Applicants’ argument is effectively that a transaction is at an undervalue within the meaning of s. 238 even if at a genuine and appropriate price because the company then later fails to deploy the (appropriate) value it receives effectively, or at all. This is incompatible with the purpose of s. 238 which is to unwind transactions where the company does not receive appropriate value.”

The court found that the company had got what it wanted from the insurance and there was no evidence that the premium charged for the insurance was inappropriate.

Dishonest Assistance

The claims against the marketing agent and the insurance broker for dishonest assistance failed for the reason that the parties did not provide the requisite assistance and their actions were not dishonest in any event. The court confirmed the position in the authorities that the assistance does not have to be the cause of the loss but the assistance should be more than minimal and it should enable the breach by the trustee to be committed [173].

Alex Heylin and Annie Townley have also written an article published in the most recent issue of the ThoughtLeaders4 Fire Magazine. The article can be found on page 8 of the magazine and covers one of the key topics and considers the quality of the liquidator’s investigations and the impact this had on the outcome of the trial.