Equitable Law Capital, Re

The joint liquidators of Equitable Law Capital Limited sued various participants in the company's Legal Redress Scheme alleging fraudulent trading (s.213 Insolvency Act 1986), wrongful trading (s.214 IA 1986), breaches of fiduciary/statutory duties by a de facto director, dishonest assistance, transactions at an undervalue (s.238 IA 1986) and related relief. The court found that Mr David Clarkson was a de facto director who knowingly participated in a fraudulent scheme and was therefore liable for fraudulent trading, wrongful trading, breach of duty, misfeasance/constructive trust and to account for payments received (transactions at an undervalue).

By contrast, the judge rejected claims against (inter alia) Mr Anthony Flaton and Mr Richard Arnison/Belmonte: the evidence did not establish that they acted dishonestly or with the requisite knowledge or recklessness. The court also held that the written settlement reached with the Milners did not bar continuation of the remaining claims against other respondents.

Key legal principles applied include the tests for dishonesty (objective standards of ordinary decent people together with the defendant's knowledge), law on fraudulent and wrongful trading under the Insolvency Act 1986, the concept of de facto directorship, the statutory test for transactions at an undervalue (s.238) and principles on the effect of settlements with one alleged wrongdoer on claims against others (including Jameson and subsequent authorities on implication and construction of settlement terms).

Background and parties

Equitable Law Capital Limited ("ELC") ran a short-lived investment scheme funding alleged bond mis-selling claims. Investors lent in units of £1,500; management and claims work were handled by MS2U; insurance cover was placed through Belmonte with Gable; marketing was driven by Mr Flaton and his companies. The Liquidators claimed that about £3.3m was invested, payments to investors were minimal, and nearly £2.2m was extracted by participants; ELC entered liquidation with an alleged deficit of just over £2m.

Nature of the application and relief sought

• The liquidators sought remedies including contributions under s.213 (fraudulent trading) and s.214 (wrongful trading), recovery for transactions at an undervalue (s.238 IA86), equitable remedies (constructive trust/knowing receipt), misfeasance, and declarations and ancillary relief against a number of individuals and companies involved in the Scheme.

Issues framed by the court

• Whether particular respondents (notably David Clarkson) acted dishonestly or were de facto directors;
• Whether the Scheme was fraudulent from inception;
• Liability under s.213 and s.214 IA86;
• Whether payments out of ELC constituted transactions at an undervalue;
• Whether settlements with the Milners precluded continuation of the remaining claims.

Court reasoning and findings

The court carefully weighed documentary and witness evidence while acknowledging significant defects in disclosure (notably selective production by the Milners and altered documents). The judge found that some documents had been falsified (principally by David Clarkson) to mislead third parties. On the key factual findings the court concluded:

• David Clarkson was centrally involved in running ELC, repeatedly using "we" in contemporaneous messages, controlling relationships with the insurer and the marketer, taking part in financial and operational decisions, and receiving large payments. He was a de facto director. His covert alteration of legal advice and other documents, together with his knowledge of the Scheme's finances and operations, established actual dishonesty. He therefore was liable for fraudulent trading (s.213), wrongful trading (s.214) and breaches of statutory/fiduciary duties; the sums he received were recoverable as transactions at an undervalue and he held sums on constructive trust.
• By contrast, Mr Flaton (marketing) and Mr Arnison/Belmonte (insurance broking) were not shown to have been dishonest. The evidence supported that they acted negligently or naively in places, and that documentation and advice were imperfect, but did not establish the knowledge or dishonesty required for s.213 or for dishonest assistance. The court rejected attempts to treat routine insurance placement or negotiated commissions as automatically voidable transactions at an undervalue where the counterparty received arm's-length commercial consideration.
• The Milner Settlement Agreement, although a release in form, contained express terms (notably clauses requiring the Milners to provide documents and for Mrs Milner to give evidence) and was made on a means basis. Applying contractual construction and the law on implication (including the approach in Jameson and later authorities), the judge held it did not extinguish the liquidators' ability to pursue remaining claims against other respondents; a term reserving those claims was to be implied in the factual matrix.

Disposition

The court allowed the liquidators' claims against David Clarkson and dismissed the claims against the other principal respondents; further hearing was directed to determine relief and quantification.

At first instance the court partially upheld the liquidators' claims. The court held that: (a) The claims against Mr David Clarkson succeed — he was a de facto director, acted dishonestly, and is liable for fraudulent trading (s.213 IA86), wrongful trading (s.214 IA86), breaches of duty, misfeasance/constructive trust and for sums received as transactions at an undervalue. (b) The claims against Mr Flaton and Mr Arnison/Belmonte fail — the evidence did not establish dishonesty or the requisite knowledge to found liability. (c) The written settlement with the Milners does not bar the liquidators from pursuing the remaining claims; a term reserving the right to pursue other defendants is to be implied in the factual matrix. The court directed a further hearing to determine remedies and quantification. The reasoning combined findings about altered documents, contemporaneous communications, and the applicable insolvency and trust law tests for dishonesty and recovery of value under IA 1986.