London Capital & Finance Plc & Ors v Michael Andrew Thomson & Ors

The claims were tried at first instance. The central legal themes were (i) fraudulent trading under section 246ZA Insolvency Act 1986, (ii) equitable proprietary claims and tracing (including knowing receipt), (iii) dishonest assistance, and (iv) directors' duties (Companies Act 2006 ss.171, 172, 174 and 177). The judge found that LCF raised over £237m from retail investors and, contrary to representations in its information memoranda and promotional material, the company advanced most of that money to a small, connected group of companies and entities associated with four individuals. Those advances funded a series of contrived share/asset sale transactions and onward payments which transferred very large sums to the four individuals and their associates.

Key holdings were that (a) LCF’s promotional materials gave a false and misleading picture of its business model and security, (b) the company’s business was conducted in a manner that amounted to operating a scheme in which payments to existing bondholders were materially funded from receipts from new bondholders (the judge characterised this in the terms used in the judgment), and (c) substantial money was misapplied and diverted from LCF through the SPA transactions and other mechanisms. On those bases the judge held that the company’s business had been carried on with intent to defraud creditors or for a fraudulent purpose; the court found participation and knowing involvement by named defendants, together with breaches of fiduciary duty by some defendants, dishonest assistance by others, and that constructive trusts and tracing remedies were available.

The Claimants were the joint administrators of LCF (and LOG). LCF sold unlisted mini-bonds to retail investors between 2013 and 2018, raising over £237m. The company publicly portrayed itself as an arm’s-length lender to the United Kingdom SME sector, undertaking proper due diligence, taking independent security and generating income from its lending sufficient to meet investor coupons and redemptions. The administrators sued former directors and a number of associated persons and businesses, alleging fraudulent trading, breaches of directors’ duties, dishonest assistance, knowing receipt and equitable proprietary remedies (tracing and constructive trust).

The principal factual findings were:

• LCF in fact advanced most of the money to a small number of connected companies associated with four principal individuals (including its CEO), and not to many independent UK SMEs as marketed.
• The advances were often made without meaningful due diligence, without reliable or independent security valuations and sometimes before written facility documentation was in place; documents were backdated on occasions.
• Large sums were channelled from LCF (directly or indirectly) via borrowing companies and payment intermediaries into the hands of the four individuals and others by means of a sequence of sale and purchase agreements (Lakeview, Elysian, Prime, LPE and LPT SPAs) which the court found to be artificial devices to extract value.
• During the period the court found that payments to existing bondholders (interest and redemptions) were routinely funded from receipts derived from new bondholders rather than from income generated by underlying borrowers; money-flow and bank records analysed by a financial witness supported this conclusion.
• Surge (the marketing agent) and named individuals involved in sales received very large commissions (25% of gross receipts) and further secret payments; key personnel at Surge knew or had strong grounds for suspicion about the true state of LCF’s business but continued to market and sell the product.

The legal issues decided included (i) whether the business was carried on with intent to defraud creditors or for a fraudulent purpose (section 246ZA); (ii) whether and to what extent directors’ duties were breached; (iii) whether third parties had dishonestly assisted or knowingly received misapplied company property; and (iv) whether equitable proprietary remedies were available and traceable.

The judge applied the governing principles for fraudulent trading and for equitable proprietary remedies. On the primary issues the court found that LCF’s business was carried on in a manner that involved deliberate deception of investors, unlawful diversion of company assets and dependence on receipts from new investors to meet liabilities to prior investors. The judge attributed the relevant states of mind to the company via its controlling figures and responsible officers, found participation and knowledge on the part of the named defendants, and held they were liable in fraudulent trading, in breach of fiduciary duty, for knowing receipt and for dishonest assistance in the respects particularised in the judgment.

The court made extensive factual findings and concluded that the company carried on its business in a manner that involved fraudulent elements: the judge found that (i) LCF systematically misrepresented its lending business and security to investors, (ii) large parts of money raised were diverted to connected persons under contrived SPAs and other devices, and (iii) payments to existing bondholders were materially funded by receipts from new investors. On those findings the court held that fraudulent trading under section 246ZA was established and made findings of liability for breaches of directors’ duties, knowing receipt, constructive trust and dishonest assistance against a number of named defendants. The judge granted declarations and equitable relief in principle, and directed further submissions and accounting steps to quantify remedies and order tracing or proprietary relief.