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

Misrepresentations about a lender’s loan book, its due diligence and the independence/value of security cannot be remedied by simply calling the issuer a legitimate lender; where the issuer in fact channels investor money to connected recipients and recycles new investor funds to pay earlier investors, the business is being carried on with intent to defraud creditors (a form of Ponzi-like conduct) and responsible persons may be ordered to contribute to the company’s assets.

This is a first instance trial of claims brought by the administrators of London Capital & Finance Plc (LCF) and related companies against a group of former directors, promoters and professional advisers. The administrators alleged extensive misapplication of sums raised from retail investors through mini-bonds, dishonest fundraising and multiple statutory and equitable causes of action. The court heard detailed factual and expert evidence about the nature and value of assets said to secure the lending, the identity and conduct of borrowers, the marketing and distribution arrangements (principally by Surge), and a string of complex inter-company sales and loan arrangements by which very substantial sums were paid out of LCF to individuals connected with the borrower group. The judge identified three principal modes of unlawful conduct: (1) repeated and material misrepresentations to investors about the nature of LCF’s lending business, borrower profile, security and risk; (2) a pattern of recycling new investor money to meet obligations to earlier investors; and (3) a network of sale-and-purchase transactions and payments that diverted investor money into the pockets of the company controllers. He therefore addressed claims for fraudulent trading under section 246ZA Insolvency Act 1986, breaches of directors’ duties, knowing receipt, dishonest assistance and proprietary remedies, and made extensive factual findings on credibility, valuations, document back-dating and participation of each defendant in the arrangements.

1. Disposition. The court found that LCF’s business was not the legitimate, diversified SME lending operation portrayed to investors. Instead the court found that much of the money raised from bondholders was advanced to a small, connected group of companies and individuals, recycled through corporate conduits, and in substantial part paid out to persons associated with those companies. The court held that the company’s conduct, and the conduct of a number of those behind it and assisting it, amounted to carrying on the business with intent to defraud creditors (fraudulent trading) and to other equitable wrongs.
2. Findings of dishonest participation and breaches of duty. The court found detailed participation and knowing involvement by the principal executive (the first defendant), by the principal beneficial controller (the fourth defendant), by the marketing agent and its principals, by the principal solicitor who drafted and backdated transactional documentation, and by others. Each of those persons knowingly participated in the carrying-on of the business in a manner that put the economic interests of bondholders at serious risk (paras summarised in judgment). The first defendant and the fourth defendant were in addition found to have breached statutory directors’ duties (including duties to promote the success of the company and to exercise reasonable care, skill and diligence) by causing or permitting the misapplication of company funds and by approving and concealing the transactions described.
3. Proprietary and personal relief. The court held that the administrators were entitled to pursue proprietary claims over sums and assets received by the defendants that were traceable to LCF. Where funds or assets have been dissipated and could not be recovered in specie the court accepted the administrators’ entitlement to seek equitable compensation and to apply the statutory power under section 246ZA for contributions by participants in fraudulent trading. The judgment sets out the categories of transfers traced into particular defendants and companies and holds that the administrators are entitled to remedies including proprietary declarations, accounts and inquiries, and personal remedies against those knowingly involved. The court directed further submissions and account and quantification procedures on the extent of the monetary relief and any account for overlaps and credits.
4. Documentary backdating and contrivance. The court made extensive findings that a number of crucial documents were backdated or fabricated after regulatory enquiries and in advance of the administrations; the provenance, creation and late disclosure of the documents supported the administrators’ case on the true purpose of the transactions and on the defendants’ states of mind.
5. Practical outcome. The court (1) declared the principal factual findings described above, (2) held the named defendants liable for fraudulent trading, breach of fiduciary duties and dishonest assistance to the extent described, (3) found the administrators entitled to proprietary and equitable relief in relation to sums and assets traced to the defendants, and (4) invited detailed submissions on the quantum and precise form of declarations, delivery-up and accounting orders (including the interaction with prior freezing orders and recoveries) before making final monetary awards or contribution orders.