Portfolios of Distinction Ltd, Re [2006] EWHC 782 (Ch)

No: 1872 & 1873 of 2005[2006] EWHC 782 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Venue Royal Court of Justice, Strand, London WC2A 2LLDate 27 th March 2006
Before
Mr J M JARVIS QCSitting as a Deputy High Court Judge
IN THE MATTER OF:
PORTFOLIOS OF DISTINCTION LIMITED
AND IN THE MATTER OF:
TURNING POINT SEMINARS LIMITED
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Khawar Qureshi (instructed by the Treasury Solicitor) appeared for the Petitioner
Jonathan Russen (instructed by Judge Sykes Frixou) appeared for the Respondents
JUDGMENT
Introduction
[1]On 21 March 2005, the Secretary of State for Trade and Industry (the Secretary of State) presented petitions against two companies, Portfolios of Distinction Limited (POD) and Turning Point Seminars Limited (TPS) seeking an order for their compulsory winding up pursuant to s.124A of the Insolvency Act 1986. On 9 March 2004 in civil proceedings involving a related company CM2 Services Limited (CM2) Laddie J referred the conduct of POD and CM2 to the Secretary of State with a view to an investigation of the affairs of these companies. On 13 May 2004 Mr Gordon Stevenson and Mr Clayton Ruthven, both accountants, were appointed to investigate the affairs of the companies. The Secretary of State’s investigation ended in November 2004.[2]On 7 April 2005 provisional liquidators were appointed over POD and TPS pursuant to the order of Park J, following a without notice application by the Secretary of State. It was the Official Receiver who was appointed the provisional liquidator in each case.[3]The primary complaint of the Secretary of State is that POD was carrying on business in a way that was inherently objectionable. The complaint is that it induced members of the public to participate in its scheme for an annual fee of some £50,000 on the basis of a representation that the client would acquire a portfolio of property worth £1m within 12 months. It is said that this representation was deliberately false and can be shown to have been so by the small number of clients who achieved that result. It is also said that POD and TPS were so inter-connected with CM2 that its wrongdoing has “tainted” POD and TPS.[4]On the second day of the hearing of the petitions, Counsel for the Secretary of State, Mr Qureshi, sought to amend the POD petition to plead a number of allegations relating to directors’ loan accounts. In the face of objection by the Respondents that these serious allegations were being raised by way of pleaded case at the last moment and the fact that it would require forensic evidence to deal with them, Mr Qureshi withdrew the application to amend in relation to the directors’ loans.[5]The Secretary of State’s case against TPS is that it diverted its clients to POD and CM2 knowing the nature of the business of those companies. In addition, the Secretary of State alleges that irregular payments were made out of the funds of TPS.[6]POD resists the petition on the basis that the Secretary of State has failed to make out a case of mis-selling. POD says that there is no evidence to show that it did not provide the services for which the client contracted. It asserts that, although its association with CM2 can be severely criticised, it took steps to rectify the position and there is no longer any public risk in relation to CM2. It also asserts that over a period of one year before the presentation of the petition, it had instituted real improvements to the way in which its business was conducted and the Secretary of State had failed to take into account these improvements.[7]TPS resists the petition by reiterating the points made by POD but also on the basis that the business of TPS was the giving of seminars about which no complaint has ever been made by a member of the public. It rejects the claims in respect of financial irregularity.[8]I must set out in more detail the background of the companies.

Background

[9]POD was incorporated on 28 March 2002. Its shareholders were Mr Alan Churchill and Ms Wendy Dowling. Mr Churchill and Ms Dowling were appointed directors of POD on 1 June 2002 and remain directors of POD. Ms Dowling was also appointed company secretary on 1 June 2002 and resigned on 4 January 2005. At that time, Mr Churchill and Ms Dowling were married but have since divorced. Although divorced, they are currently living in the same accommodation in Florida. TPS was incorporated on 18 January 2001. Ms Dowling has been the sole director since 18 January 2002. Mr Churchill has been the company secretary of TPS since 18 January 2002.[10]CM2 was incorporated on 29 January 2003. Although there is no formal documentation, it appears to be common ground that POD owned 49% of the shares of CM2 whilst Mr Donald Ian Laird owned the remaining 51%. Mr Laird was appointed a director of CM2 on 29 January 2003 and resigned on 16 December 2003. Mr Churchill was appointed director of CM2 on 12 November 2003 and resigned on 8 December 2003.[11]Mr Churchill and Ms Dowling started the business of TPS in February 2001. They held residential courses lasting four days with a view to educating participants on the techniques of investing in property. Delegates paid a fee of £4,000 which was increased to £6,000 after the first year. Initially TPS did not offer any properties to the delegates at the seminars but in March 2002 they met Mr and Mrs Kieran Connolly who attended a TPS seminar. The Connollys told Mr Churchill and Miss Dowling that they had got into “a bit of a mess with their investments” and they would like to be involved with the business of TPS. The Connollys had an existing company called Quicksell Limited (Quicksell) and it was agreed that Quicksell could be used to offer a property sourcing service.[12]TPS put its clients in contact with Quicksell and allowed the Connollys to rent office space at TPS’s offices at Portfolio House.[13]In April 2002, Mr Churchill and Miss Dowling started the business of POD and, for that purpose, they employed Mr Connolly to help in the sales side of the business. Mr Connolly was featured in the sales brochure. Unfortunately, in February 2003 Mr Churchill and Miss Dowling discovered that Mr Connolly was holding himself out as a director of POD and receiving money intended for POD either himself or through Quicksell. In March 2003, Mr Churchill discovered that Mr Connolly was using the alias of Mr Waterfall. Mr Connolly’s employment was terminated and a petition to wind up Quicksell was presented, and a freezing order made.[14]In March 2003, Mr Churchill and Ms Dowling met Mr Ian Laird who at that stage was acting as a bodyguard for them. Mr Laird had established CM2 and said that he was experienced in debt purchase and debt collection. Mr Churchill and Ms Dowling took a 49% shareholding in CM2 and claimed to be impressed by the CM2 scheme. They started marketing CM2 to the POD and TPS client base and to the general public.[15]However by September 2003 they became suspicious of Mr Laird who had not produced documentation to support the transactions which were supposed to have taken place. At a meeting on 8 September 2003 between Mr Churchill and Ms Dowling and Mr Laird requests for further information were made which were reinforced at a meeting on 27 October 2003. During the course of the audit in November 2003 Mr Laird refused to make any documents available to POD’s auditors, Kingston Smith. Mr Laird, who had operated CM2 from Portfolio House was ejected from the premises in December 2003. On 21 January 2004 POD started proceedings against CM2.[16]There seems little doubt that the business of CM2 was conducted fraudulently and that investors were deprived of their money.[17]Until the appointment of the provisional liquidators, TPS and POD had continued in business. There is an issue whether TPS had held any seminars since March 2005, although it still maintains a website. On the basis of the schedule produced in court by Mr Churchill, POD had some 118 clients, of which some 80 were still active. The schedule demonstrates that POD had procured offers of property to a substantial number of its clients.

The grounds in the petitions

(a) POD

[18]I set out the grounds relied upon by the Secretary of State in paragraph 36 of the petition: “36. For reasons detailed above and in the affidavits of Mr Stevenson and Mr Ruthven filed in support, and summarised below it is the Petitioners case that POD acted with a lack of commercial probity to the significant detriment of its clients and that, therefore, it is in the public interest that POD be wound up. i) Having reviewed the client files held by POD and after speaking with POD directors, Mr Ruthven’s investigations did not reveal a single instance of a client who had achieved a £1m property portfolio within 12 months, in contrast to the clear and unequivocal representations made in this regard. ii) Further, representations on the closing costs were considerably understated. The client’s (sic) never appreciated the full financial burden until too late in the purchase transaction and purchased (sic) were aborted as a consequence with loss to the client. iii) Inevitably, the rental returns promised were not achieved. iv) POD purported to breach its contract with its clients after providing unsuitable premises for purchase or asking the client to decide on purchase without sufficient information or time. v). By virtue of the interconnectedness between POD/TPS and/or Services, the business operations of the three companies became intertwined through intermingling of funds and/or transfer of funds without justification. vi). Further or in the alternative, POD and/or TPS promoted Services purported debt investment scheme in circumstances where it was apparent or should have been apparent that Services’s business operations were a sham.

(b) TPS

[19]I set out the grounds relied upon by the Secretary of State in paragraph 36 of the petition. “36. For reasons detailed above and in the affidavit of Mr Stevenson and Mr Ruthven filed in support, and summarised below it is the Petitioners case that TPS acted with a lack of commercial probity to the significant detriment of its clients and that, therefore, it is in the public interest that TPS be wound up. i). TPS misrepresented its services to its clients in thata. Guaranteed sourcing of 3 properties per annum were said to be the responsibility of Quicksell Limited, even though the brochures and advertisements indicated that the said service was provided by TPS. Further, the brochures and advertisements making these statements were in use after the relationship between TPS and Quicksell had broken down irretrievably, indicating that Quicksell could not reasonably be construed or represented to be an integral and/or continuing part of the sourcing of properties service offered by TPS.b. Guaranteed rental incomes did not materialise ii) Open market values of properties recommended to clients were found to be overestimated. iii) By its contract with its clients TPS purported to qualify and/or negate the clear and unequivocal representations made to potential client as an inducement to become its clients. iv) Refunds to TPS customers were paid from POD funds. v) TPS appears to have made irregular payments such as(i) advancing a £30,000 loan to a Mr. Connolly/Waterfall without any documentary record and/or explanation(ii) advancing £200,00o (sic) to its Director Ms. Dowling purportedly by way of Director’s loan and then purporting to adjust (thereby so as to extinguish) the apparent debt by way of a journal entry during the course of the S447 enquiry. vi). By virtue of the interconnectedness between POD/TPS and/or Services, the business operations of the three companies became intertwined through intermingling of funds and/or transfer of funds without justification. vii). Further or in the alternative, POD and/or TPS promoted Services purported debt investment scheme in circumstances where it was apparent or should have been apparent that Services’s business operations were a sham. Monies received by Services from members of the public pursuant to its sham scheme were then diverted to POD without justification and/or for the ultimate benefit of Wendy Dowling.” 4. Nevertheless, it is submitted that the core issues in this regard include three central themes: (A). POD/TPS identifying/representing results to prospective clients which were so manifest in their absence that the necessary inference is that POD/TPS business was incapable of delivering the same (“the Mis-selling issue”) (B). POD/TPS clients being “funnelled” towards the CM2 “debt purchase scheme” in circumstances where minimal enquiry by POD and/or TPS should or would have revealed CM2 to be a sham, and/or POD/TPS Directors knew the same to be the case or were reckless in this regard (“the CM2 sham issue”) (C). The intermingling of POD/TPS/CM2 business operations and finances (“the Interconnectedness Issue”).” a. Guaranteed sourcing of 3 properties per annum were said to be the responsibility of Quicksell Limited, even though the brochures and advertisements indicated that the said service was provided by TPS. Further, the brochures and advertisements making these statements were in use after the relationship between TPS and Quicksell had broken down irretrievably, indicating that Quicksell could not reasonably be construed or represented to be an integral and/or continuing part of the sourcing of properties service offered by TPS. b. Guaranteed rental incomes did not materialise vi). By virtue of the interconnectedness between POD/TPS and/or Services, the business operations of the three companies became intertwined through intermingling of funds and/or transfer of funds without justification. (C). The intermingling of POD/TPS/CM2 business operations and finances (“the Interconnectedness Issue”).”

The Law

[20]Section 124A of the Insolvency Act provides that where it appears to the Secretary of State from information which he has obtained from investigations that it is expedient in the public interest that a company should be wound up the Secretary of State may present a petition for it to be wound up. If the Court thinks it is just and equitable for it to do so, the Court may order the winding up of the company.[21]The leading case is Re Walter L Jacob [1989] BCLC 345. I was also referred to Re Market Wizard Systems (UK) Limited [1998] 2 BCLC 282, Secretary of State for Trade and Industry v. Traveltime UK Limited [2000] BCC 792, Secretary of State for Trade and Industry v. Deaneside Developments Limited [2004] EWHC 126, Re Secure and Provide Plc [1992] BCC 405, Re Alpha Club (UK) Limited [2002] EWHC 884 and In the Matter of Supporting Link Limited [2004] EWHC 523.[22]From these cases, the following principles can be extracted: (1) The Court’s task is to carry out a balancing exercise having regard to all the circumstances as disclosed by the totality of the evidence before the Court. The Court has to weigh the factors which point to the conclusion that it would be just and equitable to wind up the company against those which point to the opposite conclusion. The Court must evaluate the reasons given by the petitioner in forming a view that it would be in the public interest to wind up a company, but it is the Court itself which must reach that decision. The Court must identify the aspect or aspects of public interest which would be promoted by making a winding up[23]Very substantial written evidence was filed. Each of the witnesses was cross-examined.[24]As was to be expected, Mr Stevenson and Mr Ruthven gave their evidence with the care of professional witnesses. I have no doubt about their honesty, although as will appear later in this Judgment, I do not accept that all the conclusions which they reached were right.[25]By contrast, there were many aspects of the evidence of Mr Churchill and Ms Dowling which cause me concern. On many occasions, I felt that their evidence was not as forthcoming as it might have been and I do not believe that they acted honestly in relation to CM2. However, I also believe that they were duped by both Mr Connolly and Mr Laird. I do not believe that Mr Churchill and Ms Dowling set about operating a scheme with POD and TPS which was intended to deliberately deceive the public and to deliberately mis-sell the services of POD and TPS.[26]I accept the evidence of Mrs Penfold, a partner in the auditors, Kingston Smith. As to the other witnesses called on behalf of POD and TPS, I accept the essential features of their evidence although I believe that Mr Wilson, who is the brother of Ms Dowling, was clearly protective of Ms Dowling in the way in which he gave his evidence.

Analysis of the issues

(a) Mis-selling

[27]POD produced a brochure, the first of which contained a Mission Statement saying:
“To provide innovative solutions, in the acquisition of high quality property portfolios, on behalf of our clients.”
No real complaint could be made in relation to that Mission Statement. However, Mr Qureshi submits that the brochure was misleading in the way in which it depicted Mr Connolly, whose picture was shown alongside that of Mr Churchill. The description of Mr Connolly was in these terms:
“A former police officer of 23 years’ service, Kieran has 9 years’ experience in property portfolio building. He has seen many property entrepreneurs burn their fingers at auction and in cheap property schemes, particularly in the north of England. With this experience, Kieran has implemented a rescue plan for these investors. With his vast experience you can be assured that your portfolio is in safe hands.”
Mr Qureshi contrasted that statement with the evidence of Mr Churchill given during the course of his cross-examination. Mr Churchill said that the Connollys had “told us that they had a number of properties in the north, and had experienced problems with tenants, etc, and trashed houses.” He accepted that the Connollys had not had much success with property investment. It seems to me that the wording used in the brochure has been very carefully chosen and does not actually constitute a misrepresentation, although it seems to me it was little assurance for investors that Mr Connolly might be looking after their affairs.[28]A further point is made by Mr Qureshi that despite the fact that Mr Connolly had ceased to be employed by POD from March 2003, POD continued to use this version depicting Mr Connolly. This was undoubtedly an error on the part of POD and a new brochure should have been introduced with all references to Mr Connolly deleted. It is one example, of many, of the poor corporate practices at POD during this time but it does not seem to me that this was a deliberate act of mis-statement on the part of POD. There is no evidence that any investor was induced to become a member of POD’s scheme because of a representation that Mr Connolly would be looking after the portfolio. Again, there is no evidence that any client’s property was not properly safeguarded by POD.[29]The representations in the brochure relied upon by the Secretary of State are:
“ Portfolio of quality property across the UK, which can include overseas properties in the top holiday rental market areas, with good capital appreciation included.  We will build you a £1 million portfolio in the first year (approx 6 properties). No deposit required on each property therefore typically saving you £200,000 in deposits on a £1 million portfolio.  A £1 million property portfolio will typically give you a tax-free income of £100,000 per annum.”
[30]POD’s terms and conditions in its original brochure provided:
“POD will provide property up to the value of 1 million pounds within the first 12 months, subject to each applicant entering into a purchase contract.”
[31]It is necessary to look at the terms of the POD purchase contract. Clause 5 provided:
“The Company will propose each purchase to the client with a full appraisal sheet, showing purchase costs and expected rental returns.”
[32]Considering these documents on their own, I am not satisfied that they show that POD was representing to investors that they were guaranteed the acquisition of £1 million pounds worth of property in the first twelve months of their membership of the POD scheme. The reader of the brochure, the terms and conditions and the purchase contract would conclude that he was going to be offered property to that value and if he accepted those offers he could acquire a £1 million portfolio. It was also clear from the brochure that the investor would have to fund certain other costs.[33]It is also significant that members of the public did not simply become POD clients by completing an application form. I accept Ms Dowling’s evidence about the “client journey” as she described it. The client would have attended a seminar, they would have had a one-to-one meeting and they would be told that they should seek legal advice. Mr Churchill said in evidence that some applicants were not suitable and he would refuse them membership.[34]In my view POD was offering a service to its clients which could result in the acquisition of a £1 million property portfolio. I do not consider that to be a guaranteed investment scheme.[35]I must now consider whether the subsequent purchase contract and terms and conditions constituted a “misrepresentation” to investors. The new version was being used in January 2004: see the copy signed by the Sulemans, one of POD’s clients, on 15 January 2004.[36]The new purchase contract included the following terms: “1. Portfolios of Distinction agrees to acquire on behalf of the client a mixed property portfolio of value in excess of 1 (one) million pounds within the 12 month period of contract date, covering the UK and overseas. … 6. The client may withhold consent to purchase any property which Portfolios for Distinction advised upon. Continued withholding of consent to purchase will deem this contract to be fulfilled by Portfolios of Distinction. 7. All properties purchased on behalf of clients will be on a deposit free basis. Each property will incur approximately 0.5-6% purchase cost, which would include search and acquisition fees for Portfolios of Distinction. 8. This agreement can be extended between the parties by mutual agreement after 12 months. The terms and conditions, described as the “rules of the Portfolios of Distinction membership scheme” were on the reverse of the purchase contract. Mr Qureshi says that this is unsatisfactory in itself in that any qualifications to the main terms of the contract were effectively hidden on the back of it. Although it is obviously desirable that terms are clearly displayed I do not see this as part of some deceptive scheme on the part of POD. It is not unusual to have terms and conditions or rules of membership on the back of a document.[37]The rules provided under the heading “Purpose” that:
“The purpose of the Scheme is to offer to a member within a 12 month period a portfolio of properties on a buy-to-let basis with a minimum aggregate open market value of one million pounds.”
[38]Under the heading “Operation of Scheme” it was provided:
“PofD will provide members with property purchase appraisals as and when properties become available. The Appraisals will include estimates of purchase costs and expected rental returns (the ‘Appraisal’). On receiving an Appraisal members will have 3 days to accept or reject the Appraisal in writing. Any failure by the member to make a decision and notify PofD within the time limit will be deemed as a rejection by default. Any member declining the offer of a purchase of 3 or more Appraisals without good reason will lead (at PofD’s discretion) to either the cancellation of PofD’s obligation to continue to build the member’s portfolio within a 12-month period, or revocation of membership of the scheme.”
[39]It seems to me clear that reading together the purchase contract and the rules that POD’s obligation by way of the service which it provided was to offer properties with Appraisals to investors and that it was up to those investors whether or not they accepted the offers. I do not accept the submission that the 2004 purchase contract contained a guarantee of the kind suggested by Mr Qureshi.[40]The thrust of the Secretary of State’s case was that members of the public were being induced to invest in the POD scheme in circumstances where the likelihood of their actually achieving a £1m property portfolio in 12 months was remote. I think that legitimate criticism can be made of the brochure that insufficient information was given to investors as to the risk that they might not acquire a £1m portfolio but I am not convinced that this would constitute the deliberate mis-statement or omission which would constitute the significance necessary for the severe sanction of a compulsory winding-up: see Park J in Traveltime, 804A.[41]The evidence on behalf of the petitioner was that only one out of 111 clients had achieved a £1m property portfolio at the time of the investigation. The report of the Official Receiver dated 3 March 2006 indicates that some 3 clients out of 156 had achieved a £1m portfolio by 7 April 2005. Both Mr Churchill and Mr Wilson provided schedules showing the offers made by POD, their refusal or acceptance by the clients and the eventual outcomes. I found these schedules telling. Far from POD’s business being a sham it was genuinely offering properties to clients, a proportion of which were being declined. Although there were some suggestions made by Mr Stevenson that the offers may not have been appropriate in some instances (because the price was too high or the proposed rentals were not achievable) this was not the case put forward by Mr Qureshi. It was not suggested that the offers referred to in Mr Churchill’s and Mr Wilson’s schedules were other than genuine. Investors were entitled to take their own commercial view in relation to the offers. It is also clear that a number of investors built up substantial portfolios of property. In many instances contracts had been exchanged for the sale of property “off Plan”, meaning that these were developments which were in the process of being built. If these acquisitions are combined with the completions it can be seen that many more investors achieved the £1m goal. There were also many who achieved the £½m mark.[42]It was submitted by Mr Russen, counsel for POD and TPS, that there was no satisfactory or sufficient evidence to show that investors were ever deceived or that the public were likely to be deceived by POD. There were undoubtedly complaints made by clients. The investigators found that out of the 111 POD client files, that 33 of them involved either litigation or complaint. In his evidence Mr Ruthven summarised the complaint files in this way:
“The sense of the complaint files were: I gave you £50,000, I do not have a portfolio within a year, or £30,000 or whatever, I do not have a portfolio within a year. Therefore I have a problem with you.”
However, no attempt was made by the Secretary of State to demonstrate to the Court the nature of any particular complaint by an investor. This was accepted by Mr Ruthven during the course of his cross-examination. He accepted that there was no evidence of any complaint by a client that in return for paying the membership fee they would get £1m worth of property. In the absence of a clear analysis of the nature of complaints by investors, Mr Ruthven’s so-called “sense of the complaint files” is little short of conclusory and does not provide the Court with the evidence necessary to make a finding that investors were in some way misled. It was also accepted by Mr Ruthven that there was no evidence of any client of POD complaining that he had been misled by the terms of an advertisement.[43]Mr Russen relied on the example of the investor Mr Pasetchnik as an example of a client who had been offered property worth £1.48m and had accepted property worth £476,000. Mr Russen submitted that once it was accepted that POD’s role was to offer properties for purchase then it is impossible, on the evidence available, to say whether the reasons for the investor not attaining a £1m portfolio were due to the client’s own personal difficulties or unwillingness or were attributable to some wrongdoing on the part of POD. I accept this submission. In addition, as Mr Russen pointed out, there was no cross-examination of Mr Churchill or Ms Dowling to the effect that the poor performance was due to some systemic weakness on the part of POD. By way of example, Mr Ruthven could not establish that the complaint by Mr Arnott who made a complaint about acquisition costs could be justified.[44]For all these reasons, I am not satisfied that the Secretary of State has made out a case of mis-selling on the part of POD.

(b) Connection with CM2

[45]Mr Qureshi submits that the involvement of both POD and TPS must be looked at in the light of the debacle with Quicksell. It does seem unfortunate that, having ejected Mr Connolly from Portfolio House on 13 March 2003, within days Mr Churchill and Ms Dowling had been induced by Mr Laird to become involved in CM2. On their evidence, they fell prey to two dishonest businessman in short succession. Having seen Mr Churchill and Ms Dowling give evidence, they could not be described as gullible people. But even the most intelligent people can be misled by convincing fraudsters. The fact is that once Mr Churchill and Ms Dowling discovered that Mr Connolly had been using an alias and that he had been offering the same property to investors and taking multiple reservation fees they severed their relationships with him. It was POD who then applied to wind up Quicksell. In my judgment, there was no evidence to show that POD had knowingly participated in the wrongdoings of Quicksell.[46]With the failure of Quicksell, it would have been expected that Mr Churchill and Ms Dowling would have taken particular care in considering the proposition put forward by Mr Laird in relation to his debt purchase scheme. In her first affidavit in the proceedings brought by POD against Mr Laird, CM2 and others, Ms Dowling explained how the CM2 scheme worked. At paragraph 18 she said:
“As I have explained above, if a particular book of debt outperformed the anticipated returns, then once the anticipated monthly returns due to the individual investors had been paid over, the remainder of the sums collected would of course, be profit for Services. In addition, the agreement between Mr Laird and Alan and myself was that the book of debt would be notionally “sold” to investors at a price higher than the actual price paid by Services with the resulting profit being retained in Services and used (if necessary) to insure the monthly guaranteed returns to investors was met should there be a shortfall in collection. This has all the hallmarks of a scam.”
This was amplified by Ms Dowling at paragraph 19 of her first affidavit sworn in response to the petitioner’s evidence. The debts were to be bought from high quality companies such as Mercedes, Yorkshire Bank and the Bank of Scotland. If CM2 was “notionally” selling on the debt at twice its value to investors then it seems likely that the obvious route of repayment would be from the so-called “profit” made by CM2 selling it on to the investor. This looks like a scheme where clients’ monies will be used to make re-payment to them rather than a scheme which could genuinely produce a high return. " "[47]The advertising for CM2 made promises such as “Double your money guaranteed in 12 months”. The CM2 brochure, which had been approved by Ms Dowling, claimed that for a cost of £62 per month an investor could have a monthly return of £2,025. As Mr Stevenson explained in his affidavit, of some £3.3m invested by investors into the CM2 scheme, only a tiny proportion was spent on the purchase of debt or for the purposes of the administration of the debt income scheme. Much of the money was passed through accounts controlled by Mr Laird and appeared to be used for his own purposes.[48]During the course of their evidence, Mr Churchill and Ms Dowling sought to distance themselves from their involvement in CM2. In my view, they were closely involved with the activities of CM2 although they could not know the full extent of Mr Laird’s wrongdoing. They promoted CM2 at TPS seminars and invited POD clients to invest in CM2. POD clients who were directed to CM2 were those that were unable to raise the funds over and above the £50,000 membership fee to cover the acquisitional costs. Mr Churchill accepted that the reason why there was a £15,000 limit on the investment in CM2 was that this was the limit of capital gains tax relief for a couple. However he was content to recommend to POD clients that they should invest a further £15,000 at a lesser return (62%): see the letter to Mr Pee dated 15 July 2003. Mr Pee was of very limited means and should not have been encouraged to invest in CM2.[49]There are a number of reasons why I consider that Mr Churchill and Ms Dowling were closely involved in the business of CM2.(a) CM2’s offices were operated from Portfolio House. Ms Sue Evans, who had previously worked at POD, became employed at CM2 and it is clear that her office was open to Mr Churchill and to Ms Dowling.(b) Ms Dowling “approved and signed off” the CM2 brochure. It is true that she only corrected a number of typographical errors but she also suggested photographs of desirable objects being put in the brochure.(c) Ms Dowling was writing to an investor on 15 July 2003 that “many happy clients” had already been in receipt of their cheques. The first cheques were paid to investors after 12 August 2003. There is no explanation as to why Ms Dowling should have misled an investor in this way.(d) The parents of Ms Dowling, Mr and Mrs Wilson, received a payment of some £40,000 on the basis of an investment which was never made in CM2. The irregularity of the payment and the involvement of Ms Dowling in achieving this is seen in an internal file note dated 11 September 2003. The note suggests that Ms Dowling’s parents would be paid two investment payments and their investment payment would be deducted from Ms Dowling’s next payment.(e) By a board resolution of CM2 signed by Mr Laird, Ms Dowling and Mr Churchill it was recorded:
“It was agreed on 2 October 2003 that dividends of £100,000 be paid on this date to Alan Churchill and Wendy Dowling and also £100,000 to be paid to Ian Laird.”
As at 2 October 2003 no accounts for CM2 were found by the investigators. At that date there was no basis upon which any director of CM2 could have concluded that there were profits of CM2 capable of distribution. Mr Churchill did not admit in cross-examination that he was culpable in relation to this action but Ms Dowling conceded in cross-examination that it was “improper” and that she “should have known better”. According to the return at Companies House, Mr Churchill was a director of CM2 from 12 November 2003 to 8 December 2003. Neither Mr Churchill nor Ms Dowling were recorded as directors on 2 October 2003 but they plainly held themselves out as being directors capable of distributing the monies of CM2. (f) During the period from July to November 2003, Ms Dowling and Mr Churchill became increasingly concerned about the failure of Mr Laird to produce any documentation relating to the investments allegedly made by CM2. Despite this, they continued to urge POD and TPS clients to invest in CM2. They must have had their own serious misgivings by this time about the business of CM2 but they were willing to risk clients’ money.[50]Members of the public have lost some £3.3m by reason of their investment in CM2. Through their officers, Mr Churchill and Ms Dowling, POD and TPS were, as I have found, closely involved with the business of CM2 and should not have encouraged investors into CM2. However the business of CM2 had effectively ceased by 21 January 2004 when POD started proceedings against CM2. It was wound up on 11 May 2005. Mr Qureshi submits that POD and TPS are so tainted with their involvement in CM2, in a business which was inherently objectionable, that it is in the public interest that they should be wound up.[51]One of the reasons for making a winding up order under s.124A is that it enables an investigation to be carried out into the affairs of the company which has been carrying on the inherently objectionable business. Because it was a different business run by a different company which is now being wound up, there is not the same imperative to wind up POD or TPS. If there has been impropriety in the affairs of CM2 then the liquidator can bring the necessary proceedings and can refer the conduct of directors and shadow directors to the Secretary of State with a view to disqualification proceedings. If Mr Churchill and Ms Dowling were acting as shadow directors of CM2, then there is already an appropriate means for dealing with any misconduct on their part. In these circumstances, I do not consider that the “taint”, as Mr Qureshi called it, of CM2 is sufficient to justify the making of a winding up order against POD and TPS. I do not accept the further submission of Mr Qureshi made in his closing submission in reply, that POD and TPS should be treated as serial offenders. I am not satisfied for the reasons set out above that the involvement of POD and TPS in Quicksell can be shown to have been improper.

(c) TPS

[52]The brochure of TPS stated:
“Due to Turning Point’s enormous success, you are GUARANTEED as a delegate to be offered a minimum of 3 ‘no deposit down’ properties per year by the property sourcing company, typically saving you in excess of £90,000 in deposits.”
This was stipulated under condition 4 to be “subject to joining our associated property sourcing company”.[53]It is plain from this that TPS did not itself offer properties to its clients but it was necessary for its clients to join another company. Initially this would have been Quicksell. Paragraph 36(i)(a) of the petition claims that the source of property was to be Quicksell and that the brochure continued to be used after the relationship between TPS and Quicksell had broken down. This allegation did not form part of Mr Qureshi’s submissions for obvious reasons. First, the involvement of TPS in the wrongdoing of Quicksell could not be proved. Second the brochure did not in fact name Quicksell and there was evidence that TPS customers would be referred on to POD after the demise of Quicksell.[54]Mr Qureshi’s submissions focused on the fact that it was TPS who referred clients on to POD and to CM2. For this purpose, the success of the TPS petition was dependent on the success of the POD petition on those grounds. For the reasons which I have given in relation to POD it must also fail in relation to TPS.[55]A final allegation against TPS concerned the irregular payments of a £30,000 loan to Mr Connolly without documentary record or explanation and the loan of £200,000 to Ms Dowling by way of director’s loan which was then followed by a journal entry adjustment in the books of TPS. It is not in dispute that these transactions were not properly documented. This would indicate a lack of good corporate governance. As for the £200,000 an explanation was given for this transaction by Mrs Penfold, the auditor. Her analysis depended upon there having been a dividend declared in POD which was treated as being a dividend to Mr and Mrs Dowling and which was then transferred through the intercompany account against the loan account. She explained that one of the difficulties was that the bookkeeper did not at that stage operate a nominal ledger. Since the issue of the POD dividend is a matter which it was conceded by Mr Qureshi that I should not try, absent an adjournment, I am not in a position to decide on the validity of this transaction. Mrs Penfold seemed to think that it was acceptable and I certainly cannot be satisfied on this limited evidence that it was wrong.[56]Finally in relation to TPS it is significant that Mr Ruthven accepted that there was nothing to suggest that the majority of TPS’s clients were dissatisfied with the service of TPS. Mr Ruthven said that no identifiable measure of loss to members of the public could be traced to the activities of TPS. He agreed that there was no evidence of clients demanding a return of seminar fees. I also accept the evidence of Mrs Larkin-Carroll that the last four-day TPS seminar was held as long ago as 22 April 2004. Although the website of TPS is still operational, if new seminars were to be given they would be given in the light of this judgment and by reference to the reforms which have taken place to POD to which I shall next refer.

(g) Reforms at POD

[57]There was a considerable volume of evidence before me of a number of reforms which had taken place at POD since the appointment of the investigators. There may be cases where a company’s conduct has been so reprehensible that the only response of the Court can be to wind it up. There are other cases where there may have been wrongdoing which has ceased and where the company has made real efforts to ensure that the public is protected in future. I am quite satisfied that the present circumstances cannot be compared with a case such as Alphaclub where the company had discontinued its activities and then gone into voluntary liquidation only days before the hearing of the public interest position in an attempt to take the sting out of the petition.[58]I summarise the improvements which took place in POD after April 2004:(a) Mrs Larkin-Carroll was employed as the operations manager. She was an impressive witness who explained how she had organised the transfer of client records on to a computerised MIDAS system. POD paid some £100,000 for the system. I can see no point in a company making this kind of investment in equipment and personnel if it did not intend to improve its administration.(b) Mr John Grantham was employed as the customer services manager in November 2004. A risk review team was formed consisting of John Peck, Gary Wilson and Mr Grantham. Mr Grantham had had one-to-one interviews with 60% of those whom he had invited.(c) Mr Gary Britton was employed as a sales and marketing manager in December 2004 and he was concerned with assessing the suitability of clients of POD.(d) In October 2004 POD introduced the “One-to-One Meeting Summary” which was to ensure the clients were properly informed of all relevant matters.(e) POD introduced new contracts which provided for varying time limits for achieving the goal of £1m worth of property.(f) Better accounting systems were introduced following the replacement of Ms Kylie Ellis by Mr David Hughes.[59]I take the view that these were all significant reforms which were implemented at considerable cost to POD. I do not believe that they were implemented with a view to staving off a petition brought by the Secretary of State. They are also consistent with the desire to run a properly conducted business. Mr Russen submitted that it was surprising that the investigators made no mention of these reforms. Mr Qureshi’s riposte was that Mr Churchill and Ms Dowling had failed to mention these reforms to the investigators. There may be fault on both sides in this regard, but it is unfortunate that the reforms were never evaluated by the investigators.[60]These reforms by POD further convinced me that this is not an appropriate case to wind up these companies.

Conclusion

[61]For these reasons, I reject the petitions of the Secretary of State and refuse to make an order compulsorily winding up POD and TPS.

order

see Nicholls LJ in Re Walter L Jacob, 353a-g. (2) In some cases the public interest will be seen to be affected where a company is committing offences such as offences under the Fair Trading Act 1973 and the Lotteries and Amusements Act 1976: see Alpha Club (UK) Limited. There are also cases where it will be expedient in the public interest to protect members of the public who deal with a company whose business is such that it causes members of the public inevitable loss, whether this derives from illegal activity or not. This is conveniently described as a business which is “inherently objectionable”. (3) The burden of proof is on the Secretary of State to establish, on the balance of probabilities, that it is just and equitable for a company to be wound up: see Nicholls LJ in Re Walter Jacob at 354d-f. The Secretary of State must put forward weighty and substantial reasons justifying the Court in making a winding up order,whch is a serious step for the Court to take. (4) Insofar as the petition relies on “mis-selling” this must be established to be deliberate and of some significance: see Traveltime p.803B-D. (5) Where remedial steps have been carried out by a company in the face of an imminent petition to wind up a company, the Court will generally pay little regard to such actions: see Re Walter L Jacob p.60f-h. The evidence