Abacrombie & Co Ltd, Re [2008] EWHC 2520 (Ch)

[2008] EWHC 2520 (Ch)Case No 3385of 2008
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue MANCHESTER DISTRICT REGISTRYDate 23/10/2008
Before
MR JUSTICE DAVID RICHARDS
Between
IN THE MATTER OF ABACROMBIE & CO LIMITEDIN THE MATTER OF THE INSOLVENCY ACT 1986
Mr David Mohyuddin (instructed by Cobbetts) for Secretary of State forBusiness, Enterprise and Regulatory ReformMr Nicholas James Buchanan, Director, for Abacrombie & Co LimitedHearing Hearing dates: 7,8,9,10 October 2008
Judgment

Introduction

[1]The Secretary of State applies to the court for an order to wind up Abacrombie & Co Limited (“the company”). The application is made under s.124A of the Insolvency Act 1986 which so far as relevant provides:
“Where it appears to the Secretary of State from (a) any report made or information obtained under Part XIV of the Companies Act 1986 (company investigations, etc.)…that it is expedient in the public interest that a company should be wound up, he may present a petition for it to be wound up if the court thinks it just and equitable for it to be so.”
An investigation into the company and its business was conducted by Paul Andrew Simpson and Katharine Louise Blount, investigators in the Companies Investigation Branch of the Insolvency Service, in the course of which documents and information were obtained pursuant to s.447 of the Companies Act 1986. In August 2008 Mr Simpson made a report of his investigation on the basis of which the Secretary of State by an appropriate officer concluded that it was expedient in the public interest that the company should be wound up. The petition to wind up the company was presented on 22 August 2008. The company will be ordered to be wound up if the court thinks it just and equitable to do so.[2]The Secretary of State applied for the appointment of a provisional liquidator pending the determination of the petition. On the company giving undertakings as regards the conduct of its business, HHJ Hodge QC declined to appoint a provisional liquidator. Nonetheless, the company ceased business on 3 October 2008, because, I was told, it was unable to continue in business while the undertakings remained in force.[3]At the hearing for the appointment of a provisional liquidator, both the Secretary of State and the company were represented by solicitors and counsel. By the time of the trial of the petition, the company was for financial reasons no longer represented. Its sole shareholder and director, Nicholas James Buchanan, acted on its behalf at the trial. Mr Buchanan conducted the defence in an intelligent, fluent and coherent manner.[4]The principal evidence in support of the petition and in response to the evidence filed by the company was given by Mr Simpson who was cross-examined on his affidavits. The evidence on behalf of the company was given by Mr Buchanan who was cross-examined on his five affidavits. Legal principles[5]Section 124A of the Insolvency Act 1986 confers a discretion on the court as to whether to order the winding-up of a company. The grounds for such an order on a petition presented by the Secretary of State are rooted in considerations of the public interest, as the language of the section makes clear. The task of the court is to balance such of the grounds as are made out against the factors which tell against the making of a winding-up order, and to come to a conclusion as to whether it is just and equitable to make the order. See re Walter L. Jacob & Co Ltd (1989) 5 BCC 244 at 250 – 251 per Nicholls LJ. A winding-up order is not confined to those cases where the company has been acting unlawfully: re Senator Hanseatische Vervaltungsgesellschaft MbH [1997] 1 WLR 515 at 522-3 (Saville LJ) and 526 (Millett LJ). Where the activities of a company are contrary to a clearly identified public interest, including but not limited to falling short of a minimum standard of commercial morality (re Walter Jacob & Co Ltd), it may be just and equitable to wind up the company. Little attention will be paid to any changes made by a company in the face of an actual or imminent winding-up petition. The company and its business[6]The company was incorporated on 20 September 2002 and commenced business within the following nine months. Since acquisition of the company from incorporation agents, Mr Buchanan has been the registered holder and beneficial owner of its only issued share. Mr Buchanan was a formally appointed director from 1 May 2003 to 22 December 2004 and became a director again on 27 August 2008 after service of the petition. Thomas Edward Green was a director from 25 February 2003 to 27 August 2008. Mr Buchanan has nonetheless been in control of the company at all material times. He readily accepted that he was “the decision-maker”. The company had about a dozen employees and consultants.[7]The company promoted itself as insolvency and bankruptcy experts, providing bankruptcy advice and help. On its website, it stated:
“We are committed to giving our clients the best bankruptcy advice, help and solutions they need to get them back on the quickest route to a debt free life. As one of the UK’s leading bankruptcy advisors we can help you with your debt problems – every step of the way!”
It advertised its services widely, particularly in telephone directories such as the Yellow Pages. It placed advertisements in the Yellow Pages for every area in England and Wales. Yell Limited, the publisher of the Yellow Pages, has given notice of support of the petition as a creditor for £78,206, although Mr Buchanan disputes the claim. Typical of the advertisements was one which read:
“Call us before you commit to debt management and/or IVA. Want to clear your debts instantly? Talk to us We act on your behalf not your creditors. Under the new bankruptcy laws the stigma has gone…Talk to us today! We can help you. ”
Other advertisements referred to “protecting your interests not your creditors” and stated that “A free call could solve all your financial worries.” Want to clear your debts instantly? Talk to us Under the new bankruptcy laws the stigma has gone…Talk to us today! We can help you. ”

to us today!

[8]The solution offered by the company to its clients was to assist them to become bankrupt. In many cases this involved help with the process of bankruptcy : advice on how it operated, assistance with completing a bankruptcy petition and other documents, attending with the client at court and at a meeting with the Official Receiver. For this service, a fee of between £1,500 and about £3,000 plus VAT was charged and paid ahead of the bankruptcy. The Secretary of State’s case is not concerned with this part of the business.[9]Rather more was involved where the insolvent client was a co-owner of a property, normally a house or flat shared with a spouse or partner. Before any steps were taken for the client to become bankrupt, the company would purport to determine the size of the debtor’s beneficial interest and, on the basis of a valuation of the property, arrange for the purchase of the interest by the debtor’s spouse or partner. The proceeds of sale would be deposited with the company and the company would take its fee out of the proceeds. Typically, the fee would account for between 70 and 90% of the proceeds. In most cases the proceeds were in the range of £9,000 to £20,000. Larger sums of up to £44,000 were involved in some cases, while in others the equity was valued at a negative figure. A composition offer, in a range of 7 - 17p in the £, was made to the debtor’s creditors but this was conditional on 100% acceptance which was never achieved. There was paid to the Official Receiver or trustee in bankruptcy the balance of the proceeds of sale after deduction of the company’s fees and other expenses. It was rarely, if ever, sufficient to enable a distribution to be made to creditors.[10]Mr Buchanan’s evidence was that this activity accounted for no more than 10% of the company’s business, with simple advice and assistance in becoming bankrupt accounting for 90%. Whether or not this is the case in terms simply of the company’s clients, it is not the case as regards the company’s receipts and turnover, of which a significant proportion derived from the fees taken from the proceeds of property transactions. It is clear that this part of the company’s business was highly significant to its financial performance and results and hence, as will be seen, to Mr Buchanan’s drawings from the company.[11]The activities of debt insolvency advisers such as the company are entirely unregulated. This was emphasised by Mr Buchanan in his evidence and submissions, as a justification for a number of matters, including the lack of any clear pricing structure; the absence of agreement in advance on fees in a number of cases; the level of the company’s fees, which Mr Buchanan accepted were high; the lack of any records as to time spent on clients’ affairs; and the absence of any arrangements to segregate funds held on behalf of clients from the company’s own funds. Clients’ funds were paid into the company’s current account which was frequently overdrawn. Mr Buchanan accepted that the company’s clients were generally unsophisticated in financial matters and, being insolvent, were in a vulnerable position. Whether in the light of facts disclosed in this case, insolvency advisers and the like should remain unregulated is a question which may merit consideration.[12]The Secretary of State’s case that the company should be wound up is based on seven grounds, although there is overlap between some of them. I will address each of them, although not in the order set out in the petition. Lack of commercial benefit to the company’s clients[13]The effect of the arrangements made by the company and in issue on this petition may be shortly stated. The client debtor disposes of their interest in the shared property to their spouse or partner. Some of the funds thereby realised are offered as a composition to creditors, but on terms as to the amount and acceptance level which means that in practice the offer will not become effective. A very substantial proportion of the proceeds are retained by the company as fees and the amount paid to the Official Receiver or trustee in bankruptcy is generally insufficient for a distribution to creditors.[14]The arrangements therefore involved no financial or commercial benefit to the client debtor or his or her creditors. The financial and commercial benefits accrued to the company in the form of the fees retained by it and, it may be said, to the spouse or partner, who was able through the arrangements to purchase the remaining equity in the property without having to pay for the arrangements and without the need for any negotiation with an independent person acting for the debtor’s estate.[15]Not only did the arrangements not benefit the debtor’s creditors, they were detrimental to their interests. Instead of owning an asset which could be realised for their benefit, the debtor was left with a cash sum too small for distribution. The arrangements, as operated by the company, in my judgment, subverted the proper functioning of the law and procedures of bankruptcy. Their true purpose and effect was to enable the debtor to remain in his or her home at minimum cost to his or her spouse or partner. Mr Buchanan was entirely candid in his oral evidence on this topic. He rightly discerned that this is usually the concern uppermost in the minds of a person facing bankruptcy. He rightly discerned that people in that position would rarely be concerned with whether the funds paid over for their interest in the property went in paying the company’s fees or in paying their trustee in bankruptcy’s fees and making an often small distribution to creditors.[16]For the purposes of his evidence, Mr Buchanan prepared calculations of the sums which had been “saved” for clients by the company’s arrangements. This involved comparing a 50/50 split of the equity and the smaller share attributed to the debtor client under the company’s arrangements. The difference, totalling over £776,000, was described as the amount “saved”. It had not, of course, been “saved” for the client, still less for his creditors, but had been “saved” for the client’s spouse or partner who had to pay less for the client’s equity.[17]Mark Davies, the company’s office manager, prepared a notice for circulation among the staff which is revealing as regards the company’s view of its function. Paragraph 1 reads as follows:
“… Our presentation in the large majority of files to the OR are simply not good enough. One of the main aspects relates to the creditor lists. We are finding particularly on the corporate side, many company creditor lists are extremely inaccurate. This portrays us as completely incompetent in front of the OR and client. I have had now two complaints from clients and consultants over the state of the files we pass. Fax cover sheets, consultancy agreements, questionnaires, scrap pieces of paper have been handed over. Even the salessheets identifyingall our tricks, exactly what we don’t want the OR to see. It could easily lead to a DTI investigation. …”
(emphasis added) Mr Davies later repeats his warning about creditor lists, adding “we are volunteering our records to the ‘enemy’…”. Mr Buchanan agreed that the “enemy” referred to the Official Receiver and trustees in bankruptcy. Mr Buchanan denied all knowledge of this document, which he said was never put before him. In view of his position in the company and control of it, I find this denial implausible and I reject it.

…” (emphasis added)

[18]It might be said that even if all the proceeds of sale had been paid to the Official Receiver or a trustee, the costs and expenses of the bankruptcy would have left little or nothing for distribution among creditors. In some cases this may well be true, but not in all cases. In the case of one client, taken as an example, Mr Simpson calculates in his evidence that if the client had simply presented her own bankruptcy petition and her interest in the shared property had been sold for the price paid under the company’s arrangements, a distribution of 13.2 pence in the pound could have been made, instead of the 9.1 pence in the pound offered under the company’s arrangements. The distribution in a bankruptcy would not, of course, have been dependent on acceptance by all creditors.[19]The offers to creditors made by the company on the debtor’s behalf were in truth something of an illusion. Mr Buchanan knew from experience that the requirement for 100% acceptance, combined with the low level of the offer, meant that there was no realistic chance that they would become effective. In his evidence, Mr Buchanan explained that the purpose of the offers was to protect the debtor against later criticism by the Secretary of State or trustee that no attempt had been made to reach a compromise with creditors. In some cases the available funds were insufficient to meet the offer and to pay the fees in fact taken by the company. In one case, the deficiency was £16,304. Excessive fees and lack of clear charging structure[20]Until some time in 2007 or 2008 the company used a standard form contract for all clients called a Standard Consultancy Agreement. Clause 1 recites that the client was unable to meet his or her liabilities as and when they fell due. Clause 2 provides for a fixed fee in the following terms:
“In consideration for the Consultancy Services (as defined below), the Client shall pay to the Consultant fees of £……plus VAT, in total £…… (“the Fees”).”
The Consultancy Services are defined in cl.5 which provides:
“…. In consideration for the Fees, the Consultant agrees to provide services so as to advise the Client as shall reasonably be required, including; (i) advice on the Clients position, duties and responsibilities; (ii) assistance in relation to any bankruptcy or winding up proceedings taken against the Client; (iii) advice on possible alternatives to bankruptcy or winding up, and; (iv) subject to the Client paying for any disbursements required, assistance in the preparation of an Interim Order or other Court ruling where appropriate. (“the Consultancy Services”)”
[21]In cases involving the sale of the client’s equity in a shared property, the fees in fact later charged substantially exceeded the fees as fixed by cl.2. In other cases, cl.2 was left blank as to the amount of fees. By way of example, the fee stated in the agreement for one client (Mr Coghill) was £1762.50, but the fee in fact charged was £13,512.50. In the case of two clients (Mr Kukuc and Ms Parker) their agreements each gave the fees as £2,350 but they were in fact charged £12,337 and £12,962 respectively. In the cases of Mr and Mrs Hursey (both insolvent), Ms Hennessey and Mr Urquhart, the fees in their agreements were left blank and the fees ultimately charged were £37,600, £11,162.50 and £42,300 respectively. All these figures are inclusive of VAT. Mr Buchanan gave evidence that in all these cases, he or the consultant dealing with the client made clear at the initial meeting that the fees would be higher than those (if any) shown in the agreement and that they would not be cheap. I am not prepared to accept this evidence in the case of those clients whose fees were stated in their agreements. In the case of those where the fee clause was left blank, there is no evidence that clients were told that the fees would be on the scale in fact charged.[22]At a later stage, the company started to use an alternative standard form contract in the cases where the client had equity in a property, called a Consultancy Agreement – Informal Arrangement. As with the Standard Consultancy Agreement, cl.1 recited the inability of the client to meet his liabilities, but cls.2 to 4 provided as follows:
“…. 2. In consideration for the Consultancy Services (as defined below), the Client shall pay to the Consultant fees to be charged periodically based on the amount of work undertaken (“the Fees”). The Consultant estimates the Fees to be £2000 plus VAT for the initial phase of the work. 3. The Consultant will apply any further Fees as and when appropriate and will supply copies of and reasons for any Fees in excess of the estimated initial Fee on request of the Client or his legal representative. 4. The Consultant is hereby authorised (where applicable) to deduct the Fees from monies deposited with the Consultant in order to try to reach settlements with the Client’s creditors.”
The definition of the Consultancy Services is the same as in the standard agreement. Although cl.2 provides that the fees were to be “charged periodically based on the amount of work undertaken”, they were not charged periodically and no time records were maintained to provide a reliable estimate of the time spent. Statements of account produced for different clients, frequently after they had been declared bankrupt, showed substantial variations in the fees charged for apparently similar items of work. In the case of Ms Hennessy, Mr Kukuc and Ms Parker, the fees charged for each round of offer letters sent to creditors were £1,762.50 (and £l,175 in the case of the second round to Ms Parker’s creditors), but in the case of Mr Urquhart the fee was £2,350 and in the case of another client, Mr Oldfield, the first, second and third rounds cost £5,875, £2,350 and £3,525 respectively. These were letters in a standard form, needing only the addresses and the amount of the offer to be completed. The numbers of creditors were not large, ranging from 6 to 29, and the costs bear no relation to those numbers. There is no adequate explanation for these variations and all the amounts involved were excessive. Likewise, the fee charged for an initial consultation and advice with Mr Buchanan or other consultants, all of them unqualified, ranged from £1,762 to £5,875. In his evidence Mr Buchanan suggested that the variations might in part reflect different times spent with the client or on his affairs and factors such as travelling time, but the lack of records meant not only that it was impossible to verify this at trial but also that at the time of fixing the fees in any individual case Mr Buchanan did not have the material to enable him to assess these factors.[23]The fees in all these and similar cases were fixed at or after the client’s bankruptcy when the company was holding the funds realised from the sale of the client’s equity. Mr Buchanan accepted that a significant factor in fixing the fee was the amount of money available and held by the company. I am in no doubt, and I find, that this was the overwhelming factor in the determination of the fees charged in each case. For the reasons already given, the debtors were in practice rarely concerned with the level of fees, provided that they did not have to pay more than the proceeds of sale.[24]Mr Buchanan relied on the low number of challenges by the Official Receiver or trustees in bankruptcy to the company’s fees as showing that they were not excessive, but I do not consider that this assists the company’s case. In those cases where there was a challenge, the company agreed a reduction. More generally, the Official Receiver or a trustee in bankruptcy must take a commercial decision as to whether to mount a challenge in the light of the funds available to him in the estate. The depletion of funds through the company’s fees left many estates with little or no available funds.[25]The fees taken by the company, fixed principally as I have found by reference to the available funds, formed an integral part of the overall arrangement which I have held, for the reasons given, subverted the proper administration of the debtors’ bankruptcies. Inappropriate banking structure[26]The company’s principal bank account is a current account. It did not operate a client account for the receipt of proceeds of sale or other funds from clients although they were paid to the company on terms that, subject to payment of the company’s fees, they would be applied in payments to creditors if the offer to creditors were accepted or would be paid to the client or his trustee in bankruptcy. Such funds were paid into the company’s current account.[27]On many occasions the current account was either overdrawn or had an insufficient balance to meet payments to clients’ creditors or trustees. It was frequently the case that even with the use of the company’s overdraft facility of £10,000, there would be insufficient funds; this appears to have been the case continuously from December 2006 to the present.[28]These problems are compounded, and in part caused, by the fact that because of his poor credit record Mr Buchanan does not maintain a personal bank account or have any personal credit cards. Instead, as he accepted, he freely used the company’s current account and credit cards for his own personal expenditure. These drawings were debited to a loan account and when the annual accounts were prepared he would decide the level of remuneration by way of consultancy fees to be paid or credited to him, which would be at least sufficient to balance his drawings. Between 30 June 2003 and 29 February 2009 Mr Buchanan’s drawings from the company’s bank account totalled almost £770,000.[29]When asked how the company would in these circumstances meet payments to clients’ creditors or trustees, Mr Buchanan replied that if necessary he would repay drawings to the level required. This raised the question of how he would be able to do so in view of his own credit status and lack of banking facilities. He said that he could rely on friends and family and produced in evidence two “offers” of funding from individuals, dated 2 and 3 September 2008. They were produced in the context of the present proceedings and, in view of their terms, could not be regarded as a reliable source of funding. On Mr Buchanan’s evidence, the company is presently accountable for some £94,000 of client money which it is unable to pay, unless Mr Buchanan was able to raise third party funding to repay his loan account. In any event, Mr Buchanan claims credits against his loan account balance which would reduce it significantly below £94,000.[30]It is clearly improper for an actual or shadow director to treat a company’s bank account as his own, particularly where, as in the case of this company, it posed a real risk to the solvency of the company. The impropriety is increased if the funds being used in this way do not represent revenue of the company but are funds received by the company to be applied for particular purposes. Unsustainable business model[31]This is closely linked with the previous ground. Mr Buchanan relied on receipts from new clients to meet payments due in respect of existing clients. The conduct of many ordinary businesses rely on future receipts to meet existing liabilities, in particular liabilities on credit facilities. But this cannot be an acceptable approach where it is not the ordinary liabilities of the business which are met in this way, but the obligation to account for funds received from and held for clients. Lack of probity, inappropriate transactions and advice[32]There are a number of separate issues which arise under this ground. They are the back-dating of documents, advice to make payments said to be preferential, a sham agreement and memoranda or declarations of trusts prepared by the company and executed by clients. i) Back-dating documents[33]Mr Buchanan accepts that documents were back-dated. Memoranda of trust were prepared by the company in order, it is said, to record the respective beneficial interests of a debtor and his or her spouse or partner in their jointly-owned property. One client was sent a draft memorandum of trust on 19 December 2007 under cover of a letter from the company which stated:
“Please date the Memorandum Tuesday 15 November as it needs to be before your bankruptcy date, which was on the 22 November 2007”
. Mr Buchanan’s explanation in evidence was that the memorandum recorded an existing agreement. He said it was a stupid letter and added, revealingly, that the document did not need to be back-dated because it had no legal effect of its own.[34]Another client, Mr Smith, was sent a draft memorandum of trust on 18 May 2006 with a request that it should be dated 1 November 2005, which was before his bankruptcy order. Once this was done, he was told that the company would forward it to the Official Receiver. This was a second version of the memorandum. The first had been created on 19 December 2005 and differed in material respects from the first.[35]It is clear, and I find, that the purpose of back-dating these memoranda of trust was to deceive the Official Receiver or trustee in bankruptcy into believing that they were executed before the bankruptcy. The letters requesting back-dating were not sent by Mr Buchanan but by different members of staff. Mr Buchanan in his affidavit evidence states that this is not a practice condoned by the company and that the advice was inappropriate. I am not satisfied by Mr Buchanan’s evidence that he did not know that memoranda of trusts were on occasions back-dated but, if he did not, it demonstrates an unacceptable lack of control of the conduct of the business.[36]The electronic file for Mr Smith contains two letters to him from another member of staff, Christopher Harrison, which were created on 22 November 2006 but back-dated to 28 February 2006 and 12 April 2006. Mr Buchanan could give no explanation for this.[37]Three invoices apparently in respect of work done for Mr Smith were created on 22 November 2006 but back-dated to 3 November 2005, 28 February 2006 and 12 April 2006. Mr Buchanan explained that it was not the normal practice of the company to issue invoices at all. Only a statement of account was prepared at the end of the company’s engagement, showing the amount taken in fees from the funds deposited with the company and broken down into various items. Only if the client, or the Official Receiver or the client’s trustee, requested invoices, would they be provided. In those cases, it was usual practice to back-date them. In his affidavit evidence, Mr Buchanan explains that the invoices were only prepared for the purpose of being submitted to the trustee in bankruptcy. In line with this policy, five invoices were created on 18 June 2007 for a client, Mr Oldfield, after his bankruptcy but back-dated to various dates between 31 March 2005 and 31 January 2006.[38]The purpose of back-dating the invoices was, as I find, to deceive the Official Receiver or trustee in bankruptcy into believing that liabilities for the company’s fees had arisen and been quantified while the work was in progress and well before the date of bankruptcy. ii) Advice as to preferential payments[39]This arises in relation to one client with whom Mr Buchanan personally dealt. After receiving advice from Mr Buchanan, the client produced a list of his creditors, including a section showing that his wife’s uncle had lent him £5,000 and that his daughter had lent him £29,673.07 The client noted, “All these should be paid in full on Nick’s advice”. Mr Buchanan agreed that “Nick” referred to him but his explanation stated in his first affidavit, was “…. The facts in this case are that Mr Oldfield had borrowed funds from his daughter and his wife’s uncle to try to keep his fishing shop business afloat. Part of the funds lent by his daughter were lent with no guarantee but part were lent on the understanding that Mr Oldfield would repay these from a sale or re-mortgage of his jointly owned property. All of the funds lent by the uncle were on these terms. It was clear to me that, although there was no formal charge registered over the property, part of the funds lent by the daughter and all of the funds lent by the uncle constituted an equitable charge and that neither would have lent the funds unless they had obtained categorical assurances from Mr Oldfield that they would be repaid from such sale or re-mortgage.”[40]As this is the only instance in evidence of such advice, and in the absence of contradictory evidence from the client, I accept the explanation given by Mr Buchanan of his advice. However, it illustrates a real danger in the company’s business and mode of operation which will become more apparent when I consider the memoranda of trust. Mr Buchanan has no legal qualification or training, but he has picked up a few legal concepts, including an equitable charge. He is, however, ignorant of other legal requirements, such as for example those relating to the creation of charges over land or interests in land. Although he may have thought his advice was legally sound, it was in fact wrong. As a result, the debtor’s assets were dissipated to the detriment of his creditors generally and of the proper administration of his estate. iii) Sham documents[41]On 19 September 2006 an insolvent company, Aidis 24 Limited, signed a standard consultancy agreement with the company. A new company, operating from the same address, called Aidis 24 UK Assistance Limited was formed with a view to acquiring the assets of Aidis 24 Limited. An asset sale agreement was prepared and valuation obtained. In an email dated 8 December 2006 to Aidis 24 Limited, Mark Davies of the company wrote:
“…. The procedure is as follows: The old company must invoice the new company for £6,500 (values awaiting confirmation from valuer). The new company must then present a cheque to Abacrombie & Co for £6,500. Once the company has been wound up in January 2007, Abacrombie & Co will then reimburse the new company for £6,500. Nick has informed me that he advised you both of this procedure in the meeting. Any bailiffs who call and attempt to seize goods will fail as you can show them the sale agreement and then we can confirm we have received payment for these..”
In his second affidavit, Mr Buchanan’s evidence was that this related “to the need to forestall possible bailiff action, which would have prevented a sale”, while in his oral evidence he said that the whole point was a sale and purchase of the assets and that the avoidance of action by bailiffs was only an effect. I reject Mr Buchanan’s oral evidence. The procedure is as follows:[42]The transaction did not in fact proceed and no funds were paid to the company. If it had proceeded, it would not have been a true sale because Aidis UK Limited was not intended to receive the sale proceeds. They would have been paid to the company and either returned to the purchaser, as envisaged in the email, or perhaps retained by the company in payment of fees by Aidis UK Limited for which that company, as opposed to its owner, would have received no benefit. The allegation of an intended sham document is, in my judgment, established. iv) Memoranda of trust[43]An important part of the arrangements put in place by the company was to prepare a memorandum of trust purporting to show the size and value of the insolvent client’s interest in his or her jointly owned property. For this purpose, there would be an estimate of the property’s open market value and details obtained of amounts secured on the property; no issue is taken with these features.[44]More controversially, Mr Buchanan or the consultant dealing with the client would seek so far as possible to diminish the size of the debtor’s interest. Mr Buchanan gave evidence that instructions were taken from debtors and their spouses or partners as to any agreements as regards the treatment of, for example, deposits paid by one party or monies raised on the security of the property but not for its purchase or improvement. Mr Buchanan said that he or the other consultants would always take notes of these instructions which would either be in his diary or kept with the client’s file. No such notes are in evidence. Mr Simpson was unable to find any on his inspection of the company’s offices and Mr Buchanan has produced none. It is therefore impossible to take simple steps to verify this aspect of the memoranda.[45]Once again, the little more than nodding acquaintance of Mr Buchanan and the other consultants with legal concepts presented significant risks. Considerable use was made of the “equity of exoneration”, as explained by Scott J in re Pittortou [1985] 1 WLR 58, although Mr Buchanan’s evidence demonstrated only an approximate understanding of it. In the case of one client and his wife, Mr Buchanan or one of the other consultants accepted that the couple had agreed that funds raised on the security of their jointly-owned house for use by a company of which the client was a director were to be debited solely to his interest. Because of the known risks of challenges in bankruptcy to memoranda of trust, Mr Buchanan said that they would have checked that the wife received no benefit from the loan. Mr Buchanan did not know, and clearly no inquiries had been made which would show, that among a number of shareholders in the company the wife held over 25% of the shares. The memorandum of trust for the same couple recorded that following the sale of the property, a second property was purchased in which their respective interests were 30% for the client and 70% for his wife. Notwithstanding this division of interest, the memorandum deducts the mortgage loan taken out for the purchase equally between them. Mr Buchanan’s attempted explanation in evidence was that as against the lender they were equally liable. The effect, even assuming all other figures to be correct, was to give the client negative equity of £1,403 instead of positive equity of £35,596. In his closing submissions, Mr Buchanan suggested that the reason for the equal division of the liability for the mortgage loan was that only by this means could the husband pay for his one-third share. Conclusions such as these require far more analysis than the company undertook or was capable of undertaking. It was instructive that only in his closing submissions, having read a hand-out from a firm of solicitors, did Mr Buchanan mention constructive trusts in terms which suggested no understanding of the relevant principles.[46]As Mr Buchanan made clear in his evidence, the memoranda of trust were prepared to assist the debtor and his or her spouse or partner. They were designed to show the trustee in the bankruptcy that the client had an interest of either no or a low value, so that there was no point in seeking to realise it or to challenge a sale of it to the spouse or partner. Although in many cases only purporting to record previous agreements, they were executed as deeds because, as Mr Buchanan explained, it gave the documents more credibility.[47]The Secretary of State’s case was opened on the basis that the memoranda were designed to mislead as to the existence of agreements or understandings contemporaneous with the transactions in question when in fact there were none. The evidence before the court does not justify such a finding. But the evidence amply justifies a finding that the company’s stated aim to assist the debtor and their spouses or partners by minimising the debtors’ interests in their jointly-owned properties, combined with the lack of understanding of the applicable legal principles on the part of Mr Buchanan and the other consultants, posed a serious risk to the proper administration of the debtors’ bankruptcies.[48]Again, it is no answer that it was always open to the Official Receiver or a trustee in bankruptcy to challenge the stated division of equitable interests. An absence of challenge does not mean that a memorandum accurately reflected the debtor’s interest. It more likely reflects a belief that the memorandum was competently researched and prepared or a lack of funds in the estate. Inadequate accounting records[49]The obligation of the company to maintain accounting records was governed by s.221 of the Companies Act 1985 which provides in sub-sections (1) and (2):
“…. (1) Every company shall keep accounting records which are sufficient to show and explain the company’s transactions and are such as to- (a) disclose with reasonable accuracy, at any time, the financial position of the company at that time, and (b) enable the directors to ensure that any accounts required to be prepared under this Part comply with the requirements of this Act (and, where applicable, of Art. 4 of the IAS Regulation). (2)The accounting records shall in particular contain- (a) entries from day to day of all sums of money received and expended by the company, and in the matters in respect of which the receipt and expenditure takes place, and (b) a record of the assets and liabilities of the company. ” (a) disclose with reasonable accuracy, at any time, the financial position of the company at that time, and (b) enable the directors to ensure that any accounts required to be prepared under this Part comply with the requirements of this Act (and, where applicable, of Art. 4 of the IAS Regulation). (a) entries from day to day of all sums of money received and expended by the company, and in the matters in respect of which the receipt and expenditure takes place, and (b) a record of the assets and liabilities of the company. ”
[50]This may seem a technical requirement but it is fundamental to the proper administration of a company. A lack of proper accounting records may not only deprive the management of accurate and up to date financial information, but it will also facilitate fraud and hamper, where needed, the investigation of a company’s affairs. A failure to maintain proper accounting records is a serious matter.[51]The accounting records maintained by the company comprised QuickBooks software, which was used only for the preparation of annual accounts, a computer record of cash receipts and payments, and a list kept by Mr Buchanan of payments he expected to receive from clients. As to liabilities yet to be paid, the only records were the invoices issued to the company.[52]The QuickBooks software, which might have formed the basis of adequate accounting records, was badly out of date at the time of Mr Simpson’s first attendance at the company’s premises. Despite several undertakings to bring it up to date, it was by 14 July 2008 up to date only as at 29 February 2008.[53]The company was in clear breach of its obligations under s.221 and it is no answer for Mr Buchanan to say that he had access to all the information he needed to run the company. Lack of transparency as to controllers[54]It is undisputed that Mr Buchanan was at all material times the controller of the company and its business. He resigned as a director on 22 December 2004 but in fact continued to fulfil the role of principal director.[55]Mr Buchanan’s explanation for his resignation was given in his second affidavit:
“… 23. Late in 2004, I felt that Abacrombie would benefit from additional banking facilities. This was because I intended to extend the company’s operations and possibly set up a Licensed Insolvency Practitioner business. I was aware that this would require substantial initial funds, but I had poor financial credibility personally at that time due to defaults on credit card payments and no long term establishment of my home address. Mr Green on the other hand had an excellent financial status and was already a director. I felt that it would help in gaining finance if I were to resign from the board, and this I did on 22 December 2004. I did not inform any of Abacrombie’s suppliers, clients, or staff of this, and I always maintained my position as the controlling party to all concerned, although I did discuss it and my reasons with the bank manager, who was at that time Mr Vincent Gell of Nat West. 24. Mr Gell did at that time tell me that he did not think it would make any difference, since the bank would look at the case based on its financial merits, but I had already registered the forms for my resignation at Companies House. 25. As it happened, I did not proceed with the plans and Abacrombie never made an application for new funding, but I did not then re-appoint myself as a director. … ”
[56]It appears from this evidence that Mr Buchanan’s purpose in resigning was to give the impression to the bank that the company was controlled by Mr Green who had “an excellent financial status” rather than by himself who had “poor financial credibility”. His purpose was to deceive the bank. The fact that the local bank manager knew of the true position makes no difference because he would not be the decision-maker as to whether to provide the loan. The fact that no application for a loan was in the event made does not excuse the fact that the company, through Mr Buchanan, was willing to present a deliberately false impression of its control to a potential creditor. Involvement of Mr Harrison[57]Mr Harrison was the subject of a disqualification order for a period of eight years made under s.2 of the Company Directors Disqualification Act 1986 on 23 April 2003 after he pleaded guilty to a charge of conspiracy to defraud. Under the terms of a disqualification order a person must not, among other things, be a director of, or be concerned or take part in the management of, a company. Mr Buchanan knew of Mr Harrison’s disqualification order and its effect, and said in evidence that he was careful to ensure that Mr Harrison did not act in breach of it.[58]Mr Harrison was introduced to Mr Simpson at the start of his inquiries by Mr Buchanan as a part-time book-keeper. In fact it is clear that his involvement was more extensive. As well as responsibility for maintaining financial records, he drafted various of the company’s standard form documents and he was involved in dealing with some of the more complex cases, drafting memoranda of trust and giving advice and assistance to consultants as regards clients’ affairs. These activities would not, in my view, be sufficient to amount to participation or involvement in the management of the company. However, Mr Simpson details in paragraph 53 of his third affidavit a number of actions on the part of Mr Harrison which are consistent only with participation or involvement in management of the company. These include placing an order with Yell Limited, dealing on the company’s behalf with its solicitors, negotiating a reduction of fees with a client, negotiating on behalf of the company with an accountant for an agency agreement and dealing with an employee whom he considered to have performed poorly. In this last case, he wrote a letter to the employee which ended:
“In view of all the above, I have decided that you will not receive any commission for this month, although I will calculate what you would otherwise be entitled to and may review this if there is an immediate, substantial and sustained improvement in your performance.”
A company structure chart and other internal documents treated Mr Buchanan and Mr Harrison as having a similar status. Mr Mohyuddin drew attention to the drawings made by Mr Harrison of over £227,000 between June 2003 and February 2008 and to the provision by the company of a Jaguar car for him. This level of remuneration would suggest a position of some responsibility. It contrasts with the total of £104,707 paid to Mr Green in the five years to February 2008, when for much of the time Mr Green was the sole formally appointed director.[59]I am satisfied that Mr Buchanan, knowing of the restrictions placed on Mr Harrison by his disqualification order, sought in his evidence to downplay Mr Harrison’s involvement in the business. I find that, with Mr Buchanan’s knowledge and approval, Mr Harrison was participating, and involved, in the management of the company. Mr Buchanan accepted that at all times he knew of the existence and effect of the disqualification order. The fact that Mr Buchanan had ultimate control and was “the decision-maker” does not mean that others, in this case Mr Harrison, could not also be involved in the management of the company. Conclusion[60]I am satisfied on all of the grounds advanced by the Secretary of State that it is just and equitable to wind up the company. I should make clear that I regard the grounds summarised under the heading “lack of commercial benefit” as sufficient to wind up the company. For the reasons given when considering that ground, the purpose of the company’s business as it related to clients with equity in their residential property was, prior to the client’s bankruptcy, to sell the equity to the client’s spouse or partner at as low a price as possible and to use the proceeds to fund the company’s charges which were both excessive and unjustifiably charged to the debtor client. The effect, as the company through Mr Buchanan well appreciated, was to deprive the debtor’s estate of any substantial return or value from the debtor’s beneficial interest which was likely to have been the only asset of any substance. The effect was detrimental to creditors and undermined the proper administration of the bankruptcy of the debtor.[61]The other grounds also raise very serious issues, including dishonesty in some instances such as the back-dating of documents, which fully justify the making of an order. In addition, the company appears to be insolvent but I have not found it necessary to deal with that.[62]The factors that are relied on in opposition to the making of a winding-up – that it has, as the company submits, provided a helpful service to many debtors in the straightforward cases not involving property transactions, that it has provided employment and that it has been financially successful – do not, in my judgment, provide grounds of any substance against the making of an order in the light of the matters established by the Secretary of State.[63]While maintaining its position that the petition was unfounded, the company was willing to offer undertakings as to the future conduct of its business. I need not go into the details of these undertakings. The Secretary of State was not willing to accept these undertakings and is under no obligation to do so. Unless acceptable to the Secretary of State as a means of disposing of a petition, it will be an unusual case where the giving of undertakings will be an appropriate alternative to a winding-up[64]Accordingly, for the reasons given above, I shall order the company to be wound up.[65]There is a further matter to mention. The principal evidence in support of the petition is the first affidavit of Mr Simpson, which runs to 740 paragraphs and 150 pages. The exhibits are over 900 pages. In a later affidavit, Mr Simpson acknowledged that his first affidavit “to all intents was a top and tailed version of my “information” provided for my superiors”. The grounds stated briefly in the petition are supported by Mr Simpson’s first affidavit, but the affidavit is not organised in a way which readily enables the reader, whether the court or the company’s officers or lawyers, to link each of the grounds with the particular evidence relied on in support of it. There are substantial parts of the evidence which were in the event not relied on.[66]I raised this question with counsel for the Secretary of State and, after taking instructions, he made the point that petitions presented by the Secretary of State are frequently unopposed and it is important that a full picture of the findings of an investigation are before the court to enable a properly considered decision to be made on all available material. I agree with this aim but I do not think that an affidavit in the form used in this case achieves it. The report should be exhibited, but the affidavit should identify the evidence supporting each ground for winding-up.[67]I consider this to be important for a number of reasons. First, the company should be able readily to identify the case made against it. Secondly, in pre-reading for a hearing, the court needs to know those parts of the evidence which are important to the decision it will have to make. Thirdly, presentation of a petition is usually followed swiftly by an application for the appointment of a provisional liquidator. These are generally urgent applications which require the court, and the company if it has been given notice, to assimilate and assess rapidly the essential evidence.[68]As I made clear at the hearing, I am satisfied that there has been no unfairness in the present case. Mr Buchanan was able to deal fully with the case made against the company.

order

Inre Bamford Publishers Ltd (2 June 1977, unreported, Brightman J), In re Supporting Link Alliance Ltd [2004] 2 BCLC 486, Secretary of State for Trade and Industry v Bell Davies Trading Ltd [2005] 1 All ER 324 (CA). It would not be appropriate in this case.

Cited in 6 later judgments