Secretary of State for Business Enterprise and Regulatory Reform v Sullman & Anor [2008] EWHC 3179 (Ch)

Neutral Citation Number: [2008] EWHC (Ch) 3179

Case No 5989 of 2004

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 19 th December 2008

Before

Mr Justice Norris

Between

The Secretary of State for Business Enterprise and Regulatory ReformClaimant

Anthony Frederick SullmanDefendants

Colin David PooleDefendant

Mr Mark Cunningham QC and Mr George Hayman (instructed by The Treasury Solicitor) for Claimant

Mr Jeremy Cousins QC and Mr Andrew Charman (instructed by Neil Davies & Partners LLP) for First Defendant

Hearing Hearing dates: 14-15,17,21-23, 28 April, 7,9,12 May 2008

JUDGMENT

[1]By section 8(1) of the Company Directors Disqualification Act 1986 (“CDDA”) the Secretary of State may make an application to the Court for a disqualification order to be made against a person who is or has been a director of a company. Mr Anthony Sullman (“Mr Sullman”) was a director of Claims Incorporated PLC (“Claims Incorporated”) from the 13th of December 1995 until the 20th of March 2001 and a director of Claims Direct PLC (“Claims Direct”) from the 20th of June 2000 until the 29th of August 2001. His conduct has been investigated under section 447 Companies Act 1985 and the Secretary of State considers it expedient to make an application for a disqualification order.

[2]By section 8(2) CDDA “the Court may make a disqualification order against a person where….it is satisfied that his conduct in relation to the company makes him unfit to be concerned in the management of a company”. The requirement that the conduct should make the director “unfit to be concerned in the management of company” is also to be found in section 6 CDDA (with which section most of the reported cases are concerned). In that context it is well established that these words must be approached as ordinary words of the English language to which it is important to hold in each case, and that whilst in the ordinary case the conduct must display a lack of commercial probity, or a marked degree of negligence or incompetence, “… the true question to be tried is a question of fact - what used to be pejoratively described in the Chancery Division as “a jury question”….” (per Dillon LJ in Sevenoaks Stationers Retail Ltd

[1991] Ch 164

at 176B-F). As Timothy Lloyd J put it in Re Atlantic Computers PLC (unreported 15 Jun 1998) summarising the authorities :- “ In order to disqualify a respondent the court has to be satisfied that he or she “has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies”…. This is a minimum standard…. It is also appropriate to recall that the purpose of the legislation is to improve the standard of conduct of company directors…….. The point of a disqualification order is, by depriving the respondent of the liberty to take part in the management of a business carried on with the privilege of limited liability, to protect the public both from misconduct of a business by that director and also by a deterrent effect in relation to other company directors…. A consistent theme in the cases under the Act is that, while the Court must consider the extent of a respondent's responsibility… a director cannot avoid his responsibility by leaving the management to another or others….”(see the passage at page 14 line20 to page 16 line 20).

[3]What is at issue in the present case is not Mr Sullman's competence, but his integrity, in constructing and selling an insurance product to members of the public, in floating the business so created on the stock market, and in statements made to the market. In relation to Mr Sullman's alleged conduct Mr Cunningham QC on behalf of the Secretary of State submitted that Mr Sullman's willingness to mislead the public, franchisees and underwriters and prospective and actual investors was calculated, cynical and shameless; as was his rapacious disregard of the rules prohibiting professional referral fees and his willingness to assist his co-director in “cashing his chips in”. He accused Mr Sullman of being driven by a financial imperative, namely to become as rich as possible, as quickly as possible and as invisibly as possible. The question for decision may be “a jury question”, but the tribunal making the decision is not a jury.

[4]Furthermore, although the fundamental question is a jury question and one to be approached on a “broad brush” basis (see Re Westmid Packing Services Limited

[1998] 2 All ER 124

at 134j-135b per Lord Woolf MR) that does not mean that the Court is entitled to undertake only a superficial factual enquiry. To refer again to the judgment of Timothy Lloyd J. in Re Atlantic Computers (now at p.18 line 10):- “The question of unfitness and the period of disqualification are aspects which need to be considered in a broad way, but where there are factual issues as to whether the conduct of a respondent was as alleged by the applicant, I do not see how the Court can avoid a detailed investigation of the evidence including all relevant documents”. It was a central part of the case for Mr Sullman advanced by Mr Jeremy Cousins QC and Mr Charman that, on examination, the matters out of which the charges arose were not as they appeared in the evidence filed on behalf of the Secretary of State. This has entailed a detailed analysis of a mass of paper, which has taken this case well away from the summary proceedings of which the Court of Appeal spoke in Re Westmid Packaging

[1998] 2 All ER 124

: and it has resulted in judgment that is regrettably long and fact-heavy. But a summary of the position reached will be found in paragraphs 117 following.

[5]The context in which Mr Sullman's business was created was the implementation of the policy to restrict the availability of Legal Aid, and so to relieve the general body of taxpayers of the burden of assisting litigants of modest means and to cast that burden upon motorists, householders and others who took out policies of insurance. The first step in this direction was taken in Regulations made in 1995 under the original section 58 of the Courts and Legal Services Act 1990 which permitted providers of legal services to offer conditional fee arrangements containing a costs uplift (a “success fee”). An unsuccessful defendant could thus be made to pay uplifted costs (the uplift defraying costs incurred by unsuccessful claimants in other cases against successful defendants). But whilst a conditional fee agreement deals with a claimant’s exposure to liability for his own costs in the event of failure of his claim, it does not deal with his exposure to a claim for the defendant’s costs in the event of the failure of his claim. Mr Sullman exploited this market from 1996 by promoting a contingency fee scheme (“the 30% scheme”). In essence, in return for a 30% share of the proceeds of a successful claim Claims Incorporated agreed(a) to find a solicitor to advance the claim (and if necessary to bring proceedings) and

(b) in the event that the proceedings were unsuccessful then to indemnify the claimant in respect of (i) any liability to pay any order for costs in favour of the defendant and (ii) the costs of the solicitor that was provided by Claims Incorporated. In 2000 it was asserted that between 1996 and 2000 under the 30% scheme Claims Incorporated had settled 15,000 cases recovering £50 million in damages for its clients.

[6]The next step came in the Access to Justice Act 1999 (which was enacted on the 27th of July 1999). This was designed to promote an “after-the-event” (“ATE”) insurance market. The section provided:- “ Where in any proceedings a costs order is made in favour of any party who has taken out an insurance policy against the risk of incurring a liability in those proceedings, the costs payable to him may, subject in the case of court proceedings to rules of court, include costs in respect of the premium of the policy” An unsuccessful defendant could thus be made to pay “costs in respect of the premium” on “an insurance policy against the risk of incurring a liability in [the] proceedings” as part of the recoverable costs in the litigation. The claimant’s exposure to liability for a successful defendant’s costs was thereby addressed.

[7]The section did not have immediate force, but was to be brought into effect on a day to be appointed. It came into force on 1st of April 2000 by virtue of the Access to Justice Act 1999 (Commencement No.3, Transitional Provisions and Savings) Order 2000 made on the 20th of March 2000. The delay between enactment on the 27th of July 1999 and coming into force on the 1st of April 2000 required that the period between those two dates be addressed. This was done in the Access to Justice Act 1999 (Transitional Provisions) Order 2000, paragraph 3 of which was in these terms:- “ Section 29 (recovery of premium insurance premiums by way of costs) shall not apply, as regards a party to proceedings, to (a) any proceedings in relation to which that party took out an insurance policy of the sort referred to in section 29 before 1st April 2000……..” .

[8]On the 16th of August 1999 (and so immediately after enactment of, but before the coming into force of, section 29) Mr Sullman and his colleague Mr Poole (a solicitor) launched an ATE policy called “the Claims Direct Protect Scheme”. The policy was available to any claimant who had a “better than evens” chance of success in his claim (the standard that had to be met in order to obtain Legal Aid). The “premium” was £1312.50 inclusive of IPT (£1250 net). Of this, only £90 went to underwriters in respect of the insured risk which they carried. A further £50 went to Litigation Protection Limited (“LPL”) the agent for the underwriters and which administered the policies. Of the rest, £110 went to Claims Direct as commission and £1000 was payable to Medical Legal Support Services Limited (“MLSS”), a wholly owned subsidiary of Claims Direct which provided medical reporting, enquiry agency, process serving and cost drafting services. (As a matter of mechanics the whole premium was collected by LPL which paid it into a trust account on behalf of the underwriters before distributing it with their authority). In return for this premium the customer was covered against the costs of pursuing his claim (if the defendant did not pay them) as well as the risk of exposure to the defendant's costs if the claim failed (this was the risk underwritten) ; and he was also entitled to some claims management services. The premium was funded by a loan to the claimant arranged by Claims Direct with an outside funder. If the whole of the premium was not recovered from the defendant as “costs in respect of the premium” on “an insurance policy against the risk of incurring a liability in [the] proceedings” then the claimant would have to meet the shortfall out of his damages award, or otherwise.

[9]The Claims Direct Protect scheme was heavily marketed and was very successful. By the year ending 30th of April 2001 Claims Direct was processing some 71,118 live cases.

[10]The Claims Direct Protect scheme was also very lucrative. On 13th July 2000 Claims Direct’s shares were floated on the London stock exchange. For the year ending 31 March 2000 it disclosed a turnover of a fraction under £40 million, and that in the months before flotation it was taking on 4,000 cases per month at £1250 each, earning about £660 profit per case. But two years later administrative receivers were appointed over its business (because underwriters were no longer prepared to provide cover) and it went into voluntary liquidation on the 30th of January 2003.

[11]This is the essential narrative within which the Secretary of State's charges against Mr Sullman must be considered. The detailed factual enquiry that must be undertaken in respect of the some of the charges can now be placed within this broad picture. Ten charges were brought, nine of which were pursued at trial. I will consider each in turn before standing back and examining whether the conduct taken as a whole justifies exercising the discretion under section 8 CDDA to disqualify Mr Sullman and, if so, for how long.

[12]The first accusation led against Mr Sullman is that he misled the public as recoverability of insurance premiums paid before April 2000, and later made misleading statements in an attempt to justify the conduct of Claims Direct.

[13]In the outline narrative I have noted that the Access to Justice Act 1999 was passed on the 27th of July 1999, that section 29 was not brought into effect until the 1st of April 2000, and that when it was brought into effect the premium on contracts effected before the 1st of April 2000 did not form part of the costs recoverable from a defendant. I have also noted that throughout that period the Claims Direct Protect Scheme was being marketed. This charge calls for inquiry as to the basis on which that marketing was undertaken and whether Mr Sullman’s conduct in relation to that undertaking demonstrates or contributes to “unfitness”. These are my findings of fact.

[14]The ATE market was not created by the Administration of Justice Act 1999. The significance of section 29 was to permit recovery of the ATE premium from an unsuccessful defendant as part of the litigation costs, so reducing the litigation costs of a successful claim and making ATE insurance attractive to meritorious claimants seeking access to justice that was otherwise denied by reason of the increasing restrictions on legal aid. Mr Sullman was already active in the litigation funding market through the 30% scheme and was known by the Lord Chancellor's Department to be a likely active participant in the ATE market. Claims Direct was developing its product and discussing it with the Lord Chancellor's Department before the AJA 1999 was passed.

[15]On the 14th of June 1999 Mr Sullman was advised in consultation by Mr James Goudie QC and Mr Andrew Gordon-Saker of Counsel in relation to the proposed new product. Their clear opinion was that “pending the implementation (sic) of the Access to Justice Bill” the premium on the Claims Direct Protect scheme would be payable out of the damages (and not recoverable from the defendant). If this view was right, a claimant with a relatively small claim (say £2000) might well not consider it worthwhile to spend £1312.50 to recover £700 net. Mr Sullman was advised that this risk could be insured under a “deficiency in damages clause” but the current form of the Claims Direct Protect scheme did not afford such cover.

[16]On the 9th July 1999 Mr Sullman wrote to the Lord Chancellor's Department informing it that he had been able to devise a scheme supported by insurance which he believed “work[ed] post-Access to Justice coming into place”. He raised the question whether it would be advantageous for current customers of the 30% scheme to transfer to the new insured scheme, saying:- “ Much of that, of course, will depend upon the insurance premium, if a policy is taken out today, can be recovered at the conclusion of the case. If the Access to Justice Act provides for insurance premiums being recovered where the policy has been taken out prior to the Access to Justice Act coming into force, then clearly it would be beneficial to the large majority of our clients to be given that option.”. I have no doubt that in raising that question Mr Sullman was inquiring not about policies effected before the passing of the AJA 1999 (for he had no such policies on the market and the Royal Assent was imminent). He was inquiring about policies effected after the enactment but before the implementation (“coming into force”) of the AJA 1999. The answer he received was in these terms:- “ I have now spoken to a colleague who is dealing with the provision for the recoverability of insurance premiums in the Access to Justice Bill. She has advised that, whilst there will be consultation about the recoverability of insurance policies taken out pre-enactment (sic) of the Access to Justice Bill, she considers it will be extremely unlikely that the recoverability will be backdated. ”. So far as I can see the possibility of recovering premiums paid pre-enactment had never been floated by anybody: it was certainly not the question asked by Mr Sullman. The general tenor of the reply was clearly that “backdating of recoverability” was extremely unlikely. Nonetheless in his written evidence Mr Sullman asserted that (without seeing the need to make any further enquiry) he took the quoted passage “to mean that for policies issued after Royal Assent recoverability could be expected”. He maintained this position at trial, stating that in 1999 his understanding was that the odds were much more in favour of recoverability than against, and that there was no significant risk of non -recoverability. I do not believe this evidence.

[17]On the 12th of August 1999 there was a meeting of the Claims Direct National Franchisee Association attended by Mr Sullman and Mr Poole. One franchisee asked whether the premium of £1250 would be recoverable as part of the settlement clients would receive. Mr Poole responded that no guarantees could be given, that it was very much up to individual District Judges’ interpretation, but that there was a Court of Appeal precedent that any insurance premium was recoverable on settlement of a claim; he added that no specific guidance had been issued from the Lord Chancellor's Department. Mr Poole’s information about “a Court of Appeal precedent” may have derived from Mr Sullman's account of an article that he had read; despite diligent research the precedent has not been traced nor the article identified. The suggestion that there was some common law right of recovery which was not dependent on the implementation of the AJA 1999 would appear to run counter to the advice which had been tendered by Mr James Goudie QC, but Counsel’s view had not been questioned nor had further advice been sought. The information provided to the franchisees is not consistent with Mr Sullman's evidence as to his then current belief that the Lord Chancellor’s Department had indicated that all post-enactment premiums would be recoverable.

[18]At the time of the Claims Direct Franchisee meeting other claims managers were in correspondence with Claims Direct. In answer to one of them (Mr Carroll) Mr Sullman expressed the view that the Access to Justice Bill “[was] most unlikely to be retrospective” but that defendant insurance companies were making “voluntary payments” in respect of “after-the-event” legal expenses insurance premiums already. This again is not consistent with Mr Sullman's evidence as to his then current belief. (I should also note that during the course of the investigation Mr Doona of Claims Direct acknowledged that the “voluntary payments” had probably been made as a result of administrative oversight on the part of defendant insurers rather than as a result of any acceptance of a legal right of recovery: it transpired that between August 1999 and February 2000 full or partial recovery was made in 5 settled cases, whereas there was no recovery in 1795 settled cases).

[19]On the 16th of August 1999 the first Claims Direct Protect scheme policy was sold. So far as material to the present issue the documentation provided as follows:-(a) In a Fair Trading Statement (which had been settled by Leading and Junior Counsel with input from Mr Raincock of LPL) each customer was invited to signify that he understood that “if my claim is successful my appointed Solicitor will attempt to recover the amount of the premium I have paid to purchase the insurance policy from my opponent, in addition to my compensation” and that “if…. my appointed Solicitor fails to recover all or any part of the balance outstanding on my loan then the money I receive for compensation will first be used to discharge my obligations on the loan”;

(b) Claims Direct appointed a Solicitor to act for the claimant. The Solicitor was provided by Claims Direct with a specimen “Rule 15” letter to send to the claimant. It was just over four pages long. It included the sentence:- “In the event that we are able to get your opponent to pay the cost of the insurance premium, this will also be sent to you…”. It also contained a further passage which said :- “If you win your case we will attempt to recover the monies due under the Consumer Credit agreement in addition to your personal injury compensation. If we are successful in doing so you will receive your compensation in full and the Claims Direct insurance policy will have effectively have cost you nothing. If we are unsuccessful in recovering the monies due under the Consumer Credit agreement, the monies due will be deducted from your personal injury compensation”.

(c) The Claims Manager who would have sold the scheme to the customer should have attended a course run by CLT training. In one place the training manual tells the claims manager “ Claimant wins: Solicitor fails to recover insurance premium and costs. Claimant receives compensation less insurance premium and costs.” But four paragraphs later it proclaims “ CLAIM PROCESSED AT NO RISK TO CLAIMANT WIN WIN

• Damages

• Solicitors costs paid

• Cost of Insurance Policy paid” .

[20]Whilst that was the form of the fairly dense documentation there is reliable evidence that the substantial presentation was rather different:-(a) Mr Saunders had an accident in August 1999 and on 15th of September 1999 took out a Claims Direct Protect policy. The claims manager who sold him the policy said in later investigations that in those days he was “taking the line that the premium was recovered from the other side because that is what we were told”. I find that that is likely, having regard to the terms of the training manual to which I have referred above. He said he would not have given Saunders a cast iron guarantee, and would have hedged his bets slightly by saying that the premium was “probably” or “generally” recovered from the other side; and he expressed the view that “I am pretty damn certain, to be fair to him, that he would have been given the impression that [the premium] would come back from the other side”.

(b) The Roberts family had an accident in July 1999 and on 2nd September 1999 took out a Claims Direct policy. Later, in the course of a complaint, Mr Roberts wrote that he had been told quite categorically that he would pay nothing. I find that that is likely, having regard to the terms of the training manual.

(c) Mrs Spiller took out a Claims Direct Protect policy in October 1999. The claims manager acknowledged that he would have told her that non-recovery of the premium was “an unlikely event”.

(d) From material produced in the course of complaints to Claims Direct by customers (exhibited to the Secretary of State’s evidence) other claims managers appear to have told their customers that the insurance premium “would definitely be recovered from a third-party” since this was the training they had been given (a matter confirmed by one of the trainers). I approach this evidence with some caution; but it cannot be ignored because its thrust is corroborated by the contents of the training material.

(e) There are in evidence some telesales scripts and other marketing material. It was submitted on Mr Sullman's behalf that there is no direct evidence that any of this material was used. It was plainly the Secretary of State's case that the material was used, and it is part of Mr Sullman's own evidence that telemarketing scripts where in use. I consider that an evidential burden lay upon him to produce the telesales scripts and marketing material actually used if he was to rebut the inference that those found amongst Claims Direct papers were they. On this state of the evidence I find on the balance of probabilities that the telesales scripts and other marketing material produced in the Secretary of State’s evidence were used.

(f) Amongst the material so deployed were statements that non-recoverability of the premium was “an unlikely event”, that the customer would be “taking advantage of an insurance policy which means you should receive 100% of your compensation and not lose the 35.25% you might today”, that “if your case wins you should receive all of your compensation and the insurance fee should be paid for by the other side”, that “the new law states that they should pay so it will be very unlikely that they won’t”.

(g) The potential for prospective customers to gain the impression that there was every likelihood that the insurance premium they were paying would be recovered from the other side, and for that impression not to be corrected by individual sentences in the dense documentation that they received, was obvious. It was appreciated by the senior management of Claims Direct. When dissatisfaction with the Claims Direct Protect product achieved wide publicity Mr Poole noted (and Mr Sullman did not dissent) in a paper for the Board that “ the difficulty is that the Client will say that despite the fact that the Fair Trading Statement made it perfectly clear that there was no guaranteed recoverability, and despite the fact that their own Panel Solicitors advised them of the risks of the recoverability of the cost of the insurance within their Rule 15 letters and the fact that they had a cooling off period, they will ignore all of that and say that our claims managers told that that irrespective of what the documents said, there would not be a problem and that recoverability was, in effect, guaranteed.”

[21]In September 1999 the Lord Chancellor's Department published a consultation paper entitled “Conditional Fees: Sharing the Risks of Litigation”. In relation to the implementation of section 29 it stated:- “It is also proposed… that the recoverability of the insurance premium should not be retrospective but should apply only to policies entered into after the coming into force of the relevant section of the Act.”

[22]The import of this proposal was well understood by Mr Poole and (I find on the balance of probabilities) also by Mr Sullman. This is demonstrated by the response which Mr Poole made to a persistent claims manager who differed from the optimistic view as to recoverability of premium promoted by Claims Direct. In a letter dated 5 November 1999 Mr Poole acknowledged that the likely outcome of the Act was that it would not be retrospective where proceedings had already been issued and the policy predated the issue of court proceeding: but he suggested that an identical policy could be issued the day after the new rules came into force so as to facilitate recovery of the premium. There is no evidence of any change in the approach to potential customers following the publication of the Consultation Paper, notwithstanding a clear understanding of the proposal it contained that no premium paid before 1st April 2000 would be recoverable from the defendant.

[23]On the 23rd November 1999 Mr Poole responded to the Consultation Paper on behalf of Claims Direct. He first responded to a proposal that the recoverability of the success fee under a CFA should not be retrospective, but should only apply to CFA’s entered into after the relevant section came into force. He agreed with that basic proposition, but said that anyone who already entered into a CFA prior to the section coming into force should be entitled to recover the success fee if they had notified the existence of the CFA prior to the issue of court proceedings. When he came to address recoverability of the insurance premium he said that this should be along the same lines as recoverability of the success fee. He stated:- “ Accordingly it is our view that the recoverability of the insurance premium should not apply where proceedings have been commenced prior to the relevant section of the Act coming into force. Anyone who has already incurred an insurance premium prior to the Act coming into force should not be able to recover that insurance premium from the losing opponent unless they have notified their opponent as to the existence of the insurance policy prior to the issue of proceedings.” Three things are noteworthy about that response. First there is a clear recognition by the senior management of Claims Direct that there is a difference between the enactment of a section and the coming into force of a section. Second it is not said that post-enactment but pre-implementation premiums should be automatically recoverable. Third it is not said that automatic recovery of the premium is in fact the footing on which Claims Direct has been acting in reliance upon an earlier indication from the Lord Chancellor's Department, and that the proposal represents a departure from that earlier view. That response is not consistent with Mr Sullman's present evidence as to his then current belief about recoverability.

[24]The Lord Chancellor's Department's response to the consultation process was published in February 2000. It made clear that insurance premiums would only be recoverable where the policy was entered into after the first of April 2000 because the government believed it right to avoid retrospectivity.

[25]This announcement had implications for two classes of Claims Direct customer. First, a number of customers had at the date of the announcement applied for the Claims Direct Protect scheme but the policy documents had not been issued. Claims Direct decided that all policies processed before 1st of April would in fact have an inception date of the 1st of April 2000 (in order to make the premium recoverable from the defendant). But notwithstanding the inception date of the policy the customer would have all the benefits flowing from payment of the premium as from the date of its payment. 7500 such policies were issued (7777 less cancellations). This was the idea of Mr Raincock of LPL (a witness called on behalf of the Secretary of State) and proceeds on the footing that form will prevail over substance and that the issue of the policy marks the acceptance of the risk. There was opportunity at trial to explore the circumstances in which Mr Raincock came to tender that advice and its propriety; but because he was the witness of the Secretary of State that opportunity could not be exploited. Second, there were customers with current policies who (if the Government’s announcement was embodied in a statutory instrument) would not recover their premiums. On the 23rd of February 2000 Mr Poole notified the Claims Direct panel solicitors that it “would not be appropriate at this time” to advise such customers “ that it is now looking less likely that recoverability will be available”. He also notified them that Claims Direct was considering whether to assist clients caught in this position by introducing a system providing for a minimal level of compensation. Although the messenger was Mr Poole I regard it as almost certain that Mr Sullman was party to both decisions.

[26]Claims Direct dealt with the difficulties created by the implementation of section 29 by blaming “recent announcements by the Lord Chancellor's Department” and “a change in the law brought in by Lord Chancellor Derry Irvine which meant that anyone who took out after-the-event insurance between August 1999 it April 2000 and WON their case could not automatically (sic) claim back ……their insurance premiums” There was, of course, no change in the law, merely the implementation of section 29 following its enactment.

[27]On this evidence I hold that Mr Sullman acted in a culpable manner. The Claims Direct Protect policy was an untested product sold to members of the public. Mr Sullman is not to be criticised for creating and offering an innovative product, nor (in the circumstances) for offering it in an untested state, nor for failing accurately to predict the eventual form of the law when that law was left in a state of uncertainty and subject to consultation following the enactment of the AJA. He can be criticised for seeking to blame the Lord Chancellor's Department for the position in which the Claims Direct customers found themselves: but seeking to shift the blame for an embarrassing situation does not of itself demonstrate unfitness to be concerned in the management of a company (for by that test many would fail). He can be criticised for attempting to redeem the situation after February 2000 by post-dating policies: though I do not class that as culpable conduct since it was undertaken on the advice of a vastly experienced and prominent insurance practitioner in the litigation insurance market (Mr Raincock). But in my judgment Mr Sullman was very seriously at fault in seeking to establish a business by widespread misrepresentation of the nature of the risk which customers ran in purchasing the product. In the face of unequivocal advice from senior Counsel that until implementation of AJA, insurance premiums would be payable out of the damages recovered, and manifest uncertainty in the statements of policymakers about the scope for any retrospectivity (of which Mr Sullman demonstrated an appreciation in his letter of 9 July 1999, and as to which he can have been in no doubt following the publication of the consultation paper), Mr Sullman permitted policies to be sold on the footing that this would be “an unlikely event”. His unbelievable evidence that this approach resulted from a genuine belief in the likelihood of retrospectivity, founded upon an indication given by the Lord Chancellor's Department, itself demonstrates unfit conduct. I am satisfied that Mr Sullman knew that there was a very significant risk that the premiums paid by customers before implementation of section 29 would not be recoverable from defendant insurers, but his desire to establish an immediate leading position in a lucrative new market led him to countenance sales techniques which gave the opposite impression.

[28]Mr Cousins QC and Mr Charman powerfully advanced a number of arguments as to why I should not reach this conclusion. First, they submitted that the charge could not the brought home as a matter of law. To be relevant for the purposes of section 8 the conduct of which complaint was made had to be “conduct in relation to” the company. The only conduct of which complaint was made was in relation to customers of the company. They submitted that this did not suffice because the conduct had to have the company as its victim. I reject this argument. It is dangerous to put a gloss upon the words of section 8 or to seek to paraphrase them: and what follows is not an attempt to do so. But in my judgment “conduct in relation to [a] company” encompasses conduct as a director which bears upon the company’s business or its affairs, whether that conduct occasions prejudice to the company itself or to its shareholders or to its customers or funders or anyone else with whom it has commercial relationships. The phrase refers to the way the business is run. I consider this to be a fair meaning of the words themselves, to be consistent with categories of relevant conduct specified in Schedule 1 to CDDA, and to be consonant with the mischief at which the Act is directed. For example, a director who runs his business by constantly exceeding the credit terms extended by his suppliers (and so using unagreed credit as part of his working capital) is guilty of conduct which prima facie renders him unfit to be concerned in the management of a company, although his company is not the victim of such conduct, but rather the suppliers. Although the point was not explored in argument I think such a reading is also consistent with authority, which has, for example, established that conduct in relation to the disqualification proceedings themselves is relevant conduct for the purposes of section 6.

[29]Second, Mr Cousins QC submitted that Mr Sullman was (as a director of Claims Direct) under no obligation to members of the public, shareholders or anyone else to warn them about the potential irrecoverability of the insurance premiums. He submitted that a director’s duties are defined by specific statutory and regulatory material, his contractual and tortious duties to the company and his fiduciary duties: and that if the DTI wished to put its case on the basis that in any particular situation there was an obligation to go beyond such defined duties, then it was incumbent upon it to identify the source of that obligation. The only relevant obligation here was the Claims Direct Protect scheme contract, and it was neither an express nor an implied term of that contract that Claims Direct should advise its customer. With all of that I am in substantial agreement, so far as it goes. Claims Direct was not in the business of giving advice: it was in the business of selling a claims management service and an associated insurance policy. In my judgment Mr Sullman’s fault was that in building up a business founded upon such sales he permitted Claims Direct to misrepresent the likely cost to the customer of entering the contract. Customers thought the service was very probably free: it would be “an unlikely event” if they had to pay. But before section 29 was implemented there was no legal obligation on anybody but the customer to pay the costs of the insurance. The true complaint (however expressed in particular sentences in the DTI’s evidence) is of that misrepresentation.

[30]But I would add that in any event I do not regard a breach of an identifiable and independent duty to be a prerequisite for a finding of culpable conduct under the CDDA 1986. The Act uses the broad term “conduct” (not “any breach of duty”): and I consider that the authorities establish that unfitness may be demonstrated by conduct which does not involve a breach of any statutory or common-law duty, but which, for example, constitutes a failure to achieve an acceptable standard of commercial probity.

[31]Third, Mr Cousins QC submitted that Claims Direct at no stage represented that the premiums would be recovered. He drew particular attention to the precise terms of the Fair Trading Statement and of the Rule 15 letter, which promised only that an attempt would be made to recover the premium. I agree that that was the promise that was made. But I have found as a fact that customers were induced to part with £1312.50 in return for that promise and others because they were told that they would very likely get their money back, whereas the true position was that as the law then stood they could not recover it, and there were no real grounds for thinking (and Mr Sullman did not in fact think) that automatic recovery would be retrospectively introduced.

[32]Fourth, Mr Cousins QC submitted that every one of Claims Direct’s customers had received independent advice from a Claims Direct panel Solicitor and (so far as the evidence disclosed) none had recommended the client not to proceed. It came as no surprise to learn that solicitors who had paid a significant sum to get onto the Claims Direct panel did not recommend clients introduced to them by Claims Direct not to purchase a Claims Direct product. But the fundamental point is that Mr Sullman is not relieved of responsibility for permitting misrepresentations to be made to potential customers because the system also provided a means by which the customer might discover the truth.

[33]Fifth Mr Cousins QC submitted that Mr Sullman could not been guilty of misconduct if he had acted in accordance with a responsible body of appropriate professional opinion, and that it was demonstrable from the evidence that the views of Mr Raincock (who was the DTI's witness, and a leading figure in the litigation insurance industry) were entirely supportive of the case being advanced by Mr Sullman as to premium recoverability. Reliance was placed on material produced by LPL in connection with its own conditional fee insurance scheme. An LPL document addressed to the solicitors offering CFAs stated:- “If you win the other side will be ordered to pay your client's damages and your costs and disbursements. Out of the award your client repays the disbursements and the interest charges for the funding of your disbursements. (The client currently also pays the premium and your success fee, although these amounts are likely to the recoverable from the other side once the Access to Justice Bill has been passed (sic))”. Mr Raincock acknowledged that that last sentence “could have been more tightly drawn”, but maintained that by the word “passed” he meant “enacted and implemented”. I am not convinced by Mr Cousins QC's argument. The document on which he relies was evidently published before the 27th of July 1999: it falls far short of establishing that post July 1999 there was a substantial body of reputable opinion that held that after enactment and before implementation of the AJA premiums would be automatically recoverable, and that the risk of irrecoverability was so small that policyholders could be told it was “an unlikely event”. Even if the evidence had established that, I would have needed a lot of persuading that an over-optimistic misstatement to the public of the true risk inherent in a new untested product constituted acceptable behaviour simply because a lot of people made the same misstatement. The behaviour of other participants in the market can inform but can never determine what constitutes misconduct for the purposes of sections 6 and 8 CDDA 1986.

[34]Sixth, Mr Cousins QC submitted that the initial target population for the Claims Direct Protect policy was customers who had already signed up to the 30% scheme and whose claim exceeded £4,000 or £5,000. If they stayed with their existing scheme they would necessarily have to hand over some 30% of the damages recovered (£1200-£1500): whereas if they transferred to or took up the new scheme even on a worst-case scenario they would only pay £1312.50. Whilst existing members of the 30% scheme were undoubtedly identified as potential customers for the new insurance scheme I do not find it possible to ignore or to discount as insignificant entirely fresh customers who were also canvassed: nor do I think the fact that existing customers might be no worse off justifies a misstatement to them of the risk they were being invited to run.

[35]Seventh, Mr Cousins QC submitted that the fact that Claims Direct put in place an ex gratia payment scheme showed that Claims Direct was not an irresponsible organisation whose directors should regarded as unfit to hold office. I do not agree. The original misconduct remains. The offer of compensation bears only on the question whether the misconduct warrants disqualification. In that connection what brought about the offer of compensation may be highly material. According to Mr Sullman's Chairman's Statement on the interim results for the six months ended 30 of September 2000:- “Subsequent to the period end your company suffered damaging media comment about the issue of premium recoverability pre-1 April 2000. The Board has therefore taken the initiative by announcing that all clients who have taken out insurance policies prior to first April will be guarantee that they will be placed in no worse a position than they would have been under the company's previous arrangements”.

[36]For these reasons I remain of the view that Mr Sullman is culpable of misconduct.

[37]I turn to deal with the second charge. The Secretary of State says that Mr Sullman misled customers that the full sum paid under the Claims Direct Protect scheme reflected the actual cost of the insurance policy, when it did not; and also failed to warn customers of the serious risk that they might not recover the whole of the sum paid because insurers acting for defendants might seek to argue that only part of the payment constituted the insurance premium.

[38]Section 29 AJA 1999 permitted recovery from a defendant of “costs in respect of the premium of the policy”. I have already described how the full cost of the Claims Direct Protect scheme was collected in by LPL and how it was disbursed by them, and how little of it went to underwriters. Of the £1000 paid to MLSS, £225 was payable at the successful conclusion of the case to the franchised claims manager, and was in the meantime held in a retention account. The Claims Direct Protect scheme was in essence a scheme to create a new category of litigation costs recoverable from a defendant viz nebulous “claims management” costs not otherwise recoverable as disbursements on the solicitor’s assessed bill. These were to be recovered as “costs in respect of the premium”. The key question is whether it was to be anticipated that the premium might be deconstructed so as to identify these claims management costs for the purpose of disallowing the whole or part of the claimed costs.

[39]I find the following additional facts:-(a) It was the view of Mr Raincock who was assisting Mr Sullman in putting the Claims Direct Protect product together that one did not “deconstruct” the sum charged in respect of insurance: and that the overall test for recoverability would be one of reasonableness. He maintained this view at trial. Mr Sullman genuinely shared this view. He believed that if a single sum was collected by LPL and then disbursed that single sum would constitute “costs in respect of the premium on the policy” and the only challenge would be to reasonableness.

(b) Claims Direct selected a figure of £1250 plus IPT as the cost of the product not on the basis of “marking up” a profit margin on costs but on the basis that that was the amount they believed they could get away with recovering from insurers. This was set out in a Memorandum to Claims Managers dated 5th July 1999.

(c) The figure selected was by no means the highest charged in the market: it was mid-range and was charged in respect of a product which it was the view of Mr Raincock of LPL “offered the only true solution to the withdrawal of Legal Aid” (because of its availability for “better than evens” cases). Mr Raincock told me that it was throughout his view that the whole of such a sum would be recoverable from defendant insurers. The proposed charge was openly canvassed with the Lord Chancellor's Department, and (according to Mr Raincock) although it would be too much to say that they in any sense “approved” it, they gave no indication that that level of payment was regarded as unreasonable. Recoverability of premium as such was also the subject of discussion by Mr Raincock with the Department: there are no indications in the evidence that the LCD expressed any views contrary to those held by Mr Raincock as to “deconstruction” of the sum paid.

(d) Mr Girling, a solicitor who had been President of the Law Society in 1996/1997, was an acknowledged authority within the profession on the subject of solicitors’ costs, had been a member of the Supreme Court Costs Office Practitioners Group and had been personally involved at the Law Society with the issues during the period leading up to the Access to Justice Act 1999, gave evidence of an understanding current at the time that a premium of about £1500 would be expected by the Government to be recoverable. He also said it was his firm’s policy (as a Claims Direct panel solicitor) to ensure that the client knew that full recoverability of the premium might not be effected.

(e) In October 1999 Mr Sullman arranged for a letter to be sent to all of the existing clients of Claims Direct promoting the new insurance product and stating that “due to the extensive cover of the insurance policy the cost is £1312 50 inclusive of tax”. In truth the cost was £1312.50 because of the level of charge made by Claims Direct for the limited range of ancillary management services which it provided (taking the original witness statement and preparing a plan of the accident site), not because of the cost of insuring the risk.

(f) By November 1999 Mr Sullman was exploring with LPL obtaining “Positive Deficiency in Damages” cover. This insured a shortfall in cost recovery that would otherwise have to be met out of damages. It demonstrates an awareness of a risk that less the full £1312.50 might be recovered from the defendants: but it says nothing about whether he thought that was because some of the premium was not within the scope of charge, or because the overall level of the premium would be regarded as unreasonable by costs assessors.

(g) The Government’s response to the consultation process published in February 2000 contained a proposal that:- “ Rules of Court should provide that on final assessment the losing opponent should be able to challenge….the cost of insurance premium by demonstrating to the Court that the choice was wholly unreasonable and generated excessive costs”. The paper explained that the essence of the test was that no reasonable person would think it appropriate to pay the premium claimed, and that the purpose of setting so tough a test was to preclude the Court having to decide between insurance arrangements. It noted a proposal that there may be elements of the cost of the insurance which it would be inappropriate to ask the losing party to meet, but commented:- “Trying to tease out and to disallow certain elements of business overheads, whether in respect of insurance premiums or success fee, would be impractical and unjustifiable in the Government's view.”

(h) In April Investec (who funded the Claims Direct Protect scheme) sought the advice of Mr Richard Salter QC on the scheme. He expressed the view (communicated to Claims Direct and I find seen by Mr Sullman) that “ ..to describe the £1300 paid by the claimant…. as “the insurance premium” was a misrepresentation in that only £202 was actually retained by the insurer…… when the £1300 is eventually challenged by a defendant as an excessive insurance premium and the true makeup is discovered, a court could enable the claimant to rescind the arrangement…. ” Communication of this view was met with a robust response from Claims Direct which pointed out that the whole sum was paid to the underwriters’ agents, that the underwriters did not have to do any marketing or risk assessments (because these were functions which were performed by Claims Direct and for which it was paid) and that the Court “would not be allowed to look at the makeup of the premium”. This led to a further consultation on 4th May at which Claims Direct was represented. The result was described thus:- “Although you are satisfied that the amount of money paid by claimants can properly be described as a premium in the scheme documentation, we consider (confirmed by Mr Salter) that such a description could be held by a court in the UK to be a misrepresentation of the actual position. The consequences of such a finding to Investec could be severe… we are therefore sensitive that this must be described in a transparent way”

(i) On the 8th June 2000 the Opinion of Mr Jeffrey Gruder QC was taken. He warned of “the real risk” that the makeup of the premium and the monies received from it by Claims Direct might be one area where defendant insurers concentrated their fire, and that the argument that “these may not be properly characterised as “insurance premium”….” was one that “must be taken seriously and… cannot be dismissed as frivolous”. He also warned that a customer who suffered a shortfall because of the success of this argument might argue that he was misled into thinking that £1312.50 was the true cost of the insurance. He identified the sum actually payable to underwriters and described (accurately) the rest of the money as “in reality remuneration payable to Claims Direct which is routed via the insurers and designated as “insurance premium” in order to maximise its recovery from the defendant with the assistance of section 29”.

(j) On 6th February 2001 Mr Raincock of LPL sought the advice of Miss Elizabeth Gloster QC in respect of LPL’s own products. She expressed the view that it was critical for the future recoverability of premiums that the charges of the service providers could be characterised as “costs of the policy” and not as “administrative charges” i.e. that the entire premium should be payable to underwriters but that LPL should be authorised by the underwriters to pay the administration charges of the various parties as part of the “insurance spend”. This was precisely the arrangement that obtained in respect of the Claims Direct Protect policy. Mr Sullman did not, of course, know of or act on this view when putting together the Claims Direct Protect policy: but the tenor of this advice demonstrates that Mr Sullman's view was not unreasonable.

(k) In July 2002 Chief Master Hurst gave judgment in a number of test cases in which he found that of the £1312.50 only £621.13 was recoverable from the defendant as “costs in respect of the premium”. This consisted of the £140 payable to LPL in respect of the underwriting cost and its £50 commission, and the £110 commission payable to Claims Direct itself. £30 was allowed in respect of “insurance services” provided by MLSS not recoverable as disbursements on the solicitors’ bill. (The balance was additional underwriting costs under arrangements to which I must later come).

(l) An appeal against the Chief Master's decision was dismissed on the 12th of February 2003, and only £621.13 was found to be reasonable and proportion as an insurance cost.

[40]This charge adds nothing of substance in respect of policies taken out before 1st April 2000. For such policies the question whether part only of the premium might be recoverable is subsumed within the greater question whether any of the premium was recoverable (as to which Mr Sullman misrepresented the position). In essence this charge relates the policies taken out after 1st April 2000 where following implementation of AJA there could be recovery from the defendants. On the evidence I hold that Mr Sullman’s conduct is not culpable in relation to those policies. Mr Sullman is not to be criticised because he failed accurately to predict the eventual outcome of the test cases. Before the resolution of the issues by Chief Master Hurst Mr Sullman held the view that it was not permissible for the Court to deconstruct the sum paid in respect of the insurance cover obtained, and further that £1250 was a reasonable sum to charge for the cover and services afforded. Each of those views was shared by experienced people eminent in their respective fields. Mr Sullman's holding such views in common with others is not conduct which demonstrates unfitness to manage a company. Mr Sullman owed no positive duty to advise or warn prospective customers of potential technical difficulties with his product; but he was under a duty (and commercial probity required him) not to mislead or misrepresent. From April 2000 Mr Sullman was aware that a charge of misrepresenting the position might be made. But he was also aware(a) of equally eminent views to the contrary and

(b) that the rules promoted by the Government were intended to make challenges difficult and to focus those challenges upon the reasonableness of the premium (as to which there was a respectable view that anything less than £1500 was not at risk of challenge). To communicate to potential customers the genuinely held and not unreasonable opinion that (post-March 2000) the whole premium “should” be recoverable (in the terms of the tele-sales scripts and marketing material I have referred to) does not in my judgment warrant a finding of misconduct.

[41]The third charge brought against Mr Sullman is that he made misrepresentations to the public and to underwriters as to the failure rate of cases handled by Claims Direct. Claims Direct took on cases where there was a 51% chance of success (i.e. where the view was taken that the case would be established on the balance of probabilities): representations about failure rate were in essence representations about the ability of the vetting system to identify those cases. Misrepresentation to the public would be of importance because the mere fact of having a case accepted and the offer of a Claims Direct protect policy made would encourage the potential customer to think that his case had a higher prospect of success than was truly justified, encouraging him to enter and to proceed with the arrangement (and not to exercise rescission rights during the cooling off period). Misrepresentation to underwriters would be of importance since it might provide a ground for rescission of current cover, or make future cover impossible (because of an adverse claims record) and so render the business model unsustainable.

[42]I find the following facts:-(a) The term “failure” was not always used consistently. Sometimes the term included cases which were cancelled (because the customer withdrew) or which were discontinued (e.g. because the claimant had been dishonest) as well as those which were pursued (but lost). Sometimes the term meant only those claims that did not succeed and would result (under the Claims Direct Protect scheme) in policy liability for the premium, interest on the loan, claimant's own costs and opponent’s costs. But since the latter figure will always be lower than the former (and is the principal figure of concern to honest members of the public and to underwriters) this flexibility of meaning does not matter.

(b) Widely advertised ATE insurance was essentially a new market with no readily available data capable of really useful analysis. Both underwriters and prospective purchasers of the product would therefore be making judgment calls on scanty material. Mr Sullman can have been in no doubt that whatever statements were made by any participant in the litigation funding market as to current experience therefore had great significance.

(c) As to the underwriters, prior to the launch of the Claims Direct Protect policy Mr Sullman told underwriters that Claims Direct experienced (in relation to the 30% scheme) a 4% failure rate across the board. This was established in evidence by an attendance note dated 5th March 1999 of discussions with LPL and the documents subsequently faxed on 24th March 1999, and by the evidence of Mr Raincock of LPL (who was the intermediary between Claims Direct and the underwriters).

(d) If asked to evidence the 4% figure Claims Direct relied on two matters. The first was what Mr Sullman called (in my judgment wrongly) “judicial statistics”: this was apparently a statement in work written by Mr Michael Napier (it was not identified) to the effect that 96% of Legally Aided personal injury cases were successful. The second was one badly reproduced page out of the financial statements (prepared by KPMG) for the year ended 31 March 1998 relating to an accounting provision. The provision related to a charge against profits for franchisee income management charges and refund of solicitors fees, and the provision was 4% for the current year and 4.8% for the prior year. This was taken to demonstrate (which it did not) “the failure rate”. The truth is that Mr Sullman did not understand what it meant (though he confidently produced it) and nor could anyone else to whom this single partly-illegible sheet was produced.

(e) Underwriters set their premium on the basis of the material provided by Mr Sullman, knowing it to be scant. In so doing they made their own judgment about “the judicial statistics” because (as Mr Raincock said in evidence) it was common to base premiums upon it. In evidence before Chief Master Hurst Mr Primer was later to describe the £90 premium as “a very bad underwriting policy decision” which turned out to be “a bad call” because of the poor failure rate.

(f) As to the public, the tele-sales script and marketing material that appear to have been in circulation since September 1999 required the canvasser to state that Claims Direct had a 90% success rate on cases it accepted.

(g) The scheme was underwritten through Catlin Underwriting Agencies Ltd and Alleghany Underwriting (with LPL as the coverholder) by 12 August 1999 at £90 per policy, with an agreed review around March 2000.

(h) The administration of the scheme required Mr Raincock to produce for the underwriters monthly “triangulation reports” relating policies issued to claims under current policies. This enabled the immediate claims experience to be recorded, but not to be set in any context. Claims under policies began to come in during March 2000.

(i) On 15 December 1999 the Claims Direct board considered a number of significant issues upon which papers had been prepared. Amongst those was the determination of the failure rate. This was a critical matter relating to the accounting provisions to be made in respect of costs incurred on failed cases for the period ending the 30 September 1999 (i.e the 30% scheme). The paper noted that for the preceding period ended 31st March 1999 a failure rate of 17% had been used. The accountants analysed the figures and expressed the view that for the period ended 31st March 1999 the true failure rate was 28.5%: they then analysed the figures for the period ended 30th September 1999 and expressed the view that the true failure rate was 37.7%. They advised:- “As noted above this is believed to be indicative of cases being accepted that have a higher probability of failure. From an accounting perspective, this fact is not considered an issue given that now all new cases are on the insured basis and hence all costs are covered thereby. However, from a commercial point of view, there may be an issue in respect of the insurance viability with increased failure rates and the cost/benefit thereof for the insurance company”. They recommended that a failure rate of 24% should be used in the new business model.

(j) On 14th January 2000 Mr Peter Ross resigned as a director of Claims Direct. In his letter of resignation he set out his reasons for this action. He was not called as a witness at trial and the truth of the statements which he made is therefore not to be taken as read. The importance of the letter is that it inescapably brought to the attention of Mr Sullman issues relating to the failure rate. Mr Ross said that it was maintained within Claims Direct that the failure rate for accepted cases was about 5% and that he himself had been informed prior to the appointment that it was 6%. He drew attention to the differing figures referred to by accountants and auditors commenting:- “ Whether it is 17%, 24% or 37%, all these are significantly different from the 6% figure quoted in our discussion. This is material for these purposes in 3 respects: first, it has an impact upon the year end accounts since the figure was ignored for their purposes; secondly, it is wholly inappropriate for the company to issue inaccurate and misleading information to the world a large; and thirdly this has a great impact on the viability of the insurance arrangements and the cost benefit for the insurance Company.” These were perceptive comments by a newcomer to the business model, and simply could not be ignored by those holding themselves out as fit to manage a company.

(k) Analysis of the claims experience to the end of March 2000 shows that some 19,475 Claims Direct Protect scheme policies had been issued, of which there were 232 cases closed (claims having been paid or reserved in 64 cases): a failure rate of 27.5% of closed cases.

(l) On 3rd May 2000 there was a meeting between Mr Sullman, Mr Raincock of LPL and Mr Primer of Catlin at which Mr Sullman stated (and subsequently confirmed by fax) that Claims Direct did not expect, nor would they intend, the 4% rate overall to be breached.

(m) In other meetings during the spring and summer of 2000 in the course of a contractual review Mr Sullman confirmed direct to Mr Primer of Catlin that the failure rate was about 4%.

(n) This was contrary to Mr Primer’s direct experience and Mr Sullman was required to produce any available data. It was originally suggested on behalf of the Secretary of State that he completely failed to do so: but I am satisfied that this allegation cannot be made out. Historic data was provided on the 23 May 2000 going back to 1996 (i.e. focusing upon the 30% scheme). This showed an overall failure rate of about 8% of total cases accepted. The accountants’ report of December 1999 containing the further analysis and recommendation was not produced: nor were any management accounts.

(o) The June 2000 management accounts for Claims Direct related principally to the Claims Direct Protect scheme and show that for insured cases the failure rate ranged from 58% (April) to 43% (June) of closed cases. These percentages relate only to closed cases, not total cases accepted. The tenor of the evidence of Mr Sullman and Mr Raincock was that if a case was going to fail it tended to fail earlier rather than later. Given that cases closed in April, May or June 2000 can only have commenced after August 1999 it may therefore be anticipated that the failure rate amongst closed cases would be exaggerated. But the disparity between a 4% failure rate and a 58% failure rate even amongst closed cases is so vast as to require of a competent and upright management team an examination of the assumed 4% percent failure rate in the light actual experience of closed cases.

(p) In September 2000 underwriters were to analyse their claims experience. Alleghany told Mr Sullman that the 1999 underwriting year was currently running at a 36.6% failure rate.

(q) In August and September 2000 underwriters procured an examination of some of Claims Direct’s case files with a view to examining the competence of the vetting procedure (and whether defects in the vetting procedure accounted for the alarming failure rate). It was the Secretary of State's case that Mr Sullman obstructed this process. I find that he did not do so, but that it is quite clear that both he and Mr Poole sought to control the flow of information to underwriters (as is demonstrated by a Memorandum dated the 21st August 2000 which instructs staff that if they receive telephone calls from Catlin, Alleghany or LPL asking for information they are not to supply it and they are not to discuss failure rates).

(r) On the 3rd November 2000 Claims Direct issued a press release (which, given his involvement, I find was probably approved by Mr Sullman) that announced that “nine out of every ten cases the company takes on are successful”. My attention was drawn to no material within the evidence relating to closed cases that would justify that assertion.

(s) In March 2001 there was prepared a schedule of “Claims in Progress by Month”. This was a computer spreadsheet and its form suggests that it had been a monthly production, but I cannot on the evidence ascertain when it was first produced. It notes the total number of cases accepted, the number of cases cancelled, the number of cases failed, the number of cases settled, and the number of cases in progress. In September 1999 immediately after the launch of the Claims Direct Protect scheme the cumulative failure rate was above 8% of total cases accepted. By January 2000 it was above 9%. By March 2000 it was above 10%. A competent director fulfilling his duty to understand and supervise his business would have seen from such figures that there was no hope of a “reversion” to a 4% percent failure rate “overall”. Even if every single outstanding case closed favourably it was impossible to achieve that rate: and the experience of closed cases demonstrated how unlikely that outcome was in any event.

[43]On this evidence I hold that Mr Sullman’s conduct is culpable. He misrepresented (and allowed Claims Direct to misrepresent) the failure rate of Claims Direct products both to underwriters and to members of the public. At the time when he told underwriters that the failure rate was 4% (relying on the “judicial statistics” and the KPMG provision sheet) he must have known that a 17% failure rate was being used in the accounts for 31st March 1999. At the time when he told underwriters that he did not intend or expect the 4% failure rate to be breached overall he did know that the company’s accountants had analysed the true failure rate down to September 1999 at over 37% and were recommending a failure rate of 24% for adoption. I was shown nothing in the evidence to justify the implicit assertion that the performance on open cases would be so very remarkably different that a 4% failure rate overall was likely to be achieved. As the figures produced by Mr Sullman in May 2000 were to demonstrate there was an overall failure rate of 8% of total cases accepted under the 30% scheme, and a current failure rate of 27.5% of closed cases in initial claims experience under the new: as the office Memorandum demonstrates Mr Poole and Mr Sullman were anxious to control the release of such material. In my judgment Mr Sullman asserted and maintained a 4% failure rate to enhance the profitability of the operation (by seeking to keep the already modest underwriting premium below what it ought to have been initially and on review); and he asserted a 90% success rate to enhance sales (by making it appear that if a case got through the vetting process and was taken on by Claims Direct then it was almost certain to succeed). I do not regard this as achieving the appropriate standard of commercial integrity, and so do not regard it as fit conduct. (I should emphasise that that is the question for my consideration, not whether Mr Sullman actually procured the underwriting contract or the taking out of any individual policy by committing the tort of misrepresentation, or whether the law of tort or contract imposed upon him any ongoing duty of disclosure).

[44]The fourth charge against Mr Sullman is that he wrongfully operated Claims Direct’s business so as to cause its panel solicitors to pay an unlawful referral fee of £395 per case to MLSS and wrongfully encourage those solicitors then to recover the sum from defendants in costs.

[45]The premium paid by a customer to enter the Claims Direct Protect scheme included £1000 paid to MLSS in respect of claims management services. When the accepted case was referred to a panel solicitor that panel solicitor had to pay £395 to MLSS for claims management services if he accepted the referred case. If the case concluded successfully the panel solicitor would seek to recover from the defendant £1312.50 under section 29 as “costs in respect of the premium of the policy”: but he would seek to recover the £395 he had had to pay to MLSS as disbursements (because the August 1999 edition of the Claims Direct Panel Solicitors operating manual told him that he would be able to reclaim it as a disbursement, a position essentially maintained in the next edition).

[46]By section 2(3) of The Solicitors’ Introduction and Referrals Code 1990 solicitors must not reward introducers by the payment of commission or otherwise.

[47]I find the following facts:-(a) MLSS only provided one set of “claims management services” viz taking the witness statements, preparing plans or photographs, arranging for medical reports. They did not provide one set of services to a customer under the policy and a separate set of different services to the solicitor under the claims management engagement.

(b) Some of those services would have been provided before the case was referred to the panel solicitor: they therefore cannot have been undertaken under any claims management engagement entered into by the panel solicitor.

(c) MLSS charged a flat fee of £395 to every panel solicitor irrespective of how little work was actually required in the individual case. This represented perhaps up to 25% of the company’s income stream.

(d) The fee derived from the days of the 30% scheme. The culture of the company in those days was to regard the £395 as the price of the case. Thus at a Board Meeting on 10 February 1999 it was recorded that Mr Poole had “identified a further 600 cases….which [his firm] could possibly sell to panel solicitors for the current standard fee of £395”.

(e) On 14th June 1999 Mr James Goudie QC and Mr Gordon-Saker of Counsel advised in consultation that the most important potential area where the scheme could be successfully challenged was that it breached the Solicitors Practice Rules. They expressed the view that “the suggested scheme” did not breach the rules. The attendance note does not identify which rules Counsel had in mind, nor does it identify the precise nature of “the suggested scheme”. I do not regard this evidence as establishing that Counsel approved the payment of flat fee of £395 to MLSS, and the attempted recovery of both that and the full policy premium.

(f) On 15th October 1999 (after the Claims Direct Protect scheme had commenced operation) Mr Sullman was advised by Mr James Goudie QC and Mr Gordon-Saker of Counsel that only if the payment to MLSS was genuinely made in consideration of services provided by MLSS would it be unobjectionable: and that it would otherwise be a prohibited referral fee. This was simple advice which Mr Sullman (even as a non-solicitor) well understood.

(g) In mid-February 2000 Mr Poole had a meeting with representatives of the panel solicitors from which it appeared that the experience of panel solicitors as regards recoverability of this sum was “mixed”, and that some solicitors were seeking to recover the sum not as a disbursement but as part of their profit costs. As a non-solicitor Mr Sullman may be taken to have understood that defendants were challenging the £395 claimed (and to have recalled the legal advice which Claims Direct received), but he is not to be taken as understanding the difference between claiming the sum as a disbursement and claiming it as part of profit costs.

(h) In April 2000 Mr Sullman was informed that Richard Salter QC had expressed concern that the payment of an introductory fee by a panel solicitor would be unlawful unless it could be demonstrated that the remuneration was reasonable for work actually and reasonably done.

(i) In April 2000 Ms Alison Crawley (Head of Professional Ethics at the Law Society) visited Claims Direct’s offices. She was told that on accepting a referral a panel solicitor was invoiced £395 by MLSS, that there had been no difficulty in recovering this amount as a disbursement in successful cases, and that time spent by the claims manager was recorded and calculated on a chargeable hourly rate of £75. She considered the information provided. She confirmed in her evidence that following her visit she took no step to advertise any concerns about potential breaches of professional regulations nor did she issue an advisory bulletin. It appears that no disciplinary action has been taken against any solicitor for participating in the Claims Direct scheme.

(j) The material produced by Claims Direct suggested to panel solicitors that the £395 could be recovered on an assessment of costs. The August 1999 edition of the Operating Manual (coinciding with the launch of the Claims Direct Protect scheme) plainly stated “Where a case is successful….the Panel Solicitor will also be able to reclaim the MLSS fee as a disbursement”. Subsequent material equivocated as to whether the fee could be claimed as a disbursement or as profit costs.

(k) In the Claims Direct Test Litigation Chief Master Hurst found that in the cases before him there was no evidence of work which would bring the sum properly chargeable to the figure of £395: and he held:- “ It is quite clear that the £395 plus VAT is the price which the panel solicitor must pay in order to obtain the work. If the panel solicitor is not prepared to pay, the work goes elsewhere. This is not a question of client choice that of MLSS effectively selling work to the panel solicitors”

(l) This amounted to a finding on the evidence adduced that the £395 was an unlawful referral fee. Mr Sullman told me that evidence could have been adduced before Master Hurst to show (a) that where £395 was charged there were cases in which sufficient work was done at £75 per hour to justify the charge; and (b) that £395 simply became a standard fee for the service which in some cases would overcharge and in other cases undercharge (a feature of all standardised charges).

[48]This has been difficult charge on which to adjudicate: but I have concluded that Mr Sullman’s creation and operation of the £395 fee does not demonstrate unfit conduct. The reality of the position (which I consider Mr Sullman well understood, as evidenced by the unguarded Board Minute) was that cases were being “sold” to panel solicitors. As a matter of commerce or general law there is nothing wrong with that. It might, of course, constitute a breach of Law Society’s professional rules. But the Law Society Head of Professional Ethics (who recognised the charge for what it was) did not immediately brand it an unlawful referral fee and did not warn the general body of solicitors of the risk that it might be. (Further, Chief Master Hurst’s judgment of 3 January 2003 in the Claims Direct Test Cases (Tranche 2 Issues) refers at paragraph 87 to 89 to the dismissal by the Solicitor’s Disciplinary Tribunal of a complaint that such payments were necessarily unlawful referral fees). It is difficult to see why a layman such as Mr Sullman should be bound to take a more stringent view of the Law Society’s internal rules than the profession itself, and to decline to demand the fee.

[49]Turning from payment of the fee to recovery of the fee, a solicitor who sought to recover the acceptance fee in the course of a costs assessment would, in my view, have been in breach of the indemnity principle (which is matter of general law). The client had already paid for claims management services as part of the £1000 paid to MLSS, and his solicitor could not say the client was bound to pay for those same services as part of the £395 which the solicitor had paid Claims Direct on acceptance. The services (taking a statement and the preparation of a plan) would in most cases have been performed before the solicitor accepted the case and paid the fee: so the client would in no sense have asked the solicitor to incur such expenses on his behalf. Therefore the solicitor could not charge the £395 to a client who had already himself paid for the self-same service and had not authorised the solicitor to incur the further expense. But what charges the solicitor chose to include in his bill submitted for agreement or assessment was a matter for the professional judgment of the solicitor and was always subject to the ultimate supervision of the Court.

[50]I do not think that Mr Sullman has demonstrated that he is unfit to be concerned in the management of a company because he developed a business model which might have (but did not obviously) involve service suppliers in a breach of the rules of their professional body, and which might (if they chose not to exercise their skill and judgment in the very matter in which they were expert and he was not) involve a breach of the general law. In this respect his position differs from that of Mr Poole (the solicitor with whom he co-created the business model). Mr Sullman’s conduct was not culpable.

[51]The fifth ground of complaint by the Secretary of State is that Mr Sullman wrongly operated a business which caused Claims Direct’s panel solicitors to pay an unlawful referral fee of £72.50 per case to Claims Direct and wrongfully encouraged panel solicitors then to seek to recover that sum from the defendant on a costs assessment.

[52]The context in which this complaint arises is that under an agreement dated 1 June 1996 (and relating to the 30% scheme) it had been agreed that all proposals would be submitted to Mr Poole’s firm, Poole & Co., for vetting. When the case was then referred to a panel solicitor that panel solicitor became liable to pay Poole & Co. a “vetting fee” of £72.50 per case. The nature of this vetting process was not examined at trial. The one thing I am clear about is that the vetting involved confirming that the defendant was insured. (Amid all the high statements of moral principle that were made at trial about affording access to justice, it must be firmly borne in mind that Mr Sullman’s company would only offer the Claims Direct Protect scheme to claimants against insured defendants: the whole business model depended on recovering litigation costs, inflated by the nebulous “claims management” fees, from insurers). It was Mr Sullman’s evidence that the £1000 which MLSS received from the “premium” paid by the intended claimant included a payment in respect of “risk assessment”. That “risk assessment” was undertaken by Poole & Co. “Vetting” and “risk assessment” were the same process. Like the £395 acceptance fee the vetting or assessment was thus charged both to the intending claimant (being part of the MLSS £1000 case management fee) and to the panel solicitor. If the panel solicitor then sought to recover both the £1,312.50 “premium” and a disbursement of £72.50 from the defendant insurer, he would(a) be in breach of the indemnity principle (since the £72.50 would have been paid by the solicitor for his own purposes, and not incurred on behalf of the client, who had already paid for the same service directly): and

(b) seeking repayment of something that could not properly be treated as a disbursement because at the time when the panel solicitor became liable to make the payment he had not been retained by the client.

[53]So much for the original arrangement. But on 5 July 2000 a change was introduced. On that date Claims Direct acquired the “vetting” business of Poole & Co. It took over the staff. Vetting was thereafter conducted “in house”. Nonetheless Poole & Co. continued to render invoices for £72.50 to panel solicitors. The reason for this was that whilst Paragraph 2(3) of the Solicitors Introduction Referrals Code 1990 prohibits a solicitor from rewarding an introducer for work, this prohibition does not apply to referrals of work as between solicitors. It would therefore be a breach of the Code for Claims Direct to charge a panel solicitor £72.50 on referring a case, but it would not be a breach of the Code for Poole & Co. to charge that sum. Mr Sullman was aware that to minimise the grounds of challenge the invoice had to be presented by Poole & Co.: but he also knew (and arranged) that the work be done “in house”. I find that the practice of Poole & Co. continuing to invoice panel solicitors for the £72.50 fee on the basis that it had “sub-contracted” the performance of the task to Claims Direct was a wholly artificial device. The formal arrangement of(a) Claims Direct “retaining” Poole & Co. to vet proposals and

(b) Poole & Co. then sub-contracting back to its instructing client the performance of the very task it was retained to do had no correspondence with reality. The device was used precisely because from 5 July 2000 at the latest everyone knew that however it was “dressed up” the £72.50 paid by a panel firm whenever a case was referred to it was a referral fee: so the rules about referral fees had to be observed in form. This element of deliberate artificiality adds a dimension absent from the £395 acceptance fee charged.

[54]I further find that it was a lucrative device. In the first month after the “sub-contract” arrangement had been put in place vetting fees of £323,000 were received by Claims Direct in respect of 4,492 cases accepted in that month. Demands for payment to that value were made of panel solicitors, and made in a form consciously designed to enable them to seek re-imbursement from third parties in the costs-recovery process. If Claims Direct had demanded the money itself everyone would have said it was an unlawful referral fee.

[55]On this evidence I hold Mr Sullman’s conduct to have been culpable. The analysis of the original model has caused me the same difficulties as that concerning the acceptance fee of £395. For the reasons I there set out I would not regard Mr Sullman as having demonstrated unfitness to be concerned in the management of a company because the business model he created might have involved the breach of professional rules (though the profession itself did not think so, and had to be told so in the judgment of Chief Master Hurst): or because the business model held out the prospect that competent and experienced professionals might recover some of their expenses on a costs assessment. But from 5 July 2000 there is an additional dimension which in my judgment demonstrates a failure to adhere to acceptable standards of commercial probity viz. the adoption of a wholly artificial arrangement from that date in an endeavour to avoid acknowledged difficulties with the Solicitors Code and mislead others as to the true position. At this stage there seems to me to be an acknowledgement that the “vetting fee” is in substance a referral fee (for the invoicing arrangement was otherwise unnecessary), and the creation of paperwork which did not correspond to reality to overcome the difficulty so as to present to defendant insurers a false picture in any costs assessment. The fundamental wrongfulness of resorting to artifice to get round a regulatory restriction (albeit in a professional code) was as obvious to a layman like Mr Sullman as it was to the technically expert Mr Poole.

[56]The sixth charge relates to a “training and support” fee that was charged to intending panel solicitors. The general nature of the case here is that as part of its business Claims Direct charged training and support fees (far in excess of the actual cost of any training provided) to panel solicitors as a precondition for any cases being referred, and the greater the number of referred cases the higher the “training and support” fee charged. The Secretary of State says that this was simply a disguised referral payment.

[57]I find the following facts:-(a) the Operating Manual for Claims Direct panel solicitors made clear that the minimum case allocation to a panel firm was five cases per week. It then stated:- “The fee in respect of the Training and Support Services provided in respect of panel solicitors receiving this case allocation is £5000 plus vat per annum. If a panel solicitor wishes to receive more that five cases per week then it is open to him to do so. However there is an increase in respect of the fee payable at the rate of £2,500 per extra five cases allocated per week.” The Manual made clear that once a solicitor had been on the panel for a year, the fee would be calculated by reference to the average number of cases accepted each week in the previous year.

(b) Every solicitor who wanted to get onto and to remain on the Claims Direct panel had therefore to pay a minimum of £5000 plus vat each year.

(c) There was no direct evidence of any support being given in return for this payment, other than the Operating Manual itself and the holding of occasional panel solicitors’ group meetings.

(d) Training was provided by Central Law Training (“CLT”). A panel solicitor who paid £5000 plus vat was entitled (but not obliged) to send two delegates per quarter to CLT courses. The course lasted four and a half hours. The £5000 payment thus gave the solicitor access to 36 hours training for his staff. For each additional £2,500 plus vat that he paid a panel solicitor could send one further delegate.

(e) CLT charged Claims Direct £1000 plus vat for each panel firm who had access to the training (compared to the £5000 that Claims Direct on-charged).

(f) Panel solicitors expressed a substantial degree of concern at the amount of the fee. In particular, there was objection to the amount of the training fee being fixed by reference to the number of cases allocated rather than the number of cases accepted. The initial linking of the training fee to the allocation of cases is an indication that the amount of the fee was linked to a “sale” of cases. In response to this objection Claims Direct agreed that the training fee should be linked to cases allocated for the first year, and thereafter to cases accepted.

(g) It was the evidence of Mr Girling (which I accept) that panel solicitors eventually came round to the view that they were obtaining value for money (though the nature of the “value” was not explored).

(h) On 27 April 2000 Alison Crawley of the Law Society visited the Claims Direct offices. Her note of her visit records:- “Firms pay a fee of £5000 for accreditation/training if they contract to take five cases a week. An additional £2,500 is paid for each five cases thereafter. In effect, this is a payment for a Claims Direct franchise, although it is not described in this way to the solicitors. The training is undertaken again by Central Law Training.” Following her visit she issued no bulletins or advice either to panel firms or to solicitors generally that the “franchise fee” was an unlawful fee: no solicitor has been the subject of professional disciplinary measures for having paid the £5000 training and support fee.

(i) It did not occur to Mr Girling (with all his experience and with his sensitivity to any impropriety) to view the “training and support” fee as an unlawful referral fee (although he initially regarded it as an excessive training fee).

[58]In my judgment Mr Sullman’s conduct was not culpable in this regard. In his concern to make as much money as he could out of the new opportunities opening up in the ATE market he was undoubtedly trying to wring every penny he could out of every step in the claims management process. His effective guide was “What can I get away with?” In this instance he was dealing not with ordinary members of the public, but with experienced professionals who were able to look after their own business interests. What he wrung out of them in the form of exorbitant training charges would eat into their profits, but would not be charged to their client or sought to be recovered from the defendant insurers. In each case the solicitor could only recover on an assessment reasonable professional charges. Mr Sullman knew that his exorbitant training charges were in effect a franchise fee. But panel solicitors (well able to look after their own interests) chose to pay it and the Law Society did not choose to put a stop to it. There seems to me to be no want of commercial probity in blatantly selling overpriced training which competent professionals (with an eye to securing a franchise for profitable work) persuade themselves is value for money. The jurisdiction under the CDDA 1986 does not exist to enforce professional rules of conduct, but to enforce the standards of conduct to be expected of directors.

[59]I turn to the eighth charge laid against Mr Sullman. Its headline is that he misled members of the public (namely prospective investors) in a share issue and placement in July 2000. The several complaints fall into two categories:-(a) a failure properly to alert investors to risks inherent in the business:

(b) a failure to disclose to investors the benefits which Mr Sullman and his co-director would personally derive from the offer. The first of those categories contains a number of specific matters of complaint. In order to explain my conclusions I will first set out the general background to the flotation, then deal with each of the detailed issues relating to risk, and conclude by dealing more broadly with the issues relating to benefit.

[60]I find that it was an integral part of the plan to establish the Claims Direct business that Mr Sullman and Mr Poole would sell the business to outside investors. On 14 August 1999 (two days before the launch of the Claims Direct Protect Scheme) Mr Sullman e-mailed Mr Poole notifying him of his intention to make contact with venture capitalists and saying:- “If the company is on target for producing in excess of £10 million a year, and Claims Express could double that again, it’s time to cash my chips in. With a market [capitalisation] of £150 million to £200 million my shares would be worth about £100 million. I do not think I could ever spend that, but I would not like to lose the opportunity if the market was to move against us in the years to come…I believe I will ship my assets out to a tax free zone…of course, with £20 million or more going to you maybe you would look at cashing your chips in?” I consider that the phrase “cashing the chips in” is a neat summation of Mr Sullman’s attitude to building the business and extricating himself from it. Mr Sullman told me that he played poker, and that there comes a point “when you stop playing the game and take your money”. I consider that the phrase “cashing the chips in” is a neat summation of Mr Sullman’s attitude to building the business and extricating himself from it. Mr Sullman told me that he played poker, and that there comes a point “when you stop playing the game and take your money”.

[61]As part of this plan Mr Sullman and Mr Poole caused shares to be issued to Merlin Group Securities Limited in Guernsey to be held on discretionary trusts in a fund called “the Cartmel Trust”. By the 10 March 2000 Mr Sullman was able to e-mail his tax adviser at KPMG to inform her:- “A decision will be made at next week’s board meeting as to the date for a full IPO. We believe this will be June/July of this year, with a long stop date of September. It is anticipated that the whole of the off shore share holdings will be disposed of at the IPO. This will mean Colin and I will be bringing circa £100 million back on shore as a personal asset, the value of the float being 350 to 400 million…”.62. Any IPO would involve the issue by Claims Direct of a prospectus. It was accepted at trial that the issue of a prospectus was every bit as serious a matter as a public announcement by the directors of a listed company. In connection with such public announcements I was referred to the observation of Timothy Lloyd J in Re: Atlantic Computers PLC (15 June 1998, unreported) that:- “In the context of a listed company the public announcement has a sort of sacrosanct character, and directors are rightly seen as under a very special burden of responsibility as regards the content of such announcements. How a director faces up to that responsibility in difficult circumstances may well be very revealing of his or her character. So long as the conduct in question is honest, and not lacking in commercial integrity however, it does not necessarily follow that, if the director falls short of the standards of competence which might be expected, by the City or others, (whether or not by the law as regards directors’ duties) of a director of a publicly listed company, that director is thereby shown to be unfit to be concerned in the management of any company, however small, private and simple its affairs may be. Nevertheless, where public announcements are concerned, in the case of a listed company, issues of commercial probity do arise, even in the absence of any issue of dishonesty or personal gain.” That passage encapsulates the approach that I have adopted in relation to the IPO of Claims Direct.

63. The key legal obligation is to be found in section 146 of the Financial Services Act 1986. This provides (so far as material) that:- “Any listing particulars….. shall contain all such information as investors and their professional advisers would reasonably require, and reasonably expect to find there, for the purpose of making an informed assessment of…..(a) the assets and liabilities, financial position, profits and losses, and prospects of the issuer of the securities……”. Those words are in my view to be construed generously.

[64]It was the unchallenged evidence of Mr Sullman that, in the preparation of the due diligence report and the draft prospectus, he was advised by Maclay Murray & Spens (solicitors) (“MMS”), Pricewaterhouse Coopers (accountants) (“PwC”) and Investec Henderson Crosthwaite (brokers to the share offer) (“Investec”), and that he adopted in relation to MMS and PwC an “open door” policy (to the extent that they had offices at Claims Direct’s premises). Mr Cousins QC at times came close to submitting that of itself this constituted a complete answer to all complaints under this head. I do not treat it so. The fact that a director has sought advice from competent professionals and has acted on that advice will, of course, be a significant factor in many cases. It will tend to demonstrate fitness (rather than unfitness) to be concerned in the management of the company. But it all depends on what the professional is instructed to do and upon the extent of his instructions (so far as concerns the provision of material on which his judgment is to be exercised and advice given). A director who says:- “Here's the keys to the warehouse. See what you can find. But in general, I want to see how little I can get away with.” stands on a very a different footing from one who says “These are matters which particularly concern me and here is everything I know about the issues; what must I do to make sure I have fully complied with my duty?” I saw none of the retainer letters and very, very little of the advice.

[65]It was also common ground that MMS were a reputable Scottish legal firm competent to carry out due diligence work; that PwC were accountants and advisers competent to provide a report; and that if a professional person was involved in a flotation in which a company wished to issue a misleading prospectus then such professional would disassociate himself from it and not permit his name to be used. It was further common ground that neither MMS and PwC nor Investec had refused to continue to act. Mr Cousins QC and Mr Charman effectively submitted that on those facts there was no case to answer. Once again, I do not agree. Even competent firms can make a mistake: and a mistake by professionals in the performance of professional duties (or even faultless performance) will not inevitably discharge a director from his separate and independent obligation to act in a fit manner in the management of the company. Moreover a professional may not realise that the material produced in the course of the retainer is misleading if the director has not drawn to his attention matters within the knowledge of the director which bear the upon the judgment to be made. That is precisely why all professionals involved in this case were careful to ensure the acceptance of personal responsibility by Mr Sullman, as set out in a signed Responsibility Statement (a responsibility which, to his credit, he did not seek to shirk). The terms of the Responsibility Statement required Mr Sullman to draw to the attention of his advisers any matter the omission of which might make what they had stated untrue.

[66]A draft due diligence report was prepared by MMS on 8 March 2000 in connection with the placement of some shares by a Mr Hyde. That due diligence report referred to the Cartmel Trust in these terms:- “The trustees, Merlin Group Securities Ltd, have confirmed that neither Anthony Sullman nor Colin Poole is a beneficiary of any Trust interested in the shares of Cartmel, and that no proceeds of the disposal of ordinary shares by Cartmel under the placing agreement will be distributed to either Anthony Sullman or Colin Poole or any members of their families.” It is important to emphasise that this statement was not made in relation to the IPO (but to the placing agreement in which Mr Hyde was concerned).

[67]That same due diligence report also contained a statement that MMS had been informed “that there is no prospect of the insurance premium being retrospectively increased as a result of claims’ experience.” That was what Mr Sullman had told MMS.

[68]When MMS came to undertake due diligence for the IPO they produced a report dated 5 July 2000 the introduction to which made plain that they had reported only on those matters that had materially changed since their report dated 1 March 2000: they stressed that the July 2000 report “should be read as an update to that report and in conjunction with it” and that it was “inadequate to consider the terms of this due diligence report in isolation from that previous report.” My attention was not drawn to any part of the July 2000 due diligence report which modified either of the passages from the March report which I have quoted. Investec will therefore have proceeded on the footing that both statements were accurate, and the Prospectus will have been prepared on that basis.

[69]The July due diligence report also referred to the following matters relevant to the issues before me:-(a) It noted that the directors had adopted a policy in certain circumstances of indemnifying clients who failed to recover a sum sufficient to discharge the premium they had paid and for which they had taken out a loan. It advised the directors to consider carefully whether they would be prepared to extend the policy were difficulties to arise in other similar circumstances.

(b) It warned that payments made to Claims Direct by panel solicitors could potentially breach the professional code of conduct if shown to be commissions and warned that the group would then have to rethink the structure of the payments received.

(c) It noted that it was the proposed that Claims Direct should take an assignment of loans taken out by claimants from Investec and that a draft assignment was under negotiation: but it made no reference to any other lending arrangements in which the company might participate.

(d) It noted that there existed an Introduction and Referrals agreement between Claims Incorporated and Poole & Co, and drew specific attention to the fact that it operated on a rolling three-month notice period. It noted that it was proposed that Claims Direct should acquire Poole & Co’s vetting business.

[70]The prospectus ultimately produced itself contained the following material provisions:-(a) On p.16 it referred to the placing of the proceeds of the offer (amounting to some £48 million) on deposit first, to enable the group to fund its current operations more efficiently and expand into complementary business areas, but it disclosed that £9.75 million would be paid to Mr Poole relating to the acquisition of certain assets and the subcontracting of the claims vetting business to Claims Direct.

(b) On p.21 it referred to the changes introduced as a result of the Access to Justice Act and said that “while these were anticipated by the board and the outcome has to date been positive for the Group, future legal or regulatory changes could adversely affect the Group's current business model.”

(c) On p.22 it referred to ATE insurance. It is said that “while a number of insured cases have settled with the full amount of the cost of the insurance being recovered from the third-party insurer, the Group is not yet in a position to estimate how often this will be the case. In particular no insured case has yet come to court and no court judgment has yet been made that the full cost of the insurance is recoverable as an expense from an unsuccessful defendant. Any change in the legislation or rules of court or any interpretation of them which restricted the amount of the insurance cost which can be claimed as a cost against the defendant could have a material adverse effect on the Group.”

(d) On p.22 it also referred to the 30% scheme and stated that “cases operated on a contingency basis may be more open to challenge by claimants than cases utilising post-event insurance, and, if successfully challenged, this could have a material adverse effect on the Group”.

(e) On p.62 it disclosed the interests of the directors and that before the flotation Mr Sullman would hold 35.2% of the issued shares and afterwards 29.98% of the enlarged capital; and that (save as disclosed) he did not have any interest directly or indirectly in the share capital of the company.

(f) On p.62 it disclosed that Cartmel would be selling 27,777,778 shares for £50 million (contemporaneously with the issue of an identical number of new shares). The prospectus explained:- “The ownership of Cartmel is vested in discretionary trusts constituted under the laws of Guernsey. The trustees have the right in pursuance of their discretionary powers to appoint any party (which may include any director) a beneficiary at a future date, provided always that such beneficiary shall then be resident for tax purposes outside the UK”.

(g) On p. 69 it stated that there had been no significant change in the financial or trading position of the Group since the 31st March 2000. 71. Mr Cousins QC and Mr Charman took a general point. They effectively said that I could not the weigh this material because the Secretary of State had not adduced any expert evidence as to market practice. They relied on the observations of Arden J. in Eagle Trust plc v SMC Securities Limited

[1995] BCC 231

. In a takeover Eagle offered its shares as consideration for the acquisition of the target’s shares, and made a rights issue. Eagle’s chief executive personally became a sub-underwriter to the rights issue. He used company money to discharge his underwriting obligations. The corporate finance department of SM (Eagle’s stockbrokers) did not disclose in the listing particulars the chief executive’s interest when launching the rights issue. This was said to be a breach of section 146 of the Financial Services Act 1986. The employee of SM responsible for the decision was “G”. Arden J. held:- “ In my judgment, there can only be a legal duty of care on a financial adviser to advise upon the disclosure of any matter if that matter is required to be disclosed by law…. it is rare for a director to have a sub- underwriting commitment. There could not therefore in my judgment be any consensus in the marketplace as to the disclosure requirements in this context of which he could be said [G] should have been aware. [G] did consider the question of disclosure;…… I do not consider that [G] as a layman could be expected to reach the correct conclusion as a matter of law on the meaning of section 146 of the 1986 Act or the scope of the duty at common law”. Mr Cousins QC submitted that what fell to be disclosed was only that required by law, that that was determined by section 146 of the Financial Services Act 1986, and that a layman cannot be expected to reach correct conclusion as a matter of law on the section or on the scope of any common law duty. But this submission invites me to focus on the wrong question. I am not adjudicating upon whether there has been a breach of section 146 of the 1986 Act. I am adjudicating upon whether Mr Sullman’s conduct as a director of Claims Direct in relation to the IPO makes him unfit to be concerned in the management of a company: and the essential simplicity of the question must remain at the forefront of my consideration. Whether or not there was a breach of section 146 (and if so, how it came about) undoubtedly has a part to play in answering that question: but the focus is upon what the director did. 72. Against that general background it is possible to consider the specific allegations of nondisclosure. The first is that Mr Sullman failed to disclose that Claims Direct was making (or may have to make) ex gratia payments to customers who had been left out of pocket by reason of the irrecoverability of premiums in respect of policies taken out before April 2000. 73. In my judgment Mr. Sullman's conduct in this regard does not demonstrate unfitness. Attention was drawn to the existing indemnity arrangements (as they were described) in the due diligence report and to the desirability of considering whether they might be extended: and all professionals may be taken to have been aware that the issue needed to be addressed appropriately in the prospectus. 74. Moreover, in June 2000 PwC had prepared a long form report for Investec. This specifically addressed two categories of discretionary payment. The first was “Transferred Cases”. These arose where a customer of the 30% scheme had transferred to the Claims Direct Protect scheme and then recovered an amount of less than £4000. Assuming a recovery of £4000, net of premium costs such a customer would receive £2700 under the insured scheme, but would have received £2800 under the 30% scheme. As at the 31st May 2000 there were 171 such queries, of which 23 had resulted in cheques being issued at an average amount of £620 each. PwC noted that no provision had been included in the accounts but that the amount “is however unlikely to be material”. There is no evidence which suggests that the position was misrepresented to PwC or that Mr Sullman was in possession of some information which made it improper for him to rely on PwC's assessment of materiality. The evidence does not therefore establish on the balance of probabilities that Mr Sullman acted culpably in failing to cause the prospectus to disclose that these non-material ex gratia payments were currently being made. 75. PwC’s second category was “Insured Scheme Discretionary Payments”. These were original purchasers of the Claims Direct Protect policy who, at the time of their purchase before April 2000, believed that premium would be recoverable. In its long form report PwC addressed “certain rare circumstances where the amount of the settlement of the case is insufficient to allow the claimant to repay the loan taken out from Investec”. The position here is more debatable. It turns on the question whether “rare” is an appropriate adjective. Its use may derive from something which the board of Claims Direct told PwC: or it may be PwC's own assessment (in which case the question would whether Mr Sullman knew it to be inapt). Either might demonstrate unfitness. 76. The irrecoverability of pre-April 2000 premiums was known in February 2000. Mr Poole (and undoubtedly Mr Sullman) were then considering whether to advise panel solicitors to communicate with customers. In a letter of the 23rd February 2000 Mr Poole advised that they should not, and held out the prospect that Claims Direct might introduce a system whereby clients would have a minimum level of compensation protected in the event that their case was successful. (This had nothing to do with any proposed amendment to provide deficiency in damages cover to new customers who might in the future find themselves in a similar position: it was a proposal directed at existing customers “caught in this position”). From February 2000 Mr Sullman therefore knew that insured scheme discretionary payments to maintain goodwill were a distinct possibility. The crucial question is: at what level? In May 2000 Claims Direct notified its panel solicitors (some of whom had been indicating that ex gratia payments may be needed) that they would only be considered if it was proved that reasonable attempts had been made to recover the premium from the defendant insurers. This demonstrates that a restrictive approach was then being taken. As at 31 May 2000 there were, according to the PwC long form report, 19 such cases with an average pay-out of £230. That justifies the adjective “rare”. Mr Sullman was entitled to treat that as an accurate summary unless he knew or suspected that it represented the beginning of an avalanche. I have held above that customers who bought policies before April 2000 where misled. Mr Sullman must have known that there are would be some challenges. On the 18 August 2000 Mr Poole prepared a board paper on “Ex Gratia Payments”. He expressed the opinion:- “ Whilst I understand the potential damaging PR effect that there is if we do not deal with this problem, I feel that we must, as a matter of some urgency, find out what the size of the problem is first. [An employee] has done some very rough numbers but they are just that, and it is not sensible to start band[y]ing around calculations unless they have been checked and verified…. I am not saying that I have an answer or a solution, but what is clear is that one needs to be found and a policy decision made sooner rather than later.” That was done shortly after the 30th of September 2000 and was reported by Mr Sullman in his chairman's statement in these terms:- “ Subsequent to the period end your company suffered damaging media comment about the issue of premium recoverability pre-1 Apr 2000. The board has now for taken the initiative by announcing that all clients who have taken out insurance policies prior to first April will be guaranteed that they will be placed in no worse position than they would have been under the company's previous arrangements. The cost of this guarantee is expected to be approximately £5 million thus requiring a further provision of £4 million to that contained in the interim results.” 77. On this state of the evidence it is not possible to find that Mr Sullman acted culpably at the time of the July flotation. The historic level of payments was then low: the then current appreciation was that the problem could be contained within the £1 million provision made in the interim accounts. This was reconsidered in August (in recorded terms which demonstrate that the true extent of the problem was not known) and a policy formulated in October. In July 2000 there was nothing known to Mr Sullman in relation to this aspect of the company's business to render the statement in the prospectus that there had been no significant change in the company's financial position since the 31 March 2000 accounts untrue. 78. It is said secondly by the Secretary of State that Mr Sullman failed to disclose that there were likely to be challenges to the extent to which the full £1312.50 paid by customers would be recoverable. In my judgment Mr Sullman did not acted culpably in this regard either. So far as potential investors were concerned there was a clear warning in the prospectus that:- “No insured case has yet come to court and no court judgment has yet been made that the full cost of the insurance is recoverable as an expense from an unsuccessful defendant….. Any interpretation of [the legislation or rules of court] which restricted the amount of the insurance cost which can be claimed as a cost against the defendant could have a material adverse effect on the Group….” Whatever Claims Direct and its franchised claims managers were saying to ordinary customers in order to induce them to take out policies, a more measured approach was taken to potential investors. 79. Mr Cunningham QC and Mr Hayman criticised this disclosure as failing to make plain that more than one Leading Counsel had advised that there was a risk that the premium might be deconstructed. But amongst those Leading Counsel had been Richard Salter QC whose advice had been given to Investec (and I have quoted it above). In must follow that Investec and their solicitors Nabarro Nathanson were satisfied that the terms of the Prospectus correctly notified to potential investors the risk to which their own Leading Counsel's opinion had alerted them. In light of that it is not possible to conclude that Mr Sullman acted in an unfit the manner in personally reaching the same view. 80. It is thirdly said by the Secretary of State that the Prospectus failed to disclose to potential investors that the failure rates on claims handled by Claims Direct exceeded the level represented to underwriters so that this was likely to lead both to increased future premiums and to a retrospective demand to cover past losses. In fact the Prospectus said that there had been no material change in the financial or trading position of the company since 31 March 2000. I have no doubt that it contained that statement because it had been prepared on the basis of the due diligence report of 8 March 2000 (which recorded the management’s view that there was no prospect of retrospective premium increases as a result of claims experience), a statement which was not updated in the July report. 81. I have already found that the June 2000 management accounts showed a failure rate on closed cases of between 58% and 43%. I have held that there was nothing to suggest that the performance of the remaining open cases would bring the failure rate down to 4% or anywhere near it. As at March 2000 19,475 policies had been sold, of which 232 had concluded, with 168 successful outcomes and 64 failures; an overall failure rate of 27.5%. (To calculate failure rates as a proportion of policies incepted is meaningless). I have reported the views of Mr Ross in January 2000 that the disparity between the assumed failure rate and current claims experience posed a clear threat to the viability of the insurance arrangements. It now falls to address the question whether the view expressed by the management in March 2000 that there was no prospect of the insurance premium being retrospectively increased was properly maintainable at the time the Prospectus was issued in July 2000: and whether the view that Prospectus need not alert investors to the risk of increased insurance costs was likewise properly maintainable. 82. In my judgment they were not. Mr Cousins QC and Mr Charman urged that the former was because there was no legally enforceable right vested in the underwriters retrospectively to increase the premium. That is too simple an answer. Fit conduct entails as much an assessment of the commercial realities of managing a company as an appreciation of legal nicety. Commercial realities suggest that underwriters would not simply write off historic losses on new business: they would recoup them either by retrospective charges or by repricing future insurance to cover not only current losses but also to recover on past losses. 83. Right at the outset when the original insurance arrangements had been negotiated in July 1999 the underwriters indicated that they would review the position on the 31 March 2000. Mr Raincock’s note said that the underwriters “… have agreed that at that point the arrangements will be maintained provided that the CDL Account does not show a loss at the anniversary i.e. claims paid and reserved do not exceed the net premium allocated to underwriters..” This is such an obviously uncommercial arrangement that one thinks something must have gone wrong with the record of the bargain, and indeed Mr Raincock said that it was not what he intended. (Suppose 1% of the cases were closed and 99% of the net premium income was paid or reserved in respect of those closed cases: the underwriters were apparently offering to extend cover on the same terms even though they only had 1% of the net premium income available to cover the 99% of open cases). I do not think Mr Sullman was so naive as to think that that is the bargain he had achieved. A man of his abilities must have understood that when placing the following year’s risk (as he was absolutely compelled to do, or face the collapse of his business) the same terms would not be available, and that there was a significant chance that he would be asked to pay something for the current year’s loss. Mr Raincock had made as much plain in September 1999. It was re-inforced at a conference in Las Vegas in November/December 1999. It was put into figures in May 2000 when Mr Raincock calculated that the underwriters required a minimum premium of £136 to break-even (as opposed to the £90 they were collecting). It was carried into effect in June 2000 when Mr Primer required the loss ratio to be defined by reference to finalised cases only and to secure a loss ratio below 60%. By 21July 2000 (a week after flotation) it had been agreed (“conclud[ing] the recent round of negotiations” according to Mr Raincock’s fax of that date) that the underwriters would receive a revised net premium of £300 per policy on all policies issued from 3February 2000 to be remitted in one lump sum. It was further articulated in unmistakable terms on 17 August 2000 (a month after flotation) when Mr Primer wrote “In view of early adverse claims experience a “back-dated” increase in premium has been agreed which will produce additional gross premium of approximately 25,000 -27,000 at £220 per policy which will produce gross brokerage of £5.5 million….” At the time of the flotation Mr Sullman cannot have been in any doubt that the current arrangements were precarious and a rise in insurance costs inevitable in view of the then current negotiations. 84. The position was somewhat obscured by concurrent negotiations for an increase in the scope of cover to include “a deficiency in damages” clause. In the course of those negotiations the underwriters offered to accept the extra risk but in return for increase in the premium. Accordingly Mr Cousins QC submitted that any increase in premium was attributable to the extension of cover. I do not accept this submission. The underwriters were not continuing to charge £90 for the basic cover of £2000-£3000 and then a further £210 for an additional £500 worth cover: the underwriters had significantly increased all their rates to cover future costs and recoup past losses (as Mr Primer’s explanation makes plain). I find that from at least April 2000 Mr Sullman knew that such an increase was a real risk and understood that it would significantly impact upon profitability: but he made no mention of it in the prospectus. 85. I am in no doubt that Mr Sullman well understood the significance of premium rates for the flotation. On 12 May 2000 he sent a fax to Mr Raincock dealing with the proposed premium increase, at that point from £140 (£90 for the underwriters and £50 to LPL) to £235. He stated:- “It is important to our current corporate strategy that we maintain stability in premiums/premium allocation as we go forward to our LSE flotation and this is reflected in our keeping the [Claims Direct Protect] premium at £140 until September”. This increase was essentially a pure cost increase. Mr Sullman told me this increase in underwriting costs was to be associated with an increase in the price charged to customers, which would enhance profitability: and that the importance to “current corporate strategy” of “maintaining stability” was not that it avoided unsettling the market as to the underlying true insurance costs in the run-up to flotation, but rather that it meant there would be some post-flotation “good news”. The answer was entirely unconvincing. The Prospectus did not draw attention to the risk inherent in the business model because that would have made the offer less attractive. A premium increase of £145 would have increased the cost base and prejudiced profitability (which the Prospectus said was about £660 per claim). To maintain in the Prospectus that the financial position was the same as at the last accounting date notwithstanding inevitable rises in underwriting costs (some of which might well be retrospective) demonstrates a want of commercial probity. 86. The fourth matter which it is said Mr Sullman failed to disclose in the prospectus is that Claims Direct no longer had banking arrangements in place for the third-party provision of loans to its customers to fund the Claims Direct Protect premiums and was in fact itself advancing money to its customers for that purpose. 87. In my judgment this charge is partially made out. The original loan provider had been Investec Bank (UK) Ltd. It ceased offering facilities with effect from the 31 May 2000. On 3 May 2000 Claims Direct entered into an agreement with First National Bank plc (“FNB”) to provide alternative funding, the agreement to commence from 1 June 2000. There was therefore no funding gap (as is said in paragraph of 326(a) of the first affidavit of Mr Weaver for the Secretary of State). But there was a transitional difficulty occasioned by the rushed nature of the replacement funding. Until 31 May 2000 the loan applications sent to customers referred to Investec as the lender. From 1 June 2000 the loan applications could refer to FNB. This meant that there was a batch of customers who had completed loan applications for Investec loans but whose applications had either not been approved before the cut-off date or had been approved but not drawn down. These customers should have been sent new applications for FNB loans. Claims Direct decided to self-fund the loans in these cases i.e. to extend its operations from the selling of insurance policies and the provision of claims management services into the lending of money. 88. It did not do so for the month of June or for that part of July preceding the flotation date. That is why the due diligence reports refer only to a possible assignment of loans still under negotiation. Immediately after 13 July 2000 Claims Direct began to do so extensively. In the 6 days from 25 July to 31 July 2000 it lent £3.4 million. In August 2000 it lent a further £6.93 million. The prospectus issued only days before (following a Board Meeting at which the directors specifically addressed the topic of “Business Development”) contained not a word about this change in direction of commercial activity, nor did it address the undoubted impact that self funding had on the cash flow. (The balance sheet for 30 September 2000 had to show the “self funded loans” as “Investments” amounting to at £10.5 million, representing just short of 20% of Claims Direct’s net assets). 89. I find the omission from the Prospectus to have resulted from a deliberate decision by Mr Sullman (along with others) not to disclose it to potential investors. On the evidence I have seen there can be no question of this funding difficulty for customers being a sudden problem that emerged only after flotation: nor can there be any question that self funding the loans suddenly emerged after flotation as the solution to to a known problem. The problem and the anticipated solution were known before flotation, deliberately not disclosed to potential investors, and then implemented immediately after flotation. In my judgment Mr Sullman's conduct in this regard was culpable because he mislead investors as to the application of Claim Direct’s capital.

[90]Mr Cousins QC and Mr Charman urged me not to reach this conclusion. They relied heavily on the fact that the first such loans were made on the 25 July 2000. But the loans were not made that day “out of the blue”. The problem they addressed was known as from 3 May 2000. Mr Cousins QC and Mr Charman also relied on the passage in the Prospectus which stated:- “ The Directors believe that the net proceeds of the offer of £48 million receivable by the Company (which will initially be placed on deposit) will enable the group to capitalise on growth opportunities available to it. In particular, the proceeds will enable the group to ….expand into complementary business areas”. In my judgment that reliance is misplaced. The quoted words are simply not an adequate disclosure of the fact that 20% of the proceeds of the offer will immediately be applied in lending to customers to enable them to purchase the company's product.

[91]The fifth complaint of nondisclosure made by the Secretary of State is that the Prospectus did not disclose that there was a risk that the 30% scheme would be found to be champertous.

[92]In my judgment this complaint is not made out. I will deal with it very shortly.

[93]On 8 June 2000 Mr Jeffrey Gruder QC had advised that the 30% scheme was prima facie champertous, and that there was a risk that the customer would say he was not bound to share the damages recovered (a point nobody had taken throughout the life of the scheme since 1995). Other Counsel had expressed a different view: Mr Adrian Salter in December 1995, Mr Goudie QC and Mr Gordon Saker in October 1999, and (as to Scottish law) Mr G. J. B. Moynihan QC in May 2000. The risk of an adverse legal finding was therefore difficult to assess.

[94]So were the financial consequences for the business. I think the risks were twofold. First there might have been exposure to third-party claims for costs. But it seems to me Claims Direct had taken out insurance on the 11,118 outstanding 30% scheme cases at a cost of some £1.8 million as disclosed in its accounts to the 31 March 2000. The Claimant did not satisfactorily explain why (notwithstanding such insurance) third-party costs claims were not covered. Second, if the damages were not shared then an anticipated income stream would not be receivable. But my analysis of the 30% scheme leads me to the conclusion that on receipt by Claims Direct of its 30% share, £225 of this 30% was handed on to the franchised claims manager in partial or total reimbursement of the £250 case acceptance fee which he had had to pay Claims Direct when initially allocated the case. A successful champerty claim would therefore have harmed the claims managers more than Claims Direct itself.

[95]Given the uncertainty of the true legal risk and the obscurity of its financial impact on the business in my judgment Mr Sullman simply cannot be criticised for approving a Prospectus which said:- “Cases operated on a contingency basis may be more open to challenge by claimants than cases utilising post-event insurance, and, if successfully challenged, this could have a material adverse effect on the Group”. Indeed I think that in many respects this is a model disclosure: and it is a great pity that its form was not followed in respect of more serious risks to the business.

[96]The sixth instance of alleged nondisclosure on which the Secretary of State relies is that there was a failure to disclose to potential investors that part of the income of Claims Direct derived from unlawful referral fees paid by panel solicitors.

[97]In my judgment this complaint is not made out. I have expressed the view above that Mr Sullman is not guilty of unfit conduct in operating a business model which depended for a substantial part of it income stream upon the payment by panel solicitors of an acceptance fee of £395. But that does not determine the answer to the present question, which is whether he should have disclosed to potential investors the risk to the business of an adverse finding by a Court should the payment be challenged.

[98]The short answer the question is that he did make such disclosure. The prospectus said:

“It is possible that any change to the rules of conduct or the interpretation thereof may require alteration to the role and involvement of panel solicitors (including as to the payment of fees by and to panel solicitors) in any scheme operated by the group”

It might be said that that form of disclosure did not draw attention to the financial consequences to the business of the alteration of the payment of fees by and to panel solicitors. There is force in that point. But I do not consider that it can be held against Mr Sullman because this is another issue on which Investec received the advice of their own Leading Counsel warning of the precise risk, prepared the prospectus with that in mind, and were themselves satisfied.

[99]That completes my survey of the complaints of non-disclosure of inherent risks. I turn to consider the complaint of non-disclosure of anticipated benefits.

[100]In my judgment this complaint is made out, and Mr Sullman’s conduct was culpable. The extraction of personal gain from a business conducted under the privilege of limited liability is in my judgment one area that must be subject to the closest scrutiny and the most rigorous application of the standards of “fit conduct”. Directors cannot derive personal advantage to the prejudice of customers, creditors, funders, investors or others with whom the company has commercial relationships.

[101]The Prospectus contained a section on “Interests of Directors and Others”. It had been the subject of specific consideration at a Board Meeting on 5th July 2000, and Mr Sullman hadf specifically confirmed that there were no material matters known to him which ought properly to be drawn to the attention of MMS to enable to complete full “due diligence” and “no other facts, the omission of which would make a statement or opinion expressed in the Prospectus misleading..” This led to the Prospectus containing the disclosure about Cartmel that I have quoted above.

[102]It is I think notorious (and did not appear to be in substantial dispute at trial) that directors’ dealings in their company’s shares have a significant impact on market perception, particularly as an indicator of prospects. Hence the necessity for the Prospectus to contain a section on “Directors Interests”. In my judgment a reader of the Claims Direct prospectus would not have appreciated that the company was raising £48 million net of costs and that the directors were personally realising £50 million. But that is what happened. Cartmel sold 27,777,778 shares at 180 pence per share realising £50 million: and in November 2000 £33,638,253 was paid to Mr Sullman’s English solicitors, that sum having been appointed to him out of the Cartmel trust. Mr Sullman had caused the shares to be settled on these trusts and (even in the absence of disclosure of the relevant trust documents) there is no doubt that he always expected to receive this payment. This was the money he was bringing onshore and in relation to which he had sought tax-accountancy advice months before.

[103]This is a case in which in my judgment the literal truth in the Prospectus constituted a substantial misrepresentation of the reality. Mr Cunningham QC asked Mr Sullman why, if he had an expectation of benefit, he did not tell the whole truth, and acknowledge that there was no real discretion in the trustees. Mr Sullman’s response was “Legally you are wrong. There was an expectation that we would receive”. As a matter of legal nicety Mr Sullman is correct. But potential investors deserve more than legal nicety. They are entitled to know the relevant substance.

[104]Mr Cousins QC argued that such disclosure was not material to the obligations under section 142 FSA 1986. He submitted that the section required the disclosure of information necessary for the making of an informed assessment of “the assets and liabilities, financial position, profits and losses, and prospects” of Claims Direct, and that sale shares for the benefit of Mr Sullman was not material to any of those matters. I disagree. The ownership of shares by the board is taken by the market as indirect indicator of prospects. The prospectus gave prominence to Mr Sullman’s retention of his personal holding: and it ought to have given equal prominence to his realisation of a holding in which he had a real (if not technical) interest.

[105]Mr Sullman’s response to this challenge was twofold. First that there were press reports that he and Mr Poole were benefiting from the flotation; and secondly that he did tell all institutional investors what the real arrangements were. Neither response is a sufficient answer. Accurate media speculation as to the truth does not relieve a Director from the obligation to act in a fit manner as regards disclosure. Disclosure of the truth to part only of the market does not relieve a Director from the obligation to act in a fit manner as regards all those with whom the company has or might have commercial relationships.

[106]In my judgment Mr Sullman’s conduct was culpable in this regard.

[107]The ninth charge laid against Mr Sullman is that he knowingly misled investors after the flotation of Claims Direct, in particular in relation to insurance arrangements.

[108]The standard of commercial probity to be attained by the directors of publicly listed companies is informed by the UK Listing Rules. Rule 9.2 provides:- “ A company must notify the Companies Announcements Office without delay of all relevant information which is not public knowledge concerning a change(a) in the company's financial condition;

(b) in the performance of its business; or

(c) in the company's expectation as to its performance; which, if made public, would be likely to lead to substantial movement in the price of its listed securities”. Rule 9.3A provides that a company must take reasonable care to ensure that any information it notifies to or makes available through the UK Listing Authority is not misleading, false or deceptive (whether by statement or omission).

[109]I find the following facts:-(a) On 23rd November 2000 “subject to contract” Heads of Agreement were entered between underwriters and Claims Direct to record their understanding of the basis on which cover was being and would be provided. These were signed by Colin Poole but Mr Sullman was intimately involved in their negotiation. After the signature of the Heads, the detailed negotiation appears to have been taken up by Claims Direct’s Finance Director (Mr Doona) in place of Mr Sullman, an indication that the key deal had been done.

(b) The Heads of Agreement provided for an extension in the available cover under the Claims Direct Protect scheme to include 'deficiency in costs recovery' i.e. to cover any shortfall in damages (ignoring the first £1000) in respect of the premium payable and any legal costs and disbursements incurred by or on behalf of the Claims Direct customer. This cover was to be retrospectively available in respect of policies incepted from 1st April 2000 upon an additional premium of £245 per policy, and was to be included in future policies at an increased premium.

(c) Claims Direct was obliged to pay as advance premium £245 for every policy issued from 1st April 2000 whether or not the customer actually took out the additional cover. Customers were unlikely to want to pay the £245 (which would not be recoverable from defendant insurers) for limited additional cover. The agreement noted that £2.0 million had already been paid (in fact on 31 August 2000) and it required a payment of a further £5.2 million in November 2000 (which was paid) with the balance payable at conclusion of the contract (by which time a total of £16.6 million would have been paid).

(d) In effect this £16.6 million (payable whether or not the customer bought additional cover) represented a retrospective premium increase to compensate the underwriters for losses suffered or likely to be suffered on issued policies. This was recognised in the auditors’ report (presented in June 2001) for the year ending 31st March 2001 which described the payment as “[a] cost….incurred to compensate the original underwriters for their estimate of their losses on past and existing business” which was “fairly described as an additional premium chargeable against current year results rather than as a cost of setting up a new facility”.

(e) Underwriters knew that they could extract this sum because they were being asked to renew cover and to enter into a three commitment to provide cover: but the payment did not relate to future risks to be assumed. It represented a further payment for risks already borne, and to that extent would inevitably reduce the profits earned by Claims Direct on policies already in issue. If it became known that the business model was actually less profitable than it had appeared then such information had the potential adversely to affect the share price.

(f) The re-pricing of policies yet to be issued (and the inclusion in such policies of cover for deficiency in costs recovery) obscures the true effect of the Heads of Agreement. Originally underwriters took £90 per policy in respect of the major risk. For a very slightly increased risk they were now to take £425 per policy. In truth this represented a huge hike in the premium in the light of claims experience. Information that future cover was only available on more stringent terms also had the potential adversely to affect the share price.

(g) No announcement was made to the market in respect of the surcharge on issued policies or in respect of the revised premium on future policies which had been agreed in principle. Mr Sullman continued to deal in the market.

(h) Negotiations on the drafting necessary to embody the commercial deal continued until March 2001: but the deal itself did not significantly alter.

(i) Claims Direct made a trading statement to the Stock Exchange on the 25th January 2001 (occasioned by a drop in business). There was nothing in the dealings with the underwriters which of itself warranted disclosure of the negotiations being made in January 2001 (rather than in November when the key deal was struck). The statement said:- “Discussions continue with the underwriters and the Company anticipates that it will be required to make substantial advanced payments in order to secure underwriting capacity on a longer-term basis (three years). This will be reflected in the accounts for the full year to 31st March 2001.”

(j) The trading statement included a passage which recorded that the Board had decided that Mr Sullman would be better able to serve the company in a non-executive capacity and that he was therefore becoming non-executive chairman with immediate effect. At trial Mr Sullman sought to persuade me that this event had occurred in December 2000 (thereby distancing himself from responsibility for the trading statement). But I find that the trading statement accurately reports the true position.

[110]On those findings I hold that Mr Sullman's conduct was a culpable. The Secretary of State did not assert that Mr Sullman (having failed to warn in the Prospectus of an inherent risk to the business through rising rates) ought to have made disclosure of the underwriting negotiations earlier (and he was not required to meet that charge). I therefore leave out of account both the delay in the announcement and the fact that Mr Sullman continued to deal significantly in Claims Direct shares. The charge made was twofold. First, that the trading statement was inadequate because it suggested that the “advanced payments” represented sums payable in respect of future cover whereas (as the audit report makes plain) they certainly were not. Second, that the statement that Claims Direct “will be required” to make the payments concealed the fact that at least £7.2 million (and possibly £9.1 million) had already been paid. Each of those matters had the potential significantly to affect Claims Direct’s share price. The trading statement of which the quoted passage forms part was directed to adjusting the market’s expectations of trading in the then current financial year i.e.disclosing matters relevant to the share price. But in relation to actual underwriting costs it did not tell the truth. In my judgment both allegations are established.

[111]Mr Cousins QC and Mr Charman resisted this conclusion. They said that at the date of the statement negotiations were still continuing. They said that under the arrangements then under negotiation substantial advanced payments would be required. They said that the purpose of the payment was to secure long-term arrangements (because if the payment was not made the underwriters would not offer future cover). They said that in any event Mr Sullman no longer exercised executive authority. Apart from the last (which I have found not to be the case) each of the statements is literally correct. But isolated statements of literal truth do not tell the whole truth, and taken as a whole the trading statement presents a substantially inaccurate picture of the true position. As a director Mr Sullman was responsible for that inaccuracy.

[112]The final charge is that Mr Sullman misconducted himself in causing Claims Direct to make a payment of £9.75 million to Poole & Co to acquire rights when the company could have acquired those rights by simply serving a contractual notice.

[113]I find the following facts:-(a) As recorded above in June 1996 Claims Incorporated plc entered into an agreement with Poole & Co under which all accident claims were to be exclusively referred to Mr Poole’s firm (with the object that he should either act for the customer as solicitor or refer the claim to a panel solicitor). The agreement acknowledged that Poole & Co would have the right to charge a panel solicitor to whom a case was referred a fee of £72 50 plus VAT in respect of work done in vetting the claim before referring it. The right of exclusive reference to Poole & Co therefore gave rise to an income stream.

(b) The agreement was to last until June 1999 and thereafter until one party gave the other three months’ written notice. The “poison pill” in the agreement was that on service of the notice Poole & Co had the right to elect either to continue to service current cases or immediately to cease work and render the company a bill for current work in progress (exercising a lien over the papers until payment).

(c) This agreement (under the extension of the fixed term) governed cases referred under the Claims Direct Protect scheme from August 1999.

(d) The arrangement was extremely lucrative. It produced an income stream of approximately £362,500 per month (£4.35 million per year).

(e) In May 2000 the board of Claims Direct discussed the possibility of bringing the vetting business “in house”. Approaching the matter commercially an “arm’s length” prospective purchaser would ask “What is the strength of Poole & Co’s bargaining position on a sale?”. Claims Direct had a unilateral right to terminate the agreement. Poole& Co could in that event elect either to earn a further three months’ income (approximately £1.1 million) or immediately to bill all work in progress on current cases (significantly less than £1.1 million but with a nuisance value). It might be thought that the purchaser’s offer would reflect that analysis.

(f) Instead on 1 June 2000 the Board of Claims Direct instructed PwC to determine “a fair value”. On the 12th June 2000 the valuers produced “an indicative valuation…. on a “desktop basis”…..”. The report emphasised that the valuers had not conducted a full valuation exercise, and in particular had not reviewed any statutory accounts or management accounts for Poole & Co and had relied on representations from management as to the financial position. At a hearing before Mr Justice Warren on the 14th February 2008 Counsel for the Secretary of State acknowledged that in valuing the business “a competent valuer would have needed to be aware of the contractual arrangements (including those as to termination) with regard to Poole & Co”, but did not concede that the valuation was in fact undertaken by a competent valuer.

(g) The valuation is curiously expressed as “8.5% of the market value of Claims Direct as estimated by Investec Henderson Crosthwaite” which translates into some £27 million. The supporting calculations appear to assume a maintainable income of at least £4.5 million for the current and two further years, with vetting fees per case rising to £75. The valuation thus has no regard to the actual terms of the then current agreement. It proceeds on the footing of a rolling three year contract, not a rolling three month contract. Either PwC were incompetent; or the representations from the management as to the financial position had not disclosed the whole nature of the contractual arrangements (including those as to termination).

(h) Of the two possibilities I regard the latter as the more probable. In April 2000 PwC had been told for the purposes of preparing “the long form report” that the contract with Poole & Coe was being “renewed”. In this litigation the position taken by Mr Poole (and supported by Mr Sullman) was that the two of them had in fact in June 1999 agreed the terms of a new three-year deal (although it was not reduced to writing). It was only at trial that Mr Sullman abandoned this position and accepted that the only binding agreement was that made in 1996. It therefore seems likely that PwC was told that although the former arrangement was a three month rolling contract a new three year deal had been agreed.

(i) Mr Sullman knew that the payment of £27 million manifestly could not be justified. Instead of seeking a full valuation from PwC based on an examination of the documents (rather representations from management) he decided to see what he could get away with. Investec Henderson Crosthwaite told him that they could not see a figure in excess of £10 million being accepted by shareholders, so he settled on £9.75 million. (There is in fact in the trial bundle a valuation on a discounted cash flow basis which supports £9.75 million as being the present value of the anticipated income stream on the assumption that the contract has a rolling three year term. But this was not the subject of consideration at trial).

(j) In an e-mail in August 1999 when Mr Sullman spoke of “cashing in his chips” he had said to Mr Poole that there was £20 million going in Mr Poole's direction. The realisation of Mr Poole's interests in Cartmel yielded £10.7 million. If he was to achieve £20 million something like £9 million had to be found elsewhere. In my judgment it was found here.

[114]On these findings I hold that Mr Sullman's conduct was culpable. The essence of the charge is that the payment of £9.75 million was an improper payment. The precise terms used in Mr Weaver’s evidence may be thought to pose the question “Should Mr Sullman have paid £9.75 million? Or should have terminated the arrangement by notice?”. But a charge of unfit conduct is not to be approached as if it were a criminal indictment and attended with technicality. Provided the gravamen of the charge is clearly put and can be fairly addressed at trial it is the substance of the charge that must be addressed. The substance of the charge is that £9.75 million was too much to pay because of possibility of terminating the arrangement. This was the case put and answered in evidence at trial.

[115]I consider Mr Sullman's approach to the company’s acquisition of Mr Poole's personal interests was not undertaken on a proper commercial basis but was essentially a device to overcompensate Mr Poole at the expense of shareholders (albeit that those shareholders included Mr Sullman) in order that he should receive the £20 million he was expecting from the flotation process. The valuation was a figleaf to cover this otherwise embarrassing truth.

[116]Mr Cousins QC and Mr Sharman urged me not reach this conclusion. They said that terminating the 1996 contract (which the Secretary of State suggested was the proper course) was attended with difficulty and with cost which a competent disinterested director would seek to avoid. I see the force of that submission. But it does not follow that such a director would then have paid the maximum amount he could without complaint from the shareholders irrespective of the true value of what he was acquiring. They said Mr Sullman was entitled to assume that the valuation was competent and to rely on it. But Mr Sullman did not rely on the valuation; he knew that the desktop valuation produced on the instructions that he and Mr Poole had given the valuers was wildly out, and he did not treat it as a benchmark. Instead he asked the sponsor to the issue what he could get away with and then worked below their arbitrary ceiling. They said that PwC did not object to the price being paid either in their long form report or in their audit of the post-flotation accounts. But this point has weight only if it is established that PwC knew that the business being acquired had an expectation of only three months’ income not three years’ (and the discounted cash flow calculation suggests they did not). They submitted that provided that the figure paid for the vetting business was one which could be justified by reference to commercial considerations, including the underlying value of the asset as assessed by PwC, the payment was a proper one. I agree (subject to qualification). But no commercial considerations justifying a payment at that level have been identified. The whole problem is that the deal was an uncommercial one designed to benefit Mr Poole. (The qualification is that it has long been recognised that the purchase by a company of a business belonging to a director is a form of self-dealing and might be open to attack even if commercially fair: the transaction was not examined from this standpoint before me). In my judgment this another instance of a director (Mr Poole) deriving a personal advantage from the company to which the standards embodied in section 6 CDDA 1986 must be rigorously applied.

[117]In my judgment the Secretary of State has established that Mr Sullman’s conduct may be regarded as culpable in the following respects:-(a) in misstating to customers the likelihood of the recoverability of pre-1 April 2000 premium payments;

(b) misrepresenting to underwriters and to customers the failure rate of Claims Direct Protects scheme policies;

(c) in adopting an artificial device in order to sustain an income stream which he knew faced a regulatory obstacle, the object of the artifice being to enable recipients of the invoice to make an apparently sound claim for re-imbursement from a third party (and thus not to jib at payment):

(d) in failing to disclose to investors the inherent risks to the business from incipient premium increases and the intended self-funding of loans, and the taking of personal benefits from the flotation;

(e) in failing to make true and proper disclosure of the fundamental insurance arrangements to the market after flotation;

(f) in purchasing a business from a co-director for a consideration that was not objectively justified.

[118]The ascertainment of unfit conduct is essentially the application to the found facts of the ordinary words “unfit to be concerned in the management of a company”. Being a jury question, and one to be considered in a broad way, it is not appropriate to put a judicial gloss on the words of the section. But I should articulate what have seemed to me in this case (I say nothing of others) to be influential considerations. Each instance of conduct has the hallmark that it was undertaken either(a) to acquire business or capital for the company or

(b) to confer a personal advantage on a director; and in each case it did so to the prejudice of those who had entered or were about to enter commercial relationships with Claims Direct or who would be affected by the entry of such relationships. The prejudice consisted in inviting a section of the public to deal with the company on what was a false basis in a material particular (or suffer the consequences of some-one else having done so). In my judgement companies should not be conducted on that basis if their liability to those with whom they deal is limited. It falls below the standards of commercial probity which the law is entitled to expect (even if others thought it acceptable).

[119]I emphasise that that is not intended to be a gloss on the section: nor is it anything like a complete statement of the complex considerations that have led me to my view on each charge. It has, for example, seemed to me that Mr Sullman’s whole approach to the business has been “What can I get away with?”, and that is bound to have played some part in my consideration of matters in a broad way.

[120]Disqualification under section 8 is discretionary, not mandatory. But I am in no doubt that the protection of the public and the need to deter other directors inclined to embark on similar conduct requires a period of disqualification. My provisional view (having regard to the nature of the conduct but bearing in mind that this conduct did not cause the ultimate insolvency of Claims Direct itself, although it obviously impacted upon the business of the Courts) is that a period of 7 years is appropriate. But this is only a provisional view, and I agreed with Leading Counsel that they should each have the opportunity to make submissions before a concluded view is reached. In relation to such submissions I note that in Re Westmid Packaging

[1998] 2 All ER 124

(CA) the judgement of the Court was that “This should be regarded, especially in relation to the period of disqualification, as a jurisdiction which the court should exercise in a summary manner and the court should confine the parties to placing before it the material which is need to enable it to exercise the jurisdiction in that way”

[121]I will formally hand down this judgment on 19th December 2008 (in approved form but subject to editorial corrections). I do not expect attendance of legal representatives. I will on that occasion adjourn the question of the period of disqualification, the question of costs, and any applications for permission to appeal, to a date to be fixed. I will order that time for the service of any appellant’s notice shall not begin to run until the conclusion of that adjourned hearing.

[122]I conclude with an expression of thanks for the care with which I was taken through the very considerable volume of material, and for the clarity of the many legal submissions made. Mr Justice Norris…………………………………………………………19 December 2008

Secretary of State for Business Enterprise and Regulatory Reform v Sullman & Anor [2008] EWHC 3179 (Ch)

Cited in 2 later judgments