Weighing in at 494 paragraphs, Meade J’s judgment in Re Equitable Law Capital Ltd  EWHC 763 (Ch) covers a lot of ground, not all of which can be examined in this alert. Beginning with the end, Meade J found for the company’s liquidators against one respondent, Mr Clarkson, who he held had been a de facto director, in respect of claims for fraudulent trading, wrongful trading, transactions at undervalue and breach of duty; a constructive trust claim also succeeded. Claims for relief against other respondents did not succeed.
ELC had run an investment scheme, the purpose of which was to fund claims against financial institutions for the mis-selling of bonds. It ran for only a short time, during which investors had put in about £3.3m but received returns of only a little over £230,000. The respondents, on the other hand, had received just under £2.2m, either directly or through companies. ELC went into liquidation with an estimated deficiency of just over £2m.
The liquidators’ case was that the scheme was always “too good to be true,” promising yields of up to 8% with no risk to investments because of insurance backing. The judge agreed with the liquidators up to a point. He accepted that the scheme itself could have been viable if ELC had been properly capitalised and managed, without the very large payments out, and if investors’ moneys had only been taken where there were appropriate mis-selling claims to which to allocate them. It relied, however, in the absence of a good capital base, on an increasing need for investor money. He found that the scheme as operated was dishonest. Significant misrepresentations were made to investors. But it was the under-capitalisation of the company that underpinned significant parts of the judge’s findings. In his view ELC had been insolvent from inception because it had no working capital to fund its activities yet was making substantial payments out and incurring significant liabilities. Mr Clarkson, the respondent against whom the judge ruled, “knew that it was never solvent and was bound to go into insolvent liquidation (that would happen once there was no longer enough money coming in from new investors, as happens with Ponzi schemes).” His conclusion on the fraudulent trading claim was pithy: “Given my findings above, it is clear that the Scheme was dishonest and fraudulent from the outset, and David Clarkson was fully aware of the same. So he is liable under s. 213.”
It is unsurprising in the light of that that the wrongful trading claim also succeeded. There was, however, a dispute about loss. The respondents argued that, for a wrongful trading claim to succeed, it was necessary to show that the loss claimed would not have been suffered had the respondent complied with his duties (see Lexi Holdings v Luqman  2 BCLC 715 in which it was alleged that total inactivity on the part of certain directors had caused the company to suffer loss as a result of misappropriations by the managing director and transactions infringing ss. 330 and 320 Companies Act 1985). Counsel for the liquidators successfully argued that Lexi Holdings did not apply to a claim under s. 214 Insolvency Act so was not subject to the causation requirement. The judge agreed:
“Their [counsel for the applicants] position is consistent with the language of s. 214(1) and with the decision in Ralls Builders…which requires a causative link between the continuation of trading and an increase in the deficiency to creditors.”
He went on to find in any event that Mr Clarkson’s behaviour had been a key factor, but not the only one, in causing the losses suffered and an increased loss to creditors, saying: “I mention this because it means that this point would go nowhere for David Clarkson unless it were to be submitted on his behalf that s. 214 only bites where the failures of the director in question were the sole cause of loss. No authority was provided in support of such a proposition and in my view it would be obviously wrong.” An attempt by Mr Clarkson to rely on s. 214(3) on the basis of two occasions on which he mentioned the possibility of liquidation was also rejected: “[Section] 214(3) only applies if the director takes ‘every step’ to minimise potential loss, and clearly David Clarkson did not do so as ELC continued to do business in the same way until Belmonte stopped providing any further insurance cover.” He concluded,
“During the time that ELC was trading but was, to David Clarkson’s knowledge, insolvent, its deficiency in relation to the creditors grew, for all the reasons given above, and was inherent to the fraudulent nature of the Scheme. Thus David Clarkson is liable under s. 214 IA86 from the inception of the Scheme.”
Given the judge’s findings about how the scheme operated and Mr Clarkson’s role in the company, his finding that he acted in breach of his duties, in particular the duties to act for proper purposes, to act bona fide in the best interests of the company as a whole, to take into account creditors’ interests, and to exercise reasonable care, skill and diligence, is also unsurprising. “S. 1157 does not arise given my finding that David Clarkson was dishonest.”
On the constructive trust issue, the judge said:
“On my findings thus far, in particular that he owed the fiduciary duties of a director and behaved dishonestly in the ways that I have described, David Clarkson became a constructive trustee of the moneys paid to him from ELC. I also refer to my analysis below of why on the facts the payments to him were transactions at an undervalue. His defence to this claim lay purely in the denial that he was a de facto director and was not dishonest; it raises no point of principle or law.”
The claim in respect of transactions at an undervalue gave rise to submissions about value. The judge noted,
“Whether there is an undervalue is normally assessed by reference to valuations, although there can be cases where it is obvious that whatever the precise value, the incoming value is significantly less than the outgoing value: Ramlort Ltd. v. Reid  EWCA Civ 800 at -. The value is prima facie what a reasonably informed purchaser would pay in arm’s length negotiations (Philips v. Brewin Dolphin Bell Lawrie Ltd.  1 WLR 143) and where there is a market in the assets of the type in question, the market value is the relevant figure: Re Brabon, Treharne v. Brabon  BCLC 11.
“The relative values have to be assessed from the point of view of the company: Re M.C. Bacon Ltd (No 2) 1990 BCLC 324 at 340. What is typically valued is the consideration from each side for which they bargain. […]
“In general the valuation must look to the time of the transaction, but where the value is uncertain or speculative, subsequent events may be looked at to test the accuracy of the valuation: Philips v. Brewin Dolphin.”
The judge ultimately decided that the case against Mr Clarkson was straightforward. He had been receiving £250 per claim, presented as an introduction fee for each case for finding investors; but the judge found that in fact he did not provide most of the introductions and where he had, they were of low value: “On any view they were worth vastly less than the payments he received [so] the fact that no specific figure has been provided is not important.” The claim against Mr Clarkson succeeded on that basis.
A large part of the judgment deals with the effect of a settlement agreement and the question of whether it barred the liquidators’ claims against the other respondents. The judge conducted what appears to be an exhaustive examination of the legal principles before concluding that in the case before him it did not; although incidental to that decision he noted that in the case before him it was obviously an oversight on the part of the applicants not to have included in the agreement an express provision preserving the right to continue against the other respondents. That lesson requires no elaboration.