Claims Against Directors ' An Equitable Result For The Liquidators?

• Published date: 25 May 2021
• Subject Matter: Corporate/Commercial Law, Criminal Law, Corporate and Company Law, Directors and Officers, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Moon Beever
• Author: Mr Robert Paterson

Weighing in at 494 paragraphs, Meade J's judgment in Re Equitable Law Capital Ltd [2021] 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...