Re Walter L. Jacob Ltd v the Insolvency Act 1986
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE NICHOLLS,LORD JUSTICE RALPH GIBSON,LORD JUSTICE FOX |
| Judgment Date | 21 December 1988 |
| Judgment citation (vLex) | [1988] EWCA Civ J1221-4 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | 88/1129 |
| Date | 21 December 1988 |
[1988] EWCA Civ J1221-4
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR JUSTICE HARMAN)
Royal Courts of Justice,
Lord Justice Fox
Lord Justice Ralph Gibson
Lord Justice Nicholls
88/1129
No. 001951 of 1987
MR PHILIP HESLOP, Q.C. and MR T. MAWSHENSON (instructed by the Treasury Solicitor) appeared on behalf of the Secretary of State for Trade & Industry.
MR R. KAYE was present on behalf of the Official Receiver
MR D. MATHES0N (instructed by Messrs. Russell Jones Walker) appeared on behalf of the Company.
This is an appeal of the petitioner, the Secretary of State for Trade and Industry, against the dismissal by Harman J. on 7th July 1987 of his petition for an order for the compulsory winding up of Walter L. Jacob & Co. Ltd. ("the Company").
Shortly stated, the background to the petition was this. The Company was incorporated in 1984. It has an issued and paid up share capital of £5,500. All of the 5,500 shares (save one) are, and at all material times were, registered in the name of Mr Walter Lyall Jacob, the sole director of the Company. He is a Scottish solicitor.
Until April 1987 the Company carried on business as dealers in securities and investment advisers. It had the requisite authority to deal in securities by virtue of its membership of the self-regulatory organisation known as Financial Intermediaries, Managers and Brokers Regulatory Association, usually referred to by the acronym FIMBRA. The Company traded from addresses in London and Edinburgh.
Early in January 1987 FIMBRA sent to the Department of Trade and Industry copies of correspondence passing between FIMBRA, members of the public and the Company relating to complaints about the conduct of the Company. Most of the complaints concerned delays by the Company in completing share dealings. On 26th January the Secretary of State authorised Mr D.R. Brailsford, a Senior Examiner of the Companies Investigation Branch of the Department of Trade and Industry, to require the Company to produce to him its books and papers. That was pursuant to Section 447 of the Companies Act 1985. Mr Brailsford duly carried out an examination of the books and records of the Company. The upshot of his examination was that the Secretary of State formed the view that it was expedient in the public interest that the Company should he wound up. On 15th April 1987 he presented the petition in exercise of his power under Section 440 of the Companies Act 1985, read with Section 124 (4) of the Insolvency Act 1986. On the following day the Vacation Judge appointed the Official Receiver to be provisional Liquidator of the Company, and Mr R. Hocking, a chartered accountant, to he the special manager of the Company.
The petition was supported by an affidavit of Mr Brailsford, extending to 44 pages, in which he set out the results of his examination of the Company's hooks and papers. The thrust of the affidavit—although Mr Brailsford did not use this form of words—was that the Company was preying on unsuspecting members of the public who got in touch with the Company in response to its advertisements offering attractive terms for the purchase of shares in Trustee Savings Bank or British Gas, following those share issues. The Company sought to persuade those investing members of the public, successfully in many instances, to invest the proceeds of sale of their TSB or British Gas shares in buying shares in one or other of two American companies of dubious value, by putting forward recommendations in a form which was misleading in that it conveyed the impression that the Company was giving professional investment advice as distinct from being a vendor of shares disseminating sales literature. Further, the Company's connection with the American companies was not disclosed, nor were investors told that the shares being recommended could not be traded freely. Moreover, the Company's financial records had not been adequately maintained, with the consequence that it was impossible to know, with any acceptable degree of accuracy, what money was owed by the Company to its clients, or vice versa.
The Company filed affidavit evidence in answer. Mr Jacob said that the Company was comfortably solvent. Its records were in no better or worse state than the records of other dealers in securities after the recent "privatisation" issues, and they were being brought up to date. The Company's clients were being paid promptly and, but for the intervention of the Department of Trade and Industry, they would all have been paid. Magnacard Inc. was a company whose shares Mr Jacob would still strongly recommend. The restriction on transferability which affected only some of the shares was temporary and did not really affect the marketing of the shares.
The effective hearing of the petition took place on 7th July 1987. There was no cross-examination. There were no supporting or opposing creditors. But before referring further to the hearing, I should mention some of the salient facts in the history of the Company.
The Company's trading activities with the public
I can start in October 1986. Before then the Company had fewer than a hundred clients, and its activities were on a comparatively modest scale. It did not deal directly with the public. In October 1986 the Company advertised nationally and in London, offering to buy Trustee Savings Bank shares at a competitive price and without charging any commission. The Company's advertisements were aimed at small investors. Persons who availed themselves of this facility (and there were many who did) were recommended, initially over the telephone, by salesmen acting for the Company, to consider investing in an American company, Electronic Speciality Products Inc. ("ESPI"). About one in every four persons accepted this recommendation, and exchanged the whole of their investment in TSB for ESPI shares. In November and December 1986 the Company's business was further boosted as a result of similar advertisements being made by the Company regarding the British Gas issue. It seems that the Company undertook altogether over 5,000 separate purchase transactions of TSB and British Gas shares.
Between May and October 1986 the sole investment recommended to clients by the Company was ESPI. Prom November 1986 onwards the Company began to recommend investment also in another American company, Magnacard Inc. Magnacard carried on business in the USA as a consumer finance company and, through a subsidiary, the sale of solar heating systems. Both ESPI and Magnacard shares are traded on the American NASDAQ market. In December 1986 and January 1987 the NASDAQ market value of ESPI shares fell, and the Company ceased recommending ESPI shares as an investment. It seems that the reason was this. ESPI had formerly carried on business in the USA as an operator of video games, but by December 1986 its only substantial asset was a French subsidiary carrying on a jewellery business known as "M, Gerard", acquired by ESPI in November 1985. In December 1986 Mr Jacob, a director of ESPI, attended a board meeting of that subsidiary company, and he was disturbed by what he learned about the subsidiary company's business and assets.
So the Company advised its clients to switch into Magnacard. Most did so. They switched, not at the prevailing NASDAQ price of the ESPI shares, but at the actual price paid by them for their ESPI shares. This was a higher figure. This was a repetition of the practice which the Company had previously adopted in about April 1986 when it stopped recommending purchases of shares in another American company, Advanced Energy Corporation ("AVEC"), and advised a switch into ESPI shares.
Over the 13-month period between January 1986 and 12th February 1987, the net inflow of money into the Company from investors in respect of purchases of shares in AVEC, ESPI and Magnacard was about £1,250,000. On Mr Jacob's estimate, in February 1987 the Company had over 1,500 current "investing clients", viz., clients who had taken up shares in ESPI or Magnacard.
In March 1987 the Company issued a prospectus inviting the public to take up between one million and two million shares in a newly-incorporated English company, First International Entertainment plc, which was intending to carry on a film distributorship business. The shares were priced at 50p. each. Some one and a quarter million shares were taken up, raising about £550,000.
The Company received adverse publicity in two newspaper articles, one published in December 1986 and the other, which was very critical, on 5th April 1987. On the following day, 6th April, the Company decided to cease dealing in securities, to discharge the claims of all clients and other creditors, and to offer the business for sale. However, the further way ahead for the Company was taken out of its hands. On the next day, 7th April, FIMBRA sent a letter to the Company by which, pursuant to its Rule 9, FIMBRA gave a direction to the Company which effectively stopped the Company, at once, from conducting any further business in securities and from making any payments or any disposition of its assets or liabilities without permission from FIMBRA. The direction was expressed to continue until termination of the disciplinary proceedings currently being heard by the FIMBRA disciplinary committee. Eight days later the petition was presented. This, as stated above, was followed at once by the appointment of a provisional Liquidator and a Special Manager.
The material paragraphs in the...
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