London City & Finance PLC (LCF) entered administration in January 2019 following intervention by the FCA. In the period between 2013 and December 2018, LCF issued mini- bonds to around 12,000 retail investors, raising around £237million.
The claimants were successful in their claims for fraudulent trading under section 246ZA of the Insolvency Act 1986, breach of fiduciary duty, dishonest assistance, knowing receipt, and proprietary tracing claims.
In the judgment, which runs to 335 pages, Mr Justice Robert Miles found that LCF had operated a Ponzi scheme, misrepresenting itself in a “widespread, fundamental and systematic” way.
Having considered the various claims, the court found that:
- Contrary to LCF’s claims that funds would be lent to third-party borrowers, substantial amounts were loaned to group companies, entities closely associated with LCF's directors and their business associates. These connections were not disclosed to bondholders. The business model was fraudulently misrepresented to investors.
- Notwithstanding the defendants arguing that they were lawfully entitled to the money that they received from LCF, it was held that funds in excess of £136m were misappropriated by key individuals. Other funds were diverted to connected companies via dishonest transactions that lacked commercial rationale.
- LCF operated as a Ponzi scheme; funds from new bondholders were used to pay interest and redemption payments to existing investors.
- A director and shadow director were found to have breached their fiduciary duties by engaging in fraudulent activities. Associates were found to have dishonestly assisted in these breaches.
The defendants were found to be personally liable for their participation in fraudulent trading, breach of duty, knowing receipt and dishonest assistance. A further hearing will be necessary to deal with quantum. The court requested further submissions about the contribution to be made by the relevant defendants in respect of the fraudulent trading claim. The net deficit to LCF’s estate is over £379m. As regards the equitable compensation for dishonest assistance and breach of duty, there was no dispute between the parties on the principles. However, given the complexities of assessing the contribution claims, and the claimants proposition that various defendants should be made joints and severally liable, the court requested further submissions.
The judgment makes clear the courts’ willingness to holding individual and entities accountable where they mislead investors and misappropriated funds.
In reference to London Capital & Finance Plc (in administration) and others v Michael Andrew Thomson and others [2024] EWHC 2894 (Ch).
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