Secretary of State for Business, Enterprise & Regulatory Reform v Charter Financial Solutions Ltd & Ors

In this case the Secretary of State for Business, Enterprise and Regulatory Reform (“The Secretary of State”) petitions for the winding up of five companies under section 124A of the Insolvency Act 1986 (“IA 1986”) on the ground that it is expedient in the public interest that those companies should be wound up. Those companies are Charter Financial Solutions Limited (“CFS”), Charter Financial Solutions (UK) Limited (“CFSUK”), Finance Select (UK) Limited (“FSUK”), Bounce World Limited (“Bounce”) and Trash Express (UK) Limited (“Trash”). I will refer to those five companies together as “the Companies”.

The Companies are the creatures of a Mr Knight and a Mr Lake. Mr Knight has also been known as Mr Graham and Mr Lake as Mr James. In the proceedings the Companies have not been legally represented and by order of Chief Registrar Baister, made on 29 October 2008, were given permission to appear at trial by any duly appointed directors. Mr Lake is now a director of all the Companies and Mr Knight is a director of all save Trash. Mr Lake and Mr Knight are equal shareholders in all of the Companies with the exception of Trash whose shares were equally held by Mr Lake and his wife.

The issue in the case comes down to whether a winding up order should be made under section 124A against FSUK, it being conceded that winding up orders should be made against the other four of the Companies of which only CFS has traded. The only evidence adduced by the Companies was given by Mr Lake who was also responsible for making oral submissions on the Companies’ behalf.

It was Mr Lake’s evidence that both he and Mr Knight had had wide experience of the world of consumer finance extending over several years. On 19 August 2005 CFS was incorporated as a general commercial company and commenced trading in October 2005 after obtaining a consumer credit licence on 1 October 2005. Its business consisted of three main activities: -

On 1 October 2005 CFS obtained a consumer credit licence and started trading. CFS records show that it sold its first franchise to a Mr Saville in February 2006. Unaudited accounts of the company for the period to 31 August 2006 show an operating profit of £7,619 on a turnover of £105,346, of which £60,130 was recorded as “commission receivable” and £44,770 as “franchise income”. Similar accounts of CFS for the 12 month period to 31 August 2007 show a profit for the period of £17,692 on a turnover of £138,865, of which £61,070 are shown as “commission receivable” and £71,638 as “franchise income”.

On 26 February 2007 Mr Richard May, a franchisee of CFS, commenced proceedings against CFS in the Northampton County Court claiming £7,457.12. The particulars of claim state:-

“In September 2006 I purchased a franchise from the Defendant. This franchise contained many promises and obligations and also guaranteed income.

None of the promises or guarantees have been fulfilled and letters to the company are not answered.

I have requested the return of my money but the company has not replied.”

Judgment was entered in those proceedings in default for £7,707 on 24 April 2007. On 23 May 2007 application was made by CFS to set aside the judgment in default.

Bounce was incorporated on 24 May 2007. Mr Knight was appointed its only director on that date and Mr Lake its company secretary. Bounce was incorporated as a franchising company to sell franchises to members of the public intended to promote the leasing of “bouncy castles”. Bounce has advertised its services on the internet but has never traded in the sense that it has had any sales.

FSUK was incorporated on 11 July 2007 to carry on business as a general commercial company. It was Mr Lake’s evidence that FSUK was incorporated to take over the business of CFS when it became impossible to continue CFS business because of the impact of County Court judgments entered against CFS. It has a nominal capital of £100 divided into a hundred ordinary shares of £1 each, of which two were issued, one each to Mr Lake and Mr Knight under the name of Graham. Mr Knight, under the name of Graham, was appointed its director on incorporation. He resigned on 27 September 2007 and was immediately reappointed under the name of Knight. Mr Lake was appointed secretary on incorporation and has remained in that position since. FSUK has traded but no accounts have, as yet, been filed. They were due on 11 May 2009. In the course of the hearing I asked to see management accounts for the company’s trading but nothing has been produced.

Trash was incorporated on 23 July 2007, again to carry on business as a general commercial company. Its intended purpose was to act as a franchising company selling franchises to the public to conduct the business of offering a rubbish removal service to the public to supplement that provided by local authorities. Like Bounce, Trash has never traded in the sense that it has made sales although it has advertised its services through an internet website. Mr Lake and his wife each hold 500 of its 1,000 authorised ordinary shares of £1, all of which have been issued. They have been directors of Trash and Mrs Lake has been its secretary since incorporation.

On 31 July 2007 a further County Court judgment was entered against CFS for £5,620.

On 18 September 2007 CFSUK was incorporated to carry on business as a general commercial company. Mr Lake and Mr Knight each hold one of the two issued shares in this company. Mr Knight has been its only director since incorporation and Mr Lake has been its secretary. It seems that this company has been entirely dormant since incorporation.

On 26 September 2007 FSUK applied for a consumer credit licence. It will be necessary to return to this event later in my description of the background to the case.

On 27 September CFS’s records record the resignation by Mr Graham as director and the appointment of Mr Knight in his place. They were, of course, the same person.

On 10 October an order was made in the Cardiff County Court that Mr Lake attend at the Macclesfield County Court to provide information about the assets of CFS. On 16 October a Mr Giacone commenced proceedings against CFS in the Nottingham County Court and on 25 October Mr Lake was personally served with court documents in relation to the County Court judgment entered against CFS on 31 July. On 12 November a County Court judgment was entered in favour of Mr Giacone against CFS for £7,766.29.

Meanwhile, on 31 October, Mr Lake and Mr Knight applied to open a business bank account for FSUK with Abbey National plc in the course of which Mr Lake and Mr Knight, under the name of Graham, completed an application form. Section 3 of this form covers personal details and asks:“Have you ever been associated with a business that has failed to keep up repayments on a mortgage, credit card or other financial arrangement, or had a court order for debt registered against it?” Both Mr Lake and Mr Knight answered this question by ticking the box indicating a negative reply.

On 30 November FSUK was issued with a consumer credit licence. I will return to this subject later. Suffice it to say for the moment that it appears that this licence was issued in error.

On 4 December 2007 Mr Lake attended the Macclesfield County Court in compliance with the Cardiff County Court’s order of 10 October referred to above and informed the court that CFS had ceased trading and had no assets. On 10 December CFS filed total exemption small accounts with the Registrar of Companies for the year ended 31 August 2007. These are the accounts to which I have already referred.

On 14 December the Office of Fair Trading issued a “minded to refuse notice” to FSUK in relation to that company’s consumer credit licence notwithstanding that the licence had already been issued on 30 November. At the same time, it issued a “minded to revoke notice” to CFS. These notices and their accompanying documentation are included in a bundle forming a schedule to this judgment. It will be seen that among the grounds upon which it was proposed to refuse or revoke the licences of CFS and FSUK were the following:-

(i)

In the course of their conduct of the affairs of CFS and FSUK, Mr Lake and Mr Knight used different personal names.

(ii)

In completing application forms for consumer credit licences Mr Lake and Mr Knight had knowingly or recklessly concealed that they had used different names and that CFS had been the subject of judgments in the County Court.

(iii)

The publication of a fictitious and misleading testimonial for the services offered by CFS.

These are all matters of complaint by the Secretary of State in the petitions before this court.

On 21 December Mr Lake resigned as director and secretary of CFS and Mr Knight (still under the name of Graham) also resigned as director. From a letter from Companies House dated 19 August 2008 it appears that on 21 December 2007 CFS applied to be struck off the register to which application there was objection and thus the company’s application was rejected. It is not known who the objector was but it is likely to have been one of the County Court claimants against CFS.

In January 2008 a further County Court judgment was entered against CFS for £2,765. On 1 January Mr Knight resigned as a director of CFSUK and Mr Lake resigned as secretary. Starting on 12 February 2008 Mr Gray, for the Secretary of State, received various authorisations under section 447 and 453A of the Companies Act 1985 to obtain documents and information and have access to the premises of the Companies.

Meanwhile on 31 January 2008 a hearing took place before an Adjudicator appointed under the Consumer Credit Act 1974 to hear submissions on behalf of CFS and FSUK as to why their consumer credit licences should not be revoked. A transcript of that hearing is included in the bundle of documents forming the schedule to this judgment.

On 26 March 2008 FSUK published on its website an apparent testimonial praising its services as follows:-

“Amanda Jackson’s success Story/

with Finance Select (UK) Ltd.

“Hi, my name is Amanda Jackson and I purchased a franchise opportunity nearly a year ago from Finance Select (UK) Ltd. and I’d like to tell you my success story…

I had been looking to start my own business for some time but lacked the knowledge, know how and money to do this, but I knew I had to work for myself.

I wanted to be free to come and go when it suited me, take the family on holiday, etc and buy my husband his dream car one day (Ferrari 348GTS).

These things were beyond me in my present job as a coordinator, all those hours and not really being appreciated for what I did and for little pay was not my idea of life! So I spotted Finance Select (UK) Ltds.’s advert and asked them to send me some information.

It seemed just what I was looking for: training, on-going support etc and business from day one! All this and much more, but I also appreciated what they had to offer the customer as myself had many debts that had built up over the years from my modest income, which had left me black listed and struggling to cope.

So in February 2006 I purchased a franchise from Finance Select (UK) Ltd. after they arranged the finance for me to do so. I was amazed they managed to do this as no one else wanted to help me, but in their own words “that’s what we do”.

I went for my training and a week later I received my first cheque.

I was 100% committed and I got stuck in. They sent me agents who in turn sent me business. Finance Select (UK) Ltd. did everything else for me. I recruited my own agents as they showed me and I got paid for them too, and received more business.

People required my services everywhere I went, most of the time they just didn’t know I could help them or these services were available, just like I thought myself a few months ago. Now I have twenty two agents and plenty of business and it’s still growing!

Now nearly a year on as I write this story I have bought my husband’s dream car. Life is really good for me. I have quit my old job and have taken the family on holiday to Mexico in August just six months into my business opportunity with Finance Select (UK) Ltd. I have managed to pay off most of my debts now which added up to over £20,000. I’m in control of my life again and have the freedom I so much wanted. I’m also looking to upgrade my house, and all this has happened to me in under a year”

Amanda has now opened offices and taken on staff as part of her expansion.

You could join her today and share in our success!”

This was a repeat of a testimonial published by CFS on 18 October 2007, the only difference being the name of the publisher, notwithstanding that that testimonial was one of the matters complained of by the OFT in their notices, set out in paragraph 19 above, and which they subsequently found to have been established. There is no record in the documents either of CFS or FSUK of a Miss Jackson having been a franchisee of either CFS or FSUK, such as the receipt of a franchise fee from a person of that name. It is accepted that Ms Jackson is in fact the wife of Mr Lake whom he married on 2 August 2008, she having been his girlfriend or partner prior to that date. This fact is not disclosed in the testimonial. In any event, so far as FSUK is concerned, the testimonial had to be untruthful because FSUK had not been incorporated on the date when Miss Jackson claimed to have bought a franchise from it.

On 15 May 2008 Mr and Mrs Lake were appointed directors of Trash and Mr Lake was appointed secretary.

On 23 June 2008 the Office of Fair Trading determined to revoke FSUK’s consumer credit licence. In doing so it found the three matters of complaint I have summarised at paragraph 19 above to have been established.

On 6 August 2008 these petitions were presented. They were served on 14 August and advertised on 23 September. The first hearing of the petitions took place on 29 October.

On 11 November Mr Lake was appointed a director of FSUK. On 12 November Mr Lake and Mr Knight were reappointed directors of CFS and Mr Lake was appointed secretary. On 13 November Mr Lake was appointed director and secretary of CFSUK and Mr Knight was appointed director. On the same day Mr Lake was appointed a director of Bounce.

On 22 December 2008 the Consumer Credit Appeals Tribunal allowed an appeal made by FSUK against the Office of Fair Trading’s determination to revoke FSUK’s consumer credit licence. The appeal arose from the following circumstances set out in paragraphs 2 and 3 of the judgment of the Appeal Tribunal:-

“2.

An application for a consumer credit licence was submitted by the Appellant [FSUK] dated 26 September 2007 and received by the Office of Fair Trading on 2 October 2007. Due to concerns that the Office of Fair Trading had in relation to the application, an adverse marker should have been placed on the Office of Fair Trading’s new database “PROMOD” against the name of the Appellant, the purpose of the adverse marker being to prevent a licence being issued without full consideration of the Appellant’s fitness to hold a licence including concerns about its associates.

3.

Unfortunately, problems were being experienced with the new system with the result that on 30 November 2007 a licence was said to have been issued in error to the Appellant.”

The Appeal Tribunal were concerned with the preliminary point “whether or not the notice procedure followed by the Office of Fair Trading in seeking to revoke the Appellant’s licence complied with the provisions of the Consumer Credit Act 1974.” At paragraph 51 of their judgment the Appeal Tribunal arrived at the following decision :-

“51.

In answer to the preliminary issue, the Tribunal therefore find that the notice procedure followed by the Office of Fair Trading in seeking to revoke the Appellant’s licence failed to comply with the provisions of the Consumer Credit Act 1974.”

In the result, the determination of the Office of Fair Trading on 23 June 2008 to revoke the appellant’s consumer credit licence was quashed. It is of note, however, that no order for costs was made of the appeal. The quashing of the determination to revoke the licence therefore resulted from a technical breach of rule by the Office of Fair Trading and not from any examination of the merits of the case.

The gravamen of the Secretary of State’s complaints about the conduct of the Companies’ businesses centres on their sale of franchises to the public and, to a lesser extent, on the sale of agencies.

The standard agreement between CFS and franchisees varied from time to time although the obligations of CFS under the agreement remained reasonably stable. I will take as an example the CFS agreement of 13 March 2007 with Mr Kajol Miah. Against payment of £5,595 plus VAT CFS undertook as follows:-

“Charter Financial Solutions Ltd: Obligations

1.

CHARTER FINANCIAL SOLUTIONS LTD agree to supply to the Franchisee a brand new lap top computer with twelve months warranty, and software needed to run the Franchise.

2.

CHARTER FINANCIAL SOLUTIONS LTD agree to supply to the Franchisee with [sic] all the ongoing support and training they may require.

3.

CHARTER FINANCIAL SOLUTIONS LTD agree to supply the Franchisee a complete fully hosted website, automated answering system, 0870 number (0870 numbers sometimes charge a small fee per month of £5 to operate, this must be paid by the Franchisee after six months, as the first six months are paid upfront by ourselves).

4.

CHARTER FINANCIAL SOLUTIONS LTD agree to supply the Franchisee with agents recruited from our national advertising for the first year.

5.

CHARTER FINANCIAL SOLUTIONS LTD agree to pay the Franchisee £40.00 for every agent introduced to the Franchisee for the first year.

6.

CHARTER FINANCIAL SOLUTIONS LTD agree to pay for all costs needed to set up the Franchise including hotel accommodation for one night (two day training course if needed) Consumer Credit License for a sole trader, lap top computer, automated answer system for six months, website hosted for twelve months and recruiting for agents for twelve months.

7.

CHARTER FINANCIAL SOLUTIONS LTD accepts no responsibility for the conduct of the Franchisee as the Franchisee operates solely as an independent business.

8.

CHARTER FINANCIAL SOLUTIONS LTD agree to process all applications provided to them from the Franchisee as long as the agreement is in operation, and pay all commissions due (50% of the gross profit) on completion to the Franchisee within five working days from when payment is received by CHARTER FINANCIAL SOLUTIONS LTD.

9.

CHARTER FINANCIAL SOLUTIONS LTD agrees to supply all of the above after receipt of £5995.00 + vat.”

After completion of their training franchisees were required to sign a disclaimer. That signed by Mr Miah read as follows:-

“DISCLAIMER

I confirm that I have now fully completed my scheduled training session at Head Office and confirm I am fully confident in the operation and processes relating to the information and programs that I have received as part of my Franchise Package.

I also understand that I may at any reasonable time contact Head Office for help or assistance if needed and that ongoing support and training will always be available to me if required.

It has been explained to me that all applications for Head Office processing must be completed in full showing a minimum of 3 years trackable Residential and Employment history before any application can be processed.

I have been instructed to only ask Head Office for updates on the applications sent in once a fortnight for Vehicle Finance and once a month for Mortgages/Re-Mortgages and secured loan applications.

The Franchisee shall be notified of any updates within the agreed time frame as and when they are received by Head Office.

I fully understand that I am now in control of a business opportunity purchased from Charter Financial Solutions and that the success of this business opportunity is solely based on my effort and the efforts of the agents I receive from Charter Financial Solutions and the ones I recruit myself and any further efforts that I may implement into my business myself. Charter Financial Solutions shall have no direct influence for the success of my business, this is solely my responsibility”

In late November 2007 the form of disclaimer was varied to read as follows:-

“I fully understand that I have purchased a business opportunity from Charter Financial Solutions Ltd and I am now in control of my own business. The success of this business opportunity is solely based on my own efforts and the efforts of all sub-agents that I recruit myself and the leads I receive from Charter Financial Solutions Ltd. Also any further efforts that I may implement into my own business myself. Charter Financial Solutions Ltd have supplied me with everything advertised and contractually obliged to and shall have no direct influence for the success of my business, this is solely my responsibility.”

The position is not entirely clear from the evidence but it seems that CFS had at least 22 franchisees and possibly as many as 27. Franchisees were required to refer all firm applications to CFS [and later FSUK] and were entitled to receive half of all commission paid by lenders on a successful application. CFS suggested in “training notes” to franchisees that they in turn pay their agents half of the commission payable to them.

CFS advertised for franchisees on an internet website. On 16 April 2008 Mr Gray for the Secretary of State printed out pages from that website. Some material parts read as follows:-

“Charter Financial Solutions Ltd

Specialists in MotorFinance – Commercial Mortgages / Re-mortgages – Secured Loans – Commercial Loan …Telephone: 0870

Full Franchise Option with Charter Financial

The Market Place

Guaranteed finance is big business…fact! One in four people have credit problems… fact! Charter Financial Solutions Ltd specialise in this market place. We help people re-start their credit by obtaining a line of credit they require. This is a multi billion pound industry in this country and it’s getting even better, so now is the time to have a slice of the action. This is why we are franchising it to people like yourself, so we can all profit from this booming market place, which will always be required, so we’ll all have a secure future.

What we offer

-

Car finance-lease-contract hire/ vans

-

Secured loans-unsecured loans

-

Commercial mortgages / re-mortgages

-

Commercial loans

-

Credit cards

-

Bank accounts (business & private on and off shore)

-

Company formations

-

Credit repair

-

Name change by deed poll (see our web site for a full listing)

The Company

Charter Financial Solutions Ltd is a privately owned family business headed by Christopher Lake and Stephen Graham who have been involved in the finance industry for over thirty years between them. They formed Charter Financial Solutions partnerships in 1989 and expanded tenfold over the next ten years into the successful limited company they are today. In order to expand to a national competitive finance organisation, it was decided to franchise the business.

How the Charter Financial Solutions partnership works

You as a potential franchisee have requested this brochure because you’ve been thinking that you would like to start up your own business but are unsure what and how to do it!

That’s where we as a franchise comes in. We charge you a fee to set you up in business from day one, so you don’t make all the mistakes we’ve made along the way. By learning from our mistakes, you won’t make them.

This will mean you will make money from day one, giving you confidence and the will to succeed. All you have to do is what we tell you and you can’t fail. We know because we’ve done it.

You will receive initial in house training and any further ongoing training you need. A fully set up website of your own including your own 0870 number (low national rates) along with a professional electronic answering service to redirect calls or take messages. It’s just like having your own secretary when your [sic] not there. All linked to your brand new lap top computer supplied by us.

Your website will be sent to all the major search engines, so after a few weeks it will start generating business for you and while your[sic] asleep or at your day job, people will be completing applications on your website, so when you wake up/get home you simply access your site, download your applications and send them for processing … easy!

We will process all your applications for you, so your job is just to find the customer, that’s all. Your website is just one way of generating business. Another one is Charter Financial Solutions, will also supply you with business, and pay you at the same time, again to make sure you succeed.

We supply you with direct links to companies who arrange some of our products, like credit cards/bank accounts etc. This means you get all the commission and you don’t have to share it with anyone. Also we supply you with computer software which will print off deed poll change of name for you… You charge what you like, the money is all yours!! We will directly link these and many more products to your website, as a national company, when you succeed we succeed, which is the name of the game.

As a company we guarantee to recruit agents for the first twelve months. We advertise every week on a national basis to ensure you receive a good regular supply of agents (just tell us to stop if you have too many). This will make sure you have plenty of business coming in. Not only do we supply you with agents, but we also pay you for everyone we send you!! We pay £40.00 per agent. So if we supply you with five agents in a month, that’s £200.00 guaranteed before you even start. This is for the first twelve months and is renewable yearly at only £1,200 + vat (optional) but we know you will want to because it’s a fantastic way of advertising, so just think how many thousands of pounds those agents are going to make you in return.

Now what can you use this money for? Easy… Advertising!!!

This will create even more business for you and us, hence why we guarantee it! It works brilliantly…

Everything we do for you, benefits us… Hence why it makes for a good partnership, where everyone is a winner.

Everything you will need to start we will supply, from training to computers, all computer software/website/telephone system and information you will need. All you have to do is what we tell you and for a few hours work per week (15-20 hours per week) more if you wish, you could be earning over £1,000.00 per week … fact!

Charter Financial Solutions Ltd Business Plan

(15-20 hours per week)

Weekly income

Very conservative outlook

-

Two completed car deals @ £300.00 £600.00

-

One completed commercial mortgage £500.00 £500.00

-

One completed bank account @ £50.00 £50.00

-

One completed van lease @ £200.00 £200.00

-

Two agents supplied to you by ourselves £80.00

-

Total £1,430.00

These are based on low rate applications for realistic figures. Commercial mortgages can pay many thousands of pounds e.g. £250,000 commercial mortgage with sub prime rate with payment protection can pay up to £2,500.00 in commission.

(15-20 hours per week)

Weekly outgoings based on working from home

Phone bill £20.00

Electricity £5.00

Heating (winter time) £10.00

Stamps £5.00

Advertising up to you

But these figures are based on us just supplying agents to you and them bringing you three deals per week

Total £40.00

Net weekly profit £1,390.00

Allowing four weeks holiday but remember that your website will be working for you while your [sic] away!

15-20 hours per week = £72,280.00 per annum

These figures are based on 15-20 hours per week 5 days a week!

The income/profit is increased if weekends and longer days are worked.

What the Company does for you

-

Full in house training on all aspects of the business.

-

Brand new lap top computer.

-

Establish[sic] customer base.

-

Supply full website will all set up fee’s covered, links and Google boost, along with credit card acceptance, all arrange for you. [sic]

-

Supply deed poll direct link information/bank account/credit cards/company formation/credit repair.

-

Supply all computer software needed to run your business including accounts package.

-

Assistance with expansion plans.

-

Supply comprehensive marketing/agents

-

Supply ongoing business through agents.

-

On going support.

-

Guaranteed income.

-

Supply 0870 national rate number.

-

Supply fully automated answering service.

-

Company discounts on all our finance products.

Cost of the franchise

The cost of the franchise is very cheap compared to many franchises out there, simply because our franchise fee only covers the cost of the franchise, not the big profits that are normally associated.

Cost of franchise £5,995 plus VAT

Includes everything listed inc hotel accommodation

Full list

-

Two nights hotel accommodation (home training can be arranged).

-

Full two day training course.

-

Brand new lap top computer.

-

On going training and support.

-

Guaranteed income from day one.

-

Guaranteed advertising for one year (renewable yearly which is optional).

-

Assistance with expansion plans.

-

All software needed inc accounts package (runs all your accounts/invoicing etc (full training given).

-

Consumer credit licence fee inc.

-

Website.

-

0870 number (which will move anywhere you do).

-

Answer system.

-

Company discounts on all our finance products.”

Later in the document, under the heading “Questions and answers”, there was a question and answer as follows:-

“Q. Do I need to register for VAT?

A.

The choice is entirely yours but you don’t have to until you have turned over more than £57,000 per year so you should just get away with it in your first year or most of it.”

As already described, CFS appears to have ceased trading in late 2007. FSUK was incorporated on 11 July 2007. Mr Lake admitted that FSUK was incorporated to take over the business of CFS if the latter became too hobbled by County Court judgments to continue. CFS ceasing to trade seems to have coincided with the resignations of Mr Lake and Mr Knight as directors on 21 December 2007 and the abortive application to have that company struck off. I was told by Mr Lake that some, but not all, franchisees of CFS transferred to FSUK. Mr Lake told Mr Gray that FSUK started trading in February 2008 although it appears from the company records that “leads” were being transferred to franchisees in January.

As with CFS, FSUK advertised its business through an internet website which demonstrated a business substantially the same as that which had been conducted by CFS but with certain changes. For instance, FSUK did not offer assistance to customers to change their name by deed poll in order to start a new credit history which CFS had offered to do. FSUK offered assistance with debt management, the setting up of individual voluntary arrangements and setting up overseas bank accounts in countries such as Belize, Cyprus and Tanzania. Like CFS, FSUK recruited agents to find customers, now called “introducers” at three levels upon payment of fees; in respect of level 1 - £99, in respect of level 2 - £399.95 and in respect of level 3 - £1,295. Potential introducers were encouraged to apply by the representation that they would be “earning fantastic commissions for just introducing customers to us”.

FSUK’s sales of franchises were also advertised on its website, the first page stating:-

“Finance Select (UK) Limited is part of the FSUK Group and have been established for over 22 years. We have plenty of experience in the sub-prime finance market. Due to fantastic growth we have decided to franchise our finance business nationwide.”

Then, having listed the products available to be offered to customers of franchisees, much the same as those listed on the CFS website, the website continues:-

“Part of the FSUK Group

The franchise package

We as a company will set up your business for you. Everything you need to run your own successful sub-prime finance brokerage business, from websites to business cards, and we even supply a minimum of £100,000’s worth of high quality leads from our national lead generator, this will ensure you are kept busy and the results will come in to earn you a fantastic income, either part time or full time, from home or office, it’s up to you! We even advertise on national websites for people looking for business opportunities and we pass these people on to you as your own finance introducers, to help build your business. This business is a numbers game, so the more finance introducers you have, the more business they bring in, and the more money you will make. So this free advertising will help generate some fantastic finance introducers for you, and we will train you how to deal with them too, which is all part of the package and our commitment to you. So there you have it, we will set you up as a finance brokerage, we’ll advertise for finance introducers, give you full training and on going support, along with £100,000’s worth of hot leads supplied direct to you on a regular basis, guaranteed… and much much more! (see our full listing).

The franchise is designed to be run part time, around just 2 hours per day. If you wish to work full time then that’s fantastic, the more you put in the more you’ll get out. We have years of experience, so with our help and your input, we’ll make plenty of money together. We process all applications, so as soon as we get the application we see it through to completion then pay you… simple! This leaves you the time to concentrate on the leads and the general day to day running of your business, follow our structure given to you in training and you’ll be soon working your way to a profitable and successful future.

So if your [sic] looking for a part time or full time business working from home or office, with a small investment with unlimited rewards, then this is the business for you! Keep reading…

We supply everything you’ll need…

Here is the full list of everything we supply to you:-

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Minimum of £100,000 worth of hot leads… this comes with our money back guarantee!! supplied from our national advertising lead generator. These are genuine leads from our national advertising for all types of finance, supplied to you on a regular basis for 1 year as part of this package.

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Full website, inc design, with optional paypal service, to take credit card payments (credit card or debit card needed).

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1000s of business cards, letter heads, compliment slips and flyers, in you own business details including full design and print, to help promote your business in your own area.

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New laptop computer, including operational programs, to help run your business.

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Accounts package.

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Data base program to help store and control your business.

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National cheap rate number (so if you move, it moves with you).

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Fully programmable digital operator system.

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60% commission and direct links on smaller products (credit cards, bank accounts, un-secured loans etc) to boost your commissions to 100%.

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Advertising on a national premier business opportunities website, which receive thousands of hits from people looking for business opportunities. Anyone interested in being a finance introducer for you, we will recruit them for you and pass them directly to you… This is a fantastic way of generating more finance introducers to you, to help generate more business.

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Sole trader Consumer Credit Licence.

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Full training.

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Full back up and support and ongoing training if required.

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OTE £100,000 + per annum.

I think, as you can see, you receive everything you can imagine to help your business take off and create a fantastic income and security for your future.

It’s important to us that we have an excellent relationship with our franchisees, so there are only limited places available for the right people, who enjoy this type of environment, appreciate our products and are prepared to work at least 2 hours per day.

If that’s you! then please call the office on: 0844 804 4023 to make an appointment and discuss your needs further. Please write down any questions you may have or please read on.

The full cost of this fantastic business opportunity is £6595 + VAT.

Franchise Holding Deposit - £1,000

Business plan & guide to fantastic earnings

The following is an illustration of your potential earnings from this fantastic business opportunity.

This business has no limits on the earnings you can achieve, depending on the effort you put in, in response from hot leads, your finance introducers and advertising will determine how much you can make. Unlike most franchises which offer £200 or £300 per week for a large investment, we offer unlimited earnings for a small investment, we know from experience that the system works well, and if you follow it, the sky’s the limited [sic].

Based on 60% commission, which is the highest rate available.

Re-mortgages, pay on average £2,400.00, one of these a month is most people’s monthly wage.

Secured loans, pay on average £2,000.00, again one of these per month.

Car finance, pay on average £300.00 a few of these would add up nicely and there [sic] quick and easy.

Credit cards, Bank Accounts etc, 100% commission, how many of these can you complete in a month. It’s up to you what you charge but on average we charge £150.00 per card/account, the higher the card the more you can charge (see our website for pricing).

Unsecured loans average £100 per loan. You will sell these all day!

Commercial Loans, well, get these right and the big money comes in…£1,000,000 commercial loans happen every day, get one of these a year and you’ll be laughing! Never mind one a month @ 2% that’s £20,000.00 just for introducing this type of deal.

Imagine, when you have many finance introducers working for you, and the regular supply of leads from our lead generator, along with your own efforts, I’m sure you’ll agree that your [sic] well on your way to making well over £100,000 per year. You’ll have self satisfaction knowing it’s your business, working for yourself, and together we’ll do everything we can to make sure it happens, as your success is our success.

Here is an average monthly income based on the above.

4 x average car deals £1,200.00

1 x average Mortgage £1,000.00

1 x average Secured loan £2,000.00

10 x Credit Cards/Bank Accounts £1,000.00

10 x Unsecured loans £1,000.00

3 x IVA’s £600.00

Total monthly income £6,800

There are many more products that you can sell, but we’ll leave it there for now, but I think you can now appreciate the potential income with these easily achieved monthly figures.

OTE £100,000 + per year

Funding?

The cost of the full franchise introducer package is £6595 + VAT. If you do not have the funds available for whatever reason, then allow us to help you! We have many different lending options to offer and having credit problems is obviously no problem for us.

County Court Judgments

Arrears

Retired

Defaults

We can help!!

Please speak to one of our advisors, if you need any help financing your franchise or any other financial needs.

Loan Example: £7500 x 120 monthly payments of £93.75 APR 9.9%

Subject to status your home is at risk if you do not keep up the repayments on a mortgage or other loan secured on it.

Thank you for taking time out to read through our franchise details. If you wish to move to the next level or just have some more enquiries, please do not hesitate to contact us. Remember it helps to write down any questions you may have.

Call: 0844 804 4023 (low rate call)”

The grounds for seeking a winding up order against FSUK are set out at paragraph 20 of the Secretary of State’s petition against that company in eight paragraphs a) to h), under the general heading “The Business of FSUK has been characterised by a lack of commercial probity”. It is convenient to start by taking paragraph a) with paragraph e). Paragraph a) reads as follows:-

“a)

The whole business model was misleading to the public and flawed. Far from being a successful business model, the business operated by FSUK of selling finance on behalf of third parties and franchising the same, was the successor business to the business of CFS which had ceased to trade because of the County Court judgments registered against it.”

Paragraph e) reads as follows:

“e)

Additional misleading statements are made on the FSUK website. The website claims that ‘Finance Select (UK) Ltd is part of the FSUK group and have been established for over 22 years’. However checks on Companies House reveal that there is no UK incorporated business with the name FSUK Group or any registered companies with a similar name. FSUK itself was not incorporated until 11 July 2007.”

That these allegations are well founded is amply illustrated by the extract from FSUK’s website page which I have quoted at paragraph 40 above. Saying that FSUK was part of “the FSUK Group” was clearly designed to give the impression that that company was part of a substantial commercial entity to persons who might not have knowledge of who the main providers of loan finance were or the means of obtaining information about them and their relative status and trustworthiness. In truth there was never any such thing as an FSUK Group of companies. As I have already pointed out, FSUK was, on Mr Lake’s admission, incorporated to take over the business of CFS when that company became hobbled by the effect of County Court judgments against it. The statement that the mythical FSUK Group or FSUK itself “have been established over 22 years” is simply untrue and blatantly so. FSUK was only incorporated on 11 July 2007 (and CFS only on 19 August 2005). Mr Lake’s explanation that the 22 years represented the joint experience of himself and Mr Knight in the financial services industry is no excuse for publishing this untruth. The suggestion that the decision “to franchise our finance business nationwide” was “due to fantastic growth” is unsupported by any evidence. No accounts of any kind, not even management accounts, have been produced in respect of FSUK’s trading since it acquired its consumer credit licence. The “growth” here must refer to growth in FSUK’s non-franchising business. Analysis of the accounts of CFS, which were in evidence, shows that, if the receipts from franchise fees are removed, CFS made a loss in both periods. It is not in issue that CFS is now insolvent. FSUK was incorporated to take over CFS business. It seems that, after the presentation of the petition, a company called FSUK Group Limited was incorporated on 18 September 2008. It was suggested by Mr Lake that this was done on the recommendation of an official from the Ministry and that to do so would, in some way, put right the misrepresentation that an FSUK Group existed. Without any evidence confirming that this happened I find it impossible to accept that it did solely on the evidence of Mr Lake. In any event, it in no way meets the objection that the misrepresentation was made at the time that it was included on FSUK’s website.

I turn to consider paragraph b) which reads:-

“Misleading statements have been made to franchisees: members of the public have been induced to pay for a franchising opportunity which advertises a highly inflated projected income on its website and in its marketing material.”

I have quoted above extensively from material appearing on FSUK’s website, part of which is devoted to a forecast that a franchisee could look forward to obtaining an income of more than £100,000 a year from a franchise “designed to be run part time around just two hours per day.” There is no evidence that any of the franchisees of either CFS or FSUK have ever made an income approaching £100,000 in any year of trading. CFS accounts show that, when franchising income is removed, its gross receipts from trading never reached £100,000 in any year or came near that sum.

In my judgment the allegation made under this head is plainly established.

Turning to c), this reads:-

“FSUK makes misleading and exaggerated claims in that it promises training, assistance and thousands of pounds worth of leads to assist in the success of the franchise. However, the promised leads are not actually existing leads, they are merely a hope of what can be achieved through national advertising.”

The extract from FSUK’s website pages, which I have set out above, shows the support which FSUK was promising to members of the public who were potential franchisees, in particular, the website promises the supply of leads in the following words:-

“Minimum of £100,000 worth of hot leads… This comes with our money back guarantee!! supplied from our national advertising lead generator. These are genuine leads from our national advertising for all types of finance supplied to you on a regular basis for one year as part of this package.”

Those words can only be interpreted as guaranteeing to any would-be licensee that they would be fed £100,000 worth of valuable business in their first year of trading. The only record of the supply of leads to franchisees by FSUK produced from the company’s records shows the supply of leads to five franchisees during a period between early January 2008 and the middle of March of the same year. It is not clear whether these are new franchisees, but it is clear that if these franchisees were continuing to receive leads from FSUK over a twelve-month period at the same rate as these schedules show, the value of leads received would not approximate to £100,000. However, whereas it is accepted that a number of the County Court claimants against CFS were complaining about a failure by CFS to given franchisees the support promised to them by CFS, including the provision of leads, it was Mr Lake’s evidence and submission that there were no complaints of failure to give promised support by franchisees of FSUK and there is no clear evidence of any such complaint. It is not in issue that FSUK has a certain number of continuing franchisees, some of which are ex CFS franchisees who have moved to FSUK.

The burden of proof of this allegation must rest on the Secretary of State and I have come to the conclusion on balance that it has not been discharged.

I turn to paragraph d). This reads:-

“In addition to exaggerating the potential benefits to franchisees, a misleading reference, supposedly attributable to a successful franchisee of FSUK, but which was in fact traced to the wife of a director without that link being disclosed to the public. Further, as the testimonial has simply been amended to replace CFS with FSUK it states, “So in February 2006 I purchased a franchise from FINANCE SELECT (UK) LIMITED”. This is despite the fact that FSUK wasn’t incorporated until 11 July 2007, didn’t hold a consumer credit licence until November 2007 and wasn’t trading according to the directors until at least February 2008.”

It will be apparent from what I have already said in this judgment that I regard this complaint by the Secretary of State as plainly made out; see paragraphs 23 and 24 above.

I turn to f). The gravamen of the charge here pleaded is contained in the second and third sentences of paragraph f). Those sentences read:-

“The FSUK website states that the secured loans and mortgages it now offers are provided through Norton Finance Limited and Bright Finance Limited. The FSUK website appears to show a typical APR of just 6.6% on the application form. However, the websites for Norton Finance Limited and Bright Finance Limited advertise typical APRsof 13.9% and 11.9% respectively for their secured loans.”

It is then alleged that the above was a misleading statement because it is “extremely unlikely that any of FSUK’s customers will ever see an APR of 6.6% and in any event this rate could not be described as typical for customers of FSUK.” This follows from the fact that the websites of Norton Finance Limited and Bright Finance Limited advertise typical APRs of 13.9% and 11.9% respectively and typical APRs for secured vehicle finance are 19.9%.

The representations made by FSUK as to its APR are far from clear. Typical is a note appearing on a published form of application for a loan to FSUK used for all types of secured and unsecured advance. This reads:-

“The overall cost for comparison is 6.6% APR. The actual rate available will depend on your circumstances. Ask for a personalised illustration. The APR is variable and based on a usual case.”

I was not taken to any other published representation stronger than this that the usual APR available from FSUK was 6.6%. In my judgment the inclusion of “6.6 % APR” in the note is not necessarily to be interpreted as suggesting that such a rate will be available for most loans offered by FSUK. Thus, in my view, this complaint of the Secretary of State is not made out.

Turning to ground g), this reads:-

“Mr Lake and Mr Graham have also misled the Abbey National plc when completing two separate application forms for bank accounts. On 31 October 2007 Mr Lake and Mr Graham completed an application form for a business bank account for FSUK with Abbey National plc and ticked “no” when asked whether they had ever been associated with a business that had had a court order for debt registered against it. On 28 November 2007 Mr Graham signed an application form for the partnership bank account for Clean Machine UK. The form asks the same question and again Mr Graham ticked the box marked “no”. However by 31 July 2007 two franchisees had already obtained County Court judgments against CFS. Mr Lake admits to having knowledge of one of these, as he had been served personally in relation to that County Court judgment on 25 October 2007. Since FSUK was set up deliberately by directors to take forward the business begun by CFS because CFS could no longer trade due to problems with complaining franchisees and County Court judgments registered against it, it seems incredible that the directors would forget to mention this fact on application forms for bank accounts for FSUK and its related business and the inference is that the false statement was deliberately misleading.”

There was in evidence an application form to open a business bank account for FSUK at Abbey National plc signed by Mr Lake and Mr Knight as directors on 31 October 2007 at a time when there were at least two County Court judgments against CFS and which contained the question to be answered by them “Have you ever: …been associated with a business that has failed to keep up payments on a mortgage, credit card or other financial arrangement or had a court order for debt registered against it?” Both answered that question in the negative by ticking a box opposite the word “no”. I do not accept the suggestion put forward by Mr Lake that in signing this document they had overlooked the judgments against CFS since he was personally served with documents consequent on a judgment against CFS on 25 October 2007; see paragraphs 11 and 15 above. It was accepted by Mr Lake that FSUK was incorporated to take over the business of CFS because that company had become hobbled by the existence of County Court judgments for debt against it. I therefore find this ground established.

I am not prepared to accept that this was a minor form-filling oversight. It seems to have been part of the business philosophy of these two gentlemen that it was legitimate in starting a new business to attempt to conceal past business history. Each of them practised this, as can be seen from their use of differing names described in the background facts set out above, and it will be remembered that one of the services offered by CFS to its customers was assistance in effecting a change of name. It must have been apparent to Mr Lake and Mr Knight that Abbey National would place importance on the past financial history of the two controlling directors of a company for which they were being asked to open a current account and who would operate that account. In signing the application, Mr Lake and Mr Knight represented that “the information contained in this application is true and correct”.

I turn to ground h) which reads:-

“In a determination and notice dated 23 June 2008 (subject to appeal) [at the time of the presentation of the petition] the OFT revoked FSUK’s consumer credit licence and found that the directors of CFS, Mr Graham and Mr Lake, had knowingly or recklessly provided false information to the OFT”

and that

“the record of deceit, contravention, transgression and unfair business practices outlined above indicates a business and a set of directors and controllers (Mr Graham and Mr Lake) who are quite prepared to act beyond the boundaries of the law and regulation until they are either forced to stop or significantly alter their business practices. Consumers are entitled to expect complete honesty, a transparency and fair business practice from licensees, especially those dealing with vulnerable clients in financial difficulties. In my view (FSUK) cannot be trusted to act to these standards.

There is a lack of probity throughout the dealings of the directors’ companies.”

From my description of the background facts set out above and, in particular, paragraphs 13, 17, 19, 22 to 24 and 26 above, and the documents forming the schedule to this judgment, it is apparent that, in a manner reminiscent of their dealings with Abbey National, Mr Lake and Mr Knight gave false information to the OFT in their application on behalf of FSUK for a consumer credit licence by representing that they had never used different names and concealing from the OFT the County Court judgments obtained against CFS. The passage quoted above in ground h) from the reasons given for the Adjudicator’s decision appears at the page in the schedule to this judgment marked 679.

I have found all save two of the grounds put forward by the Secretary of State to justify the making of a winding up order to have been established. I have done so largely on the basis of admissions by Mr Lake, the unchallenged evidence of Mr Gray and incontrovertible documentary evidence. The case for FSUK put forward by Mr Lake, in opposing the making of a winding up order against FSUK, was to seek to differentiate between the conduct of CFS and that of FSUK. He pointed to the occasions upon which CFS changed its conduct when breaches of regulations and good business conduct were pointed out to it and changes to the wording and content of FSUK’s website publications when compared with those of CFS. No formal undertakings as to further such alterations or amendment of future conduct were offered to the court but Mr Lake indicated that if the court found there to have been further breaches, the necessary alterations and amendments would be made. He placed particular emphasis on the fact that, by comparison with CFS, there was no evidence of complaints by licensees of FSUK against that company in respect of its conduct of licence agreements. He submitted, and I accept, that FSUK had a number of licensees, the precise number was unclear, of which a large proportion had transferred over from CFS on that company ceasing trading, who were conducting their businesses without apparent complaint against FSUK. I was shown certain documents emanating from licensees, which indicated support for that company. It was Mr Lake’s submission that in these circumstances and notwithstanding the past conduct of CFS and FSUK, a winding up order should not be made against FSUK.

Section 124A(1) of the Insolvency Act 1986 provides, so far as material to this judgment:-

“Where it appears to the Secretary of State from –

(a)

any report made or information obtained under part XIV…of the Companies Act 1985 (Company Investigations etc), …

that it is expedient in the public interest that a company should be wound up, he may present a petition for it to be wound up if the court thinks it just and equitable for it to be so.”

My attention was drawn by Mr Westwood, for the Secretary of State, to authorities on the exercise by the court of the power to wind up companies on the petition of the Secretary of State on “public interest” grounds. In particular, he drew my attention to a judgment of Mr Justice Norris in Re Amway (UK) Limited [2008] EWHC 1054 (Ch). That was a casewhich had some similarities to the present case where the court was considering a company conducting a pyramid selling business which, although it had conducted its own affairs in a manner which could not be criticised, had failed to supervise and control the representations and promotional material used by members of the public, called independent business operators, who sold Amway’s products on its behalf. The material issue in the case was whether it was open to the judge to decline to make a winding up order on the basis of undertakings offered by the company as to its future conduct which had been offered to the Secretary of State and declined. In the result, the judge found that it was open for him to do so and, accepting the undertakings, refused to make a winding up order. The Secretary of State appealed the judge’s decision. In the Court of Appeal the lead judgment was given by Lord Justice Rix, handed down on 29 January 2009. This judgment helpfully conducts a review of the authorities on section 124A and, in particular, those which deal with the question of whether a company, against whom the Secretary of State has launched a public interest petition to wind it up, and in which facts have been established, relating to the company’s past conduct, which would justify the making of a winding up order, can nonetheless avoid such an order by proffering undertakings to the court which are not acceptable to the Secretary of State.

What emerges from that review and the Court of Appeal’s judgment and that of Mr Justice Norris is that the judge hearing such a public interest petition has a complete discretion as to whether to make a winding up order in the light of the facts, including past conduct, existing at the time the petition comes to be heard and including the fact that, at the time of the hearing, undertakings are being offered by the company to seek to ameliorate criticisms of that conduct and to indicate an intention, in the future, to change it for the better. It will be a rare case where the court declines to make a winding up order where the Secretary of State has rejected the undertakings and pressed for a winding up order. Nonetheless it is open to the court in such a rare case to do so where the facts, in the court’s judgment, require it.

I am satisfied that this is not a case where the court should take that course. The grounds pleaded in the petition, which I have found to be established, demonstrate that Mr Lake and Mr Knight have conducted the affairs of FSUK with a serious lack of commercial probity. I echo the view of the Adjudicator of the OFT at paragraph 43 of his reasons that the evidence “indicates a business and a set of directors and controllers who are quite prepared to act beyond the boundaries of the law and regulation until they are forced to either stop or significantly alter their business practices. …There is little or no evidence to show that Mr Lake or Mr Knight have voluntarily changed their business practices on their own initiative. It is not enough for them to say ‘we have made mistakes’ and ‘ we will do what we are told to do’”.

I will make the winding up order against FSUK sought by the Secretary of State. I will also make winding up orders against CFS, CFSUK, Bounce and Trash which are not opposed and against which the Secretary of State has presented a similar case to that which I have found made against FSUK.