Secretary of State for Business, Innovation and Skills v Hawkhurst Capital Plc

JUDGE HODGE QC: This is my extemporary judgment in the matter of Hawkhurst Capital PLC, petition number 3903 of 2013.

On 4 September 2013 the Secretary of State for Business, Innovation and Skills presented a petition for the winding-up of Hawkhurst Capital PLC on public interest grounds. The return date of the petition is 5 November 2013. On the same day the Secretary of State issued an application notice for the appointment of a provisional liquidator in respect of the company.

The petition and that application are supported by two witness statements. The first, and principal, witness statement is that of Ms Karen Clarke, an investigator with Company Investigations, which is part of the Insolvency Service. Ms Clarke’s witness statement is dated 16 August 2013 and runs to some 64 pages. The exhibit thereto, exhibit KC1, extends to some 573 pages.

The second witness statement is that of Mr Colin Peter Cronin, an investigation supervisor with Company Investigations. That witness statement is dated 4 September 2013.

Ms Clarke, together with Ms Pauline Draper, had been appointed by the Secretary of State on 17 January 2013 to investigate the affairs of Hawkhurst Capital PLC. That company had been initially incorporated on 29 March 2010 by a Mr Csurgo and a Mr Shea. Both of those gentlemen would appear to be Canadian nationals, with addresses in Holland and Canada respectively. The company was initially incorporated with the name Normandy Mining PLC. On 2 February 2011 the Registrar of Companies received a notice of change of name to the company’s present name, Hawkhurst Capital PLC.

The initial share capital of the company was 5 million ordinary shares of 1p each which were issued to and paid for by Mr Csurgo and Mr Shea, giving them 2.5 million shares each. On 1 June 2011 the Registrar of Companies received a return of allotment of shares stating that on 18 January 2011 a further 20 million ordinary shares of 1p each were allotted. However, the return does not identify the allottee or allottees.

Initially the directors of the company were Mr Csurgo and Mr Shea, although Mr Shea was apparently replaced as a director by another Canadian national, Mr Kilambi, on 8 June 2010. On 25 January 2011 the existing directors resigned and a Mr Giles (resident in Spain although a British national) and a Mr Read (a British national with an address in Harwich in Essex) were appointed in their place. They remain the sole directors of the company.

The business of the company is described at paragraphs 10 through to 15 of the petition. It is asserted that the company has been, and is, involved in a scheme whereby clients obtain ‘pension release’, being early access to their pension funds before their pensionable age. The scheme is said to involve the arranging of extended unsecured personal loans to private individuals who transfer their existing pension funds to a SIPP and purchase shares in the company as a condition of obtaining a loan made by a Seychelles company, The Regent Group Ltd. By a share lock-in agreement, the shares so purchased are not to be disposed of before 31 December 2026. As a result of using the scheme, the client’s pension fund, or part of it, has been used and the client (through a nominee company and/or a SIPP) holds shares in the company. The client receives the cash required by him or her from the cash loan made by Regent.

The background to, and specifics of, the scheme are:

On 25 January 2011 a company incorporated in Belize (referred to in the petition as Holbrook Belize) purchased the entire stock of Hawkhurst shares. Mr Giles is a director of Holbrook Belize.

Hawkhurst shares have been sold on the Frankfurt Stock Exchange between 1 February and 15 November 2011 and on the online stock exchange scheme known as CREST since 1 February 2011.

Until the last-known share transfer on 11 June 2013, the total amount paid for the shares was some €13,586,259. The shares are offered to members of the public who respond to marketing text messages, or through websites aimed at people who want to gain early access to their pension funds.

Potential shareholders were identified by cold calls or referred by websites, for example one called ‘Pension Release’, and were told that they would receive a loan payment into their bank if they set up a SIPP and purchased Hawkhurst shares. They were also told that the Hawkhurst shares purchased would cover the principal amount and interest due on the loan.

Payment of the loans was made by Regent and shareholders entered into share lock-in agreement and loan agreements.

When required, the shares are released by Holbrook Belize into the market and are transferred through intermediaries to a nominee company which holds the shares on behalf of the beneficial shareholder in their SIPP accounts.

When contacted by the investigator, some of the shareholders have provided documents. These include the lock-in agreement preventing shareholders from selling their Hawkhurst shares until 31 December 2026 and a loan agreement with Regent stating that interest at 6% will accrue on the outstanding balance until 31 December 2026, when the loan is due to be repaid. The loan agreement also states that the shareholder shall not be required to repay Regent more than the total value of Hawkhurst shares held.

The cash released to the shareholders using the scheme varies from 50% to 85% of the purchase price of the shares in Hawkhurst for which their pension fund has been used. The proportion of the client’s pension fund used to purchase shares in Hawkhurst also varies. The company’s annual accounts dated 31 December 2011 record an investment in a Seychelles company which is said to be worth just under £12 million. That company is called Craven Capital Ventures Ltd. However, there is no independent evidence to support the value stated in the company’s accounts or, indeed, that there is any substantial value in Hawkhurst shares.

The provisions of the Finance Act 2004, and in particular sections 208 and 209, restrict payments by registered pension schemes to their beneficiaries and impose charges and surcharges for unauthorised payments. One shareholder who used the scheme is known to have received an assessment from Revenue & Customs, being a 40% tax charge on the loan received from Regent, plus a surcharge of 15%. That shareholder was unaware of the reason why that tax charge and surcharge were being levied.

The grounds upon which the Secretary of State relies to wind up the company in the public interest are set out at paragraphs 16 and following of the petition. The first of the grounds relied upon is a lack of transparency. It is said that the precise nature of the company’s activities is unclear. Further particulars of that lack of clarity are set out at paragraph 18 of the petition.

Secondly, under this ground, it is said that the structure of the company is such that its involvement and role in the scheme is not transparent. It is said that overseas companies have been used to conceal the control of those involved in administering the scheme and the connections between them. Particulars of that are set out at paragraph 19 of the petition.

It is further said that Mr Giles, the company’s only active director, is evidently involved in procuring and facilitating the investment in Hawkhurst shares, yet he has sought to conceal his involvement in the respects identified at paragraph 20 of the petition. Mr Giles is also said to have used an alias, the name of Simon Murray, as set out at paragraph 21 of the petition.

At paragraph 22 of the petition, it is asserted that there is no evidence for an increase in value of the investment in Craven recorded in the accounts from £250,000 to just under £12 million in the period 2011 through to 2012. The accounts of Craven state that the company holds in excess of US$106 million worth of shares in a subsidiary. The value of the share premium equates to a value of just under £12 million for the 19 shares purchased by Hawkhurst for £250,000. Mr Giles has been unable to provide any explanation for that disparity in values.

The second ground relied upon in the petition is said to be the filing of inaccurate and/or misleading accounts. Particulars are given at paragraphs 23 through to 25 of the petition.

Paragraph 26 relies as a third ground for winding up on what is said to be operating with a lack of commercial probity. Full particulars are given at paragraphs 26.1 through to 26.7 of the petition. There is said to be a lack of transparency as to the company’s activities and role in the scheme. That is said to be either misleading, or potentially so, to individuals who potentially seek to use the scheme. In this regard, the petitioner relies upon responses given to the investigators by shareholders who use the scheme as to their understanding of the company’s trading activities.

Further, it is said that the company is either operating the scheme, or allowing itself to be a vehicle for the scheme, and thereby facilitating it. It is the company in which members of the public are obliged to buy shares as a condition of releasing part of their pension fund, such funds having been solicited for the purchase of Hawkhurst shares. In so doing, it is said that the company is operating with a lack of commercial probity because the scheme has several features identified at paragraph 26.3 which are said to have no logical commercial basis.

It is also said that individuals have been misled as to the nature and risks of the scheme, or that it has been operated in such a way as to give rise to a significant risk of misunderstanding by potential clients. Particulars of that are given at subparagraphs 26.3.5, 26.3.6, 26.5.1 and 26.5.2 of the petition. In particular, it is said that there is no evidence that the risks of the scheme giving rise to tax implications were or are given to clients or shareholders. Mr Dobbs was apparently informed that the scheme was ‘legal and above board’. However, one shareholder who used the scheme is known to have received an assessment from Revenue & Customs involving a 40% tax charge on the loan received from Regent, plus a surcharge of 15%. Mr Dobbs received an assurance that the remainder of his pension fund invested in the scheme would be made available to him once the pension would have originally matured. That assurance is said to be inconsistent with, or not borne out by, the scheme by which Mr Dobbs’s pension fund has been used to buy shares in Hawkhurst and he has received a loan from Regent. The only director that the investigators have been able to contact, Mr Giles, has failed to co-operate with the Secretary of State’s investigation.

The final ground for winding-up relied upon in the petition is said to be Mr Giles’s failure to co-operate with the investigators, his provision of only limited documentation, his refusal to answer questions, and his evasiveness during interview. Full particulars are given at paragraph 27 of the petition.

At paragraph 28, it is said that Mr Giles’s failure to provide information goes beyond the investigation. He has failed to respond to requirements for explanations and information made by Computershare, which has led to that entity terminating its relationship with Hawkhurst with effect from the end of May 2013.

It is on that basis that the Secretary of State petitions for the winding-up of the company. The matters in the petition are not only verified by Mr Cronin’s witness statement but full particulars are given in Ms Clarke’s extensive witness statement and the documents exhibited to it. Those matters lead Mr Cronin, in his witness statement, to consider it to be expedient in the public interest that the company be wound up on the grounds set out in the petition. I am satisfied, on the evidence presently before the court, there is a prima facie case made out for the winding-up of the company on public interest grounds.

Mr Cronin considers that, additionally, it is in the public interest for a provisional liquidator to be appointed over the company pending the hearing of the petition which, as I have said, will not take place until 5 November 2013. The investment by Hawkhurst in the Seychelles company, Craven Capital Ventures Ltd, is said not to appear to be a genuine investment. Mr Cronin elaborates upon that at paragraph 9 of his witness statement. He there expresses concern, for the reasons that he gives, that the investment in Craven appears to be a device as a result of which individuals are persuaded to purchase and invest in Hawkhurst shares, which is a key part of the pension release scheme.

Mr Cronin is concerned that Hawkhurst shares remain available for sale. He is concerned that information provided to the investigators shows that some 49,500 Hawkhurst shares were sold during the period 2 May to 7 June this year. There is also evidence that the last transfer of Hawkhurst shares was on 11 June 2013, when just under 110,000 shares were transferred. There are 25 million shares, of which a little under 11 million have been sold, leaving a significant balance available for purchase by members of the public.

Shareholders receive only between 50% and 85% of the cost of purchasing shares in Hawkhurst by way of loan from Regent, again a Seychelles company. The amount used to purchase these shares appears to be a substantial part of the individual’s pension fund. The shareholders’ pension funds are invested in Hawkhurst, and the investors are subjected to lock-in agreements, preventing them from realising the value of their shares until 31 December 2026. If the investment by Hawkhurst in Craven is, as Mr Cronin fears, not genuine, then shareholders are going to be unable to recover the value of their investment in Hawkhurst, leaving them unable to satisfy their loan obligations to Regent.

On the basis of the terms of the loan agreement, since the borrower is not required to repay Regent more than the total value of the shares held, if Hawkhurst shares prove to be worthless there would be no loss to the individual as they would have received the loan monies but are not obliged to repay Regent. However, as Mr Cronin points out at paragraph 13 of his witness statement, the individual will already have paid over a substantial part of their pension fund in order to purchase the shares. If the value of the shares is negligible, then the individual will have lost the value of the fund used to pay for the shares, less the amount of the loan received from Regent. Because shareholders receive only between 50% and 85% of the cost of purchasing shares in Hawkhurst by way of loan, they will have suffered a loss. For that reason, it is said by Mr Cronin to be imperative to stop the scheme as soon as possible before more members of the public depart from the regulated pension market by using their pension funds to purchase shares which appear to have no substantial value.

Mr Cronin relates at paragraph 14 that he has carefully considered the issue and, in particular, whether it is appropriate to apply for this relief, having regard to the seriousness of its implications for the company (if granted) and whether alternative relief would be adequate. For the reasons he sets out at paragraphs 15 through to 18, he believes it to appropriate for the court to appoint a provisional liquidator.

He has considered whether any alternative form of relief to the appointment of a provisional liquidator would be appropriate, but he considers that there is no other alternative pending the final hearing of the winding-up petition. That is because of the characters of the persons in control of the company, and the fact that reliance cannot be placed on any undertakings that might be offered. Mr Cronin draws attention to the failure of Mr Giles to co-operate during the investigation, and his evasiveness and unhelpfulness. Mr Cronin also considers that the lack of transparency of the operation and activities of the company, specifically the deliberately opaque manner in which the scheme has been operated, shows Mr Giles to be generally untrustworthy.

Mr Cronin does not consider that an injunction not to continue the objectionable trading practices would be sufficient. First, an injunction would not serve to rectify the company’s previous activities. Secondly, a proper investigation into the assets held by the company, and its interrelationship with the other companies in the scheme, needs to be undertaken. Thirdly, given the unclear nature and the extent of Hawkhurst’s role in the scheme, and the fact that its participation includes allowing itself to be used as the vehicle for, and to facilitate, the scheme, an injunction would not prevent continuation of this. In order to prevent individuals being persuaded to purchase shares in Hawkhurst as part of the scheme, relief would be required against possibly Regent and Holbrook Belize, both of which are overseas companies. Further, Mr Giles has declined to provide adequate information as to those companies, or the relationship between the various companies. For all of those reasons, Mr Cronin does not believe that an injunction would give adequate protection to the public.

In summary, Mr Cronin considers that a provisional liquidator should be appointed in order to:

place the company, and its assets, in responsible hands, and take them out of the control of the company’s directors as soon as possible;

bring the company’s involvement in objectionable trading activities to an immediate end, and prevent further promotion, or use, of the scheme on members of the public;

enable the company’s affairs and trading to be investigated more fully, and the company’s financial position and creditors to be established;

provide an independent focal point for information and advice for any third parties who have had dealings with, or involvement in, the company pending determination of the petition; and

insofar as the company has received, or holds, monies referable to the operation of the scheme, prevent dissipation of such funds.

Moreover, a provisional liquidator would seek to take control of the company’s records and assets. Mr Cronin considers that, for those reasons, the appointment of a provisional liquidator is necessary, and that alternative relief would not adequately protect the public; and that the application for the appointment of a provisional liquidator should be made on notice, albeit on short notice, to the company.

I accept and endorse Mr Cronin’s concerns. I have already said that I am satisfied that there are good grounds for a winding-up order being made in respect of Hawkhurst and, further, I am satisfied that the management of the company should be taken out of the hands of its directors as soon as possible.

I am concerned that Hawkhurst appears, on the evidence, to be involved as the vehicle for a scheme which is highly prejudicial to holders of pension funds, and appears to have hallmarks of serious and deliberate misrepresentation. It would appear that individuals are paying away significant parts of their pension funds for no real commercial return. The available evidence suggests that the company’s shares are still being sold, and that the scheme is still being operated. Just over 14 million shares out of a total share capital of 25 million still remain to be released if there are new customers for the scheme. Over some €13 million has been invested, apparently, so far.

I am also concerned that the lack of co-operation by Mr Giles mirrors and underlines the lack of transparency as to Hawkhurst’s operation, its true role, and the reason why its shares are being purchased as a condition of participation in early pension release. That lack of co-operation raises serious concerns as to the commercial probity of what has been going on. When considered alongside the use of overseas companies in which Mr Giles is involved, and about which he has declined to give full information, the concern is even greater. If Hawkhurst’s shares were a genuine investment, then there would be no reason for its involvement with Regent and Holbrook Belize not to be made clear. There would also be no commercial reason, or justification, for locking in shareholders until 31 December 2026.

Miss Wilson-Barnes submits that there could be no real prejudice to Hawkhurst. It is said not to be trading, but merely to hold investments. If those investments are what they purport to be, then that should not change as a result of the appointment of a provisional liquidator. If, as suspected, they are not, then use, or reliance upon them, and the accounts, should be stopped as soon as possible. The appointment will enable a proper and urgent consideration to take place of the nature of the company’s assets.

I am satisfied that the petitioner has, in accordance with the guidance given by Mr Justice Etherton in Re: City Vintners Ltd (unreported, 10 December 2001), considered whether a remedy other than the appointment of a provisional liquidator would provide an adequate answer to the Secretary of State’s concerns; but I accept that there are strong reasons to believe that injunctive relief would be insufficient and/or ineffective. Those reasons are:

It is difficult to see how any injunction order could be formulated to stop the conduct which is complained of. Hawkhurst is the vehicle through which the pension release scheme is being conducted. It is not, therefore, ostensibly, an active participant, in that it is not itself openly involved in the sale of its own shares. Share sales are taking place, but the true structure of the companies in the scheme is not clear. Given the lack of transparency, the precise roles of the participants in the scheme, and how it is being operated, are not clear.

The lack of transparency, the position of Mr Giles in failing to provide information regarding the overseas companies, his general failure to co-operate, and his use of the alias Simon Murray all point to there being no confidence that an injunction would be complied with. It would also be difficult, if not impossible, to police. Mr Giles is resident in Malaga in Spain, and companies which appear to take part in the pension release scheme are also overseas.

Finally, the concerns entertained by the Secretary of State and his investigators as to the falsity of the accounts underlines the lack of any confidence that any injunction would be complied with.

Pursuant to her duty of full and frank disclosure on a short-notice application, Miss Wilson-Barnes expressly draws to the court’s attention the fact that, in accordance with his usual practice, the Secretary of State offers no cross-undertaking in damages. That increases the potential for injustice to the respondent if a provisional liquidator is appointed in circumstances where it proves that he should not have been. I bear that in mind; but, nevertheless, I am satisfied that this is an appropriate case for the appointment of a provisional liquidator.

This application has been made on short notice. The petition, the application and the supporting evidence were served at the registered office of the company just after 11.00am on the morning of Thursday, 5 September. There has, therefore, been a little over a week since notice of this application was given. Service of the proceedings at the company’s registered office had been preceded by the transmission of the relevant documents to Mr Giles at his email address in Spain, and by airmail post to him at the Malaga address. I have seen confirmation that the emails were successfully relayed to the two email addresses to which they were sent, but the requested delivery status notifications may not have been generated by the destination.

Despite what I am satisfied are all possible attempts to give notice of this application to Mr Giles, as well as proper service of the application and supporting evidence, together with the petition, at the company’s registered office over a week ago, no one has attended court today for, or on behalf of, the respondent company. I am satisfied that this is a case in which the urgency of the situation requires an abridgement of time for the service of the application. I note that the notice that has been given is more than the three clear days that would have been required for a non-insolvency interim application in accordance with the terms of the Civil Procedure Rules. Despite that, as I say, no one has attended today to oppose the application for a provisional liquidator.

I am satisfied, notwithstanding the absence of any cross-undertaking in damages, that it is appropriate to appoint the Official Receiver to act as provisional liquidator of the company pending the hearing of the petition or further order. A representative of the Official Receiver has confirmed that he is content to accept the appointment, and is content with the terms of the proposed order.

I have been offered two alternative forms of order. One of them contains the usual provision, appropriate to a without-notice application, that the officers of the company should have permission to apply to the court to set aside or vary the order on 48 hours’ written notice, and in connection therewith to apply to the court to use the company’s funds in respect of such application. Miss Wilson-Barnes has included that provision because only short notice of this application has been given. It does seem to me that it is appropriate, given the fact that there has been short notice, for that provision to be included within the order.

The one respect in which it seems to me the order may be deficient is that I am not sure that it presently includes the abridgement of time for service of the application. That needs to be added in. Subject to that addition, I will make an order in the terms of the draft with the provision for liberty to apply to set aside or vary.