Equitable Law Capital, Re

The First and Second Applicants (together “the Liquidators”), who are partners in Begbies Traynor, are the joint liquidators of the Third Applicant (which the documents refer to as “the Company” or “ELC” – I will use the latter except when quoting other documents).

This judgment, which follows a ten-day trial, concerns an application for various orders for payment and compensation against certain of the Respondents (others having settled or been struck off).

ELC’s only business was the running of an investment scheme called “the ELC Legal Redress Scheme” (“the Scheme”). The idea behind the Scheme was the funding of claims against financial institutions for mis-selling of bonds. I will shortly explain it in a little more detail.

The Scheme ran for only a short time, during which investors put in about £3.3m. They received payments of only just over £230,000. The Respondents, on the other hand, received just under £2.2m, either in their own hands or through their companies. ELC was put into insolvent liquidation, in which liquidation there is alleged to be a deficit of just over £2m.

The idea behind the Scheme was as follows:

It is not in dispute that the Brochure contained many serious misrepresentations, but a key issue at this trial was whether the remaining Respondents knew about them or were involved in their making.

I will now identify the key individuals and companies; I will introduce other more minor players as they arise.

I have already mentioned the Applicants. It is the First Applicant, Mr Biscoe, who has taken the lead in the liquidation of ELC and who gave evidence before me.

The First and Second Respondents are a married couple. The First Respondent

The Second Respondent (“Lillie Milner”), by contrast, did not have a formal directorship but was on any view a key player in ELC and the Scheme. She was certainly a moving spirit, whether she was the sole moving spirit is one of the central factual issues between the Applicants and the Third Respondent (“David Clarkson”). It is accepted by the Third Respondent that Lillie Milner was a de facto and/or a shadow director of ELC.

Lillie Milner had two companies through which she received money from ELC. They can be referred to together as “Savvy Sister”.

The Applicants settled with the Milners by a written agreement dated 11 September

David Clarkson is accepted to have been involved in ELC and in the Scheme. His case is that he was an arm’s length introducer to ELC of the Fifth, Sixth and Seventh Respondents and never saw the Brochure. The Applicants’ case is that he was central to ELC’s running and to the Scheme and was a de facto and shadow director.

The Fourth and Ninth Respondents are, respectively, David Clarkson’s son and wife (“Paul Clarkson”, “Carole Clarkson”). David and Carole Clarkson have been separated for many years but remain in contact and on at least reasonably good terms. Paul and Carole Clarkson settled with the Applicants during trial (“the Clarkson Settlement Agreement”).

I have already introduced Mr Flaton, the Fifth Respondent, and his companies. It is also worth mentioning that:

Likewise, I have already introduced the Sixth Respondent, Belmonte. It is FCA regulated.

The Seventh Respondent (“Mr Arnison”) is an owner of the Sixth Respondent. He is an FCA approved person. His fellow owner at the time of the events concerned was Mr Andrew Wesson (“Mr Wesson”). No claim was made against Mr Wesson. Mr Arnison and Mr Wesson were both involved in putting in place the Contract of Insurance.

I will need to return in more detail to the way the case against Mr Arnison was put, and developed. It changed significantly over time, and even during the trial.

The Eighth Respondent (“Eiger”) performed administrative functions for the Scheme. It was in common ownership and control with Belmonte. It was struck off on 8 January 2019. It remains relevant as part of the history.

I have already introduced MS2U (where the key player was one Joseph Battle, “Mr Battle”), and Gable and Mr Flaton’s companies.

White & Co Limited (“White & Co”) is a firm of accountants which was appointed to receive and hold investors’ moneys pending payment to ELC.

Hectary International Limited (“Hectary”) is a Seychelles company. David Clarkson says that he was engaged by Hectary, that Hectary was entitled to introduction fees/commissions from ELC, and that he was then paid appropriately by Hectary pursuant to agreements that he had with it in a way that I describe below. The Applicants dispute the genuineness of this; it is not in dispute that the money in fact went directly to David Clarkson.

Advice was given in relation to the Scheme at different times by two members of the Bar, Mr David Berkeley QC and Mr Mark Anderson QC (“Mr Berkeley QC” and “Mr Anderson QC” respectively). I make clear that no criticism is made of either of them or of the soundness of their advice, which was given on the basis of the facts relayed to them and in the context of important developments in the case law over the period in question.

I will summarise how the Scheme ran, noting the points of major dispute where the Applicants say that what was done was improper:

The money per claim available for ELC to provide to MS2U at the final stage was £1,000 (but would have been £1,250 had Carter Rovali’s commission not come out of the investor’s funds). In fact, much less was paid to MS2U. It was £500 or even less; it has been understandably difficult for the Applicants to put the pieces together, but on average it appears only £328 per claim was paid over. In due course, if claims were successful then returns would be paid to investors by ELC, and a small amount was.

Underlying the history of ELC is the advice it received, and complaints that were made against it by the FCA, in relation to two aspects of FSMA. 27.The first was whether the Scheme was a Collective Investment Scheme (“CIS”) under s. 235 FSMA. If it was, then it was also an Unregulated CIS (“UCIS”).

Mr Anderson QC advised on this twice, as noted in the brief chronology below. On the first occasion his advice was, subject to important caveats, to the effect that the Scheme was not a CIS. By the second occasion, in March 2016, the Court of Appeal had given its decision in FCA v. Capital Alternatives [2015] EWCA Civ 284 which changed the picture very considerably, as Mr Anderson QC advised.

It was Mr Anderson QC’s second advice that led to Belmonte ceasing to offer any further cover, as I explain below, whereupon no further money could be taken into the Scheme.

The second aspect of FSMA relevant to ELC was accepting deposits, which is prohibited under s. 19 unless a person is authorised or exempt, and ELC was neither.

The relevant definitions of “deposits” is contained in art. 5 of the Financial Services and Markets Act (Regulated Activities) Order 2001 (“RAO”).

Unauthorised deposit taking was the focus of the FCA’s complaint against ELC. Mr

I have not set out the provisions of FSMA or RAO here because Counsel for the Applicants made clear that it was not necessary to his case to determine whether ELC was in fact in breach of FSMA, or when, or on what exact basis. Rather, the Applicants’ case includes the assertion that it was dishonest for the remaining Respondents to be involved with ELC continuing to do business when they knew of negative advice on these issues.

The parties provided a list of issues prior to trial. It was helpful at the time, but matters moved on very considerably, and I consider it best for me to set out my own understanding of which issues are agreed and which are contested. In various instances I also identify issues which fell away or were conceded, or which I consider not to matter.

A number of issues affect the case as a whole, and/or multiple Respondents:

The issues in relation to David Clarkson were:

The issues relating to Mr Arnison/Belmonte were:

The issues relating to Mr Flaton were:

I have written this judgment to address all the above issues, but because of the multiple Respondents and their different roles, it has been necessary to touch on some of the issues in more than one place. It is also not practical to deal with the issues in the order above.

The trial was conducted entirely remotely. This generally worked well although there were some internet outages from time to time.

The Applicants, who had the greatest administrative burden and the heaviest load in terms of cross-examination, were represented by Mr Reuben Comiskey and Ms Katie Longstaff.

The Clarksons, who expressed particular concerns about COVID at the PTR, were at a serviced office, at which a representative of the Liquidators was also present to observe compliance with the rules in relation to David Clarkson’s evidence.

Mr Brad Pomfret represented all the Clarksons. They were litigants in person at the time of the PTR (although they had solicitors earlier) and until very close to the trial, and Mr Pomfret therefore had limited time to prepare, which I record he coped with in an extremely calm and efficient way.

I refer below to certain health issues which David Clarkson had and their significance.

Mr Flaton was a litigant in person. He did a very good job in difficult circumstances and was assisted by his father (who also attended the interview of Mr Flaton by the Liquidators) in the role of McKenzie Friend. They were in the same place except that Mr Flaton Senior left the premises for the duration of Mr Flaton’s oral evidence.

Mr Arnison and Belmonte were represented by Mr Alexander Heylin and Ms Annie Townley. When I refer to “Counsel for Mr Arnison” I mean Counsel for Mr Arnison and Belmonte, and similarly when I refer to “Mr Arnison” I mean Mr Arnison on behalf of Belmonte, there being in general no need to distinguish between them.

The Clarksons and Mr Arnison cooperated and shared the advocacy where possible, in particular in relation to the argument over the effect of the Milner Settlement Agreement.

The trial took ten days in Court. The estimate was already increased from 6 to 8 days at the PTR, and then was increased to ten during the trial. I have to say that the complexity of the case and the number of parties was such that it was inevitable that neither earlier estimate was enough. Even ten days was an extremely tight squeeze and was only achieved by allowing for two rounds of post-hearing written submissions. Had the claims against Paul and Carole Clarkson not settled the situation would have been even worse. David Clarkson’s cross-examination overran severely, not because the time was

Part of the problem with the time estimate was that there were so many claims and defences against so many Respondents, all dealt with at a level of detail which was sometimes necessary but often not. The parties did not cut things down materially until closing submissions.

At the start of the trial, Counsel for Mr Arnison applied to strike out large parts (originally, all) of the witness statement of Mr Biscoe on the basis, mainly, that it was merely comment. He prepared a schedule listing the objections and the Applicants marked it up with their responses.

Overall and in the main, I thought that although there was a lot of material in the statement which was not direct evidence, it collated the information from the extensive documentation to show what the Applicants were relying on and for what, and provided more detail than the pleadings did or were required to, but earlier than the Applicants’ skeleton argument. So I did not think it was deleterious or ill-intentioned.

On the other hand, Counsel for Mr Arnison was right to identify the issue and was entitled to certainty about what he was required to cross-examine upon. The preparation of the schedule was a sensible and proportionate approach and the Applicants should have engaged with it much sooner.

I directed that Counsel for Mr Arnison was not required to cross-examine to those parts of the statement identified in the schedule in certain ways. He sought further clarification which I gave on specific paragraphs. I was cited various authorities on this sort of situation, in some of which much more stringent orders, including striking out, were made. No doubt those decisions were appropriate on their facts and if Mr Biscoe’s statement had been more tendentious or argumentative or prolix, or less useful I would have reacted differently.

The witnesses who gave oral evidence before me for the Applicants were:

I comment on Mr Biscoe’s investigations as Liquidator in more detail below.

The following Respondents gave evidence:

I comment on each of them in detail below.

Statements were put in for Paul and Carole Clarkson but following their settlement with the Applicants they were not called to give oral evidence. No party submitted that I should draw any inference from this, and I do not do so.

The Agreed Points of Law, to which I refer in more detail below, contained the following:

In addition, Counsel for Mr Arnison referred me in written submissions after the trial to the statements by Falk J in Re Keeping Kids Company [2021] EWHC 175 (Ch) at [899][902].

All the Respondents made submissions about what they said was the lack of thoroughness of the Liquidators’ investigations. At one point at the start of the trial Counsel for Mr Arnison sought to elevate the complaints to the level of a substantive defence to the claims, in the nature of abuse of process. I ruled that that would require an amendment to the pleadings, which was not sought. But the complaints about the investigations remain in play for the purpose of undermining the reliability of the Applicants’ evidence.

The Respondents’ submissions focus on:

To some extent these all go together, and in my view they show that the Liquidators did not treat all the Respondents alike and did not gather all readily available material, but

It was the Milners themselves who chose Begbies Traynor. One can understand why the Respondents feel uncomfortable about this, but in itself it does not have much significance. There was an early sense of insinuation by the Respondents that there was something improper about Begbies Traynor being chosen, or some significant previous relationship, but this was not really pursued.

However, one of the first things that then happened was that Graham Milner, the sole de jure director, filled in his Directors’ Questionnaire on 15 November 2016, in which he identified David Clarkson (but not Lillie Milner) as a shadow or de facto director. This was on the stated basis that David Clarkson was responsible for relationships with the “IFA Broker” (which probably meant Mr Flaton even though he was not an IFA) and

In my view this clearly understated Lillie Milner’s role in a way which even at an early stage should have rung alarm bells for the Liquidators. And it was put to Mr Biscoe, and I accept, that the Milners had an obvious incentive to increase the apparent culpability of David Clarkson and de-emphasise that of Lille Milner.

Further, questions 41 to 43 of the Questionnaire identified that ELC had kept accounting records and that statutory records and a minute book had been kept. These should surely have been the first port of call, but Mr Biscoe did not secure them.

The Liquidators used more care and energy over getting in the documents of the other Respondents than they did of the Milners. They did not obtain Lillie Milner’s computers or telephones or the documents identified in Graham Milner’s Questionnaire and they did not use their compulsory powers under s. 236 IA86 (which they did with David Clarkson). The explanation was offered that that was because it would not have been possible to go behind a witness statement from the Milners that they had provided everything, but I do not accept that because at the very least the documents identified in the Questionnaire had plainly not been provided.

Rather than getting complete electronic repositories of documents from Lillie Milner, or at least intact copies of the originals with metadata, the liquidators allowed Lillie Milner to forward original emails to herself, print them, and provide those.

In a similar vein, Lillie Milner provided text messages by taking screen shots and giving those to the liquidators, rather than giving access to the complete (relevant) contents of her phone.

Both of these raised the possibility that Lillie Milner could give over materials that were selective, or redacted, or tampered with. I have already said that I think she had the potential positive motivation to try to cast the blame elsewhere.

No adequate justification for this approach was given.

The Milner Settlement Agreement was made on a “means” basis, i.e. on the basis that what would be paid would be conditioned on what the Milners had.

In cross-examination of Mr Biscoe, Counsel for Mr Arnison made a powerful case that Mr Biscoe simply accepted valuations of the Milners’ properties provided by them, and that those valuations were obviously too low. There was also questioning about the Milners’ mortgage with an offshore company of unknown ultimate beneficial ownership, although I found that less clear.

This is not of direct relevance, in my view. It is entirely possible that the Milners just out-negotiated Mr Biscoe who settled too low. But it does somewhat emphasise the impression, which is more relevant in relation to the way the Milners gave disclosure, for example, that Mr Biscoe yielded too easily to Lillie Milner.

In cross-examination Mr Biscoe simply said, as was often the case, that he acted on advice in not getting a witness statement from Lillie Milner. He provided no explanation of substance.

However, when the matter came up in oral argument, as it was bound to do, Counsel for the Applicants offered an explanation. It was phrased as a possible hypothetical reason for not obtaining evidence from Lillie Milner, but it was fairly obvious that it was intended to provide the actual explanation without too-obviously being evidence from Counsel. The explanation was that evidence had not been obtained from her because it was thought that because she was a “professional liar” she would not be believed.

This explanation was a fairly obvious one and had already occurred to me. The difficulty is, of course, that it undercuts still further the reliance that can be placed on the documents she provided, as to the way they were selected or as to whether they might have been meddled with.

In the present case I have both witness and documentary evidence to consider, in a commercial context of arranging and selling financial products, which is such that normally one would expect there to be a full paper trail. If there had been such a paper trail then a reasonable approach would have been to use that as a structure for factual findings, and to test the witness evidence against it. I considered key authorities about the relative significance of documentary and witness evidence recently in Martin v. Kogan [2021] EWHC 24 (Ch); one aspect that I think is important in this case is the significance of testing matters against the known or undisputed facts.

However, a distinguishing feature of the present case is that not only is the documentary record incomplete, but a number of documents have plainly been tampered with (as the parties agree, although they dispute who was the culprit).

In my view, I must still assess all the evidence. I have to take account of the incompleteness of the documents and that there are documents which are not genuine. But I would not be justified in rejecting whole categories of documents without sufficiently granular consideration. Nor, obviously, can I uncritically start from the documents and subordinate the witness evidence to them without having in mind the shortcomings of the documents.

In doing this, I think it is important that I should bear in mind where the problems with the documents lie, and what effect they have. Some sources of documents are more reliable than others. Thus:

I will bear in mind this variation in quality in assessing the evidence, and will seek to cross-check the documents from one source against the others, as the parties did in their submissions.

Tampered documents include in particular (as the parties agree, or I find):

The picture on this changed right up until the very end of the trial, when the issue about the (draft) letters to the FCA of 26/27 November 2015 to which I refer below came to light.

I also bear in mind that the problems with disclosure from inside ELC or from David Clarkson have a differing impact on the remaining Respondents. There is of course a dispute about whether David Clarkson was “inside” ELC in the sense of being a de facto director, but he was on any view in close and regular contact with Lillie and Graham Milner, and for a period so was Paul Clarkson. So if there were incidents or documents which Lillie Milner omitted, David Clarkson would have a much better chance of realising it than would either Mr Flaton or Mr Arnison/Belmonte.

A particular issue that arises is with the text messages that passed between Lillie Milner and David Clarkson and which were provided by her to the Liquidators. As I have explained, this was done by her printing screen shots of messages which she chose. David Clarkson repeatedly questioned these when they were put to him, but his criticisms were vague and general, apart from a single point about the reference to Mr Arnison as “rich” in August 2014, which I reject below. If the texts were seriously incomplete or materially doctored then I think he would have been able to come up with much better examples. On the contrary, however, they fit well with the known chronology and with other documents and dates (for example, the preparation of the business plan in May 2014, the events of 12/13 August 2014, and the arrival of the FCA letter of complaint in March 2015). Their tone and content is also convincing and I find that they are genuine. A limitation is that they are not always in strictly chronological order of presentation and not every page bears a date, but it is very minor impact.

Another specific problem was that because Lillie Milner printed out the emails that she gave to the Applicants, it was difficult to be certain in some instances about which electronic document was attached to a specific email. The problem was compounded by the way in which attachments were shown in forwarded emails, and by Counsel for the Applicants accidentally putting questions on the wrong basis in this regard, which was understandable given the complications, but could have been avoided.

Overall, although I have to be careful about the reliability of disclosure from ELC via the Applicants on specific issues and incidents, most especially the FCA investigation and which version of the Brochure was being referred to at specific points, I do not have any real hesitation in relying on the documentary record (emails and texts in particular) to make overall findings about the general nature of how ELC worked, and of David Clarkson’s involvement in it.

The Applicants’ case is that the Brochure contained misrepresentations, made to investors, which were false and made fraudulently.

The Applicants made clear that their cause of action is not in fraudulent misrepresentation in itself since, they accept, those would be claims that would belong to the individual investors. Rather, they rely on the misrepresentations as part of the fraudulent and dishonest conduct of certain of the Respondents.

The Applicants’ case was pleaded by reference to a particular version of the Brochure which was the one that Mr Holloway received. It was entitled “Equitable Law Capital ELC Finance and Legal Redress”.

There were other versions of the Brochure over time.

In particular, the Applicants’ evidence also focused on what was referred to in Mr Biscoe’s statement as “the Mis-selling Brochure”, which bore the title “Legal Redress for Investment Mis-selling”. It contained many similar statements to those in the Brochure.

The Liquidators sent questionnaires to investors, and one of the objectives of that was to identify what materials they received. I am not convinced that the process was entirely rigorous, and the questionnaires were not provided by the Liquidators so there is something of a lack of transparency. Nonetheless, there is enough for me to conclude that most and probably all investors received the Brochure and that a significant number also received the Mis-selling Brochure.

There was unfortunate and to some extent probably avoidable confusion during the oral evidence about which version/draft was sent to whom and when. However, as I say below, David Clarkson’s involvement with ELC was such that I hold he saw all the material versions of and contents of the Brochure.

The misrepresentations relied on in the Points of Claim were:

"Unlike many other investment schemes your capital is fully protected with ELC." (at pages 2, 3,4, 5,7, 8, 10, 11 and 12 of the Brochure)

"To be involved with ELC [i.e. the Company] is a chance to participate in a scheme unlike any other. We offer a system that provides a healthy and secure return on your money whilst, at all times, protecting your initial capital through robust insurance cover and strong commercial agreements." (at page 3 of the Brochure)

ELC provides a system overseen by 3 leading UK FCA regulated Firms, a Chartered Accountant [i.e. White & Co], a UK Insurer [i.e. Gable] and a UK specialist insurance Broker [i.e. Belmonte] ... All of the Regulated Firms monitor the scheme for validity and security of funds." (at page 3 of the Brochure)

"Your money is used solely for the purpose of financing the generation and management of mis-selling claims." (at page 3 of the Brochure)

"ELC has been set up as a standalone company to deal solely with bond and investment mis-selling claims" (at page 3 of the Brochure)

"We currently employ the services of many senior managers who have a background within the banking sector who bring great inside knowledge as to how to deal with these claims against banks and similar institutions." (at page 4 of the Brochure)

"...we have arranged CAPITAL GUARANTEE INSURANCE underwritten by Gable Insurance; ... we will not go forward with any offering without it. Your capital, when you put it with us, is safe and we are one, if not the only company, of this type that can say this." (at page 4 of the Brochure)

"Their [i.e. the Company's] team of experts can draw on years of experience as they were employed by the high street banks especially to handle investment complaints within the large banks and the Financial Ombudsman Service." (at page 5 of the Brochure)

"Loans are repaid upon completion of each case with a fixed fee charge from successful conclusions of cases." (at page 6 of the Brochure)

"Cases must carry insurance underwriting." (at page 7 of the Brochure)

"There is a requirement that cases can be completed in under a year" (at page 7 of the

"ELC adopts a proven process-driven strategy when running and winning cases for the mis-selling of investment products. ELC provides key management experience..." (at page 7 of the Brochure)

"To date our average redress for clients is £16,000 and on average it takes approximately 8 months to complete a case." (at page 7 of the Brochure)

"HOW CAPITAL PROTECTION IS ACHIEVED

"At the time of launch of the ELC Legal Redress Scheme the expected loan amount used by ELC per case will be circa £1,500. Each case will pay the following costs which are fully covered the insurance underwriter

"The capital lent to ELC by the Lender is fully insured by Gable Insurance." (at page

"Please note that the use of the word 'protected' throughout this brochure refers only to the fact that 100% of the amount loaned is covered by insurance for non-return."

The allegations of falsity were pleaded in the Points of Claim as follows:

“Misrepresentations made to Investors

As is obvious, the representations are of differing levels of detail and significance. The more fundamental ones were as to the assurance investors could have about the safety of their capital, as to their money all being put towards funding save for some specified costs, and as to the claims being for bond mis-selling. Others, such as the specific companies involved and their roles, and ELC’s track record were points of detail intended to give general comfort (these were in general completely made up, for example in that ELC had no track record at all and the figure of average recovery of £16,000 was fiction).

David Clarkson was taken through the Brochure (and much of the Mis-Selling Brochure) in cross-examination. In substance he accepted all the allegations of falsity put to him (which did not include details of what proportion of the claims were PPI and when he knew about that); his defence was simply that he did not see the Brochure. I deal with that below, and reject it.

As I have said above, the relationship between individual investors and ELC was governed by the terms of the FRA.

Provisions of the FRA were pleaded in the Points of Claim at length. This was necessary to the Applicants’ case at that stage because one of the ways they sought to demonstrate insolvency of ELC was by showing that it was in breach of the FRA and liable to repay all the investors. Since it is accepted before me that ELC was insolvent because it had no capital and was making large payments out from the beginning while incurring liabilities to the investors, there is no need to make detailed findings about the FRA, or to set out its provisions at any length.

However, clause 2.2 remains important in relation to the point about the payment of Carter Rovali’s commission. Clause 2.2 provides:

“The proceeds of each advance shall be applied in or towards satisfaction of Borrower’s overheads in bringing a redress claim.”

The pleaded parts of the Contract of Insurance which are of relevance to this judgment are:

The former is relevant to demonstrate that the Contract of Insurance did not cover PPI claims. This is not in dispute and is also the clear effect of recital c. The latter is relevant to the Carter Rovali commission issue.

The Applicants also relied upon the “Right of Audit” as defined in Section 1: “The Insured and the CMC will allow the Administrator [which was Belmonte] to audit files on a random basis to ensure compliance with the terms herein.”

Mr Arnison and Mr Flaton referred in their oral evidence to recital b. which was as follows:

“The Insured intends to provide fixed charge loans and other bespoke financial funding (hereinafter the “Loans”) to the CMC in its sole discretion for the purpose as defined.”

Money from investors was tracked by Eiger/Belmonte by way of what Mr Arnison referred to as “the bordereau basis”. This meant that tranches of money from investors were linked to individual claims to be brought by the claims management company (and were also assigned week-by-week). Mr Arnison also explained that this was better for the insurer in administrative terms, and it did not need to issue individual policies to individual investors. It was the way that Belmonte had previously dealt with ATE insurance policies.

There was extensive reference to the bordereau approach in the evidence and some of the skeletons. I was not clear if it was relied on by the parties as to its actual or legal effect. I asked them in closing and they all said not; that the bordereaux were just a convenient administrative approach.

Perhaps surprisingly, Mr Arnison was not clear in his own mind about what protection the bordereau approach gave an investor whose interest was “noted on the policy” in accordance with it. I accept that he thought in some rather inchoate way that it might be useful if the insured (ELC) or the underwriter (Gable) was in financial difficulties or unwilling to claim, but no party submitted that that was the case in law.

ELC’s relationship with MS2U was to be governed by a written agreement of 25 September 2014 (“the MS2U Agreement”). This was not easy to understand and how it was operated in practice is obscure, other than that the Applicants have been able to identify payments made between ELC and MS2U, and to assess how much was paid to it per £1,500 investment (referred to above).

However, the details of the MS2U Agreement are not important to the issues that I have to determine, so I will say no more about them and do not need to quote them.

“Misapplications” is the expression used by the Applicants to describe all those payments made from ELC in connection with the Scheme which are alleged to have been wrongful.

They are as follows (taken from paragraph 34 of the Points of Claim):

I address the payments to Belmonte in connection with the claim against it for transactions at an undervalue. My considerations there would also apply to the payments to Carter Rovali and Eiger. They were payments which reflected the value that those companies’ efforts would have had to ELC had the Scheme not been conceived of and run in the fraudulent way that it was.

There is little evidence about the payments to Paul Clarkson (£26,877.09), but the evidence shows that he was actually doing significant administrative work. The duration of his appointment leads me to conclude that this payment was for work actually done.

Some of the money paid to Graham Milner was also for administrative work that he actually did, but the way in which the Scheme and ELC were run makes it impossible to tell how much, and none of the parties attempted that exercise. In the very roughest of terms, I think he probably did about as much actual administrative work as Paul Clarkson. The rest of the money paid to him was a way of enriching the Milners as part of the fraudulent running of ELC.

All the other payments were means for taking money out of ELC for the benefit of those running it, which includes David Clarkson.

ELC filed one set of accounts, for the year ended 31 March 2015. They were not filed until 12 February 2016 and were abbreviated accounts. They were approved by Graham Milner on behalf of the Board (although of course he was the only Director).

The accounts showed total net assets of £1,805 and creditors of £8,452. This was plainly a complete misrepresentation of the position of ELC, not least because it had already taken in £605,000 from investors by 31 March 2015.

The deficiency to creditors at various points in time were calculated by Mr Drewery and included in his witness statement. They rose from £1,081,579.51 at 22 July 2015 to £2,128,151.07 at March 2016. Mr Biscoe provided the up to date figure in November 2020 as £2,076,649.28. None of these figures was challenged.

The hoped-for success of the Scheme, and therefore of ELC, was dependent on a number of things. Key requirements were:

Various figures were put forward in the pleadings and contemporaneous documents to illustrate this. It is unnecessary to go into the details. One thing they showed was that a really quite high level of recovery for each claim was needed.

As to the first requirement there was no problem getting investors – Mr Flaton was successful on that front.

As to the second, insurance was of course put in place with Gable through Belmonte. I deal below with the alleged deficiencies of it, but to the extent there were any, they were not the reason why the Scheme and ELC failed.

As to the third and fourth requirements, the needed flow of claims was not there, and they were not profitable enough. It is not clear when this bit, but it undoubtedly did. It is, presumably, the reason why MS2U started using the money from ELC to fund the much less profitable PPI claims.

As to the fifth requirement, ELC never had any working capital to speak of. It used incoming investors’ funds to try to keep itself going and to pay other earlier investors their returns (to the limited extent that it did). In this sense, it was really a Ponzi scheme.

It was the problems with the third, fourth and fifth requirements that, in my view, led to the Scheme’s and ELC’s failure. The fifth was very seriously compounded by the large amounts being paid out to the Milners and David Clarkson (or the companies with which they were associated). And any attempt to keep things going with further investments coming in, even if it could otherwise have been possible, was derailed by the regulatory problems with the FCA.

It was a feature of the Applicants’ case that the Scheme was obviously “too good to be true” in promising yields of up to 8% with no risk to capital. There is a good deal of truth to this, but so far as it matters, it seems to me that if ELC had been properly capitalised and well managed, without the very large payments out, and if investors’ moneys had only been taken where there were appropriate mis-selling claims to allocate them to, then the Scheme could have enjoyed some success. The reason is that the mis-selling claims were inherently highly likely to succeed (because of the result of the regulatory action over the mis-selling by the financial institutions concerned) and some would be expected to have very good recovery. So I think the charge levelled at Mr Arnison, Belmonte and Mr Flaton that they must have realised that the Scheme was a fraud simply because it was too good to be true, does not hold water. Clearly, and sadly, the investors did not take any such view, either.

The parties provided a very detailed Agreed Chronology which I have used extensively in preparing this judgment. It is, however, too detailed to be of use as a narrative to help the reader of this judgment get an overall understanding, so I provide a higher level account of the main events. In some instances the dates are by reference to an approximate period, or I have given them slightly out of strict order in an attempt to group related events together for readability.

ELC was incorporated on 21 March 2014 with a Mr Clifford Connors as its only director.

Early in 2014 there were meetings and discussions involving, variously, Lillie Milner, David Clarkson, Mr Arnison and Gable at which the potential for the Scheme was discussed. It is a matter of dispute as to who had and proposed the idea first. I do not think it matters but the likeliest explanation is that it arose from discussions between Lillie Milner and Mr Battle of MS2U.

In a similar time frame, an early version of the Brochure was created and emailed between David Clarkson and Mr Flaton.

Continuing into May and June 2014, there were discussions about the Scheme documentation and potential payment levels (for example in relation to Mr Flaton’s companies’ commissions).

In July 2014, Mr Flaton asked for assurance that the Scheme was not a UCIS. Belmonte also said that it was going to instruct Counsel. In the same month, further Brochure versions circulated between David Clarkson and Mr Flaton.

On 21 July 2014 Belmonte instructed Mr Anderson QC to advise on the legality of the Scheme. He gave telephone advice on two occasions, there were further instructions to him, and he advised in writing on 19 August 2014.

Also during August 2014 Mr Flaton was provided with versions of a letter of advice concerning the UCIS issue from Belmonte to ELC and an edited version of Mr Anderson QC’s advice.

Meanwhile, on 30 July 2014 Belmonte provided ELC with draft documentation for the Scheme based on a previous somewhat similar scheme that Belmonte had participated in. This was described in an email of 4 August 2014 as being on a “non-liability” basis.

On 8 September 2014 the Contract of Insurance was made between ELC and Gable, and on the same day a Letter of Engagement was entered into between Belmonte and Gable.

On 10 September 2014 Mr Connors resigned as director of ELC and was replaced by Graham Milner.

ELC started to accept investments on or just before 11 September 2014. On this first occasion Mr Arnison made the commission payment from Belmonte to Carter Rovali.

In mid to late September 2014, various agreements are said to have been made between David Clarkson and Hectary. Their authenticity is disputed.

In mid-September Belmonte prepared two documents summarising Mr Anderson QC’s advice.

White & Co was formally engaged on 18 September 2014, and the MS2U Agreement was made on 25 September 2014.

ELC started to receive payments from White & Co on 2 October 2014.

Payments to David Clarkson purportedly relating to Hectary started on 9 October 2014.

On 25 February 2015 David Clarkson found out that the FCA was investigating ELC, and on 13 March 2015 the FCA gave formal notice of investigation, which David Clarkson sent to Mr Arnison on 17 March 2015.

On 21 April 2015 the FCA wrote to state that it considered that ELC was accepting deposits. Discussions between Mr Arnison and David Clarkson took place, leading to a reply from ELC to the FCA on 5 May 2015.

On 22 July 2015 Mr Berkeley QC advised that ELC probably was taking deposits and liable to enforcement action, but suggested how possible remedial action could be taken. He broadly agreed with Mr Anderson QC’s earlier advice about the UCIS issue.

In September 2015 ELC instructed Mr Berkeley QC to correspond with the FCA on its behalf. David Clarkson passed on the gist of the advice to Mr Arnison on 10 September 2015.

On 23 September 2015 the FCA stated that it was “firmly of the view” that ELC was taking deposits, and raised the UCIS issue again.

On 20 October 15, following discussions, Mr Berkeley QC on behalf of ELC gave a written undertaking not to accept any new payments pending resolution of the FCA’s complaint.

However, up to this time ELC did take payments, and did so thereafter as well

From no later than November 2015, MS2U was using funds from ELC to pay for new facilities and for funding PPI rather than bond claims.

In late November 2015 Mr Berkeley QC provided a draft letter for circulation to investors to the FCA. There is a major dispute about the correct date and the authenticity of documents relating to this.

The FCA responded on 16 December 2015 rejecting the draft letter, and ELC ceased to instruct Mr Berkeley QC from February 2016.

ELC instructed Mr Anderson QC again in March 2016 (the instructions being drafted by Mr Wesson of Belmonte) and on 14 March 2016 he advised that ELC was taking deposits and probably (based on a new Court of Appeal decision) also that the Scheme was a UCIS.

Belmonte provided no further cover under the Contract of Insurance after 17 March 2016 but carried on maintaining the existing cover.

On 12 October 2016 the FCA approved a circular letter to investors (as proposed by Mr Anderson QC), which was never sent, and Mr Anderson QC was no longer instructed after 18 October 2016.

On 26 October 2016 ELC instructed Begbies Traynor to convene a meeting of shareholders to place ELC into creditors’ voluntary liquidation.

Following a chaser from the FCA on 28 October 2016 ELC wrote to investors on 31 October 2016 to tell them about the FCA’s investigation.

On 11 November 2016 ELC entered creditors’ voluntary liquidation and the First and Second Applicants were appointed Joint Liquidators.

At about the same time, the Police investigated Sable for fraud, and it entered administration on 21 November 2016.

Investigations of ELC began in late 2016/early 2017 with a Director’s Questionnaire by, and interview of, Graham Milner. The investigations continued, including interviews of Lillie Milner, Mr Arnison and Mr Flaton.

The present application was issued on 30 January 2019.

The Milner Settlement Agreement was made on 11 September 2019.

The parties provided me with a very helpful Agreed Points of Law. I have reproduced large parts of it below. The following should be noted:

I have dealt with all the legal issues going to dishonesty, of which there are a number, next. I have dealt with the other legal issues where they arise. The main disputes of law are in relation to i) transactions at an undervalue and ii) the Milner Settlement Agreement issue.

The parties were essentially agreed as to the basic test for dishonesty. The Agreed Points of Law contained the following:

I do not consider it necessary to resolve the point at iv) above since it does not arise. David Clarkson was knowingly dishonest and Mr Flaton and Mr Arnison were neither knowingly dishonest, nor reckless, and nor did they turn a blind eye. In any event, recklessness was not adequately pleaded against the Respondents (only on a very narrow front in relation to the legal advice received against Mr Arnison; in the circumstances seeking to rely on it as evidence of dishonesty without pleading was not good enough), and blind eye knowledge was not pleaded other than in relation to Mr Flaton. I consider below whether Mr Flaton and/or Mr Arnison misunderstood the legal effect of the FRA or the

The Agreed Points of Law contained the following:

The Agreed Points of Law contained the following:

A subsidiary point of disagreement developed at trial, which was what significance the dishonest assistance (if shown) need have. In the end, I think the parties agreed that it is not a requirement that the assistance itself cause loss, but that it has to be more than minimal and must enable the breach by the trustee to be committed. This is what Lewin says at 43-032. The parties dug into the detail of a number of authorities in arguing this out, but I will not go into them here because I thought it was an illegitimate exercise in comparing facts and not directed to identifying principles. This subsidiary point is also not very important in the scheme of my decision since it only really came into play in relation to Mr Arnison and the abbreviated versions of the advice of Mr Anderson QC, and I have found that he was not dishonest in any event.

The Agreed Points of Law contained the following:

The Agreed Points of Law contained the following:

Counsel for Mr Arnison also relied on the well-known principle that the inherent probability or improbability of an event may be taken into account in this context, and that in the right situation the seriousness of an allegation may make it less probable. He accepted that the applicability and force of the principle depends on the facts and is not universal. I did not understand Counsel for the Applicants materially to disagree with this, and I have borne it in mind in the context where it arises, which is in relation to Mr Arnison’s honesty.

David Clarkson clearly has significant health issues, which he was also suffering from at the time of the events surrounding ELC. I was not provided with details and they were not explored in cross-examination, but nor would it have been necessary to intrude in that way.

It was not submitted for him that his health issues specifically affected his memory or cognition, and although he mentioned at times that his medication was taking its toll, and on one occasion that he had not taken it so as to make giving evidence easier, the overall impact was essentially that he tired more easily. I have taken account of this, and during his evidence breaks were taken, or evidence sessions concluded, to reflect his fatigue.

David Clarkson’s susceptibility to tire was exacerbated by the overrun in his cross-examination. The overrun was not due to time being wasted, but to the original estimates (and later, the updated estimates) being much too short, and taking too little account of the questions that the other Respondents would want to ask of him. I have taken account of this too, in assessing his evidence.

Overall, although giving evidence was clearly something of an ordeal for David Clarkson, I am satisfied that he understood what was going on and what he was being asked perfectly well. His recollection was more than adequate, and, as I go into in more detail below, I think he synthetically asserted a lack of memory when it suited him, on issues where he was in difficulty. In addition, I think it is significant that at the time of the events surrounding ELC he was having the same or similar health issues, but it did not stop him from organising and carrying out complex commercial arrangements and dealing with numerous other people in tight time frames, as with the FCA investigation and associated taking of advice.

In assessing David Clarkson’s evidence, I have two main questions to answer: (1) was he acting dishonestly in the light of what he knew and (2) was he acting as a de facto director of ELC? It is important that I bear in mind that these are not the same question and the answer to the one does not necessarily follow

I also must bear in mind that because David Clarkson is the only witness associated with the running of ELC who gave oral evidence, there is a risk of the perception that he must have been a de facto director; the absence of both Graham and Lillie Milner might give a misleading impression that David Clarkson was more central than he really was. I have taken this into account, although my ultimate conclusion is that he was indeed central, along with Lillie Milner.

A final general observation before I embark on the detail is that I must have carefully in mind the incompleteness of the documentary record. I have dealt with this above and have concluded that while it is a real issue, it did not disadvantage David Clarkson significantly in presenting his case.

David Clarkson’s case as put in closing written submissions on his behalf was “In a nutshell, [he] was a consultant to ELC, who provided it with a number of important introductions, including to Mr Flaton and Mr Arnison, and their respective companies. He was not a registered, de facto or shadow director of ELC”.

As, however, is apparent, he had far more frequent and detailed communication with ELC than would be consistent with merely being a consultant, and his remuneration of (probably) over £500,000 was out of all proportion to the introductions to Mr Flaton and Mr Arnison. Although clearly he did make those introductions, neither Mr Flaton nor Mr Arnison had anything of a unique or even especially unusual character to offer (internet marketing and ATE insurance brokerage respectively). His level of remuneration was much more consistent with his simply sharing with Lillie Milner what they were able to abstract from ELC, and I find that is what happened.

In addition to the above, I bear the following in mind in relation to David Clarkson’s credibility and reliability:

It is not entirely clear who came up with the idea of the Scheme, but on balance I think it is more likely than not that Lillie Milner conceived of it as a result of discussions with Mr Battle of MS2U, as David Clarkson asserted.

However, the fact that David Clarkson did not have the initial idea for the Scheme is of minimal if any relevance to whether he bears legal responsibility.

As I have said already, it is not in dispute that David Clarkson made these two introductions. The introductions were made before the dates of the Hectary Agreements (see below) and this led to an argument about whether the introductions could provide consideration under the Agreements. Counsel for David Clarkson argued that they could, because it was mutually expected that David Clarkson would be remunerated for the introductions. I would have accepted that, in the abstract, had the remuneration been in some way proportionate to the introductions, but it plainly was not.

Thereafter, David Clarkson maintained ELC’s relationships with Mr Flaton and Mr Arnison/Belmonte. He was in regular and close contact with each of them, both on points of detail and higher level strategic matters. I give examples below. This went far beyond being merely their introducer.

By contrast, David Clarkson had much less to do with MS2U and Mr Battle.

David Clarkson’s credibility and honesty were attacked in relation to specific documents. The main ones concerned advice about UCIS in the time frame when both Mr Anderson QC and Belmonte were providing advice.

Mr Anderson QC provided verbal advice to Belmonte prior to giving formal written advice.

Belmonte then gave a letter of advice to ELC on 12 August 2014 summarising the position. David Clarkson admitted receiving this.

In the text messages, there are two from David Clarkson to Lillie Milner which related to “tony” and the “opinion”.

The first, on 12 August 2014 says “Spoke to tony he wont move until re get written opiniog [sic]. I also need to amend that before is goes to him”.

The second, on 13 August 2014, says “I have amended letter from rich. Spoken to tony he has 8 people waiting for opinion. Letter will do.”

An amended letter was sent to Mr Flaton by David Clarkson under cover of an email of 19 August 2014. Among other things, it said that Mr Flaton would in due course be able to “show” (the quotation marks are in the original) Mr Anderson QC’s written opinion to his clients.

The amended letter was significantly altered to give the impression that the documentation intended to be used had been approved by Mr Anderson QC.

David Clarkson had no explanation for the alteration of the letter of advice. He denied altering it, but the inference that he did so is overwhelming, and I find that he did. I also find that the intention was to mislead Mr Flaton about the strength and scope of the advice. He did it because Mr Flaton was pressing for comfort about the advice and would not start taking money without it. The desire to start money coming in was an obvious incentive for David Clarkson to make the changes.

This is also an instructive incident in terms of the way in which I think that I need to approach the documents in this case:

It was in relation to these specific text messages that David Clarkson made his most specific criticism. He said that he only ever referred to Mr Arnison as

“Richard”, and indeed Mr Arnison said that he did not like to be called “Rich”. However, there was also evidence that Lillie Milner referred to him as “Rich”, to needle him. I think it is perfectly possible that David Clarkson was echoing this, and anyway the texts from him are littered with mistyping. This is a tiny crumb at best and in assessing the text messages is far outweighed by the consistency with known, reliable events, including those to which I have just referred.

Mr Anderson QC’s written advice was given on 19 August 2014. It was provided by Belmonte to ELC on 26 August 2014 in an email from Mr Arnison to David Clarkson and Lillie Milner.

Belmonte also sent a letter to ELC of the same date entitled “Bond Mis-Selling”

On 27 August 2014, David Clarkson emailed Mr Flaton. The email attached a document purporting to be Mr Anderson QC’s advice.

Mr Anderson QC’s advice was generally positive that there was no breach of s. 235 FSMA 2000, but was significantly caveated in relation to the documents he had seen being drafts, in relation to the advice being only for Belmonte, and in relation to his assuming that the facts “on the ground” matched what he had been told.

However, the version sent to Mr Flaton was rather crudely altered in relation to these caveats, with a significant change in tone.

It was put to David Clarkson that he had altered the advice; he denied this. In re-examination he said that he probably spoke to Lillie Milner in between getting the advice in and sending the altered version to Mr Flaton, the implication that Lillie Milner might have made the changes. That is totally improbable given the timing and the absence of any explanation as to how Lillie Milner might have substituted the one for the other without David Clarkson noticing. There is also no sign of the existence of any email to David Clarkson from anyone else providing him with the altered version (I bear in mind that this is an area where it is relevant that Lillie Milner might have provided incomplete documents).

It is obvious, and I find, that he altered the document with the intention of changing its tone and of concealing from Mr Flaton that it had been changed.

The above acts of alteration by David Clarkson were dishonest. They were covert, they involved falsifying documents and concealing the falsification.

Counsel for David Clarkson objected that this episode was not adequately pleaded. There is force in this contention, but it concerned a topic, the advice of Mr Anderson QC, which was always central, and nothing was specifically identified on behalf of David Clarkson that could have been done with greater or better notice. It was possible, for example, to look into the text messages to identify the very specific “rich” point. So overall I do not think the way in which the issue was raised caused any real prejudice.

There is a written agreement dated 1 September 2014 between ELC and David Clarkson, which purports to entitle David Clarkson to £250 per £1,500 received, by way of introduction fees. It also purports to provide for half of that amount (£125) to go to Lillie Milner or her nominated party.

However, although it was in contemplation that David Clarkson was responsible for introducing Mr Flaton and Mr Arnison, it was not expected that he would be introducing investors – the whole point of having Mr Flaton was to find them.

In addition, it is impossible to see how the payment to Lillie Milner could be justified. She was not going to make any such introductions. The effect of the payments, if made, would be to funnel money from ELC to Lillie Milner in a way that was not transparent and not justified.

There is no sign in David Clarkson’s bank accounts, obtained by the Applicants under a Bankers Trust Order of 8 March 2018, of any such payments to Lillie Milner ever taking place (with the possible exception of a relatively modest amount to Mediprotect, with which company she was involved), although David Clarkson said that they did in a witness statement of 27 October 2017 made pursuant to s.236 IA86 (which led to the Bankers Trust Order). In passing, I note that these were events which make clear that David Clarkson was conscious of intended payments to Savvy Sister and Mediprotect from ELC, and that those companies were Lillie Milner’s.

David Clarkson’s evidence on this agreement and the transactions under it was completely unreliable, and at the same time he could not provide any justification for why the payments would have been appropriate if they had been made.

The Applicants challenged the authenticity of this agreement. As I understood it, the grounds for the challenge were:

More broadly, the Applicants challenge the authenticity in the context of the general dishonesty they allege, and the issue over Lillie Milner’s involvement.

There are four Agreements between Hectary and ELC. The first was made on 15 September 2014 (with an addendum of 18 September 2015), and the second, third and fourth on 25 September 2014, which was the same date as the MS2U Agreement.

One of the Agreements of 25 September 2014, an “Agreement for the Referral of Claims”, was in ELC’s books and records.

The Applicants also challenged the authenticity of the Hectary Agreements, on very similar grounds as for the Client Source Terms of Business Agreement, (although as I say one of them was in ELC’s files).

David Clarkson accepts that although the agreements were with Hectary, ELC made payments to him personally. The explanation offered was that this was because ELC did not want to make payments directly to Hectary, whose only bank account was offshore. I found this not to be credible.

David Clarkson also said in his witness statement that payments directly to him made sense because Hectary owed him £386,000 from past commissions (there was no documentary evidence of this) and those could be offset against what he received from ELC. He said that Mr Jute, a Director of Hectary, would provide a witness statement confirming all this, but that was never done.

A further issue is that the Hectary agreements envisaged it getting £250 per £1,500 invested in the Scheme by way of introduction, and David Clarkson did receive payments of that order (although his payments are not entirely matched by Hectary invoices), but of course Hectary did not make any such introductions, as clients came from Mr Flaton’s efforts. It also would make no sense, and could not benefit ELC, for Hectary to receive £250 from each incoming £1,500 even if it did no work.

Mr Clarkson’s account of the rationale for, and operation of, all these five agreements was incredible and I reject it. He was making it up to cover up what he had done. His completely contradictory account of why 50% was to be paid to Lillie Milner (but was not) was particularly implausible.

Although it does not matter much, and despite that fact that I conclude David Clarkson dishonestly altered other documents, I do not think that it is shown that these agreements (and I include the Client Source Terms of Business Agreement) were concocted after the event. It is more likely that they were put in place at the time to provide some sort of cover. The fact that they were not in ELC’s records does not mean anything given their incompleteness and having been filtered through Lillie Milner, and if the agreements had been concocted recently I think a better job would probably have been done to make them consistent with David Clarkson’s defence.

The contemporaneous texts and emails, and the evidence of Mr Flaton and Mr Arnison paint a convincing picture of David Clarkson being in close and continual contact with the affairs of ELC, particularly but not exclusively in relation to the relationships with Carter Rovali on the marketing side, with Belmonte on the insurance side, and in relation to the FCA investigation. David Clarkson was also involved in discussions of individual payments into the Scheme.

For example:

David Clarkson was also involved in discussions and decisions about the appointments of Graham Milner as director and of Paul Clarkson as employee, and in relation to the remuneration each of them was to receive. For example:

David Clarkson was involved in discussions about the Brochure and other Scheme documentation:

I find on this basis, and consistently with his general oversight of the marketing and insurance aspects of the Scheme, that he was aware of the contents of all of the versions of the Brochure. This is not inconsistent with his statement, which may well be true, that the words were mainly written by Graham Milner. It is also not inconsistent with his having stated at some points that the expression

“capital guaranteed”, and similar other formulations, should not be used. He may have said that, but I find that to the extent he did, he did not follow through with it, and as I have mentioned above, he positively put forward similar expressions in emails with Mr Flaton.

I have dealt elsewhere in this judgment with the FCA investigation. David Clarkson was in extremely frequent contact by email and text with the Milners in relation to it. He was the person handling it, and he did do with personal control and input far beyond that which could reasonably result merely from having made the introductions to Mr Flaton and Mr Arnison.

It was in the context of the FCA investigation primarily that David Clarkson twice (in October and November 2015) made the suggestion that liquidation of ELC should be considered. Counsel for David Clarkson sought to gain some credit for David Clarkson in relation to these suggestions, and to say that although David Clarkson made the suggestion it was for the Milners, and particularly Graham Milner, actually to make the decision. I reject those submissions. David Clarkson was in the thick of the discussions, driving them as much as anyone else, if not more so. On the first occasion he said (email of 8 October 2015, my emphasis) “We could stop and liquidate.” It is true that in the second email string in November the tone of his advice is more arm’s-length, but still is in the context of being involved in the fine detail of relations with MS2U, the financial position of ELC and the types of claims available. In any event, even if viewed favourably to David Clarkson’s position on honesty/de facto director/wrongful trading it is a tiny shred compared to the many other weighty items against him.

In case it is not clear already, I emphasise that I find that David Clarkson knew the financial affairs of ELC very well, knew all the payments in and out that are relied on by the Applicants, knew that ELC had no working capital and, in short, that it was being run in the nature of a Ponzi scheme for the benefit of those in charge, in particular himself and Lillie Milner. He accepted that the Brochure contained many serious misrepresentations, and he knew of its contents at the time.

The Agreed Points of Law contained the following:

Points ii) and iii) were only relevant to make out liability against Belmonte (on the extra territorial point), Mr Arnison and Mr Flaton and do not come into play since I have found they were not dishonest.

Given my findings above, it is clear that the Scheme was dishonest and fraudulent from the outset, and David Clarkson was fully aware of the same. So he is liable under s.213.

The Agreed Points of Law contained the following very brief statement:

Since the trial, Falk J gave judgment in Re Keeping Kids Company [2021] EWHC 175 (Ch) which contains an extremely thorough analysis at paragraphs 153-167, from which I have worked, but which is too long to set out here. It is consistent with what the parties agreed, and picks up the cases they cited in their skeletons in supplementation of the Agreed Points of law, but is more full and more detailed.

A key part of the assessment, an “important starting point” is to identify the corporate governance structure.

Counsel for David Clarkson pointed to the fact that the books and records, including a minute book, were not comprehensively recovered. I have dealt with this above. If there are any minutes of board meetings, for example, I do not have them.

However, I do not think this is a point which really helps David Clarkson. There are two main reasons:

I feel confident in being able to find that the corporate governance structure of ELC from its earliest days was that:

In terms of actual decision making, consistently with my findings above, David Clarkson took a central role in deciding strategy, operating decisions, and financial decisions from the biggest down to the level of a few thousand pounds.

He also participated fully in setting the remuneration of more junior persons (Graham Milner and Paul Clarkson) and agreed with Lillie Milner what she would receive, as the text messages support.

David Clarkson’s case that he was a consultant and gave advice but was at arm’s length is obviously not true.

David Clarkson had no formal title with ELC, but then neither did Lillie Milner, who is agreed to have been a de facto director.

However, had ELC been a more formal company, David Clarkson would have filled a role probably called Co-CEO.

The evidence of emails to outside persons do not present David Clarkson as having a formal title, and the email account he used generally was not an ELC email account, but apart from that, the directions he was giving and the information he was providing were of a kind and at a level of the highest decision making (but also down to more minor and more detailed matters) and gave the appearance of being on behalf of ELC. I refer to my findings above about putting in place the Scheme documents, and also to how matters worked with Mr Flaton and Mr Arnison.

Mr Flaton in particular gave oral evidence that Lillie Milner and David Clarkson appeared to be of equal status in meetings, and that David Clarkson was his point of contact with managerial status. Counsel for David Clarkson submitted that this evidence was only about the early stages, but I reject this attempt to limit its impact. Mr Flaton was speaking generally, albeit that an example he touched on was an early meeting.

I turn to the points made in David Clarkson’s defence on this issue.

First, it is said that ELC was formed by Lillie Milner’s accountants and on her instructions. This is true but has no impact on how it was later run.

Second, it was pointed out that Mr Arnison described Lillie Milner as “the driving force” behind ELC in his interview with the Liquidators. But that is just a soundbite and may well be a comment on Lillie Milner’s powerful personality. It also relates to her undoubtedly greater role on the claims (MS2U) side of ELC. So I take it into account but it is extremely minor.

Third, there are documents showing that Lillie Milner did a lot of detailed work, including in response to queries from Mr Arnison. No one disputes that she was also a key player, but it does not downgrade David Clarkson’s role.

Fourth, there are documents referring to “Lillie’s proposal” and similar. These do not take matters further given the fact that she probably did initiate the idea of the Scheme.

Fifth, a document prepared for the Liquidators called “Brief Overview of Equitable Law Capital” on their appointment does not mention David Clarkson at all, and says that the Scheme emanated from MS2U and Mr Battle. This document, described as “very significant” in written closing submissions for David Clarkson, came from the Milners and is an attempt to cast the blame on MS2U. It is in no sense an honest or complete or thorough assessment. Just as it does not mention David Clarkson, nor does it mention the very large sums paid to Lillie Milner.

Sixth, it was submitted that there are documents showing that Lillie Milner was responsible for the Brochure and David Clarkson merely for finalising and printing it in June 2014. Quite apart from the fact that his being responsible for getting something done by a printer is inconsistent with his case that he was a high-level, arm’s-length introducer and consultant, I have identified evidence above that he was involved in the detail of the Scheme documentation.

Seventh, it was submitted that David Clarkson played only a minor part in relation to the FCA. This is contrary to all the evidence.

In summary, the points made by David Clarkson are of virtually no weight individually or collectively and barely engage with the case against him.

In reaching my conclusions, I do not need to rely and do not rely on the statement by Graham Milner in his Questionnaire to the effect that David Clarkson was a de facto director (although for numerous other reasons I agree that he was). I accept the submission of Counsel for David Clarkson that Graham Milner had reason to enlarge David Clarkson’s role so as relatively to diminish his wife’s. But the other evidence is overwhelming.

The Agreed Points of Law contained the following:

There was one point of dispute in relation to wrongful trading. The Respondents argued that, for a claim in wrongful trading to succeed, it must be shown that the loss complained of would not have been suffered had the respondent complied with his or her duties. For this proposition they rely on Lexi Holdings v Luqman [2008] 2 BCLC 715. In that case, a company in administration made claims against two non-executive directors for breach of duty. It was alleged that their total inactivity had caused the company to suffer loss as a result of misappropriations by the managing director and transactions infringing ss. 330 and 320 Companies Act 1985. The Court considered (at [28] et seq.) whether the breaches of duty had caused loss, so that the causation requirement was established.

The Applicants say that Lexi Holdings was not a claim under s. 214 IA 1986. Accordingly, they argue that it is not relevant and does not establish that there is a causation requirement of the kind alleged in relation to a wrongful trading claim.

I agree with the Applicants on this point. Their position is consistent with the language of s. 214(1) and with the decision in Ralls Builders, above, which requires a causative link between the continuation of trading and an increase in the deficiency to creditors.

In any event, on the facts as I find them below David Clarkson’s behaviour was a key causative factor in causing the losses ELC suffered and the increase in loss to the creditors. His behaviour was not the sole cause because others, including in particular Lillie Milner, also played a major part. I mention this because it means that this point would go nowhere for David Clarkson unless it were to be submitted on his behalf that s. 214 only bites where the failures of the director in question were the sole cause of loss. No authority was provided in support of such a proposition and in my view it would be obviously wrong.

I have noted that it is accepted that ELC was insolvent from the outset because it had no working capital to fund its activities but was making substantial payments out and incurring significant liabilities.

David Clarkson said that he thought ELC had working capital because Graham Milner had told him so. There is no documentary evidence of this and I reject David Clarkson’s evidence that it happened as deliberately untrue. I am sure that given David Clarkson’s extremely close involvement with payments in and out, he knew ELC’s financial situation; he knew that it was never solvent and was bound to go into insolvent liquidation (that would happen once there was

It does not matter whether he had “access” to ELC’s bank accounts and I accept that he probably was not a signatory on the bank accounts, but that in itself does not mean that he did not know the financial status of ELC.

During the time that ELC was trading but was, to David Clarkson’s knowledge, insolvent, its deficiency in relation to the creditors grew, for all the reasons given above, and was inherent to the fraudulent nature of the Scheme.

Thus David Clarkson is liable under s. 214 IA86 from the inception of the Scheme.

David Clarkson relies on s. 214(3) on the basis of the two occasions on which he mentioned the possibility of liquidation. However, s. 214(3) only applies if the director takes “every step” to minimise potential loss, and clearly David Clarkson did not do so as ELC continued to do business in the same way until Belmonte stopped providing any further insurance cover.

Since he was a de facto director, David Clarkson owed ELC statutory duties under the Companies Act 2006 (“CA06”) ss. 171-177.

The Agreed Points of Law contained the following:

I do not consider it necessary to determine the point of disagreement as to ii), since in my view David Clarkson gave no importance at all to the interests of creditors and the question of whether or not they should have been paramount is academic. Also, David Richards LJ in BTI indicated the point is a difficult one, and it is better that it should be considered and decided when it matters, and with full argument.

Given my findings about how the Scheme operated and David Clarkson’s role, it is clear that he acted in breach of his duties under those sections, in particular the duties to act for proper purposes, to act bona fide in the best interests of ELC as a whole, to take into account creditors’ interests, and to exercise reasonable care, skill and diligence. Save for the last, those are fiduciary duties.

S. 1157 does not arise given my finding that David Clarkson was dishonest.

On my findings thus far, in particular that he owed the fiduciary duties of a director and behaved dishonestly in the ways that I have described, David Clarkson became a constructive trustee of the moneys paid to him from ELC. I also refer to my analysis below of why on the facts the payments to him were transactions at an undervalue. His defence to this claim lay purely in the denial that he was a de facto director and was not dishonest; it raises no point of principle or law.

The relevant statutory provisions are ss. 238 and 241 IA86, with the latter identifying orders that may be made pursuant to the former (but expressly “without prejudice to the generality of [s.] 238(3) …”). The Agreed Points of Law contained the following (which I have edited slightly to remove reference to preferences, as they are no longer relevant):

Until closing submissions the Applicants were also seeking the repayment from Mr Flaton of the £599,500 that Carter Rovali received. This was dropped during closing submissions when the Applicants accepted that it was not possible to recover from Mr Flaton personally money which had been paid to Carter Rovali. No explanation was given for why this step was not taken earlier.

In addition, in closing written submissions the Applicants accepted that they could only recover from Belmonte the amounts that Belmonte itself actually received and kept, and could not recover those parts of the £347,000 that were paid to Gable (which was most of it). The Applicants later clarified that they did not exclude recovery of sums paid to Eiger.

The Points of Claim asserted that the relevant payments were made for “no consideration, alternatively for consideration which was worth significantly less, in money or money’s worth, than the payments”, and referred back to earlier paragraphs of the pleadings, which said that:

At the trial there was no dispute as to whether the requirements of s. 238 were met other than in relation to whether the payments were at an undervalue. In post-judgment written submissions it was submitted for Belmonte that the Contract of Insurance was made more than two years before the onset of insolvency (September 2014 v. November 2016). This point should have been pleaded, but in any event the substantive answer to it would have been (as Belmonte’s submissions effectively recognised) that the transactions were continuing ones with the payment of each £1,500, so the great majority was within the 2-year period.

Whether there is an undervalue is normally assessed by reference to valuations, although there can be cases where it is obvious that whatever the precise value, the incoming value is significantly less than the outgoing value: Ramlort Ltd. v. Reid [2004] EWCA Civ 800 at [103]-[105]. The value is prima facie what a reasonably informed purchaser would pay in arm’s length negotiations (Philips v. Brewin Dolphin Bell Lawrie Ltd. [2001] 1 WLR 143) and where there is a market in the assets of the type in question, the market value is the relevant figure: Re Brabon, Treharne v. Brabon [2001] BCLC 11.

The relative values have to be assessed from the point of view of the company: Re M.C. Bacon Ltd (No 2) 1990 BCLC 324 at 340. What is typically valued is the consideration from each side for which they bargain. The view is expressed in Goode on Principles of Corporate Insolvency Law, 5^th Ed. at 13-23 and 1326, by reference to cases including Claridge’s Trustee in Bankruptcy v. Claridge [2011] EWHC 2047 (Ch) and Agricultural Mortgage Corp Ltd v. Woodward [1995] 1 BCLC 1 that unbargained-for benefit and detriment are not to be taken into account. I agree with this and return to its relevance below.

In general the valuation must look to the time of the transaction, but where the value is uncertain or speculative, subsequent events may be looked at to test the accuracy of the valuation: Philips v. Brewin Dolphin.

The cases against David Clarkson and against Belmonte are very different.

In my view, the case against David Clarkson is straightforward given my findings on the facts of what he did. What he received in connection with the Hectary agreements was essentially £250 per claim, presented as an introduction fee for each case for finding the investors. But he did not provide any such introductions; Carter Rovali found the investors. Furthermore, while he did make the introductions to ELC of Mr Flaton and Belmonte, those were of very low value, for reasons I have given. On any view they were worth vastly less than the payments he received and the fact that no specific figure has been provided is not important.

So the Applicants’ claim against David Clarkson under this head succeeds. The benefit of the introductions he did make is, I find, so low in the context of the payments he received that the best way to most closely approximate ELC’s position had the transactions not taken place, as s. 238(3) requires, is to order him to repay all of them.

The claim against Belmonte is quite different and raises different issues. They fall under two broad headings:

Neither of these involved a valuation approach of the ordinary kind. Belmonte negotiated the premium at arm’s length with ELC and there is no evidence that the price arrived at was other than one which was appropriate if the insurance did what it appeared to.

As to the flaws alleged to affect the insurance, my understanding was that they fell away. It was true that the initial period of the insurance was only one year and that the renewal process was scrappy and unclear, but Counsel for the Applicants accepted that there was an extension. Similarly, the fact that ELC was the insured and not the investors meant that the policy would not pay out to the investors in the event of the insolvency of ELC, but from ELC’s point of view the insurance was what it was supposed to be.

In addition, the Applicants did not try to claim under the insurance: despite being asked by Mr Arnison to pursue a claim in the administration of Gable, the Applicants never did so. I was told in submissions that that was because they were unable to tally any claim managed by MS2U with an entry against the policy on the bordereaux, and the view was taken that the overriding fraud made a claim impractical, but there was no detailed evidence about this.

My clear understanding during and at the end of the oral closing submissions, and in the light of the written submissions which preceded them, was that the Applicants were abandoning the allegations that the insurance was flawed and proceeding only on the more fundamental basis of the Scheme being a fraud from the outset. I am sure that Belmonte and its Counsel thought the same. I mention this because in further written submissions after trial the Applicants sought to revive the points, including a fresh emphasis on the allegation that Belmonte had not audited properly (as to which, see further below). The audit point cannot in my view carry any weight because it is impossible to see how Belmonte’s right to audit the company could be a benefit to ELC.

I would not allow the Applicants to reopen and indeed expand the flaw points in this way, and it was not the intention of my directing further written submissions after trial to permit the surviving issues to be widened. But even if I did allow it, I find that the flaw points are fundamentally bad ones, and/or cannot support the claim under s. 238 in the absence of evidence as to their effect on the value of the insurance, which has not been provided.

That leaves the Applicants’ point that the whole Scheme (and therefore ELC’s whole business) was a fraud from the outset and that ELC received no benefit from the insurance because it was doomed.

This is a radical and, so far as I am aware, novel point. It asserts that a transaction may be a transaction at an undervalue within the meaning of s. 238 even if it took place at a freely negotiated market price, if events affecting the company but extraneous to the transaction (and of which the other party could have no knowledge) mean that the company was doomed. It would seem to have the effect that every transaction by a doomed company would be a transaction at an undervalue.

I asked for authority to support the Applicants’ approach. On behalf of the Applicants, attention was drawn in its written post-trial submissions to the Philips v. Brewin Dolphin and Re M.C. Bacon lines of cases about reference to subsequent events, speculative consideration, and the valuation having to be from the company’s perspective. I have dealt with those above. In my view none of them supports the Applicants’ more radical argument; they deal with conceptually quite different issues of how to ascribe value to a transaction in an uncertain situation, and the appropriate perspective.

In my view, the Court should look to the bargained-for benefits and detriments, within the scope of the transaction or series of transactions under consideration. I think that is established by the cases referred to in Goode to which I have referred above. There is no basis in s. 238 for looking to events extraneous to the transaction(s) in the way that the Applicants contend. The Applicants’ argument is effectively that a transaction is at an undervalue within the meaning of s. 238 even if at a genuine and appropriate price because the company then later fails to deploy the (appropriate) value it receives effectively, or at all. This is incompatible with the purpose of s. 238 which is to unwind transactions where the company does not receive appropriate value.

So the claim against Belmonte under s. 238 fails for this reason. That conclusion makes it unnecessary for me to consider what order would have been appropriate if there had been a transaction at an undervalue. It also makes it unnecessary for me to consider Belmonte’s assertion that it would have a defence under s. 238(5). I do not consider that that was really pleaded and furthermore it emerged that the argument was formulated on the basis that the good faith required was that of the other party to the transaction whereas it is in fact (as Counsel for Mr Arnison later accepted in post-judgment submissions) that of the company. In any event in case I am held on appeal to be wrong on my main conclusion, I think I have made full factual findings, including about the state of mind of the individuals concerned, to allow the Court of Appeal to determine these matters. This is not an indication one way or another about how I would rule on permission to appeal.

It was submitted for Mr Arnison that in assessing his honesty I should take account of the facts that:

I accept that in principle some of these might be relevant to assessing the inherent likelihood that Mr Arnison would act dishonestly, but apart from the last, to which I return, I have found them of only modest significance, and I have felt able to assess Mr Arnison’s conduct and honesty by direct consideration of what actually happened, without resort to these second order matters.

As to the individual points above, I do agree that Mr Arnison’s professional position in the insurance industry means that he would have had a lot to lose by behaving dishonestly, so i) and ii) have some significance. As to iii) the Ombudsman rejected the complaint because Dr Holloway was not a client of Belmonte, so it has no significance, and as to iv) I get no assistance from a conclusion arrived at by reasoning and on materials that I do not know. As to v), the modest amount in fact received is a bit misleading as Mr Arnison hoped and expected that much more would flow in. This does not make it a point against him, but it diminishes any significance in his favour.

I do find point vi) significant. If Mr Arnison had had some consciousness of doing wrong, and had been actively dishonest as alleged, then he could have been a lot less open, and would have had the incentive and probably the opportunity to avoid giving disclosure of documents against him. A central allegation against him is that he dishonestly prepared, or was involved in, the abbreviated version(s) of the Advice of Mr Anderson QC. But this really only came to light because Mr Arnison gave disclosure of relevant documents.

Mr Arnison gave his evidence in a trenchant and at times rather argumentative way (which led to some unduly long answers), but he was generally direct and open in what he said. His demeanour did not give me any reason to doubt the truth of what he was saying.

Mr Arnison made the point repeatedly and forcefully that Belmonte was only the insurance broker for the Scheme, and that his conduct therefore ought not to be assessed on the basis that he was central to it.

There is some force in this, but it must not be overdone. Belmonte’s limited role is indeed supported by the fact that it is now accepted that it was not involved in putting together the Brochure, but on the other hand:

It bears repeating that Mr Arnison is not alleged to have known of the wider Ponzi-style fraud, or of the excessive payments to the Milners and the Clarksons, or indeed that ELC lacked any working capital – there was evidence, which was not challenged, that he was told that it did.

In closing, Counsel for the Applicants arranged his submissions as to Mr Arnison’s alleged dishonesty under five headings:

Counsel for the Applicants barely pushed iv) in his closing submissions; he said that it was fourth for a reason (although he maintained that point v) was not to be denigrated on the same lines). I found it hard to follow, and I accept the submissions made on behalf of Mr Arnison that the purpose of the audit was to protect Gable against the possibility that ELC would recycle coverage when a claim succeeded and use the same premium for another claim. Investors were not told or given the impression that Belmonte would look after them by way of the audit provisions of the Contract of Insurance. It is true that Mr Arnison allowed Lillie Milner to present a small number of claims chosen by her in mid2015 (which were all bond mis-selling claims), rather than conducting a more searching check, but that is nowhere near dishonesty, and more broadly I accept his evidence that the frequency of audits (intended to be every two years) was in

So I also reject iv). I will deal with the others in the above order.

Point i) covers very similar ground to the parallel allegation against Mr Flaton, but must be considered from the different perspective of Mr Arnison, who is no longer alleged to have seen the Brochure.

The basic point was that clause 2.2 of the FRA and clause 2.1 of the Contract of Insurance meant that it was wrong, because a breach of the FRA, to pay Mr Flaton’s commissions from investor’s funds, and that the insurance would not cover ELC for Mr Flaton’s commission. In the light of this, it is said, Mr Arnison was dishonest. It is important to note that the Applicants have to show what Mr Arnison’s state of mind was, not just whether there was a breach of the FRA.

As I understand it, Mr Arnison’s responses were:

As to the FRA, I think “Borrower’s overheads in bringing a redress claim” in clause 2.2 does not cover Carter Rovali’s commission because those were not costs of bringing a claim but of getting investment. But I also think this is not very clear, and furthermore provided that the insurance obtained would cover ELC for commissions paid to Carter Rovali, and MS2U were given enough to run the claims, then I do not think the Applicants made out a case that a breach would be truly significant.

As to the terms of the Contract of Insurance, I prefer the view that clause 2.1 would allow ELC to recover commission to Carter Rovali in the event of an unsuccessful claim because of the reference to “loss realised by the Insured in connection with its Loan to the CMC in respect of a Claim” [emphasis added]. A point was also made by Mr Arnison (and Mr Flaton) about “bespoke financial funding” in recital b., but I did not understand that. As with clause 2.2. of the FRA, clause 2.1 is not clear.

Given Mr Arnison’s greater understanding and experience he could have been in a position to think things through in more detail than Mr Flaton. I note the Applicants’ point that in August 2014 Mr Arnison said that he was going to check through the documentation carefully (an email of 4 August 2014, in which I hold that the “I” in the last paragraph does refer to Mr Arnison), and that the supplemental instructions to Mr Anderson QC of 15 August 2014 referred to deductions being made from each £1,500 that did not include Carter Rovali’s commission, only to Eiger’s administration fee and the insurance premium.

However, I accept Mr Arnison’s evidence that he did not see anything wrong at the time; that he thought the limitations in clause 2.1 of the Contract of Insurance were there to cap Gable’s liability at £1,500 and to prevent it being liable for sums loaned to persons other than the claims management company; and that he thought ELC could validly claim £1,500 for a failed claim even if the amount loaned was diminished by Carter Rovali’s commission.

I also accept the general point that it would have been a very odd thing for Mr Arnison to go along with Carter Rovali’s commission coming from investors’ funds had he thought it was wrongful, since Gable was well aware of what was being done.

I also consider that if Mr Arnison had thought it was wrong for Carter Rovali to be paid in the way that it was, he would simply have required that its commission be paid from ELC. He had nothing to gain from the particular way in which it was done.

So for these reasons, I hold that Mr Arnison was not dishonest in this respect. Nor was he reckless. At a maximum, as with Mr Flaton, he was in possession of documents which on a more careful reading could have indicated that Carter Rovali’s commission should not have been paid in the way that it was. It is not that he did not care what was in those documents, or turn a blind eye, but, at worst, that he misunderstood them. In general, he was concerned that things should be done properly. Abbreviated Advice of Mr Anderson QC 322.I turn to point ii).

In mid-September, probably on 16 September, 2014 a document was prepared at

At the same time, Mr Arnison started work on a document called “Bond Mis

Mr Arnison emailed the Abbreviated Advice to David Clarkson and Lillie Milner on 17 September 2014. Also referred to in the email was a “Q&A”. The email said “Attached the edited QC advice for Tony. Can you please get him to with draw the copy he is sending to everyone.”

The Abbreviated Advice was not, however, sent to Mr Flaton, and nor was the Q&A; Mr Flaton said so in oral evidence and neither was included in his disclosure.

The circumstances surrounding the Abbreviated Advice and Bond Mis Selling document are very unclear. The episode only came to light following a passing and inaccurate reference in Mr Arnison’s first witness statement to Mr Richard Jones QC having advised, and which led to a correcting second witness statement from Mr Arnison. The witnesses all said that they could not recall to whom Mr Flaton had been showing the full opinion. Mr Wesson was certainly involved but Mr Arnison explained that Mr Wesson has had COVID and is having memory problems (and there is no witness statement from him).

I feel able to make the finding that it is more likely than not that Mr Wesson initially created the Abbreviated Advice; he had a relationship with Mr Jones QC and possibly had obtained some informal advice in relation to ELC from him. But plainly Mr Arnison was aware of its existence, and I also find that his creation of the Bond Mis Selling document probably had a similar objective, which was to provide a shorter summary of the advice received.

The Applicants submit that Mr Arnison acted dishonestly in this episode; the allegation is that he wanted to provide Mr Flaton with a document that would be given to investors in order to give them a misleading impression of the strength of legal advice supporting the Scheme.

This episode is close in time and, it might be said, somewhat similar in nature to the alteration of documents by David Clarkson which I have found took place and were dishonest. But there are important differences. In particular:

Mr Arnison was clearly particularly uncomfortable when he gave his evidence about this episode, but in large measure that may have been because of the messy way in which it came to light and his erroneous first statement. Overall, I do not conclude that he was dishonest. The Abbreviated Advice was a summary, but that was plain on its face. In addition to the two kinds of caveat that were removed as I have mentioned already, (draft documentation, assumed facts), the Applicants pointed to the fact that the full advice contained a statement that it was for Belmonte’s benefit. I do not think that he intended by these changes to give an actively misleading impression. I doubt if a reader’s understanding would have been materially changed by the inclusion of a statement that Counsel had made clear that his advice rested on the facts being as he was told.

In reaching this conclusion, I do not overlook the surrounding circumstance that it was desired that Mr Flaton should stop providing the full advice. This naturally leads one to ask what was thought to be wrong with it; what problem was it causing? The evidence does not provide an answer to this, but clearly it was not that the full advice had positively said that there was a significant problem; it did not say that. There are relatively benign possibilities – perhaps the second paragraph had sparked multiple requests about final documentation. This is speculation, of course, but the point is that it cannot be assumed that just because the full advice had caused issues, Mr Arnison formed a dishonest intention to misrepresent its contents.

The Bond Mis Selling document (not sent out) rather fortifies the impression that Mr Arnison’s intention was to provide the gist of the advice on the potential point of law about s. 235, on the basis of the way the Scheme was intended to run. It strips the matter down to that by quoting only the key part of the Advice, with just very brief introductory words making clear that it is an extract.

In any event, the Abbreviated Advice was, as I have said, not sent to Mr Flaton and had no effect on anything that happened later. The Bond Mis Selling document was not sent out by Belmonte.

This, point iii), has particular significance for Mr Flaton as well as Mr Arnison.

The Applicants’ case in this respect is that those Respondents provided dishonest assistance by continuing their activities in relation to the Scheme after ELC had given its undertaking to the FCA on 20 October 2015.

The undertaking was given on ELC’s behalf by David Berkeley QC and was as follows:

One of the things that Mr Flaton and Mr Arnison say in answer to this is that they understood at the time that it remained permissible for FCA to take on investments if the relevant investors were “in the pipeline” at the time. “Pipeline” has not been tightly defined but essentially meant, as I understood it, investors to whom the Scheme had already been marketed.

The development of this issue has been chaotic and unsatisfactory for a number of related reasons. While none of the parties is without blame, I think the most fundamental problems lie with the difficulties of getting to the bottom of the facts in the absence of Lillie Milner giving evidence, and with documentation which is unreliable. The Applicants bear the greatest responsibility for this.

The point that it was dishonest to go on taking business after the undertaking was at least pleaded, but only in the Amended Points of Reply at paragraph 20G(viiii). However, it was identified at best fleetingly in the Applicants’ opening written submissions at trial, and until well into the trial the emphasis in relation to the allegations of dishonesty against Mr Arnison were focused much more heavily on the allegation that he had been centrally involved in the drafting of the Brochures. As the trial went on, that allegation, which was where much of the work of Mr Arnison’s advisers had gone, was entirely dropped, as was the allegation about Belmonte’s appointment of Fox & Co under s. 39 FSMA, and aspects of the allegation that the insurance provided was inadequate.

Probably because the allegation was only made in Reply, there was no pleading in response by Mr Arnison/Belmonte.

However, Mr Biscoe’s witness statement dealt with it to some extent, for example in paragraphs 222 and 223, and at paragraph 193 he referred without comment to what is a key bone of contention, a letter from Mr Berkeley QC of 26 November 2015, to which I will refer below.

In addition, the pipeline issue came up with e.g. Lillie Milner in her interview with the Liquidators, and in David Clarkson’s witness statement.

As I have already said, none of the parties is without blame on this point, and it is only fair to say that the pipeline issue was not in itself or in terms raised in the witness statement of Mr Arnison for trial, or that of Mr Flaton. But the point was very specifically identified in the opening written submissions on behalf of Mr Arnison, by reference to an email in November 2016 from Lillie Milner, in which she said that Mr Berkeley QC had advised in October 2015 that pipeline investment was acceptable.

What then happened at trial was that David Clarkson referred to pipeline business in his cross-examination. Mr Flaton and Mr Arnison then referred to it in their oral evidence.

I can clear away immediately two points made on behalf of the Applicants, namely that the pipeline issue was concocted by Lillie Milner (or others) as a justification for breaching the undertaking only later (after March 2016), and that Mr Flaton and Mr Arnison only brought up the point in their oral evidence by way of being “contaminated” by what they heard David Clarkson say. The former is clearly wrong because there are definitely documents from before March 2016 which mention pipeline (I identify some below) and the latter is clearly wrong because the point was raised in the skeleton on behalf of Mr Arnison, as I have mentioned.

I also reject at the outset an attempt which was made by the Applicants in written submissions after the trial to say that it did not matter if Mr Flaton or Mr Arnison believed that pipeline business was acceptable, because it was dishonest to assist the Scheme given the fact of FCA investigation alone. It was too late to switch to this much broader allegation.

I will come shortly to some of the complexities of trying to work out what happened in this regard. However, I remind myself first of the importance of identifying the facts which are undisputed, or clearly correct. On this issue, I think the most important facts are that (i) Mr Arnison was keen to ensure that Counsel’s advice was taken, as had happened with Mr Anderson QC’s first advice, (ii) when Mr Anderson QC’s definitive advice (to whose obtaining Belmonte through Mr Wesson was a key mover) was given in March 2016, Belmonte stopped providing cover immediately, and (iii) communications with the FCA and the taking of advice from Mr Berkeley QC were primarily handled by ELC and Mr Arnison was very much at one remove.

In my view, these facts make it inherently improbable that Mr Arnison would have carried on post-undertaking if he had known that that was contrary to the advice of Counsel.

Similar points apply to Mr Flaton, who had also been concerned to know that there was appropriate advice.

The other basic point is that I am concerned both with what advice Mr Berkeley QC actually gave, and with what was passed on by ELC to Mr Flaton and Mr Arnison. They are related but they are not the same.

I turn to try to address the detail. I am dealing here with a situation where I know I have less than complete information, because this is plainly a point on which Lillie Milner’s evidence could be key, and I know that there are real issues over the reliability of the documentation (because of the issue over the 26 November 2015 letter, to which I come below).

I pick the chronology up on 10 September 2015, when David Clarkson updated

On 8 October 2015 Mr Berkeley QC emailed ELC to say that the FCA was seeking confirmation that ELC was not accepting further deposits, which was discussed (via email) by the Clarksons and the Milners. This is the point at which David Clarkson made a suggestion to liquidate. The terms of the discussion are not very clear and no consensus emerged.

On 9 October 2015, Graham Milner emailed Mr Berkeley QC to say that “I confirm we will cease marketing ELC ltd to new clients from close of play today, until this issue is resolved with the FCA as requested.” The reference to “marketing … to new clients” is of obvious importance to the pipeline issue.

There was then a meeting at Mr Berkeley QC’s Chambers on 20 October 2015, the same day that the undertaking was given. The undertaking itself is not on its face consistent with there being a “pipeline” exception.

Mr Arnison accepts that the undertaking letter was sent to him by email but said that he did not see it at the time. In the same paragraph of his witness statement (258) he referred to another letter of 26 November 2015 from David Berkeley QC to the FCA, which he also says he did not see at the time.

The 26 November 2015 letter contains the following statement: “As you are aware, my client is not currently taking any new business but is continuing to accept pipeline business notified before the agreed date … .”

On its face, this letter is of course very clear support for the pipeline exception having been discussed and adopted at the time. The letter is also mentioned (without specific comment on the pipeline issue) in the witness statement of Mr Biscoe as having been sent to the FCA, as I have said above.

As I will explain, great controversy now surrounds the authenticity of the letter of 26 November 2015, but it is clear that it was in existence at the time or very shortly after, because it was included as item 20 in the instructions for Mr Anderson QC prepared by Mr Wesson by 1 March 2016, and it has been confirmed by the Applicants that it got into their disclosure as a result of a request to Mr Anderson QC for documents.

The FCA responded on 16 December 2015. It is stated to be in response to a letter of 27 November, and right at the very end of the last day of trial Counsel for the Applicants produced for the first time another letter marked with that date (27 November), not previously in the bundles, but which was in David Clarkson’s disclosure, and which does not include the sentence I have quoted above from the 26 November version. The Respondents objected vehemently to its attempted introduction.

Moving on, there are later documents, but still in the time frame before the end of March 2016, which refer to pipeline. In particular, there are internal emails of 4, 5 and 26 February 2016 involving the Milners and the Clarksons, and an email from Mr Flaton to ELC of 21 March 2016 which attaches a “Pipeline Client List” and begins with the statement “Please find attached a list of outstanding clients we are aware made enquiries before the FCA sanctions. These represent the last of any pipeline business and I can confirm that we have not been marketing ELC to any new investors since September/October 2015”. It was forwarded to Graham Milner immediately on receipt and then by him to Lillie Milner in November 2016.

Returning to the letters of 26/27 November 2015, Counsel for the Applicants took the position in closing submissions that it was inconceivable that Mr Berkeley QC had given advice that there could legitimately be a pipeline exception to the undertaking, that no such advice had ever been given, and therefore it could not have been relayed to Mr Flaton or Mr Arnison. It was in response to that submission that Counsel for Mr Arnison quite understandably pointed to the 26 November version. I can understand why the Applicants then went to find the 27 November version, but the lateness of their doing so, in the last hour of a ten day trial, when the 26 November version was referred to in their own evidence, and when the pipeline issue had been raised in David Clarkson’s evidence, was just not good enough.

Obviously it is possible that the 26 November version is a concoction and was never sent to the FCA. Aside from its date being inconsistent with the reply, if it had been, one would have expected that the FCA would have commented in their reply about the pipeline exception, and the statement in the 26 November version that the FCA was already aware of it seems completely unsupported. Counsel for the Applicants submitted that it was unlikely that David Clarkson had concocted it (given that it was from his disclosure) and that the likely culprits were Lillie or Graham Milner.

My overall conclusion is that the absence of Lillie Milner and the extremely late confusion about critical documents, both of which resulted from the Applicants’ actions and inactions on an issue which only came to prominence as they dropped other parts of their case, are so seriously unfair on Mr Flaton and Mr Arnison that it would be wrong of me to draw any conclusion against them on the pipeline issue.

However, on reflection I conclude that anyway on the materials available to me, it is more likely than not that the Milners and/or David Clarkson gave Mr Flaton and Mr Arnison the impression that the situation with the FCA was not such as to prevent investments being taken in relation to pipeline business. The main reasons for my conclusion are the undisputed facts referred to at the beginning of this section, the various contemporary documents prior to the end of March 2016 referring to “pipeline”, and the 26 November 2015 version letter. As to the 26 November 2015 version letter, it may be, but if so, the reason for its concoction was probably to promote the false impression that there was a pipeline exception. On any view it shows that at the relevant period there was a document which entered the possession of Belmonte referring to a pipeline exception.

I have well in mind in reaching this particular conclusion that Mr Arnison did not refer to it explicitly in his witness statement at all. There are, however, possible explanations for this, including that he was dealing with the issue at the higher level that ELC was mainly dealing with the FCA and he was relying on them, or that he did not specifically remember it. Mr Flaton did not refer to it either, but he had no professional help with his witness statement and anyway the documents refer to him specifically in connection with pipeline.

Furthermore, in reaching this conclusion I have borne in mind the Applicants’ submission that it is inherently unlikely that Mr Berkeley QC advised that there could be a pipeline exception given the actual terms of the undertaking. I see the force in that, and my conclusion relies on what it is likely that the Milners and/or David Clarkson told Mr Flaton and Mr Arnison. Given all the other surrounding circumstances and what else those individuals were prepared to do, it is entirely plausible that they would tell Mr Flaton and Mr Arnison something for which there was no basis. A plausible motivation for them to do that would be to keep ELC going, and get in more money for themselves.

Before leaving this point, I record that I also found it troubling that it involved the Applicants making a positive argument on the last day of trial that Lillie Milner had probably meddled with the contents of a relevant document. Up until then they had merely accepted the possibility that the disclosure was incomplete, although there was one document (an email of 4 November 2015 produced by forwarding in an email from Lillie Milner to herself of 18 January 2017) which showed signs of a possible manual redaction, but not an alteration to the text, and on which the Respondents relied for the possibility of tampering but which the Applicants had downplayed. I have borne all this in mind when reaching the conclusions in this judgment.

I agree with Counsel for Mr Arnison that this is an area where the Applicants’ pleadings were deficient to an extent and in a manner that is unfair on Mr Arnison and prejudicial to him. It is true that contact with investors was mentioned, but there was a lack of detail and specificity, and what was pleaded was deficient in informing Mr Arnison what it would be alleged at trial that he had said that was dishonest, and in what respect.

The Applicants’ opening skeleton was no better, and although the witness statement of Dr Holloway had been provided, it was no substitute for an adequate pleading.

Mr Arnison’s witness statement engaged with the Applicants’ pleaded case at the level at which it was developed. He explained that he did not actively contact investors, but did receive inquiries from some of them, and developed a process for handling those inquiries. He provided the documentation, which emphasised that Belmonte was not providing advice, and other such matters. At this general level, it seemed to me that Mr Arnison behaved professionally, and the overall approach was not criticised in cross-examination.

Mr Arnison’s defence to the allegations made was also prepared in the context of a much more general case that he and Belmonte had been in the thick of the whole Scheme and had known, prepared and approved the contents of the Brochure, and provided insurance that was wholly worthless. That all changed, of course.

It was a very different approach for the Liquidators then to focus on the fine detail of Mr Arnison’s engagement with a very small number of investors, without a supporting pleading.

As I have explained above, the Liquidators sought information from investors via questionnaires. These were not intended to get detailed information about any contact the investors might have had with Mr Arnison and were not the basis for this aspect of the Applicants’ allegations at trial. Instead, the Applicants relied on the statement of Dr Holloway and his oral evidence, and disclosure documents about Mr Scott. Reference was also made to a letter to a Mr Pritchard, and there was brief cross-examination on it. If the Applicants wanted to develop a case that Mr Arnison’s communications with investors followed a dishonest pattern they could have sought evidence from more investors. I can understand why that might not have seemed like a proportionate way to proceed, but it would be unfair on Mr Arnison to treat the individual incidents that were before me as representative or typical.

In any case, those incidents were not very powerful:

I reject the incidents as being acts of dishonesty or evidence of a pattern of dishonesty.

The claim against Mr Flaton based on the payments to Carter Rovali having been transactions at an undervalue were dropped late in the trial, with the explanation that it was not considered possible to succeed against him personally when the payments were made to his companies. In any event although I do not have to rule on it, it seems highly likely to me that that claim would fail for reasons parallel to those I have given in relation to the similar claim against Belmonte.

All the other claims against Mr Flaton depend on allegations that he was dishonest and/or acted in knowledge of the dishonest nature of the Scheme generally. It is said that he was either actively and positively dishonest or had “blind eye” knowledge.

I have already said that Mr Flaton represented himself at trial. Allowance must be made for the stresses that that brought with it. It led to some of his answers being rather long and emotional, and at times he was argumentative, but this was not especially marked and he was in general clear and direct in what he said.

At the time of the key events, Mr Flaton was in his late twenties. He was not especially experienced in the business world.

Mr Flaton’s version of events is that his responsibility was just to market the Scheme; he was not FCA regulated, and he was not an IFA. He said he was concerned that the Scheme should be properly set up and he was keen for the involvement of companies that were regulated, in particular Belmonte. He accepted that he did review the Scheme documentation, but at a high level and not with a deep understanding of the detail.

Mr Flaton also sought to make clear that of the approximately £600,000 that his companies received, he did not himself get much. He had staff and expenses and sub-contracted much of the work. This was not challenged and I accept it.

It was particularly pressed on Mr Flaton in cross-examination that he coldcalled potential investors, and that the Scheme was targeted at the elderly and vulnerable. These points were not themselves directly relevant to legal requirements of the Applicants’ claims and were directed at his credit and general honesty. Mr Flaton denied them.

The other key points on which Mr Flaton was particularly challenged were:

I accept Mr Flaton’s version of events and find that while he was naïve, he was not dishonest.

The veracity of his evidence has to be tested with due regard for the fact, which I find to be true, that his computers were taken by the Police in connection with Sable and he does not have anything like complete documentation.

I also bear in mind that while rejecting the allegations against him in strong terms throughout, he was generally co-operative with the Applicants’ inquiries.

It is also important to bear in mind what Mr Flaton is not accused of. It is not alleged that he knew of the very large payments out to the Milners or the Clarksons, it is not alleged that he knew ELC had no working capital and was in the nature of a Ponzi scheme, and it is not alleged that he knew that MS2U was using investors’ money for non-bond claims or for its own inappropriate purposes.

First, I reject on the facts the allegations that there was cold calling or that the Scheme was targeted at the elderly. The basis for the assertion of cold calling was questionnaires provided by individual investors to the Applicants. A small number referred to cold calling but those people did not give evidence and so their hearsay evidence could not be tested. There is no contemporaneous documentation supporting the allegation. A plausible explanation for there being reports of cold calling is that potential investors filled in an online form requesting a call-back which followed some time later, and it is possible that for some of them they did not have in mind filling in the form when they received the call-back. As to targeting the elderly, there is evidence that the investors were on average into their 70s and in many cases much older but that may perfectly well be because that is the demographic of people with the sort of available money that the Scheme would be of interest to. There is no direct evidence of targeting in the documents. That is not to minimise the distress that the Scheme has caused to elderly investors, which has clearly been genuine, very severe and deeply sad. I accept Mr Flaton’s evidence that he feels very badly about the distress that has occurred.

Second, I accept Mr Flaton’s evidence that he positively wanted to ensure that the Scheme was compliant with the relevant legislation. There is documentary evidence that he would not start bringing in investors until he was satisfied that there was appropriate advice, and he wanted to know that a regulated company (Belmonte) was involved. But he was dependent on others for this; he did not have the qualifications or expertise to make detailed judgments, or to understand the specific legal effect of provisions of the FRA, for example. He only reviewed the Brochure and other Scheme documentation at a high level and in this light. This level of care was consistent with his essential function being marketing.

Third, while it is true that the £250 per claim came from investors’ funds and that this was arguably inconsistent with other Scheme documentation, I do not think that Mr Flaton ever focused on that as a significant distinction, let alone a problem. His attitude was that those involved in the Scheme (himself, Belmonte, ELC itself) all knew how he was being paid, and had it not been for the wider fraud, of which he was unaware, it would not have been a problem. He also took the reasonable view that it was obvious that the Scheme would incur marketing expenses that would be paid by way of a commission. Further, his understanding, somewhat rudimentary as it may have been, was that the whole £1,500 was insured.

Fourth, I accept that when he was told about the FCA investigation, he did not just ignore it, but he was given the impression that such regulatory problems as there were might be misconceived on the part of the FCA, and/or could be overcome by rearranging the operation of the Scheme. This is why he set up Sable. I accept his evidence that he has worked hard to deal with the subsequent collapse of Sable. As to the pipeline issue, I refer back to what I have said in connection with Mr Arnison; at best the Applicants have failed to prove their case and on balance it is probable that Mr Flaton genuinely thought it was permissible for ELC to go on processing this business.

There was a late attempt in the cross-examination of Mr Flaton to show that even if there was a pipeline exception, some of the investment taken postundertaking was from new investors. The whole interchange was a muddle and I do not think it proved anything.

On the regulatory issues, Mr Flaton was particularly challenged in relation to an email of 16 July 2014 to him from David Clarkson. He asked if investors (“Mr Jones” and “Mrs Smith”) might get different returns depending on whether their respective funded cases succeeded or not, and David Clarkson replied that ELC would use “their own” cases to ensure that investors funding losing cases received the same as investors funding winning cases.

I agree that read carefully by a lawyer in the cold light of day this would be a clear indication of a risk of pooling, but I accept that Mr Flaton did not see it that way and I doubt if he really even understood it. What he wanted to know was at a much more basic level of whether some investors would feel disappointed by their luck.

I also note that Mr Flaton’s witness statement was at least incomplete in saying that he was told of the FCA’s investigations in August 2015 by David Clarkson, since he knew something of it in March 2015. I do not consider that the error was malicious and it made no difference to the overall picture.

None of this was dishonest and Mr Flaton did not turn a blind eye. As to the latter, he did have the raw materials in terms of documentation from which, with a careful and more qualified eye problems could have been spotted, but he did not ignore the materials, or go ahead without caring what they contained.