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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> The Official Receiver v Watson & Anor [2008] EWHC 64 (Ch) (24 January 2008) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2008/64.html Cite as: [2008] EWHC 64 (Ch) |
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CHANCERY DIVISION
MANCHESTER DISTRICT REGISTRY
IN THE MATTER OF AG (MANCHESTER) LIMITED
(FORMERLY KNOWN AS THE ACCIDENT GROUP LTD
(IN LIQUIDATION)
AND IN THE MATTER OF THE COMPANY DIRECTORS
DISQUALIFICATION ACT 1986
Strand, London, WC2A 2LL |
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B e f o r e :
____________________
| THE OFFICIAL RECEIVER |
Claimant |
|
| - and - |
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| (1) MICHAEL WATSON (2) DEBORAH LANGFORD |
Defendants |
____________________
(instructed by Cobbetts LLP (Manchester)) for the Claimant
Mr Michael Booth Q.C and Mr Mark Harper (instructed by Pannone LLP )
for the First Defendant
Hearing dates: 8,9,10,11,12,15,16,17,18 October 2007
____________________
Crown Copyright ©
Mr Justice Patten :
Introduction
Mark Campion Langford ("Mr Langford")
Deborah Langford ("Mrs Langford")
Michael Watson ("Mr Watson")
Gary Andrew Hoddes ("Mr Gary Hoddes")
Andrew Christopher Hopper QC ("Mr Hopper")
Philip John Bird ("Mr Bird")
Jacqueline Brennan ("Mrs Brennan")
Philip Anthony Hoddes ("Mr Philip Hoddes")
Barry Nield ("Mr Nield")
Neil Robertson Ross ("Mr Ross")
The business of TAG
"Where in any proceedings a costs order is made in favour of any party who has taken out an insurance policy against the risk of incurring a liability in those proceedings, the costs payable to him may, subject in the case of court proceedings to rules of court, include costs in respect of the premium of the policy."
"
(1) where the insurance cover is not purchased in support of a conditional fee agreement with a success fee, how its cost compares with the likely cost of funding the case with a conditional fee agreement with a success fee and supporting insurance cover; (2) the level and extent of the cover provided; (3) the availability of any pre-existing insurance cover; (4) whether any part of the premium would be rebated in the event of early settlement; (5) the amount of commission payable to the receiving party or his legal representatives or other agents."
"6. TAG went into administration in May 2003, in circumstances that are not the concern of this court. While it was still operating, it was a claims management company, similar to Claims Direct, that sold 'one-stop' services to members of the public who had or thought they might have personal injury claims. The scheme was vigorously marketed by a sales force of some 75 people, for instance by means of direct approach to members of the public in shopping malls and similar places, and many thousands of persons were attracted to it.
7. The potential client filled in a simple application form, the purpose of which was first to establish the contractual relationship between the client and TAG, and second to enable TAG to decide whether to accept the case. The client undertook to enter into a 'legal expenses policy' which provided for: (i) a guarantee of a minimum sum of £500 damages after deduction of any obligation under the loan to be retained by the client if successful in his claim (this arrangement being known in this case as 'ring-fencing'); and (ii) if the claim was unsuccessful an indemnity against liability to pay the client's own disbursements and counsel's fees, the other side's legal costs, and any outstanding balance on the client's loan.
8. The loan referred to was arranged under an agreement to take out a bank loan that the client was required to enter into at the same time as signing the application form. The loan was available to him because of block arrangements negotiated by TAG with particular banks. If TAG decided not to proceed with the case, the loan was simply cancelled. If TAG proceeded with the case, its fee or premium was debited to the loan account, on the basis that the fee would either be recouped from any damages that the client was eventually awarded, or repaid under the TAG insurance if the claim failed. There were certain other transactions put through the loan account, to which I shall refer below. Although the loan account was in the client's name, and on its face not subject to any restriction, Mr Dutton confirmed that the client had no control at all over the handling of the account, which was managed by TAG in accordance with the provisions of the scheme.
9. Some application forms would be rejected on sight. The remainder were passed to an organisation called Accident Investigation Ltd (AIL) for investigation. AIL was a sister company of TAG, operating out of the same premises as TAG. It received a fixed fee of £310 plus VAT for every case referred to it. The legal status of this fee, and the role and status of AIL itself, are strongly in dispute in these proceedings. AIL then passed the papers to a 'vetting solicitor' who formed a view as to whether the claim had a more than 50% chance of success and whether the apparent value of the injuries was more than £1,500. If the claim thus qualified, he would then refer it to one of the solicitors on the TAG 'panel'. The solicitor had 48 hours to decide whether to take the case. If he accepted it, the client's insurance became operative, the solicitor issued him with a CFA, and the case thereafter proceeded as a normal piece of litigation. To obtain access to membership of the panel the solicitor had to enter into detailed, standard form, agreements, not only with TAG, but also with the funding banks and with AIL.
10. At each stage of the process, if either TAG or the solicitor decided not to accept the claim the bank loan and other arrangements were simply cancelled.
11.The charge made to clients by TAG, described as a 'premium', in the two years with which we are concerned was £840 (£800 plus insurance premium tax (IPT)) in 2000 and £997·50 (£950 plus IPT) in 2001. The ATE insurance that formed part of the TAG service was arranged by TAG with a number of Lloyds insurers in 2000, and in 2001 with Lloyds insurers and an organisation called NIG. Out of the sum charged to clients by TAG, in 2000 £320 was paid over to underwriters, leaving £480 with TAG. In 2001, £300 was paid to NIG and £650 remained with TAG. In respect of Lloyds in 2001 underwriters succeeded in negotiating to raise the insurers' share of the client's payment to TAG to £550."
"
"Premium" - £950 each case plus IPT of £47.50 each case less £621.50 each case underwriters contributions to costs.
The net premium will be adjusted to ensure that cumulative paid loss ratio does not exceed 80% per annual period subject to a maximum net premium of £550 per certificate issued for the relevant annual period. This will be achieved by rebating underwriters contributions to costs. Any such adjustment shall be calculated and closed on a monthly basis.
."
1. Prematurity: Was the ATE premium recoverable under s.29 AJA 1999 where the case was settled before any proceedings were issued?
i) The premium was held to be recoverable in such cases by HH Judge Edwards on 29 January 2001 in Callery v Gray. Norwich Union, the defendant's insurers appealed both on the issue of recoverability and on the question of what amount of the premium it was reasonable for the claimant to recover. Their appeal on the first issue was dismissed by the Court of Appeal on 17 July 2001 (see Callery v Gray [2001] 1 WLR 2112) but the Court of Appeal directed an inquiry before Master O'Hare before dealing with the issue of the reasonableness of the premiums charged for ATE cover.ii) Master O'Hare conducted a hearing on 6 July 2001 at which various interested parties (including Mr Langford of TAG) addressed him and he produced a report on 23 July 2001 suggesting certain guidelines that might be adopted in any determination of the reasonableness of an ATE premium;iii) On 31 July 2001 the Court of Appeal held that the entirety of an ATE premium could be recovered if reasonable in amount and that the court must have regard to such evidence as existed of the relationship between the premium and the risk and also the cost of alternative cover available. This would become easier over time once more data became available. En passant Lord Phillips MR described the £997.50 cost of cover on a block rating basis (put forward by Mr Langford to Master O'Hare) as hard to justify: see Callery v Gray (No. 2) [2001] 1WLR 2142;iv) On 27 June 2002 the House of Lords dismissed the insurers' appeals from both decisions of the Court of Appeal: see [2002] 1 WLR 2000 Lord Bingham said (at para 9) that the Court of Appeal "was not purporting to lay down rules applicable for all time but was giving provisional guidance to be reviewed in the light of increased knowledge and developing experience".2. Ringfencing: Was the additional cost of insuring against a deficiency in the damages below £500 in a successful claim a "risk of incurring a liability" within the meaning of s.29 AJA 1999? This issue was addressed by Chief Master Hurst on 19 July 2002 in Re Claims Direct Test Cases [2002] EWHC 9002 (at paras 212 214) and held to be recoverable.
3. Self-insurance: Was the cost of insuring against the loss of the amount of the ATE premium in the event of an unsuccessful claim recoverable by a successful claimant against a defendant as part of a premium within the meaning of s.29 AJA 1999? On 15 May 2003 in The Accident Group Test cases Tranche 2 Issues [2003] EWHC 9020 (Costs)(Chief Master Hurst) the claimants accepted that it might be necessary to make reductions from the premium to allow for the non- recoverability of this item.
4. Swing premium: Was this recoverable as part of the "premium" under s.29 AJA 1999?
i) On 30 July 2003 in The Accident Group Test Cases Tranche 2 Issues Part 2 [2003]EWHC 9004 (Costs) Chief Master Hurst allowed £525 including IPT for the 2001 Lloyds premium including the swing premium;ii) The element of swing premium was held to be recoverable under s.29 subject to it being reasonable in amount. This decision was partly based on evidence that the premiums charged by NIE (which provided cover in 2001 without a swing premium) were insufficient to enable that part of its business to be viable due to adverse claims.5. Allocation premium:
i) This is the amount of the TAG premium allocated to TAG after payment of the amount of the ATE premium plus IPT to the underwriters. Two issues arose: was it a premium within s.29 AJA 1999 and was it reasonable?ii) The question whether it was a premium was raised in The Accident Group Test Cases (Tranche 2 Issues) [2003] EWHC 9020. On 15 May 2003 Chief Master Hurst (at para 335) held that the entirety of the TAG premium (therefore including the allocation premium) was not to be regarded as a premium within the meaning of s.29 AJA 1999 but that of its component parts the allocation premium included a commission element (£80) of which £57 (25% of gross risk premium) was conceded to be recoverable as a reasonable acquisition commission: see para 288;6. The AIL fee:
i) This was claimed to be recoverable in costs as a disbursement by the claimant's solicitors. On 3 January 2003 in Claims Direct Trust Cases (Tranche 2 Issues) Chief Master Hurst held that the equivalent fee payable under the Claims Direct scheme was a referral fee.ii) On 15 May 2003 in The Accident Group Test Cases (Tranche 2 Issues) [2003] EWHC 9020 Chief Master Hurst held that the AIL fee itself of £310 was not a disbursement paid by the solicitor on the client's behalf nor expenditure authorised by the claimant. It was an unlawful referral fee by reason of rule 2(3) of the Solicitors Introduction and Referral Code 1990 and was therefore irrecoverable;iii) On 20 May 2004 the Court of Appeal dismissed an appeal by TAG against his decision: see Sharratt v London Central Bus Company (No 2) [2004] EWCA Civ 575; [2004] 3 AER 325;iv) The other issue relating to the AIL fee was whether that part of the ATE premium attributable to the AIL fee was as a consequence irrecoverable as a qualifying premium under s.29 AJA 1999. In Sharratt v London Central Bus Company (supra) the Court of Appeal confirmed that it was irrecoverable for that reason.7. Pre existing cover
i) On 5 July 2001 in Sarwar v Alam HHJ Halbert in the Chester County Court disallowed the cost of the ATE premium because there had been alternative cover available under a pre-existing BTE policy.ii) This decision was reversed on appeal by the Court of Appeal on 19 September 2001: see [2001] 1 WLR 1615.
Corporate management and dividend policy
i) Ring-fencing:
ii) Self-insurance:
iii) The reasonableness of any premium in particular having regard to the criteria set out in CPD para 11.10;
iv) The recoverability of the premium in cases where the case settled before any proceedings were issued; and
v) The recoverability of the AIL fee and other investigation fees as disbursements.
"A new financial reporting standard, FRS 18 Accounting Policies (effective for years ending on or after 22 June 2001), highlights that, where financial information is prepared under conditions of uncertainty, a degree of caution (ie prudence) needs to be applied in exercising judgement and making the necessary estimates.
This highlights the need for management to review continually the extent to which it accrues income because the Group does have a relatively short history from which to draw statistics and there is a risk, as the market matures, that conversion rates will decline. Management recognises this to be the case and accordingly is monitoring, on a monthly basis, the actual conversion ratios and considers the ongoing appropriateness of the rate used to calculate accrued income.
On the basis that management does continue to perform a perpetual review of the actual conversion rates, amends the rates applied to reflect the actual rates and performs post period end reviews of the actual revenue generated compared with the accrued income we consider the basis applied by the Group to be acceptable and in accordance with UK GAAP. This view has also been confirmed by Andersen in carrying out their audit of the 2000 accounts. "
" Langford believed that there remained a period in which the TAG core business should go from strength to strength (ie. while the Court of Appeal case drags on and before the insurance industry has forced HMG to change existing legislation and act against claims management companies). As a consequence, he was minded to continue as follows:
- Drive the core business as fast and far as possible, dividending out as appropriate
- Start making publicly conciliatory noises towards the insurance industry
- Investigate j-vs as a means of commencing TAG'
- Sell Motor Law
..."
The disputed dividends
| Date | Amount | Payee |
| £ | ||
| 31.07.00 | 30,000 | Mr & Mrs Langford |
| 31.08.00 | 30,000 | Mr & Mrs Langford |
| 30.09.00 | 30,000 | Mr & Mrs Langford |
| 30.10.00 | 30,000 | Mr & Mrs Langford |
| 01.12.00 | 30,000 | Mr & Mrs Langford |
| 08.01.01 | 200,000 | Mr & Mrs Langford |
| 06.02.01 | 30,000 | Mr & Mrs Langford |
| 06.02.01 | 30,000 | Mr & Mrs Langford |
| 15.06.01 | 300,000 | Mr & Mrs Langford |
| 13.07.01 | 149,000 | Mr & Mrs Langford |
| 19.07.01 | 1,700,000 | Insinger |
| 20.07.01 | 290,000 | Insinger |
| 20.07.01 | 11,000 | Insinger |
| 30.07.01 | 337,000 | Insinger |
| 21.08.01 | 280,000 | Leverington |
| 29.08.01 | 333,000 | Leverington |
| Total | 3,810,000 |
| Date | Amount | Payee |
| £ | ||
| 11.09.01 | 1,000,000 | Mr Mark Langford |
| 11.09.01 | 3,000,000 | Leverington |
| 21.09.01 | 280,000 | Leverington |
| 28.09.01 | 396,000 | Leverington |
| 01.10.01 | 330.000 | Leverington |
| 04.10.01 | (396,000) | Repayment |
| 23.10.01 | 2,225,000 | Leverington |
| 23.10.01 | 750,000 | Mrs Deborah Langford |
| Total | 7,610,000 |
"Any controlling shareholders plus connected family members (and former controlling shareholders) in the Company are excluded from benefit under the Trust and only non-shareholder directors and employees can benefit (see below). There is no element of disguised distribution to shareholders. Therefore, the contribution to the Trust can only be said to be made exclusively for the purposes of the Company's trade."
"The advantages and disadvantages of these types of schemes in general were discussed both on a tax planning and from the prospective of marketing any initial public offering. In substantive terms, ADD advised that DLA would be unable properly to assess the proposed scheme with a view to assessing its impact on TAG without seeing firm proposals. ADD suggested to Mr Langford that Baxendale Walker should be invited to set the scheme down in writing and Mr Langford could then approach independent tax counsel for a view on the robustness of the tax planning."
"I am anxious to resolve the Directors jam. Can you let me have the table that shows how many cases we have accrued in prior months and how many we have actually been paid on. Have we yet formed a view on what is collectable prior to August. We also need to consider this in conjunction with the Baxendale Walker scheme and also in terms of the structure in salaries/bonuses going forward."
"Dividend Policy Can you arrange for £2.25 million to be transferred to Insingers and £0.75 million to Coutts. This will bring us up to date up to the end of October. For the period November 2001 to August 2002 £375,000 needs to be transferred and £125,000 respectively into Insingers and Coutts on the first working day of each starting 1 November 2001."
Legality of the dividends
" .
(1) A company shall not make a distribution except out of profits available for the purpose.
3) For purposes of this Part, a company's profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.
This is subject to the provision made by sections 265 and 266 for investment and other companies.
."
"
The dividend payments were made by reference to prior year audited accounts and management accounts available at the time.
11 Prior year adjustment
Income recognition
The directors have revised the accounting policy for income recognition in light of the requirement to adopt the most appropriate accounting policies under FRS18 'Accounting Policies' and the Accounting Standard Board's Discussion Paper on Revenue Recognition and have decided upon a more appropriate policy. This revision is to be treated as a prior year adjustment in accordance with FRS 3, 'Reporting financial performance'.
.."
The profits after tax for that year were £12.096m which after deducting the interim dividend left a retained profit of £4.486m. After taking into account an accumulated loss on the profit and loss account from the previous year, this created a deficit on reserves of £264,000.
"The directors have reviewed the accounting policy for income recognition in light of the Accounting Standard Board's Discussion Paper on Revenue Recognition and have decided upon a more appropriate policy. This is to be treated as a prior year adjustment in accordance with FRS 3, 'Reporting financial performance'"