Summary

A company director of a claims management service involved in selling various insurance products to claimants was disqualified under the Company Directors Disqualification Act 1986 s.8 following his misconduct and misrepresentation in selling the products and in the flotation of the company on the stock market.

Facts

The applicant secretary of state applied for an order disqualifying the respondent company director (S) from being a director. S was director of a business that had been created in response to the implementation of the policy to restrict the availability of legal aid. Providers of legal services were permitted to offer conditional fee arrangements containing a costs uplift. S exploited the market from 1996 by promoting a contingency fee scheme whereby for a 30 per cent share of the proceeds of a successful claim the company agreed to find a solicitor and to advance the claim and to indemnify the claimant for costs. Following the enactment of the Access to Justice Act 1999, but before s.29 of that Act which permitted recovery of the after the event premium from an unsuccessful defendant as part of the litigation costs came into force, S launched an after the event policy. The scheme was very successful and the company was floated on the stock exchange. However, two years later the company went into voluntary liquidation. S's integrity in constructing and selling an insurance product to members of the public, in floating the business on the stock market and in statements made to the market was called into question. His conduct was investigated under the Companies Act 1985 s.447 and the secretary of state brought several charges against him.

Held

(1) The secretary of state had established that S's conduct could be regarded as culpable in misstating to customers the likelihood of the recoverability of premiums paid prior to the implementation of the Act. S was seriously at fault in trying to establish a business by widespread misrepresentation of the nature of the risk which customers ran in purchasing the product. Despite receiving unequivocal advice that until the implementation of the 1999 Act insurance premiums would be payable out of damages recovered, and the manifest uncertainty in the statements of policymakers about the scope for any retrospectivity, S permitted policies to be sold on the basis that it would be an unlikely event. On the evidence it was clear that S knew that there was a very significant risk that the premiums paid by customers before the implementation of s.29 of the 1999 Act would not be recoverable from defendant insurers. Whilst the company was not in the business of giving advice but was in the business of selling a claims management service S was at fault in allowing the company to misrepresent the likely cost to the customer of entering into the contract. Customers were led to believe the service was probably free but before s.29 of the 1999 Act was implemented there was no legal obligation on anybody but the customer to pay the costs of the insurance. (2) S had misrepresented the failure rate of company products. He told underwriters that the failure rate was much lower than was actually the position. He asserted the untrue failure rate to enhance the profitability of the operation. (3) S had adopted an artificial device in order to sustain an income stream by causing the company's panel solicitors to pay an unlawful referral fee per case and then wrongfully encouraged panel solicitors to seek to recover that sum from the defendant on a costs assessment. (4) S had failed to disclose to investors the inherent risks to the business from incipient premium increases and the intended self-funding of loans and taking of personal benefits from the flotation. S had also failed to make true and proper disclosure of the fundamental insurance arrangements to the market after flotation. (5) S's conduct could also be regarded as culpable in purchasing a business from a co-director for a consideration that was not objectively justified. (6) Disqualification under the Company Directors Disqualification Act 1986 s.8 was discretionary but there was no doubt that the protection of the public and the need to deter other directors inclined to embark on similar conduct required a period of disqualification. Each instance of S's conduct had been undertaken either to acquire business or capital for the company or to confer a personal advantage on a director. Accordingly, S would be disqualified for a period to be ascertained following further submissions, Westmid Packing Services Ltd (No2), Re (1998) 2 All ER 124 CA (Civ Div) considered.

Application granted