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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Secretary of State for Trade & Industry v Amiss & Ors [2003] EWHC 532 (Ch) (20 March 2003) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2003/532.html Cite as: [2003] EWHC 532 (Ch), [2003] 2 BCLC 206

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
In the matter of J A Chapman & Co. Ltd.
Between :

		Royal Courts of Justice Strand, London, WC2A 2LL
		20 March 2003

Mr Justice Peter Smith:

INTRODUCTION

1. This is an application by the Secretary of State for Trade and Industry seeking a Disqualification Order against the Second Defendant Mr Jonathan Chapman ("Mr Chapman"). The case against the First Defendant Mr Amiss was discontinued in December 2001. In December 2002 the Third Defendant Mr Ingles offered a satisfactory disqualification undertaking under section 1A Company Directors Disqualification Act 1986 ("CDDA 86") for a period of five years. In the circumstances the proceedings against him were discontinued on the first day of the trial.
2. The application is made under section 8 CDDA 86 following a report from inspectors following an investigation under section 447 of the Companies Act 1985. In the case of an application under section 8 CDDA 86 the Court has a discretionary power of disqualification against a person where it is satisfied that his conduct in relation to the company makes him unfit to be concerned in the management of a company.
3. This contrasts with the applications that are normally made under section 6 CDDA 86, where the Court is under an obligation to make a disqualification order against a person where such unfitness is satisfied.
4. There are a number of differences between the two sections. First, as I have said under the power of disqualification under section 8 the Court retains a discretionary power not to disqualify even if the Defendant's conduct is unfit. That must be read in the light of the observations of Lloyd J in re Atlantic Computers Plc [unreported 15 June 1998] where he observed that it would be unusual for the Court to use its discretion in this way. Second, under section 8 there is no minimum period of disqualification whereas under section 6 there is a minimum of 2 years. Third there is no limitation period for proceedings under section 8. Fourth, there is no requirement for the company to become insolvent for an application under section 8. Fifth, the application under section 8 must be made by the Secretary of State. The Official Receiver cannot apply and finally, the County Court has no jurisdiction under section 8.
5. Nevertheless, there are a number of similarities. I have already observed the test is the same as to unfitness. Second, it is established that the disqualification periods (if any) set out under section 6 in re Sevenoaks Stationers (Retail) Limited [1991] Ch 164 are to be applied to the period of disqualification under section 8 see re Samuel Sherman Plc [1991] 1 WLR 1070.
6. At the same time as the present proceedings there was to be a linked disqualification case [No. 929 of 2001] in the matter of Dobinson Gregory & Company Limited, but that has not taken place because all of the Defendants there have offered satisfactory disqualification undertakings.
7. The connection between the present case and the Dobinson Gregory case was that they both concerned Lloyd's Brokerage businesses.
8. Applying the principles set out in re Sevenoaks Stationers (Retail) Limited the requirement is for the Court to be satisfied that the person in question's conduct in relation to the management of the company makes him unfit to be concerned in the management of companies. These are ordinary words and it is essentially a question of fact in each case to decide whether or not the person's conduct has made him unfit to that extent.
9. The purpose of the CDDA jurisdiction is to improve the standard of company directors see re Swift 736 Limited [1993] BCLC 796, re Blackspur Group Plc [1998] 1 WLR 422. In addition the disqualification procedure has a prohibitory purpose as well as the exemplary purpose set out above, see the observations of Lord Woolf MR in the Blackspur case at page 426 F.

THE CHARGES

10. Three charges are made against Mr Chapman set out in sub-paragraphs (a), (b) and (c) of paragraph 3 of the Affidavit of Mr Robertshaw sworn on 25 January 2001 on behalf of the Secretary of State. Those charges are as follows:-

(a) Mr Chapman caused J A Chapman & Company Limited ("Chapco") to operate the practice of grossing up (about which I shall say more in this Judgment) the operation of which practice was:-

(i) Fraudulent and dishonest;

(ii) Contrary to Mr Chapman's fiduciary duties to Chapco to act honestly and in Chapco's best interests;

(iii) Contrary to [Mr Chapman's] fiduciary duties to Chapco's assureds to act with utmost good faith and integrity, and in their best interests and not to make secret profits;

(iv) Contrary to paragraph 1(e) of (Lloyd's) Misconduct, Penalties and Sanctions Bylaw (number 5 of 1983) in that it involved the conduct of insurance business in a discreditable manner and with a lack of good faith.

(b) [Mr Chapman] compounded and aggravated the misconduct involved in the practice of grossing up by causing the secret profits therefrom and the profits from a transaction involving International Catering Enterprises (amounting to more than US$1 Million) being transferred to third parties, namely to Chapman (OEC) Limited in which [he] had an interest and to three Liberian companies. Such transfer of profits was:-

(i) Dishonest and misfeasant;

(ii) Contrary to [Mr Chapman's] fiduciary duty to Chapco:-

(a) To act honestly;

(b) To act in Chapco's best interests;

(c) not to make and retain secret profits.

(iii) Contrary to the provisions of rule 6(3) of the schedule to the Insurance Brokers Registration Council (Accounts and Business Requirements) Rules Approval Order 1979.

(c) [Mr Chapman] failed to put in place and/or operate adequate or sufficient corporate governance controls or accounting procedures and thereby enabled the misconduct specified in [Charges] (a) and (b) to take place.

11. The last Charge is a necessary inevitable corollary of (a) and (b). Mr Chapman was variously the Managing Director, Chairman and Chief Executive of Chapco. In addition the shares in Chapco were ten thousand ordinary shares of £1.00 each divided into two thousand ordinary "A" shares and eight thousand ordinary "B" shares. Since 1998 the entire share capital had been held by Chapman LMH Limited ("LMH") apart from one ordinary "B" share, which LMH held jointly with Mr Chapman. The shareholding in LMH was split but Mr Chapman with Mr Amiss each held something in the order of 33% of the shares being the largest shareholding in LMH.

HISTORY OF CHAPCO

12. Chapco was incorporated as an insurance broker in 1988. Initially, it traded outside Lloyd's but had become registered under section 2 of the Insurance Brokers (Registration) Act 1977. It expanded and then in early 1991 it with Mr Chapman as its Chief Executive and largest paid Director embarked on a procedure to become a Lloyd's Broker, and it became a member on 6 September 1991. Part of the obligations of a registered Lloyd's Broker involve the execution of a broker's trust deed which Chapco executed on 3 September 1991 and the following day Lloyd's took a floating charge over Chapco's Insurance Brokerage Account ("IBA") which must always be solvent (whether registered at Lloyd's or not) in accordance with section 11 of the IB(R) Act 1977.
13. Shortly before it became a registered Lloyd's broker Chapco moved from its existing offices of International House, 1 St. Katherine's Way, London to new premises at Beaufort House, 15 St Botolph Street, London. This accommodation was offered to Chapco by Beaufort House Developments Limited ("Beaufort") a subsidiary of the Mountleigh Group Plc ("Mountleigh"). Chapco was offered the accommodation at Beaufort House on terms which would enable it to assign its expensive and long leases of International House to Mountleigh and to receive an incentive premium of £1.9 Million from Beaufort as cash for moving. In the new premises Chapco had to pay an annual rent of £520,000.00 plus service charges, whereas the rent at the previous premises was £84,000.00 per annum.
14. This substantial premium was utilised in various ways including the payment of a rent deposit (£750,000.00) and the declaration of a dividend (£940,000.00). Chapco paid that dividend to LMH, which then passed it back to Chapco as a long term subordinated loan. In addition at the same time Chapco took a loan of US$100,000.00 from OEC. Those two loans allowed Chapco to fulfil the capitalisation condition with Lloyd's, which Lloyd's imposes. Lloyd's and LMH agreed that no call for payment of the loan of £940,000.00 could be made without Lloyd's prior consent. As I shall set out in this Judgment, the OEC money was derived from premium monies received by Chapco and diverted to it as part of the grossing up procedures.
15. Simultaneously, a Mr Brian Wakeham, who was described by Mr Chapman in his statements to Mr Grant who swore the substantive affidavit on behalf of the Secretary of State on 18 January 2001 as being a well known and respected member of Lloyd's was appointed as its Chairman.
16. Chapco encountered difficulties initially in April 1992 when Beaufort and Mountleigh went into administrative receivership. Mountleigh had fallen into arrears of rent. This also deprived Chapco of some £100,000.00, which Beaufort agreed to pay towards further office refurbishment. It also meant that the leases, which Chapco had assigned of International House to Mountleigh reverted to it. As a result of this financial collapse Chapco ultimately had to pay Taylor Woodrow the superior landlord at International House £500,000.00 for arrears of rent.
17. The trading history subsequent to these events does not have any significance to the issues before me. By around late May and early June 1995 the directors of LMH concluded that Chapco could no longer sustain itself and sought professional advice. As a result they decided that Chapco should find a partner and strike a deal to protect clients and underwriters to allow for an orderly run off of the business to them. In August 1995 an oral agreement achieving those aims was reached with Nelson Hurst Marine Limited ("NHML") and it agreed to administer the run off.
18. On 11 August 1995 Lloyd's crystallised its floating charge over Chapco's IBA and on 16 August 1995 Chapco went into creditors voluntary liquidation.
19. A meeting of creditors was held on 29 August 1995 and a Mr Wansted and a Mr Thomas of Kidson Impey were appointed joint liquidators. The statement of affairs sworn by Mr Chapman at that date showed a deficiency of £791,927.00 as regards creditors after an anticipated surplus of £469,171 of IBA debtors.
20. On 29 May 1996 Lloyd's appointed a Mr Evans as administrative receiver under its debenture. His report to clients and underwriters by 31 August 2000 showed modified figures of a shortfall of US$5.8 Million which converted to Sterling resulted in an overall deficiency for creditors of £4,313,898.00.
21. Neither set of Insolvency Practitioners made any report suggesting Mr Chapman was unfit to be involved in the management of a Company.

PROCEDURE AT LLOYD'S AND GROSSING UP

22. The complaint is about a practice known as "Grossing Up" in respect of premiums negotiated with underwriters at Lloyd's. The procedure of obtaining insurance is set out in some detail in Mr Grant's affidavit (section 3). The matter complained of involves the procedure whereby an insurance premium is negotiated. I should say Mr Chapman's expertise was that of international marine insurance, in which he had been involved for 12 years. He had recognised a niche for a small independent brokerage in the market and set up Chapco as a marine insurance broker ultimately at Lloyd's.
23. The procedure involves a broker approaching an underwriter for a particular type of insurance. The broker prepares the relevant documents and will then negotiate with the underwriter a "Slip". This document sets out key terms of the contract. The broker and underwriter will agree the period of insurance, the type of risk insured, the premium and the broker's commission. The underwriter further agrees to accept on behalf of his syndicate either the whole or a percentage of the risk. If the underwriter only accepts a percentage the Broker then takes the endorsed Slip to other underwriters until he has the risk fully covered. The largest underwriter in percentage terms is the lead underwriter.
24. A broker placing a risk at Lloyd's ("the placing broker") may have obtained the business from another broker ("the producing broker"). Business in marine insurance often comes from "P&I" Clubs that is Protection and Indemnity Clubs which are mutual associations of ship owning companies formed to obtain insurance cover. The ultimate client being the person whose risk is being insured and who will be the principal in the insurance contract is known as the Assured. When the risk is placed before the policy has been issued at the policy signing office the placing broker prepares a document called a Cover Note, which shows the assured and the various agents the main terms of the cover. The underwriter agrees the level of commission payable to the broker. It is noted on the Slip as "deductions". The deductions clause may state "or N/E" a reference to a "net equivalent" provision. The figure for commission payable to the broker known as "brokerage" is generally expressed as a percentage of the premium paid by the Assured and provides the broker with his income. The underwriter receives a sum, which is the amount of the premium less the brokerage.
25. A significant fact in the procedure is that the Underwriter does not see the Cover Note and the Assured does not see the Slip. The two documents in theory quote the same figure for premium. However, structuring the documents in this way does allow a broker to increase the premium on the cover note a practice known as "grossing up" or sometimes called "net equivalenting". In a transaction involving grossing up the underwriter receives the anticipated (and lower) premium agreed on the Slip less the amount of brokerage. The premium quoted to the Assured and appearing on the cover note is larger and is the liability of the Assured. The result is that the Broker may then retain the difference between the two sums for his own use apparently without the knowledge of the Underwriter or the Assured.
26. This practice has clearly been regarded by Lloyd's always as being unacceptable. On 23 April 1974 a general circular issued by the Chairman of Lloyd's indicated that where Slips had been written showing premium less brokerage or "same net equivalent" the Lloyd's Policy Signing Office is not to process such Slips or take down premiums unless all underwriters have initialled the gross premium (or rate) payable by the assured as finally determined and any deductions therefrom.
27. In the Code of Practice for Lloyd's Brokers dated 6 July 1988 in particular the introduction in paragraph 3 required three fundamental principles to be observed by brokers, two of which are related. First, they were obligated at all time to conduct their business with the utmost good faith and integrity (item A). Second they were obligated to do everything possible to satisfy the insurance requirements of their clients and place the interests of their clients before all other considerations (item B).
28. In a market bulletin issued on 1 May 1995 (after the events complained of in this action) the Council of Lloyd's stated that they viewed the practice of inflating ("grossing up") premiums quoted by underwriters without the informed consent of the insured as wholly unacceptable. On 6 September 1996 a further regulatory bulletin referred back to this bulletin of 1 May 1995 and the attached statement to that was intended to build on existing best practice. The duties of Lloyd's Brokers in the attached document made it quite clear that grossing up was unacceptable without the informed consent of the proposed policy holder.

GROSSING UP IN THIS CASE

29. Mr Grant in section 5 of his affidavit summarised the result of his investigations. He identified 8 transactions and the result of those investigations are summarised in a table produced at page 265 of exhibit "KJG2". An analysis of this table shows that the assureds in the 8 cases were charged a total of US$2,487,910.95. The underwriting charges were £1,163,842.47.
30. In between the figures US$647,414.38 were diverted to three Liberian companies, which held offshore accounts in the Channel Islands. Those three companies were called Hedingham, FMS and Aldborough. In addition OEC (referred to above) received US$196,584.00. I have already commented that US$100,000.00 of that was utilised for Mr Chapman's indirect benefit by partially satisfying Lloyd's solvency requirements in respect of Chapco. He also admitted that he and other Directors had a share in some of the bonuses in OEC.
31. He has denied consistently that he had any benefit from the substantial monies diverted to the Liberian Companies. The Secretary of State does not assert that he does and the case proceed entirely on the basis that there was no evidence to show that he did receive any benefits by the Liberian Companies.
32. In addition to those figures according to an examination of Slips Chapco was entitled to a total brokerage of US$238,281.82. In fact it took US$414,570.10 an excess of US$203,288.28.
33. In total therefore, Chapco received grossed up sums of over US$1.2 Million.
34. I do not propose to set out the transactions in detail as they are fully set out in Mr Grant's affidavit with all of the supporting documentation exhibited to it. Mr Chapman features in some of the transactions by signing requisite authorities and signing documents with the calculations of the percentages of the grossing up payment taken. He did not dispute the transactions and he has admitted that he knew about all the transactions.
35. Two transactions are worthy of mention. One was an insurance policy for the client Waco. This was a renewal of a policy, which had led to a reduced premium of US$40,000.00 charged by the underwriters. Chapco was entitled according to the Slip to a brokerage of 20% of US$50,000.00 namely US$10,000.00. In fact it took ten times that US$100,000.00. The premium although reduced from the previous year by the Underwriter is US$400.000.00. The previous year the premium was US$248,000.00. Therefore although the premium was reduced by the underwriter for the second year the premium was increased to the assured by US$152,000.00. The excess thereby skimmed off was distributed as to US$100,000.00 to OEC, US$100,000.00 to MFS, US$60,000.00 to Aldborough. In addition Chapco took the extra US$90,000.00 brokerage.
36. A second transaction worthy of consideration is the Standard Steamship transaction where the underwriter's premium was US$120,000.00. Chapco was entitled to a brokerage of 20% (i.e. US$30,000.00 according to the Slip) but generously only took US$25,000.00. However, FMS has diverted to it a sum of US$90,000.00 and the premium actually charged was US$235,000.00.
37. It is difficult to see a more flagrant breach of duties owed to the Assured. The obligation of the broker is to obtain the best policy for his client at the best possible price. Such grossing up without the consent of the client Assured is plainly a breach of that obligation. It is plainly a breach of the duties identified in the Lloyd's documentation referred to earlier in this Judgment.
38. If such actions are procured by directors of Chapco it seems to me that that would also be a flagrant breach of their duties to Chapco as it puts Chapco in a position of breaching its duties to the assured clients. It could be faced with claims for accounting of premiums, which it has improperly obtained and which have then been remitted beyond its control to offshore companies. All this was done at the instigation of the directors and would therefore have been in breach of their duties as directors owed to Chapco.
39. It follows also from that that there would be a failure as outlined in Charge (C) namely the failure to put in place systems to prevent such things happening.

LLOYD'S DISCIPLINARY PROCEEDINGS

40. Lloyd's laid charges against Mr Chapman in relation to the same matters. As a result of the Secretary of State's intervention, Lloyd's was provided with the material obtained as a result of that investigation. I see no basis for criticising that provision of the information. It seems to me self-evident that as it raised matters that affected Lloyd's and the conduct of Lloyd's Brokers it would only be proper to provide the material to it. Lloyd's then embarked on its own disciplinary procedures against Mr Chapman. There is no evidence to show that the Secretary of State or any of the investigative officers had any role in that exercise beyond the provision of the results of the investigation.
41. They laid 12 charges against Mr Chapman of misconduct, namely conducting himself in a manner which was dishonourable, disgraceful or improper. Mr Chapman did not dispute the liability and he was excluded from membership of Lloyd's, his right to transact or be concerned in the business of Lloyd's was permanently suspended, his right of admission to the Room and other parts of the premises was permanently suspended, he was suspended and he was ordered to pay a fine of £100,000.00. In addition, he was excluded from being involved directly or indirectly in any Lloyd's regulated entity and was also required to contribute £30,000.00 towards the cost of Lloyd's arising from the proceedings.
42. The summary of the proceedings dated 15 February 2000, which Mr Chapman accepted contained a number of important matters.
43. First, he acknowledged he was either principally or jointly with another involved as client contact and account director in respect of the involvement of Chapco in each of the relevant policies. In addition he was aware of and approved and took part in all the matters set out in respect of those policies (paragraph 3).
44. The instances relate to grossing up and Chapco's involvement as broker was as set out in the second column of the schedule in paragraph 5. The third column showed the amount, which had been charged by way of premium and the fourth column showed what was actually appearing on the cover note (which information was false and deliberately misleading). The final column showed the amount by which the premium was deliberately inflated (paragraph 5).
45. As accounts director Mr Chapman authorised the grossing up on the accounts. In addition he signed the relevant cover notes as sent out to clients, which grossed up the premiums in six instances (paragraph 6).
46. In respect of each of the accounts Mr Chapman had neither sought nor received the insured's written consent either directly or through the relevant producing broker to the inflation of the premium (paragraph 7).
47. In addition Mr Chapman was aware that the insured had not been made aware either directly or through the relevant producing broker involved that the premiums were being inflated (paragraph 8).
48. There was no justification for the grossing up. Mr Chapman grossed up the accounts with a lack of good faith (paragraph 9).
49. Various payments were made to the Liberian Companies through bank accounts in Jersey with the RBS (paragraph 12).
50. Mr Chapman had admitted that [the Liberian Companies] were not entitled to benefit from any of the payments since they had no connection with the inception of the relevant policies. Mr Chapman was aware of and authorised the payments (paragraph 13).
51. Mr Chapman admitted at the time that he knew that none of the payee/beneficiaries was entitled to the benefit of any of the payments since they had no connection with the inception of the relevant policies (paragraph 15).
52. Mr Chapman admitted charges 1 – 12 on the basis of the facts and matters detailed in the report (paragraph 25).
53. Mr Chapman swore an affidavit in the proceedings dated 11 October 2001. He dealt fleetingly with the Lloyd's determination in paragraph 52. In that he said:-

"I have already confirmed to Lloyd's that I was fully aware of some of the grossing up of premiums that took place in Chapco (and have suffered the penalty of a premature end to my career in insurance and financial hardship) and now with the benefit of hindsight, accept that if criticism is due it is that I acted somewhat naively but I do not accept wrongly because I did not know the practice to be wrong at the time and was not told otherwise by contemporaries colleagues or professional advisors ".

54. Earlier in his affidavit (paragraph 7) he drew to the Court's attention the fact that in the notice of censure issued by Lloyd's it noted that it was no part of the case against him that he personally had received the benefits of those grossed up premiums.
55. That does not explain satisfactorily the benefits received by OEC admitted by him in his interviews with Mr Grant and the diversion of those grossed up premiums for utilisation by Chapco to satisfy its solvency requirements.
56. Mr Chapman when he gave evidence before me gave conflicting evidence in relation to his attitude to the Lloyd's decision. Initially, he said that he agreed it, as it was following his departure. He had already made a decision to leave the insurance market. By this time he did not want any dispute and Lloyd's put to him a deal, which would be an end to it. This he said was part of a negotiation he was involved in with Lloyd's and other potential creditors over his proposed IVA. Ultimately that IVA was made on 21 December 1999 (three months before the determination of the Lloyd's proceedings). In that he disclosed liabilities totalling £5.203 Million including £200,000.00 due to Lloyd's, and £4.878 Million due to the Lowndes Lambert Group arising out of a judgment of Mr Justice Timothy Walker dated 10 June 1998. I shall make further reference to this judgment below.
57. The voluntary arrangement accepted £50,000.00 provided by Mr Chapman's mother in full satisfaction of all of their debts.
58. Nevertheless, he was asked by Mr Cunningham QC who with Mr Westwood appears for the Secretary of State, whether he resiled from it, his answer was "no". He accepted the entirety of the arrangements as summarised in the Lloyd's documents when they were put to him.
59. He appears to be raising two matters. First, he says he did not know it was wrong, as it was a practice he says was widespread then in Lloyd's. He also said in evidence that the practice was still carrying on notwithstanding the express prohibitions made clear by the directions issued by Lloyd's set out earlier in this Judgment. He said that the practice was now being hidden in offshore accounts. I am not in a position to confirm whether or not that is correct but it does seem to me that in view of his assertions it is appropriate for the Secretary of State to consider whether the matter should be further investigated and also whether the matter should be drawn to the regulatory authorities in Lloyd's to see whether in fact Mr Chapman's assertions are factually correct.
60. None of those matters make any difference to my mind. I do not see how a dishonest practice can be any less dishonest if others do it. I do not see how anybody in Mr Chapman's position could come to any conclusion but that the matter was dishonest. Although he says he did not accept it was dishonest I reject that evidence having seen him in the witness box. His evidence was evasive and unsatisfactory. At some stages he suggested he agreed with the findings at Lloyd's. At other stages he said he did not. His attempts to distance himself from the arrangements at Lloyd's, which he agreed were unsatisfactory. I was unpersuaded that he did not accept fully the consequences of the Lloyd's decision.
61. His second explanation, which also to my mind was completely unsatisfactory was that he had no option but to make these payments because these were required by the introducing brokers and those associated with them as premiums and that if he did not agree the premiums Chapco would not obtain the business and the matter would go elsewhere to other brokers who would be prepared to pay the grossed up premiums. This does not excuse the behaviour either. The simple fact of the matter is that it cannot be any excuse whatsoever that it is necessary to obtain business by defrauding the clients. Nobody can possibly believe that the inflation of the premiums was justified on any basis. Mr Chapman also suggested that some clients were aware of the practice, but he produced no evidence of that. He suggested that some clients received some monies, but he produced no evidence of that. If any clients had acted in such a way that would have afforded him a complete defence to a charge because the prohibition of grossing up is not absolute; it is prohibited only as regards grossing up without the informed consent of the client. He never produced any evidence to show this was the case either at Lloyd's or before me. I reject any suggestion that clients received any part of the grossed up premium.
62. Even if Mr Chapman did not receive any benefits (the basis upon which the case proceeds against him in relation to the Liberian Companies) he has participated in a serious breach of fiduciary duty. That breach of fiduciary duty is the one owed by Chapco to its clients. He was also in breach of the fiduciary duties as a director that he owes to Chapco.
63. I have already observed that he had obtained indirect benefits of sums wrongfully grossed up in respect of the OEC payments.
64. Mr Collings who appears for Mr Chapman, suggest that Mr Chapman did not have the necessary or requisite level of dishonesty required to make him a party to an accessory breach of trust as set out in the House of Lords decision in Twinsectra Limited -v- Yardley [2002] 2 AC 164. The test required to make a person liable for accessory liability is that "he had to have acted dishonestly by the ordinary standards of reasonable and honest people and had been himself aware that by those standards he was acting dishonestly". Mr Chapman asserted that he did not know it was wrong repeatedly. I reject that evidence. Having seen him in the witness box and having seen his acknowledgment to the Lloyd's findings I have no hesitation in finding that he knew the practice was thoroughly dishonest. The facts speak for themselves. I do not see how he could have been aware of any proper basis for which the transactions could take place. The graphic illustration of that is the Waco transaction where the client paid ten times the premium sought by the underwriter. I therefore conclude that if the Twinsectra test is relevant it is satisfied.
65. I am not convinced however, that the Twinsectra test is required. What is required is that his conduct has to be such as to make him unfit to be a director. It seems to me that even if there was not dishonesty, as the managing director, chief executive and substantial shareholder in Chapco he has participated in these transactions to such a degree that his conduct makes him unfit to be a director.
66. In any event that test is not necessary in relation to the OEC transactions where he received an indirect benefit of part of the proceeds of the grossing up.

JUDGMENT OF MR JUSTICE TIMOTHY WALKER

67. This related to what the Judge called the rump of a very large and complex piece of litigation, which was settled incrementally. The Plaintiffs in the action were an Australian insurance company, which by a Slip signed by their underwriter agreed to reinsure the Defendants in the action for twelve months from 20 February 1994. It sought declarations against the defendant P & I Club, that they were entitlement to avoid the contracts of reinsurance on the grounds of non-disclosure and misrepresentation, and that they were not bound by the contracts. The P & I Club in its turn brought third party proceedings down the brokering line and against their immediate brokers GMR, Mr Chapman of Chapco the brokers who were acting to place the risks and a fifth third party (GAK) a reinsurance broker based in Sydney. GMR then brought fourth party proceedings against Chapco, that fifth third party and Mr Chapman. Ultimately the case settled entirely except as regards the grossing up claims brought by the P & I Club against GMR seeking the difference between the net sums received by the underwriter, the Plaintiff and the sums paid out by the P& I Club. This amounted to some US$7.8 Million including interest. Ultimately the Judge was left with the fourth party proceedings brought by GMR against GAK, Mr Chapman and Chapco not appearing. After the case was opened GMR and GAK settled on terms that GAK paid GMR US$6.5 Million and agreed that GAK would not pursue any claims against any other parties to fourth party proceedings. GMR then proceeded with its claims against Mr Chapman and Chapco. The amount claimed by way of contribution was US$7.17 Million.
68. The Judgment was an unreserved Judgment on an undefended claim. The first issue was as to whether or not Chapco and Mr Chapman owed fiduciary duties to the P & I Club. In his Judgment Timothy Walker J found that they did owe such duties. The second matter then was whether or not Mr Chapman was in breach of the duty to the P & I Club. Part of this related to grossing up. The Judge said this:-

"I have headed this "grossing up" because this is how [counsel on behalf of GMR] labelled it. It is a polite term for what Mr Chapman did. In simple terms he passed on a higher premium … for example the per capita premium charged by GIO for the 1994 crew reinsurance was US$180.00 but he told the club that he had been charged US$235.00 he then pocketed or siphoned off the difference to offshore accounts. The evidence against Mr Chapman is overwhelming. He would have been held liable to the Club for breach of fiduciary duty in taking a secret profit and he would have been held liable to account for that profit. The total sums involved were US$3,877,990.00 ".

69. Later on in the Judgment, the Judge said that he dealt with the issues as they originally unfolded and he dealt with them as it was right to nail each of the same issues as between GMR and Mr Chapman since Mr Chapman was not present. He was therefore found liable (with Chapco) on the basis that the Judge could see no conceivable basis for excusing Mr Chapman's conduct in the sum of US$7,170,000.00 plus costs.
70. That liability was ultimately discharged by the CVA and a modest payment made thereunder.
71. Mr Chapman chose not to appear in those proceedings. Mr Collings suggested that he was unable to fund the litigation. That might have been so, but nevertheless in my judgment the reason he did not challenge them was because he had no Defence to them.
72. Mr Chapman referred fleetingly again to this litigation in paragraphs 49 and 50 of his affidavit. In paragraph 49 he refers to the settlement and then says "the next thing I heard was that a Judgment had been passed on me by the errors and omissions underwriters of GMR", that hardly explains how the Judgment arose to any credible degree.
73. In paragraph 50 he said this:-

"I cannot sufficiently express my horror when I read the Judge's summing up. It was so far from the truth. I was incensed and frankly had had enough of being the scapegoat for others but eventually was forced to conclude that I did not have the money to take any legal steps and my career in the Lloyd's market was over in any event."

74. I reject that as the basis for him not resisting the case. He failed to resist it because he had no Defence. He does not put any Defence forward in this trial because there is none. The transactions are thoroughly dishonest and can only be viewed in that light. Whether there are other participators in such practices or whether it was necessary to obtain the business are both completely irrelevant factors.
75. I therefore conclude that on the basis of the evidence provided by the Secretary of State as set out in this Judgment, that Mr Chapman is guilty of conduct which renders him unfit to be a director of a company. That finding is based on the evidence on behalf of the Secretary of State also having read Mr Chapman's affidavit and having seen his evasive performance in the witness box.
76. It is the same conclusion as the conclusion which he agreed to when he signed up to the admission of liability for Lloyd's and it is the same conclusion reached (in his absence) by Mr Justice Timothy Walker.

PROCEEDURAL OBJECTIONS

77. Mr Collings raised a number of procedural matters, which he submitted ought to lead to the conclusion that the continuation of the proceedings against Mr Chapman should not be allowed. This was against a backcloth of him acknowledging that Mr Chapman accepted that the conduct was wrongful, grossing up was wrongful and that he was responsible. He also accepted that he was not seeking to exonerate it nor go behind his knowledge and participation in the grossing up.
78. First, he submitted that the Secretary of State could not rely on the findings in the Lloyd's disciplinary proceedings and the findings of Mr Justice Timothy Walker. He submitted that they were not like fully contested proceedings resulting in findings which give rise to an issue estoppel referring to re Thomas Christy Limited [1994] 2 BCLC 527 and re Queen's Moat House Plc [5 December 2001]. This seems to me to be an impossible submission. The reality is that Mr Chapman chose not to contest either set of proceedings. In the case of the Lloyd's proceedings he admitted liability. If someone is found liable after a contested hearing public policy requires that the matter should not be capable of being re-litigated again. To echo the words of Mr Justice Pumfrey in the matter of Queen's Moat House Plc (page 22) the interests of justice are unlikely to require a second investigation of facts, which have already been the subject matter of an exhaustive examination. There has been an exhaustive examination in two tribunals. Neither was a default procedure but in both of them Mr Chapman chose not to participate and in one actually agreed to it. I do not see how public policy would allow him to re-litigate those absent some evidence showing that in some way his consent was not properly given through lack of understanding or capacity or misunderstanding in some way. Mr Chapman has not adduced any evidence, which suggests he did not understand fully what was happening. His evidence is to the contrary. To allow him to re-litigate it would be an abuse as Mr Justice Jacob indicated in Thomas Christy Limited at page 537. It seems to me applying the principles set out in Johnson –v- Gore Wood & Co [2002] 2 AC 1 it would be an abuse to allow Mr Chapman to get round his admission of the Lloyd's liability. It would also to my mind be a reopening of a matter, which has been decided by both the Lloyd's tribunal based on his admissions and the Judgment of Mr Justice Timothy Walker in the light of the evidence put before him. The decisions are thus also issue estoppel decisions as against Mr Chapman. The fallacy of Mr Collings' arguments to my mind was the answer he gave to the question that I posed to him, "what would happened if the proceedings were reversed, i.e. the Secretary of State proceedings were first. Could he have stopped Lloyd's bringing their own proceedings under their own disciplinary code?" His answer was no.
79. The point is academic in the sense that I heard all the evidence anyway. Having seen the evidence (irrespective of the two tribunal findings) I am quite satisfied for the reasons set out in this Judgment that Mr Chapman's conduct renders him unfit to be concerned in the management of a Company.
80. Mr Collings' second argument was the opposite of his first argument. If the proceedings before Lloyd's were in respect of the identical issues it would not be right for the Secretary of State to be allowed to re-litigate the matters because that would be unjust to Mr Chapman. It would been seen that this argument involves an adoption of the result of the Lloyd's decision whereas his first argument was designed to prevent me relying on the tribunal decision. This submission to my mind is equally misconceived. I cannot see on decided authority how a decision made by Lloyd's to enforce its regulatory procedures can possibly have the effect of preventing the Secretary of State from bringing disqualification proceedings in discharge of functions conferred upon the Secretary of State under the CDDA 86. It would enable people like Mr Chapman to avoid the more significant consequence of disqualification by agreeing to an early capitulation in front of Lloyd's and thus preventing the Secretary of State from investigating the matter. Happily however, the position is covered by the decision of re Barings Plc (No. 3) [1999] 1 BCLC 226. In that case the Judge at first instance, Mr Justice Jonathan Parker (as he then was) and the Court of Appeal concluded that having regard to the overriding need to preserve public confidence in the Administration of Justice the Court could stay proceedings on the grounds of abuse, where to allow them to continue would bring the Administration of Justice into disrepute among right thinking people. This was an attempt to stop disqualification proceedings because it was alleged that the matter had being investigated and adjudicated on in proceedings brought by the Securities and Futures Authority (SFA). Equally, I do not accept that there is any connection between Lloyd's and the Secretary of State's separate procedures. Material may have been provided to Lloyd's but that to my mind is perfectly proper and I do not see the hand of the Secretary of State anywhere being involved in the Lloyd's disciplinary proceedings. (The Court of Appeal (see for example page 253 per Chadwick LJ) supported that conclusion). I cannot see how allowing the disqualification proceedings in the present case would lead right thinking people having a proper understanding of the different regulatory procedure to lead to the conclusion that the Secretary of State's proceedings would bring the Administration of Justice into disrepute. To my mind the opposite would be the case. There is a substantial public interest in ensuring that people who are unfit to be involved in companies as directors have the requisite orders made against them. This is of a twofold effect. First it is a sanction applied to them and second it operates as a warning to others who might act in a similar way. Although Mr Chapman suggests he has no intention to become a director, if he is not disqualified there will be no basis for him not being a director. Having regard to his conduct a right thinking person would think it would be absurd and to bring the Administration of Justice in disrepute if the Secretary of State was left powerless because of a decision in which she had no right or ability to participate. It might have been otherwise of coarse if it could be argued that the Secretary of State had encouraged or controlled the earlier proceedings but there is absolutely no evidence to support such a suggestion and merely because the Secretary of State deploys the two Judgments does not to my mind amount to evidence of such involvement.
81. I therefore reject that submission by Mr Collings.
82. He suggested that the proceedings ought to be stayed because of the age of the matters complained of. It seems to me that whilst the events took place sometime ago the ability of the Secretary of State to investigate was delayed because of the time when she became aware of them as a result of the report. The only period of delay identified by Mr Collings was a period of some eighteen months when the matter was being considered by the Treasury Solicitor. In the overall pattern I do not see that delay as being of sufficient magnitude to lead to the conclusion that the continuation of these proceedings would be unjust and an abuse as against Mr Chapman.

CONCLUSION

83. I have concluded therefore that Mr Chapman's conduct was such that he is unfit to be involved in the management of a company. It may be that others are involved. That does not excuse Mr Chapman who was the main officer of Chapco and substantially interested. It may be that others have given undertakings, which are satisfactory to the Secretary of State. Mr Chapman sought to blame Mr Amiss significantly and Mr Collings drew attention to the fact that the Secretary of State had discontinued proceedings against him. Now why that occurred is by no means clear. Nor is it actually relevant. I am only concerned with the case of Mr Chapman and his role. He had a major and significant role in the actions complained of whether or not he received any benefits. Of course I cannot ignore the fact that Chapco thereby made large profits, which enabled him to draw substantial remuneration over the years as the highest paid director.
84. I accordingly find all of the grounds laid out against Mr Chapman proven.

DISCRETION

85. I refer to the Atlantic Computers decision above. Having regard to the conduct that I have found set out in this Judgment I do not consider it would be appropriate for me to exercise a discretion not to disqualify Mr Chapman. On the contrary not to disqualify him in relation to these matters would be to lead to the Administration of Justice in my mind to be considered to be in disrepute. It would be a complete negation of the object and purpose of the disqualification act proceedings.


 
LENGTH OF DISQUALIFICATION

86. It seems to me having found him guilty of dishonesty and having regard to the size of the sums obtained from clients that a period of disqualification should be towards the upper end of the middle Sevenoaks bracket of six to ten years. Although as I have said other people have given undertakings in lesser sums Mr Chapman's role is significantly higher. Further, I bear in mind the fact that Mr Chapman whilst on the one hand he did not seek to dispute the liability supposedly, nevertheless did fight the case over a number of days. It seems to me having regard to my findings and those matters it is appropriate to make a disqualification order against Mr Chapman of nine years. Mr Cunningham QC invited me in his closing submissions to go beyond that middle bracket, but I do not think that that is appropriate.
87. Finally, as I have already said in this Judgment, I am concerned as to the practice of grossing up. I am particularly concerned as to Mr Chapman's assertion that it still carries on although in a disguised way. For these reasons this Judgment should to my mind be brought to the attention of the Secretary of State and the authorities at Lloyd's for consideration as to whether there should be a further investigation in Lloyd's to see whether the practice still proceeds.