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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 Grove & Anor [2006] EWHC 2761 (Ch) (15 November 2006) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2006/2761.html Cite as: [2006] EWHC 2761 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		15/11/2006

Judge Richard Havery Q.C. :

1. This is an application on the part of the Secretary of State for a disqualification order against each defendant under section 6 of the Company Directors Disqualification Act 1986 ("the Act"). It was not in dispute that the condition set out in section 6(1)(a) of the Act was satisfied, namely that each defendant had been a director of a company which had become insolvent after he had been a director of that company. In deciding whether I should make a disqualification order against a defendant, the question that I have to decide in the case of each defendant is whether his conduct as a director of that company makes him unfit to be concerned in the management of a company.
2. The company in question, which I shall call "Vintage", was incorporated as Vintage Hallmark Ltd on 1^st April 1998. The defendant Mr. Grove was appointed as a director of Vintage on that day. On 6^th November 2000 Mr. David Lamb and the defendant Mr. Gunter were appointed as directors of Vintage. On 27^th November 2000 Vintage was re-registered as a public company, Vintage Hallmark plc. On 22^nd January 2002 notice was given of an extraordinary general meeting of Vintage to be held on 15^th February 2002 to consider and if thought fit to pass resolutions removing Mr. Lamb, Mr. Gunter and Mr. Grove from office as directors of Vintage. On 12^th February 2002 Mr. Grove resigned as a director of Vintage. On 15^th February 2002 Mr. Lamb and Mr. Gunter were removed from office as directors of Vintage. Mr. Lamb had been chairman of Vintage and had been removed from that office on 18^th January 2002. On 22^nd January 2003 Vintage went into creditors' voluntary liquidation with an estimated deficiency as regards creditors of £2,710,962 and an estimated deficiency as regards members of £77,257,689. Vintage thereby became insolvent for the purposes of sections 6 and 7 of the Act. On 1^st November 2003 Mr. Lamb took his own life.
3. Until late 2000 the activities of Vintage were relatively insignificant. In its first accounting period, to 30^th September 1999, a loss of £2 was recorded on a turnover of £63,380. Turnover for the following year, ending on 30^th September 2000, increased to £108,276, on which the company recorded a loss of £179. As at that date, Vintage had assets of £5 and net liabilities of £179. The accounts for the year ended 30^th September 2000 describe the company's principal activity during that year as being marketing specialists. With the exception of a company formation agent, Mr. Grove was the sole director until the appointment of Mr. Lamb and Mr. Gunter on 6^th November in that year.
4. On 19^th November 2000 Vintage acquired the assets and assumed certain specified liabilities of the Hallmark Partnership ("the Partnership"). The Partnership had been formed in about 1984, entering the drinks business in 1995. From 1995 the only, or principal, partners in the partnership were Mr. Grove, Mr. Gunter and Mr. Lamb. I consider in paragraph 53 below evidence that there was a fourth partner in the Partnership.
5. In February 2002, the US shareholders procured that the defendants and Mr. Lamb were removed as directors and dismissed as employees of Vintage. The U.S. shareholders took over the running of the company, but were unable to prevent it from going into liquidation.
6. The matters by reference to which the Secretary of State contends that the defendants' conduct makes them unfit to be concerned in the management of a company are, in the case of each defendant, as follows:

a. He procured that Vintage should purchase a business from the Partnership which he knew

i. to be hopelessly insolvent, and

ii. to have liabilities which Vintage had no reasonable prospect of discharging by any honest means.

If he did not so know, he was nevertheless recklessly indifferent or grossly negligent as to whether the business was solvent or insolvent and as to whether there was any lawful means by which Vintage had a reasonable prospect of discharging the liabilities it had undertaken.

b. He procured that Vintage paid some £59 million for assets from the Partnership which he knew were worth only some £5 million at most, alternatively worth a sum very significantly less than the price paid. If he did not so know, he was recklessly indifferent or grossly negligent as to whether the price paid for the assets represented the reasonable value of the assets.

c. He persuaded others to subscribe for shares in Vintage by falsely and knowingly misrepresenting that Vintage had assets worth some £59 million when he knew that the assets were worth only some £5 million at most, alternatively worth a sum very significantly less than £59 million, and that Vintage was hopelessly insolvent. If he did not so know, he was recklessly indifferent or grossly negligent as to whether the assets of Vintage were worth the sum he represented them to be worth and was recklessly indifferent as to whether Vintage was solvent.

d. He procured that Vintage should sell spirits and wines and agree to buy them back, or to find third party purchasers, at excessively inflated prices which he knew that Vintage had no reasonable prospect of being able to satisfy, alternatively he was recklessly indifferent or grossly negligent as to whether Vintage could satisfy the obligations undertaken.

e. He procured that Vintage should represent that the spirits and wines being sold as in d. above could be sold for profits equal to or greater than the sum at which Vintage had agreed to buy them back, or to find third party purchasers, thereby inducing the purchasers to believe that they were acquiring good 'security', when he knew that the spirits and wines could not be resold for such sums, alternatively he was recklessly indifferent or grossly negligent as to whether the spirits and wines could be sold for such sums.

f. Where sales were not made on the basis of a guaranteed return, he nevertheless procured that Vintage should represent that the spirits and wines could be sold by the purchasers for large profits, when he knew that such profits could not be made, alternatively he was recklessly indifferent or grossly negligent as to whether such profits could be made.

The words "or grossly negligent" were added in each case by Mr. Newey in the light of an alternative allegation on the part of the Secretary of State that the defendants were grossly negligent in performing their duties as directors of Vintage.

7. I derive the following summary of the claimant's case from an affidavit of Mr. Elliott Burns. Mr. Grove, Mr. Gunter and Mr. Lamb carried on the business of the Partnership fraudulently, in that the partnership made fraudulent misrepresentations to so-called investors, mainly medical doctors in the USA, and to a lesser extent in Canada, regarding the profits that could be made from purchasing spirits and wines. In many cases, the Partnership undertook obligations to repurchase the spirits and wines from those investors, or to find third party purchasers, at prices which were unrealistically high and which they knew they had no prospect of being able to satisfy. On 20^th November 2000, when Vintage acquired the assets and specified liabilities of the Partnership, the Partnership, as the defendants and Mr. Lamb were aware, had liabilities of just under £52 million and assets that could not realistically be valued at anything significantly in excess of £5 million. The partners became directors of Vintage and issued themselves 7,926,217 £1 ordinary shares in Vintage in consideration of the sale of the Partnership business to Vintage. The defendants and Mr. Lamb knew that the Partnership was hopelessly insolvent and that there was no prospect of Vintage honestly being able to pay off the liabilities it had assumed. Vintage was able to discharge most of its liabilities only because the directors fraudulently misrepresented to the 'investors' that Vintage had acquired assets which could realistically be valued at just under £60 million so as to persuade the 'investors', who were by that stage owed just under £49 million, to convert their debt into equity and become shareholders in Vintage. Thereafter, the defendants and Mr. Lamb carried on the business of Vintage in the same fraudulent manner as that in which they had carried on the business of the Partnership. That is the claimant's case in a nutshell.
8. The defendants vehemently denied dishonesty on their part. They were not qualified accountants. Mr. Lamb was until his death a qualified accountant. The defendants relied entirely on 'the experts', in particular Mr. Lamb and a Mrs. Hughes, also a qualified accountant, from whom they derived assurance that the business was being run honestly and profitably. They did not understand figures which showed the true position. Mr. Grove's expertise lay in promoting brands, whilst that of Mr. Gunter lay in salesmanship. Each concentrated on his special field. Mr. Gunter additionally insisted that the large sums offered by way of buy-back or resale price were realistic in the expanding niche markets of branded spirits and wines in America.
9. I consider the conduct of the defendants and the question of their fitness to be concerned in the management of a company in the light of the following judicial pronouncements. In Re Barings plc and others (No. 5) [1999] 1 BCLC 433, 484, Jonathan Parker J. said

.....the court will assess the competence or otherwise of the respondent in the context of and by reference to the role in the management of the company which was in fact assigned to him or which he in fact assumed, and by reference to his duties and responsibilities in that role.....For example, where the respondent was an executive director the court will assess his conduct by reference to his duties and responsibilities in that capacity.

And at p.486 Jonathan Parker J. cited the judgment of the Court of Appeal given by Lord Woolf M.R. in Re Westmid Packing Services Ltd. [1998] 2 BCLC 646, 653, 654, [1998] 2 All ER 124, 130, 131 to this effect:

Each individual director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them.....It is of the greatest importance that any individual who undertakes the statutory and fiduciary obligations of being a company director should realise that these are inescapable personal responsibilities.

Jonathan Parker J. also cited (at p.487) the speech of Lord Davey in Dovey v. Cory [1901] AC 477, 492. In that case, before the House of Lords no moral obliquity was attributed to the respondent Cory. Lord Davey said

I think the respondent was bound to give his attention to and exercise his judgment as a man of business on the matters which were brought before the board at the meetings which he attended.....But I think he was entitled to rely upon the judgment, information, and advice of the chairman and general manager, as to whose integrity, skill and competence he had no reason for suspicion. I agree with what was said by Sir George Jessel in Hallmark's Case, and by Chitty J. in In re Denham & Co., that directors are not bound to examine the entries in the company's books.

At p.488 Jonathan Parker J. cited the decision of the Supreme Court of New South Wales in Daniels v. Anderson (1995) 16 ACSR 607, 668 as representing the law of England:

A person who accepts the office of director of a particular company undertakes the responsibility of ensuring that he or she understands the nature of the duty a director is called upon to perform. That duty will vary according to the size and business of the particular company and the experience or skills that the director held himself or herself out to have in support of appointment to the office. None of this is novel. It turns upon the natural expectations and reliance placed by shareholders on the experience and skill of a particular director.....The duty includes that of acting collectively to manage the company.

Jonathan Parker J. (ib.) pointed out that where there is an issue as to the extent of a director's duties and responsibilities in any particular case, the level of reward which he is entitled to receive from the company may be a relevant factor in resolving that issue. Finally in this connection, he observed (p.489) that directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company's business to enable them properly to discharge their duties as directors.

10. I bear in mind that the conduct of the business of the Partnership, and the conduct of the defendants as partners, is not conduct of the defendants as directors of Vintage. It is only the latter conduct which I take into account in assessing the questions of the respective defendants' fitness to be concerned in the management of a company. But the activities of the partnership are essential background to the questions I have to decide.
11. I read expert evidence of Margaret Lombard-Chibnall and of David Eric Ellswood. I also read an affidavit of Elliott Burns containing factual and non-expert opinion evidence. I heard factual evidence from Mr. Christopher John Dent, who was cross-examined by Mr. Grove and by Mr. Gunter. Neither Mr. Grove nor Mr. Gunter availed himself of the opportunity to require Ms. Lombard-Chibnall or Mr. Ellswood to attend court for the purpose of cross-examination, or to apply to the court pursuant to an order of Blackburne J. made on 21^st April 2005 for an order that Mr. Burns should attend for cross-examination. Mr. Grove and Mr. Gunter themselves gave factual evidence. I admitted in evidence parts of an affidavit of Bharat Pandya submitted out of time by Mr. Grove. Mr. Pandya described himself as an accountant, but in the sworn part of his affidavit he made no mention of that fact or of his qualifications. He gave some evidence of general accountancy matters, but I found it of no assistance.
12. Mr. Burns summarised the businesses of the Partnership and of Vintage in substantially the following terms, which were unchallenged. Vintage, he said, carried on business in much the same manner as the Partnership had done. As the manner of carrying on business was largely indistinguishable, he referred to the business carried on by the Partnership and that carried on by Vintage as "the Business". The Business involved selling spirits and wines to U.S. (and, sometimes, Canadian) residents, largely medical doctors, with, in many cases, guaranteed rates of return over a fixed period of time. These individuals were persuaded (my italics) to invest in spirits and wines, largely through cold calling, but subsequently also through referrals from existing investors. The spirits and wines were not usually delivered to the investors but were retained by the Business. After the fixed period of time stipulated for the promised return, money equalling the promised return would be sent to the investors or, as was more generally the case, the investors were persuaded (again my italics) to roll their investment into another product or to accept a promissory note. Where there was a fixed rate of return, the reality was that the Business was borrowing money at a fixed rate of interest on the security of the spirits and wines. The partners and the directors described this activity as "inventory financing". Not all transactions involved a fixed rate of return: for example, whisky was often promoted on the basis that large profits could be made from selling in the USA without an undertaking to repurchase the whisky or find buyers at fixed prices.
13. Mr Gunter objected to the use of the word "persuaded" where I have italicized it above. He said that the investors received offers which they accepted. I am content to adopt Mr. Gunter's phraseology, though in my judgment it makes little difference. On the totality of the evidence, including documentary evidence, before me, I am satisfied that Mr. Burns's above description of the businesses of the Partnership and of Vintage is a fair one.
14. The defendants insisted that the business of the Partnership had been profitable, and relied on a statement of the tax authorities to that effect. Certainly it was profitable to them: they drew large sums from it, as appears in paragraph 53 below. However, they were able to do that only because the Partnership incurred large debts to the investors.
15. Vintage bought the business of the Partnership by an agreement dated 19^th November 2000. The written agreement is entitled Assets Purchase Agreement. By that agreement, Vintage bought: 1. the inventory of the Partnership and 2. fixtures and fittings, plant and machinery "all at Temple Chambers.....Luton and 36, St. James's Street, London". The goodwill of the Partnership business was included in the sale, and the Partnership agreed not to continue to operate the business or any similar business. The purchase price for the purchased assets was £7,926,217, "paid in £1.00 shares (fully paid) at Closing, together with the assumption of liabilities specified herein". Those liabilities included promissory notes of the seller and certain contract obligations of the seller to investors.
16. The inventory was specified in lists. There were two lists, one of goods valued in United States dollars, and another of additional goods valued in Sterling. At cost, the value of the goods in the first list amounted to about $4.5 million (I am rounding down the figures), but the stated value at wholesale prices amounted to $42.3 million. In the second list, the value was shown as £162,000 on an unspecified basis which seems to have been wholesale price or a discounted wholesale price. There is a list of "Promissory notes and product liability" showing a total of 12.4 million in unstated units, which must be United States dollars. The contract obligations to investors were stated in the agreement to be listed in appendix C, but that appendix was blank.
17. A balance sheet of Vintage signed by Mr. Lamb and dated 20^th November 2000, the day after the making of the Assets Purchase Agreement, shows fixed assets of £35.9 million, including goodwill of £34.8 million; inventory of £23.8 million; and creditors and amounts due totalling £51.8 million, including £43.5 million as amounts due between one and five years. Thus the total liabilities of the Partnership taken over by Vintage on 19^th November 2000 amounted to £51.8 million. An auditor's report dated 24^th November 2000 and signed by Mrs. Hughes expressed her opinion that the balance sheet gave a true and fair view of the state of Vintage's affairs at 20th November 2000 and had been properly prepared in accordance with the provisions of the Companies Act 1985, "which would have applied had the balance sheet been prepared for a financial year of" Vintage.
18. Before the Assets Purchase Agreement was entered into, Mr. Lamb was in correspondence with the Partnership's (and Vintage's) attorney in the United States, Mr. Jonathan Neff, of Tulsa, Oklahoma. On 23^rd October 2000 Mr. Lamb sent to Mr. Neff a balance sheet of the Partnership as at 30^th September 2000. He explained that it included inventory at wholesale cost, together with all promissory notes and product liabilities, and that he had used a dollar/pound conversion rate of 1.5. That balance sheet showed inventory of £28.2 million, current liabilities of £41.0 million, and total assets of minus £10.5 million. There was no mention of goodwill. In a letter of 2^nd November 2000 Mr. Lamb said to Mr. Neff "I.....need to discuss with you the element of 'goodwill', which as you know covers the deficit in the capital accounts, and allows the partners to have equity in the business". On 7^th November 2000 Mr. Lamb sent to Mr. Neff an opening balance sheet of Vintage showing how the position would look on the transfer of the Partnership, based on the position as at 30^th September. That balance sheet showed goodwill of £10.4 million, inventory of £25.5 million, current liabilities of £11.4 million, and a figure of £30.3 million representing the excess of assets over current liabilities. On 9^th November 2000 Mr. Lamb wrote to Mr. Neff telling him that after serious deliberations, he had decided to ignore the item "goodwill" from the opening balance sheet. He said: "By excluding the item goodwill, we have a more accurate Balance Sheet, and will not have any questions raised as to what it contains and where did it come from". On 13^th November Mr. Lamb again wrote to Mr. Neff, referring to a telephone conversation between them which had taken place earlier the same day, and stating that he was sending a make up of the goodwill figure involved in the transfer of assets to Vintage. He wrote: "This may have changed slightly from the figures reported to you earlier, but now agrees with all the liabilities involved". On 16^th November, Mr. Lamb sent to Mr. Neff the final statement of assets acquired. That statement, with figures in dollars, showed assets of $37.3 million and liabilities of $77.7 million, the difference of $40.4 million being described as goodwill. A figure of $11.8 million was added as "15% payment for business (extra goodwill)". That figure represented 15 per cent. of $79,262,188, the proposed share capital of Vintage. The total goodwill was expressed to be $52.3 million.
19. A meeting of Vintage was held on 15^th November 2000. The minutes of that meeting state that those present were Mr. Lamb "acting as chairman", Mr. Gunter and Mr. Grove "acting as secretary". The minutes state that a list of assets to be acquired and liabilities to be assumed was presented to the meeting. That list appears to be the statement mentioned at the end of paragraph 18 above, a copy of which was sent to Mr. Neff the following day. The following is an extract from the minutes:

A discussion took place, regarding the transfer of all assets and liabilities from the Hallmark Partnership to the company – the consideration being shares in Vintage Hallmark limited to the three parties named above [sc., Mr. Lamb, Mr. Gunter and Mr. Grove].

A list of assets to be acquired and liabilities to be assumed was presented to the meeting.....

A further discussion took place as to how the company would balance the books on acquiring the list of assets and liabilities as listed, and Mr. Lamb advised that the company would also be acquiring the goodwill attached to the partnership. Whilst Goodwill was not broken down, it was to incorporate the present network of the partnership in North America, including all the rights to the label approvals, distribution rights, web site, and the element attached to Better Beverages Importers Company Inc. (a Delaware Company), and the value attached to 36 St. James's Street, London site. It was noted that over several years the partnership had built up a network of suppliers and distributors, and had proceeded to have bottles of alcoholic beverages produced under the label of Vintage Hallmark of St. James's, and had an agreement with Harbor Industries (US) Limited to store and distribute the products of the partnership portfolio.

It was noted that whilst the goodwill value was high, the potential for substantial future sales was in place, with the United States of America being the prime market place, also the company would have the use of all licences under the current control of Harbor Industries (US) Limited.

The minutes record that since no intangible assets were involved, the item goodwill would be stipulated in the balance sheet of Vintage but in view of the requirements of accounting standards would be written off over a period of twenty years. It was resolved that Vintage would acquire the assets and liabilities of the Partnership as soon as a detailed check of the assets and liabilities had been carried out by a third party. Once that check had been carried out, the transfer would take place, together with the issue of shares to Mr. Lamb, Mr. Gunter and Mr. Grove.

20. An extraordinary general meeting of Vintage was held on 29^th November 2000, attended by Mr. Lamb as acting chairman and by Mr. Gunter, Mr. Grove and Mr. Neff. At that meeting, the authorized share capital of Vintage was increased from £7,926,219 to £70 million. Authority was delegated to Mr. Lamb to enter into negotiations with Harbor Industries (US) Limited ("Harbor"), legally constituted in the state of New York, U.S.A., to acquire the capital of that company in exchange for shares in Vintage, as Harbor had been acting on behalf of the Partnership for some time as a distributor and warehousing facility. Subject to the successful completion of that acquisition it was agreed to invite Mr. Richard J DeCicco to become a director of Vintage and that he be retained as the director in charge of Harbor. The minutes of the meeting also contain the following statement:

A discussion took place regarding the issue of a Private Placement Memorandum to the client base acquired on the purchase of the assets and liabilities of the Hallmark Partnership, and it was agreed to proceed with the issue of such document, in order to offer equity in the company in exchange for the liability presently existing, subject to the correct valuation being presented and attested by the companies [sic] auditor, and presented to the Registrar of Companies prior to the issue of any equity.

21. The Private Placement Memorandum ("the PPM") was given the effective date of 6^th December 2000. It was sent out to potential investors together with a business plan under cover of a circular letter dated 5^th December 2000 from Vintage, signed by Mr. Lamb as executive chairman. That letter stated that the ultimate goal was to list on a recognised stock exchange.
22. The PPM contained the following statements:

The Hallmark Partnership ("the Partnership") entered into the liquor distribution business in 1995. Over a period of five years, the Partnership has grown the business through the use of unique financing mechanisms. Relying upon the experience of the partners in finance related trading, the Partnership developed a system for inventory financing in which investors purchased the inventory of the company and held it for specified time periods, and upon maturity, the investors sold the inventory back to the company for a profit. For corporate tax purposes, this inventory financing mechanism may be characterized as interest-bearing loans secured by specific inventory.

Over a period of years, many investors who assisted the Partnership with inventory financing expressed interest in participating in the business of the Partnership on an equity basis. In response, the Partnership made equity participation available to certain investors through the Vintage Ale Company Ltd. ("Vintage Ale Company") and Evergreen Resources Ltd. ("Evergreen"). More recently, the Partnership determined to reorganize the business in such a way that equity participation could be made available to all of the investors while expanding the capitalization of the business.

In connection with the reorganization of the business, the Partnership transferred all of its assets and liabilities into a British limited company, [Vintage]. In order to offer shares to investors, [Vintage] was subsequently converted into a public limited company known as [Vintage].....[Vintage] provides the vehicle for equity ownership in the business by both principals of the business and its investors. Upon the successful completion of the stock offering described in this Memorandum, provided that it is successful, [Vintage] will own all of the assets and liabilities of the business and operate the business. The investors will own approximately...(84%) of the stock of [Vintage] and the four principals will own approximately...(16%), depending on the number of shares subscribed by the investors.....

Under the plan of reorganization set forth in this Memorandum, all of the persons who currently have investments in the business, whether through financing of inventory or through equity investment in Evergreen or Vintage Ale Company, and who qualify as "accredited investors" under U.S. securities laws (the "Investors"), will be offered the opportunity to participate on an equity basis in the ongoing business of [Vintage] through ownership of stock in [Vintage].

As of the effective date of this Memorandum, all of the assets and liabilities of the Partnership have been transferred to [Vintage]. [Vintage] has also acquired all of the stock of three U.K. corporations, Eurotec Developments Ltd., Vintage Ale Management Company Ltd. and Bishopsgate Distillery and Wine Company Ltd, which have become wholly owned subsidiaries of [Vintage]. [Vintage] has also acquired all of the stock of [Harbor], a New York corporation. As a result of this transaction, Harbor has also become a wholly owned subsidiary of [Vintage]. Harbor has one wholly owned subsidiary, Better Beverage Importers Co. ("BBI").

Harbor is a U.S. importer of liquor and related products, with all necessary import licences and warehouse facilities located in Long Island, New York. BBI, Harbor's wholly-owned subsidiary, is a nationwide distributor and wholesaler of liquor, with licences to wholesale liquor in all fifty states. Harbor and BBI together provide U.S. distribution of the products acquired abroad by [Vintage]. Through Harbor and BBI, [Vintage] has the capability to introduce new products and market existing products throughout the United States.

[Vintage] has authorized share capital of £70,000,000 or $105,000,000, at an exchange rate of 1.5/1. Shares have been and will be issued at the value of £1.00 per share. As of the effective date hereof, [Vintage] has issued 10,568,292 shares of its stock in exchange for the assets and liabilities of the Partnership and the stock of Harbor. David Lamb, Robin Grove and Richard Gunter presently hold the shares equally, the three partners of the Partnership, and Richard DeCicco, the former owner of Harbor. As additional consideration for such shares, the partners conveyed to [Vintage] all of the stock of Eurotec Ltd., which owns the building in which the headquarters of the business operates, all of the stock of Vintage Ale Management Company Ltd, and all of the stock of Bishopsgate Distillery and Wine Company Ltd., which owns a brand of spirits.

[Vintage] offers in this Memorandum to trade shares of its stock to the Investors in exchange for certain debts and obligations of [Vintage], including promissory notes and inventory financing accounts assumed from the Partnership, and in exchange for the investments in Evergreen and Vintage Ale Company.....

23. The matters set out in paragraph 22 above were not in dispute before me, save for three matters. The first was this. Mr. Grove said that he was not aware of the formulation set out in the first paragraph of the quotation, though he knew people invested in the company. The second was that Mr. Gunter did not agree that investors sold the inventory back to the company for a profit. The third was that Mr. Grove and Mr. Gunter contended that Mr. DeCicco was a partner in the Partnership.
24. A list of directors of Vintage appended to the PPM showed Robin N. Grove and Richard F. Gunter, the two defendants, as joint managing directors (UK). The PPM contained the following description of Mr. Gunter:

Richard Frederick Gunter spent the early years of his business career in sales and marketing of luxury products in Europe before moving on to a career in finance and commodities, which lasted for nine years. Some of those years were spent in the United States, with an internationally renowned fund manager and commodities dealer located in Connecticut. Later progressing into business on his own as a commodities fund manager, he dealt in all London commodities markets on behalf of clients and continued to be associated with the American brokerage house. A founding member of the [Partnership], Richard Gunter is now responsible for [Vintage's] sales activity, strategy and marketing policies.

Regarding carrying on business on his own as a commodities fund manager, Mr. Gunter gave evidence that what it amounted to was "playing the market with my own money and members of my family". He accepted that the last sentence of the passage quoted above was accurate. He accepted that the expression joint managing director of Vintage was an accurate description of his position. Mr. Grove said that joint managing director UK was his title. I am satisfied that both Mr. Gunter and Mr. Grove were joint managing directors of the company.

25. The PPM also contained the following paragraph:

The four directors of [Vintage] are responsible for the accuracy of the information contained in the financial statements and this Memorandum. They believe that the financial statements present a reasonably accurate and complete statement of the financial condition of [Vintage] and its subsidiaries as of the effective date of this Memorandum. The management of [Vintage] believe that they are well qualified to form an opinion as to the achievability of the forward looking statements and financial projections contained herein based upon their experience in the industry.

Mr. Grove, in the course of his cross-examination, said that he had had no access to the document. The terminology would be that of the financial and legal people. They took advice. He had no such beliefs as are mentioned in the second and third sentences, and the statement to the contrary was wrong. Mr. Gunter said, with reference to the same paragraph:

We are saying the four of us are confident and believe we are well qualified. I agree I had input. I knew this paragraph was there.

Mr. Gunter's reference to "the four of us" must include reference to Mr. DeCicco, who was described in the PPM as Joint Managing Director (North America).

26. The PPM contained a list of assets that had been acquired by Vintage, valued in terms of United States dollars. It showed assets acquired from the Partnership of $88,806,960 including inventory of $35,728,011 and goodwill of $52,303,759. From that, liabilities including promissory notes amounting to $77,763,625 were deducted. Those figures are consistent with the corresponding figures in the final statement of assets acquired mentioned in paragraph 18 above. Mr. Gunter accepted that it was implicit in those figures in the PPM that the Partnership had accrued liabilities greater than the assets excluding goodwill. He did not accept that it was implicit that the Partnership had made very large losses, because of the inventory.
27. The PPM stated that Messrs. Lamb, Grove, Gunter and DeCicco would serve as officers and directors of [Vintage]. Employment contracts with five-year terms had been executed recently by each of those individuals. Under those contracts, each officer would receive an annual salary equivalent to $275,000, "together with typical employment benefits including health insurance and an automobile allowance".
28. Mr. Gunter gave evidence that Vintage, its subsidiary companies and formerly the Partnership operated the business of acquisition, brand design, marketing and sales of branded and own branded alcoholic drinks to the wholesale and retail sectors in Europe and throughout North America. The emphasis in his evidence about his own selling activities for the business was on sales to North America, especially the United States. He said that the Partnership began actively marketing its portfolio of branded whiskies to the North American market and, on the back of success following the advice of the industry experts, extended its product range into Cognac, Port, Champagne, Wine, Armagnac and other quality whiskies. He had overall responsibility for the telesales team, which was employed at the Luton premises and successfully selling multiple cases of inventory to liquor stores in Florida, Illinois, California, New York and New Jersey. I accept that evidence.
29. Mr. Gunter also gave this evidence. Mr. Lamb, he said, had overall direction and control of the business generally, finances, product purchase, profit margins and dealing with clients, control that continued from the Partnership into Vintage. "Mr. Lamb and Mr. Hughes [Mr. Barry Hughes, financial controller of the Partnership and of Vintage].....conceived a new way of financing the Partnership, apparently utilising the Partnership-owned products as leveraged security for bringing new investment into the business. Apparently for the cycle to work and continue working, i.e. in order that investors would be paid out on time and with the promised returns, sales revenue was essential and the sales team worked tirelessly towards this end". With the assistance of the industry experts the business was able to acquire the right products at preferential rates. He also gave evidence which I paraphrase in these terms, that the connection with Harbor enabled the business to start expanding its distribution from coast to coast in the U.S.A.
30. I do not accept that Mr. Lamb had control of the business in the sense of a controlling interest. He and the two defendants were equal partners in the partnership and equal shareholders in Vintage. I accept that Mr. Lamb was the leader, and if that is what Mr. Gunter meant by the word "control" in the second sentence of the previous paragraph, 29, I accept the evidence contained in that sentence. But that does not absolve the defendants from their responsibilities as directors of Vintage.
31. Mr. Gunter sold the drinks of Vintage in the United States market. He was bullish about his success in increasing sales in that market and about the prospects of his being able rapidly further to increase sales in the United States. He also expressed confidence in his ability to sell the goods at large profit margins. He was cross-examined about that and about the value of the inventory. A particular example was put to him. The inventory attached to the asset purchase agreement showed an acquisition cost of Speyside whisky as $2.93 a litre of pure alcohol, and a wholesale price of $11.00 a bottle, which works out at $36.66 a litre of pure alcohol. That is an uplift by a factor of 12½. Mr. Gunter said

When I see a wholesale price of $11 I know I can achieve $30. I can sell it for 37½ times the acquisition cost: three times the wholesale price. I have no idea how the inventory figure of $35.7 million was arrived at. I knew we could beat the figures.

MR. NEWEY: How do you know you can beat the 35 million?

A.  Because we were geared up to do so and we were selling, and now we're in a PLC and now we're all excited and new directors are going to be placed on board; some very high powered ones, who didn't last long, albeit. It was very exciting times; repeat buyers, the client base was growing in terms of consumers. It was just a matter of time before all that happened. It's a natural progression in sales.

JUDGE HAVERY: In that case you might have said 350 million for the same reason; you thought you would beat it. Is that right?

A.  Yes, my Lord. Because everything and all the mechanics were in place to do that. I must emphasize, my Lord, strongly that the client base was growing with consumers purchasing the product and the feedback we got was one of so much enjoyment of the product. They were continuing to reorder and recommending all their friends to buy, so it was just a matter of time from my perspective, being involved in sales, and my experience that it's a matter of time before you double your client base, and then you go on a referrals run and double it again. It's just a matter of time.

MR. NEWEY: Just so that I understand, coming back to the 35 million-odd, you did not know how that had been calculated?

A.  Correct.

Q. But, however it had been calculated, you were confident that you could beat it?

A.  Compared to the wholesaler. I'm saying I can beat the wholesale price, yes.

Mr. Gunter then referred to some figures for Castarede VSOP Armagnac. The inventory showed an acquisition cost of $6.47 a bottle and a wholesale price of $23.99 a bottle. He said

A company buying the whole outfit would have to pay $23.99 not $6.47. You could not just buy from the grower because of our sole agency.

32. Mr. Grove and Mr. Gunter, as partners in the Partnership and directors of Vintage, had a conflict of interest as both vendors and purchasers in relation to the asset purchase agreement. Far from giving the Asset Purchase Agreement the attention it deserved, by their own account they gave it no intelligent attention.
33. Mr. Gunter exhibited to his affidavit a copy of the minutes of the meeting between him and Messrs. Lamb and Grove held on 15^th November 2000 to discuss the transfer of assets from the Partnership to Vintage. Those minutes state that a list of assets to be acquired and liabilities to be assumed was presented to the meeting. The list itself was not exhibited. Its existence was not called into question. It appears to be the list of figures marked "final" which Mr. Lamb sent to Mr. Neff on 16^th November (paragraph 18 above). As I have said, the figures of total liability, inventory and goodwill (in particular) are the same as those set out in the PPM. I am satisfied that those figures must have been in the list presented to the meeting of 15^th November.
34. Mr. Grove and Mr. Gunter were cross-examined about the meeting and those minutes. Mr. Grove said that he did not know who had drafted the minutes. He said words which I have noted as follows:

The distribution network in the United States in my opinion was extremely valuable. I did not specifically address my mind to whether the goodwill was worth $52 million.

The balance sheet of 20^th November 2000 mentioned in paragraph 17 above was put to him. That shows an identical figure of goodwill, converted into sterling as £34.8 million. Mr. Grove said

I did not address my mind to the figure of £34 million goodwill. But I would accept anybody's assertion of that if it was a professional accountant. I would say the goodwill, if that's what it is, was worth £34 million.

It may be that by his reference to a professional accountant Mr. Grove was referring to Mrs. Hughes, who signed the auditor's report of 24^th November 2000. However, Mr. Grove did not claim to have seen that report. He said that he did not understand what goodwill was. When asked whether he thought that the Partnership business could have been sold in the market for £34 million he said no, but he trusted the professionals.

35. Mr. Grove was asked whether he had addressed his mind to the question whether it was in the interests of Vintage to buy the Partnership assets for £59 million. (That figure was the sum of the face value of the shares, £7.9 million, and the liabilities of the Partnership, £51.8 million). He said that with his knowledge of the distribution of the products it was a more than acceptable figure. He had not specifically addressed his mind to the question at the time. He was content to rely on the professionals.
36. As to the value of the inventory of the Partnership, the attachment to the asset purchase agreement showed that the cost price, in Sterling terms, was about £3.2 million (see paragraph 16 above). It was put to Mr. Grove that it could not have been in the interests of Vintage to pay more than £3.2 million for the inventory. He would not accept that; when pressed, he said that he was "lost" by the line of questioning. He did accept, however, that it could not be in the company's interest to buy stock at the price at which it could sell it.
37. The question of the list of assets and liabilities was put to Mr. Gunter. He gave evidence to the following effect:

I was always reassured that nothing sinister was going on. I did not know our current liabilities at the time. I was assured that there was no insolvency situation. Probably I did nothing about checking about liabilities. I do not recall seeing the list at the time. I knew of an audit.

With reference to the statement in the minutes that there was a discussion how the company would balance the books, Mr. Gunter said:

We did not discuss how the company would balance the books. Mr. Lamb would have said, I know what I'm doing, you get on with your job. He was an accountant. I did not ask to see the list.

Mr. Gunter also said

I had no involvement whatsoever in the company's acquisition of the partnership business. I have no idea how a partnership is converted into a plc, or how to put balance sheet figures. That work was done by Ben Grocock, Ralph Schweitzer and others. I had no involvement with the contract by which the company purchased the partnership's business. I did not see [sc., at the material time] the Asset Purchase Agreement in draft and final form.

He said he took no interest in the goodwill figure. It was put to him that he knew that the Partnership had very large liabilities. He said he was always told that the clients were entitled to their product, so he had no fear or worry about large liabilities, goodwill or debts. He was asked whether he gave any thought to the liabilities of the Partnership. He said "I was constantly reassured that we were OK". When asked whether he asked for reassurance, he said no, he got it on a daily basis. Those were exciting times. By that last remark he was referring, as I understand it, to his success as a salesman. He said he did not understand the working of the figures in the PPM and, so far as he could recall, he did not ask anyone to explain them.

38. I do not accept Mr. Gunter's explanation of his use of the word "reassured". I am satisfied, having regard to all the evidence, that at the least he had qualms about the amount of liabilities of the Partnership. Yet on his own evidence he took no interest in the figures of liability and goodwill available to him.
39. Mr. Gunter accepted that he had seen the PPM just before it was sent to the clients. He gave evidence that he remembered the figure of $77.7 million (which represented liabilities) but he said that he did not understand what the figures meant. He thought it was all promissory notes. His only contribution, he said, was forecast sales figures for Vintage for the years ended 31^st December 2001, 2002 and 2003 contained in a business plan sent to clients with the PPM. The figures in question were $34.6 million, $40.2 million and $59.8 million respectively. He said:

There was a track record justifying these projections. We started from nothing. We built up a large trade in the United States. Why did we buy Harbor and BBI? Why did we buy the premises at St. James's? Why did we buy the pubs? These figures were very conservative.

40. It is true that an analysis of income and expenses of the Partnership shows income increasing by 68 per cent. from the year 1996/97 to 1997/98, and then increasing 16-fold in the next year and ninefold again in the following year, to a figure of £16.5 million. However, first draft figures as at 30^th September 2001 for the Vintage Hallmark Group (Vintage, Vintage Ale, Harbor Industries, Eurotec) show sales of £379,000 for Vintage, £2.3 million for Vintage Ale, £2.0 million for Harbor Industries and £170,000 for Eurotec. The figures for Vintage Ale and for Harbor Industries are not for the whole year. They appear to be for approximately half a year in each case. Trading losses are shown as totalling £4.1 million, and capital losses £5.7 million. Inventory is shown as £24.0 million, with a possible downward adjustment of 50 per cent. Goodwill is shown as £37.2 million, with possible downward adjustments of 50 per cent. and 100 per cent.
41. The minutes of a board meeting of Vintage held on 9^th October 2001 and attended by Mr. Lamb, Mr. Gunter and Mr. Grove among others referred to a report dated 29^th June 2000 and received by the Partnership on 6^th August 2000. In that report, the inventory of the Partnership was valued at $45 million and its liability to its investors was valued at $56 million. The minutes recorded that in August 2000 it was recognized by the Partnership that it might be necessary to sell some of the inventory at lower prices to get the inventory moving. Mr. Gunter gave evidence that his reaction was that "We needed to increase our sales". He said:

At all times Mr. Lamb told me that the basic valuation of the inventory was far lower than it should have been. He took the wholesale price less 15 per cent. or something like that.

42. I have seen a number of instances in the documentation before me where customers have bought goods from the Partnership or Vintage without delivery on terms that they could sell them back to the Partnership or Vintage, as the case might be, at substantially enhanced prices representing high rates of return over short periods. An expert witness before me, Mr. Elswood, the International Head of Wine Sales for Christie's auction house and a director of Christie Manson and Woods (London), has been responsible for the valuation and appraisal of a wide variety of wines and spirits. He examined many documents in this case including a spreadsheet of all deals and returns of the Partnership and Vintage. He expressed the following conclusions in his unchallenged affidavit:

Firstly, the vast majority of the products offer no interest for potential buyers as they are not those products that form the body of wines/spirits with investment potential.

Secondly, in the very few instances where the product has some possible wider recognition value (such as one of the wines, Chateau Latour 1996 or the older vintage Armagnacs) the price paid by the investor was so ridiculously high that they stood no chance of reselling at a profit. As an example, the Latour 1996 was offered by Vintage at between $5184-5760 per dozen. The fair market price at the time in London from recognised outlets was $1200-1400. A further example is a bottle of Castarede Armagnac 1931, offered by Vintage at $499 and with a fair market value at the time of $150-200 (exchange rate of $1.4 to GBP used). To illustrate the investment potential of these two items, the Latour 1996 now trades for approximately $3000 per dozen in 2004 and the 1931 Armagnac at $250 (exchange rate of $1.8 to GBP used). Even with a favourable current pound to dollar exchange rate improving the price, it can be seen that the investment potential of these specific items was destroyed by the original unrealistically high sale price from Vintage.....

From my own calculations, I have estimated that the average return offered by Vintage lay somewhere in the region of 35-40% pa, often by way of guaranteed 'buy-back'. Even if Vintage had been offering proper investment grade wines and spirits at competitive prices (which was not the case) then a return of 40% pa was not even close to being realistic. From my own 20 year experience in the legitimate world of wine investment, if a buyer follows the four correct guidelines.....they [sic] stand a fair chance of making between 8-10% pa, assuming global market conditions are in their favour. This can be considered a maximum figure, especially when applied across the range of the various types of wines available.

I accept that evidence of Mr. Ellswood. Whilst he did not specifically mention whisky, which was, I think, the principal subject of Mr. Gunter's evidence in this regard, it is clear that he studied many Vintage documents relating to whisky and that his expertise covered whisky. I prefer the evidence of Mr. Ellswood to that of Mr. Gunter where they are mutually inconsistent.

43. Another expert witness was Margaret Lombard-Chibnall. She was managing director of Lombard Brands Limited. She had long experience of spirits markets, specifically whisky. She concluded that the rates of return offered by Vintage to investors were unobtainable and completely unrealistic. Again, her evidence was unchallenged.
44. I am satisfied that the buy-back deals offered to American (including Canadian) customers were quite unrealistic in the sense that Vintage could not possibly expect to make a profit, or even come close to breaking even, by honouring them. They were a means of raising money from credulous customers. That conclusion is borne out by Mr. Gunter's own evidence. First, there is his evidence set out in paragraph 29 above, viz:

Mr. Lamb and Mr. Hughes.....conceived a new way of financing the Partnership, apparently utilising the Partnership-owned products as leveraged security for bringing new investment into the business. Apparently for the cycle to work and continue working, i.e. in order that investors would be paid out on time and with the promised returns, sales revenue was essential and the sales team worked tirelessly towards this end.

Mr. Gunter was asked why Vintage did not itself sell at the buy-back price. He said that Mr. Lamb fixed up the deals. "He may have needed the money to help the company along". After another question, he said, according to my note:

I told Mr. Lamb he should sell direct and make these profits himself but he said he needed the money up front.

45. A document dated 31^st October 2004 containing a complaint by a client, Mr. Gordon, was put to Mr. Gunter. The complaint was this. A salesman (not Mr. Gunter) had offered Mr. Gordon a deal for the purchase of vodka. Mr. Gordon was told that he would take title to the vodka and it would remain his until it was resold. He was told that his $50,000 investment would be resold for $90,000 in three months time. He made an investment of $50,000 on 9^th June 2000 by wire to Vintage Hallmark. He subsequently received confirmation for a Cutty Sark Single Malt Whisky shipment. He was told by the salesman that the vodka shipment was oversubscribed and that the whisky shipment would be under the same terms. Before three months had passed, Mr. Gordon was told that the shipment had yielded him the $90,000 and the deal was complete. He asked for the money, but he received considerable resistance from the salesman. He also spoke with David Lamb. They told him that they were doing deals that would yield him considerably more. He told them he was not interested in any more deals. He reluctantly agreed to take a promissory note for the $90,000 on the assurance of the salesman and Mr. Lamb that the note was secured by $4 to $5 million in liquor in storage in the U.S.A. in Westbury, Long Island as well as a bond from Lloyd's of London. The note purported to yield 10 per cent. interest and was due one year from 26^th July 2000. In early 2001 he asked the salesman for payment on his note. The salesman strongly recommended that Mr. Gordon convert the note to stock. Several times he was told that the cheque was in the mail. Finally, about March 2001 he was told that if he converted his note to stock, then the note would be paid off. He agreed that, on terms that he would be paid within two weeks. He never was paid. In April 2001 he spoke to four people including Mr. Gunter. All of them told him he would be paid for his note: if not in full, then with $50,000. In September 2001 he had multiple telephone conversations with Mr. Lamb, Mr. Gunter and another. "They" told him that they would pay $50,000 and the remainder would go to him in stock. He agreed. Despite written confirmation of payment from Mr. Gunter, he received no payment.
46. The parts of that complaint involving Mr. Gunter were the subject of questions of Mr. Gunter from counsel. Mr. Gunter said:

I do not remember this.....The only reason I would speak to a client like this would be if Mr. Lamb told me to talk to the client. It was always Mr. Lamb who made the payment. I would never promise payment or give dates because it was impossible for me to say, but on the occasions when I did people probably got their money back.

A letter dated 26^th September 2001 from Mr. Gunter to Mr. Gordon was put to Mr. Gunter. It said, among other things:

We will start trimming back your equity position from 1^st October 2001. The amount of $50,000 will be returned to you by 15^th October 2001.

Mr. Richard Gunter.....will be monitoring your account on your behalf.

Mr. Gunter said that it was appropriate for him to monitor the situation because that was within his role. He accepted that it seemed to be the case that Mr. Gordon did not get his money. Mr. Gunter said:

It seems to me that Mr. Lamb for whatever reason decided he did not want to give the money back.

47. The records of the Partnership record a transaction in which a Dr. and Mrs. Paul agreed to buy Cognac from the Partnership at a price of $50,000 on 31^st January 2000 and sell it back to the Partnership on 22^nd February 2000 for $70,000 (which the record notes was to be paid by credit note, the transaction being rolled over into another purchase). That represents a paper profit to Dr. and Mrs. Paul of 40 per cent. in less than a month. Mr. Gunter had drawn £900,000 from the Partnership (see paragraph 53 below). That matter was also put to him:

Q. Why not use your money for the 40 per cent. profit in four weeks?

A. Mr. Lamb was desperate to get the sole distribution rights in the United States. He could not get the finance elsewhere. He asked me to talk these people up. He continued to set the deals and we implemented them. I am not arguing that fact.

Q. Why not use your money?

A. Obviously Mr. Lamb felt that this was the only way to get the money [and volume?] to get the distribution rights.

Mr. Gunter pointed out that the client had title to the product. The same record shows that the credit note for $70,000 was used to purchase Ben Nevis Special Export whisky at a price of $70,000 on 21^st February 2000 on terms that Dr. and Mrs. Paul would (or could) resell it to the Partnership on 31^st July 2000 at a price of $132,300, representing a profit of 89 per cent. in five months. That transaction was put to Mr. Gunter. He said:

Mr. Lamb obviously believed that these goods would sell in the U.S. within that time frame. We were the sole distributors for Ben Nevis bottled or cask in the U.S.

Mr. Gunter put himself forward as the, or at any rate an, expert on sales of the Partnership's and Vintage's drinks in the U.S. Yet he failed to explain of his own knowledge how that transaction could be justified.

48. I find it implausible that a man who on his own admission was an effective salesman should not know the terms on which deals were made with customers, or understand the reason for the agreement of the terms in question. Moreover, on his own evidence Mr. Gunter knew that Mr. Lamb wanted the money up front and Mr. Lamb asked him to talk the clients up. That Mr. Gunter should not have known the terms of the transactions, on the basis of which terms the clients could be talked up, is implausible. I am satisfied that Mr. Gunter knew that the Partnership and later Vintage were carrying on business in that way.
49. On 8^th December 1998 Dr. and Mrs. Paul bought a cask of Cognac from the Partnership for $10,700 on terms that the Partnership would buy it back on 23^rd November 1999 for $15,700 payable by credit note. Mr. Grove said that he was not familiar with the names of Dr. and Mrs. Paul before filing his defence. He said that he knew nothing about the transaction. A letter to Dr. and Mrs. Paul dated 9^th December 1998 and signed by Mr. Grove p.p. David Lamb expresses thanks for their order to purchase the cask of Cognac at $10,700. It goes on:

As confirmed, the payment for this transaction is to be made by personal check.

I will keep you informed of our progress with this transaction at regular intervals.

Mr. Grove was asked to explain his signature on the letter. He explained that there was no-one in the office: he would have been asked to sign the letter. All the documents were generally signed by Mr. Lamb or one other person. He was asked what was meant by "progress with this transaction". He said:

"Progress" I think refers to the progress of the product sale in the United States. The product would have to be bottled and shipped, or not, as the case may be.

He said he did not know whether Dr. and Mrs. Paul were going to sell the goods back to the company: this was one of the brands sold in the United States. I conclude from that evidence that Mr. Grove knew that a transaction for the purchase of drink could be a transaction in which the purchaser continued to have an interest, possibly by way of sale of the same product in the United States; and that if the product was not to be sold on in the United States, the Partnership (or Vintage, as the case might be) might buy it back.

50. The first draft figures of Vintage as at 30^th September 2001 (paragraph 40 above) do not bear out Mr. Gunter's bullish forecast of increasing sales (paragraphs 31 and 39 above). Moreover, Mr. Gunter said that the maximum individual deal he had done on the open market was for $37,000. By the open market I take it he meant sales otherwise than to clients who entered into buy-back deals. There was recognition of a need to reduce prices to get the inventory moving and to increase sales (paragraph 41 above). Thus Mr. Gunter's evidence that the valuation of the inventory was justified by the capacity of Vintage to sell the goods at a greater price is not borne out, and I reject it.
51. In the papers before the court there was an unsigned draft witness statement of Mr. Barry Hughes. I do not regard that statement as evidence in this case. But one proposition in it was put to the defendants. It was that the Partnership had a Belgian bank account into which approximately US$423,000 had been paid, and that in December 2000 each of the partners (i.e., Mr. Lamb, Mr. Grove and Mr. Gunter) had transferred £91,000 from that bank account into his personal account. Mr. Grove said, according to my note:

I understand this account was for customers who wanted to keep their money out of the UK. I did not receive £91,000 so far as I recall. I doubt I received it. If a document exists, I would admit it.

52. The matter was also put to Mr. Gunter. He said:

The Partnership had a Belgian bank account. I have no idea why it was not included in the purchase by the company. I am sure it would have been. All I remember is I received a figure of £89,000: my memory was jogged by the tax man.

Q. $423,000 is equivalent to £282,000 – each of the three of you gets approximately £90,000.

A. The chances are, there was more than $423,000 in that Belgian account. The tax man put the £89,000 into the 1999/2000 year. He included it in the £931,000.

The figure of £931,000 mentioned by Mr. Gunter was the amount of his drawings from the Partnership in the year 1999/2000, ending 30^th April 2000. When a document was put to Mr. Gunter from which it appeared that the £89,000 was not included in the £931,000 Mr. Gunter accepted that that looked to be the case. "All I know is that I've got a serious tax bill to look forward to", he said.

53. Mr. Grove and Mr. Gunter were not non-executive directors of Vintage. They were joint managing directors of a company with only three directors at the time that Vintage purchased the Partnership business. Their salaries were equal to that of Mr. Lamb. That reflected the fact that they had been equal partners in the Partnership. Their position had then been scarcely subordinate to that of Mr. Lamb: each of the three of them drew about £900,000 from the Partnership in the year 1999/2000. Mr. Grove and Mr. Gunter claimed that Mr. DeCicco had been a partner also. Mr. Gunter produced a document showing that on 13^th March 2001 Vintage paid Mr. DeCicco $250,000 for "Distribution and Carriage". Mr.Grove said that there had been an earlier payment to Mr. DeCicco of $100,000. This figure of $250,000 came to light later, he said. It could only be viewed in his opinion as a golden handshake: consideration for joining the Partnership. Had it really been for distribution and carriage, it would have been paid to Mr. DeCicco's company, Harbor Industries (US) Ltd. Mr. Grove said that Mr. DeCicco joined the Partnership as a partner in May 2000. Mr. Grove exhibited an email dated 19^th May 2000 from Mr. DeCicco to Mr. Lamb and Mr. Grove thanking them for the honour of being their partner. However that may be, it does not materially affect the defendants' position for present purposes.
54. In giving his evidence in answer to questions in cross-examination, Mr. Grove was evasive and contradicted himself on a number of occasions. I find him to have been an unreliable witness. That finding is reinforced by the curious piece of evidence mentioned in paragraph 51 above.
55. The defendants submitted that they gained nothing from the sale of the Partnership, since their shares in Vintage are worthless. I reject that submission. Their shares in the Partnership were in truth worthless. Moreover, once customers who were owed money had given up their claims in return for equity in Vintage, the defendants were relieved of substantial financial liabilities. As Mr. Burns said in his unchallenged affidavit:

As a result of the share offering, the Company managed to issue some 60 million £1 ordinary shares to 'investors', largely in return for the investors forgoing debts owed to them.

56. As I have said, both defendants were equal partners in the Partnership with Mr. Lamb. They were joint managing directors of Vintage, and each had a shareholding equal to that of Mr. Lamb. Thus a priori, one would expect them to have a good general knowledge of the nature of the business of the Partnership at the time that its business was sold to Vintage, and to have a good general knowledge of the business of Vintage then and thereafter. In particular, they had access to the figures of goodwill and inventory value and could have availed themselves of it, in so far as they did not in fact do so. Even on their own evidence, Mr. Grove and Mr. Gunter were recklessly indifferent and grossly negligent in relation to all of the matters raised in paragraphs a, b and c of the Secretary of State's contention set out in paragraph 6 above. That alone renders them utterly unfit to be concerned in the management of a company.
57. In view of the self-inconsistency and evasive nature of Mr. Grove's evidence, I reject his denial of knowledge of the way the Partnership and Vintage were conducting their business or of the true value of the inventory and goodwill purchased. Even if he did not in fact know the true figures, he turned a blind eye to the evident fact that Vintage was effectively paying some £59 million for a worthless partnership and to the fact that Vintage, like the Partnership, was raising money by offering impossible returns to credulous clients.
58. It was clear from his evidence mentioned above that Mr. Gunter knew at least the general nature of the transactions entered into by the Partnership and Vintage with their clients. Mr. Gunter was clearly, from the manner of his giving evidence before me, an assertive and self-confident man. I do not accept his evidence (by implication) that Mr. Lamb would not have let him see the figures (paragraph 37 above). I reject Mr. Gunter's evidence that the value of the inventory was more than that stated in the figures contained as wholesale price in the Asset Purchase Agreement, since it is inconsistent with the unchallenged evidence of Mr. Elswood and Ms. Lombard-Chibnall. I reach the same conclusion in relation to Mr. Gunter as that expressed in relation to Mr. Grove in the last sentence of paragraph 57 above.
59. Accordingly, I find that each of the defendants had actual knowledge of, or deliberately turned a blind eye to, all the matters set out in paragraphs a to f of the Secretary of State's contention set out in paragraph 6 above. Mr. Grove and Mr. Gunter will each be subject to a disqualification order under section 1 of the Act for the maximum permitted period of fifteen years.