B e f o r e :
HHJ DAVID COOKE
Sitting as a judge of the High Court
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Between:
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Nedim Ailyan (1) and Mark Fry (2)
The Trustees in Bankruptcy of Kevin Foster
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Applicants
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- and -
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Lee Smith (1) Darren Smith (2) Barry Bashford (3) and Nigel Stevens (4)
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Respondents
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Timothy Evans (instructed by Edwin Coe LLP) for the Applicants
The Fourth Respondent appeared in person
The First, Second and Third Respondents did not appear and were not represented
Hearing dates: 16-18 November 2009
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HH Judge David Cooke :
Introduction
- By their application issued on 15 November 2007, the Applicants Mr Ailyan and Mr Fry, who are the trustees in bankruptcy of Mr Kevin Foster, seek relief pursuant to section 339 of the Insolvency Act 1986 in respect of sums in excess of £11 million paid into what they say was a pyramid scheme dishonestly run by the respondents. It is important to note that the sole ground of relief is that the transactions complained of were transactions at an undervalue within the meaning of that section. No additional cause of action, for example in misrepresentation or deceit, is pleaded, even though it is alleged that the circumstances surrounding the scheme and the payments made by Mr Foster included dishonesty and misrepresentation on the part of the respondents, or some of them.
- Section 339 and the following sections provide as follows (so far as is material):
"339 Transactions at an undervalue
(1) Subject as follows in this section and sections 341 and 342, where an individual is adjudged bankrupt and he has at a relevant time (defined in section 341) entered into a transaction with any person at an undervalue, the trustee of the bankrupt's estate may apply to the court for an order under this section.
(2) The court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if that individual had not entered into that transaction.
(3) For the purposes of this section and sections 341 and 342, an individual enters into a transaction with a person at an undervalue if—
(a) ...
(b) ..., or
(c) he enters into a transaction with that person for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by the individual.
341 "Relevant time" under ss 339, 340
(1) Subject as follows, the time at which an individual enters into a transaction at an undervalue or gives a preference is a relevant time if the transaction is entered into or the preference given—
(a) in the case of a transaction at an undervalue, at a time in the period of 5 years ending with the day of the presentation of the bankruptcy petition on which the individual is adjudged bankrupt,
(b)...
(2) Where an individual enters into a transaction at an undervalue or gives a preference at a time mentioned in paragraph (a), (b) or (c) of subsection (1) (not being, in the case of a transaction at an undervalue, a time less than 2 years before the end of the period mentioned in paragraph (a)), that time is not a relevant time for the purposes of sections 339 and 340 unless the individual—
(a) is insolvent at that time, or
(b) becomes insolvent in consequence of the transaction or preference;...
(3) For the purposes of subsection (2), an individual is insolvent if—
(a) he is unable to pay his debts as they fall due, or
(b) the value of his assets is less than the amount of his liabilities, taking into account his contingent and prospective liabilities.
342 Orders under ss 339, 340
(1) Without prejudice to the generality of section 339(2) or 340(2), an order under either of those sections with respect to a transaction ...entered into or given by an individual who is subsequently adjudged bankrupt may (subject as follows)...
(d) require any person to pay, in respect of benefits received by him from the individual, such sums to the trustee of his estate as the court may direct;...
(2) An order under section 339 or 340 may affect the property of, or impose any obligation on, any person whether or not he is the person with whom the individual in question entered into the transaction ... but such an order—
(a) shall not prejudice any interest in property which was acquired from a person other than that individual and was acquired [in good faith and for value], or prejudice any interest deriving from such an interest, and
(b) shall not require a person who received a benefit from the transaction ...in good faith and for value to pay a sum to the trustee of the bankrupt's estate, except where he was a party to the transaction ..."
- It is necessary therefore to identify the transaction or transactions complained of, determine whether they were "at an undervalue" within the meaning of section and whether they occurred "at a relevant time". If so, the court is required to make "such order as it thinks fit for restoring the position to what it would have been if that individual had not entered into that transaction", bearing in mind the restrictions on the orders that can be made, and the non-exclusive examples of the provisions which such orders may contain, set out in section 342.
- Mr Foster was made bankrupt on 4 July 2005, on a petition brought by the FSA on the grounds of public interest. Prior to that time he ran a substantial business under the name "the KF Concept", in which he received money from members of the public, to whom it appears he promised substantial rates of return which he expected to achieve by "investing" the money in various schemes run by himself and others. One of these, apparently, involved a system of gambling on football results. Another was the scheme run by the respondents. Mr Foster is said to have taken a total of some £42 million from the public. His affairs, and those of the respondents, have been investigated by the SFO, and the evidence before me includes material seized by the SFO or recovered from computers seized by them, statements and Affidavits given to the SFO, and the transcripts of examinations of Mr Foster and Mr Lee Smith under oath before the Chief Registrar.
- Throughout the investigation and the proceedings so far, the first, second and third respondents have been represented by solicitors and counsel, and it is clear that they have denied all allegations of wrongdoing on their part and fought the proceedings tooth and nail up to an application for the proceedings to be struck out, or for summary judgment to be given in their favour, which was heard and refused by Mr Nicholas Strauss QC, sitting as a Deputy Judge of the High Court, on 29 July 2009. They have not however appeared at the hearing before me, and have not given any explanation for their absence or made any application for the proceedings to be adjourned. I am satisfied that they have had notice of the hearing date and been served with copies of the court bundles, which amount to some 13 lever arch files. I have the benefit of seeing the skeleton argument of Mr McGrath, who represented those respondents at the summary judgment application, which shows me the arguments raised on their behalf, all of which are relevant to the issues before me.
- The fourth respondent Mr Stevens appeared in person. He filed a defence to the claim against him and lodged a document described as a skeleton argument shortly before the hearing. He had not previously served any witness statement containing evidence of fact, but as his skeleton argument contained matters of fact he elected to go into the witness box to affirm its contents, and was cross-examined by Mr Evans on behalf the applicants. Somewhat remarkably, it appears that he has not been interviewed or investigated in any way by the FSA or the SFO in relation to this matter, although it is clear that he played a role of some significance, albeit relatively minor in comparison with that of the other respondents.
- The evidence for the applicants is contained in two statements of Mr Ailyan, which he confirmed before me. Mr Stevens did not seek to contest that evidence, and there is of course no evidence given at trial by the other respondents to contradict it. The applicants rely on the statements and Affidavits made by the other respondents, insofar as they constitute admissions against their own interest.
- It is fair to say that despite the enormous volume of material and a lengthy investigation, the applicants have not been able to present the court with a fully detailed and coherent picture of the way in which the respondents' scheme operated. This is not through any lack of effort on their part; I pay tribute to the detail in which the facts have been gone into and the incomplete and contradictory explanations provided by the respondents have been analysed to get as far as the applicants have done. I am satisfied that the picture that has emerged is sufficient for me to determine the issues raised by the application, and also that it supports the general allegations of dishonesty made by the applicants in relation to the way the respondents scheme was run.
Background facts
- There were two parts to the scheme, firstly an operation run through a company called Infocus Cayman Ltd, incorporated in the Cayman Islands, which purported to sell photographs and other works of art through a website, and secondly the alleged pyramid scheme, which was operated under the name "Planline" and had its own website. The basic system was that a member of the public wishing to participate would go on to the Infocus website and choose a piece of art from a gallery displayed on screen. It appears that initially at least all the art offered for sale was in the form of photographs, and certainly that is all that is referred to in the terms and conditions displayed on the website. All the items offered were priced in Swiss francs, in multiples of ChF 260. Having selected an item, an electronic copy of the photograph was e-mailed to the purchaser, and he was permitted to use it as a computer screensaver. A hard copy of the photograph was also printed, apparently in England, and sent by post to the purchaser. An invoice was raised for the purchase and proceeds received were paid into an account in the name of the company at UBS in Interlaken, Switzerland.
- For every ChF 260 spent, the purchaser was offered one "free unit" in the Planline scheme, which was run through its own website on which various documents, including a set of terms and conditions and one described as a "Planline tour," purported to describe it. The description is, the applicants would say deliberately, baffling. What can be discerned is that the units were allocated to a "line" of the Planline scheme and that each line contained twice as many units as the line before, in a classic pyramid structure. Payments would be made to the holders of units on one line when a certain number of following lines were completed. Members' attention was drawn to a system by which half the units created by subsequent purchasers would "attach" to those who had introduced them, filling up spaces on a circular diagram of concentric lines, each containing twice as many as the one before. This created an incentive to each member to introduce others with a view to filling up a number of lines sufficient to entitle him to a payment. The documents and statements refer to "lines" confusingly both in relation to the circles representing the interests of each individual member, or each unit they owned, and in relation to the total number of units in the scheme.
- In the latter context, the evidence shows that before any units were allocated to members of the public, the respondents and their friends and relatives were allocated all the units up to line 10 of the scheme, ie a total of 1023 units. The following table shows the number of units on each line, the cumulative total of units theoretically purchased once each line is filled, and the amount of money that would have had to be paid to acquire those units at the rate of either ChF 260 or £110, being the approximate sterling equivalent used in the evidence.
| Line |
Units |
Cumulative |
x ChF 260 |
x £110 |
| 1 |
1 |
1 |
260 |
110 |
| 2 |
2 |
3 |
780 |
330 |
| 3 |
4 |
7 |
1,820 |
770 |
| 4 |
8 |
15 |
3,900 |
1,650 |
| 5 |
16 |
31 |
8,060 |
3,410 |
| 6 |
32 |
63 |
16,380 |
6,930 |
| 7 |
64 |
127 |
33,020 |
13,970 |
| 8 |
128 |
255 |
66,300 |
28,050 |
| 9 |
256 |
511 |
132,860 |
56,210 |
| 10 |
512 |
1,023 |
265,980 |
112,530 |
| 11 |
1,024 |
2,047 |
532,220 |
225,170 |
| 12 |
2,048 |
4,095 |
1,064,700 |
450,450 |
| 13 |
4,096 |
8,191 |
2,129,660 |
901,010 |
| 14 |
8,192 |
16,383 |
4,259,580 |
1,802,130 |
| 15 |
16,384 |
32,767 |
8,519,420 |
3,604,370 |
| 16 |
32,768 |
65,535 |
17,039,100 |
7,208,850 |
| 17 |
65,536 |
131,071 |
34,078,460 |
14,417,810 |
| 18 |
131,072 |
262,143 |
68,157,180 |
28,835,730 |
- Mr Foster is said to have joined (around April 2002) at or about the end of the line 15, and by the time the FSA intervened to put an end to his practice it was said that line 18 was still incomplete.
- Each unit owned by a member was said to earn rewards when a certain number of lines in a circular diagram, starting with that unit in the centre, had been filled. It appears there were intended to be three levels of these rewards, referred to as "plans A, B and C", and that the first reward (ie "Plan A") would be earned when three further lines had been filled, the outermost of which would therefore contain eight units. The amount of this reward was ChF 1600, or ChF 200 for each of the eight units in the outer line. That value would be credited to what was referred to as a "holding account" maintained in the member's name.
- It is not clear, to me at least, whether the amount of these rewards would be actually payable immediately when the appropriate number of lines in the member's own circular diagram had been filled, or whether payment would only be made once a complete line of the whole Planline scheme had been filled. It is clear for instance that members, who were given online access to their own circular diagrams and the balances in their holding accounts, were shown steadily increasing balances in those accounts, suggesting payment, or at least credit to the holding account, by reference to the number of units "attached" to their own original units. On the other hand, Mr Foster refers in his evidence to being told that line 11 of the plan had paid out, which suggests that payment was made by reference to the overall number of units and lines filled in the whole scheme.
- Rewards were also available by way of various other incentives. The "Planline tour" shows that the 8 units which generated a reward payment of ChF 1600 under "Plan A" in the example above would also give rise to payments to the accounts of those who had directly or indirectly introduced their purchasers, totalling ChF 825. Mr Ailyan makes the point in his witness statement that the cost of these eight units is ChF 2080 (8x 260) and yet the scheme apparently provides for rewards flowing from the purchase totalling ChF 2425 (1600 + 825). This, he says, makes the scheme inherently insolvent, and that is before taking account firstly of various ad hoc schemes which were run from time to time under which extra bonuses were allocated for introducers and secondly what appears from the evidence to have been the wholesale manipulation of the number of units and balances on holding accounts in which such units or balances were simply created and allocated on the instructions of the first to third respondents as it suited them from time to time. This deficit is also before taking account of any costs of running the scheme, including the costs of purchasing the art that was supposed to have been the object of the payments.
- In addition, although Mr Evans did not seek to rely on this, I observe that it would appear that the eight units giving rise to a payment of ChF 1600 to an earlier unit under "Plan A" should also give rise to further rewards attributable to still earlier units under "Plan B" and "Plan C", further increasing the inevitable deficit.
- Once a member had accumulated a balance in his holding account he was said to have the option of withdrawing it in cash or leaving it in place so that his units would continue to earn further rewards. Electing to leave units within the scheme was referred to as "re-buying" those units and, apparently, generated a further entitlement to pieces of art even though no money changed hands.
- It is apparent that the structure was designed to encourage members not to cash in the amounts apparently available to them. There was also a system by which members with holding account balances could "sell" those balances to others, whereupon the "purchaser" would have the units in the Planline scheme corresponding to those balances in some way attributed to him, presumably so that they would either continue to earn further rewards themselves or trigger the payment of rewards on existing units held. Somewhat oddly, although these transactions took place between members, and did not on the face of it involve any transaction between a member and the scheme, they were also said to give rise to entitlement to additional pieces of art.
- Mr Foster appears to have become an enthusiastic participant in the Planline scheme. Most members participated under pseudonyms; the main one used by Mr Foster was "Delacey" but according to Mr Lee Smith he also used and controlled a great many others. The trustees have had the greatest difficulty piecing together the financial records provided by the respondents, which are incomplete and confusing. They strongly suspect that the records do not show a complete picture of the dealings between Mr Foster and the respondents, but the respondents' own evidence contains admissions as to certain amounts, which are relied upon as minimum values for the purposes of these proceedings. The amounts are as follows:
i) cash payments of some £2,245,421.96 paid into the bank account of Infocus (Cayman) Ltd between 24 July 2002 and 7 January 2004. This figure comes from a schedule produced by the respondents and exhibited by Mr Ailyan to one of his witness statements (NA 39 at bundle 11/50) entitled "Cash Paid by DeLacey to Planline as per LNS/4", which is a summary of purchase invoices raised by the company for payments marked as being made in cash. Each invoice is expressed to be in respect of a purchase of art, and each such purchase gave rise to the issue of units in the Planline scheme.
ii) payments by cheque or bank transfer totalling £2,257,536.79 made to Infocus (Cayman) Ltd between 22 June 2002 and 24 November 2003, on a similar basis. These payments are admitted by Mr Lee Smith in his second affidavit and referred to a schedule attached to the affidavit (LNS4 at bundle 5/18).
iii) a further cash amount of £499,985 paid to Infocus (Cayman) Ltd, on the same basis, referred to in paragraph 34 of Mr Smith's second affidavit and a schedule attached (LNS8 at bundle 5/19).
iv) sums of £1,655,129 paid between 25 November 2002 and February 2004. Paragraph 41 of Mr Lee Smith's second affidavit refers to these payments being made "directly into the administration centre of Planline" in return for the transfer of units or holding account balances belonging to other members of the Planline scheme, mainly but not entirely the respondents. These transactions are said by Mr Smith to have been made partly on a credit basis, leaving a balance outstanding of £5,950,928 owing by Mr Foster "to Planline members".
v) further amounts of £4,403,029 paid from the middle of 2003 onwards to the respondents and others as repayment of the credit on the above transactions.
- The total of these amounts is £11,061,101, of which £5,002,943 was paid to Infocus (Cayman) Ltd and resulted in the issue of new units in the Planline scheme (which I will refer to as the "purchase transactions"), and £6,058.158 was paid to the respondents and other individuals for transfer of units and/or holding account balances (which I will refer to as the "transfer transactions"). The case for the Trustees is that each dealing in which money was paid for any of the above purposes constitutes a 'transaction' by Mr Foster for the purposes of the section, all of them were made at a 'relevant time', all or most of them were made with the defendants, and all of them were 'at an undervalue' within the meaning of the section.
Were the dealings 'transactions' by Mr Foster?
- An argument was raised before Mr Strauss QC as to the basis on which Mr Foster held the monies used to make these payments. It was said that all of the monies had been raised from members of the public by Mr Foster and were either held and invested by Mr Foster as trustee for those members of the public, or would be the traceable proceeds of his having defrauded them, in which case they were held on resulting or constructive trust. In either event, it is said, Mr Foster had no beneficial interest in the monies, so that paying them over to Planline or the respondents has not prejudiced his own assets and was not a "transaction" within the meaning of section 339. For that proposition, the respondents' counsel referred to Re Taylor Sinclair (Capital) Ltd [2002] BPIR 203, in which it was held that a limited company which received funds from a third party into its own account and paid those funds on at the direction of the third party had not itself entered into a "transaction" within the meaning of the equivalent section, on the basis that there was no element of dealing between the company itself and the payee.
- The respondents themselves have produced no evidence as to the basis upon which Mr Foster collected and paid the money he did. The evidence of the trustees is that in the bankruptcy the members of the public who gave money to Mr Foster are being treated as creditors, rather than trust beneficiaries. There is an estimated shortfall of some £9 million. Such records as exist for Mr Foster's business do not enable it to be said with any certainty that particular amounts paid into the Planline or any other scheme relate to identifiable contributions from any individual "investor". The trustee's evidence (paragraph 253 of Mr Ailyan's first witness statement) is that Mr Foster told his investors they were becoming members of schemes under various different names including "Corporate growth plan" "Phase 9" and "Platinum scheme", but the nature of the arrangements was that the individual "investors" deposited money with Mr Foster which he then used as he saw fit, having given an expectation, and in some cases a promise, of a return to the "investors".
- I heard evidence from Mr Hodgkins, who described himself as having been a "director of the KF Concept", who told me that records were kept of the amounts received from individuals, although he did not have access to them. The individuals were given a certificate stating that they had paid into a named scheme (such as "Phase 9"), but Mr Hodgkins was unable to say whether any records were kept linking the receipt of funds from a particular individual and a particular payment into the Planline scheme. He was only aware that another employee, Mr Gibb, would periodically tell Mr Foster how much was available to buy units, and Mr Foster would then arrange to buy them. Some "investors" were repaid when they demanded their money back, but his understanding was that the money used to repay these people came either from gambling winnings or receipts from later investors, and not from any proceeds of the Planline scheme or any other scheme in which Mr Foster may have used the money.
- This evidence is slight, but in my judgment it does not show a situation comparable to that in the Taylor Sinclair case. In that case, a specific amount was received by a company for the purpose of payment on to a named recipient, on behalf of the provider of the funds. The funds were applied as directed, so that the company incurred no liability to the provider once it had accounted for the funds. As between the company and the recipient, the company had not entered into a transaction of its own at all because it had simply passed on monies on behalf of the provider at its direction. There was no element of dealing between the company and the third party. That is not the case here. Mr Foster did not put in place transactions between his investors and Planline, he put in place two sets of dealings, one in which he received the money and issued receipts of some sort to his investors, and another in which he applied the money to the Planline scheme (among others), acquiring units and holding account balances in his own name or various names of his own devising, there being no evidence to link any such names to particular investors. In doing so, he incurred liabilities to his investors and acquired assets with which he no doubt hoped he would be able to satisfy them. If the assets were insufficient, his liability to the investors would remain, subject to any terms he agreed with them. In applying the money in his possession, Mr Foster was therefore entering into transactions which affected the amount of his own assets and liabilities, in contrast to the position of the company in the Taylor Sinclair case. There was plainly in my view a dealing between himself on the one hand and Planline or the respondents on the other.
- This is not in my judgment affected by the possibility that one or more of Mr Foster's investors might be able to pursue a tracing claim to particular assets. Unless and until such a claim is made and established, and there is no evidence that any have been, such assets as there are, including any deriving from the amounts paid to the respondents, are owned by Mr Foster and available for payment to all his creditors.
- I conclude therefore that the circumstances in which amounts in question were paid do amount to "transactions" to which Mr Foster was a party, within the meaning of the section.
Were the transactions 'at a relevant time'?
- Some of these transactions took place more than two years before the commencement of the bankruptcy (ie between April 2002 and July 2003). It may be relevant therefore to establish whether or not Mr Foster was insolvent at that time, in the sense that he was unable to pay its debts as they fell due, or that the value of its assets was less than the amount of his liabilities, taking into account contingent and prospective liabilities. The evidence before me on this point mainly comes from the trustees, and is set out in paragraphs 253 to 259 of Mr Ailyan's first witness statement. The trustees of course have access to all such records as exist in relation to Mr Foster's financial affairs and are in the best position to be able to give evidence about them. Their conclusion is that Mr Foster was insolvent from at least 2000 onwards, well before the first of Mr Foster's dealings with Planline (April 2002), having taken money from members of the public promising them a return to be obtained from gambling but, according to his bank records, not having made any winnings. It would follow that the amount of his assets was less than the amount of his liabilities. The trustees believe that beginning in 2001 he used receipts from later investors to pay amounts due from earlier ones, which strongly suggests an inability to pay debts as they fell due, prior to April 2002. Mr Hodgkins gave evidence to similar effect, but he did not identify any particular time for the transactions he referred to.
- I conclude from this evidence that on the balance of probabilities Mr Foster was insolvent within the meaning of section 341(3) on both the tests set out therein, at some time before 1 January 2002. It follows that all the transactions admitted by the respondents and called into question in this case, which commenced in June 2002, were made at a "relevant time" as defined in section 341(1) and (2). So indeed were any other dealings by Mr Foster, since they began in or about April 2002.
Who were the other parties to the transactions?
- It is convenient to begin with the transfer transactions. Although many of these transactions were entered into between Mr Foster and one or more of the first, second and third respondents, some of them were not. Those that were with other people appear to have been with friends or relatives of the first three respondents, who were among those to whom the first units had been allocated before any money was received from outsiders. The effect of the transfer transactions was that the first three respondents and their relatives were able to realise large amounts of money in respect of their units immediately, whereas otherwise they would or might have had to wait for some further period of time until the appropriate number of further units had been purchased. It also meant that money coming in to the scheme was preferentially paid to these favoured parties, whereas if it had been applied to purchase new units, some at least would have led to entitlements in favour of other scheme members.
- In his closing submissions, Mr Evans elected only to seek a remedy against the first three respondents (in relation to the transfer transactions) in respect of the amounts admitted to have been received by them in respect of transfers made by them, although if all the other elements of the claim had been established in my view there would have been a strong case to be made out for relief in respect of amounts paid at their request to their relatives. The amounts admitted to have been paid in respect of transfers by the first second and third respondents are as follows, with reference to the documents from which the figures are derived:
i) aggregate payments of £1,318,425 paid to the Swiss bank account of the first respondent (2/5/46)
ii) £996,069 paid by cheque to the first and second respondents jointly (2/5/47)
iii) cash payments of £553,759.58 made to the first second and third respondents (5/12/36). The amount of these payments was admitted by the first respondent, and I accept Mr Evans submission that I may infer that the payments are made to the first second and third respondents jointly.
iv) £403,351 paid by cheque to the third respondent (2/5/48)
- All of these payments (amounting in aggregate to £3,271,604) were made in respect of the transfer of units or balances held under various pseudonyms. From the admissions made by Mr Smith it is to be inferred, to the extent that it is not directly admitted, that those of the first, second and third respondents who received payment were behind the pseudonyms concerned, and were therefore party to the transfer transactions involved.
- In respect of payments to the company, it has been the case advanced by the respondents prior to trial that they were not personally party to any of the purchase transactions, and that all these sums were paid in respect of purchases of art from the company. The case for the trustees is that the company was at all times nothing more than a facade for the Planline scheme, and that scheme was operated by the respondents jointly. The relevant purchase transactions were not purchases of pieces of art, but purchases of units in the Planline scheme, the operation for ordering and supplying art being nothing more than window dressing.
- Mr Ailyan's first witness statement, beginning at paragraph 60, sets out a number of extracts from evidence given at various stages by the first respondent attempting to explain the relationship between Planline and Infocus (Cayman) limited. It is apparent that he uses the name "Infocus" sometimes to refer to the limited company and at other times to refer to the combined operation for sale of art and the issue of units in the Planline scheme. He maintains that Planline is separate from the limited company, referring to it as "a marketing scheme developed by Infocus". In his second statement he says this "Planline has traded from 2001 to date. It is currently trading. It has never ceased to trade or suspended trading. The confusion in this regard arose, I believe, over a misunderstanding of the role of Infocus (Cayman) Ltd. Infocus (Cayman) Ltd was the incorporated vehicle used to facilitate the sale of the artwork. It is separate and distinct from Planline which was never incorporated. All artwork (relevant to Mr Foster's purchases) were purchased from and supplied by Infocus (Cayman) Ltd. Mr Foster accordingly owed Infocus (Cayman) Ltd the purchase price for the artwork. Points given to Mr Foster on the purchase of that artwork were given however in Planline."
- In 2004 Infocus (Cayman) Ltd ceased to trade and was put into liquidation. The first respondent was questioned about the mechanism by which the process of receiving and paying cash, and the supply of artwork were immediately transferred without payment to a company incorporated in the Seychelles called High Resolution, and later on further transferred to a third company incorporated in Belize called Classic Art. In relation to this, the first respondent said in his second affidavit "… I made it clear that High Resolution Ltd (Seychelles) was incorporated to perform the functions held by Infocus (Cayman) Limited but explained that this was because Infocus (the generic company name) continues to trade." In his first witness statement he said "Infocus and Planline traded through High Resolution, a company incorporated in the Seychelles, via a Credit Suisse bank account in Geneva from September 2004" and in his evidence given to the Chief Registrar he said "I have opened a new company to use as the vehicle for Infocus called Classic Art which is a Belize company, and the trade from a bank account in Cyprus" and "Infocus (Cayman) Ltd stopped, as far as I'm concerned, in December 2004. Infocus uses as a vehicle then High Resolution and then on to Classic Art."
- It is in my judgment clear from these extracts that Mr Lee Smith, and I have no doubt the other respondents, regarded the principal operation as being that conducted under the Planline name (which is sometimes referred to by the name "Infocus" used "as a generic company name") and the corporate entity operated for the time being was merely treated as a "vehicle". It seems that this was accepted on behalf of the respondents by leading counsel (Mr Winter QC) appearing for Mr Lee Smith at his examination before the Chief Registrar, who in dealing with matters relating to costs said this, in extracts referred to at paragraph 63 of Mr Ailyan's first witness statement:
" the point is that it is actually irrelevant, in fact, what the corporate vehicle is all was because the value -I appreciate this comes as a shock to any lawyer -has never been held in the corporate vehicle. It is always held in Planline. … the money is paid into the company account … but the way it has always in fact operated and has resulted in all the payments going out to the people in the appropriate manner has been under the auspices of Planline, and that is a consistent thread throughout this, and therefore the fact that the money may come from an Infocus or a High Resolution or now Classic Art account is the mechanics that brings about Planline paying those it owed. "
- As for that suggestion that all these transactions were exclusively or even primarily genuine purchases of art, in my judgment it is clear from the evidence that this is unreal. Mr Hodgkins gave evidence of one garden party at which approximately £1 million in cash was raised from people attending. It is apparent from the evidence that this is only one of many such occasions held by Mr Foster and, one must presume, other members of the scheme, seeking to interest other "investors". Further, Mr Foster himself made clear that the benefits sold to potential investors at these meetings were the rewards to be made from the Planline scheme, not the artwork. In relation to Mr Foster's attitude to the artwork Mr Hodgkins said "in return for the money that Kevin Foster put into the Planline network artwork would be delivered to Kevin Foster. The artwork consisting of paintings and pictures. I have seen a dozen of them lying around in Wellwood Farm [Mr Foster's home]. Kevin Foster thought the artwork was not worth anything. Kevin Foster told me that the artwork was only a byproduct and is meaningless. According to him, the important thing was getting the points, as points mean prizes and if we got more points we would get more prizes, that is, we would get more money…. Kevin Foster did not want all the artwork delivered to Wellwood Farm because it was clogging up the farm. Consequently I am aware from conversations with Mr Foster that he got rid of it and had it redirected... When I told Kevin Foster how bad the artwork was, he told me not to worry about the artwork and said that it was the points we were after, and not the artwork."
- It had been Mr Lee Smith's evidence that of the money received by Infocus (Cayman) Ltd some 15% was applied in purchasing art and the remainder passed over as profit to be used in providing rewards through Planline. However when in due course the respondents produced a set of unaudited accounts for the company it appeared that the total amount spent on acquiring the artwork was of the order of 0.6% of its turnover, rather than 15%. When these figures were put to Mr Lee Smith, he could only respond that they must be wrong (although he had produced them) and the actual amount was about 6%, itself a far cry from the 15% originally claimed. He referred to the high cost of printing copies of photographs which were sent out to members, but that cost did not appear to be reflected anywhere in the accounts produced. When asked whether there was any evidence of the artwork being sold on or having its value realised in any way, his responses were invariably vague and to the effect that it was nothing to do with him what the members did with the art once they had purchased it.
- Although the respondents maintained that there was no evidence as to the value of the artwork sold, which must therefore be taken to be what someone would pay for it and that all the transactions were genuine purchases of art with an associated, optional, reward scheme, in my view it is simply incredible to suggest that the enormous amounts of money put into the respondents scheme were in truth paid to acquire what seem to have been for the most part mass reproduced photographs acquired at negligible cost and for which there is no evidence of any resale value whatsoever.
- The picture that emerges from the evidence is rather that what participants in the scheme were sold, and were interested in, was the benefits of membership of the Planline scheme and its complex system of units, reward points and lines. I have no doubt that those putting in money would, like Mr Foster, have regarded the art as a "byproduct". Rather than the Planline scheme being an incidental reward scheme for purchasers of art from Infocus (Cayman) Ltd, the reality of the situation was the other way around and both the operators of the scheme and Mr Foster regarded the transaction as being one for acquisition of units in the Planline scheme, with the possible incidental provision of a piece of art.
- The question arises of course why the organisers would need or wish to bolt on to their scheme a procedure for sale of photographs or other art. There is no clear answer in the evidence, but I suspect that it has something to do with attempting to avoid legislation in this country and abroad designed to protect consumers from losing out through pyramid schemes. The scheme's own literature makes it clear that the money that goes into it is not invested anywhere, and the only source of payment of the various benefits and rewards said to be available is the receipt of money from purchasers of later units. That of course could be regarded as the essential element of a pyramid scheme, but it appears that the protagonists were keen to deny that Planline was a pyramid scheme, no doubt because of the negative connotations.
- Material on the Planline website in question and answer format responds to the question whether Planline is a pyramid scheme with the evasive answer that pyramid schemes are illegal in the Cayman Islands. Mr Stevens gave evidence that he had asked whether the scheme was a pyramid scheme, and being reassured by being taken to Accountants introduced by Mr Bashford that it did not come under the relevant legislation. Whether the Planline scheme was or was not covered by legislation regulating pyramid schemes in the United Kingdom, the Cayman Islands or elsewhere, and if it was not so covered whether this was due to the associated supply of artwork, is not relevant to the issues before me. It is also not relevant to the question whether the scheme was in truth a pyramid scheme, as in my view it clearly was.
- I find therefore that in entering into the purchase transactions, the reality was that Mr Foster was entering into a transaction with the Planline scheme. At the request of those behind it, payment was made to the company in the Cayman Islands, but that company (and its later successors) was nothing more than a vehicle or agent for the operators of the Planline scheme. I accept Mr Evans submission that this is not a case of lifting the corporate veil; the purchase transactions were made directly with the Planline scheme. Insofar as they were documented as being exclusively purchases of art, that documentation was in the true sense of the word a sham, as it did not describe the true nature of the transaction between Mr Foster and those he was in truth dealing with, namely those behind the Planline scheme.
- The Planline scheme, as Mr Lee Smith made clear in his written evidence, was never incorporated. According to Mr Lee Smith's first witness statement, it was set up by himself, Darren Smith and Barry Bashford, who had previously been involved in a similar "multilevel marketing scheme" called Image Direct run from Holland. They fell out with the operators of that scheme and decided to establish their own. Needing assistance to run the banking systems, website and databases Mr Bashford approached Mr Stevens, who was known to him as a bookkeeper and former building society employee and a Mr Boateng and a Mr Salako who had expertise in producing websites and managing databases.
- Mr Lee Smith referred to these seven individuals as "the founders". The defence filed on behalf of the first second and third respondents says that "there was a verbal agreement between the respondents by which it was agreed that Infocus was owned jointly by the respondents and a number of other people in varying proportions". That appears to have been a reference to the ownership of shares in the limited company, which had only one issued share. Mr Stevens' evidence was that he was the sole registered shareholder but the share was regarded as being held on behalf of the seven "founders" in the proportions in which they had agreed that they would be entitled to the profits from the whole operation. He said that he had initially been promised 5% of the profits, but when he agreed to go to the Cayman Islands to conduct the administration of the company there this was increased to 10%. 20% each was held by Lee Smith, Darren Smith and Barry Bashford. Mr Boateng and Mr Salako each had 10%. I am not clear who had the remaining 10%, but nothing turns on it.
- Mr Stevens was paid a monthly salary of £3000 while in the Cayman Islands, together with various amounts in respect of his expenses. From time to time Mr Stevens was paid an amount by way of distribution of his share of the profits. He maintains that he did not have sufficient financial information to be sure that he was receiving the correct amount, and he suspects that he was not.
- On the basis of this evidence, Mr Evans invites me to treat the Planline business as in effect a partnership between the respondents and the other "founders". I accept that that treatment is appropriate; it was clearly a business operation carried on by them in which they were all to share, to a greater or lesser extent, in the profits.
- It follows that as I have held that the purchase transactions were made between Mr Foster and those behind the Planline scheme, each of the respondents must be treated as being party to those transactions.
Were the purchase transactions and/or the transfer transactions "at an undervalue"?
- In Ramlort v Reid [2004] EWCA Civ 800 Jonathan Parker LJ (with whom the other members of the court agreed) described the court's approach to establishing whether or not a transaction is at an undervalue in the following terms:
"102 In all material respects, paragraph (c) of section 339(3) is in the same terms as paragraph (b) of section 238(4) of the 1986 Act (the paragraph which Millett J was considering in the passage in his judgment in MC Bacon …). For present purposes, the critical words in each of those paragraphs are the words 'significantly less'. For there to be a transaction by an 'individual' (whom I will call "the debtor") at an undervalue within the meaning of those paragraphs, the value in money or money's worth, from the debtor's point of view, of the consideration for which he enters into the transaction (I will call it "the incoming value") must be 'significantly less' than the value in money or money's worth, again from the debtor's point of view, of the 'consideration provided' by the debtor – that is to say, the value in money or money's worth of the totality of whatever it is that the debtor is parting with under the transaction (I will call it "the outgoing value").
103 Thus, there is nothing in the express provisions of paragraph (c) of section 339(3) which requires the court to ascribe a precise figure either to the outgoing value or to the incoming value. On the face of the paragraph, it will apply whenever the court is satisfied that, whatever the precise values may be, the incoming value is on any view 'significantly less' than the outgoing value. Woodward was just such a case.
104 Nor, in my judgment, is there any need to imply into paragraph (c) any further requirement in relation to the determination of the incoming value or the outgoing value. In particular, I can see no reason why the court, if it considers it appropriate to do so, should not address the issue of undervalue by taking from a range of possible values those which are most favourable to the party seeking to uphold the transaction. If, even on that basis, the incoming value is 'significantly less' than the outgoing value, paragraph (c) will apply. Thus I can see nothing in paragraph (c) to prevent the court from proceeding on the basis of a finding as to the maximum value for the incoming value, and/or a finding as to the minimum value for the outgoing value.
105 At the same time, there can in my judgment be little doubt that it is preferable for the court to arrive at precise figures for the incoming value and the outgoing value in those cases where it is able to do so; if only because, in the absence of precise values the range of available remedies may be circumscribed in the sense that it may be more difficult to assess with precision the amount of any monetary compensation which the court may order to be paid by the other party to the transaction.
106 In National Westminster Bank plc v. Jones [[2001] EWCA Civ 1541] Mummery LJ, giving the judgment of the court, concluded (in paragraph 29) that in applying section 423(1)(c) (the terms of which are for all practical purposes the same as those of section 339(3)(c)) the court "must ascertain from the evidence the actual value against which the consideration for the transaction must be measured". However, that observation must not be taken out of context. What Mummery LJ was there addressing (and rejecting) was the contention advanced on behalf of Mr and Mrs Jones that in addressing the issue of undervalue the court should adopt the same general approach as it adopts in cases of allegedly negligent valuation (see Mummery LJ's summary of the appellants' submissions at p.61a). As I understand it, that contention involves the proposition that, notwithstanding a finding by the court that the incoming value is significantly less than the outgoing value, nevertheless the transaction is not to be characterised as a transaction at an undervalue if the amount of the shortfall lies within some 'acceptable' range of values. In rejecting that contention I do not understand Mummery LJ to be saying that, in making its findings as to value, the court may not take from a range of possible values those values which are most favourable to the party seeking to uphold the transaction and make findings to that effect, whether as to the maximum figure for the incoming value or (as in the instant case) as to the minimum figure for the outgoing value.
107 This interpretation of Mummery LJ's observations is in my judgment supported by the fact that in his judgment he expressly referred to [Agricultural Mortgages Corporation v Woodward [1995] 1 BCLC 1] (at p.60c-d), where Slade LJ made no findings as to the specific value of the tenancy agreement."
- It is apparent from this passage that although the court will if possible seek to ascertain an exact monetary value to be placed on the incoming and outgoing consideration, there is no absolute requirement to do so, the critical thing being whether it can be established that, whatever the values are, the former is significantly less than the latter.
- Mr Evans also relies upon the statement of Lord Scott in Phillips v Brewin Dolphin [2001] 1 WLR 143 that
"the value of an asset that is being offered for sale is, prima facie, not less than the amount which a reasonably well informed purchaser is prepared, in arm's length negotiations, to pay for it."
- His submission is that the value received by Mr Foster must be taken to be nil, because on the facts a reasonably well-informed purchaser would not have paid anything to acquire units in the Planline scheme. This in turn is because, he submits, the Planline scheme was in fact dishonestly operated by the respondents and, whatever a purchaser might have paid in the open market for the chance to participate in an honestly run scheme of a similar nature, the reasonably well-informed purchaser must be taken to have knowledge of the actual dishonesty of the Planline scheme, and having such knowledge, would not be prepared to pay anything to take part in it.
- In most cases no doubt the court will approach the task of valuation of consideration, or comparison of relative values, with the benefit of expert evidence, typically of what a willing buyer would have been prepared to pay for an asset in the open market at the relevant time. If the consideration is readily capable of valuation in that way, it may be difficult to make out a claim without such evidence. But there may be some cases where the form of the consideration is such that no such expert evidence is obtainable, and the court is not in my judgment necessarily precluded from making the necessary comparison by the absence of expert or other evidence speaking directly to the value.
- Although it is often the case that the transferor is aware of the difference between the incoming and outgoing consideration, and indeed positively wishes to reduce the amount of his assets available to its creditors, it is not necessary for the purposes of section 339 that this should be so. This is in contrast to the position under section 423, which deals with transactions defrauding creditors, for which purpose it is an essential part of what must be proved that the transactions entered into for the purpose of putting assets beyond the reach of creditors, or otherwise prejudicing their interests. Thus, if the consideration provided to Mr Foster was in fact valueless, or at least had a value in money or money's worth substantially less than the amount paid by him, for the reasons put forward by Mr Evans, the necessary element of undervalue would be established whether or not Mr Foster was aware of the relevant facts at the time.
- I was concerned as the case was presented as to how the value of the consideration provided to Mr Foster (the "incoming value") would be established. The right to participate in a pyramid scheme is not of course a conventional asset in valuation terms. The principal criticism of such schemes, and no doubt the reason why they are subject to regulation, is that although in the initial stages it may be relatively easy to recruit new members sufficient to pay out rewards to those first on board, the successive generations of the scheme involve a geometric progression in the number of new members required at each stage. In the present case, each line of the scheme required twice as many as the line before which, as the table set out above shows, relatively quickly results in a huge number of new members being required if any benefits are to be realised. It inevitably becomes more and more difficult to find the number of new members necessary, with the result that those who join the scheme later on have a much lower chance of being paid out and those who were in at an early stage.
- It is not however necessarily the case that no one participating in a pyramid scheme stands any chance of being paid out. A rational assessment may in principle be made that if the scheme is run as the participants are led to expect, and one is offered the chance to participate early enough, there is still a reasonable prospect of the necessary number of further members being obtained to produce a payout. It would have been a very difficult exercise, it seems to me, to perform such an assessment in respect of all the transactions entered into by Mr Foster over an extended period of time. The prospects of a payout would have been greater in the beginning, and would inevitably diminish over time, but how would one determine how high they were at the beginning, or when the likelihood of obtaining a payment did not justify the amount "invested"?
- If Mr Evans' submission is correct however these potential difficulties fall away, because the scheme was not run in an honest manner and if the hypothetical purchaser had been aware of the true basis, he would not have been prepared at any stage to put money into it. I turn then to consider the circumstances that Mr Evans relies on. In my judgment, the effect of these various factors on the amount which a hypothetical purchaser would be prepared to pay must be taken cumulatively, as such a purchaser would base his decision on whether to make a purchase, and if so at what price, on the totality of the information available to him.
- Firstly, Mr Evans points to the fact that all the initial units of the plan were allocated to the respondents themselves and certain members of their families. These apparently consisted of 50 (or perhaps 57) "memberships" in a variety of invented names, but filling up the first 10 lines of the plan, being approximately 1000 units. These units were of course the first to earn rewards with the result that there was an early and very substantial return to those holding them. Mr Ailyan's first witness statement, beginning at paragraph 100, sets out the evidence relied on and showing that rewards earned on these initial memberships totalled over £4.3 million. It also appears that the next 100 memberships were allocated to the respondents, their friends, families and business associates. Each of these would also have presented a much better opportunity to earn a reward than units issued later on.
- It also appears from the evidence that Mr Foster and others were encouraged to enter into transfer transactions rather than purchase transactions, being told that this would get their units registered into the scheme earlier and so qualify for rewards more quickly. Anyone interested in such transactions was steered towards a "seller" who was one of the first three respondents or their relatives, who were thus able to obtain cash directly. This was a very beneficial form of preferential treatment for the favoured sellers.
- Secondly, various steps were taken to conceal the identity of those behind it and to make it seem more exotic and professionally run than it in fact was. Communication with participants in the scheme seems to have been almost exclusively by e-mail or through the website. Although the first three respondents regularly attended presentations at which members of the public were solicited to join the scheme, they always held themselves out to be ordinary participants in it who had achieved spectacular benefits, without disclosing that they had set it up and were behind it (see Mr Ailyan's first witness statement at paragraph 131).
- E-mail communication with the members was set up to give the impression that the administration of the scheme was being carried on in the Cayman Islands when in fact most of that communication originated from premises in Kent (see Mr Ailyan's first witness statement at paragraph 107). Members were provided with the names and supposed business backgrounds of the executives administering the scheme, in the names of Margaret Gallant (said to be the CEO), Karina Lombardo and Anita Kirkconnell. None of these individuals existed and the information about their apparently impressive business backgrounds was entirely fictitious. E-mails produced in their names were in fact generated by one or other of the founders. Lee Smith referred to this as "mere marketing puff" and said that these names were not given to prospective new members, but only to existing members, though he also emphasised that repeat business from existing members and existing members recruiting new members were vital to the continuing flow of funds.
- In fact it is clear that these fictions and other misrepresentations were intended to boost the credibility of the scheme and its sales; Mr Lee Smith was asked about some fictitious e-mail traffic that he generated between two pseudonyms, one representing himself as a member of the scheme and the other representing himself as the Planline "support" department, which was sent to two individuals who were attempting to market Planline in Malaysia. He said "at this stage we decided that because Image Direct were our main competitors we would try to do what most companies do and make ourselves look bigger than we were… the purpose of this was to make ourselves look… that we were a lot bigger than we were, but they would not necessarily believe that we were going to be a main rival for Image Direct whilst Nigel was out in the Cayman Islands and we were working from Barry's back garden."
- It seems that Mr Foster did insist on meeting at least one of the directors, which the respondents felt they had to agree to in view of the amount that he was paying into it. Mr Foster was told that he would be meeting the director of finance "John Simpson" and arrangements were made for a meeting in Switzerland. In fact there was no "John Simpson" and the individual sent to the meeting was the fourth respondent Mr Nigel Stevens. Mr Lee Smith maintained that this was not a deception, Mr Stevens in fact was known as "John" and was referred to within the organisation as "John Simpson" because of a resemblance to a TV character. Mr Stevens' evidence to me was that this was all lies; he had never been known as "John" or "Simpson" except when he was told by one of the other respondents to use that name for the purpose of the meeting in Switzerland and for e-mails.
- Mr Stevens' evidence was that he was approached by one of the first three respondents and told that Mr Foster wanted a meeting with the director. He said that as far as Mr Foster was aware, the only directors of Planline were the three women, Gallant, Lombardo and Kirkconnell. They were of course fictitious (and it appears in fact that Kirkconnell was not said to be a director). He had first been told that Mr Foster would be flown to Cayman to meet him, but then for reasons he did not know the location was changed to Geneva. He flew there and met Mr Foster and some of his associates at the Intercontinental Hotel. As to the content of the meeting, Mr Stevens did not provide much detail. He said that Mr Foster had done most of the talking. He had not described his own role to Mr Foster beyond saying that he was the only director in Europe. Asked if he had explained that the principals behind the scheme were in fact Lee and Darren Smith, Mr Stevens said he had not explained that, but Mr Foster had kept saying "I know Lee and Darren are behind this". It was put to Mr Stevens that it was his job to conceal the fact that Lee and Darren were behind it, which he appeared to accept, saying "I suppose I was trying to protect them a bit. In hindsight it was a bit dishonest". So it seems that Mr Foster suspected the truth, but Mr Stevens did as he was told in attempting to deflect his enquiries and cover it up.
- Importantly, there is evidence that strongly suggests that the founders arranged to manipulate the balances shown on holding accounts and create additional units as and when it suited them to present a picture of favourable returns to potential participants or avoid the need to pay out cash to members who might ask for it. This evidence comes from a number of e-mails obtained in disclosure, and is summarised in Mr Ailyan's first witness statement beginning at paragraph 116, including references to "creating" units, an intention to "rob a few more holding accounts to reduce the payout", a request "please would you kindly add some funds to the Morpheus account to boost them a little. As and when we do a presentation we show Morpheus holding account and I want members to see that Morpheus has a lot of funds available for buying units for others. More points equals more prizes" [Morpheus being a pseudonym used by the respondents] and creation of fictitious invoices "have done more invoices for Delacey. This time through Neo [another of the respondents' pseudonyms]. It totals 144 units but remember the invoices that I've created have added ChF25 to each one… please load them on tonight as they are supposed to have come from Neo HA [holding account]".
- Apart from his suspicions about the involvement of Lee and Darren Smith, none of the above matters would appear to have been known to Mr Foster. It certainly was not part of any of the evidence advanced by the respondents that he was so aware; the thrust of that evidence was to deny, minimise or explain away any adverse implications. Mr Evans points also to a number of other factors which were or may have been known to Mr Foster, as follows:
i) the inherent insolvency of the scheme , by reason of the rewards generated by new units exceeding in aggregate the amount of additional funds that they generated. The information Mr Ailyan used in the analysis that led to this conclusion was all available to Mr Foster and any other member but of course it was not a conclusion which was pointed out to members and there is no evidence that Mr Foster or any other member in fact did the same analysis in order to come up with the same result.
ii) the fact that it is an inherent characteristic of the Planline scheme as with all other pyramid schemes that the initial spectacular returns become progressively harder and less likely to be achieved, so that it was bound to collapse sooner or later. I assume that in principle this is a fact that a reasonably well informed potential member must be taken to know. Although the Planline documentation implicitly denied that it was right to call it a pyramid scheme, it made clear that the availability of rewards was dependant on future members joining so that potential members would know they were taking the risk that there might not be sufficient later members for their own units to be paid out. Mr Evans did not for instance suggest that members were given information misleadingly minimising this risk.
- Mr Evans also submits that, on the respondents own evidence it would appear that after the initial allocation of units to the respondents, their friends and associates, Mr Foster was substantially the only contributor to the scheme. The figures he relies on are taken from the audited accounts for Infocus (Cayman) Ltd for the period 2 March 2002 to 28 July 2004, which are referred to and analysed in Mr Ailyan's first witness statement between paragraphs 198 and 241. I would have the gravest doubt as to whether it were safe to rely on these accounts as evidence in the respondents favour, but Mr Evans is entitled to rely on them as admissions against their interest. The accounts show a total turnover of £11.1 million. They do not include the first six weeks of trading, but it appears (see paragraph 205) that there was little or no turn in that period. According to Mr Lee Smith, this turnover represents new money paid into the company to acquire art (or, as I have found, units in Planline). It is said however to include some purchases made by Mr Foster on credit, for which a bad debt allowance of approximately £2.3m is to be deducted, implying an actual receipt of money of approximately £8.8 million. Of that, from the figures given above, approximately £5 million or 57% was admitted to have come from Mr Foster as payment for the purchase transactions.
- I do not think that this point assists Mr Evans' case greatly. It is not of itself any evidence of dishonesty in the running of the scheme, though it may tend to emphasise the inherent risks of a pyramid scheme arising from failure to maintain the flow of incoming funds that it would require to be successful for an indefinite period.
- Taking all this evidence together, what conclusions can the court properly come to as to the value, in money or money's worth, of the consideration given to Mr Foster? In my judgment, the value of the "art" can properly be treated as negligible. No doubt, applying Lord Scott's words, if the art had been exposed for sale in the open market and purchased at arms length for its own merit, its prima facie value would be not less than the amount paid. But that is not what happened here; the transactions were entered into for the principal purpose of acquiring points in the Planline scheme and so the amount paid cannot be taken as any indication of the value of the art. On the evidence, the best indication of its value is the amount paid by the company to acquire it, or approximately 0.6% of the supposed sale value.
- In addition, Mr Foster acquired, in both the purchase and the transfer transactions, the right to participate in Planline scheme. It is an intangible right, and as I have said not a conventional asset for purposes of valuation. In my judgment, the court has to assess as best it can on the evidence what its value in money or money's worth would be to a rational and reasonably well-informed purchaser, having knowledge of the actual characteristics of what it is he is buying. It could not, for instance, be suggested that if the purchaser is deceived or misled about the true nature of the Planline scheme, that deception must be left out of account, any more than if Mr Foster had purchased shares in a company and been substantially misled as to its profitability and prospects.
- It cannot in my view be assumed that the hypothetical purchaser would never pay money into a pyramid scheme, because such schemes do offer a return to some at least of those who pay into them. But it is I think reasonable to assume that such a purchaser acting rationally would be cautious and less willing to pay into a scheme if, in addition to the inevitable inherent risks which arise from the fact that at some point it will become impracticable to attract enough money into the scheme for it to keep going, there are particular characteristics about it and the way it is run which make it additionally risky.
- The Planline scheme, in my judgment, was replete with such additional factors. The reward structure, as Mr Ailyan points out, meant that the amount of cash introduced on purchasing new units is inevitably insufficient to pay all the rewards theoretically resulting from the purchase of those units. As soon as that happens, the scheme can only keep going if these rewards are not in fact all paid, but some are deferred in some way. Thus, some members of entitled to rewards will receive them, but others will not. Anyone joining the scheme is at risk that his rewards will end up being among those that are deferred. In principle, as I have said, it was open to any new member including Mr Foster to do this analysis for himself, but it is not a matter that is obvious at all and it cannot therefore be assumed that he was conscious of it and prepared to accept it, still less that the hypothetical purchaser knowing of it would be.
- This inherent insolvency risk was magnified by what appears to have been the routine and dishonest practice of creation and allocation of units and balances, which could only result in the dilution of funds available to pay out "genuine" rewards. Furthermore, it is apparent from the evidence that the founders of the scheme, their friends and relatives were put in privileged positions by being allocated the first units, and having new funds channelled in that direction in order to buy their holding account balances in transfer transactions. The effect of this was of course that such funds as were available to be paid out of the scheme were preferentially directed to the founders and their favoured participants, so that outsiders such as Mr Foster and, it must be assumed, the hypothetical purchaser, were disproportionately exposed to the risks of remaining in the scheme.
- So far as concerns the deceptions practised as to the size, location and management of the scheme, these in my judgment indicate a general pattern of dishonest operation of the scheme which would, if known to the hypothetical purchaser, have increased his wariness about the scheme and made it less likely that he would be willing to accept the risk of participating in it. Although the instances of dishonesty occurred in some cases after Mr Foster's first payments into the scheme, they show in my judgment a propensity for dishonest management which it would be reasonable to infer was present from the beginning. It follows that this dishonest propensity would be taken into account by the hypothetical purchaser at any time.
- It is not in my judgment necessary to put a precise value on the "rights" acquired by Mr Foster in each of the numerous transactions called into question. The cumulative effect of the factors mentioned about the operation of the Planline scheme is in my judgment such that no one in their right mind with knowledge of them, let alone the hypothetical purchaser I have postulated, would have been prepared to put money into it. Mr Foster of course did so, but those same factors mean in my judgment that the court can fairly conclude that the "rights" he acquired were of a value in money or money's worth which was negligible, or at least "substantially less" than the money paid for them, and that this is so in respect of all the purchase and transfer transactions, whenever occurring.
Conclusion
- It follows then that each of those transactions was a transaction at an undervalue within the meaning of section 339. The court is required to make "such order as it thinks fit for restoring the position to what it would have been if [Mr Foster] had not entered into" those transactions. This gives the court a very wide discretion. Examples of orders which may be made are set out in section 342, but these are expressly without prejudice to the generality of the powers conferred under section 339. These include, at subsection (1)(d) an order which would "require any person to pay, in respect of benefits received by him from the individual, such sums to the trustee of his estate as the court may direct".
- An order completely restoring Mr Foster's position to what it would have been had he not entered into the transactions would require the repayment to him of all the money paid, subject perhaps to some small deduction for the value of the "art" that was delivered to him and which, I assume, is no longer available to be returned, and the re-transfer of any remaining rights attaching to the units held. There appears to be no evidence that he received any payment in cash or equivalent out of the Planline scheme in respect of any of the rewards theoretically due to him and so no allowance falls to be made for that. In fact, the order Mr Evans seeks does not go so far, and differentiates between the purchase transactions and the transfer transactions, and between the various respondents. The distinctions he draws are on the basis that it is clear from the evidence, as I accept, that the first three respondents were the instigators of the scheme and procured that the major part of the benefits arising from it were received by themselves or their favoured friends and relatives, whereas Mr Stevens the fourth respondent played a lesser and subordinate role, and received a much smaller part of the rewards.
- So far as the purchase transactions are concerned, Mr Evans seeks against the first three respondents jointly and severally an order that they repay the full amount of just over £5 million paid. That order seems to me to be appropriate in principle as a straightforward reversal of the transactions entered into. The first three respondents were, as I have held, parties to those transactions in that they were among the principals behind the Planline scheme. Although the court has express power to order that an individual should make a payment to the trustee "in respect of benefits received by him from the individual" the court's powers are not limited by that provision and accordingly it is not in my judgment necessary to show that those individuals personally received benefits from the scheme, or that any benefits they did receive from the scheme derived directly or indirectly from the payments made by Mr Foster. Since the order is intended to restore the position to what it would have been if the transactions had not been entered into, it should provide that if requested by the respondents and against payment by them the trustee will execute any documents reasonably required to vest in those respondents the benefit of any rights that Mr Foster theoretically still holds in the Planline scheme arising from those transactions. The amount payable should be reduced by 0.6% as an allowance for the value of the art which cannot be returned.
- In relation to the transfer transactions, Mr Evans seeks an order that the first three respondents should pay to the trustee the amounts admitted to have been received by them in respect of those transactions where they were personally the transferor. These are set out at paragraph 30 above, and include some payments which were made on a separate basis, and others made on a joint basis in various combinations. That order is also appropriate, representing as it does the repayment of benefit personally received by those respondents from Mr Foster. Mr Evans has not sought any order against the respondents in respect of amounts paid by Mr Foster to other individuals in the transfer transactions.
- Mr Stevens was not party to the transfer transactions, and no order is sought against him in relation to them. In relation to the purchase transactions, Mr Stevens was a principal in the Planline scheme until the end of December 2003. At some point earlier in that year he had returned from the Cayman Islands, but he accepts that he continued to have some involvement in the scheme until the end of December. Mr Evans' primary case is that I should order Mr Stevens to be jointly liable with the first three respondents for all the amounts paid pursuant to the purchase transactions up to the end of 2003, namely £4,753,219.75. Alternatively, he invites me to make an order limited to the amount of the benefits which Mr Stevens can be shown to have received from the scheme, other than his salary and expenses. A schedule was produced of payments from the company bank account to Mr Stevens, totalling some £419,000, but Mr Evans was prepared to accept that any individual payment of under £6000 should be ignored as being probably salary or expenses, and that I should also ignore any payments specifically described as expenses. The total of the remaining amounts is, in round terms, £270,000.
- Mr Stevens submitted that he had played only a very minor role, doing what he had been told by the first three respondents. He was not an instigator of the scheme and had been brought into it and used by the first three respondents to put a respectable face on what they were doing. He accepted that he had come into it on the basis that he would be entitled to a 10% share of the profits, i.e. half the amount receivable by Mr Bashford who had brought him into the scheme. He said he was not aware of the detail of the scheme and how it operated in the same way as the other respondents were. I accept that Mr Stevens role was much less than that of the other respondents, but it was not trivial or, in my judgment, entirely innocent. He was aware of the general nature of the Planline scheme at the very least and took part in the deception of Mr Foster and other members as to who was operating it and where from. He was aware that very substantial amounts were being made from it, and content to receive a share himself, indeed he felt that he was getting less that he should have. These factors in my view reduce Mr Stevens culpability relative to the other respondents but do not go so far as to make it inappropriate that any order should be made against him at all.
- I could not make an order for Mr Stevens to pay £270,000 or any other amount on the specific basis that it represented benefits received by Mr Stevens from Mr Foster, because there were other participants in the scheme and the amounts received by Mr Stevens no doubt derived partially from what they paid in. Mr Stevens was however a principal in Planline and therefore a party to the purchase transactions, and an order could be made against him on the basis that he is jointly liable with the other respondents to pay the amount required to reverse those of the purchase transactions that took place while he was a principal. The width of the discretion given to the court to make 'such order as it thinks fit' however in my judgment enables me to take account of his limited role and make such an order on the basis that Mr Stevens' joint liability shall be limited to £270,000 and that as between the respondents, the first three respondents, whom I regard as primarily responsible, should indemnify Mr Stevens against any amount he is called on to pay.
- I will list a hearing in Birmingham at which this judgment can be formally handed down. I invite Mr Evans to prepare a form of order and circulate it to the respondents for their comments or agreement. With a view to avoiding costs, there need be no attendance at that hearing unless any party wishes to make oral submissions as to the form of order.
