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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Secretary of State for Business, Innovation & Skills v Chohan & Ors [2011] EWHC 1350 (Ch) (05 May 2011) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2011/1350.html Cite as: [2011] EWHC 1350 (Ch) |
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CHANCERY DIVISION
COMPANIES COURT
Strand London WC2A 2LL |
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B e f o r e :
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SECRETARY OF STATE FOR BUSINESS, INNOVATION & SKILLS | Claimant | |
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MR BALJINDER CHOHAN & OTHERS | Defendant |
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165 Fleet Street, 8th Floor, London, EC4A 2DY
Tel No: 020 7422 6131 Fax No: 020 7422 6134
Web: www.merrillcorp.com/mls Email: [email protected]
(Official Shorthand Writers to the Court)
MR STEPHEN DAVIES QC & MR JEREMY BAMFORD (Instructed by Lupton Fawcett LLP) appeared on behalf of Defendant
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Crown Copyright ©
"In relation to UKLI's current operations, our attention has recently been drawn to various matters which have caused us some concern.
"We note that in your Proposal to the 'Financial Services Authority', sent to us in April 2006, you advised us at paragraph 2.1(d) that UKLI would apply for the 25% of the land that it owns on its sites to be re-zoned into a Local Development Framework, with the consequent likelihood that any freehold plots purchased by customers which adjoin UKLI's plot would also fall within the rezoning proposals.
"By a letter dated 11 May 2006 UKLI's solicitors, MacFarlanes, enclosed a copy of an opinion received from Michael Blair QC, in which he considered the lawfulness of UKLI's proposed plan. Mr Blair stated at paragraph 26 of that opinion that UKLI's new papers (literature, contractual and conveyancing documentation and telephone scripts) would refer to 'the advantages of the property being re-zoned'. At paragraph 27 however he qualified that statement, noting:
"'Further, the papers would carefully avoid giving the impression to any potential purchaser that the Company was intending to apply for re-zoning either for its retained land or for the land of any purchasers'.
"At paragraph 30 he further stated: 'As long as the substance of the transaction is one for the sale of the land for investment purposes with no element of collectivisation of any process for obtaining planning permission or rezoning, the Company has, in my view, successfully avoided the problems about planning permission that characterised the previous business models'.
"The FSA agreed with Mr Blair's views on this point, and considered that as he had given UKLI clear guidance as to how to avoid its new scheme having the element of collectivity that would lead to it falling within the ambit of section 235 of the Act. We therefore assumed that UKLI would comply with that guidance.
"Recently, however, our attention has been drawn to the manner in which UKLI actually markets its scheme to potential investors, and we are concerned to note that the guidance given by Mr Blair has not been adhered to. In particular we have seen a copy of a brochure entitled 'Guide to Buying Strategic Land'. That brochure contains the following statements:
• 'We reserve up to £500,000 per site to promote our retained land for re-zoning within its local authority framework. Once a site has been re-zoned, its value, as we will demonstrate in this guide, can increase significantly'.
• 'we do everything possible - reserving up to £500,000 of our resources per site - to promote our retained land to be re-zoned for residential development'
• 'the exceptional potential returns from land come with getting the site rezoned ... Achieving re-zoning is a very expensive, highly skilled process ... our land and planning team conducts a thorough investigation of the site ... our land and planning team submits its initial representation for the local authority to consider. A series of further submissions and public inquiry appearances follow as the local authority refines and finally adopts its development plan.'
• 'Once a site has been successfully re-zoned, the value of the land will increase dramatically. It is at this stage that we recommend all investors on the site sell to the highest bidding developer ... we strongly recommend you exit your investment at the same stage as we do'.
• 'By promoting our land for re-zoning with the local authority we are confident that we will increase its value significantly, should we be successful'.
• There is a calculation of the 'potential returns on your land' based on re-zoning of the 'parcel of land' being achieved, showing a potential new value for the parcel of land of £69,580 as against a typical cost of £20,000 (i.e. with a profit of £49,580) .
"The FSA is aware that extracts from this booklet form the basis of the regular seminars which UKLI invites members of the public to attend, and at which attendees are given the same message: that an investor can expect UKLI to achieve the rezoning of the site, including any plot which they buy, resulting in a large increase in value.
"The FSA has also seen two short marketing videos that UKLI distributes to potential investors. They contain statements from Brian Smith, the Planning Director for UKLI such as: 'We promote land with the local authorities to achieve its rezoning for development' and 'I also oversee the Planning Department to ensure that they use their strong expertise to promote the sites in the best possible way'. Nigel Walter states 'When we promote land to get rezoned there is a dramatic increase in value'. This statement is overlaid on screen with the figures '250% to 400%'. Further, UKLI's website also states that 'From our point of view we are looking to sponsor a site to be re-zoned (or allocated) for residential use'.
"The FSA is extremely concerned by the way in which UKLI is marketing its current scheme. The FSA considers that any form of representation or indication made to the participants that re-zoning will be sought by the firm in respect of the land that it retains is liable to make the arrangements a collective investment scheme because such steps will be essential elements in facilitating access to the profits that will be the main/sole factor behind the investor's decision to purchase the plot to begin with. In addition, we consider that seeking re-zoning of the land is management as a whole because the firm cannot realistically seek re-zoning only in relation to the land that it owns.
"We are particularly concerned as Mr Blair's opinion clearly stated that UKLI should not give the impression to any potential purchaser that it was intending to apply for re-zoning either for its retained land or for the land of its investors. The FSA advised UKLI that it was content with UKLI's proposals on the basis of this opinion, in the expectation that UKLI would comply with its Counsel's guidance. Clearly this is not the case. Investors to whom UKLI marketed on the above basis will have the clear expectation that UKLI will apply for rezoning of the retained land (although I note in this regard that only on some occasions does UKLI clarify which land will be the subject of its application) which will also inevitably benefit their own land, and that it is intended that once rezoning has been granted they will sell their land to a developer, thus achieving a profit. The FSA considers that this amounts to a collective investment scheme.
"Given the concerns outlined in this letter, please confirm that UKLI will cease selling plots of land to investors in the UK, and to cease seeking new investors in breach of the Act until this matter is resolved. Please will you let me have your confirmation of this by Friday 1 June 2007."
"There shall in the affidavit or affidavits or (as the case may be) the official receiver's report be included a statement of the matters by reference to which the respondent is alleged to be unfit to be concerned in the management of a company."
"It is not in dispute that the affidavits filed on behalf of the Secretary of State - or the report to be made by the official receiver - must set out the case against the persons sought to be disqualified with sufficient clarity and identification of the evidence being relied upon for the respondent to know where he stands. See the judgment of Nicholls V-C in Re Rex Williams Leisure plc [1993] BCC 79; [1994] Ch 1 at p. 87H to 88A; 15C."
"That procedure, and, in particular, the mandatory requirement in r. 6, emphasises the importance to the respondent of being able to ascertain with clarity from the evidence filed on behalf of the applicant what are the criticisms laid against him, and upon what evidence the applicant intends to rely. It is on the basis of the applicant's initial affidavit evidence that the respondent is required to decide whether to advance any evidence of his own; and, if so, what issues he must address by that evidence. It should not be open to the applicant, by making general allegations of misconduct, to require the respondent to put forward his own account of events, and then to rely upon the respondent's own account to support the case for a disqualification order."
"But it is not satisfactory to leave the matter there. Nothing that I have said detracts, in the least, from the requirement that the applicant must set out his case with sufficient clarity and identification of the evidence relied upon to enable the respondent to know where he stands. If the applicant's evidence does not satisfy that test, the respondent must have some remedy before he can be required to decide whether to file his own evidence."
"A respondent who has less confidence in the insufficiency of the applicant's evidence will be embarrassed, because he will be unable to risk filing no evidence of his own. In such a case he may apply to the court for an order that, unless the matters complained of are made clear, the offending allegations be struck out on the grounds that they embarrass a fair trial of the action. A sensible preliminary step in such a case must be to seek clarification in correspondence before making an application to the court."
"It is not sufficient for the director to know and understand the allegations he has to meet. There is an obligation on the [Secretary of State] to set out in the affidavit or affirmation in support the main parts of the evidence on which she is to rely. This is all the more important because, as noted above, there is no particulars of claim which will identify the key facts upon which the court will be asked to exercise its powers. Fairness to the director demands that he knows not only the allegations of unfitness but also the essential facts which are relied on in support of them."
"No doubt the court should adopt a robust approach to criticisms of the affidavit evidence served on behalf of the [Secretary of State]. But none of this removes from her the obligation to ensure that the evidence filed is balanced, that the particular evidence relied on in support of the allegations is properly identified and that issues proved by direct evidence should be distinguished from matters of inference."
"27. Mr Walter caused or allowed UKLI to operate a land banking scheme between 26 April 2006 and 5 March 2007. In March 2006 UKLI obtained legal advice (confirmed in writing in May 2006) on how to operate a land banking scheme which was not a CIS and UKLI revised its operations, UKLI provided the FSA with this advice and commenced trading the Second Scheme. From March 2006 UKLI's land banking scheme was marketed to the general public in that:
27.1 UKLI identified and purchased sites that it would split into small plots and market these to the general public along with the unsold plots it still held in relation to its first land banking scheme which had traded from 5 March 2003 to 15 March 2006 ("the First Scheme") for prices between £7,000 and £55,000;
27.2 Customers would have legal title to their acquired plot or plots; UKLI would retain up to a third of each acquired site, with the intention to have the site it had acquired re-zoned from uses such as agricultural to housing for the benefit of the land retained by UKLI and the plots held by the plot holders;
27.3 the site would increase in value.
"28. In this period, 15 March 2006 to 31 January 2008, UKLI sold plots under the Second Scheme with sales amounting to £27,698,430.
"29. In May 2007 the FSA requested UKLI to cease trading its land banking scheme and subsequently notified UKLI that they considered its scheme was a CIS as UKLI's operations were not following that detailed in the advice obtained in May 2006:
29.1. UKLI has not, at any time, been authorised by the FSA;
29.2. The FSA advised UKLI that its operation of a CIS breached the general prohibition, section 19 of the FSMA, and was a criminal offence, section 23 of the FSMA;
29.3. On 1 April 2008 the FSA filed a winding-up petition against UKLI on the basis that:
29.3.1 UKLI had/was carrying on a regulatory activity in breach of a general prohibition;
29.3.2 UKLI was insolvent and unable to pays its debts, and
29.3.3 It was just and equitable that UKLI was wound up.
29.4. On 3 April 2008 the FSA was granted a restraining order against UKLI, preventing the dissipation of UKLI's assets and the continuation of UKLI's Second Scheme;
29.5. As UKLI was not authorised by the FSA, UKLI's Customers of either the First Scheme or the Second Scheme will not be compensated by either the FSA or the Financial Services Compensation Scheme;
29.6. UKLI has failed to inform any of its Customers of their rights under section 26 of the FSMA."
"The FSA agreed with the substance of Mr Blair QC's views on the factual basis that he had identified in the May 2006 opinion. The FSA considered that, as Mr [Michael] Blair QC had given UKLI his clear views on how the proposed structure of the Second Scheme would avoid it having the element of collectivity that would lead to it falling within the statutory definition of a CIS, UKLI could operate the Second Scheme. In particular, UKLI said nothing to indicate that the summary of how the Second Scheme would operate, as contained in the May 2006 opinion, was inaccurate, or that they planned to make any changes to that model."
"In approximately November 2006 the FSA received information from a consumer about the manner in which UKLI was promoting the Second Scheme. The Enforcement Division was concerned at this, and accordingly wrote to UKLI on 4 December 2006 (page 756 of ESB1), setting out the points that were of concern, namely that UKLI was stating to potential plot purchasers that it would retain up to one third of the site and that and a detailed strategy would be prepared by UKLI seeking residential allocation of this land. This form of promotion appeared to the FSA to run entirely contrary to the facts identified by Mr Blair QC in his May 2006 opinion to be the basis of his advice and therefore to undermine Mr Blair QC's views as expressed in the May 2006 opinion (with which the FSA had at the time agreed) that the Second Scheme did not amount to a CIS.
"Mr Walter of UKLI responded to the FSA's letter of 4 December 2006 by e-mail on the same day (page 757 of ESB1). He noted that UKLI did not believe that it was offering a CIS to the public, and stated that the land referred to in UKLI's promotion was UKLI's retained land and was not for sale."
"There was a quite clear statement in the promotional material that once an investor bought land from UKLI, the company would be responsible for re-zoning all of the land (both its retained share and also the plots sold off to purchasers) for its investors collectively."
"Please specify precisely (including by reference to specific paragraphs in Mr Blair QC's written Opinions dated 4 May 2006, 13 June 2007 and 20 July 2007) which aspects of Mr Blair QC's advice it is alleged the Second Scheme was run entirely contrary to, giving full particulars of each alleged contravention."
The response refers to the FSA's letter of 23 May 2007 as sufficient particularisation of the ways in which the second scheme was run contrary to counsel's advice. It is, in my judgment, clear that the Secretary of State adopts as his case that the second scheme constituted a collective investment scheme on the grounds set out in the FSA's letter and that he relies on the specific instances of marketing referred to in the letter and in Mr Burns' affidavit. It follows that I do not consider that an order should be made, as asked in paragraph 1.1 of the application notice, for a statement by way of clarification of the grounds on which the Secretary of State alleges that the second scheme was unlawful.
"2.1 the precise conduct of the Fifth Defendant in relation to the Second Scheme which the Claimant alleges makes the Fifth Defendant unfit to be a director;
"2.2 the facts relevant to that conduct of the Fifth Defendant that the Claimant claims to be established by direct evidence contained within paragraphs 90-141; and
"2.3 the inferences the Claimant invites the Court to draw from the facts referred to in paragraph 2.2 above."
"… disclosing no reasonable grounds for bringing the claim and/or as embarrassing a fair trial, alternatively that pursuant to CPR 24 summary judgment be entered for the Fifth Defendant in respect of that allegation on the grounds that the Claimant has no real prospect of succeeding on that allegation."
An application for this order was not made at the hearing.