England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London WC2A 2LL
		23rd February 2007

INTRODUCTION

1. This is the trial of a petition presented on the 7 July 2006 by the Financial Services Authority ('FSA') pursuant to s.367 of the Financial Services and Markets Act 2000 (FSMA). It is apparently the first such petition to be contested! No cross-examination has been sought, and accordingly the trial has been conducted on the basis of the papers and oral submissions, Mr Peacock the the FSA has presented the case very fairly. Mr Roderick Shears appeared in person on behalf of Respondent, The Inertia Partnership LLP ('TIP'). He presented his case clearly and with courtesy.
2. Under FSMA s.367(1)(c), the FSA may petition for the winding-up of a 'body' which is carrying on, or has carried on, a 'regulated activity' in contravention of the 'general prohibition' On such a petition, the court may wind up the body by virtue of s.367(3) if (a) the body is unable to pay its debts within the meaning of s.123 or s.22l of the Insolvency Act 1986, or if(b) the court is of the opinion that it is just and equitable that the body should be wound up.
3. TIP is a limited liability partnership As such, it is a 'body' for! the purposes of s.367(1)(c) (see FSMA s,367(2) and regulation 6(2) of the Limited Liability Partnership Regulations 2001 (SI 2001/1090), 'the L.LP Regulations') and it falls to be wound up (if at all) pursuant to the provisions of Part IV of the Insolvency Act 1986 (regulation 5 of the LLP Regulations).
4. Pursuant to a resolution passed on the 3l August 2006, TIP went into creditors' voluntary liquidation ('CVI'). Accordingly, the issues that fall to be determined in this trial are:

4.1. Whether TIP has been conducting a regulated activity in breach of the general prohibition

4.2. If so, whether TIP is or was insolvent at the relevant time

4.3. Further or alternatively, whether it is .just and equitable to wind TIP up

THE FACTS

Boiler rooms:

5. The FSA is Rightly concerned about the activities of 'boiler rooms' These are generally off-shore entities which are not authorised or exempt for the purposes of the FSMA They cold-call private individuals in the UK (for convenience, 'consumers') and try to encourage them to buy shares in unlisted companies. The shares tend to be significantly overpriced. The sales techniques of boiler rooms are typically persistent, often high pressure. They may also make misrepresentations, usually concerning the imminent flotation of the company on an investment exchange, and/or the likely resale value of the shares currently on offer. Their activities are pernicious.
6. , In the past, boiler rooms have sought to sell shares in non-UK companies, for which payment would have to be made into off-shore bank accounts. Consumers might understandably show some reluctance to enter into such transactions. More recently, the boiler rooms have accordingly changed their tactics and started selling shares in UK companies. They have also sought to put in place arrangements that are calculated to provide reassurance to consumers in the UK by providing for a receiving agent in the UK to collect payments
7. Through complaints received from a number of consumers during 2005 and 2006, the FSA became aware of the activities of three particular boiler rooms that are relevant to this petition, namely Integra Advisory Group ('JAG'), Aims Management and Stanford Long. Some or all of them sold shares in three UK companies, namely Vivadi Plc ('Vivadi'), Plasma Warehouse Group Plc ('Plasma') and Police 5 Group Pie ('Police 5')
8. In his written and oral submissions, Mr Shears has objected to the use by the FSA of the pejorative term 'boiler room' in these proceedings, He has also pointed out that the FSA has not described any of TAG, Aims Management or' Stanford Long as 'boiler rooms' in any of the alerts it has issued, and indeed he says that the only alert issued by the FSA relating to any of them merely states that TAG is not authorised under the FSMA. Be that as it may, the evidence clearly shows that the term 'boiler room' is a useful and suitable shorthand for the activities of these three bodies, and others like them

TIP's activities:

9. TIP is neither authorised nor exempt for the purposes of the FSMA nor is it a boiler room. There may be some dispute about the lawfulness and the moral culpability of its activities, but there is little doubt about their actual nature These can be summarised briefly.
10. TIP was incorporated on the 22 August 2003. Mr Shears has been a member since then. He has been the sole member since the 9 October 2005. Its business was originally that of management consultancy. At some point before the end of 2005, Mr Shear's came to know of' a man called Jacob Daniels, who operated through Porterland Associates Limited ('Porterland'), a company incorporated in the Seychelles. Mr Shear's says that he understood Porterland to have a client base of' high net worth individuals ('HNWIs') who would be interested in investing in UK companies Mr Shear's introduced Porterland to a number of UK public companies with a view to assisting them in raising capital

Vivadi:

11. Mr Shear's first introduced Porterland to Vivadi in 2005. Porterland was subsequently engaged by Vivadi to help it raise capital. Porter land in turn engaged the services of lAG, and possibly other boiler rooms as well. Mr Shears was clearly aware at the time that Porterland had engaged a number of 'brokers'. This appears from the evidence of' Katie Souter, a director of 535X (a corporate news and share information service designed for small capitalisation UK public companies). In October 2005, she received a complaint from a member of the public, Elaine Green, who said that she had been cold-called by JAG offering shares in Vivadi, in the course of which she was told that the company was to be posted on 535X imminently. Ms Souter passed the complaint to Mr Roberts, the CEO of Vivadi, and to Mr Shears the same thing happened again in January 2006, when another consumer complained that the same representation had been made to them, this time by Aims Management. Ms Souter says that she was concerned about these complaints because there was no imminent prospect of Vivadi being posted on 535X. Mr Shears has challenged Ms Souter's evidence on this point.. He says that there was an agreement in principle that Vivadi would be posted on 535X, and that he asked Ms Souter to correct her error
12. There is indeed an email from Mr Shears to 535X dated the 23 August 2005, in which he purported to "require the letter of acceptance for Vivadi to join 535X as agreed at your presentation in July". However', no such letter of acceptance appears to have been sent by 535X, and there is nothing to suggest that either Vivadi or Mr Shears pursued the matter after August 2005 More significantly, neither Vivadi nor Mr Shears pursued the matter after the complaint from Ms Souter in October 2005 In the circumstances, there is no evidence before the court to suggest that Vivadi was about to be posted on 535X, either in October 2005 or in January 2006, when the representations were made to consumers. More importantly, I am satisfied from Ms Souter's evidence that Mr Shears knew in October 2005 and again in January 2006 that Porterland had engaged brokers, who had cold-called members of the public and that there were complaints about their activities. In other words, Porterland was not seeking to place Vivadi shares exclusively (if at all) with established HNWI clients, which is what Mr Shears said he thought would be happening. Indeed, in the course of presenting his case in court, Mr Shear's acknowledged in terms that he was aware that Porterland had 'associates' and a 'network', although he disclaimed any knowledge of the exact details.
13. Having said that, the evidence does not establish that TIP took any active part in selling Vivadi shares The nearest the FSA's evidence comes on that issue is in the note of a telephone conversation between Mr Roberts, the CEO of Vivadi, and an FSA official on the 20th March 2006, in which Mr Roberts is recorded as having said that Mr Shears "had arranged the issue of the shares in Vivadi". However, it is wholly unclear what Mr Roberts meant by that remark, always assuming that he made it. He may simply have been saying that TIP facilitated the issue by having introduced Vivadi to Porterland.. There is no sufficient evidence to base any finding that TIP did anything more.

Plasma:

14. Later in 2005, Mit' Shears introduced another company, Plasma, to Porterland, This time the arrangements were more formal and TIP's role was more active. A written agreement dated the 17th November 2005 was made between (1) Plasma, (2) Daniel Faughnan (the CEO of Plasma), (3) Porterland, and (4) TIP ('the Plasma Agreement') The FSA only produced an unsigned copy in evidence, and it is apparent that the substance of the agreement must have been slightly different, for reasons that will emerge, Mr Shears said in interview that the draft Agreement I have seen was not a "current document", but neither has he denied that there was an agreement in place to substantially like effect, nor has he produced the actual agreement.. Subject to the various comments I shall make below, I find that the Plasma Agreement did represent the essential terms of the bargain made and performed by the parties.
15. The purpose of' the Plasma Agreement was to enable Plasma to raise £400,000 by means of a 'placing'. It appointed Porterland as its agent to procure subscribers (clause 2). Porterland agreed to use its best endeavours to arrange for "institutional and other investors" to subscribe for the shares (clause 4 1) All "application moneys" were to be paid "to and under" the control of TIP, which was described as the 'Receiving Agent' (clause 5 1) Plasma was to receive "a minimum of 2.5p per share" (clause 6 I)
16. However, the Agreement produced in court is incomplete because it does not specify the 'commission' payable by Plasma (clauses 5 2 and 6 1) In the course of his presentation, Mr Shears claimed that the actual agreement was for the shares to be sold at l0p, and for Plasma to receive 4.5p (not the 2.5p mentioned in the Plasma Agreement). In other words, on his version of events, Porterland and TIP were between them sharing a commission of 5.5p per share, a rate of more than 122% of the share price actually received by the company. Although there is no documentary evidence before the court to substantiate Mr Shears assertions in this regard, I am prepared to proceed on the basis that he is right.
17. There is one further confusion in the Plasma Agreement. One of the 'Placing Documents' in Schedule 1 is a letter dated the 18th November 2005 from Plasma to Porterland, ostensibly recording an agreement by Porterland itself to subscribe for "up to" 16 million 1p shares at 2.5p each. This is not the same deal as that set out in the body of' the Agreement. Schedule 1 to the Agreement also lists two other documents, copies of which were attached.. Form B was described as: 'Application and registration details' It was a one-page fbrm, which TIP was to send out to consumers who had 'agreed' to subscribe for shares The form was to be completed and sent back to TIP, presumably with any payment enclosed (although it does not say so on its face). In interview, Mr Shears referred to it as an 'application form'.
18. .. In the course of' presenting his case in court, Mr Shears was keen to emphasise that Plasma had provided Porterland with a number of documents, including accounts, a risk warning, and a prospectus dated the 6^th October 2004 which (he said) complied with the Public Offers of Securities Regulations 1995, SI 1995/153 7 ('the POS Regulations').. Nevertheless, it is apparent from complaints received and from the evidence given by a number of consumers that Porterland engaged the services of various boiler rooms to sell the shares in Plasma. There is not the slightest suggestion that any documents were sent by Porterland or by the boiler rooms to any consumers.
19. On the 16th January 2006, Timothy Lyle of City & Merchant Corporate Finance Ltd ('City &

Merchant'), then Plasma's financial advisers, received a phone call from a consumer, Mr Sirrett. He had been cold-called by Aims Management in Germany, trying to sell him shares in Plasma, He was told by Aims Management that Plasma was going to be listed on the Alternative Investment Market and that it was being advised in relation to the flotation by City & Merchant. This was untrue Mr Lyle immediately contacted Mr Shears and Mr Faughnan (the CEO of' Plasma) and told them what had happened. After a number of email exchanges and meetings, the ultimate outcome was that Mr Lyle was asked to resign as adviser to Plasma.

20. In presenting his case, Mr Shears was at pains to discredit Mr Lyle and to provide other explanations for his departure as financial adviser to Plasma. However, the real significance of the FSAs evidence in this regard is that, on the 16th January 2006, Mr Shears had been told that at least one member of the public had been cold-called by brokers who were trying to sell shares in Plasma on the basis of misrepresentations

Police 5:

21. Early in 2006, Police 5 approached TIP with a view to their providing assistance in raising capital Mr Shears said that he would introduce them to Porterland, who could assist with a placement. A written agreement was in due course made on the 23rd February 2006 between (1) Police 5, (2) three director's of Police 5 (including the Managing Director, Philip Walsh), (3) Porterland and (4) TIP ('the Police 5 Agreement'). It was very similar to the Plasma Agreement, but there were certain important differences The FSA again produced an unsigned copy, but on this occasion Mr Shears has produced a signed copy as well. The two are substantially identical as far as they go, but the signed copy appears to be incomplete, as will emerge.
22. The purpose of the Police 5 Agreement was to enable Police 5 to raise £750,000 by means of a 'placing'. As in the Plasma Agreement, Police 5 appointed Porterland as its agent to procure subscribers (clause 2), and Porterland agreed to use its best endeavours to arrange for "institutional and such other' of' its private investors" to subscribe for the shares (clause 4 1). All application moneys were to be paid "to and under the control of TIP, which was described as the 'Receiving Agent' (clause 5. 1). Police 5 was to receive "a minimum of 2.5p per share" (clause 6.1) Both versions of the Police 5 Agreement are more complete than the Plasma Agreement, because they specify that the Placing Price (the price that consumers would pay) was to be 7.5p. Nevertheless, Mr Shears (in court) Mr Walsh (in a statement dated the 6th October 2006) and Mr Daniels (in a statement dated the 9th October 2006) all insisted that Police 5 was to receive 3.5p per share, not 2.5p. In the course of his oral presentation in court, Mr Shears corrected himself and said that Police 5 was to receive 3.9p Either 3.5p or 3.9p is plainly inconsistent with the written agreement produced by him.
23. One other provision in the Police 5 Agreement that did not appear in the Plasma Agreement was a warranty from Porterland that it had "all necessary authorities to enable it to lawfully procure subscribers to the Placing Shares" and that it would operate "in accordance with all requirements of FSMA and any other legislation which it may be subject to" (clause 7.2).. There is also a 'compliance guidance' in relation to FSMA s.21 (Schedule 4)
24. The draft Police 5 Agreement produced by the FSA included a letter from Police 5 to Porterland dated the 23rd February 2006 ostensibly recording an agreement by Porterland to subscribe for "up to" 30 million shares at 7.5p each. The signed version produced by Mr Shears did not include a copy of this letter. Nevertheless, in a telephone conversation on the 5th July 2006 with an FSA official, Mr Walsh, the Managing Director of' Police 5, explained that the deal involved a subscription by Porterland for new shares, In the circumstances, I am satisfied that the subscription letter attached to the draft Police 5 Agreement produced by the F SA formed part of the bargain between the parties.
25. Attached to the Police 5 Agreement was a model Form B to be sent by TIP to consumers who had 'agreed' to subscribe for shares. It is in substantially the same form as that attached to the Plasma Agreement, but in the event it was never used. Instead, TIP was provided by Porterland with access to an internet-based system which recorded the details (presumably entered by the boiler rooms who were cold-calling consumers) of those who had 'agreed' to subscribe for shares An Application Form showing details of the consumer's name and address, and the shares s/he had 'agreed' to subscribe for, could then be printed automatically and sent to him/her, directing him/her to return it with payment to TIP. As printed from the internet site, each Application Form identified the broker that had effected the sale. A review by the FSA of the Application Forms in relation to Police 5 reveals the names of ten brokers.
26. The Application Forms say this (my emphasis):

"I/We apply for the number of shares stated above , I/We request that you send me/us a share certificate by post at my/our risk to the address given below for the number of shares in respect of which this application may be accepted. I/We understand that no application will be accepted unless and until payment in full for the shares has been made. I/We agree to accept a lower number of shares should the Offer be oversubscribed and the Directors exercise their discretion to scale down applications

27. Given the anticipated volume of transactions, TIP decided that it would be unable to provide the necessary administration services itself. In about February 2006, Mr Shears accordingly made arrangements for them to be provided instead by Nelson Direct Mail Services Limited ('Nelson'), which printed and posted the Application Forms, received them back with the investors cheques, paid the cheques into TIP's bank account, and copied the Application Forms and the cheques to Mr Shears. TIP would then divide the subscription moneys, paying to each of' Police 5 and Porterland the amounts they were due under the Police 5 Agreement, and retaining its own commission
28. In the course of presenting his case in court, Mr Shears was again keen to emphasise that Police 5 had provided Porterland with a number of documents, including accounts, a risk warning, and a prospectus which (he said) complied with the POS Regulations. Nevertheless, it is apparent from complaints received and from the evidence given by a number of consumers that Porterland engaged the services of various boiler rooms to sell the shares in Police 5. There is not the slightest suggestion that any documents were sent by Porterland or by the boiler rooms to any consumers.
29. The FSA issued a warning about JAG in January 2006. Nevertheless, Application Forms for shares in Police 5 dated as late as April 2006 continued to be received by TIP showing IAG as the broker that had effected the sale TIP obviously had no qualms about banking the money received from such consumers.

The scale of the transactions:

30. There is some dispute over the amount of money involved. The FSAs analysis is that TIP handled a total of at least £1.12 million. The FSA says that £131,931.25 was paid to Plasma, £231,771 to Police 5, and £694,082.08 to Porterland. Mr Shears agrees that Porterland was paid about £694,000, but otherwise he disputes the FSA's figures. He says that Plasma was paid about £155,000 and Police 5 about £485,000. Both he and Police 5 claim that it is currently owed a further £104,000 odd, which has been collected by TIP from investors under the Police 5 Agreement but not paid over by TIP because its bank account has been frozen. He also says that TIP received about £168,000. For the purposes of this petition, it is unnecessary to resolve the conflict of evidence. Both sides agree that TIP handled at least £1 million, and possibly considerably more than that, and that Porterland was by far the largest beneficiary of the whole exercise

The FSA investigation:

31. Prompted by a number of complaints, the FSA investigated TIP As a result of concerns generated by the FSA's investigation, TIP's bank froze its accounts in June 2006. This is why TIP has not paid Police 5 the balance of moneys raised from investors. On the 7th July 2006, the FSA presented the petition that is now before the court
32. On the 7th August 2006, TIP issued notice of a creditors' meeting to be held on the 31st August. Earlier that day, the resolution placing the partnership in CVL was passed. According to the Statement of Affairs prepared by Mr Shears, TIP has an estimated deficiency of £199,444. No provision is made in that Statement for claims by investors

ISSUE 1: BREACH OF THE GENERAL PROHIBITION

The legislative structure:

33. FSMA s.19 imposes the general prohibition. No person may carry on a regulated activity in the UK, or purport to do so, unless he is authorised or exempt
34. Pursuant to FSMA s.22, a regulated activity is one which satisfies three conditions: (a) it is an activity of a specified kind; (b) it is carried on by way of business; and (c) it either relates to an investment of a 'specified kind', or (in relation to some activities) it is carried on in relation to property of any kind For these purposes, activities and investments are to be 'specified' by Order made by the Treasury: FSMA s 22(5)
35. This power has been exercised by making the Financial Services and Markets Act 2000

(Regulated Activities) Order 2001, SI 2001/544 (as amended by SI 200 1/3544) ('the RAO'). Part II of' the RAO sets out specified activities which are regulated, whatever the property involved is. Part III of the RAO sets out specified investments. For present purposes, the relevant activity is defined in article 25 of the RAO. There are two alternative elements:

35.1. Article 25(1) covers the making of arrangements for another person (whether as principal or agent) to buy, sell, subscribe for or underwrite an investment which is either (a) a 'security', or (b) a 'relevant investment', or (c) an investment of the kind specified by article 86, or article 89 so far as relevant to that article Excluded from this definition (by article 26) are arrangements which do not or would not "bring about the transaction to which the arrangements relate"

35.2.Article 25(2) covers the making of arrangements with a view to a person who participates in the arrangements buying, selling, subscribing for or investments falling within article 25(1) (whether as principal or as agent)

36. For the purposes of the RAO, the word 'security' is defined in article 3 as meaning any investment of the kind specified in articles '76-82. That includes shares or stock in the capital of any body corporate (wherever incorporated).

The issue:

37. TIP was neither authorised nor exempt for the purposes of the FSMA. It was plainly carrying on a business within FSMA s.22. The shares in Vivadi, Plasma and Police 5 were all specified securities within the RAO. Accordingly, the only live issue is whether TIP was carrying on specified activities within RAO article 25, and if so whether it can avail itself of the exception in RAO article 26

The interpretation of'RAO aiticles 25 & 26:

38. There is apparently no guidance on the scope of RAO articles 25 or 26, either from previous case-law or from any statutory or non-statutory source. The court must accordingly interpret the words used in these articles by reference to first principles. The ultimate objective is plainly to identify 'the objective of' the legislation, interpreting the words of the RAO by reference to the context in which they are used
39. The critical words in article 25 are these: "making arrangements for' another person.. to buy, sell [or] subscribe for shares. The exception under article 26 applies to "arrangements which do not or would not bring about the transaction to which the arrangements relate". In my judgment, the correct analysis of these provisions is as follows:

39.1. The word 'arrangements' is, depending on the context, capable of having an extremely wide meaning, embracing matters which do not give rise to legally enforceable rights.

39.2.In articles 25 and 26, the word 'arrangements' is used in contradistinction to the word 'transaction'..

39.3. In article 26, the word 'transaction' is plainly a reference to the purchase, sale etc of shares contemplated by article 25

39.4. As such, a person may make 'arrangements' within article 25 even if his actions do not involve or' facilitate the execution of each step necessary for" entering into and completing the transaction (ie. the purchase, sale etc of the shares)

39.5. The availability of the exception in article 26 is essentially a question of fact. As a matter of causation, did the arrangements bring about the transaction (ie. the purchase, sale etc of the shares)?

Breach of the general prohibition:

40. Dealing first with Vivadi, as already noted, there is no evidence to suggest that TIP took any part in arranging the sale of its shares, beyond having introduced the company to Porterland.. That introduction is in my judgment too nebulous and too remote an act to fall within the concept of 'making arrangements' within RAO article 25 Such an introduction in these circumstances is not an 'arrangement' in any meaningful sense, for two reasons: first, because it does not necessarily result in anything further happening as between Vivadi and Porterland, let alone between any consumers and Vivadi or Porterland; and secondly, because any further steps that might be taken following the introduction were not within TIP's power to effect or to direct.. As such, the introduction did not involve TIP in any violation of the general prohibition under FSMA s .19.
41. Turning next to Plasma, the position is different TIP entered into an express agreement pursuant to which it provided administration services designed to facilitate the sale of Plasmas shares Mr Shears main defence is that the brokers entered into binding agreements with consumers in the course o their telephone conversations, and that TIP did nothing more than provide the necessary paper work after the contract had already been made This argument raises two questions. First, is it right as a matter of fact? Secondly, if so, does it save TIP from the reach of article 25?

41.1. As to the first question, the position is slightly obscure, not least because none of the forms submitted to TIP by investors in Plasma have been adduced in evidence. There are numerous forms in relation to Police 5, but none in relation to Plasma. In the absence of any documentary evidence to the contrary, I can only assume that, in relation to Plasma, TIP sent out Forms B, attached to the Plasma Agreement. Nevertheless, on the balance of probabilities, I am satisfied that the brokers did not enter into binding contracts with consumers over the phone, for a number of reasons, First, Form B is described in Schedule 1 to the Plasma Agreement as: 'Application and registration details'. The use of the word 'application' is inconsistent with a situation in which an investor is already bound to purchase a specified number of shares. Secondly, the money paid by consumers to TIP is described in clause 5.1 of the Plasma Agreement as 'application moneys' Again, the same point can be made, Thirdly, in the course of his interview, Mr Shears referred to the 'application forms' in relation to Plasma, which again implies that no previous binding agreement to subscribe for shares had been made. Finally, it is highly likely that the matter was handled by the boiler rooms in the same way as in relation to Police 5, where the evidence is much clearer, as will emerge.

41.2. But, even if they had entered into any such binding contracts, would it have made any difference? In my judgment, it would not. Even then, the sale and purchase of shares would still need to be completed. in particular, the investors would need to pay, and the company would need to receive the funds, TIP provided the necessary administrative services in that regard. Those services 'brought about' the transaction (a sale and purchase of shares), even if there was a pre-existing contract in place, because without the services provided by TIP such contracts would not have been completed..

42. For these reasons, TIP was in my judgment acting in breach of' RAO article 25 in relation to Plasma. The position in relation to Police 5 is clearer still The Application Forms are conclusive that the consumer was applying for shares, and that s/he might receive less than s/he applied for, or none at all. There was plainly no pre-existing contract concluded between the broker and the consumer over the phone There is also some evidence to show that consumers who failed to send off cheques after they had spoken with brokers over the phone were not pursued: that is again inconsistent with any suggestion that the brokers were making binding contracts with consumers. As such, in sending out the Application Forms, collecting the cheques and paying the money to Police 5, TIP was not merely providing completion services, but was making arrangements for the company to enter into agreements with investors. For these reasons, there was in my judgment a breach of' RAO article 25 in relation to Police 5.
43. In response to the FSA's case in this regard, Mr Shears made a number of other objections. For completeness I will summarise them briefly, and explain why they miss the point.
44. First, he emphasised that each of Vivadi, Plasma and Police 5 had legitimate and profitable businesses, and that they were run by experienced and respectable managers. That may or may not be true, but it is irrelevant. The thrust of the FSA's petition is that TIP was acting in breach of the general prohibition, not that it was I facilitating the sale of shares in companies that were necessarily doomed.,
45. Secondly, Mr Shears emphasised that Porterland claimed to have existing HNWI clients, and that it would be selling shares only to them, Again, even if that were true, it is irrelevant to the question whether TIPs own actions were in breach of the general prohibition Even if Porterland had been selling shares to HNWIs, that would not have prevented TIP's activities from falling within RAO article 25..
46. Thirdly, Mr Shears emphasised that Porterland had warranted in the Police 5 Agreement that it was authorised and that it would conform to the FSMA. But that does not mean that TIP did not also need authorisation, or that its own actions were immune from RAO article 25.

ISSUE 2: INSOLVENCY

47. The second question is whether TIP should be wound up on the grounds of insolvency. For these purposes, the relevant date of insolvency appears (from the wording of s..367(3)(a)) to be the date on which the court comes to decide whether to make a winding-up order.
48. There is no doubt that TIP is insolvent. The Statement of Affairs prepared by Mr Shears says so. Indeed, it is entirely possible that the deficit is greater than he has estimated, given the possibility of compensation claims under FSMA s.28 But irrespective of the scale of the deficit, the partnership is plainly insolvent.
49. Even if insolvency is established for the purposes of FSMA s.367(3)(a), the court has a discretion whether or not to make a winding-up order. In this case, Mr Shears relies on three matters by way of defence — namely, (a) an assertion that the FSA caused the insolvency (b) the fact of the CVL, and (c) the fact that three creditors are, he says, opposed to a compulsory winding-up order. The same arguments are deployed again in answer to the claim for winding-up on the just and equitable ground, and I propose to deal with them comprehensively under that heading
50. Formally, the FSA needs permission to amend the petition in order to rely on insolvency. I give them leave to amend in terms of the draft Amended Petition which I have initialled.. Mr Shears has not been disadvantaged by this late amendment, because he has known that the FSA seeks to rely on insolvency, and he has sought to meet that argument.

ISSUE 3: THE JUST AND EQUITABLE GROUND

The test:

51. As noted above, this is the first contested petition under FSMA s.367. It may therefore be convenient to set out the basis on which the court should proceed when considering the exercise of its jurisdiction on the just and equitable ground In my judgment, there is a close analogy between FSMA s..367 in this regard and the courts well established jurisdiction to make winding-up orders on the petition of the Secretary of' State under s.124A of the Insolvency Act 1986. Although the statutory trigger in each case is different, in both cases petitions may be brought by public officials, and the court has a power to make a winding-up order in the public interest on the just and equitable ground. Both jurisdictions should accordingly be exercised with a view to protecting the public interest, and in doing so the court needs to balance all relevant interests against each other in order to ascertain the just and equitable result: see for example Re Walter L Jacob & Co Ltd [1989] BCLC 345, at 351-353 and 360, and In Re Supporting Link Ltd [2004] 1 WLR 1549, at §49-53
52. Applying that test to the facts of this case, it is in my judgment clear that a winding-up order should be made, for the following reasons

Satisfaction of the FSA's statutory objectives:

53. First, the FSA says that a winding-up order would satisfy its statutory objectives by maintaining confidence in the financial system (FSMA s.3), promoting public awareness of the financial system (s.4), protecting consumers (s.5) and reducing financial crime (s.6) I agree. These objectives will be satisfied principally because a winding-up order will demonstrate that Mr Shears is wrong in saying that TIPs activities do not involve a breach of the general prohibition. As such, the order will assist the FSA in clarifying the scope of that prohibition, and will enable it to provide further publicity to protect consumers in future and to deter others who might be tempted to break the general prohibition.. This will in turn make it harder for boiler rooms to avail themselves of receiving agents located in the UK whose participation in share placements is calculated to lend comfort and reassurance to consumers who might be discouraged from sending cheques to overseas entities,

Scale of the activity:

54. As noted above, there is some dispute over the scale of TIP's activities, but there is no doubt that it has participated in arrangements involving at least £1 million..

The significance of TIPs role:

55. Similarly, there is no doubt that TIP played a significant role in these transactions. It issued the application forms, collected the moneys and distributed them to the companies and to Porterland. Its participation was calculated to provide comfort and reassurance to consumers. In my judgment, Mr Shears recognised as much in interview, although he subsequently sought to deny it in court. His denial was unconvincing, because on other occasions and for other purposes he was at pains to emphasise the propriety of his behaviour, which is, he says, what investors would have expected of him.

Knowledge that boiler rooms were being used:

56. The FSA alleges that Mr Shears was aware that boiler rooms were being used by Porterland. Leaving aside the pejorative connotations of that label, it is in my judgment entirely clear (and Mr Shears did not seriously deny) that he was aware that Porterland was using a number of off-shore brokers in order to place the shares. This had been the pattern since the placement of Vivadi shares, and it is clear from his interview that Mr Shears was aware of it, and even that he knew where some of the brokers were based (namely, Spain).. He also knew horn Ms Souter and (it would seem) from an FSA alert that at least one of the boiler rooms was not authorised for the purposes of the FSMA.

Knowledge that sales were not being made to HNWIs or existing clients:

57. Mr Shears has said that he thought that Porterland would only be selling to a network of existing HNWI clients. I reject his assertions in this regard. The whole pattern of share sales in relation to Vivadi, Plasma and Police 5 indicated that Porterland was using boiler rooms to sell to unsophisticated consumers with limited means. The addresses on the Police 5 Application Forms (which were copied to TIP by Nelson), the size of the transactions, and the fact that some consumers provided post-dated cheques all indicated that these were neither established clients nor wealthy individuals. Indeed, the very scale of the Police 5 placement, requiring TIP to engage the services of Nelson, indicated that capital was not being raised in large lump sums from a few HNWIs, but rather from numerous small investors. Furthermore, the complaints that had been relayed through Ms Souter and Mr Lyle again indicated a pattern of cold-calling to consumers who were previously unknown to Porterland. In the circumstances, Mr Shears was in my judgment aware that Porterland was procuring off-shore brokers to cold-call consumers in the UK.

Knowledge that consumer's were being misled:

58. The FSA also alleges that Mr Shears was aware that consumers were being misled by the boiler rooms. The most significant charge is that, to his knowledge, Application Forms were being sent out in relation to Police 5 showing a share price of 7.5p, when Mr Shears knew perfectly well that the company was only receiving 2.5p each (or, if he is to be believed, 3.5p, or 3.9p) He says in his defence that no shares are ever traded at par, and that commission is always paid. That may be true. However, in my judgment the transactions in this case involved 'commission' that was on any view exorbitant (up to 200% of the actual price received by the company) and the documentation was calculated to mislead consumers into thinking that the share price was indeed 7.5p, not 2.5p (or 3.5p, or 3.9p). In the circumstances, if he does not consider that consumers were being misled, Mr Shears showed a startling lack of judgment in lending his name to these transactions
59. The FSA also alleges that Mr Shears was aware that the boiler rooms were making misrepresentations to consumers. The evidence in relation to that derives from Ms Souter and Mr Lyle. Although he has tried to undermine their evidence, as noted above, in my judgment Mr Shears was aware at the very least that certain consumers were complaining that misrepresentations were being made,

Knowledge of' a breach of the FSMA:

60. The FSA also alleges that, from the exchanges with Mr Lyle in early 2006, Mr Shears knew that his activities were in breach of the FSMA. In my judgment, this allegation adds nothing. Even now, Mr Shears continues to maintain that the activities of TIP did not involve any breach of the FSMA. He may have no legal basis for holding that opinion, but to allege that he knew that those activities involved a breach at some earlier date is unconvincing

Commission of a criminal offence:

61. The FSA also points out that a breach of the general prohibition constitutes a criminal offence under FSMA s 2.3. Subject to any available defences, as to which I make no finding this would appear prima facie to be true. Mr Shears only answer is that he has a successful and previously unblemished business record, and also that he is respectable family man, with successful professional children. He has also produced a number of testimonials. As such, he would not (he says) jeopardise his good name. In my judgment, this evidence again misses the point The question whether Mr Shears has acted in breach of the general prohibition is a matter of black letter law. His previous good character might become relevant if a prosecution is successfully brought against him, and the court is considering what sentence to impose. But at this stage the evidence has no relevance

Direct benefit to investor's:

62. The FSA also alleges that the making of a compulsory winding-up order would provide a direct benefit to investors. Any such order would necessarily be predicated on a finding that there has been a breach of' the general prohibition. As such, investors would have established the first element in a claim for compensation under s.28 Whether they are in reality entitled to any such compensation, and if so against whom, is not for this court on this occasion.
63. It is plainly right that investors should enjoy the benefit of a formal ruling on the question of breach. But that does not lead to the conclusion that a winding-up order should also be made. Exactly the same benefit could be achieved for investors by the grant of declaratory relief, without the court taking the extra step of making a winding-up order. In the circumstances, the possible availability of compensation is not, in my judgment, a factor militating in favour of compulsory liquidation in a case such as this where a company is already in voluntary liquidation

FSA participation in the winding-up:

64. Finally, the FSA alleges that it would be able to participate, albeit informally, in a compulsory winding-up, but not in the CVL. However, in my judgment no weight can be given to this allegation. There is no legal basis on which it can be said that the FSA has any better right to participate in a compulsory winding-up than it does in a voluntary winding-up. And, if it is to be suggested that any particular voluntary liquidator has been unco-operative with the FSA, proper evidence should be adduced. There is none here.

The FSA's conduct:

65. As noted above, Mr Shears blames the FSA for TIPs insolvency.. He also says that it has been guilty of bullying and a deliberate attempt not to find the truth
66. However, it is apparent from Mr Shears own report to creditors on the 3l August 2006 that the business (originally management consultancy) was loss-making before it became involved in the placement of shares in Plasma and Police 5. Furthermore, its demise was (according to the same report) precipitated by the banks decision to freeze TIP's accounts, not by any decision on the part of the FSA.. As such, there is no proper evidence that the insolvency was caused by any conduct of' the FSA, let alone by any improper conduct on its part
67. Furthermore, there is no reliable evidence that the FSA has been guilty of any other improper conduct such as to persuade the court to refuse a winding-up order. I should in any event add that, if the court were otherwise satisfied that a winding-up order under FSMA s.367 was appropriate, it would have to be presented with truly exceptional evidence to persuade it not to make such an order purely on the basis of the FSAs own misconduct. The relief sought is for the public benefit, not for the benefit of the FSA as such. Accordingly, its own conduct is likely to be irrelevant to the exercise of the court's judgment, other than in wholly exceptional cases.

Opposing creditors:

68. Mr Shears also relies in opposition to the petition on the fact that three creditors are, he says, opposed to a compulsory winding-up order. However, none of the creditors has actually given notice pursuant to rule 4.16(1) of the Insolvency Rules 1986 Although the court retains a discretion in such circumstances to allow a person to appear on the hearing of the petition (rule 4.16(5)), no grounds for doing so have been suggested in this case. In the circumstances, there is no properly constituted opposition to the petition, other than from TIP itself, and I propose to disregard the views of the three creditors.
69. In case the matter goes further, I should also add that, if I had taken those views into account, I would have afforded them very little weight indeed, for the following reasons.
70. First, TIP's former solicitors, KSB Law, have provided a letter in opposition dated the 6th September 2006. However, their views need to be discounted In the course of his presentation, Mr Shears cast doubt on whether KSB Law are creditors at all. He stated that TIP has cross-claims against them for management services, and is possibly also entitled to withhold professional fees on the basis of negligent advice. They appear to have given TIP certain advice as to the lawfulness of its activities. Although I am unable to resolve these matters on the material currently available in court, there is obviously some doubt both about KSB Law's status as a creditor and also about the propriety of taking its views into account, if indeed its own advice has led to the present state of affairs
71. Secondly, there is opposition from Police 5, in the form of a short letter dated the 4th September 2006 and a statement from Mr Walsh. He says that the FSA has caused unnecessary stress and that it has hampered the company's operations. He would prefer the CVL to continue Mr Shears has explained that Police 5 is a creditor in the sum of over £104,000, representing the balance of the subscription moneys collected by TIP from investors, which it has been unable to pay to Police 5 because its bank account has been frozen. As such, the views of Police 5 must be heavily discounted. The company is the beneficiary of the placement which TIP helped to arrange. The contractual debt allegedly owed to it is accordingly tainted by the unlawfulness inherent in the overall arrangements Furthermore, investors who have paid cheques to TIP may well be entitled to compensation under FSMA s.28, in which case the end result may well be that Police 5 is owed nothing by TIP. I make no finding on that point, because it is not entirely clear which agreement would be rendered unenforceable by FSMA s 26(1), nor is it clear against whom any compensation may be recovered under s,28 Nevertheless, the court should not in my judgment lend any real weight to the views of Police 5 in the present circumstances.
72. Finally, Porterland has written a letter in opposition dated the 14th September 2006, and Mr Daniels has provided a statement dated the l5 January 2007. Porterland claims to be a creditor on the basis of unpaid fees under the Agreements. As such, its locus standi to oppose this petition is based on arrangements which have been operated in breach of the general prohibition. Mr Daniels says by way of justification that Porterland agreed only to approach established clients. For the reasons given, that is plainly not what happened. His evidence is obscure and, in so far as it is intelligible, unconvincing. Furthermore, Mr Shears has again cast some doubt on Porterlands status as a creditor, by claiming in the court of oral argument that it owes TIP £30,000 In all the circumstances, it would be quite inappropriate for the court to give any weight at all to Porterland's opposition.

The significance of' the CVL:

73. The third ground of resistance is the existence of the CVL. For the reasons already given, it is appropriate to apply by analogy the court's approach to the same question when it is considering a petition under s.124A of' the Insolvency At 1986. So far as that is concerned, there is a slight inconsistency between the authorities. In Re Alpha Club (UK) Ltd [2002] 2 BCLC 612, at §38, the learned Deputy Judge accepted that it was no part of the function of' the Companies Court to make winding-up orders as a mark of disapproval. However, in Walter Jacob, at 360, Nicholls L.J took the opposite view. He said that, by winding up a company that has misconducted itself on the securities market, the court would be expressing in a meaningful way its disapproval of such conduct
74. In my judgment, the discrepancy between these two cases cannot be explained solely by reference to the fact that in Alpha Club the company was already in liquidation, whereas in Walter Jacob the company had simply ceased to trade. The two eases clearly demonstrate a difference in attitude to the court's function in this kind of case. Since Walter Jacob is plainly a higher authority, and it has been cited with apparent approval more recently in Supporting Link, at §53, I have no hesitation in following it. On that basis, there can be no doubt that this is an appropriate case for the court to mark its disapproval of the activities of' TIP.
75. A further advantage in making such an order (as was also recognised in Alpha Club at §38-39) is that the public will thereby see that the FSA has investigated the matter and concluded that it is in the public interest that the business be wound up, and that the court agrees with that conclusion; and that the public can also feel that the matter is properly investigated by a court appointed liquidator I say that without casting any doubt on the integrity of the voluntary liquidator. It is a matter of public perception, which the court is entitled to take into account, as the learned Deputy Judge did in Alpha Club.

Miscellaneous defences:

76. Finally, Mr Shear's relied on a number of miscellaneous defences, which I can deal with shortly.
77. He said that he took legal advice However, none has been produced, and it would in any event be irrelevant to the hard-edged question whether TIP was acting in breach of the general prohibition. It is also difficult to see how any such advice could be relevant to the exercise of the court's discretion on the just and equitable ground, but it is unnecessary to speculate on such matters in the absence of the actual advice
78. Mr Shears also said that there is no evidence that investors have been misled by TIP or by the companies in which they invested, Given the content of the Application Forms that were sent out by TIP, I am not satisfied that this is entirely true, And even if it were, it would be irrelevant to the ground on which the petition is based. Given the way in which TIP has facilitated the activities of Porterland and various boiler rooms, it remains just and equitable to wind it up, whether its own conduct has misled consumers or not..
79. .Finally, Mr Shears says that a compulsory winding up will be more expensive. No particulars have been given. Even accepting that the cost is liable to be somewhat higher, this is a price that is worth paying in light of the other considerations listed above.

Conclusion:

80. Balancing all these considerations together, it is in my judgment just and equitable that TIP be wound up by the court