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The Ostrich Farming Corporation Limited
C239/98 - Alleged delay by the Department of Trade and Industry (DTI) before initiating action under the Companies Act against the Ostrich Farming Corporation Ltd (the corporation)
Summary of case
Full report
Legislative background
Background to the corporation
Jurisdiction
Investigation
The complainant's contentions
TSD's comments on the complaint
DTI's comments on the complaint
Further investigation
Summary of case
In March and April 1995 DTI vetted the corporation for possible investigation under section 447 of the Companies Act 1985. They concluded at that stage that good reason for investigation was absent. In September 1995, after the corporation had issued a revised brochure guaranteeing rates of monetary return to investors and after additional information had been received, DTI re-opened their file. On 14 November they initiated a section 447 investigation. DTI concluded their investigation on 5 February 1996 and sought advice from the Treasury Solicitor's department (TSD) on 6 February. On 26 March, after consultation with TSD and leading counsel had been completed, DTI presented a winding up petition to the court, who appointed the Official Receiver as provisional liquidator on 3 April. An order winding up the corporation was made on 17 June. Many of those who had invested in the corporation made large losses.
The Ombudsman found that DTI had not delayed in their section 447 investigation of the corporation, and that DTI's earlier decision in April 1995 not to initiate a section 447 investigation had been a discretionary one taken without maladministration. Losses made by investors in the corporation were not due to any maladministration by DTI.
Full report
1. The complainant said that DTI delayed unnecessarily before initiating action against the corporation, a company which they investigated under section 447 of the Companies Act 1985, and so failed to protect the interests of investors.
2. My investigation began in April 1998 after I had obtained comments from the Treasury Solicitor and from the Permanent Secretary of DTI following the referral of the complaint by the Member. I have not put into this report every detail investigated by my staff; but I am satisfied that no matter of significance has been overlooked. A glossary of the abbreviations used in this report is at Appendix B.
Legislative background
3. Section 447 of the Companies Act 1985 (the 1985 Act) empowers the Secretary of State, where he thinks there is good reason, to authorise one of his officers to require a company to produce specified documents and to provide an explanation of them. Such examinations, known as section 447 investigations, are conducted by DTI's Companies Investigation Branch (CIB).
4. A DTI booklet "Investigations How They Work" explains that section 447 investigations are conducted in confidence. That is to allow for any suspicion of misconduct to be looked at without the risk of harming the company under investigation should that suspicion prove to be unfounded. DTI do not announce the opening of section 447 investigations; nor do they respond to questions about whether or not a particular company is under investigation.
5. Internal guidance used by CIB officers vetting cases referred to them by CIB's pre-vetting section to see whether a section 447 investigation would be warranted explains that there is no statutory definition of the term 'good reason' used in section 447 of the 1985 Act, but that DTI interpret the phrase by reference to criteria set out in section 432(2) of the 1985 Act, which deals with other types of investigation. The guidance also says that those criteria should not be seen as exhaustive. The criteria set out in that section are that there are circumstances suggesting
(a) that the company's affairs are being or have been conducted with intent to defraud its creditors or the creditors of any other person, or otherwise for a fraudulent or unlawful purpose, or in a manner which is unfairly prejudicial to some part of its members, or
(b) that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial, or that the company was formed for any such fraudulent or unlawful purpose, or
(c) that persons concerned with the company's formation or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards it or towards its members, or
(d) that the company's members have not been given all the information with respect to its affairs which they might reasonably expect.
6. The internal guidance also says that the purpose of a section 447 investigation is to obtain "more facts and explanations (DTI's emphasis) of the matters that give cause for concern". It is not necessary to identify criminal offences in order to establish 'good reason'. The Secretary of State retains a discretion whether or not to initiate a section 447 investigation even where 'good reason' is established. The internal guidance also says that the general principle behind authorising a section 447 investigation should be that a reasonable prospect is seen of something positive resulting that realistically could not be achieved by other means. That "something" might be a prosecution, winding-up, disqualification of one or more directors, or obtaining information for disclosure to other regulators.
7. Section 124A of the Insolvency Act 1986 (the 1986 Act) says that a winding-up petition may be presented by the Secretary of State where, following a report or information obtained under part XIV of the 1985 Act (which includes section 447 of that Act), it appears to him that that is in the public interest. Section 135 of the 1986 Act provides that in England and Wales the appointment of a provisional liquidator may be made by the court at any time after the presentation of a winding-up petition and either the Official Receiver, or any other fit person, may be so appointed.
Background to the corporation
8. The corporation was incorporated on 22 December 1994. From January 1995 it started to trade in the sale of ostriches to individuals and companies. On incorporation the corporation had two directors, to whom I refer as Mr Q and Mr R, both of whom had previously been directors of another company which had also traded in ostriches.
9. Promotional brochures produced by the corporation set out the terms and conditions under which investors could purchase ostriches, and gave information about the yields which, the corporation claimed, could be made from such investments. The brochures indicated that investors would own particular birds.
10. Copies of two brochures, which collectively I refer to as brochure 1A, were obtained by CIB in late February 1995 (see paragraph 14). Brochure 1A, and another brochure which I refer to as brochure 1B, were largely superseded after 30 June 1995 by a further brochure, which I refer to as brochure 2. That latter brochure was then used by the corporation, in conjunction with a promotional video, until the time when trading eventually ceased. (DTI only had brochure 1A before them in March/April 1995 - see paragraphs 14 to 16 - they obtained a copy of brochure 1B during the course of the section 447 investigation, and a copy of brochure 2 was obtained from a DTI regional office in October 1995 - see paragraph 17.) In brochure 1A a British farmer, who was said to be one of the first to have farmed ostriches in the United Kingdom and to possess one of the largest ostrich herds in the country, was said to be the corporation's farming director. In brochure 1B the corporation's European facilities were said to include the largest ostrich farm in Europe, as well as a British facility for rearing ostrich chicks. In brochure 2 it was claimed that the corporation's farmers had been successful in breeding and rearing ostriches since 1983 and that their farms were the largest and most technically advanced in Europe. The person described as responsible for the breeding centres was called Europe's most authoritative wild life breeding expert.
11. Brochure 1A included an example price list which indicated the prices at which the corporation were prepared to sell ostriches to investors. Those prices increased, depending on the age of the bird concerned, from £1,000 to £10,000 in nine stages. Two examples of potential returns were also given. One postulated a £3,000 return, after deduction of all costs, after 21 months on an investment of £1,000 in a three months old chick; the second postulated a £120,000 asset in the form of breeding offspring after two to three years, based on an investment of between £6,000 and £10,000 in a breeding bird. The return on the chick was based on an estimate of its increase in value with age; the second example was based on an estimate of the value of the breeding bird's progeny. Brochure 1A included what was termed a "Statutory Warning", which said that investors should make sure they understood what was being offered and were not misled by claims that high earnings were easily achieved, and that it was advisable to take independent advice before signing a contract. There was also a disclaimer which said that the figures quoted or implied were for guidance and should not be taken as a guarantee, though all had been prepared with a conservative bias. In brochure 1B examples were given of financial returns similar to those identified in brochure 1A. Additionally, however, brochure 1B purported to guarantee investors who purchased birds of two years of age or older an annual nett production of at least two three months old chicks. Those investors who agreed to purchase an older (and more expensive) bird would have a greater guaranteed entitlement to chicks. Brochure 1B also said that the ownership of 50% of the chicks hatched from an investor's bird would be retained by the corporation. (There was a reference in brochure 1A to "a shared revenue of all chicks produced", while in brochure 2 the reference was to 'some' of the offspring being retained by the corporation.) Brochure 1B included the disclaimer that the figures quoted or implied within it were only for guidance and were not guaranteed.
12. Brochure 2 showed five different values for birds, depending on their breeding status. A breeder chick's value was shown at £1,400 and a mature breeder bird's value at £14,000. Brochure 2 gave examples of what were claimed to be "minimum returns" on each type of bird. Those returns ranged between £2,500 (or 41% of the initial outlay) in the second year, after an outlay of £6,000 on a young breeder, and £5,000 (or 357% of the initial outlay) after five years on an outlay of £1,400 on a breeder chick. Those monetary returns, unlike those identified in brochure 1A or 1B, were referred to as guaranteed. There was said to be a guaranteed 'buy back option' under which investors, who were to have a specified number of chicks allocated to them at specified times (regardless of the actual progeny of their own bird), could sell chicks they had been allocated back to the corporation for £500 each or retain them. Brochures 1A and 1 B described a tariff of livery charges for looking after investors' birds. Brochure 2 offered what was described as a 'complete care package', under which the purchase price for an ostrich was to include all livery charges for the bird through its commercial life, and for its chicks through to their 'buy back' age (12 months). All the brochures said that an investor could become a member of a club called the Ostrich Owners Club (the club). According to brochure 1A a fee was payable for that, but a full member of the club could earn commission by acting as an agent of the corporation. Brochure 1B also referred to a fee for club membership but made no reference to potential commission earnings. Brochure 2, which also did not mention any opportunity for commission to be earned, said that membership of the club was automatic and free to investors.
Jurisdiction
13. Paragraph 6 of Schedule 3 to the Parliamentary Commissioner Act 1967 debars me from investigating the commencement or conduct of civil or criminal proceedings before any court of law. Section 12(3) of the 1967 Act precludes me from questioning the merits of a discretionary decision, taken without maladministration, by a body within my jurisdiction.
Investigation
14.1995 An officer from DTI was given a copy of brochure 1A in late February during an investigation into an unrelated company. A head of branch at CIB doubted the claim that ostriches could be bred in the United Kingdom. The brochure was sent to CIB's pre-vetting section with the query about ostrich breeding in the United Kingdom noted on its front cover. A CIB pre-vetting officer noted down three other matters under the heading "Note for Vetter". They were whether the corporation was "just another network marketing/money generating scheme"; secondly, a claim made in brochure 1A that one of the directors (Mr Q) had had an unidentified company successfully floated on the stock market; and thirdly, whether "The Ostrich Owners Club needs to be considered separately".
15. On 3 March a file was opened and on 22 March a CIB officer whom I call vetting officer A contacted the Animal Health Division of the Ministry of Agriculture, Fisheries and Food (MAFF) to find out whether ostriches could be bred in the United Kingdom. MAFF put that officer in contact with a reputable association of ostrich breeders who confirmed that their members were breeding ostriches successfully in the United Kingdom. They said that their association had been in existence for two and a half years; that ostriches were being bred throughout the United Kingdom up to the far north of Scotland; that they had 108 members; and that about 20 of their members had twelve or more birds.
16. Vetting officer A recommended on 6 April that no section 447 investigation of the corporation then needed to be undertaken, as the necessary 'good reason' (paragraph 3) for an investigation appeared to be absent. He gave as his reasons the fact that the corporation had no known connection with the company on whose premises the copy of their brochure 1A had been found; that there had been no complaints about the corporation; that there appeared to be nothing suspicious about the network marketing element of the corporation's business, nor was there anything obviously suspicious about other aspects of the corporation's business as described in brochure 1A. That decision was endorsed on 7 April by the vetting supervisor who commented "I hope members of the club are not burying their heads in the sand over the likely returns they can earn". The file was then put away.
17. There matters rested for a while, as far as CIB were concerned, though over the following months the corporation advertised quite extensively in the press. On 20 September CIB received an anonymous telephone call from a caller who said that the corporation was really being run by one man, whom I shall call Mr S, and who was known to DTI for his involvement in another company (which I refer to as company M) which had been closed down as a result of DTI's action, and a second man, who had served a sentence for fraud. The CIB's pre-vetting section recalled the file which had been put away in April. On 28 September the same pre-vetting officer as before sent a note and the file to vetting officer B. That note referred to the previous decision not to open a section 447 investigation, and suggested that it would be worth having a second look, because the rates of return being offered were extravagant and, probably, unrealistic. A new file was opened on 3 October. On 9 October a regional office of DTI told CIB that one of the corporation's directors, Mr Q, had also been involved with company M. On 19 October vetting officer B asked the regional office to send her the version they held of the corporation's brochure (brochure 2). The regional office also told vetting officer B that the corporation were about to undertake a DTI-supported export mission. Vetting officer B confirmed that DTI's export team should not reveal CIB's interest in the corporation, because of the confidential nature of section 447 investigations. The export mission to the Middle East went ahead on 28 October with the corporation's participation.
18. Meanwhile on 20 October the then Securities and Investment Board (SIB) - now part of the Financial Services Authority - had written to CIB. They said they had considered whether the corporation might be operating an unauthorised collective investment scheme, but had found no evidence of that. SIB questioned the corporation's high outlay on advertisements and the high returns it was promising (51.6% according to press advertisements), and suggested that enquiries might be called for. Vetting officer B made enquiries within DTI to see whether the directors of the corporation were connected with company M or another company, but no connection was established. She obtained records for four companies of which Mr Q had been a director, and discovered that, in each case, the company concerned had failed and that a recommendation had been made that Mr Q's conduct was 'unfitted' for a director. Vetting officer B spoke to the disqualification unit of the Insolvency Service on 30 October and was told that disqualification proceedings against Mr Q had been started about a month earlier, in connection with the most recent company failure.
19. On the same day vetting officer B recommended that the case should be accepted for a section 447 investigation. Officer B said that there was "good reason" for that and that a section 447 investigation would be in the public interest. Drawing on material from brochure 2, officer B gave as reasons for that the fact that it was not evident that the guaranteed returns could be sustained; the uncertainties of the unproven market for ostrich products; and the suspicion that the corporation's activities were a front for a money-making scheme which relied on new money from investors to sustain it. Officer B mentioned as particular areas of concern the high level of investments then being made (by that stage £2 million a month); that the minimum investment required started at a high level (£1,400); that no returns to investors were promised until the end of the second year; her doubts that the ostriches existed; and Mr Q's past record of conduct as a director. The vetting supervisor gave his approval to an enquiry on 3 November, when he noted his concern at, in particular, the extraordinarily high levels of income being promised by the corporation. On 7 November vetting officer B notified SIB (in response to their letter of 20 October - paragraph 18) and others that CIB intended to carry out a section 447 investigation of the corporation.
20. A CIB officer, whom I call officer D, minuted on 14 November that authorisation for a section 447 investigation had been given that day. Two CIB officers (whom I call officers E and F) visited the corporation's premises in the East Midlands on 16 and 17 November. Officers E and F were authorised to require the corporation to produce such documents as they might specify. They visited the corporation's premises again on 21 and 22 November, and obtained documents and information, among which were details of members of the club (paragraph 12) and some information relating to the ownership and supply of ostriches. A case conference involving an internal DTI legal adviser and officers D, E and F took place on 23 November. The initial conclusion from the documents and information obtained by that stage was that there appeared to be a shortfall in the number of ostriches in the possession of the corporation; that there was doubt whether the corporation could meet their 'buy back' obligations (paragraph 12); that the commercial basis for payments made by the corporation in connection with the purchase of ostriches was questionable; and that DTI needed to undertake a speedy section 447 investigation.
21. On 4 December the internal legal adviser gave advice to officer D on the legal relationship between the corporation and the investors, the status and the role of the club (paragraph 12), and the significance of various agreements entered into by the corporation. On the same day officer D established from MAFF that there was an expert on ostrich farming (whom I call Mr Z) in what was then MAFF's Agricultural Development Advisory Service. On 6 December CIB asked Mr Z to consider brochure 2 and, subsequently, the corporation's promotional video. Mr Z was asked to report on the size of the United Kingdom and European markets for ostrich products; the size and price of ostriches at the time of their commercial slaughter; the age and price of breeding ostriches; and, in northern Europe, the rate of egg production and chick survival. Mr Z was asked to observe strict confidentiality. No delivery date for his report was specified. On 11 December the internal legal adviser gave CIB advice on various legal measures which DTI might be able to pursue against the corporation: after considering the options in some detail he concluded that the presentation of a winding-up petition to the court would be the best option. Also on 11 December the corporation's auditors sent officer E draft accounts for the corporation for the period from 22 December 1994 to 30 September 1995. The partner who sent the draft accounts said that he did not anticipate any changes to them.
22. Officers E and F interviewed the corporation's directors, Mr Q and Mr R, in the presence of their solicitor on 13 and 14 December. During the course of that interview Mr Q provided a version of a list of ostriches purchased by the corporation and their progeny. Officer E asked for further information from Mr Q and also asked him to obtain from the corporation's auditors their working papers to support the corporation's draft accounts (that was so that the adequacy of the corporation's provision to meet their obligations under the 'buy back' scheme could be considered). She sought information about the commercial relationship of the corporation to four other companies. They were a Belgian company responsible for the provision of ostrich raising facilities there; a company (which I refer to as company X) from which the corporation had purchased ostriches; and two other companies (which I refer to as company Y and company W), both of which had provided sales personnel to the corporation. Officer E later stated in an affidavit that she had been told by Mr Q that 50% of the chicks hatched to ostriches which had been sold to investors were retained by the corporation and given to the Belgian company. She had also been told that some investors had been allocated male birds. A male bird would be kept with two females; and the owner of the male bird would receive one third of the eggs from the breeding trio. However, brochures 1B and 2 had given the misleading impression that investors would be allocated only female birds. She also said that Mr Q had told her on 14 December that the corporation's records of ostrich progeny were at the Belgian facilities.
23. On 22 December CIB received from the corporation a different version of a progeny list. On the same day the corporation's auditors sent officer E schedules from their working papers relating to the provisions in the corporation's draft accounts in respect of the corporation's obligations under the 'buy back' scheme (paragraph 12). Officer E was told by Mr Q on 13 December 1995 that Mr S and members of his family were involved with companies W and Y. Although both companies were said by Mr Q to have contracts governing their commercial relationship with the corporation the corporation did not provide officer E with written evidence of that, merely reporting that oral contracts had been made. Officer E saw the connection between the corporation and Mr S as significant, because of Mr S's previous involvement with two companies, company M and its parent company, both of which had been wound up by the court following petitions submitted by DTI on the basis that they were involved with a money circulation scheme. The corporation had made payments totalling £456,716 to company Y; had been invoiced for a total of £24,750 by company W; and had paid Mr S £100,000 for the termination of their contract with company W.
24. 1996 On 3 January officer E, who had reviewed the documents and information provided by the corporation during and after the interviews on 13 and 14 December (paragraph 22), asked Mr Q for some items which had not yet been provided. On 4 January CIB reminded Mr Z that they were awaiting his report (paragraph 21). On the same day CIB received some of the outstanding documents from Mr Q. Two other CIB officers were authorised on 8 January to conduct section 447 investigations of company X and a yet further company, both of which were suspected of having received large payments from the corporation.
25. Officer E wrote to Mr Q on 17 January because she had identified six items of information which were still outstanding. Included in her request for information were a sight of all those invoices and account statements which the corporation had received from company X and which had not yet been provided. Mr Z faxed an interim report to CIB on 18 January. He gave figures for the value and breeding rate of ostriches which were at odds with the claims in brochure 2 - parts of which he said were misleading. On 31 January the findings of the section 447 investigations into company X and the further company were reported to officer D. On 2 February CIB received additional invoices which had been issued by company X; and on that day officer E asked Mr Q to explain why, from CIB's analysis of the company X invoices and of the corporation's records, the corporation had paid company X substantially more than the invoiced amounts. (Officer E subsequently stated in an affidavit that Mr Q had given no explanation.)
26. Officers E and F concluded their investigation into the corporation on 5 February (although they had not at that stage received all the information and documents they had sought). Officer E reported to officer D that they had been unable to establish a true market value for ostriches, but that the indications from Mr Z's report were that the values quoted by the corporation were unrealistic, as were the corporation's claims for the breeding potential of ostriches in the northern hemisphere. She concluded that investors had been promised an unsustainable rate of return, and that on that view the corporation's trading was fraudulent. She recommended that winding up of the corporation should be considered.
27. On 6 February CIB asked the Treasury Solicitor's department (TSD) to seek counsel's advice because of what was seen as a major "public-at-risk element" in the case. An internal DTI referral sheet dated 6 February set out a timetable, agreed in principle by DTI and TSD, that winding-up proceedings should be initiated by 7 March.
28. TSD asked CIB on 12 February to seek further advice from Mr Z on the prospective cost to the corporation of importing ostrich eggs and bringing the resultant chicks up to age to make good any shortfall in the guaranteed allocation of chicks promised to investors. TSD and CIB subsequently exchanged minutes on the content and form of draft affidavits to be completed by DTI officers and by Mr Z. After a case conference involving TSD, Mr Z, the internal DTI legal adviser and leading counsel on 11 March CIB noted the next day that certain elements of the case needed to be strengthened; on the same day they again sent Mr Z the promotional video to review. Mr Z gave CIB his further comments on 22 March. TSD noted on 25 March that counsel's advice was to apply to the court for the appointment of a provisional liquidator "on notice" to the corporation and that, although that action would reduce the prospects of recovering funds for investors, those prospects had not been good anyway.
29. On 26 March DTI presented a petition to the court for the corporation to be wound up under the 1986 Act (paragraph 7). On 28 March the court heard the application and made an order giving the corporation until 1 April to produce their evidence. The court appointed the Official Receiver as the corporation's provisional liquidator on 3 April. CIB and TSD liaised with the Official Receiver thereafter, and continued to refine the evidence needed to support their application to have the corporation wound up. On 28 May the corporation's solicitors told CIB that, for commercial reasons, the corporation had decided not to oppose the winding-up application. The order winding up the corporation was eventually made by the court on 17 June. The Official Receiver became liquidator on 18 June, and subsequently, following a meeting of creditors of the corporation, joint liquidators were appointed on 25 July.
The complainant's contentions
30. The complainant, who like all other investors, was not aware of CIB's vetting of the corporation in March 1995, based his complaint to me on advice from the joint liquidator (who had been appointed in succession to the Official Receiver in July 1996) that by 14 December 1995 officer E had uncovered sufficient information to justify the Secretary of State petitioning the court for the corporation to be wound up at that stage rather than in March 1996 as had actually happened. Had that action been taken then, in the joint liquidator's view, at least those investors who had purchased birds after 1 January 1996 would have been spared their losses. The corporation's sales in the period 1 January 1996 to 3 April 1996, when the provisional liquidator was appointed, totalled £14.58 million. In the event, at the time of liquidation the corporation's liabilities had totalled in the region of £70 million, and the dividend to creditors was not expected to exceed one penny in the pound. A fuller description of the joint liquidator's specific contentions is contained in the extracts from a report to investors which he produced in February 1998, reproduced at Appendix B.
TSD's comments on the complaint
31. The Treasury Solicitor referred me to the report on the Barlow Clowes affair made by Sir Godfrey Le Quesne QC in which Sir Godfrey had said:-
"Presentation of a winding-up petition is a drastic step. In the case of an investment company the mere presentation of the petition is likely to shake investors' confidence and cause a run on the company. Application for the appointment of a provisional liquidator makes the proceeding even more drastic, for upon appointment the provisional liquidator may seize the company's assets and close the business down.The Court will not make orders leading to such consequences without strong evidence of the need to do so. It has generally been thought necessary, and was thought necessary in the [Barlow Clowes] case, to adduce evidence not merely of irregularity, but of some very serious circumstance such as the insolvency of the company, or the carrying on of business in breach of fiduciary duties to clients or creditors, or diversion of clients' money to purposes other than those for which it was received.
Before an application can be made to the Court for winding-up and the appointment of a provisional liquidator, the evidence has to be prepared. In the [Barlow Clowes] case the application was in the end unopposed, but it is always necessary to assume that it will be opposed and the evidence will be tested and challenged. Great care has therefore to be taken over the preparations. The relevant information contained in a report of enquiries under section 447 of the Companies Act or an investigation under section 105 of the Financial Services Act has all to be put into the form of affidavits. The report itself is never put before the Court, for two reasons: it is important to maintain the confidential status of such reports, so that investigators are not inhibited in expressing their views, and the reports are likely to contain some material (eg discussion of suspicions entertained but not established) which cannot be used as evidence."
32. The Treasury Solicitor said that what Sir Godfrey had said still held good today, save that DTI investigators' reports are now produced on discovery. They are still never used as primary evidence. DTI had sent TSD instructions on 6 February 1996. The corporation had been given notice of DTI's intention to apply to the court for the appointment of a provisional liquidator; and that application had come before the judge on 28 March. The judge had appointed a provisional liquidator on 3 April. That had led to the closure of the business. The corporation had been finally wound up on 17 June. Accordingly, the crucial period in relation to TSD's involvement had been from 6 February to 28 March 1996 - a period of some seven and a half weeks. The Treasury Solicitor said that during that time a great deal of work had been required from the two lawyers principally involved, as the case had not been an "open and shut" one. After considering DTI's submission of 6 February, TSD had given advice on 12 February on the merits of initiating winding-up proceedings, and advice on the further evidence required from Mr Z. Much time had been taken up in preparing the extensive affidavit eventually made by officer E. A full set of papers had had to be prepared for counsel. They had been made available to counsel on 7 March, and a conference had followed on 11 March. Counsel had advised on the merits of the case and the further research and evidence required. The work required had taken until 21 March, when there had been a further consultation with counsel. Preparations had then been made for the evidence to be finalised and sworn, with the matter coming before the judge on 28 March. DTI could not have been reasonably sure of success until the work required by TSD and by counsel had been completed. The corporation had been a substantial company carrying out a large volume of business. It would have been irresponsible for DTI and TSD to have sought to have such a company wound up without proper preparation.
DTI's comments on the complaint
33. The Permanent Secretary said that after the section 447 investigation had been authorised on 14 November 1995 (paragraph 20) production of documents by the corporation had been both slow and incomplete. There had been no-one in the regulatory field who had experience of the corporation's unusual area of business. Following internal discussion, DTI had recognised the need for expert advice on ostrich farming. Mr Z, the only known available authority, had been commissioned as the expert on 6 December 1995, but had not always been contactable. DTI had received Mr Z's report on 18 January 1996 at a time when other related enquiries were still under way. Although DTI had not received all the information sought from the corporation (significantly, company documents relating to the breeding and allocation of ostriches remained to be supplied) it had been decided that DTI should conclude the investigation and submit a report to TSD. That had been done on 6 February, and had led to a conference with TSD and counsel on 11 March. The vital importance of Mr Z's evidence had been emphasised in that discussion; further evidence had been sought from him and, shortly after it was received, DTI's petition for the corporation to be wound up had been presented to the court on 26 March.
34. The Permanent Secretary said that when presenting petitions to the court, or applying for the appointment of a provisional liquidator, DTI were assiduous to ensure that the court had the fullest information, and that the prospect in any particular case of a winding-up order being made was exceedingly high. The courts were said to have been concerned to ensure that that standard was adhered to: the court would not rubber-stamp applications. Counsel's advice, even on 11 March, had been that the evidence then to hand was insufficient to apply ex parte for a provisional liquidator to be appointed. That was why Mr Z had been asked to expand his evidence. The Permanent Secretary said that in all cases where DTI sought to wind up a business in the public interest there would always, unfortunately, be people who had paid money, or delivered goods, to the company concerned in the period between the commencement of a section 447 investigation and the business being brought to an end. The affidavits required in the winding-up proceedings and in the application for the appointment of a provisional liquidator had been voluminous and detailed. Many exhibits had had to be produced. At the hearing of the application for the appointment of a provisional liquidator, the judge had been satisfied that a winding-up order could be made and had considered the non-production of the breeding documents by the corporation as particularly important. The Permanent Secretary saw it as a mistaken presumption that DTI had been in a position to petition the court immediately after officers E and F had interviewed the directors of the corporation on 14 December 1995 (paragraph 22). Such a view did not take proper account of the other enquiries that DTI had been obliged to make (paragraphs 23 and 25) before they were in a position to present a petition.
Further investigation
35. DTI told my staff that the vetting process conducted by CIB leading to the discretionary decision whether or not to begin a section 447 investigation was not a precise art. There was no model procedure; but vetting usually involved a two-stage process. First, a "pre-vetting" phase filtered out, from the approximately 3,500 referrals DTI received each year, those cases where there appeared to be no public interest issue, those cases which did not fall to be dealt with by DTI, and those cases for which there was a more appropriate regulator or other body to deal with the matter. The remaining cases (approximately 900 a year) proceeded to formal vetting. Typically, each year, after that formal vetting, about 300 of them were taken up for a section 447 investigation.
36. DTI also said that the background to CIB's vetting of the corporation which had concluded in April 1995 (paragraph 16) had been unusual in that no public complaint had then been made. Brochure 1A had been handed to CIB by a DTI colleague. Vetting officer A had made enquiries to ascertain whether it was possible to breed ostriches in the United Kingdom and, on discovering that it was, in the light of his other findings he had recommended closing the file. Vetting officer A told my staff that he had considered the figures quoted in brochure 1A, but had concluded that they were not obviously absurd. Though he had thought that ostrich feathers must be "worth their weight in gold" if the claims of the corporation were correct, he had been aware that a great deal of money had been made by South African ostrich farmers over many years. The vetting supervisor told my staff that he too had considered the returns suggested by brochure 1A, but had seen no reason why, on the face of it, such returns should necessarily not be possible.
37.My staff asked why, given that vetting officer B had discovered that Mr Q had been a director of four failed companies (paragraph 18), that information had not come to light when vetting officer A had vetted the corporation in April 1995. DTI said in reply that it was not a matter of vetting officer A having been unable to obtain information about Mr Q's record as a director of other companies - presumably he could have obtained it. It was rather that the vetting process in April 1995 had primarily addressed what was seen as the key question of whether or not ostriches could be bred in this country.
38. My staff made calculations which showed that returns referred to in brochure 1A, when put in percentage terms, appeared to indicate in one case a net return of 163.2% per annum while the return offered by the corporation in the press advertisements which had caused concern to SIB, and which had been a factor in the October 1995 vetting, had only been 51.6% (paragraph 18). They asked DTI to comment on that. DTI explained that there was no set or established figure, or level of claimed return, which would necessarily trigger a section 447 investigation. It would be a matter of judgement and of assessing whether the claimed levels were very high compared with expected levels for comparable business ventures - an assessment which had not been possible at the time of the April vet because of the novelty of the concept. The figures given in brochure 1A were seen as illustrative (not guaranteed, as the return promised in brochure 2 was) and merely advertising "puff".
