Appendix B: Edited extracts from a report to creditors dated 13 February 1998 made by the joint liquidator
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Edited extracts from a report to creditors dated 13 February 1998 made by the joint liquidator
(Original paragraph references have been retained)
6. Risk of delay
6.3 The corporation's turnover from the sale of ostriches had been steadily increasing towards the end of 1995, from £358,000 and £510,000 in July and August 1995, to £1.997 million and £1.555 million in November and December 1995. The corporation's turnover from the sale of ostriches between January and April 1996 when the corporation ceased trading was £14.595 million.
10 DTI Investigation and Evidence
10.1 Officer E was the senior examiner in CIB who conducted the investigation into the affairs of the corporation. On 26 March 1996 she swore an affidavit in support of the petition presented by DTI for a winding-up order against the corporation. The majority of the facts and matters upon which I rely in this report are derived from her affidavit and exhibits. In preparing this report I have made reference to the principal facts and matters that support my conclusion.
10.2 Officer E visited the corporation's premises on many occasions between 16 November 1995 and 26 February 1996 and interviewed Mr Q inter alia on 17 and 21 November, 13 and 14 December. Officer E cites ten reasons in her affidavit in support of her view that the corporation had not been run by its directors with proper commercial probity and that it was therefore in the public interest that it should be wound up. I shall now refer briefly to each of the principal factors indicating when, by reference to the comments made by her in her affidavit, she obtained the necessary evidence to support them.
11. The principal factors supporting the claim by DTI that it was in the public interest and just and equitable that the corporation should be wound up by the Court and the dates when the evidence supporting these claims was obtained by CIB
11.1 Misleading advertising material and misrepresentations to potential investorsIn November 1995 the corporation had two brochures in circulation, was advertising in the press and provided a free video to potential investors. CIB obtained the relevant documents during November and raised a number of enquiries with Mr Q on 17 and 21 November. They concluded (after taking advice from Mr Z, a qualified expert on the subject of ostrich farming and a senior Livestock Consultant for ADAS, an agency of the Ministry of Agriculture, Fisheries and Food) that the brochures published by the corporation contained misleading information that misrepresented the investment value of the ostriches to potential investors and improperly persuaded them to pay money for the purchase of ostriches and to participate in one of the corporation's schemes. For example:
11.1.1 the commercial breeding life of a female ostrich was exaggerated:
11.1.2 purchasers were promised an income from chicks born to their ostriches on the basis that far more chicks would survive to slaughter age than could reasonably have been expected;
11.1.3 values given for ostriches at certain ages did not reflect the true market value for the bird but the price at which the corporation would seek to sell ostriches to its own clients, a price that was considerably in excess of the true market value;
11.1.4 it was not properly explained to purchasers that half the chicks born as offspring to each ostrich would be taken by the Belgian company and not be available for attribution to the owners of the birds. Purchasers were guaranteed an allocation of chicks which greatly exceeded the number of viable chicks that could be reasonably expected and promised a rate of return on capital that could not in practice be achieved through breeding ostriches;
11.1.5 information provided to purchasers implied an unrealistically high price for the market value of a slaughtered ostrich.
11.2 Buy-backs and buy-back obligations
11.2.1 Under Brochure Two in use by the corporation, it committed itself to buying back the progeny of each ostrich purchased at a guaranteed price of £500 thereby guaranteeing part of the return on each purchaser's investment. CIB calculated that the potential liability of the corporation under the buy-back options as at November 1995 should all ostrich owners exercise their right to sell their one year old chicks back to the corporation would be £2.26 million by October 1997.
11.2.2 The corporation had insufficient funds put aside to meet the buy-back obligation. The corporation's auditors provided CIB with draft accounts for the corporation for the period ended 30 September 1995 on 11 December 1995 together with some further supporting information on 22 December 1995. These accounts show £10,452 as "Other Reserves" in the balance sheet to meet costs of liabilities on the buy-back scheme. Mr Q, when interviewed by CIB in November, insisted that the corporation was bringing in enough money each month to be able to meet these obligations in the future.
11.2.3 In conclusion, officer E stated as follows "The business of the [corporation] is highly speculative and depends on a considerable expansion in the market for ostrich products which may not happen. It is unrealistic and deceptive to offer guaranteed returns in these circumstances. It seems inevitable that the [corporation] will have insufficient resources to fulfil its guarantees to purchasers under the scheme of Brochure Two unless it continues constantly to expand the numbers of persons joining the scheme (with a consequent constantly expanding flow of money). Quite apart from the inevitable shortage of ostriches that must arise to attribute to purchasers, the scheme is bound to collapse as soon as saturation point is reached and insufficient new members join. The whole scheme of Brochure Two is fundamentally unsound and it is misleading to seek to attract members of the public to participate in it."By 14 December 1995, after several requests, the corporation had failed to produce satisfactory information to CIB concerning the records it kept attributing specific ostriches and their chicks to each owner. The absence of satisfactory information gave rise to an assumption that the schemes were not being managed in a proper manner for purchasers.
11.4 Company X - The purchase of ostriches
The corporation had entered into two contracts which enabled it to purchase ostriches. One contract was with company X dated 2 January 1995 and the other contract dated 18 February 1995 was with the Belgian company. All purchases from February to July 1995 were from the Belgian company and all purchases from 3 July 1995 onwards were from company X. Company X obtained its ostriches from the Belgian company. CIB established in November 1995 that the corporation paid company X £200,000 for the right to act as its distributor and in some cases the corporation paid company X up to £3,500 more per ostrich than the price company X had paid to the Belgian company. At an interview with Mr Q on 21 November 1995, no satisfactory reason was obtained for these transactions. Officer E concluded that company X had simply been interposed in the middle of the chain of supply from the Belgian company to the corporation with the consequence that the corporation paid a premium for its ostriches for no discernible reason.
11.5 Mr Q's suitability to act as a director
In or about September 1995 the Official Receiver commenced proceedings for the disqualification of Mr Q under section 6 of the Company Directors' Disqualification Act 1986 in relation to his involvement in the affairs of another company. CIB therefore formed the view that the corporation was partly under the control of a person who was alleged not fit to be a director of a company.
During their enquiries, CIB discovered that a trading relationship existed between the corporation and company Y which appeared to have provided telephone sales support, charging a commission of 20% of the sale price per ostrich sold by their personnel. Invoices obtained by CIB suggested that £456,716 was paid to company Y by the corporation. On 13 December 1995 Mr Q told CIB that the people behind company Y included Mr S and his brother. It was known to CIB that Mr S and his brother were well known to the DTI because of their previous involvement in "pyramid selling" schemes run by companies which were wound up by the Court in 1994 on petitions presented by the DTI in the public interest. Among those companies was company M. Mr Q told CIB that he had known Mr S at company M, had known Mr S's family for ten years and first met Mr S eight or nine years earlier. CIB formed the view that money was being siphoned off from the corporation through uncommercial contracts with company Y, company W and another company with which Mr S was involved.
11.7 Directors' remuneration and bonuses
The draft accounts for the corporation for the period from12 December 1994 to 30 September 1995 which were supplied to CIB by the corporation's auditors showed that Mr Q and Mr R received remuneration of £74,000 and £66,397 respectively. Board minutes of 30 June 1995, 22 September 1995 and 25 October 1995 confirm that approval was given for the directors' salary to be increased to £48,000 and then £102,000 and bonuses of £18,500 and £166,500 be paid to each director. In 1995 Mr Q and Mr R received payments of at least £240,500 and £232,897 respectively. CIB concluded that siphoning off money and making payments of excessive remuneration was reckless as the corporation would ultimately be unable to perform its guarantees to purchasers of ostriches under Brochure Two.
CIB expressed the view that another cause of prospective insolvency was that, having misled members of the public to participate in the schemes, the corporation would either be liable to repay to them moneys advanced and pay compensation or have heavy liabilities under the buy-back provision in Brochure Two.
11.9 Date by which the above conclusions were or should have been reached
All of the above conclusions were or should have been reached by CIB by not later than 14 December 1995 following the meeting between Officer E and Mr Q.
12 The need for action in December 1995
12.1 Officer E mentions in her affidavit that CIB were conscious that the corporation's turnover was "expanding enormously" at the time of the investigation. Sales between January and August 1995 amounted to a total of £1.84 million whereas the sales for the subsequent months were:
| September 1995 | £1.168 million |
| October 1995 | £1.30 million |
| November 1995 | £1.99 million |
| December 1995 | £1.55 million |
| TOTAL | £6.008 million |
The sales in 1996 for the period until trading ceased when the Provisional Liquidator was appointed on 3 April 1996 were:
| January 1996 | £5.79 million |
| February 1996 | £4.14 million |
| March 1996 | £4.05 million |
| April 1996 | £0.6 million |
| TOTAL | £14.58 million |
12.2 Officer E comments in her affidavit that in March 1996 it was likely that as a result of recent advertisements and the trend for increased turnover, a large amount of money would be flowing into the corporation from members of the public. In fact this had already happened. £14.58 million had been received by the corporation from 1 January 1996 in circumstances where DTI had, by not later than mid-December 1995, the necessary facts from which they concluded or should have concluded that members of the public were being induced to invest in a scheme which would not produce the returns represented and would be likely to cause those who invested to incur substantial losses.
13 The Complaint
All of the facts outlined in paragraph 11 above were derived from information or documents given principally by the directors of the corporation to CIB on or before 14 December 1995. In my view, a Secretary of State discharging his responsibility properly should have appreciated the urgency of the matter and presented a petition to wind-up the corporation by not later than Friday 29 December 1995 or if this was not feasible, early in the New Year. Given the urgency, this would have provided the Secretary of State and his advisers with a more than adequate period of time to prepare the necessary documents for the application. If this action had been taken then members of the public who invested £14.58 million in connection with the purchase of ostriches from the corporation between January and April 1996 would have avoided the losses they have suffered acquiring ostriches that were worth significantly less than their actual cost upon terms that the corporation was unable to perform.
