Secretary of State for Business, Innovation & Skills v Choha [2013] EWHC 680 (Ch)

The Secretary of State sought disqualification orders against directors of UKLI Limited, a land banking company that collapsed with a deficiency exceeding £70 million. The First Defendant, Mr Chohan, was found to be a de facto or shadow director who operated an unauthorised collective investment scheme contrary to FSMA 2000, and improperly procured loans and dividends. He was disqualified for 12 years.

Facts

UKLI Limited carried on a land banking business, selling small parcels of land to investors with the suggested attraction that the sites might receive planning permission or be rezoned, leading to significant increases in value. The company went into administration on 22 April 2008 with an estimated deficiency exceeding £48 million, which grew to over £70 million by the date of liquidation on 21 November 2008.

The Financial Services Authority investigated UKLI and concluded that its land banking scheme was operated as an unauthorised collective investment scheme contrary to the Financial Services and Markets Act 2000. Despite legal advice suggesting the scheme could be structured lawfully, the FSA maintained that the manner of promotion and implementation constituted a CIS.

Mr Chohan, the sole shareholder, resigned as de jure director in April 2006 but the Secretary of State alleged he remained a de facto or shadow director. He was accused of procuring UKLI to make unsecured loans exceeding £12 million to entities he owned or controlled, and to pay dividends totalling approximately £1.36 million which UKLI could not afford.

Issues

Was Mr Chohan a director during the relevant period?

Although not a de jure director from 27 April 2006 to 4 March 2007, the court had to determine whether Mr Chohan was a de facto or shadow director.

Did the Second Scheme constitute an unauthorised collective investment scheme?

The court examined whether the land banking arrangements fell within section 235 of FSMA 2000.

Were the loans and dividends improper?

The court assessed whether Mr Chohan’s conduct regarding substantial unsecured loans and dividend payments made him unfit to be concerned in company management.

Judgment

Mr Justice Hildyard found that Mr Chohan was both a de facto and shadow director during the relevant period. Evidence from other directors and employees, together with email correspondence showing Mr Chohan’s control over financial decisions, supported this finding.

“CAN I PLEASE MAKE THIS CLEAR, NO PAYMENTS ARE TO BE SIGNED OFF WITHOUT MY SAY SO>>>>THAT’S ANYTHINGZERO, ZILTCH.”

The court held that the Second Scheme, as actually promoted and implemented, constituted a collective investment scheme within section 235 FSMA. The marketing materials and the reality of operations demonstrated collectivisation of the investment, with UKLI managing the property as a whole for the benefit of all participants.

Regarding the loans and dividends, the court found these were not in UKLI’s best interests. The unsecured loans to companies controlled by Mr Chohan proved substantially irrecoverable, while dividends were declared without proper regard to UKLI’s financial position.

The court concluded Mr Chohan’s conduct made him unfit to be concerned in company management, applying the test from Re Grayan Building Services Ltd that conduct must be measured against standards appropriate to a person fit to be a director.

Implications

This case provides significant guidance on the identification of de facto and shadow directors, particularly where individuals seek to distance themselves from directorial responsibilities while retaining control. The judgment confirms that influence exercised by a sole shareholder does not insulate them from being treated as a director where they exercise powers typically reserved to directors.

The case also illustrates the approach courts take to land banking schemes under FSMA 2000, emphasising that the substance of arrangements, rather than their theoretical structure, determines whether they constitute collective investment schemes. Legal advice providing a theoretical framework will not protect directors where the actual implementation departs materially from that framework.

The 12-year disqualification period, in the top bracket of severity, reflects the seriousness with which courts view conduct involving criminal breaches of financial services legislation combined with misuse of company funds for personal benefit.

Verdict: Mr Chohan was found to be a de facto and shadow director whose conduct made him unfit to be concerned in company management. The court made a disqualification order for a period of 12 years.

Source: Secretary of State for Business, Innovation & Skills v Choha [2013] EWHC 680 (Ch)