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Re J A Chapman & Co Ltd

Summary

A director of a company who was guilty of dishonesty in relation to the practice of "grossing up" within the insurance business would be disqualified for nine years.

Facts

Application by the Secretary of State for Trade and Industry under s.8 Company Directors Disqualification Act 1986 seeking a discretionary disqualification order against the second defendant ('C') following an investigation and report from inspectors under s.447 Companies Act 1985. C was the managing director, chairman and chief executive of a company ('Chapco'), which was an insurance broker and a member of Lloyds. In 1995 Chapco went into creditors voluntary liquidation with an overall deficiency for creditors of over £4.3 million. Following the investigation three charges were made against C that he had: (i) operated a practice of "Grossing up", which was a practice of structuring documents with the result that a broker could retain the difference between the premium notified to the underwriter and the larger premium paid by the assured without either parties' knowledge; (ii) allowed the profits from grossing up to be transferred to a third party; and (iii) failed to put in place controls to prevent grossing up taking place. The duties of Lloyd's brokers made it clear that grossing up was unacceptable without the informed consent of the policy holder. C alleged that: (a) he did not know that the practice of grossing up had been wrong as it was widely practised at Lloyds; and (b) he had no option but to make the payments as the business would be taken elsewhere to brokers who were willing to gross up.

Held

(1) The obligation of the broker was to obtain the best policies for his client at the best possible price. Grossing up without the consent of the client was a breach of that obligation. It was a breach of the duties identified in the Lloyds rules. If those actions were procured by the directors of Chapco it would also be a flagrant breach of their duties to Chapco as it put Chapco in a position of breaching its duties to the assured clients. (2) C knew the practice of grossing up was thoroughly dishonest, but even if it were not dishonest, C had participated in the transactions to such a degree that his conduct made him unfit to be a director of a company whether or not he had received any personal benefit. (3) This type of conduct was not the sort over which it was appropriate to exercise a discretion not to disqualify C. Not to disqualify him would be a complete negation of the object and purpose of the disqualification proceedings. (4) Having being found guilty of dishonesty the period of disqualification ought to be nine years.

Application allowed.

Chancery Division
Peter Smith J
Judgment date
20 March 2003
References

[2003] 2 BCLC 206

Practice areas

insurance-and-reinsurance,Insurance & Reinsurance