SIX DISHONEST DIRECTORS DISQUALIFIED

20 Mar 2003 03:45 PM

Six former directors of two insurance broking companies have been disqualified for a total of 33 years because of their dishonest conduct, following investigations carried out by the DTI's Companies Investigation Branch (CIB).

The directors, working for JA Chapman and Company Limited and Dobinson Gregory and Company Limited, whose work predominately related to business in the Lloyd's insurance market, used fraudulent practices to generate secret profits.

Using a practice known as 'grossing up', the directors agreed premiums with insurance underwriters and then charged clients inflated prices. They siphoned off the profits to third parties, principally companies based in Liberia, without any proper explanation.

Mr Justice Peter Smith today disqualified Mr Jonathan Andrew Chapman, the former managing director of J A Chapman and Company Limited for a period of 9 years.

The Secretary of State has also accepted disqualification undertakings from the following former directors based on their agreed unfit conduct:

- Mr Michael Paul Perry (former managing director of Dobinson Gregory & Company Limited), of Braebourne Rise, Beckenham, Kent, BR3 6SQ for a period of five years commencing on 11 January 2002.

- Mr Glen Dobinson (former director of Dobinson Gregory & Company Limited), of Purdis Farm Lane, Ipswich, Suffolk, IP3 8UF for a period of five years commencing on 26 February 2003.

- Mr James Anthony Kimber (former director of Dobinson Gregory & Company Limited) of Little Browns Lane, Edenbridge, Kent, TN8 6LF for a period of five years commencing on 26 February 2003.

- Mr David Edward Gyngell (former director of Dobinson Gregory & Company Limited), of Sheepcote Lane, Orpington, Kent, BR8 4ET for a period of four years commencing on 3 March 2003.

- Mr Roger Rex Ingles (former finance director and compliance officer of J A Chapman & Company Limited), of School Hill, Measham, Surrey, RH1 3EG for a period of five years commencing on 8 January 2003.

Mr Justice Peter Smith agreed with the Secretary of State's allegations against Mr Chapman and in banning him said:

"I have no hesitation in finding that he knew the practice was thoroughly dishonest. The facts speak for themselves. I do not see how he could have been aware of any proper basis for which the transactions could take place."

The disqualification proceedings started in January 2001 against the above former directors of J A Chapman & Company Limited and in February 2001 against the above former directors of Dobinson Gregory & Company Limited.

NOTES FOR EDITORS

1. DTI Companies Investigations Branch (CIB) is part of the Fair Markets Group, Company Law and Investigations Directorate of the Department of Trade and Industry. Further information on company investigations is available from: http://www.dti.gov.uk/cld/comp inv.htm

2. Section 8 of the Company Directors Disqualification Act 1986 allows the Court to make a disqualification order of up to 15 years for unfit conduct. On 2 April 2001, amendments were introduced by the Insolvency Act 2000 allowing directors, with the agreement of the Secretary of State, to avoid the need for a Court hearing by offering an acceptable disqualification undertaking. This has the same legal effect as a disqualification order made by the Court and usually includes a schedule identifying the director's unfit conduct. The consequences of breaching a disqualification undertaking are the same as those for breaching a disqualification order. For a copy of the defendants' agreed unfit conduct please call the DTI press office on 020 7215 5969.

3. Contravention of a disqualification order or a breach of a disqualification undertaking is a criminal offence and may result in a fine or imprisonment for up to two years. Information relating to persons acting in contravention of this provision should be passed on to the Department on 0845 601 3546.

4. These investigations were carried out under section 447 of the Companies Act 1985 which enables investigators to require a company to produce its records. If it is in the public interest the Secretary of State may use the information obtained to petition the Court to wind up a company or to disqualify the company directors.

5. J A Chapman & Company Limited was incorporated on 26 August 1986 and carried on business arranging marine liability insurance. It operated under an umbrella arrangement initially with Gaunt Kemble Armstrong Limited (to 1987) and then with Norex Insurance Brokers Limited until it obtained Lloyds status in 1991.

6. The registered office and trading address of J A Chapman & Company Limited was Beaufort House, 15 St Botolph Street, London, EC3A 7DT.

7. On 16 August 1995 J A Chapman & Company Limited was placed into creditors voluntary liquidation with an estimated deficiency of £91,927, after taking into account an anticipated surplus on its Insurance Brokerage Account ("IBA") of £469,171. On the same day Lloyd's appointed agents to manage the company's IBA which at all times must remain solvent (see note 15). Following concerns about a substantial potential IBA shortfall, Lloyd's appointed administrative receivers on 29 May 1996. The shortfall on the IBA amounted to some US $5 million.

8. Grossing-up occurs when a broker agrees a premium with an underwriter and then, without informing the assured, charges the latter an inflated figure for his cover, leaving the broker to deal with the difference as he thinks fit. The practice of grossing up was described by Mr Justice Timothy Walker in his judgement against J A Chapman & Company Limited and its director Mr Chapman in the High Court on 10 June 1998 in a recovery action brought by an Australian insurer as:

"a polite term for what Mr Chapman did. In simple terms he passed on a higher premium to the Liverpool & London Club than the premium GIO were in fact charging. Thus, for example, the per capita premium charged by GIO for the 1994 crew reinsurance was $180, but he told the Club that it had been charged at the rate of $235. He then pocketed, or siphoned off, the difference to off-shore accounts. The evidence against Mr Chapman is overwhelming. He would have been liable to the Club for breach of fiduciary duty in taking a secret profit and he would have been liable to account for that profit. The total sums involved were $3,877,990".

9. The allegations by the Secretary of State against Mr Chapman were that he, amongst others, had caused J A Chapman & Company Limited ("Chapco"):

(a) to operate the practice of grossing up, the operation of which practice was

i. fraudulent and dishonest;

ii. contrary to his fiduciary duties to Chapco to act honestly and in Chapco's best interests

iii. contrary to his fiduciary duties to Chapco's assureds to act with utmost good faith, and integrity, and in their best interests and not to make secret profits;

iv. contrary to paragraph 1(e) of (Lloyd's) Misconduct, Penalties and Sanctions Byelaw (No 5 of 1983) in that it involved the conduct of insurance business in a discreditable manner and with a lack of good faith.

(b) had compounded and aggravated the misconduct involved in the practice of grossing up by causing the secret profits therefrom and the profits from a transaction involving International Catering Enterprises (amounting to more than US $1 million) being transferred to third parties, namely to Chapman (OEC) Limited, in which he had an interest, and to three Liberian companies. Such transfer of profits was

i. dishonest and misfeasant;

ii. contrary to his fiduciary duties to Chapco:

(a) to act honestly;

(b) to act in Chapco's best interests;

iii. contrary to the provisions of Rule 6 (3) of the Schedule to the Insurance Brokers Registration Council (Accounts and Business Requirements) Rules Approval Order 1979.

(c) he failed to put in place and/or operate adequate or sufficient corporate governance controls or accounting procedures and thereby enabled the misconduct specified in (a) and (b) above to take place.

10. Dobinson Gregory & Company Limited was incorporated on 28 August 1987 and too carried on business arranging marine insurance. It similarly traded initially under an "umbrella" arrangement with another Lloyd's broker, David Gyngell & Company Limited now Gyro Insurance Services Limited.

11. The registered office and trading address of Dobinson Gregory & Company Limited was 3 Lovatt Lane, London, EC3R 8DT.

12. On 2 August 1996 Dobinson Gregory & Company Limited was removed from the register of umbrella agreements after enquiries by Lloyd's found significant weaknesses in the company's board operations and that its capital base had been seriously eroded by heavy losses. Subsequently on 20 January 1997 the company was placed into creditors voluntary liquidation with an estimated deficiency of £155,031, after taking into account an anticipated IBA surplus of £31,910.

13. Following recovery proceedings in the High Court by a syndicate in which underwriters sought to avoid certain contracts of re-insurance arranged by Dobinson Gregory & Company Limited (known as the "Mander" proceedings), evidence was given about payments to certain Liberian companies concerning excess premiums. On 19 January 1998 the company was ordered to indemnify the Mander syndicate against the loss of such re-insurance. On 18 June 1998 the parties to the proceedings and others affected by the outcome entered into a settlement to avoid further litigation and to mitigate the losses of those not covered by reinsurance.

14. Lloyd's is an incorporated Society by virtue of the Lloyd's Act 1871, with the main piece of governing legislation now being the Lloyd's Act 1982.

15. Only accredited Lloyd's brokers can place risks in the Lloyd's market. A broker, whether registered at Lloyds or not, has to operate an Insurance Brokerage Account ("IBA"), which must always remain solvent, in accordance with section 11 of the Insurance Brokers (Registration) Act 1977 and, more particularly, rule 6 (3) of the Schedule to the Insurance Brokers Registration Council (Accounts and Business Requirements) Rules Approval Order 1979.

16. Lloyd's regards the practice of "grossing up" as wholly unacceptable and has, over the years, taken overt and positive steps to publicise its disapproval of the practice and to discipline those who indulge in it.

17. Disciplinary action has been taken by Lloyd's against some of the former directors of Dobinson Gregory & Company Limited including Mr Perry, Mr Dobinson, Mr Kimber and Mr Gyngell. Details of the penalties imposed by Lloyd's can be found in its Regulatory Bulletin Case Numbers LDB/9810/17, LDB/0011/19 A & C and LDB/0011/20.

18. Lloyd's disciplinary action has also been taken against J A Chapman & Company Limited and some of its former directors including Mr Chapman and Mr Ingles. Details of the penalties imposed by Lloyd's can be found in its Regulatory Bulletin Case Numbers LDB/9909/23 a to c.

19. Under the Financial Services and Markets Act 2000 regulation of Lloyd's is overseen by the Financial Services Authority (FSA).

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