Charles - fraudulent trading - Serious
Fraud Office prosecution- Companies Act
1985
Charles had a brilliant business idea and, in 2000, set up a company with
two friends to exploit it - initially in the UK but also in Australia, Canada
America and other countries. The plan was to sell to the public for just
over £100 computers worth £600, but in return retain a link with the
customers so that they became virtually a captive market for the sale of
other goods, such as cars and kitchen equipment, at discounted prices.
Charles could buy the computers for £450 and, once he had sufficient
customers, planned to agree bulk purchase deals enabling him to make
significant profits on the subsequent sales of the cars and other goods
while still offering a substantial discount on retail prices.
At the same time, once the operation had gathered momentum the price
of the computers would be steadily increased until it exceeded the £450
cost. Charles planned to only the first 250,000 computers at below cost
price.
Unfortunately start up funds were very limited and the computer
manufacturers would give no credit to Charles’ new company. However
he considered that by taking payment in advance from customers and
growing the business exponentially he would manage to supply each
customer with a computer 8 weeks after receiving their payment (by
using funds received from later customers to pay for the earlier
customers’ computers).
Sadly the company ceased trading after 8 months when the Department
of Trade and Industry intervened following complaints from the public.
By this time approximately 18,000 customers had paid in advance for a
computer but only just over 1,000 of these had actually received one.
However the company had been able to pay Charles £150,000 for the
intellectual rights to his brilliant business idea and had met the costs of
overseas business trips by Charles and his family in preparation for
opening in foreign markets. Charles and his friends were arrested and
charged with fraudulent trading.
We were instructed by the defence to give an opinion on the viability of
Charles’ brilliant business idea.
Charles and his friends had produced a business plan which showed an anticipated
borrowing requirement of nearly £100 million. We formed the opinion that this business
plan, and particularly the supporting cash flow projections, had not been competently
prepared and would not have provided an appropriate basis upon which to enter into
negotiations with a potential lender or investor. In the event the company had been unable
to secure any significant funds either by way or borrowings or investments.
Furthermore the company not only required to find new customers and expand continuously
to survive, but also it needed to expand at a particular rate of growth. Too slow an
expansion would not bring in funds quickly enough to meet the costs of computers already
required for existing customers, too rapid an expansion would accelerate the need to find yet
more customers to fund the purchase of computers for which orders and payments were
being taken.
We concluded that in our opinion these arrangements went well beyond the range of normal
and acceptable business practices and risks.
In the event, Charles’ legal team decided not to rely upon our report and it was not used in
evidence.
Charles was later convicted of fraudulent trading and sentenced to four years imprisonment.