A wholesale insurance broker's former directors misused clients' money to cover the company's own costs and hid it with false accounting, a court found. An appeal court has now upheld that fraud finding but cut part of the damages, drawing a sharp line around what the fraud actually caused.
The broker, formerly AFL Insurance Brokers and now called Ambon Brokers, was authorised by the Financial Conduct Authority to place risks in the Lloyd's market. FCA rules known as CASS 5 require a broker to hold client money on trust in separate accounts, check the balance at least every 25 days, and make good any shortfall itself.
The trial court found that, between August 2011 and September 2017, the directors improperly drew on those client money accounts to meet the broker's own expenses and trading losses, then entered false accounting figures to disguise the growing hole. By the time a majority stake in the broker was sold in September 2017, the deficit on the client money accounts had reached £3,510,000.
That sale mattered. The buyer, Next Generation Holdings, paid £2,119,900 for 58% of the broker, relying on figures the trial court found were fabricated - including a spreadsheet built on false income accruals shown to the buyer's chairman during negotiations. The court accepted evidence that the inflated figures were designed to make the broker look like "a profitable and successful business to potential buyers and investors, and disguise that it was, in actual fact, balance sheet insolvent and operating at a loss."
The trial court awarded the broker damages of just over £6.1 million, much of it for "trading losses" both before and after the sale. It treated the £3.51 million client money hole as a stand-in for the pre-sale trading losses, reasoning those losses flowed directly from the directors' conduct.
On appeal, the case narrowed to a single question: did the fraud actually cause those trading losses? The Court of Appeal said no. It held that the broker's business lost money through ordinary trading with clients and counterparties - not because of what the directors did. The wrongdoing was how they responded to those losses: using client money to cover them. In the court's words, "the trading losses occurred independently in the course of AFL's business. It was the manner in which the Finches responded to those trading losses that was wrongful."
That distinction limits how far the damages reach. A wrongdoer is generally liable only for consequences "attributable to that which made the act wrongful," the court noted, not for everything that follows. The directors' direct loss to the broker was the duty to restore the £3,510,000 taken from client money, plus £158,135 spent investigating the wrongdoing. The court also rejected the idea that directors owe a general duty not to trade at a loss or while insolvent.
The revised figures cut both ways. The Court of Appeal substituted £3,668,135 for the £7,114,167 the trial court had ordered specifically for trading losses. But it also removed a £2,847,038 credit the broker had been required to give for later selling parts of its business. The net effect was a £598,994 reduction, leaving the broker's total award at £5,525,436.02. The separate damages awarded to the buyer were not affected, and the fraud findings themselves stand.
For insurers and brokers, the ruling lands a clear point: client money sits on trust, and misusing it creates a direct liability to put it back - whatever the wider business happens to be doing.
