Isle of Man
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Foundations Program plc - in liquidation
FPA Limited - in liquidation

Update February 2013


Foundations Program plc - in liquidation ("FPP")
FPA Limited - in liquidation ("FPA")
Joint Liquidators and deemed Joint Official Receivers ("JL&dJORs")


FPP has two significant and realisable assets - its claims against FPA and a 27% stake in a Guernsey registered company named Lonscale Holdings Limited ("LHL"), an investment vehicle used to acquire a holding in Lonscale Limited ("LL"), an Isle of Man registered company. LL has an investment in the Club Easy Group, which owns and operates a student accommodation fund.


FPA is significant to the extent that it is central to the provision of security to lenders to the Program. Barclays Bank secured its lending by taking assignments of the legal and beneficial ownership of Participant's life policies ("the assigned assets"), such policies having initially been assigned to FPA. As a result of the assignments up to the lending institution, FPP was then able to utilise the bank facility to undertake investment activities. On discharge of the bank lending any remaining assigned assets will be re-assigned back to FPA. Surplus assets, released back to FPA when the secured lending of Barclays Bank has been discharged will be held by FPA to make good any losses on a Participant's ledger account as far as possible. Those assets therefore represent a source of potential recoveries for FPP in the event a Participant fails to make good losses on his or her ledger account.

FPA's liability to the US Loan Note Holders is yet to be finally determined. Nevertheless, it appears to be very unlikely that FPA will be able to meet all its liabilities and that it is therefore insolvent.

Lonscale Holdings Limited

FPP entered into an arrangement that exchanged certain securities, including holdings in the Arch Cru Group, in return for an investment in LHL. This was an investment arrangement entered into prior to the date of liquidation. The arrangement included deferred consideration terms by LHL that render the completion of the arrangement contingent on full discharge of those deferred consideration obligations. The inherent value in LHL is only available if the obligations under the agreement are discharged. However, the investment in LHL held by FPP is a minority holding of 27%. FPP has no representation on the board of LHL. As set out in the following paragraphs, the JL&dJORs have had very limited success in obtaining meaningful information to enable them to assess the value of and likelihood of realizing value from its holdings.

As part of the JL&dJORs general attempt to obtain information, the directors of FPP have been requested to provide information about the state of affairs of LHL. Messrs Barkman and Montague are directors of LL but are not directors of LHL. In October 2012, the JL&dJORs were presented with an Amendment to the Agreement that gave rise to the arrangement described above as FPP was a party to the Agreement. On investigation, it appears that the deferred consideration payments have not been made by LHL on schedule and there appears to be a technical breach of the original agreement. Inspection of the Deed of Amendment revealed that the other parties had been in negotiation for several weeks (possibly months) and had signed the Deed of Amendment but had failed to include FPP in those negotiations. The JL&dJORs were advised by Mr Barkman that the Deed of Amendment had to be signed by 19th October 2012.

On receipt of the document the JL&dJORs responded immediately, advising that five working days notice was entirely unreasonable for a document of considerable volume, particularly as it appeared that the other parties had had the agreement for some considerable time and moreover had signed it on or around 1 August. It was also pointed out to him that Mr Fayle had been incorrectly cited as agent of FPP when it should have been well known that he was joint liquidator. The JL&dJORs declined to sign the Deed of Amendment until full information was provided to enable them to take advice and consider the terms of the amendment and the effect on the interests of FPP.

Mr Barkman was advised that that the JL&dJORs needed access to the financial statements of LHL for 2010, 2011 and 2012 to enable them to obtain a comprehensive understanding of the circumstances prior to making a decision. That request was followed up on 16 th, 19 th and 23rd October, and again on 5th November. By this time the JL&dJORs had been advised that an extension for the completion of the Deed of Amendment had been granted to 31st December 2012.

In addition, on 29 th October 2012, Mr Fayle emailed the directors of LHL directly requesting the accounts as described above. On 20 th November 2012, he wrote formally to the company at its registered office and again followed up in writing on 30 th November 2012.

On 3rd December 2012, Marlborough Trust Company, who provides directors to LHL, responded and finally on 17 th December the JL&dJORs were provided with financial statements for LHL for the two years ended 31st July 2010 and 2011. Whilst being of interest, the most recent were almost eighteen months out of date. As importantly, they did not include consolidated financial statements for the 100% owned subsidiary (LL). The JL&dJORs have now requested draft accounts for July 2012, together with accounts for the subsidiaries. In the light of the Deed of Amendment it is of some concern to the JL&dJORs that completed financial statements to July 2012 are still not available.

The JL&dJORs remain concerned that the directors of FPP, and in particular Messrs Barkman and Montague (in their dual capacity as directors of LL), are not providing appropriate levels of cooperation with the JL&dJORs. The JL&dJORs will consider whether further formal steps will be required.

The JL&dJORs are also concerned that they do not take any steps in relation to LHL, particularly in the absence of meaningful information regarding its standing that may be detrimental to the value of the asset. Accordingly, they are considering carefully the actions that they should take to obtain the necessary information to enable them to perform their duties.


The JL&dJORs have investigated the circumstances giving rise to the alleged fraudulent Loan Note issue in the United States - this in turn falls as part of the establishment or otherwise of the US Loan Note Holders status as creditors of FPA.

The JL&dJORs have reviewed the statutory records, loan note documentation, draft agreements between FPP and Brewer Investment Group ("BIG"), email correspondence between FPP and Brewer, company minutes of FPP, email correspondence between the directors of FPP and their business associates, email correspondence between FPP and its advisers and general email correspondence (although there is a large volume of correspondence and emails they do not appear to be complete). The JL&dJORs have also interviewed Mr Alan Blythe, a former director, in relation to the loan notes issue. At the date of this update Messrs Barkman and Montague have agreed in principle to be interviewed but have not agreed dates for such interview nor the detail of how the interview will be conducted or what ground will be covered. For the avoidance of doubt, the JL&dJORs have been available at all proposed dates for the interviews.

The statutory records confirm that Mr Brewer was appointed as a director to FPP and FPA by consent. The context of his appointment was explicitly in relation to his role to ensure that the terms of the loan note issue were adhered to for the protection of loan note holders.

Over a number of months, in conjunction with legal advisers, loan note documentation was agreed together with 'sales' briefing documentation. The administrators to the Program raised several concerns of a regulatory nature. This appeared to be supported by the evidence of Mr Blythe who shared a number of the concerns.

In the documents submitted by Mr Montague in support of the Statement of Affairs states:

"In the third quarter of 2009, the paperwork for the notes was developed in conjunction with lawyers in UK (sic) Isle of Man and USA, with a view to sale through Brewer and subsidiaries, and potentially offshore (subject to compliance). The Board threw all efforts behind this development and I (Philip Montague) went to Chicago for 3 days on two occasions in the third quarter with a view to completion. The legal work in the States and the regulatory considerations, including calls to legal advisers seemed impressive, thorough and complete. Similarly, the Brewer operation appeared to match the impressive due diligence materials and marketing materials we had seen previously.

Shortly after the last trip to Chicago, in the 4th quarter of 2009, the final administration matters related to the eligible introducer status of Brewer to the satisfaction of SMP, as well as the administration of money transfers. No writing could occur until this was completed. Brewer were fully aware of this requirement. The possibility that they had actually paid monies over did not occur to us on the basis that this was not possible until FPA in IOM had approved. I was advised that clients would not buy them as long as Barclays had first charge until the debt was cleared.

Note writing, at this time dropped out of all discussion. The focus switched to brewer facilitating both investment and lending opportunities. All our energies were directed in this area. The communications were several times a week and there is substantial email correspondence. Teleconferences also occurred. Notes were never mentioned, we received no enquiries from any potential Note investors.

In January 2010, Mr Brewer joined the Boards of FPP and FPA."

Mr Montague has confirmed that he does not wish to amend his submission appended to the Statement of Affairs and Mr Barkman has confirmed that the statement represents his position too.

The JL&dJORs have identified a number of Board minutes and many examples of email correspondence that are not compatible with the explanations given by Messrs Montague and Barkman.

In June 2009 the FPA Board set out the details of the proposed arrangement to appoint Brewer as the Loan Note Manager. The minutes acknowledge "subject to completion of these outstanding points IT WAS AGREED to proceed with using Brewer as note manage with, (sic) FPA as note issuer."

The following are a sample of quotes from emails sent by or received by the directors of FPP/FPA:

Brewer are out in the field selling our notes (Oct 2009)

They are selling notes please consider and advise of their sales stuff, see next email. (Nov 2009)

Barclays should allow us more time, but none of us are selling enough notes fast enough, or secure other lending (Nov 2009)

I just got off the phone with Mike. It seems he has an anxious investor (Dec 2009)

We will write $50k in 1 year notes this month (Jan 2010)

It is the conclusion (on advice) of the JL&dJORs that Mr Brewer (the alleged fraudster) was validly appointed as a director of FPP and FPA at the material times. FPP, FPA and Mr Brewer (together with BIG) were in advanced discussions relating to the raising of new sources of finance through BIG including the issue of Loan Notes. The extracts above indicate that the JL&dJORs have identified sufficient correspondence and other documentation that, taken with the documentation issued by BIG in procuring the US Loan Note Holders, show that Messrs Barkman and Montague were aware that BIG was actively marketing loan notes in FPA's name and were doing so with what appears to be their active consent. Accordingly the JL&dJORs will need to permit the Loan Note holders to submit their proofs of debt against FPA and will thereafter need to consider their admission as proofs in the liquidation of FPA. Without waiving privilege the JL&dJORs' can confirm that they only reached their conclusion after having taken legal advice from Isle of Man advocates Callin Wild LLC. Any proofs that are in the future admitted will also be subject to reconsideration in the event that the US Loan Note Holders recover from BIG/Mr Brewer. The JL&dJORs' have also taken advice in the USA in the context of the ongoing proceedings regarding BIG/Brewer.


Without waiving their privilege the JL&dJORs' have obtained Isle of Man legal advice from Callin Wild LLC and have concluded that the Participants are neither contributories nor creditors of FPP and/or FPA. In due course it is anticipated that the Participants will become creditors of FPA when the liabilities of FPP have been discharged. Accordingly, they are considered to be contingent creditors. The JL&dJORs' however recognise the Participants are key stakeholders in these liquidations.

As stated in previous updates, difficulties arise from inadequate record keeping of Participant details, valuations and therefore proper participation in the Foundations Program. The failings fall into two key categories:

1 The correct allocation of points depends upon the accurate recording of the valuation of the investments within each life policy on a monthly basis. There are numerous examples where the valuations are incorrect. There are also numerous examples where the original valuation has been entered but no further valuations have been received/entered at all This has lead to the wide variations in the total value of the policies when compared to the actual valuations provided by the life companies at 23 November 2011. This issue was more fully documented in the last update.

2 In a number of cases, the administration system has not recorded the changes in investments that have taken place in the life policies. Accordingly values have been attributed to assets that are not held within the assigned policies.

All life companies have been approached for historical data, but those who have responded to date have only been able to provide paper records. The cost of manually updating all administration records will be significant and the cost/benefit is not clear. Electronic recordkeeping on a monthly basis is therefore not possible.

In the light of the stance currently taken in respect of the Loan Note holders, the position of the assigned assets must be considered. The Offering Document, its Notes and the Assignment documents (both from policy holders to FPA and from FPA to Barclays) are silent in several circumstances that are now live issues - namely, they do not specify what is to happen if assigned assets are released in circumstances where there are losses either within the Foundations Program or within FPA; nor do they state what should happen if part of the population of assigned assets is realised in full in settlement of the obligations of the Program whilst other assigned assets remain intact.

This is a not a commercial decision, but a matter of legal interpretation of the documents. As JL&dJORs, we have taken Queen's Counsel's Opinion seeking advice on whether assigned assets released back to FPA would form part of FPA's general assets available for distribution amongst FPA's unsecured creditors or whether they would be held on trust either for those Participants that provided those released assets or alternatively for all Participants that had provided assigned assets. On the basis of advice received and without waiving privilege, the JL&dJORs have concluded that the assets would be classed as general assets of FPA and not subject to some form of trust. Nevertheless, the JL&dJORs, having taken advice, consider that the directions of the Court should be sought on the issue to formally resolve this matter and have therefore decided that this is an appropriate matter to refer to the Court.

Resolution options

The JL&dJORs have concluded that they will canvas the opinion of Participants as to how they might prefer to proceed. There will be two options.

- To obtain valuations for all valuation dates required by the operating rules of the Program. This is for each underlying investment in the life policies for each month of the Program. This will enable the records to be recreated with the maximum opportunity for accuracy, but at the greatest cost.

- To reduce the valuation requirement to the valuation of the policy at quarterly intervals. This will result in valuations that the JL&dJORs consider will be equitable and in the spirit of the rules of the Program, but will be at a significantly lower cost.

The results of the consultation will assist JL&dJORs in any application they may be required to make to the Court to permit a variation of the calculation of participation points other that that set out in the rules of the Program.


Interviewing of directors

Mr Blythe resigned before winding up, but has cooperated on an informal basis.

Mr Traill was newly appointed before winding up and has expressed his willingness to cooperate. At the date of this report the JL&dJORs have not sought to interview him as their enquiries are focused on periods before his appointment.

Mr Brewer is now bankrupt in the United States and the Securities and Exchange Commission has been successful in its action against him. At the date of this report the JL&dJORs do not know whether any matters will be subject to appeal. The JL&dJORs have had limited communication with Mr Brewer's legal representative and no response has been received to the enquiries.

Messrs Montague and Barkman have informally cooperated by providing written answers to initial questions. The JL&dJORs have sought to arrange informal interviews to expand on the information obtained. At the date of this report, the detail of the conduct of any interviews, and dates convenient to Messrs Montague and Barkman, have not been agreed.

Allegations re conduct of Barclays

A small number of Participants and IFAs have made assertions and asked questions about the actions and responsibility of Barclays. Although we have seen no evidence and have not been provided with any new information to support these assertions and/or questions, Mr Shimmin has undertaken an initial review of the relationship and loan agreements between the Bank and FPP

Following Mr Shimmin's initial review, he has thought it prudent to seek separate independent legal advice in respect of the fiduciary duty of Barclays, the relationship and loan agreements between the Bank and the Foundations Program.

Instructions were issued to consider the following allegations:

a) that the Bank had a duty of care to the companies (FPP and FPA) and to the Participants

b) that the Bank have failed in this duty

c) that the Bank should be held accountable for the failure of their responsibilities towards the companies and to the Participants

Without waiving privilege the JL&dJORs' confirm that the advice received identified those matters that the JL&dJORs' must consider in order to reach a conclusion regarding the allegations. Those matters include the Scheme documentation, the regulatory background, the contractual position, the general law on the duty of care and/or negligence and the authorities.

On the basis of such advice received, the JL&dJORs have concluded that there is nothing in the documents that would lead to a conclusion that the Bank owed FPP, FPA or the Participants a common law duty of care, or a duty in equity, or that it had assumed any responsibility with regard to the substance of matters raised by the aggrieved Participants.

Accordingly, on the basis of advice received the JL&dJORs have concluded that any civil action against the Bank brought on the basis of the above instructions would be unlikely to succeed.

Accordingly, on the basis of advice received the JL&dJORs have concluded that there is no impediment to the repayment of the amounts due to the Bank at the appropriate time.

Repayment of Barclays

FPP remains solvent as a consequence of the assigned assets held by Barclays and the obligation of the Participants to meet the losses of the Program. Interest accrues at 5.5% on the loans denominated in GBP and at 5.25% on the loans denominated in USD. The Bank has suspended any actions to realize the policies in accordance with the rights granted to it under the terms of the assignments to permit an orderly realization to minimize the damaging impact such enforced realisation is likely to have on the Participants as a whole.

On the basis of the final determination of any questions relating to the conduct of the Bank, the JL&dJORs wish to advise the Participants of what options there are for the first stage of the discharge of their obligations to the Program. The JL&dJORs will give notice to the Participants of their intention to formally seek satisfaction of the Participants' obligations. The JL&dJORs, with the agreement of the Bank, will permit the reassignment of each Participant's assigned assets on the receipt by the JL&dJORs of cleared funds equal to the then current value of the underlying assigned asset which will be disclosed at the date of the demand. The Participants will be permitted a period of 21 days, in accordance with section 13.5 of the Offering Document, to pay those funds to a designated bank account that will be set up by the JL&dORs. Those funds will then be held on the same terms as assigned assets were originally held. In the event that a Participant is unable (or chooses not) to provide funds to enable the assets to be reassigned on the expiry of the 21 day period surrender proceedings will commence in accordance with provisions of the Program's rules.

As has been described elsewhere, the allocation of losses will also be subject to a concurrent consultation with the Participants to establish a preference for the process that will lead to such allocation of losses. Until that process is completed, the surplus assets will be retained by the JL&dJORs in full.

Application to Court re the assigned assets

The JL&dJORs anticipate seeking the directions of the Court as to whether the assigned assets are held on trust or assets of FPA, once Barclays has been discharged. An application will be brought before the Court in the near future, which will include proposals to permit the effective involvement of the Participants in presenting legal submissions to present arguments that might properly be put on their behalf.

Asset realisation

As explained above, the JL&dJORs have not been assisted by the directors of LHL or LL (either in their capacity of directors of LL or FPP). In the absence of a full understanding of the position of LHL, any formal recovery actions initiated by the JL&dJORs may have unintended consequences detrimental to the interest of the creditors of FPP and FPA. The JL&dJORs propose to continue to investigate the circumstances and to seek the cooperation of the respective companies.

Admit and/or reject POD claims

The JL&dJORs have deferred consideration of the Proofs of Debt for the following reasons:

- As regards the Participant claims, these are considered to be contingent creditors. Until such time as the obligations of the Participants to discharge the losses have been met, the quantum of their claims cannot be determined.

- As regards the Loan Note holders, the JL&dJORs must formally conclude whether the circumstances set out in Section 9 require the JL&dJORs to accept the Proofs of Debt for consideration to be admitted.

- As regards the unsecured creditors, the JL&dJORs have issued several requests for further information and/or support for claims made. These remain substantially unanswered.

Participant queries

The JL&dJORs have adopted a policy of providing information to creditors by maintaining a web site. The website contains a detailed background to the liquidations. Updates have been posted on 15th August 2012 and 6th November 2012. The JL&dJORs propose to provide a further update substantially aligned to this report. The JL&dJORs consider that this is the most effective means of informing creditors of progress in circumstances where they are widely distributed.

Notwithstanding this approach, a number of creditors, mainly those who are Participants, seek personal updates from the JL&dJORs. It is understandable that the Participants are very concerned about the liquidation as their obligations to the Program are similar to that of guarantors. JL&dJORs have taken the view that all enquiries should be addressed with as much openness as is consistent with protecting any sensitive information that the JL&dJORs may hold and not to jeopardize any actions that the JL&dJORs may wish to take.

However, the number of enquiries is time consuming and the JL&dJORs are mindful of the need to manage the costs incurred in the liquidation carefully. Accordingly, the JL&dJORs are seeking to encourage all creditors to consider the web site as the authoritative source for monitoring the status of the liquidations and to the greatest extent possible, to wait for the periodic updates.


A certain amount of misunderstanding of the role of the Joint Liquidators appears to have been circulating amongst some Participants, and in particular, regarding the role of Mr Shimmin. Mr Shimmin and Mr Fayle are jointly appointed by the Court. Mr Shimmin's role is not that of 'gatekeeper' and his appointment has never been described in that way. The specific matter raised with the Court was that in particular, he should have responsibility for dealing with matters relating to the actions, conduct or claims of the Bank. This was drawn to the Court's attention to avoid any perception of conflict in Mr Fayle's former role. However, this is not a limitation on his powers or responsibilities. In all other respects the conduct and management of the liquidation is the joint responsibility of both Joint Liquidators.


The question of possible losses has been set out by the JL&dJORs as carefully as possible. It has always been set in the context that the outcomes are uncertain. The range of losses for the Program as a whole have been described as, at best, in the region of 20% and at worst, in excess of 50%. The percentages are expressed in relation to the aggregate value of the assigned assets.

However, it has been carefully stressed that the average loss cannot be predictably attributed to each Participant individually. The loss borne by a Participant is calculated by reference to the investments' notional value (ie the relevant discount factor) and the length of time in the Program. In simple terms, a Participant of five years is likely to have a greater share of the loss to bear that one who was in the Program for 3 years. The final outcome will likely be most heavily affected by the recovery that can be achieved from the investment of the Program in LHL. There may also be losses attributable to the Loan Note Issue referred to above.


This update indicates that matters have progressed on several fronts and the applications to Court that are now planned will provide certainty in a number of areas. However, the difficulties in anticipating how matters with LHL might resolve mean that it is not possible to predict with any accuracy when the liquidations might be completed. The JL&dJORs will be doing their utmost to make distributions to creditors at the earliest date and will be working to do so in 2013. However, this cannot be given as a firm commitment in the light of the many uncertainties.

February 2013