'Visionary' businessman used company's cash to buy flats

SPECIAL EXCLUSIVE by our COURT REPORTERS

Martin Frost, the former chairman of the now insolvent Avocet group of businesses, breached his fiduciary duty as a company director by using £425,000 of the firm's cash to help buy two upmarket flats in Scarborough, a judge has ruled.

In a damning written judgment handed down in the Leeds courts, District Judge Christopher Royle dismissed evidence submitted by Mr Frost and his supporters as inconsistent, largely irrelevant and tediously lengthy.

The successful claim by the joint liquidators of Omega Infinite PLC, the former parent of the Avocet group, is a significant step in the insolvency team's bid to repossess the Scarborough properties from Mr Frost and his wife Janet. Both Mr and Mrs Frost were declared bankrupt in 2021.

Court papers lodged by liquidators Joanne Hammond and Ashleigh Fletcher, of specialist firm Begbies Traynor, also allege that company money was used by the Frosts to pay for holidays and luxury travel.

A witness statement submitted by Miss Hammond included details of four payments, all of them originating from Omega and with each sum made to a Royal Bank of Scotland account in Mr Frost's name. The amounts were for £150,000 on September 27th, 2017, £145,000 the following day, and separate transactions of £50,000 and £80,000 both completed on April 26th, 2018.

The transfers took place around the time the flats, numbered 2 and 4, in Scarborough's 57 Belvedere, The Esplanade changed hands into the ownership of Mr Frost. His assertion that the properties are in fact owned by a company called Loch Lomond Heritage of which he was a director, was also rejected by Judge Royle.

Mr Frost had argued that  he was effectively withdrawing and spending his own money. 

According to the judgment: "The fact that he [Mr Frost] had invested significantly in Omega in some way entitled him to make those payments. He said that he put in roughly £9m, part of which had been share capital. Eventually a lot of share capital was converted to loans, and he had "about £6m" of "off-balance sheet loans" by early 2017, by which he said he meant that Omega was using equipment owned by him in its business."

Mr Frost also claimed Omega's shareholders were aware that he was not drawing a salary to which he was entitled (though he did not quantify that salary), and he was also lending money to Omega.

According to Judge Royle: "It is a breach of Mr Frost's fiduciary duties to make substantial payments out of Omega's resources without board and/or shareholder approval or ratification according to Mr [Steven]Fennell (counsel for the applicants). I agree.

"Nor is there any accounting or documentary evidence to support the substantial figure of £6,139,220 he advances in his witness statement. Insofar as Mr Frost relied on audited accounts, no complete document was provided to me and I decline to allow his reliance on the same. Nor is there proper evidence of board or shareholder approval or ratification. I accordingly reject that proposition."

And in a further put down of Mr Frost's evidence, the judge states: "As to the purpose of the transfers, if they were not for Omega's legitimate purposes when made, it does not seem to me to be open to Mr Frost to attempt to re-classify them after the fact. It was for Mr Frost to explain those payments. On their face they appear to have been for the purchase of real property in his name. Such re-classification seems to me to be what he appears to be trying to do.

"In any event, it is no explanation for an apparent dissipation of Omega's funds to say that those funds arose from Mr Frost's investment. By definition, such funds are Omega's funds, not Mr Frost's funds. For similar reasons, I reject the suggestion that his lack of salary (of which there is no evidence as to quantum) justifies such payments from Omega's resources.

"Even if the Frosts were, at the material times, significant creditors of Omega, for similar reasons that makes no difference. As it is, there is no sufficient evidence which persuades me that they were."

There was nothing before the judge which persuaded him that the payments were made other than in breach of Mr Frost's duties as a director. There was, as Mr Fennell had pointed out, no proper evidence of shareholder approval, board approval, or that Mr Frost did anything other than use monies invested in Omega.

"I hold that Mr Frost has failed to justify the four payments out of the Omega account into the RBS account which are the subject of this application. It seems to me that his understanding of what was Omega's money and what was his own is sufficiently fluid that even he does not understand (and thus cannot explain) where the distinction lies."

Having concluded that Mr Frost paid out a total of £425,000 of Omega's money in breach of his fiduciary (and, no doubt also, other director's) duties, Judge Royle said he must now analyse whether that money could be traced into the equity in the flats as the applicants had suggested.

The judgment continues: "Even where there are mixed funds, as here in the RBS account, all other things being equal, Omega remains entitled to assert a proprietary claim.

"Where the other contributor to the mixed fund is at fault (as here, being Mr Frost), it is for Mr Frost to distinguish which money was his and which was Omegas otherwise the money is presumed to belong to the innocent party (here, Omega).

"To the extent that a trustee (here Mr Frost) pays a claimant's money (here, Omega's) into an overdrawn bank account is generally to render the money untraceable. Whilst a change of position by the trustee (or some other inequitability in a claimant's claim) may act as a defence, nothing has been suggested by Mr Frost which would found such a defence."

Judge Royle concludes that: a) Omega had a distinct identifiable title to the £295,000 which was paid into the RBS account in breach of fiduciary duty and was entitled to trace that sum into the equity of Flat 2. b) All but the pre-existing credit balance in the RBS account at the time the £295,000 arrived was undoubtedly Omega money. So, at least £280,000 can be traced into the equity in Flat 2.

"The same result obtains in relation to Flat 4 for the same reasons. Given the payments from Omega's account to the RBS account in relation to this flat partly discharged an extant overdraft, I hold that at least £125,446.96p of the money paid by Omega into the RBS account went toward acquiring Flat 4."

Mr Frost has been quick to give his version of events at Thursday's court hearing.

In his capacity as Joint Life President of Genfro Ltd., an apparent successor of Omega, he sent the following communication to shareholders: "Begbies were partially successful against Janet and I in that the Leeds High Court upheld Begbies debt narrative upon which Judge Geddes gave my and Janet's bankruptcy orders.

"Begbies secured a possession order upon Flat 4 but on Flat 2 (where Janet and I live) a possession order was refused. That said, contrary to Begbies wishes their action was stayed for an extended period to allow Janet and I to appeal. Janet and I left Leeds happy".

But a long-suffering investor in Avocet's 'mythical' green fuel, commenting on the judgment, told us: "This is a ground-breaking decision in that, for the first time in a court of law a judge has found that Frost breached his fiduciary duty as a director by misappropriating company funds for his own personal use.  

"This should be an absolute gift to law enforcers as an embezzlement case now appears to be substantially proven, and should be of some solace to the Avocet shareholders and creditors who have long been Frost's unwitting victims."