Tiuta Plc released from Guarantee

Posted on August 8, 2012

Investors in the Connaught Income Fund, Series 1 (formerly known as the Guaranteed Low Risk Income Fund, Series1) thought that any lending undertaken by the Fund was guaranteed or underwritten by Tiuta Plc, an FSA regulated company. The Investment Memorandum explained that : “If the full amount [of a loan made by the Fund] is not recovered, Tiuta Plc has a legal obligation to repay the original investment to all investors.”

The newly released accounts of Tiuta Plc for the 18 month period ended 30 September 2011 states that “the guarantee from Tiuta plc to Tiuta International Limited” has been released. We believe that this means that the guarantee in favour of the Fund no longer exists. We further understand that it cannot call on the guarantee.

It now appears that Tiuta plc had guaranteed any lending by the Fund to Tiuta International Limited under a guarantee dated 15 April 2008. The Fund had therefore received a guarantee of lending to Tiuta International Limited from Tiuta Plc.

Investors were not told about any lending to Tiuta International Limited in the Investment Memorandum. Investors had thought that Tiuta plc arranged lending by the Fund directly to third parties secured by first fixed charges over saleable property.

The guarantee of 15 April 2008 was for the benefit of the Fund. The accounts refer to a guarantee from Tuita Plc to Tiuta International Limited. We understand that Connaught believes that there is an enforceable guarantee. We sure hope so!

The newly released accounts state that Tiuta International Limited was sold on 12 June 2012 and subsequently placed into administration on 5 July 2012.

We understand that Tiuta International Limited was sold to Connaught and BDO were appointed as administrators.

Prima facie, it looks like an FSA regulated company, Tiuta plc, has been released from a guarantee to the detriment of investors. This is challenged by Connaught. Where is the FSA in this mess? Surely, Tiuta is insolvent if the guarantee  remains in place?

In summary, it appears that investors may have ended up without a guarantee from Tiuta plc. This was not the basis on which they invested. The commercial benefit to the Fund in releasing Tiuta plc from the Guarantee is far from clear. The General Partner of the Fund, Connaught Administration Limited and the operator of the Fund, Blue Gate Capital Limited, have more than a few questions to answer to investors.

The accounts of Tiuta plc state:

“During 2010, the group experienced significant growth in the Connaught Fund (“Series1″) (through Tiuta International Limited, a subsidiary undertaking)…..However, redemptions (exits) on loans suffered as a result of the economic climate. The basic business model of Series1, which required the group to finance any losses, became untenable as the size of Series 1 borrowing and related loans dwarfed any reserves of the group. A significant amount of loans failed to
redeem on the agreed redemption date, and failed to reimburse interest. As a result, the group’s working capital facilities were found to be insufficient.

The directors, initially with assistance from BDO, constructed a strategy and plan to address the liquidity problems by selling all properties that had been acquired (largely through repossession) and to increase the efficiency of the availabile funds in Series1.  A more aggressive policy was adopted to recover non-performing loans……………..”

Our questions are:

1. Did the Fund benefit from any first fixed charges over property as set out in the Investment Memorandum?
2. Has the Fund lent monies to Tiuta International with no security?
3. Has Tiuta International used moneys borrowed from the Fund to buy property (as implied in the accounts) in breach of the objectives of the Fund?
4. Is the guarantee valid and enforceable or not?

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