Claims Direct franchisees prepare to take legal action against founders

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A high-profile law firm is poised to unleash legal proceedings against the founders of Claims Direct on behalf of employees who allege they were misled about the business's prospects.

This emerged as the same former directors looked set to clinch victory in their heavily-criticised takeover bid for the company.

Class Law, the City law firm which specialises in group actions, may issue proceedings this week against Tony Sullman, Colin Poole and Stephen Hyde, who set up the "no-win, no-fee" personal injury company and organised its flotation last July for 180p. Mr Hyde left the company just before the float but Mr Sullman and Mr Poole became its chairman and chief executive and, last month, launched a 10p a share offer for Claims Direct.

Together, the three are understood to have made about £100m out of Claims Direct, which Class Law is targeting for compensation for employees. Class Law is also likely to issue a writ against the company itself, which appears to have about £11m of cash.

Wynne Edwards, a solicitor at Class Law, said: "We have been instructed to investigate potential legal claims against the company and against its former directors."

Mr Edwards added: "We met franchisees on Friday to discuss the case. We found that one of their number has had to sell his home because of the financial strain he was under."

Legal action could have serious implications for the Sullman-Poole bid for the company. It is believed that about 10 per cent of investors, unaware of the impending legal case, have opted to accept the offer, which values the company at £19m. If the Class Law case succeeds, this value may drop because the company may have to pay compensation from its own funds, on top of demands directed at the individuals involved.

The charge in all cases is believed to be that senior executives involved misrepresented the likely success of the company's business model when they took on more than 250 claims managers, many of whom have subsequently suffered substantial financial loss.

Claims Direct has been widely criticised since it emerged late last year that many successful clients received very little of their compensation in personal injury cases because they had to pay a hefty insurance premium out of their winnings. The company's shares then plummeted and customer numbers fell dramatically.

This left many claims managers, known as franchisees, out of pocket because they had been forced to pay up to £30,000 for their franchise and were relying on a high flow of new customers to make back the money.

Commenting on his bid to buy the company, Mr Poole said he was "confident" that he and Mr Sullman had attracted enough shares to add to their 43 per cent stake to take it over 50 per cent. It is thoughtthe two will keep the company's listing in the short term as they are still negotiating over possibly selling all or part of the business on to one investor, Simon Ware-Lane.

Mr Poole denied allegations that franchisees were misled when they signed contracts to take on personal injury victims on the basis that clients would have to take out an insurance premium. He said: "Franchisees were given a choice. The majority of them did sign the agreement, but we did not force them to do it."