Business club scheme was unlawful lottery

LAW REPORT 30 July 1996

Re Senator Hanseatische Verwaltungs GmbH and others; Court of Appeal (Lord Woolf, Master of the Rolls, Lord Justice Saville, Lord Justice Millett) 24 July 1996

A multi-level snowball or money circulation scheme, whereby persons paying to join a "business club" became entitled to receive a proportion of the joining fees thereafter paid by anyone whom they then recruited, and by those whom their own recruits in turn recruited, was an unlawful lottery and the company operating it was liable to be wound up by the court under Part XIV of the Companies Act 1985.

The Court of Appeal dismissed an appeal by Senator Hanseatische Verwaltungs GmbH (SHV), Titan Marketing Gesellschaft and Titan Business Club, against the decision of Sir Richard Scott, Vice-Chancellor, on 14 June 1996, who granted an injunction preventing them from continuing to operate what was known as the Titan scheme in this country, pending the hearing of winding-up petitions issued against them by the Secretary of State for Trade and Industry on 9 May 1996.

Edward Bannister QC, Clive Hugh Jones and Paul Kennedy (Charles Buckley) for the appellants; Roger Kaye QC and Guy Newey (Treasury Solicitor) for the secretary of state.

Lord Justice Saville said the Titan scheme was based on invitations to become members of the Titan Business Club. To take up the invitation, the person concerned attended a recruitment meeting organised by "self- employed consultants" of SHV, was interviewed by one such consultant, signed an application form, and paid what was originally pounds 2,500 but had recently been increased to pounds 3,000. He then became a "junior partner" with the right, but no obligation, to seek to introduce other new members. He received pounds 450 for each of the first two successful introductions, but if and when he introduced a third be became a "senior partner" and received pounds 1,220 from the money paid by that new member. In addition, for each of the first two new members which that new member in turn successfully introduced, the senior partner would receive pounds 770 from the money paid by them. Any further successful introductions by a senior partner were treated in the same way as the third introduction.

At least in theory, very large amounts indeed could be generated by this means, given each new layer of membership was successful in introducing new members. The scheme had no other purpose.

There was no statutory definition of a lottery. The appellants submitted that an essential feature of a lottery was the distribution of money or prizes entirely by chance. Since the receipts of the participants depended on the exercise of skill in persuading others to join the scheme, this essential feature was lacking and the scheme could not be a lottery.

In his Lordship's judgment, the correct approach to be taken by the court was one of common sense: see Seay v Eastwood [1976] 1 WLR 1117, per Lord Wilberforce.

In the present case the reality of the matter was undoubtedly that those persuaded to join the scheme paid their money in the hope of the rewards that would result from those afterwards joining their particular "family tree". Such a scheme could be a lottery even if some of the rewards could be said to be gained by the application of an element of skill on the part of the participant, in persuading others to join, provided the scheme to a substantial extent offered other rewards dependent entirely on chance, namely the success or failure of others in recruiting members further down the line.

The appellants also submitted that the "self-employed consultants" who ran the recruitment meetings exercised skill in persuading people to sign up. That was undoubtedly true. The meetings were conducted in what could be described as a "revivalist" style, with music and chanting and the oft-repeated promise of the chance of great rewards. It was said that, since this skill was being exercised on behalf of the existing members, this was sufficient to prevent the scheme being a lottery. But there was no evidence to suggest that those running the recruitment meetings did so as agents for the members, especially since they stood to make money themselves from the introduction of new members. The skill deployed at the meetings was deployed by and for the promoters and not the participants.

Looked at as a whole, this scheme had the word "lottery" written all over it.

Paul Magrath, Barrister