THE business that gave the largest financial gift to the Liberal Democrats was entirely fraudulent and had never traded, a High Court judge ruled yesterday.

The London-based finance company 5th Avenue Partners Ltd, which donated £2.4 million to the party, shunted investors’ money around Europe without their knowledge, Mr Justice Cooke said.

His judgment raises the stakes for the Liberal Democrats. The party has been resisting calls to return the gift, saying that it was accepted in good faith.

The Electoral Commission, which polices political donations, said last night that it will study the judgment in detail. It has the power to ask the courts to force parties to surrender gifts. Under election law, corporate donations may be accepted only from companies “carrying on business” in Britain.

A ban on foreign donations forbade Michael Brown, owner of 5th Avenue, from making a personal gift to the Liberal Democrats because he lived in Spain and was not registered to vote in Britain. He is beginning a two-year jail term for perjury.

Mr Justice Cooke gave a summary judgment for breach of contract to four millionaire investors in 5th Avenue, including Martin Edwards, the former Manchester United chairman. They believed Brown would invest their money in high-yield schemes.

The judge said that the allegations were “extremely serious regarding the dishonesty and fraud of Brown and the involvement by him of his companies in that dishonesty. It is clear that the assurances and representations (from Brown) were lies.

“There was no trading and the scheme was fraudulent from its inception, it never being Brown’s intention that the money should be used this way. Funds had instead been shunted around various accounts in Europe. It is also clear that Michael Brown tried to hide the fact that there had been no legitimate trading with the funds supplied to him,” the judge said.

A source close to rigorous investigations into 5th Avenue’s books told The Times: “There was money coming into and out of the accounts. There is no evidence it was carrying out any sort of business whatsoever in the United Kingdom; it could not be said that was the case. No evidence has been found of a single legitimate foreign exchange deal, which is what it existed for.

“It does put the Liberal Democrats in a very odd position of having funded their last election campaign from fraudulently obtained funds, obtained from someone else.”

The Lib Dems rapidly spent all the money on posters and advertisements for Charles Kennedy and the entire donation is now spent. If the Electoral Commission forces the party to surrender the gift, each member will become liable for a share of the debt.

The commission has suspended its inquiries pending a money-laundering investigation across three continents by the City of London Police.

Three stockbrokers were still being questioned yesterday after being arrested in connection with the criminal inquiry.

The source said he believed that the Liberal Democrats would, if they could, have returned the money to escape the lingering bad publicity. “If they had it, I expect they would have handed it over to get rid of it,” he said.

HSBC is understood to have traced £25 million of assets belonging to Brown, who lent Mr Kennedy a jet to fly him around Britain on the party’s most successful election campaign in 2005. Among the possessions seized by the courts on behalf of the bank is a private jet impounded at Biggin Hill airport in southeast London.

The bank is understood to believe that £5 million of 5th Avenue’s assets are still missing. HSBC is believed to be confident that none of the missing cash is in Britain.

They doubt it is in Spain, where Spanish police have been investigating. Most likely the cash is in the Bahamas, where Mr Brown had another home.

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