Emma RadmoreThe Court of Appeal was asked to consider whether failure of a law firm to have advised that arrangements constituted collective investment schemes made Claimants who essentially operated and promoted the schemes liable to investors in circumstances where they would not otherwise have been liable. The issue focussed on what rights investors would have if the schemes were, or were not, CISs and therefore whether the liabilities would actually be any different.
In terms of facts, 43 SPVs had entered insolvent liquidation. The SPVs had been used in connection with investment schemes promoted to the public, which offered long leasehold interests in individual rooms in hotels, care homes or student accommodation, either off-plan or after refurbishment of an existing building. The schemes offered attractive returns. However, the schemes failed, and the Claimants said they had in fact been operated together as Ponzi schemes and their founder had acted fraudulently.
The various schemes could have been collective investment schemes for FSMA purposes but no-one involved in the schemes was authorised under FSMA. So, if the schemes were CISs, s26 FSMA would apply to make the relevant agreements unenforceable by the person in breach, and to entitle the other party to recover their money and receive compensation for any loss suffered as a result of parting with it. The Court said that it is commonly understood (although the Court does have the power to allow the agreement to be enforced), that the other party will therefore have a a choice between enforcing their contractual rights or claiming their money back and relevant compensation.
In this case, it was argued that the schemes were all CISs and so the Claimants in the case (the SPVs) were liable under FSMA. Legal advice on the point had been sought several times over a 3 year period, and the solicitors instructed had taken advice from various counsel, who came to different conclusions. Eventually the solicitors advised, on the basis of the latest counsel’s advice, that the schemes were CISs, and so FSMA authorisation should be sought.
The Claimants case was that the solicitors should have advised much earlier that the schemes were CISs, or at least that there was a significant risk that they were, and so acted in breach of duty. On causation, the Claimants said that if the solicitors had given the advice they should have done, then the Schemes (which ultimately raised £68.2m) would never have been promoted so no investments would have been made – so the effect of the advice was to make the relevant companies liable for significant civil liabilities under s26 FSMA.
This heading was not on the substantive matter of whether the schemes were CISs, but on whether it mattered in terms of the liabilities of the Claimants. The Judge in the High Court accepted the losses the Claimants suffered were attributable to the use to which they put the monies, and not to the alleged negligence of the solicitors. Similarly, the High Court said requirement under FSMA (if the schemes were CISs) was the requirement to make restitution, which was set off in full by the amounts received in investment monies. It struck out the claims against the solicitors.
On appeal, the Claimants said:
- it was wrong to say the Claimants had not established any loss;
- it was wrong to say the Claimants’ losses were not attributable to the solicitors’ alleged negligence; and
- the Judge should have concluded that the Claimants had a real prospect of showing there were losses in the shape of compensation payable under s26 FSMA
The Court of Appeal dismissed the appeal on all grounds. The most persuasive reason, it said, was that, if the schemes had been CISs, the investors would have had claims in contract or tort at least as valuable to them at the claims they would have had under s26 FSMA.