Afan Valley Ltd & Ors v Lupton Fawcett LLP

This appeal concerns a claim brought by numerous insolvent companies against Lupton Fawcett LLP, a firm of solicitors (“Lupton Fawcett”), for damages for alleged professional negligence. Lupton Fawcett applied to strike out, or for reverse summary judgment on, the claim against it on the basis that even if negligence were established the Claimants would be unable to prove any recoverable loss.

The application was heard by Sheldon J (“the Judge”). He agreed with Lupton Fawcett and struck out the claim against it (and granted summary judgment against the Claimants) for reasons given in a judgment handed down on 23 April 2024 at [2024] EWHC 909 (KB) (“the Judgment”).

The Claimants appeal with permission granted by Dingemans LJ after an oral hearing. We had the benefit of submissions from Mr James Pickering KC and Mr Paul O’Doherty for the Claimants, and from Mr Daniel Saoul KC, who appeared with Ms Pippa Manby, for Lupton Fawcett.

For the reasons that follow, I would dismiss the appeal.

There has of course been no trial or any findings of fact. What was before the Judge was an iteration of the Particulars of Claim that was known as “APOC 5”,being the fifth version of draft Amended Particulars of Claim. In this Court the Claimants applied to introduce a further iteration (“APOC 6”), but we refused that application for reasons that I give below. That means that the question before us is the same as the question before the Judge, namely whether it was right to strike out (or give summary judgment on) the claims made against Lupton Fawcett in APOC 5. In those circumstances the following account of the (alleged) facts is taken from APOC 5. I should make clear that Lupton Fawcett denies any negligence or breach of duty, but the application proceeded on the familiar assumption that the underlying facts are as the Claimants allege.

The Claimant companies are 43 companies, all of which are now in insolvent liquidation and act by their joint liquidators, Mr Robert Armstrong and Mr Edward Bines. These companies were used as special purpose vehicles (“SPVs”) in connection with investment schemes (“Schemes”) promoted to the public, under which investors were offered the opportunity to buy long leasehold interests in individual rooms in hotels, care homes or student accommodation, either off-plan (where the Scheme was for construction of the building and thereafter operation of the hotel, care home or student accommodation), or in a pre-existing building (where the Scheme was for the refurbishment of the building and operation of the hotel, care home or student accommodation). The Claimants are mostly either “Asset SPVs”, which owned Scheme property assets, or sold leases in Scheme property assets to investors, or “Managing SPVs”, which were set up to manage Scheme property assets. A total of 22 such Schemes are pleaded, under which over £68m was raised from investors in the UK and overseas. We were told by Mr Pickering that the amounts invested by individual investors were generally of the order of £100,000 each.

Investors were offered very generous returns (described as “guaranteed” or “assured”), including:

The Claimant companies fall into two groups, called respectively the MBi Group and the Northern Powerhouse Development (“NPD”) Group. The MBi Group was founded in 2012 by Mr Gavin Woodhouse, who was initially the sole shareholder and director of each of the MBi companies. He was joined in 2014 by Mr Robin Forster who became a shareholder and director in the MBi companies, but in 2016 they went their separate ways and Mr Woodhouse founded the NPD Group. This consisted of a number of companies (including companies formerly in the MBi Group which were transferred to the NPD Group) which were subsidiaries of Northern Powerhouse Developments (Holdings) Ltd, of which Mr Woodhouse was the sole shareholder and director.

One of the questions which arose in the operation of the Schemes was whether they were collective investment schemes (“CISs”) within the meaning of ss. 235 and 417(1) of the Financial Services and Markets Act 2000 (“FSMA”). The significance of this is that it is common ground that if a Scheme were a CIS then it would fall within the general prohibition in s. 19 FSMA under which no person may carry on a regulated activity unless they are authorised or exempt. (This is the effect of s. 22 FSMA and art 51ZE of the Financial Services and Markets Act 2000 (Regulated Activities) Order SI 2001/544 under which establishing and operating a CIS is a regulated activity.)

None of the Claimant companies, nor any other entity or person involved in the Schemes, was an authorised person. This means that if the Schemes were CISs, they would attract the consequences of s. 26 FSMA. This provides, so far as relevant, as follows:

“26 Agreements made by unauthorised persons

(1)

An agreement made by a person in the course of carrying on a regulated activity in contravention of the general prohibition is unenforceable against the other party.

(2)

The other party is entitled to recover–

(a)

any money or other property paid or transferred by him under the agreement; and

(b)

compensation for any loss sustained by him as a result of having parted with it.

(3)

“Agreement” means an agreement–

(a)

made after this section comes into force; and

(b)

the making or performance of which constitutes, or is part of, the regulated activity in question.”

By s. 28(3) FSMA the Court may, if satisfied that it is just and equitable in the circumstances of the case, allow the agreement to be enforced and any money paid to be retained; but, subject to this, it is common ground that the effect of s. 26 is to give the “other party” (here an investor in one of the Schemes) an election to choose between enforcing their contractual rights and claiming their entitlement under s. 26(2): see In re Whiteley Insurance Consultants (a firm) [2008] EWHC 1782 (Ch), [2009] Bus LR 418 (“Whiteley”) at [25] per David Richards J. Mr Pickering submitted that this was not what he called an “election at large” but one where the default position was that the money invested fell to be repaid. I am not sure that I agree. An election usually requires a choice to be made and in some cases it will be in the interests of the investor to choose to enforce their contractual rights rather than their s. 26(2) rights. For reasons I give later I think this is in fact very likely to be the case here. But I do not think it necessary to pursue this point: it is clear that if the Schemes were CISs then the relevant Claimant companies were at least exposed to potential liabilities under s. 26(2) FSMA.

In these proceedings the Claimants’ pleaded case is that the Schemes were indeed all CISs, and they claim declarations that the Schemes were CISs and operated in breach of the general prohibition in s. 19 FSMA, and that the Claimants are liable to the investors by operation of s. 26 FSMA.

Lupton Fawcett was a firm of solicitors in Leeds. The pleaded case is that the MBi and NPD Groups took advice from Lupton Fawcett on whether the Schemes were CISs on a number of occasions between 2014 and 2017. Lupton Fawcett took advice from counsel but different counsel advised different things. Eventually in November 2017 Lupton Fawcett advised Mr Woodhouse that in the light of the latest advice from counsel “I advise that you become FCA regulated”, the FCA of course being the Financial Conduct Authority, the relevant regulator.

The Claimants’ case on breach of duty is in effect that Lupton Fawcett should have, but failed to, advise much earlier that the Schemes were CISs, or that at the very least there was a serious risk that they were.

The Claimants’ case on causation is that if Lupton Fawcett had given the advice that it should have done, the Schemes would not have been promoted and no investments would have been made. It is said that during the period that Lupton Fawcett was retained by the MBi and NPD Groups, the Claimant SPVs in reliance on its advice raised some £68.2m from investors across the 22 Schemes.

The Schemes were however unsuccessful. The Claimants’ case is that not one of the Schemes made a profit, and indeed that the Schemes were operating together as a “Ponzi” scheme whereby unachievable investment returns for existing investors were paid not out of the performance of the underlying assets/businesses in the Scheme but by the fraudulent use of newer investors’ monies (including investors in other Schemes).

Indeed it is the Claimants’ own case that Mr Woodhouse not only operated the Schemes fraudulently but dishonestly extracted large sums for his own benefit from them; and they rely on a judgment given against him in a claim brought by some of the Claimant companies in which he was found to be dishonest, in breach of his duties as director, and liable for some £2.3m to the four claimants in those proceedings: Northern Powerhouse Developments Ltd & Ors v Woodhouse [2023] EWHC3124 (Ch) (HHJ Claire Jackson sitting as a Judge of the High Court). We were provided with extracts from the Claimants’ closing submissions in those proceedings, which include submissions that Mr Woodhouse presented a fundamentally dishonest business model as a legitimate investment opportunity; and that not only was the entire enterprise dishonest from the start, but once the house of cards began to collapse, Mr Woodhouse lied to investors to keep the money coming in.

By 2018 the NPD Group began to suffer from cashflow problems, and by the end of March 2018 it was insolvent, although it continued to trade. Insolvency proceedings began in June 2019 when an application was made to the High Court by a number of dissatisfied investors who had not been paid investment returns; by July 2019 interim managers had been appointed over some of the Claimants, replaced in August 2019 by administrators; in due course all the Claimants were confirmed to be insolvent; and all are now in liquidation.

As to the Claimants’ case on loss, I will have to look at that in more detail below, but in brief summary it is said that the effect of Lupton Fawcett’s advice was that the companies concerned became liable for significant civil liabilities under s. 26 FSMA. The loss and damage suffered by the Asset SPVs was said to be some £63.5m. Schedule 3 to the pleading gives a breakdown of this figure from which it can be seen that it is calculated by taking the total investor funds raised of some £68.2m, and deducting returns paid to investors totalling some £4.7m, leaving a net figure of some £63.5m. This is not all claimed however as it is accepted that some of the investments (totalling some £14.8m) were made more than 6 years before the issue of the claim and such losses are not pursued. Deducting those gives a figure of some £48.7m described in schedule 3A.3 as “Estimated investor losses in relation to investments which exchanged on dates less than 6 years prior to issue of the claim.”

In addition a sum of some £19.7m was claimed in respect of the balance outstanding in respect of secured loans taken out by the Claimant companies, and there were pleaded claims to certain other losses (such as loss of opportunity to make a profit, and the costs of interim management, administration and liquidation).

The Claim Form was issued in April 2022 and served in August 2022. Due to limitation concerns the claim was issued without complying with the pre-action protocol, and against nine defendants in all. The first six were various Lupton Fawcett entities, but it is now accepted that the only relevant one is the 2^nd Defendant (that is, the Respondent Lupton Fawcett), and the claims against the other Lupton Fawcett entities have been discontinued. The other defendants were two Metis Law entities (Metis Law being another firm of solicitors which advised the Claimants, and against whom the claim is continuing); and a 9^th defendant, the claim against whom was struck out at an early stage.

For reasons it is not necessary to go into, the proceedings progressed very slowly and Lupton Fawcett has not yet been required to serve a defence. Instead by application notice dated 21 September 2023, the Lupton Fawcett defendants applied to strike out the claim against them pursuant to CPR r 3.4(2) or for summary judgment against the Claimants on such claims pursuant to CPR r 24.2.

The application, together with an application by the Claimants to amend their Particulars of Claim in the form of APOC 5, eventually came before the Judge in February 2024 and was heard over 3 days. He handed down the Judgment on 23 April 2024.

The Judge accepted that the claims should be struck out and/or dismissed summarily on the basis that the claims brought by the Claimants failed to establish that they had suffered any loss as a result of Lupton Fawcett’s alleged negligent advice (Judgment at [100]). In essence he accepted Lupton Fawcett’s arguments. These were that the Claimants’ case was that, properly advised as to the CIS status of the Schemes, the SPVs would not have promoted the same, would not have received investor monies and would therefore not have incurred s. 26 FSMA liabilities to investors in the form of obligations to return their payments to them. It was this that formed the primary head of damage claimed. But no loss was generated at that point as the SPV had obtained an asset of equal value to the liability it had incurred and had to give credit for it. This was referred to in argument as the “£ in £ out” argument, that is that a person who receives an investment of £100,000 and at the same time is liable to repay £100,000 to the investor is no worse off. A similar argument applied to monies received by way of secured loans. In reaching this conclusion the Judge relied in particular on two decisions of this Court, Saddington v Colleys Professional Services (a Firm) [1999] Lloyds’ Rep PN 140 (“Saddington”), and Stanford International Bank Ltd (in liquidation) v HSBC [2021] EWCA Civ 535, [2021] 1 WLR 3507 (“Stanford”).

The Judge also accepted that the losses alleged to be suffered by the Claimants were not attributable to Lupton Fawcett’s alleged negligence. A distinction had to be made between the receipt of the monies and the use to which they were put: it was the use to which the monies were put which was the cause of the losses, not the receipt of the investment or loan monies themselves (Judgment at [102]).

The same conclusion was reached if one looked at the scope of duty in accordance with the majority decision in Manchester Building Society v Grant Thornton LLP [2021] UKSC 20, [2022] AC 783 (“Manchester”). Lupton Fawcett’s duty of care concerned the impact of FSMA if the Schemes were CISs. The only harm for which there was a sufficient nexus to the duty of care was the requirement to make restitution to the investors or repayment to the lenders. That requirement, as already explained, was set off in full by the amounts received in investment monies (or loan monies). Accordingly no loss was attributable to the duty of care alleged to have been breached (Judgment at [114]).

The Judge then dealt with other matters, including two other suggested grounds for dismissing the claim, namely (i) that it would have made no difference in fact if Lupton Fawcett had advised the Schemes were CISs, as Mr Woodhouse would have carried on anyway, and (ii) an argument based on the ex turpi causa principle; a question on limitation; and the proposed amendments as against both Lupton Fawcett and the Metis defendants. None of these points has been raised on appeal and it is not necessary to refer in any detail to what he decided.

His conclusion therefore was that the claims against Lupton Fawcett were dismissed (Judgment at [145]). Effect was given to that by his Order dated 4 June 2024 whereby the Claimants’ claims against Lupton Fawcett were struck out and summary judgment was entered against them on those claims.

The Claimants applied for permission to appeal. Sheldon J held that by the time the application was made he no longer had jurisdiction to consider the application and it was therefore pursued in this Court. By Order dated 30 December 2024 Bean LJ adjourned the application to an oral hearing, commenting that the Claimants should focus on the issue whether Saddington and Stanford were genuinely distinguishable. The oral hearing was heard by Dingemans LJ on 29 January 2025. He granted permission to appeal.

There are three Grounds of Appeal. As pleaded they can be summarised as follows:

In fact as argued before us, the Grounds have been modified and simplified somewhat. I explain the way they were argued below but in very brief outline Ground 1 is concerned with the impact of commissions and legal and professional fees payable on completion of an investment; Ground 2 with the scope of Lupton Fawcett’s duty; and Ground 3 with compensation payable under s. 26(2)(b) FSMA.

When granting permission to appeal, Dingemans LJ accepted for the purposes of Grounds 1 and 2 that there was an arguable case that an investment of say £100,000 was not in fact balance sheet neutral, as a 12.5% commission would immediately become due to the sales agent. He did however comment that the commission point was not at all clearly pleaded. He also granted permission on Ground 3 but said that there was very considerable force in what the Judge had said about compensation claims not being pleaded or evidenced before him.

No doubt prompted by these remarks, the Claimants applied by application notice dated 26 March 2025 for permission to rely on a further draft of the Amended Particulars of Claim, namely APOC 6, and further evidence set out in a witness statement of Mr Armstrong, one of the joint liquidators.

By Order dated 6 May 2025 Dingemans LJ directed that this application be adjourned to be determined by the Court at the hearing of the appeal.

We heard this application at the outset of the appeal and, as already indicated, refused permission. I now give my reasons for agreeing to this course.

APOC 6 contains a number of further amendments over and above those proposed in APOC 5. Some of these are irrelevant for present purposes such as amendments updating the narrative, or deletions, or amendments to the claim against the Metis Law defendants. The significant ones are those that concern the Claimants’ case on loss. They can be summarised as follows:

The further evidence set out in Mr Armstrong’s witness statement primarily concerns the question of compensation under s. 26(2)(b). Mr Armstrong explains that in a liquidation investigations are conducted to determine the creditor position of each company, with creditors being invited to prove for their debt by completing a proof of debt form. But creditors’ claims are generally adjudicated only when there is a dividend distribution to be made, and that point has not been reached in the liquidation of the Claimant companies, so no final date has yet been set for proofs of debt to be returned. Nevertheless a number of claims have been received either by way of proof of debt forms or by way of completed investor questionnaires which were sent to investors requesting details of their investment. Mr Armstrong exhibits some examples. He also lists the amount of sales agents’ commission and legal fees and disbursements for each of the relevant Schemes (amounting in total to some £7.4m by way of commission and some £780,000 by way of fees and disbursements).

The legal principles applicable to an application like this were considered by this Court in Aylwen v Taylor Johnson Garrett [2001] EWCA Civ 1171 (“Aylwen”). That was a very similar case in that the claimant was seeking damages against a firm of solicitors for alleged professional negligence; the judge (Lloyd J) had granted summary judgment against her under CPR r 24 on the basis that even if she established negligence the loss she claimed was not in law attributable to the defendants’ negligence and hence the case could not succeed; the claimant appealed to this Court; and on appeal she sought both to amend her pleading and to adduce further evidence. The Court refused both applications for reasons given by Arden LJ (with whom Kay and Peter Gibson LJJ agreed).

Arden LJ first addressed the question of adducing further evidence on appeal. She referred at [40] to the pre-CPR position under which the rules required “special grounds” to be shown before the Court of Appeal would permit new evidence, the relevant principles being set out in the well-known case of Ladd v Marshall [1954] 1 WLR 1489 at 1491. These were that three conditions had to be met: (i) that the evidence could not have been obtained with reasonable diligence for the trial; (ii) that it would have had an important, even if not decisive, influence on the result of the case; and (iii) that it must be apparently credible. At [41] she referred to the post-CPR decision of Hertfordshire Investments Ltd v Bubb [2000] 1 WLR 2318 in which the Court said that although the CPR no longer required special grounds to be shown the principles in Ladd v Marshall remained relevant to the exercise of the Court’s discretion. This has subsequently been confirmed, if not taken further, by this Court in Terluk v Berezovsky [2011] EWCA Civ 1534 at [32] where Laws LJ said that the Ladd v Marshall criteria were:

“no longer primary rules, constitutive of the court’s power to admit fresh evidence; the primary rule is given by the discretion expressed in CPR 52.11(2)(b) [now 52.21(2)(b)] coupled with the duty to exercise it in accordance with the overriding objective. However the old criteria effectively occupy the whole field of relevant considerations to which the court must have regard in deciding whether in any given case the discretion should be exercised to admit the proffered evidence.”

Reverting to Arden LJ’s judgment in Aylwen, at [47] she considered a submission on behalf of the claimant that the Ladd v Marshall criteria did not apply to an appeal against an order for summary judgment. She rejected that submission. In Langdale v Danby [1982] 1 WLR 1123 the House of Lords had held that the Ladd v Marshall criteria should have been applied on an appeal against an order for summary judgment under RSC Ord 86, albeit with some modification, as explained by Lord Bridge at 1133D-F as follows:

“In the situation arising on an appeal to the Court of Appeal from a summary judgment, the application of these conditions and perhaps the conditions themselves will require some modification. It may well be that the standard of diligence required of a defendant preparing his case in opposition to a summons for summary judgment, especially if under pressure of time, will not be so high as that required in preparing for trial. The second and third conditions will no doubt be satisfied if the further evidence tendered is sufficient, according to the ordinary principles applied on applications for summary judgment, to raise a triable issue. But I can see no injustice at all in requiring a defendant to use such diligence as is reasonable in the circumstances to put before the judge on the hearing of the summons, albeit in summary form, all the evidence he relies on in defence, whereas it would be a great injustice to the plaintiff to allow the defendant to introduce for the first time on appeal evidence which was readily available at the hearing of the summons but was not produced.”

Having cited this passage, Arden LJ continued at [49]:

“In the light of this decision, the practice of the Court of Appeal as recorded in the annual practice is to decline to admit fresh evidence even on an appeal against summary judgment unless the special grounds in Ladd v Marshall apply. It seems to me that a similar approach should apply to the reception of fresh evidence on applications under CPR 3.4 and 24.1 as now apply to other appeals (see Hertfordshire Investment v Bubb), respecting of course the type of difference in application of the principles to which Lord Bridge referred in Langdale v Danby. Moreover, I would accept that the same should apply to amendments to statements of case adduced for the first time in the Court of Appeal to avert the unfavourable outcome of an application to dismiss a claim under CPR 3.4 or CPR 24.2.”

As can be seen, in this passage Arden LJ not only confirms that the (modified) Ladd v Marshall criteria apply to an application to adduce fresh evidence on an appeal such as this, but also that the same applies to an application to amend a statement of case. Although we were provided with a number of other well-known authorities on the principles applicable to late amendments, none of these specifically addressed the question of an amendment put forward on appeal to avert the unfavourable outcome of an application to dismiss a claim, and on this specific point we were not shown anything which adds to or qualifies what was said in Aylwen. What Arden LJ says at [49] is I think clearly part of the ratio of the decision and binding on us, as Mr Paul O’Doherty, who argued this part of the appeal for the Claimants, effectively accepted.

Viewed against these criteria however it seems to me that the application must be refused. Taking first the proposed amendments to the pleading on loss in the Particulars of Claim, none of them meets the first requirement that the material could not have been obtained with reasonable diligence for the hearing before the Judge. None of them arises out of material that has recently come to light, or recent developments in the case. The factual basis for the amendments was always available to the Claimants. All that has happened is that having seen the reasons why they lost in front of the Judge, the Claimants wish to improve their case on appeal by deploying (or, as they would have it, clarifying and expanding on) arguments that were always available to them.

Nor is this a case where the Claimants were under any time pressure in responding to Lupton Fawcett’s application to strike out such that the modified standard of diligence referred to by Lord Bridge might assist them. In fact the Claimants had an unusually long period to think about how to answer the points relied on by Lupton Fawcett. As long ago as 21 February 2023 Lupton Fawcett’s solicitors, RPC, wrote to the Claimants’ solicitors indicating that the claim appeared to be amenable to a strike out or summary dismissal and articulating the £ in £ out argument that was later successfully relied on before the Judge. After further correspondence, Lupton Fawcett’s application was issued on 21 September 2023, supported by a witness statement from Mr Graham Reid (an employed barrister representing Lupton Fawcett) which among other points raised the same argument again. As already referred to, the application did not ultimately come on for hearing until 7 February 2024, nearly a year after the £ in £ out argument had first been put forward in correspondence. In the intervening period the Claimants had formulated a number of iterations of draft Amended Particulars of Claim, culminating in APOC 5. Some of these were dealing with quite minor matters, but I do not think that affects the fact that the Claimants had ample time to consider how best to answer the £ in £ out argument, and ample opportunity to put forward draft amendments to their Particulars of Claim to remedy any shortcomings in them. Even adopting a lower standard of diligence than that required for a trial, the Claimants could have identified the points they now wish to plead in good time for the hearing before the Judge. In those circumstances I consider that we are constrained by Aylwen to refuse the Claimants permission to make the amendments to their statement of case, which are, as Arden LJ refers to, “adduced for the first time in the Court of Appeal to avert the unfavourable outcome of an application to dismiss a claim under CPR 3.4 or CPR 24.2.”

Mr O’Doherty said that the amendments were not really new; they were just an expansion and clarification of the case that was already pleaded. I do not think that is a fair characterisation of all, or indeed the majority, of them, but I do not think it is necessary to consider this in any detail. It seems to me the Claimants cannot have it both ways. Either the proposed amendments add something of substance to their case as set out in APOC 5, or they do not. If they do, it is unfair to Lupton Fawcett to face a new case on appeal unless the Claimants can bring themselves within the (modified) criteria already referred to. But if the proposed amendments do not add anything of substance to APOC 5, then the Claimants will be able to make their arguments on APOC 5 and do not need the extra that is now sought to be pleaded.

So far as the evidence of Mr Armstrong is concerned, much the same applies. His evidence as to how a liquidation is conducted was undoubtedly something that could have been ascertained with reasonable diligence and deployed before the Judge if the Claimants had thought it relevant to do so; as could the sample investor questionnaires, most of which appear to date from 2019.

Those were the reasons why I joined in the decision to dismiss the Claimants’ application to amend in the form of APOC 6 and to adduce the further evidence given by Mr Armstrong. In short, the lesson to be drawn from Aylwen is that it is incumbent on a person who is facing an application to strike out their statement of case, or an application for summary judgment, to give careful consideration to how they are going to answer the application, whether by way of pleading or evidence, before the application is heard by the judge hearing it, and not after it has been decided against them.

Before coming to the specific Grounds of Appeal, it may be helpful to give an overview of the substantive appeal.

Reduced to its essentials the Claimants’ case as pleaded in APOC 5 can I think be adequately summarised as follows:

As to the other losses pleaded, the claim for the loss of the opportunity to make a profit was abandoned during the hearing before Sheldon J, and the others (the Claimants’ liabilities on loans taken out, and the costs of interim management, administration and liquidation) can be ignored for present purposes, as Mr Pickering confirmed that we are only concerned on this appeal with the s. 26 liabilities.

The headline quantum for this claim is the £68m odd which the investors invested and which they can claim back under s. 26(2)(a) FSMA. As explained above, it is in fact accepted in APOC 5 that this overstates the claim in two respects, namely (i) that the £68m falls to be reduced to some £63m once account is taken of “investor returns”, that is sums paid to investors during the life of the schemes (largely, if not wholly, by way of coupon); and (ii) that this figure is further reduced to some £49m once investments completed more than 6 years before issue of the claim form are excluded. But for the purposes of the analysis which follows, I propose to put these two deductions on one side and will assume that the claim is for the full £68m.

Lupton Fawcett’s answer to this claim is a very simple one. I think it can be summarised as follows. It is true that if the Schemes had not proceeded, the Claimant companies would not have been exposed to £68m by way of potential s. 26 liabilities. But equally they would not have received the £68m which they did receive. Once one includes those in the comparison, it can be seen that the Claimants are no worse off as a result of being exposed to the potential s. 26 liabilities. There is therefore no loss. This is the £ in £ out argument.

Mr Pickering as I understood it did not dispute that one has to take into account the £68m received from investors. In any event it seems to me obvious that one has to do so. In assessing damages for the (alleged) legal wrong done to the Claimants one has to compare the position they are in fact in with the position they would have been in had the wrong not taken place. That means comparing (i) the scenario in which the Schemes proceeded, the Claimants received £68m and are exposed to a potential liability to repay the £68m (the actual position); and (ii) the position in which the Schemes did not proceed, the Claimants received nothing in and had no liability under s. 26 FSMA (the position that the Claimants say they would have been in had Lupton Fawcett advised that the Schemes were CISs). It therefore seems self-evident that when comparing the two one has to take into account the fact that although the Claimants are now said to be exposed to a liability to pay £68m which they would not have been, they have also had £68m in which they would not have received; and (subject to the further arguments advanced by the Claimants on this appeal) that means that the Claimants are no worse off in this respect.

I do not think one really needs authority to support this analysis, but if authority is needed it can be found in Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360 (“Galoo”). Here two companies claimed damages for negligence against a firm of accountants who audited their accounts. One of the heads of claim was loss allegedly incurred by them as a result of accepting loans totalling over £30m which it was said they would not have accepted had the defendant not been negligent. This claim was rejected by the deputy judge, who said:

“I do not accept that accepting loans involving an obligation simpliciter to repay them can be described as damage. At the moment of accepting the loan, the company which accepts the loan has available that amount of money and the obligation to repay that amount of money, and I simply fail to see how that can amount to damage.”

On appeal Glidewell LJ said he entirely agreed with the deputy judge on this issue and that, like him, he did not understand how the acceptance of a loan could, of itself, be described as a loss causing damage: see at 1369C-E. This was followed in Saddington where a claim was brought against a valuer for allegedly overvaluing a property with the result, again, that a loan was made which would not otherwise have been: see at 142 col 2 per Balcombe LJ. There is no relevant distinction between the case of a borrower accepting a loan (and thereby incurring an obligation to repay the money it has received from the lender) and the case of the Claimant companies here accepting an investment (and thereby incurring a potential obligation under s. 26 FSMA to repay the monies they have received from the investors). In each case there is no loss because the liability incurred is matched £ for £ by the monies received.

The three Grounds of Appeal advanced on this appeal each attempt to answer the £ in £ out argument, but in different ways. Ground 3 is perhaps the simplest. This is that the liability incurred by the Claimants under s. 26 FSMA is not just to repay the investors the amounts received under s. 26(2)(a) but in addition to pay them compensation under s. 26(2)(b): see the text of s. 26 as set out in paragraph 10 above. This means that it is not a simple case of £68m in and £68m out, but of £68m in and £68m+ out. The liability to pay compensation on top of repayment of the monies received is therefore, it is said, a loss which can be claimed from Lupton Fawcett.

Ground 1 also seeks to challenge the £ in £ out analysis, this time by relying on the fact that when an investment was successfully completed, the Claimant companies paid commissions to sales agents and legal and professional fees. So if for example an investor paid £100,000 to one of the Claimant companies, the Claimant company might incur a liability to pay commission of 12.5% (£12,500) to the sales agent, and to pay fees of perhaps 10% of that figure (say £1,250). In other words, the Claimant company would not end up with £100,000 but a net amount of say £86,250. So if one looks at the position of the Claimant companies at the time each investment completed, it would not be a case of £68m in £68m out, but of a rather lesser figure (under £60m) in and £68m out. It follows, so it is said, that Lupton Fawcett is in effect liable for the difference, representing the amount of commissions and fees.

Ground 2 is not quite so easy to follow, and I find it difficult to summarise. As pleaded in the Grounds of Appeal it is concerned with the scope of Lupton Fawcett’s duty. As articulated in the Claimants’ skeleton it seems to have become a rather different argument, premised on the assertion that the Schemes were always intended to make a profit but only in the medium to long term; on investment, further expenditure was necessarily required, including the acquisition of long-term illiquid assets and other upfront costs which at the time of investment did not result in a £ for £ return. So while the Schemes forecast profits and gains to be made after a period of several years, for the first few years the value of each Scheme and its assets would inevitably be less than the value of the sums received and invested. It is said that it follows that the loss suffered by each Claimant was not only the expenditure on commissions and fees but the balance of any expenditure; and that Lupton Fawcett, which had advised on the terms of the relevant schemes knew that monies would have to be incurred in this way. In oral argument, Mr Pickering accepted that the Claimants would give credit for sums misappropriated by Mr Woodhouse and that possibly there could be further deductions for the Ponzi scheme, although he suspected that that wouldn’t be a very large sum; but it would seem that otherwise the claim would be to the entirety of the £68m, all of which had been lost.

In these circumstances I think the easiest place to start the analysis is with the scope of Lupton Fawcett’s duty. Although this is invoked by the Claimants in particular in connection with Ground 2, it does I think impact on all three Grounds of Appeal for the reasons that I give below.

It is a principle of the law of negligence that a defendant found to be in breach of a duty of care is not liable for all the losses which the claimant has sustained as a result of acting on their advice, but only for those within the scope of their duty. This principle was firmly established by the House of Lords in South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 (“SAAMCO”), where Lord Hoffmann gave his celebrated example of the mountaineer’s knee. But as Lord Sumption JSC explained in Hughes-Holland v BPE Solicitors [2017] UKSC 21, [2018] AC 599 (“Hughes-Holland”) at [21], this was by no means a new idea, although it took some time for its significance to be fully appreciated. Lord Sumption gives some of the history, including the statement by Lord Bridge in Caparo Industries plc v Dickman [1990] 2 AC 605 at 627C-D that:

“It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless.”

The most recent authoritative examination of the principle is found in the Supreme Court decision in Manchester (to be read with the decision of the same constitution in Meadows v Khan [2021] UKSC 21, [2022] AC 852). The majority judgment was given by Lord Hodge DPSC and Lord Sales JSC (with whom Lord Reed PSC, Lord Kitchin JSC and Lady Black agreed). At [6] they set out a structured framework for the resolution of claims for damages for negligence as follows:

“When a claimant seeks damages from a defendant in the tort of negligence, a series of questions arise:

(1)

Is the harm (loss, injury and damage) which is the subject matter of the claim actionable in negligence? (the actionability question)

(2)

What are the risks of harm to the claimant against which the law imposes on the defendant a duty to take care? (the scope of duty question)

(3)

Did the defendant breach his or her duty by his or her act or omission? (the breach question)

(4)

Is the loss for which the claimant seeks damages the consequence of the defendant’s act or omission? (the factual causation question)

(5)

Is there a sufficient nexus between a particular element of the harm for which the claimant seeks damages and the subject matter of the defendant’s duty of care as analysed at stage 2 above? (the duty nexus question)

(6)

Is a particular element of the harm for which the claimant seeks damages irrecoverable because it is too remote, or because there is a different effective cause (including novus actus interveniens) in relation to it or because the claimant has mitigated his or her loss or has failed to avoid loss which he or she could reasonably have been expected to avoid? (the legal responsibility question).”

As can be seen the relevant questions for the scope of duty principle are (2) and (5).

In the present case there seems to me no difficulty over question (2). The Judge answered it as follows (Judgment at [114]):

“the duty of care imposed on [Lupton Fawcett] concerned the impact of FSMA if the schemes about which [Lupton Fawcett] was advising and seeking advice from counsel about, were CIS.”

That seems to me plainly right. The question Lupton Fawcett was asked to advise on was whether the Schemes were CISs. So the duty of care which it undertook was a duty in respect of that question, not in respect of any wider questions such as the viability of the Schemes, or the risk of fraud, or misappropriation by Mr Woodhouse, or the commercial wisdom of any particular expenditure. The “risks of harm to the claimant against which the law imposes on the defendant a duty of care” must be similarly limited to the impact on the Claimants of the Schemes being CISs.

As I understood it Mr Pickering ultimately accepted this. He did point to a recurrent refrain in the pleading that Lupton Fawcett was under a duty to advise on the “legal, regulatory and commercial implications arising from the issue of whether or not the Schemes were CISs” and at times in his oral argument appeared to suggest that the “commercial implications” extended to the fact that the Schemes were not going to show any profits in the early years. But this seems to me unsustainable. The risk – or even certainty – that the Schemes would not be profitable for a number of years had nothing to do with whether they were CISs or not.

I think it self-evident that the Judge was right that the implications of the Schemes being CISs were limited to the fact that the Claimants were exposed to various risks under FSMA. In principle that could include a number of different risks. The FCA for example might have stepped in and sought to close the Schemes down and there might have been various regulatory, civil or even criminal consequences. The FCA might perhaps have required the Claimants to establish a redress scheme for investors. Any investor might, even without the involvement of the FCA, have sought repayment of their money under s. 26 FSMA on the ground that the Scheme in question was an unauthorised CIS, and had they done so, this might have brought about the collapse of the Schemes, pushing the Claimants into insolvency. But it is not suggested that any of this in fact happened. The FCA is not said to have taken any regulatory action against the Claimants before the Schemes collapsed. No investor is said to have asked for their money back on the grounds that the Scheme they invested in was a CIS. Certain investors did bring claims which ultimately brought about the collapse of the Schemes, but the claims they brought were based on the non-payment of investment returns (their coupons). The only pleaded consequence of the Schemes being CISs is that the Claimants are exposed to liabilities under s. 26 FSMA. And Mr Pickering confirmed in terms in the course of his submissions to us that he had accepted before the Judge that “the commercial implications” simply meant the impact of s. 26 FSMA.

Having thus answered question (2) from the structured framework in Manchester, it is now possible to answer question (5), namely whether there is a sufficient nexus between a particular element of the harm for which the claimant seeks damages and the subject matter of the defendant’s duty of care as analysed under question (2). Again this does not seem to me to be difficult to answer.

Taking the three grounds in turn, the loss claimed in Ground 3 (compensation payable under s. 26) in principle satisfies the nexus requirement. If this is otherwise a good claim (as to which see below), there is a sufficient nexus between the liability of the Claimants to pay such compensation and the subject matter of Lupton Fawcett’s duty of care. The risk of being exposed to claims under s. 26 FSMA is undoubtedly a risk of harm which Lupton Fawcett’s duty of care was intended to guard against, and hence within the scope of the duty of care.

But the position seems to me different with Ground 1 (commissions and fees). The payment of commission to sales agents, and of legal and professional fees, has nothing to do with whether the Schemes are CISs or not. The fact that the Claimants might make these payments – or even would, to the knowledge of Lupton Fawcett, certainly do so if the Schemes went ahead and investments were made – does not mean that the costs to the Claimants of doing so were within the risks of harm for which Lupton Fawcett was responsible. They were quite unconnected with the consequences under FSMA of the Schemes being CISs.

That can be tested by asking Lord Hoffmann’s mountaineer’s knee question. This “legal parable” (as Lord Sumption calls it in Hughes-Holland at [1]) is very well known. It is set out by Lord Hoffmann in SAAMCO at 213D-F as follows:

“A mountaineer about to undertake a difficult climb is concerned about the fitness of his knee. He goes to a doctor who negligently makes a superficial examination and pronounces the knee fit. The climber goes on the expedition, which he would not have undertaken if the doctor had told him the true state of his knee. He suffers an injury which is an entirely foreseeable consequence of mountaineering but has nothing to do with his knee.

On the Court of Appeal’s principle, the doctor is responsible for the injury suffered by the mountaineer because it is damage which would not have occurred if he had been given correct information about his knee. He would not have gone on the expedition and would have suffered no injury. On what I have suggested is the more usual principle, the doctor is not liable. The injury has not been caused by the doctor’s bad advice because it would have occurred even if the advice had been correct.”

This therefore entails a counterfactual analysis: would the loss in question still have been sustained even if the advice given had been correct (not in the sense that the doctor correctly told the mountaineer his knee was unfit, but in the sense that the knee had actually been fit as the doctor advised)?

In Manchester the majority considered the use of such counterfactual analysis at [23]. They concluded that the counterfactual test might be regarded as a useful cross-check in most cases, but that it should not be regarded as replacing the decision that needs to be made as to the scope of the duty of care (that is question (2) in the structured framework). At [26] they also adverted to the danger of manipulation of the parameters of the counterfactual world. But in the present case the counterfactual world is very simple to construct, and I do not think there is any real danger of the analysis being distorted by manipulation of parameters. The counterfactual world is simply one in which the Schemes were not CISs (in other words, Lupton Fawcett’s advice was correct), and the Schemes otherwise went ahead in exactly the same way.

Nor is it difficult to identify what losses would have been sustained by the Claimants in this counterfactual world. They would have been almost exactly the same. The Schemes would still have been a Ponzi fraud, and would still have collapsed at the same time and in the same way, the collapse of the Schemes having nothing to do with them being CISs. The Claimants would still have lost all the money invested, and the investors would still have been left with nothing except the returns they had already had, and the right to prove in insolvent liquidations. The only difference in the counterfactual world is that the investors would not have the option of claiming their money back under s. 26 FSMA. But that does not mean that they would not have had claims. I consider below what those claims would have been, but the significant point for present purposes is that whatever the nature and quantum of the investors’ claims, the Claimants would still have paid exactly the same commissions to sales agents, and exactly the same legal and professional fees, as they did in the actual world. The expenditure of those monies is not something which turned on whether the Schemes were CISs or not.

I think it inevitably follows from a correct application of the principles in Manchester that the loss which flowed from that expenditure is not something for which Lupton Fawcett was responsible. The fact that, because of money spent on commissions and fees, the Claimants only had a net sum of some £86,000 or so of every £100,000 invested to spend on other things is not a consequence of Lupton Fawcett’s advice that the Schemes were not CISs (save in the “but for” sense that the Schemes would not have gone ahead at all, which is a necessary but not sufficient prerequisite of liability); and the loss that flows from this is not a loss that falls within the risks of harm which Lupton Fawcett’s duty of care was intended to guard against.

I would therefore dismiss Ground 1 of the Grounds of Appeal. It is not therefore necessary to consider the question debated before us as to whether this head of loss is adequately pleaded in APOC 5 or not. I rather doubt that it is, but it is neither necessary nor profitable to lengthen this judgment with a detailed examination of the question.

For similar reasons, I would also dismiss Ground 2. I am very doubtful that this is open to the Claimants, as Mr Saoul says that it was not run before the Judge, and was first sought to be pleaded in APOC 6, for which we have refused permission, and I agree that it is difficult to see it pleaded anywhere in APOC 5. Ground 2 also seems to assume that the Schemes were ultimately intended to be profitable, which seems flatly inconsistent with the Claimants’ position that the Schemes were not, taken together, a genuine investment opportunity but a dishonest Ponzi scheme that would never have made a profit.

But I will assume that the point is available to the Claimants. Insofar as I have understood it at all, it seeks to lay at Lupton Fawcett’s door all the consequences of the way the Schemes were operated, and the entire loss of the sums contributed by investors save for sums misappropriated by Mr Woodhouse and possibly an unspecified (but not very large) amount for the operation of the Ponzi scheme. But none of these losses were attributable to the Schemes being CISs. In the counterfactual world in which the Schemes were not CISs, the Schemes would have been operated in exactly the same way, the sums contributed by investors would have been lost in exactly the same way, and the Claimants would have been in exactly the same position (save for not being exposed to potential claims under s. 26 FSMA). So the loss of the investors’ money, and the fact that when the Schemes collapsed the Claimants no longer had the £68m to repay the investors, was not something for which Lupton Fawcett bears any responsibility. These losses have nothing to do with whether the Schemes were CISs or not, and, as with the commissions and fees, are not within the risks of harm which Lupton Fawcett’s duty of care was intended to guard against.

My conclusion on the scope of duty question therefore is that neither of the matters relied on under Grounds 1 and 2 to defeat the £ in £ out argument falls within the scope of Lupton Fawcett’s duty. That leaves Ground 3 and the question of compensation under s. 26(2)(b) FSMA as the Claimants’ only possible escape from the logic of the £ in £ out argument.

The Judge dealt with this as follows (Judgment at [65]):

“In the course of oral argument, Mr Pickering KC also referred to the possibility that the investors would seek compensation from the Claimants, and not merely a return on their investments. It is possible that investors could seek such compensation under the terms of their contractual arrangements with the SPVs, or under FSMA itself. However, I was shown no evidence that any investors had sought compensation, and this was not a matter which was pleaded, in spite of five attempts by the Claimants to plead their case. It was not an argument, therefore, that I was prepared to take into account when considering the applications before me. ”

Mr Saoul had a number of answers to Ground 3, of which the first is that the Judge was correct to say that the claim to compensation is not pleaded in APOC 5. I think he is right about that. The relevant paragraphs of APOC 5 are as follows.

Paragraphs 55ff plead that the Schemes were CISs. Paragraphs 59 to 61 plead that the establishment, operation and promotion of the Schemes contravened the general prohibition in s. 19 FSMA. Paragraph 62 then pleads:

“Further, as a result of the above contravention of the general prohibition, by operation of section 26 of FSMA:-

(1)

the agreements entered into by the Asset SPVs and the Investors pursuant to operation of the Schemes, i.e. the Scheme Documentation, became unenforceable, and

(2)

the Investors became entitled to recover their Investments from the assets of the Asset SPV into which they had invested and/or the collective assets of all of the Claimants.”

Paragraph 66 pleads:

“The Claimants seek declarations that the Schemes were CISs, were operated in breach of the section 19 of FSMA general prohibition and that the Claimants are liable to the Investor creditors by operation of section 26 of FSMA. Further, to the extent necessary, the Claimants will seek indemnities from the Defendants for such losses that arise by operation of section 26 of FSMA.”

Paragraph 172 pleads loss and damage. So far as relevant it includes the following:

“…the SPVs have suffered loss and damage as follows:

…

(4)

both the Asset SPVs and the Managing SPVs became liable for significant civil section 26 FSMA liabilities.”

Paragraph 173 then pleads the loss and damage suffered by each of the Asset SPVs for the 22 Schemes (in precise amounts). These total some £63.5m, and paragraph 174 directs the reader to Schedule 3 for particulars of these losses. Schedule 3, as already referred to, lists for each Scheme the investor funds raised (totalling some £68.2m) and the investor returns paid (of some £4.7m), the difference between the two being the estimated investor loss (the £63.5m).

Paragraph 177 then pleads:

“Further and in the alternative, the Claimants seek declarations that the Schemes were CISs, were operated in breach of the section 19 of FSMA general prohibition and that the Claimants are liable to the Investor creditors by operation of section 26 of FSMA. Further, to the extent necessary, the Claimants will seek indemnities from [Lupton Fawcett] for such losses that arise by operation of section 26 of FSMA.”

In the prayer for relief the Claimants claim damages and:

“(3)

Declarations that the Claimants have become liable to the Investor creditors as a result of the operation of section 26 of FSMA;

(4)

Indemnities in respect of losses arising from the declarations that the Claimants have become liable to the Investor creditors as a result of the operation of section 26 of FSMA.”

Mr Pickering relied on the claim for indemnities pleaded in paragraph 177 and the prayer for relief, and said that this was wide enough to include a claim for indemnity against liability for compensation under s. 26(2)(b) FSMA. If these words were taken in isolation, that would no doubt be a tenable view. But a pleading, like any other formal legal document, must be read as a whole, and having regard to its purpose. The purpose of Particulars of Claim is to articulate the claims that the claimant is making and thereby give fair warning to the defendant of what claims he is facing and why.

Here if one asks what the pleader means by the “result of the operation of section 26 of FSMA” referred to in the prayer, the answer is to be found by reading the rest of the pleading. Paragraph 177 is evidently intended to repeat paragraph 66 which pleads that, to the extent necessary, the Claimants will seek indemnities for “such losses that arise by operation of section 26 of FSMA”; and this follows shortly after paragraph 62 which pleads “the operation of section 26 of FSMA”, namely (1) that the agreements entered into by the Asset SPVs and investors became unenforceable and/or (2) that “the Investors became entitled to recover their Investments”. “Investments” is defined in paragraph 28 as the investments made in the Schemes. There is no reference in the Particulars of Claim, as Mr Pickering accepted, to compensation under s. 26(2)(b) FSMA at all.

In these circumstances I consider that the “operation of section 26 of FSMA” referred to in paragraphs 66 and 177 and the prayer is the “operation of section 26 of FSMA” pleaded in paragraph 62 and hence extends to the repayment of the investors’ investments (under s. 26(2)(a)) but not to the payment of compensation (under s. 26(2)(b)), which is nowhere referred to or even hinted at.

Mr Pickering said that the sums claimable under s. 26(2)(a) are pleaded to the last penny in paragraph 173, so the addition of paragraph 177 must have been intended to add to that and refer to something else. But I do not think that is necessarily so. Paragraph 177 is pleaded “Further andin the alternative” and the indemnity is claimed “to the extent necessary”. That suggests that the claim to an indemnity was not intended to bring in extra sums by way of compensation under s. 26(2)(b), as if it had been, one would expect paragraph 62 to expressly refer to them, and paragraph 177 to claim an indemnity in any event. Paragraph 177 reads instead like a fall-back position. What the pleader actually had in mind is not entirely obvious but I suspect that it might have been the thought that the claim might get to trial before the investors had been required to prove in the liquidations (not least because unless and until the action were successful there might not be any funds to distribute or need for investors to prove). Since there was no guarantee that all – or indeed any – of the investors would in fact claim repayment under s. 26 FSMA, the defendants might well object that they should not have damages assessed against them in the precise sums pleaded in paragraph 173 before it had been established that such sums had been or would be claimed. The technique of claiming a declaration and indemnity in circumstances where future losses cannot be securely identified at trial is, even if generally discouraged, a recognised one (see the discussion in McGregor on Damages (22^nd edn, 2024) at §11-033), and this might explain why the pleader referred to claiming such an indemnity in the alternative and to the extent necessary.

But whether this is so or not, I remain of the view that APOC 5 gave no fair warning to Lupton Fawcett that the Claimants would not only claim in respect of repayment of their investments to investors under s. 26(2)(a) but also in respect of payment of compensation to them under s. 26(2)(b). I can take comfort in the fact that if this had really been what paragraph 177 was intended to do, one might have expected the Claimants to have referred to the point at some time in the year or so since RPC first put forward the £ in £ out argument, and to have flagged it up in their skeleton arguments before the Judge; it appears however that it was only in oral submissions on Day 3 of the hearing that Mr Pickering clearly articulated the point. That does tend to suggest that it was not what the pleader had in mind.

In circumstances where we have already decided that permission to amend in the form of APOC 6 should be refused, that is enough to mean that Ground 3 also falls to be dismissed. But I would not wish it to be thought that an otherwise meritorious argument has been defeated by a technical pleading point. I do not consider that there would have been any merit in the point in any event.

The reason goes back to the counterfactual analysis. In order to see whether the exposure of the Claimants to the potential liability to pay compensation under s. 26(2)(b) FSMA has caused the Claimants any recoverable loss, it is helpful to compare the position they are in with the position they would have been in had the Schemes not been CISs. As already discussed, if that had been the case, everything would have been exactly the same except for the potential liability under s. 26 FSMA. The Schemes would still have been run as a Ponzi scheme; they would still in due course have collapsed; and the investors would still have taken steps which would have ultimately pushed the Claimants into liquidation. The investors would admittedly in this scenario have no claims under s. 26 FSMA because on this hypothesis there would have been no contravention of the general prohibition in s. 19 FSMA. But that does not mean they would have had no claims to prove in the liquidations. It was the Claimants’ own case in the proceedings against Mr Woodhouse that he was guilty of consistently lying to investors “by presenting to them fundamentally flawed investment schemes as low risk/high return investments”, that he “presented a fundamentally dishonest business model as a legitimate investment opportunity” and that “the entire enterprise was dishonest from the start”.

In those circumstances I accept Mr Saoul’s submission that it is overwhelmingly likely that the investors would have valid claims against the Claimants in the tort of deceit. The measure of damages for deceit would include not only the amount of investment lost (less any investor returns), but also either interest, or, if the investor could establish what he would have done with the monies invested otherwise, damages for the loss of use of them.

I agree with Mr Saoul that there is every reason to think that such claims would be at least as good as the claims that such an investor could make under s. 26 FSMA. Under s. 26(2)(a) an investor would be entitled to claim return of any money invested, but the effect of s. 28(7)(b) is that if he did so, he would have to repay any money received by him under the agreement, so s. 26(2)(a) would not give him any more than the amount he could claim in deceit (namely investment lost less any investor returns). In addition he could claim compensation under s. 26(2)(b) but it is to be noted that this is “compensation for any loss sustained by him as a result of having parted with it” (ie the money paid under the agreement). Again that seems to me to be never likely to be more than he could claim as damages for deceit. I think it plain that the suggestion in the Grounds of Appeal (not repeated orally by Mr Pickering) that the compensation could include the benefit of contractual provisions such as the buy-back provision is wrong. The compensation is focused on what one has lost by investing, not what one might have received had the investment performed as promised.

There is little authority on s. 26(2)(b) but in Whiteley David Richards J expressed the view at [29] that the policyholders there in question (who had paid premiums under unauthorised insurance policies) would not be entitled even to compensation for loss of interest, on the grounds that “any loss sustained” must be a loss in fact sustained by the policyholder, rather than a notional loss. It is true that he said (at [28]) that that was not the case in which to explore the extent of the remedy; but if the view he expressed were right (and we heard no real argument on it) it would mean that it would be incumbent on the person claiming under s. 26 to establish that they had any case for compensation under s. 26(2)(b) at all, and I do not see that it is at all likely that an investor in the current case could do so in circumstances where he would not equally be able to establish a claim to be similarly compensated in damages for deceit.

Quite apart from this the investors all have contractual claims, and would have the same contractual claims in the counterfactual world where the Schemes were not CISs. The contractual claim would entitle each investor (i) to a guaranteed coupon of between 8% and 12% a year for 10 years; and (ii) to the right to have the investment bought out after 10 years at 125% of the amount invested. So an investor investing £100,000 had a contractual right to repayment from the relevant Claimant company of between £80,000 and £120,000 over the next 10 years and £125,000 in 10 years’ time. No doubt the future receipts might have to be discounted, and we received no submissions on how such contractual rights would be valued for the purposes of proof in the liquidations, but it is difficult to believe that a contractual right to between £205,000 and £245,000 over 10 years, even if discounted, would be less valuable than the right to claim back £100,000 and compensation for the loss of use of it. Investors were presumably only persuaded to invest in the Schemes at all by the prospect of earning higher returns than they could otherwise obtain, so it is inherently unlikely that any investor who invested was already earning 8% on their money.

In those circumstances I think it highly probable that if the Schemes had not been CISs, the investors would have had claims in tort or contract at least as valuable to them as the claims they in fact have (on the Claimants’ case) under s. 26 FSMA, even taking into account the right to claim compensation under s. 26(2)(b) FSMA. (Indeed they continue to have the same tortious and contractual claims in the real world, and as Mr Saoul pointed out, there is in fact no evidence, or pleading, that any investors have claimed under s. 26 FSMA to date at all). But it is only if their s. 26 claims were greater than the tortious and contractual claims that they have anyway that Lupton Fawcett’s (assumed) negligence in failing to advise that the Schemes were CISs would make any difference to the Claimants.

In the light of my decision that the compensation claims were not pleaded in APOC 5, it is not in fact necessary to reach any concluded view on these questions, but for the reasons I have given I am far from persuaded that there would have been anything in the nature of a viable claim under this head even if the claim had been pleaded.

For the reasons I have given I do not think that any of the three Grounds of Appeal succeeds, and there is therefore nothing to answer the £ in £ out argument which the Judge, rightly in my view, accepted. I would therefore dismiss the appeal.

I agree.

I also agree.