Brown & Ors v Innovatorone Plc & Ors

I shall address the issues in this action under the following headings:

INTRODUCTION

This is a case arising out of failed tax schemes.

The background to the schemes was the UK Government’s desire to encourage investment in information and communication technology (“ICT”) following the dot.com crash in the early 2000’s. To that end generous first year capital allowances for income and capital gains tax purposes were allowed on the acquisition of ICT with a view to its exploitation.

These schemes (“the Innovator Schemes”) were devised with a view to taking maximum advantage of the available tax benefits. There were a number of other ICT tax investment schemes which were introduced at this time. Many had similar features to earlier schemes which had sought to take advantage of the tax benefits of investing in films.

The marketing of each Innovator Scheme involved the issue of an Information Memorandum (“IM”) inviting investors to submit applications and (in most cases) subscription monies so as to become partners of a Partnership formed as a vehicle to carry on a trade, consisting of the acquisition and exploitation of rights to ICT. 16 of the 19 Innovator Schemes which are the subject of the litigation were limited liability partnerships (“LLPs”), and 3 were general partnerships (“GPs”).

The key features of the Innovator Schemes as promoted were:

The upshot in financial terms was that:

Aside from the Scheme failing from a tax perspective, the main risk to the partner was his liability for his share of the 80% Partnership loan. However, this risk was managed by an arrangement whereby the 80% loan, when paid as part of the purchase price for the Technology, was placed by the Technology Vendor back on deposit with the lender effectively as security. In the event that the Technology was successfully exploited then the loan would be repaid and the bank would release similar amounts back to the Technology Vendor. If the Technology was not successful then the loan would be repaid after three years unless alternative arrangements were subsequently made. In such circumstances the protection envisaged for the partners was that there would be an agreement to hive the Partnership’s assets and liabilities down to a limited company or a debt for equity swap with the Vendor.

The Schemes were therefore structured in such a way that although the Vendor would be paid a 100% price for the Technology, 80% of that price would immediately be placed on deposit to secure the loan made and the Vendor would only be likely to receive the benefit of that element of the price if the Technology was successfully exploited. This form of circular movement of monies was a common feature of tax schemes at the time. This reflected the fact that it was not seen as a valid ground of attack following the House of Lords’ decision in MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd [2003] 1 AC 311. In the present case it had the endorsement of Mr Rex Bretten QC who was closely involved in advising on tax matters throughout.

More recently the Inland Revenue (“IR”) has successfully challenged such circular arrangements, as exemplified in the recent Supreme Court decision in TowerM Cashback LLP1 v Revenue and Customs Commissioners [2011] STC 1143, which involved another ICT partnership scheme. In that case the Supreme Court, reversing the decisions of the courts below, held that the circular nature of the loan meant that there had not in any meaningful sense been an incurring of expenditure of the borrowed money on the acquisition of software rights, but rather that it had gone in a loop to enable the LLPs to indulge in a tax avoidance scheme.

In relation to the Innovator Schemes in most cases the partners (in this judgment I shall generally use that term neutrally since it was the Claimants’ case that they never did become partners) did successfully obtain the full first year tax relief, often resulting in substantial payment rebates being made. However, in July 2003 the Special Investigations Section of the IR (led by Mr Peter Frost) began investigating the Schemes. In the course of 2004 there were various meetings with the IR. The IR challenged the Schemes, essentially on the basis that they were not satisfied with the commerciality of the Schemes, it being a requirement of tax relief that the trade be carried on on a commercial basis with a view to realising profits within a reasonable time.

The IR was prepared to settle the matter on the basis that the tax relief would only be available in relation to the capital contribution made by each partner rather than the grossed up amount of the investment. Instead of receiving tax relief representing 200% of the capital contribution the partners would now only receive tax relief representing 40% of that capital contribution. A capital contribution of £20,000 would therefore yield relief of £8,000 rather than the £40,000 anticipated and in many cases received. Most partners in the Partnerships decided to accept the IR’s offer on the basis that, on advice, it was the best they were likely to achieve.

The essential (but not complete) failure of the Schemes from a tax perspective left a number of partners aggrieved. This was all the more so given that many of them had received and spent the tax relief and now faced the prospect of having to find funds to repay the IR and of interest and penalty charges if this was not done. Their grievances were heightened by the IR’s criticisms of the lack of commerciality of the Schemes and the fact that none of the Technologies had been successfully exploited. They were heightened still further by the discovery that it appeared that the architect of and the driving force behind the Schemes was Mr Bjorn Stiedl, who in November 2004 was convicted at Southwark Crown Court of pension fraud, for which he was subsequently imprisoned.

Steering groups were formed and lawyers consulted and the Partnership businesses were investigated. In the event the partners were advised that they had various causes of action against the people and entities involved in the establishment and operation of the Innovator Schemes and indeed that they had never been made partners. In October 2008 the first claim form in the current proceedings was issued.

The Claimants in the proceedings, from whom the 44 Lead Claimants who gave evidence at trial were drawn, are some 555 individuals who invested into 19 Innovator Schemes, marketed by InnovatorOne Plc (“Innovator”), Capital Planning (UK) Ltd (“CPUK”) (for the Gentech 1 Scheme) and Mr David Gates (for the Gentech 2 Scheme) from mid 2002 to mid 2004.

The Defendants to the claims made are Innovator; CPUK; the LLPs in relation to each Scheme; CLFL; Mr Paul Carter, the managing director of Innovator and the Administrator of the Innovator Partnerships; Mr David Gates, the managing director of CPUK and Managing Partner of the Gentech Partnerships; Mr Stiedl, the alleged architect of and driving force behind the Schemes; Collyer Bristow (“CB”), solicitors engaged in relation to the Schemes; Mr John Bailey and Mr Jonathan Roper, former partners of CB; Vermilion, a Technology Vendor. Mr Carter, Mr Gates and Mr Stiedl attended the trial but were unrepresented. Innovator, CLFL and the LLPs are all in liquidation, and did not participate in the trial.

The claims made arise from (1) alleged frauds practised upon the Claimant investors involving the establishment, promotion and operation of the Innovator Schemes; (2) the failure of each Scheme; (3) the alleged misappropriation of subscription money and (4) other losses and liabilities incurred by the Claimants.

The claims and the defences engage various areas of law, including (1) contract issues (offer and acceptance, implication of terms, affirmation); (2) agency issues (authority, ratification); (3) trust including constructive trust; (4) accessory liabilities (dishonest assistance, knowing receipt and conspiracy); (4) Financial Services and Markets Act 2000 (“FSMA”) issues; (5) misrepresentation; (6) tort and (7) damages and other remedies and relief. The claims are advanced on both primary and alternative bases.

Because the Claimants contended that they were never partners the litigation took a different shape to that which might more usually be expected. No claims were brought by the LLPs against those who were acting on their behalf in relation to the management of the Schemes; indeed the LLPs were made Defendants. The Court was not therefore concerned with what duties were owed to the LLPs or whether such duties were discharged with the appropriate level of skill and care. It was concerned with alleged duties owed to the subscribers themselves and the existence of those duties was very much in issue. Further, although the Claimants were introduced to the schemes by Independent Financial Advisers (“IFAs”) or other advisers no claims were made against those advisers. CB issued Part 20 proceedings against various of the IFAs involved but those proceedings were stayed pending determination of the Claimants’ claims.

In order to make the litigation more manageable it was decided to try the issues in respect of 6 selected Schemes. These were the YTC Scheme (one of the two initial Schemes); the Etrino Scheme (also a “first generation Scheme”); the Optibet Scheme (a second generation Scheme); the Charit and Gentech 2 (“GT2”) Schemes (third generation Schemes); and the Arte Scheme (a fourth generation Scheme and the last of the Schemes). There were some differences between the Scheme arrangements for each generation of Scheme.

For the same reason it was decided to have evidence from Lead Claimants whose evidence would be treated as representative of the Claimants for each Scheme. There were 44 Lead Claimants.

GENERAL FACTUAL OVERVIEW

The Claimants and CB agreed a helpful General Statement of Facts which I have drawn on in making the following general findings as to the operation of the Schemes. These findings are set out without prejudice to the Claimants’ case that they do not accept, and they put in issue, the accuracy and genuineness of Scheme and other documents and the accuracy of dates stated thereon and that they did not become partners of any relevant Partnership.

The Innovator Schemes which are the subject of the claims in these proceedings are 19 Schemes promoted by Innovator, CPUK (GT1 Scheme) and Mr Gates (GT2 Scheme) at various periods over 2 years from June 2002.

The 19 Schemes may conveniently be classified as apparent from the following table:

In general terms, and subject to the terms of each IM, promotion of each Scheme involved the issue of an IM specific to the Scheme inviting investors to submit subscription applications and subscription money with a view to becoming partners of a Partnership formed as a vehicle to carry on a trade, consisting of the acquisition and exploitation of rights to ICT (“Technology” or “Technology rights”), with attendant tax advantages. Most Partnerships were promoted as LLPs, but three were promoted as GPs. Those three were the Tracksys, Optibet and CIT Schemes. In this judgment the use of the word “partnership” shall be intended to refer to either a GP or an LLP.

The Innovator Schemes as promoted included the four main features identified in paragraph 6 above, namely: a tax incentive; gearing; a profit incentive and borrowing ability.

The following is a cast list of the main relevant individuals and entities involved in some way in the Innovator Schemes:

Mr Andrew Evans, a friend and business contact of Mr Bailey, was also involved with Mr Stiedl in devising and setting up the Schemes. He died in July 2003.

The following abbreviations are also used as follows:

The availability of the relevant tax relief was predicated upon the fulfilment of certain conditions under the Capital Allowances Act 2001 (“CAA 2001”), including the following:

The general rule was that capital expenditure was to be treated as incurred as soon as there was an unconditional obligation to pay it (CAA 2001 (s.5)). This was subject to certain exemptions including: “If under an agreement an amount of capital expenditure is not required to be paid until a date more than 4 months after the unconditional obligation to pay has come into being, the amount is to be treated as incurred on that date” (CAA 2001 (s. 5(5)).

A restriction on the availability of relevant tax relief was announced on 26 March 2003 by Ministerial Statement and implemented by the addition of a new subsection in the CAA 2001 (s. 45(4)). This precluded expenditure on ICT being first-year qualifying expenditure under the section, “if the person incurring it does so with a view to granting to another person a right to use or otherwise deal with any of the software in question” (“the CAA s. 45(4) restriction”). The amendment was introduced with effect to expenditure incurred on or after 26 March 2003 (the “26 March 2003 deadline”).

A further amendment, introduced for years of assessment for which the basis ended after 10 February 2004, was announced on 10 February 2004 by Ministerial Statement and implemented by the addition of new subsections 118ZE and 118ZJ of the Income, Corporation & Taxes Act 1988 (“ICTA 1988”). This restricted the amount of recoverable sideways relief in the case of “non active” members of a Partnership. In effect, this amendment restricted the available relief to the amount contributed by the member, rather than to that member’s liability upon a winding up of the Partnership. ICTA 1988 sections 118ZE to 118ZK were introduced by section 124(1) of Finance Act 2004 with effect from 22 July 2004. ICTA 1988 section 118ZE applied to basis periods ending on or after 10 February 2004 (subject to certain transitional measures for periods which straddled this date – see s. 118ZJ).

For each of the 19 Schemes, an IM specific to the Scheme was issued. The issuer was stated as Innovator or CPUK (GT1 Scheme) or Moneygrowth Financial Services (“MFS”) (GT2 Scheme), describing it, and inviting subscriptions as summarised in the table below:

Innovator Schemes were promoted by Innovator from about June 2002 to about late 2004.

These arrangements, as indicated in the IMs, involved three steps.

The first step involved a subscriber completing and signing standard forms contained in an IM:

Each subscription application was expressed as an application by a signatory to become a partner in a named Partnership.

By each P/A, a subscriber appointed as attorney (“P/A donee”), with authority to take relevant steps to constitute the subscriber a partner of the Partnership named in the IM, that P/A donee being:

The second step involved a subscriber sending the form(s), together with a cheque for subscription money, made out to “Collyer-Bristow ‘[name of Partnership in IM]’ Client Account” or a Loan Application, to Innovator or (for the GT1 Scheme) CPUK or (for the GT2 Scheme) MFS, or directly to CB.

The third step involved cheques for subscription money received other than by CB being sent on to CB for encashment with the resulting proceeds being retained in a client account. CB recorded subscription money received in separate electronic ledgers or statements. Each ledger provided for the inclusion of various details including “Client/Matter No”, “Name” and “Description”. The reference number included a number specific to Innovator (24213) and a number specific to a particular scheme (e.g. for the YTC Scheme: 00024213/00000008). The “Name” stated was Innovator Plc. The “Description” was the name of a Partnership (sometimes without the suffix “LLP”) and “Completion(s)” or “Comp” (e.g. “YTC Medical-Completions”). Those and other ledgers are called collectively “CB ledgers” and per Scheme e.g. “CB YTC ledger”, “CB Agent Mole ledger” etc.).

There were Acknowledgement letters for all Schemes on Innovator headed paper which were signed by or on behalf of Mr Carter as Managing Director of Innovator. The initial draft of an Acknowledgment letter was approved by Mr Bailey in an email to Mr Carter on 3 October 2002. Versions of the letters changed over time.

These included:

For each Scheme, at least one LLP was incorporated. Tracksys, Optibet and CIT were promoted as GPs.

D/As (to a previous LLP Deed or partnership agreement) were made whereby subscribers were made partners as summarised in the table below:

There were Service Agreements made between (1) a named LLP or individual and (2) Mr Carter or Mr Gates.

In relation to each Scheme, there were one or more Acquisition Agreements (“AAs”).

The AAs for Schemes 1 to 7 provided for:

The AAs for Schemes 9 to 11 did not include an obligation upon the Technology Vendor to pay a “Guarantee” into a “Guarantee Account”. Rather, a like obligation was imposed under a “Guarantee Agreement” made on the same date and between the same parties (24 March 2003).

The AAs for Schemes 12 to 19 (called a “Sale and Purchase Agreement”) were made between (1) a LLP and (2) a Technology Vendor, whereby,

In relation to each of Schemes 12-19, in order to meet revised tax legislation requirements, there were 4 Licence Agreements licensing the use of Technology for a specified territory and made between (1) a named offshore company as Licensor (being the same as the corresponding Technology Vendor) and (2) a named company as Licensee for a specified territory (Asia, USA & Canada, Australia and Europe respectively).

Under each Licence Agreement, the Licensor granted to the Licensee a “sole and exclusive licence commercially to use, deal with and generally exploit the Licensed ICT in the Territory but not to sell, lease or otherwise dispose of [it]” in consideration of the payment of a “Fee”, defined as a percentage (e.g. 25%) of “the gross income received by the Licensee from the Licensed ICT per annum”. The “Licensed ICT” was defined as a named Technology (e.g. “The Charit-email Technology”).

The Licensees were the same for each Scheme, being:

Other acquisition arrangements included the following in relation to some Schemes:

These arrangements included:

In relation to each Scheme, an AEA was made with a company (incorporated in England and Wales) referred to as the “Agent”, the parties thereto being:

By each AEA, the Agent:

Mr Hamish McCallum of Holly House Management Services (H2M) Ltd (“H2M”) was retained by Innovator to monitor the exploitation of the technologies. H2M’s reports were published on Innovator’s website.

In relation to each Scheme, there is a Security Agreement dated the same day as the AEA and made between (1) the Technology Developer and (2) the Exploiter.

Each Security Agreement relates to the “Shortfall” as defined, being any difference between the “Minimum” (as defined in the AEA) and sums actually received by the Partnership pursuant to the AEA.

By each Security Agreement, in effect, a mechanism was provided by which interest payable on the Deposit made by the Technology Vendor with a bank could be paid via the Technology Developer and Exploiter to the Partnerships in order to enable the latter to discharge its liability for interest on the loans.

In relation to most Schemes, there are Business Plans made for the purpose of exploiting Technology rights.

In the case of most Schemes, there is a Valuation of the Technology rights.

Counsel, in particular Mr Rex Bretten QC and Mr Jonathan Crystal, were instructed and advised in relation to the Schemes as to Scheme-specific and generic matters.

Loan arrangements were made with two banks (in addition to the loan arrangements made with CLFL described below).

Acquisition arrangements involved financing arrangements with a lender whereby a lender would provide the Partnership (save in the case of the Arte Scheme where the loan or loans were to be provided to the individual subscribers) with a loan for approximately 80% of the acquisition cost, conditional upon the Technology Vendor depositing an equivalent amount with the lender.

Loan arrangements included the following agreements:

The IMs for each of the Schemes, save for GT1, GT2 and Arte, contained a provision to the effect that the Partnership referred to in the IM would have a fixed duration but that the partners could determine to dissolve it earlier and that “one possibility” was that the partners could “transfer the Partnership business to a limited company”. A similar (but not identical) provision was included in the IM for the GT1 Scheme which referred to there being a number of possibilities for an “Exit Route” and that these included “transferring the Partnership business to a private limited company in exchange for shares, selling the [Technology] to a trade purchaser or otherwise disposing of the business”.

Each LLP Deed contained, at clause 4.24, the following provision: “At any time after the first Financial Year End has passed, the Members may by a majority vote based on Membership Shares of those present and voting in person or by proxy resolve to sell and transfer [the business of the Partnership/Trade] including (without prejudice to the generality of the foregoing) transfer of the business of the Partnership to a company limited by shares in consideration of the issue of shares.”

From about June 2005 until July 2006 Innovator executed an exit strategy in respect of a number of the Schemes by means of a hive down to a limited company. This effectively ensured that the partners would have no liability for the 80% Partnership loan. This happened for all of the 19 Schemes, except YTC and Charit.

The exit arrangements, where executed, were approved by resolutions at Extraordinary General Meetings of the Partnerships (“EGMs”).

Arrangements involving CLFL included the following:

By an agreement, dated 1 April 2003, between Innovator and CLFL, Innovator agreed to provide a loan facility to CLFL for CLFL to provide loan facilities to investors to finance their subscription money.

By an agreement, dated 1 April 2004, between the same parties, Innovator agreed to provide a loan facility to CLFL for CLFL to provide loan facilities to investors in respect of the GT2 Scheme.

The facilities under the two loan agreements were to be made upon (among other things):

In accordance with the agreements set out above, CLFL made fixed term personal loans to some subscribers in Schemes to fund their subscription money.

CLFL brought claims against certain subscribers for subscription loans, with CB acting on CLFL’s behalf.

A claim by CLFL against one subscriber (Mr Crothers) was the subject of a trial in the Leicester County Court (Claim Number 6LE93000) before Recorder Godsmark QC. By judgment dated 15 November 2007 CLFL’s claim was dismissed.

On the face of CB ledgers, CLFL made loans to 10 Innovator Partnerships totalling £83.84m on 17 July 2003 generally in £4m tranches. These arrangements are described further below.

CLFL’s financial statements for year ended 31 January 2004 stated: “The company entered into bridging loans during the period with various client partnerships pending the finalisation of re-financing agreements with various banking institutions. On completion of the re-financing, the company waived the interest charge.”

The Courvoisier Trust was established in the BVI by a Declaration of Trust dated 12 April 2001. At inception, (1) the original trustee was Euro-American Trustees Ltd. (BVI) (“EATL”); (2) the Protector was Mr Nigel Bailey (of International Captive Consultants Ltd. (BVI)); (3) the sole beneficiary was the International Red Cross of Geneva and (4) the trust property (the “Trust Fund”) was one share certificate in CCC.

Minutes of a meeting on 11 November 2002 of the directors of the trustee record the appointment of Mr Stiedl as an Investment Adviser of the trust and the appointment of Ms Sascha Poulsen and Ms Mette Lyhne as beneficiaries (respectively Mr Stiedl’s daughter and former partner) replacing Mr Morten Neilsen (“Mr Neilsen”) as beneficiary. In an email to “Intercap” dated 26 July 2002 Mr Stiedl stated that “the Trust is an ‘open ended’ Trust and it is up to Nigel and me to appoint new beneficiaries at any time”.

Courvoisier & Cie Corporation (“CCC”) was incorporated on 11 April 2001 in the BVI under its International Business Companies Act. Its authorised share capital was US$50,000 divided into 50,000 shares each of US$1.00. The subscriber to its Memorandum of Association was Euro-American Trust and Management Services Ltd. (BVI). On 12 April 2001 one share of US$1.00 was issued to EATL, expressly as trustee of the Courvoisier Trust, as apparent from the share certificate.

By letter, dated 18 December 2001, Mr Stiedl instructed Mr Bailey to incorporate a company named “InnovatorOne Plc” with (1) an authorised capital of £5m (500m 1p shares); (2) a minimum subscription of £50,000 (5m shares); (3) CCC as the first and only shareholder; (4) Mr Carter as managing director; (5) Mr Bailey as company secretary and (6) the company’s registered address at CB’s address at 4 Bedford Row, London WC1.

CB sent a retainer letter to Innovator in relation to the YTC Scheme on 12 March 2003. CB recorded that its retainer was “to act on your behalf in relation to the formation of the above Partnership, the drafting of all necessary documentation relating to the acquisition of certain technology, the drafting of the Information Memorandum relating to the raising of money for the above, the preparation of Verification Notes and the negotiation of banking documentation with the appropriate lending institution”.

In the period January to June 2002, steps to launch Innovator and the first of the Innovator Schemes (YTC, Agent Mole and Etrino) included (1) the incorporation of Innovator; (2) various planning arrangements; (3) obtaining advice and settled documents from specialist leading tax counsel, Mr Bretten QC, and (4) drafting of Scheme documents.

Innovator was incorporated on 6 February 2002 (Co. No. 4368289) as a private company. It reregistered as a public company on 15 April 2002.

The initial shareholders of Innovator were Mr Bailey and Mr Roper who subscribed for one £1 share each. Mr Bailey and Mr Roper transferred their respective shareholdings to CCC on 3 April 2002.

Mr Roper was the company secretary of Innovator from 6 February 2002 to 18 March 2002. Mr Bailey was a director of Innovator from 6 February 2002 to 28 May 2004. Mr Bailey was company secretary of Innovator from 18 March 2002 to 16 November 2005. In IMs for Innovator Schemes, Mr Bailey was described as acting as non-executive chairman of the company. Mr Carter was appointed a director on 14 March 2002.

In IMs for Innovator Schemes Mr Carter was described as the managing director of Innovator. Mr Alexander and Mr Ramsden were appointed directors on 15 March 2002 and 21 March 2002 respectively. In IMs for Innovator Schemes they were described as non-executive directors and part of a team of technology advisors.

Mr Stiedl was not registered as a shareholder or director of Innovator. He was not mentioned in IMs for Innovator Schemes or other promotional material.

Innovator was neither an authorised nor an exempt person under the FSMA regulatory regime.

Agreements were made between Innovator and various companies. Agreements made in this period included a “Sale and Purchase Agreement” dated 6 March 2002 with CCC, a “Subscription Agreement” dated 3 March 2002, an agreement dated 3 April 2002 with J Bear Capital Ltd. (BVI), an agreement dated 29 April 2002 with CPUK and another agreement dated 29 April 2002 said to be with Offshore Investment Group (International) Ltd. (“OIGIL”) and CPUK.

A bank account was opened in the name of Innovator at the City Office, Angel Court branch of Allied Irish Bank Plc (“AIB”). A payment of £12,500 was then received. Under cover of a letter on the notepaper of one of Mr Stiedl’s companies dated 11 March 2002 to Mr Bailey, Mr Stiedl enclosed a cheque for £50,000 on behalf of CCC for 5m shares in Innovator.

Between January and July 2002, drafts were prepared of a prospectus with a view to Innovator raising money by way of a public offering of shares. A minute of an Innovator Board meeting on 28 June 2002 recorded that Mr Paul Carter informed the Board that Innovator “has to give up its anticipated fundraising”.

CB on behalf of Innovator sought the advice of leading tax counsel, Mr Bretten QC “in connection with the tax treatment of a proposed investment in a technology development business concept through the means of a [LLP]”. This was the first of over 100 occasions when Mr Bretten QC’s advice was sought between 2002 and 2005 in relation to the Innovator Schemes. He advised at various times in relation to specific Schemes and to generic issues (e.g. the effect of legislative changes and tax reported cases) relevant to more than one Scheme and he settled some scheme documentation.

Mr Stiedl was involved in instructing and liaising with Mr Bretten QC. In an email to Mr Stiedl dated 5 September 2002, Mr Bailey referred to CB acting as a “conduit for the obtaining of instructions from [sic] Mr Bretten QC”.

Enclosed with CB’s 22 March 2002 Instructions to Mr Bretten QC was what was therein described as an “Extract of draft paper to the board of directors of [Innovator], entitled ‘Exploitation Model’”. Mr Bretten QC settled the paper (“Exploitation Model Memorandum”) and in a Note dated 4 April 2002 advised (in summary) that he was satisfied as to the efficacy of the model from a tax treatment viewpoint. He recorded his understanding that “the software licence is … to be exploited by the LLP on a commercial basis and with a view to profit. That is to say, from the point of view of the LLP, the transaction will have ‘commercial reality’, and will not be put in place simply to utilise the ‘tax capacity’ of the partners in the LLP”.

Following receipt of Mr Bretten QC’s Note, the drafting of documentation for Innovator Schemes commenced.

In respect of the YTC and Agent Mole Schemes there are documents, each incorporating an Option Agreement made by Innovator for the acquisition of “Products” as defined.

Each is in like terms and provides for the payment of a “Fee” by the counterparty to Innovator in the event of the former selling the “Products” to Innovator or a “Partnership” as defined, (as directed by Innovator). In each case the “Fee” as defined is £1.1m (plus applicable VAT).

The first board meeting of Innovator was on 28 June 2002. The minutes of that board meeting record as follows:

Mr Bretten QC first advised in relation to the YTC Scheme in conference on 21 May 2002.

In an Opinion, dated 4 July 2002, Mr Bretten QC advised in relation to the matters raised in his YTC 6 June 2002 instructions (an initial draft of which was written by Mr Stiedl). He was asked to advise as to the availability to YTC partners of tax relief under the CAA 2001, in particular whether the acquisition cost of the software would be first-year qualifying expenditure under s. 45.

Mr Bretten QC also reviewed and settled the draft attachments to his Instructions: i.e. a signed copy of an Option Agreement and draft copies of an Acquisition Agreement, Agency Acquisition Agreement, “Partnership Deed” and IM. He advised that relevant tax reliefs would be available, subject to various conditions. He identified the importance, for the purpose of obtaining sideways relief (as distinct from eligibility under CAA 2001 s 45), of the trade being “carried on a commercial basis and with a view to the realisation of profits in the trade”. He noted the proposed purchase price of the Technology (referred to as “IP”). He stated that while he was not in position to comment on it, the price was relevant to the availability of sideways relief. He also advised that it was essential that the costs of acquisition should qualify for capital allowances and that the IP be purchased for a lump sum (proposed to be £10m) made on or before 31 March 2003.

By undated Instructions received on or about 23 July 2002, CB instructed Mr Bretten QC to settle amended drafts of the proposed YTC IM and “Partnership Deed”. Mr Bretten QC did so, as apparent from a related Note dated 31 July 2002.

By Instructions dated 24 September 2002, Mr Bretten QC was asked to advise, in light of the decision of Park J in Barclays Mercantile Finance Ltd. v. Mawson [2002] S.T.C. 1068, whether the proposed financing arrangements involving a circular flow of funds would prevent the proposed partnership from establishing that the sum of £9.92m to be paid to the Technology Developer was expenditure “incurred” by it for the purposes of s. 45 of the CAA 2001. In an Opinion dated 16 October 2002 Mr Bretten QC advised that the arrangements would not prevent that.

Over the period from June 2002 to April 2003, seven Schemes were promoted by Innovator including by the issue of IMs. For each Scheme, a separate IM was issued. The IMs differed in various respects as between each Scheme. In particular, the named LLP, “Technology Developer” and “Exploiter”, as well as the “Technology”, differed as between each of the Schemes.

The IMs for the first 5 schemes provided for a “Managing Partner” as opposed to an “Administrator”, as in IMs for later schemes. The latter change followed advice from counsel, Mr Jonathan Crystal (“Mr Crystal”), and a revision of Scheme documents in December 2002.

Subscription applications were made by investors, including for the YTC and Etrino Schemes. Subscription applications and cheques were sent to Innovator. On occasion monies were sent direct to CB. In the former case Innovator forwarded the cheques to CB for CB to pay into a client account.

Money was paid out from the CB ledgers and recorded in the relevant CB ledger under the debit column.

Between July and November 2002 there was correspondence between Innovator and CB and the Bank of Scotland (“BoS”) and its solicitors, Dundas & Wilson (“D&W”). In November 2002 BoS and its solicitors ceased discussions. By letter dated 25 November 2002, D&W stated “We write to advise that the Bank has in carrying out due diligence in respect of the proposed transactions become aware of information regarding Bjorn Stiedl. Our clients no longer wish to pursue this opportunity further and will enter into no further correspondence regarding it. We have also been instructed not to enter into any further correspondence on this matter”.

D&W raised enquiries with CB and Innovator as to whether YTC (as well as other Schemes) was a collective investment scheme (“CIS”).

Other agreements were made in the period August to December 2002, including:

Innovator subsequently invoiced the Technology Vendors for “Fees” under the relevant Option Agreements (e.g. £1.106m in the case of the YTC Scheme).

AAs for the YTC Scheme (dated 9 December 2002) and Etrino Scheme (dated 13 December 2002) are in like terms. Each provides for payment of the “Final Purchase Price” by “no later than 1 March 2003”. In each, the front sheet of the AA names a limited company and a LLP:

In relation to each of Schemes 1 to 7, there is a document bearing the date 5 December 2002 and entitled “Limited Liability Partnership Deed” in relation to a named LLP (e.g. in the case of Scheme 1, “The YTC Medical Learning System Partnership LLP”).  The parties thereto are Mr Evans and Mr Carter. Both are referred to as “the Members” and their “Initial Capital Contribution” is stated to be £1.00 each. The document is signed by them, their signatures being countersigned by Mr Bailey as witness.

In the case of each of the first 5 Schemes:

On 11 December 2002, 8 LLPs were incorporated as set out in the table below:

CB instructed Mr Crystal to advise on the CIS issue. He provided two Advices dated 10 December 2002 (“Crystal first CIS Advice”) and 13 December 2002 (“Crystal second CIS Advice”).

Prior to the Crystal first CIS Advice, documents for Innovator Schemes were drafted on the basis of each Partnership having a Managing Partner and his having a day to day management role.

The IMs for the first Innovator Schemes (YTC, Agent Mole, Etrino, Casedirector and Mamjam) each described a Partnership with a “Managing Partner” as defined, who would undertake “the day to day management of the Partnership’s administrative activities and the management of the Business”.

Mr Crystal was first instructed to advise in relation to the CIS issue on 29 November 2002.

The Crystal first CIS Advice was dated 10 December 2002. Mr Crystal stated in his conclusion, “If the day to day control of the management of the LLP is (in substance and reality) by the partners, then the LLP will not be a [CIS]. The present documentation needs revision if the LLP is not to be considered a [CIS]”.

Mr Bailey then sent a fax dated 10 December 2002 to Mr Stiedl in which he stated that he found the Advice confusing, that it had not addressed all the questions raised and that no account appeared to have been taken of the amendments which had been made to the documentation.

There was a conference with Mr Crystal on 11 December 2002. Two copies of the Crystal first CIS Advice exist, each with different amendments in manuscript. The amendments are reflected in part in the Crystal second CIS Advice. Overwritten in manuscript on the cover sheet of the second version are the words “Superseded by Advice dated 13 December ‘02”.

Mr Stiedl emailed Mr Bailey at 10.04 on 12 December 2002 attaching “the Service Agreement and the Partnership duly amended and marked up in accordance with Counsels instructions”.

By letter, dated 12 December 2002, CB sent Mr Crystal further revised versions of the Partnership Deed and Service Agreement and requested that “Counsel would confirm his approval of the same”.

On 12 December 2002, Mr Crystal marked the proposed revised versions of the Partnership Deed, Service Agreement and IM “JC as altered 12.12”.

The changes to the IM, approved by Mr Crystal, included (1) the substitution of the term “Managing Partner” by the term “Administrator”, (2) the removal of references to the “Managing Partner” having any day to day management role and (3) the imposition on the Partners of the obligation to have day to day control over the management of the Partnership.

Schemes marketed in this period comprised both Schemes 1 to 7 and also Scheme 8. The IMs for Schemes 6 and 7 (TVE and Mobile Warrior) differed from earlier IMs in that they provided for an “Administrator” as opposed to a “Managing Partner” and for the members or partners having day to day control as opposed to the “Managing Partner”.

In the same period subscription applications continued to be made by investors, including for the YTC and Etrino schemes.

In the same period 10 LLPs were incorporated, as summarised in the table below:

The March 2003 AAs are in like terms but they differ from the 2002 AAs in various respects, including the following. First they provide for a single “Purchase Price”, as distinct from an “Initial Purchase Price” and “Final Purchase Price”. Secondly, they do not provide for a deadline (“no later”) payment date. Thirdly, the counterparty named as “The Purchaser” is a named LLP, which was the name of an LLP then incorporated. Each is signed on behalf of the named LLP by Mr Evans and Mr Carter each as a “partner”.

The 24 March 2003 AAs for Schemes 9 to 11 (Tracksys, Optibet and CIT) are in like terms but they differ in various respects from both the 2002 AAs and the other March 2003 AAs. First they provide for transfer of title of the “Products” from “the Vendor” to “the Purchaser” on 24 March 2003 and payment of the purchase price by no later than 1 July 2003. Secondly the counterparty named as “The Purchaser” is a named LLP, but not that of an LLP which was then incorporated (as opposed to one incorporated 2 days later on 26 March 2003). Each of the 24 March 2003 AAs in Schemes 9 to 11 is signed by Mr Evans and Mr Carter each as a “partner”.

In the case of the AAs for schemes 9 to 11, the named LLP was not that of an LLP which was then incorporated (as opposed to one incorporated 2 days later on 26 March 2003).

In the case of Schemes 1, 2 and 4 to 8, AEAs were made on 28 March 2003 or (for Schemes 3 and 5) 31 March 2003, each in like terms. Each of those AEAs is made between (1) Mr Carter as “Administrator” of a named LLP referred to as “the Partnership”, also identified by incorporation number, “as authorised signatory for and on behalf of the Partnership” and a named company, also identified by incorporation number, as “the Agent”. Various terms are defined by reference to Schedules: i.e. “Duties” (i.e. of “the Agent”) and “Products” (Schedule 1); “Exploitation Forecast” (Schedule 2) and “Acquisition Agreement” (Schedule 3). In fact, Schedule 1 to these AEAs did not further describe the “Products” as indicated in the definition of that term.

For Schemes 1 to 11, there are D/As dated on 4 April 2003, all in similar terms.

For each of Schemes 1 to 7 the D/A:

On 26 March 2003 the Paymaster General issued the 26 March 2003 Ministerial Statement announcing proposed legislation (later enacted in CAA 2001 s. 45(4)) with effect from that date which cut down the scope of the relevant tax relief. This prompted CB to instruct Mr Bretten QC to advise as to the effect of the Ministerial Statement, as apparent from his Instructions dated 27 March 2003 and consequent Note dated 28 March 2003.

In his Note, Mr Bretten QC advised that the critical question was the date on which the Partnership was to be treated as having incurred relevant expenditure, applying the provisions of CAA 2001 s. 5. He stated that it was reasonable to assume that envisaged legislation would adopt CAA s. 5 for the purposes of determining whether expenditure was incurred before 26 March 2003.

Consequently, on that basis, he advised that a Partnership would not be subject to the new legislation if it had prior to 26 March 2003 entered into a legally binding agreement to buy “IP” and thereby immediately become unconditionally obligated to pay the purchase price within 4 calendar months of the date on which the agreement was made. It was then to be treated by CAA 2001 s.5 (1) as having incurred the expenditure on the acquisition of the IP on the date when the agreement was made (i.e. prior to 26 March 2003).

He also set out timings for a partner of a relevant Partnership to become entitled to sideways relief: (1) expenditure on the acquisition of IP had been incurred before 26 March 2003; (2) the partnership trade had been commenced before 6 April 2003 and (3) the person in question had become a partner before 6 April 2003 (whether before or after 26 March 2003).

Innovator issued IMs for these Schemes (Tracksys, Optibet and CIT) in this period.

The IMs for these Schemes differed from earlier IMs. Schemes 9-11 were each promoted to potential investors as a GP as distinct from an LLP, including by an IM dated 12 May 2003 for Scheme 10 (Optibet) and 21 May 2003 for Schemes 9 & 11 (Tracksys and CIT).

In each such IM, reference is made to an AA dated 24 March 2003 made between a named “Technology Developer” and the “Partnership” (i.e. a GP) described by Innovator as a “Golden Contract”.

In the same period subscription applications were made by investors.

Scheme agreements made in this period included the following:

For each of Schemes 9-11, there is a D/A:

By Instructions dated 14 April 2003 entitled “Instructions to Counsel in the matter of the Partnership Structure for the Optibet Technology Partnership”, CB instructed Mr Crystal to advise whether “Counsel agrees” that Mr Carter and Mr Evans had “de facto ... acted as members of a general partnership in relation to [the AA document] and [the Guarantee document] and that the IP de facto has been acquired not by the LLP but by the general partnership between the Partners …”.

In an Advice dated 16 April 2003 Mr Crystal advised: “The IP has been acquired by [Mr] Evans and Mr [Carter]. It may well be that their acquisition is as partners by virtue of the Partnership Act 1890. My Instructions indicate that they agreed on [18 March 2003] to acquire the IP in a limited liability structure and the reasonable inference is that if such intention failed (as the Acquisition Agreement and the Guarantee agreement was signed prior to the incorporation of the LLP) that the IP was acquired and the obligations under the Guarantee assumed by them as partners.”

Following on from Mr Crystal’s Advice dated 16 April 2003, Schemes 9-11 were promoted as “Golden Contracts”. Their promotion also reflected advice given by Mr Bretten QC, in Opinions dated 8 April 2003 and 20 May 2003. The latter Opinion was stated to be “on the basis that the position is as stated by Mr Crystal”.

In a Note dated 20 May 2003 Mr Bretten QC advised that the draft CAA s. 45(4) restriction as proposed in the Finance Bill 2003 as printed on 14 April 2003 would not apply “if the intended sub-licence agreements were to be put in place by the vendor of IP on a ‘forward’ basis before the [AA] with the Partnership were entered into.”

The advice given in the Note dated 20 May 2003 was confirmed by Mr Bretten QC, after the Finance Bill 2003 had been passed, in his Opinion dated 10 September 2003 where at page 9 he stated: “Subsection 4 of section 45 of the Capital Allowances Act 2001 provides that expenditure on an item within Class C (software) is not first-year qualifying expenditure if the person incurring it does so with a view to granting another person a right to use or otherwise deal with any of the software in question. On the basis that the Licences to the Distribution Companies will be put in place by the Vendor prior to the Partnership acquiring the ICT, so that the ICT will be acquired by the Partnership subject to, and with the benefit of, the Licences, I am of the view that the Partnership will not acquire the ICT “with a view to granting to another person the right to use or otherwise deal with any of the software” as mentioned in the said subsection (4) (see Macdonald v Dextra Accessories Limited [2003] STC 749)”.

Schemes 12-19 were each structured and promoted as schemes involving licence agreements made before the relevant AA.

Enquiries as to whether Innovator Schemes were CISs and their operators required authorisation were raised by Bank Leumi and their solicitors Denton Wilde Sapte (“DWS”) both internally and in correspondence with CB in January to March 2003.

In the event, Bank Leumi proceeded to advance funds to the LLPs.

CB corresponded with another bank, Société Générale (“SocGen”) and their solicitors CMS Cameron McKenna (“CMS”).  By letter dated 15 July 2003 SocGen informed Mr Carter that the bank was unable to proceed with the proposed loans following “an internal review”.   The letters “SFO” appear in the document reference of this letter.  Mr Stiedl faxed a copy of the 15 July 2003 SocGen letter to Mr Richard Sallybanks at Burton Copeland solicitors with the comment, “Letter from SocGen received by fax and courier. Please note the bottom footer. Please advice [sic]”. Burton Copeland were acting for Mr Stiedl in connection with his Balfron pension fraud prosecution. CMS declined to elaborate further as to reasons for their client’s decision.

In the event alternative financing arrangements were made for those other schemes with a Swiss bank, MFC. MFC were represented by both Swiss and English lawyers, namely Froriep Renggli and Ashurst Morris Crisp. MFC did not raise any issue as to whether the schemes were CISs.

CB instructed Mr Bretten QC to advise in relation to movement of monies in July 2003. As recorded by Mr Bretten QC in his note of the telephone conference on 15 July 2003, Mr Carter was “concerned in relation to the AAs entered into on 18^th March, 2003, and 24^th March, 2003, that if payment of the Purchase Price were not made before 18^th July, 2003, and 24^th July, 2003, respectively, CAA 2001 s. 5(1) would not be able to be relied upon to treat the expenditure as incurred when the AAs were made. The position in relation to the AAs entered into on 17^th October, 2002, and 9^th December, 2002, seemed even more problematic.”

Mr Bretten QC’s advice is recorded in his own note as being “GB agreed that the loans could be made by the Technology Vendor. An alternative (and preferable) arrangement would be for the Partnership to obtain third party finance (e.g. from a Finance Company) and to use the borrowed money to pay the outstanding balance of the Purchase Price to the Technology Vendor, which would then place the moneys on deposit with the Finance Company”.

Mr Bretten QC’s recommendation of obtaining third party finance was adopted through the use of CLFL and as reflected in various entries made in the CB ledgers.

Other documents were prepared, as may be illustrated by reference to the YTC Scheme.

There is a document incorporating on the same page an unsigned draft of a letter, with the subject heading “Loan of [£4m] (‘the Amount’)”. The draft letter is from a director of Innovator to CLFL and provides for an interest free loan from Innovator to CLFL on the same day, 17 July 2003, repayable within 24 hours. It includes a request to sign an attached form of acknowledgement of acceptance of the loan terms. The form provides for signature by a director of CLFL.

By a handwritten Note, dated 17 July 2003, Mr Bretten QC recorded his change of view from that expressed in telephone conferences on 7 July 2003 and 15 July 2003 as to when, as a matter of construction of CAA 2001 s. 5, capital expenditure was to be treated as incurred. His revised view was that, where the AA in question was silent as to payment date, s. 5(5) did not apply so as to treat payment made more than 4 months after the date of the agreement as made on the date of payment. Rather in such cases, s. 5(1) applied so as to treat the expenditure as incurred “as soon as there was an unconditional obligation to pay it”. Thus, on this view, there was such an obligation “as soon as the relative Acquisition Agreement was entered into, the obligation to buy (and, hence, to pay).”

It followed that “on reflection” he did “not consider it necessary that loans should be made to the partnerships to enable them immediately to make payments of (or of the outstanding amounts of the) Purchase Price”. He nevertheless recommended that the Partnerships in default should enter into Supplemental Agreements with the Technology Vendors, which acknowledged the defaults and made appropriate provision for payment of the outstanding indebtedness. Mr Bretten QC’s recommendation of Supplemental Agreements was not followed.

Mr Stiedl sent a first draft of Instructions to Counsel to Mr Bailey by email on 23 July 2003. By email to Mr Stiedl dated 24 July 2003 (12.08) Mr Bailey sent a revised version of the Instructions to Counsel together with a “draft letter”.

The Instructions state that the 13 partnerships listed therein (including YTC-LLP) had “in principle” entered into a similar transaction. Mr Bretten QC was asked to confirm that actual payment for the whole of the technology had been made by conducting the 17 July 2003 transactions.

By memorandum, dated 8 August 2003 (“the quick fix memorandum”), to Mr Marsh, a litigation partner at CB, Mr Bailey asked Mr Marsh to consider whether any action should be taken against SocGen in light of their withdrawal. The memorandum refers to the CLFL bridging loan arrangements and stated that: “... the attitude of the Inland Revenue to the quick fix that we had to do is not clear and it may well be that the Inland Revenue will deny relief because of this.  I will mention that we do have an Opinion of Rex Bretten QC that what was carried out was permitted by the tax legislation.  However there is a doubt and it does seem to me that there should be some form of response to the letter from SocGen withdrawing the facility.”

By his Opinion, dated 31 October 2003, Mr Bretten QC restated the view given in his manuscript note of 17 July 2003 that s.5 (5) did not apply and hence there was no need for actual payment within four months of the date of the AAs. In any event, he then went on to advise (in accordance with his Instructions) that the transactions constituted actual payment on 17 July 2003 of the outstanding balances of the purchase prices for the Technologies.

In the end financing arrangements were made with two banks.

In respect of Schemes 1 and 2 (YTC and Agent Mole) financing arrangements were made with Bank Leumi.

In respect of Schemes 3 to 18 financing arrangements were made with MFC.

Schemes promoted by Innovator in this period comprised Schemes 12 to 18. There were IMs for Schemes 12 to 14 and 16 to 18 that are undated. The IM for Scheme 15 (GT2) bears the date 12 November 2003.

In the GT2 IM: (1) the issuer is described as “Moneygrowth Financial Services” (not Innovator); (2) the IM refers to operation of the “Partnership” (defined as “The Gentech Partnership 2 LLP”) by Mr Gates as the “Managing Partner”; (3) the IM describes an investment by the LLP in rights to a mix of software applications amounting to “QICT” as defined, and (4) the Scheme is expressly described as an “unregulated collective investment scheme”.

In the same period subscription applications were made by investors.

In the same period 11 LLPs were incorporated, as apparent from the following table:

Scheme agreements made in this period included the following:

By a letter, dated 3 November 2003, Mr Stiedl sent Mr Roper draft Instructions to Counsel. Instructions to Mr Crystal were sent and received by Mr Crystal on 5 November 2003. The Instructions asked whether the activities of Innovator in relation to the Partnerships amounted to a regulated activity. Subsequently, Mr Crystal provided an Opinion dated 11 November 2003 to the effect that none of the activities of Innovator carried out in relation to the Partnerships involved a regulatory activity under FSMA. In relation to Chapter X of FSMA CISs Mr Crystal stated that Chapter X was inapplicable “due to the partners having day to day control over the management of the property”.

On 14 November 2003 Mr Stiedl telephoned and emailed Mr Bailey concerning agreements which were to become the PPUAs. On 19 November 2003 at 10.45 Mr Bailey emailed Mr Stiedl with a draft PPUA attached. PPUAs subsequently entered into by Technology Vendors and Innovator broadly followed the form of the draft PPUA emailed by Mr Bailey on 19 November 2003.

The Special Investigations Section of the IR began enquiries into tax returns of YTC LLP and eight other 2002/3 LLPs for YE05.04.03. Baker Tilly (the LLPs’ then auditors) had sent tax returns to the IR on 6 June 2003. Notification of the enquiry was given by the inspector, Mr Frost, to Mr Carter and Baker Tilly by letters dated 31 July 2003.

In respect of each Scheme under enquiry, Mr Frost asked to be supplied with various documents, initially by letter dated 31 July 2003. Baker Tilly prepared a draft response dated 3 September 2003 and Mr Bretten QC was instructed to settle it, which he did under cover of a Note dated 22 October 2003. Baker Tilly responded to the IR, by a letter dated 27 October 2003 in accordance with Mr Bretten QC’s advice.

Mr Frost replied to Baker Tilly by letter dated 30 December 2003 in which he made a request for further documents. Baker Tilly responded by letters dated 1 March 2004. The terms of all such letters were settled by Mr Bretten QC on 19 February 2004.

On 25 March 2004 Baker Tilly resigned as auditors of all Innovator Partnerships, including as accountancy representatives of those under IR enquiry. They sent their resignation letters to the members of each Partnership at its registered address, namely 4 Bedford Row, London WC1 (CB’s offices). Baker Tilly said that their reason for resignation was their stated discovery of information that Mr Stiedl might be exercising significant influence over the management of the Partnership and their understanding that he was under investigation by the Serious Fraud Office (“SFO”)

By letter, dated 26 March 2004, Mr Carter replied to Baker Tilly’s national managing partner, Mr Longe, and requested a meeting. Mr Carter’s letter stated “It is absolutely without foundation that Mr Bjorn Stiedl is or has ever been able to exert significant influence over the management of each partnership, which is and always has been totally in the hands of the partners”. Mr Longe responded by letter dated 30 March 2004. He stated that he saw no merit in a meeting with Mr Carter and Mr Stiedl and recommended that Mr Carter urgently seek independent legal advice. Baker Tilly reported their resignation to Mr Frost by letter dated 5 April 2004 stating “For the avoidance of doubt, this firm’s resignation did not result from a failure of co-operation or disclosure by the Partnerships in respect of your enquiries”.

Crouch Chapman was appointed to replace Baker Tilly as auditors and as representative of the Partnerships in the tax enquiry.

There was a meeting on 19 April 2004 attended by Mr Frost and another inspector (Ms Marrable) for the IR and by Mr Carter, Mr Stiedl, Mr Roper, Mr Keith Chapman and Mr Des Louis (the latter two of Crouch Chapman). Two notes were prepared of this meeting. One note was prepared by Mr Roper. The other bears the name of Mr Frost.

By letter to Mr Carter, dated 23 March 2004, Mr Frost sought further documentation.

During this time the Arte Scheme was promoted by Innovator as a 2004/5 Scheme, including by the Arte IM.

By Instructions, dated 30 April 2004, Mr Bretten QC was instructed to settle a draft reply to Mr Frost’s 23 April 2004 letter. He settled a draft reply dated 13 May 2004, which contains alternative answers on certain points. Mr Carter finalised Mr Bretten QC’s draft and responded to Mr Frost by letter dated 19 May 2004.

Mr Carter sent a copy of his letter, dated 19 May 2004, to Mr Roper and Mr Stiedl as well as the Crouch Chapman representatives by email dated 21 May 2004 (16.19), to which he also attached Mr Bretten QC’s draft for comparison purposes. He stated in the email that his text accorded with the latter draft “added to (with great care!) where appropriate”.

By email dated 21 July 2004 (10.10), Mr Roper informed Mr Carter that the IR had served statutory notices on 9 Schemes requiring CB to disclose client accounts for Technology Vendors and CLFL for the full (2003) calendar year.

On 21 July 2004, CB Ledgers for CLFL and Technology Vendors were printed. There is a copy of the CLFL print out annotated in handwriting. The annotations on the first page show the origin of CLFL’s £4,459,400.31. The ledgers were forwarded by Mr Roper to Mr Carter (copied to Mr Stiedl) by email dated 22 July 2004 (17.20) stating that “I thought it may be useful for you to see the client account ledgers in respect of the Technology Developers and Chancery Lane Finance to ensure that they accord with your own records”.

Under cover of a letter dated 28 July 2004, Mr Bailey sent to Mr Frost “copies of [CB] accounts” for seven Technology Vendors and for CLFL. The letter refers to the entries having been annotated with the account names of the corresponding entries.

There was a meeting on 22 September 2004 attended by Mr Frost and another inspector (Mr Orchard) for the IR and by Mr Carter, Mr Stiedl, Mr Roper, Mr Duffet-Smith (then a CB trainee), Mr McCallum (of H2M), Mr Chapman and Mr Louis (of Crouch Chapman) and Mr Paul Marks. Two notes have been prepared of this meeting. One was prepared by CB. The other bears the name of Mr Frost.

Mr Stiedl was convicted of conspiracy to defraud the Balfron pension fund at the Southwark Crown Court on 23 November 2004. He was later sentenced to four and a half years imprisonment. A SFO press release stated that the judge in sentencing had taken into account, by way of consideration, the fact that Mr Stiedl had volunteered to pay back the pension fund.

There was a meeting on 29 November 2004 attended by Mr Frost and two other inspectors (Ms Marabel and Mr Pautard) for the IR and by Mr Carter, Mr Bailey, Mr Roper, Mr Duffet-Smith, Mr Chapman and Mr Louis (of Crouch Chapman) and Mr Bretten QC. Mr Frost is recorded as handing out an agenda. Two notes have been prepared of this meeting. One was prepared by CB. The other bears the name of Mr Frost.

Following the meeting, CB instructed Mr Bretten QC to “advise generally in relation to this matter in Conference but with particular attention to the following points that appear to have been of concern to the Inland Revenue”. Mr Bretten QC advised in a consultation on 10 December 2004, attended by Mr Carter, Mr Marsh and Mr Duffet-Smith and Mr Chapman and Mr Rattansi of Crouch Chapman. There is a note of the conference prepared by CB.

Separate EGMs were held on 19 January 2005 in respect of each Partnership which was the subject of the tax enquiry. There are minutes for each EGM.

The various EGM minutes record a vote by members to reject the IR’s without prejudice proposals to allow tax relief at between 5% and 10% of the overall Technology costs.

By letter dated 2 February 2005 to Mr Carter, Mr Frost indicated that, as Mr Frost’s without prejudice offer had lapsed without acceptance, he was preparing closure notices.

By letter dated 17 February 2005, KPMG confirmed that it had been appointed by the relevant Partnership to act as tax advisers in connection with the IR investigation into the tax planning implemented by that Partnership. The letter confirmed that:

There was a meeting on 22 February 2005 attended by Mr Frost and Ms Marrable, Mr Carter, Mr Chapman, Mr Honeywell and Mr Duffet-Smith. There is a note of the meeting made by CB.

CB continued to act for Innovator during 2005, including in relation to the 2004/5 partnership (Arte LLP).

By letter dated 26 February 2004 to Mr Carter, the FSA (Enforcement Division) requested information as to Innovator Schemes since literature received by it suggested that Innovator had been operating a CIS in breach of FSMA s. 19. By letter dated 4 March 2004, Mr Carter replied to the FSA stating that “the partners in each partnership have day to day control over the management activities” of the Partnership.

The FSA (Mr Hanif) replied by letter dated 2 July 2004 pointing out the change between the Casedirector-IM and the TVE-IM. The former IM referred to the “Managing Partner” undertaking “the day to day management”, whereas the latter IM and later IMs provided for the partners having day to day control over the management activities. The FSA sought further information, including as to why the management arrangements had been altered, and noted Mr Carter’s assertion that no investor had sustained loss.

Mr Crystal’s advice was sought as to how to respond to the FSA. Mr Crystal provided an Advice dated 12 July 2004, which included the terms of a proposed response to the FSA. Mr Carter replied to the FSA in the terms advised by Mr Crystal, by letter dated 14 July 2004, which stated that it was copied to CB. The FSA (by Mr Hanif) replied by letter, dated 30 July 2004, seeking further information.

Mr Brian Lee (“Mr Lee”) was CEO of Ogier Corporate Administration Ltd. (“Ogier”). From 5 May 2004, Ogier was authorised by the FSA to carry on various regulated activities, including operating a CIS. By email dated 3 August 2004 to Mr Carter, Mr Lee, as an investor in the Charit Scheme and “a CEO of a FSA regulated entity”, asked Mr Carter to clarify the Charit Scheme’s regulatory status as it appeared to be a CIS which required an FSA approved operator. Mr Lee sent Mr Carter a memorandum dated 18 August 2004 stating that for an LLP not to be a CIS the partners needed to be actively involved in day to day management of its property.

Mr Crystal’s advice was sought on Mr Lee’s memorandum. By an Advice, dated 6 September 2004, Mr Crystal stated that he agreed “with the point that Mr Lewis [sic] is seeking to make but do not agree with the terms in which he makes it” and that “My advice as to the status of the LLPs was premised on the basis that the partners would have real day to day control over the management of the property. Such needs to be ensured (in reality)”. Mr Crystal also provided a draft reply to the FSA’s letter dated 30 July 2004. He did so under cover of an email dated 24 September 2004 (13.55) to Mr Carter stating that his draft dealt specifically with the Casedirector Scheme and that the position in relation to the YTC and Agent Mole Schemes “may be different and is not raised presently”. Mr Carter replied to the FSA by letter dated 24 September 2004 in terms reflecting Mr Crystal’s draft. By letter, dated 15 October 2004, the FSA (by Mr Hanif) replied to Mr Carter stating that, as at that time, the FSA proposed to take no further action.

The Innovator board minutes dated 25 November 2004 record that Mr Carter recommended that Ogier be appointed operator of Innovator Partnerships (other than Gentech Partnerships). The minutes record that Mr Carter referred to “recent tightening of the regulations meant that there is the possibility that, in operation, these partnerships could slip into the category of an unregulated [CIS]”. Ogier was appointed operator of various LLPs, pursuant to various Operator Agreements, each specific to a particular LLP (e.g. that with YTC LLP is dated 12 January 2005).

Mr Lee expressed concerns in an email to the FSA, dated 9 June 2005, which related to the GenTech LLPs. By a letter, dated 21 June 2005, to Mr Lee, the FSA raised further enquiries. By letter dated 1 July 2005, Mr Lee asked Mr Carter to clarify the extent and substance of the relationships between Mr Stiedl, Innovator and the Partnerships in respect of Innovator Schemes. Mr Carter replied to Mr Lee by letters dated 12 July 2005 and 13 July 2005. In his letter dated 13 July 2005, Mr Carter explained that Mr Stiedl provided consultancy services for Innovator pursuant to companies of which he was a director (Atech Advanced Technology Com Ltd. and J Bear Capital Ltd.) and that Mr Stiedl “never had any direct relationships with the partnerships”. In the same letter he refers to five technologies having been purchased by First Global Technologies Ltd. “a BVI company owned by Courvoisier Trust, Bjorn Stiedl is Investment Adviser to this Trust”. Mr Lee responded by letter dated 18 July 2005.

The FSA renewed correspondence with Mr Carter by letter dated 22 September 2005. The letter records the FSA as having reviewed the position of the Partnerships following the appointment of Ogier and having reached the view that, on the basis of factors pointing to effective day to day control not being exercised by the partners, the Partnerships were likely to be CISs. It also records the FSA as having concluded that the appointment of Ogier since January 2005 had not resulted in the regulatory position of the Partnerships being acceptable under FSMA: “It seems that Ogier are effectively an outsourced resource to whom certain administrative and compliance functions have been delegated and therefore they are not the operators, or at least not the sole operators, of the LLPs. The operation of the LLPs therefore remains with the LLPs themselves or the person who is actually responsible for that operation”. The letter concludes by requesting a copy of any legal opinion received on the status of the Partnerships.

By letter to Mr Carter dated 6 October 2005 (copied to the FSA), Mr Lee alleged that Innovator’s conduct amounted to a repudiatory breach of contract and requested a meeting. Mr Carter forwarded Mr Lee’s letter to Mr Roper by fax, dated 7 October 2005. The fax stated “I shall give you a call to discuss later today”. Ogier subsequently resigned.

There is a note, dated 4 November 2005, drafted by Mr Crystal of a meeting with the FSA on 2 November 2005 attended by Mr Carter and Mr Crystal and the FSA’s Mr Richard Bennett and Mr Charles Vosser.

There is a draft unsigned letter from Mr Carter to the FSA, dated 15 November 2005. There is a copy of this letter with “Final Version” written on in manuscript.

The FSA replied to Mr Carter by letter dated 9 November 2006 giving Innovator until 9 February 2006 to pursue the appointment of another authorised operator. Mr Carter responded by letter dated 8 February 2006 explaining that such an appointment had yet to be made, but that a conversion process was underway to transfer the assets, liabilities and business activities from each partnership to a limited company. The FSA by letter dated 17 March 2006 requested more details about the conversion process, to which Mr Carter responded by letter dated 3 April 2006. Mr Carter stated that all 23 partnerships had agreed to convert to limited liability companies and the conversion process had been undertaken in accordance with advice given by CB, Crouch Chapman and Mr Bretten QC. Mr Carter also stated in this letter that “it was not considered” that the partnerships were CISs and that he was “unaware of any information relating to any alleged over-valuation of the technology at inception. The current valuation of the technology is dealt with in the accounts”.

Both before and after Ogier’s resignation, Innovator disputed Ogier’s fees and engaged CB to act for it in relation to the dispute.

EGMs for Innovator Partnerships were held on various dates between 23 January 2006 and 23 March 2006.

At these EGMs investors voted in favour of:

There is an internal CB memorandum from Mr Roper to Mr Marsh (copied to Mr Bailey), dated 25 April 2006 in which Mr Roper provides “background information in relation to the Innovator Technology Partnerships”.

As set out in Mr Roper’s internal memorandum to Mr Marsh, dated 25 April 2006, exit arrangements were put forward which involved a relevant LLP establishing a subsidiary to which the LLP’s liabilities and assets were novated. In the memorandum, Mr Roper stated that:

By letter to Mr Carter dated 17 February 2006 Mr Roper had expressed the view that such arrangements would be effective to extinguish the LLP’s liability in respect of the loan.

Confiscation proceedings were brought against Mr Stiedl consequent upon his conviction on 23 November 2004. There is an agreement, dated 2 June 2006, which records a settlement of those proceedings. That agreement provided for payment of £2,400,000 (or £2,250,000 if paid by 21 June 2006) and recorded that the Courvoisier Trust intended to lend monies to Ms Mette Lynhe, a beneficiary of the Trust, to enable her to lend the same to Mr Stiedl for him to make the payment.

According to his letter to the IR dated 14 January 2009, Mr Carter resigned as Administrator of YTC LLP in August 2008.

SCHEME SPECIFIC FACTUAL OVERVIEW

YTC (short for ‘You to Coach’) was an online computer-based training system which was to be marketed to the medical profession. The system was designed to deliver content and training for continuing professional development purposes. YTC was developed by YTC Development Ltd which was run by Mr Simon Meager. YTC’s Business Plan was drafted by Mr Norrie and Mr Bajic of YTC Medical.

The Technology Vendor was a company called Ellsburg Technology Limited (“Ellsburg”). An Option Agreement for the sale and purchase of the YTC Medical Learning System was executed on 7 June 2002. This agreement set out the price of the Technology (£9.92 million) and indicated that Innovator would be entitled to a fee (£1.1 million) were the option to be exercised.

The YTC IM was distributed on or after 21 June 2002. Further versions of the IM and the LLP Deed were subsequently sent to Mr Bretten QC on 12 July 2002 for his review and the revised version of the IM was used from September 2002.

YTC Holdings Ltd (Mr Meager’s onshore company that represented Ellsburg) ran into financial difficulties in relation to payment of staff salaries. A meeting of the PLC Board took place on 30 July 2002 at which it was resolved to accept a loan of £25,000 from Innovator.

Baker Tilly were appointed as accountants and auditors to the YTC Partnership in around September 2002.

The LLP Deed for the Partnership was originally executed on 5 December 2002. The parties to the Deed were Mr Evans and Mr Carter. This document originally referred to the Managing Partner of the LLP. As summarised above, the wording of the Deed was revised by counsel, Mr Crystal, on 12 December 2002 as part of a number of revisions designed to ensure that the Schemes were not CISs. Consequent upon Mr Crystal’s advice, references to Managing Partner were changed to ‘Administrator’ and further amendments were made to confirm that the partners would have day to day control of the business of the Partnership. Although the wording of the document was amended in these ways on or around 17 December 2002, the Deed’s front and back sheets remained those from the version executed on 5 December 2002.

By an AA dated 9 December 2002, Mr Carter and Mr Evans acquired the rights to the YTC Technology. At that stage, due to administrative delays, the LLP had yet to be incorporated.

Also on the 9 December 2002 Mr Meager entered into a Subscription Agreement with Mr Evans and Mr Carter. Pursuant to that agreement, Mr Meager agreed to subscribe for shares in the YTC LLP in the event that existing subscriptions were not sufficient to enable the purchase price of the Technology to be raised. In the event, YTC was fully subscribed and this agreement was never called upon.

The LLP was then incorporated on 11 December 2002. The Board of Innovator then agreed to launch the Partnership (to be called the “YTC Medical Learning System Partnership LLP” with a valuation for the Technology of £10 million.

On 6 February 2003, an agreement was entered into between Ellsburg, the YTC LLP, YTC Medical Limited, Mr Meager and Mr Clarke (who was the solicitor to Ellsburg). Pursuant to this agreement, and in order to assist in the successful exploitation of the YTC Technology, Ellsburg agreed to release £300,000 of the purchase price for the Technology, and CB was authorised to release the monies in tranches to the Exploiter.

By an AEA purportedly dated 31 March 2003, YTC Medical Limited (“the Exploiter”) was appointed to exploit the YTC Technology. The same day a Security Agreement was entered into between Ellsburg and the Exploiter whereby the sum to which Ellsburg became entitled as interest from sums held on deposit would be used to pay for the interest accruing on the loan to the LLP.

By a D/A purportedly dated 4 April 2003, and pursuant to the P/A granted to him, Mr Carter purported to enter the YTC Claimants into the YTC LLP.

On 7 April 2003 Mr Bailey provided Baker Tilly with schedules setting out monies held in CB’s client account in respect of each Partnership. Mr Carter provided Baker Tilly with Scheme documentation for the YTC LLP on 7 April 2003. On 30 April 2003, Baker Tilly produced a financial statement for YTC the period ending 5 April 2003.

On 9 April 2003 there was a meeting which, according to a note of Mr Roper, involved “sign off on Tech Partnership”. On that day the YTC LLP held a meeting at which authority was given to execute the loan arrangements with Bank Leumi.

A dispute arose between Innovator and Ellsburg over the latter’s entitlement to payment from the Partnership under the AA. Ellsburg demanded payment of the balance of the purchase price, less the £8m held on deposit at Bank Leumi. A Settlement Agreement dated 15 April 2003 was entered into whereby the Partnership was to pay the balance of the 20% of the purchase price, which was acknowledged to be net of all monies that were due to Innovator from Ellsburg.

On 23 April 2003, a Service Agreement was executed stipulating Mr Carter’s obligations to the Partnership as Administrator thereof. The Claimants placed significant reliance upon the fact that this was after the execution of the D/A.

An agreement was entered into on 16 July 2003 whereby the sum of £8m was purportedly loaned to YTC LLP from CLFL (“the CLFL Bridging Loans”). As explained above these arrangements were made because it was understood that the purchase price had to be paid by 18 July 2003. It subsequently transpired that it had not been necessary to make payment by this deadline and the CLFL arrangements were overtaken as a result of Bank Leumi providing finance for the purchase. The Claimants contended that these arrangements involved improper and indeed dishonest behaviour. They will be addressed in connection with the Claimants’ case on dishonesty.

An enquiry notice was issued by the IR in relation to YTC on 31 July 2003.

The Scheme’s banking documents were executed on 1 August 2003. These consisted of (i) a Term Loan Facility by which £8m was made available to the LLP in relation to the purchase of YTC; (ii) a debenture agreement by which the LLP granted Bank Leumi a charge over the Partnership’s assets by way of security; and (iii) a Deed of Deposit by which Ellsberg agreed to place the £8m into a deposit account at Bank Leumi. A drawdown notice was issued in the sum of £8m the same day by Mr Carter and Mr Bailey on behalf of YTC LLP.

An arrangement fee of £140,000 was payable to Bank Leumi in relation to the £8 million loan facility to be made available. That was paid by CB on 5 August 2003.

By December 2005, the IR had indicated that it would only allow relief on 20% of the total sum claimed, conditional on this being accepted by all the Partnerships. An EGM of the YTC LLP was held on 23 January 2006, which approved the offer in principle and the partners of YTC LLP resolved to accept the same on 1 February 2006.

At a further EGM of 10 March 2006, the YTC partners resolved to incorporate a company and to transfer the assets and liabilities of the LLP to that company.

The Claimants alleged that the YTC Scheme contained a number of “egregious” features. These “irregularities” were said to be relevant to the effectiveness of the Scheme and the honesty and credibility of the Defendants involved. Most of these are addressed when considering the Claimants’ various claims.

Three documentary related allegations may conveniently be considered here, namely: (1) there was no valid AA; (2) documents were backdated and (3) there was concealment of key agreements.

The Claimants contended that there was no valid AA for the YTC Scheme because it predated the incorporation of the YTC LLP. It is correct that the AA was purportedly signed by Mr Carter and Mr Evans on behalf of the LLP a few days before it was incorporated. In such circumstances the rights to the Technology would have been held by Mr Carter and Mr Evans on behalf of the inchoate LLP and the LLP would have acquired the rights upon or shortly after incorporation. Further, at all times both the LLP and Ellsburg acted on the basis that there was a valid AA between them on the terms set out in the 9 December 2002 AA. In the above circumstances I reject the contention that there was no valid AA.

This issue arises in relation to the Etrino scheme as well.

It was not in dispute that the LLP Deeds for YTC and Etrino were not in their finally executed form as at 5 December 2002, this being the day upon which the document is dated.

The relevant chronology of events is as follows:

The LLP Deeds were not re-executed but amended versions were produced with the original signature pages. The front page was dated, apparently by Mr Braithwaite, to match the date of the original deed, namely 5 December 2002.

Mr Bailey accepted that the document was not executed in its final form on the date on the face of the document. He explained that this was an amendment to an existing document. It was not suggested to Mr Bailey that doing so was dishonest.

It would no doubt have been better for Mr Bailey to have insisted that the document be re-executed, as he accepted. As at this time the only members of the LLPs were Mr Carter and Mr Evans, this would have been easy to achieve. However, his failure to do so is of no legal consequence. The Claimants accepted that this amendment to the LLP Deed did not affect the tax consequences of the structure or give rise to any cause of action. Nor do I consider that it bears on the honesty or credibility of Mr Bailey or anyone else involved. It is simply an example of poor practice.

Again this also applies to the Etrino D/A. The Claimants relied in particular on correspondence involving Mr Roper. He was emailed by Mr Stiedl on 8 April 2003 who noted that: “I believe Paul has forwarded you the first 9 schedules earlier today” and providing the last schedule, for Gentech 1. He continued: “You will note that we have 110 partners”. The Claimants submitted that the likelihood is that that was a reference to the schedules of names attached to the D/A. The Claimants also relied upon a diary entry created on 4 April 2003 but for an appointment, in Mr Roper’s diary, on 9 April 2003, entitled “sign off on Tech Partnerships”. It was submitted that the likelihood is that this referred to the signing off of the D/As.

The evidence of Mr Roper was that this correspondence and meeting related to banking documents and the need to sign Board Minutes by which the LLPs approved the entering into of the banking documents, such as the Term Loan Facility. This evidence was supported by the Board Minutes themselves, a number of which were signed between 9am and shortly after 10am on 9 April 2003. That this was the subject matter of the 9 April meeting was borne out by a number of other matters. In particular:

Next the Claimants relied on the fact that there are some subscription applications dated on or after 4 April 2003 as well as credit entries after 4 April 2003 in the YTC ledger. They also point out that in the case of Mr Kirk, it was only by a letter dated 4 April 2003 that his financial adviser wrote to him seeking his agreement to transfer him to YTC LLP.

It is apparent, however, that the subscription applications were for applicants who had made earlier applications to other Schemes which were being “replaced and superceded” by those for YTC. In each case the original application to invest in an Innovator Scheme was therefore made well before 4 April 2003 and I accept Mr Carter’s evidence that the likely explanation is that the investments were transferred to the YTC Scheme when the other Scheme became over-subscribed on or before 4 April 2003 and that the replacement paperwork was only completed at a later stage.

In relation to the ledger entries in the CB client account for YTC that post-dated the 4 April 2003, this again related to investors who had been moved from a different Scheme that was over-subscribed and, as Mr Carter explained, was CB’s accounts “catching up with the reality of the situation”. Mr Carter’s evidence was that Innovator stopped bringing in new business after 26 March 2003 (the date of the Ministerial Statement) and hence they had plenty of time to transfer partners between Partnerships to ensure all Schemes were fully subscribed. I accept that evidence.

The Claimants also relied on correspondence with Bank Leumi and their solicitors and the fact that, despite a number of requests, CB did not provide them with a list of YTC-LLP members until 23 July 2003 and that that list comprised 17 members (as opposed to 37 in the LLP). However, the explanation for that is that Mr Roper mistakenly re-forwarded an old email to DWS which attached a list of members. That email was dated 14 March 2003, and thus the list of members as it appeared at that date contained fewer members than the D/A which was subsequently executed on 4 April 2003.

I am accordingly not satisfied that the Claimants have shown the YTC and Etrino D/As were backdated. Indeed, no good reason for doing so was made out. It was well known that the tax year ended on 5 April and that the D/As needed to be signed before that date and there was no evidence that any particular difficulty arose to prevent Innovator adhering to that deadline.

In relation to the signing of the D/As it was Mr Bailey’s evidence that: “My recollection is that we had the large board meeting room in Collyer-Bristow, there were hundreds of piece of paper, Paul Carter and I signed and our wrists went practically numb. In and out of the meeting came Mr Gates and Mr Evans. I can't recall the precise date. I felt no uneasiness when signing, but I do remember a feeling of triumph it had been done.” Mr Carter’s evidence was similarly that there was a long signing session and that it took place on 4 April 2003. I accept that evidence.

In summary, I am not satisfied that it has been shown that any of the YTC agreements were backdated and I find that they were not.

The Claimants contended that the Subscription (or Underwriting) Agreement of 9 December 2002, the Funding Agreement of 6 February 2003, the Settlement Agreement dated 15 April 2003 and the CLFL/YTC LLP Loan Agreement were ‘secret’ agreements whose disclosure would have indicated (1) that there was no genuine arms length purchase of Technology (2) that the purchase price stated in the IM and the AA was fictional (3) subscribers could not have obtained tax relief which it was represented they could obtain and (4) the YTC Scheme lacked bona fides and was fraudulent.

As to the Subscription Agreement, its purpose was to ensure that the Scheme became fully subscribed such that it could proceed. The liability for the shortfall was Mr Meager’s, not Ellsburg’s. The Claimants contended that it was obvious that Mr Meager would never have had this obligation and that the agreement lacked commerciality and was a pretence. However, it was Mr Bailey’s unchallenged evidence that agreements of this kind are usual in a scheme of this nature and that it gave him no reason to suppose that the Scheme was anything other than genuine.

As to the Funding Agreement, this was designed to ensure that there would be sufficient funding to enable the Exploiter to carry out its obligations. It was designed to ensure the Scheme worked and supports rather than detracts from the genuineness of the Scheme arrangements.

As to the Settlement Agreement, this formalised the parties’ liabilities only as regards the 20% portion of the purchase price (taking account of other existing liabilities), whereas the 80% element was assumed to follow, the banking arrangements not then having been finalised. I reject the unrealistic submission that it limited the liability of the LLP to Ellsburg to 20% of the agreed price. Although one can see how this argument arises from a literal consideration of the wording of the agreement divorced from its context, when considered against the background of the Scheme arrangements and the existing agreements it is clear that it was addressing only the non-bank loan element of the purchase price. The bank loan was integral to the Scheme arrangements and was an important part of the potential benefit to Ellsburg. There was never an intention to remove the responsibility to pay the full consideration to Ellsburg and the parties continued to act on the basis that there would be a bank loan and deposit of the security amount as set out in the AA, as indeed thereafter happened.

As to the Loan Agreement from CLFL, this is addressed elsewhere but it was designed to ensure that finance was raised to enable the Scheme to become operational and was expressly approved by Mr Bretten QC.

I accordingly find that the agreements were not secret in so far as this is sought to imply that different arrangements were in place as compared to those set out in the Scheme documentation. These agreements sought to give effect to those arrangements. I do not consider that they contain anything which ought to have been brought to the Claimants’ attention. Even if they did this would not be the responsibility or duty of CB, Mr Bailey or Mr Roper.

Etrino was an email marketing and client retention tool. It was a web-based tool aimed at small to medium-sized businesses. Etrino was developed by PeterPostPartners Limited (“PPP”) which was run by Mr Peter Lewis. The Etrino business plan was produced by Mr Duncan Binks, but was varied by Mr Lewis over time.

On 14 August 2002, PPP granted Innovator an option to purchase the Etrino Technology for or on behalf of a third party (i.e. the Etrino Partnership). The Option Agreement set out the £3m purchase price of the Etrino Technology and provided that Innovator would be entitled to a Fee of £240,000 were the option to be exercised.

Instructions in relation to the tax structure and anticipated tax implications of the Etrino Scheme were sent to Mr Bretten QC on 15 August 2002. Mr Bretten QC provided his advice in writing on 20 August 2002 and produced a further, slightly amended advice on 22 August 2002. Scheme documents were settled in line with how Mr Bretten QC had settled similar Scheme documents for the Agent Mole and YTC Schemes.

The Etrino IM was distributed on or after 10 October 2002. Further instructions were sent to CB to instruct Mr Bretten as to the implications of the decision in Barclays Mercantile Business Finance v Mawson. Mr Bretten QC provided written advice as to the implications of the decision on 15 October 2002. His advice was that there was nothing in the decision which required any qualification or modification to be made to the advice which he had previously given in relation to the structure and documentation of the Etrino scheme.

On 28 October 2002, American Appraisal UK Limited produced a report on the Fair Market Value of the Etrino Technology. The report was based on the Business Plan financial forecasts.

On 6 December 2002 Mr Bretten QC advised on the potential applicability of section 384(7) of the Income and Corporation Taxes Act 1988 and concluded that it should not be in point.

The LLP Deed was executed on 5 December 2002. The Etrino LLP was incorporated on 11 December 2002. The AA between PPP and the Etrino LLP was executed on 13 December 2002. Unlike the other AAs, this agreement was an onshore transaction and the transfer of Technology was in principle liable to attract capital gains tax.

That fact gave rise to the possibility of PPP being assessed for the sums it had received on the sale. Although the 80% was held on deposit, if exploitation was successful, then any additional sums released to PPP would have been equally liable to assessment.

A further potential risk arising from the existing structure of the sale was raised by the proposed lending bank: the concern was that if a UK Technology Vendor became insolvent, its provision of security might be regarded as a preference and/or unwound, thus prejudicing the security of the lending bank.

In the light of these concerns it was agreed between the parties that the technology would be sold to First Global Technologies Limited (“First Global”) – an offshore entity – and then re-sold to the Etrino LLP. The 13 December 2002 agreement was thus to be cancelled and/or replaced. The insolvency legislation would then not apply and there would be no risk of capital gains tax on the new transaction. Precisely when this agreement was concluded was in dispute.

There was an agreement of 24 March 2003 by which First Global purportedly sold the rights to Etrino to the LLP, although the Claimants questioned the validity of that agreement.

The AEA was purportedly executed on 31 March 2003 pursuant to which the Etrino LLP (through Mr Carter) appointed Marble Eye to be the Exploiter of the Etrino Technology. The same day a Security Agreement was entered into between First Global and Marble Eye pursuant to which First Global agreed to transfer interest accruing on the sum to be held in its deposit account to pay for interest accruing to the lender in relation to loan to the LLP.

By a D/A dated 4 April 2003 and pursuant to the P/A granted to him, Mr Carter purportedly entered the Etrino Claimants into the Etrino LLP. A Service Agreement was entered into between Mr Carter and the Etrino LLP on 23 April 2003 which recorded Mr Carter’s obligations to the Partnership as Administrator thereof.

Also on 4 April 2003 a Tri-partite Agreement between First Global, PPP and the Etrino LLP was signed, although it was dated 18 March 2003.

After the withdrawal of SocGen as lending bank, an agreement was entered into on 16 July 2003 whereby the sum of £2.4m was loaned to the Etrino LLP from CLFL. This arrangement was subsequently overtaken as a result of MFC providing finance for the purchase.

On 21 July 2003, Mr Bailey was given the authority to execute banking documents to secure loan finance from MFC. On 20 August 2003, a General Pledge and Assignment Agreement was entered into between First Global and MFC. On 27 August 2003, two further agreements were entered into between The Etrino LLP and MFC:

A drawdown notice was subsequently issued for £2.4 million. By a letter dated 4 September 2003, CB wrote to CLFL informing it of the refinancing arrangement with MFC and further indicating that the loans to Etrino LLP had in effect been cancelled.

On 31 July 2003, the IR wrote (1) to Baker Tilly, auditors to the Etrino LLP, stating that an enquiry notice had been issued in respect of the Etrino scheme and (2) to Mr Carter informing him that the Etrino LLP’s tax return was under enquiry.

Exploitation of the Etrino Technology was unsuccessful for various reasons including demands and objections raised by Mr Lewis and attempts by him to go back on the terms of the AEA. By an EGM on 9 February 2004, it was resolved to remind Marble Eye of its obligations but to continue with the existing exploitation arrangement given Marble Eye’s proximity to the Technology.

The Etrino LLP and Etrino Technology Limited entered into an agreement dated 20 February 2004 whereby the former transferred its assets and liabilities to the latter. The hive down followed from the failure of Marble Eye to exploit the Etrino Technology. The same day the LLP entered into a Licence Agreement with Vermilion International Investments Limited (“Vermilion”) pursuant to which Vermilion granted a licence to the LLP to exploit the XPsend Technology. A further AEA was entered into by which the Etrino LLP appointed Exploit Limited to exploit the XPsend Technology.

Further instructions were sent to Mr Bretten QC on 23 February 2004 in relation to whether there was any adverse tax implication for the partners of the Etrino LLP in relation to the hive down of the business of the LLP to Etrino Technology Limited. Mr Bretten QC advised that there were no tax issues in relation to such a hive down, however the transfer may give rise to questions as to the commerciality of the business.

As a result of the failure of Marble Eye to successfully exploit the Etrino Technology and difficulties that Mr Lewis had created for the further exploitation of the Etrino Technology, a Settlement Agreement was entered into on 26 May 2004 between PPP, First Global, the Etrino Technology Limited, Mr Carter, Marble Eye and Mr Lewis. By that agreement, PPP received a sum in settlement of all outstanding obligations that may have been owed to it.

A deed of release was executed whereby upon receipt of the stated sum, First Global was released from the obligation to pay any outstanding sum under the AA by which it acquired Etrino from PPP on 18 March 2003. In addition, a termination agreement was entered into between Etrino Technology Limited and Marble Eye whereby the latter was discharged from its obligations as exploiter under the AEA of 31 March 2003.

The Etrino EGM took place on 20 January 2005, pursuant to which the LLP rejected a 10% offer of settlement made by the IR on the Partnership’s claim for relief.

A further EGM was held by the Etrino LLP on 23 January 2006. By December 2005, the IR had indicated that it would allow relief on 20% of the total sum claimed, conditional on this being accepted by all the Partnerships. An EGM of the Etrino LLP was held on 23 January 2006, which approved the offer in principle and the partners of the Etrino LLP resolved to accept the same on 1 February 2006.

The documentary related allegations of “egregious” features or irregularities relied upon by the Claimants which may conveniently be considered here are: (1) there was no valid AA and (2) documents were backdated

The Claimants contended that there was no evidence of any valid AA in respect of the Etrino Scheme. Etrino LLP was not a party to the 13 December 2002 agreement and as to other versions of acquisition agreements whether the 18 March 2003 AA between FGT and Etrino AA (which is referred to in some documents, but a copy of which appears not to exist) or the 24 March FGT/Etrino AA (a copy of which does exist),it was submitted that Mr Carter was not authorised to enter into them on behalf of Etrino LLP as they were executed after the Ministerial Statement of 26 March 2003 and backdated. This will be addressed when addressing the backdating issue.

The Claimants contended that the Etrino D/A was backdated for essentially the same reasons as the YTC D/A. For the reasons set out when dealing with that issue in relation to the YTC scheme I find that all the Scheme 1 D/As, including the Etrino D/A, were executed on 4 April 2003. In so far as some Claimants’ subscriptions appear on the Etrino ledger after the date of the D/A in which those same investors were entered into the Etrino LLP I find that these monies were received prior to the D/A but were the subject of transfers across Scheme ledgers as a result of earlier Schemes becoming over-subscribed.

This raises the same issues as the YTC LLP Deed and has been addressed above.

The Tripartite Agreement is not relevant for the purposes of obtaining of tax relief so whether it was backdated goes to the credit/honesty of those involved. It was signed by Mr Bailey for First Global and Mr Carter for the Etrino LLP.

It was accepted that the date on the front of the agreement (18 March 2003) is not the date upon which the written document was signed. The written document was created and signed on 4 April 2003. However, as the Defendants stressed, and as was not seriously challenged, there is nothing dishonest about having a written agreement that bears a date other than the date of signature if this merely records the terms of an earlier agreement (at least if, as with the Tripartite Agreement, it is not a deed). That that was Mr Bailey’s contemporaneous understanding is borne out by a letter he wrote to Mr Lewis on 30 March 2004.

It was the evidence of Mr Bailey that he had not been involved in the earlier negotiations concerning the Tripartite Agreement and that his role was merely to document an agreement previously reached, in accordance with the instructions given to him.

The Claimants called Mr Lewis as a witness and it was his evidence that the Tripartite Agreement was both made and signed on 4 April 2003. Indeed it was his evidence that all relevant agreements, the PPP/First Global AA, the Etrino AEA and the Tripartite Agreement were made on 4 April 2003, although there had been an agreement in principle on 18 March 2003.

I find that the essential terms of the offshore sale to First Global and the Tripartite Agreement were agreed on 18 March 2003.

Mr Lewis’ evidence that no agreements were made until 4 April 2003 was undermined by his concession in cross examination that the AEA was concluded on 31 March 2003 and that this could by definition only take place after the sale of the Technology to the LLP. As Mr Lewis accepted, First Global had to own the Technology in order to be able to sell it to Etrino and Etrino could only then enter into the AEA with Marble Eye.

In his witness statement he stated that: “Although it did not come to my notice at the time. I have since been made aware by my solicitors that the Exploitation Agreement (which has 31 March 2003 on its face) appears also to have been backdated. As I have explained, this agreement was agreed and signed on 4 April 2003.”

However, this was contradicted by the documents, including documents signed by Mr Lewis. There was a meeting of the Exploiter, Marble Eye Limited, dated 28 March 2003 to approve the AEA. The meeting minutes are signed by Mr Lewis. The meeting minutes record that the LLP had entered into an AA with First Global. Although Mr Lewis did not accept this, the clear inference is that Mr Lewis understood that the Technology had been sold to the LLP before 28 March 2003.

There was then a meeting of the Etrino LLP management committee on 31 March 2003 attended by Mr Lewis, Mr Binks and Mr Tenconi in which cash flows resulting from the exploitation of the Etrino Technology were discussed. The meeting minutes, signed by Mr Lewis, clearly record that there was a signed AEA at that time: “Following the agreement above, the signed Agency Exploitation Agreement was passed to the other party signifying confirmation of the terms and conditions”.

Mr Lewis in cross-examination accepted that the AEA could not have been backdated given this meeting minute.

The fact that the essential terms of the Tripartite Agreement were agreed on 18 March 2003 rather than 4 April 2003 is also supported by the following:

The correctness of the recorded dates of the agreements is also supported by the terms of the Settlement Agreement dated 26 May 2004. This agreement is signed by Mr Lewis who was then represented by RadcliffesLeBrasseur. Mr Lewis confirmed in evidence that he would not accept money for making statements that he believed were not true nor would he lie to secure a deal. The terms of the agreement record the existence of the following agreements:

The Settlement Agreement also states: “In consideration of the parties entering into this Deed Peter Lewis, PeterPostPartners and MarbleEye formally recognise the documents recited above as being true, valid and entered into on the dates stated thereon. Furthermore, the parties agree that upon the request of Mr Carter, they will furnish statements made in this Deed and confirming that they are not aware of any ancillary agreements which conflict with the transactions set out in this document recited above. (clause 1.1)”

The Claimants and Mr Lewis relied on email exchanges between himself, Mr Tenconi and Mr Stiedl in early April 2003 which suggested that the agreements were not yet finalised. However, there is no necessary inconsistency between a binding contractual agreement having been made and the finalisation of non-essential terms. Nor would references in the exchanges to them being “subject to contract” or “without prejudice” alter the position if in fact there already was a binding agreement. Further, even if there is an inconsistency the more compelling evidence is to be found in the documents signed by Mr Lewis himself acknowledging the earlier making of the agreements.

In all the circumstances I find on the evidence that a binding agreement the essential terms of which are set out in the Tripartite Agreement dated 4 April 2003, was made on 18 March 2003. It may be that Mr Lewis took the view that until each and every term had been finalised there was no binding agreement but, if so, I find that he was wrong in that view.

I further find that in any event it was Mr Bailey’s belief and understanding that a binding agreement had been made on 18 March 2003, in which case there would be nothing untoward about so dating the Tripartite Agreement.

The Tripartite Agreement refers to both the AA between PPP and First Global and that between First Global and Etrino being dated 18 March 2003. No such agreements have been found. There is, however, a First Global/Etrino AA dated 24 March 2003, and in the Settlement Agreement it was recorded as being true, valid and entered into on that date. Mr Carter confirmed in evidence that the AA was made on this date and before the Ministerial Statement on 26 March 2003. I accept that evidence.

The Claimants relied on various exchanges which suggested that the terms of the PPP/First Global offshore sale were not finalised until late in March or early April 2003. However, the fact that the final terms of that agreement had not been determined does not mean that there was not an already binding sale agreement. In any event none of these documents bear directly on the First Global/Etrino AA. Mr Lewis was not involved in the execution of this agreement and had no direct knowledge of its execution. If an already binding offshore sale had been made, or was believed to have been made, there is no reason why the onshore sale should not have been made on 24 March 2003. In all the circumstances I am not satisfied that it has been shown that this AA was not concluded on the date that it bears.

No copy of the agreement between PPP and First Global selling the Technology offshore has been disclosed by any party. However, as the Tripartite and Settlement Agreements both record its existence, and as there must have been a sale offshore for title to have passed to First Global, it is highly likely that such a document existed in 2003 and I so find.

The Claimants also alleged that that the AEA was backdated in reliance upon the evidence of Mr Lewis. In the light of the fact that Mr Lewis in cross-examination accepted that the AEA could not have been backdated given the meeting minute of 31 March 2003 I reject this allegation.

In summary, I am not satisfied that it has been shown that any of the Etrino agreements were backdated and I find that they were not.

Unlike in relation to YTC, no pleaded case was advanced as to the concealment of key Etrino agreements and this allegation was accordingly not specifically addressed by the Defendants in their submissions and evidence. The Claimants nevertheless submitted that the following agreements and related arrangements were concealed from investors (as well as the banks and the IR), namely (1) the 13 December 2002 AA, the 13 December 2002 Subscription Agreement; (2) the Tripartite Agreement; (3) the 26 May 2004 agreements with Mr Lewis and his companies and (4) the 16 July 2003 CLFL/Etrino-LLP Loan Agreement. In the light of the pleadings I do not consider any positive case to this effect to be open to the Claimants.

In any event, I do not consider that the First Global AA was required to be disclosed once it had been replaced by the First Global/Etrino AA. The CLFL loan arrangements are addressed elsewhere. There is, however, force in the criticism made that the Tripartite Agreement should have been disclosed since on the face of the agreement it conferred on PPP an option to acquire the intellectual property rights in the Technology on the third anniversary of the Agreement.

The Optibet Technology was a betting odds comparison website. It used feeds from online Bookmakers to display real-time odds on betting opportunities. Fees were to be earned every time a user placed a bet with one of those bookmakers.

An LLP Partnership Deed was executed on 24 March 2003, prior to the incorporation of the Optibet Technology Partnership LLP on 26 March 2003.

On 24 March 2003, an AA was entered into between Covington Inc the Technology Vendor and the Optibet Technology Partnership LLP. As the Optibet LLP had not, as at that date, been incorporated, Mr Carter and Mr Evans acquired the Technology as partners of a GP, as subsequently advised by counsel.

A Guarantee Agreement was also entered into between the Technology Vendor and Mr Carter and Mr Evans on 24 March 2003. The Guarantee Agreement required the Technology Vendor to pay the ‘Guarantee’ sum into the ‘Guarantee Account’ to be used as security for the loan to be acquired by the Partnership to enable it to purchase the Technology. The Guarantee amount was 80% of the purchase price, i.e. the sum to be borrowed from the lending bank to enable the acquisition of the Technology.

On 24 March 2003, American Appraisal (UK) Limited valued the Optibet Technology. The valuation was based on a Fair Market Value of the business and was based on information and forecasts provided by the Technology Vendor. The valuation contained an analysis of the Optibet Business and an overview of the betting industry and concluded that the Fair Market Value was £9,947,000.

On 14 April 2003, instructions were sent to Mr Crystal in relation to the Optibet partnership structure. These instructions were not drafted by CB but were forwarded by CB acting as a conduit for the transmission of instructions from Innovator to Counsel. Mr Crystal was asked to confirm whether he agreed that (1) the LLP could not have acquired the Technology under the AA, the latter having pre-dated incorporation of the LLP and (2) the Technology was acquired by members of a GP which new members might subsequently join.

Mr Crystal provided his written advice on 16 April 2003. Mr Crystal’s advice stated (at paragraph 2):

“A contract purportedly made with an embryo LLP itself stands not as a contract with the LLP but as a contract made with those who purportedly acted for it in the making of the contract and it does not bind the LLP. Section 36C of the Companies Act 1985 (as amended and as applied and incorporated by the Limited Liability Partnership Regulations 2001, Reg. 4 and Sch. 2) provides: (1)“A contract which purports to be made by or on behalf of a Limited Liability Partnership at a time when the Limited Liability Partnership has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the Limited Liability partnership or as agent for it and he is liable on the contract accordingly.”

Mr Crystal further stated that although the intention may have been to acquire the Optibet Technology in a limited liability structure, it would nevertheless be the case that the Technology “was acquired and the obligations under the Guarantee assumed by them as partners”.

On 16 April 2003, instructions were sent to Mr Bretten QC in relation to various tax aspects of the ‘Golden Contracts’ of which Optibet was one. These instructions were not drafted by CB but were forwarded by CB to Mr Bretten QC. Mr Bretten QC provided his advice on 20 May 2003.

Following the initial advice given by Mr Crystal in relation to Optibet, a draft Partnership Deed between Mr Evans and Mr Carter appears to have been sent to Mr Crystal for his review and approval. That draft deed does not appear, in the event, to have been executed.

The Optibet IM was distributed on or after 12 May 2003. The Optibet Partnership was identified therein as a GP.

On 16 July 2003, by resolution of the Optibet Technology Partnership, Mr Carter and Mr Bailey were given the requisite authority to execute transactional documents necessary to pay the balance of the purchase price.

By a Loan Agreement dated 16 July 2003, CLFL loaned £8m to the Optibet Partnership to enable it to pay the balance of the purchase price under the AA.

On 21 July 2003, Mr Evans died. As a result of Mr Evans’ death, the then existing GP would have dissolved. Partnership assets (including the Optibet Technology) would have vested in Mr Carter as the surviving partner. Although the GP would have dissolved there was nothing to prevent Mr Carter trading in the name of that Partnership, as he sought to do, being unaware of the legal consequences of Mr Evans’ death.

By a D/A dated 31 July 2003, the Optibet Claimants were purportedly entered into the Optibet General Partnership. The Claimants submitted that that in exercising the P/A Mr Carter sought in the D/A to make subscribers partners of an existing GP, being the same GP as was allegedly constituted by the 24 March LLP Deed. He did not purport to make subscribers partners of a new Partnership with him, as would have been necessary. They further submitted that he had no authority to make subscribers partners of such a new partnership as it was not the Partnership described in the IM.

An AEA was executed on 6 August 2003 pursuant to which the Optibet Partnership appointed Optibet Limited (“the Exploiter”) to exploit the technology on its behalf. The Managing Director of the Exploiter was Mr Peter Hanford.

On 6 August 2003, a Security Agreement was entered into between the Technology Vendor and the Exploiter pursuant to which the Technology Vendor agreed to transfer interest accruing on the sum to be held in its deposit account to pay for interest accruing to the lender in relation to loan to the Partnership.

On 8 August 2003, a Service Agreement was executed whereby the Optibet Partnership appointed Mr Carter to be the Administrator to the Partnership. This Agreement set out Mr Carter’s obligations to the Partnership as Administrator thereof.

On 1 September 2003, the Optibet Technology Partnership 2 LLP was incorporated. The prospective members of that Partnership were all those who had become partners of the Optibet General Partnership as listed on the LLP2 application. By a Transfer of Trade Agreement of the same day, the business of the GP was transferred to the new LLP.

Mr Carter signed the incorporation application for that LLP on behalf of each of the Optibet investors, confirming in respect of each of the investors “I consent to act as a member of the limited liability partnership named on page 1.”

By meeting of the Optibet Technology Partnership 2 LLP on 1 September 2003, Mr Carter was given authority to execute transactional documents with MFC to secure loan finance for the purchase of the Optibet Technology.

On 2 October 2003, a General Pledge and Assignment was entered into between Covington and The Optibet Technology Partnership 2 LLP. On 9 October 2003, two further agreements were entered into between The Optibet Technology Partnership 2 LLP and MFC:

A drawdown notice dated 2003 was provided by The Optibet Technology Partnership 2 LLP to MFC: an advance of £8m under the term loan facility agreement was to be made to The Optibet Technology Partnership 2 LLP's account with MFC, which was then transferred to the Technology Vendor’s deposit account at MFC, and made subject to the General Pledge and Assignment.

Financial Statements were signed off by Crouch Chapman, auditors to the Optibet Technology Partnership 2 LLP, on 13 May 2004.

A meeting of the Partnership took place on 23 March 2005 at which the IR 10% offer of settlement was rejected.

An EGM took place on 24 January 2006 at which the partners agreed to accept the IR’s new offer to allow relief on 20% of the total sum claimed.

On 27 March 2006, the business of the Optibet Technology Partnership LLP was transferred to Optibet Technology Limited.

The documentary related allegations of “egregious” features or irregularities relied upon by the Claimants which may conveniently be considered here concern the alleged backdating of documents.

The Claimants alleged that the AA (dated 24 March 2003) was likely to have been made after the Ministerial Statement of 26 March 2003.

The Claimants’ case as put to Mr Carter in cross examination was as follows:

Mr Carter strongly denied this. His recollection was that after receiving the advice of Mr Bretten QC they went back and checked the relevant AA for the 13 Technologies that had been executed and upon checking the agreements it transpired that 3 of the 13 agreements contained the date of 1 July 2003 for payment of the Final Purchase Price and hence could be used.

The suggestion that the separation of the guarantee from the terms of the AA did not take place until April 2003 was incorrect and was not ultimately pursued. Mr Bailey was instructed to do this by an email from Mr Stiedl dated 19 March 2003. AAs and Guarantee Agreements were sent by email by Ms Lone Christensen to Ms Laura Mouck of Covington by email on 24 March 2003. The change to split the guarantee from the remainder of the AA had therefore already occurred before the Ministerial Statement of 26 March 2003, let alone the 10 April 2003.

In support of the suggestion that the date in the three agreements was changed the Claimants relied in particular upon the fact that the sample AA sent to Mr Bretten QC to consider had a payment date of 31 July 2003; the implausibility of AAs being prepared with different payment dates, and a note of Ms Keeble of CB of the conference with Mr Bretten QC which records as follows:

“Agreement was drafted prior to Ministerial Statement

BS – everything prepared according to previous Opinion. Drafted etc 24^th March

GRB – should have synchronised them

BC [must be BS] – but we had no idea knew what the Ministerial Statement would say”.

And then records BS (Mr Stiedl) saying: “I’ll check the contracts and change the dates”

It is inherently unlikely that Mr Stiedl would be telling leading counsel that he was going to change the dates in existing contracts. The typed up notes of conference accorded with Mr Carter’s recollection and stated as follows: “He said that Clause 3 of Agreement should say “a date not later than 25^th July.” BS said that the first step would be to check all other Agreements to see what dates they contain in Clause 3. It could be that not all the dates are 31^st July.”

Mr Carter’s recollection is also borne out by the documents.

The signature pages of the AAs and Guarantee Agreements for 12 of the 13 LLPs were sent by fax from Ms Laura Mouck to Ms Christensen on 25 March 2003. The fax was stated to be 25 pages, two signature pages for each Technology and a cover page. The fax also stated that original agreements were being sent by Fedex International with waybill number 9670 5463.

The signatures of Ms Nicola Mouck (who signed on behalf of both Covington Inc and Fortress Financial Services Inc) on the faxed copy match exactly the signature that appears on the copy of the AA and Guarantee Agreements for Optibet. It follows that these two agreements are the same agreements that were sent by Fedex to Innovator by Covington on 25 March 2003. Moreover, every page of these agreements is initialled by Ms Nicola Mouck, including page 3 which states that the Purchaser shall pay the Purchase Price no later than 1 July 2003. This shows that the Optibet AA that was returned by Fedex on 25 March 2003 did contain the date of 1 July 2003 for final payment and not 31 July 2003. I accordingly find that the Optibet AA sent to Covington on 24 March 2003 contained the date of 1 July 2003 for payment of the final purchase price.

The Claimants also sought to place reliance upon differences between the signature of Mr Carter and Mr Evans on the signature page of the fax and that in the actual agreements. The likely explanation is that the faxed signature page was signed when it was received on 25 March 2003 and the originals were signed when they arrived in the UK on 26 March 2003.

As at 25 March 2003, both parties had signed the signature pages of the deed. This is sufficient to constitute delivery of a deed which has, in effect, been executed and delivered in counterparty form. There is no need for the signatures to co-exist on one document. The fact that the deed may not have been delivered until 25 March 2003 but is dated 24 March 2003 is of no significance. A deed takes effect from delivery and does not necessarily need to be dated - see Goddard's Case (1584) 2 Co Rep. 4b.

In any event, even if, as the Claimants contended, the steps necessary to execute and deliver a deed had not been complied with by 25 March 2003, the document would take effect as a simple contract. On that basis, as there are no formalities required for an AA, even if the Claimants were correct in their assertions, the Optibet AA was entered into before the Ministerial Statement and thus could be used as a Golden Contract, it having the date for final payment of 1 July 2003.

This allegation arises from an email, dated 25 September 2003, from Mr Roper to Mr Carter stating “could I also ask you to sign these transfers of the business from the general partnership to the LLPs which you will see have been dated 1 September 2003 as discussed.”

As appears from the email exchanges between Mr Stiedl and Ms Ballard, of Baker Tilly, of 22 August 2003, it had been agreed that the transfer of trade from the GPs to the LLPs would take effect as from 1 September 2003 and that “the trading will be continued in the LLPs from the 01 September 2003.” The Transfer of Trade Agreements were explicitly entered into on the basis that “The Purchaser has agreed with the Vendor with effect from midnight on 31 August 2003...to purchase as a going concern the Business and Assets and to assume the liabilities and obligations...of the Vendor in connection with the Business.” Mr Roper was on holiday as at 1 September 2003 but in the light of the information the correct date to enter on the Transfer of Trade Agreement was 1 September 2003.

In summary, I am not satisfied that it has been shown that any of the Optibet agreements were backdated and I find that they were not.

The Charit email technology (“Charit”) was a web-based email system which contributed a proportion of its gross revenue to charity. The Technology Developer was Vermilion, which was owned and controlled by Mr Bob Speirs.

By an Option Agreement dated 22 October 2002, Vermilion granted Innovator an option for Innovator or a third party introduced by Innovator to purchase the intellectual property rights to the ‘Charit-email technology’. In the event that Innovator exercised the option within the ‘Option Period’, Vermilion would become liable to pay a fee of £1,595,000 to Innovator.

Instructions to advise on the tax structure and consequences of the Charit Scheme were sent to Mr Bretten QC on 29 October 2002. The instructions were sent via CB who acted as a conduit for these purposes. Mr Bretten QC confirmed that the structure would be amenable to the anticipated tax treatment by written advice of 20 November 2002.

On 11 December 2002, The Charit-Email Technology Partnership LLP (referred to as “Charit dash” to reflect the fact that there was a hyphen between Charit and Email) was incorporated at Companies House under Partnership Number OC303539 (at this time it was envisaged as being a Generation 1 scheme).

Mr Bretten QC provided tax advice in conference on 14 March 2003 in relation to the position of all incoming partners of partnerships in the tax year 2003/4. The instructions to Mr Bretten QC were sent by Mr Stiedl and were incorrectly dated 16 March 2003.

Further instructions dated 27 March 2003 were sent to Mr Bretten QC in light of the Ministerial Statement of 26 March 2003. Mr Bretten QC provided a written advice on 28 March 2003. Further instructions were sent to Mr Bretten QC on 3 July 2003 in relation to the tax position of Technology purchased after 5 April 2003. Mr Bretten QC provided his written advice in relation to such Technology on 10 September 2003.

The Charit Technology was valued by Mr Peter Wren-Hilton of HB Internet who produced a valuation report on 11 September 2003 having been provided with the Business Plan, a 10 year summary for Europe, USA and Canada, Australia and New Zealand and India. Mr Wren-Hilton adopted an income methodology to determine Fair Market Value which he put at £78,800,213.

On 12 September 2003, Vermilion entered into four licence agreements with (1) HBI Sales Private Limited (for the territory of Asia); (2) ICT Europetec Limited (for the territory of Europe); (3) Mir Technologies LLC (for the territory of the USA and Canada); and (4) Zacan Holdings Proprietary Limited (for the territory of Australia).

By these licence agreements, Vermilion granted a sole and exclusive licence to each Licensee to use and exploit the Charit technology in that Licensee’s territory in consideration for the Licensee undertaking to provide regular reports, forecasts etc in relation to its exploitation of the technology. The licence agreements were subsequently varied by deed on 10 September 2004.

Because “Charit dash” had been incorporated prior to the 26 March 2003 Ministerial Statement it was decided that it should change its name and for its name to be adopted by a new LLP.

Accordingly on 24 September 2003, Mr Carter and Mr Neilsen applied to incorporate an LLP with the slightly different title ‘The Charit E-Mail Technology Partnership’ (referred to as “Charit gap” because of the lack of hyphen between Charit and Email). The difference was unintentional. Such a Partnership was incorporated on 30 September 2003 under Partnership number OC305678. On the same day the name of the “Charit dash” LLP was changed to The Innovator “K” Partnership LLP”. The only Charit named LLP in existence thereafter (until July 2004) was accordingly “Charit gap”.

On 30 September 2003, a Limited Liability Partnership Deed for the Charit E-mail Technology Partnership LLP was executed. The founding members were again listed as Mr Carter and Mr Neilsen.

A Sale and Purchase Agreement was entered into between Vermilion and the Charit-Email Technology Partnership LLP on 13 October 2003. The front sheet stated that the Agreement related to the sale of ‘the Charit-email Technology’.

By letter of 13 October 2003 Vermilion wrote to the Charit E-mail Partnership LLP indicating that it had complied with the terms of the Licence Agreements with the 4 Licensees, and acknowledging its obligations to the LLP under the Sale and Purchase Agreement.

On 24 November 2003, Innovator entered into a PPUA with Vermilion.

On 16 February 2004, Mr Bretten QC advised in writing on the impact of the Ministerial Statement of 10 February 2004.

On 8 March 2004, the 4 Licensees entered into an AEA with Charit E-Mail Limited (“the Exploiter”). The board of the Exploiter had resolved to enter into such an Agreement the same day.

On 8 March 2004, a Security Agreement was entered into between Vermilion and the Exploiter pursuant to which Vermilion agreed to transfer interest accruing on the sum to be held in its deposit account to pay for interest accruing to the lender in relation to loan to the LLP.

On 23 March 2004, Mr Carter, exercising the P/A vested in him, purported to enter the Charit Claimants into ‘The Charit-email Technology Partnership LLP’". The D/A referred on the front sheet to ‘The Charit Email Technology Partnership LLP’ (written in block capitals) whereas the footer on each page of the Deed referred to ‘The Charit-email Technology Partnership LLP’.

On 24 March 2004, Vermilion granted a P/A to Mr Bailey and Mr Roper for the purposes of executing all documents necessary to give effect to the arrangements contemplated in the Sale and Purchase Agreement, including such documents as would enable the balance of the purchase price to be raised by way of a loan from MFC.

On 30 March 2004, The Charit E-Mail Technology Partnership LLP entered into a Service Agreement with Mr Carter pursuant to which Mr Carter was appointed as Administrator to the LLP. The name of the LLP on the front sheet of the Service Agreement appeared as above, save that it was in block capitals.

On 2 April 2004, there was a meeting of ‘The Charit-Email Technology Partnership’ at which it was resolved to confer a P/A on any of Mr Carter or Mr Neilsen to execute the transactional documents needed to complete the loan with MFC.

By a General Pledge and Assignment of 24 April 2004 Vermilion pledged and assigned in favour of MFC “any and all securities, claims, rights, objects and other assets which, although not described here, are or will be held by the Bank for this account and which are referred to as the pledged assets”.

On 11 May 2004, Crouch Chapman signed off on the audited accounts of ‘The Charit-Email Technology Partnership LLP’. On 27 May 2004, the “Charit-Email Technology Partnership LLP’ entered into two agreements with MFC:

A Drawdown notice was issued the same day in the sum of £28 million for immediate onward transfer to Vermilion’s deposit account at MFC.

On 2 July 2004 “Charit gap” changed its name to “Charit dash”. On 28 July 2004, Mr Carter wrote to the partners indicating that "We have received a letter from the Special Investigations Section of the IR informing us that they are undertaking an investigation into the Partnership Tax Return for the period ending 5 April 2004".

On 6 September 2004, Mr Crystal provided written advice on the status of the “Charit Email Technology Partnership LLP” following a memorandum produced by Mr Brian Lee of Ogier on 18 August 2004. Mr Crystal confirmed that whether or not the scheme was a CIS would turn on whether or not the partners had day to day control over the business.

On 29 June 2005, an EGM was held to consider the 10% tax relief offer made by the IR. The minutes of the “Charit-Email Technology Partnership LLP” record that the members voted unanimously to reject the offer.

A further EGM was held on 31 August 2005, to vote on whether or not to transfer the Partnership’s business and assets and liabilities into a limited company. The minutes of the “Charit-Email Partnership LLP” record the fact that the resolution in respect of conversion to a limited company was carried by a “substantial majority”. In the event though no such transfer took place.

A further EGM was held on 24 January 2006 to consider the IR's offer of 20% of the tax relief claimed. The minutes of the “Charit-Email Technology Partnership LLP” record that no resolution was passed as the partners decided to postpone decision pending receipt of further information. At a further meeting of all the Generation 3 partnerships on 23 March 2006, the partners voted to accept the IR's offer of 20% tax relief.

On 27 April 2007, MFC wrote to the Charit-Email Technology Partnership LLP requesting repayment of total outstanding amount of the credit facility, stated to be £29,383,376.40. The letter states "we expect payment of the outstanding balance latest until May 27, 2007. In case of non performance all rights available under the credit facility documents, especially the rights relating to the collaterals, remain reserved". That sum was subsequently taken from Vermilion’s deposit account in satisfaction of the loan.

The documentary related allegations of “egregious” features or irregularities relied upon by the Claimants which may conveniently be considered here concern the alleged backdating of documents.

The Charit D/A is dated 23 March 2004 and the D/A for each of the other five Generation 3 Schemes (PaperTradex, Mobilemail, Columbiz, Hermes and New Media) are each dated 25 March 2004. In respect of each of these 6 D/As, the date was entered by Mr Carter; the principal signatory to the Deed, exercising the P/A he had received from investors, is Mr Carter; and Mr Carter’s signature is witnessed on multiple occasions by Mr Roper.

In support of their allegation of backdating (in relation to all the Generation 3 schemes including Charit and GT2) the Claimants relied in particular upon emails from Mr Roper sent on 1 April 2004. At 09.36am Mr Roper wrote to Messrs Carter and Stiedl on the subject of MFC financing arrangements. His email concluded “I presume that, as you are working on the deeds of adherence, the partnerships are now finalised and closed”. By a further email Mr Roper emailed Mr Stiedl and Mr Carter stating: “just to confirm that tomorrow we are signing up 11 Partnerships” and setting out a list including Charit and GT2.

The Claimants asserted that this must be referring to the signing of the D/As for the Schemes. However, this ignores the fact that Mr Roper’s involvement was with the banking arrangements and the documents relating to the 2 April 2004. These include the minutes for the relevant Board meetings required to enable the LLPs to provide authorisation for their entry into the bank financing agreements. Again, each of the Board minutes proceeds on the basis that Mr Carter is acting as attorney for the “remaining Members of the Partnership pursuant to the terms of his appointment” which presupposes that the D/A was executed on a date prior to that on which the relevant Board meetings took place.

As to the reference to “working on the deeds of adherence”, the full text of the email is as follows: “Morning gentlemen, I am just preparing the Loan Agreements, draw down notices and debentures for the LLPs and MFC. Could you let me have details of the capital contributions (i.e. total investor’s contributions) and total bank borrowing so that I can insert the relevant loan figures please. I presume that, as you are working on the deeds of adherence, the partnerships are now finalised and closed?”

It is apparent from the first sentence of the email that, as at 1 April 2004, Mr Roper was focused upon the completion of the bank financing documentation. It is apparent from the second sentence of the email that the purpose of Mr Roper sending the email was to obtain information as to the quantum of investors’ investments so that he could complete the relevant bank financing documentation. Independently of the D/A, Mr Roper required such information for the purpose of the work that he was conducting concerning the bank financing documentation. It is apparent from the third sentence that Mr Roper was under the impression, as at 1 April 2004, that the partnerships have been “finalised and closed.” This is consistent with the D/A having been executed.

As to what is meant by “working on the deeds of adherence” I find that the most likely explanation is that Mr Roper was positing, and asking for confirmation of the fact, that as the D/As have been executed and Innovator are working on the basis of those D/As in providing financial information to Mr Roper, the partnerships were in fact “finalised and closed” such that no new investors would be admitted and the finalised financial information could be provided to the Bank.

As at 1 April 2004, the tax year still had a number of days to run and, as far as Mr Roper was aware, Innovator could theoretically have sought to join further investors to the relevant partnership, whether by a Supplemental D/A or by additions to the extant Deed. The fact that some investors had been made members of LLP did not preclude further investors being joined to the same LLP at a subsequent date (as happened in the case of Agent Mole in respect of the Generation 1 Schemes).

No reason was suggested to Mr Roper or Mr Carter in cross examination as to why the D/A should be backdated given that 2 April 2004 was still within the relevant tax year. It was, however, suggested to Mr Bailey (who was not involved in the execution of the D/As) on the basis of an attendance note made by Mr Bailey, recording a conversation which took place with Mr Carter and Mr Bailey that Mr Carter thought that there was an IR imposed deadline of 26 March 2004 which “explains why the GT2 and Charit deeds of adherence were backdated.” If, however, it was to be suggested that Mr Carter had a conscious motivation to backdate the Generation 3 D/As of then it should have been put to him, but it was not.

In all the circumstances, I am not satisfied that it has been shown that the Charit D/A was backdated.

The Claimants alleged that, although there appears to have been no particular reason for such backdating, the Charit LLP Deed was dated 30 September 2003, despite having been executed on 9 December 2003.

The Claimants relied in particular upon the fact that the final version of the Charit LLP Deed has a front page which has a footer of 9 December 2003 and a printed date of 30 September 2003 and on exchanges relating to amendments in November 2003.

Mr Carter’s evidence was that the Charit LLP Deed was executed on 30 September 2003 when the LLP was incorporated. He considered that the footer of 9 December 2003 related to the date when a further version, possibly incorporating changes suggested by Mr Bretten QC, was saved.

In this regard, it is apparent that, on 20 November 2003, Mr Roper sent Mr Stiedl a precedent for the Innovator LLP Deeds (“the Master Precedent LLP Deed”). Thus, at all times from, at least 20 November 2003, the Master Precedent LLP Deed was on the Innovator system and could have been amended and printed out by Innovator – in which case the CB automatic footer macro embedded in the Master Precedent LLP Deed would have created a footer containing the date upon which the Deed had been amended.

I consider that the most likely explanation is that the Charit LLP Deed was, as Mr Carter stated, executed on or about 30 September 2003. The documentary evidence clearly establishes that the Deed was sent out by Mr Roper for signature on 24 September 2003. The amendments that subsequently appear to have been made to that document on or before 9 December 2003, whether by Innovator or CB, as set out were minor, and it is likely that, by way of what Mr Carter termed a “short cut”, these amendments were incorporated into the Deed by means of replacement pages which were amended and saved, either by Innovator or someone at CB, on 9 December 2003. Whilst that means that the final version of the LLP Deed was not executed until that date, it does not involve backdating. The LLP Deed was executed and signed on 30 September 2003, albeit that it appears to have been amended at a later date and not re-executed.

Further, Mr Roper was absent from the office on 9 December 2003 and there is no evidence that Mr Roper was aware of or complicit in any backdating. Whilst it was put to Mr Roper that the Charit LLP Deed had been backdated, it was not suggested to Mr Roper that he was either contemporaneously aware of this or complicit in any backdating. Finally, there was no suggestion that there was any particular reason for back dating the Charit LLP Deed.

In support of this allegation the Claimants relied on two pieces of correspondence. The first, dated 6 May 2004 is a letter from Ms Christensen to Mr Roper following a request by MFC Bank to be provided with certain documents. The letter, sent by courier, enclosed the majority of the documentation requested. In respect of three categories of documents, however, Ms Christensen stated: “As you have the originals, could you please date them. We are talking of: Agency Exploitation Agreement, Service Agreement and Security Agreement.”

I agree with the Defendants that the most likely explanation is that Ms Christensen was simply pointing out that she does not have the original executed versions of these agreements; that Mr Roper does have those agreements; and that therefore they are documents which Mr Roper can provide to MFC Bank, dating if necessary.

There is no reason to suppose that Ms Christensen, who did not have the original executed versions of the agreements in her possession, was aware of whether or not the originals had already been dated.

The second communication relied on in this context, is a further letter from Ms Christensen to Mr Roper, dated 10 May 2004 in which Ms Christensen refers to five of the Security Agreements which had been amongst the documents referred to at paragraph 4 of her previous letter of 6 May 2004, and informs Mr Roper “You date.” This is consistent with the previous communication in that Ms Christensen did not have the signed originals and believed that Mr Roper did. In other words she was checking to ensure that they were dated; not giving some instruction to do so (which would not be her function anyway).

Further, even if, however, as at May 2004, some of the agreements referred to by Ms Christensen’s letter had, through oversight, been executed but left undated, it was perfectly proper for Mr Roper to ascertain from Mr Carter or Mr Stiedl, and then enter, the correct date of execution on the agreements.

In summary, I am not satisfied that it has been shown that any of the Charit agreements were backdated and I find that they were not.

The documentary related allegations of “egregious” features or irregularities relied upon by the Claimants which may conveniently be considered here concern the alleged backdating of documents.

The GT2 D/A is dated 24 March 2004. The date was entered by Mr Roper. The principal signatory to the Deed, exercising the P/A he had received from investors, is Mr Gates. Mr Gates’ signature is witnessed on multiple occasions by Mr Roper.

In support of their allegation of backdating (in relation to all the Generation 3 schemes including Charit and also GT2) the Claimants relied in particular upon emails from Mr Roper sent on 1 April 2004. For reasons already given in relation to the Charit scheme I do not consider that they show the GT2 D/A to be backdated.

In relation to GT2, this is the only one of the Generation 3 D/As which is dated by Mr Roper and is the only one where the principal signatory on behalf of investors was not Mr Carter but Mr Gates.

These differences make it inherently likely the GT2 D/A was signed on a different occasion to the other Deeds.

Mr Carter’s consistent evidence was that the GT2 D/A was signed at a separate meeting to any other Generation 3 D/As. Mr Gates confirmed that he had not “sat there and waited” while Mr Carter entered multiple signatures on D/As which did not involve Mr Gates .

Mr Gates’ evidence was that he had specifically decided to “close the partnerships quite a bit before the end of the tax year.” He stated that “my impression was that [the GT2 D/A was executed] quite a long time before the end of the tax year and the 24^th would not be inconsistent with my recollection.” This is supported by the dates of the application forms relating to GT2 which show a steady flow of investment into GT2 throughout March 2004, particularly as Mr Gates’ self-imposed deadline approached. Having taken that decision, there is no particular reason why Mr Gates would have waited until 2 April before executing the D/As.

The existence of a single application form from Mr Bell after 24 March 2004 does not undermine the fact that the weight of the evidence demonstrates that the GT2 D/A was executed on 24 March 2004. Mr Bell was not called as a witness and the form could be misdated or Mr Gates may have been informed that the application form would be “on the way” as at 24 March 2004, such that Mr Bell was included in the relevant D/A.

The other matter relating to the allegation of backdating of the GT2 D/A which was put to Mr Carter in cross-examination (but not Mr Gates or Mr Roper) was that the CB ledger entries recording the receipt of investment monies for GT2 in many cases were made after 24 March 2004. However, I accept and find that this is merely another example of CB’s administrative paperwork lagging behind the actual receipt of funds.

For all these reasons I am not satisfied that it has been shown that the GT2 D/A was backdated. Indeed, no reason for so doing was shown given that the signing date suggested by the Claimants, 2 April 2004, was still well within the relevant tax year.

It was alleged that the LLP Deeds dated 27 February 2003 and 26 March 2003 were backdated, not least because Mr Nielsen did not become a designated member until after Mr Evans’ death in July 2003. It was Mr Carter’s evidence that these dates were entered by mistake. I find these agreements were probably not signed until later in 2003, probably September 2003.

In support of this allegation the Claimants relied on the two pieces of correspondence from Ms Christensen to Mr Roper dated 6 and 10 May 2004. For reasons already given in relation to Charit I do not consider that they demonstrated backdating.

In summary, aside from the mistaken misdating of the LLP Deeds dated 27 February 2003 and 26 March 2003, I am not satisfied that it has been shown that any of the GT2 agreements were backdated and I find that they were not.

The documentary related allegations of “egregious” features or irregularities relied upon by the Claimants which may conveniently be considered here concern the alleged backdating of documents.

In support of their allegation of backdating the Claimants relied in particular upon Mr Roper’s email to Mr Carter of 8 March 2005 to which he attached an unexecuted copy of the D/A and requested that Mr Carter use his P/A to execute the draft.

Further, Mr Carter had not apparently returned an executed copy of the D/A to Mr Roper by 5 May 2005 when Mr Roper asked him for it by email. Ms Barrie wrote on her version of that email next to the requested D/As “PC to sign”. The Claimants suggested that this indicated that the D/A had still not been signed by May.

In his evidence Mr Carter accepted that the D/A had not been dated until March but explained that “it was dated the date on which we had closed...already closed the partnership to new partners”, and that this would have been done in March, not May 2005. Given that the matter was expressly raised in March and that all concerned were aware of the importance of executing the D/A before the end of the tax year I accept and find that it was signed in March 2005.

Although Mr Carter dated the Arte D/A 8 December 2004 there is no evidence that this was in any way directed or advised by Mr Roper and I find that he was not even aware that Mr Carter had done so. Mr Roper did not sign, witness or date the Arte D/A.

There appears to have been no particular reason for Mr Carter to backdate the D/A other than, as he explained, to reflect when the Partnership closed. Although there was some suggestion by the Claimants that it may have been related to the 2 December 2004 Ministerial Statement, this cannot have been the case since it was not dated before that Statement.

In support of the allegation that the LLP Deed was backdated the Claimants relied upon the fact that “Accountants” in the LLP Deed is defined as Baker Tilly but this is amended in manuscript (initialled by Mr Carter) to add the words “or such other as the partners may decide”. It was suggested that the inference to be drawn is that this was added in order to accommodate the resignation of Baker Tilly from other Innovator LLPs and its withdrawal from its involvement in the Schemes in March 2004. Whilst, Mr Carter’s manuscript amendment is likely to have been made after Baker Tilly’s resignation that is no reason for supposing that the rest of the Deed itself was executed then. As Mr Carter explained, the Arte LLP was incorporated on 27 November 2004 and it would have made absolute sense to execute the LLP Deed at the same time.

There is a footer on the first page of the document which bears the date of 10 December 2004 which suggests that at least an amendment was made on that date.

The Claimants also relied on an exchange of emails involving Mr Roper in March 2005 that suggests that he did not have a copy of the signed LLP Deed at that stage. There is nothing surprising about that and Mr Roper’s email suggests that he believed that a “signed original” may already exist and be in Innovator’s possession.

The Claimants also relied on Mr Roper’s email of 5 May 2005 requesting a copy of the signed LLP Deed. This indicates that he has not yet received it but not that there was no signed version in existence.

In all the circumstances, I am not satisfied that it has been shown that the LLP Deed was not executed and signed on 27 November 2004 albeit that it appears to have been amended at a later date in March 2004 (and possibly December 2004) and not re-executed.

The Claimants submitted that backdating of the AEA is evident from four letters from Mr Carter dated 15 June 2005 to each of the Licensees by which Mr Carter requested that they sign the AEA. Mr Carter instructed the Licensees not to date the agreement. By letter dated 22 August 2005 Mr Carter sent the AEA to Mr Gebhard and requested that he arrange to have this executed by Artex Solutions Ltd. It is apparent that the AEA was not finally signed off until this time but it was Mr Carter’s evidence that the date reflected the date upon which the AEA was in place and operational. He pointed out that Artex Solutions Ltd was an exploitation company operating under the Outlander Management Limited umbrella managed by Mr De Bo who would have been well aware of the terms of the operative agreement.

This allegations stem from an email dated 5 May 2005 sent by Mr Roper to Mr Carter in which he stated: “I would be grateful if you could kindly date each of the bank documents sometime in January of this year to ensure that we can use the existing anti-money laundering documentation.” The “bank documents” referred to are identified in the immediately preceding passage as “The individual bank opening documents.”

The “individual bank documents” were the documents pursuant to which investors applied to MFC to open individual bank accounts for the purpose of receiving personal loans (the receipt of personal loans being the main structural difference between the Arte Scheme and previous generations of the Innovator Schemes).

Mr Carter’s authority to sign these documents arose from the P/A contained in the Application Form which had been received by Mr Carter by 26 November 2004. Mr Carter no doubt should have completed the account application forms promptly upon receipt of those authorities. The difficulty with not having done so was that if the account opening forms were not dated within 3 months of the date of the supporting anti-money laundering documentation this would cause an internal difficulty at MFC.

Mr Roper’s unchallenged evidence was that he discussed this issue with MFC and agreed the date which should be put on the bank opening documents with the appropriate representatives of that bank before asking Mr Carter to “date each of the bank documents sometime in January.” I find that this was a proper procedure and that it does not support any allegation of dishonesty against Mr Roper.

In any event, Mr Carter did not in fact backdate, or enter any date, on any of the bank documents.

In summary, aside from the March 2005 D/A being dated in December 2004 I am not satisfied that it has been shown that any of the Arte agreements were backdated and I find that they were not.

As stated in their Closing Submissions, “the Claimants’ core case is that each of the schemes was a fraudulent scheme”.

The RRAPOC begins by asserting that “the claims arise from a complex fraud practised upon the Claimants.”

The essential basis upon which the Schemes were alleged to be fraudulent is set out in paragraph 4 of RRAPOC as follows:

“4.

The Schemes were fraudulent schemes established, promoted and operated with a view to defraud investors of subscription money, under the guise of being genuine schemes established and operated such as to carry on the Trade with reasonable prospects of success and attendant tax advantages. In fact:

4.1

there were no Technology rights or none with any real value or exploitation prospects;

4.2

the promoters and operators had no intention, or no real intention, to exploit the Technology Rights, or to do so in such a manner as to provide any real prospects of success;

4.3

investors’ subscription money was wrongly disbursed (including in breach of trust) and misappropriated, before and after they were purportedly made partners;

4.4

the “Technology Vendors” (called “Technology Developers” in IMs), all international business companies (“IBC (s)”) incorporated in offshore jurisdictions and subject to limited disclosure requirements, had not carried out any development of Technology rights;

4.5

the purchase price for the acquisition of Technology rights due to a Technology Vendor as apparent from each IM, represented a fraction of the price in fact receivable by that vendor, given arrangements not disclosed to investors;

4.6

there was no real finance to fund the Trade beyond subscription money actually paid by subscribers.”

The conspiracy underlying these fraudulent schemes was alleged to be as follows (paragraph 331 of RRAPOC as amended during trial):

“331.

Mr Stiedl, Mr Carter, Mr Evans (until his death on 21.07.03), Mr Bailey, Mr Gates (in the case of the GT1 and GT2 schemes only), Innovator and CLFL, including by establishing and/or operating the Innovator schemes and related arrangements (including those related to CLFL) conspired to injure the Claimants by unlawful means, namely by inducing them to subscribe money in a Partnership purportedly formed to conduct a business with a view to profit with substantial external Bank funding, when at all material times:

331.1

such business was a sham and/or there was no genuine or realistic prospect of trading or making any profit and no real external funding beyond money subscribed by subscribers;

331.2

the real purpose of the scheme was to enable Mr Stiedl and his associates including Mr Carter, Mr Evans and Mr Gates to secure for themselves huge reward from subscription money paid.”

The amendment made during the trial to the effect that Mr Gates was only an alleged conspirator in respect of the GT1 and GT2 Schemes made it clear that it was not, or was not any longer, being alleged that there was a single overarching conspiracy.

The essence of the Claimants’ pleaded fraudulent scheme/conspiracy case was their allegation that the business was a “sham” and that “there was no genuine or realistic prospect of trading or making any profit”. This was closely linked to their allegations that (1) there were no Technology rights or none with any real value or exploitation prospects; and (2) the promoters and operators had no intention, or no real intention, to exploit the Technology rights, or to do so in such a manner as to provide any real prospects of success.

During the course of opening the case the Claimants emphasised that they would “seek to make out their case as to conspiracy by reference to the multiple irregularities that they say attended each Scheme and by reference to the arrangements made as regards (and related to) establishing and operating each Scheme.” This means that it is not possible to determine the conspiracy claim without first considering the alleged “multiple irregularities” which the Claimants contended attended each Scheme as exemplified by all their other asserted causes of action.

Although conspiracy was logically the Claimants’ primary claim, since if such a conspiracy existed then all or most of their other claims would flow from it, I shall not draw any final conclusions in respect of the conspiracy claim until all the other causes of action and alleged multiple irregularities have been considered.

I shall, however, address at this stage the main pleaded allegations upon which the claim was based, as set out above.

The relevant legal principles were not in dispute.

The elements of the tort of conspiracy to injure by unlawful means were summarised by the Court of Appeal in Kuwait Oil Tanker Co v. Al Bader [2002] 1 All ER (Comm) 271 at [108] as follows:

“A conspiracy to injure by unlawful means is actionable where the claimant proves that he has suffered loss or damage as a result of unlawful action taken pursuant to a combination or agreement between the defendant and another person or persons to injure him by unlawful means, whether or not it is the predominant purpose of the defendant to do so.”

This passage was approved by the Court of Appeal in Sophie Baldwin, Ramasan Navaratnarajah v Berryland Books [2010] EWCA Civ 1440 (at paragraph 45). Etherton LJ went on to set out the further requirements for a finding of conspiracy at [46 and 47]: “46 It is not necessary that every overt act is done by every conspirator, but the act must be done pursuant to the conspiracy or combination: Kuwait at [110]. Further, it is not necessary to show that there is anything in the nature of an express agreement, whether formal or informal. It is sufficient if two or more persons combine with a common intention, that is to say, that they deliberately combine, albeit tacitly, to achieve a common end: Kuwait at [111]. Nourse LJ quoted (at [111]) the following passage from the judgment of the Court of Appeal Criminal Division delivered by O'Connor LJ in R v Siracusa (1990) 90 Cr App R 340 at 349 as being of assistance in this context:

“Secondly, the origins of all conspiracies are concealed and it is usually quite impossible to establish when or where the initial agreement was made, or when or where other conspirators were recruited. The very existence of the agreement can only be inferred from overt acts. Participation in a conspiracy is infinitely variable: it can be active or passive. If the majority shareholder and director of a company consents to the company being used for drug smuggling carried out in the company's name by a fellow director and minority shareholder, he is guilty of conspiracy. Consent, that is agreement or adherence to the agreement, can be inferred if it is proved that he knew what was going on and the intention to participate in the furtherance of the criminal purpose is also established by his failure to stop the unlawful activity.”

47

It is not necessary, therefore, for the conspirators all to join the conspiracy at the same time. The parties must, however, be sufficiently aware of the surrounding circumstances and share the same object for it properly to be said that they were acting in concert at the time of the acts complained of: Kuwait at [111]. In most cases it will be necessary to scrutinise the acts relied upon to see what inferences can be drawn as to the existence or otherwise of the alleged conspiracy or combination, for it will be a rare case in which there will be evidence of the agreement itself: Kuwait at [112].”

The required intention for the purposes of this economic tort was set out by Lord Hoffmann in OBG Ltd v Allan [2007] UKHL 21 who stated at [62]:

“Finally, there is the question of intention. In the Lumley v Gye tort, there must be an intention to procure a breach of contract. In the unlawful means tort, there must be an intention to cause loss. The ends which must have been intended are different. South Wales Miners' Federation v Glamorgan Coal Co Ltd [1905] AC 239 shows that one may intend to procure a breach of contract without intending to cause loss. Likewise, one may intend to cause loss without intending to procure a breach of contract. But the concept of intention is in both cases the same. In both cases it is necessary to distinguish between ends, means and consequences. One intends to cause loss even though it is the means by which one achieved the end of enriching oneself. On the other hand, one is not liable for loss which is neither a desired end nor a means of attaining it but merely a foreseeable consequence of one's actions.”

Further, the House of Lords made it clear that a high degree of blameworthiness is required. Lord Nicholls stated at [166]:

“Lesser states of mind do not suffice. A high degree of blameworthiness is called for, because intention serves as the factor which justifies imposing liability on the defendant for loss caused by a wrong otherwise not actionable by the claimant against the defendant. The defendant's conduct in relation to the loss must be deliberate. In particular, a defendant's foresight that his unlawful conduct may or will probably damage the claimant cannot be equated with intention for this purpose. The defendant must intend to injure the Claimant. This intent must be a cause of the defendant's conduct, in the words of Cooke J in Van Camp Chocolates Ltd v Aulsebrooks Ltd [1984] 1 NZLR 354 , 360.”

Various breaches of duty were pleaded against the Defendants. To establish a combination to cause loss by any of those wrongs it would need to be shown that there was a deliberate combination to cause loss by way of carrying on acts said to be constitutive of those wrongs. For these purposes, the FSMA claims could not be the subject of a claim in conspiracy since the circumstances in which a claimant can rely on breach of statute as unlawful means is limited to cases where, on its proper construction, the relevant statutory obligation was imposed for the benefit of a particular class - see Lonrho Ltd v Shell Petroleum Co Ltd (No 2) [1982] A.C. 173. FSMA is not, however, for the benefit of a particular class: it is for the benefit of the wider public.

To succeed in their claim in conspiracy the Claimants would therefore need to show that other alleged breaches of duty were committed. If that cannot be established, there can be no combination by unlawful means. If that can be established, it would be necessary for the Claimants also to establish that the Defendants were party to a deliberate combination or arrangement to carry out those wrongs with the intention to cause damage to the Claimants.

Did the Technologies have no or no real exploitation prospects? Was there no or no real intention to exploit the Technology rights? Was there minimal if any exploitation? (RRAPOC 4.1; 4.2; 252).

There was evidence at trial from a number of people involved in the exploitation of the Technologies. By way of example:

There was also important evidence from Mr McCallum who was employed by Innovator, at its expense, to monitor the Technology exploitation.

Mr McCallum was an experienced management consultant whose integrity was unchallenged by the Claimants in evidence. He confirmed that there was genuine Technology and genuine attempts to exploit the Technology for all of the Schemes and much of his detailed witness statement dealing with the exploitation of the Technologies was not challenged.

Mr McCallum stated how certain of the Schemes initially did very well and looked like they might take off. In relation to Quiet Days, for example, he described how it completely rebranded itself, launched its service and had made sales and had real customers. He further stated that it had extensive advertising and showed that “they could drive customers on to their site and through – it was primarily an SMS service, so through their SMS service by using different types of advertising. I would say for a business at a very early stage having its first contact with the real world market, I would call that flourishing. If it was my company, I would be very pleased with it.”

Although Mr McCallum accepted that the structure of the Schemes made exploitation difficult, his evidence is inconsistent with the Claimants’ case that there were no exploitation prospects and was no intention to exploit the Technology.

Mr Honeywell of KPMG (called as a witness for the Claimants) accepted that Mr McCallum was frustrated by the lack of progress on exploitation. He said he agreed with Mr McCallum’s conclusions on many of the reasons why exploitation was unsuccessful; in particular, events like marketplace developments and new regulations had arisen to stifle the development of some Technologies.

Mr McCallum confirmed that an issue in relation to exploitation was the funding of the Exploiters. Mr Carter acknowledged in evidence that (with hindsight) this was a failing of the structure and documentation, although as a matter of fact the Technology Vendors and Developers did provide substantial funding to the Exploiters. He therefore disagreed with the assertion that there was no money in the system and observed that it was in everyone’s interest to make those Technologies as successful as they could be.

Mr Carter also said that the Technology Vendors all thought they were going to be the next Bill Gates and it was their aim to make their Technology a success. This was borne out by the evidence of those Technology Vendors who gave evidence.

Mr Carter’s evidence was that he believed that all Technology Vendors, through their Exploiters, had a very good go at exploiting the Technologies. He denied that there had been no or minimal exploitation, even though such exploitation was not ultimately successful.

The lack of financing of Exploiters may be said to have been a defect in the commercial structure of the Innovator Schemes. Further, the fact that 80% of the purchase price was to be used to secure the bank funding meant that, absent successful exploitation, there would be limited funds immediately available. However, difficulties encountered in successful exploitation do not mean that there were no prospects of such exploitation, still less no intent to do so. I am satisfied and find that there were genuine and real attempts at exploitation and real prospects of such exploitation being successful.

I find that the Technologies did have real exploitation prospects, that there was a real intention to exploit the Technology rights and that there was more than minimal exploitation.

Whether there was no development of the Technology Rights by the Technology Vendors (RRAPOC 4.4)

The Technology Vendors who gave evidence had clearly developed Technology; namely, Messrs Wren-Hilton and Walsh (Agent Mole and Business 24/7); Mr Lewis (Etrino) and Messrs Speirs, Joshi and Burade (Charit).

Mr Honeywell gave evidence that the Technology Vendors who he met (he named 6) all appeared to him as people who thought they had genuine and worthwhile Technology which they had developed.

The Claimants and their expert criticised the extent of the development of the Technologies and the fact that they were not all in an immediately marketable state. However, as the evidence made clear, technology is not static. It evolves and indeed has to evolve to meet and move with market demands.

Mr Gray, a software analyst and developer employed by Mr McCallum, explained that the software was ‘iterative’ in that one expected any problems to be resolved and enhancements to be made over time. Software development did not reach an end point, it was an ongoing process. Further, where problems existed, Mr Gray confirmed that it would normally take only a few days at £250 per day to fix them. Mr McCallum explained in evidence that it was conventional within the industry to describe technology in the present tense even though it was still in development. Mr Gates stated that if the Business Plan was commercially sound, problems with the source code could always be fixed.

When it was put to the Defendants’ expert, Dr Collis, that where a purchaser acquires fully functioning technology that is ready to be exploited that is what he should get, he said:

“I disagree with this notion that it is fully functioning technology that is ready to be exploited because you have to remember that we are dealing here with an opportunity that some entrepreneur has looked at and thought: I could write a software service or a software product to exploit this. But they need to get feedback. They need to be in a virtuous circle of learning about how their product is used by their customers so they can perfect it. I think this notion that you could just sit in a darkened room and bash out some code and then say “Right, now we are going to exploit this” is wrong ...”

I think where we disagree is that we – you are proposing to me a scenario where something is a finished product and fully ready to go, in which case there would be no need for the developer to do any further work on it. But I come from a world where software is developed quickly, it is put out into the market place and is adapted as we understand how people are using it.”

Dr Collis confirmed that there is a never a finished product in software: the technology is always responding to what one discovers in the market and what one’s customers need. The Claimants’ expert, Mr Dickson, accepted that the normal way of start-ups developing software would be through an iterative process by which technology would be developed as an ongoing process rather than to specified standards set out up front.

I find that in every case there was technology which had been developed. Further development was required, but that is always going to be the case. Technology does not and cannot afford to stand still.

Whether many, if not all, Technology Vendors were offshore companies controlled or influenced by Mr Stiedl (RRAPOC 251).

The allegation that many Technology Vendors were controlled or influenced by Mr Stiedl appears to have been based on a misunderstanding of the involvement of First Global. First Global was not a Technology Developer or Vendor in relation to the Innovator Schemes in any substantive sense. It was used as a conduit for tax reasons for some of the Schemes, including Etrino.

This was confirmed in the evidence given by Mr Honeywell of KPMG on behalf of the Claimants. He agreed that:

Whilst it is therefore factually correct that for various Technologies First Global, which was a company controlled by Mr Stiedl, was the immediate vendor, this was as a conduit for tax reasons and is not indicative of any fraud or conspiracy.

Whether there was no genuine arms length negotiation of the acquisition cost of the Technology (RRAPOC 251).

The substantive Technology Vendors were independent parties who were not connected with any of the Defendants.

During the course of the trial some doubt was cast on the role of Mr and his relationship with Mr Stiedl. Mr DeBo was behind some of the Technologies, but was not a Defendant or alleged conspirator and was not mentioned in the RRAPOC. That being so, the nature of his role and relationship with others was not explored in any detail in disclosure or in evidence. Although it is clear that he was a personal friend of Mr Stiedl, on the evidence before the Court there is no basis for treating him as a connected party.

The price negotiations were therefore between arms length parties. Mr Speirs and Mr Wren-Hilton gave evidence of arms length negotiations with Mr Stiedl.

It was suggested to Mr Stiedl that there was no real arms length negotiation over price. Mr Stiedl did not accept this and explained that some Technologies were rejected because the price was too high.

It was suggested to Mr Stiedl that the purchase prices were adopted by him for Innovator’s convenience. Mr Stiedl denied this and said the only case where he rounded the price down was Etrino “where Mr Evans was suggesting 10 million and though I couldn’t persuade him to give up the project, I at least managed to get it down to 3 million”.

Mr Stiedl also rejected the suggestion that there was no genuine negotiation. Thus in relation to Casedirector, an email from Mr Trowell to him and Mr Carter showed Mr Trowell proposing a £30 million price which was negotiated down to £10 million.

It is the case that there was little or no documentary evidence of price negotiations and that this later created difficulties with the IR. It is also the case that the valuations were produced after the price had been agreed, and that in the case of YTC there was no valuation.

There is force in the point that some at least of the price negotiations were “soft” negotiations. The higher the overall price the greater the tax relief potentially available so there may well not have been an attempt on the part of Mr Stiedl to drive a hard bargain and get the lowest possible price. Further, as Mr Honeywell accepted, if one sells something for cash, as opposed to on deferred payment terms or with other restrictions, one would expect a lower price and he agreed that a deposit arrangement would inevitably inflate the price. He also accepted that the negotiations would have been predicated on the informal understanding that the Vendor may not get his 80% back. In addition, the Technology Vendors were in a position to influence the achievable price since they were to provide the income projections.

It may well therefore be the case that the prices agreed were not the lowest prices achievable. However, that does not mean that there was no negotiation or that they were not arms length transactions.

Further, the valuations did provide evidence to support the prices agreed.

The one Scheme in relation to which real doubt was cast on the genuineness of the price negotiation was Arte. Although it was explained that the price ultimately payable reflected defects in the Technology, the fact that the price agreed happened to be the grossed up sum reflecting the actual amount of the subscribers’ applications when the Scheme was closed is a remarkable co-incidence.

I find that although some at least of the price negotiations were “soft” negotiations, there were genuine negotiations (with the possible exception of Arte) and the acquisition price was agreed as part of an arms length transaction.

Whether there was no genuine valuation of the acquisition price despite the impression given in the IM that there was (RRAPOC paragraph 251).

The valuations were carried out by independent valuers. As I have found, they used the usual and most appropriate method to value start-up technology, the income approach.

As I have also found, the failure to carry out due diligence on the Technology Vendors’ Business Plans and projected income figures is a shortcoming of the valuations which were produced. However, they were still genuine third party valuations that bore relation to the acquisition costs under the AAs.

It was Mr Honeywell’s evidence that it is impossible to know in advance whether, in valuing a technology, that technology was going to be a flop or a Microsoft so one is forced to make an educated assumption as to likely future profits when one values it. He accepted that there is a real risk of either overvaluing or undervaluing depending on how the technologies turn out and thus the valuation can only really be required to be in good faith and given by an independent valuer. He said that he had no reason to think that American Appraisal was anything other than a respectable and reputable organisation. He accepted that one would expect them to have added a number of caveats in a technology valuation and this cast no doubt on their authenticity or respectability. Mr Honeywell accepted that American Appraisal did what they were asked to do and did not suggest they had done a bad job.

It was suggested to Mr Carter that the American Appraisal and Xexco valuations were not the type of valuations that investors were led to believe would be obtained by the IMs. Mr Carter replied saying that the valuations were at all times available for inspection and said that they did comply with the description in the IM. The IMs expressly stated that the valuations would be based on profit projections provided by the Technology Vendors. In the event virtually none of the Lead Claimants or their IFAs took the opportunity to read the valuations which had been made available to them.

When Mr Stiedl was shown an email in which he asked Mr Ustunel of American Appraisal to support the £10 million valuation of Optibet, he stated that he was simply asking Mr Ustunel to support their assessment of the value. He pointed out that there were a number of letters where Mr Ustunel said that American Appraisal could not support the values placed on the Technologies, which Technologies were taken no further.

Mr Stiedl said American Appraisal asked all the questions that a potential buyer would have asked during due diligence. Mr Stiedl said that although American Appraisal had declined to value Charit, Coloured Industry and Tracksys, he said these were only brought forward in a different form to that which American Appraisal had considered.

Mr Ustunel of American Appraisal did not think that there was anything untoward about the Schemes. He wrote a September 2004 letter to the IR indicating that he had due diligence meetings with the Technology Vendors who he quizzed about the Technologies and their prospects.

I find that there were genuine valuations which provided support for the acquisition price paid, although the failure to carry out due diligence on the Technology Vendors’ Business Plans and projected income figures was a shortcoming of those valuations.

There was no process or proper process of due diligence carried out to assess the Technology, despite impressions and assurances given to the contrary (RRAPOC paragraph 251)

The initial due diligence was carried out by Mr Stiedl. His evidence was that he assessed about 300 technologies, and reduced the potential pool down to 75. I accept that he carried out this process although there was no documentation showing what he had done, or how thoroughly it had been done.

There was then an internal assessment carried out by Mr Alexander. Mr Carter said that the technical verification reports from Mr Alexander and Mr Ramsden were a mere synopsis that did not reflect the amount of work that went on behind the scenes in relation to valuation which was considerably in excess of this. Mr Alexander’s evidence was to the same effect: he said he checked the Technologies considered for the Generation 1 Schemes and all of them worked.

Although I accept that there was an internal verification process it was not properly documented. In many cases no report was produced, and such reports as were produced were cursory.

The decision to proceed with a Technology would then be taken at board level and the independent valuation report would be produced.

Although there was a process of due diligence carried out to assess the Technologies, I find that it was not as rigorous or extensive as it could have been, and it was not properly documented.

Whether the purchase price for the acquisition of Technology rights due to a Technology Vendor as apparent from each IM, represented a fraction of the price in fact receivable by that vendor, given arrangements not disclosed to investors (RRAPOC 4.5).

It is the case that although the Technology Vendors were paid the full purchase price for the Technology 80% of that amount was immediately put on deposit to secure the repayment of the loan. The Technology Vendors therefore only received up front their agreed portion of the 20% made up of capital contributions, which was generally 8-9%. However, if the Technology was successful the Technology Vendors would receive the balance of the purchase price proceeds as the loan was repaid. These arrangements reflected the Scheme structure and were apparent from the documentation. There was nothing underhand or undisclosed about the arrangements.

It was the Claimants’ case that the PPUAs had the effect that the balance of the purchase price was never due.

Clauses 2.1 and 2.2 of the PPUAs typically provided that:

“2.1

The Vendor acknowledges and agrees that the [SIC] Innovator shall be entitled to deduct from the Purchase Price and prior to the release of the balance thereof the following:

(i)

the Guarantee Sum and arrange for the deposit for a minimum period of thirty-six (36) calendar months of such sum in a bank account with such bank or other financial institution nominated by Innovator as security for the Loan of a value similar to the Guarantee which the Vendor acknowledges to be utilised to repay the loan.

(ii)

the Fee to enable Innovator to pay fees in connection with offering of the technology partnership having acquired the Products including (without prejudice to the generality of the following) to settle all legal fees, accounting fees, fees relating to taxation advice, banking fees and margin spreads, other professional fees, valuation fees, marketing fees and commission to independent financial advisors.

2.2

The Vendor shall accordingly be entitled to the sum remaining out of the Purchase Price after the deduction of the sums referred to in clause 2.1 such sum being £825,000. The Vendor acknowledges and agrees that it shall have no entitlement to receive any further payment pursuant to the Sale and Purchase Agreement.”

Whilst one can understand the Claimants’ case on a literalist construction of the wording of clause 2, the words need to be construed in the general context of the Scheme arrangements as a whole, and in the specific context that the PPUAs were devised to avoid arguments arising as to what would happen to the 20% capital contribution in the light of the difficulties which had been encountered with Mr Meager and Mr Lewis in respect of the YTC and Etrino schemes.

This was explained by Mr Bailey in his witness statements and confirmed in evidence. As he said: “This document was put into place to stop the arguments that occurred in relation to YTC and Etrino. The document was never intended to deprive the technology vendor of all his money but it wanted to make clear what happened to the 20% and also what happened to the 80% and to acknowledge that it was to be put into a separate account in accordance with the structure of the scheme”.

I agree with the Defendants that, as all parties understood, the agreement reflected in the PPUAs related not to the whole of the purchase price (i.e. the 100%) but merely to the 20% comprised of subscription monies. The reduced sum did not seek to alter the purchase price, but related to the net amount to be paid to the Technology Vendor once various disbursements to be paid by the Vendor had been made.

That this was the mutual intention underlying the PPUAs was borne out by the events surrounding the variation to the PPUA for the Charit Scheme. It is apparent from the recital B to the Deed of Rectification that Vermilion and Innovator agreed that the original PPUA did not reflect the intention of the parties and amendments to the Charit PPUA were made which make it expressly clear that the PPUA dealt only with the 20% of the purchase price not paid to the bank by way of guarantee.

Although the PPUAs were not disclosed to investors since they did not alter the Scheme structure or the price payable/receivable thereunder I find that there was no need to do so. As Mr Bailey explained in evidence, the PPUAs did not have anything to do with the documentation underpinning the Scheme but rather was sub-documentation designed to determine what was to be done with the 20%.

I find that the purchase price for the acquisition of Technology rights due to a Technology Vendor as apparent from each IM did not represent a fraction of the price in fact receivable by that Vendor, given arrangements not disclosed to investors.

Whether there was no real finance to fund the Trade beyond subscription money actually paid by subscribers (RRAPOC 4.6).

As stated in paragraph 601 above, the Scheme structure was such that the amount of funds received up front by the Technology Vendors was limited to 8 or 9% of the purchase price, and the Exploiter would be paid a proportion of these funds. The limited amount of funds received was the inevitable consequence of the arrangements to put the 80% on deposit to secure the loan and the need to pay fees and expenses.

The structure of bank finance with the 80% loan being placed by the Technology Vendor back on deposit to secure the bank loan was not unusual and in this case it was expressly approved by leading tax counsel, Mr Bretten QC, of whom no criticism is made by the Claimants. There are many structural similarities between the Innovator tax savings Schemes in issue and many of the film finance tax deferral schemes that a number of Claimants also invested in and also with other ICT schemes, such as the Tower MCashback scheme.

Mr Honeywell agreed that the financing banks in this litigation operated in the same way as the banks involved in some film deferral schemes, holding money with a debit on one account matched with a credit in another account and a right to apply the credit to set off the debit. Further, the structure of the financing contemplated was very similar as between the banks who were proposed lenders to the Schemes (including SocGen) and the banks who did lend (Bank Leumi and MFC).

That there were to be limited amounts initially made available from the purchase price payment to fund the trade was therefore apparent from the Scheme arrangements, which were patent, were not unusual and which were approved by leading counsel.

The Technology Vendors were generally associated with the Exploiters and, as Mr Carter explained, it was in their interest to fund the development and exploitation of the Technology. This was the means by which they would be able to obtain the benefit of the 80% which had been deposited with the lending bank. The Technology Vendors believed in their products and were being given the opportunity to kick start development and exploitation with the cash injection being provided, even though it was limited.

With hindsight it may well be the case that the structure did not allow for sufficient funds to be made available for the successful development and exploitation of the Technologies. This was indeed a primary reason given by Mr McCallum for why the exploitation of the Technologies failed. However, this does not indicate that the Schemes were a sham or anything other than genuine. There was money available for exploitation and the Technologies were exploited initially. The subsequent problem of lack of funding was not foreseen.

I find that, as made clear by the Scheme documentation, whilst initially there was no real finance to fund the Trade beyond subscription money actually paid by subscribers, more funds would have become available if the Technology had been successfully exploited.

The issue of whether subscription monies were disbursed in breach of trust will be addressed separately.

As to the more generalised allegations made of wrongful disbursement, they involve a misunderstanding of the Scheme structure.

Once the subscribers had been made partners their capital contributions became the Partnership’s capital. Thereafter it could no longer be regarded as being and was not subscription money. If there had been any misappropriation of Partnership monies thereafter it is the LLP which would have the right of suit, not the individual subscribers. It might be different if the LLP itself was somehow involved in the misappropriation but in that case it would be the partners who could sue not mere subscribers.

In any event, the only obligation of the LLP was to pay for the Technology. In each case that has been done. Every Technology Vendor was paid in full and no Technology Vendor has contended or suggested otherwise.

The Claimants’ case concentrated on particular uses made of monies which had been paid to Innovator by the Technology Vendor as part of its agreed fee. However, aside from its obligation to pay the set up and administration fees, costs and expenses, what Innovator did with the money to which it was entitled as its own fee was a matter for it.

The position was complicated by the manner in which accounting was carried out. It is not immediately apparent from the accounting information on whose behalf payments have been made. Payments were (in some cases) made directly to the ultimate beneficiary of the funds, thus avoiding the need for a chain of payments between various entities achieving the same ultimate goal. There was nothing wrongful in this, as is addressed later in the judgment.

Detailed schedules setting out precisely where the money went for each Scheme were attached to the schedules to the witness statement of Mr Roberts. Although he was only employed by Innovator in September 2003 and did not work at the Innovator offices until April 2004, it was apparent from his cross-examination that he was intimately involved with producing the accounts for both Innovator and the LLPs from September 2003. He was well qualified to give factual evidence about the payments made for each Scheme. Indeed, it was not suggested to him that his schedules were incorrect as records of where the money actually went, merely that Mr Roberts could not explain why the various payments were made (which he fairly accepted, since his role was to deal with accounts and not payments).

His schedules showed that:

Mr Roberts also explained how the CLFL loans were treated in the accounts. The accounting treatment was as follows:

The Claimants emphasised that these arrangements involved no real movement of money. However, the monies were nevertheless properly accounted for in the accounts of Innovator. Had there been ‘physical movement of monies’, the net result of the transaction would have been identical in accounting terms. Further, when loans were repaid, the money was paid by CLFL to Innovator. On any view, that is a real movement of monies. Further, the obligation undertaken by CLFL was to provide a loan that would enable the investor to complete their investment into the relevant Partnership through which they would be able to claim tax relief. In that respect, they got what they bargained for.

It was put to Mr Carter that a letter of 22 December 2004 from CLFL to Innovator regarding the loans by Innovator to CLFL showed that those loans were artificial as they would not be recovered by CLFL but would be written off by Innovator. Mr Carter rejected this saying that the loans were made on a roll through basis. He said that Innovator effectively took the risk of non-repayment of the loans.

The Claimants also drew attention to the fact that some individuals, including Mr Carter, Mr Gates and Mr Bailey, received interest free CLFL loans that were not pursued for repayment. These loans were, as Mr Gates stated, designed to fill a subscription hole in order to enable the particular Partnership to complete (which was the point at which the purchase price for the Technology had been raised). Mr Bailey confirmed that he took out such a loan, but again only to enable the Scheme to complete. He claimed relief on the loan but stated that he repaid the relief that was granted.

Whilst one can understand how both the nature and accounting of some payments made gives rise to question, on analysis it becomes apparent that monies were generally paid in accordance with the structure of the Schemes. As such, it is difficult to see how there could be any misappropriation, unless the entire Schemes were a sham or fraud. However, issues surrounding alleged misappropriation are considered further later in the judgment and a final conclusion on this issue shall be made once this has been done.

Whether there were huge irregularities including backdating of documents (RRAPOC paragraphs 253 and 254).

The issue of backdating of documents has been addressed when considering the Scheme specific narratives. The alleged irregularities involve a consideration of all the various causes of action asserted and the main allegations raised in relation thereto. I shall accordingly return to this issue and draw an overall conclusion in relation to the allegation of a fraudulent scheme and conspiracy later in the judgment.

I find that there were genuine Technology rights in relation to each Scheme.

I find that the Technologies did have real exploitation prospects, that there was a real intention to exploit the Technology rights and that there was more than minimal exploitation.

I find that in every case there was Technology which had been developed.

I find that whilst for various Technologies First Global, which was a company controlled by Mr Stiedl, was the immediate vendor, this was as a conduit for tax reasons.

I find that although some at least of the price negotiations were “soft” negotiations, there were genuine negotiations (with the possible exception of Arte) and the acquisition price was agreed as part of an arms length transaction.

I find that there were genuine valuations which provided support for the acquisition price paid, although the failure to carry out due diligence on the Technology Vendors’ business plans and projected income figures was a shortcoming of those valuations.

I find that although there was a process of due diligence carried to assess the Technologies; it was not as rigorous or extensive as it could have been, and it was not properly documented.

I find that the purchase price for the acquisition of Technology rights due to a Technology Vendor as apparent from each IM did not represent a fraction of the price in fact receivable by that Vendor, given arrangements not disclosed to investors.

I find that, as made clear by the Scheme documentation, whilst initially there was no real finance to fund the Trade beyond subscription money actually paid by subscribers, more funds would have become available if the Technology had been successfully exploited.

The pleaded case and the Claimants’ written closing in respect of the claims made against unrepresented Defendants put the conspiracy and fraud allegations at the “core” of the case.

In so far as the Claimants had any real understanding of the claims being made on their behalf it was these claims which they understood to be central.

It was also the understanding of both represented and unrepresented Defendants that these were indeed “core” claims which were of first importance both in themselves and in relation to most of the other causes of action asserted.

By the time of the closings, however, the emphasis of the Claimants’ case had very much become that it was FSMA that was central to the case.

For reasons given when addressing the FSMA Claims (Part 2) I find that the Schemes were CISs and that there were contraventions of the general prohibition and the financial promotion restriction. That being so it is relevant at this stage briefly to address the suggested ramifications of those findings.

The Claimants contended that the engagement of the FSMA regime had ramifications for what in fact was done and for what should have been done, and also for common law liabilities.

The Claimants drew attention to the FSA’s Principles for Businesses and the FSA rules applicable to authorised persons.

In relation to the FSA Principles the Claimants emphasised, in particular: Principle 1 (Integrity), Principle 2 (Skill, care and diligence), Principle 3 (Management and control), Principle 4 (Financial prudence), Principle 6 (Customers’ interests), Principle 7 (communications with clients), Principle 8 (Conflicts of interest) and Principle 10 (Clients’ assets).

In relation to the FSA rules the Claimants emphasised, in particular: Limits on exclusion of liability (COB 2.5); Financial promotion (COB 3); Accepting customers (COB 4), including requirements as to terms of business in adequate detail; Dealing and managing (COB 7) including requirements as to conflicts of interest and disclosure of interest.

The Claimants were less clear, however, as to how the Principles and Rules were specifically relevant to the existence of the various duties/causes of action alleged.

The Claimants made a generalised point that if the financial promotion restriction had been followed then the Schemes may never have been promoted in the first place since Innovator would never have satisfied the requisite authorisation requirements. However, Innovator would not have needed to do so and would not have done so. Had it been realised that these were CISs then they would have been promoted through and operated by an authorised person, as later happened with the Key Data schemes.

It was then suggested that if that had been done then matters would have turned out differently and in particular without the various irregularities and egregious conduct alleged. However, this is belied by the fact that the Claimants are making almost exactly the same allegations in proceedings concerning the Key Data schemes as they are making in these proceedings.

FSMA deals with both authorised and unauthorised persons and imposes criminal and civil liabilities for its contravention. For reasons given later in the judgment, it does not found a cause of action for breach of statutory duty. The reasons that it does not do so apply a fortiori to other common law duties sought to be found upon it.

Whether a particular common law duty arises has to be determined in accordance with established legal principles. Those principles are not altered by the engagement of FSMA although it may provide relevant background for the application of those principles.

In their detailed submissions there were in fact few examples of specific reliance on FSMA by the Claimants. It was submitted, for example, that it was relevant to the necessity for the alleged subscription money agreement and for the alleged information condition/representation, but for the most part the Claimants’ detailed submissions did not reference FSMA.

Given the importance attached by the Claimants to FSMA I shall have general regard to it in considering the various claims made, but if it is not specifically referred to that largely reflects the fact there is equally no specific reference to it in the Claimants’ own submissions.

THE “NEVER A PARTNER” CLAIM

It was the Claimants’ case that contractually they never became partners of any of the Schemes. This claim was put in two related ways.

First, it was submitted that as a matter of construction of the IM or, if necessary, the implication of terms therein, the subscribers’ offer to subscribe made by the subscription application was the subject of a series of conditions (“the IM Conditions”) and was not capable of acceptance unless and until these conditions were met.

Further or alternatively, it was submitted that as a matter of construction of the P/A or, if necessary, the implication of terms therein, the exercise by the P/A donee of the power of attorney was subject to the same (and other) conditions.

The IM Conditions were as follows (RRAPOC 274):

“274.1

that relevant deadlines for the availability of relevant tax relief had not expired (“the deadlines condition”);

274.2

that tax relief would be available as set out and in the proportions and amounts set out in the IM (“the tax relief condition”);

274.3

that the Partnership had or would incur qualifying expenditure on ICT as set out in the IM (“the expenditure incurred condition”);

274.4

that the Partnership and its business were real and not a sham in the sense that that there was never any intention on the part its promoters, operators or administrator that it be a real and genuine business or have any real purpose other than as a vehicle to obtain tax relief (“the business condition”);

274.5

that there were rights to Technology as described (“the Technology rights condition”);

274.6

that there was a real possibility of deriving profit from exploitation of the Technology rights(“the exploitation condition”);

274.7

that the Technology vendor had developed the Technology rights(“the Technology development condition”);

274.8

that the price apparently paid for the Technology rights bore a reasonable relationship to its true value (“the Technology price condition”);

274.9

that the Technology rights acquired or to be acquired had been independently and properly valued (“the valuation condition”);

274.10

that Bank funding for the required Loan had been secured (“the Bank Loan condition”);

274.11

that the Technology rights, the proposed business, its prospects, its funding and its proposed operators (including the Administrator, Operators and the Exploiter) and advisers (including legal and technology advisers ) had been assessed with appropriate due diligence(“the due diligence condition”)

274.12

that the IM contained all such information as investors and their professional adviser would reasonably require and reasonably expect to find for the purpose of making an informed assessment of the issuers of the IM, the Technology rights, the Partnership including its proposed business and prospects and its management and advisers (“the information condition”).”

Contractual analysis of the subscription offer

The Claimants relied on the well known speech of Lord Hoffmann in ICS v West Bromwich Building Society [1998] 1 WLR 896 at 912:

“I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v. Simmonds [1971] 1 W.L.R. 1381 , 1384–1386 and Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen [1976] 1 W.L.R. 989 ,is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of “legal” interpretation has been discarded. The principles may be summarised as follows:

(1)

Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2)

The background was famously referred to by Lord Wilberforce as the “matrix of fact,” but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3)

[concerning pre-contractual negotiations, not relevant here]

(4)

The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co. Ltd. v. Eagle Star Life Assurance Co. Ltd. [1997] A.C. 749 .

(5)

The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera S.A. v. Salen Rederierna A.B. [1985] A.C. 191 , 201: “if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.”

I agree with the Claimants that in the context of construing an offer a similar approach applies. It is a question of how the offer would have been understood by a “reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time”, but focussing on the position of the offeree.

The Claimants also relied, if necessary, upon the principles governing the implication of terms into contracts as a basis for implying terms into the offer made. It is unusual for offers to be subject to implied terms. The terms of the offer are a matter for the offeror and there is no requirement that it be workable. Whilst it is nevertheless possible for terms to be implied into an offer, I agree with the CB Defendants that an offer cannot be subject to an implied term unless that term would pass the general test of contractual implication. That is the very least that must be required if the terms of the offer are to be objectively ascertainable such that the offeree can objectively know the terms of the offer on which his acceptance is being sought.

It was the Claimants’ case that to the extent they need to establish implied terms those terms are necessary to give the Scheme contractual arrangements business efficacy (The Moorcock (1889) LR 14 PD 64) or so obvious as to go without saying (Shirlaw v Southern Foundries (1927) Ltd [1939] 2 K.B. 206) on the basis that they represent the presumed but unexpressed intentions of the parties to those contractual arrangements.

The Claimants submitted that this was consistent with and reflected Lord Hoffman’s reformulation of the principles in Attorney General of Belize v Belize Telecom Limited [2009] 1 WLR 1988. In that Privy Council decision Lord Hoffman said that: “There is only one question: is that what that instrument, read as a whole against the relevant background, would reasonably be understood to mean” (at [21]). He explained that the various different formulations which the courts have used all come back to this question and are different ways of saying “although the instrument does not expressly say so, this is what a reasonable person would understand it to mean.” (at [25]).

The Belize Telecom case was considered in the Court of Appeal decision Mediterranean Salvage & Towage Limited v Seamar Trading & Commerce Inc [2009] 2 Lloyd’s Rep. 639. In that case it was emphasized that the touchstone remains necessity rather than reasonableness.

In deciding whether that touchstone is met the considerations set out by Lord Simon of Glaisdale in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, 282–283 still provide useful guidance - see Lewison on The Interpretation of Contracts (5^th ed.) para. 6-06. They are: “(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’ (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”

In the context of a contractual offer clarity is of particular importance. The first requirement for the formation of a contract is that the parties should have reached agreement. The Courts deploy an objective test to determine whether the parties are ad idem. Agreement will only be reached where the terms of the acceptance precisely match the terms of the offer. The terms of the offer must be capable of being clearly ascertained for the offeree to know (1) what he is being asked to accept and (2) what has been accepted.

The nature of the IM Conditions is that they are conditions precedent to the making of the contract between subscribers and the Partnership. As such, the CB Defendants (CB, Mr Bailey and Mr Roper) placed reliance on the distinction between promissory and contingent conditions.

In Total Gas Marketing Ltd v Arco British Ltd [1998] 2 Lloyd’s Rep 209 at 220 Lord Steyn said that a promissory condition is one which is within the power of the promisor to bring about, whereas a contingent condition is one which is not within its power to bring about, although it may undertake obligations to try to do so.

Contingent conditions are conditions whereby obligations are triggered or terminated on the happening of certain stipulated facts or events. In UK Power GmbH v Kuok Oils and Grains Pte Ltd [2009] EWHC 1940 (Comm) Gross J said at [15] as follows:

“In the case…of a contingent condition precedent, a contract will not be binding until the specified event occurs. But in the case of a promissory condition precedent, the contract will be binding, albeit that performance of an obligation by one party will be a condition precedent to the liability of the other…[The distinction between contingent and promissory conditions precedent may well turn on whether the agreement purports to impose on A…an obligation to bring about the stipulated event; if it does, the condition is or [is] likely to be promissory; if not, the condition is, or is likely to be contingent…”

The CB Defendants submitted that on analysis many of the IM Conditions are promissory conditions since they were within the power of Innovator to bring about. If so, then by definition, the offers are and must be capable of immediate acceptance: if they were not, such that no contract came into existence, there would be no obligation on the promisor to bring about those conditions. Promissory conditions are, simply, terms of an extant contract not conditions precedent to the existence of a binding contract.

The relevant background in considering the obviousness and the alleged need for the IM Conditions includes the contractual context and the rights and remedies otherwise available to the subscribers.

The Claimants’ case was that the IM Conditions were terms of the offer made by the subscribers to the Partnership which was accepted on behalf of the Partnership when they were purportedly made partners through the execution of a D/A. They submitted that the relevant time to focus upon was when the time came for that acceptance and the need for the IM Conditions was sought to be justified on the basis of considering the position at that time.

The Claimants did not accept that any earlier contract had been made with Innovator and their case effectively assumed that no such contract had been made.

The Defendants’ case, however, was that a contract was made with Innovator on its acceptance of the subscribers’ irrevocable offer as communicated by the Acknowledgment letters.

I agree with the Defendants that a contract was made with Innovator. It is clear from the IM that Innovator was more than a mere promoter of the Scheme. Taking the Etrino IM by way of example, Innovator’s stated objective was to “advise and administer” the Partnership. To that end Innovator was stated to have engaged “Technology Advisers”, a “Technology Valuer”, Collyer Bristow as “its legal advisers”, Pridie Brewster to advise it “in relation to auditing and tax planning” and leading counsel to confirm the tax assumptions. It was Innovator which was to be responsible for the payment of those fees and for the application of subscription monies for the purposes set out in the IM. This was to be done from the fee payable to Innovator as set out in the contractual documentation, which was not expected to exceed 11%.

Further, it was Innovator which was to be responsible for the general administrative costs of the Partnership throughout its life. Save for the annual fee of the Managing Partner/Administrator (which was to be based on the success of the Business) no other ongoing fees were to be chargeable to the Partnership. If and to the extent that these could not be met out of the initial fee payable to Innovator, they would fall on Innovator.

It was also Innovator to which the subscription applications were to be addressed. It was Innovator which had the “right to accept or reject applications at its sole discretion” and which was to ensure that “any excess Partner’s contributions to the Partnership will be refunded”. It was Innovator which was to “ensure that all the imposed conditions of making the loan are met” and also to “ensure that such security as is required to guarantee the Guaranteed Exploitation Income payable under the Agency Exploitation Agreement, but not yet due, will be met”.

As the CB Defendants pointed out, there was no obligation on the P/A donee to execute anything. Although the IM stated that the Managing Partner/Administrator would arrange for the formation of the Partnership his duties under the anticipated and actual Service Agreement were to administer the Partnership and it was Innovator which would have to ensure that he did what was necessary to form the Partnership.

For all these reasons I accept the CB Defendants’ case that there was a contract made between the subscribers and Innovator. Although the detailed terms of that contract were not explored (since it formed no part of the Claimants’ case) I accept the CB Defendants’ contention that they would include an obligation to ensure that:

It should be noted that the Claimants did not advance any case that the IM Conditions would be conditions precedent of any contract made with Innovator (even though the basis of the offer to make that contract was also the subscription application). Their sole focus was upon the position at the time of the D/A and the contract with the Partnership.

Whilst I accept the Claimants’ case that there was additionally a contract made through the subscription application with the Partnership when the subscribers were made partners that contract falls to be considered in the context of the contract already made with Innovator.

Another relevant aspect of the contractual context are any limitations on the exercise by the P/A donee on the powers conferred on him under the P/A. The Claimants argued that the exercise of this power was subject to the same conditions as the subscription application contract with the Partnership. The applicability of such conditions will be considered below, but I accept, as did the CB Defendants, that the exercise of that power would be subject to the limitations on a fiduciary’s authority identified by Norris J in the case of Bieber v Teathers Limited [2012] EWHC 190 (Ch) (although the Claimants did not advance any case on this basis), namely:

“…the only restriction on Teathers' authority to deal with the offered capital contribution arises from its duty to act honestly and loyally. If Teathers actually knew at the time of forming a partnership that it was not possible in any circumstances to conduct "the Partnership Business" as defined in the Partnership Deed, then its authority to apply the money would cease. It would be unconscionable (indeed it would not be honest) to apply the offered subscription in the capitalisation of a partnership to conduct a business which it was actually known it was certainly impossible to conduct. It would actually be known that the specified purpose (conducting the Partnership Business) was incapable of being achieved”.

By parity of reasoning a P/A donee who was to make the subscribers partners in the Partnership business could not, consistently with his fiduciary duty, do so if it was actually known that it was certainly impossible to conduct the Partnership business.

In relation to the relevant background, the Claimants placed great stress on the importance of any finding that the Schemes were CISs and the regulatory context. The Claimants submitted that the FSA Principles set standards which are relevant in assessing the conduct of persons who were not authorised and the consequences in terms of civil liabilities. They further submitted that if the FSA Rules are necessary requirements in the case of authorised persons then they are similarly necessary in the context of unauthorised persons carrying out regulated activities. In their detailed arguments in relation to each of the IM Conditions they did not, however, identify specific Principles or Rules which were said to be relevant to the particular condition in question, save in relation to the Information condition.

The alleged IM Conditions are generally not express terms of the IMs, still less express conditions precedent. They are allegedly to be discerned from the terms and conditions of the IM as a matter of construction or necessary implication.

In considering the appropriateness or necessity of conditions which are not expressly set out in the IM the warnings and non-reliance provisions contained therein are of relevance. These are set out in detail later in the judgment, but they stress in particular that no warranty or representation is made in relation to the completeness or accuracy of the information or opinions contained in the IM. They also stress the need for subscribers to obtain and rely upon their own advisers in relation to the financial, legal and other consequences of subscribing.

It is also relevant to have regard to the fact that the subscription applications were irrevocable. The subscribers were thereby agreeing to commit themselves immediately and unconditionally. The effect of the IM Conditions, however, is to make that commitment conditional and in many cases conditional on what does or does not happen thereafter and potentially a considerable time thereafter.

The tax relief condition – that tax relief would be available as set out and in the proportion and amounts set out in the IM.

The offer is not made subject to this or any other express condition.

There is no express statement to this effect in the IM.

This condition is expressed as a warranty as to the future availability of tax relief which, as is accepted, would be a plainly inapt condition for acceptance. One cannot make acceptance conditional on an event that lies in the future at the time for acceptance. However, the Claimants clarified their case as being that that “all other things being equal the structure of the scheme arrangements is such as at the time that the offer is both made and purportedly accepted that relief in the proportions and amounts set out in the IM was capable of being obtained. To put it another way, the tax relief condition is only fulfilled if, as at the time of purported acceptance of the subscription offer, there are no defects in the scheme arrangements which would imperil (in the sense of changing the risk profile or prospects of obtaining relief) or remove the entitlement to relief as set out in the IM.” This is not how the claim is pleaded and it is important that any condition of the acceptance of an offer is made clear.

The condition is a complex one.

The ambit of the condition is extremely wide. It purportedly covers any defect in the Scheme arrangements which change the “risk profile” or “prospects” of obtaining tax relief. This could cover matters which are very minor and/or which do not in the event have any impact at all.

The condition (as originally formulated) is expressed in inapt terms and (as reformulated) is expressed in vague and uncertain terms.

It is a condition which raises what may be difficult judgmental questions. It could apply regardless of whether this was or even should have been known to the offeree. This means that the offeree may not be in a position to accept the offer made even though he neither knows nor should know this. That would not be reasonable or equitable.

The proposed term covers both the case where tax relief is not available because there is some defect in the Scheme arrangements and also where the structure no longer qualifies or could be made to qualify for tax relief due to some change in the tax regime.

The IM sets out an expectation that tax relief will be available as described, but it is careful not to state that it will be and emphasises the need for subscribers to obtain their own advice.

Innovator had a duty to establish the Partnerships and the proper and careful performance of that duty would be likely to involve taking reasonable care to ensure that the Scheme was structured so as to achieve the anticipated relief, as is supported by the statement in the IM that the Partnership “is structured in such a way as to allow Partners to take advantage of the tax reliefs available”. If the Scheme was not in fact so structured then arguably recourse could be had against Innovator.

Further, it could be argued that it was an essential element of the Partnership’s business that the acquisition cost of the Technology qualify as capital allowances for tax purposes and that if it was actually known that it was certainly impossible for it to do so because of defects in the Scheme arrangements then the P/A donee may not have had authority to enter the subscribers into the partnership.

The availability of other means of recourse militates against the necessity or obviousness of implying any such condition.

I find that there was no such condition as alleged.

Given that I have found that there was no tax relief condition, and given its unclear ambit, I do not propose to consider whether any such condition (if it existed) would have been breached. However, it is not obvious that at the date of the D/A there was a fixed reason why the Schemes should not have generated the anticipated tax relief, and it was the CB Defendants’ case that there was in fact no breach of this alleged term.

The expenditure incurred condition – that the Partnership had or would incur qualifying expenditure on ICT as set out in the IM.

The offer is not made subject to this or any other express condition.

There was no statement that the Partnership “had” incurred qualifying expenditure. Nor was there any need or requirement that the Partnership had incurred qualifying expenditure on ICT before subscribers were made partners. Indeed the arrangements envisaged the Partnership being fully subscribed before the Partnership incurred that expenditure.

A term as to what “would” be done speaks to the future and is an inapt condition of acceptance. In recognition of this the Claimants stated that the term was meant to cover the case where there was no intention to incur the expenditure or it was known that the expenditure could not be incurred (because, for example, the Technology no longer existed). This is not how the term was pleaded and it is important that any condition of the acceptance of an offer is made clear.

Whilst the examples put forward by the Claimants were clear examples of an unwillingness or inability to incur the expenditure, the term proposed is expressed far more widely and could well cover cases which raise difficult judgmental questions, particularly as to what is “qualifying” expenditure. Moreover, it could apply regardless of whether this was or even should have been known to the offeree. This means that the offeree may not be in a position to accept the offer made even though he neither knows nor should know this. That would not be reasonable or equitable.

It was Innovator’s duty to ensure that the Technology was acquired and if it was not acquired due to lack of intention then arguably there would be a right of recourse against Innovator.

Further, it could be argued that the acquisition of the Technology was essential to the Partnership’s business and that if it was actually known that it was certainly impossible for it to purchase that Technology then the P/A donee may not have had authority to enter the subscribers into the partnership.

The availability of other means of recourse militates against the necessity or obviousness of implying any such condition.

I find that there was no such condition as alleged.

In any event, there was no breach of the alleged expenditure term condition since, as addressed elsewhere in the judgment, in every case expenditure was incurred on qualifying technologies, and such Technologies did exist.

the business condition; (ii) the technology rights conditions; (iii) the exploitation condition; (iv) the technology development condition; (v) the technology price condition.

Taking the Etrino IM as an exemplar the Claimants relied on the following provisions in support of their case that there was (i) the business condition; (ii) the technology rights conditions; (iii) the exploitation condition; (iv) the technology development condition; (v) the technology price condition.

The business condition – that the Partnership and its business were real and not a sham in the sense that that there was never any intention on the part of its promoters, operators or administrator that it be a real and genuine business or have any real purpose other than as a vehicle to obtain tax relief.

The offer is not made subject to this or any other express condition.

There is no express statement to this effect in the IM.

If, as the condition supposes, the business was a sham and there was never an intention that there be a real and genuine business one would expect there to be remedies in deceit and conspiracy to defraud. The real vice here lies in the fraudulently induced offer, not its acceptance.

One would also expect there to be contractual recourse against Innovator on the basis that its duty involved intending to acquire a Technology which was real and genuine.

Further, it could be argued that the acquisition of a real and genuine business was essential to the Partnership’s business and that if it was actually known that it was certainly impossible for it to purchase a real and genuine business then the P/A donee would be unlikely to have had authority to enter the subscribers into the partnership.

The availability of other means of recourse militates against the necessity or obviousness of implying any such condition.

I find that there was no such condition as alleged. In any event, there was no breach of the alleged business condition since, as found later in the judgment, the Partnerships and their businesses were not shams.

The Technology rights condition – that there were rights to Technology as described.

The offer is not made subject to this or any other express condition.

The description of the Technology does imply that there are rights to the Technology. In so far as the Claimants’ case is that the condition covers the case where there are no such rights because the Technology does not exist one can see why there should be recourse in such circumstances. As with the business condition, if it was known that there were no Technology rights one would expect there to be remedies in deceit and conspiracy to defraud. One would also expect there to be rights of recourse against Innovator and limitations on the exercise of the P/A, as with the business condition. The availability of other means of recourse militates against the necessity or obviousness of implying any such condition.

In so far as the Claimants’ case is that the rights must be to Technology which exactly matches the description given in the IM that is a matter which would need to be addressed by way of a promissory warranty. It cannot be a reasonable condition of acceptance of an offer that the rights to the Technology are exactly as described. Whether or not that is so would be a matter requiring considerable investigation, as the expert evidence in this trial has illustrated. Further, it is to ignore the reality that the Technology was inevitably to be subject to development.

In so far as the Claimants’ case lies somewhere between the two positions set out above, it is not explained nor is it apparent where and how the line is to be drawn. The proposed term is accordingly unclear.

Further, unless the condition is limited to cases where it is clear that there are no Technology rights it could well raise difficult judgmental questions. Moreover, it could apply regardless of whether the existence of such rights was or even should have been known to the offeree. This means that the offeree may not be in a position to accept the offer made even though he neither knows nor should know this. That would not be reasonable or equitable.

I find that there was no such condition as alleged.

Given that I have found that there was no Technology condition, and given its unclear ambit, I do not propose to consider whether any such term (if it existed) would have been breached. However, in so far as it relates to the existence of real Technology, for reasons addressed elsewhere in the judgment there would have been no breach of the term.

The exploitation condition – that there was a real possibility of deriving profit from exploitation of the Technology rights.

The offer is not made subject to this or any other express condition.

There is no express statement to this effect in the IM.

Whilst the IM anticipates the exploitation of the Technology for profit it is careful not to give any warranty or guarantee of profit.

If the term involves a judgment being made as to the potential profitability of the business that could well raise difficult questions. Moreover, it could apply regardless of whether the lack of potential profitability was or even should have been known to the offeree. This means that the offeree may not be in a position to accept the offer made even though he neither knows nor should know this. That would not be reasonable or equitable.

If the term is meant to be limited to cases where it is known that there is no real possibility of profit then it may be covered by the P/A donee limitation in that it could be said in such circumstances that it would be actually known that it was certainly impossible for the Partnership to conduct the business.

In so far as the Claimants’ case lies somewhere between the two positions set out above, it is not explained nor is it apparent where and how the line is to be drawn. The proposed term is accordingly unclear.

In closing submissions it was said that the term requires there to be both a genuine intention to exploit and the mechanisms necessary to do so. This is not what the term says and the requirement of “necessary mechanisms” is inherently unclear.

I find that there was no such condition as alleged.

In any event, there was no breach of the alleged condition given my finding that the Technologies did have real exploitation prospects and that there was a real intention to exploit them.

The Technology development condition – that the Technology vendor had developed the Technology rights.

The offer is not made subject to this or any other express condition.

In the YTC IM it was stated that Ellsburg had developed the YTC Technology. There would not appear to be similarly unequivocal statements in the other IMs.

This was an express statement of fact in the IM. Subject to the effect of the disclaimers it would potentially found remedies in misrepresentation, if it was untrue.

The Claimants’ case appeared to be that it was a necessary condition of the acceptance of the offer that the provenance of the Technology was as stated. It is difficult to see why the provenance should be such a critical factor. What mattered was the Technology itself and the tax relief opportunities it provided. None of the Lead Claimants gave evidence to the effect that provenance was a matter of any concern to them.

In so far as the focus of the condition is that the Technology should have reached a certain stage of development, it was plain that the LLP’s business was to involve “developing” the Technology. In any event it is unclear what level of development is being referred to. Any such term would involve a judgment being made as to the state of the development of the Technology that could well raise difficult questions. Moreover, it could apply regardless of whether the lack of potential profitability was or even should have been known to the offeree. This means that the offeree may not be in a position to accept the offer made even though he neither knows nor should know this. That would not be reasonable or equitable.

I find that there was no such condition as alleged.

Given that I have found that there was no Technology Development condition, and given its unclear ambit, I do not propose to consider whether any such term (if it existed) would have been breached. However, in so far as it relates to whether there was Technology which had been developed there would be no breach of the alleged term since, as found elsewhere in the judgment, in every case there was such Technology.

The Technology price condition – that the price apparently paid for the Technology rights bore a reasonable relationship to its true value.

The offer is not made subject to this or any other express condition.

There is no express statement to this effect in the IM.

The terms of the condition are vague and unclear. What is meant by a “reasonable relationship” or “true value”? The expert evidence showed that there is no such thing as the “true value” of technology. There are various ways in which technology can be valued but none of them can be said to produce a “true” value.

The condition is the type of matter which would be need to be expressed as a warranty, and defined. Even if was clear what bearing a “reasonable relationship” to the “true value” means, to determine that issue would involve judgment, and potentially a difficult judgment. Moreover, it would apply regardless of whether the lack of such a relationship was or should have been known to the offeree. This means that the offeree may not be in a position to accept the offer made even though he neither knows nor should know this. That would not be reasonable or equitable.

I find that there was no such condition as alleged.

Given that I have found that there was no Technology price condition, and given its unclear ambit, I do not propose to consider whether any such term (if it existed) would have been breached. However, in so far as it relates to whether the Technology was of real value which was more than minimal and which bore relation to the Acquisition costs under the AAs, there would be no breach of the alleged term since, as found elsewhere in the judgment, the Technology rights had such value.

the valuation condition; (ii) the bank loan condition; (iii) the due diligence condition.

Taking the Etrino IM as an exemplar the Claimants relied on the following provisions in support of their case that there was (i) the valuation condition; (ii) the bank loan condition; (iii) the due diligence condition.

Under “Activity”; “The Partnership will fund the acquisition of Technology by way of a bank loan of 80% and Capital Contribution from Individual Partners of 20%....”(page 4)

Under Definition of ‘Valuation’; “a valuation of the Technology based upon its Exploitation Income potential during its estimated commercial life carried out independently by American Appraisal (UK) Linited”. (page 5)

Under “Team of Technology Valuers” the whole section including “the group of Technology advisers have analysed and recommended each investment being proposed by InnovatorOne PLC to investors.”(page 6)

AAUK listed as the “Independent Technology Valuer” (page 6)

Each of the “Partners and Advisors” there listed (in relation to the due diligence condition) (page 6).

“Because the bank loan will be for a qualifying purpose, the Partnership should be eligible to deduct tax relief....” (page 11).

The valuation condition – that the Technology rights acquired or to be acquired had been independently and properly valued.

The offer is not made subject to this or any other express condition.

There is a statement in most of the IMs that the Technology had been independently valued. That is a statement of fact. Subject to the effect of the disclaimers it would potentially found a claim in misrepresentation, if it was untrue.

There is no statement in the IM that the Technology had been properly valued. Such an obligation is appropriately the subject matter of a promissory warranty, but no such warranty has been given.

It is unclear what “properly” valued means.

Even if this was clear, to determine that issue would involve judgment, and potentially a difficult judgment. Moreover, the condition could apply regardless of whether the lack of a proper valuation was or even should have been known to the offeree. This means that the offeree may not be in a position to accept the offer made even though he neither knows nor should know this. That would not be reasonable or equitable.

I find that there was no such condition as alleged.

In any event the Technology rights were independently valued. Given that I have found that there was no valuation condition, and given the unclear ambit of what is meant by being “properly” valued, I do not propose to consider whether any such term (if it existed) would have been breached. However, in so far as it relates to whether the valuation was genuine, used appropriate methods and provided a valuation which bore relation to the Acquisition costs under the AAs, there would be no breach of the alleged term since, as found elsewhere in the judgment, the valuations did so.

The Bank Loan condition – that Bank funding for the required Loan had been secured.

The offer is not made subject to this or any other express condition.

The IM does state that the acquisition of the Technology will be funded by a bank loan but it does not state when the loan will be obtained. In particular it does not state that the bank loan was to be secured at the time that the subscribers were made partners and there was no necessity for the loan to be in place at this time. If, for example, the loan arrangements were to be finalised the next day or week, there could be no sensible objection to the subscribers being made partners. Although the bank loans were not generally in place at the time of the D/A, in every case there was an intent and expectation that the loans would be secured and in every case (except Arte) they were secured.

Any statement that there will be a bank loan is more appropriately the subject matter of a promissory warranty. If there was any such warranty the subscribers would potentially have recourse against Innovator. A statement as to the future at the time of acceptance is an inapt condition of acceptance.

I find that there was no such condition as alleged.

In any event, if there was a condition that a bank loan would be secured, in every case it was so secured. The Arte scheme raises different considerations since it involved a personal loan and was the subject of an express term in the subscription application. It will be addressed separately.

The due diligence condition – that the Technology rights, the proposed business, its prospects, its funding and its proposed operators (including the Administrator, Operators and the Exploiter) and advisers (including legal and technology advisers ) had been assessed with appropriate due diligence.

The offer is not made subject to this or any other express condition.

There is no express statement to this effect in the IM.

Such a condition is more appropriately the subject matter of a promissory warranty. As a condition precedent it is unworkable. There could be endless room for argument and uncertainty as to whether it had been fulfilled.

It involves wide ranging issues of judgment, and potentially a difficult judgment. Moreover, the condition could apply regardless of whether the lack of due diligence was or even should have been known to the offeree. This means that the offeree may not be in a position to accept the offer made even though he neither knows nor should know this. That would not be reasonable or equitable.

It may be that if the Claimants had chosen to pursue a contractual claim against Innovator a term that it would perform identified duties with reasonable skill and care could have been implied, but that is not the way that the Claimants put their case.

I find that there was no such condition as alleged.

Given that I have found that there was no due diligence condition, and given its unclear ambit and the factual complexities to which it potentially gives rise, I do not propose to consider whether any such term (if it existed) would have been breached.

The information condition – that the IM contained all such information as investors and their professional adviser would reasonably require and reasonably expect to find for the purpose of making an informed assessment of the issuers of the IM, the Technology rights, the Partnership including its proposed business and prospects and its management and advisers.

It was not suggested that there were any terms in the IM that supported this condition. Indeed it runs contrary to the clear statement in the IM that no representation or warranty is given as to the completeness of the information and opinions provided and the non-reliance provisions.

It was in relation to this condition that the Claimants relied on FSMA. The suggested condition is in similar terms to the requirements for IMs set out in the Public Offers of Securities Regulations 1995 (“the POS Regulations”). As was accepted, these do not apply to LLPs but were relied upon by way of analogy. The Claimants also placed reliance upon the fact that the verification notes produced internally by CB in respect of each IM required this question to be addressed.

The alleged condition is more appropriately to be characterised as an implied representation and it will be considered in more detail in that context.

As a condition of acceptance it is unworkable. There could be endless room for argument and uncertainty as to whether it had been fulfilled.

It involves wide ranging issues of judgment, and potentially difficult judgment. Moreover, the condition could apply regardless of whether the lack of information was or even should have been known to the offeree. This means that the offeree may not be in a position to accept the offer made even though he neither knows nor should know this. This would not be reasonable or equitable.

I find that there was no such term as alleged.

Given that I have found that there was no information condition and given its unclear ambit and the factual complexities to which it potentially gives rise, I do not propose to consider whether any such term (if it existed) would have been breached.

Having carefully considered each of the IM Conditions contended for by the Claimants I have reached the clear conclusion that none of them has been established.

A requirement that the IM Conditions be satisfied before the subscription offer could be accepted would put the offeree in an impossible position. If an offer is to be made subject to a condition it is essential that that is made clear. In the present case it is not clear that there are any conditions at all, still less conditions in the terms contended for by the Claimants. Further, in order to decide whether the conditions were met would in almost every case involve difficult issues of judgment. Yet further, the terms of many of the conditions are such that it might be subsequently found that the condition had not been met even though the offeree did not know this, and even where it cannot be said that he should have known this.

The air of unreality surrounding the suggested IM Conditions was borne out by the fact that there was no evidence that anyone was aware of them at the time. Although the Court’s task is an objective one it is striking that not one of the Lead Claimants gave evidence that they understood their subscription application to be subject to the IM Conditions. It is clear on the evidence that neither Mr Bailey nor Mr Roper, still less Mr Carter or Mr Gates, was aware of the IM Conditions. Although such knowledge was asserted in the Claimants’ pleaded case, it was faintly put, if at all, to these witnesses. To the extent that it was put it was certainly not made out.

In order to support their arguments the Claimants sought to take the most extreme case possible and assert that this shows that it is obvious that there must be such a condition. However, the IM Conditions are not framed in terms which would catch only the most extreme cases. They are cast far more widely than that. Moreover, the possibility of other rights of recourse or limitations on authority in such cases was not considered when addressing the more extreme examples.

The IM Conditions appear to reflect an after event rationalisation by the Claimants’ lawyers put forward with a particular end in mind. They do not reflect what would reasonably have been understood by the relevant persons at the time, as was borne out by the evidence. In general: they are not clear; they are not necessary; they are not obvious; they are not reasonable and equitable; they are not consistent with the terms of the IM.

In summary, my findings in relation to each of the individual conditions alleged are as follows.

I find that there was no “deadline”condition as alleged. In any event, there was no breach of the alleged condition since the relevant deadline had not expired at the date of the execution of the D/As.

I find that there was no “tax relief” condition as alleged. I do not propose to address the issue of breach of any such condition, but it is not obvious that at the date of the D/A there was a fixed reason why the Schemes should not have generated the anticipated tax relief.

I find that there was no “expenditure incurred” condition as alleged. In any event, there was no breach of the alleged condition since in every case expenditure was incurred on qualifying technologies, and such technologies did exist.

I find that there was no “business” condition as alleged. In any event, there was no breach of the alleged condition since the Partnerships and their businesses were not shams.

I find that there was no “Technology rights” condition as alleged. I do not propose to consider whether any such term (if it existed) would have been breached. However, in so far as it relates to the existence of real Technology there would have been no breach of the term.

I find that there was no “exploitation” condition as alleged. In any event, there was no breach of the alleged condition since the Technologies did have real exploitation prospects and there was a real intention to exploit them.

I find that there was no “Technology development” condition as alleged. I do not propose to consider whether any such term would have been breached, but in so far as it relates to whether there was Technology which had been developed there would be no breach of the alleged term since in every case there was such Technology.

I find that there was no “Technology price” condition as alleged. I do not propose to consider whether any such term would have been breached, but in so far as it relates to whether the Technology was of real value which was more than minimal and which bore relation to the Acquisition costs under the AAs, there would be no breach of the alleged term since the Technology rights had such value.

I find that there was no “valuation” condition as alleged. In any event the Technology rights were independently valued. I do not propose to consider whether they were “properly” valued, but in so far as it relates to whether the valuation was genuine, used appropriate methods and provided a valuation which bore relation to the Acquisition costs under the AAs, there would be no breach of the alleged term since the valuations did so.

I find that there was no “Bank Loan” condition as alleged. In any event, if there was a condition that a bank loan would be secured, in every case (save Arte) it was so secured.

I find that there was no “due diligence” condition as alleged. I do not propose to consider whether any such term (if it existed) would have been breached.

I find that there was no “information” condition as alleged. I do not propose to consider whether any such term (if it existed) would have been breached.

Contractual analysis of the Power of Attorney

The Claimants’ case is most conveniently set out as pleaded in the RRAPOC as follows:-

“276.

The P/A contained in each IM (as described in D3 above) was limited in the following respects:

276.1

it was exercisable only by the person who was the P/A donee as described (“the P/A donee attributes condition”);

276.2

it authorised the P/A donee to make a subscriber a Partner:

276.2.1

of the particular Partnership referred to in the IM, and no other (“the P/A Partnership condition”); and

276.2.2

only if the terms and conditions in the IM, including the IM conditions were fulfilled at time of its purported exercise (“P/A terms condition”).”

For the P/A donee attributes condition to be satisfied the Claimants contended that it was necessary (in relation to all schemes other than GT2) for the donee to be:

In relation to the GT2 scheme it was necessary for the donee (Mr Gates) to be Managing Partner of a Partnership named Gentech Partnership 2 LLP.

The Claimants’ contention in relation to the P/A donee attributes condition was that Mr Carter was only capable of falling within the definition of Managing Partner for the purposes of being the P/A donee, if he was acting pursuant to an executed Service Agreement.

For the P/A Partnership condition to be satisfied the Claimants contended that the Partnership had to be precisely as named and identified in the IM.

For the P/A terms condition to be satisfied the Claimants contended that all the IM Conditions had to be fulfilled.

Although the Claimants recognised the general applicability of the principles of construction set out by Lord Hoffman in the ICS v West Bromwich case, in the context of powers of attorney they referred to and relied upon what is said at Article 24 in Bowstead & Reynolds on Agency (19^th ed.) (“Bowstead”) as to the proper construction of P/As.

Article 24 provides:

“Powers of attorney are strictly construed and are interpreted as giving only such authority as they confer expressly or by necessary implication. The following are the most important rules of construction:

(1)

The operative part of a deed is controlled by the recitals where there is ambiguity;

(2)

Where authority is given to do particular acts, followed by general words, the general words are restricted to what is necessary for the proper performance of the particular acts;

(3)

General words do not confer general powers, but are limited to the purpose for which the authority is given, and are construed as enlarging the special powers only when necessary for that purpose;

(4)

A deed must be construed so as to include all incidental powers necessary for the effective execution of the power it confers.”

Whilst the Article refers to the strict construction of P/As it also refers to construing them having regard to the purpose for which the authority is conferred. That involves a consideration of the relevant context. In this case the context included the IM and the tax relief/business opportunity offered thereby. This was not a free standing P/A.

The P/A for the Schemes other than GT2 was expressed in similar terms to the YTC P/A set out below (save that there was an additional provision in Arte).

“1.

I hereby irrevocably apply to become a partner in the YTC Medical Learning System Partnership LLP (“the Partnership”) on and subject to the terms and conditions set out in the information memorandum dated 21 June 2002 (“the Memorandum”).

2.

I hereby agree to become a partner in the Partnership and as security irrevocably appoint the Managing Partner to be my attorney and irrevocably instruct such attorney to take all such steps and execute all such documents and deeds and do all such things as my attorney at his discretion may consider necessary or appropriate to constitute me as a partner, including, without limitation but for such purposes alone, to execute a Partnership Deed or a deed of adherence to such Deed, any document and/or deed related to the Partnership’s acquisition of Technology and any loan or loans obtained by the Partnership in that respect...

EXECUTED AS A DEED BY THE APPLICANT”

Relevant definitions in the Definitions Section of the IM were as follows:

On the Partners and Advisers page of the IM, under the heading “Management”, it was said that “The Managing Partner of the Partnership is the Managing Director for InnovatorOne PLC, Paul T Carter”.

It was the Claimants’ case that the P/A is conferred on the “Managing Partner”; the “Managing Partner” is defined as the Managing Partner “acting in accordance with the Service Agreement”; and that it followed that the donee had no authority unless and until there was an executed Service Agreement.

According to the Claimants if a D/A was purported to be executed the day before the Service Agreement it would be void and of no effect, and that would be so even if Mr Carter was at the material time conducting himself on the basis of the terms of the shortly to be executed Service Agreement.

There are a number of considerations which show that this literalistic construction cannot be correct. In particular:

The P/A is clearly appointing someone there and then and that person is the “Managing Director for InnovatorOne PLC, Paul T Carter” who the IM states “is” “The Managing Partner of the Partnership”.

The words “in accordance with the Service Agreement” in the definition of ‘Managing Partner’ refers to the fact that Mr Carter’s role and duties as such would be set out in the Service Agreement. They do not require there to be a Service Agreement before Mr Carter can be regarded as the Managing Partner for the purpose of the IM and the P/A.

Even if they did, the words do not require there to be an executed Service Agreement. It was Mr Carter’s evidence, which I accept, that he acted as the Managing Partner/Administrator in accordance with the Service Agreement from the date of the incorporation of the LLP and that the executed Service Agreement confirmed his existing status. If so he was “acting as” Managing Partner/Administrator “in accordance with” the Service Agreement even though the formal agreement had yet to be executed. The same applies to Mr Gates in relation to GT2.

The Claimants contended that the purpose of the P/A was to make a subscriber a partner in the “Partnership” and that this meant the “Partnership” as defined in the IM which was the Partnership named therein.

It follows that if the Partnership into which the subscribers were purportedly entered differed in any way from that named in the IM then there was no authority to enter them into that Partnership, even though that slightly differently named Partnership was the Partnership which acquired the Technology, was the only Partnership through which the tax relief could be obtained, and even if there was in fact no Partnership with the precise name set out in the IM.

The Defendants contended that literalist approach would result in absurd consequences that cannot have been intended by the P/A donor, the subscribers. Their interest was in investing in the Partnership which acquired the Technology and thereby qualified for tax relief, not a Partnership with a particular name which did not do so.

I agree with the Defendants that the Claimants’ construction leads to insensible results. The purpose of the P/A was not to confer authority to be entered as a partner in a Partnership with a particular name but rather to enter them into a Partnership which would acquire and exploit the Technology. The P/A should be construed consistently with that purpose.

This is borne out by the Definitions section upon which the Claimants placed so much reliance. Thus the Partnership is defined as the named Partnership “formed to carry out the trade of the Business” (YTC), “formed for the trade of commercially exploiting the Technology” (Etrino; Optibet); “formed for the trade of the Business” (GT 2); “formed for the trade of acquiring the Technology…and commercially exploiting the Technology” (Charit and Arte). It is the Partnership which was formed for this purpose that the subscribers were to be entered into, not a Partnership with a particular name which could not carry out that trade, still less one which did not even exist.

It is also supported by other provisions of the IM. Thus the IM states that “The Partnership provides an opportunity for individuals to become members of an LLP involved in the Business of acquiring, developing and commercially exploiting Technology”. The P/A was directed at the Partnership which provided that opportunity, not a particularly named Partnership which did not do so.

I accordingly reject the Claimants’ case that the P/A related and could only relate to a Partnership that had exactly the same name as that referred to in the IM.

The Claimants contended that the P/A was subject to the IM Conditions for essentially the same reasons that the subscription application offer was subject to those conditions. If anything, they submitted that the case was stronger as regards the P/A due to the principle of strict construction and the importance of the authority being exercised precisely as granted, given in particular the inability of the donor to supervise the exercise of that power.

In my judgment the substance of the reasons given for rejecting the IM Conditions as terms of the subscription application offer apply equally to the P/A. In particular, the Claimants have to rely on the implication of conditions and they cannot show that such implication is necessary or appropriate. Further, the implication of such conditions would put the P/A donee in an impossible position. His authority would depend on unstated terms of which he was not aware, nor should he reasonably have been so aware. Even if he had been so aware the ambiguity of and uncertainty surrounding most of the alleged terms would render the P/A unworkable.

The Claimants further contended in closing that there was no authority to backdate any document. However, the pleaded authority issues relating to backdating were limited to backdating of the D/A for the YTC and Etrino schemes. I am not satisfied that it is open to the Claimants to advance any wider case in closing. Further, the backdating amendment application made during the course of the trial proceeded on the basis that backdating was relevant to the issues of dishonest assistance and conspiracy to defraud. Nor does GS13, which was the subject matter of the amendment application, make any reference to authority issues in either its unamended or its amended form. In my judgment it would be unfair to allow the Claimants to introduce in closing a wider authority case which had not been clearly pleaded and put.

The Arte P/A was slightly differently worded to the other Innovator IMs. It provided, in addition to the usual clauses of the POA, as follows:

“I hereby apply to the Bank for a personal loan as stipulated above and my application is conditional upon the loan being granted by the Bank. I undertake immediately to provide any financial and/or personal information requested by the Bank at any time.”

Unlike any other IM the Arte P/A was expressly made conditional. Mr Carter accepted in evidence that the Arte applications were conditional on a bank loan being received, although I accept that he did not appreciate this at the time of executing the D/A. Mr Roper acknowledged in evidence that the subscription application indicated that the application could not be accepted until a loan had been granted by a bank, but thought that it was badly drafted as this condition was inconsistent with the irrevocability of the application.

The CB Defendants submitted that the explanation of this inconsistency is that the underlying purposes of this clause in the P/A were (1) to enable Mr Carter as Administrator of the Partnership to reject a partner who could not obtain the personal loan (for instance, if it emerged that the investor was bankrupt), and (2) to protect the investor so that he would not be liable to pay the balance of his gross contribution if his application for a bank loan were refused. However, it was submitted that this did not mean that the Administrator was unable to make the investor a partner of the Arte Partnership without such loan being in place.

Whilst CB may be correct that this is what the condition is aimed at, this is not what the P/A says. There is no such qualification made in relation to the expressed condition.

CB further submitted, however, that it was in any event waived by the Arte investors since they signed voting forms agreeing not to drawdown personal loans. This is considered further below.

Article 13 of Bowstead, relating to ratification, states as follows (para. 2-047):

“Where an act is done purportedly in the name or on behalf of another by a person who has no actual authority to do that act, the person in whose name or on whose behalf the act is done may, if the third party had believed the act to be authorised, by ratifying the act, make it as valid and effectual, subject to the provisions of Article 14 to 20, as it if had been originally done by his authority, whether the person doing the act was an agent exceeding his authority, or was a person having no authority to act for him at all.”

The principal must have knowledge of all the material circumstances in order to be able to ratify that act. Article 16 of Bowstead deals with the knowledge that is necessary (para. 2-067):

“In order that a person may be held to have ratified an act done without his authority, it is necessary that, at the time of the ratification, he should have full knowledge of all the material circumstances in which the act was done, unless he intended to ratify the act and take the risk whatever the circumstances may have been. But knowledge of the legal effect of the act may be imputed to him and it is not necessary that he should have notice of collateral circumstances affecting the nature of the act.”

It is knowledge of material acts that is important. As knowledge of the legal effect of the act may be imputed to the principal, he does not need to have actual knowledge of the legal effect of that act. In this case, therefore, the Claimants would not need to know that the exercise of the D/A was in excess of the authority. As stated in Bowstead (para. 2-068): “Where the principal is aware of the agent’s acts and the terms of the purported contract, it appears not to be necessary that the principal had realised…that his agent had exceeded his authority. Assent may otherwise be manifested by the principal’s commencing to perform the contract, and where, to the principal’s knowledge, the third party commences to act on it, the principal may become estopped from disowning it.”

Ratification can occur without knowledge of all the material circumstances where the principal “intended to ratify the act and take the risk whatever the circumstances may have been”.

As to what constitutes ratification Article 17 of Bowstead states as follows (para. 2-070):

There is no requirement that the ratification be communicated. As Bowstead states (para. 2-074):

“There is… in principle no necessity for the ratification to be communicated to the other party: it seems long established that it operates, if proved, as a unilateral manifestation of will”

The CB Defendants submitted and I accept that that the Claimants knew or ought to be taken to have known the following facts and matters:

I find that there was no P/A donee attributes condition as alleged and that, if there was, it was complied with.

I find that there was no P/A Partnership condition as alleged. If there was, it did not mean that the P/A could only be exercised in relation to a Partnership that had exactly the same name as that referred to in the IM.

I find that there was no P/A terms condition as alleged.

I find that Mr Carter exceeded his authority under the P/A in purporting to enter the subscribers as partners in the Optibet and Arte LLPs but that this act was ratified.

For the reasons outlined above I reject the Claimants’ case that they never became partners of the Schemes.

MISREPRESENTATION CLAIM

The Claimants contended that fraudulent alternatively negligent misrepresentations were made in the IM, in the Acknowledgment Letters, in the Welcome Letters, in the Statement of Losses letters and during the course of the IR enquiry.

These representations were alleged to have been made by Innovator, Mr Carter, Mr Stiedl, the LLP (from the date of its incorporation) and Mr Gates and MFS Ltd in the case of GT2.

I addressed the law on misrepresentation in some detail in my judgment in CRSM v Barclays Bank [2011] EWHC 484. The following paragraphs are of relevance to the present case:

“C. Making a representation

215.

A representation is a statement of fact made by the representor to the representee on which the representee is intended and entitled to rely as a positive assertion that the fact is true. In order to determine whether any and if so what representation was made by a statement requires (1) construing the statement in the context in which it was made, and (2) interpreting the statement objectively according to the impact it might be expected to have on a reasonable representee in the position and with the known characteristics of the actual representee: see Raiffeisen, supra, at [81]; Kyle Bay Ltd v Underwriters Subscribing under Policy No. 01957/08/01 [2007] Lloyd’s Rep IR 460, 466, at [30]–[33], per Neuberger LJ.

216.

In order to be actionable a representation must be as to a matter of fact. A statement of opinion is therefore not in itself actionable. However, as stated in Clerk & Lindsell para 18-13:

“A statement of opinion is invariably regarded as incorporating an assertion that the maker does actually hold that opinion; hence the expression of an opinion not honestly entertained and intended to be acted upon amounts to fraud.”

217.

In addition, at least where the facts are not equally well known to both sides, a statement of opinion by one who knows the facts best may carry with it a further implication of fact, namely that the representor by expressing that opinion impliedly states that he believes that facts exist which reasonably justify it – see Clerk and Lindsell para 18-14, citing among other cases Smith v Land and House Property Corp (1884) 28 Ch D 7, 15, per Bowen LJ, and Brown v Raphael [1958] Ch 636.

218.

A statement as to the future may well imply a statement as to present intention: “that which is in form a promise may be in another aspect a representation” - Clerk & Lindsell, para 18-12, quoting Lord Herschell in Clydesdale Bank Ltd v Paton [1896] AC 381, 394.

219.

Silence by itself cannot found a claim in misrepresentation. But an express statement may impliedly represent something. For example, a statement which is literally true may nevertheless involve a misrepresentation because of matters which the representor omits to mention. The old cases about statements made in a company prospectus contain illustrations of this principle – for example, Oakes v Turquand (1867) LR 2 HL 325, where Lord Chelmsford said (at 342-3):

“... it is said that everything that is stated in the prospectus is literally true, and so it is; but the objection to it is, not that it does not state the truth as far as it goes, but that it conceals most material facts with which the public ought to have been made acquainted, the very concealment of which gives to the truth which is told the character of falsehood.”

220.

In relation to implied representations the “court has to consider what a reasonable person would have inferred was being implicitly represented by the representor’s words and conduct in their context”: per Toulson J in IFE v Goldman Sachs [2007] 1 Lloyd’s Rep 264 at para. 50. That involves considering whether a reasonable representee in the position and with the known characteristics of the actual representee would reasonably have understood that an implied representation was being made and being made substantially in the terms or to the effect alleged.

221.

In a deceit case it is also necessary that the representor should understand that he is making the implied representation and that it had the misleading sense alleged. A person cannot make a fraudulent statement unless he is aware that he is making that statement. To establish liability in deceit it is necessary “to show that the representor intended his statement to be understood by the representee in the sense in which it was false” – per Morritt LJ in Goose v Wilson Sandford & Co. [2001] Lloyd’s Rep PN 189 at para. 41. In other cases of misrepresentation this is not a requirement, but one would generally expect it to be reasonably apparent to both representor and representee that the implied representation alleged was being made.

222.

It is necessary for the statement relied on to have the character of a statement upon which the representee was intended, and entitled, to rely. In some cases, for example, the statement in question may have been accompanied by other statements by way of qualification or explanation which would indicate to a reasonable person that the putative representor was not assuming a responsibility for the accuracy or completeness of the statement or was saying that no reliance can be placed upon it. Thus the representor may qualify what might otherwise have been an outright statement of fact by saying that it is only a statement of belief, that it may not be accurate, that he has not verified its accuracy or completeness, or that it is not to be relied on: Raiffeisen, supra, at [86].

224.

As further observed in Raiffeisen, at [87], the claimant must show that he in fact understood the statement in the sense (so far as material) which the court ascribes to it; and that, having that understanding, he relied on it. Analytically, this is probably not a separate requirement of a misrepresentation claim but rather is part of what the claimant needs to show in order to prove inducement.

D. Fraud

225.

The classic statement of the mental element required to found a claim in deceit remains that of Lord Herschell in Derry v Peek:

“First, in order to sustain an action of deceit, there must be proof of fraud and nothing short of that will suffice. Secondly, fraud is proved when it is shown that a false representation has been made (1) knowingly, (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement from being fraudulent, there must, I think, always be an honest belief in its truth.”

226.

As to recklessness, even if the party making the representation may have had no knowledge of its falsehood, he will still be responsible if he had no belief in its truth and made it, “not caring whether it was true or false” - See Clerk & Lindsell, para 18-21. As Lord Herschell put it Derry v Peek, supra, at 368 (and 361):

“Any person making such a statement must always be aware that the person to whom it is made will understand, if not that he who makes it knows, yet at least that he believes it to be true. And if he has no such belief he is as much guilty of fraud as if he had made any other representation which he knew to be false, or did not believe to be true.”

227.

It is not necessary that the maker of the statement was ‘dishonest’ as that word is used in the criminal law - Standard Chartered Bank v Pakistan National Shipping Corp (No. 2) [2000] 1 Lloyd’s Rep. 218, 224. Nor is the defendant’s motive in making the representation relevant: “If fraud be established it is immaterial that there was no intention to cheat or injure the person to whom the false statement was made.” - Clerk & Lindsell, para 18-20, quoting Bradford Third Benefit Building Society v Borders [1941] 2 All ER 205, 211 per Viscount Maugham; and see also Derry v Peek, supra, at 409. What is required is dishonest knowledge, in the sense of an absence of belief in truth - The Kriti Palm, supra, para 257 (Rix LJ); and see also para 258, quoting Armstrong v Strain [1951] TLR 856, 871, per Devlin J (“When Judges say, therefore, that wickedness and dishonesty must be present, they are not requiring a new ingredient for the tort of deceit so much as describing the sort of knowledge that its necessary”).

228.

The ingredient of dishonesty (in the above sense) must not be watered down into something akin to negligence, however gross - The Kriti Palm, supra, para 256. However, the unreasonableness of the grounds of the belief, though not of itself supporting an action for deceit, will be evidence from which fraud may be inferred. As Lord Herschell pointed out in Derry v Peek, supra, at 376, there must be many cases: “where the fact that an alleged belief was destitute of all reasonable foundation would suffice of itself to convince the court that it was not really entertained, and that the representation was a fraudulent one.”

229.

Where a serious allegation (such as deceit) is in issue, this does not mean the standard of proof is higher. However, the inherent probability or improbability of an event is itself a matter to be taken into account when weighing the probabilities and deciding whether, on balance, the event occurred. The more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established - The Kriti Palm, supra, para 259, quoting Lord Nicholls in re H (Minors) [1996] AC 563, 586.”

In relation to reliance and inducement the position is conveniently summarised in Chitty as follows:

The Claimants stressed the duty to correct a representation which is known to have become false and that what matters is whether the representation is false when acted upon.

The Claimants also relied upon the fact there may be liability for representations which have been passed on. As stated in Chitty at 6-028: “To put the matter another way, the claimant must show that it was intended that he was intended to act on the representation, rather than it being aimed solely at someone else. There may be said to be three types of representees: first, persons to whom the representation is directly made and their principals; secondly, persons to whom the representor intended or expected the representation to be passed on; and thirdly, members of a class at which the representation was directed……Nor is it always necessary that the actual representation should reach the representee. If a person asks an agent to find some property for him, and the agent, relying on the fraudulent inducements of the vendor, recommends the vendor's property, the buyer will be entitled to relief for misrepresentation even though the agent did not actually pass on the fraudulent statements.”

In a number of instances representations were “passed on” in the sense of being repeated by IFAs to subscribers. Such representations are actionable when those subscribers relied on them if the representations fall within classes two or three in the passage set out. Where the representations induced advisers or introducers to recommend the Schemes to their clients, the same principle may apply.

In considering whether a representation, and in particular an implied representation, was made; the scope of any representations made; whether there was any assumption of responsibility or duty of care and whether there was reliance the terms of the IM are of relevance.

The disclaimers contained in the YTC Information Memorandum of September 2002 may be taken as an exemplar. They included the following:

“IMPORTANT NOTICE ABOUT THIS MEMORANDUM

…this Information Memorandum…provides information only”

No reliance may be placed for any purpose whatsoever on the information provided in this information memorandum or its completeness. No representation or warranty, express or implied, is or will be made as to the accuracy or completeness of the information, including, without limitation, all projections or opinions contained in this information memorandum and no liability is accepted by InnovatorOne Plc for any such information or opinions.

This Information Memorandum provides recipients with information on arrangements for the Partnership in particular, and in the context of the acquisition and exploitation of the technology, in general. Recipients are advised to refer to the final form of the Partnership Deed…consult their own advisers and consider for themselves the financial, legal and other consequences of subscribing to the Partnership before subscribing. Recipients are also referred to the risk factors described on page 13 herein.

….

RISK FACTORS

Subscribers to the Partnership should consider the potential risks of such participation, which include, but are not limited to, the following:

….

The value of an individual’s participation in the Partnership may decrease as well as increase and there is no guarantee that partners will fully recoup their contributions to the Partnerships”.

Partners should take and maintain while they are partners, independent professional advice as to their duties at law as partners of an LLP and the potential liabilities that they may incur in excess of the amount they will have agreed to contribute to the assets of the Partnership in the event of its winding up….

….

This information memorandum has been prepared on the basis of current tax legislation and Inland Revenue practices, concessions and interpretations. If these change, or if the levels and bases of taxation change as a result of amendments to the law, the changes may be applied retrospectively. The value of an individual’s subscription may be affected as a consequence, as may be the amount, timing and availability of tax relief….

…there is no guarantee that the Inland Revenue will agree that the tax reliefs described in this Information Memorandum will be applicable to that individual

…profits by way of exploiting technology are very speculative and there can be no guarantee that a partner’s participation is the exploitation of the technology will result in a profit.

The Partnership interests described in this Information Memorandum are commercial participations in a business venture. Individuals are recommended to take appropriate professional advice before subscribing.

DISCLOSURE TO HIGH NET WORTH INDIVIDUALS

Reliance on this Information Memorandum for the purpose of engaging in any investment activity may expose you to a significant risk of losing all of your property invested; and

If you have any doubt about the investment to which this information memorandum relates, you should consult an authorised person specialising in advising on investments of this kind.”

These sections of the IM make it clear that a subscriber ought to take independent professional advice before subscribing, that the investment was speculative and that tax relief may not be granted. It also makes it clear that no warranty or representation is being made as to the accuracy and completeness of any information, projections or opinions provided.

In this connection the Defendants relied upon the case of IFE Fund SA v Goldman Sachs International [2006] EWHC 2887 (Comm). In that case Goldman Sachs had sent a Syndicate Information Memorandum (“SIM”) to the claimant and others inviting them to participate in the syndication of a mezzanine facility. The SIM stated that the information in it had been derived from many sources and was not to form the basis of any contract; that Goldman Sachs had not independently verified the information and gave no representation, warranty or undertaking, express or implied and did not accept responsibility for its accuracy; and that the information was not to be assumed to have been updated and did not constitute a representation by any person that the information would be updated. The SIM gave a positive view of the company.

It was held that this disclaimer meant that no duty of care arose. In the Court of Appeal [2007] EWCA Civ 811 Waller LJ at [28] endorsed Toulson J on this point:

“....the argument that there was some free standing duty of care owed by GSI to IFE in this case is, in the light of the terms of the Important Notice, hopeless. Nothing could be clearer than that GSI were not assuming any responsibility to the participants: Hedley Byrne v Heller & Partners [1964] A.C. 465. The foundation for liability for negligent misstatements demonstrates that where the terms on which someone is prepared to give advice or make a statement negatives any assumption of responsibility, no duty of care will be owed. Although there might be cases where the law would impose a duty by virtue of a particular state of facts despite an attempt not “to assume responsibility” the relationship between GSI either as arranger or as vendor would not be one of them. I entirely agree with the judge on this aspect.”

The Defendants also relied upon the recent line of authority concerning contractual estoppel and in particular Peekay v Australia & New Zealand Banking Group [2006] 2 Lloyd’s Rep 511 and Springwell Navigation v JP Morgan Chase Bank [2008] EWHC 1186 (Comm)(Gloster J); [2010] EWCA Civ 1221 (CA).

I reviewed these authorities in the CRSM v Barclays case and concluded as follows:

“505.

The authorities accordingly establish that:

(1)

It is possible for parties to agree that one party has not made any pre-contract representations to the other about a particular matter, or that any such representations have not been relied on by the other party, even if they both know that such representations have in fact been made or relied on, and that such an agreement may give rise to a contractual estoppel.

(2)

If a term is to be construed as having this effect (and thereby prevent from arising the ordinary consequences which would otherwise follow as a matter of law) clear words are necessary – see Peekay para. 57; Board of Trade v Steel Brothers & Co. Ltd. [1952] 1 Lloyd’s Rep. 87 at p95.

(3)

Whether or not a clause or collection of clauses has this effect is a matter of construction of the contract.

(4)

The principle may not apply where there has been a misrepresentation as to the effect of the contractual documents which give rise to the estoppel – see Peekay para. 60; Springwell para. 166.

These cases are primarily of relevance to claims made against a contractual counterparty. In the present case the Claimants’ claims were mainly addressed at non-contractual parties. However, these cases still involve a helpful analysis of the scope and effect of comparable disclaimer provisions and of the applicability of section 8 of UCTA, which the Claimants relied upon by way of late amendment.

In relation to the applicability of UCTA guidance is given by the Raffeisen decision in which Christopher Clarke J. said at [310]:

“...the essential question is whether the clause in question goes to whether the alleged representation has been made (or, I would add was intended to be understood and acted on as a representations), or whether it excludes or restricts liability in respect of representations made, intended to be acted on and in fact acted on; and that question is one of substance not form...”

Christopher Clarke J made it clear, however, that a clause would amount to an exclusion clause if it “attempts to re-write history or parts company with reality” at [314]. He concluded that the clauses relied upon by RBS did not:

“attempt to exclude or restrict any liability...On the contrary they contain, it seems to me, the agreement of the parties as to the basis upon which the Confidential Information was to be given, namely that it was not to be regarded as a representation of fact on which RBS intended that [RZO] should rely or upon which it was entitled to rely; and that any statements made in, for instance, the IM were not to be regarded as complete. The provisions in the IM and the Confidentiality Agreement were there at the start of, and defined, the relationship between the parties and the character of what was to be said.

If parties such as these agree in unequivocal terms as to the ambit of what is being represented to them and the extent to which one party is entitled to rely on what it is being told by the other, I do not see why the Court should not give effect to their agreement...” [316-317].

Christopher Clarke J also held that, even had the clause been subject to the requirement of reasonableness, it would have satisfied the test. In taking this view, he was influenced to a considerable degree, by the fact that the parties were both large commercial organisations.

In relation to the disclaimers in the IMs in the present case I do not consider that they mean that no representations are being made at all. Although the IMs state that no reliance may be placed on any information provided in the IM, it is elsewhere acknowledged that it will be so relied upon, as it would have to be. Thus the basis upon which recipients are urged to consult their own advisers is stated to be the information in the IM (“This Information Memorandum provides recipients with information…”) upon which reliance would have to be placed to give such advice. Further, the subscription application contains an acknowledgment that the subscriber has “relied on the information in the Documentation”, which includes the IM.

The disclaimers do, however, make it clear that no representation is being made that the information provided is complete. They also state that no representation is being made as to its accuracy. These provisions qualify any representations of fact made and indicate that there was no intention that the recipient should rely or be entitled to rely on the completeness or accuracy of the representations made. As such they would not be caught by UCTA since they do not exclude or restrict liability in respect of representations made and intended to be acted upon, nor do they attempt to re-write history or part company with reality.

These provisions also make it difficult to found any assumption of responsibility or duty of care in respect of the accuracy or completeness of the information provided. They do not, however, go to the genuineness of the information provided or to claims based in deceit.

These were stated to be as follows (RRAPOC 231):

“231.1

Representations as to tax including:

231.1.1

the relevant deadlines for the availability of relevant tax relief had not expired or had been complied with (“the deadlines representation”).

231.1.2

that tax relief would be available as set out and in the proportions and amounts set out in the IM (“the tax relief representation”).

231.1.3

that the Partnership had or would incur qualifying expenditure on ICT as set out in the IM (“the expenditure incurred representation”).

231.1.4

Representations as to the business of the Partnership including that the Partnership and its business were real and not a sham in the sense that that there was never any intention on the part its promoters, operators or administrator that it be a real and genuine business or have any real purpose other than as a vehicle to obtain tax relief (“the business representations” ).

231.2

Representations as to the Technology including:

231.2.1

that there were rights to the Technology as described (“the Technology rights representation” );

231.2.2

that there was a real possibility of deriving profit from exploitation of the Technology rights (“the exploitation representation”).

231.2.3

that the Technology Developer had developed the Technology rights (“the Technology development representation” ).

231.2.4

that the acquisition cost for the Technology rights bore a reasonable relationship to its true market value (“the Technology price representation” ).

231.2.5

that the Technology rights acquired or to be acquired had been independently and properly valued (“the valuation representation” )

231.3

Representations as to funding including that Bank funding for the required Loan had been secured (“the Bank Loan representations”).

231.4

that the Technology rights, the proposed business, its prospects, its funding and its proposed operators (including the Administrator, Operators and the Exploiter ) and advisers (including legal and technology advisers ) had been assessed with appropriate due diligence (“the due diligence representation” );

231.5

that the IM contained all such information as investors and their professional adviser would reasonably require and reasonably expect to find for the purpose of making an informed assessment of the issuers of the IM, the Technology rights, the Partnership including its proposed business and prospects and its management and advisers (“the information representation”).”

It is apparent that the IM Representations are essentially the IM Conditions reformulated as representations. Many of the reasons given as to why there were no such Conditions equally apply to the IM Representations. In particular, most of them are not derived from express statements in the IM and cannot reasonably be implied.

Many of the alleged representations relied upon cannot be described as statements of present fact but amount at most to statements of opinion or expectation. The IMs must be read as a whole and each contained a number of explicitly stated assumptions and set out a range of risk factors associated with the investment. Read alongside those assumptions and risk factors, statements as to tax relief or potential commercial success cannot reasonably be regarded as statements of present fact. The Claimants’ case was put on the basis of the representations being statements of present fact. There was no pleaded case that statements of expectation, belief or of opinion based on reasonable grounds were made.

In so far as the Claimants were alleging implied representations it was incumbent on them to prove that such representations were understood to have been made since otherwise there could be no reliance. In relation to most of the alleged implied representations there was no such evidence, or no sufficient evidence, of any such understanding from Lead Claimants or IFAs. Equally, in so far as deceit was being alleged, it was incumbent on the Claimants to prove that the alleged representor understood a representation to the alleged effect to have been made. In relation to most of the alleged implied representations there was no such evidence, or no sufficient evidence, of any such understanding

Further, any representations made in the IM were made when it was issued and distributed and were acted upon when the subscribers made their irrevocable application to become partners and that offer was accepted by Innovator. In so far as there was any duty to correct representations made it is unlikely that it continued thereafter. On any view it did not extend beyond the time when they were made partners.

The alleged tax representations

In the YTC IM, by way of exemplar, it was stated that “…the Partnership should be able to write off the cost of acquiring the Technology..” and that the “Partnership may expect to incur a trading loss” leading to “anticipated initial tax benefit”; “It is expected that relief under section 45 will be available…”; “The reliefs depend upon the trade being carried on a commercial basis and with a view to profit” (emphasis added). These are not statements of fact, but rather statements of expectation, belief or opinion. However, no case was advanced on the basis of any statement of fact that might be inherent in a statement of expectation, belief or opinion.

As to each of the individual representations within the alleged tax representations:

The alleged technology representations

The Defendants accepted there were statements made in the IMs to the effect that the Technology existed and had been developed to a certain stage. For reasons addressed in more detail elsewhere, these statements were true, as borne out, for instance, by the evidence of Mr Lewis, Mr Binks, Mr Wren-Hilton, Mr Walsh, Mr Joshi, Dr Burade, Mr Brocklebank, Mr McCallum, Mr Flint and Dr Collis. However, the IM made clear that there were no certain outcomes: “The commercial success of the Business will solely depend upon the exploitation of the Technology”. Again this was not a statement of present fact but a caveated statement as to the future.

As to each of the individual representations alleged:

The alleged bank funding representations

There is no statement in any IM that a loan had been secured. There were statements to the effect that there would be a loan, but no statement as to when it would be obtained. Such statements as were made were statements of intent or expectation or belief as to the future not present statements of fact. The YTC IM, for example, said that “the partnership intends to obtain 80% finance for its acquisition of Technology” and “…the partnership is anticipated to obtain finance for 80%”. In any event, in all cases there was an intent and expectation that bank loans would be secured and bank funding was secured for all Schemes save for Arte.

The alleged due diligence representations

The alleged due diligence representations do not appear in the IMs. There is no basis for inferring such a contentious and far reaching representation. Issues of this kind are properly the subject matter of negotiation and, if agreed, a promissory warranty. What is “appropriate” or what is “due diligence” is a matter of evaluation and judgment, not a statement of fact.

The alleged information representations

There was no such representation anywhere on the face of the IM. There is no basis for inferring any such representation given the clear statements made in the IM that no representation was being made as to the completeness of the information provided.

It is correct that the Verification Notes (which was an internal process designed to bring discipline to Innovator’s documents) used some of the language found in the POS regulations which form the basis of the alleged representation. However, these were not representations made to the Claimants. They were internal documents. Whilst they support the view that consideration of this question is good practice, they do not support the suggestion that any statement to that effect was made. It was not.

In summary, for the most part I reject the Claimants’ case that the IM Representations were made. To the extent I have found that such representations were made they were true.

These were alleged to be as follows (RRAPOC 234):

“234.1

“Your funds will be held will be held in the [CB] Client Account until the Partnership has been established” [emphasis added] or “The funds will be held in the [CB] Client Account until your Capital Contribution is invested into the Partnership” “the AL subscription money representation”;

234.2

the subscriber would become a partner of the Partnership only when his or her Capital Contribution was “formalised” and the “Managing Partner” had signed the Partnership Deed on his or her behalf (“the AL partner representation”);

234.3

(in Version 1 Acknowledgment Letters) the Partnership would “then” (i .e. after the subscriber had been made a partner) purchase the technology and commence its trading activities (“the AL purchase and trading representation”);

234.4

in the “unlikely event that the Partnership is never formed, your funds will be returned.” [emphasis added] (“the AL return of funds representation”);

234.5

in that event, the subscriber would be offered to option to invest into an alternative partnership, if one were available and suitable and acceptable to the subscriber (“the AL alternative option representation”);

234.6

(by implication), unless and until a subscriber became a partner of the relevant Partnership, each of the representors regarded that subscribers’ subscription money as his or her money and not that of the Partnership or any other person (“the AL funds representation”).”

The alleged representations set out in paragraphs 234.1 to 234.5 are all statements as to what will happen. They are not statements of present fact. The only potential statement of present fact alleged is 234.6 which would appear to allege a belief on the part of the alleged representors.

I would agree that the express statements made in the letter as to what “will” happen can be regarded as statements of expectation or belief. However, the alleged implied representation goes further and essentially asserts a legal consequence which is said to follow from the express statements made. I am not satisfied that any implied representation to that effect was made. Even if it was, there was no evidence that any Lead Claimant or IFA relied on what Mr Carter or Mr Gates may have believed.

Further, by the time of the Acknowledgment Letters the Claimants had already made their irrevocable subscription application and that had been or was thereby accepted. These representations cannot have and did not induce the Claimants to make the subscription application or to enter into the contract with Innovator. By this stage the Claimants were already contractually bound.

The Claimants pleaded an alternative case on causation that if there had been no breach of duty they would have recovered all or a substantial part of the monies subscribed. However, there was no positive case advanced on the evidence to the effect that had it not been for the misrepresentations allegedly made in the Acknowledgement Letters the Claimants would have sought to recover their subscription monies. Nor was any positive case advanced as to whether and how this would have been achieved.

These were alleged to be (RRAPOC 237):

“237.1

The addressee of the letter had properly and validly been made a partner of the Partnership named in the Welcome Letter (“the WL partner representation”).

237.2

The formalities for establishing the Partnership and constituting the addressee of the letter as a partner thereof had been completed and had been completed in accordance with the IM and the P /A (“the WL formalities representation” ).”

The letters stated that the subscribers had been made partners. That was a statement of fact. The refinements introduced by the alleged representations go beyond what was actually said in the letters and essentially involve legal matters. I am not satisfied that any representation was made beyond what is expressly stated in the letters.

Paragraphs 920 and 921 above equally apply to these letters.

These were alleged to be:

“239.1

The addressee of the letter had properly and validly been made a partner of the Partnership named in the SLL (“the SLL partner representation”).

239.2

The formalities for establishing the Partnership and constituting the addressee of the letter at a partner thereof had been completed and had been completed in accordance with the IM and the P /A (“the SLL formalities representation”).

239.3

The audited accounts and the Partnership tax return gave a fair and accurate view of the financial position of the Partnership and, in particular, of the qualifying expenditure and losses incurred by the Partnership (“the SLL accounts representation”).

239.4

The statement of individual losses accurately set out the losses in respect of which the addressee of the letter was entitled to claim tax relief upon those losses (“the SLL tax representation”).”

The first two representations are the same as alleged in the Welcome Letters and the same comment applies.

As to the SLL accounts representation, any such statement relating to the audited accounts would be made by the auditors, not the alleged representors and the Partnership returns would be based thereon. In any event it would be a statement of opinion or belief, not present fact.

As to the SLL tax representation, if made, this too would be a statement of opinion or belief, not present fact.

Paragraphs 920 and 921 above equally apply to these letters.

These were alleged to be as follows (RRAPOC 241):

“241.1

Letters despatched in January 2004 which represented that “there do not appear to be any particular areas of the structure which have been highlighted as potential causes for concern.”

241.2

Letters despatched in September 2004 which again represented that that “the structure is robust” and that the HMRC’s three areas of concern “can be resolved”.

241.3

The calling of EGMs in January 2005 (and thereafter) which in and of itself represented to the Claimants that (a) the Partnerships had been properly formed and (b) they had been properly constituted as Partners of those Partnerships.

241.4

Representations made by Mr Carter at EGMs on 18.01.05, 19. 01.05 and 20.01.05, 23.03.05 and 29.06.05 which included representations to the effect that:

241.4.1

Innovator had been approached by Technology Developers to raise finance to bring Technology to the market.

241.4.2

Innovator had undertaken extensive due diligence on the Technology acquired by the Partnerships assisted by independent assessors and advisers who had “nothing to do with Bjorn Stiedl”.

241.4.3

Neither Innovator nor its consultants were involved in ascertaining the purchase price.

241.4

.4 There was no evidence of any link between the Technology Vendors and Mr Stiedl.

241.4.5

Mr Stiedl had been a consultant to Innovator whose role had been limited to determining which technologies met the business requirements of the scheme and who had not been involved in owning or introducing the technologies.”

Whilst at least some of these representations were made they were made to Claimants of existing Schemes long after they were bound into the Schemes and had become partners. In such circumstances there can have been no relevant reliance and the comments made in paragraph 920 apply with even greater force.

Whilst it is theoretically possible that the statement in 241.1 could have influenced an existing Scheme participant in his decision to subscribe in later Schemes there was no evidence to that effect. The same applies in relation to the statement in 241.2 in relation to the Arte Scheme subscribers. All the other alleged representations post-date the D/As for all Schemes.

For the reasons set out above I am not satisfied that any actionable misrepresentation was made, even if one has no regard to the disclaimer provisions. If one does have regard to them then it becomes all the more difficult for the Claimants to establish that the alleged representation was made; that it was intended to be relied upon; that it was relied upon and that any duty of care was owed.

It might be different if a fraudulent representation could be made out in relation to the business representation or the technology rights representation. However, for reasons set out in more detail elsewhere I find that no misrepresentation, still less fraudulent misrepresentation, has been made out.

I would add that in relation to the IM representations I am not satisfied that any representation was made other than by Innovator (or possibly, if continuing after incorporation, by the LLP). None of the statements relied upon were made personally by Mr Carter or Mr Gates (other than as MFS) or Mr Stiedl, nor was there any evidence that they were so understood or relied upon. Different considerations might arise if fraud was established, but it has not been. The issue of personal liability is dealt with in more detail later in the judgment.

STATUS OF SUBSCRIPTION MONIES & ALLEGED BREACH OF TRUST

The principles by reference to which a Quistclose trust will arise have been helpfully summarised by Norris J in his recent judgment in Bieber v Teathers Limited [2012] EWHC 190 (Ch) which was a case involving the status of monies subscribed into a CIS partnership. He stated as follows:

“16.

First, the question in every case is whether the payer and the recipient intended that the money passing between them was to be at the free disposal of the recipient: Re Goldcorp Exchange [1995] 1 AC 74 and Twinsectra at [74].

17.

Second, the mere fact that the payer has paid the money to the recipient for the recipient to use it in a particular way is not of itself enough. The recipient may have represented or warranted that he intends to use it in a particular way or have promised to use it in a particular way. Such an arrangement would give rise to personal obligations but would not of itself necessarily create fiduciary obligations or a trust: Twinsectra at [73].

18.

So, thirdly, it must be clear from the express terms of the transaction (properly construed) or must be objectively ascertained from the circumstances of the transaction that the mutual intention of payer and recipient (and the essence of their bargain) is that the funds transferred should not be part of the general assets of the recipient but should be used exclusively to effect particular identified payments, so that if the money cannot be so used then it is to be returned to the payer: Toovey v Milne (1819) 2 B&A 683 and Quistclose Investments at 580B.

19.

Fourth, the mechanism by which this is achieved is a trust giving rise to fiduciary obligations on the part of the recipient which a court of equity will enforce: Twinsectra at [69]. Equity intervenes because it is unconscionable for the recipient to obtain money on terms as to its application and then to disregard the terms on which he received it from a payer who had placed trust and confidence in the recipient to ensure the proper application of the money paid: Twinsectra at [76].

20.

Fifth, such a trust is akin to a “retention of title” clause, enabling the recipient to have recourse to the payer's money for the particular purpose specified but without entrenching on the payer's property rights more than necessary to enable the purpose to be achieved. It is not as such a “purpose” trust of which the recipient is a trustee, the beneficial interest in the money reverting to the payer if the purpose is incapable of achievement. It is a resulting trust in favour of the payer with a mandate granted to the recipient to apply the money paid for the purpose stated. The key feature of the arrangement is that the recipient is precluded from misapplying the money paid to him. The recipient has no beneficial interest in the money: generally the beneficial interest remains vested in the payer subject only to the recipient's power to apply the money in accordance with the stated purpose. If the stated purpose cannot be achieved then the mandate ceases to be effective, the recipient simply holds the money paid on resulting trust for the payer, and the recipient must repay it: Twinsectra at [81], [87], [92] and [100].

21.

Sixth, the subjective intentions of payer and recipient as to the creation of a trust are irrelevant. If the properly construed terms upon which (or the objectively ascertained circumstances in which) payer and recipient enter into an arrangement have the effect of creating a trust, then it is not necessary that either payer or recipient should intend to create a trust: it is sufficient that they intend to enter into the relevant arrangement: Twinsectra at [71].

22.

Seventh, the particular purpose must be specified in terms which enable a court to say whether a given application of the money does or does not fall within its terms: Twinsectra at [16].”

Neither the Claimants nor the Defendants challenged this summary of the relevant principles, although they emphasised different parts of the summary.

I reject the Claimants’ case that there was a trust on terms of or subject to powers as set out in the IM Conditions essentially for the reasons given in rejecting that case in relation to the subscription application offer and the P/A.

In my judgment the substance of the reasons given for rejecting the IM Conditions as terms of the subscription application offer and the P/A apply equally to the submission that they are terms of the alleged Quistclose trust or of the powers exercisable thereunder. In particular, the Claimants have to rely on the implication of the terms and they cannot show that such implication is necessary or obvious, reasonable and equitable. Further, the implication of such terms would put the trustee in an impossible position. His fulfilment of the terms of the trust would depend on unstated terms of which he was unlikely to be aware, nor should he reasonably have been so aware. Even if he had been so aware the ambiguity of and uncertainty surrounding most of the alleged terms would render the trust and the exercise of powers thereunder uncertain and unworkable.

As stressed by Norris J in the Teathers case, “the particular purpose must be specified in terms which enable a court to say whether a given application of the money does or does not fall within its terms”. For reasons already given, that is not the case in relation to most of the alleged IM Conditions.

That however, leaves the Claimants’ case that there was a Quistclose trust for the purpose of investing in the particular Partnership named in the IM. In support of such a trust the Claimants submitted that it was clear that the monies were not at the “free disposal of the recipient”.

As Norris J explained in Teathers, in considering whether it was intended that the monies should be at the “free disposal” of the recipient “it must be clear from the express terms of the transaction (properly construed) or must be objectively ascertained from the circumstances of the transaction that the mutual intention of payer and recipient (and the essence of their bargain) is that the funds transferred should not be part of the general assets of the recipient but should be used exclusively to effect particular identified payments, so that if the money cannot be so used then it is to be returned to the payer”.

The Claimants submitted that this was clear from the documents in this case and emphasised in particular the following facts and matters:

The CB Defendants disputed that there was any Quistclose trust and submitted that the present case could be distinguished from other cases in which such trusts had been found. They stressed the distinction between a contractual and a fiduciary obligation in relation to the monies transferred. They emphasised that what needs to be shown is an intention to restrict the recipient’s freedom to dispose of that money by requiring that it should not be applied for any purpose other than that stipulated. They submitted that the cases show that the following factors are of particular relevance in determining whether there was an intention to retain a beneficial interest in the monies transferred:

Save in relation to item (6), which will be considered further below, I agree that none of these factors are present in this case. However, whilst these factors are relevant they are neither individually nor collectively determinative.

The particular feature of the Scheme in this case which the CB Defendants submitted was inconsistent with the existence of any Quistclose trust was the recognised need for fees and expenses to be incurred in relation to the setting up of the LLP and the scheme arrangements, which expenses were likely to be incurred and payable before subscribers were made partners following the scheme becoming fully subscribed.

It was obvious from the IM that significant fees and expenses would be incurred in setting up the scheme. This is apparent, for example, from all the professional advisers identified in the IM. Further, as the Option Agreement referred to in the IM made clear, these expenses were the responsibility of Innovator and were to be paid out of its fee.

Of particular importance is the section of the IM entitled “Application of Subscription Monies” which provides:

“Partners’ contributions to the Partnership will be used to buy the rights to the Technology, pay initial fees and all ordinary ongoing administrative expenses. Initial fees include commissions payable to independent financial advisors for introducing Partners, fees payable to the bank for arranging the loan to the Partnership, Partnerships’ incorporation fees and all legal and professional advice relating to the various contracts to be entered into.”

The CB Defendants submitted that this made it clear that these fees would be payable without more and would be applied without more and as such undermines the Claimants’ allegation that such expenditure could not occur until the investor had been made a partner. It was submitted that it would have been clear to an investor reading this that his subscription monies would be used immediately to pay for these fees and costs and that subscribing on that basis is inconsistent with an intention to retain any beneficial interest in those subscription monies.

The CB Defendants submitted that the IMs:

It was submitted that all these features were inconsistent with the existence of a Quistclose trust.

The CB Defendants also relied on the evidence of various Lead Claimants which they submitted showed that they had no intention to retain any beneficial ownership of the monies, and in particular the fact that they saw the Innovator Schemes as being an investment. They also relied on the evidence of all the Defendants that they understood the subscription monies to be Innovator’s once it had been “irrevocably” paid to it. However, the test for the creation of a trust is objective and does not depend on the subjective intentions of the payer and recipient.

I recognise the force of many of the CB Defendants’ arguments and in particular the need for set up costs and expenses to be incurred and paid by Innovator, the recognition in the IM that this will be done and the reality that many of these costs would be likely to be payable before the Partnership was fully subscribed. However, it was an important element of the scheme structure that all the subscription monies were used by the Partnership in the acquisition of the Technology so as to maximise the tax relief available. As was apparent from the IM and the contractual documentation, this was to be done by using the subscription monies in payment of the acquisition price to the Technology Vendor and the Vendor paying about 11% of the amount received to Innovator so as to enable it to pay all necessary fees and expenses. The first step envisaged was therefore payment of the purchase price by the Partnership.

Further, the Teathers case provides strong support for the Claimants’ case that there was a Quistclose trust up until the time that the subscribers became partners and their monies became Partnership capital. In that case it was common ground that there was a Quistclose trust up until that time and Norris J accepted and adopted that analysis.

It was submitted that the “Application of Subscription Monies” provision in the IM distinguished this case from Teathers but it is to be noted that there was a broadly similar provision in that case – see [44].

Having carefully considered the evidence and the parties’ submissions on this issue I conclude that until the subscribers became partners their subscription monies were not at the free disposal of Innovator and were subject to a Quistclose trust.

If so, the next question is what were the terms of that trust or of the powers exercisable thereunder. The Claimants submitted that the purpose of the trust was to invest in the Partnership and that the trustee could only use the subscription monies for the purpose of making the subscriber’s capital contribution to that Partnership.

CB submitted that if there was a Quistclose trust it would be a trust whereby Innovator as trustee held the funds on terms that they were to be used in connection with the setting up of the LLP and the acquisition of the Technology and making of consequential arrangements for its exploitation and the administration of the Partnership.

CB submitted that in practical terms it was always clear that Innovator would have to incur costs on behalf of the investors/Partnerships in setting up the Partnerships, in paying commission to introducers and in seeking the necessary professional advice including that from tax counsel. Some means had to be found to enable payments to be made which were properly incidental to the Schemes and necessary to their implementation, out of the money subscribed, but which would in due course become costs to be defrayed by Innovator out of the monies it received from the Technology Vendor, (which monies were themselves part of the price paid by the Partnerships). This was to be done by treating sums applied directly out of the account to the payment of commission, fees or otherwise as advance payments to the Technology Vendor which in turn would make them available to Innovator as an advance on its fee. Mr Carter’s evidence supported this analysis.

I do not accept that subscription monies could simply be applied by Innovator to pay the expenses identified in the IM. That would be inconsistent with the recognised need for the monies to be used by the Partnership to pay the acquisition price. However, I do accept that monies could be used by the Partnership in payment of that price. So, if, for example, a payment was made which was authorised by the Technology Vendor as an advance payment by the Partnership of the purchase price and which was then, for example, used to pay fees and expenses due out of Innovator’s fee, that would be a proper payment and involve no breach of trust.

It was Mr Carter’s evidence that the Technology Vendors authorised Innovator to manage the disbursement of funds in order to satisfy the Technology Vendor’s obligations under the financing scheme and that they authorised CB to accept instructions from Innovator as to the disbursement of those funds.

It was Mr Bailey’s evidence that CB had instructions from the Technology Vendors to act as their agents for the receipt of the acquisition price and to make payments out on the instructions of Innovator.

I accordingly conclude that the terms of the Quistclose trust were that until the subscribers were made partners their subscription monies could only be used for the purpose of making a capital contribution to the Partnership or for the purposes of making a payment of the acquisition price on the part of the Partnership.

The next issue is who was the trustee of any Quistclose trust. The Claimants contended that it was CB. The CB Defendants contended that it was Innovator.

In support of their case the Claimants relied in particular on the following:

I accept, however, the CB Defendants’ case that the trustee was Innovator. That case was supported in particular by the following facts and matters:

Although the Claimants argued that Innovator similarly had no power to direct what was to be done with the monies until the subscribers had been made partners, they did have authority from the Technology Vendors to manage the disbursement of funds in order to satisfy the Technology Vendor’s obligations under the financing scheme. Even if they did not, it was Innovator and Mr Carter who was to direct when and how subscription monies were to become capital contributions in the Partnership. CB’s role was throughout to follow instructions, unless criminality or other obvious impropriety was raised thereby.

As to the particular points relied upon by the Claimants as set out above:

For the reasons set out above and those given by the CB Defendants I find that it was Innovator/MFS who was the trustee of the Quistclose trust, not CB.

The Claimants had an alternative argument that even if the subscription monies were not held on trust by CB they were held by CB as a sub-trustee and not as a mere agent. The pleaded case was as follows:

“285.

If, contrary to the Claimants’ primary contentions in the previous paragraphs, subscription money was not held by C-B on trust for the subscriber concerned, it was held by C-B on trust for:

[.1] Innovator and/or,

[.2] the Partnership to which a subscriber’s Application Form pertained,

[.3] and in either case such money was held on trust by Innovator and/or the Partnership (i.e. a sub-trust) for the subscriber concerned pending fulfilment of the conditions previously stated.”

In this connection the Claimants relied on a passage from Lewin on Trusts at 42-89 which states as follows:

“Section 3 - Locus Standi for a Breach of Trust Action

Assignees and sub-trusts

39-73

We consider elsewhere the circumstances in which vested or contingent interests may be alienated, either by assignment or resettlement. Once [the interest is] validly assigned, the assignee will stand in the position of the original beneficiary and have the same rights to take steps to ensure that any breach of trust is prevented or remedied. In a case where an interest is settled into a separate settlement, we consider that it is clear that the trustees of that settlement have locus standi to sue the trustees of the head-settlement since the trustees of the head-settlement have duties to the trustees of the separate settlement in their capacity as such. We also consider that it is clear that the beneficiaries of the separate settlement can sue the trustees of the head-settlement for breach of trust if there are special circumstances justifying a derivative action by the beneficiaries against the trustees of the head settlement. It is not clear, however, that the beneficiaries of the separate settlement have locus standi to sue the trustees of the head-settlement in the absence of special circumstances”.

I agree with the Defendants that this passage is addressing a different issue. It is concerned with the kind of sub-trust where you have a beneficial interest in settlement A, the head settlement, and that is transferred to the trustees of a separate settlement, settlement B, who hold that beneficial interest on different trusts. However, the trust property remains held and administered by the trustees of settlement A. In this case if the trustees of settlement A exercise their administrative powers over the trust property in breach of trust, for example they invest in unauthorised investments, then the trustees of settlement B can sue the trustees of settlement A for breach of trust. That is nothing to do with this case.

The Claimants also placed reliance on Freeman v HM Commissioners of Customs and Excise [2005] EWHC 582; [2005] B.C.C. 506 at [25]-[27]. In that case monies were paid by a purchaser of a property to the vendor’s solicitors (“Jay Benning”) for the exclusive purpose of discharging the VAT liability, if any, of the vendor. The solicitors paid the money to an accountant (“Mr Fox”) who absconded with it. The monies were claimed by the IR as the ultimate beneficiary of the Quistclose trust. Accordingly the Court had to consider whether the IR’s interest had crystallised and concluded that it did. The question arose whether, given that the fund had been transferred by the solicitors to the accountant, a claim could be brought by the IR against the accountant.

Michael Crystal QC sitting as a deputy Judge of the Chancery Division reasoned it could as follows:-

“25.

Mr Fox became an agent of Jay Benning upon receiving the fund (see generally Bowstead & Reynolds on Agency (17th ed., 2001, Sweet & Maxwell), p.1). In particular, Mr Fox obtained the power to alter Jay Benning's legal relationship with those interested under the Quistclose trust (for example, by arriving at a figure for the VAT liability and then paying the relevant amount over to Customs & Excise).

26.

Mr Fox, although aware of all of the facts as to the nature of the trust attaching to the fund, nevertheless used the fund in a way inconsistent with the trust. This “dishonest dealing” with trust property made him personally liable to account for the loss thereby caused to the fund Lee v Sankey (1873) L.R. 15 Eq. 204; Soar v Ashwell [1893] 2 Q.B. 390).

27.

Since the claim against Mr Fox was for misappropriation of trust property, the claim vested in Jay Benning as trustee, not for its own benefit or for the benefit of the company but for the benefit of those interested in the fund. In other words, the claim against Mr Fox itself became trust property.”

I do not consider that this case provides any assistance to the Claimants. The Deputy Judge held that the monies were received by Mr Fox as an agent, not as a sub-trustee. The basis of his liability was as a constructive trustee who had misappropriated monies with knowledge of the terms of the trust.

As CB pointed out, the Claimants’ argument is not consistent with the Twinsectra decision. In that case an express undertaking had been given by a solicitor (Mr Sims) to Twinsectra that if it lent money to Mr Yardley he would only use it for the purposes of acquisition of property. The money was released to Mr Yardley’s solicitor (Mr Leach) who was aware of the terms of the undertaking. He then allowed Mr Yardley to use part of the monies for purposes other than the acquisition of property. Mr Leach’s liability depended on whether he had dishonestly assisted in a breach of trust. It was not suggested that he was himself a sub-trustee and liable simply for breach of trust.

The Twinsectra analysis is that which would usually apply in a case such as the present. No special facts or circumstances have been identified which would support the finding of a sub-trust. The Claimants’ argument is that if their argument that there is a direct trust fails then for essentially the same reasons it should be found that there is a sub trust. However, all the reasons for rejecting the existence of a direct trust apply a fortiori in relation to the suggested sub-trust.

For the reasons outlined above and those given by the CB Defendants I reject the Claimants’ case that there was a sub-trust.

It is the case that a number of payments were made out of the CB account prior to the subscribers being made partners by the execution of the D/A. Some payments were made in all the exemplar Schemes except GT2.

The main reason for such payments was the payment of expenses as contemplated by the IM but there were instances where monies relating to one Partnership were used for another and where monies were used from the profit element of Innovator’s fees.

Whilst a considerable time was spent at trial considering various individual payments it is important to have regard to the bigger picture.

The Scheme structure involved approximately 11% of the gross capital contribution being paid by the Technology Vendor to Innovator. From that sum Innovator was to pay all the set up and ordinary ongoing administrative expenses of the Partnership as well as its own fees. The balance (other than bank fees) was to be retained by the Technology Vendors.

As demonstrated by the evidence of Mr Roberts, Innovator’s accountant, this is how the schemes were in fact operated. Although there were a couple of schemes in relation to which Innovator received slightly more than 11%, in some cases it received less and in all cases the agreed structure was effectively followed. All the Technology Vendors received what was due to them and none contended otherwise. Equally it appears that the third party expenses were paid.

The Claimants contended that the 11% figure related to the net cash subscription and not the gross loan element. Although this is not spelt out expressly I am satisfied that it would reasonably be understood as relating to the total capital contribution. It was clear from the IM that substantial initial and ongoing fees and expenses were going to be incurred which it would be unlikely could be met from 11% of the net cash contribution alone. This would have been obvious to the IFAs whose own fees alone exceeded 11% of the net figure. Although the Claimants did not generally know the level of the IFAs commission, they did know that the IFAs would be receiving commission and if the 11% was a net figure it would be apparent that that would leave little for the other substantial fees and expenses that were necessarily going to be incurred.

Although there was some short circuiting of payments, all the payments prior to the subscribers being made partners about which complaint is made were ultimately properly accounted for. This is demonstrated by the reconciliations that Mr Carter did in relation to each ledger for each Scheme and the Payment Schedules produced by CB at trial. These show that the entirety of the subscription monies raised were accounted for as received by the relevant Partnership and spent on a combination of bank fees and the acquisition of the Technology. It was on that basis that the Partnership accounts were filed and each of the partners claimed (and generally received) their tax relief. Importantly, it was also on that basis that they retained the more limited tax relief on their tax contribution that was eventually negotiated with the IR.

It follows that if the subscribers were made partners then no loss was suffered as a result of any breach of trust which may have occurred in respect of payments made before they became partners. Those payments were ultimately all properly accounted for and the subscribers/partners ended up in exactly the same position they would have been in but for the breach of trust.

This was seemingly accepted by the Claimants in oral closings but in their reply submissions they suggested that in such circumstances the entire purpose of the trust will have failed because qualifying expenditure of the level set out in the IM could not be incurred or shown to be incurred. But this does not follow. Notwithstanding any breach of trust the expenditure could be and was properly accounted for as qualifying expenditure.

As to whether the payments involved a breach of trust, as already found, the mere fact that a payment was made before the subscribers were made partners does not mean that there was a breach of trust. Provided the payment was authorised as an advance payment of the purchase price there would not be a breach of trust. The evidence is that the Technology Vendors gave Innovator authority to direct the management of the funds in order to satisfy the Technology Vendor’s obligations under the financing scheme and that they authorised CB to accept instructions from Innovator as to the disbursement of those funds. Mr Carter’s evidence was that all payments were made in accordance with the authority conferred, as later reflected in the accounts. On that basis there would have been no breach of trust. Even if that be wrong, no recoverable loss was caused thereby.

The Claimants also made complaint about payments to recipients who had no obvious connection with the Scheme. An example upon which great reliance was placed was a payment from the YTC ledger to Burton Copeland, who were Mr Stiedl’s solicitors in the criminal proceedings he faced.

However, the Claimants’ analysis of this and many other payments ignored the fact that Innovator was entitled to about 11% of the purchase price as fees to cover expenses and its own profit. How it distributed its own profit was a matter for Innovator. It was for Innovator to use that money to which it was entitled as it wished.

The Claimants’ analysis also ignored the fact that the short circuiting of payments may be permissible, both legally and from an accounting perspective. As stated by Buckley J in Re Collard’s Will Trusts [1961] Ch 293 in the context of short circuiting by a trustee and section 32 of the Trustee Act 1925:

“The principle is that the court will not insist on circuitry of action if the same result can be achieved by direct action which legitimately could be achieved by more circuitous action.”

Collard was applied in Pilkington v Inland Revenue Commissioners where Viscount Radcliffe held (again in relation to Section 32 of the Trustee Act 1925).

“To transfer or appropriate outright is only to do by short-cut what could be done in a more roundabout way by selling the shares to a consenting party, paying the money over to the new settlement with appropriate instructions and arranging for it to be used in buying back the shares as the trust instrument. It cannot make any difference to follow the course taken in Re Collard’s Will Trusts...and deal with the property direct.”

Mr Stiedl was entitled to be paid pursuant to his consultancy contract. As shareholder representative he was also entitled to give directions as to how payments or loans to shareholders should be made. Mr Stiedl explained that if the money were Innovator’s, then Innovator could transfer that from whatever Innovator account they saw fit, and it was much easier to transfer directly instead of transferring to Innovator’s account at AIB, waiting for clearance and then paying out from that account: Mr Stiedl also confirmed that Mr Carter’s internal reconciliations at CB meant that things were paid directly when otherwise fees to Mr Stiedl would have gone to him first and then on, for example, to Burton Copeland.

I agree with the Defendants that there is nothing inherently improper about this short circuiting process. If Mr Bailey or Mr Roper were entitled to pay sums received into a particular ledger account (representing Innovator’s entitlement to fees or sums which it would be responsible for paying by way of fees) to Innovator’s client account and from that client account to Innovator’s own bank from which those monies could be disbursed as Innovator saw fit, then it was, as the above authorities show, permissible to avoid such circuitry (and the additional costs of transferring monies between several accounts). CB was entitled, on Innovator’s instructions, to disburse those monies to which Innovator was entitled directly to those third parties whom Innovator would have paid from its own account, had the monies followed the above circuitous path.

The Claimants contended that short circuiting should not have been carried out since it suggested lack of commerciality and potentially jeopardised the tax relief obtainable. However, that goes to the care and skill with which it might be said the Scheme arrangements should have been operated by Innovator rather than entitlement to make the payment in this manner.

Returning to the example of the Burton Copeland payment there was nothing wrong about this being made directly to Burton Copeland as opposed to Innovator, Mr Stiedl and then Burton Copeland. As to the timing of the payment, as already stated, it would not involve a breach of trust if it was authorised as an advance payment of the purchase price on behalf of the Partnership.

In relation to payments after the subscribers became partners there is no question of breach of trust since the Quistclose trust would have come to an end when they became partners and the subscription monies became Partnership capital.

In the event that I had concluded that CB was a trustee and acted in breach of trust, CB relied on Section 61 of the Trustee Act 1925. That Section is entitled ‘power to relieve trustee from personal liability’ and provides:

“If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach, then the court may relieve him either wholly or partly from personal liability for the same.”

If I am wrong in my conclusion that CB was not a trustee and that there was no breach of trust I would have found that CB was entitled to relief under section 61. All the reasons I have given for concluding that CB was not a trustee and that there was no breach of trust are reasons why Mr Bailey and Mr Roper could honestly and reasonably have concluded likewise. In particular:

For the reasons outlined above, I find that any breach of trust would have involved a honest and reasonable mistake by Mr Bailey and/or Mr Roper and accordingly Section 61 would apply.

I find that there was no trust on the terms of or subject to the powers set out in the IM Conditions.

I find that the subscription monies were held subject to a Quistclose trust on terms that until the subscribers were made partners their subscription monies could only be used for the purpose of making a capital contribution to the Partnership or for the purposes of making a payment of the acquisition price on the part of the Partnership.

I find that Innovator was the trustee of the Quistclose trust and that CB was neither a trustee nor sub-trustee.

I find that the payments made prior to the subscribers being made partners were not made in breach of trust. If they were so made then no loss was caused thereby.

I find that the Quistclose trust came to an end when the subscribers were made partners.

I find that if, contrary to my findings, CB was a trustee and acted in breach of trust CB is entitled to relief under s.61.

THE ALLEGED SUBSCRIPTION MONEY AGREEMENT

An implied contract is one that is inferred from the conduct of the parties. However, such a contract must still satisfy the other pre-requisites to contractual formation, including an intention to create legal relations.

As stated by Mance LJ in Baird Textiles Ltd v Marks & Spencer plc [2001] EWCA Civ 274:

“61.

An intention to create legal relations is normally presumed in the case of an express or apparent agreement satisfying the first requirement: see Chitty on Contracts (28^th Ed.) Vol. 1 para.2–146. It is otherwise, when the case is that an implied contract falls to be inferred from parties' conduct: Chitty, para.2–147. It is then for the party asserting such a contract to show the necessity for implying it. As Morison J said in his paragraph 12(1), if the parties would or might have acted as they did without any such contract, there is no necessity to imply any contract. It is merely putting the same point another way to say that no intention to make any such contract will then be inferred.

62.

That the test of any such implication is necessity is, in my view, clear, both on the authority of The Aramis [1989] 1 Ll.R. 213, Blackpool and Fylde Aero Club Ltd. v. Blackpool B.C. [1990] 1 WLR 1195, The Hannah Blumenthal [1983] AC 854 and The Gudermes [1993] 1 Ll.R. 311 cited by the Vice-Chancellor, and also a matter of consistency. It could not be right to adopt a test of necessity when implying terms into a contract and a more relaxed test when implying a contract — which must itself have terms.”

Necessity in this context generally requires demonstrating that the parties have acted in a way which is consistent only with an intention to make a contract. If they would or might have acted the same way in the absence of such a contract then necessity is unlikely to be established. In The Gudermes [1993] 311 at p320 the Court of Appeal approved the following direction given by the Judge (Hirst J):

“In my judgment no implied contract can be inferred unless it is necessary to give business reality to the transaction, and unless conduct can be identified referable to the contract contended for which is inconsistent with there being no such contract; and it is fatal to the implication of such a contract if the parties would or might have acted exactly as they did in the absence of such a contract..”

On demonstrating an intention to create legal relations in the context of implied contracts, Mance LJ said as follows in Modahl v British Athletic Federation [2001] EWCA Civ 1447 at [102]:

“One distinction exists [between express and implied contracts]...in relation to the ease with which an express or implied contract may be established. Where there is an express agreement on essentials of sufficient certainty to be enforceable, an intention to create legal relations may commonly be assumed. It is otherwise when the case is that a contract should be implied from the parties’ conduct. It is then for the party asserting a contract to show the necessity for implying it.”

The Claimants therefore bear the burden of proving that the parties had an intention to create legal relations, a burden the authorities suggest is a heavy one to discharge. As the authors of Chitty state:

“Such cases illustrate the judicial attitude that ‘contracts are not lightly to be implied’ and that the courts must (in cases of this kind) be able ‘to conclude with confidence that...the parties intended to create contractual relations.” – see paragraphs 2-160 to 2-164.

The other standard contractual requirements must also be met if an implied contract is to be legally enforceable. In particular, there needs to be offer and an acceptance as well as consideration.

The Claimants relied in particular on the following circumstances as the basis of which such an agreement falls to be inferred:

As to (1), the Claimants stressed that cheques were requested to be made out in a name consistent with CB being the recipient and custodian of that money, as apparent from Application Checklists and Subscription Application Forms and that the subscription money was to be paid into a “client” account. They submitted that in each IM, CB was held out as providing (and willing to provide) a service consisting of receiving subscription money, paying it into their client account and disbursing it only in circumstances consistent with the IM (including in accordance with the P/A given to the Managing Partner or Administrator), a service consistent with that of a custodian or registrar and receiving agent.

However, the IM was not issued by or on behalf of CB. It was issued by Innovator. It invited offers to subscribe being made to Innovator, not to CB.

As the Claimants knew or ought to have known, CB was acting for Innovator. In the YTC-IM, Etrino-IM and Optibet-IM, under the title “PARTNERS AND ADVISERS”, Innovator is described as “using” Collyer Bristow”. In the Charit-IM and Arte-IM, Innovator is described as having “appointed” CB. In the GT-IM (specifically relating “The GenTech Partnership LLP”), under “PARTIES AND ADVISERS”, CB are described as “Solicitors”. In each case it would reasonably be understood that CB was acting as Innovator’s solicitors. As such they would reasonably have known that CB would not be able to undertake duties to any party on the other side of the transactions. Moreover, subscribers were recommended to consult with their own legal advisers.

Against the above background the “client” account being referred to would reasonably be understood as referring to the account of Innovator, and possibly that of the Partnership once established. It would not reasonably be understood as referring to that of the subscribers, still less each subscriber individually.

CB were accordingly not offering any “service” to the subscribers at all. CB’s client account was to be the mechanism by which subscription monies would be processed and held, but not as part of any service offered to subscribers. CB’s services were to be carried out for its client, Innovator and possibly later the Partnership.

CB’s role as described in the IM is consistent with it acting for Innovator only. There is nothing in that described role which is consistent only with the CB acting under a contract with subscribers. CB would or at least might have performed exactly the same role in the absence of any such contract.

Nor is a contract with subscribers necessary to give business reality to the transaction. The arrangements described can be operated and operated satisfactorily without any such contract.

As to (2), these were letters from Mr Carter on behalf of Innovator, not CB. They do not evidence or confirm any offer being made by CB. Further, in most cases they post-date the alleged contract, which was said to be concluded on receipt of the subscription monies by CB.

As to (3), the Claimants relied on the fact and scale of monies held by CB. However, this can make no difference in principle. The Claimants’ case is that a contract was made with each subscriber. What other subscribers may have done and how many there were does not affect that. It is the individual dealings between each subscriber and CB which is alleged to result in a contract.

As to (4), the Solicitors Accounts Rules 1998 apply to “client” monies. The argument proceeds on the basis that the subscribers are “clients” but that assumes what has to be proved.

The Claimants also sought to place reliance on the FSMA regime and the fact that, as found elsewhere in the judgment, the Schemes were CISs in support of the necessity for implying the alleged contract. However, FSMA has its own means, including criminal sanctions, for dealing with cases of non-compliance. As the Claimants accepted, non-compliance with FSMA does not found any cause of action for breach of statutory duty. For similar reasons, it is difficult to see why it should found causes of action based on other tortious or contractual duties. The legal principles which apply to the implication of contracts are clear and are not altered by the fact that FSMA provides the context.

None of the circumstances relied upon by the Claimants provide a compelling case for the implication of a contract, still less demonstrate the necessity for such implication.

The Claimants have not identified conduct which is “referable to the contract contended for” and “which is inconsistent with there being no such contract”. The subscribers and CB “would or might have acted exactly as they did in the absence of such a contract.”

There is no sufficient evidence of an intention to create legal relations. There is no sufficient evidence of a clear contractual offer being made by CB. Further, if, as I have found to be the case, there was a contract between the subscribers and Innovator, there is still less need for a contract with CB. The existence of a Quistclose trust also militates against any need to infer a contract.

In so far as it is relevant to have regard to the understanding of the parties, the evidence as to that did not support the implication of a contract.

The Claimants’ witness statements do not assert that that they understood themselves to have entered into any kind of contractual agreement with CB. The fact that most Claimants had no idea what was being asserted against CB on their behalf necessarily meant that they had no understanding that such a claim might include a claim for breach of contract against CB. Even those Lead Claimants, such as Mr Taylor QC and Mr Sherry QC, who were in a position to know CB’s role did not suggest that they had entered into a contractual relationship with CB.

Whilst nearly all the Lead Claimants asserted in their witness statements that they were “reassured by CB’s involvement and trusted them to deal with subscription monies properly” this does not support the allegation that there was a contract between the Claimants and CB or that there was an intention by the Claimants to create legal relations with CB: such assertions essentially go to what is alleged to have motivated the Claimants to enter into a contract with Innovator (not CB).

Mr Bailey confirmed in evidence that he had no dealings with investors. Mr Roper did not think that investors were CB’s clients. Mr Bailey did not accept that, in providing use of its client account, CB was acting in a custodian role: Mr Bailey stated that the money was, as had always been his understanding, Innovator’s and that CB acted on Innovator’s instructions.

In summary, for all these reasons, and those given by CB, the Claimants have not proved the alleged implied contract.

DISHONEST ASSISTANCE