£68m claim against law firm dismissed

Overview

The High Court has dismissed a £68m claim against a law firm by its former clients - all companies now in liquidation - over advice given in connection with investment schemes operated by the companies that ultimately failed. The companies had argued that the firm was liable for their losses (the over £68 million owed to creditors) on the basis that the firm had failed to properly advise them on the investment schemes. The Court disagreed and dismissed the claims against the firm. Key among the Court’s findings was that any losses suffered by the companies were not attributable to the law firm’s alleged negligence, but rather were the result of the use to which the companies put the investor funds.

Background

The 43 claimants were all companies in liquidation. They previously ran investment schemes involving the sale of individual rooms in hotels and care homes to retail investors. The schemes all failed, and the claimants went into administration in 2019 and subsequently liquidation. The deficiency to creditors is in excess of £68 million.

The claimants brought claims against their former solicitors, Lupton Fawcett LLP (“LP”) and Metis Law Partners LLP (“Metis”), for professional negligence. LF had been retained to advise as to whether the schemes amounted to “collective investment schemes” (“CIS”) for the purposes of the Financial Services and Markets Act 2000 (“FSMA”). CIS are heavily regulated by the FCA, and the claimants were not authorised by the FCA to promote or operate CIS. Metis was alleged to have been instructed to advise and carry out legal services with respect to the investment transactions themselves.

The claimants alleged that the schemes were CIS set up in contravention of the FSMA and that they were operated as a Ponzi scheme, resulting in the claimants becoming liable for significant civil liabilities under section 26 FSMA. The crux of the claim was that, had the claimants been properly advised, they would not have promoted the schemes, accepted investment monies and taken out loans, and would not have suffered substantial losses as a result. £68 million in damages was initially sought from LF (although the claimants acknowledged that this amount had been overstated by some £14 million due to certain claims being time-barred), while over £57 million was sought form Metis.

LF made an application to strike out the claims and/or for summary judgment on the basis that (i) no loss had been suffered; (ii) there was an absence of a causal nexus; and (iii) ex turpi causa.

The Court’s Decision

Justice Sheldon dismissed the claims against LF on the basis that the claimants had failed to establish that they had suffered any loss as a result of the alleged negligent advice by LF.

Key findings included:

• As a matter of law, the monies owed to investors pursuant to section 26 FSMA must be offset by the investment monies and secured loans that were received.

• Any losses suffered by the claimants were not attributable to LF’s alleged negligence. A distinction must be drawn between the receipt of the monies (the investment receipts and the loan monies) and the use to which they were put. In this case, it was the use to which these monies were put that caused the claimants’ losses, not the receipt of the investment or loan monies themselves.

• The receipt of the investment monies by the claimants was not itself “a loss causing damage”. At the time when the monies were accepted by the claimants, they did not cause any damage to them. Rather, they were monies that had a zero effect: penny in, penny out.

• Any alleged breach of duty by LF in failing to advise that the schemes were CIS did not cause the loss of the investment or loan monies. At most, it gave the opportunity for that loss to occur. This not recoverable.

Justice Sheldon rejected the arguments based on the absence of a causal nexus and ex turpi causa.

Conclusion

The claims against LF were dismissed.

Justice Sheldon also refused various amendments sought by the claimants to the particulars of claim against Metis, other than those that Metis did not object to, finding that the pleading was “already prolix”, and that any additional material needed to be properly justified.

Judge: Justice Sheldon

Counsel: Daniel Saoul K.C. and Pippa Manby of 4 New Square Chambers (instructed by RPC) for Lupton Fawcett

James Pickering K.C. of Enterprise Chambers and Paul O'Doherty of Forum Chambers (instructed by Hewlett Swanson) for the claimants

Ben Hubble K.C. and Michael Bowmer of 4 New Square Chambers (instructed by Keoghs) for Metis Law