Appeal court backs strike-out of £68m claim against solicitors

The Court of Appeal has dismissed an appeal by a group of insolvent special purpose vehicles against Lupton Fawcett LLP, confirming that alleged exposure to restitution claims under the Financial Services and Markets Act 2000 did not, without more, amount to recoverable loss for the purposes of a professional negligence claim. The Court upheld a High Court order striking out the claim and granting summary judgment in favour of the solicitors.

The proceedings were brought by 43 companies now in liquidation that had been used as asset-holding and management vehicles in hotel, care home, and student accommodation investment schemes promoted to retail investors. The schemes raised more than £68 million and promised annual coupons of 8% to 12% alongside a contractual buy-back at 125% of the purchase price after 10 years. The companies alleged that Lupton Fawcett negligently failed to advise, at an early stage, that the arrangements constituted collective investment schemes, exposing them to potential restitutionary liability to investors under section 26 of FSMA.

At first instance, Sheldon J accepted Lupton Fawcett’s argument that even if negligence were assumed, the claimants could not establish loss. Any liability to repay investor monies under FSMA was matched pound-for-pound by the receipt of those same monies. Applying established authority on balance-sheet neutrality, the judge concluded that there was no recoverable loss, and that the losses ultimately suffered arose from the way the schemes were operated, including alleged fraud by their principal, rather than from the regulatory characterisation of the schemes.

The Court of Appeal rejected all three grounds of appeal. The Court endorsed the so-called “£ in, £ out” analysis, holding that the mere incurring of an obligation to repay funds received does not, of itself, constitute damage. Authorities such as Galoo v Bright Grahame Murray and Saddington v Colleys applied equally to investments as to loans, and there was no principled distinction between the two.

Attempts by the liquidators to recast the claim on appeal were also rebuffed. The Court refused permission to rely on a further amended pleading and new evidence, emphasising that parties facing strike-out or summary judgment applications must advance their full case at first instance, not seek to improve it on appeal.

The Court also rejected reliance on the compensation limb of section 26(2)(b) FSMA. That head of loss was not pleaded in the operative particulars of claim, and in any event the Court was unpersuaded that it would have placed investors in a better position than the contractual and tortious claims they would have held even if the schemes had not been collective investment schemes. Any such compensation was unlikely to exceed claims for deceit or breach of contract arising from the alleged misrepresentations underpinning the schemes.

Read the decision here.

Professionals involved:

• Daniel Saoul KC and Pippa Manby of 4 New Square (instructed by Reynolds Porter Chamberlain) for Lupton Fawcett

• James Pickering KC of Enterprise Chambers and Paul O'Doherty of Forum Chambers (instructed by Hewlett Swanson) for Afan Valley acting by its joint administrators Robert Armstrong and Andrew Knowles of Kroll