The Financial Conduct Authority v Capital Alternatives Ltd & Ors [2015] EWCA Civ 284

[2015] EWCA Civ 284Case No A3/2014/0764; 0764A; 0766
IN THE COURT OF APPEAL (CIVIL DIVISION)
[2014] EWHC 144 (Ch)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
NICHOLAS STRAUSS QC SITTING AS A DEPUTY HIGH COURT JUDGE
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 25/03/2015
Before
THE CHANCELLOR OF THE HIGH COURTLORD JUSTICE CHRISTOPHER CLARKELORD JUSTICE VOS
Between
THE FINANCIAL CONDUCT AUTHORITYClaimant/CAPITAL ALTERNATIVES LIMITEDDefendants/and othersAppellants
Mr Derek Sweeting QC and Mr Jason Mansell (instructed by Candey LLP) for 7 th Appellant, Mr HaddowMr Andrew Green QC and Mr Paul Luckhurst (instructed by DAC Beachcrofts LLP) for 9 th, 10 th and 11 th Appellants (African Land Ltd, Mr McKendrick and Mr Meadowcroft)Mr Jonathan Crow QC, Mr Tim Penny and Mr Adam Temple (instructed by the FCA) appeared for FCAHearing Hearing dates: 27 th and 28 th January 2015
Judgment

The question

[1]The question in this case is whether four different schemes constituted “collective investment schemes” (“CISs”) within the meaning of section 235 of the Financial Services and Markets Act 2000 (“FSMA”). On the trial of a preliminary issue in an action brought by the Financial Conduct Authority (“the FCA”) in July 2013 against the promoters and operators of the schemes, Nicholas Strauss QC, sitting as a deputy judge of the Chancery Division, held that they were. The appellants contend that he was wrong to do so.[2]If the schemes are CISs then the establishment, operation and winding up of them are - by virtue of Articles 4 (2) and 51 (1) (a) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 - “regulated activities” within the meaning of section 22 (i) (b) of FSMA; and - by virtue of section 19 thereof – such activities cannot lawfully be carried out by unauthorised persons (such as the promoters and operators in the present case). Whether or not a scheme is a CIS will, also, affect the tax treatment applicable to it.[3]It is a criminal offence for an unauthorised person to carry on a regulated activity in the UK (section 23) and, subject to exceptions, it is an offence for such a person in the course of a business to communicate an invitation or inducement to engage in investment activity, which includes establishing or operating a CIS (sections 21 and 25 and Schedule 2). By section 26 an agreement by an unauthorised person in the course of carrying on a regulated activity is unenforceable and entitles the other party to recover money or property transferred or compensation for loss. But under section 28 the court has power to allow the agreement to be enforced if satisfied that it is just and equitable in the circumstances of the case. Section 382 (d) of FSMA enables the court to require persons who have contravened the Act, or been knowingly concerned in a contravention, to make appropriate restitution to investors who have suffered loss. Those who have operated and/or promoted the schemes may also be liable to prosecution under s 397 of FSMA in respect of what the FCA claims were misleading statements which led investors to invest.

The schemes

[4]Two types of scheme are in issue:(1) the African Land Scheme; and(2) the Carbon Credits Schemes. The African Land scheme involved the exploitation of a rice farm in Sierra Leone. It had been promoted since about November 2009 and, at the time when proceedings were brought in July 2013, had attracted investment totalling some £ 8.1 million from some 1,160 investors.[5]The Carbon Credit Schemes related to forest areas in Australia, Sierra Leone and the Amazon. The aim was to generate tradable carbon credits, which could be resold at a profit. This required the scheme to obtain accreditation from the relevant accrediting body. The Australian scheme involved reforestation; the other two schemes involved the preservation of existing forests. These schemes had attracted investments totalling some £ 8.8 million from 919 investors.

The parties

[6]The FCA was previously named the Financial Services Authority (“the FSA”) and was established under FSMA with the regulatory objectives set out in ss 2 (2) – (6) in force up to 1 April 2013, namely to further confidence in, and the stability of, the UK financial system, the protection of consumers and the reduction of financial crime.[7]The positions and roles of the 16 defendants were described by the judge as follows: “[14] The 1st to 5th defendants are the "Capital" companies, which are directly or indirectly involved in the promotion of alternative investments, including the schemes described above, or as receiving agents for operators. The 1st defendant ("CAL" or "Capital Alternatives" or "D1" promoted a large number of schemes, including the African Land and CCC schemes, and featured in early brochures for them. The 2nd defendant ("CS" or Capital Secretarial" or "D2") acted as agents to receive investors' funds. The 3rd defendant ("COL" or "Capital Organisation" or “D3”) is said also to have received investors' money and to be responsible for the overall organisation of the Capital companies. The 4th defendant ("CAS" or "Capital Administration" or "D4") and the 5th defendants ("MH Trustees" or "D5") also acted as receiving agents at certain times. All these companies, apart from D5, are balance sheet insolvent, according to their latest available accounts. [15] The 6th to 8th defendants ("Ms Hargous", "Mr Haddow" and "Mr Henstock" or "D6" "D7" and "D8") are individuals involved in the running of the Capital companies. Ms Hargous (who gave evidence) is a director and sole shareholder of Capital Secretarial, Capital Administration and MH Trustees, a director of Capital Organisation and formerly a director of Capital Alternatives. She is a solicitor, and is in effect the in-house solicitor for the Capital companies. She was a straightforward and truthful witness. Mr. Haddow, who is subject to a disqualification undertaking which precludes his acting as a company director, is nevertheless alleged by the FCA to have had a leading role in the running of these companies. Mr. Henstock is a director of Capital Alternatives. Neither gave evidence. [16] The 9th defendant ("African Land", formerly Agri Capital Limited or "D9") is the operator of the African Land scheme (sometimes referred to as "the Agri Capital scheme"). Early brochures for the scheme referred to Agri Capital as a "division" of Capital Alternatives. There is also a Sierra Leone company called Agri Capital Sierra Leone Limited ("ACSL"), which was incorporated on 12th September 2011 and is owned as to 80% by African Land and as to 20% by a local businessman, Mr. Abdul Hamid Fawaz. The precise division of responsibility for the African Land project between African Land and ACSL is not entirely clear, but D9-11 conceded in the course of the hearing that the project is operated by or on behalf of African Land. African Land is balance sheet insolvent according to its latest available accounts. [17] The 10th and 11th defendants ("Mr. McKendrick" and "Mr. Meadowcroft" or "D10" and "D11") are both directors of African Land, and Mr. McKendrick is also a director of ACSL. Both gave evidence. Mr. McKendrick has had a varied career. He worked as a geologist in South Africa for some years and then in the family textile business and in the property market. He has considerable experience of West Africa, having interests in a mine in Sierra Leone and iron ore exploration in Liberia. He decided to set up the rice farming project at Yoni Farm in 2009, and it is clear from his evidence that he is deeply attached to it. Mr. Meadowcroft is a management surveyor with experience in construction and property development and was asked by Mr. McKendrick to become involved in African Land because of his project management expertise, and in particular to oversee the development of the infrastructure of Yoni Farm. In and after 2012, he became more generally involved with farm management and other issues. Both Mr. McKendrick and Mr. Meadowcroft were straightforward and truthful witnesses. Mr. McKendrick was not always accurate on detail and, by his own admission, accounting matters are not his forte. [18] Ms. Hargous was also a director of African Land from 26th August to 28th September 2009. She is also a director of ACSL, having agreed to be appointed because it was thought that a third director was needed. However she played no part in its affairs and had no recollection, when she gave evidence, of her appointment. [19] The 12th defendant ("Regency Capital" or "D12") is now the promoter of the African Land scheme, instead of Capital Alternatives, following disputes which arose between African Land and the Capital companies. It may also have some involvement in the CCC schemes. D12 has net assets of £1,336 according to its latest available accounts. [20] The 13th defendant, previously Capital Carbon Credit Limited ("Reforestation Projects" or "D13"), is the operator of the CCC schemes. [21] The 14th and the 15th defendants ("Mr. Ayres" and "Mr. Gibbs" or "D14" and "D15") are or were involved in the running of Reforestation Projects. Mr. Gibbs is, and Mr. Ayres was until December 2012, a director, and Mr. Gibbs is a director of Climate Care Global Limited ("CGL"), the Accreditations Specialist for the Sierra Leone and Brazil schemes. According to its latest available accounts, for the year ended on 31st December 2011, Reforestation Projects has net assets of £40,485. [16] The 16th defendants ("D16") are the personal representatives of Mr. Waygood, who was a director of Alternatives, Organisation and Administration.” [Bold added] Put more shortly, D 1- D 8 were the promoters of the African Land product and the Carbon Credit product. D 9-D 11 were the product providers for the former, and D 13 –D 15 for the latter.

[Bold added]

[8]Before us D 1-6 and D 8 were no longer represented; but D 6 and D 8 adopted the arguments of D 7, who was represented by Derek Sweeting QC and Jason Mansell. D 9 – D 11 were represented by Andrew Green QC and Paul Luckhurst. D 12 – D 16 were not represented before us or before the judge.[9]The importance and significance of the appeal was urged upon us by Mr Green, who pointed out that D 9 – D 11 believed, based on legal advice, that the African Land Scheme was not a CIS. It had been operated for the last four years, with the knowledge of the FCA; had attracted over 1,000 investors; and had the support of the Government of Sierra Leone. The provisions to which I have referred above mean, he submitted, that, if it was a CIS, the scheme would almost certainly collapse and hundreds of agricultural workers would become unemployed, quite apart from the potentially dire financial consequences for D 9 – D 11 if restitution orders are sought by the FCA. Further a conclusion that the scheme was a CIS might well impact on many other schemes in relation to buy-to-let flats, hotel rooms, student accommodation and other ventures.[10]The court cannot tell what exactly will be the consequences of any of these schemes being held to be CISs; nor can the potentially prejudicial consequences of dismissing the appeal dictate its result. It is, however, plainly necessary to be satisfied that the schemes in question truly are CISs before declaring that they are.

The African Land scheme

[11]African Land Ltd (“African Land”), the 9th Defendant, leased 3,000 acres of land about 25 miles from Bo, the second largest town in Sierra Leone, which came to form Yoni Farm. The lease was for 50 years from 1 November 2009 at a rent of one bushel of rice per acre. Investors in the scheme were offered 49 or 48 year subleases on a plot or plots of an acre of what was described as “prime rice farming land” to be harvested by local workers to produce rice crops. The investment was to be £ 1,250 per acre. The investors were to own their own plots and would be entitled to 40% or 50% of the net profits from the harvest of those plots and to the full value of the leases if they wished to sell them (less 3% if African Land arranged the sale). The judge was shown two brochures describing the investment, one of November 2009 and one of February 2013. The term of the sublease and the amount of the profit share differed as between the two.[12]The judge set out the terms of the scheme, as described in the 2009 and 2013 brochures, in paras [61]-[74] of his judgment. It is sufficient for present purposes to note that the investors were told in the November 2009 brochure(i) that on purchasing their investment they would receive a leasehold deed for their area of land (which did not happen);(ii) that they were entitled to 40% of the net profit for the rice crop on their plot, which was estimated to yield 15% per annum;(iii) that their land (which they could sell) was expected to have a 50% increase in value immediately after it became productive;(iv) that African Land aimed to generate a potential return of at least 175% including annual income over 5 years; and(v) that they would be entitled to a refund of their contribution if rice production did not begin within 2 years.[13]The detailed terms at the end of the brochure provided that “Field Revenue” was defined as:
“40% of the net income solely attributable to the production of rice in the Investor’s Field (s) after deduction of all costs and expenses incurred in connection with the management, cultivation and sale of rice and payable on an annual bases (sic) during the Term”
. Paragraph e (iii) of the terms provides that: “upon payment of the investment, the Investor unconditionally agrees to the Company being solely responsible for managing and cultivating the land on behalf of the Investor”.[14]The February 2013 brochure described the benefits of the scheme in glowing terms and claimed that the last harvest had produced an average return of 14% on investments. It provided, inter alia, that(i) the minimum investment was now £ 11,250 for five acres;(ii) investors were entitled to appoint their own manager (although by the time of the trial no one had done so);(iii) there were to be at least two harvests annually from year 3;(iv) the share of net income would be 50% and the period of the sublease 48 years;(v) the money back guarantee was dropped; and(vi) the investor could give 3 months’ notice to terminate management by ACSL (which by the time of the trial nobody had done). How the scheme worked[15]The judge made findings as to the way in which the African Land Scheme operated. In short they were as follows. African Land entered into the lease of what became Yoni Farm on 11 November 2009 for 50 years from 1 November 2009. The lease was of 3,000 acres of uncultivated land, covered by elephant grass and with a northern and southern area, roughly equal, bisected by a river [80]. Sublease certificates were sent to investors which certified that the investor was the owner of a number of acres of land with allocated acre numbers [78], although no specific land was allocated at the time the certificates were sent.[16]A road was created from the local village, Yoni village; a farmhouse and other farm buildings were erected; and some of the land was cleared by burning the 9 foot high grass. Heavy farm equipment was ordered and arrived. All this took place by the end of 2010 and there was a small trial harvest in that year [80].[17]Specific plots were allocated to investors as and when it became clear that the area was suitable, which might be before it was actually cleared. The coordinates of the plots were fixed by GPS. No formal notification of the allocation of specific areas was sent to investors nor was any leasehold deed ever sent to them. On 1 July 2013 sublease agreements were entered into between African Land and at least some of the investors for a term of 46 years with an option to renew for a further 50 years at a nominal rent. (How such an option could come to be given was unclear). The schedule to these agreements identified the coordinates of the subleased land [82].[18]The suitable land was something less than 3,000 acres and the investment had been sold to investors in respect of more acres than that [83]. When the proceedings were commenced, according to the information available to the FCA, 1,165 investors had purchased 5,365 acres; but only 1,876 acres had been allocated to 563 investors. So about 600 investors were entitled to about 3,500 acres. Since there were only about 1,000 acres left unallocated at Yoni Farm, rights to about 2,500 acres would have to be satisfied from land still to be acquired [84]. The judge recorded [83] that it was Mr McKendrick’s evidence that the investment had been oversold by D 1, that D 9 had taken legal action against D 1(which was settled), and that he had in place agreements in principle to expand the area of the farmed land sufficiently to provide plots to all those who had invested in the scheme.[19]The first harvest, in September/October 2010, was a trial harvest of 4 acres that had been cultivated. Three investors were paid £ 415 per ton of milled rice without any deduction for expenses. The next harvest took place in September/October 2011 by which time 303 acres had been allocated to 90 investors. The standard price had risen to £ 450 per ton but £ 200 was deducted for the cost of lime and additional fertiliser thought to be necessary to enhance yields in later year and investors received 40% of £ 250 per ton. There was no further reduction for expenses. The 2012 harvest involved 372 investors and a total of 1,066 acres. Investors were paid 40% of the standard price for milled rice with no deduction for expenses.[20]By the time of the 2013 harvest African Land and ACSL had appointed a Vietnam-controlled UK company, GMX Consulting (“GMX”), as managers. The agreement with them had no provision for services to be rendered to investors on an individual basis. In 2013 GMX’s main innovations were the design and construction of improved irrigation for part of the farm and planting new varieties of seed with a view to seed multiplication. A 13- hectare area was irrigated and planted which would provide enough unmilled rice to plant about 700 acres in 2014 as well as producing a high yield for the owners of plots on those 13 hectares.[21]The costs of GMX’s work meant that, for 2013, rice was grown on only about 700 acres, for lack of funds, and that the owners of about 300-400 acres would receive no income at all. By contrast the owners of the 13 hectares would get a particularly good yield and future yield generally was expected to be enhanced.[22]The upshot of all this was that, overall, purchasers of some 4,300 acres had so far received no return and most of them still had had no land allocated to them. Section 235[23]Section 235 of FSMA provides as follows:
“235 Collective investment schemes (1) In this Part "collective investment scheme" means any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income. (2) The arrangements must be such that the persons who are to participate ("participants") do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions. (3) The arrangements must also have either or both of the following characteristics– (a) the contributions of the participants and the profits or income out of which payments are to be made to them are pooled; (b) the property is managed as a whole by or on behalf of the operator of the scheme. (4) If arrangements provide for such pooling as is mentioned in subsection (3)(a) in relation to separate parts of the property, the arrangements are not to be regarded as constituting a single collective investment scheme unless the participants are entitled to exchange rights in one part for rights in another. (5) The Treasury may by order provide that arrangements do not amount to a collective investment scheme– (a) in specified circumstances; or (b) if the arrangements fall within a specified category of arrangement.”
[24]The purpose of the section is to provide protection for an investor in a collective investment where there is pooling of(a) contributions and income/profits and/or(b) collective management. In such circumstances the operator is not, or may not be, dealing with the characteristics and needs of each individual investor, or his appetite for risk, or his need for income or capital, but with the operation of the scheme, and the assets forming part of it, as a whole. The investor’s individual interests may thus be subordinated to the interests of the scheme as a whole. Distribution of income – the judge’s findings[25]The judge rejected the FCA’s case that there was no separate harvesting of investors’ plots so that both contributions and income/profits were pooled. As he found, there was pooling of contributions [92] and [161] (which was common ground) but not of income/profits. As to the latter, the harvest from each plot was segregated and the investors were paid by ACSL for the rice harvested on their plot(s) at a standard price [111]. This was an inconvenient and inefficient way of going about things, which was adopted because it was believed to be the key to the scheme not being a CIS. The rice was cut down in the fields, which were individually demarcated, and was put through the shredder, bagged, dried, re-bagged and then weighed. In 2012 a combine harvester was used for some of the plots. Detailed calculations were made of the amounts due to each investor by reference to the recorded yield from each plot. ACSL bought the rice in question for a standard price, which was paid by ACSL or African Land. One or other of these sold it on or otherwise used or disposed of it. But the amount paid to investors was unaffected by what happened to the rice after it had been sold to ACSL.[26]In the light of these findings, the scheme did not, the judge held, fall to be treated as a CIS under section 235 (3) (a) because the income out of which payments were to be made to the investors was not pooled. The critical question, therefore was whether “the property [was] managed as a whole by or on behalf of the operator of the scheme”. Pooling of income/profits – the FCA’s submissions[27]The FCA contends that the judge was wrong to hold that the income/profits were not pooled. Even in 2013, although the bags of rice from each plot were counted, they were then mixed, and the amount lost by drying and milling (said to average 20% and 40% respectively) was simply taken as a percentage without reference to the actual weight loss of the individual investor’s rice. The mixing, drying and milling of the rice meant that it lost any identity it might have had as rice derived from any particular plot; and later sales were, thus, sales of the pooled rice which resulted in the receipt of pooled income.[28]The sums paid to investors were calculated by reference to a standard price. But deductions for the cost of production were haphazardly applied. In the first two years there were no deductions. When deductions were applied they were applied at a rate of £ 200 per acre Para [87] of the judgment refers to a deduction of £ 200 without indicating whether it was per ton or per acre. Para [162] refers (erroneously) to £ 200 per ton. without any reference to the actual costs incurred or returns generated in respect of each investor’s plot. As a result the return for each investor did not reflect the true value of the product on his land less the actual cost of production in relation to that plot. Instead there was a cross-subsidising of expenses between investors. Pooling - Conclusions[29]I do not regard the judge as having fallen into error. Investors were, as he found [111] and [160], paid a standard price for the rice actually grown on their individual plot[s]. The standardised deductions, as he held:
“… might conceivably mean that minor variations in the actual losses through drying and milling, or in the amount of fertiliser used, might not be reflected in the price paid to investors, but there is no evidence that any significant difference in these respects from one lot of rice to another was likely.”
Since such “minor variations” made no “significant difference” the judge was entitled to find that they did not mean that there was pooling of income/profit on account of cross subsidization. In any event the making of a standard charge per unit for some service (whether it be fertiliser for fields or heating for flats) does not necessarily mean that there is what should be regarded as a pooling of income.[30]The second point made by the FCA - that the rice from the individual plots was, or might be, later pooled and sold on – did not, as the judge rightly held [58], mean that there was pooling of income. Each investor’s return can still relate to the yield from his plot even if a buyer later purchases from ACSL the product of several plots or all of them. Pooling, as the judge said, “does not arise merely because there is no separate sale of the rice from each individual plot”.[31]The third point urged by the FCA is that the contributions of “new” investors were used to pay “old” investors for the rice grown on their plot. That, as the judge held [161] does not mean that there was pooling of profits; it was merely a part of the reason to find that there was pooling of contributions. Managed as a whole[32]The appellants’ case, here and below, is that individual plots were individually managed precisely because each investor received a return based on the value of the crops (if any) grown on his individual plot of land. None of an individual’s income was derived from any part of the farm other than their own plots or from the individual plots being part of a larger whole. The Perimeter Guidance Manual[33]Section 139 A of FSMA authorises the FCA, like the FSA before it, to give guidance consisting of such information and advice as it considers appropriate “(a) with respect to the operation of specified parts of [the Act]”. By section 139 B the FCA is required to give the Treasury written notice of any general advice it is giving, and of any alteration thereto.[34]The FCA produced, after a consultation exercise, what it calls a Perimeter Guidance Manual (“the Manual”) on the operation of the Act. In [129] – [131] of his judgment

the judge referred to certain paragraphs of the Manual which explain its function:

“[129] Para. 1.1.2 states: "The purpose of this Manual is to give guidance about the circumstances in which authorisation is required, or exempt person status is available, including guidance on the activities which are regulated under the Act and the exclusions which are available" [130] Para. 1.2.2 states: "(1) The Act, and the secondary legislation made under the Act, is complex. Although PERG gives guidance about regulated activities and financial promotions, it does not aim to, nor can it, be exhaustive. (2) References have been made to relevant provisions in the Act or secondary legislation. However, since reproducing an entire statutory provision would sometimes require a lengthy quotation, or considerable further explanation, many provisions of the Act, or secondary legislation made under the Act, are summarised. For the precise details of the legislation, readers of the manual should, therefore, refer to the Act and the secondary legislation itself, as well as the manual. ..." [131] Para. 1.3.1 relating to the status of the guidance states as follows: "This guidance ... represents the FCA's view and does not bind the courts ... anyone reading this guidance should refer to the Act and to the relevant secondary legislation to find out the precise scope and effect of any particular provision referred to in the guidance and any reader should consider seeking legal advice if doubt remains. If a person acts in line with the guidance in the circumstances mentioned by it, the FCA will proceed on the footing that the person has complied with the aspects of the requirement to which the guidance relates."” "The purpose of this Manual is to give guidance about the circumstances in which authorisation is required, or exempt person status is available, including guidance on the activities which are regulated under the Act and the exclusions which are available" "(1) The Act, and the secondary legislation made under the Act, is complex. Although PERG gives guidance about regulated activities and financial promotions, it does not aim to, nor can it, be exhaustive. (2) References have been made to relevant provisions in the Act or secondary legislation. However, since reproducing an entire statutory provision would sometimes require a lengthy quotation, or considerable further explanation, many provisions of the Act, or secondary legislation made under the Act, are summarised. For the precise details of the legislation, readers of the manual should, therefore, refer to the Act and the secondary legislation itself, as well as the manual. ..." "This guidance ... represents the FCA's view and does not bind the courts ... anyone reading this guidance should refer to the Act and to the relevant secondary legislation to find out the precise scope and effect of any particular provision referred to in the guidance and any reader should consider seeking legal advice if doubt remains. If a person acts in line with the guidance in the circumstances mentioned by it, the FCA will proceed on the footing that the person has complied with the aspects of the requirement to which the guidance relates."”
[35]As is apparent from those citations the Manual provides no more than guidance, which in no way binds the court, in a field where the precise scope of the legislation must be decided by reference to its exact terms.[36]Chapter 11 of the Manual gives guidance on property investment clubs. Such clubs may take a number of different forms. Investors may club together to invest in plots of land with or without buildings with a view to realising their investment once planning permission has been obtained or the market has risen. They may invest in flats, houses or other buildings which are to be let. They may invest in chattels such as wine or antiques, or in stocks and shares. The activities of such clubs may be managed, in whole or in part, by others.[37]The guidance is drafted in the form of questions and answers. The answer to Question 1 makes plain that the Q & As are principally aimed at those involved in the running of property investment clubs or schemes involving the sale of plots of land with arrangements for obtaining planning permission in respect of them or for the disposal of land as a whole.[38]The most significant of the Q & As for present purposes, are questions 7 and 12 and the answers thereto, which read as follows: “Q7. The participants in my property investment club do not get involved in every single management decision, but appoint agents to take decisions for them in accordance with criteria agreed between them. Have the participants lost day-to-day control? We do not consider that day-to-day control means that each participant would themselves need to be involved in each and every decision taken, so long as they retain day-to-day control over the management. For example, delegating rent collection, cleaning and management services in relation to a property, by appointing agents to carry out these tasks would not necessarily mean that the participants lose day-to-day control, so long as the participants retain day-to-day control over the management of the agency contracts. ... Q.12 I run a scheme where each person owns individual properties or parts of properties in the property investment club. Each person owns property either directly, or indirectly (for example, through a limited company or a limited liability partnership of which he is the owner or through a limited partnership). Is this scheme likely to be a collective investment scheme? No, unless the properties belonging to each person, company, limited liability partnership or limited partnership is managed as a whole by or on behalf of the operator of the scheme. So, the mere fact that the operator is managing a number of properties and achieves economies of scale in his management charges or in things such as insurance cover would not mean that the properties are being managed as a whole. Neither would the fact that the operator may be able to offer reductions in sale price because of bulk discounts negotiated with developers. This is provided the operator is managing each property on an individual basis. As an example, if a managing agent manages a block of flats on the basis that the only profit or income each individual flat owner obtains is what arises from the management of his property, there is no management as a whole. However, if the managing agent managed the flats in such a way that each individual flat owner received an income from total lettings, regardless of whether that person's flat was let or not, the properties are managed as a whole and the arrangements are likely to be a collective investment scheme.” [Underlining added]

[Underlining added]

[39]The appellants place great store by the advice given by the FCA, the authority which applies section 235 from day to day, in its answer to question 12. It shows, they submit, that, if the only profit or income which an individual investor obtains is what arises from the management of his own property, as was the case with the African Land Scheme, there is no management as a whole. Such a scheme is to be contrasted with one where the investor takes a pro rata share of the collective profit generated by, e.g., obtaining planning permission for an entire site of which he owns part. The example given in the last paragraph of the answer shows, they submit, that a scheme is managed on an individual basis if it is managed in such a way that the investor gets, and gets only, the income/profit from his plot.[40]Question 12 was not addressing the example of a large rice farm with farm buildings, machinery and equipment, roads and tracks, with its land divided into 1 acre plots, and with farm labourers of one kind or another. Any analogy with the leasing of flats may not be entirely apposite.[41]Arrangements for the letting of the flats of several individuals by one manager may take different forms. At one end of the scale a scheme may invite investors to purchase sub-leases in individual flats. The block is managed by a managing agency which arranges for subleases to be entered between each investor and a subtenant. The managing agent has a standard form for use in respect of the property but the final decision as to(i) the identity of the tenant;(ii) the term of the sublease;(iii) the rent; and(iv) the conditions of the sub-lease rests with the individual investor. The investor receives the rent attributable to his individual flat (less expenses and any commission there may be). The agent is responsible for the day to day running of the block and relationships with tenants, including the collection of rent, the arranging of repairs and insurance, cleaning and security.[42]In such a case there would be no difficulty in regarding the scheme as not involving any pooling of profits or income and the property as not managed as a whole by or on behalf of the operator of the scheme. In that example decisions as to the matters set out in (i) – (iv) above are for the individual investor and the property is managed on an individual basis. The management of his property is distinct from the management of the property of others. The fact that the managing agent is left to deal with activities such as cleaning and maintenance of common parts, which contribute indirectly to the receipt of profit, or that it obtains block discounts for all investors in respect of insurance and the like would not alter the position.[43]At the other end of the scale is an investment where the manager makes all decisions about how each flat in the block is to be let, to whom and on what terms, and as to whether any flat should be left unlet for a period; with each investor receiving no income or profit referable to any individual flat but a proportion of the total income or profit, being the percentage that the area of his flat bears to the area of the flats as a whole. Such a scheme would involve both pooling of profits or income and the management of the property as a whole by or on behalf of the operator of the scheme.[44]The first and last sentences to the answer to question 12 make plain that if there is ownership of individual properties the scheme is unlikely to be a collective investment scheme “unless the properties ... are managed as a whole by or on behalf of the operator of the scheme”/“provided the operator is managing each property on an individual basis”. That is, of course, for present purposes the critical condition. The guidance identified its importance.[45]The first sentence of the second paragraph (“As an example, if a managing agent manages a block of flats on the basis that the only profit or income each individual flat owner obtains is what arises from the management of his property, there is no management as a whole”) is accurate if each flat is individually managed, e.g. in the way described in [41] above. If, however, the sentence is interpreted as meaning that, if each investor receives only the profit or income from his property, that inevitably means that there is no management as a whole, the proposition is too wide.[46]Since the example given was an example of property managed on an individual basis the draftsman is likely to have had in mind the sort of arrangement that I have described in [41], and not an arrangement whereby, whilst the investor receives the income or profit of his flat, the letting of the flats was managed as a whole by the operator. There is, in any event, no reason to suppose that he had in mind an agricultural scheme such as the present. The two types of scheme are markedly different. In a flat rental scheme the income is mainly derived from the flat itself; management is less significant and may often be done on an individual basis. In the case of a farm such as this the land itself would yield nothing without the operator’s management of the overall project, and management on an individual basis may be impracticable.[47]The judge held that there were “arrangements with respect to property” in the scheme, which were contractual, the contract being on the terms of whichever brochure was used by the investor. The purpose of the arrangements was to provide investors with profit from the property or part of it by the receipt of income from the rice grown on their plots. There was (as was common ground) no day-to-day control over the management of the property, although there might be in future. The contributions of investors were to be available to meet the costs of developing and running the farm and there was, therefore (as was also common ground), pooling of contributions.[48]As to section 235 (3) (b) the judge held that “the property” referred to was the property described in sub-section (1) i.e. not the property obtained by an individual investor – in the present case his individual field [s] – but the property which was the subject of the arrangements enabling all participants to receive income or profits. He rejected, in my view rightly, the submission that the words “acquisition, holding, management or disposal” in sub-section (1) were restricted to acquisition etc. by the investor, holding that they extended to acquisitions etc. by the operator of property – in this case Yoni Farm including [157] farm buildings (which included some limited accommodation for staff and space for storage of the rice and of equipment), roads, irrigation areas and other parts of it which were not part of individual plots but which were necessary to enable the operation to run – which generated profit for the investor.[49]D 9 – D 11 submit that the judge was wrong to treat the relevant property as extending to facilities associated with the cultivation of investors’ plots. This was said to be on the basis that the “property” from which the investors were to “receive profits or income” was the totality of individual investors’ plots.[50]This is too narrow a view. Section 235 is concerned with an arrangement with respect to property, the purpose or effect of which is to enable investors (“whether by becoming owners of the property or any part of it or otherwise” ) to participate in or receive profits or income arising from, inter alia, the management of the property. In that context “the property” (which the section does not require to be owned by any investor) is perfectly apt to cover a farm from the management of which, including the buildings, roads etc., the investor, who becomes the owner of part of the property, is to receive the share of profit attributable to the proceeds of his plot.[51]D 1- D 8 say that the property is each investor’s plot. That is wrong too. The section is designed to cover a scheme such as this where there is participation by several persons in a property of part of which they each become owners. Management as a whole[52]That left for consideration the question as to whether the property was managed as a whole by African Land, acting through ACSL or GMX? As to that, what was meant, the judge held, was that there was collective management of Yoni Farm as one entity as opposed to management of the investors’ individual interests. He regarded it as logical to consider that question from the position of the manager and whether, from his point of view, he was managing the property as one entity. From that point of view GMX and its predecessors would see themselves as managing Yoni Farm as a whole.[53]I doubt whether much assistance is gained by saying that the question must be looked at from the point of view of the operator as opposed to the investor, although, since the management as a whole is to be “by or on behalf of the operator”, if anybody’s point of view is to be selected, the operator would seem the natural candidate. I would think it preferable to say that the relevant inquiry is as to what, looked at objectively, the scheme required the operator, or his agent, to do.[54]The judge then turned [178] to what he described as “the key issue” in the case, namely whether it was necessary that all management was carried out as a whole, or whether there could be management of the property as a whole even though some management activity was directed at individual plots. As to that the judge rejected the submission of D 1 – D 11 that the first sentence of the second paragraph of the answer to question 12 (“As an example, if a managing agent manages a block of flats on the basis that the only profit or income each individual flat owner obtains is what arises from the management of his property, there is no management as a whole”) meant that, so long as each investor was paid the income from his property, there was no management as a whole. He did so for three reasons.[55]The first was that the guidance was intended for property investment clubs. These are defined as follows:
“Q2. What are property investment clubs? In general property investment clubs, (sometimes also known as buy-to-let schemes, buy-to-let syndicates or property investment syndicates) are schemes allowing members of the public to invest in property and which possess some or all of the following characteristics: • a pooling of resources to allow investment in, or collective management of, real property; • much or all of the property purchased being financed by money borrowed by the members of the scheme (a typical split being 15% equity and 85% debt), with the borrowing often being arranged by the property investment club itself for members; • the offer of educational training on the property market; • other help given to members by the property investment club, including help with the purchase, and the sale, of the property (sometimes involving forward purchase contracts); • the properties concerned are often newly, or not yet, built; and • discounts are often offered, or are purported to be offered, on the price of the property (usually from the developer in recognition of a bulk purchase by club members).” • a pooling of resources to allow investment in, or collective management of, real property; • much or all of the property purchased being financed by money borrowed by the members of the scheme (a typical split being 15% equity and 85% debt), with the borrowing often being arranged by the property investment club itself for members; • the offer of educational training on the property market; • other help given to members by the property investment club, including help with the purchase, and the sale, of the property (sometimes involving forward purchase contracts); • the properties concerned are often newly, or not yet, built; and • discounts are often offered, or are purported to be offered, on the price of the property (usually from the developer in recognition of a bulk purchase by club members).”
[56]The judge thought that, on a strained interpretation, the scheme could be fitted into the first bullet point but, also, that no one could see the African Land Scheme as a property investment club. It was an investment in an agricultural project. I do not regard this as an irrelevant distinction. A farm may, depending on the circumstances, involve “management as a whole” and a lack of decisions on important matters by the individual investor when a flat may not.[57]Secondly he took the guidance as primarily covering buy-to-let investments where the investor was likely to take the main commercial decisions himself, or at least be consulted about them. That was clear from the whole tenor of the guidance which did not suggest that what was contemplated was the owner delegating to a manager all the main decisions about the property.[58]Thirdly the judge considered that the one sentence relied on in the second paragraph of the answer to question 12 (“As an example …”), could bear the suggested meaning but read as a whole, particularly given the earlier reference to “the mere fact” followed by “economies of scale in his management charges”, made it clear that overall management of the property was not contemplated. Guidance letters - Hotels in Prague and Hungary[59]Defendants 1 - 11 also relied on certain informal guidance given to them on various projects, including the Carbon Credit schemes, by either the PERG team, the CIS team or the General Counsel’s Division of the FCA. The relevant letters are set out in [135] – [147] of the judgment. The first two letters requesting guidance (written, as all such letters were, by Mr Bretherton, who became D 1 – D 8’s solicitor) related to(a) a hotel in Prague, where the investor was to pay a fixed sum in consideration of the right to use a specific room in a hotel for one week per year [135]; and(b) a hotel in Hungary with a similar scheme [137].[60]I do not propose to set out this material again. It is sufficient to observe(i) that the schemes were different to those now under consideration;(ii) that such guidance as was given in respect of the Prague hotel was significantly caveated to the effect (a) that what was said did not amount to an assurance, and (b) that firms would be expected to reach their own conclusions on the basis of the guidance provided and in the light of any legal advice that they had obtained (other letters also contained caveats); and(iii) that the letters seeking guidance did not explain how the hotel or the room lettings were to be managed, or the basis on which it was said, in relation to the hotel in Hungary, that each room would be managed separately.[61]Guidance was also sought in relation to a hotel to be built in Albania at which, once again, Mr Bretherton expressed the view that each room would be managed separately without explaining what exactly he meant by that. Since a hotel cannot really function without central management of(i) bookings (including the allocation of rooms);(ii) arrivals and departures;(iii) the provision of food and drink, housekeeping, cleaning and other services, together with the maintenance of reception, eating and leisure areas (e.g. gyms, pools, health centres, and shops), it is far from self-evident that each room is managed separately simply because the investor gets the income from that room for his week.[62]The reply in respect of Hungary confirmed that, on the basis of the confirmation given by Mr Bretherton (which included confirmation that “there will be no management as a whole as each room will be managed separately”), the CIS and PERG teams considered that the proposed scheme would not be a CIS. The reply in the case of Albania (to a letter in which the author “did not consider that there will be any management as a whole as each room will be managed separately for investors: hotel room income/profit will be calculated separately for each investor on an individual basis”), expressed the view that the schemes described were unlikely to be collective investment schemes “as long as each room is acquired by a single investor … and the income from rent or profit (from sale of the hotel) related solely to what is generated by the investor’s room”.[63]The letters seeking advice and the replies appear, therefore, to proceed on the basis that, provided the profits and income are those of the individual investor in relation to his individual room, that will, of itself, mean that the property is not managed as a whole. It is not so. As the structure of section 235 itself shows pooling of contributions or income is one thing; management of the property as a whole is another. Absence of pooling of contributions or incomes may not necessarily mean there is no management of “the property” as a whole. The view that it does appears to have become commonly held in the “alternative investment market”. If it has, it is unwarranted, and reflects a failure to analyse with care what management of the property schemes such as these involve.[64]That such a view has become common may, in part, be a result of the expressions of view by the FCA referred to in the preceding paragraphs, or others to similar effect. As the judge pointed out [192-3] these expressions of view, made without further inquiry, were inconsistent with the FCA’s present case. Further guidance - the Carbon Credits schemes and land in Lithuania[65]In September 2010 the PERG team gave a non – committal response to a request by Mr Bretherton in respect of what became the Carbon Credits schemes. His request had included a statement that the rainforest plots would be managed on an individual basis, and not as a whole, as each investor would have the choice to determine how his/her plot[s] were managed.[66]In December 2010 Mr Bretherton sought guidance about a proposed investment in Lithuanian land the structure of which had similarities with the African Land scheme. He repeated the statement in the September 2010 letter about plots being managed on an individual basis. The response from the Customer Contact Centre (of the FSA, as it then was) did not address management as a whole but the exercise of day-to-day control, about which it was rather guarded.[67]I do not regard any of these letters as of assistance in determining whether the schemes in those cases were CISs. Nor can I regard them as creating any presumption that the African Land Scheme (or any of the Carbon Credit Schemes) was not a CIS. As the judge pointed out [194] they were informal guidance, given in response to short letters which were vague on important matters, in relation to different schemes.[68]I have not ignored the fact that in Bloomsbury International Ltd v Sea Fish Authority [2011] 1 WLR 1546, SC, [55] – [59] Lord Phillips explained that the Courts are reluctant to disturb a settled interpretation and the practice based on it, and that there was a powerful presumption that the meaning that had been given to a phrase in issue by a regulatory body was the correct one. It does not seem to me that the guidance contains a settled interpretation of section 235 which is applicable to present circumstances, and Mr Green accepted that that was so. The submissions to the judge[69]On the key issue the judge had rival submissions. The FCA’s submission was that the court had in essence to identify the collective and individual elements of management to see whether the collective elements outweighed the individual. The approach of D 1 – D 11 was to isolate the supposed “core” activity of Yoni Farm namely the cultivation of each plot while rejecting others as too remote.[70]In the judge’s view the correct test was:
“whether the elements of individual management, arising either from attention given by the management to the interests of individual investors, or from participation by the investors themselves in the management of the property, is substantial. If so, the management by or on behalf of the operator is not to be regarded as management "as a whole".”
[71]In applying this test he accepted:
“200 … that GMX and its predecessors have managed Yoni Farm as an entire project, and that the element of individual management in African Land is minimal. The terms and conditions make African Land entirely responsible for the management of the investors' plots. Investors have no control whatsoever over the management of Yoni Farm, or of their individual plots. They are not, and do not expect to be, consulted on anything. From the point of view of GMX and its predecessors, virtually anything they do is planned and carried out as a whole, even where it is carried out on individual plots. The updates (para. 93 above) provide an accurate picture. What rice is grown, and how, is entirely in the hand of the management, and fundamental decisions which may affect yield, such as what variety of rice to grow, or whether to spend available funds on irrigation or on cultivation, are taken by the management. 201Furthermore, the only element of management which can sensibly be regarded as individual as opposed to collective, the segregation of plots for separate harvesting, while genuine, (a) has no real commercial purpose See the evidence of Mr McKendrick: “As all our investors [who] have ever been out there, say “Why are you doing it such a ridiculous way?”
And we tell them, “It’s because that’s the way we have to do it”.” And Mr Sillah:
“The first set of investors …couldn’t believe how uneconomical this was but they appreciated that this was the way it had to be”. and (b) does not benefit investors; its only purpose is to attempt to take the scheme outside section 235 so as to be able to proceed without regulation. From the investors' point of view, their plots are selected at random, and there is no expectation that a particular plot will produce a higher or lower yield, even if sometimes this may happen fortuitously, as in the case of the lucky owners of 13 hectares, and the unlucky owners of 300 acres, in 2013. As the discussion with Ms. Botto (para. 109 above) illustrates, a sub-lease entitling the investor to a proportion of pooled profits, corresponding to the size of his plot, would be just as good, indeed better as the expense and delay involved in individual harvesting (see paras. 93(e), 105, 107 above) would be avoided. Therefore, in any qualitative assessment of the importance of individual management, this element of it counts for little.”
He concluded that the African Land Scheme was and always had been a CIS. Discussion[72]The phrase “the property is managed as a whole” uses words of ordinary language. I do not regard it as appropriate to attach to the words some form of exclusionary test based on whether the elements of individual management were “substantial” - an adjective of some elasticity. The critical question is whether a characteristic feature of the arrangements under the scheme is that the property to which those arrangements relate is managed as a whole. Whether that condition is satisfied requires an overall assessment and evaluation of the relevant facts. For that purpose it is necessary to identify(i) what is “the property”, and(ii) what is the management thereof which is directed towards achieving the contemplated income or profit. It is not necessary that there should be no individual management activity - only that the nature of the scheme is that, in essence, the property is managed as a whole, to which question the amount of individual management of the property will plainly be relevant.[73]If one applies that test, or the test adopted by the judge, it seems to me plain that the property, i.e. the farm, was managed as a whole. The appellants submit that the profit/income was generated from individualised management activity because each individual investor was to receive the income from his own plot and every relevant act of management (whether in the sowing, harvesting or accounting phase) treated each plot separately. But that ignores the matters found by the judge in [200] and [201] of his judgment. In truth the management activity involved in procuring a separation of plots was not designed to generate profit (if anything it reduces it) but to cause – so it was hoped - the scheme not to be a CIS. The essence of the scheme was, as the November 2009 brochure put it on the title page next to the Agri-Capital logo– see [62] of the judgment – “We harvest – you profit”.[74]There was ample justification for the judge making the findings which he made in the light of the eleven factors that he set out at [167][d]. There was a single manager for the whole farm with complete autonomy over its management. GMX’s contracts with ACSL made no reference to individual investors. The bonuses payable were based on average yield per hectare without reference to individual plots. Management decisions were taken by reference to the interests of the project as a whole rather than the interest of any individual investor. Investors had no contract, or contact, with the managers and played no part whatever in the management. The roads, farm buildings and machinery were used for all investors, and not in any way differently by reference to the interests of any individual investor. There was no evidence that any separate management decisions were taken in relation to the separate interest of any individual investor and his plot in relation to, e.g.(i) which strain of rice should be used for seed;(ii) when and how it should be planted, fertilised or irrigated;(iii) what pesticides should be used;(iv) when it should be harvested; and(v) when, how, to whom, and at what price it should be sold. Most of the management activities necessary to create a viable farm were carried out “as a whole”. Each individual plot was managed in a uniform manner as part of a single farm project.[75]In addition no investor chose his own plot. He was allocated it by those administering the scheme. The cultivation fee paid by each investor was applied towards the management of the farm generally; and neither the investors’ contributions, nor the cultivation fee part of them, was segregated and used exclusively for expenditure on each individual investor’s plot: see judgment [153].[76]The appellants submitted that no significant weight should be placed on the fact that investors did not (as they accept) participate in the day-to-day management of the property. That, they submit, is the focus of sub-section 235 (2) and, if there is no day-to-day management, the extent of lesser than day-to-day participation in management, should not be regarded as an important point in the interpretation of 253 (3) (b). I disagree. The absence or presence (and, if so, the extent) of participation in management by investors may (depending on the circumstances) be a significant (but not conclusive) factor in any assessment of whether the property is managed as a whole by the operator. I note also that the judge clearly accepted [174] that investor participation in decisions which was short of day-to-day control over the management of the property could still mean that the property was not managed as a whole by the operator. The authorities

The judge recorded that he had been referred to 8 authorities on CISs namely:

[77](i) The Russell-Cooke Trust Company v. Elliott (“Russell-Cooke”) [2001] WL 753378, 16th July 2001 (Laddie J, concerning a scheme for using a solicitor’s clients’ funds for loans secured on real property);(ii) Financial Services Authority v. Fradley (“Fradley”) [2006] 2 B.C.L.C. 616 (C.A., concerning a horse race betting scheme);(iii) Re The Inertia Partnership (“Inertia”) [2007] Business L.R. 879 (Jonathan Crow Q.C., concerning the sale of shares in a Seychelles company);(iv) Re Sky Land Consultants plc (“Sky Land”) [2010] EWHC 399 (Ch.) (David Richards J, concerning a “land-banking” scheme);(v) The Financial Services Authority v. Watkins (“Watkins”) [2011] EWHC 1976 (Ch.) (Proudman J, concerning a land banking scheme);(vi) Brown v. Innovator One (“Brown”) [2012] EWHC 1321 (Comm) (Hamblen J, concerning investment schemes);(vii) The Financial Services Authority v. Asset Land Investment Inc. (“Asset Land”) [2013] EWHC 178 (Ch) (Andrew Smith J, concerning a land banking scheme, where judgment was subsequently given by this court on 10 April 2014 [2014] EWCA Civ 435) and(viii) The Secretary of State for Business, Innovation and Skills v. Chohan (“Chohan”) [2013] EWHC 680 (Ch) (Hildyard J, concerning a land banking scheme).[78]He referred to the dictum of Arden LJ in Fradley that :
“...since contravention of the general prohibition in s.19 may result in the commission of criminal offences, s.235 must not be interpreted so as to include matters which are not fairly within it.”
He compared it with the decision of Warren J, in Re Digital Satellite Warranty Cover Ltd [2011] EWHC 122 (Ch), which related to an alleged breach of section 19 of FSMA in carrying on unauthorised insurance business, that certain provisions of Schedule 1 of FSMA (a penal enactment) will not be given a strict construction if other interpretative factors weigh more heavily in the scales. Warren J had referred to Bennion on Statutory Interpretation, 5th ed (2008), p 828 and to a decision of Sir Nicholas Browne Wilkinson V-C in Re Lo-Line Electric Motors Ltd [1988] Ch 477 declining to give a strict construction to the word “director” in the Company Directors Disqualification Act 1986 because the paramount purpose of disqualification was the protection of the public.[79]I would accept, as, I think, did the judge, that it was not necessary to adopt a restrictive construction because FSMA contains penal sanctions. Such an approach involves no contradiction with the words of Arden LJ in Fradley. If the schemes are to be treated as CISs they must come fairly within the definition contained in s 235, according to the ordinary meaning of the words used, construed in the light of the overall purpose of the section, as applied to the facts found by the judge.[80]The judge drew from these authorities, the following propositions, with which I would agree: a) that the application of s 235 depends on the specific facts of the case; b) that, as held by Andrew Smith J in Asset Land the FCA did not have to prove breaches of the FSMA beyond reasonable doubt although since, as Smith J put it, “the court’s starting point is that the defendants probably did not behave as the FSA alleges, it has to prove its case the more cogently”; c) that “arrangements” had a wide meaning and could include non-contractual arrangements which existed on their own or in parallel with contractual arrangements; d) that the reference to the “purpose or effect” of the arrangements reflected the fact that what mattered was the way in which the scheme was run in practice and not contractual terms which might not reflect reality; e) that whether there was day-to-day control depended on whether such control was actually exercised not on whether investors had a contractual right to exercise it; and f) that whether a scheme was a CIS might change over time, depending on how it was operated in practice.[81]The authorities do not, however, offer any direct assistance on the interpretation of “managed as a whole”. The Appellants refer to Arden LJ’s statement in Fradley that “at the heart of the concept ... is the requirement for the sharing of profit or income by participants who do not have day-to-day control over the management of the property. A paradigm example of a CIS would be a unittrust”, and to descriptions of a CIS as a “communal investment” (Russell-Cooke), or a “collectivised investment” (Chohan), but these do not take the matter any further. The authorities on land banking[82]The authorities on land banking relate to schemes where the property acquired by the individual investor is part of a larger area, and the profit which it is hoped will be obtained is to be derived from a change in that larger area. The summary of the cases contained in the following paragraphs is largely based on that of the judge. Sky Land[83]In Sky Land the operators of the scheme acquired options over two separate pieces of land near Crewe and at Winterton and sold smaller plots to investors. They did so on the basis that they would apply for planning permission for the whole site and that, once permission was obtained, the purchasers of the individual plots would be required to sell at the then market value. They could, however, resell in the meantime, provided that the new purchaser undertook the same obligation to sell once planning permission was obtained. Following intervention by the FSA, changes were made to the terms, so that the company was no longer responsible for seeking planning permission or for selling the individual plots, nor were the purchasers of the individual plots under any obligation to resell if planning permission was obtained. Nevertheless, as David Richards J found [70] in fact the operators continued to represent to investors that they would deal with the planning and sale of the Winterton site, including the individual plots, and undertaking activities with a view to obtaining planning permission for the entire site and then selling it.[84]David Richards J regarded “the property” as the land comprising the individual plots sold to investors; and held that it was managed as a whole even though the operators were not concerned with the current agricultural use of the land which was managed by the owners. He held that what constituted management was dictated by the nature of the property concerned and said this:
“78. As regards the land in question, management could be said to involve (i) long-term goals, such as planning permission, development and sale, and (ii) the short-term physical stewardship of the land. The latter was of no real concern to the investors. This was not intended to be an investment in agricultural land. In any event, it seems clear that the arrangements envisaged that the original owner would continue to use the land as part of his agricultural business until possession was needed for development or sale. It was the company which in practice had a relationship with the owner and the reasonable inference from the evidence is that investors were content to leave it to the company to agree the use of the land pending development or sale. 79. The purpose was to make a profit from an actual or prospective change from agricultural to residential or other use. The management of the property, so far as relevant to the investors, was taking steps with a view to obtaining planning permission and developing or selling the land. Such activities fall naturally within the ambit of management of land …”
[85]In those circumstances he disregarded the management of the farming activities on the land as irrelevant and concluded that the arrangement promoted and operated by Sky Land was at all times a CIS. The judgment rightly concentrated on the management with which the investors were concerned, namely that which would lead to the intended profit. In the present case that is the management of the farm with its buildings, roads, fields, irrigation areas, machinery and equipment, appurtenances and labourers. Asset Land[86]In Asset Land Andrew Smith J agreed with David Richards J as to what was “the property”, and that “the management of the property” relevant for identifying the “characteristics” of the arrangements was the management directed to what David Richards J called in the Sky Land Consultants case at para. 78, the “long term goals”. He stated that his conclusion would have been the same if he had regarded “the property” as the individual investors’ plots. Chohan[87]In Chohan Hildyard J accepted the Secretary of State’s argument that it was necessary to ascertain the true nature of the investment as viewed by the investors from the evidence as to the manner in which the scheme was actually promoted and managed.[88]On the issue of management he said the following:
“116. As to (1) in paragraph 115 above, and as in the Sky Land Consultants case, the object of the investments solicited was plainly, in my judgment, to enable investors to benefit from an increase in the collectivised value of the individual plots they were invited to invest in, which was to be brought about by rezoning the entire site of which such plots formed a part. The object was not an investment in the land itself with a view to its use and profit thereby: the object was profit from an enhanced value generated by rezoning of the site, and thus the prospect of sale of each plot with the potentiality of planning permission. ... 122. Turning to the second alternative characteristic, what constitutes “management” is helpfully addressed in both Sky Land Consultants and Asset Land. I have already cited (see paragraph 71 above) a passage from the judgment of David Richards J in Sky Land Consultants at paragraphs 77 to 79, which seems to me substantially to apply in this context also. 123. Bearing in mind the necessity to look at substance rather than form, it seems to me clear that the arrangements in reality were for UKLI to realise the common objective of all the participants by doing what was necessary with their support to obtain rezoning of the site: that was what the plots were bought for and it is the purpose to which their ownership was directed.”
[89]These cases illustrate that in deciding whether the property is managed as a whole it is necessary to consider the management with which the participants are concerned, which will be determined by their common objective in entering into the scheme as it was sold or described to them. In construing “managed as a whole” the court must focus on the investment objectives of the arrangements. THE CARBON CREDITS SCHEMES[90]The Carbon Credits schemes were operated by D 13, then named Capital Carbon Credit Ltd. The essence of each of the three schemes was that D 13 would acquire a lease of an area of forest land, which would be split into specific plots to be allocated to individual investors, who would then be entitled to the proceeds of carbon credits generated by their plots. The scheme in Australia was far less advanced than the African Land Scheme. As Mr MacNee said “the trees are only this [indicates]. Thinner than my finger”. The Australian Carbon Credits Scheme[91]The Australian Government had a Carbon Farming Initiative (CFI) which was a carbon off-set scheme relating to reforestation. Under the terms of this initiative the Government issues Australian Statutory Carbon Credits (ACCUs).[92]Under the scheme for investors, as explained in the brochure, investors would obtain a licence for a 15 year term of a ½ hectare plot within a 320 hectare area of approved land located in the Gippsland region of Victoria, which qualified under the CFI, at a price of £ 9,000 per plot, including all planting, management, maintenance, administrative and insurance costs. The “preferred Project Developer” was to be Citola Resources Pty. Ltd. (“Citola”).[93]The judge referred to the terms of the relevant brochure [215] – [225] and to the detailed terms and conditions which:
“[226] …provided that, within 28 days of receipt of a duly completed application form, the investor would receive confirmation of the Plot(s) allocated to them by way of a Licence Certificate, and the terms and conditions also included the following:- “3. LICENCE ... (iii) The Licence Covenant Registration will take place no later than 18 months from the date recorded on the Licence Certificate providing Investors the exclusive right plant, maintain and own all Carbon Sequestration rights in accordance with the CFI Act 1996; (iv) upon payment of the Management and Accreditation Fee, the Investor irrevocably and unconditionally agrees to the Project Developer being solely responsible for Project on behalf of the Investor for the term of the Licence in accordance with Part 10 of the CC (CFI) Act 2011; (v) Ownership of seedlings, harvest, machinery and any intellectual property rights developed and maintained by the Project Developer remain with the Project Developer and Landholder during the Licence Term.

(s) is not reduced; and …”

. There are also various disclaimers, including that D12 had no specialist knowledge and could not guarantee that the price paid for the licence represented market value or that the projections set out in the document would be realised. [227] The “Project Developer” is defined as Citola Resources Pty Ltd, and the Landowner as Forestry Land Resources Pty Ltd, a subsidiary of Citola. [228] “Licence” is defined as “the issue of a licence over the ACCUs that will be produced from 1/2 hectare plot(s) granted to the Investor for the term in accordance with the terms and conditions set out in this Offer.” “3. LICENCE ... (iii) The Licence Covenant Registration will take place no later than 18 months from the date recorded on the Licence Certificate providing Investors the exclusive right plant, maintain and own all Carbon Sequestration rights in accordance with the CFI Act 1996; (iv) upon payment of the Management and Accreditation Fee, the Investor irrevocably and unconditionally agrees to the Project Developer being solely responsible for Project on behalf of the Investor for the term of the Licence in accordance with Part 10 of the CC (CFI) Act 2011; (v) Ownership of seedlings, harvest, machinery and any intellectual property rights developed and maintained by the Project Developer remain with the Project Developer and Landholder during the Licence Term. The Plots) remains the property of the Landholder; (vi) The Investor is unconditionally the sole beneficial owner of any ACCUs issued on the Investor’s Plot(s); (vii) The Company reserves the right to defer the date for performance of, or issue of the ACCUs units, or to terminate this Licence, if it is prevented from, or delayed in, carrying on its activities by acts, events, omissions or accidents, beyond its reasonable control, including (without limitation) strikes, lockouts or other industrial disputes (whether involving the workforce involved in the project or any other party), failure of a utility service or transport network, act of God, war, riot, civil commotion, malicious damage, compliance with any law or governmental order, rule, regulation or direction, accident, breakdown of plant or machinery, fire, flood, storm, crop failure or default of suppliers or subcontractors; (viii) the Investor accepts that the Licence issued over the Plot(s) for exclusive purpose and use of the Project; (ix) the Investor hereby acknowledges that the Company shall be entitled in its absolute discretion to allocate the Plot(s) within the Licensed Area on behalf of the Investor provided the total area of the Plot(s) is not reduced; and …”. There are also various disclaimers, including that D12 had no specialist knowledge and could not guarantee that the price paid for the licence represented market value or that the projections set out in the document would be realised.[94]As the judge held, despite what was said in the brochure, a careful reading of conditions 3 (v) and (vi) revealed that the plot remained the property of D 13 and the investor was only the beneficial owner of “any ACCUs issued on (his) Plot(s)”. It would appear, from the brochure, that the plot was the property of Forestry Land Resources Pty Ltd, a subsidiary of Citola.[95]The judge summarised the agreement between D 13 and Citola dated 24 January 2012 as follows. It was described:
“[239] …as an Agreement for the Provision General Services: Asset Management Agreement. [240] Carbon Sequestration Rights are defined as “the exclusive economic rights to economic benefits associated with the carbon sequestered by the trees as recognised under or provided for in the Act” (i.e. the 2011 Act). [241] Citola’s Services are defined in Schedule 2 and 3: it is unnecessary to go into detail, these schedules demonstrate that Citola has the entire management of the project. [242] Clause 2.2(a) provides that Citola’s subsidiary, the landholder, will grant Citola “exclusive Carbon Sequestration Rights over the Planted Area for the purposes of the Project”. [243] Clause 2.2(b) provides that D13 will have the exclusive right to all ACCUs subject to payment to Citola as specified in the agreement. [244] Clause 2.2(c) provides that Citola will transfer all ACCUs to D13’s ANREU account for the term of the project. [245] Clause 2.2(d) provides that Citola will provide to D13 plot certificates for each plot at the appropriate stage (as defined) in the implementation of the project. [246] Schedule 2 item 5 repeats clause 2.2, and further provides that Citola will design the project according to the Reforestation – Environmental Planting methodology developed and approved by the Australian Department of Climate Change and Energy Efficiency, as a “Single Project Proponent”, and that it would provide copies of Project Reports at the end of each Reporting Period.”
Pooling of income/profits - The judge’s findings[96]The judge found that there were arrangements in accordance with the terms of the brochure relating to property [252], the property being the whole of the forest area, which was what Citola was managing. Investors were intended to benefit from the overall management of the project, including for example “permanent” areas, not owned by investors, but set aside for the purposes of research and experiments, and not only from their own individual plots [253]. There was no evidence that any investor had taken over day to day management [254]. The ACCUs, if any, would be awarded to D 13 and then divided between investors in accordance with the performance of their individual plots i.e. the carbon benefit generated by each plot (rather than the total carbon benefit divided rateably in accordance with the area of each investor’s plot) [256].[97]In this respect he accepted the evidence of Mr MacNee, the managing director of Citola, that Mr Haddow and Ms Hargous had explained to him and others that it would be necessary to ensure that each investor received the proportion of ACCUs which represented the performance of his own individual plot and that that was what would be done. Mr MacNee's evidence was that at somewhere between 18 months and 3 years after planting it would be possible to take measurements for carbon credits purposes, and that, when the time came, one of Citola’s duties would be to provide a report which would enable D 13 to divide up the ACCUs in accordance with the performance of each plot. That being so there was no pooling of income/profit. Pooling - the FCA’s submissions[98]The FCA submits that the judge was wrong to reach a conclusion that there was no pooling of income by reference to an explanation which formed no part of the contractual arrangements for the scheme. Neither the contract between Citola and D 13 nor the brochure makes reference to assessing each half acre plot for its individual carbon credit. Moreover the brochure includes a number of references to how the “project” is monitored and that ACCUs are generated by each project. The judge, says the FCA, was in error in failing to address the submission that the non-contractual arrangements, made after the event, did not form part of the “arrangements” between the investors and the operator under s 235. Conclusion on pooling[99]In my judgment, in the light of the evidence of what had passed between Mr MacNee and Ms Hargous [D 6] and Mr Haddow [D 7] about the way in which the scheme was going to work, it was open to the judge to find that there was to be individual accreditation, and that that formed part of the arrangements enabling investors to participate in profits or income arising from the acquisition of the relevant property within the meaning of s 235. The contractual documentation and the brochure did not specify the method of attribution of income or profit. In order to determine the nature of the scheme it was, thus, necessary to understand the way in which the scheme was intended to work in practice. If a scheme provides for the distribution of income/profit, which would mean that there was no pooling, but it is in fact operated in such a way that there is such pooling, it is the actual method of operation that will, in all likelihood, determine its nature. The same applies if the scheme does not, by its express terms, specify how the sharing is to be effected. It is, then, the way in which it is intended to operate (or, when the time comes, does operate) that will determine its nature. Management as a whole – the judge’s findings[100]As to management as a whole the judge found that that was established. The property (whether it was the whole forest or just the totality of plots allocated to investors so far) was clearly being managed in its entirety by Citola on behalf of D 13. The terms and conditions did not provide for any input into management by investors, or consultation with investors, and there was no evidence of any such management or consultation in practice. He added:
“[259] As in the case of African Land, it is true that trees are planted on each plot, but the decision what to plant (according to Mr. MacNee an identical mixture of different trees on each plot) is that of the management, and I do not regard this as an element of individual management. There is again only the allocation of profit to individual plots. As in the case of African Land, this has no economic purpose, since there is no difference at the outset between the expected yield of one plot as against another, and the sole or main purpose is to allow the promoters and operators of the scheme to be unauthorised persons.”
Conclusion on management as a whole[101]In my view the judge was right for the reasons which he gave. Citola managed the whole project by contract with the operator and not the individual investors and without reference to any particular individual interests. The contract refers to the development and implementation of “the Project” and payment is made according to milestones for the Project and not by reference to individuals’ plots. The Sierra Leone and Brazilian Carbon Credit schemes[102]D 13 was the operator of these schemes, which were even less advanced than the Australian Carbon Credits scheme; and there was a separate “project developer/accreditation specialist”, namely Eco Securities Group Plc, which was swiftly replaced by Climate Care Global Ltd, of which Mr Ayres [D 14], until December 2012, and Mr Gibbs [D 15] were directors.

The judge described the main features of each of the schemes as follows:

“(a) Carbon credit potential generated through Reducing Emissions from Deforestation and Forest Degradation in Developing Countries (“REDD”) Scheme. (b) Ethical carbon off-setting generating VER (voluntary emissions reductions) carbon credits, which can be traded. (c) Investors buy sub-leases of one hectare plot(s), for a term of 45 years. (d) Investors have the option to appoint own manager with a reduction in price. (e) Full money back guarantee (not including accreditation fees) if the land is not granted carbon credits within three years of the investment. (f) The terms and conditions provide that on payment of the accreditation fee (i.e. unless appointing their own manager) investors “irrevocably and unconditionally agree to D13 being solely responsible for managing the land and the Carbon Credit Accreditation Process” on their behalf. (g) The terms and conditions refer to the sublease as “your legal ownership over the land”. (h) By the terms and conditions, D13 is to procure that investors will receive their “Carbon Credit Allocation” within three years, and Carbon Credit is defined as – “...the number of carbon credits attributed to an investor’s plot in accordance with the Accreditation Agency (which is Eco Securities or CCG).” ” “...the number of carbon credits attributed to an investor’s plot in accordance with the Accreditation Agency (which is Eco Securities or CCG).” ”
Pooling – the judge’s findings[104]The judge accepted the evidence of Ms Hargous [D 6] that it was her understanding that satellite imagery for each plot of land could be used to determine tree heights and types so as to give each plot a carbon credit value. Had matters proceeded in accordance with the brochures, with the intention of measuring individually the carbon credit values of each plot, he would have held that the scheme did not involve the pooling of profits or income but did involve management as a whole and was therefore a CIS for all the reasons given in relation to the other schemes [265].[105]But he found on the balance of probabilities that the intention of D 13 (but not of Ms Hargous [D 6]) at the time that the schemes were promoted and thereafter, was that the accreditation manager/specialist should seek one allocation of carbon credits for each of the schemes, if they ever got that far, which would be shared rateably between investors in accordance with the size of their plots [270]. So the intention of the operator of both schemes was both to pool profit/income and to manage them as a whole. The basis on which he reached that conclusion was as follows: Sierra Leone[106]In relation to Sierra Leone there was, first, no clear evidence as to the progress of attempts to obtain carbon credit accreditation [266][b].[107]The second point was this: “[66] (c) The feasibility study and project development study prepared by CCG say that conservation of forest land would be achieved by activities on non-forest land, including the creation of a protected area, working with communities to identify sustainable [land use] practices and planting community wood lots for fuel wood and construction materials. Similarly, a Co2 balance proposal suggests four key activities, namely forest patrols, improved forest management, biomass pellet production using waste residue from rice production and reforestation of degraded areas. It is difficult to see how the income from any of these could be allocated otherwise than by pooling”.[108]Most significantly he relied on the witness statement of Mr Barrington, an investor, who referred to a meeting with Mr Ayres [D 14] on 6 November 2012 at which he said that the yield of 400 carbon credits per hectare suggested in the brochure would not be achieved and that he proposed:
“...that no more than 10% of the forest be sold to investors, i.e. 5000ha. They will use the credits attaching to the 90% to fulfil their obligations to investors to make up their promise of 400 credits.”
There is also a reference to this intention in an internal email from Mr Ayres of 6 September 2012. Brazil[109]The judge described the evidence as to this scheme as virtually non-existent. A brief feasibility study prepared by CCG again referred not only to conservation of the forested area but also to other activities on non-forest land in order to avoid deforestation and developing ecotourism and other activities, which would not be capable of being related to individual plots. There was no evidence of any land having been leased or otherwise acquired to enable D 13 to fulfil its promise to sublease to investors. There was no provision in either the Sierra Leone or the Brazil scheme for the measurement of carbon benefit on individual plots, or evidence that consideration had ever been given to establishing a method for measuring the carbon credit value of each plot individually or for appointing a firm to do so.[110]Further an internal email sent by D 14 on 4 May 2012 suggested that it was never contemplated that there would be individual measurement. The email, which was responding to an inquiry from Capital Alternatives [D 1] as to whether coordinates could be provided to clients in order to show them what they owned and where, read:
“If the costs of letting one client do this are approved or covered, then the individual accreditation is done on one hectare at a time to take into account the divide of land then yet it can be done! Those costs would probably be in the region of A £1m. Surely it is easier to sell the product you have, not one that is tailored to every single client. ... If we went down that route we would have to register each plot as a separate accreditation.”
[111]The judge recognised that this referred to the cost of seeking individual accreditation rather than the cost of individual assessment of the carbon credit value of each plot. But it suggested to him that D 13 had no intention of incurring what would no doubt be the considerable cost of carrying out the latter assessment in the vast areas involved. Conclusion in respect of Sierra Leone and Brazil Pooling[112]In respect of Sierra Leone and Brazil it was open to the judge in the light of the evidence - including evidence that the carbon credits would not be linked to the particular land interest purchased by an investor, but that accreditation would be made on the basis of activities both on and off the investors’ land - to make the findings to which I have referred in [105] above; and to conclude that there was pooling of income as well as contributions, and that the schemes were, on that account, CISs. The fact that Mr Ayres did not participate in the trial or, therefore, explain the content or circumstances of his email of 4 May 2012 did not mean that the judge was disentitled to attach significance to it. On the thin material with which the judge was provided he reached a conclusion which was open to him. Management as a whole[113]It was also open to the judge to conclude that in respect of the Sierra Leone and Brazil Carbon Credits schemes there was management as a whole, as he did for all the reasons given earlier in relation to the other schemes: [265] and [270]. Exclusive rights to the carbon credits were to be owned by the operator and not by the investors, and CCG was to apply for them on behalf of the project as a whole. Management decisions were not taken according to the separate interests of individual investors. Plot allocation was in the hands of those administering the scheme. No item of individual management was apparent. The result[114]For these reasons I would dismiss both appeals and the cross appeal.[115]I agree with the judgment of Christopher Clarke LJ, but add a few words of my own as we are differing from the judge on the question of what is the correct test for deciding whether property is “managed as a whole” within section 235(3)(b) of the Financial Services and Markets Act 2000 (“FSMA”).[116]As Christopher Clarke LJ has said, the judge held that the court should ask “whether the elements of individual management, arising either from attention given by the management to the interests of individual investors, or from participation by the investors themselves in the management of the property, [are] substantial”. If they were, then management by or on behalf of the operator was not to be regarded as management “as a whole”. I agree with Christopher Clarke LJ that the statute uses ordinary language. In my view, no gloss on that language is necessary or desirable.[117]In my judgment, it is important to put the construction of section 235(3) in the context of the section as a whole. Section 235(1) defines a collective investment scheme as “any arrangements with respect to property of any description … the purpose or effect of which is to enable persons taking part in the arrangements … to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property …”. It may, therefore, be seen that the “arrangements” are central to an understanding of a collective investment scheme. The arrangements in question must be “with respect to property”, but for these purposes must also have the purpose and effect of enabling participants to receive profits or income arising from one of four specified activities, namely “the acquisition, holding, management or disposal” of that property.[118]Section 235(2) then makes clear that the arrangements must also be such that participants do not have day-to-day control over the management of the property whether or not they have the right to be consulted or to give directions.[119]Sections 235(1) and (2) provide the vital backdrop to a proper understanding of section 235(3), which imposes a further requirement that the arrangements should have one or both of two further characteristics. The first characteristic is that the contributions of the participants and the profits or income out of which payments are to be made to them are pooled. I need say no more about that characteristic. But the second characteristic is central to this case. It is that “the property is managed as a whole by or on behalf of the operator of the scheme”. As Christopher Clarke LJ has explained, the property in question is not, as the appellants submitted, the individual plot (in the African Land scheme, for example) but the whole of the property in respect of which the arrangements alleged to be a collective investment scheme are made. Any other construction would be meaningless, since one cannot sensibly ask whether an individual plot is “managed as a whole”. The “whole” plainly refers to the whole of the property to which the arrangements relate.[120]It was the appellants’ core submission that the purpose of the management was crucial to the question of whether the property was “managed as a whole”. Accordingly it was submitted that, if the property were managed for the purpose of producing an income from the individual plot (or flat in a scheme involving a block of flats), that would be sufficient to exclude the conclusion that it was “managed as a whole”. I disagree. The question is a straightforward one and cannot be confined in the way the appellants suggest. The arrangements that need to have the characteristic of being “managed as a whole” are those relating to one or more of the acquisition, holding, management or disposal of the property. The question of whether the property is managed as a whole may be answered differently depending on which of these types of arrangements have been made in order to produce the intended profits or income. For example, in the land bank cases, the arrangements relate to the obtaining of planning permission which is the core management activity from which profit is expected to arise on disposal. That is plainly a management of the property as a whole. In the case of a block of flats with different owners, the arrangements from which profits or income are expected to be generated relate to the letting of the flats. If the letting of each individual flat is undertaken separately in consultation with the individual owner on different and flat-specific terms, the arrangements may not have the characteristic of the property (the whole block) being managed as a whole. That will not be likely to be affected even if the common parts are managed collectively.[121]In the African Land case, the arrangements in question were those made in relation to the cultivation of rice at Yoni Farm. Those were the arrangements relating to the management of the property from which profits or income were expected to be generated. In asking whether these arrangements had the characteristic of Yoni Farm being managed as a whole, the whole gamut of cultivation activities had to be considered, such as purchasing of seed and other materials, the use of machinery, crop management generally, decisions on the use of fertiliser, chemical treatments and irrigation, and the timing of the harvest, in addition of course to the processing and sale of the crop. This was, in effect, the exercise that the judge undertook in reaching the conclusion that the arrangements made in relation to the African Land scheme did have the characteristic provided for in section 235(3)(b) and that the property in question was managed as a whole. The fact that the judge thought a “substantiality” approach was appropriate does not seem to have prevented his consideration of the appropriate factors. In any event, even if he did not, on the facts he found, I would, like Christopher Clarke LJ and for the reasons he has given, have reached the same conclusions in respect of both the African Land scheme and the other schemes with which this case is concerned. Each of them was properly to be regarded as a collective investment scheme.[122]I too would therefore dismiss the appeals and the cross-appeal.

The Chancellor of the High Court (Sir Terence Etherton)

[123]I agree.

Cited in 5 later judgments