“At any time after the first Financial Year End has passed, the Members may by a majority vote based on Membership Shares of those present and voting in person or by proxy resolve to sell and transfer [the business of the Partnership/Trade] including (without prejudice to the generality of the foregoing) transfer of the business of the Partnership to a company limited by shares in consideration of the issue of shares.”
“The company entered into bridging loans during the period with various client partnerships pending the finalisation of re-financing agreements with various banking institutions. On completion of the re-financing, the company waived the interest charge.”
“The Board Authorised an agreement with Mr Stephen Wheatley and Mr Simon Meager to pay up to£200,000 in commission for the introduction of the tax capacity”; (6) In respect of promotion: “The Board authorised the use of The Website and authorised Paul [Carter] to finalise the presentation and the brochure ... it was decided to produce and purchase a database of IFA’s, Accountants, tax advisers and other likely introducers of business”; (7) In respect of Innovator’s funding: “Paul [Carter] informed the Board that the company has to give up its anticipated fund raising of£2,000,000 through Credo Financial Services Limited and the Company was funded via a Shareholder loan of£72,500 which should be sufficient until the first sales revenue was achieved. The Board agreed on that basis to postpone the yearly board member fees until the first transaction was closed”
“The IP has been acquired by [Mr] Evans and Mr [Carter]. It may well be that their acquisition is as partners by virtue of thePartnership Act 1890 . My Instructions indicate that they agreed on [18 March 2003 ] to acquire the IP in a limited liability structure and the reasonable inference is that if such intention failed (as the Acquisition Agreement and the Guarantee agreement was signed prior to the incorporation of the LLP) that the IP was acquired and the obligations under the Guarantee assumed by them as partners.”
“... the attitude of the Inland Revenue to the quick fix that we had to do is not clear and it may well be that the Inland Revenue will deny relief because of this. I will mention that we do have an Opinion of Rex Bretten QC that what was carried out was permitted by the tax legislation. However there is a doubt and it does seem to me that there should be some form of response to the letter from SocGen withdrawing the facility.”
“It seems that Ogier are effectively an outsourced resource to whom certain administrative and compliance functions have been delegated and therefore they are not the operators, or at least not the sole operators, of the LLPs. The operation of the LLPs therefore remains with the LLPs themselves or the person who is actually responsible for that operation”
“I believe Paul has forwarded you the first 9 schedules earlier today” and providing the last schedule, for Gentech 1. He continued: “You will note that we have 110 partners”
“to sign all of the deeds of adherence for each of the Generation 1 partnerships would have taken considerably more than an hour.”
“My recollection is that we had the large board meeting room in Collyer-Bristow, there were hundreds of piece of paper, Paul Carter and I signed and our wrists went practically numb. In and out of the meeting came Mr Gates and Mr Evans. I can't recall the precise date. I felt no uneasiness when signing, but I do remember a feeling of triumph it had been done.”
“Although it did not come to my notice at the time. I have since been made aware by my solicitors that the Exploitation Agreement (which has31 March 2003 on its face) appears also to have been backdated. As I have explained, this agreement was agreed and signed on4 April 2003 .”
“In consideration of the parties entering into this Deed Peter Lewis, PeterPostPartners and MarbleEye formally recognise the documents recited above as being true, valid and entered into on the dates stated thereon. Furthermore, the parties agree that upon the request of Mr Carter, they will furnish statements made in this Deed and confirming that they are not aware of any ancillary agreements which conflict with the transactions set out in this document recited above. (clause 1.1)”
“A contract purportedly made with an embryo LLP itself stands not as a contract with the LLP but as a contract made with those who purportedly acted for it in the making of the contract and it does not bind the LLP.Section 36C of the Companies Act 1985 (as amended and as applied and incorporated by theLimited Liability Partnership Regulations 2001 , Reg. 4 and Sch. 2) provides: (1)“A contract which purports to be made by or on behalf of a Limited Liability Partnership at a time when the Limited Liability Partnership has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the Limited Liability partnership or as agent for it and he is liable on the contract accordingly.”
“Agreement was drafted prior to Ministerial Statement BS – everything prepared according to previous Opinion. Drafted etc 24th March GRB – should have synchronised them BC [must be BS] – but we had no idea knew what the Ministerial Statement would say”
“I’ll check the contracts and change the dates”
“I’ll check the contracts and change the dates”
“He said that Clause 3 of Agreement should say “a date not later than 25th July.”
“Morning gentlemen, I am just preparing the Loan Agreements, draw down notices and debentures for the LLPs and MFC. Could you let me have details of the capital contributions (i.e. total investor’s contributions) and total bank borrowing so that I can insert the relevant loan figures please. I presume that, as you are working on the deeds of adherence, the partnerships are now finalised and closed?”
“As you have the originals, could you please date them. We are talking of: Agency Exploitation Agreement, Service Agreement and Security Agreement.”
“As I mentioned to Peter Merz recently we have now closed the investment for the Arte Technology Partnership LLP and, as you will recall, this is the first generation whereby the loans are being granted to the individuals rather than to the Limited Liability Partnership itself, although of course, the money will still go from the individual loan accounts to the LLP account for onwards transmission to the Technology Developer. I am going through all of the identification material to ensure that it is all correct, in place and consistent but, in the meantime, thought it may be useful for you to ask, perhaps, one of your colleagues to go through to make sure there is sufficient information in respect of each of the individuals to enable you to open the account once I have forwarded to you certified copies of the documents.” 484. On15 March 2005 a note of an Innovator Team meeting records in respect of Arte that although most documentation is in place, "The main problem here is that the Swiss bank have rejected some money laundering documentation which although acceptable are not acceptable in Switzerland. Paul Carter is dealing with this". 485. An application was made by Arte Inc to open an account at MFC on26 May 2005 . There is a draft General Pledge and Assignment which does not appear to have been executed. 486. On19 July 2005 , Mr Hochong wrote to Mr Carter stating that the purchase price for acquisition of the Technology was reduced “as part of the negotiations between Innovator and Arte Inc. because of the failure of Arte Inc. to fix a couple of bugs in the software prior to closing”. 487. On8 December 2005 , the IR wrote to Mr Carter issuing an enquiry notice in respect of the Arte LLP. 488. On13 January 2006 , Mr Hochong (on behalf of Arte Inc) wrote to Crouch Chapman to confirm that the purchase price of the Arte technology was£7,080,000 . 489. Crouch Chapman as auditors of the Arte LLP, signed off on the LLP’s financial statements for the period ending5 April 2005 on3 February 2006 . 490. On15 February 2006 , Arte Technology Limited was incorporated at Companies House under company number 5711122. 491. On29 March 2006 , Mr Carter wrote to Mr Bailey and stated as follows: "Having agreed to refinance the Arte Partnership with another bank, please transact the following transfer by tomorrow morning… from your client account for the Arte Technology Partnership …. to InnovatorOne plc". 492. On31 March 2006 , Mr Carter wrote to the Arte Claimants and indicated that, following the restructuring of MFC, the latter was no longer going to fund Arte. He further stated: "We have now agreed with Fairbairn Private Bank Limited to take over the position vacated by MFC but unfortunately this requires information to be provided as detailed in the enclosed Account Opening Form" 493. On2 October 2006 , Mr Carter wrote to the Arte partners and stated that although a number of partners had completed the application forms required by Fairbairn, many did not. “As a consequence, no loans were ever drawn down.”
“I would be grateful if you could kindly date each of the bank documents sometime in January of this year to ensure that we can use the existing anti-money laundering documentation.”
“331. Mr Stiedl, Mr Carter, Mr Evans (until his death on 21.07.03), Mr Bailey, Mr Gates (in the case of the GT1 and GT2 schemes only), Innovator and CLFL, including by establishing and/or operating the Innovator schemes and related arrangements (including those related to CLFL) conspired to injure the Claimants by unlawful means, namely by inducing them to subscribe money in a Partnership purportedly formed to conduct a business with a view to profit with substantial external Bank funding, when at all material times: 331.1 such business was a sham and/or there was no genuine or realistic prospect of trading or making any profit and no real external funding beyond money subscribed by subscribers; 331.2 the real purpose of the scheme was to enable Mr Stiedl and his associates including Mr Carter, Mr Evans and Mr Gates to secure for themselves huge reward from subscription money paid.”
“A conspiracy to injure by unlawful means is actionable where the claimant proves that he has suffered loss or damage as a result of unlawful action taken pursuant to a combination or agreement between the defendant and another person or persons to injure him by unlawful means, whether or not it is the predominant purpose of the defendant to do so.”
“46 It is not necessary that every overt act is done by every conspirator, but the act must be done pursuant to the conspiracy or combination: Kuwait at [110]. Further, it is not necessary to show that there is anything in the nature of an express agreement, whether formal or informal. It is sufficient if two or more persons combine with a common intention, that is to say, that they deliberately combine, albeit tacitly, to achieve a common end: Kuwait at [111]. Nourse LJ quoted (at [111]) the following passage from the judgment of the Court of Appeal Criminal Division delivered by O'Connor LJ in R v Siracusa(1990) 90 Cr App R 340 at 349 as being of assistance in this context: “Secondly, the origins of all conspiracies are concealed and it is usually quite impossible to establish when or where the initial agreement was made, or when or where other conspirators were recruited. The very existence of the agreement can only be inferred from overt acts. Participation in a conspiracy is infinitely variable: it can be active or passive. If the majority shareholder and director of a company consents to the company being used for drug smuggling carried out in the company's name by a fellow director and minority shareholder, he is guilty of conspiracy. Consent, that is agreement or adherence to the agreement, can be inferred if it is proved that he knew what was going on and the intention to participate in the furtherance of the criminal purpose is also established by his failure to stop the unlawful activity.” 47 It is not necessary, therefore, for the conspirators all to join the conspiracy at the same time. The parties must, however, be sufficiently aware of the surrounding circumstances and share the same object for it properly to be said that they were acting in concert at the time of the acts complained of: Kuwait at [111]. In most cases it will be necessary to scrutinise the acts relied upon to see what inferences can be drawn as to the existence or otherwise of the alleged conspiracy or combination, for it will be a rare case in which there will be evidence of the agreement itself: Kuwait at [112].”
“Finally, there is the question of intention. In the Lumley v Gye tort, there must be an intention to procure a breach of contract. In the unlawful means tort, there must be an intention to cause loss. The ends which must have been intended are different. South Wales Miners' Federation v Glamorgan Coal Co Ltd[1905] AC 239 shows that one may intend to procure a breach of contract without intending to cause loss. Likewise, one may intend to cause loss without intending to procure a breach of contract. But the concept of intention is in both cases the same. In both cases it is necessary to distinguish between ends, means and consequences. One intends to cause loss even though it is the means by which one achieved the end of enriching oneself. On the other hand, one is not liable for loss which is neither a desired end nor a means of attaining it but merely a foreseeable consequence of one's actions.”
“Lesser states of mind do not suffice. A high degree of blameworthiness is called for, because intention serves as the factor which justifies imposing liability on the defendant for loss caused by a wrong otherwise not actionable by the claimant against the defendant. The defendant's conduct in relation to the loss must be deliberate. In particular, a defendant's foresight that his unlawful conduct may or will probably damage the claimant cannot be equated with intention for this purpose. The defendant must intend to injure the Claimant. This intent must be a cause of the defendant's conduct, in the words of Cooke J in Van Camp Chocolates Ltd v Aulsebrooks Ltd[1984] 1 NZLR 354 , 360.”
“I disagree with this notion that it is fully functioning technology that is ready to be exploited because you have to remember that we are dealing here with an opportunity that some entrepreneur has looked at and thought: I could write a software service or a software product to exploit this. But they need to get feedback. They need to be in a virtuous circle of learning about how their product is used by their customers so they can perfect it. I think this notion that you could just sit in a darkened room and bash out some code and then say “Right, now we are going to exploit this” is wrong ...”
“2.1 The Vendor acknowledges and agrees that the [SIC] Innovator shall be entitled to deduct from the Purchase Price and prior to the release of the balance thereof the following: (i) the Guarantee Sum and arrange for the deposit for a minimum period of thirty-six (36) calendar months of such sum in a bank account with such bank or other financial institution nominated by Innovator as security for the Loan of a value similar to the Guarantee which the Vendor acknowledges to be utilised to repay the loan. (ii) the Fee to enable Innovator to pay fees in connection with offering of the technology partnership having acquired the Products including (without prejudice to the generality of the following) to settle all legal fees, accounting fees, fees relating to taxation advice, banking fees and margin spreads, other professional fees, valuation fees, marketing fees and commission to independent financial advisors. 2.2 The Vendor shall accordingly be entitled to the sum remaining out of the Purchase Price after the deduction of the sums referred to in clause 2.1 such sum being£825,000 . The Vendor acknowledges and agrees that it shall have no entitlement to receive any further payment pursuant to the Sale and Purchase Agreement.”
“I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v. Simmonds [1971] 1 W.L.R. 1381 , 1384–1386 and Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen [1976] 1 W.L.R. 989 ,is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of “legal” interpretation has been discarded. The principles may be summarised as follows: (1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. (2) The background was famously referred to by Lord Wilberforce as the “matrix of fact,” but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. (3) [concerning pre-contractual negotiations, not relevant here] (4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co. Ltd. v. Eagle Star Life Assurance Co. Ltd. [1997] A.C. 749 . (5) The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera S.A. v. Salen Rederierna A.B. [1985] A.C. 191 , 201: “if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.”
“(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’ (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”
“In the case…of a contingent condition precedent, a contract will not be binding until the specified event occurs. But in the case of a promissory condition precedent, the contract will be binding, albeit that performance of an obligation by one party will be a condition precedent to the liability of the other…[The distinction between contingent and promissory conditions precedent may well turn on whether the agreement purports to impose on A…an obligation to bring about the stipulated event; if it does, the condition is or [is] likely to be promissory; if not, the condition is, or is likely to be contingent…”
“The commercial success of the Business will depend solely on the exploitation of the Technology. Exploiter has prepared the Exploitation Financial Forecast and has assured InnovatorOne PLC that the projections are realistic, based on today’s knowledge[...]”.(page 4) (5) Description of the Technology under “The Partnership’s activity”. (page 8) (6) Under “The Partnership’s Income”; “The Partnership will receive its income from commercial exploitation of the acquired Technology [...]”
“Powers of attorney are strictly construed and are interpreted as giving only such authority as they confer expressly or by necessary implication. The following are the most important rules of construction: (1) The operative part of a deed is controlled by the recitals where there is ambiguity; (2) Where authority is given to do particular acts, followed by general words, the general words are restricted to what is necessary for the proper performance of the particular acts; (3) General words do not confer general powers, but are limited to the purpose for which the authority is given, and are construed as enlarging the special powers only when necessary for that purpose; (4) A deed must be construed so as to include all incidental powers necessary for the effective execution of the power it confers.”
“1. I, the subscriber as above, hereby appoint DAVID GATES of Moneygrowth Financial Services (or failing him, PAUL T CARTER of InnovatorOne PLC) to be my true and lawful attorneys (“the Attorneys”) and I hereby authorise the Attorneys: (1) (a) to sign, execute and deliver on my behalf whether under hand or as a deed a partnership deed in relation to a limited partnership as GenTech Partnership 2 LLP of which David Gates will be the Managing Partner (“the Partnership Deed”). (2) (b) to execute, deliver and issue on my behalf any deed, document, notice, instrument or other communication whatsoever required pursuant to the Partnership Deed referred to above and the Information Memorandum dated12th November 2003 entitled The GenTech Partnership 2 LLP issued by Moneygrowth Financial Services. 2. I hereby ratify and confirm and agree to ratify and confirm the execution of the documents referred to above and irrevocably and unconditionally undertake to indemnify the Attorneys…from the exercise, or purported exercise, in good faith, of any of the powers conferred in this Deed. (3) This Power of Attorney is irrevocable until the expiry of the period of one year from the date hereof after which it shall be automatically revoked and of no further effect.” 839. The IM referred to “GT2A” (The GenTech Partnership 2 LLP) whilst the Technology was acquired by “GT2 B” (The Gentech 2 Technology Partnership LLP). The background to this discrepancy in names was the same as for Charit. The intention had been to incorporate a new LLP with the name GT2 A but by mistake it was given the name GT2 B. GT2 A was renamed at the same time as GT2 B was incorporated so that from30 September 2003 onwards there was no longer any LLP named GT2 A and the only GT2 LLP was GT2 B. 840. The Claimants submitted that because the P/A related only to GT2 A Mr Gates only had authority to enter the subscribers as members of this now non-existent LLP. He could not make them members of GT2 B. 841. For reasons already given I am satisfied that authority was given to make the subscribers partners in the LLP “formed for the trade of the Business” which was GT2 B. That was the purpose of the P/A. Further, the P/A was given in respect of a LLP “of which David Gates will be Managing Partner”
“I hereby apply to the Bank for a personal loan as stipulated above and my application is conditional upon the loan being granted by the Bank. I undertake immediately to provide any financial and/or personal information requested by the Bank at any time.”
“Where an act is done purportedly in the name or on behalf of another by a person who has no actual authority to do that act, the person in whose name or on whose behalf the act is done may, if the third party had believed the act to be authorised, by ratifying the act, make it as valid and effectual, subject to the provisions of Article 14 to 20, as it if had been originally done by his authority, whether the person doing the act was an agent exceeding his authority, or was a person having no authority to act for him at all.”
“In order that a person may be held to have ratified an act done without his authority, it is necessary that, at the time of the ratification, he should have full knowledge of all the material circumstances in which the act was done, unless he intended to ratify the act and take the risk whatever the circumstances may have been. But knowledge of the legal effect of the act may be imputed to him and it is not necessary that he should have notice of collateral circumstances affecting the nature of the act.”
“Where the principal is aware of the agent’s acts and the terms of the purported contract, it appears not to be necessary that the principal had realised…that his agent had exceeded his authority. Assent may otherwise be manifested by the principal’s commencing to perform the contract, and where, to the principal’s knowledge, the third party commences to act on it, the principal may become estopped from disowning it.”
“There is… in principle no necessity for the ratification to be communicated to the other party: it seems long established that it operates, if proved, as a unilateral manifestation of will”
“Some months ago you were informed that MFC Merchant Bank SA was no longer prepared to fund the debt portion of your Capital Contribution and that Fairbairn Bank had agreed to replace MFC. Although a number of partners completed the application forms required by Fairbairn, many did not. As a consequence no loans were ever drawn down. Furthermore, since the Partnership was formed, legislation has been changed which could have a negative impact on the loan repayment arrangements and the ability to claim the tax relief. As a result, when one also takes into account the attitude that HMRC has been taking in respect of technology and other partnerships, it is considered that the most appropriate course of action would be not to draw down the loan and amend the tax return previously prepared. To achieve this, partners are being requested to vote on the attached resolutions. I do not intend to host a meeting for this purpose, rather relying on a postal /fax vote.” 873. The Arte partners subsequently voted in October 2006 to accept Mr Carter’s proposal not to drawdown the personal loan and to amend the tax returns to reflect the fact that no personal loan had been drawn down. The Voting Forms expressly stated: “I ... being a Member of the Partnership, vote as follows ... The Partnership hereby agrees not to drawdown the loans with Fairbairn Bank ... the tax return previously prepared for the Partnership be amended to reflect the fact that the loans with Fairbairn Bank have not been drawn down”. 874. These October 2006 documents support CB’s case that the Arte subscribers knew that there had been no bank loan. The Claimants, however, contended that the position was far from clear. When Mr Carter wrote in March 2006 he referred to MFC no longer wishing to “continue” funding. This suggested that a loan was in place and the issue was whether Fairbairn would take it over. When Mr Carter wrote in October 2006 the position was still not made clear. This was supported by the evidence of Professor Von Oppell who said that it was not until December 2006 that the loan position became clear to him. 875. Although I accept that there were a number of features of the implementation of the Arte Scheme which were not made clear to subscribers, I am satisfied that ultimately the position in relation to the bank loan was made clear. The letter of October 2006 states that “no loans were ever drawn down”
“C. Making a representation 215. A representation is a statement of fact made by the representor to the representee on which the representee is intended and entitled to rely as a positive assertion that the fact is true. In order to determine whether any and if so what representation was made by a statement requires (1) construing the statement in the context in which it was made, and (2) interpreting the statement objectively according to the impact it might be expected to have on a reasonable representee in the position and with the known characteristics of the actual representee: see Raiffeisen, supra, at [81]; Kyle Bay Ltd v Underwriters Subscribing under Policy No. 01957/08/01 [2007] Lloyd’s Rep IR 460, 466, at [30]–[33], per Neuberger LJ. 216. In order to be actionable a representation must be as to a matter of fact. A statement of opinion is therefore not in itself actionable. However, as stated in Clerk & Lindsell para 18-13: “A statement of opinion is invariably regarded as incorporating an assertion that the maker does actually hold that opinion; hence the expression of an opinion not honestly entertained and intended to be acted upon amounts to fraud.” 217. In addition, at least where the facts are not equally well known to both sides, a statement of opinion by one who knows the facts best may carry with it a further implication of fact, namely that the representor by expressing that opinion impliedly states that he believes that facts exist which reasonably justify it – see Clerk and Lindsell para 18-14, citing among other cases Smith v Land and House Property Corp(1884) 28 Ch D 7 , 15, per Bowen LJ, and Brown v Raphael[1958] Ch 636 . 218. A statement as to the future may well imply a statement as to present intention: “that which is in form a promise may be in another aspect a representation” - Clerk & Lindsell, para 18-12, quoting Lord Herschell in Clydesdale Bank Ltd v Paton[1896] AC 381 , 394. 219. Silence by itself cannot found a claim in misrepresentation. But an express statement may impliedly represent something. For example, a statement which is literally true may nevertheless involve a misrepresentation because of matters which the representor omits to mention. The old cases about statements made in a company prospectus contain illustrations of this principle – for example, Oakes v Turquand (1867) LR 2 HL 325, where Lord Chelmsford said (at 342-3): “... it is said that everything that is stated in the prospectus is literally true, and so it is; but the objection to it is, not that it does not state the truth as far as it goes, but that it conceals most material facts with which the public ought to have been made acquainted, the very concealment of which gives to the truth which is told the character of falsehood.” 220. In relation to implied representations the “court has to consider what a reasonable person would have inferred was being implicitly represented by the representor’s words and conduct in their context”: per Toulson J in IFE v Goldman Sachs[2007] 1 Lloyd’s Rep 264 at para. 50. That involves considering whether a reasonable representee in the position and with the known characteristics of the actual representee would reasonably have understood that an implied representation was being made and being made substantially in the terms or to the effect alleged. 221. In a deceit case it is also necessary that the representor should understand that he is making the implied representation and that it had the misleading sense alleged. A person cannot make a fraudulent statement unless he is aware that he is making that statement. To establish liability in deceit it is necessary “to show that the representor intended his statement to be understood by the representee in the sense in which it was false” – per Morritt LJ in Goose v Wilson Sandford & Co. [2001] Lloyd’s Rep PN 189 at para. 41. In other cases of misrepresentation this is not a requirement, but one would generally expect it to be reasonably apparent to both representor and representee that the implied representation alleged was being made. 222. It is necessary for the statement relied on to have the character of a statement upon which the representee was intended, and entitled, to rely. In some cases, for example, the statement in question may have been accompanied by other statements by way of qualification or explanation which would indicate to a reasonable person that the putative representor was not assuming a responsibility for the accuracy or completeness of the statement or was saying that no reliance can be placed upon it. Thus the representor may qualify what might otherwise have been an outright statement of fact by saying that it is only a statement of belief, that it may not be accurate, that he has not verified its accuracy or completeness, or that it is not to be relied on: Raiffeisen, supra, at [86]. 224. As further observed in Raiffeisen, at [87], the claimant must show that he in fact understood the statement in the sense (so far as material) which the court ascribes to it; and that, having that understanding, he relied on it. Analytically, this is probably not a separate requirement of a misrepresentation claim but rather is part of what the claimant needs to show in order to prove inducement. D. Fraud 225. The classic statement of the mental element required to found a claim in deceit remains that of Lord Herschell in Derry v Peek: “First, in order to sustain an action of deceit, there must be proof of fraud and nothing short of that will suffice. Secondly, fraud is proved when it is shown that a false representation has been made (1) knowingly, (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement from being fraudulent, there must, I think, always be an honest belief in its truth.” 226. As to recklessness, even if the party making the representation may have had no knowledge of its falsehood, he will still be responsible if he had no belief in its truth and made it, “not caring whether it was true or false” - See Clerk & Lindsell, para 18-21. As Lord Herschell put it Derry v Peek, supra, at 368 (and 361): “Any person making such a statement must always be aware that the person to whom it is made will understand, if not that he who makes it knows, yet at least that he believes it to be true. And if he has no such belief he is as much guilty of fraud as if he had made any other representation which he knew to be false, or did not believe to be true.” 227. It is not necessary that the maker of the statement was ‘dishonest’ as that word is used in the criminal law - Standard Chartered Bank v Pakistan National Shipping Corp (No. 2) [2000] 1 Lloyd’s Rep. 218, 224. Nor is the defendant’s motive in making the representation relevant: “If fraud be established it is immaterial that there was no intention to cheat or injure the person to whom the false statement was made.” - Clerk & Lindsell, para 18-20, quoting Bradford Third Benefit Building Society v Borders[1941] 2 All ER 205 , 211 per Viscount Maugham; and see also Derry v Peek, supra, at 409. What is required is dishonest knowledge, in the sense of an absence of belief in truth - The Kriti Palm, supra, para 257 (Rix LJ); and see also para 258, quoting Armstrong v Strain[1951] TLR 856 , 871, per Devlin J (“When Judges say, therefore, that wickedness and dishonesty must be present, they are not requiring a new ingredient for the tort of deceit so much as describing the sort of knowledge that its necessary”). 228. The ingredient of dishonesty (in the above sense) must not be watered down into something akin to negligence, however gross - The Kriti Palm, supra, para 256. However, the unreasonableness of the grounds of the belief, though not of itself supporting an action for deceit, will be evidence from which fraud may be inferred. As Lord Herschell pointed out in Derry v Peek, supra, at 376, there must be many cases: “where the fact that an alleged belief was destitute of all reasonable foundation would suffice of itself to convince the court that it was not really entertained, and that the representation was a fraudulent one.” 229. Where a serious allegation (such as deceit) is in issue, this does not mean the standard of proof is higher. However, the inherent probability or improbability of an event is itself a matter to be taken into account when weighing the probabilities and deciding whether, on balance, the event occurred. The more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established - The Kriti Palm, supra, para 259, quoting Lord Nicholls in re H (Minors)[1996] AC 563 , 586.” “A statement of opinion is invariably regarded as incorporating an assertion that the maker does actually hold that opinion; hence the expression of an opinion not honestly entertained and intended to be acted upon amounts to fraud.”
“To put the matter another way, the claimant must show that it was intended that he was intended to act on the representation, rather than it being aimed solely at someone else. There may be said to be three types of representees: first, persons to whom the representation is directly made and their principals; secondly, persons to whom the representor intended or expected the representation to be passed on; and thirdly, members of a class at which the representation was directed……Nor is it always necessary that the actual representation should reach the representee. If a person asks an agent to find some property for him, and the agent, relying on the fraudulent inducements of the vendor, recommends the vendor's property, the buyer will be entitled to relief for misrepresentation even though the agent did not actually pass on the fraudulent statements.”
“IMPORTANT NOTICE ABOUT THIS MEMORANDUM …this Information Memorandum…provides information only”
“....the argument that there was some free standing duty of care owed by GSI to IFE in this case is, in the light of the terms of the Important Notice, hopeless. Nothing could be clearer than that GSI were not assuming any responsibility to the participants: Hedley Byrne v Heller & Partners [1964] A.C. 465. The foundation for liability for negligent misstatements demonstrates that where the terms on which someone is prepared to give advice or make a statement negatives any assumption of responsibility, no duty of care will be owed. Although there might be cases where the law would impose a duty by virtue of a particular state of facts despite an attempt not “to assume responsibility” the relationship between GSI either as arranger or as vendor would not be one of them. I entirely agree with the judge on this aspect.”
“505. The authorities accordingly establish that: (1) It is possible for parties to agree that one party has not made any pre-contract representations to the other about a particular matter, or that any such representations have not been relied on by the other party, even if they both know that such representations have in fact been made or relied on, and that such an agreement may give rise to a contractual estoppel. (2) If a term is to be construed as having this effect (and thereby prevent from arising the ordinary consequences which would otherwise follow as a matter of law) clear words are necessary – see Peekay para. 57; Board of Trade v Steel Brothers & Co. Ltd. [1952] 1 Lloyd’s Rep. 87 at p95. (3) Whether or not a clause or collection of clauses has this effect is a matter of construction of the contract. (4) The principle may not apply where there has been a misrepresentation as to the effect of the contractual documents which give rise to the estoppel – see Peekay para. 60; Springwell para. 166. (1) It is possible for parties to agree that one party has not made any pre-contract representations to the other about a particular matter, or that any such representations have not been relied on by the other party, even if they both know that such representations have in fact been made or relied on, and that such an agreement may give rise to a contractual estoppel. (2) If a term is to be construed as having this effect (and thereby prevent from arising the ordinary consequences which would otherwise follow as a matter of law) clear words are necessary – see Peekay para. 57; Board of Trade v Steel Brothers & Co. Ltd. [1952] 1 Lloyd’s Rep. 87 at p95. (3) Whether or not a clause or collection of clauses has this effect is a matter of construction of the contract. (4) The principle may not apply where there has been a misrepresentation as to the effect of the contractual documents which give rise to the estoppel – see Peekay para. 60; Springwell para. 166. 506. The cases provide clear examples of clauses which will be construed as having the effect of precluding claims for misrepresentation - see, for example, in the banking context the provisions in the Raiffeisen case (para. 229): “RZB acknowledges and agrees that ... RBS and its Affiliates, officers, employees, agents, and professional advisers do not make any representation or warranty, express or implied as to, or assume any responsibility for, the accuracy, adequacy, reliability or completeness of any of the Confidential Information.” “The contents of this Memorandum have not been independently verified. No representation, warranty or undertaking (express or implied) is made, and no responsibility is accepted as to the adequacy, accuracy, completeness or reasonableness of this Memorandum or any further information, notice or other document at any time supplied in connection with the Facility.”
“...the essential question is whether the clause in question goes to whether the alleged representation has been made (or, I would add was intended to be understood and acted on as a representations), or whether it excludes or restricts liability in respect of representations made, intended to be acted on and in fact acted on; and that question is one of substance not form...”
“231.1 Representations as to tax including: 231.1.1 the relevant deadlines for the availability of relevant tax relief had not expired or had been complied with (“the deadlines representation”). 231.1.2 that tax relief would be available as set out and in the proportions and amounts set out in the IM (“the tax relief representation”). 231.1.3 that the Partnership had or would incur qualifying expenditure on ICT as set out in the IM (“the expenditure incurred representation”). 231.1.4 Representations as to the business of the Partnership including that the Partnership and its business were real and not a sham in the sense that that there was never any intention on the part its promoters, operators or administrator that it be a real and genuine business or have any real purpose other than as a vehicle to obtain tax relief (“the business representations” ). 231.2 Representations as to the Technology including: 231.2.1 that there were rights to the Technology as described (“the Technology rights representation” ); 231.2.2 that there was a real possibility of deriving profit from exploitation of the Technology rights (“the exploitation representation”). 231.2.3 that the Technology Developer had developed the Technology rights (“the Technology development representation” ). 231.2.4 that the acquisition cost for the Technology rights bore a reasonable relationship to its true market value (“the Technology price representation” ). 231.2.5 that the Technology rights acquired or to be acquired had been independently and properly valued (“the valuation representation” ) 231.3 Representations as to funding including that Bank funding for the required Loan had been secured (“the Bank Loan representations”). 231.4 that the Technology rights, the proposed business, its prospects, its funding and its proposed operators (including the Administrator, Operators and the Exploiter ) and advisers (including legal and technology advisers ) had been assessed with appropriate due diligence (“the due diligence representation” ); 231.5 that the IM contained all such information as investors and their professional adviser would reasonably require and reasonably expect to find for the purpose of making an informed assessment of the issuers of the IM, the Technology rights, the Partnership including its proposed business and prospects and its management and advisers (“the information representation”).” 231.1.1 the relevant deadlines for the availability of relevant tax relief had not expired or had been complied with (“the deadlines representation”). 231.1.2 that tax relief would be available as set out and in the proportions and amounts set out in the IM (“the tax relief representation”). 231.1.3 that the Partnership had or would incur qualifying expenditure on ICT as set out in the IM (“the expenditure incurred representation”). 231.1.4 Representations as to the business of the Partnership including that the Partnership and its business were real and not a sham in the sense that that there was never any intention on the part its promoters, operators or administrator that it be a real and genuine business or have any real purpose other than as a vehicle to obtain tax relief (“the business representations” ). 231.2 Representations as to the Technology including: 231.2.1 that there were rights to the Technology as described (“the Technology rights representation” ); 231.2.2 that there was a real possibility of deriving profit from exploitation of the Technology rights (“the exploitation representation”). 231.2.3 that the Technology Developer had developed the Technology rights (“the Technology development representation” ). 231.2.4 that the acquisition cost for the Technology rights bore a reasonable relationship to its true market value (“the Technology price representation” ). 231.2.5 that the Technology rights acquired or to be acquired had been independently and properly valued (“the valuation representation” ) 231.3 Representations as to funding including that Bank funding for the required Loan had been secured (“the Bank Loan representations”). 231.4 that the Technology rights, the proposed business, its prospects, its funding and its proposed operators (including the Administrator, Operators and the Exploiter ) and advisers (including legal and technology advisers ) had been assessed with appropriate due diligence (“the due diligence representation” ); 231.5 that the IM contained all such information as investors and their professional adviser would reasonably require and reasonably expect to find for the purpose of making an informed assessment of the issuers of the IM, the Technology rights, the Partnership including its proposed business and prospects and its management and advisers (“the information representation”).”
“The commercial success of the Business will solely depend upon the exploitation of the Technology”
“234.1 “Your funds will be held will be held in the [CB] Client Account until the Partnership has been established”
“237.1 The addressee of the letter had properly and validly been made a partner of the Partnership named in the Welcome Letter (“the WL partner representation”). 237.2 The formalities for establishing the Partnership and constituting the addressee of the letter as a partner thereof had been completed and had been completed in accordance with the IM and the P /A (“the WL formalities representation” ).”
“239.1 The addressee of the letter had properly and validly been made a partner of the Partnership named in the SLL (“the SLL partner representation”). 239.2 The formalities for establishing the Partnership and constituting the addressee of the letter at a partner thereof had been completed and had been completed in accordance with the IM and the P /A (“the SLL formalities representation”). 239.3 The audited accounts and the Partnership tax return gave a fair and accurate view of the financial position of the Partnership and, in particular, of the qualifying expenditure and losses incurred by the Partnership (“the SLL accounts representation”). 239.4 The statement of individual losses accurately set out the losses in respect of which the addressee of the letter was entitled to claim tax relief upon those losses (“the SLL tax representation”).”
“241.1 Letters despatched in January 2004 which represented that “there do not appear to be any particular areas of the structure which have been highlighted as potential causes for concern.” 241.2 Letters despatched in September 2004 which again represented that that “the structure is robust” and that the HMRC’s three areas of concern “can be resolved”. 241.3 The calling of EGMs in January 2005 (and thereafter) which in and of itself represented to the Claimants that (a) the Partnerships had been properly formed and (b) they had been properly constituted as Partners of those Partnerships. 241.4 Representations made by Mr Carter at EGMs on 18.01.05, 19. 01.05 and 20.01.05, 23.03.05 and 29.06.05 which included representations to the effect that: 241.4.1 Innovator had been approached by Technology Developers to raise finance to bring Technology to the market. 241.4.2 Innovator had undertaken extensive due diligence on the Technology acquired by the Partnerships assisted by independent assessors and advisers who had “nothing to do with Bjorn Stiedl”. 241.4.3 Neither Innovator nor its consultants were involved in ascertaining the purchase price. 241.4 .4 There was no evidence of any link between the Technology Vendors and Mr Stiedl. 241.4.5 Mr Stiedl had been a consultant to Innovator whose role had been limited to determining which technologies met the business requirements of the scheme and who had not been involved in owning or introducing the technologies.”
“16. First, the question in every case is whether the payer and the recipient intended that the money passing between them was to be at the free disposal of the recipient: Re Goldcorp Exchange[1995] 1 AC 74 and Twinsectra at [74]. 17. Second, the mere fact that the payer has paid the money to the recipient for the recipient to use it in a particular way is not of itself enough. The recipient may have represented or warranted that he intends to use it in a particular way or have promised to use it in a particular way. Such an arrangement would give rise to personal obligations but would not of itself necessarily create fiduciary obligations or a trust: Twinsectra at [73]. 18. So, thirdly, it must be clear from the express terms of the transaction (properly construed) or must be objectively ascertained from the circumstances of the transaction that the mutual intention of payer and recipient (and the essence of their bargain) is that the funds transferred should not be part of the general assets of the recipient but should be used exclusively to effect particular identified payments, so that if the money cannot be so used then it is to be returned to the payer: Toovey v Milne (1819) 2 B&A 683 and Quistclose Investments at 580B. 19. Fourth, the mechanism by which this is achieved is a trust giving rise to fiduciary obligations on the part of the recipient which a court of equity will enforce: Twinsectra at [69]. Equity intervenes because it is unconscionable for the recipient to obtain money on terms as to its application and then to disregard the terms on which he received it from a payer who had placed trust and confidence in the recipient to ensure the proper application of the money paid: Twinsectra at [76]. 20. Fifth, such a trust is akin to a “retention of title” clause, enabling the recipient to have recourse to the payer's money for the particular purpose specified but without entrenching on the payer's property rights more than necessary to enable the purpose to be achieved. It is not as such a “purpose” trust of which the recipient is a trustee, the beneficial interest in the money reverting to the payer if the purpose is incapable of achievement. It is a resulting trust in favour of the payer with a mandate granted to the recipient to apply the money paid for the purpose stated. The key feature of the arrangement is that the recipient is precluded from misapplying the money paid to him. The recipient has no beneficial interest in the money: generally the beneficial interest remains vested in the payer subject only to the recipient's power to apply the money in accordance with the stated purpose. If the stated purpose cannot be achieved then the mandate ceases to be effective, the recipient simply holds the money paid on resulting trust for the payer, and the recipient must repay it: Twinsectra at [81], [87], [92] and [100]. 21. Sixth, the subjective intentions of payer and recipient as to the creation of a trust are irrelevant. If the properly construed terms upon which (or the objectively ascertained circumstances in which) payer and recipient enter into an arrangement have the effect of creating a trust, then it is not necessary that either payer or recipient should intend to create a trust: it is sufficient that they intend to enter into the relevant arrangement: Twinsectra at [71]. 22. Seventh, the particular purpose must be specified in terms which enable a court to say whether a given application of the money does or does not fall within its terms: Twinsectra at [16].”
“Partners’ contributions to the Partnership will be used to buy the rights to the Technology, pay initial fees and all ordinary ongoing administrative expenses. Initial fees include commissions payable to independent financial advisors for introducing Partners, fees payable to the bank for arranging the loan to the Partnership, Partnerships’ incorporation fees and all legal and professional advice relating to the various contracts to be entered into.”
“285. If, contrary to the Claimants’ primary contentions in the previous paragraphs, subscription money was not held by C-B on trust for the subscriber concerned, it was held by C-B on trust for: [.1] Innovator and/or, [.2] the Partnership to which a subscriber’s Application Form pertained, [.3] and in either case such money was held on trust by Innovator and/or the Partnership (i.e. a sub-trust) for the subscriber concerned pending fulfilment of the conditions previously stated.” [.1] Innovator and/or, [.2] the Partnership to which a subscriber’s Application Form pertained, [.3] and in either case such money was held on trust by Innovator and/or the Partnership (i.e. a sub-trust) for the subscriber concerned pending fulfilment of the conditions previously stated.”
“Section 3 - Locus Standi for a Breach of Trust Action Assignees and sub-trusts 39-73 We consider elsewhere the circumstances in which vested or contingent interests may be alienated, either by assignment or resettlement. Once [the interest is] validly assigned, the assignee will stand in the position of the original beneficiary and have the same rights to take steps to ensure that any breach of trust is prevented or remedied. In a case where an interest is settled into a separate settlement, we consider that it is clear that the trustees of that settlement have locus standi to sue the trustees of the head-settlement since the trustees of the head-settlement have duties to the trustees of the separate settlement in their capacity as such. We also consider that it is clear that the beneficiaries of the separate settlement can sue the trustees of the head-settlement for breach of trust if there are special circumstances justifying a derivative action by the beneficiaries against the trustees of the head settlement. It is not clear, however, that the beneficiaries of the separate settlement have locus standi to sue the trustees of the head-settlement in the absence of special circumstances”
“The principle is that the court will not insist on circuitry of action if the same result can be achieved by direct action which legitimately could be achieved by more circuitous action.”
“If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach, then the court may relieve him either wholly or partly from personal liability for the same.”
“61. An intention to create legal relations is normally presumed in the case of an express or apparent agreement satisfying the first requirement: see Chitty on Contracts (28th Ed.) Vol. 1 para.2–146. It is otherwise, when the case is that an implied contract falls to be inferred from parties' conduct: Chitty, para.2–147. It is then for the party asserting such a contract to show the necessity for implying it. As Morison J said in his paragraph 12(1), if the parties would or might have acted as they did without any such contract, there is no necessity to imply any contract. It is merely putting the same point another way to say that no intention to make any such contract will then be inferred. 62. That the test of any such implication is necessity is, in my view, clear, both on the authority of The Aramis [1989] 1 Ll.R. 213, Blackpool and Fylde Aero Club Ltd. v. Blackpool B.C.[1990] 1 WLR 1195 , The Hannah Blumenthal[1983] AC 854 and The Gudermes [1993] 1 Ll.R. 311 cited by the Vice-Chancellor, and also a matter of consistency. It could not be right to adopt a test of necessity when implying terms into a contract and a more relaxed test when implying a contract — which must itself have terms.”
“In my judgment no implied contract can be inferred unless it is necessary to give business reality to the transaction, and unless conduct can be identified referable to the contract contended for which is inconsistent with there being no such contract; and it is fatal to the implication of such a contract if the parties would or might have acted exactly as they did in the absence of such a contract..”
“One distinction exists [between express and implied contracts]...in relation to the ease with which an express or implied contract may be established. Where there is an express agreement on essentials of sufficient certainty to be enforceable, an intention to create legal relations may commonly be assumed. It is otherwise when the case is that a contract should be implied from the parties’ conduct. It is then for the party asserting a contract to show the necessity for implying it.”
“270.1 the dealings in subscription money in various C -B accounts in relation to the Innovator Schemes and related arrangements (including CLFL arrangements ), including by reason of giving and /or receiving instructions in relation to the same and also controlling, disbursing or receiving the same; 270.2 the conditions for the disbursement of subscription money and that such conditions had not been fulfilled; 270.3 the representations in the IMs were false; 270.4 there was no real or valuable Technology for any of the Schemes; 270.5 the acquisition of the Technology rights had not been conducted at arms length and did not follow any or any proper due diligence; 270.6 the Bridging Loans were funded by the misappropriation of subscription monies and did not amount to proper or enforceable loans at all; 270.7 the Loans provided by MFC and Bank Leumi were paper entries only and did not amount to proper or enforceable loans at all; 270.8 the backdating of documents; 270.9 Mr Stiedl lay behind the Schemes and was the effective owner and controller of Innovator.”
“…there is a standard which combines an objective test and a subjective test, and which requires that before there can be a finding of dishonesty it must be established that the defendant’s conduct was dishonest by the ordinary standard of reasonable and honest people and that he himself realised that by those standards his conduct was dishonest. I will term this the ‘combined test’”
“For the reasons given by my noble and learned friend, Lord Hutton, I consider that those principles require more than knowledge of the facts which make the conduct wrongful. They require a dishonest state of mind, that is to say, consciousness that one is transgressing ordinary standards of honest behaviour.”
“The judge stated the law in terms largely derived from the advice of the Board given by Lord Nicholls in Royal Brunei Airlines Sdn Bhd v Tan[1995] 2 AC 378 . In summary, she said that liability for dishonest assistance requires a dishonest state of mind on the part of the person who assists in the breach of trust. Such a state of mind may consist in knowledge that the transaction is one in which he cannot honestly participate (for example, misappropriation of other people’s money), or it may consist in suspicion combined with a conscious decision not to make inquiries which might result in knowledge: see Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd[2003] 1 AC 469 . Although a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective. If by ordinary standards a defendant’s mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards. The Court of Appeal held this to be a correct state [sic] of the law and their Lordships agree.”
“Their Lordships accept that there is an element of ambiguity in these remarks which may have encouraged a belief, expressed in some academic writing, that the Twinsectra case had departed from the law as previously understood and invited inquiry not merely into the defendant’s mental state about the nature of the transaction in which he was participating but also into his views about generally acceptable standards of honesty. But they do not consider that this is what Lord Hutton meant. The reference to ‘what he knows would offend normally accepted standards of honest conduct’ meant only that his knowledge of the transaction had to be such as to render his participation contrary to normally acceptable standards of honest conduct. It did not require that he should have had reflections about what those normally acceptable standards were.”
“The legal test for dishonesty in this context has been much discussed. The principal authorities are the decisions of the Privy Council in Royal Brunei Airlines v Tan[1995] 2 AC 378 , of the House of Lords in Twinsectra Ltd –v- Yardley[2002] 2 AC 164 and of the Privy Council in Barlow Clowes International Ltd –v- Eurotrust International Ltd[2006] 1 WLR 1476 . The two decisions of the Privy Council represent the law to be applied in this jurisdiction: see Abou-Rahmah –v- Abacha [2007] 1 ALL ER (Comm) 827, at [66] – [70]. The test as to dishonesty, distilled from the above authorities, is as follows. Dishonesty is synonymous with a lack of probity. It means not acting as an honest person would in the circumstances. The standard is an objective one. The application of the standard requires one to put oneself in the shoes of the defendant to the extent that his conduct is to be assessed in the light of what he knew at the relevant time, as distinct from what a reasonable person would have known or appreciated. For the most part dishonesty is to be equated with conscious impropriety. But a person is not free to set his own standard of honesty. This is what is meant by saying that the standard is objective. If by ordinary objective standards, the defendant's mental state would be judged to be dishonest, it is irrelevant that the defendant has adopted a different standard or can see nothing wrong in his behaviour.”
“First, on any current understanding of the law on accessory liability (see the analysis of recent authority by the Chancellor in Starglade Properties Ltd v Nash[2010] EWCA Civ 1314 ) , although the test of dishonesty or put another way the standard of honesty, is an objective one, there being a single standard of honesty objectively determined by the court and the views of the Defendant on what is dishonest are irrelevant, (see Barlow Clowes Ltd v Eurocrest Ltd [2006]1 WLR 1476 where the Privy Council explained and interpreted the decision of the House of Lords in Twinsectra v Ltd v Yardley[2002] 2 AC 164 ) ), the subjective state of mind of the Defendant, and what he knew or did not know about the circumstances of the impugned transaction, is still highly relevant since it is to the conduct of the Defendant in the light of that subjective state of mind that the court has to apply the objective test.”
“An alternative (and preferable) arrangement would be for the Partnership to obtain third party finance (e.g., from a Finance Company) and to use the borrowed money to pay the outstanding balance of the Purchase Price to the Technology Vendor which would then place the moneys on deposit with the Finance Company.”
“I hope that I made it very clear in the instructions to Counsel that in the event that Counsel was of the opinion that the Scheme as a whole was in danger of being a [CIS], he would review the amendments that I had made to the Partnership Agreement and the Service Agreement; and suggest any other amendments that may be appropriate. In my opinion the advice merely states that the Scheme is a [CIS] without taking any account of the amendments that I have made to the documentation”
“So that if the members were in a position to hold a meeting and direct things, then they had control over day to day management, day to day management being in the hands of Mr Carter here, for example, but the control of Mr Carter being in the hands of the members in general meetings.”
“(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.” 1144. It was the Claimants’ case that: (1) The arrangements were with respect to property (money and technology or technology rights), “the purpose or effect” of which was to enable participants in the arrangements to receive profits or income arising from the “acquisition, holding, management or disposal of the property or sums paid out of such profits or income”: s. 235(1). (2) Investors did not have actual day to day control over the management of the property of the Scheme s. 235(2). (3) The property was managed as a whole by the operators of the scheme and (from when investors were made partners (if at all)) their contributions and the profits and income (if any) were pooled: s. 235(3). 1145. The Claimants contended that the arrangements were not precluded from being a CIS by any exemption contained in the CIS Order (SI 2001/1062) made under FSMA s. 235(5). 1146. It was further contended that the arrangements for each scheme were each different (e.g. different participants, different property, different Partnership, different technology and generally different technology vendors and exploiters). The CIS constituted by each Scheme was different from that in the case of each other Scheme - see the analyses of Laddie J in see The Russell-Cooke Trust Company v. Elliott (No 1,23 March 2001 unreported; and No 2,16 July 2001 unreported). 1147. The Claimants further emphasised that the arrangements do not fall to be considered at two stages i.e. (1) when investors’ funds were placed in the CB client account and (2) when they were aggregated and transferred (if at all) to a Partnership. The “purpose and effect” of the arrangements for each Scheme were for the purpose of a collective arrangement (investment in a particular Partnership). In the case of each Scheme, when subscription money was first placed in the CB client account for the purposes of such an arrangement, the Scheme was from that time (if not earlier, when first promoted) a CIS: see The Russell-Cooke Trust Company v. Elliott (No 2), paragraphs 15 to 17, per Laddie J. 1068. The Schemes involved Regulated activities 1148. The Claimants contended that each of the Innovator Schemes involved various “regulated activities”. 1149. FSMA s. 22, entitled “The classes of activity and categories of investment”, defines a “regulated activity”
“The notion of ‘day to day control’ is vague and FSMA does not give any further guidance on how it should be interpreted. Furthermore, the phrase “whether or not they have the right to be consulted or to give directions”, which purports to clarify the “day to day control of the property” notion, is also obscure. There is not a clear picture as to which level of control the “right to be consulted or to give directions” encompasses” (para. 2.5). More specifically, the report comments as follows (para. 3.9): “Day to day control over the management of...” is not a wholly easy concept. “Control over the management of...” is presumably intended to be distinguished from “management of...” i.e. arrangements will not qualify simply because the participants do not manage the property themselves. On the other hand “day to day control” must clearly mean more than “have the right” to be consulted or to give directions”
“The purpose of object of the legislation and the regulatory regime created pursuant to the legislation would be easily defeated if the court felt obliged to rely solely upon a strict view of the legal rights and duties created by the documentation and was required to ignore the realities of the scheme as it was designed to operate in practice” 1171. In the present case the Claimants did not give directions or assert their right to exercise day to day control sufficiently to be regarded as being in effective control over the management of the property. The Defendants contended this was the Claimants’ own choice and responsibility. However, the degree of control actually exercised was as envisaged by the IM and the documentation. It was thought that the documentation would mean that that degree of control was sufficient, but I find that it was not. 1172. The Defendants further contended that because the day to day control requirement was not satisfied because of the way the Schemes were in fact operated by the partners the Schemes were not CISs from the outset, but only became so once the subscribers had become partners and then failed to exercise the requisite control. 1173. However, I agree with the Claimants that what matters is the “purpose or effect” of the arrangements (FSMA s.235 (1)). The arrangements were in fact operated in the manner always envisaged. Further, as Laddie J stated in The Russell-Cooke Trust Company v. Elliott (No 2) at para. 17: “It seems to me that the words ‘purpose or effect’ are broad enough to cover all stages from the preparatory step of gathering in funds up to and including the making of the communal investment. Therefore, the fact that an investor’s funds may rest in client account pending putting in place a particular loan, does not stop it being in a CIS. If the money was placed there for the purpose of such an arrangement, it is from that time in a CIS. The ‘arrangements’ to which s.75 (1) relate are those which enable, or are intended to enable, the communal funds to be invested. They include the preparatory steps which allow individual investors to park their money in the Elliott’s’ client account with a view to future investment in a communal property-based loan as well as the investment itself.” 1174. I respectfully agree and reject the Defendants’ two stage approach. In the present case the subscribers’ funds were placed “irrevocably” in the CB client account for the purpose of investment in the Scheme, which Scheme was a CIS. 1175. In relation to the stage at which subscription money was being held in the CB client account CB relied on the common accounts exception (CIS Order, A6) which provides that: “Common accounts Arrangements do not amount to a collective investment scheme if— (a) they are arrangements under which the rights or interests of participants are rights to or interests in money held in a common account; and (b) that money is held in the account on the understanding that an amount representing the contribution of each participant is to be applied— (i) in making payments to him; (ii) in satisfaction of sums owed by him; or (iii) in the acquisition of property for him or the provision of services to him”. 1176. It was argued that if subscription monies held in the CB client account were beneficially owned by the Claimant investors, this exception would apply given that, on this hypothesis, (1) the client account would be an arrangement under which the Claimants had rights or interests in money held in a common account and (2) that money was held on the basis that an amount representing each investor’s contribution was to be applied in the acquisition of technology. 1177. I agree with the Claimants that the common accounts exclusion relates to circumstances in which money in the account is held on the understanding that an amount representing the contribution of each participant is to be applied only for the benefit of that participant, as opposed to being applied for the collective benefit of more than one participant. The prime example is a solicitor’s client account. The way in which the exclusion works was explained by Laddie J. in Russell-Cooke No. 2 as follows at [35]: “All the work in this provision is done by the words ‘to him’, ‘by him’ and for him’. In this legislation the distinction between the singular and the plural is important. A distinction must be drawn between sums held in a common account to be used for making payments on behalf of ‘them’ – that is to say, all the persons whose money is in the account – and sums held for making payments on behalf of ‘him’, that is to say the individual. In the former case, the account is common both as to what it contains and as to what it will be used for. In the latter, it is only common in the first sense. The co-residence in the account of sums from different individuals may be an administrative convenience, but it does not mean that those individuals are clubbing together to make a common investment. It is only common investment with which those statutory provisions are concerned. It follows that paragraph 35(d) does not apply to the investments in issue here.” 1178. For similar reasons the exception does not apply to the subscription monies held in the CB account. It was being held for the purposes of collective investment. Further, on my findings they could be applied for that purpose even before the subscriber was made partner. (2). Whether the Schemes involved Regulated activities and a contravention of the General Prohibition (a) “Establishing” a CIS 1179. This regulated activity is defined in RAO, art. 51: “Establishing etc. a collective investment scheme 51.—(1) the following are specified kinds of activity— (a) establishing, operating or winding up a collective investment scheme;” 1180. I am satisfied that Innovator established the Schemes and therefore a CIS. 1181. Whether the individual Defendants did likewise mainly depends on whether their involvement in the establishment of the CIS was “carried on by way of a business” by them (see s.22 FSMA). 1182. This issue was considered by Neuberger J in the case of Secretary of State for Trade and Industry v Grant (15 September 2000 )(unreported) in which he stated as follows: “97. In my judgment, even where a person is the controlling shareholder and sole director of a company, then, absent special circumstances, it is the company who will be carrying on the business, and the shareholder/director who will have the secondary liability. 98. I do not understand Mr Green to disagree with that proposition, which appears to me to receive support from two decisions of the Court of Appeal. First, in Re Brauch[1978] 1 Ch. 316 , the point is well summarised in the head note at 316F: “In running the business of his company a debtor was not “carrying on business” within the meaning of Section 4(1)(d) of the Bankruptcy Act s1914 even though he was in complete control” (see per Goff LJ at 328F). 99. Secondly, in R -v- Wilson[1997] 1 All ER 119 , the Court of Appeal had to consider a case where a person had been convicted of “carrying on any insurance business in the United Kingdom” without authorisation contrary toSection 2(1) of the Insurance Companies Act 1982 . In that case, again quoting from the head note, at 119J–120A: “A person breacheds2 of the 1982 Act if he sold insurance business on his own account without authorisation. If, however, he did so on behalf of an unauthorised company, so that any contracts of insurance which he made were with the company rather than with himself, then the company was guilty of the offence and he was only guilty of aiding and abetting that offence if he knew that the company was unauthorised.” 100 I see no reason not to apply the same principles when identifying the person who carries on investment business for the purposes of Sections 1 to 6.” 1183. In the Grant case it was held that Mr Grant was carrying on business. The names in which he carried on the business, BIG and Courtney, were held to be names rather than companies. 1184. Even if they had been companies Neuberger J held that there were “special circumstances” that would justify piercing the corporate veil against him in view of the fact that the whole business was held to be a sham and a fraud. He stated that : “110. It is right to add this. If BIG and Courtney do or did exist, then, at least so far as Mr Grant is concerned, I do not consider that it would enable him to contend that he could only be secondarily, as opposed to primarily, liable. In The Glastnos [1991] 1 Lloyds LR 482, having rejected the contention that certain arrangements were shams, Steyn J accepted “the principle that where the advice of incorporation is manipulated to obtain fraudulent ends, a court may pierce the corporate veil in order to do justice”. (However he considered that the facts of that case did not justify application of that principle). If, contrary to my view, BIG and Courtney are corporate entities, then it seems to me, particularly in light of Mr Grant's previous involvement with Inner Sanctum, and indeed, his conduct generally, the facts of this case do justify invoking the principle identified by Steyn J.” 1185. Neuberger J also considered the position of Mr Hesling who he held to be acting as agent or employee of Mr Grant, and therefore “unlike with Mr Grant, one cannot simply say that Mr Hesling effectively was BIG or Courtney”
“The ‘operator’ of an OIEC has a less obvious meaning. FSMA states that it means the company itself. This is even if the OEIC engages another person to manage its property on its behalf. Hence for the purpose of applying the FSMA provisions, the OEIC is still the ‘operator’. The FSA Handbook definition is more qualified and depends on the types of OEIC and which parts of the Handbook are in issue. In the case of an OEIC within the UCITS Directive which has appointed a person to manage ‘the scheme’, it always means that manager. Otherwise a distinction needs to be drawn between the use of the term ‘operator’ in the Enforcement Guide (EG) and elsewhere in the Handbook. In EG the ‘operator’ is the company. Elsewhere it is either the company ‘or, if applicable’ the ACD in the case of an ICVC and any person who, under the constitution or founding arrangements of the scheme, is responsible for the management of the property held for or within the scheme in the case of other OEICs.” 1190. One is therefore looking for the person (or persons, as there may be more than one) responsible for the management of the property as a whole. 1191. In relation to these Schemes it was Innovator and the LLP which was primarily responsible for the management of the property of the Schemes as a whole. In so far as individuals were involved in that management they were doing so on behalf of Innovator or the LLP. They were not carrying on business on their own behalf. 1192. In relation to CB the Claimants submitted that the consideration as to who is the operator must take into account what was the property of the CIS at the material time; that money in the CB client account was the relevant property so long as it stayed there and that CB not anybody else was the operator at that time in relation to that money. 1193. However, as already held, those monies were not held under a subscription money agreement, nor was CB a trustee of those monies for subscribers. The monies were held to the order of CB’s client, Innovator. CB’s role was to accept the instructions given in relation to those monies. It was not for CB to decide what was to be done with those monies or to manage them in any meaningful way. 1194. CB relied by analogy on the Grant case. In that case Neuberger J had to consider whether Mr Hesling was an operator of the CIS by virtue of being the holder of a bank account into which investors’ money was paid. He concluded that that did not render him an operator of the schemes in question: “Of course, because the account was in his name, Mr Hesling was the legal owner of the money in the account, or, strictly, he was the person legally entitled to enforce the contract, which was embodied in the account, with the bank. However, it seems to me clear that he did not have any beneficial interest in the money (save only to the extent of taking out his pay). I think there is also force in Mr Croxford's reliance on the definition of “the operator” in Section 75(8), which shows that the legislature envisaged the manager, rather than the trustee, as the person “operating” a unit trust. He says that this tends to support the view that, as a mere trustee of monies obtained from investors in the scheme, Mr Hesling should not be treated as “operating” the scheme. Accordingly, in my view, paragraph 16 does not apply to Mr Hesling.” 1195. In this case the position is, if anything, more clear cut since Mr Hesling was far more substantively involved in other regulated activity in furtherance of the schemes than CB. 1196. In support of their argument that CB was nevertheless an “operator” the Claimants relied on the “common accounts” exemption. It was submitted that this demonstrates that, but for that exemption, the common accounts arrangement would be a CIS. However, this is concerned with the pooling aspect of a CIS. It is not addressing the management aspect. 1197. The Claimants also relied on the fact that FSMA s. 327 disapplies the general prohibition in relation to certain activities carried on by members of a profession, but that those activities do not include the activity of establishing or operating a CIS. However, that begs the question and does not assist in determining whether a particular activity is establishing or operating a CIS. 1198. For the reasons outlined above and those given by CB I accordingly reject the Claimants’ case that CB was an operator of the scheme. 1199. I also reject the Claimants’ case that CLFL was an operator. It had a facilitatory rather than a managerial role in respect of the scheme property. 1200. In relation to GT2 Mr Gates’ primary role in relation to operation was as administrator on behalf of the LLP. In so far as he had any operational role on behalf of Moneygrowth Financial Services it was on behalf of MFSL not MFS and Mr Gates was not himself carrying on the business. (c) Arranging deals in investments 1201. This regulated activity is defined in RAO, art. 25 which provides that: “Arranging deals in investments 25.—(1) Making arrangements for another person (whether as principal or agent) to buy, sell, subscribe for or underwrite a particular investment which is— (a) a security, (2) Making arrangements with a view to a person who participates in the arrangements buying, selling, subscribing for or underwriting investments falling within paragraph (1)(a), (b) or (c) (whether as principal or agent) is also a specified kind of activity”. 1202. The Claimants contended that arrangements were made to deal in investments within the meaning of RAO Article 25 through arranging for investors to subscribe for a particular investment, i.e. units in a particular named partnership which was a CIS, and for the Partnership to “sell” such investment.” 1203. There are a number of exclusions to the application of Article 25, found at Articles 26 to 36 of RAO. Article 26 is entitled “Arrangements not causing a deal” and provides: “There are excluded from Article 25(1) arrangements which do not or would not bring about the transaction to which the arrangements relate”. 1204. What constitutes “making arrangements” was considered in In re The Inertia Partnership LLP [2007] Bus LR 879 where Mr Jonathan Crow QC sitting as a deputy High Court Judge said at [39]: “… (1) the word ‘arrangements’ is, depending on the context, capable of having an extremely wide meaning, embracing matters which do not give rise to legally enforceable rights; (2) in articles 25 and 26, the word ‘arrangements’ is used in contradistinction to the word ‘transaction’; (3) in article 26, the word ‘transaction’ is plainly a reference to the purchase, sale, etc of shares contemplated by article 25; (4) as such, a person may make ‘arrangements’ within article 25 even if his actions do not involve or facilitate the execution of each step necessary for entering into and completing the transaction (i.e. the purchase, sale, etc of the shares); (5) the availability of the exception in article 26 is essentially a question of fact: as a matter of causation, did the arrangements bring about the transaction (i.e. the purchase, sale, etc of the shares)?” 1205. In line with this guidance, for something to count as “making arrangements”, it must “involve or facilitate the execution” of sufficient of the steps necessary for entering into and completing the transaction such that, as a matter of causation, those arrangements bring about the transaction – i.e. the acquisition or sale of the units in the CIS. 1206. I accept and find that Innovator did make such arrangements. 1207. I also accept that for those subscribers who took out CLFL loans those were arrangements which did sufficiently bring about the transaction to fall outside the Article 26 exception and therefore CLFL was thereby arranging deals in investments. 1208. I do not accept that the directors of Innovator and CLFL were carrying on business themselves. They were acting on behalf of their companies. The Claimants relied upon the broad approach on this issue adopted by Neuberger J in Grant. He found that in making arrangements Mr Hesling was doing so as his business rather than on behalf of Mr Grant (see paragraphs 127-130). However, that was a case of unusual facts and focused on the importance of the operation of the bank account by Mr Hesling in the fraudulent scheme. Here there was no fraud and I do not consider that Mr Stiedl and Mr Carter, let alone Mr Bailey, can be said to have been carrying on business themselves in carrying out their duties as directors. 1209. I accept and find that in relation to GT2 MFS and therefore Mr Gates were arranging deals in investments. 1210. In relation to Mr Bailey as a partner of CB and CB it was contended that they arranged deals in investments in relation to the making arrangements for a LLP Deed and D/A. This drafting/witnessing role did not bring about the transactions in any meaningful sense, let alone sufficiently to fall outside the exception. 1211. Although this was not pursued by the Claimants in closing (on the basis that any agreement entered into as a principal is excluded by RAO article 28), the same would apply to CB’s role in holding subscription monies and distributing such monies on instruction. Further, holding monies previously subscribed by investors did not bring about a deal in investments: it was the consequence of such a deal having been completed through the irrevocable application made and the contract with Innovator made thereby. 1212. Mr Bailey acting in his capacity as solicitor, never did any deals in investments whether on behalf of the Claimants (for whom CB were not acting), or Innovator. Any role CB played in relation to the investments that the Claimants made was an administrative role undertaken as agent for Innovator (or the LLPs): any acts or steps taken were not done by CB on its own account and did not themselves bring about the transaction to which any arrangements related. 1213. In the light of that clear finding it is not necessary to determine whether CB could in any event have relied on the s. 327 exemption. 1214. Finally, it is to be noted that it was not alleged in closing that Mr Roper or the LLPs arranged deals in investments. (3) Whether the Schemes involved controlled activities and a contravention of the Financial Promotion Restriction 1215. I accept and find that the Schemes involved controlled activities and controlled investments for the reasons given by the Claimants, save in relation to the alleged subscription money agreement which is considered further below. 1216. It was contended on behalf of the Defendants that the restriction was disapplied in this case because there was no evidence of any direct promotion by Innovator or its representatives to any Lead Claimant. Promotion was always through an IFA or other adviser. 1217. This involves a consideration of the “Investment Professionals” exemption in FPO art. 19 which disapplies the financial promotion restriction in relation to two categories of communication made or directed to recipients who were “investment professionals” as defined (FPO, art. 19(5)) including “an authorised person”: (1) a “communication which ... is made only to recipients whom the person making the communication reasonably believes on reasonable grounds to be investment professionals” (art. 19(1)(a)); and (2) a “communication which …may reasonably be regarded as directed only at such recipients” (art. 19(2)(b)). 1218. For the purpose of the second category of communication, further provisions were made as to when a communication could reasonably be regarded as directed at investment professionals (art. 19(2)-(4)). A communication was treated as made only to or directed only at investment professionals even if also made or directed to other persons to whom it may be “lawfully be communicated. (art. 19(6))”. 1219. The difficulty with any reliance on the Investment Professionals exemption in the present case is that the IMs were in terms directed to both HWNIs and investment professionals. They were not therefore directed only at investment professionals. Nor could the communication made by the IM be regarded as being made only to investment professionals in circumstances where it was expressly addressed to HWNIs and would be expected to be, and on a number of occasions was, provided to them, even if that was done through an IFA. The term “communicate” includes “causing a communication to be made” (FSMA s.21 (13)). 1220. It was thought at the time that reliance could be placed on the HNWI exception (FPO art. 48). However, this was not the case. The exception only applied in relation to communications to HNWIs as defined, a definition which required the individual concerned to have signed a statement in the terms specified in the 12 months prior to the relevant communication, which most investors had not. Further, it did not apply to communications in respect of an investment under the terms of which the investor could incur a liability or obligation to pay or contribute more than he committed by way of investment (art.48 (1)(d) and (5)). Most importantly it did not apply to communications in respect of an investment for units in a CIS (other than one which invested wholly or predominantly in stocks and shares in an unlisted company or instruments acknowledging indebtedness in such a company). 1221. I accordingly conclude and find that there was a contravention of the financial promotion restriction. 1222. The contravention was by Innovator, the LLP and, in relation to GT2 Mr Gates through MFS. 1223. In respect of Mr Stiedl and Mr Carter it has to be shown that they were causing the communication to be made “by way of business”
“(1) An agreement made by a person in the course of carrying on a regulated activity in contravention of the general prohibition is unenforceable against the other party. (2) The other party is entitled to recover- (a) any money or other property paid or transferred by him under the agreement; and (b) compensation for any loss sustained by him as a result of having parted with it. (3) “Agreement” means an agreement– (a) made after this Section comes into force; and (b) the making or performance of which constitutes, or is part of, the regulated activity in question. (4) This Section does not apply if the regulated activity is accepting deposits”. 1225. Section 28 provides: “28. - Agreements made unenforceable by section 26 or 27. (1) This section applies to an agreement which is unenforceable because of section 26 or 27. (2) The amount of compensation recoverable as a result of that section is - (a) the amount agreed by the parties; or (b) on the application of either party, the amount determined by the court. (3) If the court is satisfied that it is just and equitable in the circumstances of the case, it may allow – (a) the agreement to be enforced; or (b) money and property paid or transferred under the agreement to be retained. (4) In considering whether to allow the agreement to be enforced or (as the case may be) the money or properly paid or transferred under the agreement to be retained the court must – (a) if the case arises as a result of section 26, have regard to the issue mentioned in subsection (5); or (b) if the case arises as a result of section 27, have regard to the issue mentioned in subsection (6). (5) The issue is whether the person carrying on the regulated activity concerned reasonably believed that he was not contravening the general prohibition by making the agreement. (6) The issue is whether the provider knew that the third party was (in carrying on the regulated activity) contravening the general prohibition. (7 ) If the person against whom the agreement is unenforceable - (a ) elects not to perform the agreement, or (b ) as a result of this section, recovers money paid or other property transferred by him ' under the agreement, he must repay any money and return any other property received by him under the agreement. (8) If property transferred under the agreement has passed to a third party, a reference in section 26 or 27 or this section to that property is to be read as a reference to its value at the time of its transfer under the agreement. (9) The commission of an authorisation offence does not make the agreement concerned illegal or invalid to any greater extent than is provided by section 26 or 27.” 1226. The Claimants contended that the alleged CB subscription money agreements were s. 26 agreements (i.e. agreements of a kind referred to in FSMA s. 26). It was said that each such agreement was an agreement made between a Claimant and CB and by CB in the course of carrying on the regulated activities (arranging deals in investments and/or operating a CIS) in contravention of the general prohibition. 1227. I have, however, found that no such agreement was made. In any event, if there was such an agreement it was not made by CB in the course of carrying out regulated activities. 1228. The Claimants further contended that each D/A and related LLP Deed (or partnership agreement) were s.26 agreements (if made). They submitted that if any of the following agreements were made between any of the Claimants and any of the following s. 26 counterparties and were binding upon the former, the agreement was made by or on behalf of the relevant s.26 counterparties in the course of carrying on the regulated activities (arranging deals in investments, establishing and/or operating a CIS) in contravention of the general prohibition. (1) YTC scheme: (i) s.26 agreements:5 December 2002 LLP Deed and4 April 2003 D/A; (ii) s.26 counterparties: YTC LLP and Mr Carter. (2) Etrino scheme: (i) s.26 agreements:5 December 2002 LLP Deed and the4 April 2003 D/A (ii) s.26 counterparties: Etrino-LLP and Mr Carter. (3) Optibet scheme: (i) s. 26 agreements:24 March 2003 LLP Deed, the4 April 2003 D/A, the1 September 2003 TTA; (ii) s. 26 counterparties: Mr Carter and Optibet-2-LLP (4) Charit Scheme; (i) s. 26 agreements: the30 September 2003 LLP Deed and the23 March 2004 D/A; (ii) s. 26 counterparties: Mr Carter and Charit-2-LLP; (5) GT2 Scheme: (i) s.26 agreements: the27 February 2003 LLP Deed, the24 March 2003 LLP Deed, the 26.03.03 LLP Deed and the23 April 2004 D/A; (ii) s.26 counterparties: Mr Carter and GT2A-LLP and GT2B- LLP; (6) Arte Scheme: (i) s.26 agreements: the27 November 2003 LLP Deed and the08 December 2004 D/A; (ii) s.26 counterparties: Mr Carter and Arte-LLP; 1229. I accept that these agreements were made and that they were s.26 agreements in relation to the LLP. I do not accept, however, that they were made by Mr Carter in the course of carrying out regulated activities since he personally did not carry out such activities. The relevant counterparty is accordingly the LLP. 1230. Pursuant to s.26 these agreements are unenforceable by the LLP against the Claimants unless the Court is satisfied that it is just and equitable for the agreements to be enforced pursuant to s.28. The LLPs are not represented and no case has been advanced or submission made to the Court that it would be just and equitable to allow enforcement. Equally no case has been advanced and no submission has been made to the Court that the LLP should retain any money paid or transferred to it. 1231. However, the target of the Claimants’ monetary claims under s.26 is not the LLPs but rather alleged third party recipients, including CB and Technology Vendors. 1232. The Claimants case was that they are entitled to recover money paid under the s. 26 agreements in respect of that Scheme (together with compensation of loss sustained as a result of having parted with it) against the Defendant s. 26 counterparties and recipients identified in the second and third columns, by reason of FSMA s. 26(1). Scheme Relevant counterparties Relevant recipients All CB CB YTC YTC-LLP, Mr Carter Innovator, Mr Stiedl, Ellsburg, CLFL, Mr Gates (via OIGL). Etrino Etrino LLP, Mr Carter Innovator, Mr Stiedl, PPP, FGT, CLFL Optibet Mr Carter and Optibet-2-LLP ABS Global, CLFL, Coloured Industry Inc., Covington Inc. Innovator, Mr Stiedl, Tracksys Inc Charit Charit-2-LLP, Mr Carter Innovator, Vermilion, Mr Stiedl GT2 Mr Carter and GT2A-LLP and GT2B-LLP IP Software Services Inc, Innovator, Mr Stiedl Arte Arte LLP, Mr Carter Arte Inc., Innovator, Mr Carter 1233. The basis of this claim is that s.26 founds a right of recovery not only against the counterparty to the agreement but also against third party recipients of any monies paid under the agreement. 1234. In support of these claims the Claimants relied upon Scott LJ’s judgment in SIB v Pantell (No 2)[1993] Ch 256 (CA) who considered obiter that, in relation to the similarly worded,s. 5 of Financial Services Act 1986 (“the 1986 Act”), recovery may be available against a relevant recipient. He stated that: “Section 5 of the Act provides remedies for individual investors who have entered into investment agreements with persons carrying on unauthorised investment business. Subsection (1) provides that any such agreement ‘shall be unenforceable against the other party [i.e. the investor]; and that party shall be entitled to recover any money or other property paid or transferred by him under the agreement, together with compensation for any loss sustained by him as a result of having parted with it’ ” (270 C-D) The restitutionary and compensatory provisions of section 5 do not in terms identify the person or persons against whom the remedies are available. But it is difficult to see how the section 5 restitutionary remedy could be available against anyone other than the other party to the transaction in question or the party to whom, under the transaction in question, the investor’s money had been paid or transferred. Whether the compensatory remedy available ‘together with’ the restitutionary remedy, could be obtained against an accomplice who was neither a party to the transaction nor a person to whom money or property of the investor had been transferred is equally doubtful. These difficulties do not, however, have to be resolved on this appeal”. (270 G-H) 1235. The context of s.26(2) is an agreement made between a person in the course of carrying out a regulated activity and “the other party” (s.26 (1)). That agreement is rendered unenforceable against the “other party”
“Tort duties 305. In relation to the promotion of each Scheme, Innovator, its controllers and its actual and shadow directors (including Mr Stiedl, Mr Carter and Mr Bailey ), CPUK, Mr Gates and MFS Ltd., each owed to prospective investors and subscribers a duty of care in tort, including: 305.1 to comply with the FSMA regulatory regime, including the financial promotion restriction; 305.2 to the same effect as the financial promotion rules; 305.3 to ensure and /or to take reasonable steps to ensure that the representations made in each of the Scheme Documents communicated to prospective investors, subscribers and/or intermediaries were each clear, accurate, fair and not misleading and/or gave an adequate description of the nature of the investment and the risks involved. 306. In establishing and /or operating the arrangements constituted by each Scheme and related arrangements and /or arranging for investment in the Scheme, Innovator, CLFL, MFS Ltd., the directors and shadow directors of those companies, and Mr Stiedl, Mr Carter, Mr Bailey, Mr Roper in all their various capacities, as well as CB (by Mr Bailey and Mr Roper), each owed to subscribers (including the Claimants) a duty of care in tort, including: 306.1 to comply with the FSMA regulatory regime; 306.2 to ensure and /or to take reasonable steps to ensure that the representations made in each of the Scheme Documents communicated to prospective investors, subscribers and /or intermediaries were each clear, accurate, fair and not misleading and /or gave an adequate description of the nature of the investment and the risks involved; 306.3 to ensure and /or to ensure that the arrangements were honestly and properly established operated and arranged.”
“The test of tortious liability in negligence for pure financial loss 4. The parties were agreed that the authorities disclose three tests which have been used in deciding whether a defendant sued as causing pure economic loss to a claimant owed him a duty of care in tort. The first is whether the defendant assumed responsibility for what he said and did vis-…-vis the claimant, or is to be treated by the law as having done so. The second is commonly known as the threefold test: whether loss to the claimant was a reasonably foreseeable consequence of what the defendant did or failed to do; whether the relationship between the parties was one of sufficient proximity; and whether in all the circumstances it is fair, just and reasonable to impose a duty of care on the defendant towards the claimant (what Kirby J in Perre v Apand Pty Ltd(1999) 198 CLR 180 , para 259, succinctly labelled “policy”). Third is the incremental test, based on the observation of Brennan J in Sutherland Shire Council v Heyman(1985) 157 CLR 424 , 481, approved by Lord Bridge of Harwich in Caparo Industries plc v Dickman[1990] 2 AC 605 , 618, that: “It is preferable, in my view, that the law should develop novel categories of negligence incrementally and by analogy with established categories, rather than by a massive extension of a prima facie duty of care restrained only by indefinable ‘considerations which ought to negative, or to reduce or limit the scope of the duty or the class of person to whom it is owed’.” 1258. Lord Bingham then made 5 general observations: “4. First, there are cases in which one party can accurately be said to have assumed responsibility for what is said or done to another, the paradigm situation being a relationship having all the indicia of contract save consideration. Hedley Byrne would, but for the express disclaimer, have been such a case. White v Jones and Henderson v Merrett Syndicates Ltd, although the relationship was more remote, can be seen as analogous. Thus, like Colman J (whose methodology was commended by Paul Mitchell and Charles Mitchell, “Negligence Liability for Pure Economic Loss” (2005) 121 LQR 194, 199), I think it is correct to regard an assumption of responsibility as a sufficient but not a necessary condition of liability, a first test which, if answered positively, may obviate the need for further inquiry. If answered negatively, further consideration is called for. 5. Secondly, however, it is clear that the assumption of responsibility test is to be applied objectively (Henderson v Merrett Syndicates Ltd[1994] 2 AC 145 , 181) and is not answered by consideration of what the defendant thought or intended. ... The problem here is, as I see it, that the further this test is removed from the actions and intentions of the actual defendant, and the more notional the assumption of responsibility becomes, the less difference there is between this test and the threefold test. 6. Thirdly, the threefold test itself provides no straightforward answer to the vexed question whether or not, in a novel situation, a party owes a duty of care. 7. Fourthly, I incline to agree with the view ... that the incremental test is of little value as a test in itself, and is only helpful when used in combination with a test or principle which identifies the legally significant features of a situation. The closer the facts of the case in issue to those of a case in which a duty of care has been held to exist, the readier a court will be, on the approach of Brennan J adopted in Caparo Industries plc v Dickman, to find that there has been an assumption of responsibility or that the proximity and policy conditions of the threefold test are satisfied. The converse is also true. 8. Fifthly, it seems to me that the outcomes (or majority outcomes) of the leading cases cited above are in every or almost every instance sensible and just, irrespective of the test applied to achieve that outcome. This is not to disparage the value of and need for a test of liability in tortious negligence, which any law of tort must propound if it is not to become a morass of single instances. But it does in my opinion concentrate attention on the detailed circumstances of the particular case and the particular relationship between the parties in the context of their legal and factual situation as a whole.”
“It will be recalled that Waite L.J. took the view that in the context of directors of companies the general principle must not “set at naught” the protection of limited liability. In Trevor Ivory Ltd. v. Anderson [1992] 2 N.Z.L.R. 517, 524, Cooke P. expressed a very similar view. It is clear what they meant. What matters is not that the liability of the shareholders of a company is limited but that a company is a separate entity, distinct from its directors, servants or other agents. The trader who incorporates a company to which he transfers his business creates a legal person on whose behalf he may afterwards act as director. For present purposes, his position is the same as if he had sold his business to another individual and agreed to act on his behalf. Thus the issue in this case is not peculiar to companies. Whether the principal is a company or a natural person, someone acting on his behalf may incur personal liability in tort as well as imposing vicarious or attributed liability upon his principal. But in order to establish personal liability under the principle of Hedley Byrne , which requires the existence of a special relationship between plaintiff and tort easer, it is not sufficient that there should have been a special relationship with the principal. There must have been an assumption of responsibility such as to create a special relationship with the director or employee himself. The touchstone is not the state of mind of the defendant. An objective test means that the primary focus must be on things said or done by the defendant or on his behalf in dealings with the plaintiff. Obviously, the impact of what a defendant says or does must be judged in the light of the relevant contextual scene. Subject to this qualification the primary focus must be on exchanges (in which term I include statements and conduct) which cross the line between the defendant and the plaintiff. Sometimes such an issue arises in a simple bilateral relationship. In the present case a triangular position is under consideration: the prospective franchisees, the franchisor company, and the director. In such a case where the personal liability of the director is in question the internal arrangements between a director and his company cannot be the foundation of a director's personal liability in tort. The inquiry must be whether the director, or anybody on his behalf, conveyed directly or indirectly to the prospective franchisees that the director assumed personal responsibility towards the prospective franchisees… That brings me to reliance by the plaintiff upon the assumption of personal responsibility. If reliance is not proved, it is not established that the assumption of personal responsibility had causative effect.”
“(1) The principals in a practice must ensure that their practice is supervised and managed so as to provide for: (a) compliance with principal solicitors' duties at law and in conduct to exercise proper supervision over their admitted and unadmitted staff; (b) adequate supervision and direction of clients' matters; (c) compliance with the requirements of sections 22(2A) and 23(3) of theSolicitors Act 1974 ,section 9(4) of the Administration of Justice Act 1985 andsection 84(2)(e) of the Immigration and Asylum Act 1999 as to the direction and supervision of unqualified persons; (d) effective management of the practice generally. (2) Every practice must have at least one principal who is a solicitor qualified to supervise. (3)(a) Except as provided in (b) below, every office of the practice must have at least one solicitor qualified to supervise, for whom that office is his or her normal place of work. (b) Without prejudice to the requirements of paragraph (1) of this rule, an office which undertakes only property selling and ancillary mortgage related services as defined in rule 6 of these rules, survey and valuation services, must be managed and supervised to the following minimum standards: (i) the day to day control and administration must be undertaken by a suitably qualified and experienced office manager who is a fit and proper person to undertake such work; and for whom that office is his or her normal place of work; and (ii) the office must be supervised and managed by a solicitor qualified to supervise, who must visit the office with sufficient frequency and spend sufficient time there to allow for adequate control of and consultation with staff, and if necessary consultation with clients. (4) This rule is to be interpreted in the light of the notes, and is subject to the transitional provisions set out in note (k). (5) (a) This rule applies to private practice, and to solicitors employed by a law centre. (b) The rule also applies to other employed solicitors, but only: (i) if they advise or act for members of the public under the legal aid scheme; or (ii) if, in acting for members of the public, they exercise any right of audience or right to conduct litigation, or supervise anyone exercising those rights.”
“As a starting point, ensuring we had a risk management policy in place and ensuring it was kept up-to-date and that it was known about by all those in the firm, and we had a system for doing that. That would be the primary responsibility. Looking at experience to see what that led us to change, if necessary, learning from experience. Then, less directly for me but an important risk management procedure was our Lexcel accreditation where we had an external auditor from 2003 onwards who would review – indeed reviewed our systems and expressed a view as to whether they were adequate, which they were.”
“a fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.”
“The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith: he must not make a profit out of his trust; he may not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or for a third party without the informed consent of his principal.”
“The reason fiduciary duties do not commonly arise in commercial settings outside the settled categories of fiduciary relationships is that it is normally inappropriate to expect a commercial party to subordinate its own interests to those of another commercial party. But if that expectation is not appropriate in the circumstances of the relationship between the parties then fiduciary duties will arise.”
“For this purpose the plaintiff must show, first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets he received are traceable to a breach of fiduciary duty.”
“The recipient's state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt.”
“…my responsibility was: can I come up with a sensible business proposal, one that I believed in and where the numbers actually added up and could fit in with the framework...when I went into a meeting with Mr Stiedl, who is a strong personality, I knew pretty much what I felt I could accept, I knew what the structure was, I had a clear idea in my own mind what I could accept and what I couldn’t accept. .. If I had said to Mr Stiedl: I am not accepting 35 million, it’s 50 million. I am pretty confident I would have been out on Berkeley Street reasonably quickly and unlikely to be able to find another purchaser at that value. So when you are in dealing situation, you are going to be reading what the other guy is looking for and what he wants, and what you yourself must have, and that was the situation as far as I was concerned in the deal with Innovator. All I was concerned about was if I did a deal, was it one that was in line with what I felt I needed to make it happen.”