Nugee: Claimants failed to prove any loss
The Court of Appeal has dismissed a challenge to the striking out of £68m negligence claim against Yorkshire law firm Lupton Fawcett (LF) following a failed property development schemes.
The claimants alleged that, had they been properly advised by the Leeds law firm, they would not have “promoted various investment schemes, accepted investment monies and taken out loans, and would not have suffered substantial losses as a result”.
Mr Justice Sheldon struck out their claim for professional negligence in April 2024. LF was acquired last October by Flint Bishop.
The claims arose from investment schemes linked to Gavin Woodhouse, who the Serious Fraud Office has been investigating for suspected fraud and money laundering since 2021.
All 43 claimant companies, which were insolvent and in liquidation and acted through their liquidators, were used as special purpose vehicles for investment schemes through which investors were invited to buy long leasehold interests in individual rooms in hotels, care homes or student accommodation, either off-plan or in a pre-existing building.
Over £68m was raised from investors in the UK and overseas, who were offered “very generous returns”.
One of the questions on which LF was instructed to advise was whether the companies constituted collective investment schemes (CIS) for the purposes of the Financial Services and Markets Act 2000 (FSMA), which are heavily regulated.
Nugee LJ recounted that LF “took advice from counsel but different counsel advised different things”, until in November 2017 LF advised Mr Woodhouse that, in the light of the latest advice from counsel, he should become regulated by the Financial Conduct Authority.
The claimants argued that LF should have advised much earlier that the schemes were CISs, or that at the very least there was a serious risk that they were. Had it done so, the schemes would not have been promoted and no investments would have been made.
In the event CISs are promoted by people not authorised by the regulator, then under section 26 of the FSMA they are liable to the investors.
LF’s case was that it was instructed to advise on whether the schemes were FSMA compliant “and that was the scope of their duties”.
Striking out the claim, Sheldon J said the claimants had failed to establish that they had suffered any loss as a result of the alleged negligent advice by LF.
Receipt of the investment money was not itself “a loss causing damage” – rather, they were monies “that had a zero effect: penny in, penny out”.
Nugee LJ agreed, saying the claimants sought to lay at LF’s door “all the consequences of the way the schemes were operated, and the entire loss of the sums contributed by investors save for sums misappropriated by Mr Woodhouse and possibly an unspecified (but not very large) amount for the operation of the Ponzi scheme”.
He went on: “But none of these losses were attributable to the schemes being CISs. In the counterfactual world in which the schemes were not CISs, the schemes would have been operated in exactly the same way, the sums contributed by investors would have been lost in exactly the same way, and the claimants would have been in exactly the same position (save for not being exposed to potential claims under section 26 FSMA).
“So the loss of the investors’ money, and the fact that when the schemes collapsed the claimants no longer had the £68m to repay the investors, was not something for which Lupton Fawcett bears any responsibility.
“These losses have nothing to do with whether the schemes were CISs or not, and, as with the commissions and fees, are not within the risks of harm which Lupton Fawcett’s duty of care was intended to guard against.”
Further, if the schemes had not been CISs, it was “highly probable” that the investors would have had claims in tort or contract at least as valuable as the claims they in fact have under section 26.
Nugee LJ dismissed the claimants’ appeal. Lord Justices Edis and Holgate agreed.
Leave a Comment