Asset Land Investment Plc v Financial Conduct Authority
| Jurisdiction | England & Wales |
| Judge | Lord Clarke,Lord Carnwath,Lord Sumption,Lord Hodge,Lord Mance |
| Judgment Date | 20 April 2016 |
| Neutral Citation | [2016] UKSC 17 |
| Date | 20 April 2016 |
| Court | Supreme Court |
[2016] UKSC 17
Lord Mance
Lord Clarke
Lord Sumption
Lord Carnwath
Lord Hodge
Appellants
Michael Blair QC
Robert Purves
(Instructed by Morrisons Solicitors LLP)
Respondent
Nicholas Peacock QC
Tim Penny QC
Philip Hinks
(Instructed by The Financial Conduct Authority Legal Department)
(with whom Lord Mance, Lord Clarke, Lord Sumption and Lord Hodge agree)
These proceedings were brought by the Financial Conduct Authority (FCA) against Asset Land Investment plc and associated parties, alleging the carrying on of regulated activities without authorisation, contrary to section 19 of the Financial Services and Markets Act 2000 ( FSMA). The activities in question related to sales of individual plots at six possible development sites in various parts of the country. The only issue in the appeal is whether these activities amounted to "collective investment schemes" within the meaning of section 235, and thus "regulated activities" for the purpose of section 19 (as defined by section 22 and the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544)). (It is convenient to refer generally to FCA as embracing its predecessor, the Financial Services Authority or FSA.)
The FCA became aware in early 2007 that Asset Land was selling land to investors, and was representing itself as responsible for seeking rezoning for residential development and for arranging a sale to a developer. Following correspondence with Asset Land's solicitors, SJ Berwin, it accepted assurances that the company would cease to make such representations. In a further exchange in July 2008, SJ Berwin indicated that there were by then 64 plot owners, who had all been informed of the change in the arrangements. They had been offered the choice of exchanging their existing plots for plots that were larger in size and had access to services and roads ("enhanced plots"), thereby allegedly making it possible for plot owners to apply for planning permission themselves in respect of their individual plots; or of selling their existing plots back to the company for the price paid. It was said that of the 64 owners one had chosen to sell his plot back and the rest had opted for an enhanced plot. On the basis of this and other information provided by SJ Berwin, the FCA closed its inquiry in November 2008.
In June 2011 it formed the view that the agreed restrictions on the company's method of working were not being observed. It reopened its inquiry, and gave notice of the appointment of investigators. The present proceedings were begun in June 2012, following a worldwide freezing injunction against the company and Mr Banner-Eve.
In a judgment given on 8 February 2013 ( [2013] EWHC 178 (Ch); [2013] 2 BCLC 480) Andrew Smith J decided that its activities amounted to a collective investment scheme, in breach of the Act. After a second hearing on remedies the judge directed an inquiry into the amounts of restitutionary orders to be made under section 382. He made interim orders for payments totalling over £20m, based on FCA estimates of the amounts paid by investors for their plots, and on the assumption that their residual value, in the absence of planning permission, was nil. There is at this stage no issue before us arising out of those remedial orders (which have been suspended pending the determination of this appeal). The judge's decision on liability was upheld by the Court of Appeal, in a judgment given by Gloster LJ ( [2014] EWCA 435; [2014] Bus LR 993). Two of the parties Asset Land and its principal owner and director, Mr Banner-Eve, appeal to this court.
The issue turns on the interpretation and application to the facts of section 235, which reads as follows:
"235: Collective investment schemes
(1) In this Part 'collective investment scheme' means any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.
(2) The arrangements must be such that the persons who are to participate ('participants') do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions.
(3) The arrangements must also have either or both of the following characteristics —
(a) the contributions of the participants and the profits or income out of which payments are to be made to them are pooled;
(b) the property is managed as a whole by or on behalf of the operator of the scheme …"
The background and general purpose of the legislation are described by Lord Sumption. In Financial Services Authority v Fradley [2005] EWCA 1183; [2006] 2 BCLC 616, para 32, Arden LJ gave helpful guidance as to the correct approach to construction of the relevant section:
"First section 235 is drafted in an open-textured way in that it is drafted at a high level of generality and uses words such as 'arrangements' and 'property of any description', which have a wide meaning. Secondly, the application of section 235 depends on the specific facts of the case and in the event of a dispute those facts will have to be determined by a court of law on the evidence before it. Once those facts are found, then it is unlikely that an appellate court will set those findings aside unless the judge was plainly wrong. … Thirdly, since contravention of the general prohibition in section 19 may result in the commission of criminal offences [subject to section 23(3) of FSMA], section 235 must not be interpreted so as to include matters which are not fairly within it."
We have been referred to comparable legislation, and related authorities, from other Commonwealth countries. However, the wording varies, sometimes significantly. For example, the Australian Corporations Act 2001, Part 1.2, applies to a "managed investment scheme", but refers in the definition of that expression, to investors' control not over "management of the property", but over the " operation of the scheme". Such differences make it advisable to keep the discussion within the ambit of the United Kingdom statute and authorities decided under it.
The possible application of section 235 to so-called land-banking arrangements was given prominence by the publication in March 2006 of draft FSA guidance, which became section 11 of its PERG Manual. We were told by Mr Peacock QC for the FCA that this was a response to the proliferation of schemes offering investors the opportunity to participate in land development projects. As illustrated by the present case, large sums of money may be involved.
In the earlier schemes the promoter would often be subject to a contractual obligation to negotiate a sale to a developer, and would retain a call option over individual plots. Once it became known that such arrangements would be regarded as unlawful under section 235, and often following legal advice, adjustments were made to the schemes to keep them outside what was thought to be the ambit of the section. As already noted, the present is such a case. Another reported example of such changes in a land-banking scheme (in a director disqualification case) is described in the judgment of Hildyard J in Secretary of State for Business Innovation and Skills v Chohan [2013] Lloyd's Rep FC 351 (paras 73ff). He quotes (para 88) the advice of leading counsel (Mr Blair QC) summarising the changes then thought necessary to comply with the law in the light of the guidance:
"To be safe, the 'scheme' must ensure that the owners actually control the management of their property (and that any management that is carried out on their behalf by the promoter is done 'on an individual basis'). And the scheme must ensure that the owners are not subject to rights or duties, as against the promoter, or anyone else, that could lead to the conclusion that they were locked into any kind of collective management or development of the land."
It is the FCA's case that in many instances the wording of brochures, marketing material and contracts ignored reality. The more unscrupulous operators simply took to making covert as opposed to overt representations, and promises to investors regarding the planning or rezoning gains that they would procure for the site. Whatever was said, the true object of the schemes, at least as understood by investors, was to enable them to benefit from an increase in the collectivised value of the individual plots, to be brought about by the operator's supposed expertise and experience in the rezoning process, without any real involvement by investors in the management of that process. Although individuals could sell their plots at any time, this was not what was expected to happen.
Other schemes have related to different forms of land exploitation. In Financial Conduct Authority v Capital Alternatives Ltd [2015] EWCA Civ 284, [2015] Bus LR 767 ( Capital Alternatives) the Court of Appeal considered two schemes, one relating to exploitation of a rice farm in Sierra Leone, the other to tradable carbon credits in respect of forest areas in Australia, Sierra Leone and the Amazon. It will be necessary to consider some aspects of the judgment in due course.
This appeal raises the general question whether the FCA's understanding of the law is correct, and specifically whether the law was correctly applied to the facts of the present...
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