R (on the application of SL) v Westminster City Council
| Jurisdiction | England & Wales |
| Judge | Lord Justice Laws,Lord Justice Richards,Lord Justice Rimer,Lord Justice Patten,Mr Justice Hedley,Lord Justice Mummery |
| Judgment Date | 18 October 2011 |
| Neutral Citation | [2011] EWCA Civ 1158,[2011] EWCA Civ 954 |
| Date | 18 October 2011 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: C1/2010/2818,Case No: A3/2011/0318 |
[2011] EWCA Civ 1158
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
HHJ David Hodge QC (sitting as a Judge of the High Court)
IN PROCEEDINGS UNDER THE FINANCIAL SERVICES AND MARKETS ACT 2000
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Mummery
Lord Justice Patten
and
Mr Justice Hedley
Case No: A3/2011/0318
Case Number HC10C04532
and
Nicholas Vineall QC and James Purchas (instructed by the Financial Services Authority) for the Appellant
Richard Handyside QC and Tamara Oppenheimer (instructed by Barclays Bank Plc) for the Intervenor
Hearing date: 15 th June 2011
Introduction
The Financial Services Authority ("the FSA") is the regulator of financial services and markets and carries out this function in accordance with the powers and duties conferred upon it by the Financial Services and Markets Act 2000 ("the FSMA"). In December 2010 it commenced proceedings in the Chancery Division against the three named defendants, Sinaloa Gold PLC ("Sinaloa"), PH Capital Invest and Mr Glen Hoover, whom it alleged were involved in what is commonly referred to as a boiler-room fraud involving the sale of Sinaloa shares.
Sinaloa is a UK registered company. Mr Hoover is one of its directors and is said to control the company. In association with an individual or individuals (not as yet identified) trading as PH Capital Invest, he had arranged for shares in Sinaloa to be offered for sale to third party investors at prices ranging from 62 pence to 91.5 pence per share. The value of the company is based on various gold and mineral concessions which it claims to have with parties in Mexico and the United States.
The FSA's case is that the share sale scheme is a fraud; that the concessions either do not exist or are worthless; and that the proceeds of sale obtained from the disposal of the shares have been dissipated to parties unconnected with the company. Sinaloa does not have an approved prospectus for the sale of its shares as required by s.85 of the FSMA and the offer of the shares for sale was therefore unlawful and a criminal offence. Mr Hoover and those behind PH Capital Invest are also alleged to have committed breaches of ss. 19 and 21 of the FSMA by inviting third parties to invest in the shares.
On 17 th December 2010 the FSA made a without notice application for a freezing order against the defendants. The form of order sought and granted by the judge (Mr Kevin Prosser QC) prohibited any further sales of Sinaloa shares and restrained all three defendants from disposing of or dealing with their assets worldwide up to a value of £858,266.97. Appendix B of the order stated in paragraph (1) that the FSA did not offer a cross-undertaking in damages but included in paragraph (5) the standard form of undertaking to third parties that:
"(5) The Applicant will pay the reasonable costs of anyone other than the Respondents which have been incurred as a result of this order including the costs of finding out whether that person holds any of the Respondents' assets and if the court later finds that this order has caused such person loss, and decides that such person should be compensated for that loss, the Applicant will comply with any order the court may make."
The claim form was issued following the without notice hearing. The FSA seeks declaratory relief that the defendants have committed breaches of ss. 85, 19 and 21 of the FSMA; an injunction restraining them from committing any further such breaches and orders under ss. 380(2) and 382(2) for the repayment of the investors' monies or the payment of a just sum to compensate them for their loss.
The return date for the continuation of the freezing order was 31 st December. At the hearing David Richards J drew attention to a possible inconsistency between paragraphs (1) and (5) of the order of 10 th December but decided to continue the injunction in substantially the same form until a return date in the New Year. The undertaking in favour of third parties is a standard form provision in the form of freezing order contained in the Commercial Court Guide and the judge expressed the view that it operated as a cross-undertaking in damages in favour of third parties who suffered loss as a result of the making of the order. It was not therefore limited simply to the expenses incurred in complying with the order.
Sinaloa maintained three bank accounts at the Churchill Place branch of Barclays Bank plc. Mr Hoover was the authorised signatory. Some of the monies raised from investors were channelled through these accounts to various individuals and entities such as Seagull Enterprises Inc, a Seychellois company with a bank account in Cyprus. As part of the original freezing order, Sinaloa and Mr Hoover were each ordered to provide information about these transfers including the identity of the recipients. Barclays were served with the order and would therefore have had the benefit of the undertaking contained in paragraph (5) of Appendix B.
Presumably as a result of the observations of David Richards J, the FSA considered its position in relation to the paragraph (5) undertaking and decided that it would not offer to continue the undertaking at the adjourned hearing of its freezing order application. It wrote to Barclays on 12 th January to put the bank on notice of this and on 13 th January Mr Jonathan Phelan, the head of the FSA's Unauthorised Business Division, made an affidavit explaining the reason for the change. He said that it had always been the practice of the FSA not to offer a cross-undertaking in damages and that the undertaking in favour of third parties had been included in orders sought in order to cover the costs incurred (e.g. by banks) in complying with the order. If the wording of the undertaking extended beyond that to include other losses then the FSA would seek to vary the undertaking so as to limit it to the costs of compliance.
In his affidavit Mr Phelan lists a number of considerations which he relies upon as justifying the restricted undertaking which the FSA would be prepared to offer. These include the FSA's potential exposure to large compensation awards which would deter it from seeking injunctive relief and so impair its ability to carry out its functions. I shall come to the detail of these arguments later. But the bedrock for much of the argument is the exemption from liability in damages contained in paragraph 19 of Schedule 1 to the FSMA. This provides that:
"19.—(1) Neither the Authority nor any person who is, or is acting as, a member, officer or member of staff of the Authority is to be liable in damages for anything done or omitted in the discharge, or purported discharge, of the Authority's functions.
(2) Neither the investigator appointed under paragraph 7 nor a person appointed to conduct an investigation on his behalf under paragraph 8(8) is to be liable in damages for anything done or omitted in the discharge, or purported discharge, of his functions in relation to the investigation of a complaint.
(3) Neither sub-paragraph (1) nor sub-paragraph (2) applies—
(a) if the act or omission is shown to have been in bad faith; or
(b) so as to prevent an award of damages made in respect of an act or omission on the ground that the act or omission was unlawful as a result of section 6(1) of the Human Rights Act 1998."
The position of the FSA is that it can only be liable in damages in the discharge of its functions as regulator in the very limited circumstances specified in paragraph 19(3). It is not therefore willing to expose itself to a voluntary liability in damages which Parliament by the FSMA has expressly exempted it from in order to facilitate the carrying out of its duties. The existence of the indemnity in paragraph 19(1) is sufficient to establish and underline the rule of public policy that public authorities acting in the public interest should not be exposed to the same liabilities as private individuals acting in their own commercial interests.
The effective hearing of the application to continue the freezing orders took place on 24 th January 2011 before HH Judge Hodge QC (sitting as a deputy judge of the Chancery Division). He rejected the arguments of Sinaloa and Mr Hoover about non-disclosure by the FSA and there being no risk of dissipation and continued the freezing orders against them in the form of the undertakings which they offered. The injunction and other orders against PH Capital Invest (who did not appear) were also continued. But Barclays intervened at the hearing and contended that the order should retain the cross-undertaking in favour of third parties in the standard form in which it had originally been framed rather than in the modified version proposed by Mr Phelan in his affidavit. The judge declined to vary the undertaking in the manner sought by the FSA but granted permission to appeal on this point.
The judge accepted that the usual practice of the court when dealing with an application for an injunction by the Crown or some other public authority in exercise of its statutory duties was not to insist upon a cross-undertaking in damages in favour of the defendants. He rejected the FSA's submissions that there was no logical difference between the position of a defendant and that of a third party on the basis that, in order to obtain the...
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