R v Investors Compensation Scheme Ltd, ex parte Taylor
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE POTTER: |
| Judgment Date | 04 December 1997 |
| Judgment citation (vLex) | [1997] EWCA Civ J1204-12 |
| Docket Number | QBCOF 96/1777/D |
| Date | 04 December 1997 |
| Court | Court of Appeal (Civil Division) |
[1997] EWCA Civ J1204-12
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(DIVISIONAL COURT)
Royal Courts of Justice
Strand
London WC2
Lord Justice Beldam
Lord Justice Potter
Sir John Balcombe
QBCOF 96/1777/D
MR N KITCHENER (Instructed by Messrs Robinson, Derby DE1 1FL) appeared on behalf of the Appellant
MR J R McMANUS and MR A SHARLAND [4-12-97] (Instructed by Messrs Wilde Sapte, London EC4M 7WS) appeared on behalf of the Respondent
Thursday, 4 December 1997
INTRODUCTION
This is the judgment of the Court.
This appeal is brought by the appellant ("Mr Taylor") with the leave of the Divisional Court, which on 29th November 1996 dismissed Mr Taylor's application for judicial review in respect of a decision by the Investors Compensation Scheme Limited ("ICS") that Mr Taylor was not eligible for compensation under the Investors Compensation Scheme ("the Scheme") in respect of his claims for the loss of an investment made through Beechcroft Insurance Brokers ("Beechcroft"), the trading name of a Mr Barrett who was authorised to carry on investment business under that name by the Financial Intermediaries, Managers and Brokers Association ("FIMBRA").
THE FACTS
The following facts are not in dispute between the parties either on the basis of the evidence before us or as a matter of concession.
Mr Taylor is a farmer. In March 1986, he inherited £5,500 which he wished to invest. On the invitation and advice of Mr Barrett, he handed him a cheque for £5,500 in April 1986 on terms that Mr Barrett would arrange an investment which would yield a return of 9.5% per annum at compound interest for a fixed term of five years and that interest could be withdrawn as and when it accrued. Mr Taylor's mother decided to invest further sums of £2,000 and £9,000 with Mr Barrett on the same terms a week later. The total sum invested by Mr Taylor and his mother was thus £16,500 in all. In April 1987 following the death of Mr Taylor's mother, her investments were transferred to him. We shall therefore refer collectively to the sums invested as belonging to Mr Taylor.
It has subsequently transpired that Mr Barrett was a fraudster. Whatever his intentions at the time he received the monies, no investment of any kind was made or arranged on behalf of Mr Taylor. In a Report prepared by ICS in respect of Beechcroft, the determinations of fact in which were treated by ICS as applicable to the circumstances of Mr Taylor's claim, it was concluded that Mr Taylor's funds were, in common with those of other Beechcroft investors paid into an account with Barclays Bank and held there for approximately forty-two days before being misappropriated for Mr Barrett's purposes. Of the total deposits of some £1,368,000 received by Beechcroft from investors, only some 18% were used to make repayments to investors. It was concluded that the repayments made were by robbing Peter (in the form of fresh investors) to pay Paul (in the form of investors to whom payment was due).
On 22nd April 1988, Beechcroft was authorised to conduct investment business by FIMBRA and on 28th August 1988 the Scheme took effect. In March 1991, Mr Taylor "withdrew interest" in the sum of £800. In April 1991, at the expiry of the fixed term of Mr Taylor's investment, Mr Barrett represented to him that the amount due to him on his investment, together with the accrued interest, was £24,000. Mr Taylor was persuaded to make a new investment with Mr Barrett, instructing him to invest £22,000 of the £24,000. He withdrew £2,000 in interest. On his new investment of £22,000 Mr Taylor was told that he would receive a compound rate of interest of 11.25% per annum. His investment was for five years. On that basis Mr Taylor handed back all the documentation he had received in 1986 in return for a certificate from Mr Barrett in the following terms;
" 20th April 1991
This confirms your investment of £22,000 on the 1st April 1991."
In our view the proper analysis of this transaction was that, in return for his right to be paid £24,000 by Mr Barrett, Mr Taylor was promised that he would on 20th April 1996 receive £22,000 plus compound interest at 11.25%.
Mr Taylor received the payment of £2000 accrued as interest in two tranches: one in April and another in July 1991. Unknown to Mr Taylor, Mr Barrett was by this time in fact insolvent and it seems likely that the payment of £2,000 interest was made from a substantial receipt from another of Mr Barrett's clients as it coincided with that receipt. It is to be inferred that once again Peter paid Paul. However, FIMBRA did not intervene to prevent Mr Barrett and Beechcroft continuing in business for a further eighteen months. During this time Mr Taylor received a further withdrawal of £700 in May or June 1992.
In October 1992 Mr Barrett ceased trading without making any further payments to Mr Taylor. On 3rd November 1993 Mr Taylor made a claim under the Scheme which ICS refused because Beechcroft had not then been declared to be in default. However, in May 1993, ICS declared Mr Barrett to be in default under the Scheme and Mr Taylor's claim was allowed to proceed.
THE STATUTORY SCHEME
s1 and Schedule 1 of the Financial Services Act 1986 ("The Act") define "investment business" for the purposes of the Act. It is not necessary further to refer to their terms because it is not in issue between the parties that, as from April 1988 (and not before), Mr Barrett, through the medium of Beechcroft, was authorised and carrying on investment business under the Act.
s54 of the Act, under the heading "Compensation Fund", provides inter alia as follows:
"(1) The Secretary of State may by rules establish a scheme for compensating investors in cases where persons who are or have been authorised persons are unable, or likely to be unable, to satisfy claims in respect of any description of civil liability incurred by them in connection with their investment business.
(2) Without prejudice to the generality of subsection (1), rules under this section may -
(a) ……
(b) establish a fund out of which compensation is to be paid;
(c) provide for the levying of contributions from, or from any class of, authorised persons and otherwise for financing the scheme and for the payment of contributions and other money into the fund;
(d) specify the terms and conditions on which, and the extent to which, compensation is to be payable and any circumstances in which the right to compensation is to be excluded or modified…….."
The Financial Services (Compensation of Investors) Rules 1990, as subsequently amended ("the Rules"), provide, inter alia, as follows:
"1.02 Interpretation
……..
(3) Nothing in any rules made under Section 54 of the Act is to be interpreted (if it otherwise would be) as authorising the payment of compensation on a claim except to the extent that the claim is a claim in respect of any description of civil liability incurred on or after 18th December 1986 in connection with the investment business of a person who, at the time compensation is to be paid, is or has been an authorised person.
2.01 Declaration of Default
(1) The Management Company may determine a participant firm to be 'in default' where it appears.. that the firm is unable, or unlikely to be able, to satisfy claims in respect of any description of civil liability incurred in connection with its investment business and that, as a result, compensation is likely to be payable under these rules.
2.02 Payment of Compensation
(1) The Management Company is responsible for payment of compensation to investors in accordance with these rules.
(2) The Management Company may pay compensation where it is satisfied, on the basis of evidence provided by an investor or which is available to it from other sources, that …
(b) The investor has a claim against a participant firm in default which is both a scheme business claim and a compensatable claim ….
(6) For the purposes of these rules, the Management Company is to rely, to the extent relevant, on any determination by a court of competent jurisdiction or by a liquidator or trustee in bankruptcy or on the certification of any net sum due which is made in default proceedings of a recognised exchange or clearing house and the Management Company may also rely on the certification of any net sum due which is made in default proceedings of any other exchange or clearing house.
2.03 Scheme Business Claims
(1) The first kind of 'scheme business claim' is the general claim, which relates to a liability owed by the firm in connection with scheme business done by it while it was a participant firm and with the investor for as agent on his behalf …..
2.04 Compensatable Claims
(1) The basic compensatable claims are claims for property held and claims arising from transactions which remain uncompleted at the quantification date, and an application for compensation relating to any other claim is to be met only where the Management Company considers that this is essential in order to provide fair compensation to the investor.
(2) Any claim is not a compensatable claim unless it relates to a liability which has been established before a court of competent jurisdiction or which the Management Company is satisfied would be established if proceedings were brought before such a court …
2.06 Amount of the compensation
(1) In principle, the amount payable by way of compensation is the amount the investor's overall net claim against the firm in default at the quantification date.
(2) The Management Company is to adjust...
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