The Connaught Income Fund, Series 1 (in Liquidation) v Capita Financial Managers Ltd

Hearing date: 20 October 2014

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

His Honour Judge Mackie QC

Judge MackieQC:

This application for summary judgment by the claimant ("the Fund") against both defendants ("Capita", and "Blue Gate") is about whether the Fund can bring the claims it makes in this action on the basis of assignments. These assignments are from over 1,000 retail investors who subscribed some £75 million to the Fund prior to its insolvent liquidation on 3 December 2012. Many investors were limited partners in the Fund but many are not.

The hearing last week was expedited to minimize the investors' exposure to a limitation risk if the application fails. There are helpful witness statements from Mr Bouchier, the Fund's joint liquidator, Mr. Byrne Hill of Capita's solicitors and Mr Mullarkey, a director of Blue Gate, but there are no disputes about the facts on the application.

Mr Powell QC for Capita and Mr Christie QC for Blue Gate have submitted in different ways that since this is an application for summary judgment I am concerned only with whether their arguments have a real prospect of success. That approach would frustrate the purpose of the application and I will deal with the issues as though it were the trial of the points concerned.

Facts and background to the action

The Fund was an unregulated collective investment scheme set up as a limited partnership. Capita was its operator from launch in April 2008, and Blue Gate was its operator from September 2009 until winding-up. The limited partnership was formed in April 2008 and registered pursuant to s. 8 of the 1907 Act on 10 April 2008. It was initially named " The Guaranteed Low Risk Income Fund, Series 1" and renamed " The Connaught Income Fund, Series 1" on 01 October 2009. On 3 March 2012 it was wound up by order of the High Court and joint liquidators were appointed.

The Particulars of Claim allege that the Defendants unlawfully promoted the Fund to the investors who became partners in it (in breach of s.238 and s.241of the Financial Services and Markets Act 2000 (" FSMA"), and that they were responsible for promotional literature which was misleading.

The Fund sues "in its capacity as the [legal] assignee of the claims against the defendants enjoyed by the Investors identified in the schedule to the [Particulars of Claim] as having assigned their claims' The Investors include individuals as well as 'internet investment platforms' and the trustee of an exempt unit trust. They invested in the Fund at various stages between April 2008 and 3 December 2012 when the Claimant was wound-up.

The Fund seeks compensation quantified by reference to the losses sustained by assigning investors. Under clause 3.1 of the assignments in favour of the Fund any recoveries it makes in respect of assigned claims will be an asset in the winding-up, and available as such for distribution pari passu in accordance with the statutory insolvency scheme, rather than being held separately for the benefit of each assignor. This structure mirrors that used by the BCCI liquidators in Three Rivers District Council v. Bank of England[1996] Q.B. 292 (C.A.). Essentially the investors assign their rights to the Fund and any proceeds go into the overall assets available to all the Fund's creditors.

In pre-action protocol correspondence Capita, through its solicitors has claimed that the assignments to the Fund are invalid. Capita offered to drop that claim and its opposition to this application if the Fund would stay the action while discussions between the parties involving the Financial Conduct Authority took place. That offer was not accepted. Blue Gate was not involved in these exchanges but supports Capita's position and puts forward arguments of its own.

Capita asserted that these proceedings are a nullity for one or more of the following five reasons. Its position has shifted somewhat as matters have developed. Those reasons, at the outset, were as follows.

(a) The causes of action on which the Fund relies accrued to Investors in their personal capacities, not in their capacities as partners in the Fund, and as a result, cannot be pursued by the Fund, because of the terms of Paragraph 5A of C.P.R. Practice Direction 7A ("5A").

(b) If those causes of action otherwise accrued to the Fund (within the meaning of 5A) by reason of the assignments, they still cannot be pursued by the Fund, because the Fund had been dissolved by the dates of those assignments. Capita argues that following dissolution, the Fund's members were only able to bind the firm so far as was necessary to wind up the affairs of the partnership, following Section 38 of the Partnership Act 1890 ("the 1890 Act") and that as a result the partnership had no authority to take assignments from investors after its dissolution.

(c) The claim against Capita is brought in the wrong name, because the Fund only became known by the name it uses in these proceedings after Capita ceased being its operator. If the Fund could pursue the assigned claims against Capita at all, it had to do so in its old name, the Guaranteed Low Risk Income Fund, Series 1.

(d) The assignments to the Fund are invalid because they were a device to circumvent the limitations on when claims under FSMA can be maintained for the benefit of persons other than "private" persons contained in the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 ("the RAR").

(e) The assignments to the Fund were assignments of bare rights to litigate, and as such, impermissible on grounds of public policy.

Blue Gate advanced two additional points:

(f) The Fund does not have separate legal personality and is not capable of acting as legal assignee.

(g) The Fund's liquidators have acted outside the statutory powers granted to them as joint liquidators under the Insolvency Act 1986 in purporting to take assignments on behalf of the Fund.

By the hearing (e) and (f) had gone and (d) was advanced by Blue Gate but not by Capita.

The application has been brought by the Fund to respond to challenges from the Defendants. I will deal with these in the order in which first Capita and then Blue Gate raise them.

The law of partnership — 9(b) above

It is common ground that the statutes dealing with an English limited partnership are the 1890 Act and the Limited Partnerships Act 1907 ("1907 Act"). Broadly Section 7 of the 1907 Act applies the law of partnerships to limited partnerships. The Insolvent Partnerships Order 1994 SI 1994/2421 deems an insolvent partnership to be an unregistered company, enabling it to be wound up under the Insolvency Act 1986. It is also common ground that an English limited partnership has no legal personality separate from that of its members. Further the Fund accepts that the claims by investors were not assets of the partnership until, at the earliest, the date of each assignment.

I should set out the relevant part of Section 38 which says this:

" After the dissolution of a partnership the authority of each partner to bind the firm, and the other rights and obligations of the partners, continue notwithstanding the dissolution so far as may be necessary to wind up the affairs of the partnership, and to complete transactions begun but unfinished at the time of the dissolution but not otherwise…".

Mr Powell QC for Capita submits that an insolvent partnership which has been ordered to be wound up on grounds of insolvency no longer satisfies the definition of a " partnership" in s. 1(1) of the 1890 Act. That provides: " Partnership is the relation which subsists between persons carrying on business with a view of [not "to" as set out in two skeleton arguments] profit". The partners are no longer carrying on business with a view of profit. Rather control of the partnership's assets has been placed in the hands of the liquidators. Consistent with that conclusion is Section 38 of the 1890 Act which makes special provision for the continuing authority of partners to wind up the affairs of the partnership after its dissolution.

Mr Powell says that this conclusion is supported by the two leading commentaries:-

(1) "An order for the winding up of an insolvent partnership will, obviously, bring about an immediate dissolution, assuming the firm not already to have been dissolved…" (Lindley & Banks on Partnership, 19 ^th ed. at 24–49).

(2) "Under the Insolvency Act 1986, which brought into partnership law the language of company insolvency, the court order that terminates a partnership is confusingly called not a 'Dissolution' but a 'Winding-up' order…" (Blackett-Ord, Partnership Law: the modern law of firms, limited partnerships and LLPs, 4 ^th ed. at 16.2).

Mr Powell says that the original claims are those of investors and were never partnership assets. On insolvency the liquidator has to gather in the assets of the partnership. These assets were assigned after the dissolution of the partnership. The partnership had no authority to take an assignment. Mr Powell submits that...