The Financial Conduct Authority (A Company Ltd by Guarantee) v Capital Alternatives Ltd and Others
| Jurisdiction | England & Wales |
| Judge | Mr. N Strauss |
| Judgment Date | 14 February 2014 |
| Neutral Citation | [2014] EWHC 144 (Ch) |
| Docket Number | Claim No. HC13F02624 |
| Court | Chancery Division |
| Date | 14 February 2014 |
[2014] EWHC 144 (Ch)
In the High Court of Justice
Chancery Division
Mr. N Strauss Q.C.
(sitting as a deputy judge)
Claim No. HC13F02624
Mr. T. Penny and Mr. A Temple, instructed by the FCA, appeared for the claimant;
Mr. D. Sweeting Q.C. and Mr. J. Mansell, instructed by Candey LLP, appeared for the 1 st to 8 th defendants;
Mr. A Green Q.C. and Mr. P. Luckhurst, instructed by DAC Beachcroft LLP, appeared for the 9 th to 11 th defendants.
The other defendants did not appear and were not represented.
Dates of hearing: 15 th–18 th, 22 nd–25 th October 2013
Introduction
This is the trial of a preliminary issue in an action brought by the Financial Conduct Authority ("the FCA") in July 2013 against the promoters and operators of four investment schemes, to which I will refer as "the African Land scheme" and "the Carbon Credits Schemes" or "the CCC schemes".
The issue in each case is whether it is a collective investment scheme ("CIS") within the meaning of section 235 of the Financial Services and Markets Act 2000 (" FSMA").
Briefly described, the African Land scheme concerns a rice farm called Yoni Farm, which is situated about 25 miles from Bo, the second largest town in Sierra Leone. Investors buy sub-leases of plots of land at the farm, on the basis that they will receive the profit from the sale of the rice cultivated on the plot sub-leased to them. This scheme has been promoted since about November 2009 and, at the time the proceedings were brought, had attracted investment totalling some £8.1 million from some 1,160 investors.
There are three CCC schemes, relating to forest areas in Australia, Sierra Leone and the Amazon. These too involve the sale to investors of sub-leases or licences, on the basis that the operators will seek accreditation by a relevant body, resulting in tradeable carbon credits which can be re-sold at a profit. The Australian scheme involves reforestation, while the others involve the preservation of existing forest. These schemes have attracted investments totalling some £8.8 million from 919 investors.
Both kinds of investment have been part of the so-called "alternative investment" market, in common with other kinds of investment schemes in land, including land banking, blocks of flats held as investments and fractional sales of hotel rooms, and in diverse other areas such as wine and memorabilia.
Section 235 of FSMA (derived from section 75 of the Financial Services Act 1986) defines a CIS in the following terms:-
"(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 main issue, which is common to all the schemes, is whether, if the terms of an investment scheme provide that the property within the scheme is to consist of individual plots managed in such a way as to give individual returns for each investor based on the yield from his plot, this ensures that it will not be a CIS. The defendants' case, which reflects what seems to be a view commonly held in the alternative investment market, is that a scheme that is so organised has neither of the characteristics required by sub-section (3), pooling of profit or management as a whole, and is therefore not a CIS.
In my opinion, for the reasons given in more detail at paras. 60, 163–203, 208, 258–9, 265 below:
(a) pooling and management as a whole are separate issue; such an investment scheme will not involve pooling of profit or income within section 235(3)(a), but may nonetheless be "managed as a whole" within section 235(3)(b) and, if it is, and if it otherwise fulfils the relevant criteria, will be a CIS;
(b) all the schemes in this case are managed as a whole, because all the investment property is managed by or on behalf of the operator as one entity for the collective benefit of all investors, without any substantial regard for the individual interests of any of the investors, and without the investors themselves having any involvement in management; and
(c) in each case, the object of the division of the property into separate plots so as to generate individual income returns is to attempt to avoid the scheme being a "regulated activity" requiring its operators to be authorised persons, but this neither benefits investors nor involves any substantial individual as opposed to collective management, and therefore does not save it from being a CIS.
There is a further issue about the meaning of "property" in sub-section (3)(b). In my opinion, sub-section (3)(b) refers back to sub-section (1), and the property is whatever enables participants to benefit from its acquisition, holding, management or disposal. On the facts of these cases, this is not, as the defendants contend, limited to the investors' individual plots, but includes the whole of Yoni Farm and of the forest areas, because investors' income depends on their development and management, see further at paras. 154–6, 253 below.
There are also issues about the meaning of "pooling" of profits or income in section 235(3)(a). In my opinion, pooling requires the creation of a fund for the combined or common benefit of investors and, if each investor obtains an individual return based on the yield from his plot, there is no pooling of profits or income even if —
(a) the value of all investors' yield is subject to standard deductions for processing and expenses; or
(b) the value of all investors' yield is received first by the operator of the scheme and then distributed to the investors in accordance with their respective, individually calculated, entitlements. See paras. 58–9, 159–62, 207, 255–7 below.
However, in the case of two of the CCC schemes, I do not accept that there ever was any intention to pay investors individual returns based on the yield of their own plots: see paras. 261–271 below.
The parties
The FCA is a body corporate, previously the Financial Services Authority, established under the provisions of the FSMA. Its regulatory objectives, as defined by sections 2(2) to (6) in force up to 1 st April 2013 were to further confidence in, and the stability of, the UK financial system, the protection of consumers and the reduction of financial crime.
These objectives were changed on 1 st April 2013 to the following three objectives, (1) the protection of consumers (2) enhancing the integrity of the UK financial system and (3) the maintenance of competitive markets and the promotion of effective competition.
The defendants are the promoters and operators, or individual persons or companies associated or allegedly associated with the promoters and operators, of the schemes referred to above. The defendants' positions and roles are described below.
The 1 st to 5 th defendants are the "Capital" companies, which are directly or indirectly involved in the promotion of alternative investments, including the schemes described above, or as receiving agents for operators. The 1 st defendant ("CAL" or "Capital Alternatives" or "D1") promoted a large number of schemes, including the African Land and CCC schemes, and featured in early brochures for them. The 2 nd defendant ("CS" or Capital Secretarial" or "D2") acted as agents to receive investors' funds. The 3 rd defendant ("COL" or "Capital Organisation" or "D3") is said also to have received investors' money and to be responsible for the overall organisation of the Capital companies. The 4 th defendant ("CAS" or Capital Administration" or "D4") and the 5 th defendants ("MH Trustees" or "D5") also acted as receiving agents at certain times. All these companies, apart from D5, are balance sheet insolvent, according to their latest available accounts.
The 6 th to 8 th defendants ("Ms. Hargous", "Mr. Haddow" and "Mr. Henstock" or "D6" "D7" and "D8") are individuals involved in the running of the Capital companies. Ms. Hargous (who gave evidence) is a director and sole shareholder of Capital Secretarial, Capital Administration and MH Trustees, a director of Capital Organisation and formerly a director of Capital Alternatives. She is a solicitor, and is in effect the in-house solicitor for the Capital companies. She was a straightforward and truthful witness. Mr. Haddow, who is subject to a disqualification undertaking which precludes his acting as a company...
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