The Financial Conduct Authority (A Company Ltd by Guarantee) v Robin Scott Forster
| Jurisdiction | England & Wales |
| Judge | Simon Gleeson |
| Judgment Date | 28 July 2023 |
| Neutral Citation | [2023] EWHC 1973 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: BL-2020-001819 |
[2023] EWHC 1973 (Ch)
Mr Simon Gleeson
(Sitting as a Deputy High Court Judge)
Case No: BL-2020-001819
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
BUSINESS LIST (Ch D)
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Mr Adam Temple & Mr Elliott Cook (instructed by The Financial Conduct Authority) for the Claimant
The First Defendant in person
The Second and Third Defendants did not appear and were not represented
Hearing dates: 2nd, 3rd 4th, 5th and 15th May 2023
APPROVED JUDGMENT
This is a trial of a number of preliminary issues arising out of the activities of the first defendant, Mr Forster. In essence, the claimant, the Financial Conduct Authority (the “FCA”) says that Mr Forster was responsible for the operation of an unauthorised collective investment scheme, that units in that scheme were sold to investors through deception, that Mr Forster was knowingly involved in that deception, and that he should therefore make restitution. The second and third Defendants did not appear. The second defendant is in liquidation, and the liquidators have confirmed that they do not intend to take part in the proceedings, having provided a witness statement to this effect.
The facts of the case raise a number of difficult points, both factual and legal. Mr. Forster appeared at the hearing as a litigant in person, and it has therefore been necessary for me to to some extent construct his case for him. However, I was assisted in this by the fact that Mr Forster was represented by solicitors and counsel until shortly before the hearing, and a defence drafted by leading counsel, Saima Hanif KC, was filed on his behalf. I confirmed with Mr Forster at the hearing that the reason that he appeared in person at the trial was not the result of any disagreement between him and his advisers as to the substance of his case, and I therefore took that defence as the basis of his position. More importantly Ms. Hanif, with Mr Forster's consent, was prepared to appear pro bono in order to make representations on one specific point, but the point which I felt to be the most difficult aspect of the case – the extent to which Mr Forster's position had a defence to allegations of knowing concern in illegal activity on the basis that he had received independent legal advice to the effect that the activity was not illegal. I would like to express very great gratitude to Ms Hanif for the assistance which she provided to the court. I would also like to thank Mr Temple, who appeared for the FCA, for the way in which he sought to accommodate Mr Forster's position as a litigant in person, and to present the facts in as balanced a manner as possible – although I note that Mr. Forster disagrees with this assessment.
Dramatis Personae
Mr Robin Foster, was at the time when the events which gave rise to these proceedings occurred, no stranger to the business of doing business with other people's money. In September 2011 he had set up a company (“MBI”) with an associate, Mr Gavin Woodhouse, which operated on what he described in his witness statement as “the lease model”. I describe this below. Mr Forster was a director and shareholder of the MBI companies. When the relationship between Mr Forster and Mr Woodhouse broke down in 2016, the MBI business was essentially split between them into a care home business (Mr Forster) and a student accommodation and hotel business (Mr Woodhouse). The six MBI care homes were each owned by a single legal entity, and each of those legal entities seems to have been owned by or transferred to Mr Forster. Mr Forster also owned Qualia Care Limited (“QCL”), the service provider entity which operated the MBI care homes. Mr Forster also established first Qualia Care Developments Ltd (“QCD”) and then Qualia Care Properties Ltd (“QCP”) (together “the Investment Companies”). Both of these entities operated “the lease model”. They raised money from the public to invest in the acquisition of further care homes which would subsequently be operated by QCL. Mr Forster subsequently established another Qualia entity, Qualia Care Holdings (“QCH”) which also makes an appearance. All of these entities presented themselves to the public and investors under the “Qualia” brand, and Mr Forster seems to have acted on behalf of all of them. I have therefore referred to actions being taken by “Qualia” unless a specific legal entity is named.
The second defendant, Fortem Global Limited (“FGL”), was the main sales agent for the investments offered by QCD and QCP. It is now in liquidation. It was owned by Mr Forster and Mr Tasker, the Third Defendant.
“The Lease Model”
The essence of this model was that capital was raised from private investors by selling them a leasehold interest in a room in a rented commercial property – care homes, student accommodation and hotels – at a very substantial overvalue. These offerings were presented as “buy-to-let” investments. The fact that these sales were at an overvalue was not concealed – the sales pitch seems to have been that the surplus funds over and above the cost of purchase of the asset would be used to renew and refurbish the property concerned, thereby improving its rental yield. The thing that made this offer attractive to investors was that MBI (and later Qualia) was prepared, in effect, to guarantee the returns. The typical offering indicated that investors would receive a guaranteed rental of 10% of their investment per annum for the first twenty-five years, and that at various points during that period the operator would be prepared to repurchase their room for at least 115% of their initial investment, regardless of the commercial performance of the actual business concerned, and regardless of whether the specific room leased by the investor was in fact let or not.
The legal structure was a standard opco/propco arrangement. The propcos (in this case QCD and QCP) took in money from investors and acquired assets (in this case the homes). The propcos then employed the opco (in this case QCL) to manage the assets. The opco collects the revenues from customers, pays its operating expenses, and shares the resulting profit in some manner with the propco for distribution amongst investors.
Part of the appeal of this “model” to investors was that it appeared to offer enhanced security. At least part of their payment would be applied in the acquisition of a long lease of a specific room, and that interest would be registered in their name with the Land Registry. The evidence of that registration, as provided to them, gave the appearance of securing at least part of their investment.
The Company and its auditors took the view that it was not required to recognise its obligations to investors under these guarantees as liabilities on its balance sheet. The argument seems to have been that these obligations might not arise — each room might have generated the necessary revenue, and the repurchase option might not be triggered — so the obligations were mere contingencies. A company with no capital was therefore able to raise funds from retail investors at high promised rates of return without recognising its liabilities under those promises to those investors on its balance sheet. If those liabilities had been recognised at any time, it would have been transparently clear that the company was hopelessly balance sheet insolvent. However, because this was not done, the “lease model” appeared to be a viable financial structure.
An important feature of this structure was that it did not require any investment at all from its originator. Because the sales were at an overvalue, each sale created an accounting profit which appeared to constitute capital of the company. Thus, once sufficient sales were made, the result was an apparently well-capitalised and solvent company. What was happening in reality, of course, was that investors were taking all of the risk of the commercial operation of the property concerned.
The Investments
In order to understand what it was that investors were actually sold, it is necessary to address three things – (a) what investors were told about what they were investing in (“The promotional materials”), (b) what they actually legally acquired, and (c) the economics of the arrangements in which they were invited to invest.
The Promotional Materials
The investments were marketed to investors in the UK by the Investment Companies, FGL and other sales agents (FGL being the main agent in terms of commission received). Potential investors were usually given Qualia's promotional materials, including brochures for individual care homes. A wide range of these brochures were before the Court.
The investments were also promoted using a report produced in June 2016 by Lupton Fawcett LLP – a firm of solicitors used by Qualia – entitled ‘The Operations of Qualia Care and Qualia Care Developments’ (“the Lupton Fawcett Report”). The fact that the Lupton Fawcett Report was used to promote the scheme(s) does not appear to be controversial, though whether it was intended to be used for promotional purposes has been raised in witness evidence served by Mr Forster.
The legal arrangements
The investments were made up of various contractual documents between the relevant Investment Company and the individual investor, namely: a ‘Sale Agreement’, a 125-year ‘Lease’, a 25-year ‘Sublease’, a ‘Developer Assured Buy Back Option Agreement’, and a ‘Developer Call Back Option Agreement’. By these agreements:
i) The investor purchased a 125-year long lease of a specific room in a care home at a price usually between £50,000 and...
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