Financial services – Regulation – Financial Services and Markets Act 2000 – Sale of land – Collective investment scheme – Scheme under which appellants selling plots of land on various sites to investors with representations regarding pursuit of planning permission for residential development and onward sale at profit – Whether relevant “arrangements” amounting to unauthorised investment scheme within section 235 of 2000 Act – Appeal dismissed
The first appellant and its sister company operated a business that involved acquiring sites and dividing them into plots to be sold off to investors. Between them, they had a total of six sites. The second appellant was a director of the first appellant. The companies marketed the plots largely through telephone sales, with an unsolicited telephone call to a potential investor followed up by further telephone discussions. Investors who agreed to purchase would pay a 10% deposit, with payment of the balance required within a few weeks thereafter. The investors would not receive a copy of the sale contract until the purchase price had been paid in full.
Investors alleged that, in the course of the telephone discussions, the appellants had represented that they would pursue planning permissions for residential development on the plots and procure their onward sale to developers at a significant profit. However, the contract documentation stated that the appellant was not obliged to, and would not, pursue re-zoning or planning permission for the plot or the site as a whole and also contained an express statement that the investors were not entering into the agreement in reliance on any representations other than those set out in the contract or in written replies to pre-contract enquiries.
The respondent brought a claim against the appellants and others in which it alleged that the arrangements at the six sites were unauthorised “collective investment schemes” within section 235 of the Financial Services and Markets Act 2000.
Allowing the claim, the judge found that the companies had established and operated “arrangements with respect to property” of a kind that fell within the definition of a collective investment scheme in section 235, in breach of the general prohibition contained in section 19 of the 2000 Act; further, they had, in the course of their business, communicated invitations and inducements to participate in the schemes, contrary to section 21. He found that the second appellant was knowingly concerned in those breaches. He granted injunctions against the appellants and others and made orders under section 382 requiring them to pay to the respondent sums to be determined, with an order for interim payments totalling £11.27m. The appellants appealed.
Held: The appeal was dismissed.
(1) The judge had been entitled to find that the relevant “arrangements” were made at the time when investors paid deposits in respect of their plots and that those arrangements came about by reason of representations or statements made by brokers acting for the appellants as to what the schemes entailed, coupled with understandings reasonably formed by those investors based on what they had been told. The content of the arrangements was that the appellants would achieve a sale of the sites after they had sought to enhance their value through the re-zoning of the land or the grant of planning permission and that the proceeds of sale would be shared between the investors.
When interpreted together, section 235(1), (2) and (3) of the 2000 Act justified giving a very wide meaning to “arrangements”, which included understandings and agreements that were not legally binding: Financial Services Authority v Fradley [2005] EWCA Civ 1183; [2006] 2 BCLC 616, Brown v InnovatorOne plc [2012] EWHC 1321 (Comm) and Re Sky Land Consultants plc [2010] EWHC 399 (Ch) applied. For an “arrangement” to exist, there did not have to be a mutual expectation of adherence to the represented arrangements, nor did the court have to be satisfied that all participants shared an understanding of the nature of the arrangements. The existence of “arrangements”, for the purposes of section 235, could not depend on an involved investigation into the subjective intentions and expectations of a representor whose representations had caused investors to reach certain understandings. Such an approach would unduly and illogically restrict the ambit and effect of section 235 and frustrate its effectiveness in preventing the precise mischief at which the statute was aimed. Once it was accepted that a fraudulent scheme could constitute an “arrangement”, it followed that the subjective intentions of the representor as to whether or not it intended to honour the representations became irrelevant. The question was whether, looked at objectively on the basis of what they had been told, reasonable investors participating in the scheme would understand that the scheme involved arrangements of the type described under section 235.
Furthermore, it was possible for “arrangements” to exist in circumstances where there were statutory requirements in relation to the sale of land or where there was a binding contract between the participants and the operator, the terms of which were inconsistent with or contradicted the pre-existing arrangements. “Arrangements” were not merely inchoate or imperfect contracts that were displaced if the parties subsequently entered into a contract. Such arrangements, in the context of section 235, could subsist in the face of inconsistent contractual terms.
(2) The judge had further been entitled to find that the participants in the arrangements, namely the investors, did not have day-to-day control over the management of the property, within section 235(2). Where plots in the sites were specifically sold to investors as investments, with a view to the sites being “progressed” from a planning perspective and the plots being sold as a composite part of an enhanced-value development site, the management in question consisted of the acts proposed to be taken with a view to increasing and ultimately selling the sites and realising the value of the plots as investments. The appellants were in control of all the relevant steps in that regard and there was no aspect of the management of the sites or plots over which the investors had any control.
(3) The judge had also been entitled to find that the arrangements provided for the property to be managed as a whole by the operator of the scheme so as to fall within section 235(3)(b). Under the “arrangements” as presented to investors, the appellants were charged with management of the relevant features and it made no difference that some investors intended to build on their own plots.
Philip Coppel QC and Vivienne Tanchel (instructed by Litigaid Law) appeared for the appellants; Jonathan Crow QC, Tim Penny and Philip Hinks (instructed by the legal department of the Financial Conduct Authority) appeared for the respondent.
Sally Dobson, barrister
