Private mortgage scheme – Claimant ceasing to match borrowers and lenders and commencing pool – Claimant not advised to seek authorisation from Securities Investment Board – Proceedings issued against solicitors – Whether proceedings time-barred – Whether loss sustained at time of transactions by investors into scheme or subsequently – Proceedings struck out
From about 1980 the claimant, through various companies, operated a private mortgage scheme. Until 1991 the lenders and borrowers were identifiably matched, and the security was normally, if not always, a second mortgage on a property. In 1991 the claimant changed his business practice by ceasing to match lenders and borrowers and beginning a pool. The first defendant firm of solicitors acted for the claimant until 20 March 1992, and thereafter a second firm of solicitors (the second defendant) acted for him.
By virtue of section 3 of the Financial Services Act 1986, a person cannot carry on an investment business unless he is authorised under the Act. By section 6(2) of the Act, the court can order a person who has entered into a relevant transaction, without being so authorised, to restore the parties to the position that they were in before entering into the transaction. Section 75 of the Act identifies a ‘collective investment scheme’ as a relevant transaction. In May 1992, the Securities Investment Board (SIB) began an investigation into the claimant’s operations. The SIB alleged that the mortgage scheme was a collection investment scheme, within the meaning of section 75, which was being operated without authorisation.
The claimant issued proceedings against the first and second defendants. He claimed that the first defendant was negligent and in breach of duty in failing to properly advise him whether any of his companies were entering into a collective investment scheme that required authorisation. The claimant alleged that the second defendant had been negligent in advising him to sign a deed of undertaking and indemnity. The deed rendered the claimant liable to underwrite investors’ losses under the scheme and to put his companies into liquidation, which had resulted in the claimant’s bankruptcy. The action was commenced on 28 May 1998, six years and two months after the first defendant had ceased to act for him. The first defendant claimed that any claim against it was out of time and statute-barred. The master ordered that the claim be struck out and dismissed. The judge allowed an appeal and set aside the master’s order. The first defendant appealed.
Held: The appeal was allowed.
Since a cause of action only arose when loss or damage was sustained, the question was whether the alleged loss or damage was sustained by the claimant after 28 May 1992, namely within six years of the issue of the writ. The claimant submitted that the actual loss was not the same as a serious risk of loss. He claimed that there was no more than a serious risk of loss until, at the earliest, the claimant signed the deed of undertaking and indemnity (which was within the six year period). However, that submission was rejected. After a review of the authorities, it could be concluded that if the defendant was negligent in the way alleged, the claimant had sustained actual loss sufficient to complete his cause of action every time an investor made an investment into the pool scheme. Since all the relevant investments were made before the SIB investigation began on 15 May 1992, more than six years had elapsed before the issue of the writ, and the action was time-barred: Bell v Peter Browne & Co [1992] 2 QB 495; Hopkins v Mackenzie [1995] 6 Med LR 26; Knapp v Ecclesiastical Insurance [1988] PNLR 172 and Nykredit Mortgage Bank plc v Edward Erdman Group Ltd [1998] 1 EGLR 99, considered.
Alexander Hill-Smith (instructed by McGoldricks, of Croydon) appeared for the claimant; Alan Steinfeld QC (instructed by Ince & Co) appeared for the defendant.
Thomas Elliott, barrister
