In Connaught Income Fund, Series 1 v Capita Financial Managers Ltd & anr [2014] EWHC 3619 (Comm) the High Court allowed the assignment of claims by private persons under s138D Financial Services and Markets Act 2000 (FSMA). The decision highlights the possibility of claims being assigned to, for example, a hedge fund or litigation funders who might use this as a mechanism to collect a number of claims and seek to bring proceedings against a financial institution for breach of its statutory obligations.

The claimant, The Connaught Income Fund, Series 1 (the Fund), was an unregulated collective investment scheme established as a limited partnership. The defendants, Capita Financial Managers Limited (Capita) and Blue Gate Capital Limited (Blue Gate), were the Fund’s operators from its launch in April 2008 and from September 2009 respectively, until the Fund was wound up by order of the High Court on 3 March 2012 and joint liquidators appointed.

In the underlying claim, the Fund sought compensation on the basis that Capita and Blue Gate unlawfully promoted the Fund to the investors, some of whom became partners in it (in breach of s238 and s214 of FSMA) and that they were responsible for misleading promotional literature. The Fund brought the claim in its capacity as legal assignee of over 1,000 retail investors’ claims under s138D FSMA (formerly s150 FSMA). 

Capita asserted that the proceedings were a nullity because, inter alia, the assignments to the Fund were invalid. Capita contended that the assignments were a device to circumvent the limitations set by the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 (the RAR) on claims under FSMA being maintained for the benefit of persons other than “private persons”. In response to these challenges the Fund made an application for summary judgment against both Capita and Blue Gate, to which this judgment of Judge Mackie QC relates. 

Assignment of a section 138D FSMA claim to persons who are not “private persons” 

Under s138D FSMA, a contravention by an authorised person of a rule made by the FCA or PRA is actionable “at the suit of a private person” (as defined by RAR reg 3 and RAR reg 6(1)) who suffers loss as a result of the contravention, subject to certain exceptions. A contravention by an authorised person is also actionable by a person (X) who is not a “private person” if the following three conditions are satisfied (RAR reg 6(3)(c)):

(a) that person X is acting “in a fiduciary or representative capacity” on behalf of another person (Y);

(b) any remedy would be “exclusively for the benefit” of person Y; and

(c) any remedy “could not be effected through an action brought otherwise than at the suit” of person X.

The defendants argued that the RAR reg 6(3)(c) conditions were not satisfied because: (i) the recoveries would be pooled as an asset in the winding up rather than being “exclusively for the benefit” of each assigning investor; and (ii) the investors could bring the claims themselves without assigning the right to the Fund. Further, the defendants submitted that the assignments were a device designed to circumvent the criteria set out in the RAR and must be impermissible on the grounds of public policy. They also contended that the words “at the suit of” in s138D FSMA indicated that the suit must be brought by the private person and that the exception in the RAR presupposes this rule.

The claimant separated the issues raised by the defendants into two separate questions: firstly, who enjoys a cause of action under s138D FSMA; and secondly, whether that cause of action is assignable. The claimant argued that s138D FSMA was concerned solely with the former issue, and the section contains no express prohibition on assignment, in contrast to explicit language used in, for example, s187(1) of the Social Security Administration Act 1992.

Citing Norglen Ltd. v. Reeds Rains Prudential Ltd [1999] 2 AC 1 (HL) in support, the claimant argued that the fact that s138D FSMA conferred rights on a limited class of persons did not impose either an implied statutory bar on assigning to persons outside that class, or imply that proceedings premised on such assignments were somehow an abuse of the court. The defendant distinguished Norglen on the basis that the fulcrum issue of that case was whether an assignment from a legal person to a natural person was invalid because it was done to overcome the restriction on a legal person obtaining legal aid; the cause of action was one which could, however, be brought by both legal and natural persons. By contrast, a claim under s138D FSMA could only be brought by a “private person”. 

The claimant also argued that RAR reg 6(3)(c) has nothing to do with assignment and relates not to transmissibility but to a situation in which relevant investments are held through a professional trustee and where the beneficiary cannot get redress by suing in his or her own name. The claimant pointed to the FSMA Part XV Financial Services Compensation Scheme (the FSCS) and submitted that the defendants’ reading of RAR reg 6(3)(c) would undercut the FSCS’s established practice of taking general assignments of the claims enjoyed by the investors and depositors whom it compensates, which will include s138D FSMA claims.

Decision 

Judge Mackie QC held that the words “at the suit of” did not remove a claimant’s right to assign his or her claim; where Parliament intends to exclude such a right, it can say so clearly. He held that there was nothing offensive about permitting the assignment of these rights, commenting that it may be desirable to assign so as to make it easier and cheaper for private persons to assert their rights. He agreed with the defendants that the Norglen case should be distinguished. The judge also held that RAR reg 6 did not apply since an assignee is not, unless there are additional circumstances, a fiduciary or someone acting in a representative capacity. 

Further arguments raised by the defendants 

The law of partnership

The defendants asserted further reasons why the proceedings should be considered a nullity, including that, following the dissolution of the Fund, the members were only able to bind the firm so far as was necessary to wind up the affairs of the partnership and the partnership had no authority to take assignments from investors after its dissolution.

Capita attempted to argue that s38 of the Partnership Act 1890 (the 1890 Act) acted to restrict the powers of the liquidator to those which are “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…”. It also submitted that an insolvent partnership which has been ordered to be wound up on the grounds of insolvency no longer satisfies the definition of a partnership in s1(1) of the 1890 Act because the partners are no longer carrying on business with a view of profit, and thus s38 of the 1890 Act is a special provision required to expressly continue the partners’ authority.

Judge Mackie QC quickly dismissed this point on the basis that the action was not being brought by former partners under s38 of the 1890 Act, but by the liquidators on behalf of the Fund, as pointed out by the claimant.

Paragraph 5A of CPR Practice Direction 7A

Capita argued that Paragraph 5A of CPR Practice Direction 7A (Paragraph 5A) means that the Fund could not pursue the causes of action because they accrued to investors in their personal capacities, not as partners in the Fund.

Paragraph 5A provides that:

“5A.1 Paragraphs 5A and 5B apply to claims that are brought by or against two or more persons who

(1) were partners; and

(2) carried on that partnership business within the jurisdiction, at the time when the cause of action accrued. 

5A.2 For the purposes of this paragraph, ‘partners’ includes persons claiming to be entitled as partners and persons alleged to be partners.

5A.3 Where that partnership has a name, unless it is inappropriate to do so, claims must be brought in or against the name under which that partnership carried on business at the time the cause of action accrued.”

Capita submitted that the ‘partnership criteria’ had to have been met before Paragraph 5A could be used, and that they were not met in this case. The cause of action accrued to an investor who invested in the limited partnership at the point of doing so and thus became a limited partner, but it did not accrue to the investor as, or in the capacity of, partner. The claimant argued that there is no good reason to read Paragraph 5A restrictively, and Judge Mackie QC agreed with this, reading it in accordance with the overriding objective of the CPR, to deal with cases justly and at proportionate cost. He held that Capita’s approach would add expense, uncertainty and risk to litigation for no advantage. 

Capita further argued that Paragraph 5A derogates from the principle that proceedings must have a claimant who is a legal person, since it permits a partnership to bring proceedings using its trading name. Judge Mackie QC disagreed on the basis that the Fund did not lack personality since it was an insolvent partnership acting through its liquidator which could sue in the name of the Firm or in the names of the partners.

Liquidators’ powers

Blue Gate argued that the liquidator had no power to accept the purported assignments of the investors’ claims since a liquidator is given no express power by the Insolvency Act 1986 (the 1986 Act) to accept assignments. The Fund contended that schedule 4, paragraph 4 of the 1986 Act gives the liquidator the power to bring or defend any action or other legal proceeding in the name and on behalf of the company, with sanction, and that this section does not distinguish between claims vested in the company before or after the date of winding-up. Further, the Fund argued that the liquidator has the power under paragraphs 7 and 13 of schedule 4 of the 1986 Act to acquire property, after winding-up, for the benefit of the estate. 

The judge held that paragraph 13 is a “‘sweep up’” provision, but nevertheless a self-standing and extremely wide one. It empowers the liquidator to do all other things “necessary” for winding up and distributing property. He viewed as an “unassailable justification” the argument proposed by the claimant, that if it chose to bring the claims “there was the prospect of making a substantial recovery, for the benefit of all creditors, and not just the assigning investors”.

Comment

The confirmation by the court of the ability to assign claims brought under s138D FSMA raises important considerations for financial institutions. It suggests that private persons who would otherwise have been prohibited by difficulty and cost are allowed to assign their claims and therefore gain redress indirectly. Assignment was not expressly limited to liquidators so a “private person” could, in theory at least, assign his or her claim to anyone willing to bring litigation against the relevant authorised person in question.

This decision therefore highlights the possibility of retail customers who do not wish to incur the considerable time and expense of litigation, selling their investment and the claims arising from that investment to third parties. Those third parties, whether hedge funds or litigation funders for example, might use this as a mechanism to collect a number of claims and seek to bring proceedings against a financial institution for breach of their statutory obligations.