Brown & Ors v Innovatorone Plc & Ors

Subscription applications for an investment scheme are not ordinarily subject to implied conditions precedent which are unclear, evaluative or concern future events. Such terms must be necessary, sufficiently certain and consistent with the documents.

Subscription money paid for a defined investment may be held on a Quistclose-type trust until the investor becomes a participant. The trustee may apply it only for the stipulated capital contribution or an authorised advance payment of the acquisition price. A solicitor holding money in its client account for the promoter is not thereby trustee for investors.

Where an unauthorised collective investment scheme breaches the Financial Services and Markets Act 2000, the statutory restitutionary remedies under sections 26 and 30 are against the relevant contractual counterparty, not innocent third-party recipients.

Brown & Ors v Innovatorone Plc & Ors concerned claims by investors in 19 technology-based tax schemes promoted between 2002 and 2004. The schemes used partnerships to acquire and exploit technology rights, with tax relief intended to be generated by capital allowances and bank-funded gearing.

The claimants alleged that the schemes were fraudulent shams; that they never became partners; that their subscription monies were misapplied; and that the promoters, solicitors, companies and other defendants were liable in contract, trust, tort, dishonest assistance, conspiracy and under the Financial Services and Markets Act 2000.

The principal issues included the status of subscription money, the scope of powers of attorney, whether the arrangements were collective investment schemes, and the consequences of contraventions of the statutory regulatory regime.

1. The claims were dismissed. The claimants did, however, establish that the arrangements were collective investment schemes and that specified entities had contravened the general prohibition and financial-promotion restriction in the Financial Services and Markets Act 2000.

2. The alleged implied conditions in the information memoranda were not conditions precedent to acceptance of subscriptions or to the exercise of the powers of attorney. They were neither clear nor necessary, and would have made acceptance and the exercise of the powers depend on uncertain evaluative matters. The powers were to be construed in light of their commercial purpose: admitting investors to the partnership formed to acquire and exploit the relevant technology, rather than a partnership identified solely by an exact name.

3. Mr Carter exceeded his authority in admitting subscribers to the Optibet LLP and in admitting Arte subscribers before personal loans had been obtained. Those acts were nevertheless ratified. The investors knowingly claimed tax relief as LLP members in Optibet and, in Arte, voted not to draw down the loans while proceeding on the basis that they were members. Ratification defeated any claim for breach and any resulting loss.

4. Before subscribers became partners, their monies were held on a Quistclose-type trust. Innovator or MFS, rather than Collyer Bristow, was trustee. The money could be used only to make the investor’s capital contribution or to make an authorised payment of the partnership’s acquisition price. The payments complained of were authorised and properly accounted for; alternatively, no recoverable loss resulted. The trust ended when subscribers became partners and the money became partnership capital.

5. The schemes were CISs because investors did not exercise effective day-to-day control over scheme property. Innovator established, operated and arranged investments in the schemes; the LLPs operated them; and CLFL arranged investments where it supplied subscriber loans. The statutory remedies in sections 26 and 30 did not extend to third-party recipients such as solicitors and technology vendors. They were confined to the relevant contractual counterparties, principally the LLPs.

6. No fraud, conspiracy, dishonest assistance, actionable misrepresentation, negligence, breach of fiduciary duty or knowing receipt was proved. The technologies and exploitation efforts were genuine, although aspects of the schemes and their documentation reflected poor practice and inadequate rigour.

not stated in the judgment.