Brown v InnovatorOne plc

The court rejected the Claimants’ core case that the Innovator schemes were an overarching fraudulent “sham” and dismissed the majority of claims. The judge found that the promoted partnerships involved genuine information and communication technology assets, genuine (if optimistic) business plans and independent valuations, though the valuation work often lacked robust due diligence. Although a Quistclose-style trust existed over subscription funds until subscribers were validly made partners, the court found no actionable misappropriation: monies were ultimately applied to the partnerships as contemplated by the documentation and advice obtained. The court held that the Claimants had not proved conspiracy, fraud or dishonest assistance; most alleged implied contractual conditions (the so-called IM Conditions) were not part of the subscribers’ offers or powers of attorney; and no actionable misrepresentation was established.

The court did find that the schemes fell within the Financial Services and Markets Act 2000 (FSMA) collective-investment and financial-promotion rules and therefore that regulated activity and financial-promotion restrictions had been contravened, but held that FSMA provides its own civil remedies and that most of the Claimants’ restitutionary and statutory claims against third-party recipients and many individuals could not succeed. In particular, statutory recovery under FSMA (ss.26 and 30) was not available against the wide class of third-party recipients advanced by the Claimants; where liability might otherwise have arisen the court would have exercised the statutory discretion (s.28/s.30) in the defendants’ favour on the facts of the case.

The litigation arose from 19 marketed "Innovator" information-and-communications-technology investment schemes promoted between 2002 and 2004. Some 555 investors (Lead Claimants among them) subscribed to partnerships promoted by InnovatorOne Plc, CPUK and Moneygrowth Financial Services. The schemes were geared tax structures: partners made capital contributions (typically 20%) and partnerships took loans (typically 80%) and sought first-year capital allowances on qualifying ICT expenditure.

The defendants included Innovator, the various LLPs, Chancery Lane Finance Ltd (CLFL), Collyer Bristow (CB) and individual directors and advisers. The Claimants alleged a comprehensive fraud/conspiracy: that the technologies and valuations were illusory, subscription monies were misapplied, the partnerships were shams, and that solicitors and others dishonestly assisted and breached duties. They advanced a range of claims in contract, misrepresentation, trust (including Quistclose), dishonest assistance, conspiracy, negligence and breaches of FSMA (unlawful establishment/operation of collective investment schemes and unlawful financial promotion). The judge tried discrete representative issues arising from six exemplar schemes and heard extensive evidence over many days.

Key issues framed and decided:

• Whether the promoted technologies and business plans were genuine and of value — the court found real technology and genuine exploitation efforts; valuations used the standard discounted cash‑flow approach though due diligence on forecasts was often limited.
• Whether investors were ever partners — the court rejected the Claimants’ construction that numerous unstated "IM Conditions" were conditions precedent to acceptance and concluded subscribers were bound by the contractual arrangements (and many acts, including tax filings, amounted to ratification).
• Whether subscription monies were held on trust and whether misapplication occurred — the court accepted a Quistclose-style trust existed until formal admission but found no breach causing recoverable loss; payments prior to formal admission were either properly authorised or ultimately accounted for and the commercial accounting supported the position taken.
• Whether the promoters, solicitors or others dishonestly assisted breaches — the court found no dishonesty: although some documents and practices were poor or backdated in limited respects, the evidence did not show the high degree of blameworthiness required for dishonest assistance or conspiracy.
• Whether FSMA applied — the court concluded the arrangements were collective investment schemes and that regulated-activity and financial-promotion restrictions were contravened. However, FSMA prescribes the civil remedies available; statutory recovery is directed at counterparties to controlled agreements and the court emphasised the statutory scheme and the discrete role of section 28/30 discretions.

Reasoning in brief: the judge applied conventional contractual construction and implication principles (ICS v West Bromwich; Belize Telecom; BP Refinery test for implication), established tests for Quistclose/resulting trusts and for dishonest assistance and conspiracy (including Kuwait Oil Tanker, OBG, Twinsectra and Barlow Clowes principles), and analysed FSMA and the Regulated Activities Order to determine regulated activity and financial-promotion contraventions. He emphasised that where Parliament had established a statutory enforcement/regulatory code that was the appropriate route for many complaints under FSMA; the common law could not, by inventing a general FSMA-derived negligence duty, displace that legislative design.

Claim dismissed. The court found that the Innovator schemes involved genuine technologies, legitimate valuations (though due diligence on projections was often cursory), and genuine efforts at exploitation. A Quistclose-style trust over subscription funds existed until investors were validly admitted as partners, but the court found no actionable misapplication of funds that caused recoverable loss. The Claimants failed to prove conspiracy, fraud, dishonest assistance or actionable misrepresentations; many alleged implied contractual or trust conditions were not established. The court did, however, find contraventions of FSMA (collective investment scheme and financial promotion rules) but held that FSMA provides its own statutory regime and that the Claimants’ broad attempts to recover from third-party recipients and numerous individuals failed: statutory remedies are focused on counterparties to the controlled agreements and the court would have exercised its discretion (s.28/s.30) in the defendants’ favour on the facts. Accordingly most of the Claimants’ claims were dismissed.