SPL Private Finance (PF1) IC Ltd & Ors v Arch Financial Products LLP & Ors

The claimant cells succeeded in claims against Arch Financial Products LLP for breaches of contractual, equitable and common law duties and against Mr Robin Farrell in respect of dishonest assistance and inducing breaches. The court found that Arch, through its senior personnel, committed the Lonscale claimant cells to investments in Lonscale in October 2007 and thereafter without adequate due diligence, without obtaining enforceable third‑party funding commitments and without any adequate risk/reward analysis, in breach of the investment management agreements (IMAs) and of duties to exercise reasonable care and skill. The court also found that Arch breached fiduciary duties by placing itself in an unmanaged conflict of interest and profiting (the £3m payment to Arch and related payments), and that the conflict was not managed fairly in the sense required by the IMAs. The court held that Mr Farrell knowingly assisted and induced Arch’s breaches and, on the evidence, acted dishonestly in relation to key matters. The waiver letter of 22 October 2009 was interpreted as limited to releases in relation to cross investment fees and did not bar the present claims.

The action was brought by a number of incorporated Guernsey cells (the Lonscale claimant cells) against their former investment manager Arch Financial Products LLP and against Mr Robin Farrell (CEO of Arch) concerning investments made in a vehicle called Lonscale which acquired the Clubeasy student accommodation business. The cells had appointed Arch under materially identical Investment Management Agreements (IMAs). The claim alleged that Arch and Mr Farrell drove the cells to subscribe for notes and other interests that funded the acquisition and post‑acquisition funding, in reality to permit an extraction of funds (described in documents as "structuring fees") that largely derived from the cells’ own subscriptions.

Procedural posture: first instance trial in the Commercial Court; the Lonscale Arch claims and the Lonscale Farrell claims were directed to be tried together (see judgment). The FSA/GFSC regulatory inquiries were noted but the judge did not treat the FSA findings as determinative of these civil claims.

The nature of the claims: (i) contractual and tortious negligence for failure to exercise reasonable skill and care under paragraph 15 and other terms of the IMAs; (ii) breach of fiduciary duties, including duties to avoid or manage conflicts of interest and not to profit secretly; (iii) claims against Mr Farrell for dishonest assistance of fiduciary breaches and for inducing Arch to breach the IMAs; (iv) alternative equitable and restitutionary remedies, and issues as to mitigation and causation.

The court framed and decided these principal issues:

• (i) What arrangements and benefits were contemplated in 2007 and what disclosures or consents were made to the cells?
• (ii) What were Arch’s contractual powers and duties under the IMAs (including the scope of paragraph 4, paragraph 13 on conflicts, paragraph 15 on care, and paragraph 18 on relationship/fiduciary implications)?
• (iii) Whether Arch took reasonable care in October 2007 (due diligence, valuation reliance on Storeys, and the need for capital injection identified by PKF), and thereafter for the follow‑on investments;
• (iv) Whether Arch breached fiduciary duties and, if so, whether any purported disclosure or the IMAs themselves permitted the conduct by fair management of conflicts;
• (v) Whether Mr Farrell dishonestly assisted or induced Arch’s breaches; and
• (vi) Remedies, causation, mitigation and effect of the waiver letter/release of 22 October 2009.

Reasoning in brief: the judge found on the documentary and witness evidence that by mid‑August 2007 a plan existed that would result, if successful, in substantial sums being extracted from investor monies; that the Storeys property valuations were used as an inappropriate proxy for trading/business valuation and that Arch behaved negligently in relying on them and in failing to secure enforceable capital commitments despite PKF identifying the need for a substantial capital injection. The IMAs did permit certain conflicts to be managed but required fair management; external advice (Symington meeting) was considered and the judge analysed whether Arch implemented the safeguards recommended (paper trails, objective comparators, evidence of fair allocation). The court concluded Arch did not manage the conflict fairly, did not disclose the fact that the cells would in substance be funding the sums extracted, and therefore breached fiduciary duties. On Accessory/inducement claims the judge applied the established tests (including the objective Barlow Clowes standard for dishonesty) and concluded that Mr Farrell dishonestly assisted and induced breaches. The waiver/release signed on 22 October 2009 was construed narrowly and found to relate to cross investment fees only; it did not extinguish the claims litigated in these proceedings. The judge awarded remedies in equity and at common law subject to causation, mitigation and the possibility of the claimants electing between alternative proprietary or compensatory relief.

This was a first instance judgment for the claimants. The court held that Arch Financial Products LLP breached its contractual duty to exercise reasonable skill and care and breached fiduciary duties to the Lonscale claimant cells by failing to manage conflicts fairly, by failing to carry out adequate due diligence and risk/reward analysis, and by permitting and taking secret profits funded largely by the cells. The court held that Mr Robin Farrell dishonestly assisted and induced Arch’s breaches. The waiver letter and attached release of 22 October 2009 were construed to relate only to cross investment fees and did not bar the present claims. The judge awarded relief to the claimants (equitable compensation and/or alternative remedies) and directed parties to agree consequential orders; the judgment explains remedies, causation and mitigation.