Case Preview: Asset Land Investment plc & Anor v Financial Conduct Authority
05 Tuesday Apr 2016
This case raises the question as to whether certain sales of land, or arrangements relating to sales of land, are “collective investment schemes” within the meaning of the Financial Services and Markets Act 2000 (FSMA), s 235.
Between 2006 and 2008 the appellant and another company, ALI-Panama, purchased areas of farmland with the aim of carving them up into plots and selling them to individual investors. The structure of the scheme was that:
- The appellant would seek to progress planning procedures so that the sites could be used for housing;
- The appellant would procure their sale to developers; and
- The investors who sold the plots would be paid a share of the total consideration paid by the purchaser. Investors would only receive the contract for the purchase of land after they had paid the full purchase price.
The contract included clauses that:
- The appellant had made no representations which the investors were relying on in entering the contract other than those set out (the representation clause); and
- The appellant is not obliged to, and will not apply for, planning permission unless authorised and permitted by the Financial Conduct Authority (FCA) ( the services clause).
Investors filled out a separate form confirming that they had read and understood the disclaimers. Only when these documents had been received, title to the plot would be registered at the Land Registry in the name of the investor.
Following complaints, the FCA appointed investigators. On 14 June 2012, the FCA brought proceedings against the appellant for operating a collective investment scheme.
The Divisional Court upheld the FCA’s complaints.
The arrangements were such that the investors did not have day-to-day control over the management of the property within the meaning of FSMA, s 235(2), and the property was managed as a whole by, or on behalf of, the operators of the schemes.
The sales were generally made to persons who were not financially experienced or sophisticated, who had no financial, legal or other relevant advice. The appellant deliberately conducted its business on the basis that the investors should not see the written contract and learn of the representation clause and the services clause until they had paid to the appellant the whole price; and the appellant did not transfer the plot until the investors signed the contracts.
Court of Appeal decision
The appellant argued that: the judge wrongly gave a very wide meaning to the word “arrangements”; the evidence before the court fell short of demonstrating that the investors did not have day-to-day control over the property; the “representation clause” in the contracts covered the representation that had been made to buyers by, or on behalf of, the appellant relating to the planning status and re-sale of the land; and the “service clause” in the contracts was effective to dispel the existence of the arrangements.
The Court of Appeal ruled:
- The arrangements were made at the time when investors paid a deposit in respect of their plots. The content of the arrangements was such that the appellant would sell the sites after it had sought to enhance their value (through the grant of planning permission) and that the proceeds of the sale would be shared between the investors. The “arrangements” may exist without both parties sharing an intention as to what was to happen. The subjective intentions of the appellant, as to whether or not he intended to honour the representations were irrelevant. The Court of Appeal accepted the wide definition of “arrangements”- the arrangements ran in parallel with the contracts and were unaffected by their terms.
- S 235(1) didn’t require that all participants shared an understanding of what was to happen; it was enough that each of the investors had entered into arrangements with the appellant that were covered by s 235(1). All investors had an understanding of the appellants scheme. It didn’t matter that it was not the exact same understanding – it was enough that it was similar.
- It was irrelevant that te appellant had no power to sell the individual plots without the consent of individual participants. The purpose of the arrangements was to enable investors to profit from the purchase/sale of plots. The fact that a small number of the investors participated in the arrangement for personal reasons (they did not plan to sell their plots, but were planning to build a home) was irrelevant.
- S 235 (2) does not require “management” to be exercised with any degree of regularity; schemes involving little or no regular management may still be collective investment schemes.
- What was relevant in this case was what was proposed to happen under the arrangements which the appellant represented to investors – not what actually happened in practice, i.e. once the appellant sold a plot, it did nothing with it.
- The court found that, in reality, the essential features of the arrangements were those represented in the oral sales pitch to investors, and not the artificial and misleading picture presented in the footers of its contractual documentation with references to the representation and service clauses. That was particularly so in circumstances where it was only after an investor had paid the purchase price for his plot in full that he received a contract containing the relevant clauses; and any investor who did query the effect of the relevant clauses, or otherwise raised the issue of the terms of the written contracts with the appellant’s representatives was told not to worry about the provisions (they were merely legal requirements) or that the correct position had been as represented during earlier telephone calls.
On these grounds, the Court of Appeal dismissed the appeal.
Appeal to the Supreme Court
Even though both courts decided that the appellant operated a collective investment scheme, the appellant was granted leave to appeal to the Supreme Court with the purpose of giving a more detailed explanation as to the meaning of a “collective investment scheme”. On 13th and 14th of January 2016 the case was heard by a panel of five – Lord Mance, Lord Clarke, Lord Carnwath, Lord Sumption and Lord Hodge.