FSMA s.26 Recovery Is Personal Against the Contracting Counterparty and Does Not Bind Successors in Title
1. Introduction
Dhillon v Orchard & Anor concerns the civil consequences of an unauthorised sale and rent back arrangement under the
Financial Services and Markets Act 2000 (“FSMA”) and the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“the RAO”),
and—critically—whether the statutory “right to recover” in FSMA s.26(2) can be asserted against a successor in title.
The respondents, Jeffrey and Ann Orchard (“the Orchards”), sold their home under a sale-and-rent-back arrangement to Red 2 Black Properties Limited (“R2BL”)
and remained in occupation as tenants. The appellant, Daljit Dhillon, later acquired the property from R2BL and sought possession and substantial rent arrears.
The Orchards defended and counterclaimed, ultimately advancing an argument that their s.26 right amounted to a “mere equity” binding on Ms Dhillon as an overriding interest
because of their “actual occupation” under the Land Registration Act 2002 (“LRA”).
Procedurally: (i) HHJ Duddridge rejected misrepresentation and held Ms Dhillon was not carrying on regulated activity “by way of business”; he ordered possession and rent arrears.
(ii) On appeal, Miles J rejected the “by way of business” appeal ground but allowed a new “mere equity/overriding interest” argument, holding the Orchards’ s.26 rights bound Ms Dhillon.
(iii) The Court of Appeal (Newey LJ giving the leading judgment, with Asplin LJ and Snowden LJ agreeing) reversed Miles J: FSMA s.26 recovery does not bind successors in title.
2. Summary of the Judgment
The Court of Appeal allowed Ms Dhillon’s appeal. It held that the rights to recover “money or other property” under FSMA s.26(2)(a) (and similarly under s.27(2)(a))
do not extend to successors in title. The statutory scheme instead contemplates recovery against the contractual counterparty (the contravening person),
and where the property has “passed to a third party” FSMA s.28(8) indicates the claim is to the value of the property at the time of transfer under the agreement,
not the property itself.
The Court also held that Miles J was wrong to permit the Orchards to run the new argument on appeal, principally because his assumption that costs could be protected by “equity in the Property”
was flawed: whether the Orchards would recover the property was uncertain, so costs protection was not assured.
3. Analysis
3.1 Precedents Cited
Securities and Investment Board v Pantell SA (No 2) [1993] Ch 256 (“Pantell”)
Pantell was considered as the earliest relevant authority under the predecessor regime (the Financial Services Act 1986).
Sir Nicolas Browne-Wilkinson V-C stressed that the statutory private right lay against the person who contravened the prohibition, not third parties such as solicitors “knowingly concerned”.
Scott LJ observed that the restitutionary remedy was difficult to see as available against anyone other than (i) the other party or (ii) the party to whom the investor’s money or property had been transferred.
The Orchards relied on Scott LJ’s broader formulation (“party to whom ... had been paid or transferred”) to support successor-liability.
The Court of Appeal treated Pantell as not resolving the current question and returned to statutory construction of FSMA; ultimately, Pantell did not displace the textual indicators in FSMA pointing away from successor claims.
Brown v InnovatorOne plc [2012] EWHC 1321 (Comm) (“InnovatorOne”)
InnovatorOne (Hamblen J) was central. It held that FSMA s.26(2) is naturally read as providing recovery from the contractual counterparty only.
It relied on: (i) the structure of s.26(1) (“unenforceable against the other party”), (ii) the “under the agreement” language,
(iii) FSMA s.28(8) as suggesting third parties are outside s.26’s scope, and (iv) FSMA s.28(5)—which focuses on the contravening person’s belief—being incoherent if third parties were exposed without an equivalent relief gateway.
Miles J had considered InnovatorOne wrong and preferred an analogy with rescission and “mere equity”.
The Court of Appeal expressly preferred InnovatorOne’s construction and adopted its direction of travel, while supplementing it with additional statutory and coherence-based reasons.
Various Angelgate and Baltic House Claimants v Key Manchester Ltd [2020] EWHC 3643 (Ch), [2021] PNLR 15 (“Angelgate”)
Angelgate followed InnovatorOne. Judge Hodge KC endorsed the view that the s.26(2) recovery right is against the contractual counterparty,
and again treated s.28(8) as reinforcing that third parties are outside the section’s scope.
The Court of Appeal used Angelgate as confirmatory (though not binding) support for preferring the InnovatorOne approach over Miles J’s.
This case was used for statutory background and policy: David Richards J explained that the 1986 Act moved away from treating unauthorised contracts as wholly illegal/unrecoverable by the innocent party,
and instead made them unenforceable against the innocent party while preserving their ability to enforce if they wished—re-enacted in FSMA ss.26(1) and 28(9).
The Court of Appeal treated that history as supporting the “asymmetric enforceability” model, but not as implying proprietary remedies against successors in title.
These authorities governed the appellate discretion to admit new points. They stress caution, the need to avoid prejudice, and the importance of costs protection,
especially after a full trial with evidence.
The Court of Appeal applied these principles to hold that Miles J’s costs-protection reasoning was flawed.
Other authorities cited on “new points” and appellate restraint
3.2 Legal Reasoning
(A) The interpretive anchor: FSMA s.28(8) and “value not property” once passed to a third party
The Court’s key textual move was to treat FSMA s.28(8) as decisive context: if property transferred under the agreement has “passed to a third party”,
references in ss.26–28 to that property are to be read as references to its value at the time of its transfer under the agreement.
This is difficult to reconcile with a statutory intention that the claimant can demand the property itself back from the third party.
The Orchards’ attempt to read “passed to a third party” as “passed absolutely” was rejected as an impermissible gloss: the statute does not say that, and the context did not justify it.
(B) Coherence within the statutory scheme: discretion and restitution mechanics assume the counterparty
The Court pointed to internal features of s.28 that are naturally calibrated to a claim against the contravening contracting party:
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s.28(4)–(6) requires the court, in s.26 cases, to have regard to whether the person carrying on the regulated activity reasonably believed they were not contravening the general prohibition.
If successors were liable, Parliament might have addressed their knowledge/notice position, but it did not.
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s.28(7) requires the claimant who elects not to perform or recovers transferred property to “repay”/“return” what they received under the agreement.
That language fits repayment to the original counterparty. It fits awkwardly if the recovery is from a successor who was not the original exchange partner.
(C) The “silences” that matter: no tracing rules, no priority rules, no compensation calculus against successors
The Court stressed that ss.26–28 can apply to many asset types (not merely land; sale-and-rent-back regulation arrived later),
yet the statute provides no framework for successor-liability questions that would inevitably arise if third parties were within scope:
tracing through mixed funds; bona fide purchase for value without notice; successive purchasers of shares; mortgages and power-of-sale disposals; and compensation against remote recipients.
The absence of such machinery strongly suggested Parliament did not intend successor-liability under s.26(2)(a) or s.27(2)(a).
(D) Consumer protection does not justify rewriting the statutory remedy
Miles J had relied on FSMA’s consumer-protection aim to support a third-party binding “mere equity” analysis (analogous to rescission for fraud/undue influence).
The Court of Appeal accepted consumer protection as a policy backdrop, but held that statutory purpose cannot displace the concrete textual and structural signals—
particularly s.28(8)—that Parliament chose a remedy against the contravening counterparty (with a value substitute when the asset has moved on).
(E) “Hard cases” and alternative routes
The Orchards argued that, without successor-liability, consumers could be left with a worthless claim where the contravening SPV sells on collusively.
The Court responded that FSMA still provides for value recovery against the contravening party (and potentially compensation), and that other routes may exist:
FCA redress proceedings under FSMA s.382 against persons “knowingly concerned”, and insolvency/company law remedies such as Insolvency Act 1986 s.423
or liquidator actions for transactions at an undervalue or breach of duty.
3.3 Impact
(1) FSMA civil consequences: no proprietary “follow-the-asset” effect under s.26(2)
The most significant effect is to cabin FSMA s.26 to a personal remedy (restitution/compensation against the contravening counterparty),
rather than a proprietary-like remedy capable of binding later transferees of property.
This removes the foundation for characterising s.26 rights as a “mere equity” that can bind successors in title via land registration priority rules.
(2) Land Registration Act 2002: reduced scope for “actual occupation” to protect FSMA claims
The High Court’s approach would have allowed occupiers to assert an overriding interest (Schedule 3, paragraph 2) based on an FSMA rescission-like equity.
The Court of Appeal’s ruling prevents that route: if s.26 does not bite on successors, LRA priority/overriding-interest analysis becomes irrelevant to s.26 recovery.
In practical terms, buyers of registered land are less exposed to FSMA-based “revesting” claims simply because the original seller remains in occupation.
(3) Litigation strategy and pleading discipline
The Court’s comments on admitting new points reinforce that a party cannot safely hold back a determinative statutory construction argument for appeal,
particularly where allowing it would generate further hearings and where costs protection cannot be reliably assured.
(4) Sale-and-rent-back disputes: greater emphasis on insolvency remedies and regulator involvement
Claimants facing a stripped SPV may need to focus on (i) value/compensation claims against the contravening entity, (ii) insolvency and transaction-challenge remedies,
and (iii) persuading the FCA to pursue redress where the statutory test is met.
4. Complex Concepts Simplified
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General prohibition (FSMA s.19): you must be authorised/exempt to carry on specified “regulated activities” in the UK.
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Regulated activity (FSMA s.22 + RAO): an activity “specified” in the RAO, carried on “by way of business”.
RAO article 63J makes entering/administering certain sale-and-rent-back arrangements regulated.
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Unenforceable, not void: under FSMA s.26(1) the unauthorised party cannot enforce the agreement against the consumer,
but the agreement is not automatically null for all purposes (see also FSMA s.28(9)).
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Restitution vs compensation (FSMA s.26(2)): restitution is getting back what you transferred (“money or other property”);
compensation is for loss sustained because you parted with it.
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FSMA s.28 discretion: even if an agreement is unenforceable under s.26 or s.27, the court can permit enforcement or retention if “just and equitable”
and having regard to specified factors (e.g., the contravening person’s reasonable belief).
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s.28(8) “value” substitution: if the property has “passed to a third party”, statutory references to the property are read as references to its value at the time of transfer under the agreement.
The Court of Appeal treated this as a strong indicator against recovery of the asset itself from the third party under s.26.
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Mere equity: a fragile equitable right (often to set aside a transaction) that can be lost to a bona fide purchaser.
Miles J treated s.26 rights as a mere equity; the Court of Appeal’s construction removes the need for that categorisation for successor disputes.
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Overriding interest and “actual occupation” (LRA Schedule 3, paragraph 2): some interests bind a purchaser even if not on the register, if the holder is in actual occupation.
This would have mattered only if the FSMA right bound successors in title.
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New point on appeal: appellate courts are cautious about allowing arguments not run at trial, especially if it would have affected evidence,
requires further factual inquiry, or prejudices the other side (including because costs protection is illusory).
5. Conclusion
The Court of Appeal established (or at least authoritatively clarified) that FSMA s.26(2)(a) does not create a recoverability right against
successors in title: the consumer’s statutory restitutionary remedy is against the contracting counterparty who contravened the general prohibition,
and where the asset has moved on, s.28(8) points to a value claim rather than recovery of the asset from the third party.
The decision also underscores a practical appellate lesson: allowing a new point after trial requires rigorous attention to prejudice—especially whether the respondent can be
meaningfully protected in costs if the new point triggers further proceedings and uncertain outcomes.