£-In-£-Out and Scope-of-Duty Limits on Solicitors’ Negligence Claims for FSMA s.26 Exposure

1. Introduction

Case: Afan Valley Ltd & Ors v Lupton Fawcett LLP [2026] EWCA Civ 2
Court: England and Wales Court of Appeal (Civil Division)
Date: 5 January 2026

The appeal arose from a multi-claimant professional negligence action brought by the liquidators of 43 insolvent special purpose vehicle companies (the “Claimants”) against their former solicitors, Lupton Fawcett LLP (“Lupton Fawcett”). The Claimants were SPVs used in 22 investment “Schemes” (hotel/care home/student accommodation room-lease investments), which allegedly operated as a Ponzi fraud and collapsed into insolvency.

The key dispute was whether (assuming negligent advice) the Claimants could show any recoverable loss. The Claimants’ pleaded loss was primarily that, had they been correctly advised earlier that the Schemes were collective investment schemes (“CISs”), the Schemes would not have proceeded and the Claimants would not now face investor restitutionary liabilities under FSMA s.26.

Lupton Fawcett applied to strike out and/or obtain summary judgment on the basis that (even if negligence were proved) the pleaded losses were balance-sheet neutral: investor money received was matched pound-for-pound by any restitutionary obligation to return it (“£ in £ out”).

2. Summary of the Judgment

The Court of Appeal dismissed the appeal and upheld the strike out/summary judgment. The Court held:

The Claimants’ main pleaded loss—exposure to FSMA s.26(2)(a) repayment—did not constitute loss where it was matched by the receipt of the same sums from investors (“£ in £ out”).
Attempts to defeat “£ in £ out” by pointing to commissions/fees (Ground 1) or broader “deployment” of monies and scheme economics (Ground 2) failed principally because those alleged losses were outside the scope of Lupton Fawcett’s duty, which was limited to advice on CIS/FSMA consequences.
A claim based on FSMA s.26(2)(b) compensation (Ground 3) failed because it was not properly pleaded in APOC 5 and, in any event, was unlikely to yield additional recoverable loss given investors’ alternative tort/contract claims in the counterfactual world.
The Court refused the Claimants’ attempt to introduce a further amended pleading (“APOC 6”) and fresh evidence on appeal, applying Aylwen v Taylor Johnson Garrett [2001] EWCA Civ 1171 and the Ladd v Marshall [1954] 1 WLR 1489 approach.

3. Analysis

3.1 Precedents Cited

(a) Balance-sheet neutrality: loans/investments and “£ in £ out”

Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360
Treated acceptance of a loan (money in matched by obligation to repay) as not itself “damage”. The Court of Appeal used this as foundational logic: a matched liability and asset does not create loss at inception.
Saddington v Colleys Professional Services (a Firm) [1999] Lloyds' Rep PN 140
Followed Galoo in the valuation/loan context. The Court regarded the investment-repayment structure under FSMA s.26(2)(a) as analogous: repayment exposure is matched by receipt of the same principal.
Stanford International Bank Ltd (in liquidation) v HSBC [2021] EWCA Civ 535, [2021] 1 WLR 3507
Reinforced that the legally relevant “loss” must not be an artefact of ignoring corresponding benefits received. The Court relied on Stanford to support striking out where pleaded loss fails as a matter of law.

(b) Scope of duty / SAAMCO principle and structured approach

South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191
The “mountaineer’s knee” illustrates that “but for” causation is insufficient: liability is confined to losses within the risk the duty was meant to guard against.
Hughes-Holland v BPE Solicitors [2017] UKSC 21, [2018] AC 599
Re-emphasised the scope-of-duty limitation as orthodox negligence analysis, not an exceptional doctrine.
Caparo Industries Plc v Dickman [1990] 2 AC 605
Cited for the proposition that one must ask not only whether a duty exists but its scope by reference to the kind of damage from which the claimant is to be protected.
Manchester Building Society v Grant Thornton LLP [2021] UKSC 20, [2022] AC 783 (and read with Meadows v Khan [2021] UKSC 21, [2022] AC 852)
Provided the Court’s primary analytical framework: (2) scope of duty and (5) duty nexus. The Court used Manchester to confine Lupton Fawcett’s assumed duty to CIS/FSMA consequences, not the schemes’ commercial failure, fraud, or spending decisions.

(c) FSMA s.26 election and compensation

In re Whiteley Insurance Consultants (a firm) [2008] EWHC 1782 (Ch), [2009] Bus LR 418
Used for the proposition that FSMA s.26 gives the “other party” an election (enforce contract vs s.26(2) remedies). The Court also cited Whiteley on the limited and fact-sensitive nature of s.26(2)(b) compensation (including an observation sceptical of notional “interest”).

(d) Amendments and fresh evidence on appeal after strike out/summary judgment

Aylwen v Taylor Johnson Garrett [2001] EWCA Civ 1171
Binding authority that (modified) Ladd v Marshall principles apply to fresh evidence on appeal from CPR 3.4/24 outcomes and that similar discipline applies to amendments advanced for the first time on appeal to avert dismissal.
Ladd v Marshall [1954] 1 WLR 1489
The classic three-limb test (reasonable diligence, important influence, apparent credibility) remains central to discretion to admit fresh evidence, even under the CPR.
Hertfordshire Investments Ltd v Bubb [2000] 1 WLR 2318 and Terluk v Berezovsky [2011] EWCA Civ 1534
Confirmed Ladd v Marshall remains highly relevant post-CPR.
Langdale v Danby [1982] 1 WLR 1123
Confirmed Ladd v Marshall applies to summary judgment appeals, with adaptations reflecting summary procedure.

(e) Underlying fraud finding relied upon as factual backdrop

Northern Powerhouse Developments Ltd & Ors v Woodhouse [2023] EWHC 3124 (Ch)
Not a legal-driver precedent but important context: the Claimants’ own case characterised the enterprise as dishonest from inception. This underpinned the Court’s counterfactual reasoning that investors would likely have substantial tort/contract claims even if the schemes were not CISs.

3.2 Legal Reasoning

(a) The Court’s core move: properly framing “loss”

The Court treated the claim as turning on a basic compensatory comparison: the Claimants’ actual position (investor monies received; potential s.26 repayment exposure) versus the counterfactual (no schemes; no money in; no s.26 exposure). Once the investor receipts are included, the claimed s.26(2)(a) liability is matched “£ for £” by the receipt of the same principal. On that framing, there is no loss capable of grounding damages, mirroring the loan cases (Galoo, Saddington).

(b) Scope of duty as the decisive filter for Grounds 1 and 2

Applying Manchester Building Society v Grant Thornton LLP [2021] UKSC 20, [2022] AC 783, the Court identified Lupton Fawcett’s assumed duty narrowly: advice on whether the Schemes were CISs and thus the FSMA consequences. It was not a duty to protect the SPVs from:

the schemes’ commercial unviability,
fraud or misappropriation by Mr Woodhouse,
the decision to pay commissions/fees,
or the broader dissipation of investor funds.

The commissions/fees point (Ground 1) and the “inevitable early-years asset-value shortfall / spending” point (Ground 2) were therefore rejected primarily on “duty nexus” grounds: those losses would have occurred in the counterfactual world where the schemes were not CISs (the schemes still proceed; the same payments and spending occur). This is a classic SAAMCO-style limitation: the alleged losses were not within the risk the solicitors were retained to address.

(c) The s.26(2)(b) “compensation” attempt (Ground 3)

Ground 3 was the only argument with an obvious duty nexus: if the duty is to advise on FSMA exposure, additional statutory compensation beyond restitution might, in principle, be within scope. But the Court rejected it on two bases:

Pleading: APOC 5 pleaded recovery of “Investments” (s.26(2)(a)) but did not plead s.26(2)(b) compensation at all. The Court refused APOC 6 and fresh evidence on appeal using Aylwen v Taylor Johnson Garrett [2001] EWCA Civ 1171 and Ladd v Marshall [1954] 1 WLR 1489.
Merits: even if pleaded, the Court considered it unlikely that s.26(2)(b) would generate incremental loss in this case because (i) investors likely had at least equivalent claims in deceit and contract in the counterfactual world, and (ii) s.26(2)(b) compensation is for loss “as a result of having parted with” money, not contractual “profits” like the 125% buy-back.

(d) Appellate discipline: no “re-pleading after you lose”

A notable procedural holding is the Court’s firm application of Aylwen: where a party has had ample time to meet a strike out/summary judgment application, it cannot use the appeal to introduce an improved pleading or new evidence to escape the result. The Court treated the year-long notice of the “£ in £ out” point as fatal to any argument that the material could not have been deployed with reasonable diligence.

3.3 Impact

(a) Professional negligence claims framed as “regulatory exposure”

The decision reinforces that a claimant cannot plead “loss” merely by pointing to the incurrence of a restitutionary/statutory repayment obligation if the same transaction delivers an equivalent asset (the money received). Where the pleaded counterfactual is “the transaction would never have happened,” courts will still require a net detriment after bringing receipts into account.

(b) Scope-of-duty policing in complex fraud/insolvency contexts

The Court treated the schemes’ collapse and dissipation of funds as outside the solicitors’ FSMA/CIS advisory duty. This is significant for insolvency officeholders: even where negligent advice is alleged to have enabled fundraising, losses caused by fraud, mismanagement, and spending decisions may be non-recoverable if they fall outside the retained advisory scope.

(c) Pleading and evidence strategy under CPR 3.4/24

The procedural message is stark: if a strike out/summary judgment application attacks recoverability of loss, claimants must plead (and, where appropriate, evidence) any route to net loss at that stage. The Court’s reliance on Aylwen tightens appellate opportunities to “patch” cases after an adverse first-instance disposal.

(d) FSMA s.26(2)(b) as a limited escape hatch

While not finally determining the scope of s.26(2)(b), the Court’s reasoning suggests scepticism about treating s.26(2)(b) as a vehicle for recovering contractual “expected returns” (such as buy-back uplifts). Future litigants will likely need careful analysis of (i) incremental compensation beyond other available causes of action and (ii) proof of actual loss “as a result of having parted with” money.

4. Complex Concepts Simplified

Collective Investment Scheme (CIS): a structure where investors’ money is pooled and managed to produce returns, triggering financial regulation. If a scheme is a CIS, operating it generally requires authorisation.
FSMA s.19 “general prohibition”: a ban on carrying on regulated activities without authorisation/exemption.
FSMA s.26 (civil consequences): where an unauthorised person makes an agreement in breach of s.19, the agreement is unenforceable against the other party, and that other party can recover money paid and claim compensation for loss from having paid it.
“£ in £ out”: shorthand for the balance-sheet neutrality point—if you receive £100,000 and at the same time become obliged to repay £100,000, you are not worse off at that moment (unless there is some additional net detriment within scope of duty).
Strike out vs summary judgment: both are ways to dispose of claims without trial. Strike out targets defective statements of case; summary judgment targets claims with no real prospect of success.
Scope of duty / SAAMCO principle: even if negligence is proven and “but for” causation exists, a defendant is liable only for losses within the risk their duty was meant to protect against.
Fresh evidence and amendments on appeal: the Court will usually refuse new evidence or new pleadings on appeal unless strict criteria are met (notably reasonable diligence and likely influence). Appeals are not a second chance to rebuild the case.

5. Conclusion

Afan Valley Ltd & Ors v Lupton Fawcett LLP confirms two connected principles of broad practical importance:

No recoverable “loss” from matched repayment exposure: a negligence claim cannot succeed where the pleaded harm is simply exposure to repayment of sums that were received in the same transaction, absent a properly pleaded and legally attributable net detriment.
Strict scope-of-duty and procedural discipline: losses tied to fraud, scheme failure, commissions, and spending decisions were held outside the solicitors’ CIS/FSMA advisory duty; and attempts to re-plead or add evidence on appeal to overcome summary disposal were rejected under Aylwen and Ladd v Marshall.

The judgment is likely to be relied upon in future professional negligence and insolvency litigation to challenge “regulatory exposure” loss models and to enforce early, rigorous pleading of any net loss that truly falls within the adviser’s duty.