Factual and Procedural Background
This case arises from failed tax schemes known as the Innovator Schemes, which were designed to exploit UK Government tax incentives for investment in information and communication technology ("ICT") following the early 2000s dot.com crash. These schemes involved partnerships (mostly limited liability partnerships, some general partnerships) formed to acquire and exploit ICT rights, marketed to investors with the prospect of significant tax relief and financial returns.
The schemes featured tax incentives via first-year capital allowances, gearing through loans, profit incentives, and borrowing facilities provided by Chancery Lane Finance Limited ("CLFL"). Despite initial success in obtaining tax relief, the Inland Revenue ("IR") challenged the Schemes on grounds including lack of commerciality and the failure to exploit the Technologies successfully.
Following investigations and adverse findings by the IR, many investors faced repayment obligations and penalties. The driving force behind the Schemes, Mr Stiedl, was convicted of pension fraud. Investors formed steering groups and initiated litigation in October 2008 against a range of defendants including InnovatorOne Plc ("Innovator"), CPUK, CLFL, individuals involved in management and promotion, law firm Collyer Bristow ("CB"), and Technology Vendors.
The claims raised involve allegations of fraud, conspiracy, misrepresentation, breach of trust, and breaches of the Financial Services and Markets Act 2000 ("FSMA"), among other causes of action. The litigation was managed through trial of six exemplar schemes with representative lead claimants.
Legal Issues Presented
- Whether the Innovator Schemes constituted fraudulent or sham schemes.
- Whether investors became partners in the relevant Partnerships or were never partners.
- Whether misrepresentations were made in the Information Memoranda, Acknowledgement Letters, and other communications.
- Whether subscription monies were held on trust and whether any breach of trust occurred.
- Whether any contract or implied contract existed between investors and Collyer Bristow ("CB") regarding subscription monies.
- Whether defendants dishonestly assisted breaches of trust or fiduciary duty.
- Whether the Schemes contravened FSMA, including the general prohibition and financial promotion restrictions.
- Whether negligence and fiduciary duties were owed by various defendants and if breached.
- Whether conspiracy to injure by unlawful means existed.
- Whether restitutionary claims against Technology Vendors (notably Vermilion) succeed.
- Issues of causation, contributory negligence, and quantum of damages.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd [2003] 1 AC 311 |
Endorsement of circular funding arrangements not constituting incurring of expenditure for tax relief purposes |
The Court noted the Innovator Schemes had the endorsement of this principle at the time of their design. |
| TowerM Cashback LLP v Revenue and Customs Commissioners [2011] STC 1143 |
Supreme Court decision rejecting circular funding arrangements as genuine expenditure |
The Court acknowledged this decision as affecting the viability of similar schemes but found it did not invalidate the Innovator Schemes at inception. |
| Barclays Mercantile Finance Ltd v Mawson [2002] EWCA Civ 1853; [2003] STC 66 |
Tax law interpretation concerning incurring of expenditure and circularity in funding |
Considered in relation to the Innovator Scheme financing arrangements and tax advice. |
| Kuwait Oil Tanker Co v. Al Bader [2002] 1 All ER (Comm) 271 |
Elements of conspiracy to injure by unlawful means |
The Court applied the principles to assess the conspiracy claim requiring intention and unlawful means. |
| OBG Ltd v Allan [2007] UKHL 21 |
Intent required for economic torts including conspiracy |
Clarified that intention to cause loss must be deliberate and blameworthy. |
| IFE Fund SA v Goldman Sachs International [2006] EWHC 2887 |
Effect of disclaimers on assumption of responsibility and duty of care |
Applied in assessing disclaimers in Information Memoranda limiting reliance on statements. |
| Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567 |
Creation and principles of Quistclose trusts |
The Court applied this principle to subscription monies held pending formation of Partnerships. |
| Twinsectra Ltd v Yardley [2002] 2 AC 164 |
Dishonesty test for accessory liability |
Applied the combined subjective and objective test for dishonesty in claims of dishonest assistance. |
| Barlow Clowes International v Eurotrust International [2006] 1 WLR 1476 |
Clarification of dishonesty test and knowledge requirements |
Reinforced the combined test and applied to dishonest assistance claims. |
| ICS v West Bromwich Building Society [1998] 1 WLR 896 |
Principles of contractual interpretation and implication of terms |
Guided the Court's analysis of alleged implied conditions in subscription offers and powers of attorney. |
| Boardman v Phipps [1967] 2 AC 46 |
Definition of fiduciary relationship and duties |
Applied in assessing fiduciary duties owed by solicitors and agents. |
| Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 |
Principles of assumption of responsibility and duty of care for negligent misstatements |
Considered in relation to duties owed by promoters and advisers. |
| Caparo Industries plc v Dickman [1990] 2 AC 605 |
Threefold test for duty of care in negligence |
Applied in assessing negligence claims. |
| Lonrho Ltd v Shell Petroleum Co Ltd (No 2) [1982] AC 173 |
Limitation on breach of statutory duty claims and policy considerations |
Applied in rejecting claims for breach of statutory duty under FSMA where no private right of action exists. |
| Secretary of State for Trade and Industry v Grant (2000) |
Identification of person carrying on investment business for FSMA purposes |
Applied in determining whether individuals or companies carried on regulated activities. |
| SIB v Pantell [1993] Ch 256 |
Interpretation of statutory provisions for recovery of money under FSMA and related legislation |
Considered in assessing the scope of recovery against third parties under FSMA s.26. |
| Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830 |
Assumption of responsibility for personal duty of care by directors |
Applied in assessing alleged personal duties of care owed by individual defendants. |
| El Ajou v Dollar Land Holdings [1994] 2 All ER 685 |
Elements of knowing receipt |
Applied in assessing restitution claims against Technology Vendors. |
| BCCI v Akindele [2001] Ch 437 |
Knowledge requirement for knowing receipt |
Applied in assessing constructive knowledge and unconscionability. |
Court's Reasoning and Analysis
The Court undertook a detailed factual and legal analysis of the Innovator Schemes and related claims. The key findings and reasoning include:
- The Innovator Schemes were genuine commercial schemes designed to exploit ICT tax reliefs, structured with professional input and advice, including from leading counsel. The Technologies involved were real and had genuine value and exploitation prospects, although exploitation faced difficulties and was ultimately unsuccessful.
- The Claimants became partners in the relevant Partnerships; the contention that they never became partners based on implied conditions in the subscription offers and powers of attorney was rejected as unsupported, unclear, and unworkable.
- The alleged implied conditions precedent (the "IM Conditions") to the formation of partnership contracts were not established. Many such conditions were vague, uncertain, or inappropriate as conditions precedent to acceptance.
- The Court found no actionable misrepresentations in the Information Memoranda or other communications. Statements in the IMs were generally statements of opinion, expectation, or belief, qualified by disclaimers and risk warnings.
- Subscription monies were held subject to a Quistclose trust until investors became partners, with Innovator as trustee. CB was not a trustee or sub-trustee, but acted as solicitor for Innovator, holding monies in Innovator's client account and disbursing on Innovator's instructions.
- Payments made prior to investors becoming partners were not in breach of trust, being authorised or properly accounted for. Allegations of misappropriation were rejected.
- No contract was implied between subscribers and CB regarding subscription monies. CB's role was as agent for Innovator, not as a contracting party to subscribers.
- Claims of dishonest assistance failed as the defendants did not act dishonestly. The combined subjective and objective test for dishonesty was applied, and the Court found no evidence meeting the high threshold of dishonesty.
- The Innovator Schemes were collective investment schemes ("CIS") under FSMA, and contravened the general prohibition and financial promotion restrictions as none of the defendants were authorised persons. However, monetary claims under FSMA against third party recipients, including CB and individual defendants, failed because they were not contravening counterparties or relevant recipients under FSMA.
- Negligence claims failed for lack of assumption of responsibility and absence of duty of care owed by individual defendants or CB to the investors. The regulatory regime under FSMA did not create a freestanding duty of care.
- Fiduciary duties were owed by the power of attorney donees to their principals and by partners to the LLP, but not owed by the LLP to partners or by CB to investors. No breaches of fiduciary duty were found except for limited authority breaches by Mr Carter, which were ratified.
- Claims against the Technology Vendor Vermilion for knowing receipt failed as Vermilion was a bona fide seller for value, unaware of any breach of trust or fraud.
- Claims against individual defendants including Mr Stiedl, Mr Carter, Mr Gates, Mr Bailey, and Mr Roper failed on the basis of no proven dishonesty, no breach of duty, and no conspiracy or fraud.
- The Court emphasized the involvement of numerous professionals and advisers, the absence of misappropriation, and the similarity of the Schemes to other tax schemes which had not been challenged as fraudulent.
- The Court acknowledged the Claimants' disappointment but noted the inherent risks in such aggressive tax schemes and that the Claimants avoided greater potential losses through subsequent arrangements.
Holding and Implications
DISMISSED IN FULL
The Court dismissed all claims made by the Claimants against the Defendants, including conspiracy, fraud, misrepresentation, breach of trust, dishonest assistance, FSMA contraventions (except the finding that the Schemes were CISs), negligence, and fiduciary duty claims. The claims against the Technology Vendor also failed.
The direct effect of this decision is that the Claimants are not entitled to recover losses or damages on the asserted bases. The Court found no basis for holding the Defendants liable for the alleged fraudulent or improper conduct concerning the Innovator Schemes.
No new legal precedent was established beyond the application of existing principles to the facts of complex tax investment schemes. The judgment clarifies the limits of contractual, fiduciary, and statutory duties in such contexts and affirms the high threshold for establishing dishonesty in accessory liability claims.